20-F 1 tm211749d1_20f.htm 20-F

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM 20-F 

 

(Mark One) 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
OR
   
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
   
OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from to
   
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

Commission file number 001-35193

 

GRIFOLS, S.A.
(Exact name of Registrant as specified in its charter)
 
Kingdom of Spain
(Jurisdiction of incorporation)
 

Avinguda de la Generalitat, 152-158 

Parc de Negocis Can Sant Joan  

Sant Cugat del Vallès 08174  

Barcelona, Spain 

(Address of principal executive offices)
 

David Ian Bell 

General Counsel 

Telephone: +34 93 571 02 21 

Email: david.bell@grifols.com 

Grifols Shared Services North America, Inc. 

2410 Lillyvale Ave  

Los Angeles, CA 90032-3514 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered, pursuant to Section 12(b) of the Act.

 

Title of each class   Name of each exchange on which registered Trading Symbol

American Depositary Shares 

evidenced by American Depositary 

Receipts, each American 

Depositary Share representing 

one Class B non-voting 

share of Grifols, S.A. 

  The NASDAQ Stock Market LLC GRFS

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None.
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None.
(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of the period covered by the annual report.

 

  426,129,798 Class A Shares
  261,425,110 Class B Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

☒ Yes ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

☐ Yes ☒ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒   Accelerated filer ☐   Non-accelerated filer ☐   Emerging growth company ☐

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

☒ Yes ☐ No

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐   International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
  Other ☐

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

 

☐ Item 17 ☐ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

☐ Yes ☒ No

 
 

GRIFOLS, S.A.

TABLE OF CONTENTS

 

  Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION iii
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS iv
     
PART I 1
     
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1
     
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1
     
Item 3. KEY INFORMATION 1
     
Item 4. INFORMATION ON THE COMPANY 31
     
Item 4.A. UNRESOLVED STAFF COMMENTS 71
     
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 71
     
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 95
     
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 111
     
Item 8. FINANCIAL INFORMATION 114
     
Item 9. THE OFFER AND LISTING 116
     
Item 10. ADDITIONAL INFORMATION 121
     
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 139
     
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 140
     
PART II 147
     
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 147
     
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 147
     
Item 15. CONTROLS AND PROCEDURES 147
     
Item 16. [RESERVED] 148
     
Item 16.A. AUDIT COMMITTEE FINANCIAL EXPERT 148
     
Item 16.B. CODE OF ETHICS 148
     
Item 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 148
     
Item 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 149

i 

 

  Page
     
Item 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 149
     
Item 16.F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT 149
     
Item 16.G. CORPORATE GOVERNANCE 150
     
Item 16.H. MINE SAFETY DISCLOSURE 153
     
PART III 154
     
Item 17. FINANCIAL STATEMENTS 154
     
Item 18. FINANCIAL STATEMENTS 154
     
Item 19. EXHIBITS 154

 

ii

 

 

GENERAL INFORMATION

 

As used in this annual report on Form 20-F, unless the context otherwise requires or as is otherwise indicated:

 

  all references to “Grifols,” the “Company,” “we,” “us” and “our” refer to Grifols, S.A., a company (sociedad anónima) organized under the laws of Spain, and our consolidated subsidiaries;

 

  all references to the “Group” or the “Grifols Group” are to Grifols, S.A. and the group of companies owned or controlled by Grifols, S.A; and
     

 

see “Glossary of Terms” for further explanations and/or definitions of terms referenced in this Form 20-F.

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

The basis of presentation of financial information of Grifols in this document is in conformity with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, and other legislative provisions containing the applicable legislation governing our financial information, unless indicated otherwise.

 

All references in this annual report on Form 20-F to (i) “euro”, “€” or “EUR” are to the common currency of the European Union and (ii) “U.S. dollar”, “$” or “USD” are to the currency of the United States.

 

The functional and presentation currency of Grifols is the euro. All tabular disclosures are presented in thousands of euros except share and per share amounts, percentages and as otherwise indicated. Certain monetary amounts and other figures included in this annual report on Form 20-F have been subject to rounding adjustments. Accordingly, any discrepancies in any tables between the totals and the sums of amounts listed are due to rounding.

 

Constant Currency

 

Net revenue variance in constant currency is determined by comparing adjusted current period figures, calculated using prior period monthly average exchange rates, to the prior period net revenue. The resulting percentage variance in constant currency is considered to be a non-IFRS-IASB financial measure. Net revenue variance in constant currency calculates net revenue variance without the impact of foreign exchange fluctuations. We believe that constant currency variance is an important measure of our operations because it neutralizes foreign exchange impact and illustrates the underlying change from one year to the next. We believe that this presentation provides a useful period-over-period comparison as changes due solely to exchange rate fluctuations are eliminated. Net revenue variance in constant currency, as defined and presented by us, may not be comparable to similar measures reported by other companies. Net revenue variance in constant currency has limitations, particularly because the currency effects that are eliminated constitute a significant element of our net revenue and could impact our performance significantly. We do not evaluate our results and performance without considering variances in constant currency on the one hand and changes prepared in accordance with IFRS-IASB on the other. We caution you to follow a similar approach by considering data regarding constant currency period-over-period revenue variance only in addition to, and not as a substitute for or superior to, other measures of financial performance prepared in accordance with IFRS-IASB. We present the fluctuation derived from IFRS-IASB net revenue next to the fluctuation derived from non IFRS-IASB net revenue.

iii 

 

See below for a reconciliation of reported net revenues to net revenues in constant currency:

 

   2020   2019   % var      2019   2018   % var 
   (in millions of euros)          (in millions of euros)     
Reported Net Revenues    5,340.0    5,098.7    4.7%  Reported Net Revenues    5,098.7    4,486.7    13.6%
Variation due to exchange rate effects    68.0             Variation due to exchange rate effects    (197.9)          
Constant Currency Net Revenues    5,408.0    5,098.7    6.1%  Constant Currency Net Revenues    4,900.8    4,486.7    9.2%

 

PRESENTATION OF MARKET INFORMATION

 

Market information (including market share, market position and industry data for our operating activities and those of our subsidiaries or of companies acquired by us) or other statements presented in this annual report on Form 20-F regarding our position (or that of companies acquired by us) relative to our competitors largely reflect the best estimates of our management. These estimates are based upon information obtained from customers, trade or business organizations and associations, other contacts within the industries in which we operate and, in some cases, upon published statistical data or information from independent third parties. Except as otherwise stated, our market share data, as well as our management’s assessment of our comparative competitive position, has been derived by comparing our sales figures for the relevant period to our management’s estimates of our competitors’ sales figures for such period, as well as upon published statistical data, information taken from filings with the Securities and Exchange Commission and information from independent third parties, and, in particular, the reports published and the information made available by, among others, the Marketing Research Bureau, or the MRB. You should not rely on the market share and other market information presented herein as precise measures of market share or of other actual conditions.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as “may,” “anticipate,” “believe,” “estimate,” “predict,” “expect,” “intend,” “forecast,” “will,” “would,” “should” or the negative of such terms or other variations on such terms or comparable or similar words or expressions.

 

These forward-looking statements reflect, as applicable, our management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. These factors include, but are not limited to:

 

Risks Relating to Our Business:

 

  the complexity of our manufacturing processes and the susceptibility of our biological intermediates to contamination;

 

  our need to continually monitor our products for possible unexpected side effects;

 

  our ability to adhere to government regulations so that we may continue to manufacture and distribute our products;

 

  the impact of the coronavirus pandemic on our operations;

 

  the impact of disruptions in our supply of plasma or in the operations of our plasma collection centers;

 

  the impact of competing products and pricing and the actions of competitors;

 

  the impact of product liability claims on our business;

iv 

 

  our reliance on a plasma supply free of transmittable disease;

 

  interest rates and availability and cost of financing opportunities;

 

  the impact of interest rate fluctuations;

 

  the impact of the Brexit deal;

 

  uncertainty about the value of loans and other financial instruments due to the phasing out and replacement of LIBOR;

 

  unexpected shut-downs of our manufacturing and storage facilities or delays in opening new planned facilities;

 

  reliance on third parties for manufacturing of products and provision of services;

 

  our ability to commercialize products in development;

 

  uncertainties involved in product research and development, including regarding clinical trials;

 

  breaches of data security or data privacy, cybersecurity incidents, or disruptions in our information technology systems; and

 

  our ability to protect our intellectual property rights.

 

Risks Relating to the Healthcare Industry:

 

  potential legal proceedings related to the 2010 Patient Protection and Affordable Care Act and companion Healthcare and Education Reconciliation Act, repeal or amendment thereof, new legislation, or regulatory action affecting, among other things, the U.S. healthcare system, pharmaceutical pricing and reimbursement, including Medicaid, Medicare and the Public Health Service Program;

 

  legislation or regulations in markets outside of the United States affecting product pricing, reimbursement, access, or distribution channels; and

 

  changes in legal requirements affecting the industries in which we operate.

 

Please review a more detailed discussion of these and other risks that may impact our business set forth in this Form 20-F under “Item 3.D. Risk Factors.”

 

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those listed above, and actual results may differ materially from those in the forward-looking statements.

 

The forward-looking statements contained in this annual report speak only as of the date of this annual report. Except as required by law, we do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

v 

 

PART I

 

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

  A. Directors and Senior Management

 

Not applicable.

 

  B. Advisers

 

Not applicable.

 

  C. Auditor

 

Not applicable.

 

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

  A. Offer Statistics

 

Not applicable.

 

  B. Method and Expected Timetable

 

Not applicable.

 

Item 3. KEY INFORMATION

 

  A. Selected Financial Data

 

Selected Consolidated Financial Information

 

The following is a summary of our historical consolidated financial data for the periods ended and as of the dates indicated below. You are encouraged to read this information together with Item 5 of this Part I, “Operating and Financial Review and Prospects,” and our audited consolidated financial statements and the accompanying notes included in this annual report on Form 20-F.

 

The following tables present our consolidated financial data for the periods and as of the dates indicated, prepared in conformity with IFRS, as issued by the IASB. Our consolidated balance sheet data as of December 31, 2020 and 2019 and our consolidated statement of profit and loss data for the years ended December 31, 2020, 2019 and 2018 is derived from our audited consolidated financial statements for those years, which are included in this annual report on Form 20-F. Our consolidated balance sheet data as of December 31, 2018 is derived from our consolidated financial statements for such year, which are not included in this Form 20-F. The Company adopted IFRS 16 Leases on January 1, 2019, and, as permitted under the transitional provisions in the standard, has not restated comparative figures for the respective prior reporting periods as a result of this adoption.

 

   As of December 31, 
Consolidated Balance Sheet Data  2020   2019   2018 
   (in thousands of euros) 
ASSETS            
Goodwill    5,332,271    5,507,063    5,209,230 
Other intangible assets    1,557,650    1,433,534    1,385,537 
Rights of use    678,696    703,858     
Property, plant and equipment    2,324,107    2,159,545    1,951,983 
Investments in equity accounted investees    1,869,020    114,473    226,905 
Non-current financial assets    198,157    138,930    107,601 
Deferred tax assets    149,921    123,024    112,539 
Total non-current assets    12,109,822    10,180,427    8,993,795 

 1

 

   As of December 31, 
Consolidated Balance Sheet Data  2020   2019   2018 
   (in thousands of euros) 
Inventories    2,002,281    2,342,590    1,949,360 
Trade and other receivables:               
Trade receivables    383,233    369,797    269,167 
Other receivables    72,360    82,509    92,418 
Current income tax assets    64,565    38,269    42,205 
Trade and other receivables    520,158    490,575    403,790 
Other current financial assets    11,118    1,728,926    53,965 
Other current assets    51,750    58,111    42,344 
Cash and cash equivalents    579,647    741,982    1,033,792 
Total current assets    3,164,954    5,362,184    3,483,251 
Total Assets    15,274,776    15,542,611    12,477,046 
EQUITY AND LIABILITIES               
Share capital    119,604    119,604    119,604 
Share premium    910,728    910,728    910,728 
Reserves    3,776,932    3,009,599    2,441,931 
Treasury stock    (43,734)   (49,584)   (55,441)
Interim dividend        (136,828)   (136,747)
Profit for the year attributable to the Parent    618,546    625,146    596,642 
Total Equity   5,382,076    4,478,665    3,876,717 
Available for sale financial assets             
Other comprehensive income    (1,155)   (903)   (554)
Translation differences    (272,529)   344,357    349,391 
Other comprehensive expenses    (273,684)   343,454    348,837 
Equity attributable to the Parent    5,108,392    4,822,119    4,225,554 
Non-controlling interests    1,611,663    2,023,649    471,050 
Total Equity    6,720,055    6,845,768    4,696,604 
LIABILITIES               
Grants    17,008    11,377    11,845 
Provisions    27,271    8,030    6,114 
Non-current financial liabilities    6,602,100    6,846,068    6,099,463 
Other non-current liabilities    16,391    983    1,301 
Deferred tax liabilities    556,813    463,827    404,398 
Total non-current liabilities    7,219,583    7,330,285    6,523,121 
Provisions    11,175    53,109    80,055 
Current financial liabilities    424,612    361,312    277,382 
Current debts with related companies        1,258    7,079 
Trade and other payables:               
Suppliers    601,618    581,882    561,883 
Other payables    141,089    165,632    159,816 
Current income tax liabilities    3,482    5,966    1,917 
Total trade and other payables    746,189    753,480    723,616 
Other current liabilities    153,162    197,399    169,189 
Total current liabilities    1,335,138    1,366,558    1,257,321 
Total liabilities    8,554,721    8,696,843    7,780,442 
Total Equity and Liabilities    15,274,776    15,542,611    12,477,046 

 2

 

   For the Year Ended December 31, 
Consolidated Statement of Profit and Loss Data  2020   2019   2018 
   (in thousands of euros, except per share data) 
Continuing Operations               
Net revenue    5,340,038    5,098,691    4,486,724 
Cost of sales    (3,084,873)   (2,757,459)   (2,437,164)
Gross margin    2,255,165    2,341,232    2,049,560 
Research and development    (294,216)   (276,018)   (240,661)
Selling, general and administration expenses    (985,616)   (942,821)   (814,775)
Operating Expenses    (1,279,832)   (1,218,839)   (1,055,436)
Profit/(loss) of equity accounted investees with similar activity to that of the Group    20,799    8,972     
Operating Result    996,132    1,131,365    994,124 
Finance income    8,021    114,197    13,995 
Finance costs    (249,639)   (342,965)   (293,273)
Change in fair value of financial instruments    55,703    1,326     
Impairment of financial assets at amortized cost        (37,666)   30,280 
Exchange differences    8,246    (9,616)   (8,246)
Finance result    (177,669)   (274,724)   (257,244)
Profit/(loss) of equity accounted investees    60,166    (39,538)   (11,038)
Profit before income tax from continuing operations    878,629    817,103    725,842 
Income tax expense    (169,639)   (168,459)   (131,436)
Profit after income tax from continuing operations    708,990    648,644    594,406 
Consolidated profit for the year    708,990    648,644    594,406 
Profit attributable to the Parent    618,546    625,146    596,642 
(Loss) attributable to non-controlling interests    90,444    23,498    (2,236)
Basic earnings per ordinary share    0.90    0.91    0.87 
Average number of shares    685,515,740    685,115,836    684,709,377 
Basic earnings per ordinary share from continuing operations    0.90    0.91    0.87 
Cash dividend per ordinary share    0.16    0.35    0.40 
Cash dividend per preference share    0.17    0.36    0.41 
                

   For the Year Ended December 31, 
Consolidated Statement of Comprehensive Income  2020   2019   2018 
   (in thousands of euros) 
Consolidated profit for the year    708,990    648,644    594,406 
Other comprehensive expenses               
Items for reclassification to profit or loss               
Translation differences    (747,221)   33,256    268,557 
Translation differences / Cash Flow Hedge             

Available for sale financial Assets

            
Equity accounted investees    21,916    (4,360)   (9,270)
Cash flow hedges — effective part of changes in fair value             
Cash flow hedges — amounts taken to profit and loss             
Other    (252)   (349)   102 
Tax effect             
Other comprehensive income/(loss) for the year, after tax    (725,557)   28,547    259,389 
Total comprehensive income/(loss) for the year    (16,567)   677,191    853,795 
Total comprehensive income attributable to the Parent    1,408    641,772    856,598 
Total comprehensive income/(expense) attributable to non-controlling interests    (17,975)   35,419    (2,803)

 

  B. Capitalization and Indebtedness

 

Not Applicable.

 3

 

  C. Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

  D. Risk Factors

 

Summary

 

Our company, our business and our securities are subject to a number of risks which are described more comprehensively elsewhere in this item D. We present below a summary of our key risk factors.

 

Risks Relating to Our Structure:

 

  Our substantial level of indebtedness could adversely affect our financial condition, restrict our ability to react to changes to our business, and prevent us from fulfilling our obligations;

 

  Despite our substantial indebtedness, we may still incur significantly more debt. This could exacerbate the risks associated with our substantial leverage;

 

  To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, including our ability to receive dividends and other distributions from our subsidiaries, while covenants in our debt agreements restrict our business in many ways;

 

  The phasing out and ultimate replacement of LIBOR with an alternative reference rate and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition and results of operations; and

 

  Your ability to enforce civil liabilities under U.S. securities laws may be limited.

 

Risks Relating to Our Business:

 

  Plasma and plasma derivative products are fragile, and improper handling of our plasma or plasma derivative products could adversely affect results of operations. Furthermore, our manufacturing processes are complex and involve biological intermediates that may be susceptible to contamination and variations in yield;

 

 

 

Once our products are approved and marketed, we must continually monitor them for signs that their use may result in serious and unexpected side effects, which could jeopardize our reputation and our ability to continue marketing our products. We may also be required to conduct post-approval clinical trials as a condition to licensing a product. Moreover, we may not be able to commercialize products in development;

 

  Our ability to continue manufacturing and distributing our products depends on our continued adherence to cGMP regulations at our facilities;

 

  A significant disruption in our supply of plasma could have a material adverse effect on our business and our growth plans;

 

  The Coronavirus pandemic has had, and could continue to have, a material, adverse impact on us;

 

  A significant portion of our net revenue has historically been derived from sales of our immunoglobulin products and we expect that they will continue to comprise a significant portion of our sales. Any adverse market event with respect to these products could have a material adverse effect on us;

 

  We face significant competition, including from companies with greater financial resources;

 4

 

  Technological changes in the production of plasma derivative and diagnostic products could render our production process uneconomical;

 

  Product liability claims or product recalls involving our products or products we distribute could have a material adverse effect on our business;

 

  Our future success depends on our ability to retain members of our senior management and to attract, retain and motivate qualified personnel;

 

  Our business requires substantial capital to operate and grow and to achieve our strategy of realizing increased operating leverage, including the completion of several large capital projects;

 

  Our results of operations and financial condition may be affected by adverse changes in foreign currency exchange rates, especially a significant shift in the value of the euro as compared to the U.S. dollar;

 

  If our shipping distribution channels or the San Diego, Clayton, Emeryville, Los Angeles or Parets facilities were to suffer a crippling accident, or if a force majeure event materially affected our ability to operate, produce and distribute saleable products, a substantial part of our manufacturing capacity could be shut down for an extended period and our distribution processes could be disrupted;

 

  We rely in large part on the services of third parties for the manufacture, sale, distribution and delivery of our products. If these third parties fail to timely perform their obligations, or if we experience equipment difficulties, or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer;

 

  Complex and evolving U.S. and international laws and regulations regarding privacy and data security and increased risk of cybersecurity incidents to our information technology systems could result in increased costs of operations and a significant disruption to our business;

 

  In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products; and

 

Risks Relating to the Healthcare Industry:

 

  The United States Patient Protection and Affordable Care Act and the companion Healthcare and Education Reconciliation Act, each enacted in March 2010, may adversely affect our business;

 

  Impact of government regulations over product development and regulatory approvals, as well as government pressures and constraints on reimbursement may adversely affect our business; and

 

  We are subject to extensive government regulatory compliance and ethics oversight, and the failure to comply with laws and regulations governing the sales and marketing of our products or an adverse decision in lawsuits may result in adverse consequences to us.

 

Risks Relating to Our Shares and American Depositary Shares:

 

  If we discover material weaknesses or significant deficiencies in our internal control over financial reporting, it may adversely affect our ability to provide timely and reliable financial information and satisfy our reporting obligations under U.S. federal securities laws, which also could affect the market price of our American Depositary Shares or our ability to remain listed on NASDAQ;

 

  The Grifols Family may exercise significant influence over the conduct of our business;

 

  The market price of our Class B ADSs on NASDAQ may be volatile;

 5

 

  Fluctuations in the exchange rate between the U.S. dollar and the euro may increase the risk of holding our ADSs or shares;

 

  Subscription (or preemptive) rights may be unavailable to U.S. holders of our shares or ADSs; and

 

  ADS holders may be subject to limitations on the transfer of their ADSs.

 

Risks Relating to Our Structure

 

Our substantial level of indebtedness could adversely affect our financial condition, restrict our ability to react to changes to our business, and prevent us from fulfilling our obligations under our debt.

 

We have a significant amount of indebtedness. As of December 31, 2020, our current and non-current financial liabilities were €7.0 billion, of which a substantial majority (€5.9 billion) was long-term debt.

 

Our high level of indebtedness could have significant adverse effects on our business, such as:

 

  making it more difficult for us to satisfy our obligations with respect to our outstanding debt;

 

  making us more vulnerable to economic downturns and adverse developments in our business;

 

  impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes;

 

  reducing the funds available to us for operations and other purposes due to the substantial portion of our cash flow from operations which we use to pay interest on our indebtedness;

 

  placing a prior ranking claim on the underlying assets of all of the indebtedness outstanding under our purchase money indebtedness, equipment financing and real estate mortgages;

 

  limiting our ability to fund a change of control offer;

 

  placing us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

 

  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

  restricting us from making strategic acquisitions or exploiting other business opportunities.

 

We expect to use cash flow from operations to pay our expenses and amounts due under our outstanding indebtedness. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future and our anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness or to fund other liquidity needs. If we do not have enough money, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money. We may not be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could materially and adversely affect our business, results of operations and financial condition.

 

Despite our substantial indebtedness, we may still incur significantly more debt. This could exacerbate the risks associated with our substantial leverage.

 

We may be able to incur substantial additional indebtedness, including additional secured indebtedness, in the future. Our business is capital intensive, and we regularly seek additional capital. Although the indenture governing the 2017 Notes (as defined herein), the indenture governing the 2019 Notes (as defined herein), the 2019 Credit Facilities (as defined herein) and the European Investment Bank Term Loans (as defined herein) contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions, including secured debt, could be substantial. Adding more debt to current debt levels could exacerbate the leverage-related risks described above. For more information on our indebtedness, see Item 5 of this Part I, “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Sources of Credit.”

 6

 

To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. A significant reduction in our operating cash flows resulting from changes in economic conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We cannot assure you that any of these alternative strategies could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on our indebtedness.

 

In addition, our borrowings under the 2019 Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease.

 

We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under the 2019 Credit Facilities or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before the maturity of such indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including the 2019 Credit Facilities, the 2017 Notes, the 2019 Notes and the European Investment Bank Term Loans, on commercially reasonable terms or at all.

 

Covenants in our debt agreements restrict our business in many ways.

 

The agreements governing our indebtedness and other financial obligations applicable to us contain various covenants, with customary caveats, that limit our ability and/or our restricted subsidiaries’ ability to, among other things:

 

  incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

 

  issue redeemable stock and preferred equity;

 

  pay dividends or make distributions to the shareholders of Grifols or redeem or repurchase capital stock;

 

  prepay, redeem or repurchase debt;

 

  make loans, investments and capital expenditures;

 

  enter into agreements that restrict distributions from our restricted subsidiaries;

 

  sell assets and capital stock of our subsidiaries;

 

  enter into certain transactions with affiliates; and

 

  consolidate or merge with or into, or sell substantially all of our assets to, another person.

 

A breach of any of these covenants could result in a default under our 2019 Credit Facilities, our 2017 Notes, our 2019 Notes and/or the European Investment Bank Term Loans. Upon the occurrence of an event of default under the 2019 Credit Facilities and the European Investment Bank Term Loans, our creditors could elect to declare all amounts outstanding under the 2019 Credit Facilities, the 2017 Notes, the 2019 Notes and the European Investment Bank Term Loans to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the creditors under the 2019 Credit Facilities, the European Investment Bank Term Loans and the 2019 Notes could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the 2019 Credit Facilities, the European Investment Bank Term Loans and the 2019 Notes. If our creditors under the 2019 Credit Facilities, the 2017 Notes, the 2019 Notes or the European Investment Bank Term Loans accelerate the repayment of borrowings, we may not have sufficient assets to repay our indebtedness.

 7

 

Our ability to meet our financial obligations depends on our ability to receive dividends and other distributions from our subsidiaries.

 

Our principal assets are the equity interests that we hold in our operating subsidiaries. As a result, we are dependent on dividends and other distributions from our subsidiaries to generate the funds necessary to meet our financial obligations, including the payment of principal and interest on our outstanding debt. Our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness. In addition, any payment of dividends, distributions, loans or advances to us by our subsidiaries could be subject to restrictions on dividends or, in the case of foreign subsidiaries, restrictions on repatriation of earnings under applicable local law and monetary transfer restrictions in the jurisdictions in which our subsidiaries operate. In addition, payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings. Our subsidiaries are permitted under the terms of our indebtedness to incur additional indebtedness that may restrict payments from those subsidiaries to us. We cannot assure you that agreements governing current and future indebtedness of our subsidiaries will permit those subsidiaries to provide us with sufficient cash to fund payments on our indebtedness when due.

 

Our subsidiaries are legally distinct from us and, except for existing and future subsidiaries that guarantee certain indebtedness, have no obligation, contingent or otherwise, to pay amounts due on our debt or to make funds available to us for such payment.

 

We are a foreign private issuer under the rules and regulations of the Securities and Exchange Commission and, thus, are exempt from a number of rules under the Securities Exchange Act of 1934 and are permitted to file less information with the Securities and Exchange Commission than a company incorporated in the United States.

 

As a foreign private issuer under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules under Section 14 of the Exchange Act, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the Securities and Exchange Commission, or the SEC, as frequently or as promptly as U.S. companies with securities registered under the Exchange Act; we are not required to file financial statements prepared in accordance with United States generally accepted accounting principles; and we are not required to comply with SEC Regulation FD, which imposes certain restrictions on the selective disclosure of material non-public information. In addition, our officers, directors and principal shareholders are not subject to the reporting or short-swing profit recovery provisions of Section 16 of the Exchange Act or the rules under the Exchange Act with respect to their purchases and sales of our Class A shares or Class B shares. Accordingly, you may receive less information about us than you would receive about a company incorporated in the United States and may be afforded less protection under the U.S. federal securities laws than you would be afforded with respect to a company incorporated in the United States. If we lose our status as a foreign private issuer at some future time, we will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if we were a company incorporated in the United States. The costs incurred in fulfilling these additional regulatory requirements could be substantial.

 

Additionally, pursuant to The NASDAQ Stock Market LLC, or NASDAQ, “Listing Rules,” as a foreign private issuer, we may elect to follow our home country practice in lieu of the corporate governance requirements of the NASDAQ Listing Rule 5600 Series, with the exception of those rules that are required to be followed pursuant to the provisions of NASDAQ Listing Rule 5615(a)(3). We have elected to follow Spanish practices in lieu of the requirements of the NASDAQ Listing Rule 5600 Series to the extent permitted under NASDAQ Listing Rule 5615(a)(3). See Item 16.G. of Part II, “Corporate Governance.”

 

Our business could suffer as a result of the United Kingdom’s decision to end its membership in the European Union.

 

The United Kingdom, or U.K., formally left the European Union, or EU, on January 31, 2020, and on December 24, 2020, the U.K. and the EU reached an agreement on a new partnership governing the rules that apply between the U.K. and the EU. On January 1, 2021, provisional application of the agreement took effect. Despite the existence of a new deal, the decision of the U.K. to exit from the EU, or Brexit, may lead to legal uncertainty and potentially divergent laws and regulations between the U.K. and the EU, as the United Kingdom determines which EU laws to replicate or replace. We cannot predict whether or not the U.K. will significantly alter its current laws and regulations in respect of the pharmaceutical industry and, if so, what impact any such alteration would have on us or our business. Moreover, we cannot predict the impact that Brexit will have on (i) the marketing of pharmaceutical products or (ii) the process to obtain regulatory approval in the U.K. for product candidates.

 8

 

Further, Brexit may cause disruptions to our business, and create uncertainty affecting our relationships with existing and potential customers, suppliers and employees. The effects of Brexit could potentially disrupt some of our target markets and jurisdictions in which we operate, and may create global economic uncertainty. Any of these effects of Brexit, among others, could materially adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

 

The phasing out and ultimate replacement of LIBOR with an alternative reference rate and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition and results of operations.

 

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. In November 2020, the ICE Benchmark Administration announced that it would consult on its intention to cease publication of all EUR, CHF, JPY and GBP LIBOR tenors and two of the seven U.S. dollar LIBOR tenors (1 Week and 2 Months tenors) by the end of 2021, but its intention is to continue publication of the remaining five U.S. dollar LIBOR tenors (Overnight, 1, 3, 6, and 12 Months tenors) until June 2023. When phased out, LIBOR will be replaced with an alternative reference rate that will be calculated in a different manner. Similar changes have occurred or may occur with respect to other reference rates.

 

The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified the Secured Overnight Financing Rate, or SOFR, as the preferred alternative reference rate to U.S. dollar LIBOR and recommended a paced transition plan that involves the implementation of a reference rate based on SOFR before the end of 2021. SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. Given the inherent differences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR. Our 2019 Credit Facilities contains a fallback provision providing for alternative rate calculations in the event LIBOR is unavailable, prior to any LIBOR rate transition. As a result, our level of interest payments we incur may change and the new rates we incur may not be as favorable to us as those in effect prior to any LIBOR phase-out.

 

Your ability to enforce civil liabilities under U.S. securities laws may be limited.

 

We are a company organized under the laws of Spain, and many of our subsidiaries are also incorporated outside of the United States. A substantial portion of our assets and the assets of our subsidiaries are located outside of the United States. In addition, nearly all of our directors and officers and certain of our subsidiaries’ officers and directors are nationals or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us, certain of our subsidiaries or their directors or officers with respect to matters arising under the Securities Act or to enforce against them judgments of courts of the United States predicated upon civil liability under the Securities Act. It may also be difficult to recover fully in the United States on any judgment rendered against such persons or against us or certain of our subsidiaries.

 

In addition, there is doubt as to the enforceability in Spain of original actions, or of actions for enforcement of judgments of U.S. courts of liabilities, predicated solely upon the securities laws of the United States. If a judgment was obtained outside Spain and efforts were made to enforce the judgment in Spain, there is some doubt that Spanish courts would agree to recognize and enforce a foreign judgment. Accordingly, even if you obtain a favorable judgment in a U.S. court, you may be required to re-litigate your claim in Spain.

 

Risks Relating to Our Business

 

Our manufacturing processes are complex and involve biological intermediates that may be susceptible to contamination and variations in yield.

 

Plasma is a raw material that is susceptible to damage and contamination and may contain human pathogens, any of which would render the plasma unsuitable for further manufacturing. For instance, contamination or improper storage of plasma by us or third-party suppliers may require us to destroy some of our raw material. If unsuitable plasma is not identified and discarded prior to its release to our manufacturing processes, it may be necessary to discard intermediate or finished product made from that plasma or to recall any finished product released to the market, resulting in a charge to cost of goods sold.

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The manufacture of our plasma products is an extremely complex process of fractionation (separating the plasma into component proteins), purification, filling and finishing. Our products can become non-releasable or otherwise fail to meet our specifications through a failure of one or more of our product testing, manufacturing, process controls and quality assurance processes. We may detect instances in which an unreleased product was produced without adherence to our manufacturing procedures or plasma used in our production process was not collected or stored in a compliant manner consistent with cGMP (Current Good Marketing Practice) regulations enforced by the U.S. Food and Drug Administration, or the FDA, or other regulations, which would likely result in our determination that the impacted products should not be released and therefore should be destroyed.

 

Once we have manufactured our plasma-derived products, they must be handled carefully and kept at appropriate temperatures. Our failure, or the failure of third parties that supply, ship or distribute our products, to properly care for our plasma-derived products may require that such products be destroyed.

