Grifols Healthcare BPI EQUITY RESEARCH. Buy. Spain. Plasma still has Value. Medium-Risk. 17th December Grifols vs IBEX 35 vs BE Pharma Index

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1 BPI EQUITY RESEARCH Grifols Healthcare Plasma still has Value (Price Target cut from to 38.30; Buy recommendation maintained) Grifols (GRF) maintains a solid position to benefit from the expected growth of the overall market, which we estimate at 5.9% CAGR in FY13-17 F. The plasma derivatives industry is currently undergoing a round of capacity increases until 2019 that should allow its major players to adjust supply to the expected increase in demand, which in our view should not create an imbalance in the industry. With its new facility in Clayton starting operations in 2015, GRF will reach a total fractionation capacity of 12.7mn lts/year and should reach a 22% mkt share of total fractionation capacity by 2019, which compares to the estimated 20% market share in FY12. We revised our estimates to encompass for (1) lower than we previously expected Diagnostic and Raw Materials Others Revenues, (2) slightly lower volumes growth in the Biosciences Division offset by a positive USD evolution, (3) slightly higher opex, and (4) lower than previously expected effective tax rate. We downwardly revised our FY13-17 F Adj. EBITDA estimates by an average 6%. In FY15 F -16 F we expect GRF to post Adj. EBITDA margins below its medium-term target of 31-33% due to the ramp-up of its new fractionation facility in the US and the gradual reduction of royalties. In FY17 F we expect it to reach a similar margin to that of FY14 F, 32.3%. Given GRF debt exposure to the USD our YE15 F Net Debt estimate increased by 10%. The stock recently de-rated on the back of weaker than peers Biosciences Revenues evolution and increased perception of margin pressure. However, at this point we see Grifols as an attractive valuation opportunity even though the company lacks short-term triggers apart from earnings visibility. In the medium-term, however, potential announcements of new capacity and, as Net Debt gradually reduces, newsflow on further debt restructuring, new acquisitions or an increased dividend pay-out could become triggers for the stock. We are setting a E YE15 Price Target for A shares (-11% LfL) and see Grifols as an interesting risk-reward opportunity. BUY. NUM NSM NQM NOM NMM UM dêáñçäë f_bupr Buy Medium-Risk 17th December 2014 Grifols vs IBEX 35 vs BE Pharma Index píçññ=smm=bìêçéé= eé~äíüå~êé aéåjno ^ìöjnp ^éêjnq aéåjnq Source: Bloomberg. Spain Stock data Price A/B (27 th Dec): 32.30/26.25 Price Target (YE15): 38.30/32.55 (B) # shares (mn): 344 M. Cap ( mn) / F. Float: / 60% Reuters/Bloomberg: GRF.MC/GRF SM Avg. Daily Vol. [ 000]: Major Shareholders: Founders (29.6%); Capital Research (5.0%); Blackrock (4.9%); Fidelity (1.0%) Estimates F 2015 F 2016 F 2017 F PE Adj Dividend yield n.s. 0.0% 1.3% 1.6% 1.8% 2.1% 2.4% FCFE Yield -21.9% 2.7% 1.1% -9.7% 0.0% 0.9% 1.3% FCFF Yield 1.1% 2.9% 3.5% 4.8% 5.2% 5.8% 6.4% PBV EV/EBITDA (1) EV/Sales (1) (1) EV is fixed with current market cap and MV of remaining items. Analyst Tiago Veiga Anjos, CFA tiago.veiga.anjos@bpi.pt Phone Historical Recommendation Date 18-Sep Jan May-13 Recommendation Neutral Buy (A Shares) Buy (B Shares) Available on our website: BPI Online, and Bloomberg at NH BPD

2 Equity Research Grifols December 2014 BPI vs. Consensus Stock Momentum Company: Sector: Grifols Minibase STOXX 600 / Health Care Price Performance Forward P/E and EV/EBITDA Valuation monitor Relative Valuation EV/EBITDA BPI Consensus Sector P/E BPI Consensus Sector PBV BPI Consensus Sector Dividend yield BPI 1.6% 1.8% 2.1% Consensus 1.7% 1.9% 2.1% Sector 2.8% 2.9% 3.1% 1 Y 3 M YTD -10% 0% 10% 20% 30% Grifols DJ Euro Stoxx Healthcare Market Price Rating (E) 45 Price Target Consensus Price Forward P/E EV/EBITDA Market Recommendations Negative 29% Neutral 14% Positive 57% PL and B\S monitor BPI estimates/consensus Revenues 0.5% 0.0% -2.0% EBITDA -0.7% -4.3% -3.3% EBIT -3.1% -7.4% -6.2% Net Profit 2.4% 0.9% 0.8% Net Debt 4.2% 3.1% -0.1% Capex 568.2% 7.6% 14.6% Profitability monitor EBITDA Margin BPI 32.1% 30.2% 31.0% Consensus 32.2% 31.6% 31.9% EBIT margin BPI 25.5% 24.1% 25.8% Consensus 26.1% 26.4% 27.0% Net Profit margin BPI 16.9% 16.9% 17.8% Consensus 16.1% 16.2% 17.4% Key leverage ratios Net Debt/EV BPI Consensus Net Debt/EBITDA BPI Consensus Nov-13 Apr-14 Aug-14 Dec-14 Fair Value Comparison (E) CAGR Adj. EPS Net Profit 30 EBIT 20 EBITDA 10 Revenues 0 P/E PBV Consensus BPI 0% 5% 10% 15% 20% Current M arket Price BPI Consensus EBITDA Consensus (E mn) EPS Consensus (E mn) 1, FY16 FY16 1, ,100 FY15 FY FY FY Jun-11 Mar-13 Dec-14 Jun-11 Mar-13 Dec-14 Source: Factset, Bloomberg and BPI Equity Research. 2

