Earnings Call Transcript - GRFS Q1 2025

Danny Segarra, VP, IR and Sustainability

Hello, everyone. My name is Danny Segarra, and I serve as the Head of Investor Relations and Sustainability and Vice President at Grifols. Welcome to our review of the company's Business Results for the First Quarter of 2025. Today, I'm joined by Grifols Executive Chief Executive Officer, Nacho Abia; Chief Financial Officer, Rahul Srinivasan; and the President of Biopharma, Roland Wandeler. A few logistics before we get into details. Today's call will last about an hour, including a Q&A session. As a reminder, this call is being recorded. You can find additional materials, including today's presentation, in the Investor Relations section of the Grifols website at grifols.com. The transcript and a replay of the webcast will also be available on the Investor Relations website within 24 hours. Turning to Slide 2. Please note that this presentation includes forward-looking statements regarding, among other things, the company's future operating and financial performance, market position, and business strategy. These statements are based on current expectations and available information as of the date of this recording, and they are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected. All financial statements are prepared in accordance with EU IFRS and other applicable reporting provisions, including alternative performance measures or APMs, prepared under the group's financial reporting model as defined by the European Securities and Markets Authority. Please note that Grifols management uses APMs to evaluate financial performance, cash flow, and overall financial position as the basis for operational and strategic decision-making. These APMs are prepared for all time periods presented in this document. Now moving to today's agenda. Nacho will start with some introductory remarks, followed by a discussion of our business performance and strategic execution. Then Rahul will review the financial results for Q1 2025. After Rahul's presentation, we will return to Nacho for his closing comments. Roland will be joining us for Q&A. With that, I will now turn the call over to Nacho.

