Grifols & The Plasma Market - Part I | In Practise

Grifols & The Plasma Market - Part I

Former Northwest Division Medical Director at Grifols and former Associate Corporate Medical Director at BPL Plasma

Grifols SA

Why is this company interesting?

Founded in 1940, Grifols (GRF) is a family-operated, vertically integrated leader in the high BTE, USD$30bn+ global blood plasma oligopoly (along with CSL, Takeda, Octapharma which together control ~75% of the market).

Plasma (the raw material for plasma protein therapy products) has been at historically under-supplied levels following COVID-induced collection challenges. Such has curtailed production of end plasma protein products and therefore sales. However, the COVID raw material shortages have further entrenched the favourable demand-pull dynamics of this volume-driven industry with pricing offsets then supporting predictable unit economics for the major plasma proteins (Ig, Albumin).

GRF’s advantaged business model comprises an integrated discovery, development, collection, testing, value-added manufacturing (plasma protein products), direct marketing and distribution process using a captive commodity (plasma raw material). Given a large percentage of production costs are fixed, scale is essential for access to this captive commodity. These scale benefits, together with supply-chain efficiencies and process know-how crucial to manufacturing yields, drive margins. R&D then further reinforces incumbent advantages while aiding in driving incremental growth through novel use discoveries.

The plasma industry differs in its margin structure vs. conventional pharmaceutical businesses given the use of organic raw material and the costs of collecting such (~50% COGS vs <20%-30% COGS for pharma). However, given the unique sole-source nature of plasma proteins, an absence of competition from generic drugs or substitute products differentiates the plasma industry from other pharmaceutical businesses. Plasma prices have also meaningfully lagged wider pharmacy-industry pricing and are therefore not targets for regulatory/government pricing actions (many plasma products also have orphan drug status).

Competitive advantages of Grifols' business stem from a combination of regulatory BTE, niche sub-market dynamics, customer affinity borne of stellar reputation and cost v. utility, and intangible assets in the form of best-in-class industry process knowledge and R&D. GRF also has impeccable safety and quality record.

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Executive Bio

Former Northwest Division Medical Director at Grifols and former Associate Corporate Medical Director at BPL Plasma

This executive is a license physician in the US. He has practiced medicine in Colorado since 2008, following his residency in family practice at Grant Medical Center in Columbus, Ohio. In his seven years at Grifols, he had oversight of Plasma Medical Operations in the NorthWest Division of the business. He also spent three years at BPL plasma culminating in a position as Associate Corporate Medical Director.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Could we concentrate on Grifols the business, the blood plasma business model and your perspective on Grifols and the industry from the unique perspective of a physician?

Grifols is a company that’s aggressively trying to grow and compete, particularly with CSL. CSL is a big player in the plasma space. CSL is a company that has double the revenue and double the profit compared to Grifols. They are very, very good at what they do.

No one dare speak ill of CSL in Australia.

Absolutely. In Australia they are kings. They're a big company. Philosophically speaking, the big difference is that I would say that Grifols probably has a better social footprint than CSL. I’m not speaking bad about CSL but I think that Grifols has probably a better perception in this country [US] in terms of its social footprint, also with regard to saving lives. That's the big thing that Grifols really focuses on.

Of course, CSL uses a similar slogan but I do believe that Grifols goes back to its roots in the sense that here we discovered plasmapheresis; the entire process that all new companies are taking advantage of with Dr. Victor Grifols, in 1940.

Literally they were at inception, weren’t they?

They were. They invented the process of plasmapheresis and that doesn't necessarily mean that they're the kings of the process, but they certainly have pride and they certainly believe in the social impact. CSL is a very nimble company. They're very strong. Grifols might have more plasma centers in the United States than CSL, but Grifols has grown mostly through acquisition and partially through expansion in opening their own centers.

That’s a wonderful opening introduction. Could you begin by sharing with us a bit about your background and how your position as a former employee of Grifols and BPL Plasma and a practicing physician provides a unique perspective on the blood plasma industry we’re talking about?

I primarily started working with Grifols back in 2010, as a center medical director. Every plasma medical center in the United States has a center medical director. In other words, they supervise the medical staff. The medical staff works under the physician's state license and that license allows them to do certain tasks such as manage reactions, be able to operate the equipment and be able to perform the physical examination that's required for all plasma donors when they first come to the plasma center and for annual examinations, which is a regulatory requirement.