3 Grifols at a Glance Grifols Plasma Fractionation Capacity (mn liters/year) % % 23* 4* * Source: Grifols. Protein Purification Capacity (shown as comparison to plasma fractionation capacity) Source: Grifols. /0* # 1 Grifols FY14 F Consolidated Revenues Breakdown ( 3.3bn) Grifols Bioscience FY14 F Revenues ( 2.5bn) Consolidated Revenues ( mn) Adj. EBITDA Mg. Grifols Main Bioscience Products and Applications " #$ #$ #$ #$# #$"# #$# #$%# ()* +, -.* Source: Grifols, BPI Equity Research. % of GRF s Protein FY14 F Revenues Main Indication IG 42% - Immunological Deficiencies - ITP (Idiopatophatic Trombocytopenic Purpura) - CIPD Alpha-1 11% - Congenital A1PI deficiency-related Albumin 10% - Traumatic or Hemorragic shock - Severe Burns - Liver Disease pdfviii 6% - Hemophilia A - von Willebrand congenital disease Source: Grifols, BPI Equity Research. 3

4 CONTENTS 5 Valuation Recommendation 9 Bioscience Division 17 Diagnostics Division 18 Hospitals Raw Materials Others Division 18 Consolidated Revenues 19 EBITDA Margin Under Pressure in FY15F and FY16 F 20 Controlled Capex as Net Debt Gradually Reduces 22 Lower Effective Tax Rate 23 Working Capital: A Key Variable 24 Change in Estimates: Lower Revenues Margins 4

5 VALUATION RECOMMENDATION Grifols has been the subject of a strong de-rating since reaching its historical high on the 10 th June this year. In fact, the stock dropped 18% since then "helped" by a weak set of Q2 results, not entirely reverted with a somewhat solid set of Q3 earnings, and the increasing perception that consensus would have to downwardly adjust operating margins in FY15 F and FY16 F. Plasma Derivatives Industry Performance (in ) 1M 3M 6M YTD 12M 24M Grifols -6% -1% -22% -6% 0% 34% Grifols B -9% -8% -20% 4% 8% 53% CSL 0% 11% 20% 27% 33% 34% Baxter 0% 2% 7% 16% 22% 21% Biotest 7% 12% -2% 22% 29% 107% Ibex 35-1% -8% -10% 2% 7% 26% Stoxx 600 Healthcare -1% -3% 3% 16% 21% 38% Source: Bloomberg. Grifols is often compared with CSL, which as a major player in the plasma derivatives market stands as the most direct similar peer even though each of them holds other business lines (Diagnostics, comprising Immunohematology and Equipment, and Hospitals in the case of Grifols and Immunohematology and Vaccines in the case of CSL). In terms of stock performance, however, YTD they have taken divergent paths, particularly over the past 6 months when the abovementioned factors affecting Grifols came into play coupled with a strong set of 2H14 results for CSL (CSLs FY ends in June). Notwithstanding, we note that Grifols vs. CSL ratio is now trading very close to its historical average. We value Grifols through a DCF with an explicit period until FY35 F and using a 7.4% WACC and 2% perpetuity growth. Our YE15 Price Target is set at 37.05/ share. We are not considering any contribution from Grifols RD pipeline, namely from the study of Albumin replacement as a treatment for Alzheimer. Ratio Grifols vs CSL (in ).3.5 #/ Source: Bloomberg. Grifols Valuation ( mn) EV/EBITDA FY14 F FY15 F FY16 F Value of the Firm o.w. Terminal Value Net Debt (Cash) Factoring 261 Minorities 7 Treasury Stock 61 Financial Investments 67 Value of Equity Shares Outstanding (mn) 344 Fair Value ( ) A shares (mn) B shares (mn) Historical Discount of B shares -15% A shares Fair Value ( ) B shares Fair Value ( ) DCF Assumptions Re 9.2% Rf 3.4% Beta Equity 1.0 Market Premium 6.0% Rd 4.0% Tax Rate 21.0% D/EV 30.0% WACC 7.4% g 2.0% Source: BPI Equity Research 5

6 Equity Research Grifols December 2014 Valuation Multiples P/E EV/EBITDA EBITDA Growth EBITDA Margin FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 CSL % 11.5% 8.0% 35.2% 35.6% 33.9% Baxter % -3.2% 6.0% 26.4% 25.8% 26.5% Biotest % 21.9% 15.8% 16.4% 18.3% 19.2% Average % 10.1% 9.9% 26.0% 26.6% 26.6% Grifols % 0.6% 6.8% 32.1% 30.2% 31.0% Source: Factset, BPI Equity Research. FW 12M EV/EBITDA: Grifols vs. CSL PM FW 12M EV/EBITDA: Grifols vs. Historical Average PM dêáñçäë OM `pi OM doc=eáëíçêáå~ä=^îéê~öé NM NM dêáñçäë M g~åjmt pééjmv ^éêjno aéåjnq M g~åjmt pééjmv ^éêjno aéåjnq Source: Factset GRIFOLS A VS. GRIFOLS B Since the acquisition of Talecris Grifols holds two classes of shares: Grifols "A" and Grifols "B". Both shares are entitled to the same economic rights. However, the "B" shares do not have voting rights and receive a 0.01 preferred dividend. Additionally, Grifols "B" shares have lower liquidity than the "A" shares. Over the past 3 months, the "A" shares traded a daily average volume of 40mn whereas the "B" shares volume stood at 4mn. Since its listing the "B" shares have traded at a discount to the "A" shares and the historical average discount stands at 26%. However, the gap between both stocks has been gradually reducing while currently reaching 13%. In our definition of A and B shares Price Target we are assuming a 15% discount, the last 3 months everage. Ratio Grifols A vs.b NKUM NKSM NKQM NKOM We continue to see Grifols as a solid company in an industry with growth perspectives and high barriers to entry. Grifols should remain as a growth story albeit at a more moderate pace than in recent years following the acquisition of Talecris. Moreover, Grifols has the potential of becoming an interesting yield play if and when it decides to increase its pay-out following its demanding capex plan and the gradual reduction of debt. NKMM gìåjnn ^ìöjno låíjnp aéåjnq Source: Bloomberg. 7

