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Is Grifols Being Overlooked?

March 19, 2014 | About:

Based in Barcelona, Spain, Grifols SA (GRFS) is a vertically integrated producer of plasma derivatives. It also operates in the pharmaceutical-hospital sector engaged in researching, developing and retailing of plasma derivates, products for intravenous therapy, clinical nutrition, diagnostic and hospital logistics systems. The firm's products and services are used by health care providers in around 100 countries to diagnose and treat patients with hemophilia, immune deficiencies, infectious diseasses and a range of other medical conditions. Through the operation of commercial susidiaries Grifols has presence in 24 countries.

The company business' segments are three: Bioscience Division, Diagnostic Division and Hospital Division. The first is engaged in the research, development, production and commercilization of plasma derivates. The second is focused on researching, developing, manufacturing and marketing vitro diagnostics products, including analytical instruments and reagentss for diagnostics, as well as blood bank products. Lastly, Hospital Division provides non-biological products used in hospital pharmacies, surgery, nutritional support, fluid therapy and other therapeutic uses.

Grifols has performed well in the third quarter, with net profit growing 35.3% to $370.1 milion. Also, it achieved record sales in North America after revenue from the U.S. spiked 14%. This specialty biopharmaceutical stock has seen estimates rise over the past month for the current fiscal year by over 20%, which still isn't reflected on its price, as the stock only gained but 0.6% over the same time frame. Should you invest before it does?

Leading Global Presence

In the global plasma-derived protein business market share is concentrated among a small number of global players. With the $3.7 billlion acquisition of Talecris in 2011, Grifols has become a more international firm and the third-largest producer of plasma products globally. It has received a particularly strong boost to sales in the U.S. and the company has also had the opportunity to increase market share for Tallecris' products outside North America. Now, the company is able to use plasma more efficiently, as well as to reduce production costs.

In addition, it recently acquired Novartis (NVS)' diagnostics unit for $1.7 billion which complements Grifol's plasma business, thus locking in a dominant market share in blood and plasma testing in the U.S. The new diagnostics business will account for a fifth of revenue, compared to 4% up until now. The annual turnover of this business is expected to grow about $1 billion.

Deals Add Expertise and Deepen Product Portfolio

From the Talecris' acquisition Grifols has benefited from the latter's expertise in IVIG (Intravenous Immunoglobulin) yields and from its ability to market more of the plasma protein it isolates via Talecris-derived brands. IVIG currently accounts for around halft of Grifols' top line. Talecris' Gamunex more than doubled Grifols' immunoglobulin sales and combined today, the sales of Flebogamma and Gamunex hold roughly one-fourth of a more than EUR6 billion market for patients with immune disorders. As treatment rates rise and firms begin to supply more developing markets, market growth seems likely to remain sustainable with continued volume growth. Additional synergies will also come from this deal. Grifol's Factor VIII product Alphanate and albumin product Albutein are market leaders, while Talecris' product Prolastin dominates the U.S. market to treat a rare pulmonary disorder and could see continued strong growth if clinial trials in diabetes and cystic fibrosis are positive.

Naturally, the deal with Talecris will improve margins, but it will also allow this company to be relieved of its manufacturing and plasma collection constraints. Their manufacturing facilities have combined as well, in order to give the firm even more opportunities for efficient production at a higher scale. Added expertise from both companies also comes in hand as recombinant versions of several of Grifols' products are already on the market, and the safety and convenience of these products will probably erode Grifol's hemophilia sales. The company's reputation and sales depend on maintaining consistently safe products. Added expertise from both companies also comes in hand as recombinant versions of several of Grifols' products are already on the market, and the safety and convenience of these products could probably erode Grifol's hemophilia sales. In order to avoid that, Grifols now owns new technology that removes essentially all pathogenss, making plasma products much safer than they were two decades ago and more affordable than recombinant counterparts.

Overlook No Further

The firm holds a high debt level, though each year's lower, and it still has healthy free cash flow levels. Furthermore, the stock currently holds a Zacks Rank #2 (Buy) and this year's expected earning growth over the prior year is 83.6% which, at some point, is expected to translate into price appreciation.

 

Grifols SA (GRFS)

Industry Median

Baxter International

P/E

43.00

23.60

18.30

Market Capital

14.42 B

-

36.63 B

ROE

13.68

8.17

23.77

The company's not trading at discount price, but given its performance in the recent past, the stock seems to still not have fully adjusted its price. Overlook no more, as better days seem to be ahead in the future of this company, as gurus Jim Simons (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Steve Cohen seem to think.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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