What matters most People

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1 ANNUAL REPORT

2 What matters most People GRIFOLS Annual Report 2006

3 Timeline for Key Data 8 Letter from the President 10 Bodies of Governance 12 Corporate Strategy SUMMARY OF ACTIVITIES 14 DIVISIONS 26 GRIFOLS COMMITMENT 46 THE STOCK 58 5 ANNUAL ACCOUNTS 64 GRIFOLS Annual Report 2006

4 TIMELINE FOR 2006 January February March April May June July Grifols reaches an agreement with Cardinal Health to distribute Grifols purchases 8 plasmapheresis centers its Pyxis products in from Baxter Portugal These new centers were incorporated into the Biomat USA Grifols Hospital Logistics division will extend its reach structure, amounting to 59 USbased plasmapheresis centers. through Grifols Portugal after its success in Spain. acquires PlasmaCare and its 14 plasmapheresis centers By incorporating this Cincinnati, Ohio based plasma collection company, Grifols ensures its supply of plasma, the key prime material in the production of plasma derivatives, our main line of products. PlasmaCare operates in the Midwest and Southeast of the United States. A representation office is opened in Osaka, Japan Grifols opens a representation office in Japan in preparation for extending its presence to the Japanese market. Grifols makes its debut on the Barcelona Stock Market On May 17 Grifols floated shares on the stock market. The opening price per share was 4.40 euros. At the day s close, its value rose 15% to 5.09 euros per share. reaches an agreement with Kardex- Remstar to distribute its rotating carrousels in Latin America This agreement covers the distribution of rotating carrousels for the main storage supply warehouse in hospitals in the main markets of Latin America: Argentina, Mexico, Brazil and Chile where Grifols offers integrated logistical systems to modernize the hospital pharmacy. GRIFOLS is included in the Ibex Medium Cap index The technical assessment committee of the Ibex Medium Cap index (20 adjusted medium capitalization stocks quoted on the Spanish stock market which fulfill certain liquidity requirements) has decided to include Grifols in the place of Mapfre Corporation which has moved to the Ibex-35. Grifols reaches an agreement with the Italian company, Diesse Diagnostica Senese S.p.A The agreement includes the distribution of its in vitro diagnostic system, Chorus, in the United States for an initial period of 5 years. This alliance will allow Grifols to access a new area of the diagnostics market and to make the foundation for a business line which will significantly strengthen the Diagnostic division. The Germans Trias i Pujol Research Institute in Barcelona and Grifols sign a collaboration agreement This alliance will allow these two entities to jointly develop clinical nutrition, biotech and diagnostics products. GRIFOLS Annual Report 2006

5 August September October November December The newspaper The International Symposium on coagulation factors is held in Chicago, USA. Grifols organized this meeting of US hematologists to discuss the therapeutic aspects of hemophilia treatment. Launch of the new line of large volume bags in the Hospital Division A new totally automated production line for parenteral solutions was launched in the Parets del Valles plant (inaugurated in 2003) which will improve the cost of the product and increase production capacity. The capacity of the DG Gel manufacturing plant in the Diagnostic Division is expanded The company will be able to significantly increase production of its gel cards to increase its presence in the world immunohematology market. The Spanish Minister of Industry, Joan Clos, visits Grifols The recently appointed Minister of Industry, Commerce and Tourism, along with the Mayor of Parets, visited Grifols Parets del Valles (Barcelona) facilities. He emphasized the important role that the company plays as a reference in the world pharmaceutical sector. Expansión analyzes the first six months of Grifols on the stock market on November 17, Grifols sixth month on the stock market shows an 90% increase and good prospects The analysts are optimistic in their outlook on company growth. The FDA approves the marketing of Flebogamma DIF The outcome of the company s own research, the new liquid intravenous immunoglobulin has an improved safety margin and an increased yield per liter of plasma. Grifols Executive Committee approves the launch of the Minifrac After this decision was made, the preparation for FDA approval was begun for this manufacturing plant. This plant is located in the industrial complex of Los Angeles and will increase the company s fractionation capacity. GRIFOLS Annual Report 2006

6 Key Data (In millions of Euros) Other indicators % var. Shareholders equity Total assets/liabilities Fixed assets Other relevant information % var. Sales USA Staff (In units) Spain 1,931 1, USA 2,116 1, Row Total 4,323 3, GRIFOLS Annual Report 2006

7 Income Ebitda In millions of euros In millions of euros % % Ebit Net Results In millions of euros In millions of euros % % The Bioscience division saw growth of 21% thanks to the increase in sales of IVIG, Factor VIII and albumin Sales in overseas markets rose by 30.3% to account for 74.4% of the group s total turnover GRIFOLS Annual Report 2006