 

While we expect to write off small amounts of work in process inventories in the ordinary course of business due to the complex nature of plasma, our processes and our products, unanticipated events may lead to write-offs and other costs materially in excess of our expectations. Such write-offs and other costs could cause material fluctuations in our profitability. Furthermore, contamination of our products could cause investors, consumers or other third parties with whom we conduct business to lose confidence in the reliability of our manufacturing procedures, which could adversely affect our sales and profits. In addition, faulty or contaminated products that are unknowingly distributed could result in patient harm, threaten the reputation of our products and expose us to product liability damages and claims.

 

Due to the nature of plasma, there will be variations in the biologic properties of the plasma we collect or purchase for fractionation that may result in fluctuations in the obtainable yield of desired fractions, even if cGMP regulations are followed. Lower yields may limit production of our plasma-derived products due to capacity constraints. If such batches of plasma with lower yields impact production for extended periods, it may reduce the total volume of product that we could market and increase our cost of goods sold, thereby reducing our profitability.

 

Our manufacture of intermediate immunoassay antigens and antibodies to screen human donated blood and blood products is also a complex biologic process, subject to substantial production risks. These processes typically involve an upstream or fermentation process and a downstream or purification process. Since in the upstream process we deal with living cells, we may face a contamination by undesired cells which would eventually translate in a low yield. Yields in general can also be greatly affected by the different nutrients compositions added to the reactors in this fermentation step. Likewise during the purification step, we can face low yields due to poor resins composition, equipment failure or procedural mistakes.

 

Once our products are approved and marketed, we must continually monitor them for signs that their use may result in serious and unexpected side effects, which could jeopardize our reputation and our ability to continue marketing our products. We may also be required to conduct post-approval clinical trials as a condition to licensing a product.

 

As for all pharmaceutical products, the use of our products sometimes produces undesirable side effects or adverse reactions or events (collectively, “adverse events”). For the most part these adverse events are known, expected to occur at some frequency and are described in the products’ labeling. Known adverse events of a number of our products include allergic or anaphylactic reactions including shock and the transmission of infective agents. Further, the use of certain products sometimes produces additional adverse events, which are detailed below.

 

  The use of albumin sometimes produces the following adverse events: hypervolemia, circulatory overload, pulmonary edema, hyperhydration and allergic manifestations including urticaria, chills, fever and changes in respiration, pulse and blood pressure.

 

  The use of blood clotting Factor IX sometimes produces the following adverse events: the induction of neutralizing antibodies; thromboembolism, including myocardial infarction; disseminated intravascular coagulation; venous thrombosis and pulmonary embolism; and in the case of treatment for immune tolerance induction, nephrotic syndrome.

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  The use of the antihemophilic blood clotting factor, or Factor VIII, sometimes produces the following adverse events: the induction of neutralizing antibodies, thromboembolic events and hemolytic anemia or hemolysis.

 

  The use of immunoglobulins sometimes produce the following adverse events: nausea, vomiting, asthenia, pyrexia, rigors, injection site reaction, allergic or anaphylactic reaction, aseptic meningitis, arthralgia, back pain, dizziness, headache, rash, pruritus, urticaria, hemolysis or hemolytic anemia, hyperproteinemia, increased serum viscosity and hyponatremia, thromboembolic reactions such as myocardial infarction, stroke, pulmonary embolism and deep vein thromboses, transfusion-related acute lung injury and renal dysfunction and acute renal failure.

 

  The use of anti-hepatitis B immunoglobulin sometimes produces the following adverse events: thromboembolic reactions such as myocardial infarction, stroke, pulmonary embolism and deep vein thromboses, aseptic meningitis, hemolytic anemia or hemolysis and acute renal failure.

 

  The use of Koate®-DVI, which we license exclusively in the United States to Kedrion S.p.A, a corporation organized under the laws of Italy, sometimes produces the following adverse events: allergic reactions, tingling in the arm, ear and face, blurred vision, headache, nausea, stomach ache and a jittery feeling.

 

  The use of Prolastin®, Prolastin®-C, alpha-1 proteinase inhibitor, or A1PI, sometimes produces the following adverse events: dyspnea, tachycardia, rash, chest pain, chills, influenza-like symptoms, hypersensitivity, hypotension and hypertension.

 

In addition, the use of our products may be associated with serious and unexpected adverse events, or with less serious reactions at a greater than expected frequency. This may be especially true when our products are used in critically ill patient populations. When these unexpected events are reported to us, we must undertake a thorough investigation to determine causality and implications for product safety. These events must also be specifically reported to the applicable regulatory authorities. If our evaluation concludes, or regulatory authorities perceive, that there is an unreasonable risk associated with the product, we would be obligated to withdraw the impacted lot(s) of that product. Furthermore, an unexpected adverse event caused by a new product may be recognized only after extensive use of the product, which could expose us to product liability risks, enforcement action by regulatory authorities and damage to our reputation.

 

Once we produce a product, physicians are responsible for prescribing and administering the product as we have directed and for the indications described on the labeling. It is not, however, unusual for physicians to prescribe our products for unapproved, or off-label, uses or in a manner that is inconsistent with our directions or the labeling. To the extent such off-label uses and departures from our administration directions become pervasive and produce results such as reduced efficacy or other adverse effects, the reputation of our products in the marketplace may suffer.

 

Our ability to continue manufacturing and distributing our products depends on our continued adherence to cGMP regulations at our facilities.

 

The manufacturing processes for our products are governed by detailed written procedures and governmental regulations that set forth cGMP requirements for blood, blood products and other products. Our quality operations unit monitors compliance with these procedures and regulations, and the conformance of materials, manufacturing intermediates and final products to their specifications. Failure to adhere to established procedures or regulations, or to meet a specification, could require that a product or material be rejected and destroyed.

 

Our adherence to cGMP regulations and the effectiveness of our quality systems are periodically assessed through inspections of our facilities by the FDA, and analogous regulatory authorities of other countries. If deficiencies are noted during an inspection, we must take action to correct those deficiencies and to demonstrate to the regulatory authorities that our corrections have been effective. If serious deficiencies are noted or if we are unable to prevent recurrences, we may have to recall product or suspend operations until appropriate measures can be implemented. We are also required to report certain deviations from procedures to the FDA and even if we determine that the deviations were not material, the FDA could require us to take similar measures. Since cGMP reflects ever-evolving standards, we regularly need to update our manufacturing processes and procedures to comply with cGMP. These changes may cause us to incur costs without improving our profitability or the safety of our products. For example, more sensitive testing assays (if and when they become available) may be required or existing procedures or processes may require revalidation, all of which may be costly and time consuming and could delay or prevent the manufacturing of a product or launch of a new product.

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Changes in manufacturing processes, including a change in the location where the product is manufactured or a change of a third-party manufacturer, may require prior FDA review and approval or revalidation of the manufacturing processes and procedures in accordance with cGMP regulations. There may be comparable foreign requirements.

 

Grifols received approval from the FDA to relocate existing immunodiagnostic manufacturing operations to a new consolidated manufacturing facility in Emeryville, California, or our Emeryville facility. The transition, including all FDA licensed antigens regulatory submissions, was completed in 2019. The completion of the transition allowed Grifols to transfer all 21 products to the new Emeryville facility.

 

To validate our manufacturing processes and procedures following completion of our upgraded facilities, we must demonstrate that the processes and procedures at the upgraded facilities are comparable to those currently in place at our other facilities. To provide such a comparative analysis, both the existing processes and the processes that we expect to be implemented at our upgraded facilities must comply with the regulatory standards prevailing at the time that our expected upgrade is completed. In addition, regulatory requirements, including cGMP regulations, continually evolve. Failure to adjust our operations to conform to new standards as established and interpreted by applicable regulatory authorities would create a compliance risk that could impair our ability to sustain normal operations.

 

Regulatory authorities, including the FDA and the EMA, routinely inspect our facilities to assess ongoing compliance with cGMP. If the FDA, the EMA or other regulatory authorities find our facilities to be out of compliance, our ongoing operations or plans to expand would be adversely affected.

 

A significant disruption in our supply of plasma could have a material adverse effect on our business and our growth plans.

 

The majority of our revenue depends on our access to U.S. source plasma (plasma obtained through plasmapheresis), the principal raw material for our plasma derivative products. Our ability to increase revenue depends substantially on increased access to plasma. If we are unable to obtain sufficient quantities of source plasma, we may be unable to find an alternative cost-effective source of plasma and we would be limited in our ability to maintain current manufacturing levels of plasma derivative products. As a result, we could experience a substantial decrease in net revenues or profit margins, a loss of customers, a negative effect on our reputation as a reliable supplier of plasma derivative products or a substantial delay in our production growth plans.

 

Our current business plan envisages an increase in the production of plasma derivative products, which depends on our ability to increase plasma collections or improve product yield. The ability to increase plasma collections may be limited, our supply of plasma could be disrupted or the cost of plasma could increase substantially, as a result of numerous factors, including:

 

  A reduction in the donor pool. Regulators in most of the largest markets for plasma derivative products, including the United States, restrict the use of plasma collected from specific countries and regions in the manufacture of plasma derivative products. For example, the appearance of the variant Creutzfeldt Jakob, or mad cow disease, resulted in the suspension of the use of plasma collected from U.K. residents and concern over the safety of blood products, which has led to increased domestic and foreign regulatory control over the collection and testing of plasma and the disqualification of certain segments of the population from the donor pool, significantly reducing the potential donor pool. The appearance of new viral strains could further reduce the potential donor pool. Also, changes in socioeconomic conditions could impact the number of donors.

 

  Regulatory requirements. See “—Disruption of the operations of our plasma collection centers due to regulatory impediments or otherwise would cause us to become supply constrained and our financial performance would suffer.”

 

  Plasma supply sources. In recent years, there has been vertical integration in the industry as plasma derivatives manufacturers have been acquiring plasma collection centers. Any significant disruption in the supply of plasma or an increased demand for plasma may require us to obtain plasma from alternative sources, which may not be available on a timely basis.

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Disruption of the operations of our plasma collection centers due to regulatory impediments or otherwise would cause us to become supply constrained and our financial performance would suffer.

 

In order for plasma to be used in the manufacturing of our products, the individual centers at which the plasma is collected must be licensed and approved by the regulatory authorities, such as the FDA and the EMA, of those countries in which we sell our products. When a new plasma collection center is opened, it must be inspected on an ongoing basis after its approval by the FDA and the EMA for compliance with cGMP and other regulatory requirements, and these regulatory requirements are subject to change. For example, an FDA final rule, effective May 23, 2016, addressed the collection of blood components, such as plasma, intended for transfusion or further manufacturing use, including requirements with respect to donor education, donor history and donor testing. While we believe that our centers have timely adopted the regulations, which generally reflected our existing approaches, the compliance efforts necessary for evolving requirements, such as these, may increase our costs. An unsatisfactory inspection could prevent a new center from being approved for operation or risk the suspension or revocation of an existing approval.

 

In order for a plasma collection center to maintain its governmental approval to operate, its operations must continue to conform to cGMP and other regulatory requirements. In the event that we determine a plasma collection center did not comply with cGMP in collecting plasma, we may be unable to use and may ultimately destroy plasma collected from that center, which would be recorded as a charge to cost of goods. Additionally, if noncompliance in the plasma collection process is identified after the impacted plasma has been pooled with compliant plasma from other sources, entire plasma pools, in-process intermediate materials and final products could be impacted. Consequently, we could experience significant inventory impairment provisions and write-offs.

 

We plan to continue to obtain our supplies of plasma for use in our manufacturing processes through collections at our plasma collection centers and through selective acquisitions or remodeling and relocations of existing centers. This strategy is dependent upon our ability to successfully integrate new centers, to obtain FDA and other necessary approvals for any centers not yet approved by the FDA, to maintain a cGMP compliant environment in all centers and to attract donors to our centers.

 

Our ability to increase and improve the efficiency of production at our plasma collection centers may be affected by: (i) changes in the economic environment and population in selected regions where we operate plasma collection centers; (ii) the entry of competitive centers into regions where we operate; (iii) our misjudging the demographic potential of individual regions where we expect to increase production and attract new donors; (iv) unexpected facility related challenges; or (v) unexpected management challenges at select plasma collection centers.

 

The Coronavirus pandemic has had, and could continue to have, a material, adverse impact on us.

 

The outbreak of the respiratory illness caused by a coronavirus named “SARS-CoV-2” (the “Coronavirus” or “COVID-19”) has resulted in governments and businesses worldwide adopting emergency measures to combat the spread of the Coronavirus while seeking to maintain essential services. These measures have included, without limitation, social distancing, the temporary closure of non-essential businesses, stay-at-home and work-from-home policies, self-imposed quarantine periods, border closures and travel bans or restrictions. These measures and conditions have had an adverse impact and may continue to adversely affect our manufacturing and supply chains, clinical trial operations and the ability of our employees to attend work or work effectively. For as long as the measures adopted in response to the COVID-19 pandemic remain in place or are re-introduced, and potentially upon their gradual or complete removal, our revenues, financial condition, profitability and cash flows may be materially adversely affected.

 

See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Consequences of COVID-19” for additional details.

 

A significant portion of our net revenue has historically been derived from sales of our immunoglobulin products and we expect that they will continue to comprise a significant portion of our sales. Any adverse market event with respect to these products could have a material adverse effect on us.

 

We have historically derived a significant portion of our net revenues from our immunoglobulin products, including our IG products. In 2020, our IG products accounted for approximately 47% of our net revenues. If any of these IG products were to lose significant sales or were substantially or completely displaced in the market, we would lose a significant and material source of our net revenue. Similarly, if either Flebogamma® or Gamunex®-C/Gamunex® were to become the subject of litigation or an adverse governmental ruling requiring us to cease sales of it, our business could be adversely affected. Although we do not currently anticipate any significant decrease in the sales of any of these products, a significant decrease could result from plasma procurement and manufacturing issues resulting in lower product availability for sales and changing market conditions.

 13

 

We face significant competition.

 

We face significant competition. Each of Takeda, CSL Behring, Kedrion Biopharma, Octapharma Plasma, Biotest AG and Bio Products Laboratory Ltd. (BPL) now has a 10% liquid IVIG product in the United States. Both Octapharma and Bio Products Laboratory have launched 5% liquid IVIG products. As competition has increased, some of our competitors have discounted the price of immunoglobulin products as many customers have become increasingly price sensitive with respect to immunoglobulin products. If customers demand lower priced products, we may lose sales or be forced to lower our prices.

 

In 2015, the European Commission granted marketing authorization for CSL’s Respreeza® in all European Union member states. This product is a more concentrated intravenous formulation than the one we offer in Europe. Another competitor is seeking to offer an inhaled formula and submitted a Marketing Authorization Application with the EMA at the beginning of 2016 that was withdrawn in June 2017. The same competitor proposed a Phase III protocol to the FDA in July 2017. Our current and future competitors may increase their sales, lower their prices, change their distribution model or improve their products, causing harm to our product sales and market share. Also, if the attrition rate of our A1PI patient base accelerates faster than we have forecasted, we would have fewer patients and lower sales volume.

 

Other new treatments, such as small molecules, monoclonal or recombinant products, may also be developed for indications for which our products are now used. Recombinant Factor VIII and Factor IX products, which are currently available and widely used in the United States and Europe, compete with our plasma-derived product in the treatment of hemophilia A and B and are perceived by many to have lower risks of disease transmission. Additional recombinant products and new small molecules, some with extended half-lives, could compete with our products and reduce the demand for our products. In addition, alternatives exist for albumin in its application as a plasma volume expander. If an increased use of alternative products for Factor VIII, Factor IX or albumin makes it uneconomical to produce our plasma-derived products, or if further technological advances improve these products or create other competitive alternatives to our plasma derivative products, our financial condition and results of operations could be materially adversely affected. We expect in the future to face greater competition from biosimilar products which could adversely affect our financial performance.

 

Our product offerings may remain plasma-derived, even if our competitors offer competing recombinant products. In October 2018, the FDA approved Genentech, Inc’s emicizumab-kxwh injection treatment, Hemlibra, a non-plasma product to control bleeding in patients with hemophilia A. The use of Hemlibra presents a significant competitive risk for the use of plasma derived Factor VIII.

 

The introduction of products approved for alternative routes of administration, including the subcutaneous route of administration, may also adversely affect sales of our products. For example, CSL Behring and Takeda introduced a preparation of human immunoglobulin at a 20% concentration for the treatment of people who need replacement of antibodies and Takeda has an immune globulin with a recombinant human hyaluronidase indicated for the treatment of Primary Immunodeficiency (PI) in adults. Our 10% Gamunex® has the FDA approval to be administered intravenously or subcutaneously and Xembify®, our 20% subcutaneous immunoglobulin for primary immunodeficiencies, is licensed exclusively for subcutaneous administration.

 

We face competition from companies with greater financial resources.

 

We operate in highly competitive markets. Our principal competitors include Takeda, CSL Behring and Octapharma. Some of our competitors have significantly greater financial resources than us. As a result, they may be able to devote more funds to research and development and new production technologies, as well as to the promotion of their products and business. These competitors may also be able to sustain for longer periods a deliberate substantial reduction in the price of their products or services. The development by a competitor of a similar or superior product or increased pricing competition may result in a reduction in our net revenues or a decrease in our profit margins.

 

Technological changes in the production of plasma derivative and diagnostic products could render our production process uneconomical.

 

Technological advances have accelerated changes in recent years. Future technological developments could render our production processes uneconomical and may require us to invest substantial amounts of capital to upgrade our facilities. Such investments could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to fund such investments from existing funds or raise sufficient capital to make such investments.

 14

 

The discovery of new pathogens could slow our growth and adversely affect profit margins.

 

The possible appearance of new pathogens transmittable through could trigger the need for changes in our existing inactivation and production methods, including the administration of new detection tests. Such a development could result in delays in production until the new methods are in place, as well as increased costs that may not be readily passed on to our customers. See also “— The Coronavirus pandemic has had, and could continue to have, a material, adverse impact on us.”

 

Product liability claims or product recalls involving our products or products we distribute could have a material adverse effect on our business.

 

Our business exposes us to the risk of product liability claims. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk when we commercially sell any products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

  decreased demand for our products and any product candidates that we may develop;

 

  injury to our reputation;

 

  withdrawal of clinical trial participants;

 

  costs to defend the related litigation;

 

  substantial monetary awards to trial participants or patients;

 

  loss of revenue; and

 

  the inability to commercialize any products that we may develop.

 

Like many plasma fractionators, we have been, and may in the future be, involved in product liability or related claims relating to our products, including claims alleging the transmission of disease through the use of such products. Plasma is a biological matter that is known to be capable of transmitting viruses and pathogens, whether known or unknown. Therefore, our plasma and plasma derivative products, if donors are not properly screened or if the plasma is not properly collected, tested, inactivated, processed, stored and transported, could cause serious disease and possibly death to the patient. See also “— Our ability to continue to produce safe and effective products depends on a plasma supply free of transmittable diseases.” Any transmission of disease through the use of one of our products or third-party products sold by us could result in claims by persons allegedly infected by such products.

 

Our potential product liability also extends to our Diagnostic and Hospital division products. In addition, we sell and distribute third-party products, and the laws of the jurisdictions where we sell or distribute such products could also expose us to product liability claims for those products. Furthermore, the presence of a defect in a product could require us to carry out a recall of such product.

 

A product liability claim or a product recall could result in substantial financial losses, negative reputational repercussions and an inability to retain customers. Although we have a program of insurance policies designed to protect us and our subsidiaries from product liability claims, and we self-insure a portion of this risk, claims made against our insurance policies could exceed our limits of coverage. We intend to expand our insurance coverage as our sales grow. However, as product liability insurance is expensive and can be difficult to obtain, a product liability claim could decrease our access to product liability insurance on acceptable terms. In turn, we may not be able to maintain insurance coverage at a reasonable cost and may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Although we have not experienced a material liability claim, we cannot assure you that we will not experience one in the future.

 

Our ability to continue to produce safe and effective plasma derivative products depends on a plasma supply free of transmittable diseases.

 

Although it is currently believed that COVID-19 cannot be transmitted through blood or plasma, the COVID-19 pandemic has affected our ability to collect plasma and the ability by donors to donate blood or plasma. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Consequences of COVID-19” for additional details.

 15

 

Despite overlapping safeguards, including the screening of donors and other steps to remove or inactivate viruses and other infectious disease-causing agents, the risk of transmissible disease through plasma-derived products cannot be entirely eliminated. If a new infectious disease was to emerge in the human population in the future, the regulatory and public health authorities could impose precautions to limit the transmission of the disease that would impair our ability to procure plasma, manufacture our products or both. Such precautionary measures could be taken before there is conclusive medical or scientific evidence that a disease poses a risk for plasma-derived products.

 

In recent years, new testing and viral inactivation methods have been developed that more effectively detect and inactivate infectious viruses in collected plasma. There can be no assurance, however, that such new testing and inactivation methods will adequately screen for, and inactivate, infectious agents in the plasma used in the production of our products.

 

Plasma and plasma derivative products are fragile, and improper handling of our plasma or plasma derivative products could adversely affect results of operations.

 

Plasma is a raw material that is susceptible to damage. Almost immediately after its collection from a donor, plasma is stored and transported at temperatures that are at or below -20 degrees Celsius (-4 degrees Fahrenheit). Once we manufacture plasma derivative products, they must be handled carefully and kept at appropriate temperatures. Our failure, or the failure of third parties that supply, ship or distribute our plasma and plasma derivative products, to properly care for our plasma or plasma derivative products may require us to destroy some raw materials or products. If the volume of plasma or plasma derivative products damaged by such failures were to be significant, the loss of that plasma or those plasma derivative products could have a material adverse effect on our financial condition and results of operations.

 

Our future success depends on our ability to retain members of our senior management and to attract, retain and motivate qualified personnel.

 

We are highly dependent on the principal members of our executive and scientific teams. The loss of the services of any of these persons might impede the achievement of our research, development, operational and commercialization objectives. In particular, we believe the loss of any member of our senior management team would significantly and negatively impact our business. For details regarding the members of senior management, see Item 6 of this Part I, “Directors, Senior Management and Employees — A. Directors and Senior Management — Senior Management.” We do not maintain “key person” insurance on any of our senior management.

 

Recruiting and retaining qualified operations, finance and accounting, scientific, clinical and sales and marketing personnel will be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. If we are unable to attract, retain and motivate qualified and experienced personnel, we could lose customers and suffer reduced profitability. Even if we are successful in attracting and retaining such personnel, competition for such employees may significantly increase our compensation costs and adversely affect our financial condition and results of operations.

 

cGMP regulations also require that the personnel we employ and hold responsible for product manufacturing, including, for example, the collection, processing, testing, storage or distribution of blood or blood components, be adequate in number, educational background, training (including professional training as necessary) and experience, or a combination thereof, and have capabilities commensurate with their assigned functions, a thorough understanding of the procedures or control operations they perform, the necessary training or experience and adequate information concerning the application of relevant cGMP requirements to their individual responsibilities. Our failure to attract, retain and motivate qualified personnel may result in a regulatory violation, affect product quality, require the recall or market withdrawal of affected product or result in a suspension or termination of our license to market our products, or any combination thereof.

 

Our business requires substantial capital to operate and grow and to achieve our strategy of realizing increased operating leverage, including the completion of several large capital projects.

 

We have implemented several large capital projects to expand and improve the capacity and structure of our facilities and to improve the structure of our plasma collection centers in the United States. These projects may run over budget or be delayed. We cannot be certain that these projects will be completed in a timely manner or that we will maintain our compliance with cGMP regulations, and we may need to spend additional amounts to achieve compliance. Additionally, by the time these multi-year projects are completed, market conditions may differ significantly from our assumptions regarding the number of competitors, customer demand, alternative therapies, reimbursement and public policy, and as a result, capital returns might not be realized.

 16

 

We also plan to continue to spend substantial sums on research and development, to obtain the approval of the FDA, and other regulatory agencies, for new indications for existing products, to develop new product delivery mechanisms for existing products and to develop innovative product additions. We face a number of obstacles to successfully converting these efforts into profitable products, including, but not limited to, the successful development of an experimental product for use in clinical trials, the design of clinical study protocols acceptable to the FDA and other regulatory agencies, the successful outcome of clinical trials, our ability to scale our manufacturing processes to produce commercial quantities or successfully transition technology, the approval of the FDA and other regulatory agencies of our products and our ability to successfully market an approved product or new indication.

 

For example, when a new product is approved, the FDA or other regulatory authorities may require post-approval clinical trials, sometimes called Phase IV clinical trials. If the results of such trials are unfavorable, this could result in the loss of the license to market the product, with a resulting loss of sales.

 

We are expecting significant capital spending as we are undertaking an investment plan that involves among other investments, cumulative industrial capital investments to expand the manufacturing capacities of the Bioscience division as part of our €1.4 billion 2018-2022 capital expenditure plan. The amount and timing of future capital spending is dependent upon a number of factors, including market conditions, regulatory requirements and the extent and timing of particular projects, among other things. Our ability to grow our business is dependent upon the timely completion of these projects and obtaining the requisite regulatory approvals.

 

We may not be able to develop some of our international operations successfully.

 

We currently conduct sales in over 100 countries. The successful operation of such geographically dispersed resources requires considerable management and financial resources. In particular, we must bridge our business culture to the business culture of each country in which we operate. In addition, international operations and the provision of services in foreign markets are subject to additional risks, such as changing market conditions, currency exchange rate fluctuations, trade wars and barriers, exchange controls, regulatory changes, changes to tax regimes, foreign investment limitations, civil disturbances, war and emerging pandemics. Furthermore, if an area in which we have significant operations or an area into which we are looking to expand suffers an economic recession or currency devaluation, our net revenues and accounts receivable collections in that region will likely decline substantially or we may not be able to successfully expand or operate in that region.

 

We are susceptible to interest rate variations.

 

We use issuances of debt and bank borrowings as a source of funding. At December 31, 2020, $2.50 billion and €1.3 billion of our senior interest bearing debt, which represented 53.9% of our senior interest bearing debt, bore interest at variable rates, at a spread over the LIBOR for our U.S. dollar denominated debt and at a spread over the Euro Interbank Offered Rate, or EURIBOR, for our euro denominated debt. Any increase in interest rates payable by us, which could be adversely affected by, among other things, our inability to meet certain financial ratios, would increase our interest expense and reduce our cash flow, which could materially adversely affect our financial condition and results of operations. See “— Risks Relating to Our Structure — The phasing out and ultimate replacement of LIBOR with an alternative reference rate and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition and results of operations.” And see Item 11 of this Part I, “Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk.”

 

Our results of operations and financial condition may be affected by adverse changes in foreign currency exchange rates, especially a significant shift in the value of the euro as compared to the U.S. dollar.

 

A significant portion of our business is conducted in currencies other than our reporting currency, the euro. In 2020, €4.1 billion, or 76%, of our net revenue of €5.3 billion was denominated in U.S. dollars. We are also exposed to currency fluctuations with respect to other currencies, such as the British pound, the Brazilian real, the Canadian dollar and the Argentine, Mexican and Chilean pesos. Currency fluctuations among the euro, the U.S. dollar and the other currencies in which we do business result in foreign currency translation gains or losses that could be significant.

 

We are also exposed to risk based on the payment of U.S. dollar denominated indebtedness. At December 31, 2020, we had approximately $2.5 billion of U.S. dollar denominated senior debt. See Item 11 of this Part I, “Quantitative and Qualitative Disclosures About Market Risk — Currency Risk.”

 17

 

If the San Diego, Clayton, Emeryville, Los Angeles or Parets facilities were to suffer a crippling accident, or if a force majeure event materially affected our ability to operate and produce saleable products, a substantial part of our manufacturing capacity could be shut down for an extended period.

 

A substantial portion of our revenue is derived from plasma fractionation or products manufactured at our San Diego, Clayton, Emeryville, Los Angeles and Parets facilities. In addition, a substantial portion of our plasma supply is stored at facilities in City of Industry, California, as well as at our Clayton, North Carolina and Parets facilities. If any of these facilities were to be impacted by an accident or a force majeure event such as an earthquake, major fire, storm or explosion, major equipment failure or power failure lasting beyond the capabilities of our backup generators, our revenue would be materially adversely affected. In this situation, our manufacturing capacity could be shut down for an extended period and we could experience a loss of raw materials, work-in-process or finished goods inventory. Other force majeure events such as terrorist acts, influenza pandemic or similar events could also impede our ability to operate our business. In addition, in the event of the reconstruction of our Clayton, Los Angeles or Parets facilities or our plasma storage facilities, gaining the regulatory approval for such new facilities and the replenishment of raw material plasma could be time consuming. During this period, we would be unable to manufacture all of our products at other plants due to the need for FDA and foreign regulatory authority inspection and certification of such facilities and processes.

 

Our property damage and business interruption insurance may be insufficient to mitigate the losses from any such accident or force majeure event. We may also be unable to recover the value of the lost plasma or work-in-process inventories, as well as the sales opportunities from the products we would be unable to produce.

 

If we experience equipment difficulties or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.

 

We depend on a limited number of companies that supply and maintain our equipment and provide supplies such as chromatography resins, filter media, glass and stoppers used in the manufacture of our products. If our equipment should malfunction, the repair or replacement of the machinery may require substantial time and cost, which could disrupt our production and other operations. Our plasma collection centers rely on disposable goods supplied by third parties and information technology systems hosted by third parties. Our plasma collection centers cannot operate without an uninterrupted supply of these disposable goods and the operation of these systems. Alternative sources for key component parts or disposable goods may not be immediately available. And while we have experienced periodic outages of these systems, a material outage would affect our ability to operate our collection centers.

 

Any new equipment or change in supplied materials may require revalidation by us or review and approval by the FDA or foreign regulatory authorities, including the EMA, which may be time-consuming and require additional capital and other resources. We may not be able to find an adequate alternative supplier in a reasonable time period, or on commercially acceptable terms, if at all. As a result, shipments of affected products may be limited or delayed. Our inability to obtain our key source supplies for the collection of plasma and manufacture of products may require us to delay shipments of products, harm customer relationships and force us to curtail operations.

 

If our shipping or distribution channels were to become inaccessible due to a crippling accident, a pandemic, an act of terrorism, a strike, earthquake, major fire or storm, or any other force majeure event, our supply, production and distribution processes could be disrupted.

 

Not all shipping or distribution channels are equipped to transport plasma. If any of our shipping or distribution channels becomes inaccessible due to a crippling accident, a pandemic, an act of terrorism, a strike, earthquake, major fire or storm or any other force majeure event, we may experience disruptions in our continued supply of plasma and other raw materials, delays in our production process or a reduction in our ability to distribute our products directly to our customers.

 

We rely in large part on third parties for the sale, distribution and delivery of our products.

 

In the United States, we regularly enter into distribution, supply and fulfillment contracts with group purchasing organizations, or GPOs, home care companies, alternate infusion sites, hospital groups and others. We are highly dependent on these agreements for the successful sale, distribution and delivery of our products. For example, we rely principally on GPOs and on our distributors to sell our immunoglobulin products. If such parties breach, terminate or otherwise fail to perform under these contracts, our ability to effectively distribute our products will be impaired and our business may be materially and adversely affected. In addition, through circumstances outside of our control, such as general economic decline, market saturation or increased competition, we may be unable to successfully renegotiate our contracts or secure terms which are as favorable to us. Furthermore, we rely in certain countries on distributors for sales of our products. Disagreements or difficulties with our distributors supporting our export business could result in a loss of sales.

 18

 

We rely on the services of third parties for the manufacture of certain products.

 

We have rights of sale and distribution for several different products, including Tavleese® in the European market. However, for many of these products we rely upon supply from third parties. To the extent such third parties are unable to properly and timely manufacture and deliver the necessary products and services in Europe, our business could be materially affected.

 

We may not be able to commercialize products in development.

 

Before obtaining regulatory approval for the sale of our product candidates or for the marketing of existing products for new indicated uses, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including, without limitation:

 

  regulators or institutional review boards, or IRBs, may not authorize us to commence a clinical trial or conduct a clinical trial within a country or at a prospective trial site;

 

  the regulatory requirements for product approvals may not be explicit, may evolve over time and may diverge by jurisdiction;

 

  our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or we may be required by regulators, to conduct additional preclinical testing or clinical trials or to abandon projects that we had expected to be promising;

 

  the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we anticipate or participants may withdraw from our clinical trials at higher rates than we anticipate, any of which would result in significant delays;

 

  our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;

 

  we may be forced to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks or if any participant experiences an unexpected serious adverse event;

 

  regulators or IRBs may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

  undetected or concealed fraudulent activity by a clinical researcher, if discovered, could preclude the submission of clinical data prepared by that researcher, lead to the suspension or substantive scientific review of one or more of our marketing applications by regulatory agencies and result in the recall of any approved product distributed pursuant to data determined to be fraudulent;

 

  the cost of our clinical trials may be greater than we anticipate;

 

  the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate, as we currently do not have any agreements with third-party manufacturers for the long-term commercial supply of any of our product candidates;

 

  an audit of preclinical or clinical studies by the FDA or other regulatory authorities may reveal noncompliance with applicable regulations, which could lead to disqualification of the results and the need to perform additional studies;

 19

 

 

the effects of our product candidates may not achieve the desired clinical benefits or may cause undesirable side effects, or the product candidates may have other unexpected characteristics; and
     
 

our clinical trials, or the ability of regulatory agencies to review the results of our clinical trials, may be delayed by as a result of the COVID-19 pandemic.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may be delayed in or unable to obtain marketing approval or reimbursement for our product candidates, or be unable to obtain approval for indications that are not as broad as intended or have the product removed from the market after obtaining marketing approval.

