Upcoming IP Investor Dialogues: Spirax Sarco, FAST, COST, CPRT, POOL, SNOW, DDOG - Register your interest at help@inpractise.com 

Anonymous

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

Grifols & The Plasma Market - Part I

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

{audio:0:08:18} Let's get back to culture. I've got a further sense of the [Grifols] family from the Biomat acquisition presentation, and this is a family business, in every sense of the term. There has been a changing of the guard in the last five years; you've got the younger gen now with older gen as co-CEOs, the elder statesmen Brother at chair, Albert is chief science officer. To their enduring credit, they're not milking high remuneration from this business; they’ve even cut the dividends after the Biomat deal to rapidly de-lever. Rather they seek to align themselves by their ownership of the business. How would you judge the current two generations' competence in managing this business to be adaptive, and therefore durable, given the competitive challenges out there from FcRn, recombinants and the other competitive challenges faced daily in the oligopoly?

{audio:0:09:30} Well, it is an oligopoly; it's a family-owned business. In some ways, I think that it's a duel-edged sword. When you have a family business, you're somewhat restricted by the types of things you can do. More importantly, you're restricted because you also have specific shareholders you're accountable to, not just a family. Although the family, more likely than not, owns a significant stake, shareholders need to be aware that the strategy may not always be aligned with their interests. Of course, everyone's interest is for growth. Still, maybe the family's business model is, let's leverage debt versus growing profit so that we can continue to grow in a specific strategy.

{audio:0:10:34} Recombinants are certainly important to revenue and profit generation, but plasma derivatives are always cheaper, they're easier to collect, and they're easier to make. Of course, there's more regulation when it comes to the production of recombinant products. Those products are not easy to make, they have to be made in a specific method and fashion, and that's probably why Grifols is a little bit hesitant to embrace some of those newer products because of that cost. Cost in investment and producing systems to manufacture such products.

{audio:0:11:20} When you’re talking about it being a family business, does the family control mean that they can still attract the best people to the organization to work around them?

{audio:0:11:32} They try their best to include the best people, but I think that when you're talking from a family perspective, you have to consider that they may have certain hand-picked individuals in mind. Those hand-picked individuals may not always have the specific qualifications that many shareholders may be looking for or feel that need to be addressed in areas where improvement is targeted; I think that it is somewhat of a limiting factor, and in some ways, to put it politely, you're wearing blinders. When you're wearing blinders, and you're perhaps showing some nepotism or favoritism in that regard, that's not going to allow you to grow to your maximum potential.

{audio:0:12:28} Given then that contributions from new products were more than 50% of revenue growth last year, which is impressive, and obviously plasma-derived products were down because of Covid, would you say that there’s a culture here that merges adaptability and innovation and that is aligned with the strategy of the business? This culture could help not only offset any headwinds from recombinants FcRn and otherwise, but even potentially morph the company to one offering multiple growing platforms?

{audio:0:13:06} I think that these are great ways to enhance a business. I think businesses are designed to embrace innovation, particularly when you're looking at the collection of plasma. Many human factors go into the collection: donor fees, donor experience, the quality of donor you're recruiting, whether the donor continues to come back, the fickleness of the donor. You also have to consider employees. Employees come and go, and they can significantly disrupt the operation of a center if multiple individuals are not aligned with the manager. If the manager is unable to manage his or her staff, people turn over. That turnover leads to more labor costs.

{audio:0:13:52} I think the industry is already very innovative and needs to be adaptive. When you look at the industry in general, not just one company, turnover is a significant factor at the plasma donation center level. That turnover can significantly disrupt operations where if you have a goal of collecting 70,000 liters a year, now maybe you can only collect 50,000. Multiply that by the number of centers that have this same problem, in other words, a cultural problem, now you're talking about missing major targets. This means missing the ability to meet the company's targeted demand negotiated with various patient advocacy groups, hospitals, and other fractionation plants.

{audio:0:14:52} To go back to your point on management utilization in-depth, the capital allocation strategy has been one of using cheap European debt markets, and they're now committed to rapid deleveraging using any means necessary, to quote Victor over the weekend. They've used this cheap European debt to consolidate the industry, though given Covid, a lot of the benefits of this consolidation are yet to be seen in the economic mix and the revenue numbers to flow through. Acquiring Biomat removes yet another competitor, meaning the yield on the entire industry is even more consolidated with less competition. If I'm not wrong, this will likely lead to higher prices on some of their products.

{audio:0:15:43} At the same time, new proteins from Biomat will also boost their plasma economics with additional revenues, entrenching their abilities to outgrow FcRn or other competitive challenges. I’m wondering if you have any other thoughts on the strategic merits of the Biomat deal, their capital allocation strategy to consolidate the industry at large, and the combination of more controlled capacity in concert with potentially higher prices over the next few years.

