Here at the Mare Evidence Lab tower, we cover the European pharmaceutical sector extensively. As for the half-year results season, we have already published the performance of Novartis, Roche and Sanofi in the second quarter. In conjunction with the quarterly report, we initiated coverage on Lonza Group AG better assess the specialty pharmacy sector. Today is the day of the Grifols (NASDAQ: GRFS) as the company released its three-month numbers yesterday.
In the latest publications of our company, we would like to point out the following:
- There was a strong rationale behind the acquisition of Biotest and we criticized some negative comments from JP Morgan;
- When we started hedging Grifols, we knew about the potential for short-term turbulence, but we provided a positive long-term upside view;
- We had expected that the result of the complementary acquisition of Biotest would provide valuation support and after the analysis of the first quarter, we reaffirm the strong fundamentals of Grifols.
After the Q2 report, Grifols’ share price fell more than 10%. Certain accounts are undoubtedly impacted by the acquisition of Biotest, but we are also seeing favorable numbers in the Biopharma division.
In more detail, the biopharmaceutical company recorded sales of $2.8 billion in the first half of 2022, representing a revenue increase of 10.8%. As we have already mentioned, this was driven by the solid evolution of the biopharmaceutical division but also by a favorable evolution of the product mix and a better evolution of exchange rates. Note especially the positive development of plasma donations, which increased by +22%. This has always been a refusal from the investment community. While the diagnostic service achieved a turnover of minus 16.7% and amounted to 329 million euros. This was due to the lower COVID-19 test and also to reported in the press release speak “Stopping Zika virus testing“. EBITDA also improved at the margin level due to increased operating leverage.
The worst result was recorded at the net result level. Grifols’ profit amounted to 143.6 million euros, which represents a decrease of 46.2% compared to last year’s accounts. This is due to the higher interest charges that finance the German company Biotest. The cost of the external acquisition continues to be very visible in the P&L, in which the financial expenses climbed by 66% compared to the previous year. However, on closer inspection, we see that the Spanish company has little exposure to interest rate increases since around 65% of its debt is at fixed rates and only around 22% is linked to an interest rate. variable interest in US dollars.
Conclusion and evaluation
We like to report the words of the CEO which explained how the company “is more than ready to continue to deliver on its commitments and take on new challenges, unlocking further growth and profitability while maintaining financial discipline. And most importantly, to drive innovation as we continue to deliver lifesaving medicines to our patients.”
Another important news to report is the divestment of Grifols in Goetech LLC for a total amount of 91.6 million euros. The company focused its activities on the development of computer applications for hospitals and it was included as a non-strategic asset.
For the second half of the year, the company expects to maintain its double-digit sales growth. In addition, they aim for greater profitability per liter of plasma processed and save additional costs through the acquisition of Biotest. Unlocking Biotest value and deleveraging is the priority to check over the next few quarters.
Regarding valuation, our internal team believes that Grifols is well positioned for a rebound. By adjusting interest charges in our model, we confirm our buy rating and lower the price target from €28 to €25 per share. Grifols is trading at a P/E discount to European specialty pharmaceuticals and also to its closest Australian competitors. In numbers, we see a 40% discount on the P/E ratio. To posterity the arduous pain.
Risks to our target price include the following:
- greater competition;
- lower plasma donations and higher donor fees which could trigger Grifols’ profitability;
- new waves of COVID-19;
- Risk of execution of the acquisition of Biotest.