Grifols & The Plasma Market - Part I

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.