Nacho Abia, CEO

Thank you, Danny, and thank you, everyone, for joining us today. Building on the all-time high in 2024, we are pleased to report a strong start to 2025. The first quarter saw encouraging increases in revenue, EBITDA, and free cash flow. This performance reflects the fundamentals of our business and the continued execution of our strategic plan. We recognize that this growth is particularly noteworthy given the anticipated impact of the inflection reduction at IRA and the global uncertainties we all are navigating. Despite these factors, our Q1 results across the board are ahead of our plan and importantly, provide a solid foundation for continued progress throughout the year. Although the first quarter has traditionally been our softest, our Q1 performance reinforces our confidence that we will continue to see steady improvements over the course of 2025, similar to the pattern we observed last year. I will walk you through these drivers in the next slides to give you more clarity about how we plan to achieve it. Before we delve into the details of the quarter, I would like to briefly highlight that in recent weeks, we have been closely monitoring the increasing macroeconomic and policy developments that are affecting all market participants. While we strongly believe we are well prepared to navigate these dynamic market conditions without meaningful impact, we remain vigilant and continue to carefully evaluate the situation. We will share more insights on this throughout the presentations. Ultimately, our focus remains firmly on executing our strategy, staying true to our mission ambition, and delivering on our performance goals. I want to express my sincere appreciation for the dedication of our teams across the globe. Their commitment to driving our strategy forward and serving donors and patients worldwide has been critical to our positive start to 2025. With that, let's move to the first quarter results in Slide 5. Before I go through this slide, it is important to note that in order to provide the market with a clearer view of the underlying performance of Grifols and biopharma in particular, we are presenting key financial metrics for this quarter and for the remainder of the year in two ways: Reported and like-for-like. Like-for-like figures are adjusted to account for the impact of the IRA Part D redesign and the fee-for-service reclassification. As a reminder, in Q4 2024, we changed the treatment of our U.S. fee-for-service and GPO fees. These fees are now accounted for in our gross-to-net sales rather than in OpEx, which has no impact on EBITDA. The full 2024 impact of this change was reflected in Q4 '24. As a result, this distorts the biopharma revenue growth in our 2025 quarterly results. In Q1 of this year, the difference between our like-for-like and reported figures amounted to EUR43 million. Of this, EUR28 million was attributable to the IRA in line with our forecast, while EUR15 million was related to the fee-for-service reclassification. Revenue in the quarter was a key highlight, reaching EUR1.786 billion, a 7.4% increase on a constant currency basis. On a like-for-like basis, revenue increased by 10%, showing a clear continuation of the positive revenue growth trend we saw in 2024. Adjusted EBITDA for the quarter reached EUR400 million, an improvement of 14.2% at constant currency. Like-for-like, it grew by close to 22%. The revenue impact, along with some temporary phasing in albumins and rabies put some pressure on our gross margin and EBITDA in Q1 '25. Going forward, we remain confident of our continuous improvement of our margins throughout the year, following the same pattern as in previous periods. Free cash flow for the quarter was negative EUR44 million, primarily due to the payment to ImmunoTek for EUR79 million, as previously disclosed. While free cash flow was negative this quarter, we achieved a year-on-year improvement of more than EUR200 million. Considering our first-quarter performance, we see these as clear signals for continued upward momentum in top-line growth, profitability, and free cash flow generation. While we maintain our strong commitment to further deleveraging our balance sheet. In terms of guidance, we are forecasting sustained revenue growth throughout the year, driven by our immunoglobulin franchise with significant growth in the U.S. as well as outside the U.S. We expect our subcutaneous immunoglobulin to continue gaining traction and contributing to the product mix. Our revenue projections are also supported by the improved performance of rabies and albumin, as the phase in reported in Q1 '25 will not carry into subsequent quarters. We also see our alpha-1 franchise continuing to show positive momentum following a new specialty pharmacy partnership in the United States. Equally important will be the contribution of lower cost of goods as our cost per liter initiatives and yield improvement efforts have been delivering and improving our inventory cost. Additionally, as our revenue increases throughout the year, it will trigger a higher absorption of operating expenses, thus having a significant positive impact on our EBITDA. Finally, let me emphasize that this business momentum is not only reflected in the quarter's positive results, but also underpinned by increased plasma capabilities and efficiencies, along with the successful completion of key innovation milestones, including fibrinogen, which we expect to launch in Q4 '25 in Europe and in the first half of 2026 in the United States, following its FDA approval. With that, I will turn to the top-line comments on Slide 6. Year-to-date revenue increased by 7.4% on a constant currency basis, driven by robust performance across all business units. Excluding the impact of the IRA and the reclassification of our fee for services, revenue grew by 10%. The sustained momentum was primarily fueled by biopharma, which like-for-like grew by 9.6% on a constant currency. The immunoglobulin franchise continues to be the cornerstone of our growth strategy, achieving 17.5% growth in revenue at constant currency and like-for-like. This growth was led by IV and subcutaneous IG as I will explain in a second. Alpha-1 continued to improve in Q1, reversing the challenges faced in prior quarters when the company switched its U.S. alpha-1 major distributor. While biopharma posted a strong overall performance, it was partially offset by some phasing in albumin and rabies. Albumin was impacted during the quarter by a standard license renewal process in China, which has been successfully completed allowing for the resumption of shipment as planned. The diagnostic business achieved a 5.2% increase in revenue on a constant currency basis this quarter, due to a broad expansion across both core and non-core markets as well as strong joint business volume growth. Key segments, including Molecular Donor Screening, Cell Donor Screening, and blood typing solutions each grew by 7%, 12%, and 4%, respectively, all on a constant currency basis. As I previously mentioned, biopharma continued to be the main growth driver in the first quarter of the year. The IG franchise remains the leading growth protein. IVIG growth was fueled by strong demand in both U.S. and international markets. While subcutaneous IG continues to gain momentum, growing an impressive 91% at constant currency, driven by higher demand across all key regions. As mentioned, albumin sales growth was temporarily affected due to the manufacturing license