 

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates or could allow our competitors to bring products to market before we do, impairing our ability to commercialize our products or product candidates.

 

Even if preclinical trials are successful, we still may be unable to commercialize a product due to difficulties in obtaining regulatory approval for its engineering process or problems in scaling that process to commercial production. Additionally, if produced, a product may not achieve an adequate level of market acceptance by physicians, patients, healthcare payors and others in the medical community to be profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, some of which are beyond our control, including:

 

  the prevalence and severity of any side effects;

 

  the efficacy and potential advantages over alternative treatments;

 

  the ability to offer our product candidates for sale at competitive prices;

 

  relative convenience and ease of administration;

 

  the willingness of physicians to prescribe new therapies and of the target patient population to try such therapies;

 

  the strength of marketing and distribution support; and

 

  sufficient third-party coverage or reimbursement.

 

Therefore, we cannot guarantee that any products we may seek to develop will ever be successfully commercialized, and to the extent they are not successfully commercialized, such products could involve significant expense with no corresponding revenue.

 

Complex and evolving U.S. and international laws and regulations regarding privacy and data security and increased risk of cybersecurity incidents to our information technology systems could result in increased costs of operations and a significant disruption to our business.

 

Our operations are highly dependent on our information technology systems, including internet-based systems, which may be vulnerable to breakdown, cybersecurity incidents, wrongful intrusions, data breaches, malware, ransomware, and malicious attack. In addition, information security risks have generally increased in recent years, increasing our systems’ potential vulnerability, such as to data security breaches or cyber attack, whether by employees or others, which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, customers, plasma donors and others. Data security breaches may also adversely impact the conduct of scientific research and clinical trials, including the submission of research results to support marketing authorizations.

 

Additionally, our information technology systems utilize certain third party service organizations that manage sensitive data, such as personal medical information regarding plasma donors, and our business may be adversely affected if these third party service organizations are subject to data security breaches. We may continue to incur significant expenses to comply with existing privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

 20

 

Federal, state and foreign governments continue to adopt new, or modify existing laws and regulations addressing data privacy and the collection, processing, storage, transfer and use of data. This includes, for example, the EU’s regulation, the General Data Protection Regulation (GDPR) and the new California Consumer Protection Act (CCPA), effective on January 1, 2020. In our efforts to meet the GDPR, CCPA, U.S. Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations, or (HIPAA), and other data privacy regulations, we have made and continue to make certain operational changes to our business practices. Other governmental authorities throughout the U.S. and around the world are considering similar types of legislative and regulatory proposals concerning data protection. These privacy, security and data protection laws and regulations could impose increased business operational costs, require changes to our business, require notification to customers or workers of a security breach, or restrict our use or storage of personal information. For example, health information authorities, such as regulations under HIPAA and potential revisions thereto, as proposed in December 2020, include requirements to implement various recordkeeping, operational, notice and other practices intended to safeguard that information, and notify affected individuals in the event of privacy and security breaches, establish standards regarding electronic health data transmissions and set rules for specific electronic transactions, such as transactions involving claims submissions to third party payers. Failure to comply with HIPAA and similar state laws could expose us to breach of contract claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation.

 

In the United States, the CCPA generally requires companies, such as us, to institute additional protections regarding the collection, use and disclosure of certain personal information of California residents. The California Attorney General announced the finalization of initial CCPA regulations on August 14, 2020, and two new sets of modifications to CCPA regulations have since been proposed and have completed the required public comment process, although they are still subject to internal review and finalization by the California Attorney General, the timing of which is uncertain. In addition to providing for enforcement by the California Attorney General, the CCPA also provides for a private right of action. Entities in violation of the CCPA may be liable for civil penalties. Significantly, in November 2020 California enacted the California Privacy Rights Act (CPRA), effective January 1, 2023, which amends the CCPA. The CPRA, among other substantive measures, expands the CCPA’s private right of action, increases consumers’ control over personal information, imposes new compliance obligations on businesses, and enacts new exceptions that may apply to our businesses. Notably, it also creates a new California Privacy Protection Agency that will issue additional regulations by July 1, 2022 and be responsible for enforcement of CCPA and CPRA provisions going forward.

 

The European Parliament and the Council of the European Union adopted GDPR, which increased privacy rights for individuals in Europe, extended the scope of responsibilities for data controllers and data processors and imposed increased requirements and potential penalties on companies offering goods or services to individuals who are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of EUR 20 million, or 4% of global company revenues.

 

Our efforts to implement programs and controls that comply with the GDPR, CCPA, HIPAA and other data protection requirements are likely to impose additional costs on us, and we cannot predict whether the interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of the requirements, could have a material adverse effect on our business.

 

Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products.

 

Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products, especially intellectual property related to our purification processes. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if patents are issued to us or to our licensors, they may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of time our products have patent protection. Additionally, most of our patents relate to the processes we use to produce our products, not to the products themselves. In many cases, the plasma-derived products we produce or develop in the future will not, in and of themselves, be patentable. Since our patents relate to processes, if a competitor is able to design and utilize a process that does not rely on our protected intellectual property, that competitor could sell a plasma-derived or other product similar to one we developed or sell.

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Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after their filing, if at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in such patent applications. If a third party has also filed a U.S. patent application covering our product candidates or a similar invention, we may be required to participate in an adversarial proceeding, known as an “interference proceeding,” declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and our efforts in them could be unsuccessful, resulting in a loss of our anticipated U.S. patent position.

 

Our patents expire at various dates. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any competitive advantage. Even if issued, we cannot guarantee that: any of our present or future patents or patent claims or other intellectual property rights will not lapse or be invalidated, circumvented, challenged or abandoned; our intellectual property rights will provide competitive advantages; our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; any of our pending or future patent applications will be issued or have the coverage originally sought; our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments. In addition, our competitors or others may design around our protected patents or technologies.

 

Effective protection of our intellectual property rights may be unavailable, limited or not applied for in some countries. Changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. Such lawsuits could entail significant costs to us and divert our management’s attention from developing and commercializing our products.

 

We, like other companies in the pharmaceutical industry, may become aware of counterfeit versions of our products becoming available domestically and abroad. Counterfeit products may use different and possibly contaminated sources of plasma and other raw materials, and the purification process involved in the manufacture of counterfeit products may raise additional safety concerns, over which we have no control. Any reported adverse events involving counterfeit products that purport to be our products could harm our reputation and the sale of our products in particular and consumer willingness to use plasma-derived therapeutics in general.

 

Unauthorized use of our intellectual property may have occurred or may occur in the future. Although we have taken steps to minimize this risk, any failure to identify unauthorized use and otherwise adequately protect our intellectual property would adversely affect our business. For example, any unauthorized use of our trademarks could harm our reputation or commercial interests. Moreover, if we are required to commence litigation related to unauthorized use, whether as a plaintiff or defendant, such litigation would be time consuming, force us to incur significant costs and divert our attention and the efforts of our management and other employees, which could, in turn, result in lower revenue and higher expenses.

 

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how.

 

We generally seek to protect proprietary information by entering into confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may not effectively prevent disclosure of confidential information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, our trade secrets may otherwise become known or be independently developed by our competitors or other third parties. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to determine and enforce the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. We also rely on contractual protections with our customers, suppliers, distributors, employees and consultants and implement security measures designed to protect our trade secrets. We cannot assure you that these contractual protections and security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers, employees or consultants will not assert rights to intellectual property arising out of such contracts.

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Since we rely on trade secrets and nondisclosure agreements, in addition to patents, to protect some of our intellectual property, there is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect the unauthorized use of such information, prevent such use or take appropriate and timely steps to enforce our intellectual property rights.

 

We may infringe or be alleged to infringe intellectual property rights of third parties.

 

Our products or product candidates may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and/or abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

 

If we are found to be infringing on the patent rights of a third party, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms.

 

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

 

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We take steps to ensure that our employees do not use the proprietary information or know-how of others in their work for us. We may, however, be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

 

We have in-licensed certain patent rights and co-own certain patent rights with third parties.

 

Our rights in certain intellectual property that we have in-licensed or co-own with third parties and the value therein may depend on our third party licensors’ or co-owners’, as applicable, performance under our intellectual property agreements with them. If one of these third parties is unable to, or does not, enforce its own rights in such intellectual property or perform under our agreements with them, it could affect our ability to effectively compete in the marketplace and operate our business.

 

Our in-license agreements for certain patent rights may impose payments and/or other material obligations on us as a licensee. Although we are currently in compliance with all of our material obligations under these licenses, if we were to breach any such obligations, our counterparty licensors may be entitled to terminate the licenses. Such termination may restrict, delay or eliminate our ability to develop and commercialize our products, which could adversely affect our business. We cannot guarantee that the third-party patents and technology we license will not be licensed to our competitors. In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or whether the technology can be replaced on acceptable terms, or at all.

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Risks Relating to the Healthcare Industry

 

United States Healthcare Reform may adversely affect our business.

 

The United States Patient Protection and Affordable Care Act and the companion Healthcare and Education Reconciliation Act, each enacted in March 2010, as amended (collectively, the “ACA”), increased federal oversight of private health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage. While the ACA has materially expanded the number of individuals in the United States with health insurance, it has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner in which it has been interpreted.

 

There are uncertainties due to federal legislative and administrative efforts to repeal (under the previous administration), substantially change, replace or invalidate portions or all of the ACA. Additionally, federal litigation related to the ACA is proceeding in several courts and could have a significant impact on the United States healthcare industry. The U.S. Supreme Court, in upholding the constitutionality of the ACA and its individual mandate provision in 2012, simultaneously limited ACA provisions requiring Medicaid expansion, making such expansion a state-by-state decision. In 2017, the U.S. Congress effectively repealed the ACA’s individual mandate provision by eliminating the financial penalty for non-compliance. In the most recent ACA litigation, a federal appeals court found the individual mandate to be unconstitutional, and returned the case to a lower federal court for consideration of whether the remainder of the ACA could survive the excision of the individual mandate. This decision was appealed to the U.S. Supreme Court, and a decision is expected soon. Any outcome of this case that changes the ACA, any other future legislation, guidance, rules or regulations and/or Executive Orders that materially alter the healthcare industry could have a significant impact on our operations. The uncertain status of the ACA affects our ability to plan, and its repeal without adequate replacement could have a material adverse effect on our United States operations.

 

Government pressures and constraints on reimbursement may adversely affect our business.

 

We engage in various manufacturing, processing, marketing and sales activities pertaining to pharmaceutical products in a number of jurisdictions around the world. These activities subject us to several governmental regulations mandating multiple types of controls over pricing and general operations in the various countries in which we operate. The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payers are under intense pressure to control spending even more tightly.

 

In the United States, which is our main market, implementation of the ACA and trends in recent years in the healthcare industry has included significant changes including a shift towards managed or value-based care, collective purchasing agreements, consolidation in office-based healthcare providers, and other cost-saving, revenue and payment reduction measures with respect to, for example, several government healthcare programs that cover our products, including Medicaid, Medicare Parts B and D and the 340B Program. These trends could have a material adverse impact on our financial performance. For more details of these measures see Item 4 of this Part I, “Information on the Company — E. Regulatory Matters — Pharmaceutical Pricing and Reimbursement.” Global emphasis on healthcare cost containment exerts significant pressures on the pricing of our products and on our ability to obtain and maintain reimbursement rates to cover our products, which may adversely affect our business.

 

The availability of federal funds to pay for our products under Medicaid and Medicare Part B programs requires that we extend discounts under the 340B Program, and changes to this program under the ACA could adversely affect our financial performance. The 340B Program extends discounts to a variety of community health clinics and other entities that receive health services grants from the 340B Program, as well as hospitals that serve a disproportionate share of certain low income individuals, and the ACA expanded the number of qualified 340B entities eligible to purchase products for outpatient use, adding certain cancer centers, children’s hospitals, critical access hospitals and rural referral centers. The 340B Program price, or ceiling price, cannot exceed the AMP (as reported to CMS under the Medicaid drug rebate program) less the Medicaid unit rebate amount. We have entered into a pharmaceutical pricing agreement (PPA), with the government in which we have agreed to participate in the 340B Program by charging eligible entities no more than the ceiling price for drugs intended for outpatient use. Evolving requirements with respect to this program continue to be issued by the Health Resources and Services Administration (HRSA) of the United States Department of Health and Human Services (HHS) the federal agency responsible for oversight of the 340B Program, which creates uncertainty. We expect the healthcare industry will continue to be subject to increasing pricing and cost containment pressures in 2021 and beyond. These pricing and cost containment pressures may impact the reimbursement rates for our products and have an adverse effect on our business. We believe that we meet the requirements of the 340B Program, and are continuing to review and monitor these and other developments affecting the 340B Program.

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Continuing efforts of certain regulatory and legislative bodies, as well as the United States Congress, are focused on pricing and reimbursement. The outcome of these continuing discussions remains uncertain, but may have a potential negative impact on our business.

 

Impact of government regulations over product development and regulatory approvals may adversely affect our business.

 

We develop and manufacture pharmaceutical products in a number of jurisdictions around the world. These activities subject us to several governmental regulations mandating specific governmental approvals that are necessary for us to develop our products in the various countries in which we operate. Obtaining market approval for our products is a lengthy, costly and complex regulatory process that requires intensive preclinical and clinical data, and the approval process can vary significantly depending on the regulatory authority of each jurisdiction. Relevant health authorities may, at the time of the filing of the application for a marketing authorization, or later during their review, impose requirements that can evolve over time, including requiring additional clinical trials, and such authorities may delay or refuse to grant approval.

 

Even where we have obtained marketing approval for a product in one or more major markets, we may need to invest significant time and resources in applying for approval in other markets, and there is no assurance that we will be able to obtain such approval. In recent years, health authorities have become increasingly focused on product safety and on the risk/benefit profile of pharmaceutical products, which could lead to more burdensome and costly approval processes and negatively affect our ability to obtain regulatory approval for products under development. For example, the FDA and the EMA have been implementing strict requirements for approval, particularly in terms of the volume of data needed to demonstrate a product’s efficacy and safety.

 

In the United States, our main market, even with the changes in the ACA to accelerate the regulatory process for certain products, including biosimilars, it is still a lengthy, costly and complex regulatory process. The ACA introduced a new abbreviated regulatory approval pathway for biological products found to be “biosimilar” to or “interchangeable” with a biological “reference product” previously licensed under a Biologics License Applications (BLA). This abbreviated approval pathway is intended to permit a biosimilar product to come to market more quickly and less expensively by relying to some extent on the data generated by the reference product’s sponsor, and the FDA’s previous review and approval of the reference product.

 

The law provides that no biosimilar application may be accepted for FDA review until four years after the date the reference product was first licensed by the FDA, and that the FDA may not make approval of an application effective until 12 years after the reference product was first licensed. The law also includes an extensive process for the innovator biologic and biosimilar manufacturer to litigate patent infringement, validity, and enforceability, which could increase costs of protecting our reference products. Once approved, biosimilars likely would compete with, and in some circumstances may be deemed under applicable laws to be “interchangeable with,” the previously approved reference product. The extent to which a biosimilar product, once approved, will be substituted for any of our products, in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. The FDA is actively seeking to encourage the entry of biosimilars into the marketplace, including issuing, in July 2018, its Biosimilar Action Plan, intended to enhance the speed of the biosimilar development and approval processes. We expect in the future to face greater competition from biosimilar products, including a possible increase in patent challenges, all of which could adversely affect our financial performance.

 

Regarding access to our products, the ACA established and provided significant funding for a Patient-Centered Outcomes Research Institute to coordinate and fund Comparative Effectiveness Research, as those terms are defined in the ACA. While the stated intent of Comparative Effectiveness Research is to develop information to guide providers to the most efficacious therapies, outcomes of Comparative Effectiveness Research could influence the reimbursement or coverage for therapies that are determined to be less cost effective than others. Should any of our products be determined to be less cost effective than alternative therapies, the levels of reimbursement for these products, or the willingness to reimburse at all, could be impacted, which could materially impact our financial results.

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Failure to comply with laws and regulations governing the sales and marketing of our products or an adverse decision in lawsuits may result in adverse consequences to us.

 

We engage in various marketing, promotional and educational activities pertaining to, as well as the sale of, pharmaceutical products in a number of jurisdictions around the world. The promotion, marketing and sale of pharmaceutical products and medical devices is highly regulated and the sales and marketing practices of market participants such as us have been subject to increasing supervision by governmental authorities around the world, and we believe that this trend will continue.

 

For example, the laws governing our conduct in the United States are enforceable by criminal, civil and administrative penalties. Violations of laws such as the Federal Food, Drug and Cosmetic Act (FDCA), the Federal False Claims Act (FCA), the Public Health Service Act (PHS Act) or provisions of the U.S. Social Security Act known as the “Anti-Kickback Law” and the “Civil Monetary Penalties Law,” or any regulations promulgated under their authority, may result in jail sentences, fines or exclusion from federal and state programs, as may be determined by Medicare, Medicaid, the Department of Defense, other regulatory authorities and the courts. There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen “relators” under federal or state false claims laws. For a description of fraud and abuse laws see Item 4 of this Part I, “Information on the Company — E. Regulatory Matters — Government Regulation — United States Government Regulation — Anti-fraud and Abuse Regulation.”

 

Failure to comply with fraud and abuse laws and regulations could also result in other significant civil and criminal penalties and costs, including the loss of licenses and the inability to participate in federal and state health care programs, and could have a material adverse effect on our business. The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under applicable false claims laws, and who may receive up to 30% of total government recoveries. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. Further, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to frequent modification and varied interpretation by prosecutorial and regulatory authorities, increasing the risk of noncompliance. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to FCA penalties, as well as other fraud and abuse laws. While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in response to changes in applicable law or interpretation of laws, could have a material adverse effect on our business.

 

Failure to satisfy requirements under the FDCA can also result in penalties, as well as requirements to enter into consent decrees or orders that prescribe allowable corporate conduct. In this regard, our Los Angeles facility was previously managed pursuant to a consent decree that was entered into in February 1998 based on action by the FDA and the U.S. Department of Justice, or the DOJ, addressing FDCA violations committed by the former owner of the facility, Alpha Therapeutic Corporation, or Alpha. The consent decree provided for annual inspection of the plant by the FDA. On March 15, 2012, the United States District Court for the Central District of California entered an order vacating the consent decree on the Los Angeles facility.

 

Adverse consequences can also result from failure to comply with the requirements of the 340B Program under the PHS Act, which extends discounts to a variety of community health clinics and other entities that receive health services grants under the PHS Act. In early 2016, HRSA finalized a regulation regarding the 340B pricing methodology, providing guidelines for when civil monetary penalties may be issued for “knowing and intentional” manufacturer overcharges of 340B covered entities. Under this regulation, which became effective on January 1, 2019, manufacturers who overcharge could be subject to significant monetary penalties. Such findings could also result in negative publicity that could harm the manufacturer’s reputation or cause business disruption, penalties, or CMP. Under the rule, the CMP may be up to $5,000 for each instance of overcharging a covered entity. We believe that we have complied with applicable legal requirements, but if we are ultimately required to change our sales or pricing practices with regard to the distribution of drugs under the 340B program, or if we were required to pay penalties under the applicable regulations, there would be an adverse effect on our revenues and profitability.

 

In addition, companies in the United States, Canada and the European Union are generally restricted from promoting approved products for other indications that are not specifically approved by the competent regulatory authorities, nor can companies promote unapproved products. Improper promotion of unapproved drugs or devices or unapproved indications for a drug or device may subject us to warnings from, or enforcement action by, regulatory agencies, harm demand for our products, and subject us to civil and criminal sanctions. Further, sanctions under the FCA have recently been brought against companies accused of promoting off-label uses of drugs, because such promotion induces the use and subsequent claims for reimbursement under Medicare and other federal programs. The ACA significantly strengthened provisions of the FCA, the anti-kickback provisions of Medicare and Medicaid and other health care antifraud provisions, leading to the possibility of greatly increased qui tam suits by relators for perceived violations. Industry data indicates that a significant portion of IVIG volume may be used to fill physician prescriptions for indications not approved by the FDA or similar regulatory authorities. Violations or allegations of violations of the foregoing restrictions could materially and adversely affect our business.

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We are required to report detailed pricing information, net of included discounts, rebates and other concessions, to CMS for the purpose of calculating national reimbursement levels, certain federal prices and certain federal and state rebate obligations. We have established systems for collecting and reporting this data accurately to CMS and have instituted a compliance program to assure that the information collected is complete in all respects. If we report pricing information that is not accurate to the federal government, we could be subject to fines and other sanctions (including potential FCA liability) that could adversely affect our business.

 

To market and sell our products outside of the United States, we must obtain and maintain regulatory approvals and comply with regulatory requirements in such jurisdictions. The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all, which would preclude us from commercializing products in those markets. In addition, some countries, particularly the countries of the European Union, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidate to other available therapies. Such trials may be time consuming and expensive and may not show an advantage in efficacy for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the United States or the European Union, we could be adversely affected.

 

In the United States under a provision in the ACA, referred to as the Physician Payment Sunshine Act or Open Payments Program (the “PPS Act”), we are required to report and disclose payments or other transfers of value made to certain practitioners, such as physicians and teaching hospitals. CMS publishes information from these reports on a publicly available website, including amounts transferred and healthcare provider identities. Under the PPS Act we are required to collect and report detailed information regarding certain financial relationships we have with covered healthcare providers. The PPS Act preempts similar state reporting laws, although we or our subsidiaries may also be required to report under certain state transparency laws that address circumstances not covered by the PPS Act, and some of these state laws are also ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. While we believe we have substantially compliant programs and controls in place to comply with these reporting requirements, we cannot assure you that regulations will not require us to take additional compliance steps. Our compliance with these rules imposes additional costs on us.

 

We could be adversely affected if other government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.

 

Certain of our products are subject to various cost-containment measures, such as government-imposed industry-wide price reductions, mandatory pricing systems, reference pricing systems, payors limiting access to treatments based on cost-benefit analyses, an increase in imports of drugs from lower-cost countries to higher-cost countries, shifting of the payment burden to patients through higher co-payments, limiting physicians’ ability to choose among competing medicines, mandatory substitution of generic drugs for the patented equivalent, and growing pressure on physicians to reduce the prescribing of patented prescription medicines. Such pressures could have a material adverse impact on our business, financial condition or results of operations, as well as on our reputation.

 

For example, certain pharmaceutical products, such as plasma derivative products, are subject to price controls in several of our principal markets, including Spain and countries within the European Union. In the United States, where pricing levels for our products are established by governmental payors and negotiated with private third-party payors, if the amount of reimbursement available for a product is reduced, it may cause groups or individuals dispensing the product to discontinue administration of the product, to administer lower doses, to substitute lower cost products or to seek additional price-related concessions. These actions could have a negative effect on our financial results, particularly in cases where our products command a premium price in the marketplace or where changes in reimbursement induce a shift in the location of treatment. The existence of direct and indirect price controls and pressures over our products has affected, and may continue to materially adversely affect, our ability to maintain or increase gross margins. In addition, the growth of overall healthcare costs and certain weak economic and financial environment in certain countries where we do business, as well as increased scrutiny over pharmaceutical pricing practices, such as in the United States, all enhance these pricing pressures.

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In the United States pricing concerns include political and legislative efforts to increase transparency around healthcare and pharmaceutical drugs costs. Various pricing proposals have been introduced, some of which could take effect based on action by federal administrative agencies without the need for Congressional action. The uncertainty around these pricing proposals affects our ability to plan, and the proposals, if adopted, in whole or in part, could adversely affect our business. For example, on November 12, 2020, CMS issued final rules imposing price transparency requirements on hospitals and group health plans. Specifically, beginning in 2022, group health plans must post, on a public internet website, in-network provider negotiated rates (which include rates with device suppliers and manufacturers), historical out-of-network allowed amounts and drug pricing information. Our negotiated rates with various providers and group health plans could be published, which could impact our ability to independently negotiate sales contracts and rate agreements.

 

An increasing number of states in the United States have also proposed or passed legislation that seeks to directly or indirectly regulate pharmaceutical drug pricing, such as by requiring drug manufacturers to provide advance notice of certain price increases, publicly report pricing information or to place a maximum price ceiling on pharmaceutical products purchased by state agencies. State laws regulating pharmaceutical drug pricing may cause us to experience additional pricing pressures on our affected products, and could adversely affect our business.

 

Also, the intended use of a drug product by a physician can affect pricing. Physicians frequently prescribe legally available therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and that are approved by the FDA or similar regulatory authorities in other countries. These off-label uses are common across medical specialties, and physicians may believe such off-label uses constitute the preferred treatment or treatment of last resort for many patients in varied circumstances. In the United States, many off-label uses of drug products may be reimbursed by Medicare and other third-party payors, generally based on the payors’ determination that the intended use is for a medically accepted indication, for example, based on studies published in peer-reviewed medical journals or information contained in drug compendia, such as the United States Pharmacopeia-National Formulary. However, if reimbursement for off-label uses of products, including IVG, is reduced or eliminated by Medicare or other third-party payors, including those in the United States or the European Union, we could be adversely affected.

 

We are subject to extensive government regulatory compliance and ethics oversight.

 

Our business is subject to extensive government regulation and oversight by the many countries in which we operate. We have enacted anticorruption, privacy, healthcare and corporate compliance policies and procedures that govern our business practices and those of our distributors and suppliers. These policies and procedures are effectuated through education, training and monitoring of our employees, distributors and suppliers. In addition, to enhance compliance with applicable healthcare laws and mitigate potential liability in the event of noncompliance, regulatory authorities, such as HHS’s Office of the Inspector General (OIG) of the United States, have recommended the adoption and implementation of a comprehensive healthcare compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the U.S. Sentencing Commission Guidelines Manual. Increasing numbers of U.S.-based pharmaceutical companies have such programs, and we have adopted U.S. healthcare compliance and ethics programs that generally incorporate the OIG’s recommendations. However, our adoption and enforcement of these various policies and procedures does not ensure that we will avoid investigation or the imposition of penalties by applicable government agencies.

 

Failure to comply with changing regulatory requirements could materially adversely affect our business.

 

We engage in various manufacturing, processing, marketing and sales activities pertaining to pharmaceutical products in a number of jurisdictions around the world. These activities subject us to several governmental regulations governing our global operations. The laws and regulations of the many jurisdictions that govern our business and operations are subject to varying and evolving interpretations that affect our ability to comply, and future changes, additions, and enforcement approaches, including in light of political changes. For example, in the United States, President Biden’s administration has authorized and encouraged a freeze on certain federal regulations that have been published but are not yet effective, as well as a review of all federal regulations issued during President Trump’s administration. Changes with respect to the applicable laws and regulations may require us to update or revise our operations, services, marketing practices, and compliance programs and controls, and may impose additional and unforeseen costs on us, pose new or previously immaterial risks to us, or may otherwise have a material adverse effect on our business. There can be no assurance that current and future government regulations will not adversely affect our business, and we cannot predict new regulatory priorities, the form, content or timing of regulatory actions, and their impact on the health care industry and on our business and operations.

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We are subject to extensive environmental, health and safety laws and regulations.

 

Our business involves the controlled use and the generation, handling, management, storage, treatment and disposal of hazardous substances, wastes and various biological compounds and chemicals. The risk of contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any regulated chemicals, substances or wastes occurs, we could be held liable for resulting damages, including for investigation, remediation and monitoring of the contamination, including natural resource damages, the costs of which could be substantial. As owners and operators of real property, we could also be held liable for the presence of hazardous substances as a result of prior site uses or activities, without regard to fault or the legality of the original conduct that caused or contributed to the presence or release of such hazardous substance on, at, under or from our property. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials, chemicals and wastes.

 

Although we maintain workers’ compensation insurance to cover the costs and expenses that may be incurred due to injuries to our employees resulting from the use and handling of these materials, chemicals and wastes, this insurance may not provide adequate coverage against potential liabilities.

 

Additional or more stringent federal, state, local or foreign laws and regulations affecting our operations may be adopted in the future. We may incur substantial capital costs and operating expenses to comply with any of these laws or regulations and the terms and conditions of any permits required pursuant to such laws and regulations, including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions at our respective facilities. In addition, fines and penalties may be imposed for noncompliance with environmental and health and safety laws and regulations or for the failure to have or comply with the terms and conditions of required environmental permits.

 

Risks Relating to Our Shares and American Depositary Shares

 

If we discover material weaknesses or significant deficiencies in our internal control over financial reporting, it may adversely affect our ability to provide timely and reliable financial information and satisfy our reporting obligations under U.S. federal securities laws, which also could affect the market price of our American Depositary Shares or our ability to remain listed on NASDAQ.

 

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. A “significant deficiency” is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention of those responsible for oversight of our financial reporting. In addition, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

To the extent that any material weakness or significant deficiency exists in our or our consolidated subsidiaries’ internal control over financial reporting, such material weakness or significant deficiency may adversely affect our ability to provide timely and reliable financial information necessary for the conduct of our business and satisfaction of our reporting obligations under U.S. federal securities laws, which could affect our ability to remain listed on NASDAQ. Ineffective internal and disclosure controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our American Depositary Shares, or ADSs, or the rating of our debt.

 

The Grifols Family may exercise significant influence over the conduct of our business.

 

The founders of the Company and their relatives (the “Grifols Family”) and Scranton Enterprises B.V. own, directly and indirectly, approximately 36% of our Class A shares. The Class A shares exercise 100% of the voting control of our Company. As a result, the Grifols Family and Scranton Enterprises B.V. may exercise significant influence over matters requiring shareholders’ approval, including, among other things, the election of our board of directors, or the Board, dividend policy and certain fundamental corporate action, such as the issuance of bonds, a merger or a dissolution. Conflicts may arise between the interests of the principal shareholders and those of the other shareholders, and the principal shareholders may choose to resolve the conflict in a way that does not coincide with the interests of the other shareholders.

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The market price of our Class B ADSs on NASDAQ may be volatile.

 

The market price of our Class B ADSs may be volatile as a result of various factors, many of which are beyond our control. These factors include, but are not limited to, the following:

 

  market expectations for our financial performance;

 

  actual or anticipated fluctuations in our results of operations and financial condition;

 

  changes in the estimates of our results of operations by securities analysts;

 

  potential or actual sales of blocks of our Class B ADSs in the market by any shareholder or short selling of our Class B ADSs. Any such transaction could occur at any time or from time to time, with or without notice to us;

 

  the entrance of new competitors or new products in the markets in which we operate;

 

  volatility in the market as a whole; and

 

  the risk factors mentioned in this section.

 

The market price of our Class B ADSs may be adversely affected by any of the preceding or other factors regardless of operations and financial condition.

 

Fluctuations in the exchange rate between the U.S. dollar and the euro may increase the risk of holding our ADSs or shares.

 

The Spanish securities market for equity securities consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (collectively, the “Spanish Stock Exchanges”). The majority of the transactions conducted on the Spanish Stock Exchanges are done through the Spanish Automated Quotation System (Sistema de Inteconexión Bursátil Español, or SIBE).

 

Our Class A shares and Class B shares are listed on the Spanish Stock Exchanges and quoted on SIBE in euros. In addition, our Class B shares are traded in the United States on the NASDAQ Global Select Market in the form of ADSs, evidenced by American Depositary Receipts, or ADRs, in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the euro may result in temporary differences between the value of our ADSs and the value of our shares, which may result in heavy trading by investors seeking to exploit such differences. This may increase the volatility of, and have an adverse effect on, the price of our shares or ADSs.

 

In addition, as a result of fluctuations in the exchange rate between the U.S. dollar and the euro, the U.S. dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in Spain of any shares withdrawn from the ADR depositary and the U.S. dollar equivalent of any cash dividends paid in euros on our shares represented by the ADSs could also decline.

 

Subscription (or preemptive) rights may be unavailable to U.S. holders of our shares or ADSs.