7 Grifols valuation is significantly sensitive to variations of its main proteins volume growth, particularly IVIG. If assuming IVIG volumes to grow 1 p.p. above our base case each year, our YE15 Price Target would increase by 17.5%. Conversely, if assuming -1 p.p. each year would translate into a 15.1% decrease of our Fair Value. We also acknowledge that Grifols is strongly exposed to the USD. However, according to our estimates, the natural hedge from having a significant part of its operations also in USD (plasma collection in 150 centres in the US and fractionation and purification plants in Clayton and Los Angeles) limits the impact of USD variations on Grifols fair value. Grifols YE15PT Sensitivity to IVIG and Albumin Volumes Growth IVIG -1pp 0pp +1pp -1pp -18.2% -3.2% 14.2% Albumin 0pp -15.1% 0.0% 17.5% +1pp -11.5% 3.6% 21.2% Note: +/- 1pp change each year. /USD: exchange rate assumptions 14 F 15 F 16 F 17 F Sensitivity to USD Average pp 2% End of Period pp -2% Note: +/- 5pp change each year. The impact is even more limited if we take in consideration a single year swing. For instance, if the USD depreciated 5% relative to our 2015 estimate with all other years unchanged, Grifols EBITDA would come 2.0% below our base case, which would be partially offset by lower financial costs translating into a 1.5% negative impact at Net Profit. However, since most of the debt is denominated in USD, our YE15 PT would actually be marginally higher (+0.04%) due to a lower Net Debt. Grifols YE15PT Sensitivity to Factor VIII and Alpha-1 Volumes Growth Factor VIII -1pp 0pp +1pp -1pp -5.7% -4.2% -2.6% Alpha-1 0pp -1.5% 0.0% 1.6% +1pp 3.4% 4.8% 6.5% Note: +/- 1pp change each year. Grifols is currently trading at a 12.4x FY15 EV/EBITDA multiple, slightly below its peers average but at a 27% discount to CSL, which we believe seems exaggerated even accounting for the fact that CSL currently commands a faster EBITDA growth rate in the FY15 F -FY16 F period. Grifols historical average 12M Forward EV/EBITDA discount to CSL stands at c.10%, although with some variability in its evolution. Our YE15 Price Target implies a 14% discount relative to CSLs FY15 EV/EBITDA multiple and 13% discount in FY16 F. 6

8 However, in FY15 F and FY16 F, margins should be pressured by specific events, such as the gradual reduction of Royalties coming from Diagnostics (5% of FY14F Adjusted EBITDA) and the launch and utilisation ramp-up of the company s new fractionation and purification facility in Clayton as it starts to operate in parallell with the existing facility. Overall, we expect both effects to negatively impact EBITDA Margin by 200 bps. Following this period we expect the company to gradually increase its EBITDA margin to the top of the medium-long term 31-33% EBITDA Margin it guided to in its presentation following the 3Q14 results disclosure. Notwithstanding, we believe that recently the stock has been overly penalised on the back of the increased perception of lower margins in the next couple of years and the somewhat sluggish Bioscience Revenues performance in 9M14 while in the short-term we see no visible triggers for the stock apart from earnings visibility. Nevertheless, at this point and from a valuation perspective, we believe Grifols is an investment worth taking from a risk-reward perspective. BUY. 8

9 BIOSCIENCE DIVISION (75% OF CONSOLIDATED REVENUES) Plasma Derivatives Worldwide Demand For quite some time already the plasma derivatives worldwide demand has been tagged to grow at a 6-7% pace in the medium-term. Indeed, we do expect the plasma derivatives market to grow at a 5.9% CAGR from 13 F -17 F (4.1% annual growth from 13 F -25 F ), albeit with differing performances from different proteins: 1. IG (42% of consolidated sales): we expect a 7.5% CAGR in the 13 F -17 F (5.0% annual growth from 13 F -25 F ) fuelled by still low consumption per capita in Western Europe and Japan, increasing penetration in emerging markets and improvements in the diagnosis of CIDP (Chronic Inflammatory Demyelinating Polyneuropathy, a neurological disorder characterised by progressive weakness and impaired sensory function in the legs and arms); 2. Albumin (10% of sales): we estimate a 4.9% annual growth between 13 F -17 F (3.9% annual growth from 13 F -25 F ) backed by a continued growth in emerging markets, particularly in China, which has been fuelling demand in recent years and should continue to do so in the near future and market share gains following FDAs safety warning on increased mortality rate and severe renal injury with the use of hydroxyethyl starch products as a blood volume expander, which benefited the use of both albumin and crystalloids. This should lead to a higher usage rate in indications such as sepsis (potentially fatal whole-body inflammation caused by severe infection) and cardiac surgery, namely patients undergoing cardio pulmonary bypass; 3. FVIII (6% of sales): we estimate plasma derived FVIII (pdfviii) to recover from a weak 2014 on the back of stronger growth in emerging markets as the usage in developed markets matures and the products suffers some competition from FVIII recombinants (rfviii). pdfviii should rise at a 3.0% CAGR between 13 F -17 F (2.0% annual growth from 13 F -25 F ); 4. Alpha-1(11% of sales): should be the protein growing at the fastest pace as the Alpha-1 Antitrypsin (AAT) Deficiency is still significantly underdiagnosed. AAT is mainly produced in the liver and its main function is to protect the lungs from inflammation caused by infection and inhaled irritants. The low level of AAT in the blood occurs when the AAT is abnormal and cannot be released from the liver at a normal rate. This leads to the build-up of excess AAT in the liver than can cause liver disease and a decrease of AAT in the blood that can lead to lung disease. The symptoms, however, are similar to other diseases (COPD, asthma), which can lead to erroneous diagnostics. As such, main players in the plasma derivatives industry, namely Grifols, CSL and Baxter have developed easy to use test-kits to detect the absence of AAT in the blood, which should reduce the current underdiagnoses of the disease. We estimate Alpha-1 to grow at a 7.9% pace between 13 F -17 F (5.4% annual growth from 13 F -25 F ). Plasma Derivatives Products Worldwide Demand CAGR ( mn) F 2014 F 2015 F 2016 F 2017 F 13 F -17 F IVIG % Albumin % FVIII % Alpha % Others % Total % 9

