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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

 

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 Grifols 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
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

 

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

 

None.

(Title of Class)

 

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

 

None.

(Title of Class)

 

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

x Yes    o 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.

o Yes    x 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.

x Yes    o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

 

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.

o Item 17    x 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).

o Yes    x No

 

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

 

213,064,899 Class A Shares

130,712,555 Class B Shares

 

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GRIFOLS, S.A.

 

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						Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION						i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS						ii
	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			27
		Item 4.A.	UNRESOLVED STAFF COMMENTS			61
		Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS			61
		Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			86
		Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			97
		Item 8.	FINANCIAL INFORMATION			101
		Item 9.	THE OFFER AND LISTING			104
		Item 10.	ADDITIONAL INFORMATION			109
		Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			126
		Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.			128
	PART II					129
		Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			129
		Item 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			129
		Item 15.	CONTROLS AND PROCEDURES			129
		Item 16.	[RESERVED]			130
		Item 16.A.	AUDIT COMMITTEE FINANCIAL EXPERT			130
		Item 16.B.	CODE OF ETHICS			130
		Item 16.C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES			130
		Item 16.D.	EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			131
		Item 16.E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			131
		Item 16.F.	CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT			131

 

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		Item 16.G.	CORPORATE GOVERNANCE	131
		Item 16.H.	MINE SAFETY DISCLOSURE	134
	PART III			135
		Item 17.	FINANCIAL STATEMENTS	135
		Item 18.	FINANCIAL STATEMENTS	135
		Item 19.	EXHIBITS	135

 

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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, and for all periods following the closing of the acquisition of Talecris Biotherapeutics Holdings Corp., on June 1, 2011, these terms include Talecris Biotherapeutics Holdings Corp.; and

 

·                                           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.

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

The basis of presentation of financial information of Grifols in this document is in conformity with the 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.

 

Talecris has been included in our consolidated financial statements from June 2, 2011, the day following the consummation of the acquisition.

 

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, or U.S.

 

All tabular disclosures are presented in thousands of euro 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.

 

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

 

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 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 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.

 

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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: our significant indebtedness; our ability to service our indebtedness, which in turn depends on our ability to generate cash; the restrictive covenants governing our debt; risks related to compliance with reporting obligations under U.S. securities laws and our internal control over financial reporting; limitations on the enforcement of civil liabilities under U.S. securities laws; the risks associated with the potential damage or contamination of plasma, our main raw material; side effects associated with our products; our adherence to current good manufacturing practice, or cGMP; our ability to procure adequate quantities of plasma and other materials that are acceptable for use in our manufacturing processes; fluctuations in the balance between supply and demand with respect to the market for plasma-derived products; product concentration risk; increased competition in our industry; the impact of competitive products and the pricing and actions of competitors; potential product liability claims or product recalls involving our products; the impact of our substantial capital expenditures; market risks, such as interest rate risk and foreign exchange rate risk; the unprecedented volatility in the global economy and fluctuations in the financial markets; unexpected shut-downs of our manufacturing and storage facilities or delays in opening new facilities; disruptions in our distribution channels; our ability to protect our intellectual property rights and defend against allegations of infringement by others; our ability to commercialize products in development; implementation of healthcare reform law in the U.S.; potential decreases or limitations on reimbursement for purchasers of our products; regulatory actions or lawsuits brought under federal or state laws; extensive environmental, health and safety laws and regulations; our ability to maintain compliance with government regulations and licenses, including those related to plasma collection, production, and marketing; and other factors that are set forth below under Item 3 of this Part I, “Key Information — D. Risk Factors.”

 

We include forward-looking statements in Item 4, Item 5 and Item 11 of this Part I, “Information on the Company,” “Operating and Financial Review and Prospects” and “Quantitative and Qualitative Disclosures About Market Risk,” respectively.  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.

 

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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 at 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 table presents our consolidated financial data for the periods and as of the dates indicated.  Our consolidated balance sheet data as of December 31, 2013 and 2012 and our consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011 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, 2011, 2010 and 2009 and our consolidated statement of operations data for the years ended December 31, 2010 and 2009 is derived from our consolidated financial statements for those years, which are not included in this Form 20-F.