 

In the case of a future increase of our registered share capital, existing shareholders will generally be entitled to subscription (or preemptive) rights pursuant to Spanish law, unless waived by a resolution of the shareholders or, if such power has been delegated to the Board pursuant to a shareholders’ resolution, by a resolution of the Board and except in certain situations, such as capital increases made for an in-kind contribution, in which subscription (or preemptive) rights are not applicable by law. Holders of the Class B shares will generally not have a right to vote on any resolution on a capital increase or on the waiver of subscription (or preemptive) rights, unless such resolution does not treat the Class B shares in the same way as the Class A shares, except in the limited circumstances set out in the Articles of Association of Grifols, S.A. as amended, or the Articles of Association.

 

Even if preemptive rights are granted, holders of our ADSs or U.S. resident shareholders may not be able to exercise subscription (or preemptive) rights, in which case holders of our ADSs could be substantially diluted, unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, is effective with respect to such rights and the shares for which they give such right or an exemption from the registration requirements of the Securities Act is available.

 30

 

We intend to evaluate at the time of any rights offering the costs and potential liabilities associated with any such registration requirements, as well as the benefits of enabling the exercise of subscription (or preemptive) rights for the shares. In doing so, we will also evaluate any other factors that we may consider appropriate at the time.

 

There can be no assurance that we will decide to comply with such registration requirements. If no such registration requirements are satisfied, the depositary will sell the subscription (or preemptive) rights relating to the ADSs on deposit and will distribute the proceeds of such sale, if any, to the holders of the ADSs. If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case no value will be given for these rights.

 

ADS holders may be subject to limitations on the transfer of their ADSs.

 

ADSs are transferable on the books of the depositary. However, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when the books of the depositary are closed or if such action is deemed necessary or advisable by the depositary or by us because of any requirement of law or of any government or governmental body or commission or under any provision of the deposit agreement. Moreover, the surrender of ADSs and withdrawal of our shares may be suspended subject to the payment of fees, taxes and similar charges or if we direct the depositary at any time to cease new issuances and withdrawals of our shares during periods specified by us in connection with shareholders’ meetings, the payment of dividends or as otherwise reasonably necessary for compliance with any applicable laws or government regulations.

 

Item 4. INFORMATION ON THE COMPANY

 

  A. History of and Development of the Company

 

Introduction

 

We were founded in 1940 in Barcelona, Spain by Dr. José Antonio Grifols i Roig, a specialist and pioneer in blood transfusions and clinical analysis and the grandfather of our current Chairman of the Board. We have been making and selling plasma derivative products for more than 70 years. Over the last 25 years, we have grown from a predominantly domestic Spanish company into a global company by expanding both organically and through acquisitions throughout Europe, the United States, Latin America and Asia.

 

We were incorporated in Spain as a limited liability company on June 22, 1987 under the name Grupo Grifols, S.A., and we changed our name to Grifols, S.A. in 2005. We conduct business under the commercial name “Grifols.” Our principal executive office is located at Avinguda de la Generalitat, 152 Parque Empresarial Can Sant Joan, 08174 Sant Cugat del Vallès, Barcelona, Spain and our telephone number is +34 93 571 0500. Our registered office is located at c/Jesús y María, 6, Barcelona, Spain.

 

We are a vertically integrated global producer of plasma derivatives and we believe we rank in the top three largest producers in the industry. Our activities include sourcing raw material, manufacturing various plasma derivative products and selling and distributing final products to healthcare providers. We have expanded our plasma collection network and our manufacturing capacity through a combination of organic growth and acquisitions. As of December 31, 2020 we had 312 operating plasma collection centers located across the United States and Germany; and a manufacturing capacity of approximately 15.2 million liters of plasma per year. We plan to reach approximately 21 million liters fractionation capacity by 2022 and 28 million liters by 2026 and, as previously announced, 435 approved plasma collection centers globally by 2025.

 

We also research, develop, manufacture and market in vitro diagnostics products, including analytical instruments, reagents, software and associated products for use in clinical and blood bank laboratories and hospital products.

 

Our Class A shares have been listed on the Spanish Stock Exchanges since we completed our initial public offering on May 17, 2006 and are quoted on the SIBE under the ticker symbol “GRF.” Since January 2008, we have been part of the IBEX-35 Index, which comprises the top 35 listed Spanish companies by liquidity and market capitalization. Our Class B shares were issued as part of the consideration for the Talecris acquisition and are listed on the Spanish Stock Exchanges and quoted on the SIBE under the ticker symbol “GRF.P.” Our Class B shares are also traded in the United States on the NASDAQ Global Select Market in the form of ADSs, evidenced by ADRs, under the symbol “GRFS.” Each ADS represents one of our Class B shares. Our ADSs are currently traded in U.S. dollars. In November 2011, our ADSs were added to the NASDAQ Biotechnology Index.

 31

 

The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements and other information regarding issuers that file electronically with the SEC.

 

Important Milestones

 

On October 15, 2020, we acquired a 100% of the equity of California biopharmaceutical company Alkahest, Inc., or Alkahest, for a total consideration of $146 million. In 2015, we had previously acquired a significant minority stake of Alkahest and, with this transaction, we gain total control of the company;

 

On October 1, 2020, we acquired a plasma fractionation facility and two purification facilities located in the city of Montreal, Canada, as well as 11 plasma collection centers located in the U.S., from South Korean based GC Pharma, or GC Pharma, for a total consideration of $457 million;

 

On March 30, 2020, we acquired 26.2% of the voting and economic rights in Chinese company Shanghai RAAS Blood Products Co Ltd, or Shanghai RAAS, in exchange for 45% of the economic rights and 40% of the voting rights in our U.S. subsidiary, Grifols Diagnostic Solutions Inc., or GDS;

 

In June 2018, we completed the acquisition of German based pharmaceutical company Haema AG for a purchase price of €220 million;

 

In August 2018, we completed the acquisition of U.S. based pharmaceutical company Biotest US Corporation, or Biotest, for a purchase price of $286 million;

 

In December 2016, we entered into an asset purchase agreement with Hologic Inc., or Hologic, to acquire Hologic’s NAT (nucleic acid testing) Donor Screening Unit. The transaction closed in January 2017 for a purchase price of $1.9 billion;

 

In January 2014, we acquired the diagnostic business of Novartis Corporation, or Novartis, for a purchase price of $1.7 billion;

 

In June 2011, we acquired U.S. based bioterapeutics company Talecris for a purchase price of $3.7 billion; and

 

In July 2003, we acquired the assets of Alpha Therapeutics Corporation, including its plasma fractionation plant in Los Angeles, California, for a purchase price of $104 million.

 

For further details of our principal capital expenditures and divestitures, see Item 5 of this Part I, “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures, Other Intangible Assets and Rights of Use.”

 

  B. Business Overview

 

General

 

We are one of the leading global specialty pharmaceutical companies developing, manufacturing and distributing a broad range of biological medicines based on plasma derived proteins. Plasma derivatives are proteins found in human plasma, which once isolated and purified, have therapeutic value. These protein-based therapies extend and enhance the lives of individuals who suffer from chronic and acute, often life-threatening, conditions, such as primary and secondary immunological deficiencies, Chronic Inflammatory Demyelinating Polyneuropathy, or CIDP, A1PI deficiency and related emphysema, immune-mediated ITP, Guillain Barré syndrome, Kawasaki disease, allogeneic bone marrow transplants, hemophilia A and B, von Willebrand disease, traumatic or hemorrhagic shock and severe burns. In addition, we have built a diagnostic business that focuses on researching, developing, manufacturing and marketing in vitro diagnostics products for use in clinical and blood bank laboratories. We also specialize in providing infusion solutions, nutrition products and medical devices for use in hospitals and clinics.

 32

 

Our products and services are used by healthcare providers in over 100 countries to diagnose and treat patients with hemophilia, immune deficiencies, infectious diseases and a range of other medical conditions, and we have a direct presence, through the operation of commercial subsidiaries, in 30 countries.

 

We believe that in 2020 we ranked in the top three largest producers in the industry in terms of total sales globally. We believe we have a top three market position in various segments of the plasma derivatives industry including A1PI, IG and albumin as well as in terms of plasma collection centers and fractionation capacity.

 

We organize our business into five divisions: Bioscience, Diagnostic, Hospital, Bio Supplies and Others. These divisions also represent the operating segments of the Company.

 

Bioscience. The Bioscience division includes activities relating to the manufacture of plasma derivatives for therapeutic use, including the reception, analysis, quarantine, classification, fractionation and purification of plasma and the sale and distribution of end products. The main plasma products we manufacture are IG, Factor VIII, A1PI and albumin. We also manufacture intramuscular (hyperimmune) immunoglobulins, ATIII, Factor IX and plasma thromboplastin component, or PTC. The Bioscience division accounted for €4.2 billion, or 79.5%, of our total net revenue in 2020.

 

Diagnostic. The Diagnostic division focuses on researching, developing, manufacturing and marketing in vitro diagnostics products, including analytical instruments, reagents, software and associated products for use in clinical and blood bank laboratories, covering the entire value chain from donation to transfusion. We concentrate our Diagnostic business in transfusion medicine (immunology, immunohematology) and specialty diagnostics such as hemostasis. The Diagnostic division’s main customers are blood donation centers, clinical analysis laboratories and hospital immunohematology services. The Diagnostic division accounted for €775.9 million, or 14.5%, of our total net revenue in 2020. The Nucleic Acid Testing, or NAT, Donor Screening Unit is engaged in research, development, manufacturing and commercialization of assays and instruments based on NAT technology for transfusion and transplantation screening. NAT technology makes it possible to detect the presence of infectious agents in blood and plasma donations, contributing to greater transfusion safety.

 

Hospital. The Hospital division offers technology and services for hospitals, clinics and specialized centers for the manufacture of medicines, as well as physiological saline solution, enteral nutritional fluids and medical devices for interventional therapy. It also includes products that we do not manufacture but that we market as supplementary to the products that we do manufacture. The Hospital division accounted for €118.7 million, or 2.2%, of our total net revenue in 2020.

 

Bio Supplies. Net revenue from Bio Supplies primarily consists of revenue related to biological products for non-therapeutic use as well as all income derived from manufacturing agreements with Kedrion and third party sales of Haema and Biotest. The Bio Supplies division accounted for €224.1 million, or 4.2%, of our total net revenue in 2020.

 

Others. Net revenue from Others primarily consists of revenue from the rendering of manufacturing services to third party companies.

 

Geographic Markets

 

We believe we are a leading plasma derivatives producer globally, ranking in the top three largest producers in the industry in terms of total sales, along with Takeda and CSL Group. We are the world’s largest producer of A1PI, which is used for the treatment of A1PI deficiency-related emphysema.

 

We currently operate in over 100 countries through distributors and subsidiaries in 30 countries. The United States is the largest sales region in the world for the plasma derivative sector. For the year ended December 31, 2020, the United States and Canada accounted for 67.4% of our total net revenue, Europe accounted for 15.6% of our total net revenues (of which less than 6.4% was generated in Spain) and the rest of the world accounted for 17% of our total net revenue.

 

Certain sales regions, particularly in emerging markets, have experienced continuous growth, driven by enhanced socioeconomic conditions and more informed patients who are demanding better quality medical care, as well as increasing government healthcare spending on plasma derivative products. These emerging markets are expected to experience significant growth. Our presence and experience in Latin America, in countries such as Mexico, Colombia, Argentina, Chile and Brazil, where we have been marketing and selling products for over 20 years, has positioned us to benefit from this additional growth in both our Bioscience and Diagnostic divisions. In the Asia-Pacific region, we have established a presence through our subsidiaries and representative offices in Malaysia, China, Thailand, Singapore, Australia, Japan, India, Hong Kong, Taiwan and Indonesia. We have also opened a Middle Eastern representative office in Dubai and Saudi Arabia.

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We maintain a continuing focus on international expansion and acquisitions and will continue to selectively consider acquisitions that would generate operation synergies. For specific examples of acquisitions we have made to further enhance our operations, see “— A. History and Development of the Company — Important Milestones” above.

 

The following chart reflects a summary of net revenue by each of our geographic regions for the past three years:

 

Summary of Net Revenue by Region  Year
ended
December 31,
2020
   % of total
net revenue
   Year
ended
December 31,
2019(2)
   % of total
net revenue
   Year
ended
December 31,
2018(2)
   % of total
net revenue
 
   (in thousands of euros, except for percentages) 
United States and Canada    3,599,746    67.4    3,390,811    66.5    2,974,429    66.3 
                               
European Union(1)    834,492    15.6    799,460    15.7    744,218    16.6 
                               
Rest of the World    905,800    17.0    908,420    17.8    768,077    17.1 
Total    5,340,038    100.0    5,098,691    100.0    4,486,724    100.0 

 

 
 

(1) 

Net revenue earned in the European Union includes net revenue earned in Spain.  

  (2) For comparison purposes, 2019 and 2018 U.K. figures have been reclassified from European Union to Rest of the World.

 

Principal Activities

 

We organize our business into five divisions: Bioscience, Diagnostic, Hospital, Bio Supplies and Others. These divisions also represent the operating segments of the Company. The following chart presents our total net revenues by each of our divisions for the past three years:

 

Summary of Revenue by Division  Year
ended
December 31,
2020
   % of total
net revenue
   Year
ended
December 31,
2019
   % of total
net revenue
   Year
ended
December 31,
2018
   % of total
net revenue
 
   (in thousands of euros, except for percentages) 
Bioscience    4,252,502    79.5    3,993,462    78.3    3,516,704    78.4 
Diagnostic    775,889    14.5    733,604    14.4    702,265    15.6 
Hospital    118,675    2.2    134,441    2.6    119,454    2.7 
Bio Supplies    224,090    4.2    266,540    5.2    167,004    3.7 
Others    31,989    0.6    22,820    0.5    22,451    0.5 
Intersegments    (53,107)   (1.0)   (52,176)   (1.0)   (41,154)   (0.9)
Total    5,340,038    100.0    5,098,691    100.0    4,486,724    100.0 

 

The Bioscience Division

 

The Bioscience division is responsible for the research and development, production and marketing of plasma derivative products. In 2020, the Bioscience division accounted for 79.5% of total net revenue.

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Operational Structure

 

The following chart illustrates its operational structure:

 

 

 

From plasma donation to therapeutic application, there are four major steps in the industry value chain process: (i) plasma collection, (ii) transport and logistics, (iii) manufacturing (fractionation and purification) and (iv) marketing and distribution. We are present at all levels of the value chain, from collection centers to distribution of the final products. This vertical integration enables us to leverage our position at each stage to control the overall process, to benefit from lower prices and to introduce complementary products, such as those offered through the Hospital division and the Diagnostic division, to our customers.

 

Plasma Collection

 

Plasma is the key raw material used in the production of plasma-derived products. We have expanded our plasma collection network through a combination of organic growth by opening new plasma collection centers and acquisitions. We obtain our plasma primarily from the United States and Germany through 312 operating plasma collection centers and, to a much lesser extent, through agreements with third parties. In 2018, we also obtained the rights to all plasma collected at an additional 24 plasma centers in the United States and 35 plasma centers in Germany. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — Acquisition and Sale of Haema AG and Biotest Corporation” below. In 2020, Grifols was able to limit the negative impact on its net plasma supply to approximately 15%, despite COVID-19-related constraints, including social distancing, mobility restrictions and lockdowns. In 2021, Grifols is advancing on its efforts to increase its plasma supply through its expansion plan, comprising organic and inorganic growth. As we previously announced, we plan to reach 435 approved plasma collection centers by 2025 globally.

 

We believe that our plasma requirements through 2021 will be met through plasma collected at our plasma collection centers and purchased from third-party suppliers pursuant to various plasma purchase agreements. As we source the majority of our plasma internally, we have been able to ensure the availability of plasma for our manufacturing needs and assure the quality of the plasma throughout our manufacturing process.

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We have implemented mechanisms to ensure that plasma donors meet the guidelines set forth by applicable regulations regarding, among other things, health, age and frequency of donations. Once the plasma donation is completed, as required by applicable United States and European regulations, we test every donation for pathogens such as HIV, hepatitis A, B and C, parvovirus B19 and syphilis. If we discover a unit of plasma that cannot be used in the fractionation process, we notify the donor and remove all plasma previously donated by such donor from our inventory.

 

Transport and Logistics

 

Once plasma has been collected, it is frozen at the collection center and sent to fractionation centers. One essential aspect of this process is the implementation of safety procedures to guarantee the quality and safety of the donated plasma. To ensure preservation of the proteins found in plasma, plasma must be kept at or below a temperature of -20 degrees Celsius (-4 degrees Fahrenheit). In accordance with European and United States requirements, we store our plasma at a temperature of -30 degrees Celsius (-22 degrees Fahrenheit). During transportation, plasma is kept at a temperature at or below -20 degrees Celsius. Our frozen plasma is transported by one of two transport companies, which are the same used throughout the industry.

 

Fractionation and Purification

 

Once plasma has been obtained, it may be used for plasma transfusions. It may also be frozen (as fresh frozen plasma) and manufactured into plasma derivatives through the fractionation process. The fractionation process consists of the separation of specific proteins through temperature and pH changes, as well as the use of filtration and centrifugation techniques. This process also includes a phase of introducing various viral inactivation procedures. Fractionation occurs in tanks at near freezing temperatures to maintain the integrity of the proteins. All known plasma derivative products can be fractionated from the same batch of plasma. As a result, the development of a new or higher yield plasma derivative product would likely generate incremental sales without increasing the requirement for additional plasma.

 

We currently operate three Bioscience manufacturing facilities in the United States and Spain. Our plasma derivative products are manufactured at our Clayton, Los Angeles and Parets facilities, which have a combined fractionation capacity of approximately 15.2 million liters per year. Our Clayton facility is one of the world’s largest integrated protein manufacturing sites, including fractionation, purification and aseptic filling and finishing of plasma-derived proteins.

 

Currently, the Clayton, Los Angeles and Parets facilities are equipped and licensed to produce certain plasma derivative products for the United States, European and other markets. For example, we produce our Flebogamma® DIF and Gamunex® IVIG products for all of our markets at the Clayton, Los Angeles and Parets facilities.

 

We optimize utilization of our fractionation capacity by obtaining FDA and EMA licenses, and completing further requirements, that allow us to purify at any of our other facilities intermediate products that are produced at one of our facilities. We have obtained the following FDA licenses, among others:

 

  to purify at our Clayton facility the Fraction II+III (an intermediate product) made at both our Los Angeles and Parets facilities to make Gamunex®;

 

  to purify at our Los Angeles facility the Fraction II+III obtained at that facility to make Gamunex® 10%;

 

  to use Fraction V obtained at our Clayton facility to produce albumin at our Los Angeles facility;

 

  to use Fraction V obtained at our Clayton facility to produce Albutein® at our Los Angeles facility;

 

  to use Fraction IV-1 obtained at our Los Angeles facility to produce Prolastina®, an A1PI we market in Spain, at our Clayton facility;

 

  to use Fraction IV-1 obtained at our Clayton facility to produce Prolastin® at our Parets facility;

 

  to use Fraction IV-1 obtained at our Parets facility to produce Prolastin® at our Parets facility;

 

  to use the same method currently in place in our Parets facility to produce Alphanate® in our Los Angeles facility;

 

  to use paste from the fractionation facility at our Clayton facility to produce Gamunex® and Prolastin®;

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  to produce nano-filtered Gamunex® and the 40 gram vial presentation; and

 

  to use Cryoprecipitate obtained at our Clayton Facility to produce Alphanate® at our Los Angeles facility.

 

We are continuing our efforts to obtain additional FDA licenses of this nature. The flexibility provided through such licenses allows us to increase production efficiency and to better address changes in demand between the United States, the European Union and other world markets.

 

For more information on our manufacturing facilities, see “— D. Property, Plant and Equipment” below.

 

Safety

 

We have never experienced a recall of any batch of our finished biological products due to a safety risk, although in 2019 Grifols voluntarily withdrew four lots of product. All of them were due to a reported rate of adverse drug reactions higher than usual. Our philosophy is that the health of the plasma donor and the patient are the paramount considerations. We strongly believe that our safety philosophy is consistent with the business objective of generating profit. We also believe that we have a strong reputation for safety in our markets, thus making our products particularly attractive to customers. Our vertically integrated business model allows us to assure the safety and quality of our plasma derivative products through the implementation of our safety standards.

 

The plasma collection, fractionation and purification process is long, complex and highly regulated. We have adopted and maintain rigorous safety standards that we believe exceed those required by health authorities in Europe and the United States. Grifols is periodically inspected and certified for Good Manufacturing Practices, or GMP, by competent health authorities, such as European authorities, the FDA, and other relevant government authorities of other countries where our products are marketed.

 

Grifols maintains standards consistent with other industry participants with regard to plasma safety, and is periodically certified by the Plasma Protein Therapeutics Association, or PPTA, under the International Quality Plasma Program, or IQPP, for plasma donation centers, and under the Quality Standards of Excellence, Assurance and Leadership Program, or QSEAL, for fractionation plants. For example, source plasma inventory is held for not less than 60 days after donation, to allow for retrieval and destruction of plasma units if the donor is disqualified during this period (after seroconversion or due to high-risk behavior or international travel). We have also introduced innovative methods such as the Plasma Bottle Sampling™ system, which automatically prepares, codes and labels test samples at the time of plasma donation, and the PediGri™ On Line system, which provides full traceability of human plasma raw material throughout the plasma supply chain. See “— Distribution Process” below.

 

The manufacturing plants have been designed fulfilling the current GMP standards and applicable regulations for clean areas, and are designed to minimize clean areas as well as human intervention, with the objective of lowering the risk of contamination. The facilities are subject to a cleaning and sanitizing plan and to a corrective and preventive maintenance program. Periodically, we voluntarily shut down all of our manufacturing facilities to perform maintenance work, expansion projects and other capital investments. Our manufacturing facilities have never been shut down because of regulatory noncompliance while under our operation. We believe that our voluntary shutdown procedure lowers the risk of any mandatory shutdown.

 

All of our plasma derived products are manufactured strictly following validated and approved procedures, and in accordance with the corresponding marketing authorization. Also, each manufacturing process includes at least one validated specific virus inactivation or removal step as a precautionary measure to avoid improbable virus contamination.

 

Since our products are proteins that cannot be terminally sterilized, they therefore are sterilized by filtration before being aseptically filled in their final container. Grifols has patented the Grifols Sterile Filling (GSF) system which minimizes the risk of microbial or particulate contamination during the aseptic filling process. During this process, sterilized containers are filled with the product under Grade A laminar air flow. The partially closed containers (vial with stopper and protector) are sterilized prior to filling. The container closure unit remains partially closed until the moment of filling, after which it is immediately sealed thus reducing the risk of contamination by reducing the product and container exposure to the controlled environment. The filling process is recorded which enables us to identify the cause of, and rectify more easily, any related problem. These records are maintained according to our data retention policy.

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Once aseptically filled, each unit of product is laser-marked with the objective of individually identifying each container and preventing and detecting counterfeits. This allows us to protect the integrity of our manufacturing process.

 

After plasma derivatives are manufactured, every unit of each lot is visually inspected in order to detect the presence of foreign particles or other imperfections in the container closure system. Each lot is also tested during production and at the end of the manufacturing process according to the licensed specifications, marketing authorization and corresponding Pharmacopoeia monographs. All processes are overseen by the quality systems in place at Grifols with the objective of ensuring that products are marketed with the appropriate quality, purity, potency and safety.

 

Finally, once the product is marketed, our Pharmacovigilance system allows us to control all potential adverse reactions resulting from the administration of our products, thus ensuring the safety of our products globally around the world.

 

We continually invest in the improvement of our manufacturing facilities and plasma fractionation process, as well as in other related systems, in order to ensure the quality and safety of our products.

 

Distribution Process

 

With each batch of plasma derivatives, we deliver electronic information regarding the origin, characteristics and controls of each of the units of plasma that we use in the preparation of the batch to our customers. This feature, called the PediGri™ On Line system, allows for healthcare users of our products and regulatory authorities to have immediate and easy access to this information, tangible proof of the full traceability of our products. We have had this system in place since 1996, and we believe we are the only fractionator that provides this feature to customers.

 

We have our own sales and distribution networks covering substantially all of our markets, staffed with highly trained personnel. A majority of our sales in 2020 were made through our own distribution network, which is experienced in the proper handling of our products. This network provides for greater safety because it allows us to track our products and react quickly in the case of a potential product recall. In countries where we do not have our own distribution network, we use carefully selected distributors who follow all of our safety standards.

 

For further information, see “— Marketing and Distribution” below.

 

Bioscience Products and Services

 

Collected plasma, whether source or recovered, is fractionated into different component proteins. We fractionate and purify a broad range of plasma derivative products that improve patient care. In 2020, we were granted the exclusive license to sell a non-plasma derivative medicinal product, Fostamatinib, for distribution in the European Union under the “Tavlesse®” brand name. 

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The chart below presents our principal products by brand name and their respective therapeutic indications:

 

Product Description   Main Therapeutic Indications

Gamunex®/Gamunex®-C. Immune Globulin Injection (Human), 10% Caprylate/Chomatography Purified. Flebogamma® 5% and 10% DIF. Immune Globulin Intravenous (Human).

 

  IVIG is used for the treatment of: primary and secondary immunological deficiencies; and autoimmune conditions including immune-mediated ITP; Guillain Barré syndrome; Kawasaki disease; allogenic bone marrow transplants; chronic inflammatory demyelinating polyneuropathy (CIDP); and multifocal motor neuropathy (MMN). Severe acute myasthenia exacerbations is an approved indication for Gamunex-C.
     
Xembify®. Immune Globulin Subcutaneous (Human) - klhw 20% solution.   Used to treat Primary Humoral Immunodeficiency (PI) but not limited to congenital agammaglobulinemia, common variable immunodeficiency, X-linked agammaglobulinemia, Wiskkott-Aldrich syndrome and severe immunodeficiencies.
     
HyperRAB® Rabies Immune Globulin (Human).   Anti-rabies immunoglobulin indicated for postexposure prophylaxis, along with rabies vaccine, for all persons suspected of exposure to rabies who have not been previously vaccinated with a rabies vaccine.
     
Prolastin®/Prolastin®-C/ Prolastin®-C Liquid/Prolasplan®/ Prolastina®/Pulmolast®/Lynspand®. Alpha 1-Proteinase Inhibitor (Human).   Used to treat adults with clinical evidence of emphysema due to severe hereditary alpha-1 antitrypsin deficiency (A1PI deficiency).
     
Fanhdi™ and Alphanate®. Antihemophilic Factor/von Willebrand Factor Complex (Human).   Used for the prevention, management and control of bleeding in Factor VIII deficiency (hemophilia A) and indication for von Willebrand disease (in the United States, for Alphanate® only).
     
Koate®-DVI. Antihemophilic Factor (Human).   Used for the prevention and control of bleeding in Factor VIII deficiency (hemophilia A).
     
Albutein®/ Human Albumin Grifols®/Plasbumin®. Albumin (Human) 5%, 20% and 25%.   Used to re-establish and maintain circulation volume in the treatment of hypovolemia (i.e., traumatic or hemorrhagic shock and severe burns) and to treat complications related to cirrhosis.
     
Vistaseal™/VeraSeal®. Human fibrinogen/human thrombin.   Used as a supplemental treatment in adults where standard surgical techniques are insufficient for improvement of haemostasis, and as suture support in vascular surgery.
     

Tavlesse®. Fostamatinib Disodium Hexahydrate Film Coated Tablets.

 

 

Used for the treatment of chronic immune thrombocytopenia (ITP) in adult patients who are refractory to other treatments.

 

Gamunex-C® IVIG, a ready-to-use liquid IVIG product, is one of the leading products in the IVIG segment. We believe Gamunex-C® IVIG is one of the premium products in its category since its launch due to a comprehensive set of differentiated product characteristics. We are one of the market leaders in the production and marketing of immunoglobulin, with about 30% market share (in volume) in the United States as of November 2019.

 

In July 2019, the FDA approved Xembify®, our subcutaneous immunoglobulin product for use to treat primary immunodeficiencies. The Company launched Xembify® in the United States in the fourth quarter of 2019. In December 2019, Xembify® was also approved in Canada for use to treat primary and secondary immunodeficiencies. The Company is working with healthcare authorities to obtain approval in Europe and additional markets.

 

HyperRAB® is the world’s leading human anti-rabies immunoglobulin indicated for postexposure prophylaxis, along with rabies vaccine, for all persons suspected of exposure to rabies who have not been previously vaccinated with rabies vaccine. A 300 IU/ml formulation of HyperRAB® is now available in the U.S. (FDA approval February 2018). HyperRAB® is the only human rabies immunoglobulin (HRIG) provided as a higher-potency formulation, potentially requiring fewer injections in administration of each dose. Grifols has an estimated 83% market share of anti-rabies immunoglobulins in the United States as of December 2019.

 

In addition, we are the global market leader in the sales of alpha-1-antitrypsin augmentation therapy (AAT). Our AAT has 32 licenses in 27 countries worldwide with 19 countries in North America and Europe. Our liquid formulation of AAT (Prolastin®-C Liquid) is FDA approved as a chronic augmentation and maintenance therapy to treat emphysema related to severe hereditary A1PI deficiency. We had an estimated 67% global market share for AAT as of December 2019. A worldwide clinical trial is ongoing to meet post-approval regulatory commitments and obtain Prolastin®-C regulatory approval in Europe.

 

Between Koate®-DVI, Fanhdi and Alphanate, Grifols had an estimated 17% market share globally in the pdFVIII hemophilia A market in 2018 (excluding Von Willebrand disease use).

 

Grifols albumin brands are sold globally, with an 18% market share. In addition, our albumin products meet U.S., European and Chinese requirements, making them attractive to biotechnology companies and genetic labs, as well as hospitals and physicians.

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In 2017, we obtained FDA and EMA approvals for a biological sealant composed of human fibrinogen and human thrombin used in surgical operations as an adjunct to hemostasis. The product brand name is VistaSealTM in the US and VeraSeal® in Europe.

 

Tavlesse® is a novel SYK-inhibitor in-licensed from Rigel Pharmaceuticals for commercialization in Europe, Turkey, and additional markets in the Middle East and North Africa. Tavlesse® is indicated to treat chronic immune thrombocytopenia in adult patients who are refractory to other treatments. EMA regulatory authorization was obtained in January 2020, and commercial sales have commenced in Germany and the United Kingdom. For 2021, launches are planned in additional EU countries including Spain, Italy, France, Czech Republic, and the Nordics. Tavlesse® is the first oral therapy commercialized by Grifols Bioscience.

 

In addition to the products described above, we also produce intramuscular (hyperimmune) immunoglobulins, which are used for the prevention and treatment of tetanus, prevention and treatment of hepatitis B, and Rh factor complications during birth. Also, we produce ATIII (Anbinex® and Thrombate® III), which is used in the prevention and treatment of thromboembolic complications in patients with antithrombin deficiency; AlphaNine® and Factor IX Grifols®, which are used in the prevention and control of bleeding in patients with hemophilia B; and Niuliva® and Igantibe®, which are used after liver transplants to prevent hepatitis B reinfection of the graft.

 

Grifols also manufactures Vistaseal/Veraseal®, Fibrin Sealant (Human) which was approved in 2017 by FDA and EMA. Vistaseal/Veraseal® is a biological sealant composed of fibrinogen and human thrombin used in surgical operations to expedite the healing process. It is commercialized in the U.S. by Ethicon US, LLC (a Johnson & Johnson company).

 

To sell plasma derivative products, we must first register the products with the relevant authorities of the jurisdictions where the products are to be marketed and sold. To comply with the regulatory requirements in a given jurisdiction, we have a core team in Spain and the United States that prepares, files and coordinates the registration process with the technical personnel at the subsidiary assigned to that jurisdiction. We have 973 hemoderivative product licenses registered in 84 countries throughout Europe, the United States, Latin America, Asia and the rest of the world. Our most significant government-issued licenses for plasma derivative products are:

 

  Gamunex®/Gamunex®-C/Flebogamma® DIF. We have 196 licenses for the marketing and sale of one or more IVIG products;

 

  Xembify®. We have two licenses (U.S. and Canada) for the marketing and sale of this product;

 

  Prolastin®/Prolastin®-C/ Prolastin®-C Liquid/Prolasplan®/Prolastina®/Pulmolast®/Lynspand®. Alpha 1-Proteinase Inhibitor (Human). We have 32 licenses for the marketing and sale of one or more of these A1PI products;

 

  Fanhdi™/Alphanate®/Koate®- DVI Factor VIII. We have 230 licenses for the marketing and sale of one or more of these Factor VIII products;

 

  Albutein®/Human Albumin Grifols ®/Plasbumin®. We have 220 licenses for the marketing and sale of one or more of these albumin products in their various concentrations;
     

  

VistaSealTM/VeraSeal®. We have five licenses (EU and U.S.) for the marketing and sale of this product; and
     
  Tavlesse®. We have EMA authorization for Tavlesse® in the European Union and the United Kingdom. Tavlesse® is currently sold in Germany and the United Kingdom.