10 Plasma derivatives growth rates that had initially been supported by significant improvements in the usage of plasma proteins in developed markets should now be somewhat replaced by expected positive developments in emerging markets. Albeit growth should persist in developed markets for the main plasma proteins (IVIG, Albumin, FVIII and Alpha-1), this should come from improved diagnostics and increasing penetration of plasma proteins for current indications and development of further new indications. This view is quite aligned with that of players in the industry, including Grifols, which, however, does not provide detailed information by protein. Conversely, Biotest usually provides its vision on each of the proteins it produces, which stands relatively close to our estimates with the exception of pdfviii where Biotest sees a slower growth going forward. Biotest estimates a 4% growth of the total FVIII market led by a 6% growth in recombinant products and only a 2% growth in plasma derived FVIII between F. Plasma Proteins Growth: BPI vs. Biotest estimates Biotest BPI IVIG 5.6% between F 5.0% between F Albumin 4-6% between F 4.7% between F FVIII 2.0% between F 2.7% between F Source: Biotest (3Q14 Results Presentation); BPI Equity Research. Plasma Derivatives Worldwide Supply In 2011 the Worldwide Plasma Fractionation Capacity was estimated at c.40mn litres/year with a capacity utilisation of c.80% ("Production of Plasma Proteins for Therapeutic Use" edited by Joseph Bertolini, Neil Goss and John Curling, and published by Wiley). Since then, the plasma industry major players have announced several capacity increases in order to accommodate to the growing demand, particularly that of IG: - Baxter announced a USD 1bn investment to build a new manufacturing facility at Covington (Georgia, US), which will include operations supporting plasma fractionation, purification, fill-finish and a testing lab. The new plasma fractionation facility should add up to 3mn litres of new capacity annually whereas commercial production is scheduled to begin in Meanwhile, in order to overcome some capacity constraints, Baxter has entered into an agreement with Sanquin (Netherlands) that will provide Baxter with up to 1.6mn litres of incremental plasma fractionation capacity. The agreement is for at least 10 years, with production beginning in 2014 and reaching the full 1.6mn litres by the end of 2016; - CSL announced a USD 450mn investment to increase its fractionation capacity at Kankakee (Illinois, US; USD 240mn) and IG and albumin manufacturing capacity at Broadmeadows (Australia; USD 210mn). The company did not detail the incremental fractionation capacity this investment will lead to, which we estimate at c.2mn litres; 10

11 - Following the acquisition of Talecris, Grifols implemented an investment plan leading to the increase of its plasma fractionation and major proteins purification capacities. Upon completion of the plan in 2016, Grifols should reach an annual fractionation capacity of 12.5mn litres from a joint 8.4mn prior to the acquisition; - Octapharma is also investing in the increase of its plasma fractionation capacity by We assume annual capacity to reach 5mn litres in 2017 from a current 3.5mn litres capacity; - Biotest plans to more than double its current fractionation capacity from the current 1.45mn litres to 3.0mn litres in 2019; 2012 E Global Plasma Fractionation Capacity (41mn litres/year) After the completion of all these investment programs we expect global fractionation capacity to reach 57mn litres, a 41% increase from 2011 (4.4% CAGR from 2011 E F ). However, we do not expect this increase in capacity by several players to result in an unbalance between demand and supply. In our view, plasma market players have been investing in capacity to take advantage of the expected growth in the plasma derivatives products demand, particularly IG. Moreover, depending on the expectations for demand beyond 2019 we could see a new round of capacity investments being announced in coming years. We recall that (1) due to heavy capex requirements and very strict regulatory frameworks for approval, new facilities usually need 5-7 years before beginning production; and (2) most of the new facilities being built at this time have accommodated modular systems that should allow further capacity increases, potentially with a lower capex, in the future E Global Plasma Fractionation Capacity (57mn litres/year) Plasma Derivatives Market: Supply vs. Demand % " 5 " % 5 " 0*+ 3 11

12 Grifols Positioning We believe Grifols stands in a favourable position to benefit from the expected demand growth in plasma derivatives products following the conclusion of its current capex plan in By then, Grifols will have increased its fractionation capacity from 8.0mn litres in 2011 to 12.5mn litres in Please note that Grifols new fractionation facility in Clayton will start operating in Additionally, Grifols is also undergoing purification capacity increases in its major proteins in order to adjust to such a fractionation capacity increase and accommodate to the expected growth in demand, particularly that of IG. Grifols Plasma Fractionation Capacity (mn liters/year) Grifols Purification Capacity Utilisation Rate Source: Grifols. " % 23* 4* * 2013 E 2017 F IVIG 97.6% 81.2% Albumin 87.8% 51.9% FVIII 93.1% 47.3% Alpha % 76.8% Protein Purification Capacity (shown as comparison to plasma fractionation capacity) 0* 0* "0* "0* Source: Grifols. /0* # 1 With the added capacity we believe Grifols has enough headroom to accommodate expected medium-term growth in the major proteins it produces while it evaluates the need for further potential capacity increases beyond In its latest Investors and Analysts Meeting back in June, the company already stated that 2015 would be key to start evaluating the need for further capacity increases since due to regulatory requirements it would be unlikely for new capacity to come on stream before