Those are the things that the medical director typically does. They also review out of range laboratory values; they review laboratory values that pertain to total protein, to hermatocrit as well as to serum protein electrophoresis, which is specific bands, albumin, different types of bands of protein. These dictate that the individual is safe to donate plasma but also that they have the adequate protein level to donate such that the final product yield doesn't get affected and the donor’s health is not impacted. That’s a balance.

These are regulatory commitments that the plasma industry has made to the governing bodies in the United States such as the FDA and EMA.

Those regulations form barriers and ensure that this oligopoly has remained intact. Could you also give a 30,000-foot view of the industry history leading to the current status quo? Why has this been such a good industry? Who’s who in the oligopoly and where do all the pieces fit?

There are multiple parts to the oligopoly and it is an oligopoly. The government doesn't really interfere, except in regulation. You have the large player; CSL is big. You also have Takeda Pharmaceuticals, which is also BioLife. BPL, small player; Kedrion, Octapharma. You also have Grifols which is also on that pattern of producers. Then you have a number of smaller players. You used to have GCAM, a smaller Canadian player and they were purchased by Grifols.

How did the industry come about? Grifols primarily started entering the plasma space in the United States in 2003, primarily because they really couldn't grow the plasma collection industry in Europe as, basically, Europe had had banned individuals donating plasma and being compensated for their time. In the United States, we have a unique market. In Australia, you have a unique market that's similar to the United States where donors can come in, they can walk into the plasma center, register, go through this process and get paid for donating the unit of plasma. The donor can come back and continue to donate, provided that they're healthy and well and can continue to donate.

Same thing in the United States. Primarily, CSL grew through opening new centers on its own. Grifols primarily grew by buying plasma centers that were becoming defunct or that were struggling, taking advantage of market forces and opening plasma centers that were basically turnkey. They're already running; all you have to do is run them and they did. They were successful with the purchase of SeraCare. They were successful with the purchase of ZLB. They were successful with Alpha. There were then successful with Talecris Plasma Resources in 2011 when they bought 70 plasma centers. SeraCare, Alpha, ZLB; all of those combined were a total of the 140 centers that Grifols boasted back in 2011.

Then Grifols has entered into a phase where they realized they need to open their own centers, so they now have almost 300 plasma centers in the United States. They purchased 25 BPL centers; they purchased GCAM centers. They also purchased a share of Immunotec, so they are primarily an acquirer, but that costs money. So CSL and BioLife are traditionally more harder earned rewards where they've opened their own plasma centers. They've developed the strategy; a tactic for how to open centers and how to successfully, do it quickly and be efficient.

Can we talk about industry structure and why this is an entrenched oligopoly and it’s been a good business. Looking at the business model, it’s essentially one of a cornered resource achieved through scale, through the centers that you have to collect the blood plasma. There’s 50% COGS but then it’s essentially a manufacturing business which differs from normal pharma economics. There’s very high historical certainty around demand which almost creates recurring revenue here and there’s huge visibility, as far as capacity’s concerned, because it takes a long time to build out the capacity, not only to collect the plasma but also to fractionate it. It basically builds capacity to future demand. Could you talk about how to think about the multiple verticals which entrench the oligopoly and how to think about Grifols as a complex business across multiple business lines?

When you look at Grifols and look at what they do, they have several units. They have a lab unit, they have a testing unit, they have an equipment unit, they have a buyer research division. They have multiple different divisions that are contributing to the general company's revenue fold. You also have to think about the fact that, when you're thinking about growing revenue and growing business, Grifols embarked upon an aggressive plan to fractionate plasma because you can collect as much plasma as you want but you will never be able to compete and develop product unless you fractionate. So you either develop your own fractionation model and manufacturing capability or you pass it over to a third party which is more expensive.

Grifols spent heavy investments in building a Clayton, North Carolina plant capable of doing 12 to 15 million units of plasma a year and they have now tried to increase that. Their goal has been to expand that plant to 23 million units. When it comes to planning and when it comes to articulating how to do that plan, that plan takes time. It takes strategic planning and it takes quite a bit of capital expenditure to do that. It's not cheap to produce a manufacturing capability and to expand that. One of the things that people talk about is, if you need a million units of capacity, another million units, another million units, each million unit that you're trying to produce costs hundreds of millions of dollars to produce. So the initial investment is large because you need a space, you need to develop that space and then you need to get FDA approval, regulatory approval to operate, to show that it's safe, that it's doing things according to a procedure or protocol, according to federal regulations.

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