{audio:0:16:17} Inevitably, prices will go up because of the shortage of plasma derivatives. In terms of plasma-derived products, recombinants are already expensive to produce, as we talked about. You may consider that consolidation is not done yet. It's a constantly moving system of parts. We have not seen CSL and BioLife really move forward in the same pattern of an aggressive manner, in terms of trying to grow through acquisitions. When I say growing through acquisitions, I don't mean growing by purchasing other companies solely to increase collection of product or fractionation capacity, but also the number of donation centers. Certainly, that allows you to increase employees at each center provided they're meeting targeted growth strategies, and to target that improvement takes time. You also have to have a very good system to recruit people to do that type of work.

{audio:0:17:36} I think that CSL and BioLife have grown more organically, and I think that they may be beginning to look at other smaller companies to consolidate so that they can grow their revenue streams and profit line. CSL is double the size in terms of revenue and profit growth than Grifols. Grifols continues to grow, but they've leveraged quite a bit of debt. As you mentioned, it is cheaper in Europe, and that cheaper debt has allowed Grifols to take advantage of its ability, based in Barcelona, to leverage that debt.

{audio:0:18:16} I think that they'll continue to try to grow more on a worldly basis. I think they'll continue to try to grow in the United States, but I think they're looking at other foreign countries. For example, Grifols is also trying to grow in Egypt by negotiating with the government to operate plasma centers there. We have to keep in mind that they're going to continue to do this in China and perhaps even in other new growth markets, African countries particularly.

{audio:0:18:56} Turning to competing therapies, at a very high level, next-gen gene therapies are the hot ticket items in markets at the moment, but that said, the prices of Moderna and Illumina heartily reflect this enthusiasm and then some. On the flip side, granted it's a slightly different business mix, CSL is pricing a zero-risk of disruption from recombinants and FcRn while Grifols’ B-shares at the moment are almost priced for extinction. What I'm trying to do here is distinguish between narrative and fact in the gene and novel therapy and recombinant disruption debate, gauge the timing of potential disruption and determine the efficacy of Grifols and other incumbents’ competitive responses.

{audio:0:19:50} You've been very helpful and clear, painting some broad strokes here. Still, I'm wondering if you could provide a very high-level overview of the biological idiosyncrasies of recombinants, FcRn, and gene therapy products. How do they differ in molecular composition, how they work, their purpose, and most importantly, what’s the competitive risk they pose to each of Grifols’ key proteins? I understand I just asked you a large question here, so in the interest of time can we discuss each of Grifols’ key immunoglobulin proteins here and, if we have time, potentially turn to A1.

{audio:0:20:37} Virtually every plasma derivative to date has a commensurate recombinant protein. If it doesn't right now, it will. It's just a matter of time. We need to step back a little bit and think about something in the bigger picture of things. I don’t look at recombinants as taking share away from plasma derivatives; I see it as an additive value, a synergistic effect. You have to consider that these products are not necessarily a substitute for plasma collections. They're costly to make, and they have a different structure in terms of how they work. These proteins work biologically, they're made from a protein, and they're amplified in the lab. They're produced in a lab from a core protein that's collected from plasma. But it goes through such a complex manufacturing process that it's no longer considered human-derived, it's considered an artificially produced protein, but it starts with a human derivative.

{audio:0:22:04} So at the end of the day, you're talking about two products, a manufactured product, and a human derivative. They both work the same. Research studies have been done extensively on the comparisons, the efficacy, the safety, the tolerability before these drugs get FDA or EMA-approved. These drugs have the same efficacy; they work very well. There's no evidence to suggest that one is more superior than the other within each class. For example, with regard to gamma globulin or Gamimune, Gamunex, and Fc products that are coming on the market, these products are not any different. Why would you want to spend more money as a physician on a product that costs more money than the patient's insurance may cover? That's the other problem. You have to keep that in consideration.

{audio:0:23:00} In areas of the world, for example, where perhaps plasma derivatives have a shorter half-life or a shorter shelf life, the recombinants may be more useful. This is particularly true when you're talking about a third-world country where heat and other factors come into play that can denature the protein. It’s more stable, it’s more inert, it’s more flexible versus a human-derived product. You also have to keep that in mind.

{audio:0:23:32} You also keep in mind we're talking about a very, very small number of people who use these products. These are not products given to anybody and everybody. For example, I would say the incidence of hemophilia is one in 500 people, and very serious hemophilia may be one in 10,000 people who require medicine every day for life from the day of their diagnosis. You're talking about these people who require a large amount of product, and they are the bulk users of plasma derivatives and/or recombinants. I don't think that recombinants should be looked at as taking away share. They're additive, synergistic, and provide another additional revenue stream with additional stability in their shelf life.