renewal process in China. This resulted in a decline of 8.9% on a like-for-like basis and 9.4% on a reported basis. As said, the renewal process has been successfully completed, and accordingly, we expect a stronger outlook in revenue performance in the upcoming quarters. Albumin remains a key component of our portfolio, and we expect to continue to leverage our partnership in China with Shanghai RAAS and Haier to strengthen our position. Alpha-1 and specialty proteins revenue growth improved by 2.3% at constant currency and like-for-like compared to the previous year. This growth was driven by alpha-1, continuing the traction seen in the last quarters. Although it was partially offset by the phasing of demand for rabies treatment, which, as already mentioned, will reverse in Q2 2025. Turning to the next slide, I'll take a closer look at the performance and outlook for our IG franchise. As we highlighted during our Capital Markets Day, Immunoglobulin remains the cornerstone of our biopharma business, driven by the status and our highest growth protein. This is evidenced by the strong underlying demand for both intravenous and subcutaneous therapies. Our strong growth and solid market positions have enabled us to capitalize on several favorable market trends, including increased awareness of immune-related diseases, rising diagnosis rates, and the ongoing expansion of both secondary and primary immune deficiencies. Additionally, the continuous development of therapeutic solutions in areas like neurological diseases presents further opportunities for growth. We remain focused on executing the strategy outlined for biopharma, building on our leading brands, accelerating the diagnosis rate, and solidifying our leadership position in the market on the back of increasing global demand for the treatment of immune deficiencies, followed by a steady increase in albumin and alpha-1 antitrypsin and other specialty plasma-derived therapies. Let me discuss now our situation regarding recent tariff developments and our confidence that previous stem investments protect us well in the current environment and the latest developments in U.S. drug pricing policy. For decades, Grifols has developed a diversified global footprint of plasma donor centers, manufacturing facilities, and distribution hubs across key geographies, ensuring we are strategically located to serve patients where they need us. Our growth strategy has been investing in regional end-to-end capabilities that allowed us to adapt the process in response to evolving global demand. This vertical integrated and cross-license structure provides flexibility and optionality to meet global needs with minimal disruption while significantly mitigating advertising from potential tariff impacts. In the United States, our comprehensive end-to-end supply chain is a key strength. Plasma collected at over 300 U.S. donor centers accounts for approximately 70% of our global plasma supply. This is then processed at our fractionation and purification facilities in Clayton, North Carolina, and Los Angeles, California, which together represent about 65% of our global capacity in these critical areas. This alignment between our U.S. collection and manufacturing operations minimizes reliance on external sourcing and allows for agile responses to changing needs. Our presence in Europe and the Middle East is also significant, with nearly 100 plasma collection centers paired with our manufacturing facilities in Spain, Germany, and Ireland. Our European plasma collection network, the largest privately owned fleet, coupled with our expansion in Egypt, positions us well to serve increasing demand outside of the U.S. Consistent with our global strategy, we continue to invest in local partnerships to directly address regional needs. In China, our local strategic partnership with Shanghai RAAS and Haier, combined with our European manufacturing capabilities, enables us to leverage a local presence and respond swiftly to regulatory developments. In Egypt and Canada, we are investing in greater self-sufficient partnerships with the Egyptian government and Canadian Blood Service, respectively. In both countries, we are establishing donor centers and manufacturing capabilities to support local health care ecosystems for the long term. This established global network of donor centers, manufacturing, testing sites, and distribution channels provides Grifols with a degree of resilience across core border macroeconomic, political, and environmental uncertainties, including tariffs. To reiterate, we do not anticipate any meaningful impact to our business due to tariffs as we believe this strategic approach has positioned us well to effectively serve patients globally and navigate the evolving geopolitical and fast-changing landscape. Since the early 2000s, recognizing the scale and importance of the U.S. market, we began strategic investments, starting with the acquisition of plasma centers and manufacturing assets, establishing our presence as a U.S. manufacturer. In 2011, we expanded further with the acquisition of Talecris in North Carolina, and we have since grown our plasma collection network through acquisition and organic investments. At the same time, we are strengthening our European footprint by expanding manufacturing in Spain and increasing our capacity for fractionation, immunoglobulin, alpha-1, and albumin purification. We also expanded our European plasma center network, primarily in Germany through joint ventures and organic growth. This was further consolidated with manufacturing operations in Ireland and the acquisition of a majority stake in Biotest in Germany. In 2019 and 2020, Grifols pioneered local partnership models in emerging markets. We deepened our presence in China through a strategic alliance with Shanghai RAAS that allows self-sufficient initiatives in Egypt and Canada. In both countries, we're building plasma collection and manufacturing capabilities to meet local demand. Together, these investments set the foundation for our next phase of growth and innovation, positioning Grifols to continue benefiting patients, both in the U.S. and internationally. Finally, earlier today, the U.S. administration announced its intention to reintroduce a most favored nation (MFN) policy, which aims to align U.S. and ex-U.S. drug prices. While this is a recent announcement, and we don't have all the details, there are some observations I would like to consider at this point. First, plasma-derived therapies are different than regular drugs in their cost structure. We saw that this was recognized in the past in the U.S., as they were excluded, for example, from IRA direct price negotiations as well as in the first proposal of the MFN where IG was explicitly excluded. We will continue to educate policymakers on the importance of access to plasma-derived therapies for U.S. patients. With respect to global pricing, the price points for plasma-derived therapies are much closer than for many other pharmaceuticals. A part of the limited price difference is due to the higher cost of U.S. plasma compared to other markets. Finally, we have a diversified product portfolio and offering across different markets, which further helps us to mitigate any potential impact. In any case, we will closely monitor the developments and share any relevant updates in our forthcoming quarterly calls. So with that, I will turn it over to Rahul, who will walk us through our financial results. Thank you.