 

1

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		As of December 31,
Consolidated Balance Sheet Data		2013		2012		2011		2010		2009
		(in thousands of euros)
ASSETS
Goodwill		1,829,141		1,869,899		1,895,101		189,448		174,000
Other intangible assets		946,435		969,095		1,008,307		78,299		69,385
Property, plant and equipment		840,238		810,107		775,869		434,131		371,705
Investments in equity accounted investees		35,765		2,566		1,001		598		383
Non-current financial assets		15,196		16,526		12,401		7,535		3,731
Deferred tax assets		34,601		24,717		18,106		34,889		33,395
Total non-current assets		3,701,376		3,692,910		3,710,785		744,900		652,599
Inventories		946,913		998,644		1,030,341		527,865		484,462
Trade and other receivables
Trade receivables		385,537		366,022		408,263		224,355		207,840
Other receivables		36,511		43,833		108,616		44,032		39,540
Current income tax assets		43,533		37,318		15,110		14,607		7,802
Trade and other receivables		465,581		447,173		531,989		282,994		255,182
Other current financial assets		1,200		460		16,904		12,946		8,217
Other current assets		17,189		14,960		9,395		80,628		7,345
Cash and cash equivalents		708,777		473,327		340,586		239,649		249,372
Total current assets		2,139,660		1,934,564		1,929,215		1,144,082		1,004,578
Total Assets		5,841,036		5,627,474		5,640,000		1,888,982		1,657,177
EQUITY AND LIABILITIES
Share capital		119,604		117,882		117,882		106,532		106,532
Share premium		910,728		890,355		890,355		121,802		121,802
Reserves		883,415		620,144		568,274		403,604		314,903
Treasury stock		0		(3,060	)	(1,927	)	(1,927	)	(677	)
Interim dividend		(68,755	)	0		0		0		0
Profit for the year attributable to the Parent		345,551		256,686		50,307		115,513		147,972
Total equity		2,190,543		1,882,007		1,624,891		745,524		658,572
Cash flow hedges		(25,791	)	(33,036	)	(21,184	)	(1,751	)	(1,948	)
Translation differences		(63,490	)	27,797		58,800		(50,733	)	(90,253	)
Other comprehensive income/(loss)		(89,281	)	(5,239	)	37,616		(52,484	)	(92,201	)
Equity attributable to the Parent		2,101,262		1,876,768		1,662,507		693,040		566,371
Non-controlling interests		5,942		3,973		2,487		14,350		12,157
Total Equity		2,107,204		1,880,741		1,664,994		707,390		578,528
LIABILITIES
Grants		7,034		5,855		1,366		2,088		2,311
Provisions		4,202		3,348		11,502		1,378		1,232
Non-current financial liabilities		2,553,211		2,690,819		2,945,788		675,859		715,738
Deferred tax liabilities		454,089		453,846		370,723		79,141		60,325
Total non-current liabilities		3,018,536		3,153,868		3,328,929		758,466		779,606
Provisions		51,459		55,139		81,112		4,365		4,702
Current financial liabilities		258,144		195,578		162,296		209,871		126,221
Debts with associates		2,683		2,668		2,435		1,162		—
Trade and other payables
Suppliers		273,621		228,405		280,722		160,678		120,909
Other payables		42,388		27,357		27,335		11,928		17,832
Current income tax liabilities		2,934		5,679		4,691		4,172		3,258
Total trade and other payables		318,943		261,441		312,748		176,778		141,999
Other current liabilities		84,067		78,039		87,486		30,950		26,121
Total current liabilities		715,296		592,865		646,077		423,126		299,043
Total Liabilities		3,733,832		3,746,733		3,975,006		1,181,592		1,078,649
Total Equity and Liabilities		5,841,036		5,627,474		5,640,000		1,888,982		1,657,177

 