 

Pursuant to the Consent Order, we have granted Kedrion the exclusive license to sell Koate®-DVI in the United States (as defined in Item 8 of this Part I, “Financial Information — A. Consolidated Statements and Other Financial Information — Antitrust Approval of Talecris-Grifols Merger”).

 

In addition to the sale of the products described above, we have entered into a series of arrangements with many Spanish transfusion organizations to fractionate recovered plasma (plasma separated from blood obtained from a blood donation) from such organizations and manufacture plasma derivatives under our own brand name for use by hospitals. We charge the transfusion centers for the fractionation and manufacturing service. We also have contract manufacturing agreements with Italian, Czech and Slovak organizations. We also provide virus photo-inactivation of transfusion plasma to hospitals and clinics in Spain. The plasma is inactivated at our manufacturing facilities and then sent back to the clinic or hospital at which it was collected, where it is used for transfusions.

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The Diagnostic Division

 

The Diagnostic division focuses on researching, developing, manufacturing and marketing in vitro diagnostics products, including analytical instruments, reagents, software and associated products for use in diagnostic clinical and blood bank laboratories. We believe that we have a significant market share of sales in NAT blood screening solutions. In addition, we have increased our sales of automated immunohematology systems and reagents to hospital transfusion and blood centers in several markets. We also continue to grow our portfolio of clinical and diagnostic products in select areas, including autoimmunity and hemostasis, and have agreements to extend the number of antigens we manufacture for use in clinical and blood bank diagnostic tests. The Diagnostic division accounted for €775.9 million, or 14.5% of total net revenue, in 2020. Our principal diagnostic products are:

 

Product Description   Main Applications
     
Transfusion Medicine:    
     
Procleix® Tigris®/Procleix® Panther® systems/Procleix® Panther® with Automation Ready Technology (ART). Automated NAT blood screening systems, assays and software.   Used to detect infectious viruses and parasites in donated blood and plasma including: HIV (Types 1 & 2); Hepatitis A, Hepatitis B, Hepatitis C and Hepatitis E; parvovirus B19; Hepatitis A; West Nile Virus; Dengue Virus; Zika Virus, Babesia, and SARS-COV-2 Virus.
     
WADiana®/Erytra® /Erytra Eflexys® analyzers. Automated immunohematology analyzers that use gel agglutination technology to enable automatic processing of DG Gel® blood determination cards.   Used to perform routine pre-transfusion blood typing, antibody screening, antibody identification and cross-match tests.
     
Antigens. Critical component of certain infectious disease tests.   Used in the manufacture of clinical diagnostic and blood donor screening immunoassays.
     
Leucored and standard blood bags. Blood bags configured according to all blood bank separation protocols. Leucored blood bags incorporate an in-line filtration system.   Used for collection and transfusion of blood.
     
Clinical and Specialty Diagnostics:    
     
Triturus® analyzers. Open and fully automated analyzer for ELISA (enzyme-linked immunoabsorbent assay), tests with multi-test/multi-batch capability.   Automates the enzyme immunoassay testing in microtiter plate format and the processing of several batches of samples simultaneously.
     
Q-Smart, Q-Next, and Q-Expertanalyzers. Fully automated hemostasis analyzers that use reagents to measure blood coagulation levels.   Used to diagnose and measure blood coagulation status of patients with blood coagulation-related and hemorrhagic disorders.
     
Coagulation reagents, instrumentation and software.   Used to establish the coagulation status of patients and to handle the corresponding results.
     

Promonitor. Highly specific ELISA kits for quantification of serum drug levels and anti-drug antibodies of various biological drugs

  Used to measure quantity of drug and antibodies for a number of biological drugs, commonly used in the treatment of various inflammatory diseases.
     
AlphaIDTM. Genetic test for patients for alpha-1 deficiency   This is a free cheek swab to screen for alpha-1, the most common genetic form of Chronic Obstructive Pulmonary Disease (COPD).

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We assemble the majority of our instrument analyzers at our Parets facility. We manufacture antigens at our Emeryville facility, oligos and other critical components of the transcription-mediated amplified NAT kits for blood and plasma infectious diseases screening at our San Diego facility. We manufacture our blood bags at our facilities located in Las Torres de Cotillas, Murcia, Spain, which has an estimated capacity of eleven million blood bags per year, and at our new production facility and blood-collection systems plant in Campo Largo, Brazil, with an annual capacity in excess of eight million blood bags.

 

The production, marketing and sale of many of our Diagnostic division products are subject to the prior registration of such products with the relevant authorities of the applicable jurisdictions. We have over 3,009 diagnostic product licenses registered in 76 countries in Europe, the United States, Canada, Latin America, Africa and Asia.

 

In addition to the products noted above, we offer our customers products developed in collaboration with, or manufactured by, third-parties that we believe complement our product lines.

 

The Diagnostic division distributes products in over 100 countries in Europe, North America, Asia-Pacific, the Middle East, Latin America and Africa.

 

Our Diagnostic division includes a complete line of products and systems to perform blood donor screening molecular tests aimed at detecting the pathogenic agents of transfusion-related infectious diseases such as HIV, hepatitis B, hepatitis C, West Nile Virus, Zika Virus, Babesia, Dengue Virus and SARS-COV-2 Virus. We control the research and development, manufacturing and worldwide commercialization of our Procleix® blood screening products. We believe that our Procleix® NAT solutions continue to lead the market, and are used to screen more blood and plasma donations worldwide each year than any other NAT system. The Procleix® products are designed to directly detect the genetic material of a virus using a technique called transcription-mediated amplification.

 

Transfusion Medicine

 

Grifols has a leadership position in transfusion medicine, with a broad portfolio of products that range from blood collection, blood and plasma testing to blood typing and transfusion. We focus primarily on meeting changing market needs with new and enhanced products for our Procleix NAT blood screening portfolio and on expanding sales of our immunohematology products in key markets (WADiana®, Erytra® and Erytra Eflexis® analyzers and related DG Gel® blood determination cards).

 

We continue to focus on obtaining FDA and other regulatory approvals to expand our portfolio of NAT products. Clinical trials to support U.S. registration of the Procleix Ultrio Elite Assay (HIV and hepatitis B and C) and Procleix WNV Assay (West Nile Virus) on the Procleix Panther system were completed in 2016 and the corresponding BLA approval from the FDA for both assays and the Procleix Panther system was received during the second quarter of 2018. A new version of the Procleix® Xpress (v.3.0) pipette was submitted for FDA approval during 2017 and approved during the first quarter of 2018.

 

In 2016, we began working on an Investigational Use Only (IUO) assay to accommodate requests to test blood in areas potentially affected by the Zika virus and in July 2018, the assay obtained FDA approval. Shortly after that, the FDA issued guidance mandating testing of all blood in the U.S. for Zika virus and allowing for pool testing. Grifols is currently providing reagents, instruments and services to all of our U.S. customers to allow the screening of more than 85% of the U.S. blood supply.

 

In January 2019, a new assay to detect four species of the babesia parasite (b. microti, b. venatorum, b. divergens and b. duncani), known to cause babesiosis, a tick borne disease, obtained FDA approval. The assay is designed to be used for routine screening by U.S. blood banks on the Procleix® Panther® system, where Grifols is currently the market leader and continues its efforts to offer innovative solutions to blood banks.

 

In October 2019, the Procleix® Panther® System featuring Automated Ready Technology, or ART, obtained Europe’s CE mark, making it available in European markets accepting the certification, and reinforcing the Company’s leadership in the blood banking industry. With significant hardware and software improvements on the current platform, the Procleix Panther System featuring ART will help accelerate laboratory efforts to reach higher levels of workflow automation for blood and plasma screening.

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In May 2020, Procleix Panther System, featuring ART, received FDA approval for use with the following U.S. licensed products: Procleix Ultrio Elite Assay, Procleix WNV Assay, Procleix Zika Virus Assay and the Procleix Babesia Assay.

 

Also in May 2020, we obtained CE Mark for the Procleix SARS-CoV-2 Assay to screen blood or plasma for SARS-CoV-2 and plasma from convalescent donors who have recovered from COVID-19 or infection with SARS-CoV-2, for further manufacture. We also received CE Mark for a respiratory claim as an aid in the diagnosis of COVID-19 in specific respiratory specimens that are transported in Specimen Extraction Buffers, which obtained a separate CE Mark. The SARS-CoV-2 respiratory claim is limited to Spain and Northern Ireland, and other select EU countries on a contractual basis with Hologic. In August 2020, we obtained the approval of the Zika assay in Canada.

 

In August 2020, we successfully commercialized the Procleix® UltrioPlex E assay, a new multiplex assay for use on the Procleix Panther® system, in Japan. The assay, which is a TMA qualitative in vitro nucleic acid test (NAT), was designed to detect five viruses in human blood specimens: HIV-1, HIV-2, HCV, HBV, and HEV.

 

As part of our strategy of geographic expansion and as a leader in this market segment, we continue to consider requests to include NAT screening for blood and plasma donations in countries as they develop their health systems. In 2020, we entered several new countries, such as Guatemala and Czech Republic.

 

We recorded notable demand for the specialty diagnostic test to detect the SARS-CoV-2 virus, mainly in Spain, leading to higher sales of Grifols’ NAT technology systems (Procleix® NAT Solutions), which incorporates Transcription Mediated Amplification (TMA).

 

We continue to experience strong sales of our DG Gel® blood typing products. In December 2018, Erytra Eflexis®, a fully automated, mid-size analyzer that performs pretransfusion compatibility testing using DG Gel® technology already in use in the EU, was approved by the FDA. It has a smart and compact design, offering intuitive operation that has expanded our product portfolio, which already includes the WADiana® and Erytra® analyzers and DG Gel® cards. The DG Gel® family of products continued to expand in 2019, with the commercialization in CE mark countries of DG Reader NET, a single card processing platform operating with the same consumables and reagents as our fully automated systems. The DG Reader NET received FDA approval at the end of 2019. Also, in November 2019 we received FDA approval for two new red blood cell panels, Data-CytePlus 2 and Data-CyteExtend. Additionally, a Weak D assay, to be used in combination with the DG Gel system in automation, received FDA approval at the end of 2019. This is a valuable test for donor centers and our Immunohematology Reference Laboratory, or IRL, and it will support our expansion in the region. In the U.S., our blood typing solutions have experienced solid growth. We have expanded commercialization efforts and will continue to promote this area in light of its high growth potential.

 

We continue to operate our “Grifols Immunohematology Center” in our laboratories in San Marcos, Texas. The Grifols Immunohematology Center provides reference lab testing, consulting and education services to transfusion medicine professionals as well as offering simple and complex serological tests.

 

In several countries, we distribute BLOODchip® blood group genotyping tests manufactured by Progenika, a Grifols company. Progenika’s ID RHD XT Diagnostic Kit, a molecular diagnostic kit that detects the most relevant RhD variations, received FDA approval in October 2018.

 

In select markets, we are working to expand the availability of Grifols’ blood collection bags and systems, as well as our Gricode™ transfusion component tracing systems. Strengthening our position in Brazil, we commenced the operation of a blood bag manufacturing plant in Campo Largo (Paraná) in 2018. The plant started operations in November 2019, with a production line that is already fulfilling local customer orders. The plant has an initial production capacity of two million units, which we are planning to expand.

 

We operate a product line of high quality antigens, which are critical components of clinical diagnostic and blood screening immunoassay tests sold worldwide, which are produced through a joint business with Ortho Clinical Diagnostic. As part of this joint business, we have a contract with Abbott Laboratories for the supply of high quality antigens used in the manufacture of immunoassay diagnostics. This contract, with a total value of approximately $700 million, extended the supply of antigens until 2026, ensuring higher levels of recurring income in this area. We also extended our agreement with OraSure Technologies through 2022, reinforcing our position as a flexible provider of antigens.

 

Working together with Ortho Clinical Diagnostics, we maintain the VITROS® HIV Combo test for the early detection of HIV infection. This is an important milestone in the joint business between the two companies, in which Grifols is responsible for manufacturing the antigens for the test. The test received approval from the FDA in October 2018 to be used on Ortho’s VITROS® ECi/EciQ. The test was previously approved for use on Ortho’s VITROS® 5600 Integrated System and Ortho’s VITROS® 3600 Immunodiagnostic System.

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Clinical and Specialty Diagnostics

 

Our Q-Smart™, Q-Next™, Q-Expert™ and Triturus® analyzers remain key product lines in the clinical and specialty diagnostics product line. During 2019 we received approval from the FDA for the commercialization of Q-NextTM and the DG-PT reagent. In January 2020 the FDA approved the second device in the Q family, the Q-SmartTM which uses the same reagent.

 

We also continue to offer a broad portfolio of hemostasis reagents in this line, including DG™-Chrom PC, a proprietary chromogenic kit for Protein C, and DG™-TT L human reagent, a liquid human thrombin for determining thrombin time.

 

Operating within our Clinical and Specialty Diagnostics, Progenika manufactures a genetic diagnosis test for Familial Hypercholesterolemia (FH) using next generation sequencing technology (NGS). The division continues its efforts to broaden the Promonitor® line, used to monitor biologic drugs as sales continue in Chile, select European Union countries and Australia. The Promonitor® product line includes an ELISA (enzyme-linked immunoabsorbent assay) device line also developed by Progenika to monitor patients being treated with biological medicines for rheumatoid arthritis and other chronic inflammatory diseases. We maintain CE marking of two additional tests in the Promonitor® family that enable treatment with the biological product golimumab, and several tests to permit the use of a single dilution to measure quantity of drug and antibodies for a number of biological drugs, commonly used in the treatment of various inflammatory diseases, such as rheumatoid arthritis and ulcerative colitis. We also own PromonitorQuick®, a point-of-care diagnostic kit that detects anti-infliximab antibodies, antibodies that appear in patients with chronic inflammatory diseases who are treated with biological drugs.

 

We also continue to distribute our Triturus® analyzer, an open and fully automated analyzer for ELISA tests with multi-test/multi-batch capability. As an open system, it can be used for the automatization of our autoimmunity and biological drug monitoring product lines and other products in our portfolio for which we are distributors.

 

Pursuant to an exclusive agreement with AESKU Diagnostics GmbH & Co., or AEKSU, we distribute autoimmunity diagnostic products in the United States and Mexico. We also have various distribution agreements with AESKU in Chile, Italy, Portugal, Spain and the U.K. One of these diagnostic products is Helios, the only fully automated platform capable of performing all immunofluorescence pipetting and reading steps in the United States, which strengthened our U.S. portfolio of products. During 2018, AESKU obtained FDA approval of two additional assays for Helios, Antineutropil cytoplasmatic antibodies and nuclear Deoxyribonucleic acid. These products further strengthen the portfolio of IFA products offered in the U.S.

 

We retain the first FDA approved biological molecular test that uses the DNA of the patient for the diagnostic. This genetic test to detect alpha-1 antitrypsin deficiency (the “A1AT Genotyping Test”) can be conducted on DNA extracted from blood as well as a drop of blood collected on paper (a “Dry Blood Spot”). This test was developed by Progenika Biopharma, a Grifols subsidiary. Although highly complex, the test has been designed so any molecular biology laboratory can process it with minimal human intervention. At the end of 2019, we also introduced AlphaID™, a new simple cheek swab that greatly simplifies the sample collection process. AlphaID™ allow physicians and healthcare providers to obtain a sufficient oral sample for alpha-1 screening, and it is completely free from ordering to results. The test is now available for distribution in the U.S.

 

We continue to sell the Intercept Blood System®, developed by Cerus, to inactivate pathogens in blood platelets and plasma in Spain and Mexico.

 

The Hospital Division

 

The Hospital division provides services and manufactures products used by hospitals, blood banks, plasma collection centers and other healthcare systems. These products include parenteral solutions, robotics and software. It also includes products that we do not manufacture but that we market as supplementary to the products that we do manufacture. The Hospital division accounted for €118.7 million, or 2.2%, of our total net revenue in 2020.

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The Medication Management (formerly named Hospital Logistics) and IV compounding segments are also strategic areas for the Hospital division. With the inclusive® IV Compounding Portfolio, we provide IV workflow management, GMP quality cleanrooms, expert consulting, and a range of automation solutions for hospital pharmacies, increasing the safety of their sterile compounding needs. With the hardware and software solutions offered by the Medication Management area, we are the market leader in Spain and Chile, and have a strong presence in other countries in Latin America in terms of offering solutions to manage hospitals’ medication flow. At the beginning of 2018, Grifols reinforced the division by acquiring the U.S. technology firm MedKeeper, which develops and markets mobile and web-based technology solutions for the management of hospital pharmacies. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — MedKeeper Acquisition” below. The acquisition complements our Pharmatech line and enhances our presence in the U.S. market.

 

IV Therapy is also a key segment of the division where we manufacture and distribute directly or through third parties products such as parenteral solutions, which are mainly sold in Spain, Portugal and the United States. We continue to be the market leader in the Spanish intravenous therapy segment in intravenous solutions, and in 2018 Grifols’ 0.9% Sodium Chloride was marketed in the U.S. for the first time following the FDA approval of all volume Flebolex bags in 2017 and 2018. Fleboflex Luer containers were approved by the FDA in 2020. The following table describes the principal hospital products that we manufacture, distribute or install and their respective applications:

 

Product Description   Main Applications
Intravenous therapy:    
     
Intravenous fluid and electrolyte solutions. Main product groups include hypotonic solutions, isotonic solutions, hypertonic solutions and plasma volume expander solutions.   Fluid and electrolyte replacement and conduit for the administration of medicines.
     
Irrigation solutions.   Fluids for urological irrigation.
     
Intravenous mixtures. Ready-to-use intravenous mixtures of potassium and paracetamol.   Increases safety and efficiency by eliminating the need for the compounding of solutions in hospital pharmacies.
     
Pharmatech:    
     
Inclusive® IV Compounding Portfolio. Gri-fill® System uses sterile filtration to prepare intravenous mixtures at in-hospital pharmacies. Misterium® are modular clean room facilities we sell in the United States and IBAM. The Kiro Oncology automation system is designed specifically for the preparation of cytotoxic drugs, while Kiro® Fill is used with non-hazardous preparations. PharmacyKeeper is a web and mobile-based application to improve key pharmacy operational processes.   Improves safety of hospital pharmacy preparation procedures by assuring sterility, traceability, user safety and quality to ensure compliance with regulations.
     
Medication Management. Includes a range of software and hardware products to manage and automate inventory, storage, packaging and otherprocesses in operational pharmacies, including our own BlisPack®; and logistic dispensing systems, including Pyxis®, StocKey® and StocKey® RFID Smart Cabinet, and Kardex®.   Used in the logistical organization of hospital pharmacies and warehouses, in the preparation of unit dosing and in hospital management, admissions and accounting.
     
Nutrition:    
     
Dietgrif® enteral liquid diets. Oral diets with all the requirements for balanced nutrition. Different diets include standard, standard fiber, polypeptidic, hyperproteic and energetic.   For patients who are unable to eat enough to maintain a nutritious diet, administered through feeding tubes as well as orally.
     
Enteral feeding devices.   Provides solutions for patients unable to eat by means of a regular oral diet.

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Product Description   Main Applications
Probiotics. Special complementary diets composed of live microorganisms.   Improves gastroenterology conditions that are the result of a lack of intestinal microflora.
     

Medical Devices:

     
Disposable sterile therapeutic medical products.   The products have therapeutics uses in urology, neuroradiology, cardiology and anesthesia.
     

Others:

 

   
Anticoagulant sodium citrate.   Used in the plasma donor centers as an anticoagulant solution.

 

The production, marketing or sale of our various Hospital division products are subject to prior registration with authorities of the relevant jurisdictions. We have approximately 170 licenses for our Hospital division products registered in 42 countries throughout Europe, Latin America, Africa, Canada and the United States. Our sales representatives sell primarily to pharmacy, nutrition and gastroenterology units in hospitals and other units in hospitals that use our medical devices, using our own distribution network and external distribution organizations in some Latin American markets.

 

While our Hospital division generates most of its revenue in Spain (59% of net revenue in 2020), we continue to promote international expansion. In 2017, the FDA approved Grifols’ 500 ml normal saline solution in polypropylene bags (0.9% sodium chloride), in 2018 the FDA approved the 50 ml, 100 ml, 250 ml and 1,000 ml presentations and, in 2020, the FDA approved similar polypropylene bags with luer lock ports. These important milestones reinforced the global expansion of the division and mark an important step forward.

 

The Hospital division employs a commercial strategy to promote Pharmatech’s presence in Latin America through the use of specialist distributors in this sector, while also maintaining a direct sales effort.

 

Intravenous Therapy

 

We manufacture and distribute intravenous solutions, primarily in Spain. The FDA has approved our normal saline solution in 50 ml, 100 ml, 250, ml and 1,000 ml Flexoblex polypropylene bags (0.9% sodium chloride), manufactured in our Murcia (Spain) plant, allowing the division to market this product in the U.S. market. In 2020, the FDA approved the same formats in a new container (Fleboflex Luer) which will be manufactured in Barcelona (Spain). The FDA approvals of anticoagulant and normal saline have also increased the group’s self-sufficiency, and our saline is being used in our U.S. plasma collection centers to restore the circulatory volume in donors. The FDA approval reinforced the division’s global expansion and marked an important step forward that opened up the possibility of new future authorizations for other products manufactured in the Murcia and Barcelona facilities. Moreover, it bolstered our global expansion efforts and confirmed our strategy of fostering the integration of products and services among our divisions. In addition, we have increased our focus on manufacturing ready-to-use intravenous mixtures for third parties. We believe this approach will contribute to the Hospital division’s geographic diversification and allow us to maximize productive use of the Parets facility.

 

We have also signed agreements with ICU Medical, Henry Schein, Hemasource and other third parties for 0.9% Sodium Chloride distribution in the United States.

 

We continue to consolidate third-party manufacturing contracts. In 2018, the Hospital division completed new developments such as the Intercept® Red Blood Cells System, a combination product that includes three blood bags, one filter set plus two inactivation drugs to perform the process of inactivating red blood cells, and milrinone IV ready-to-use flexible bags, both of which have been submitted to regulatory authorities for approval. FDA approval has been obtained for Tirofiban IV (prediluted platelets) and Ibuprofen IV, both ready-to-use in flexible bag products.

 

Pharmatech: Medication Management and inclusiv® IV Compounding Portfolio

 

We provide logistic solutions to hospital pharmacies by selling products related to the logistical organization of pharmacies and warehouses of hospitals, including packaging instruments and software programs for hospital management, admissions and accounting departments. Most of these Medication Management products are manufactured by third parties. However, our portfolio includes some products manufactured by Grifols such as StocKey®, an automated Kanban system designed to optimize hospitals’ healthcare material restocking processes, StocKey RFID®, a radiofrequency identification cabinet for the storage of high value medical devices, such as prosthetics and coronary stents, and BlisPack®, a system designed and manufactured by us to automate the cutting of prescription pill blister packs and the electronic identification of specific drugs for individual patients to be used by hospitals.

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We also manufacture and distribute a complete portfolio of devices, softwares and services used in connection with the preparation of specific intravenous medication, which we refer to as inclusiv® IV Compounding Portfolio. We commercialize Misterium®, a cleanroom we designed to order and install on site to customer specifications. We have expanded our Misterium® cleanroom solutions with the incorporation of Airinspace® products, including medically effective air and surface decontamination systems. As the exclusive distributor of these products in the United States and Spain, Grifols is able to offer a broad portfolio of products for hospital pharmacies and other pharmacies specialized in sterile IV compounding in these countries.

 

We are managing the global introduction of the Kiro Oncology robot, which automates the preparation of intravenous medication for chemotherapy to reduce the risk that health professionals will come into contact with these hazardous products. We expect that the Kiro Oncology robot will be one of the principal drivers of inclusiv® IV Compounding Portfolio product line growth in the near future. This system enables us to offer to hospital pharmacies worldwide what we believe to be the most complete portfolio of solutions for controlling intravenous medication preparation processes. The Kiro Oncology system is available in both the United States and Europe, and in 2019 there were new consumers based in Spain, France, Sweden, Netherlands, Poland, Latvia and other Baltic countries. In 2020, operations in North America have faced some difficulties during the COVID-19 pandemic, causing four units to be closed.

 

With the acquisition of MedKeeper in January 2018, the inclusiv® IV Compounding Portfolio has continued to develop. MedKeeper, with a SaaS business model, adds the missing piece of a compounding portfolio that enables the division to offer a holistic and integrated technology, software and service solution to our customers. PharmacyKeeper® is the leading IV workflow solution and was awarded in 2021, for the fifth consecutive year, as Best In KLAS by KLAS Research. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — MedKeeper Acquisition” below.

 

Nutrition

 

We develop and distribute enteral nutrition products, including accessories such as feeding tubes and nutritional bags, for sale in the Spanish market. The main driver of the segment is the distribution of gastric probes manufactured by Halyard Health, continuing our leadership in Spain with this product line.

 

Medical Devices

 

We also sell other medical devices, such as disposable sterile therapeutic medical products for urology, neuroradiology, cardiology and anesthesia. All of these products are manufactured by third parties and complement our portfolio of Hospital division products. We are increasing our strategic efforts to sell medical devices that complement our portfolio of Bioscience division products. The main driver of growth in this segment in 2020 has been Neuroradiology disposables.

 

Research and Development

 

Research and development is a significant aspect of our business. Our principal research and development objectives are (i) to discover and develop new products, (ii) to research new applications for existing products and (iii) the improvement of our manufacturing processes to improve yields, safety and efficiency. Research and development spending was €240.6 million in 2018, €276.0 million in 2019 and €294.2 million in 2020. In addition, as of December 31, 2020, we had 1,107 scientists and support staff dedicated to research and development.

 

We have over 100 years of successful innovation history. For example, we developed a unique fractionation design that reduces the risk of contamination, reduces maintenance costs and increases the amount of product extracted per liter of plasma. We also developed the first centrifugation unit for the automated cleaning of blood cells. In addition, we were one of the first fractionators to conduct double viral inactivation processes for Factor VIII and have designed and implemented a new process for the sterile filling of vials that reduces exposure to potential contaminants as compared to other existing processes. Further, we have developed a nanofiltration method of viral inactivation for our IG, alpha-1 PI, and ATIII products. As a result of our continuing investment in research and development, we believe that we are well positioned to continue as a leader in the plasma-derived therapies industry.

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Bioscience Division Initiatives

 

We have a number of patents and research and development projects in our Bioscience division underway, 21 of which are in the clinical development phase. The following table reflects the total number of research and development projects in our Bioscience division by development phase as of the end of the last three years.

 

   As of December 31, 
Development Phase  2020   2019   2018 
Discovery    12    15    12 
Preclinical    25    19    12 
Clinical    21    21    28 
Post Commercialization Studies    11    10    9 
Rest of projects    19    19    16 
Total Bioscience Research and Development Projects    88    84    77 

 

The table below presents the most important of our research and development projects:

 

Product Candidate   Therapeutic
Area
  Product
Type
  Potential Use   Development Phase
Albumin   Alzheimer’s   Plasma-derived   Alzheimer’s disease   Expanded Phase III (clinical trial program currently in development with FDA input)
IgM   Antibiotic-resistant infections   Plasma-derived   Bacteremia   Preclinical development
Fibrin Sealant   Surgical bleeding   Plasma-derived   Vascular, organ and soft-tissue surgery   Launched in the U.S. during 2019 and in the EU in 2020
Gamunex-C/ITAC   COVID-19   COVID hIVIG (10%)     Treatment of hospitalized patients infected with COVID-19   Phase III study started in October 2020.  Enrollment was completed in February 2021. The study will be completed in April 2021.

 

ITAC Study. In October 2020, Grifols, together with other companies and various U.S. health agencies, began the international clinical trial Inpatient Treatment with Anti-Coronavirus Immunoglobulin, or ITAC, to evaluate the safety, tolerability and effectiveness of an anti-SARS-CoV-2 hyperimmune globulin (hIVIG, 10%) in patients hospitalized for medical management of COVID-19 at the onset of clinical progression and before development of serious end-organ failure. The phase III clinical study started in October 2020 with a planned study sample size of 500 participants and over 60 registered sites around the world. Study completion is anticipated to be in April 2021. The primary endpoint of this trial in hospitalized patients is an ordinal outcome based on the patient’s clinical status on day seven. It includes seven mutually exclusive categories capturing the range of organ dysfunction that may be associated with the progression of COVID-19, such as respiratory dysfunction and coagulation-related complications.

 

AMBAR Study. The Alzheimer Management by Albumin Replacement, or AMBAR, study was a multicenter trial that complemented two previous trials and involved combining therapeutic plasmapheresis with albumin and IVIG in different intervals and in varying doses. Since the AMBAR project was mainly based on albumin, the study also included a treatment arm with albumin alone in order for both approaches, the combination of albumin plus IVIG, and albumin alone, to be covered. Therefore, we conducted a Phase IIb/III clinical trial to demonstrate the efficacy of plasmapheresis with Albutein® and Flebogamma® DIF, for improving the cognitive status of treated patients with Alzheimer’s disease compared with non-treated patients. The study was conducted in collaboration with 41 hospitals in Spain and in the United States. 496 patients were enrolled, and the top line results presented in 2018 showed a reduction of 61% in disease progression in both primary efficacy endpoints measuring cognition and activities of daily living during a 14-month period. During 2019 clinical secondary endpoints, biomarkers and neuroimaging results were presented and signals of a positive effect were observed. Additionally, the AMBAR treatment showed an excellent safety profile with 72% of the treated patients completing the entire study and with approximately 90% of the 4,709 procedures performed showing no adverse effects. In July 2020, clinical trial results were published in the scientific journal Alzheimer’s & Dementia: The Journal of the Alzheimer’s Association. Also, during 2020, some different post-hoc data analysis were presented in different scientific congresses.

 

We incurred costs in the amount of €2.4 million, €3.2 million and €5.1 million in connection with this project in 2020, 2019 and 2018, respectively. We hold significant granted patents and patent applications on the production of albumin and IVIG as well as on the combination of plasma exchange with albumin replacement for the treatment of Alzheimer’s disease.

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IgM. Grifols has extensive expertise in the area of infectious disease and in the development of immunoglobulin therapies. We have made significant progress in developing IgM, a new protein entity, for the treatment of bacteremia. IgM is purified from a discarded fraction from the Gamunex® process using a number of recent chromatography technologies. There is a significant medical need for new antimicrobial therapies due to the rise of antibiotic resistance, particularly for gram negative species, and IgM has shown activity against a broad range of gram negative species. Preclinical studies have shown that IgM can bind to a wide variety of bacteria and bacterial antigens and eventually mediates bacterial uptake into phagocytic cells, which kill the bacteria. Use in rodent models has shown that IgM can act synergistically with antibiotics to protect against drug resistant gram negative bacteria. Our IgM would most likely be utilized as empiric adjuvant to antimicrobial therapy in high-risk, immunocompromised patients with systemic infections (solid organ transplantation, or SOT, hematopoietic stem cell transplantation, or HSCT, burn, ICU, etc.) and potentially be continued after the switch to a defined therapy. Toxicology studies began in February 2020 and an investigational new drug application submission (an “IND Submission”) is forecast for 2021. Phase I, II and III clinical studies are also planned.

 

We incurred costs in the amount of €5.6 million, €5.2 million and €5.4 million in connection with this project in 2020, 2019 and 2018, respectively. We hold a significant number of granted patents related to IgM.

 

Fibrin Sealant. We began clinical trials into the safety and efficacy of the use of fibrin sealant as a supportive treatment for the improvement of hemostasis in vascular, organ and soft-tissue surgery in 2008. In 2014, we completed a clinical trial in the European Union for the use of fibrin sealant in vascular surgery. Three additional clinical trials were performed: (i) a Phase III clinical trial in the United States for the use of fibrin sealant in solid organ surgery; (ii) a Phase III clinical trial in the United States for the use of fibrin sealant in soft-tissue surgery; and (iii) a Phase III clinical trial for the use of fibrin sealant in vascular surgery in the United States. All of the U.S. clinical trials for fibrin sealant were completed in 2015. Marketing authorization approvals were received from the FDA and EMA in November 2017. A distribution agreement was made with a third party, requiring an additional regulatory supplement. Vistaseal® was launched in the U.S. during 2019 and Veraseal® was launched in the EU in 2020.

