Grifols rocked by fraud allegation from short seller

Shares in Spanish pharma group Grifols have plummeted after UK-based hedge fund Gotham City Research issued a report claiming it has fraudulently manipulated its financial reporting by not disclosing debt.

A near-30% drop in its share price wiped around $3 billion in value off the family-owned company, which has categorically denied any wrongdoing in a statement to financial regulators, saying it rejects “any allegations of wrongful accounting or reporting practices of our consolidated financial statements.”

Gotham City’s claim is that Grifols is fully consolidating profits from two businesses – BPC Plasma and Haema – which were sold to Scranton Enterprises, described as a Grifols "family vehicle".

The short seller maintains this is “materially deceptive”, as the same profits are also being consolidated by Scranton, and the result is that it artificially reduces debt to around six times earnings when it should be a multiple somewhere between 10 and 13.

This isn’t divulged in Grifols’ financial reporting, it claims, adding that earnings from so-called non-controlling interests (NCIs) have risen from 0% to nearly 100% in the space of a few years. It likens the situation to a case involving French supermarket firm Casino, which went into administration last year and was also accused by a short seller of artificially minimising debt in its accounting.

Grifols is reported to include earnings from the two companies in its financials because it retains the option to repurchase its shares, and has insisted that all the transactions covered by Gotham City’s analysis are a matter of public record. “There’s no new information that can be considered hidden,” says its statement.

The company, first formed in 1909 and headquartered in Barcelona, is a manufacturer of plasma-based pharmaceuticals and other products like blood transfusion diagnostics, which is tax-domiciled in Ireland and has a significant presence in the US.

It reported a net profit of €60 million in the third quarter of 2023, after making a loss in the first half of the year, and has made a series of acquisitions in recent years to rebuild its business after it was hit hard by plasma shortages during the pandemic. It also agreed the sale of its stake in a Chinese blood products unit in 2020 to reduce debt.

Last year, executive chairman Thomas Glanzmann stepped into the chief executive role, ending the long-standing tradition of a Grifols family member being at the helm. He replaced co-CEOs Victor and Raimon Grifols, who became chief operating officer and chief corporate officer, respectively.

Grifols is reported to have arranged a conference call with investors today to respond to the allegations, according to Bloomberg. The newswire cites Patricia Cifuentes, an analyst at Bestinver Securities, as saying that the claims are not a surprise and Grifols’ “off-balance sheet debt is well known.”