13 Grifols Bioscience - Protein by Protein Grifols Major Proteins Evolution ( mn) 2014 F 2015 F 2016 F 2017 F IVIG Volume 6% 6% 5% 5% Price -3% 4% 0% 0% GRF Volumes Mkt Share 23.8% 23.5% 23.3% 23.1% GRF Revenues Mkt Share 29.3% 29.3% 29.0% 28.8% Albumin Volume 1% 4% 4% 4% Price 1% 3% 0% 0% GRF Volumes Mkt Share 19.2% 19.1% 19.0% 18.9% GRF Revenues Mkt Share 22.8% 22.8% 22.8% 22.8% FVIII Volume -8% 2% 2% 2% Price 0% 4% 0% -1% GRF Volumes Mkt Share 14.7% 14.5% 14.4% 14.2% GRF Revenues Mkt Share 22.8% 22.6% 22.4% 22.2% Alpha-1 Volume 6% 5% 5% 5% Price 0% 7% 1% 1% GRF Volumes Mkt Share 66.9% 67.4% 66.6% 66.1% GRF Revenues Mkt Share 68.0% 66.7% 65.4% 64.5% Grifols Bioscience FY14 F Revenues ( 2.5bn) Grifols Bioscience FY17 F Revenues ( 3.0bn) IVIG: in terms of volumes we expect Grifols to continue to grow at a 5.0% CAGR in F, which stands below our expected growth rate for the IG global market. We prefer to remain conservative as Baxter launched Hyqvia, its subcutaneous IG infusion with recombinant human hyaluronidase, in the US after finally being approved by the FDA. Unlike other subcutaneous IG products, namely CSLs Hizentra, which require weekly of bi-weekly infusions, Hyqvia requires a monthly infusion. Grifols is present in the subcutaneous segment through Gamunex. Still, in the mid-long term we still expect increasing population and life expectancy, increasing penetration as a treatment for CIDP (Chronic Inflammatory Demyelinating Polyneuropathy) and increased use of IVIG in emerging countries. Grifols has been focussing on these markets and has set up the basis to grow in (1) LatAm, particularly in Brazil; (2) China and Southeast Asia, while establishing a new legal entity in China (Grifols Pharmaceutical Consulting) and (3) Turkey and the Middle East. Grifols currently has direct presence in Dubai. However, Turkey is also a primary focus and Grifols is developing a new commercial model that involves a closer presence in the country. 13

14 Recent pricing trends have shown a continued growing trend in the US market supported by a still strong demand. However, that is not the case in Europe where, according to Biotest data, the trend has been slightly downwards most likely affected by the austerity measures imposed in the healthcare sector during the recent economic crisis despite a still sound demand for the product. We expect IVIG prices to remain relatively stable going forward. However, in 2014 F we estimate a 3% fall in Grifols average selling price as a result of an unfavourable fx evolution but also an intensification of competition in the attractive US market, which in our view led the company to divert some of its IVIG sales to other markets that command lower prices. The same should happen in 2015 F although it should be less visible due to a favourable evolution of the USD. Trend Curves of IVIG Prices (Jan12-Jun14) Biotest (EU) vs. US Industry Average ( /gram) "" 8*+3) " " 98): 6*.3 6*.3 6*.3 (1) The chart shows the linear trend curves of the reported per gram prices. (2) Biotest EU average includes Austria, Germany, Hungary, Italy, Spain, Switzerland and the UK. (3) 30 th June constant exchange rate applied to US prices. Source: Biotest. Overall, we estimate Grifols IVIG revenues to rise at a 5.9% CAGR from F. Albumin: growth in this protein has been recently supported by a strong increase of its usage in the Chinese market, which we expect to continue in coming years as growth should also pick-up in other emerging markets. As the global Albumin market, Grifols should also keep benefiting from an increased use of Albumin in developed markets due to the safety warning related with the use of hydroxyethyl starch products as blood volume expanders. However, in FY14 F Albumin sales were "affected" by a tough comparison with FY13 as Grifols took advantage of the strength of the Chinese market to fractionate more Albumin from intermediate paste inventories it still held at Talecris. As such, we estimate Grifols volumes to grow at a 3.2% annual pace in the F period. Grifols Albumin revenues should grow at a 4.1% CAGR since we assume a 0.8% CAGR in Albumin prices in the same period mostly due to the expected favourable evolution of the USD in FY15 F. 14

15 FVIII: pdfviii has been somewhat affected by the growth of recombinant products and the postponement of tenders that have affected growth particularly in We continue to believe that there is room for moderate growth in the pdfviii market as its price advantage when compared to recombinants should continue to fuel growth in emerging markets as these initiate programs to battle haemophilia. Recombinants products are also at a transition stage at a time when several players (Baxter, Bayer, CSL, Novo Nordisk, Octapharma) are currently engaged in the development of new generation long-acting recombinants. At the time of its FY14 results disclosure in August, CSL justified a weak performance from its Recombinant FVIII product, Helixate, with the large number of clinical trials underway in which patients were receiving medication at no cost. Notwithstanding, Baxters Haemophilia Division showed a healthy 8.4% YoY growth at 9M14 (6.2% and 10.2% YoY growth in the US and International markets, respectively). Additionally, there have been some efforts in the development of gene therapies in the haemophilia market, which if successful could eventually provide a cure instead of a treatment. However, we are still several years away from perceiving the future of this new path. RD Developments in the Hemophilia segment Long-Acting Recombinants 1 st Generation 2 nd Generation Gene Therapy Baxter BAX-855 BAX-826 BAX-335 (FIX) CSL CSL-627 CSL-654 (FIX) Novo-Nordisk N8-GP Biogen Idec Eloctate XTEN Program Bayer BAY Bio Marin BMN-270 Shire/Sangamo ZFN-mediated gene (FIX) Source: Company Releases. We expect Grifols pffviii Revenues to rise 0.2% annually from FY13-FY17 F, mostly affected by the performance in FY14 F. Alpha-1: should remain the fastest growing protein in Grifols universe as the diagnosis of the disease improves. Both Grifols and CSL have developed kits helping to assess whether a patient has Alpha-1 deficiency. Moreover, Grifols is developing an easy to use kit that could determine the presence of the Z-protein that is responsible for most severe Alpha-1 cases within 15 minutes. This new kit was already presented at the German Pulmonary Congress in March and is scheduled to be launched in several countries in 2H14/2015. The disease affects c people in the US and Europe and is significantly under-diagnosed. However, the high cost of the treatment should remain as a hurdle to further growth. Additionally, new forms of treatment are in early stages of testing and, if successful, could increase competition in this segment. 15