 

We incurred costs in the amount of €0.1 million, €2.7 million and €1.1 million in connection with this project in 2020, 2019 and 2018, respectively. We hold significant granted patents on the fibrinogen and thrombin production processes.

 

Other Bioscience research and development projects undertaken during 2020 included:

 

  licensure in the U.S. and market authorization application in the EU for a high concentration immunoglobulin for subcutaneous administration;
  new container closure systems for Albutein®, Plasmanate®, Gamunex®-C, Prolastin 4g, 5g® and Xembify Prefilled syringes;
  clinical programs to evaluate new indications of Flebogamma® DIF 5% and Gamunex®-C;
  A1PI. New vial sizes and concentrations of the liquid formulation of Prolastin®- C were licensed in 2020, providing important advancements in manufacturing efficiency as well as improved patient convenience. A new liquid formulation, intended for subcutaneous administration, is also in development;
  clinical studies to evaluate the effects of the prolonged administration of human albumin on cardiovascular, hepatic and renal function in patients with advanced cirrhosis and ascites.

 

All clinical trials involve risks and uncertainties. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during or as a result of preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. For a discussion of these unforeseen events, see Item 3 of this Part I, “Key Information — D. Risk Factors —Risks Relating to Our Business — We may not be able to commercialize products in development.” Upon the completion of each of the development stages we evaluate the results achieved as compared to the objectives pursued. Each of the key projects listed above has met our expectations with respect to results at the various development stages and we expect to move forward with the development process for each.

 

We believe that our current liquidity is sufficient to fund the ongoing costs of our key projects listed above through their completion as well as our other research and development initiatives.

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Diagnostic Division Initiatives

 

Research and development in the Diagnostic division supports various business areas, including transfusion medicine, clinical diagnostics, and the recombinant protein business. The Diagnostics division focuses on the development of in vitro diagnostic reagents/assays, instrumentation, and software for donor screening, which includes infectious disease detection and blood typing tests to determine donor/recipient blood compatibility. Here, research and development focuses on opportunities to develop increased multiplex test capabilities, as well as improved automation solutions in order to increase throughput and reduce costs for customers. The division also develops products for clinical diagnostics, including hemostasis assays and analyzers, as well as a board menu of drug and anti-drug ELISA kits and lateral flow point-of-care devices for biological drug monitoring. The research and development team employs a diverse technology portfolio including transcription mediated amplification, or TMA, polymerase chain reaction, or PCR, and NGS for molecular assays, and immunologic based methods using red blood cell, or RBC, agglutination, latex particles agglutination, solid phase capture, lateral flow, as well as enzymatic reactions using chromogenic substrates. The Company has also continued research and development of new recombinant proteins and antibodies as critical raw materials to support internal and external customers in various fields such as hemostasis, infections disease and immunohematology.

 

In 2020, the Diagnostic division obtained CE mark for SARS-CoV-2 on Panther®, as well as CE mark for the submission of the Ultrioplex E multiplex assay. CE marks were also obtained in Europe for (i) one new lateral flow device for IFX monitoring (Promonitor Quick IFX) in an automated reader (PQ Reader), (ii) two controls for drug monitoring and (iii) an ELISA assay for anti-SARS-CoV-2 IgG detection. The Division also obtained FDA approval for the QSmart hemostasis analyzer with PT reagent kit. Additionally, significant progress was made on clinical trials in China for registration of DG Gel Neutral, CT, Coombs and DG Reader Net.

 

Additionally, the Diagnostic division is developing medical devices for the extraction and storage of blood components. In 2020, we received the marketing authorization approval from Spain’s CE Mark Notified Body for Leucored WB CPD-SAGM with design improvements and a new filter, with the goal of being more competitive in the market. The principal products under development were phthalate (DEHP)-free blood bags, and improvements in standard blood bags and Leucored bags that make them more competitive in the Brazilian market.

 

Hospital Division Initiatives

 

Research and development in the Hospital division focuses on delivering products, integrated technology solutions, and services that improve safety, quality and efficiency in the operational pharmacy. The Hospital division is comprised of multiple subdivisions including IV Solutions, Contract Manufacturing and Pharmatech. Significant research and development activities are ongoing in each of these subdivisions.

 

The principal projects currently under development in the IV Solutions subdivision are a flexible plastic container closure system for biological products, a new presentation for anticoagulant solutions with apheresis connectors, to ensure compliance with ISO 18250-8, Dextrose 5% in Fleboflex containers for the U.S. market and three-liter DHPR-free irrigation bags. During 2020, we received FDA marketing authorization approval for 0.9% Sodium Chloride in Fleboflex Luer, USP (needle-free) container and enlarged the DMF for Sterile Water for injections with two new presentations (2.5/5 and 15/20 ml). In the fluid therapy market, work continues on the study of the stability of various ready-to-use mixtures in polypropylene packaging, in order to increase the range of mixtures available for hospital use.

 

Within the Contract Manufacturing product group, which focuses on offering development and manufacturing services for third parties (mainly in the U.S.) the Hospital division develops ready-to-use mixtures. During 2020, the development of an alpha-1 agonists solution in flexible bags was initiated, and two products were approved by the FDA – the Aggrastat Injection 5mg/100 mL and the Milrinone Lactate Injection in 5% Dextrose.

 

This subdivision also works on several cross-divisional initiatives. As part of the AMBAR study, the Hospital division is collaborating on the development of special devices and containers specifically designed for the procedures and protocols of the study. There is collaboration with the Diagnostic division on the manufacturing of the cuvette of Q-Coagulometer, among others. The partnership with the Bioscience division includes the development of a plastic holder for syringes of Fibrin Sealant.

 

Finally, the Pharmatech subdivision is devoted to the development of a comprehensive IV compounding portfolio of integrated technology solutions with devices, software, and services. The portfolio includes Grifols traditional products, like the Gri-fill® system, along with more recent technologies, such as the PharmacyKeeper suite of software solutions and the KIRO robotic systems, including the KIRO Oncology automated IV compounding system for oncology preparations and the KIRO Fill® system for automated filling of non-hazardous IV medication. The R&D program in this area is focused on connecting all the technology ecosystems of the IV Compounding portfolio under a single software platform and user experience.

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This subdivision has an active research and development program which includes the development of new software and state-of-the-art technology, such as cloud-based systems, mobile apps and Radio-Frequency Identification, or RFID, to improve interoperability, efficiency and overall workflow and productivity in the operational pharmacy. Other fields of development include the traceability and inventory management of high cost implants and other medical devices.

 

Other Initiatives

 

In addition, we are increasing our research and development activities in new fields. We conduct these activities through the creation of joint ventures participated in by Grifols Innovation and New Technologies Ltd, or GIANT, through agreements to use patents owned by third parties and through selective acquisitions.

 

Our investments in Araclon and VCN Biosciences in 2012 expanded our research and development capabilities in fields outside of our traditional business segments. Araclon is dedicated to finding solutions that promote new diagnostic and therapeutic approaches to Alzheimer’s disease, to be applied in the early stages of the disease. Araclon is working on the validation of an early diagnostic test and the development of a vaccine to combat Alzheimer’s disease in the asymptomatic preclinical stage. The vaccine has passed the animal experimentation stage and a Phase I clinical trial in humans has been completed. In 2017 Araclon obtained approval by the AEMPS for a Phase II placebo-controlled trial of the AB40 vaccine in Alzheimer disease patients and completed recruitment in 2019. In 2020, a change in the design of the trial was introduced that allows cross-over of the treatment arms, so all the participants could receive the vaccine. VCN Biosciences is investigating and developing new therapeutic approaches based on oncolytic adenoviruses to treat tumors for which there is currently no effective treatment. Its most advanced project focuses on the treatment of pancreatic cancer. AEMPS approved two Phase I clinical trials for this project and VCN Biosciences began recruiting patients for the Phase I trials in the first quarter of 2014. In 2017 VCN obtained approval by the Spanish Drug Regulatory Agency of another Phase I/II trial of VCN-01 in pediatric patients with Retinoblastoma. Additionally, VCN Biosciences is engaged in a Phase I/II trial involving patients diagnosed with refractory head and neck cancer combining VCN-01 with AstraZeneca’s Durvalumab. The recruitment speed of this trial was adversely affected by the COVID-19 pandemic.

 

Through our ownership of Alkahest, we develop plasma-based products for the treatment of cognitive decline in aging and other central nervous system (CNS) disorders, including Alzheimer’s disease. In 2017 Alkahest obtained approval by the FDA of a Phase I/II clinical trial of a plasma fraction (GRF-6019) in Alzheimer’s disease patients and the trial began in 2018. The trial was completed in 2019 and preliminary results were presented by the end of the year. Also, a second trial of GRF-6019 in a population of severe Alzheimer’s disease patients ended in April 2020. Another Phase II placebo-controlled trial of GRF-6021 in Parkinson disease patients with Dementia was finalized by the end of 2020. At the pre-clinical level, new potential clinical indications are being tested with plasma fractions. Finally, Grifols completed the acquisition of Alkahest in 2020. See Item 5 of Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — The Alkahest Acquisition.”

 

In 2016, we acquired 30% of the equity of AlbaJuna Therapeutics, a spin-off company from the IrsiCaixa AIDS Research Institute, promoted jointly by “la Caixa” Foundation and the Department of Health of the Government of Catalonia, and established to promote the pre-clinical and clinical development of monoclonal antibodies that neutralize the effect of HIV in the body while increasing the activity of the natural killer cells that have the task of destroying infected cells. In 2020, a candidate was selected and proof of concept studies in non-human primates (NHP) started, as well as process development and manufacturing activities, which began by the end of the year.

 

In 2017, we acquired a 43.96% equity stake in GigaGen Inc., a pre-clinical biotherapeutics company based in San Francisco (California) specialized in the research activities to develop recombinant plyclonal immunoglobulin therapies derived from human B cells for the treatment of human diseases. In 2018, Gigagen Inc. started to work in the development of Hyperimmune immunoglobulin, which continued during 2019 and 2020, with a focus on collecting the human samples needed to build DNA libraries. Beginning in 2020, GigaGen Inc. started to work on a polyclonal product to treat COVID-19 and received FDA approval of the IND in February 2021. The initiation of a clinical trial is planned for 2021.

 

In 2018, GIANT signed a collaboration agreement with IrsiCaixa AIDS Research Institute for five years to join forces to promote biomedical research on HIV and associated diseases.

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Finally, Grifols signed an agreement in the first quarter of 2020 to support a consortium with the IrsiCaixa AIDS Research Institute, the Barcelona Supercomputing Center (BSC) and the IRTA (Institute of Agrifood Research and Technology) aimed to discover new antibodies and vaccines against COVID-19.

 

Seasonality

 

Our businesses are not significantly affected by seasonal trends.

 

Raw Materials

 

The cost of plasma, the key raw material used in the production of plasma-derived products, increased as compared to 2019, mainly due to the impact of the COVID-19 pandemic.

 

Grifols recognized an impact of €205 million in 2020 to its inventory value, mainly due to COVID-19. This impact stems primarily from lower-than-expected plasma collection, which in turn caused lower capacity utilization of our facilities, and has been recognized in the gross margin line. The COVID-19 pandemic also caused an increase in the cost of plasma due to the trend towards greater incentives to reward donors.

 

We continue to monitor the efficiency of our plasma collection platform and have concentrated all of our plasma testing into our six laboratories in Austin and San Marcos, Texas, Memphis, Tennessee, Boca Raton, Florida, Leipzig, Germany and Parets, Spain.

 

In October 2020, we completed the purchase of 11 collection centers in the U.S., as well as a plasma fractionation facility and two purification facilities in Montreal, Canada, from GC Pharma for a total consideration of $457 million on a debt free basis. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — The GC Pharma Acquisition” below.

 

In June 2018, we completed the acquisition of Haema AG, a German based pharmaceutical company that owns 35 collection centers throughout Germany, for a purchase price of €220 million on a debt free basis. In August 2018, we completed the acquisition of Biotest US Corporation, a U.S. based pharmaceutical company that owns 24 plasma collection centers, for a purchase price of $286 million. In December 2018, we sold our 100% stake in Haema AG and Biotest US Corporation to Scranton Enterprises B.V., one of our major shareholders and a related party, for a total of $538 million. We have the ability to repurchase the shares sold to Scranton Enterprises B.V. at any time. Our plasma supply agreement among Grifols, Grifols Worldwide Operations Limited, Biotest Pharmaceuticals Corporation and Haema AG, or the Plasma Supply Agreement, was effectively extended on January 1, 2019 for a 30-year period, and we continue to operate the companies’ plasma centers. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — Acquisition and Sale of Haema AG and Biotest Corporation” below. We believe our Plasma Supply Agreement will play a key role in fulfilling our plasma requirements through 2020 and beyond, along with plasma collected through our plasma collection centers and plasma purchased from third-party suppliers pursuant to various plasma purchase agreements.

 

The principal raw materials for our intravenous therapy products are plastic and glass bottles, which we purchase from various European suppliers.

 

Marketing and Distribution

 

We currently sell Bioscience, Diagnostic and Hospital products to hospitals and clinics, GPOs, governments and other distributors in over 100 countries.

 

In the United States, the sales model is complex, with many intermediaries, requiring Grifols to execute multi-faceted arrangements for the distribution of our products. Sales of finished goods are distributed through various channels such as distributors, wholesalers, specialty pharmacies, home health care companies, clinics, hospitals, government entities and directly to physician offices. Payers and purchasers also control access to products, requiring separate negotiations with payers and GPOs. GPOs are entities that act as purchasing intermediaries for their members, which are primarily hospitals. GPOs negotiate the price and volume of supplies, equipment and pharmaceutical products, including plasma derivatives, used by their members.

 

We market our products to healthcare providers and other decision-makers, such as those in hospitals, through focused sales presentations. Although price and volume are negotiated through contractual agreements with intermediaries, demand for our products is generated through promotional efforts by Grifols’ sales representatives. In the case of GPOs, the actual sales are made to the authorized distributor(s) of each GPO at the contract price, and the distributor then sells the products to the members of that GPO. We promote our products directly to the GPO’s members. For safety and post-sale service reasons, the distributor is required to provide us with the specifics of the ultimate delivery to the client.

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The sales, marketing and distribution process is different in Europe, where the bulk of sales are generally made directly to hospitals. We have developed long-standing relationships with major hospitals in most of our European markets, and we believe that hospitals are loyal customers that recognize the high quality and safety of our products, our reliability as a supplier and the strong product expertise and service provided by our sales representatives. Due to the nature of our customer base and the prevalence of repeat sales in the industry, we market our products through focused sales presentations rather than by advertising campaigns.

 

Sales to Eastern Europe, the Middle East and some Asian countries are made mostly by third parties outside of our sales network. Our sales in Latin America are made mainly by our sales network.

 

Sales Representatives

 

We require our sales representatives to be able to highlight the technical differences between our products and those of our competitors. This skill requires a high degree of training, as the salesperson must be able to interact and discuss product differences with doctors, pharmacists and other medical staff. Sales representatives call on office-based healthcare providers and hospital-based healthcare providers, departmental heads, purchasing agents, senior hospital directors, lab directors and pharmacy managers. We compensate our sales representatives by means of a fixed salary and a bonus component based on sales. We divide our sales efforts along the lines of our main product categories. Our sales personnel are primarily located in Europe and the United States, but we also have sales personnel in Latin America and Asia-Pacific.

 

In our Bioscience division, we utilize mixed sales units comprised of both marketing and sales personnel. In some countries, we have product line-specific sales units for immunology & neurology, pulmonary, intensive care and coagulation factors.

 

Advertising

 

We participate in medical conferences and fairs and occasionally publish advertisements in medical journals and trade magazines. This promotional activity is also supported by online activities.

 

Distribution

 

We believe that having our own distribution network staffed with highly trained personnel is a critical element of a successful sales and marketing effort. Through this network, we are able to provide high-quality pre- and post-sales service, which we believe enhances brand recognition and customer loyalty. Our distribution network is experienced in the proper handling of our products and allows us to know where our products are located, enabling us to act quickly in the event of a suspected problem or product recall.

 

Our distribution network personnel are located in Europe, Latin America, the United States and Asia-Pacific and handle the distribution of our biological medicine, diagnostic and other medical products as well as goods manufactured by other premier healthcare companies that complement our own products.

 

During 2020, we distributed the majority of our products through our own distribution network. In some cases, particularly in the field of Diagnostics, we distribute products through marketing partners and third-party distributors. We have a direct presence in 30 countries and we carefully select distributors in the countries were we do not have a direct presence. We have a responsive, effective logistics organization that is able to punctually meet the needs of hospital centers and other customers throughout the world.

 

Our sales, marketing and distribution network included 1,529 employees as of December 31, 2020, which included 1,310 sales and distribution personnel and 219 marketing employees.

 

Each of our commercial subsidiaries is responsible for the requirements of the local market. It is our goal for each commercial subsidiary to be recognizable as one of our companies by its quality of service, ethical standards and knowledge of customer needs. Strong local knowledge enables us to build and maintain long-term relationships with customers to earn their trust and confidence.

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Patents, Trademarks and Licenses

 

Patents and Trademarks

 

Through our patent ownership, co-ownership and licensing, we seek to obtain and maintain intellectual property protection for our primary products.

 

As of December 31, 2020, we owned 3,027 patents and patent applications in various countries throughout the world, of which 634 are in the final application process. In some countries, these patents grant a 20-year protection period. 1,344 of these patents are set to expire in the next ten years, including the patent for the product Grifill, which will expire in February 2022, and the patent for the process of removing viruses in Fibrinogen solutions, which will expire in March 2024.

 

As of December 31, 2020, we also owned 3,478 trademarks in various countries throughout the world, of which 298 are in the final application process. In addition, we co-own certain patents and patent applications with third parties, including patent rights co-owned with Novartis following the Novartis Acquisition.

 

We maintain a department with personnel in Spain and Ireland to handle the patent and trademark approval and maintenance process and to monitor possible infringements.

 

Plasma Derivative Products

 

As of December 31, 2020, we owned 2,024 patents and patent applications related to plasma derivatives, including 1,019 in Europe, 168 in the United States and Canada and 837 in the rest of the world. The most important of these patents relate to:

 

  a concentrated subcutaneous alpha-1 antitrypsin;
     
  the use of low volume plasma exchange for the treatment of Alzheimer’s disease;
     
  Transferrin for the treatment of Hipoxia inducible factor related conditions;
     
  the process for removing viruses in Fibrinogen solutions;
     
  a concentrated subcutaneous Immunoglobulin G injection; and
     
  concentrated Immunoglobulin M preparations for the treatment of bacterial infections.
     

Hospital and Diagnostic Products

 

As of December 31, 2020, we owned 1,002 patents and patent applications related to our Hospital and Diagnostic products, including 564 in Europe, 120 in the United States and Canada and 318 in the rest of the world. The most important of these patents relate to the:

 

  Gri-fill® System, a process for the sterile filling of flexible material bags;
     
  BlisPack®, a blister handling machine;
     
  Erytra Eflexys®, a mid-sized instrument to perform pre-transfusion compatibility tests using DG Gel® technology;
     
  innovative containers for human plasma proteins;
     
  novel HIV antigens for blood screening;
     
  novel GpIbα for homeostasis;
     
  soluble recombinant form of CD38 receptor; and
     
  screening assays for bloodborne parasites.

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As of December 31, 2020, we owned one patent related to other areas of the business, in Europe.

 

Licenses from Third Parties

 

We license certain intellectual property rights from third parties, including Singulex and Hologic. Singulex granted us an exclusive worldwide license under certain intellectual property rights for the use and sale of certain products and services for blood donor and plasma screening. Pursuant to an intellectual property license with Hologic, we obtained a fully paid-up license to certain of Hologic’s intellectual property for use in the NAT Donor Screening Unit.

 

Licenses from Government Authorities

 

Government authorities in the United States, at the federal, state and local level, and in other countries throughout the European Union, Latin America, Asia and elsewhere, through licenses, approvals, reviews, inspections and other requirements, extensively regulate the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of healthcare products such as those that we collect, manufacture, sell or are currently developing.

 

For example, in order to sell our plasma derivative products we must hold appropriate product licenses from applicable governmental authorities. We have 973 hemoderivative product licenses registered in 84 countries, which include the licenses we hold from the FDA for the sale in the United States of IG, A1PI, albumin, Factor VIII, Factor IX, ATIII and PTC. The production, marketing and sale of many of our Diagnostic division products are subject to the prior registration of such products with the relevant authorities of the applicable jurisdictions. We have over 3,009 diagnostic product licenses registered in a total of 76 countries in Europe, the United States, Canada, Latin America, Africa and Asia. With respect to our various Hospital division products, we have close to 170 licenses for our Hospital division products registered in 42 countries throughout the European Union, Latin America and the United States.

 

Governmental oversight extends to the various facilities involved in our operations. For example, our Parets and Murcia facilities are subject to applicable regulations and standards of the European health authorities. With respect to oversight by the FDA, our Instituto Grifols Bioscience plant at our Parets facility has been registered with the FDA since 1995, and our other manufacturing facilities maintain FDA registration, and all are subject to FDA standards. We lease most of our plasma collection centers as well as our main laboratory facility located in Austin, Texas, and maintain licenses with the appropriate regulatory authorities, including the FDA, for all of these locations.

 

For more information on government licenses and regulation, see “— Principal Activities” above and “— E. Regulatory Matters” below.

 

Regulatory

 

For detailed information regarding the regulations applicable to our business, see “— E. Regulatory Matters” below.

 

Insurance Coverage

 

General and Product Liability

 

We have a program of insurance policies designed to protect us and our subsidiaries (including our United States subsidiaries) from product liability claims. Effective May 1, 2020, we have product liability insurance coverage for up to $220 million per claim and in annual aggregate for products manufactured in all of our facilities and for third-party products we sell. This policy expires on April 30, 2021. We have elected to self-insure the first $38.5 million per claim and in annual aggregate of our product liability policy through the purchase by one of our subsidiaries of such portion of the insurance policy. See “— Self-insurance” below.

 

Our master liability program also protects us and our subsidiaries from certain environmental liabilities arising in those countries in which our subsidiary companies have operations. This risk is covered up to a maximum of $220 million per claim and in annual aggregate.

 

Biomat USA, Talecris Plasma Resources and Interstate Blood Bank Inc., GCAM Inc, BPC Plasma Inc, Plasmavita Healthcare GmbH, Plasmavita Healthcare II GmbH, Haema AG and Haema Plasma Kft maintain a separate liability insurance policy. The policy covers their professional liability for plasmapheresis business activities and expires on April 30, 2021. The maximum amount of coverage for liability claims under the policy is $15 million per claim and in the annual aggregate. In addition, we have general liability coverage for up to $220 million per claim and in the annual aggregate for Biomat USA, Talecris Plasma Resources and Interstate Blood Bank Inc., GCAM Inc, BPC Plasma Inc, Plasmavita Healthcare GmbH, Plasmavita Healthcare II GmbH, Haema AG and Haema Plasma Kft.

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Property Damage and Business Interruption

 

Our property damage and business interruption insurance program covers us and our subsidiaries (including our United States subsidiaries). This insurance program, which expires on April 30, 2021, covers damages suffered by plants and buildings, equipment and machinery. Under the current terms, the insurer will cover damages to our facilities produced by fire, smoke, lightning and explosions, among others, for up to $1.5 billion per occurrence. It also covers property damage produced by flooding, for up to $110 million per claim and in the annual aggregate.

 

In addition, this policy covers loss of profit for a period of 36 months with a deductible equivalent to up to five business days of lost profits. Pursuant to the loss of profit, in the event that any or all of our plants stop production due to an event not excluded under the policy, the insurer covers fixed expenses, in addition to net profits we did not earn during the term of coverage.

 

We also have a transit and inventory insurance program, which covers damages to raw materials, supplies, semi-finished products and finished products for up to $25 million per claim for transit and $400 million for inventory in annual aggregate.

 

Self-insurance

 

We are self-insuring part of the risks described above through the purchase of a portion of the relevant insurance policies by Squadron Reinsurance DAC, one of our wholly owned subsidiaries. We self-insure the first $38.5 million per claim per year of our general and product liability policy, the first $230,000 per loss for property damage and the first ten days of lost profits, the first $27,000 per claim for transit losses, the first $200,000 per claim for inventory losses and any transit or inventory losses exceeding $2 million have an additional retention of 10% of loss value with a maximum of $500,000 per loss and an annual aggregate of $3 million. These amounts are in excess of the deductibles for each of the policies that make up our insurance programs.

 

  C. Organizational Structure

 

Grifols, S.A. is the parent company of the Grifols Group, which was comprised at December 31, 2020, of 63 companies. Subsidiaries in which Grifols, S.A. directly or indirectly owned the majority of equity or voting rights have been fully consolidated. In addition, there were 12 companies that were accounted for using the equity method, because Grifols, S.A. owned between 20% and 50% of its share capital and had no power to govern its financial or operating policies.

 

See Notes 1 and 2(b) to our audited consolidated financial statements included in this annual report on Form 20-F for details of our consolidated and non-consolidated companies.

 

  D. Property, Plant and Equipment

 

Our headquarters is located in Barcelona, Spain. As of December 31, 2020, we owned or leased facilities in seven countries. We currently own or lease manufacturing facilities in 10 sites in nine different locations, four of which have plasma fractionation capabilities. The table below shows the geographic location and business purpose of our principal properties as of December 31, 2020.

 

Location   Facility   Own/Lease (2)   Business Purpose
Parets del Vallès, Spain   Industrial Facility One Parets   66% owned; 34% of the property is leased from a third party   Plasma fractionation Manufacture of plasma derivatives & division support activities
             
    Industrial Facility Two Parets   80% owned; 20% of the property is leased from a third party   Manufacture of Diagnostic and Hospital products
             
    Industrial Facility Three Parets   68% owned; 32% of the property is leased from a third party   Plasma storage & other operating activities

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Location   Facility   Own/Lease (2)   Business Purpose
Los Angeles, California, U.S.   Industrial Facility, U.S.   92% owned; 8% of the property is leased from a third party   Plasma fractionation Plasma purification Manufacture of plasma derivatives
             
Clayton, North Carolina, U.S.   Clayton Facility   100% owned  

Plasma fractionation Plasma purification Manufacture of plasma derivatives

 

             
Durham, North Carolina, U.S.   Research Triangle Park   23% owned, 77% of the property is leased from a third party   Research and Development Labs and Offices
             
Emeryville, California, U.S.   Emeryville Facility   89% owned; 11% of the property is leased from a third party   Manufacture of Diagnostic products
             
City of Industry, California, U.S.   City of Industry U.S.   100% leased   Plasma storage
             
Murcia, Spain   Industrial Facility Murcia   100% owned   Manufacture of Hospital products
             
Fribourg, Switzerland   Industrial Facility Switzerland   100% leased   Manufacture of Diagnostic products
             
Melbourne, Australia   Industrial Facility Australia   100% owned   Manufacture of Diagnostic products
             
Austin, Texas, U.S.   Plasma Testing Lab   100% leased   Plasma testing
             
San Marcos, Texas, U.S.   Plasma Testing Lab   100% owned   Plasma testing
             
San Diego, California, U.S.   San Diego Facility   76% owned; 24% of the property is leased from a third party   Manufacture of components of the TMA amplified NAT kits
             
Dublin, Ireland   Global Operations Center   (1)   Operating activities related to the Bioscience division
             
Sant Cugat del Vallès, Spain   Headquarters   100% leased   Headquarters
             
Campo Largo, Curitiba, Brazil   Industrial Facility Brazil   100% owned   Manufacture of Diagnostic products
             

Montreal, Canada

 

 

Industrial Facility Montreal

 

 

100% owned

 

 

Plasma fractionation

 

Plasma purification 

 

 

(1)       We hold a 999 year leasehold interest in the property.

(2)       Lease percentage based on property size.

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Plasma Fractionation Plants

 

Our plasma derivative products are manufactured at our Parets, Los Angeles, Clayton, and Dublin facilities. All of our fractionation facilities have FDA and EMA certification. Our facilities currently have an aggregate fractionation capacity of approximately 15.2 million liters of plasma per year, and this capacity is sufficient to cover our current production needs.

 

The Parets facility has a fractionation capacity of 5.0 million liters per year and a unique design that separates the maintenance area from the clean areas required for the fractionation and purification procedures. This design, which we developed in house, minimizes the risk of contamination and reduces maintenance costs. In addition to licenses from the European Union and other required specific authorities for the production of various plasma derivative products, the Parets facility is also licensed by the FDA. The Parets facility is one of the few European plasma derivatives plants to be licensed by the FDA. In addition to the plasma fractionation facilities, the Parets site also has protein purification, fill and finish, packaging, storage, research and development and energy co-generation facilities for the Bioscience division and manufacturing for the Hospital and Diagnostic divisions. The Parets facility holds GMP’s, ISO 13485 and ISO 14001 for the Bioscience, Diagnostic and Hospital plants and ISO 9001 certifications for its diagnostic manufacturing facilities.

 

The Los Angeles facility has a fractionation capacity of 2.4 million liters per year. The facility contains purification and aseptic filling areas for coagulation factors, IG and albumin. The facility is licensed by the FDA and Grifols is working to certify the Los Angeles facility with ISO 14001 certification, similar to the rest of Grifols’ manufacturing plants.

 

The Clayton facility in North Carolina has a fractionation capacity of 7.9 million liters per year. This facility is one of the world’s largest fully integrated facilities for plasma-derived therapies, including plasma receiving, fractionation, purification, filling/freeze drying and packaging capabilities, as well as freezer storage, testing laboratories and a cGMP pilot plant for clinical supply manufacture. This facility holds the ISO 14001 certification, which recognizes excellence and continuous improvement in environmental performance. The scope of the certification includes research, development, production and quality control of pharmaceutical specialties derived from human plasma. In the second half of 2021, we expect to begin full operations in a new fractionation plant in Clayton with six million liters of capacity per year.

 

In 2020, we acquired the Montreal facility as a result of the GC Pharma acquisition. The facility was designed for a fractionation capacity of one million liters per year, and is currently being revamped to increase the capacity to 1.5 million liters per year. Grifols expects to launch operations in these facilities in 2023, manufacturing IVIG and albumin to supply the Canadian market.

 

We are currently building an albumin purification and filling plant in Dublin that we expect will be in operation in 2022.

 

Global Operations Center

 

In the last quarter of 2015, we opened a global operations center for our Bioscience division. The facility, located in Dublin, Ireland, occupies 22,000 square meters and centralizes decision-making with regard to commercial policy, research and development policy and supply chain global management. It houses Bioscience’s global logistics and distribution activities; warehousing of plasma, intermediate paste and finished product, labelling, packaging and final conditioning of the product; as well as regulatory and quality activities relating to the supply of plasma and plasma derivatives. It also centralizes our treasury function and acts as our point of access to the capital markets.

 

E.       Regulatory Matters

 

Government Regulation

 

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of healthcare products such as those we collect, manufacture, sell or are currently developing. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. The following is a summary of the overall regulatory landscape for our business.

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United States Government Regulation

 

In the United States, the FDA regulates drugs, biologics, plasma collection and medical devices under the FDCA and, as applicable, the PHS Act, and their implementing regulations. Failure to comply with the applicable FDA requirements at any time during the product-development process, approval process or after approval may result in administrative or judicial sanctions. These sanctions could include, as applicable, the FDA’s imposition of a clinical hold on trials for drugs, devices or biologics, refusal to approve pending applications, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution or any combination of these sanctions. Any agency or judicial enforcement action could have a material adverse effect on us.

 

The BLA (Biologics License Application) Approval Process

 

Drugs that are also biological products, such as our plasma derivative products IG, A1PI, Factor VIII and albumin, and also certain in vitro diagnostic products associated with testing blood and blood components, must also satisfy the requirements of the PHS Act and its implementing regulations. In order for a biological drug product, or for these in vitro diagnostic tests, to be legally marketed in the United States, the product must have a BLA approved by the FDA. Obtaining BLA approval from the FDA is a robust process involving, among other things, completion of preclinical laboratory tests, controlled human clinical trials, submission of manufacturing and chemistry data, and multiple statistical and physical review processes by the FDA. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators, including reports regarding adverse events and safety issues.

 

Given the robust process, certain of our clinical trials may not be completed successfully within any specified period, if at all. Furthermore, we or the FDA may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk, have experienced a serious and unexpected adverse event, or that continued use in an investigational setting may be unethical. Similarly, an IRB can suspend or terminate approval of research if the research is not being conducted in accordance with the IRB’s requirements or if the research has been associated with unexpected serious harm to patients.

 

Overall, the testing and approval processes require substantial time and effort and there can be no assurance that the FDA will accept the BLA for filing and, even if filed, that any approval will be granted on a timely basis, if at all. In most cases, the BLA must be accompanied by a substantial user fee.