{audio:0:24:37} It's interesting you say that because it's almost the opposite of the market now, the run at the moment.

{audio:0:24:46} I think that people need to stop comparing recombinants to plasma derivatives. They do the same damn thing. It's just the availability of product might be the problem. Here's the example I think everybody needs to go back to, particularly when talking about Covid. Covid has resulted in a significant disruption in plasma center operations in this country. Plasma collections are down, and they were down 50% last year. In general, they started 30% lower this year, probably ending up 20% to 25% lower. They are improved from 2020, but we're talking about 2019 when normal used to be normal. So how do you build your product line and development if you don't have enough plasma derivatives? You use recombinants. They're available. They're used to complement the system. Yes, they're more expensive, but the price will go down if they're widely used. The price competitiveness will not be what it is 10 years from now.

{audio:0:26:04} How much are Grifols using recombinants in their business mix at the moment?

{audio:0:26:13} Say, maybe 25%. I would say 75% is probably in line with plasma derivatives that come from fractionated plasma. That also includes recovered plasma that's also fractionated, in other words, blood that's collected and plasma that's separated from that collected blood and the plasma then fractionated that's recovered plasma, for the sake of definition.

{audio:0:26:49} So Grifols would be relatively ambivalent about selling recombinants if required, also given 2020 circumstances, the shortage of raw material plasma?

{audio:0:27:05} Yes; it’s about who’s manufacturing these products. These are manufactured by smaller companies that are nimbler and do not do what Grifols does, which is, in the general perspective and my perspective, a lot. They have labs, and they have tested, they have research, development, plasma operations, they have a bioscience division. They have multiple different entities in their business. Plasma is one part of it – it's not the only part of it – and plasma is certainly a growth for Grifols as a parent company.

{audio:0:27:52} But in general, recombinants right now are small. If Grifols were to get involved in recombinants and produce these compounds, they would have to restrategize. Right now, they're primarily in the plasma derivative growth, where they're growing collection centers, and they have increased their share in stake by the recent purchase of Biotest, that increases their fractionation supply by three million units. They want to be the go-to company for other companies to ship their plasma to Grifols for potential fractionation. They want to be a partner in that. That is where their focus lies. It doesn’t take much if you're looking to understand why they're buying certain companies. Their growth strategy makes sense; it's in line with what they're doing. While recombinants may be something they could be exploring, I think that's too costly for them. If you do something well already, why do you want to do something else that you don't know how to do?

{audio:0:29:01} On a high level as well, are you aware of any differentiation in the insurance companies and their reimbursement schemes between recombinants and plasma-derived protein products?

{audio:0:29:21} Recombinants are more expensive. They’re more expensive not because companies are charging what they want to charge; they're charging because that's what it costs to make these products. They're expensive. They're labor-intensive. They have a very strict manufacturing process. Insurance companies are more interested in reimbursing for the cheaper product. In their best interest, they're going to continually provide the availability of plasma-derived factors more readily than recombinants on the open market. While I strongly embrace and believe that these biologics are important, they're also important because of their novel ability to function.

{audio:0:30:13} When we talk about recombinants, it doesn't just have to be a recombinant protein. It could be a monoclonal antibody, a gene therapy, or a stem cell-derived factor, so I believe they offer new approaches. They could potentially improve efficacy and outpace the safety and tolerability of plasma-derived factors, but that will take time. We need more research, more time, and more product on the market, frankly. But the insurance companies are not going to pay for the very expensive product. They're simply not. Most people, if they had the means and the capability, can't buy it. They can't buy it on their own. But if somebody has access to financial resources, perhaps they will, but then again, that remains to be seen.

{audio:0:31:10} If a hospital is going to stock product for patients, they’re probably going to stock the plasma-derived factors because they’re cheaper and they’re readily used. In contrast, the recombinants are more expensive, they're a bit more difficult to maintain, they have to be frozen or kept at a very cool temperature, and they have to be reconstituted in certain diluents. People may not understand how to do that.

{audio:0:31:39} In concluding our discussion regarding competing therapies, would it be accurate to say new therapies could simply grow the size of the treatment market pie, which could then well remain relatively evenly split between plasma and new therapies?

{audio:0:32:05} I think that's fair to say. I also think you have to consider the fact that we have seven billion people on this planet. I do not believe 100% that we have targeted every individual who will benefit from a potential plasma-derived factor, whether it's plasma-derived or recombinant. With that in mind, there is still tremendous growth in the market. There are newly diagnosed cases yet to be made, and individuals who simply have no access to these products. Perhaps they're in a third-world country that's underserved. Perhaps they're in an area of the world where the government doesn't support health care, where individuals are ignored, where the access to medical care is limited, where the education of physicians and other providers is limited to understand and diagnose these problems. I believe that there is significant growth ahead, the population is continuing to grow, but I think you have to highlight that there are many individuals who have not been diagnosed yet. They could certainly benefit from these factors.