Rahul Srinivasan, CFO

Thank you, Nacho. Indeed, we have highly dynamic forces impacting markets. As you say, we are very fortunate to have a business that benefits from significant strategic flexibility and optionality that allows us to navigate these highly dynamic markets very well. Notwithstanding the backdrop, the entire Grifols team has been resolutely focused on execution and delivering for our patients and our customers. In doing so, we remain on course to continue our record financial performances of 2023 and 2024 into 2025, having delivered in Q1 2025, the best Q1 in Grifols history. Moving on to Page 12 for the more detailed picture. Our Q1 numbers are ahead of plan across the board, beating revenues, EBITDA, free cash flow, margins, and leverage. As Q1 is our seasonally weakest quarter, we thought that the relative performance to our internal plan for the year would be helpful to the market. But I also want to make it clear that we will not be making reference to our plan or the relative performance on any of our subsequent quarter calls. In addition, as we did with our approach to laying out our full year 2025 guidance and the impact of Part D redesign within the Inflation Reduction Act during our Capital Markets Day, we are disclosing both our reported numbers as well as like-for-like numbers that allow the market to track more easily our underlying performance and momentum versus 2024, given the impact of IRA. Reported revenue for the quarter grew by 7.4% and by 10% like-for-like, both on a constant currency basis. Reported Q1 gross profit margins were higher than Q1 2024 despite the impact of the IRA and the fee-for-service reclassification. The corresponding like-for-like margin improvement of 150 basis points clearly shows the continuing gross margin improvement potential. Reported adjusted EBITDA was up by 14.2% on a constant currency basis and adjusted EBITDA margins improved by 80 basis points to 22.4% year-on-year and considerably higher on a like-for-like basis. Profit before tax and group profit are up by 145% and 179%, respectively. Free cash flow pre-M&A had a year-on-year improvement of EUR209 million, and I will elaborate on the drivers of this considerable improvement further in the presentation. Unlike prior years where leverage tended to increase in Q1, we were able to deleverage in Q1 '25 and more on that later in the presentation. Finally, liquidity continues to be in a very robust place at EUR1.7 billion. All in all, a strong performance across the board delivered Grifols' best Q1 performance ever.

Roland Wandeler, President Biopharma

Thank you, Nacho. As we highlighted during our Capital Markets Day, Immunoglobulin remains the cornerstone of our biopharma business, driven by the status as our highest growth protein. This is evidenced by the strong underlying demand for both intravenous and subcutaneous therapies. Our strong growth and solid market positions have enabled us to capitalize on several favorable market trends, including increased awareness of immune-related diseases, rising diagnosis rates, and the ongoing expansion of both secondary and primary immune deficiencies. Additionally, the continuous development of therapeutic solutions in areas like neurological diseases presents further opportunities for growth. We remain focused on executing the strategy outlined for biopharma, building on our leading brands, accelerating the diagnosis rate, and solidifying our leadership position in the market on the back of increasing global demand for the treatment of immune deficiencies, followed by a steady increase in albumin and alpha-1 antitrypsin and other specialty plasma-derived therapies.