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		For the Year Ended December 31,
Consolidated Statement of Operations Data		2013		2012		2011(1)		2010(1)		2009(1)
		(in thousands of euros, except for per share and share data)
Continuing Operations
Net revenue		2,741,732		2,620,944		1,795,613		990,730		913,186
Cost of sales		(1,323,880	)	(1,291,345	)	(968,133	)	(529,400	)	(468,678	)
Gross Profit		1,417,852		1,329,599		827,480		461,330		444,508
Research and development		(123,271	)	(124,443	)	(89,360	)	(40,656	)	(35,387	)
Selling, general and administration expenses		(558,461	)	(545,072	)	(459,259	)	(210,991	)	(182,593	)
Operating Expenses		(681,732	)	(669,515	)	(548,619	)	(251,647	)	(217,980	)
Operating Results		736,120		660,084		278,861		209,683		226,528
Finance income		4,869		1,677		5,761		4,526		7,067
Finance costs		(239,991	)	(284,117	)	(200,562	)	(49,660	)	(27,087	)
Change in fair value of financial instruments		(1,786	)	13,013		1,279		(7,593	)	(587	)
Impairment of gains/(losses) on disposal of financial instruments		792		2,107		(805	)	91		(245	)
Exchange losses		(1,303	)	(3,409	)	(3,477	)	1,616		(1,733	)
Finance result		(237,419	)	(270,729	)	(197,774	)	(51,020	)	(22,585	)
Share of profit/(losses) of equity accounted investees		(1,165	)	(1,407	)	(1,064	)	(879	)	51
Profit before income tax from continuing operations		497,536		387,948		80,023		157,784		203,994
Income tax expense		(155,482	)	(132,571	)	(29,795	)	(42,517	)	(56,424	)
Profit after income tax from continuing operations		342,054		255,377		50,228		115,267		147,570
Consolidated profit for the year		342,054		255,377		50,228		115,267		147,570
Profit attributable to the Parent		345,551		256,686		50,037		115,513		147,972
Profit/(loss) attributable to non-controlling interests		(3,497	)	(1,309	)	(79	)	(246	)	(402	)
Basic earnings per ordinary share		1.01		0.75		0.16		0.45		0.58
Average number of shares		340,505,298		342,701,194		308,036,270		258,899,952		255,442,596
Basic earnings per ordinary share from continuing operations		1.01		0.75		0.16		0.45		0.58
Cash dividend per ordinary share		0.20		—		—		0.13		0.38
Cash dividend per preference share		0.01		—		—		—		—

 

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(1)                                  In 2012, we changed the presentation of the consolidated statement of operations data by functions instead of by nature. We believe that this will enable a better understanding of the profitability of our business. Consequently, comparative data for 2011, 2010 and 2009 has also been modified, to conform to the current presentation. For more information please see our audited consolidated financial statements, which are included in this annual report on Form 20-F.

 

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		For the Year Ended December 31,
Consolidated Statement of Comprehensive Income		2013		2012		2011		2010		2009
		(in thousands of euros)
Consolidated profit for the year		342,054		255,377		50,228		115,267		147,570
Other comprehensive expenses
Items for reclassification to profit or loss
Translation differences		(91,610	)	(31,016	)	109,607		42,225		(4,145	)
Equity accounted investees (1)		(359	)	0		0		0		0
Available-for-sale financial assets — changes in fair value		0		0		0		0		(18	)
Available-for-sale financial assets — amounts taken to profit and loss		0		0		0		0		245
Cash flow hedges — effective part of changes in fair value		22,943		(25,140	)	(33,871	)	0		(3,275	)
Cash flow hedges — amounts taken to profit and loss		(11,471	)	6,300		2,870		324		80
Tax effect		(4,227	)	6,988		11,568		(127	)	1,178
Other comprehensive income/(loss) for the year, after tax		(84,742	)	(42,868	)	90,174		42,422		(5,935	)
Total comprehensive income for the year		257,330		212,509		140,402		157,689		141,635
Total comprehensive income attributable to the Parent		261,509		213,831		140,407		155,230		140,386
Total comprehensive income/(expense) attributable to non-controlling interests		(4,179	)	(1,322	)	(5	)	2,459		1,249

 

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(1)                                  In 2013, we changed the presentation of the consolidated statements of comprehensive income as required by IAS 1, effective for annual periods beginning on or after July 1, 2012.