 

The ACA introduced a new abbreviated regulatory approval pathway for biological products found to be “biosimilars” or “interchangeable” with a biological “reference product” previously licensed under a BLA. This abbreviated approval pathway is intended to permit a biosimilar to come to market more quickly and less expensively by relying to some extent on the data generated by the reference product’s sponsor, and the FDA’s previous review and approval of the reference product. The law provides that no biosimilar application may be accepted for FDA review until 4 years after the date the reference product was first licensed by the FDA, and that the FDA may not make approval of an application effective until 12 years after the reference product was first licensed. Once approved, biosimilars likely would compete with, and in some circumstances may be deemed under applicable laws to be “interchangeable with,” the previously approved reference product. The extent to which a biosimilar, once approved, will be substituted for any of our products, in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. The FDA is actively seeking to encourage the entry of biosimilars into the marketplace, including issuing, in July 2018, its Biosimilar Action Plan, intended to enhance the speed of the biosimilar development and approval processes.

 

The testing and approval processes to obtain a BLA require substantial time, effort and financial resources, and each process may take several years to complete. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products.

 

Post-approval Requirements

 

After regulatory approval of a product is obtained, we are required to comply with a number of post-approval requirements. For example, as a condition of approval of a BLA, the FDA may require post-marketing testing and surveillance to monitor the product’s safety or efficacy. In addition, holders of an approved BLA are required to keep extensive records, to report certain adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations and practices, as well as the manufacturing conditions of approval set forth in the BLA. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

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Future FDA inspections may identify compliance issues at our facilities or at the facilities of our third-party suppliers that may disrupt production or distribution, or require substantial resources to correct and prevent recurrence of any deficiencies, and could result in fines or penalties by regulatory authorities. In addition, discovery of problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. The ACA established and provided significant funding for a Patient-Centered Outcomes Research Institute to coordinate and fund Comparative Effectiveness Research. Also, new government requirements, including those resulting from new legislation, may be established that could delay or prevent regulatory approval of our products under development.

 

Orphan Drug Designation

 

The FDA may grant orphan drug designation to drugs intended to treat a “rare disease or condition” that affects fewer than 200,000 individuals in the United States, or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for such a disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. Orphan drug designation can provide opportunities for grant funding towards clinical trial costs, tax advantages and FDA user fee exemptions. In addition, if a product that has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or a meaningfully different mode of administration. Competitors may receive approval of different drugs or biologics for the indications for which the orphan product has exclusivity. However, if a company with orphan drug exclusivity is not able to supply the market, the FDA could allow another company with the same drug a license to market for said indication. The FDA granted Gamunex® IVIG orphan drug status, which provided marketing exclusivity for the CIDP indication in the United States through September 2015. Gamunex® IVIG was the first IVIG product approved for CIDP in the United States.

 

Fast Track Designation

 

The FDA’s fast track programs, one of which is fast track designation, are designed to facilitate the development and review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs for the conditions. Fast track designation applies to a combination of the product and the specific indication for which it is being studied. Thus, it is the development program for a specific drug for a specific indication that receives fast track designation.

 

The sponsor of a product designated as being in a fast track drug development program may engage in close early communication with the FDA, including through timely meetings and feedback on clinical trials. Products in fast track drug development programs also may receive FDA priority review or accelerated approval; in other words, the review cycle has a six-month review clock instead of a ten- or 12-month review clock. Sponsors may also be able to submit completed portions of an application before the entire application is completed; however, the review clock will not officially begin until the entire completed BLA is submitted to and filed by the FDA. The FDA may notify a sponsor that its program is no longer classified as a fast track development program if the fast track designation is no longer supported by emerging data, the designated drug development program is no longer being pursued, or another product that meets the unmet medical need for the same indication is approved first.

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Plasma Collection

 

The FDA requires a licensing and certification process for each plasma collection center prior to opening and conducts periodic inspections of facilities and processes. Many states also regulate plasma collection, imposing similar obligations and additional inspections and audits. Collection centers are subject to periodic inspections by regulatory authorities, which if noncompliance is alleged, may result in fines, citations, the temporary closing of the centers, loss or suspension of licenses or recall of finished products.

 

Diagnostic Devices

 

Certain of our products are regulated as medical devices, which are typically subject to clearance for commercialization in the United States, based on a pre-market notification to the FDA demonstrating the device to be marketed is safe and effective by proving substantial equivalence to a legally marketed device (predicate device). The manufacturers of medical devices must register their establishments with the FDA, and the production of the devices must accord with applicable current good manufacturing practices and quality system regulations. With respect to the manufacture and sale of immunoassay antigens and antibodies to screen human donated blood and blood products, these products are manufactured and sold under a BLA issued by the FDA, and are subject to the heightened regulatory oversight associated with biological products.

 

Drug Supply Chain Security Act

 

The Federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements and pre-empts state law. Title II of this measure, known as the Drug Supply Chain Security Act (DSCSA), is being phased in over 10 years, and is intended to build a national electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States, including certain of our products. The law’s track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g., pharmacies) of prescription drugs began to take effect in January 2015 and will continue to be implemented. The DSCSA product tracing requirements replaced the former FDA drug pedigree requirements and pre-empt state requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements. The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers, or 3PLs, and includes the creation of national wholesaler and 3PL licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs. According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area. Current state licensing requirements will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.

 

Anti-fraud and Abuse Regulation

 

Since we supply products and services that are reimbursed by U.S. federal healthcare programs such as Medicare and Medicaid, our activities are also subject to regulation by CMS and enforcement by the OIG. The Anti-Kickback Law prohibits providers and others from directly or indirectly soliciting, receiving, offering or paying any remuneration with the intent of generating referrals or orders for services or items covered by a government health care program. Many states have similar laws. Courts have interpreted this law very broadly, including by holding that a violation has occurred if even one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. There are statutory and regulatory exceptions, or safe harbors, that outline arrangements that are deemed lawful. However, the fact that an arrangement does not fall within a safe harbor does not necessarily render the conduct illegal under the Anti-Kickback Law. In sum, even legitimate business arrangements between the companies and referral sources could lead to scrutiny by government enforcement agencies and require extensive company resources to respond to government investigations. Also, certain business practices, such as payment of consulting fees to healthcare providers, sponsorship of educational or research grants, charitable donations, interactions with healthcare providers that prescribe products for uses not approved by the FDA and financial support for continuing medical education programs, must be conducted within narrowly prescribed and controlled limits to avoid any possibility of wrongfully influencing healthcare providers to prescribe or purchase particular products or as a reward for past prescribing.

 

The FCA is violated by any entity that “presents or causes to be presented” knowingly false claims for payment to the federal government. In addition, the ACA amended the FCA to create a cause of action against any person who knowingly makes a false statement material to an obligation to pay money to the government or knowingly conceals or improperly decreases an obligation to pay or transmit money or property to the government, including clarifying that a federal Anti-Kickback Law violation can be a basis for federal FCA liability. For the purposes of these recent amendments, an “obligation” includes an identified overpayment, which is defined broadly to include “any funds that a person receives or retains under Medicare and Medicaid to which the person, after applicable reconciliation, is not entitled …”

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The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few years, and significant enforcement activity has been the result of “relators” who serve as whistleblowers by filing complaints in the name of the United States (and if applicable, particular states) under applicable false claims laws, and who may receive up to 30% of total government recoveries.  Penalties under fraud and abuse laws may be severe, and could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our business.  Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations or incur substantial defense and settlement expenses.  Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. Most states have adopted similar state false claims laws, and these state laws have their own penalties which may be in addition to federal FCA penalties, as well as other fraud and abuse laws

 

We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, German anti-corruption laws and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been the focus of increasing enforcement activity globally in recent years.

 

The PPS Act has imposed new reporting and disclosure requirements for biologic, drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners, such as physicians and teaching hospitals, and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. CMS publishes information from these reports on a publicly available website, including amounts transferred and physician and teaching hospital identities. Amendments expanded the law to also require reporting, effective January 1, 2022, of payments or other transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-midwives, and this new requirement will be effective for data collected beginning in calendar year 2021. The PPS Act preempts similar state reporting laws, although we or our subsidiaries may also be required to report under certain state transparency laws that address circumstances not covered by the PPS Act, and some of these state laws, as well as the federal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers.

 

Other Health Care Regulation

 

In the United States, government actions to seek to increase health-related price transparency may also affect our business. For example, on November 12, 2020, CMS issued final rules imposing price transparency requirements on hospitals and group health plans. Specifically, beginning in 2022, group health plans must post, on a public internet website, in-network provider negotiated rates (which include rates with device suppliers and manufacturers), historical out-of-network allowed amounts and drug pricing information. This may result in the publication of our negotiated rates with various providers and group health plans, which could impact our ability to independently negotiate sales contracts and rate agreements.

 

Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), enacted on April 16, 2015, established a new payment framework, which modified certain Medicare payments to “eligible clinicians,” including physicians, dentists and other practitioners. Under MACRA, certain eligible clinicians are required to participate in Medicare through the Merit-Based Incentive Payment System (MIPS) or Advanced Alternative Payment Models (APMs), through which Medicare reimbursement to eligible clinicians includes both positive and negative payment adjustments that take into account quality, promoting interoperability, cost, and improvement activities. Data collected in the first MIPS performance year (2017) determined payment adjustments that began January 1, 2019. MACRA standards continue to evolve, and represent a fundamental change in physician reimbursement that is expected to provide substantial financial incentives for physicians to participate in risk contracts, and to increase physician information technology and reporting obligations. The implications of the implementation of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace. New payment and delivery system reform programs, including those modeled after such federal program, are also increasingly being rolled out at the state level through Medicaid administrators, as well as through the private sector, which may further alter the marketplace and impact our business.

 

Recently, in addition to other government efforts to control health care costs, there has been increased scrutiny on drug pricing and concurrent efforts to control or reduce drug costs by Congress, the President, executive branch agencies and various states. At the state level, several states have adopted laws that require drug manufacturers to provide advance notice of certain price increases and to report information relating to those price increases, while others have taken legislative or administrative action to establish prescription drug affordability boards or multi-payer purchasing pools to reduce the cost of prescription drugs. At the federal level, several related bills have been introduced and regulations proposed which, if enacted or finalized, respectively, would impact drug pricing and related costs.

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Antitrust and Consumer Protection

 

The U.S. federal government, most U.S. states and many foreign countries have antitrust laws that prohibit certain types of conduct deemed to be anti-competitive, as well as consumer protection laws that seek to protect consumers from improper business practices. At the U.S. federal level, the Federal Trade Commission oversees enforcement of these types of laws, and states have similar government agencies. Violations of antitrust or consumer protection laws may result in various sanctions, including criminal and civil penalties. Private plaintiffs may also bring civil lawsuits against us in the United States for alleged antitrust law violations, including claims for treble damages.

 

European Community Government Regulation

 

In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of countries outside the United States before we can commence marketing that product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. Also, in addition to approval of final products, plasma centers collecting plasma for manufacture into products to be distributed in the European Union must also be approved by the competent European health authority.

 

Medicines can be authorized in the European Union by using either the centralized authorization procedure or national authorization procedures. The EMA is responsible for the centralized authorization procedure.

 

Centralized Authorization Procedure

 

The EMA is responsible for the centralized procedure, or Community authorization procedure, for human medicines. This procedure results in Community marketing authorization, the single marketing authorization that is valid across the European Union, as well as in the European Economic Area/European Free Trade Association states Iceland, Liechtenstein and Norway.

 

The Community authorization procedure is compulsory for:

 

  medicines derived from biotechnology processes, such as genetic engineering;
     
  advanced-therapy medicines, such as gene-therapy, somatic cell-therapy or tissue-engineered medicines;
     
  medicinal products for human use containing a new active substance that did not receive Community marketing authorization when the Community authorization procedure was first implemented, for which the therapeutic indication is the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases and other immune dysfunctions or viral diseases; and
     
  officially designated orphan medicines (medicines for rare diseases).
     

The Community authorization procedure is optional for products:

 

  containing new active substances for indications other than the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases and other immune dysfunctions or viral diseases;
     
  representing significant therapeutic, scientific or technical innovations; or
     
  for which the granting of a Community marketing authorization would be in the interests of European Union public health.

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Our blood derivative products are not subject to compulsory Community authorization, but it is an option for our new products. Flebogamma® DIF 50 mg/ml and 100 mg/ml, VeraSeal solutions for sealant and Tavlesse (fostamatinib) were approved through the Community authorization procedure.

 

Applications through the Community authorization procedure are submitted directly to the EMA. Evaluation by the EMA’s relevant scientific committee takes up to 210 days, at the end of which the committee adopts an opinion on whether the medicine should be marketed. This opinion is then transmitted to the European Commission, which has the ultimate authority for granting marketing authorizations in the European Union.

 

Once a Community marketing authorization has been granted, the holder of that authorization can begin to make the medicine available to patients and healthcare professionals in all European Union countries.

 

National Authorization Procedures

 

Each European Union member state has its own procedures for the authorization, within its own territory, of medicines that fall outside the scope of the Community authorization procedure. There are two possible routes available to companies for the authorization of such medicines in several countries simultaneously.

 

  Decentralized procedure. Using the decentralized procedure, companies may apply for simultaneous authorization in more than one European Union country of medicines that have not yet been authorized in any European Union country and that do not fall within the mandatory scope of the centralized procedure.

 

  Mutual-recognition procedure. In the mutual-recognition procedure, a medicine is first authorized in one European Union member state, in accordance with the national procedures of that country. Following such authorization, further marketing authorizations can be sought from other European Union member states in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

 

Our product Niuliva 250 I.U./ml was approved through the decentralized procedure. Our products Prolastina® 1000 mg/ml and Gamunex® 10% were approved through the mutual-recognition procedure. All our other products were approved pursuant to individual national procedures. We expect to use the mutual-recognition procedure if we want to extend our product licenses to other European countries in the future.

 

In some cases, disputes arising in these procedures can be referred to the EMA for arbitration as part of a “referral procedure.”

 

Orphan Drug Designation

 

Applications for designation of orphan medicines are reviewed by the EMA through the Committee for Orphan Medicinal Products. The criteria for orphan designation are:

 

  the medicinal product is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting no more than five in 10,000 persons in the European Union at the time of submission of the designation application (prevalence criterion); or

 

  the medicinal product is intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition, and without incentives it is unlikely that the revenue after marketing of the medicinal product would cover the investment in its development; and

 

  either no satisfactory method of diagnosis, prevention or treatment of the condition concerned is authorized, or, if such method exists, the medicinal product will be of significant benefit to those affected by the condition.

 

Companies with an orphan designation for a medicinal product benefit from incentives such as:

 

  protocol assistance (scientific advice for orphan medicines during the product-development phase);

 

  direct access to centralized marketing authorization and 10-year marketing exclusivity;

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  financial incentives (fee reductions or exemptions); and

 

  national incentives detailed in an inventory made available by the European Commission.

 

Since December 2011, orphan medicinal products are eligible for the following level of fee reductions:

 

  full (100%) reduction for small- and medium-sized enterprises, or SMEs, for protocol assistance and follow-up, full reduction for non-SME sponsors for pediatric-related assistance and 75% reduction for non-SME sponsors for non-pediatric assistance;

 

  To determine which companies are eligible for SME incentives, the EMA applies the definition of micro-, small- and medium-sized enterprises provided in the Commission of the European Communities’ Commission Recommendation 2003/361/EC. To qualify for assistance, companies must be established in the European Economic Area, employ less than 250 employees and have an annual turnover of not more than €50 million or an annual balance sheet total of not more than €43 million;

 

  full reduction for pre-authorization inspections and 90% reduction for post-authorization inspections for small- and medium-sized enterprises;

 

  full reduction for SMEs for new applications for Community marketing authorization and 10% reduction for non-SME sponsors; and

 

  full reduction for post-authorization activities including annual fees only to small and medium sized enterprises in the first year after granting a marketing authorization.

 

We have EMA Orphan Drug Designations for the following products:

 

  alpha-1 proteinase inhibitor (for inhalation use) for the treatment of cystic fibrosis; and

 

  alpha-1 proteinase inhibitor (for inhalation use) for the treatment of congenital alpha-1 antitrypsin deficiency.

 

Because each of these products is already authorized for a non-orphan indication in the EU, in order to obtain marketing authorization for any of the above-mentioned orphan indications, we would be required to apply for a separate marketing authorization through the Community authorization procedure for such indication, using a different proprietary name. It is not possible to extend the existing marketing authorization to cover the new orphan indication. Orphan and “non-orphan” indications cannot be covered by the same marketing authorization.

 

United Kingdom Regulatory Process

 

The United Kingdom (U.K.) withdrew from the EU on January 31, 2020, and is no longer an EU Member State. A transition period, during which EU pharmaceutical law continued to be applicable to the U.K., has ended on December 31, 2020.

 

As of January 1, 2021, the protocol in Ireland/Northern Ireland is applicable and has an impact on marketing authorizations for medicinal products in the U.K. with respect to Northern Ireland.

 

There are several routes to obtain a marketing authorization in the U.K., Great Britain (England, Scotland and Wales) or Northern Ireland. The options available are determined by the intended market and the type of application. To obtain a marketing authorization, you need to use one of the following procedures:

 

National Routes:

 

  Innovative Licensing and Access Procedure (ILAP) – the ILAP aims to accelerate the time to market and facilitate patient access for innovative medicines, including new chemical entities, and biological medicines, new indications and repurposed medicines;
     
 

National Procedure (a 150-day procedure) – this national 150-day accelerated procedure is available for high-quality applications to market a medicine in the United Kingdom, Great Britain or Northern Ireland;

 

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Rolling review – permits the submission of your application in module(s), to obtain a marketing authorization in the United Kingdom, Great Britain and Northern Ireland. This is a new route for marketing authorization applications, where an applicant for a new active substance in the U.K., Great Britain, or Northern Ireland submits increments of the eCTD dossier for pre-assessment by the MHRA, rather than as part of a consolidated full dossier submission.

 

This rolling review is intended to streamline the development of novel medicines by offering periodic enhanced regulatory interaction and advice to reduce the risk of failure at the final phase and may be integrated with the Target Development Profile (TDP) to provide a clearer pathway for development of innovative medicines.

 

Marketing authorization applications for any new active substance based on a “full dossier,” including biological products, are eligible for the rolling review;

 

 

EC Decision Reliance Procedure (a 67-day procedure) – for products under evaluation or approved in the EU centralized procedure, and for a period of two years from January 1, 2021, Great Britain may rely on decisions taken by the European Commission (EC) when considering the approval of new marketing authorizations.

 

A letter of intent should be submitted to MHRA at least four weeks before the Committee for Medicinal Products (CHMP) opinion is expected. Marketing authorization applications should be submitted to MHRA on receipt of a positive opinion from the CHMP and should contain the entire dossier as reviewed by CHMP, all iterations of the assessment reports and the positive CHMP opinion.

 

All U.K. national requirements will apply. Confirmation of the EC decision should be provided immediately on receipt to allow determination of a Great Britain marketing authorization as close to the EC approval as practicable.

 

 

MR/DC Reliance Procedure (a 67-day procedure) – the MHRA may rely on marketing authorizations approved through European decentralized (DC) and mutual recognition (MR) procedures, with a view to granting a marketing authorization in the United Kingdom or Great Britain.

 

Applications should include the dossier approved for marketing in the EU member states, accompanied by all iterations of the Reference Member State (RMS) assessment report and the RMS end of procedure notification. Applications will be reviewed for compliance with U.K.-specific requirements;

 

 

Unfettered Access from Northern Ireland (a 67-day procedure) – applicants may seek recognition in Great Britain of a marketing authorization approved in Northern Ireland under certain qualifying conditions.

 

This route is available for marketing authorizations approved in Northern Ireland via European MR or DC or through the national procedure, if the marketing authorization holder is established in Northern Ireland and the product is distributed from Northern Ireland to Great Britain.

 

For authorizations approved in EU procedures, applications should include the dossier as approved for marketing in Northern Ireland, accompanied by all iterations of the relevant RMS and CHMP assessment reports.

 

Note that national applications intended to cover marketing of a product in Northern Ireland must continue to comply with the requirements of Directive 2001/83/EC, the European Community’s code relating to medicinal products for human use, and Regulation 726/2004 on European Community procedures and supervision of medicinal products.

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International routes (collaborative procedures):

 

 

Access consortium – the Access consortium is a medium-sized coalition of regulatory authorities that work together to promote greater regulatory collaboration and alignment of regulatory requirements for companies intending to market a medicine in the U.K., Australia, Canada, Singapore and/or Switzerland. The MHRA joined the consortium in 2020 and commenced work-sharing applications in January 2021;

 

 

Project Orbis – Project Orbis is a program coordinated by the FDA involving the regulatory authorities of Australia (TGA), Canada (Health Canada), the United Kingdom (MHRA), Singapore (HSA) and Brazil (ANVISA) to review and approve promising cancer treatments.

 

In addition to the above, the following procedures can be used to obtain a marketing authorization in Northern Ireland:

 

 

Northern Ireland may be included in DC or MR procedure as a Concerned Member State (CMS). 

The DC and MR procedures can be used by companies intending to market a medicine in Northern Ireland and other named EU countries.

 

One member state will lead the assessment of the application as the RMS. The other member states (including Northern Ireland) receiving applications are called the ‘concerned member states’ (CMSs). The procedure takes up to 210 days (DC procedure) or 90 days (MR procedure), excluding time taken to provide further information or data required. If the application is approved, each CMS (including Northern Ireland as a CMS) will issue a national marketing authorization for the product within 30 days of approval.

 

 

Marketing authorizations approved in the EU’s DC procedure will automatically have effect in Northern Ireland.

 

The EU centralized procedure, including its mandatory scope, continues to apply in Northern Ireland, and therefore, the centralized procedure results in a single marketing authorization to market a product in all EU member states, as well as Iceland, Liechtenstein, Norway and Northern Ireland.

 

Further information can be found in the U.K.’s website for license applications (www.gov.uk).

 

Canadian Regulatory Process

 

Authorization to Market. Therapeutic products can be marketed in Canada after they have been subject to a review to assess their safety, efficacy and quality. A New Drug Submission must be submitted to Health Canada for review, and a Notice of Compliance, or NOC, and/or a Drug Identification Number, or DIN, must be received by the sponsor prior to marketing a product in Canada. Responsibility for review of pharmaceutical drug products resides with Health Canada’s Therapeutic Products Directorate, or TPD, while responsibility for review of biological products is under the Biologics, Radiopharmaceuticals and Genetic Therapies Directorate, or BGTD. An active DIN is required for any product being marketed in Canada. Our IG, A1PI, albumin and hyperimmune products are subject to these review and authorization processes.

 

Changes to Market Authorization. There are four classes of changes to existing market authorizations in Canada. Level 1 changes are considered “significantly different” and have the potential to impact safety, efficacy, quality or effectiveness of the product. These require the filing of a Supplemental New Drug Submission, and a NOC must be issued by Health Canada prior to implementation of the change. Level 2 changes are not considered “significant,” but a “Notifiable Change” submission must be filed to Health Canada for review, and approval is provided via a “No Objection” letter to the sponsor. Level 3 changes have minimal potential to impact safety, quality or effectiveness and can be made without prior approval of Health Canada; a summary of these changes is reported to Health Canada with the sponsor’s Annual Drug Notification. Level 4 changes are implemented without any notification to Health Canada, based on no expectation of risk.

 

Clinical Trials. A Clinical Trial Application, or CTA, must be submitted to Health Canada prior to conducting any study protocol that proposes the use of a new product, or the use of an existing product, where the indication, target population, route of administration or dosing differs from the current market authorization. The CTA should include summaries of preclinical and clinical studies conducted and (if applicable) chemistry, manufacturing and control data, and is submitted to either TPD (for drug products) or BGTD (for biological products) for review. The TPD or BGTD are responsible for assessing protection and safety of the participants as well as quality of the product; they will issue a “No Objection” letter to sponsors for studies deemed acceptable. Research ethics board approval for each trial is also required prior to conduct of the study.

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Establishment Licensing. All establishments in Canada that are involved in the fabrication, packaging/labeling, testing, import, distribution or warehousing of drug products must have a current establishment license (once an establishment license is issued, an annual report must be submitted by April 1 of each year to maintain the effectiveness of that license). As an importer/distributor, part of the licensing requirements include demonstration that any foreign (non-Canadian) facilities involved in fabrication, packaging/labeling or testing of products imported/distributed under the license comply with cGMP.

 

Post-Approval Requirements. The Health Products and Food Branch Inspectorate of Health Canada periodically inspects licensed establishments in Canada to verify compliance with cGMP. Manufacturers and importers are required to monitor the safety and quality of their products and must report adverse reactions to the Marketed Health Products Directorate in accordance with a prescribed timeline and format.

 

Regulatory Process for Markets outside the United States, Europe, United Kingdom and Canada

 

The majority of regulatory authorities in countries outside the United States, Canada and Europe require that a product first be approved by the FDA or European authority prior to granting the market authorization in their country. There are a limited number of countries (Bahamas, Bermuda, Guam, Oman and Qatar) that do not require further local product registration for products and they may be distributed based on the existing FDA approval.

 

In addition to requiring the submission of a license application containing documentation supporting the safety, efficacy and quality of the product, many countries require the submission of FDA Export Certificates for our products to provide assurance that such products can be legally marketed in the United States. The Certificate of Pharmaceutical Product, or CPP, and/or the Certificate to Foreign Government, or CFG, are issued by the FDA at the request of the manufacturer seeking licensing in the country outside the United States. The CPP conforms to the format established by the World Health Organization, or WHO, and is intended for use by the importing country when considering whether to license the product in question for sale in that country. The CFG serves to document that the product can be legally marketed in the United States and the manufacturer is in compliance with GMP. A limited number of regulatory authorities in countries outside United States, Canada and Europe conduct onsite inspections to verify GMP compliance. Failure to maintain and document GMP compliance could result in withdrawal of marketing authorization. In addition changes to manufacturing or testing procedures for the product require approval of the change in the United States prior to the submission of the variation to the registration in the international market. These changes may require approval in each market in order to maintain product distribution. Furthermore, any changes in the distributors supporting our export business could result in a loss of sales.

 

Pharmaceutical Pricing and Reimbursement

 

In the United States and other countries, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of reimbursement from third-party payors. Third-party payors include government health programs, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Our products may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

 

United States Pharmaceutical Pricing and Reimbursement

 

In the United States, our products are reimbursed or purchased under several government programs, including Medicaid, Medicare Parts B and D and the 340B Program, and pursuant to our contract with the Department of Veterans Affairs. Medicaid is a joint state and federal government health plan that provides covered outpatient prescription drugs for low income individuals. Under Medicaid, drug manufacturers pay rebates to the states based on utilization data provided by the states. The rebate amount for most brand name drugs is the greater of 23.1% of the AMP per unit or the difference between the AMP and Best Price per unit and adjusted by the CPI-U, subject to certain exceptions (for example, for certain clotting factors, such as Factor VIII and Factor IX, of the rebate amount is the greater of 17.1% of the AMP per unit or the difference between the AMP and the Best Price per unit and adjusted by the CPI-U. For non-innovator multiple source (generic) drugs, the rebate percentage is equal to a minimum of 13.0% of AMP. The ACA also extended this rebate obligation to prescription drugs covered by Medicaid managed care organizations.

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Medicare Part B reimburses providers for drugs provided in the outpatient setting based upon ASP. Beginning in 2005, the Medicare drug reimbursement methodology for physician and hospital outpatient schedules changed to ASP + 6%. This payment was based on a volume-weighted average of all brands under a common billing code. After changes in certain prior years, CMS increased the rate back to + 6% for 2013 and maintained the same rate for 2014 through 2019, except that effective January 1, 2018, a new CMS rule went into effect substantially cutting reimbursement paid to hospitals and other providers for certain outpatient drugs and biologicals, including certain of our products, if purchased by these providers under the 340B Program. The reimbursement was decreased from ASP + 6% to ASP - 22.5%. However, on December 27, 2018, the Federal District Court for the District of Columbia issued an opinion finding that this reimbursement cut exceeded CMS’s regulatory authority. No final remedy has yet resulted from this decision, and the case remains subject to appeal. The outcome of this reimbursement change on our business is uncertain, but it may decrease demand for our products and have an adverse effect on our business. We believe that we meet the requirements of the 340B/ Program and are continuing to review and monitor these and other developments affecting the 340B Program. In addition, under the Bipartisan Budget Act of 2013 and subsequent measures, Medicare is subject to a 2% reduction in federal spending, or “sequestration,” including drugs reimbursed under Medicare, for federal fiscal years 2013 through 2025. The full ramifications of this sequestration for Medicare reimbursement are not yet clear, as Congressional action may reduce, eliminate or otherwise change this payment reduction.

 

Other pricing concerns in the United States include that in May 2018, President Trump released a drug “blueprint” including an array of policy ideas intended to lower drug prices and patient out-of-pocket drug costs, and federal administrative agencies have begun issuing proposed regulations to adopt various of these proposals. An area of focus are drugs reimbursed under Medicare Part B. The proposals include, for example, moving reimbursement for certain Medicare Part B drugs into Medicare Part D to make them subject to a variety of pricing negotiations, establishing an enhanced competitive acquisition program for Medicare Part B drugs, and instituting an “International Pricing Index” payment model that would link reimbursement for certain Medicare Part B drugs to pricing levels for such drugs found in other countries. Other proposals support the marketing of biosimilars, involve lowering standards for demonstrating biosimilarity. One additional proposal, which was published as a proposed rule by the Office of Inspector General of the Department of Health and Human Services on February 6, 2019, and is focused initially on drugs reimbursed under Medicare Part D and certain Medicaid managed care organizations (although comments were sought as to whether its scope should be expanded, including to Medicare Part B drugs), would substantially disrupt current pharmaceutical market practices by apparently rendering illegal, under the federal Anti-Kickback Statute, many drug rebates now routinely paid by drug manufacturers to such health benefit plans or their pharmacy benefit managers (PBMs). The uncertain status of these various pricing proposals, some of which could take effect based on action by federal administrative agencies without the need for Congressional action, affects our ability to plan, and the proposals, if adopted, in whole or in part, could adversely affect our business.

 

An increasing number of states in the United States have also proposed or passed legislation that seeks to directly or indirectly regulate pharmaceutical drug pricing, such as by requiring drug manufacturers to publicly report pricing information or to place a maximum price ceiling on pharmaceutical products purchased by state agencies. For example, in October 2017, California enacted a prescription drug price transparency law that requires prescription drug manufacturers to provide advance notice and explanation for certain drug price increases that exceed a specified threshold. Laws of this type may cause us to experience additional pricing pressures on our affected products, and could adversely affect our business.

 

Medicare Part D is a partial, voluntary prescription drug benefit created by the federal government primarily for persons 65 years old and over. The Medicare Part D drug program is administered through private insurers that contract with CMS. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we are required to negotiate prices with private insurers operating pursuant to federal program guidance. These prices may be lower than we might otherwise obtain. In addition, beginning in 2011, the ACA generally required that we provide a 50% discount (the “Coverage Gap Discount”) to patients who have expended certain amounts for drugs and therefore fall within the Medicare Part D coverage gap. In February 2018, legislation was enacted as part of the Bipartisan Budget Act of 2018 that increased this coverage gap discount to 70%, and extended the price reductions of the Coverage Gap Discount Program to include biosimilar drugs.

 

The availability of federal funds to pay for our products under the Medicaid and Medicare Part B programs requires that we extend discounts under the 340B/PHS drug pricing program. The 340B/PHS drug pricing program extends discounts to a variety of community health clinics and other specified entities that receive health services grants from the PHS, as well as hospitals that serve a disproportionate share of certain low income individuals. The PHS ceiling price cannot exceed the AMP (as reported to CMS under the Medicaid drug rebate program) less the Medicaid unit rebate amount. We have entered into a PPA with the government in which we agree to participate in the 340B Program by charging eligible entities no more than the PHS ceiling price for drugs intended for outpatient use. Evolving requirements with respect to this program continue to be issued by the HRSA of HHS, the federal agency responsible for oversight of the 340B Program, which creates uncertainty. For example, effective January 1, 2019, a final HRSA rule codified standards regarding the calculation of the ceiling price for covered outpatient drugs under the 340B Program, as well as regarding the imposition of civil monetary penalties, or CMP, on manufacturers that knowingly and intentionally overcharge covered entities.

