Grifols: Sustainable top line growth and margin expansion

Grifols

BofAML | We reiterate Buy on Grifols A&B for durable double-digit EPS growth driven by strong global plasma market position. Margin expansion is returning as plasma cost stabilises. AMBAR study in Alzheimer’s disease; may increase IG/Albumin demand through off-label use.

Reiterate Buy for durable growth into 2020

We reiterate Buy with Share A PO at Eur32.0 and Share B PO at Eur24.0; we note the B shares have a valuation discount above historical average. Grifols continues to offer durable high single digit revenue growth from its prominent position in the global plasma oligopoly. Bioscience (c80% sales) growth is driven by favourable underlying demographics, a supportive pricing environment, potential entry into newer indications (Alzheimer’s AMBAR trial & sepsis), and newer formulations (Xembify subcut lG launchexpected 4Q19) with IG and Albumin continuing to be the main drivers (details inside). Until now, margin expansion has been restricted due to increasing plasma cost, expansion of collection centres (297 FY19E, 8% CAGR FY18-24E). However, looking ahead, we expect margin expansion to return, driven by stabilising plasma cost aided byslowing expansion of collection centres as existing ones ramp up to maximum operational efficiency. On competition, real FcRn threat, in our view, still remains away with PII trials in CIDP (autoimmune indication which accounts for c25% IG sales) only initiated in 1H19, hence approval remains a long way from market and contingent on clinical trial success. We update our estimates post model review and quarterly results. We continue to forecast 7% 21-24E sales and c10% EPS CAGR. Our unchanged Eur32.0 PO is now based on c22x 2021E PE (vs 25x 2020E PE previously), justified by sustainable double digit EPS growth.

AMBAR, a potential increase in IG/Albumin demand

AMBAR trial of Albumin/IG in Alzheimer’s disease showed positive primary endpoint (cognition & function) in moderate pts but positive secondary endpts on elements such as speech/language in mild pts may justify their inclusion in PIII, to start end19/early20, in our view. An American Apheresis Society recommendation in 19/20E could see earlier off-label use. AMBAR journal publication is expected this year.

FcRn competition worth watching but still early days

Despite some market concern over potential competition from FcRn antagonists to Ig sales in autoimmune diseases, PII trials in CIDP (c25% IG sales) only initiated 1H19 which, in our view, suggests an approval/label remains a long way away.