Charles Pitman, Analyst

Hi, guys. Thanks so much for taking my questions. Two, if I may. Just firstly, to your point about doing Grifols business structure is protected from ongoing U.S. policy discussions. I was just wondering if you could give us a little bit more transparency around what Grifols exposure is and what the split is across Medicare Part B, D, and Medicaid, just to kind of give us a little bit more to work with when considering these potential impacts regardless whether it then turns out the plasma therapies are excluded. And then just secondly, with regards to the albumin phasing noted in the release today, I was wondering if you could provide a little bit more detail on what the implied underlying growth looks like in this market, excluding the disruption? And what kind of led to the unexpected delay, given this risk wasn't flagged ahead of results. So effectively just any more confidence you can give us on the strength of the albumin market generally. Thank you.

Nacho Abia, CEO

Thank you, Charles. This is Nacho. On your first question, I mean, honestly speaking, I think that it's really too early to make any conclusion whatsoever. I think that for the reasons I explained previously in my presentation, I believe that we are well positioned to face whatever will come in the most favored nation. But we have to see the details of that and how this unfolds. On the tariffs, I think that I also made clear that our presence in the U.S. is very solid and essentially self-sufficient there, so we don't see, at this point, any impact as well on that front. So that's what I can say on the first point. On the second point, I mean, the albumin license renewal is something that was planned and is something that happens every certain time. And this doesn't change our goals for the year. Our goal for the year is that we plan to grow albumin by 5% to 6%, and we continue on that path after the resumption of the shipments after the license approval. Thank you, Charles.

Danny Segarra, VP, IR and Sustainability

Thank you, Nacho. Now I will ask Jaime from Santander, Jaime Escribano.

Jaime Escribano, Analyst

Hi, good afternoon. So a couple of questions from my side. The first one would be, when do you expect revenues coming from Canada? Are you already making revenues in the new facility there? Or what is the roadmap? So that would be one question. And the second question would be regarding fibrinogen. So do you produce fibrinogen in Europe? Or should you buy this or are you going to produce it in the U.S.? I'm also thinking on the tariffs and how this product is being produced. Thank you very much.

Nacho Abia, CEO

Yeah. On the Canadian side, right? So our presence in Canada goes back many years. I mean that it's not thanks to the agreement with Canadian Blood Services for self-sufficiency. Clearly, our partnership there positions us very well in a market that is very significant in the world. We will be producing — I mean, number one, we are increasing the number of donor centers in agreement with Canadian Blood Services, and we plan to manufacture products in Canada. That will definitely improve our presence in the market and let us capture an even higher presence in that market. So it's already happening as we speak, and there is more to come over the next few years. As for fibrinogen, the plan is to start the production of fibrinogen in Germany at the Biotest facility, but later to move that production to the United States to our Clayton facility. That's the current plan for that. Thank you, Jaime.

Guilherme Sampaio, Analyst

Hello, thank you for taking my questions. Just one still on the executive order, if possible. Could you at least reconfirm your exposure to Medicare and Medicaid post adjustments that you expect for this year? And then the second question, could you provide a bit more color on the significant step-up quarter-on-quarter in SG&A that we've seen this quarter? Thank you.

Roland Wandeler, President Biopharma

Yeah, as Nacho said before, we don't provide specific breakouts of Medicaid or Medicare. But just for everybody to remember, a significant part of our use is in commercial patients. And as we look at Medicare, we actually have a mix of Part B and Part D, which puts us in a more favorable position. As Nacho also emphasized, we will continue to educate the plasma-derived therapies are different from biopharmaceutical drugs. We saw that this was recognized in the past. We see that looking across the world, price points are closer than what you see with general drugs. Lastly, we believe we have a product portfolio that provides us with a differentiated offering across the world. So looking at all of that, we do not expect any negative business impact from any executive order into 2025.

Rahul Srinivasan, CFO

And then your comment on SG&A. Part of it relates to the reclassification in Q4 '24, if I followed your question correctly. And again, as part of revenue going up, our SG&A as a percentage of sales obviously gets correspondingly impacted. We've also got the fibrinogen launch as we think about working towards that just from an SG&A and OpEx standpoint as well. So I'll leave it at that, Guilherme.