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We make our products available for purchase by authorized government users of the Federal Supply Schedule, or FSS, pursuant to their FSS contracts with the Department of Veterans Affairs. Under the Veterans Health Care Act of 1992, companies are required to offer discounted FSS contract pricing to four federal agencies — the Department of Veterans Affairs, the Department of Defense, the Coast Guard and the PHS (including the Indian Health Service) — for federal funding to be made available for reimbursement of products under the Medicaid program and products eligible to be purchased by those four federal agencies. FSS pricing to those four federal agencies must be equal to or less than the ceiling price, which is, at a minimum, 24% off the non-federal AMP for the prior fiscal year.

 

The ACA imposed a fee on manufacturers and importers of branded prescription drugs and biologics based on their sales to United States government health programs. An aggregate annual fee of $3.0 billion was imposed on all covered entities for 2014 through 2016. The aggregate fee is allocated among applicable manufacturers and importers, including us, based on their relative sales to government health programs. The aggregate fee increased up to $4.0 billion for 2017, $4.1 billion for 2018, and was reduced to $2.8 billion for 2019 and thereafter. Beginning in 2013, the ACA also imposed a new excise tax on many medical devices equal to 2.3% of the sales price, and excludes devices generally purchased by the general public at retail for individual use. However, with respect to the medical device excise tax, a two-year moratorium was imposed under the Consolidated Appropriations Act, 2016, suspending the imposition of the tax on device sales during the period beginning January 1, 2016 and ending December 31, 2017. On January 22, 2018, an additional two-year moratorium was imposed under Public Law No. 115-120, suspending the imposition of the tax on device sales during the period beginning January 1, 2018 and ending on December 31, 2019. On December 20, 2019, the medical device excise tax was repealed under Public Law No. 116-94, eliminating the imposition of the tax for periods after December 31, 2019. In addition, the Prescription Drug User Fee Act, or PDUFA, first enacted in 1992, sets forth user fees that pharmaceutical and biological companies pay to the FDA for: certain applications for approvals of drugs and biologicals; the establishments where the products are made; and the products themselves. The fees under PDUFA cover a substantial portion of the FDA’s operating budget, and the measure also addresses aspects of the regulatory approval process, such as timing and procedures. PDUFA is subject to reauthorization by Congress every five years, and in December 2016, after a lengthy process involving significant industry and other stakeholder input, the FDA submitted its final recommendations to Congress for the sixth PDUFA reauthorization, which was signed into law in August 2017, and which covers fiscal years 2018 through 2022.

 

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. Federal, state and local governments in the United States have enacted and continue to consider additional legislation to limit the growth of healthcare costs, including the costs of prescription drugs. Existing and future legislation could limit payments for our existing products or for drug candidates that we are developing, including possibly permitting the federal government to negotiate prices directly with manufacturers. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the pressure on pharmaceutical pricing. For a discussion of certain risks related to reimbursement and pricing, see Item 3 of this Part I, “Key Information — D. Risk Factors — Risks Relating to the Healthcare Industry —United States Healthcare Reform may adversely affect our business.”

 

European Union Pharmaceutical Pricing and Reimbursement

 

Our operations in the EU are subject to regulations that affect the pricing and marketing of our products. The governments of EU Member States are able to influence the price of pharmaceutical products through their control of national healthcare systems. As such, governments in the EU Member States have been introducing healthcare reforms to limit increases in costs, particularly with respect to prescription drugs. Some EU Member States have also passed legislation to impose mandatory rebates for pharmaceutical products and financial claw-backs on the pharmaceutical industry. Through health technology assessment organizations that use formal economic metrics such as cost-effectiveness to determine prices, coverage and reimbursement of new therapies, EU Member States are also seeking to limit healthcare costs.  We expect that EU Member States will continue to pursue actions to reduce healthcare expenditures.

 

The EU is currently undergoing an analysis of the intellectual property protections extended to pharmaceutical products as well as the overall regulatory framework for the approval and commercialization of medicinal products. This could result in significant changes in the way drugs are approved and marketed, as well as with respect to the duration of exclusivity, in particular for orphan drugs.

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Pricing and Reimbursement in Other Countries

 

Many countries around the world have been taking steps to control healthcare costs, particularly as they relate to prescription drugs. For example, Canada is contemplating regulatory changes that seek to reduce prices for certain medicinal products, such as biologics and medicines for rare diseases.  China has organized national price negotiations for certain products directly linked to national drug reimbursement.  Drug prices in China may further decline due to a stated national policy of reducing healthcare costs. Furthermore, countries are utilizing tendering processes to generate competition in a bid to control prescription drugs.

 

Item 4.A. UNRESOLVED STAFF COMMENTS

 

None.

 

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following is a review of our financial condition and results of operations as of December 31, 2020 and 2019, and for the three years ended December 31, 2020, and of the key factors that have affected or are expected to be likely to affect our ongoing and future operations. You should read the following discussion and analysis in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this annual report on Form 20-F. Certain discussions of results of operations for the comparisons between the years ended December 31, 2019 and 2018 are not included in this annual report. Refer to “Operating and Financial Review and Prospects” in Part I, Item 5 of our annual report on Form 20-F for the fiscal year ended December 31, 2019, filed on April 6, 2020, for such discussions.

 

Some of the information contained in this discussion, including information with respect to our plans and strategies for our business and our expected sources of financing, contain forward-looking statements that involve risk and uncertainties. You should read “Cautionary Statement Regarding Forward-Looking Statements” in this Part I for a discussion of the risks related to those statements. You should also read Item 3 of this Part I, “Key Information — D. Risk Factors” for a discussion of certain factors that may affect our business, financial condition and results of operations.

 

We have prepared our audited consolidated financial statements as of December 31, 2020 and 2019, and for the three years ended December 31, 2020 in accordance with IFRS, as issued by the IASB. The financial information and related discussion and analysis contained in this item are presented in euros except as otherwise specified. Unless otherwise specified the financial information analysis in this annual report on Form 20-F is based on our actual audited consolidated financial statements as of December 31, 2020 and 2019, and for the three years ended December 31, 2020.

 

See “Presentation of Financial and Other Information” in this Part I for further information on our presentation of financial information.

 

  A. Operating Results.

 

Subsequent Events

 

GigaGen Acquisition

 

On March 8, 2021, Grifols acquired 59.11% of shares of GigaGen Inc. (GigaGen) for a base amount of $80 million. Grifols now owns 100% of GigaGen’s share capital, and is financing the transaction with its own funds, without incurring in any debt. Half of the consideration was paid at the closing date and the remaining amount will be paid one year after closing. This agreement is in line with our R+D+i strategy, grounded in an integrated approach that encompasses both in-house projects and investee-led initiatives whose research complements our core operations. Prior to this transaction, Grifols’ percentage stake in GigaGen was recorded using the equity method and, therefore, the difference between the fair value of the previous investment and the book value, estimated in $43 million, has been recognized as income. See Note 11 to our audited consolidated financial statements included in this annual report on Form 20-F for more information regarding this transaction.

 

Acquisition of plasma donation centers from BPL Plasma, Inc.

 

On February 28, 2021, Grifols acquired 25 U.S.-based plasma centers from BPL Plasma Inc for $382 million. These plasma centers generate, in the aggregate, approximately 1 million liters of plasma per year. The transaction received the applicable regulatory clearances and will be financed with Grifols’ own resources, without incurring debt. See Note 11 to our audited consolidated financial statements included in this annual report on Form 20-F for more information regarding this transaction.

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Factors Affecting Our Financial Condition and Results of Operations

 

Consequences of COVID-19

 

Since the second half of March 2020, the outbreak of COVID-19 has impacted our operations, customers, suppliers and employees in the countries where we operate. However, we have been able to keep our plasma centers, production facilities and our supply and services chains operational. It remains unclear at this time how the developments in relation to COVID-19 will continue to evolve through 2021 and beyond, and the extent to which COVID-19 might further impact our business, results of operations and financial condition. We have and will continue to monitor the situation closely.

 

In 2020, we were able to limit the negative impact on our net plasma supply to approximately 15%, despite COVID-19-related constraints, such as social distancing, mobility restrictions and lockdowns. This decrease in plasma collection would result in a somewhat corresponding decrease in production volumes approximately twelve months down the line; however, through our recent acquisition of plasma collection centers, as well as the expected recovery in plasma collection levels as a result of vaccine deployment and easing of restrictions, we anticipate that we will be able to more than offset such decrease. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Acquisitions — The GC Pharma Acquisition.”

 

The COVID-19 pandemic also had an adverse impact on our Hospital Division revenues (an 11.7% decrease in 2020 as compared to 2019), as it prompted a slowdown in certain hospital investments and treatments. We expect that revenues will again increase as the COVID-19 vaccination deployment continues to expand and hospitals refocus on investments and treatments that have been stalled.

 

Due to the effects of the pandemic and in accordance with IAS 2 “Inventories,” we recognized a total estimated adverse impact of €205 million in the value of our inventory.

 

On a positive note, our Diagnostic Division reported strong sales, particularly in Spain, of our TMA (Transcription-Mediated Amplification) molecular test to detect the SARS-CoV-2 virus.

 

Furthermore, as part of our overall response to the COVID-19 pandemic and its consequences, and consistent with our prudent management and commitment to profitability, we implemented an operating expense containment plan that yielded a positive impact of €112 million in the statement of profit and loss for 2020. The plan has no impact on the company’s labor force or innovation investments. In addition, at December 31, 2020, our liquidity position stood at close to €1.5 billion, including €580 million corresponding to our cash position and nearly €900 million of undrawn lines of credit.

 

We estimate that the net overall impact on our operating results in 2020 caused by the COVID-19 pandemic amounts to €155 million. This figure includes the negative impact on inventory value, reduced revenues in the Bioscience Division and the Hospital Division, and the positive impact of the operating expense containment plan and the contribution to our Diagnostic Division’s revenues of the molecular test for the detection of the SARS-CoV-2 virus.

 

Finally, as part of our commitment to society, we have been working through our talent pool, R&D projects and capital expenditures to help fight the pandemic. Particularly in Spain, and as noted above, we have developed a specific diagnostic test for the detection of SARS-CoV-2.

 

Price Controls

 

Certain healthcare products, including plasma derivative products, are subject to price controls in many of the markets where they are sold, including Spain and other countries in the European Union. The existence of price controls over these products has adversely affected in the past, and may continue to adversely affect, our ability to maintain or increase our prices and gross margins.

 

Plasma Supply Constraints

 

Plasma is the key raw material used in the production of plasma-derived products. Our ability to continue to increase our revenue depends substantially on increased access to plasma. We currently obtain our plasma from the United States and Germany primarily through our plasma collection centers and, to a much lesser extent, through agreements with third parties.

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A continued increase in demand for plasma products could lead to industry supply constraints. In response, we and certain of our competitors and independent suppliers could open a number of new plasma collection centers.

 

We have 312 operating plasma collection centers located across the United States and Germany. We have expanded our plasma collection network through a combination of organic growth by opening new plasma collection centers and acquisitions. In 2016, we purchased equity interests in the Interstate Blood Bank Group (Interstate Blood Bank, Inc., Bio-Blood Components, Inc. and Plasma Biological Services, LLC, collectively referred to herein as the “IBBI Group”), and on April 10, 2019, we exercised our option to purchase the remaining 51% equity interest of the IBBI Group, which has 35 FDA-approved centers (26 plasma centers and nine blood donation centers), as well as an analytical laboratory. On October 1, 2020, we obtained 11 U.S. plasma collection centers from GC Pharma. As part of the GC Pharma acquisition, we must supply certain output of plasma arising from the 11 collection centers for a 24-month period commencing on October 1, 2020.

 

In 2020, Grifols was able to limit the negative impact on its net plasma supply to approximately 15%, despite COVID-19-related constraints, including social distancing, mobility restrictions and lockdowns. In 2021, Grifols is advancing on its efforts to increase its plasma supply through its expansion plan, comprising organic and inorganic growth through, such as: (i) plasma collected through our plasma collection centers, including plasma centers from BPL, (ii) plasma collected through our Plasma Supply Agreement and (iii) plasma purchased from third-party suppliers pursuant to various plasma purchase agreements.

 

The effect of the COVID-19 pandemic on our ability to collect the volume of plasma we require has been a 15% reduction, as explained above. See Item 5 of this Part I, “Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Financial Condition and Results of Operations — Consequences of COVID-19” for additional details.

 

Acquisitions

 

MedKeeper Acquisition

 

On January 24, 2018, we acquired a majority stake in the U.S. technology firm Goetech, LLC, based in Denver, Colorado, doing business as MedKeeper. This transaction, for a total of $98 million, included a 51% stake in Medkeeper and a call option for Grifols and put option for MedKeeper for the remaining 49% on the third anniversary of the deal.

 

On November 9, 2020, we acquired, through our subsidiary Grifols Shared Services North America Inc., the remaining 49% interest in MedKeeper for the amount of $60.2 million. MedKeeper’s core business is the development and distribution of web and mobile-based platforms for hospital pharmacies that improve quality standards, productivity in the process, control systems and monitoring different preparations while increasing patient safety. This investment will enhance the activity of the Grifols Hospital division and it is part of the strategy to underpin this division into the U.S. market. The acquisition complements our Pharmatech line and enhances our presence in the U.S. market.

 

The GC Pharma Acquisition

 

On July 20, 2020, we executed share purchase arrangements with South Korean based GC Pharma (Group), or GC Pharma, and other investors for the purchase of a plasma fractionation facility and two purification facilities located in the city of Montreal, Canada, as well as 11 plasma collection centers located in the U.S., for a total consideration of $457 million, subject to certain working capital and other adjustments.

 

The Canadian facilities are currently in the process of obtaining needed licenses and regulatory approvals by competent health authorities for the manufacturing of plasma-derived products. When licensed and approved, we will become the only commercial manufacturer of plasma products in Canada, with a fractionation capacity of 1.5 million liters annually. We plan to be ready to manufacture IVIG and Albumin in the Canadian facilities to supply the Canadian market starting in 2023.

 

The GC Pharma acquisition closed on October 1, 2020. As part of the consummation of the GC Pharma acquisition and through a plasma supply agreement, we are committed to supplying a certain output of plasma arising from the 11 plasma collection centers in the U.S. to GC Pharma for a 24-month period concluding on October 1, 2022.

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The Alkahest Acquisition

 

In March 2015, we entered into a definitive agreement to acquire approximately 45% of the equity of California biopharmaceutical company Alkahest, Inc., or Alkahest, for a $37.5 million payment upon entry into the agreement and a further payment of $12.5 million to fund the development of Alkahest’s plasma-based products.

 

On September 2, 2020, we executed an agreement with the remaining shareholders in Alkahest, to acquire the remaining shares of Alkahest. On December 15, 2020, we closed the transaction and acquired the remaining shares of Alkahest (approximately 55%) in exchange for a total price of $146 million, on a debt free basis. We paid $20 million at the closing of the transaction and the remaining $126 million on February 1, 2021. With this transaction, we gain total control of Alkahest.

 

Alkahest is a clinical stage biopharmaceutical company targeting neurodegenerative and age-related diseases with transformative therapies derived from a deep understanding of the plasma proteome in aging and disease. Our acquisition of the remaining shares of Alkahest is part of our commitment to the research and development of therapeutic alternatives designed to contribute to both scientific and social development. It is also aligned with our strategy of complementing our range of existing plasma protein therapies and diagnostic products to treat and diagnose serious diseases and to extend the quality of human life.

 

NSPO Joint Venture

 

On November 24, 2020, we executed a binding master joint venture agreement (the “NSPO JV Agreement”) with Egyptian based National Service Projects Organization, or NSPO, to incorporate a new company under the laws of Egypt (the “NSPO JV”). The NSPO JV will be owned by Grifols and NSPO on a 49% - 51% basis, respectively. The NSPO JV will develop and construct 20 plasma collection centers throughout Egypt and will be capable of initially collecting approximately 600,000 liters of plasma annually, a fractionation facility with an annual fractionation capacity of up to one million liters of plasma, a purification and fill & finish facility, a warehouse and an analysis laboratory.

 

For us, the NSPO JV will free-up plasma and manufacturing capacity and bring diversification to our plasma procurement sources. Additionally, through a future contract manufacturing agreement, we will secure the processing of the plasma collected in Egypt into plasma-derived products to serve Egyptian national needs. The NSPO JV Agreement also provides that for the implementation of any similar project (including the commercialization of plasma or plasma derived products) in certain countries within the Middle East and the entire African continent, Grifols and NSPO shall exclusively work through the NSPO JV.

 

The NSPO JV will follow equivalent quality, safety and general operational standards as are applied by us in our worldwide operations, and hence, as part of the recognized value to be contributed by Grifols into the NSPO JV, we will provide our knowledge and expertise in the industry as well as know-how and technology held by it, providing, among other things, engineering services and quality assurance support to set the infrastructure and processes of the JV to the strictest quality and safety standards.

 

The Shanghai RAAS Acquisition

 

On March 7, 2019, we entered into an Agreement for Assets Purchase by Share Issue, or the Shanghai RAAS Agreement, with Shanghai RAAS Blood Products Co Ltd., or Shanghai RAAS.  Shanghai RAAS is a leader in China’s plasma derivatives sector and is listed on the Shenzhen Stock Exchange.  Pursuant to the Shanghai RAAS Agreement, on March 30, 2020, we acquired 26.2% of the voting and economic rights in Shanghai RAAS in exchange for the contribution of 45% of the economic rights and 40% of the voting rights in our U.S. subsidiary, Grifols Diagnostic Solutions Inc., or GDS. Thus, we have become the largest shareholder of Shanghai RAAS, while we maintain operational, political and economic control of GDS.

 

As part of the acquisition, we also entered into an Exclusive Strategic Alliance Agreement pursuant to which Shanghai RAAS became the exclusive distributor of our plasma-derived products and transfusional diagnostic solutions in China. In exchange for royalties, we provide technological and know-how support in the bioscience and diagnostic fields to Shanghai RAAS. 

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Acquisition and Sale of Haema AG and Biotest US Corporation

 

In June 2018, we completed the acquisition of Haema AG, a German based pharmaceutical company that owns 35 collection centers throughout Germany on the acquisition date, for a purchase price of €220 million on a debt free basis. In August 2018, we completed the acquisition of Biotest US Corporation, a U.S. based pharmaceutical company that owns 24 plasma collection centers, for a purchase price of $286 million. In December 2018, we sold our 100% stake in Haema AG and Biotest US Corporation to Scranton Enterprises B.V., one of our major shareholders and a related party, for $538 million. This acquisition and subsequent sale allowed us to reinforce our financial structure. We have an option to repurchase the shares of Haema AG and Biotest US Corporation from Scranton Enterprises B.V. exercisable at any time. Our Plasma Supply Agreement in place with Haema and Biotest has been extended for a 30-year period and we continue to operate the companies’ plasma centers.

 

Other Factors

 

Our financial and operating prospects can also be significantly affected by a number of other internal and external factors, such as unfavorable changes in governmental regulation or interpretation, increased competition, the inability to hire or retain qualified personnel necessary to sustain planned growth, the loss of key senior managers, problems in developing some of the international operations and lack of sufficient capital, among others.

 

Operating Results

 

Overview

 

The subsequent discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations. You are encouraged to read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F.

 

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

 

The following discussion and analysis contains information regarding our results of operations for the year ended December 31, 2020, as compared to the year ended December 31, 2019:

 

   Year Ended December 31,   Change 
   2020   2019      % 
   (in thousands of euros, except for percentages) 
Continuing Operations                    
Net revenue    5,340,038    5,098,691    241,347    4.7%
Cost of sales    (3,084,873)   (2,757,459)   (327,414)   11.9%
Gross margin    2,255,165    2,341,232    (86,067)   (3.7)%
Research and development    (294,216)   (276,018)   (18,198)   6.6%
Selling, general and administration expenses    (985,616)   (942,821)   (42,795)   4.5%
Operating expenses    (1,279,832)   (1,218,839)   (60,993)   5.0%
Profit/(loss) of equity accounted investees with similar activity to that of the Group    20,799    8,972    11,827    131.8%
Operating result    996,132    1,131,365    (135,233)   (12.0)%
Finance income    8,021    114,197    (106,176)   (93.0)%
Finance costs    (249,639)   (342,965)   93,326    (27.2)%
Change in fair value of financial instruments    55,703    1,326    54,377    4,100.8%
Impairment of financial assets at amortized cost        (37,666)   37,666    (100.0)%
Exchange differences    8,246    (9,616)   17,862    (185.8)%
Finance result    (177,669)   (274,724)   97,055    (35.3)%
Profit/(loss) of equity accounted investees    60,166    (39,538)   99,704    (252.2)%
Profit before income tax from continuing operations    878,629    817,103    61,526    7.5%
Income tax expense    (169,639)   (168,459)   (1,180)   0.7%
Profit after income tax from continuing operations    708,990    648,644    60,346    9.3%
Consolidated profit for the year    708,990    648,644    60,346    9.3%

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Net Revenue

 

Net revenue is calculated by subtracting certain chargebacks, cash discounts, volume rebates, Medicare and Medicaid discounts and other discounts from our gross revenue. See Note 24 to our audited consolidated financial statements included in this annual report on Form 20-F.

 

Net revenue increased by €241,347 from €5.1 billion in 2019 to €5.3 billion in 2020. This 4.7% (6.1% at constant currency) net revenue increase is the result of growth in the Bioscience and Diagnostic divisions, where the contribution of new products accounted for more than 50% of revenue growth.

 

The following table reflects a summary of net revenue by each of our divisions for 2020, as compared to 2019:

 

Summary of Net
Revenue by Division
  Year ended
December 31,
2020
   % of total
net revenue
   Year ended
December 31,
2019
   % of total
net revenue
   % var   % var CC(1) 
   (in thousands of euros, except for percentages) 
Bioscience    4,242,502    79.5%   3,993,462    78.3%   6.2%   7.6%
Diagnostic    775,889    14.5%   733,604    14.4%   5.8%   7.3%
Hospital    118,675    2.2%   134,441    2.6%   (11.7)%   (10.3)%
Bio Supplies    224,090    4.2%   266,540    5.2%   (15.9)%   (15.3)%
Others    31,989    0.6%   22,820    0.5%   40.2%   40.4%
Intersegments    (53,107)   (1.0)%   (52,176)   (1.0)%   1.8%   (2.7)%
Total    5,340,038    100.0%   5,098,691    100.0%   4.7%   6.1%

  

 

(1)       Net revenue variance in constant currency is determined by comparing adjusted current period net revenue, calculated using prior period monthly average exchange rates, to the prior period net revenue. See “Presentation of Financial and Other Information.”

 

Bioscience. Net revenue for the Bioscience division increased by 6.2% (7.6% at constant currency) from €4.0 billion in 2019 to €4.2 billion in 2020. This increase was primarily due to an upturn in immunoglobulins sales in countries including the United States and Canada, an increase in albumin sales, particularly in the United States and China, and the strong contribution of new products like Xembify®, VistasealTM and Tavlesse®.

 

Immunoglobulins sales remain strong, achieving double-digit growth thanks to solid demand in markets with high per capita consumption, namely, the U.S. and Canada, and several countries in the European Union and Latin America. Grifols has a range of immunoglobulins for both intravenous and subcutaneous administration (Xembify®) to adapt to patients’ diverse needs.

 

Albumin sales also remain strong amid positive growth in the U.S., Canada and China.

 

Despite the pandemic, alpha-1 antitrypsin revenues continue to grow in the U.S. and Canada, its core markets. Grifols continued to enhance its portfolio in 2020, integrating new products and presentations, including the FDA-approved Prolastin®-C Liquid in 0.5-gram and 4-gram vials. Grifols currently has three presentations to offer patients more treatment alternatives.

 

In terms of new product launches, of note are the robust sales of the biological sealant, developed and manufactured by Grifols using a combination of two plasma proteins (fibrinogen and thrombin) to control surgical bleeding. Launched in the last quarter of 2019, the product is sold and distributed by Ethicon under the trade name VistasealTM. Also worth highlighting is the market launch of Tavlesse® (fostamatinib) in specific European countries. Sold under an agreement with Rigel Pharmaceuticals, this product is used to treat chronic immune thrombocytopenia (ITP) in adult patients who are refractory to other treatments.

 

Diagnostic. Diagnostic division net revenue increased by 5.8% (7.3% at constant currency) from €733.6 million in 2019 to €775.9 million in 2020. This increase was primarily due to a significant increase in sales, particularly in Spain, of its TMA (Transcription-Mediated Amplification) molecular test to detect the SARS-CoV-2 virus. TMA is a commonly used technique known for its high sensitivity and capacity to automate large sample volumes.

 

Sales of Procleix® NAT Solutions, used to analyze blood donations, were also strong in Japan, Australia, the Philippines and Bulgaria, among other countries. These systems are able to screen for a diversity of pathogens, including the human immunodeficiency virus (HIV), hepatitis viruses (A, B, C and E), West Nile virus, Zika, dengue and the causative agents of babesiosis.

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The blood-typing line maintains its upward trend in the U.S. and Latin America, where sales continued to grow in countries such as Argentina. Sales include both analyzers (Erytra®, Erytra Eflexis® and Wadiana®) and reagents (DG-Gel® cards, red blood cells and anti-serums).

 

Hospital. Net revenue from the Hospital division decreased by 11.7% (10.3% at constant currency) from €134.4 million in 2019 to €118.7 million in 2020. This decrease was primarily due to impact of COVID-19, which caused a slowdown in certain hospital investments and treatments.

 

Grifols is a leading supplier of technology and services for hospitals, clinics and specialized centers. Its leading-edge automated compounding device (KIRO Fill®) and next-generation suite of web- and mobile-based applications (PharmacyKeeper) optimize hospital-pharmacy operations and enhance patient safety by affording greater accuracy and safety in the preparation of intravenous (IV) medications. These advancements improve patient safety and reduce reliance on manual processes.

 

Grifols’ Pharmatech business line offers comprehensive solutions to enhance hospital pharmacy operations, including the inclusiv® product portfolio, comprised by equipment, software and solutions to improve the safety and quality of sterile compound preparations. The division also consolidated sales of its MedKeeper® and Kiro Grifols® technological solutions.

 

Bio Supplies. The division records sales of biological products for non-therapeutic use and other biological products, as well as those related to the fractionation and purification agreements signed with Kedrion and third-party plasma sales channeled through Haema and Biotest.

 

Net revenue from Bio Supplies decreased by 15.9% (15.3% at constant currency) from €266.5 million in 2019 to €224.1 million in 2020 mainly as a result of a drop in third-party plasma sales, stemming mainly from the roll-off of specific third party plasma sales contracts. As planned, this will enable Grifols to increase its plasma volume to fuel the growth of plasma-derived therapies.

 

The following table reflects a summary of net revenue by each of our geographic regions for 2020 as compared to 2019:

 

Summary of Net Revenue by Region  Year
ended
December 31,
2020
   % of total
net revenue
   Year
ended
December 31,
2019(3)
   % of total
net revenue
   % var   % var CC(1) 
   (in thousands of euros, except for percentages) 
European Union(2)    834,492    15.6%   799,460    15.7%   4.4%   4.5%
United States and Canada    3,599,746    67.4%   3,390,811    66.5%   6.2%   7.1%
Rest of the World    905,800    17.0%   908,420    17.8%   (0.3)%   3.4%
Total    5,340,038    100.0%   5,098,691    100.0%   4.7%   6.1%

 

 

(1)       Net revenue variance in constant currency is determined by comparing adjusted current period net revenue, calculated using prior period monthly average exchange rates, to the prior period net revenue. See “Presentation of Financial and Other Information.”

 

(2)       Net revenue earned in the European Union includes net revenue earned in Spain.

 

(3)       For comparison purposes, 2019 U.K. figures have been reclassified from European Union to Rest of the World.

 

We believe that our ongoing internationalization has helped to improve our sales performance. We have seen a stabilization in the proportion of net revenue to total net revenue accounted for by Spain, as we continue to focus on increasing sales in regions less affected by austerity measures, with shorter payment periods and better margins. In 2020, 93.6% of net revenue, or €5.0 billion, was derived from countries outside of Spain. International expansion remains a strategic priority to stimulate the Company’s organic growth, although each division focuses on specific markets and distinct strategies to optimize sales.

 

Revenues in the U.S. and Canada grew by 6.2% (7.1% at constant currency) in 2020 to €3.6 billion. Meanwhile, sales in the European Union rose by 4.4% (4.5% at constant currency) to €834.5 million, headed by growth in countries like Spain, Italy, Germany and France. Sales in Rest of the World decreased by 0.3% (increased by 3.4% at constant currency) in 2020 to €905.8 million.

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Cost of sales

 

Cost of sales increased by 11.9% from €2.8 billion in 2019 to €3.1 billion in 2020. Cost of sales as a percentage of net revenue increased to 57.8% compared to 54.1% in 2019. This was mainly due to the €205 million impact to adjust Grifols’ inventory value (non-cash), mainly as a result of the effects of the COVID-19 pandemic. See Item 4 of this Part I, “Information on the Company — B. Business Overview — Raw Materials.”

 

Gross Margin

 

The decrease in gross margin from 45.9% of net revenue in 2019 to 42.2% in 2020 was mainly due to the aforementioned €205 million impact booked in Cost of sales.

 

Research and development

 

Research and development spending increased from €276.0 million (5.4% of net revenue) in 2019 to €294.2 million (5.5% of net revenue) in 2020. See Item 4 of this Part I, “Information on the Company — B. Business Overview — Research and Development” for additional details.

 

Selling, general and administration expenses

 

Selling, general and administration expenses increased by 4.5% from €942.8 million in 2019 to €985.6 million in 2020 mainly as a result of growth in our operating activity, including through the integration of new companies, such as Alkahest and Green Cross.

 

Finance result

 

Finance costs decreased by 35.3% from €274.7 million in 2019 to €177.7 million in 2020. This decrease was primarily a result of the completion of the debt-refinancing process in November 2019, a positive €18 million impact from exchange rate differences, and €57 million in capital gains following the closing of the Shanghai RAAS transaction in the first quarter of 2020.  See Notes 11 and 27 to our audited consolidated financial statements included in this annual report on Form 20-F for more information regarding our Finance Result.

 

Income tax expense

 

In 2020, we had a profit before income tax of €878.6 million and income tax expense of €169.6 million, which represents a tax rate of 19.3%. Our effective tax rate decreased from 20.6% in 2019 primarily due to a change in the country mix of our taxable income.

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

The following discussion and analysis contains information regarding our results of operations for the year ended December 31, 2019, as compared to the year ended December 31, 2018:

 

   Year Ended December 31,   Change 
   2019   2018      % 
   (in thousands of euros, except for percentages) 
Continuing Operations                    
Net revenue    5,098,691    4,486,724    611,967    13.6%
Cost of sales    (2,757,459)   (2,437,164)   (320,295)   13.1%
Gross margin    2,341,232    2,049,560    291,672    14.2%
Research and development    (276,018)   (240,661)   (35,357)   14.7%
Selling, general and administration expenses    (942,821)   (814,775)   (128,046)   15.7%
Operating expenses    (1,218,839)   (1,055,436)   (163,403)   15.5%
Profit/(loss) of equity accounted investees with similar activity to that of the Group    8,972             
Operating result    1,131,365    994,124    137,241    13.8%

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   Year Ended December 31,   Change 
   2019   2018      % 
   (in thousands of euros, except for percentages) 
Finance income    114,197    13,995    100,202    716.0%
Finance costs    (342,965)   (293,273)   (49,692)   16.9%
Change in fair value of financial instruments    1,326        1,326     
Impairment of financial assets at amortized cost    (37,666)   30,280    (67,946)   (224.4)%
Exchange differences    (9,616)   (8,246)   (1,370)   16.6%
Finance result    (274,724)   (257,244)   (17,480)   6.8%
Profit/(loss) of equity accounted investees    (39,538)   (11,038)   (28,500)   258.2%
Profit before income tax from continuing operations    817,103    725,842    91,261    12.6%
Income tax expense    (168,459)   (131,436)   (37,023)   28.2%
Profit after income tax from continuing operations    648,644    594,406    54,238    9.1%
Consolidated profit for the year    648,644    594,406    54,238    9.1%

 

Net Revenue

 

Net revenue increased by €612.0 million from €4.5 billion in 2018 to €5.1 billion in 2019. This 13.6% (9.2% at constant currency) net revenue increase is the result of the sustainable growth strategy. Over the last year, the Company’s strategic investments to increase its access to plasma, as well as efforts to boost its sales activities and operations, all contributed to the group’s solid performance.

 

The following table reflects a summary of net revenue by each of our divisions for 2019, as compared to 2018:

 

Summary of Net
Revenue by Division
  Year ended
December 31,
2019
   % of total
net revenue
   Year ended
December 31,
2018
   % of total
net revenue
   % var   % var CC(1) 
   (in thousands of euros, except for percentages)