8 LETTER FROM THE PRESIDENT Dear shareholders, I am pleased to present the 2006 annual report. It has been a good year in terms of results, and I would like to share with you the three main reasons why I believe it has been so special. First of all, May 17, 2006 will go down in the history of our company as the day on which Grifols was first listed on the stock market. This was the culmination of a successful process of years of preparation in which there were many obstacles to overcome. Prior to joining the stock exchange, shares were oversubscribed by a factor of 10, a reflection of the confidence of institutional investors in the company s strategy. Since flotation, our stock has risen almost without interruption on Spain s Mercado Continuo. This rise also reflects the company s success at meeting its commitments, something which has been appreciated by the market. Secondly, 2006 has confirmed the company s commercial and industrial potential in the United States. Our company s long history and our rigorous commitment to excellence have formed the basis of our success, and today the quality of our products and of our production methods, together with our R&D activities, are what allow us to compete on equal terms in the US market. The third aspect which I would like to highlight is the significant increase in our plasma collection capacity with the incorporation of US plasmapheresis centers into our structure. This year we have focused our efforts on expanding our network of centers in the United States through acquisitions. We acquired 8 new centers from Baxter and also acquired PlasmaCare and their 14 centers located in the Midwest and Southeast of the United States. Thanks to these purchases, Grifols is the second largest provider of plasma in the world. We will continue to work to achieve our goal of self-sufficiency by securing our plasma supply in order to guarantee our future. This year s results are explained in great detail on the following pages, so I will restrict myself to commenting briefly on some of the more important points. The year end sales figure of 648 million euros, an increase of 23% over the previous year, far exceeded the targets set out in the plan for The main engine of growth continues to be our international expansion, with 74.4% of total sales being made outside of Spain. In the Bioscience Division we have given priority to the US as this is the leading market for plasma derivatives. This has been a wise strategy as turnover in the US has grown 62.7%, amounting to million euros, representing more than a third of the company s total sales. Among the achievements in 2006, and more specifically in the Bioscience Division, was the granting of the US FDA license to market our new product, Flebogamma DIF, in the United States. This new generation of liquid intravenous immunoglobulin is the result of advances in technology achieved by Grifols R&D team after 10 years of work. This ambitious project required the investment of more than 30 million euros, divided between the construction of the Barcelona plant where the new IVIG is manufactured and the clinical trials of the product. After several years of strategic investment, the company is well positioned to meet the growing demand for plasma derivatives. 10 GRIFOLS Annual Report 2006

9 At the end of 2006, Grifols had 4,380 employees. Training our personnel and enhancing their professional knowledge is a long-term objective for the company because we believe that our human resources are the key to performing our activities, and to implementing our expansion plans and future projects for the company. On behalf of the Board of Directors, I would like to thank our employees for their hard work, efforts and loyalty. And I thank you, our shareholders, for the confidence you have placed in our management. Víctor Grifols Roura President and CEO GRIFOLS Annual Report

10 Bodies of Governance Board of Directors Name Position Type Víctor Grifols Roura President Executive Juan Ignacio Twose Roura Member Executive Ramón Riera Roca Member Executive Tomás Dagà Gelabert Member Other/external Thorthol Holdings B.V. Member Dominical Christian M. C. Purslow Member Independent Thomas Edwin Doster Member Dominical Thomas Glanzmann Member Independent Edgar Dalzell Jannotta Member Dominical Raimon Grifols Roura Secretary of the Board of Directors (non-member) Nuria Martín Barnés Vice-Secretary Audit Committee Name Position Type Christian M.C. Purslow President Independent Tomás Dagà Gelabert Member Other/external Thomas Glanzmann Member Independent Raimon Grifols Roura Secretary (non-member) Appointments and Retributions Commission Name Position Type Thomas Glanzmann President Independent Víctor Grifols Roura Member Executive Thomas Edwin Doster Member Dominical 12 GRIFOLS Annual Report 2006

11 Corporate Strategy Improving people s health and well-being, offering high quality innovative products made with cutting edge technology while respecting the environment, generating a profit for our investors and promoting the professional development of our employees: together, these form the mission of Grifols, a company which was born in Barcelona in We aspire to be a leading company in the world health sector for our contributions to the community through our research, commitment to ethics, economic performance and our professional team. Grifols products and services help to improve the health and well-being of people around the world. Some of our products are vital to saving the lives of people who suffer from blood disorders. We strive to ensure that these treatments are safer, more effective and convenient for the patient and that they give peace of mind to those who prescribe them. We incorporate the latest technological advances available, design different systems to improve our processes and investigate other uses for our existing products. Improving processes, quality in manufacturing and launching new products all involve a significant scientific and technological component. We work hard to keep abreast of advances in these fast-moving fields as part of our strategy for the future. Grifols has been a pioneer in the development of hemotherapy since Our experience and the quality of our human resources, scientists and technicians all guarantee the high purity levels of our products. We have become a world leader in the production of plasma derivatives due to the quality and innovation of our processes and the design of our plants. Grifols corporate commitment aims to make our mission a reality, achieving sustained and sustainable value for our shareholders and offering a stimulating and safe environment to our professionals while respecting social and cultural differences and, of course, the environment. GRIFOLS Annual Report