 

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Exchange Rates

 

The following tables show, for the periods indicated, the exchange rate between the U.S. dollar and the euro.  This information is provided solely for your information and we do not represent that euro could be converted into U.S. dollars at these rates or at any other rate, during the periods indicated or at any other time.  These rates are not the rates used by us in the preparation of our audited consolidated financial statements included in this annual report on Form 20-F.

 

As used in this annual report on Form 20-F, the term “Noon Buying Rate” refers to the rate of exchange for euro, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.  The Noon Buying Rate for the euro on March 28, 2014 was $1.3753 = €1.00.  The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro.  Amounts are expressed in U.S. dollars per €1.00.

 

Annual Data (Year Ended December 31,)		Period End ($)		Average Rate ($) (1)		High ($)		Low ($)
2009		1.4332		1.3955		1.5100		1.2547
2010		1.3269		1.3216		1.4536		1.1959
2011		1.2926		1.4002		1.4875		1.2926
2012		1.3186		1.2902		1.3463		1.2062
2013		1.3766		1.3281		1.3816		1.2774

 

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Source:  Federal Reserve Bank of New York

 

(1)                                  The average of the Noon Buying Rates for the euro on the last day reported of each month during the relevant period.

 

Recent Monthly Data		High ($)		Low ($)
September 2013		1.3537		1.3120
October 2013		1.3810		1.3490
November 2013		1.3606		1.3357
December 2013		1.3816		1.3552
January 2014		1.3682		1.3500
February 2014		1.3806		1.3507
March 2014 (through March 28 th )		1.3927		1.3731

 

B.                                     Capitalization and Indebtedness

 

Not Applicable.

 

C.                                     Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D.                                     Risk Factors

 

Risk Relating to Our Structure, Shares and American Depositary Shares

 

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.

 

On November 10, 2013, we entered into a share and asset agreement, or the Novartis Agreement, with Novartis Vaccines and Diagnostics, Inc., or “NVD,” and, solely as a Guarantor, Novartis Corporation, or “Novartis,” which was subsequently amended on December 27, 2013 and January 9, 2014 to acquire Novartis’ diagnostic business. The transactions contemplated by the Novartis Agreement are referred to herein as the Novartis Acquisition. In connection with the Novartis Acquisition, we (i) entered into a credit and guaranty agreement dated as of February 24, 2014 (as amended, the “New Credit Facilities”), which consists of the “Senior Term Loans” and the “Revolving Loans” and (ii) issued $1.0 billion aggregate principal amount of 5.25% senior notes due 2022 (the “Notes”). As of the date of this annual report on Form 20-F, no amounts have been drawn on the Revolving Loans. As of December 31, 2013, after giving pro forma effect to the Novartis Acquisition, the entry into the New Credit Facilities and the offering of the Notes and we would have $5.4 billion of indebtedness outstanding.  See Item 5 of this Part I, “Operating and Financial Review and

 

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Prospects — B. Liquidity and Capital Resources — Sources of Credit,” for terms of the New Credit Facilities and Notes and for more detailed information.

 

Our high level of indebtedness could have significant adverse effects on our business, including the following:

 

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

 

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

 

·                                           our ability to obtain additional financing for working capital, capital expenditures, acquisitions, or general corporate purposes may be impaired;

 

·                                           we must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available to us for operations and other purposes;

 

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

 

·                                           our ability to fund a change of control offer may be limited;

 

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

 

·                                           our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and

 

·                                           we may be restricted 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, including the New Credit Facilities and the indenture governing the Notes, 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 Notes and the New Credit Facilities 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 additional debt, including under the New Credit Facilities, 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.”

 

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

 

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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.

 

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 New 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 such indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including the New Credit Facilities and our Notes, 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 to the shareholders of Grifols, S.A. or distributions 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 New Credit Facilities and/or our Notes. Upon the occurrence of an event of default under the New Credit Facilities, the lenders could elect to declare all amounts outstanding under the New Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders 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 New Credit Facilities. If the lenders under the New Credit Facilities accelerate the repayment of borrowings, we may not have sufficient assets to repay the New Credit Facilities and our other indebtedness, including our Notes.  Our borrowings under the New 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.

 

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.

 

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Our subsidiaries are legally distinct from us and, except for existing and future subsidiaries that will be guarantors of 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 U.S.