16 Alpha-1 Patient Population in the US ;)* 9: 300.< / *+ -+ (1) Includes ZZ phenotype only. Source: Grifols citing Clinical Literature, Physician ATU and MRB data. We assume a 7.4% CAGR from F, below the estimated 7.9% annual growth of the market, based on 5.2% and 2.1% CAGR F of volumes and prices, respectively. Grifols Bioscience Division Revenues All in all, we expect Grifols Bioscience Division Revenues to grow at a 5.2% CAGR in FY13-FY17 F and reach 3.0bn by FY17 F. Grifols Bioscience Division Revenues CAGR ( mn) F 2014 F 2015 F 2016 F 2017 F 13 F -17 F IVIG % Albumin % FVIII % Alpha % Others % Total % 16

17 DIAGNOSTICS DIVISION (18% OF CONS. REVENUES) Grifols is not a major player in the Overall In-Vitro Diagnostics market, whose Revenues in 2013 should have amounted to c. 50bn ( 38bn). However, Grifols aim with the acquisition of Novartis Diagnostics back in late 2013 was never to become one of the major players in this specific industry. Instead, from a strategic point of view, the acquisition allowed Grifols to increase its presence in the US market and vertically integrate its offer of diagnostics solutions for blood and plasma donor centres from the donation process to transfusion, while focusing on transfusional diagnostics within the molecular segment of the industry. In-Vitro Diagnostics 2012 Revenues (USD 49bn) Grifols Diagnostics Source: Roche Diagnostics Main Players in the IVD Diagnostics Market Source: Grifols. Grifols transfusion business has 3 main business lines: - NAT: Grifols in partnership with Hologic develops and distributes the Procleix system, fully automated Nucleic Acid Testing (NAT) platforms for blood screening and plasma testing. NAT is a molecular technique used to detect viruses or bacteria. The technology allows the detection of certain viruses even before a donor displays any symptoms or develops antibodies. For Gifols diagnostics, NAT is mainly a distribution business. Grifols has recently agreed with the Japanese Red Cross to provide its latest NAT technology, which adds to the contract Grifols already had with the China Blood Bank; - Immunoassay tests: Grifols produces tests that quickly detect the presence of antibodies in blood. Immunoassays rely on the inherent ability of an antibody to bind to the specific structure of an antigen or reagent. Grifols Diagnostics manufactures the assays and the equipment to analyse the results and distributes immunoassay reagents produced by Johnson Johnson. However, Grifols is currently investing in a reagents production facility, which should replace the distribution of JJ as the agreement is due to terminate; - Blood typing solutions: Grifols produces from automated pre-transfusion testing systems to blood group genotyping products and services; - Licensing: Grifols Diagnostics also licenses some of its products. Source: Roche Diagnostics. We estimate Grifols Diagnostics Revenues to rise at a 52.7% CAGR in F. However, this rate is distorted by the consolidation of Novartis Diagnostics in FY14. From FY14 F -17 F we expect the Diagnostics Division to grow at a 5.0% annual pace. 17

18 HOSPITALS RAW MATERIALS OTHERS DIVISION (7% OF CONSOLIDATED REVENUES) Grifols operates in the Hospitals segment where it supplies intravenous fluid therapy solutions, nutritional products, medical devices for surgical therapies and several types of hospital logistics using the latest warehousing and medicine dispensing technologies. The Hospitals Division currently represents c.3% of Consolidated Revenues. We expect Revenues to grow at 1.3% F CAGR as we see growth resuming in FY15 F as Grifols keep its efforts to promote the internationalisation of the business in order to reduce the impact of the measures to rationalise health expenditure in Spain. We recall that Grifols has recently acquired a 50% stake in Kiro Robotics, a technological company specialised in the development of machinery and equipment to automate hospital processes. From January 2016 onwards, Grifols is expected to start to distribute Kiros Oncology Robot, which automates the preparation of intravenous medication for chemotherapy, in Iberia and Latam with distribution in the US coming at a later stage. Raw Material and Others includes revenues from the fractionation of plasma and/ or purification plasma proteins to other clients. In the past years, this line has also been positively affected by the contract manufacturing agreement with Kedrion to fractionate and purify the latters plasma to deliver IVIG and Albumin under Kedrions private label and Factor VIII under the Koate trade name. We expect this contribution to gradually reduce until FY15 F. Grifols FY13 Consolidated Revenues Breakdown ( 2.7bn) Following the acquisition of Novartis Diagnostics business, Grifols also accounts for Royalties it is due to receive under this line so as to not distort the Diagnostics Division revenues. We estimate royalties to terminate in 2015 as Grifols should still receive an estimated USD 90mn and USD 15mn in FY14 F and FY15 F, respectively. As such, we expect Raw Material Other Revenues to drop at an 4.8% CAGR in FY13-FY17 F. Source: Grifols. CONSOLIDATED REVENUES Overall, we estimate Grifols Consolidated Revenues to grow 8.9% annually in FY13-17 F. Grifols FY17 F Consolidated Revenues Breakdown ( 3.9bn) Grifols Consolidated Revenues CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F Bioscience % Diagnostics % Hospitals % Raw Materials Others % Total % Source: BPI Equity Research 18

