Now Could Be The Right Time To Buy Grifols With Worries Over Trade With China

Summary

• Sales and earnings growth have been tremendous.
• Profit margins were over 15% last year.
• The annual report was just released.
• The stock may be down on worries with China trade.

Plasma biotech Grifols (NASDAQ:NASDAQ:GRFS) just released its annual report and has put up record sales. The Spanish-based company is the second largest producer of plasma in the world. Revenues and earnings growth have been tremendous. It appears the stock may be down because of trade worries with China.

There are 684.2 million shares, the stock price is €22.77, and the market cap is €15.5 billion ($19.1 billion). Earnings per share were €0.97 and the price to earnings ratio was 23.5. The dividend was €0.32 and the dividend yield is 1.4%. There are two classes of stock, which is annoying. The A share receives 100% of the vote and is 36.4% owned by the Grifols family. There are 426.1 million A shares and 261.4 million B shares.

Grifols is a growth beast. Revenues were €2.74 billion ($3.3702) in 2013 and grew to €4.3 billion ($5.3 billion) in 2017. It takes $1.23 to buy one euro. Earnings per share grew from €0.51 to €0.97 over that time frame. Profit margins were over 15% last year. It doesn’t get much better than that.

The balance sheet is a little debt heavy. The asset side shows €886.5 million ($1.09 billion) in cash and €386 million ($475 million). The liability side shows €571 million ($702 million) in payables and €5.9 billion ($7.3 billion) in debt. Cash flow from operations were €841.7 million ($1.035 billion) and capex was €251.5 million ($309 million) for a free cash flow of €590.2 million ($726 million). Free cash flow is often low because so much money has been invested into new operations. The company recently announced another $210 million investment in North Carolina.

How Grifols works is like this. You go to one of Grifols' 190 centers in the United States and give plasma. This is the best part of the blood. You get decent amount of money depending upon the amount of plasma that you give. Donors are checked for diseases and drugs to make sure they are healthy. Then, the plasma is collected and frozen to destroy any germs. Next, the plasma is sent to one of Grifols' three fractionators. Two are in the U.S. and one is in Spain. The fractionators turn the plasma into medicine. Then, Grifols markets the various medical supplies to the end user.

The reason that all of this Spanish company’s centers are in the U.S. is that U.S. laws are favorable for plasma operations. In the European Union, a donor cannot give with the same frequency. In China, there was a tainted blood scandal a number of years ago that the government tried to cover up. Chinese citizens are leery about giving blood.

I looked into what it would take to start a plasma center. It’s next to impossible. The FDA and EU both have to approve your center. You cannot sell in Europe without European inspectors coming to your location in the U.S. Next, you must take in plasma (and pay the donors) while the FDA waits to approve your application. This could take up to a year. There is a chance that all of the frozen plasma you have might have to be destroyed if you do not get approval.

I’m told the process is quite slow. On top of that, you have to find a fractionator that will take your plasma. Guess what? Most of the fractionators are owned by a handful of major players. If they don’t take your plasma, then what do you do? Much of my research came from interviewing the IR person for Grifols, a plasma industry analyst, and fellow who sold out to one of the larger plasma companies. It's a very interesting industry.

It sort of gets the reputation for a place where poor people go to give blood (plasma) and receive money. The industry doesn't get the respect it deserves for supplying medicine for patients in need. It just has to pay for the plasma.

I visited the headquarters in Barcelona last fall and spoke with investor relations. Grifols has 26,000 donors in the U.S. that average 0.8 liters per visit for a total of 9 million liters of plasma a year. There is an extensive screening process to make sure that the donors are healthy. The plasma is then stored for 60 days in negative 30-degree Celsius temperatures. I wrote about this in a previous article.

The drugs produced by the plasma have many applications. Much is used by people with hemophilia and bone marrow transplants. Other diseases treated include: Guillain Barré, Kawasaki disease, and von Willebrand disease. The plasma is divided into what the industry calls factors. The higher the number, the less water in the sample. Factor V, the highest factor, is called albumin. China only allows the import of albumin for its population.

79.4% of sales come from plasma. Another 17% comes from diagnostics, which is working with blood banks. Grifols receives 67.1% of revenues from the U.S., 15.9% in Europe, and 17% in the rest of the world. This weak dollar does not help Grifols. The stock was over €26 a few months ago but now down to €22.77. My guess is the flare-up with China and the U.S. over trade. As China is such a large user of plasma, perhaps it spooked the market.

Australian CSL (OTCQX:CSLLY), Baxalta of the U.S., and Grifols together control about 88% of the market in the U.S. I don’t see that changing much as the barriers to entry are so high. Another risk with plasma is that it’s a commodity. High supply can kill the price. Right now, there seems to be a dearth of plasma.

My guess is that the Chinese won’t put any tariffs on plasma. Most of the large plasma companies are not American so they’d be punishing the Australians and Europeans. This stock is definitely one to watch for the U.S. investor.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.