 

As a foreign private issuer under the Securities Exchange Act of 1934, or Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, 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 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 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 U.S. 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 U.S. 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 U.S. 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.”

 

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.

 

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 Grifols family and Scranton Enterprises B.V. own, directly and indirectly, 35.3% of our Class A shares.  The Class A shares exercise 100% of 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 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 our without notice;

 

·                                           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, or, 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 the Spanish Automated Quotation System in euro.  In addition, our Class B shares are traded in the U.S. 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 euro 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., or 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, or 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.

 

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

 

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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.

 

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 U.S.  A substantial portion of our assets and the assets of our subsidiaries are located outside of the U.S. In addition, nearly all of our directors and officers and certain of our subsidiaries’ officers are nationals or residents of countries other than the U.S., and all or a substantial portion of such persons’ assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us or certain 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 U.S. predicated upon civil liability under the Securities Act.  It may also be difficult to recover fully in the U.S. 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 U.S. 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.

 

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 regulations 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 sales and profits. In addition, faulty or

 

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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 capacity 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.

 

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, or, collectively, “adverse events.”  For the most part, these adverse events are known, are 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, or 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.

 

·                                           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 IVIG sometimes produces 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 IVIG 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 U.S. to Kedrion S.p.A, a corporation organized under the laws of Italy, or Kedrion, sometimes produces the following adverse events:  allergic type reactions; tingling in the arm, ear and face; blurred vision; headache; nausea; stomach ache; and jittery feeling.

 

·                                           The use of Prolastin® or its successor in the U.S. and Canada, 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

 

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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, we rely on physicians to prescribe and administer it 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. 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 federal regulations that set forth cGMP requirements for blood and blood 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.

 

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.

 

For example, we finished the construction of a new plant at our facility located in Los Angeles, California in 2013, which we refer to as our Los Angeles facility, for the production of IVIG, as well as construction of a new fractionation plant at our Clayton, North Carolina plasma fractionation and manufacturing facility, which we refer to as our Clayton facility. We have begun the validation process for these plants with the appropriate regulatory authorities. We are also in the process of constructing a new, upgraded facility to assume production of the intermediate immunoassay antigen and antibody products now manufactured at our Emeryville, California plant. To validate our manufacturing processes and procedures following completion of 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 European Medicines Agency, or EMA, routinely inspect our facilities to assess ongoing compliance with cGMP. If FDA, EMA or other 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 sales 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.

 

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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 U.S., 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, which 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, have significantly reduced the potential donor pool. The appearance of new viral strains could further reduce the potential donor pool. Also, improvements in socioeconomic conditions in the areas where our and our suppliers’ collection centers are located could reduce the attractiveness of financial incentives for donors, resulting in increased donor fees or a reduction in the number of donors.

 

·                                           Regulatory requirements.   See “—Disruption of the operations of our plasma collection centers 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 plasma from alternative sources, which may not be available on a timely basis.

 

Disruption of the operations of our plasma collection centers 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 by the FDA and approved by the regulatory authorities, such as the EMA, of those countries in which we sell our products. When a new plasma collection center is opened and on an ongoing basis after its licensure, it must be inspected by the FDA and the EMA for compliance with cGMP and other regulatory requirements. An unsatisfactory inspection could prevent a new center from being licensed or risk the suspension or revocation of an existing license.

 

In order for a plasma collection center to maintain its license, 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 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 the remaining unlicensed centers, 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.

 

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 would have a material adverse effect on us.

 

We have historically derived a significant portion of our net sales from our immunoglobulin products, including our IVIG products. In 2013, our IVIG products accounted for approximately 45% of our net sales. If any of these IVIG 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

 

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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.

 

Our products face increased competition.

 

Our products have experienced increased competition. Each of Baxter, Biotest, CSL Behring, Kedrion and Octapharma has a 10% liquid IVIG product in the U.S. 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 IVIG products as many customers have become increasingly price sensitive with respect to IVIG products. If customers demand lower priced products, we may lose sales or be forced to lower our prices.