19 EBITDA MARGIN UNDER PRESSURE IN FY15 F AND FY16 F We expect Grifols opex (excluding depreciation) to increase at an 9.2% annual clip in FY13-17 F : - in FY14 F opex evolution is mainly affected by the consolidation of Novartis diagnostics business; - in FY15 F -16 F costs should be impacted by the beginning of operations at the new fractionation facility in Clayton. During this period Grifols should maintain some utilisation of the old plant as the utilisation of the new facility ramps-up, thus contributing to a penalisation of margins in this period. In fact, we estimate Adjusted EBITDA Margin to temporarily fall below the bottom of the EBITDA margin medium-term range of 31.0%-33.0% recently provided by the company following its 3Q14 results release. In fact, in FY17F we expect EBITDA margins to improve back to levels similar to those of FY14F as the utilisation of the old Clayton plant is gradually abandoned and Grifols starts to reap the benefits of the authorisations to transfer intermediate paste and optimise its production across its plants; - we expect RD to rise at a 15.4% CAGR in FY13-17 F as Grifols increases its efforts to develop new products and new indication for the major plasma proteins it produces. Overall, we expect RD as a percentage of Revenues to rise from 4.5% and 5.2% in FY13 and FY14 F, respectively, and to increase to 5.7% in FY17 F while, among other projects, it develops its AMBAR (Alzheimer Management by Albumin Replacement) study currently in Phase IIb in the US and Phase III in the European Union; - we estimate non-recurring costs connected to the acquisitions of Talecris and Novartis Diagnostics to gradually reduce until FY15 F and terminate in FY16 F. Grifols RD ( mn) " " " 5 % # "# # %# (=*+ (= Source: Grifols, BPI Equity Research. COGS ( mn) Gross Margin " " " We recall that the gradual fall in Royalties, coming from the Diagnostics business and accounted for in Raw Materials Others, should also affect operating margins in FY15 F -16 F as they represent direct contributions to EBITDA and should have negative impacts of 140bps and 10bps in EBITDA margin in FY15 F and FY16 F, respectively. " " " This leads us to estimate a 8.0% CAGR of Adjusted EBITDA in FY13 F -17 F. # 27 "# # %#.* Grifols Opex Source: Grifols, BPI Equity Research. CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F COGS % Gross Profit % Gross Margin 50.7% 51.7% 51.5% 50.1% 50.9% 51.8% RD % SGA % Total Opex (incl. Depreciation) % Depreciation % Non-Recurring Expenditure Recurrent Opex (excl. Depreciation) % 19

20 Grifols Operating Performance CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F EBITDA % EBITDA Margin 30.1% 31.5% 31.2% 29.6% 31.0% 32.3% Adjusted EBITDA (1) % Adj. EBITDA Margin 31.9% 33.5% 32.1% 30.2% 31.0% 32.3% EBIT % EBIT Margin 25.2% 26.8% 25.5% 24.1% 25.8% 27.3% (1) Adjustments for the Talecris and Novartis Diagnostics transaction costs. CONTROLLED CAPEX AS NET DEBT GRADUALLY REDUCES In our model we are incorporating Grifols current capex plan, which amounts to c. 600mn from FY14 F -FY16 F. Main projects relate with the increase of fractionation capacity and the increase in purification capacities of Albumin, Alpha-1 and IVIG in Clayton and Barcelona. Additionally, Grifols is also investing in a new facility to produce antigens for its Diagnostics activity. Adjusted EBITDA ( mn) Margin " # "# # %# +, - +, -.* " % Source: Grifols, BPI Equity Research. Grifols Capex Plan Diagnostics Commercial ( mn) Bioscience Hospital and Corporate Total Investments Barcelona Fractionation IV (IVIG); Purification and Sterile Filling of Prolastin C (Alpha-1); Fibrin Sealant Manufacturing Plant; Alzheimer Treatment Research Center; Solvents Vials Filling Line Clayton (US) New Fractionation Facility (NFF); Sterile Filling Building; Albumin Purification Enlargement; Plasma Logistic Center (-30º Warehouse) Curitiba (Brazil) Blood Bags Facility Dublin (Ireland Logistics Centre (automated storage and retrieval systems) Emeryville (US) New Diagnostics Production Facility (antigen production) Los Angeles (US) Gamunex Purification; Albumin enlargement (purification and sterile filling); Plasma Center (Bellflower) Madrid (Spain) Remodeling of Grifols Movaco Murcia (Spain) Blood Bags Facility Pisa (Italy) Grifols Italia Raleigh (US) Headquarters of Grifols Therapeutics San Marcos (US) Immunohematology Reference Labs Shangai (China) Grifols China Zaragoza (Spain) New Alzheimer RD Lab (Araclon Vaccine) Total Note: part of the capex had already been disbursed before FY14 F. Source: Grifols. 20

21 Grifols Capex Depreciation CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F Gross Capex as % of Revenues 5.7% 5.2% 47.3% 5.3% 4.8% 3.6% Net Capex as % of Revenues 3.8% 3.5% 47.3% 5.3% 4.8% 3.6% Depreciation % as % of Revenues 4.9% 4.7% 5.7% 5.5% 5.2% 5.0% In its latest Investors Analysts Meeting, Grifols hinted at the need to assess whether its new capacity would be adequate to the expected demand of plasma derived products. Acknowledging that, we also point out that considering current capacity and estimated demand, particularly IVIG, we believe Grifolss activity could become constrained by Since new plants usually require 5-7 years to start operating, particularly due to the strict regulatory requirements from FDA and EMA, it is our belief that Grifols should need to add new fractionation and purification capacity. We are assuming that (1) the new capacity should come on stream at the beginning of 2023 with investment starting in FY17 F ; (2) Grifols should increase fractionation capacity by 4mn litres (+31%) considering IVIG volumes should grow at a 2.5%/ year growth rate from 2025 onwards; (3) investment should amount to 300mn distributed between FY18 F -FY21 F. Grifols announcement of a new investment in capacity could represent a trigger for the stock in case it surpasses our expectation, implying a stronger demand for plasma derived products, and if the investment is lower than what we are assuming. Meanwhile, following a year, FY14 F, in which Cash-Flow has been obviously affected by the acquisition of Novartis Diagnostics, we expect Grifols to enter a stage of significant cash-flow generation enabling it to gradually reduce its overall debt. We estimate Grifols to reach FY17 F with a 1.8x Net Debt/EBITDA, which in our view allows Grifols to comfortably consider future investments in capacity. In March 2014, already after the acquisition of Novartis Diagnostics, Grifols completed a debt restructuring that should enable it to roughly maintain the same level of financial expenditure of FY13 despite a further 1bn in debt. Net Debt ( mn) Net Debt/ EBITDA " " Grifols Debt Structure Issue Currency Amount (mn) Interest Rate Maturity Senior Unsecured Bonds USD % 2022 Senior Debt Tranche A USD 700 US Libor 1M+250 bps 2020 Tranche B USD US Libor 1M+300 bps 2021 Tranche B EUR 400 Euribor 1M+300bps 2021 Source: Grifols. % % # "# # %# >/ >? - Source: Grifols, BPI Equity Research. 21

