Grifols Faces Novel Competition, but Strong Plasma Demand Continues To Support a Narrow Moat

Sector Strategist

Karen Andersen

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Today, Grifols holds more than 20% of a roughly EUR 15 billion immunoglobulin market that is growing at a double-digit rate thanks to demand across multiple types of immune disorders. While IG accounts for more than 40% of Grifols' top line, pulmonary product Prolastin leads the market for alpha-1 antitrypsin deficiency, and Grifols has seen solid albumin growth, owing to Chinese demand. With several products under the same roof, Grifols is able to improve margins, as more of the proteins in plasma are turned into marketed products. 

Recombinant and novel hemophilia products have shrunk the plasma-derived factor market, and Grifols is facing new competition in the immunoglobulin market from novel FcRn targeted therapies, as well as recombinants and gene editing therapies that could compete with Prolastin. However, we continue to see immunoglobulin market demand as solid in the near-term to midterm, due to several large indications that are less vulnerable to competition, and gene editing is likely to take years to reach the market. In the meantime, Grifols continues to expand its pipeline, driven by the recent Alkahest, GigaGen, and Biotest acquisitions.

The $1.7 billion acquisition of Novartis' blood and plasma diagnostics business in 2014, followed by the $1.85 billion acquisition of partner Hologic's share of this business in 2017, complements Grifols' plasma business, locking in a dominant market share in blood and plasma testing in the United States. The diagnostics arm represents around 10% of total revenue and offers a steady business that diversifies Grifols' operations in the long term.

Business Strategy & Outlook

Grifols has a strong position in the global plasma protein oligopoly, and we assign it a narrow moat rating based on the market's high barriers to entry, rooted in cost advantages and intangible assets. The $3.7 billion acquisition of Talecris in 2011 significantly strengthened Grifols' plasma business, particularly in the valuable U.S. and Canadian markets. Grifols, Takeda, and Australia-based CSL together control two thirds of the global plasma market, with shares split relatively equally. We estimate that more than half of Grifols' plasma revenue stems from immunoglobulin products Flebogamma (from Grifols) and Gamunex (from Talecris) combined. This gives the firm about 20% of the global $16 billion immunoglobulin market, with most of the balance split between CSL and Takeda. Global plasma supply and fractionation capacity are limited, and Grifols' vertically integrated business gives it access to plasma collection centers and processing facilities. We see Grifols as a low-cost provider of plasma-derived therapies and attribute the high barriers to entry in this market to the capital-intensive nature of plasma fractionation, the long lead time (five to seven years) for new capacity to be approved, and the experience level of all of the firms in this oligopoly (which contributes to high manufacturing yields and strong brands). We think the firm does face environmental, social, and governmental risks, particularly related to potential U.S. drug price-related policy reform and potential for product governance issues. While we have factored these threats into our analysis, we don't see them as material to our valuation or moat rating.

The Novartis and Hologic diagnostics acquisitions boosted diagnostics to roughly 15% of Grifols' sales (roughly 10% following the 2022 acquisition of biopharma-focused Biotest), which helps to diversify the firm's profits and reduces reliance on plasma protein sales. Grifols now dominates the blood and plasma screening market in the U.S. and has the platform to see further vertical integration of its blood and plasma-related businesses at a global level. To some extent, switching costs in screening markets should help protect Grifols' market, which is largely based on sales of immunoassay and nucleic acid testing products.

Our certainty regarding Grifols' ability to see excess returns 10 years from now is tempered slightly by our belief that the long-run competitive advantages of the plasma industry have begun to weaken. As plasma-derived products represent more than 80% of the firm's revenue, this prevents us from assigning the firm a wide moat. Novel biologics that compete with plasma-derived immunoglobulin (including Argenx's Vyvgart, UCB's Rystiggo, and Johnson & Johnson's nipocalimab) would be the biggest threat to Grifols; for example, Vyvgart launched in the U.S. in myasthenia gravis in 2022 and could gradually gain access to the roughly 40% of the immunoglobulin market driven by autoimmune disease indications, if all trials go smoothly. However, immunoglobulin demand remains high, and alternatives for immunodeficiency patients (40%-55% of the market) are not in sight. In addition, we're watching competition to Prolastin in the alpha-1 antitrypsin market, as recombinant versions of Grifols' plasma-derived therapy and gene editing therapies are in development. 

Grifols could counter this pressure with progress in improving the efficiency of its plasma business. In 2023, costs per liter of plasma collected are falling and production is increasing, in line with a cost savings program. That said, we think Grifols needs to continue to make progress with innovation in its pipeline, as less-innovative formulation changes still dominate the late-stage pipeline, with more novel drug candidates mostly in earlier stages of development. We’re closely watching for progress with Biotest’s pipeline, which should result in Fibrinogen approval as well as potential data for Cytotect and Trimodulin in 2024.

Narrow

Economic Moat

Grifols, S.A.

Grifols SA engages in the production of plasma derivatives. It operates through the following segments: Bioscience, Hospital, Diagnostic, Bio Supplies, and Others. The Bioscience Segment includes all activities related with products deriving from human plasma for therapeutic use. The Hospital Segment comprises of all non-biological pharmaceutical products and medical supplies manufactured by group companies earmarked for hospital pharmacy. The Diagnostic Segment deals with the marketing of diagnostic testing equipment, reagents, and other equipment. The Bio Supplies segment consists of all transactions related to biological products for non-therapeutic use. The Others segment focuses on the rendering of manufacturing services to third party companies. The company was founded by José Antonio Grifols Roig on November 18, 1940 and is headquartered in Barcelona, Spain.

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BARCELONA, Spain, Oct. 9, 2020 /PRNewswire/ -- Grifols (MCE: GRF, MCE: GRF.P, NASDAQ: GRFS), a global leader in the development of therapies with plasma-derived proteins with a track record of more than 100 years dedicated to enhancing people's health and well-being, today announced that...

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