{audio:0:33:20} The other thing to consider is that with Covid, we now understand that other diseases may be coming on the horizon, whether they’re manmade, lab-made, whatever we want to believe of the origin of a virus that’s wreaked havoc upon the world. Ultimately, a plasma-derived factor or a recombinant protein could be helpful to thwart, and improve the health of many individuals that we may not have even known about today.

{audio:0:33:53} So it’s increasing usage indications. The trend towards higher doses for existing patients based on clinical evidence and higher per-capita usage in new markets, the combination of this new volume growth plus potential price rises alone, seems able of generating still high single-digit top-line revenue growth for at least a decade in the industry. Then there are different efficiencies in each company which can increase that. Is the market simply paying too much attention to potential sources of competition and not enough to potential new revenue drivers? And can you touch on your views of growth from core plasma products, new applications and heightened pace in usage from here in?

{audio:0:34:48} Plasma derivatives will continue to be useful. We can fractionate additional products from plasma for disease processes that we have not identified; disease processes for which a small amount of a protein that's in plasma could certainly benefit individuals. One of those devastating diseases is Alzheimer’s, and Alzheimer’s contains a number of plasma proteins, as a clinical trial is currently being done where individuals who have mild to moderate early disease benefit from plasma derivatives, specifically plasma itself. Unbelievable information, it’s been going on for several years. I believe that the industry could explode if there's a therapeutic target and potential for Alzheimer’s patients to benefit from this treatment.

{audio:0:35:45} Again, we’re not talking necessarily about plasma derivatives specifically, like Factor VIII, Factor IX, but we're talking about the whole unit of plasma. Like albumin or even other proteins like that administered to patients who have this severe degenerative disease, patients who could maybe have five or 10 more years and do better and have a prolonged lifespan with quality of life improved.

{audio:0:36:11} Biologics? They'll continue to drive growth, top-line growth. I think 7% to 8% is a fairly modest view for long-term growth potential. I think there will continue to be work done in this field. I don't think that biologics are the answer to growth and profit long-term. You have to consider diversifying into other disease states, other countries, other markets and not necessarily focusing only on products. Products are only one ingredient of the wheel. It's only one ingredient. You have to consider that there are multiple other ways to grow. Testing, fractionation, capacity; biologics are just one part of it.

{audio:0:37:00} I think it's easy to focus on biologics because they cost a lot, but don't forget it costs a lot to make. So just because it costs a lot doesn't necessarily mean it will give you a return on investment. If you invest a billion dollars in producing a biologic, you may not make that billion dollars for five years.

{audio:0:37:25} Whereas you look at Biotest here, the new proteins added to the same cost-base mix, management has slated that it will increase margins by 500 basis points over the next couple of years.

{audio:0:37:43} Yes, a couple of years, very quickly. I think that was the reason this transaction occurred. This transaction occurred because Grifols wants to grow; it wants to grow profit. Its shareholders are also beginning to wonder, hey, you've done a lot of acquisitions, but the profit doesn't continue to grow. Debt continues to grow, but the profit doesn't continue to grow. I think this was a good way for the oligopoly to give a very clear message that look, we know what you guys want, we're focusing on it, and we're trying to get there. Here's what we see, and here's what the forecast says.

{audio:0:38:28} I was heartened to hear their discussion of focus on enhancing value for B-shareholders and keeping a few tricks up their sleeve there, too. We haven’t even touched on Grifols’ own recombinant response, the GigaGen acquisition, Alkahest, AMBAR, Shanghai RAAS, it seems like there’s a lot of other optionality outside of blood plasma. We haven’t even talked about diagnostics. A lot of optionality in Grifols that is unappreciated.

{audio:0:39:06} Yes, I think that these are sexy topics; GigaGen, Alkahest, all of these things. Grifols is trying to grow. Grifols is trying to grow its profit, but they’re also looking at it from the perspective that we also need to be competitive with our peers. We have to be able to do many similar things that they’re doing. We've talked about acquiring, we've talked about growth through acquisitions, growth through partnerships. We're not talking about true innovation, where you're in the lab, and you're developing your own techniques, and it's a blockbuster.

{audio:0:40:03} That's what's missing, and why it's missing is because Grifols doesn’t do that well. I’m not badmouthing the company; I am being factual. They don't do that well. They might do that well in diagnostics, but they probably don't do that well when it comes to these types of products. They don't really have a pharmaceutical division. If they bought a small pharmaceutical company, they could certainly integrate that, but they don't integrate. They just acquire. When you acquire, you have different entities and different business units. That doesn't necessarily mean that you are the ones innovating. It's your GigaGen team that’s innovating.

Grifols & The Plasma Market - Part II

Grifols SA

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.