22 The reduction of debt should have a positive reflection on Financial Results, which should be more significant in FY20 F -22 F as debt matures. We do not discard, however, that if as expected Net Debt/EBITDA gradually reduces, Grifols potential interest in yet another renegotiation of its debt terms increases. Grifols Financial Net Debt CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F Financial Results % Net Debt % Net Debt/EBITDA 3.1x 2.4x 3.2x 2.9x 2.4x 1.8x LOWER EFFECTIVE TAX RATE Historically, since the acquisition of Talecris, Grifols effective tax rate has been in excess of 30% due to its exposure to the US. However, following the acquisition of Novartis Diagnostics, Grifols was able to take advantage of some tax credits to reduce its effective tax rate to the low 20s. Going forward, Grifols believes it should be able to maintain its effective tax rate at similar levels as the use of the tax credits should be compensated with the start of operations of its Logistics Centre in Ireland in 4Q15. Grifols Effective Tax Rate CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F EBT % Income Tax % Effective Tax Rate 34% 31% 21% 21% 21% 21% Source: BPI Equity Research IMPROVING NET INCOME. SCOPE FOR INCREASE IN PAYOUT? Grifols Net Income Adjusted Net Income CAGR ( mn) F 2015 F 2016 F 2017 F 13 F -17 F Net Income % Net Margin 9.8% 12.6% 13.6% 13.9% 15.6% 17.2% Adjusted Net Income % Adjusted Net Margin 13.9% 16.4% 16.9% 16.9% 17.8% 19.3% Total Dividends % Dividend Payout 0.5% 40.2% 40.0% 40.0% 40.0% 40.0% 22

23 Overall, we estimate Reported Net Income to improve at a 17.7% CAGR in FY13-17 F and 13.4% considering Adjusted Net Income. As it has been described throughout this report, we expect (1) the sound improvement in Revenues, (2) the controlled increase in opex, (3) lower financial costs and a (4) lower effective tax rate to contribute to this performance. Please note that the difference between Adjusted and Reported Net Income is a result of (1) the Talecris and Novartis Diagnostics transaction costs, which we estimate to disappear after FY15 F, (2) the amortisation of intangibles related with the aforementioned acquisitions, and (3) deferred financing costs amortised as the debt matures. These last two items do not have cash-flow impact. Going forward we expect Grifols to maintain its commitment to the 40% dividend pay-out it guided to, which it should maintain in two instalments (interim and complementary dividend). We recall that B shares are due to receive the same DPS as the A shares plus a 0.01 preferred DPS. Notwithstanding, unless Grifols pursues its growth strategy through further acquisitions, the company would have scope to increase its payout as we estimate it to reach a Net Cash position in FY22 F. WORKING CAPITAL: A KEY VARIABLE Working Capital tends to be demanding in the plasma derivatives industry. Firstly, companies carry significant inventories in order to comply with all the safety requirements needed to ensure the security of the products. Secondly, Government managed healthcare systems in several countries are major clients of the industry, which may contribute to a hefty amount of trade receivables. Finally, trade payables tend to be low as companies immediately pay donors of plasma, its main raw material. Grifols WK Evolution (as % of Revenues) % In the past, Grifols has operated with levels of WK between 50-65% of revenues. However, following the acquisition of Talecris, the company was successful in managing WK more efficiently and bringing it down to levels close to 40% of revenues, which stands below the level of most of its industry peers with exception of Baxter, which is not the most comparable company due to the significant weight of Other Medical Product in its Consolidated Sales (56%). We recall that Baxter is currently undergoing a separation of its businesses while Baxalta, the resulting Biopharmaceutical company, should start publicly trading in mid " #$" #$ #$% #$ #$5 #$ #$ #$ #$ #$# #$"# #$# #$%# Source: Grifols, BPI Equity Research. Going forward, we expect Grifols to keep its WK levels close to c.40% of revenues. However, going forward we assune a higher WK investment until reaching 51% in our terminal year in FY35 F. If we assumed a return of WK to 50% of revenues from FY15 F onwards our YE15 F Price Target would decrease by 3%. WK should be closely monitored to perceive whether it converges to levels shown by other players in the industry. 23

24 Working Capital in the Plasma Derivatives Industry (FY13) ( mn) Baxter Biotest CSL Grifols Octapharma Trade Receivables Inventories Trade Payables Working Capital as % of Revenues 34.8% 58.7% 44.7% 38.3% 74.4% Source: Annual Reports. CHANGE IN ESTIMATES: LOWER REVENUES MARGINS We are revising our Grifols estimates quite substantially to reflect lower than previously expected Consolidated Revenues, which translated into lower margins. Change in Estimates FY14 FY15 FY16 FY17 Now Previous Chg. Now Previous Chg. Now Previous Chg. Now Previous Chg. Revenues % % % % Bioscience % % % % Diagnostic % % % % Hospital % % % % Raw Material Others % % % % EBITDA % % % % EBITDA Mg. 31.2% 32.6% -1.5 p.p. 29.6% 33.6% -3.9 p.p. 31.0% 34.4% -3.4 p.p. 32.3% 34.6% -2.2 p.p. Adjusted EBITDA % % % % Adj. EBITDA Mg. 32.1% 33.5% -1.4 p.p. 30.2% 34.1% -3.9 p.p. 31.0% 34.4% -3.4 p.p. 32.3% 34.6% -2.2 p.p. EBIT % % % % EBIT Mg 25.5% 27.3% -1.8 p.p. 24.1% 28.4% -4.3 p.p. 25.8% 29.8% -4.0 p.p. 27.3% 30.2% -2.9 p.p. EBT % % % % Net Profit % % % % Net Debt % % % % On the Revenues side, we are now expecting a more moderate growth in the Bioscience Division, particularly in Alpha-1 and Factor VIII. We also assume a more conservative growth pattern in the Diagnostics Division. Additionally, the downwards revision at the Raw Materials Others Division assumes lower Revenues from Sales to 3 rd parties as the Royalties expected evolution was already accounted for. 24