 

Until December 2002, Talecris’ A1PI product, Prolastin® A1PI, was the only plasma product licensed and marketed for the therapy of congenital alpha-1 antitrypsin deficiency-related emphysema in the U.S. Baxter and CSL Behring received licenses for Aralast and Zemaira, respectively, which were launched in the U.S. in 2003. In addition, Kamada Ltd. received approval of its biological license application, or BLA, for its A1PI, Glassia, on July 1, 2010.

 

While LFB Biomedicaments has a license in France for Alfalastin, we have the only licensed A1PI products with EMA Community marketing authorization. Of our competitors that are currently pursuing licensing trials in Europe, one offers a more concentrated intravenous formulation than the ones we offer in Europe. Should our competitors receive approvals in Europe sooner than expected, it will impact our unit volumes and share of sales. Our current and future competitors may increase their sales, lower their prices or change their distribution model, causing harm to our product sales and financial condition. Also, if the attrition rate of our A1PI patient base accelerates faster than we have forecast, we would have fewer patients and lower sales volume.

 

Similarly, if a new A1PI formulation with a significantly improved rate of administration (such as aerosol inhalation) is developed, the market share of our A1PI products could be negatively impacted. Similarly, several companies are attempting to develop products which could be substitutions for A1PI, including retinoic acid, oral synthetic elastase inhibitors and gene therapy. While these products are in the early stages of development, they may eventually be successfully developed and launched.

 

In addition, our plasma-derived products face competition from non-plasma products and other courses of treatments. For example, in 2008, GSK and Amgen launched thrombopoietin inhibitors targeting ITP patients, which may reduce the demand for IVIG to treat ITP.

 

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 U.S. and Europe, compete with our own 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, some with extended half-lives, could compete with our products and reduce the demand for our products. Crucell and Sanofi Pasteur have completed Phase II clinical trials for a monoclonal rabies product to compete with our rabies hyperimmune product. In February 2009, GTC Biotherapeutics obtained FDA approval of a competitive antithrombin III, or ATIII, a product derived from the milk of transgenic goats for the treatment of hereditary antithrombin deficiency. This product now directly competes with our product, Thrombate® III, which had previously been the only FDA-approved ATIII product. 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 do not currently sell any recombinant products. We are developing recombinant versions of A1PI and plasmin, but we cannot be certain that any of these products will ever be approved or commercialized. As a result, our product offerings may remain plasma-derived, even if our competitors offer competing recombinant products.

 

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, in 2010, Biotest introduced a subcutaneous anti-hepatitis preparation and is registering the product in European countries in which we market our anti-hepatitis B IVIG, which could negatively impact our sales.

 

Beginning in the late 1980s, Talecris (and prior to 2005, Bayer HealthCare LLC, or Bayer) was the “supplier of record” for the Canadian blood system. Talecris was awarded five-year contracts with Canadian Blood Services and Héma-Québec, which jointly operated the Canadian blood system, in December 2007 that became effective April 2008 and terminated in March 2013. Canadian Blood Services and Héma-Québec ended their partnership in 2012 and now negotiate separately with suppliers. Operating separately, Canadian Blood Services comprises approximately 70% and Héma-Québec comprises approximately 30% of the Canadian market for

 

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plasma products and fractionation services. In 2013, Canadian Blood Services selected us as its primary supplier of both IVIG and fractionation services pursuant to a five-year contract that became effective in April 2013. Héma-Québec negotiated a reduced four-year contract with us that also became effective in April 2013, under which we supply a reduced portion of Héma-Québec’s plasma-derived products and no longer provide fractionation services. Under these new contracts, we maintained our position as the primary immunoglobulin supplier to Canada.

 

We face competition from companies with greater financial resources.

 

We operate in highly competitive markets. Our principal competitors include Baxter, 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 sales or a decrease in our profit margins.

 

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

 

Technological advances have accelerated changes in many bioscience industries in recent years. Future technological developments could render our production processes for plasma derivative products 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 investment from existing funds or raise sufficient capital to make such investments.

 

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

 

The possible appearance of new pathogens 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.

 

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 that are inherent in the manufacturing, distribution and sale of plasma-derived therapeutic protein products. 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 capable of transmitting viruses and pathogens, whether known or unknown. Therefore, our plasma and plasma derivative products, if donors are not properly screened or the plasma 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.

 

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