12 1 SUMMARY OF ACTIVITIES SUMMARY OF ACTIVITIES Macroeconomic environment Internationalization of Grifols Analysis of results R&D: A step forward Information Technologies 14 GRIFOLS Annual Report 2006

13 In a changing economic and financial environment, characterized by fluctuations in the main stock exchange indexes, some of which reached historic highs, by rising interest rates in Europe and the United States, and by unstable oil prices throughout the financial year, Grifols has successfully met the dual commitment it made to its shareholders: floating on the stock exchange and consolidating its presence in the US market. On May 17, 2006 the company was floated on the Spanish Mercado Continuo. Two months later the company was included in the Spanish index of Medium Capitalization Companies (IBEX MEDIUM CAP). By the end of the year, the group s turnover had reached million euros, 23.8% more than in Profits rose by 77.6% and stood at 45.4 million euros. The stock exchange valuation of the company amounted to 2,152 million euros, growth of 130% since the launch. Macroeconomic environment World economic activity remained dynamic in 2006 and economic growth, according to the estimates of the International Monetary Fund (IMF), stood at 5.1%, compared with the 4% recorded in At the same time, the volume of world trade has risen significantly, growing at a rate of 9.5%. Activity decelerated during the final months of the year as a result of the slowdown in the US economy. However, growth has continued to be strong in the eurozone, in Japan, and in the emerging economies such as China or India. A key feature during the financial year was the growth of the stock exchanges, some of which reached historic highs, reflecting the company s positive profit expectations and the absence of liquidity problems. In addition, oil prices fell after reaching all-time peaks at the start of August, when geopolitical tensions were particularly high. Subsequently, crude oil prices fell by around 20%, and this reduced inflationary pressures and increased the purchasing power of families in importing countries. In 2006 the United States was responsible for a significant part of the growth although, for the second year in a row, this was lower than the year before. Gross Domestic Product (GDP) for the US rose by 3.4% in 2006 compared to 3.5% in 2005, due largely to the weakness of the property and car manufacturing sectors. However, this slowdown was precisely what the Federal Reserve (FED) wanted in order to put a brake on inflation which, during 2006 stood at 3.2%. For this reason, since August 2006 it has held interest rates at 5.25%, bringing to an end the run of 17 successive interest rate rises since June 2004, when the rate stood at 1%. For their part, the members of the European Union are also experiencing rising interest rates, creating upward pressure on the euro. Strong employment has provided one of the foundations the European Union s economic recovery which, after years of weakness, closed 2006 with growth of 2.7%. According to the European Commission this is the highest rate in the last five years. The rapid creation of employment has encouraged consumer demand and has, in turn, boosted the industrial sector and the region s exporters. With regard to the emerging economies, China and India have maintained impressive growth rates. Finally, in the specific case of Spain, during 2006 the economy maintained growth rates above the European average and closed the year with a 3.9% increase in GDP. Rising employment and family incomes contributed towards moderate growth in domestic demand, which was marked by moderation in expenditure on housing and consumption in the face of rising interest rates. At the same time, the dynamism of the European economy favored the export of goods and services, in particular tourism, as a result of which the Spanish growth rate is evidence of the reduced imbalances between the positive contributions of domestic demand, and the negative contributions from overseas. The global market for medications grew by 7% in 2006 (at constant exchange rates) and reached 643 thousand million dollars, according to IMS Health. Once again, the growth of the pharmaceutical sector was driven by rising life expectancy together with the development and sale of new medications, principally in oncology and immunology, and the significant growth of other GRIFOLS Annual Report

14 1 SUMMARY OF ACTIVITIES treatments such as those aimed at respiratory illnesses. The year as a whole saw significant growth in the consumption of pharmaceuticals by countries such as India or China, which in a short time have gone from being developing countries to emerging markets with particular significance for the global pharmaceutical industry. In fact, China saw growth of 12.3% in 2006, with sales of medications reaching 13,400 million dollars. For its part, India has been immersed in the process of opening up its health sector to multinational pharmaceutical companies, and this brought about a rapid rise in sales of pharmaceuticals in Sales rose by 17.5% to reach 7,300 million dollars. In 2006 it is important to note that 27% of global growth in sales was generated in countries with annual per capita income of less than 20,000 dollars. Apart from the emerging countries, the United States continued to be the fastest growing market, with an expansion of 8.3%. For their part, the five principal European markets France, Germany, Italy, Spain and the United Kingdom saw overall growth of 4.4%, reaching 123,200 million dollars. In Latin America, sales of medications rose by 12.7% to reach 33,600 million dollars and Japan continued to grow at similar rates to preceding years. The world pharmaceuticals sector grew by 7% in Emerging countries such as China and India consolidate as the main areas of expansion for the industry The Spanish pharmaceutical sector grew by 5.8% in 2006, faster than the Spanish economy as a whole according to Farmaindustria. Only 20% of the income generated came from hospital sales. The most recent data available about the plasma-fractionating industry, corresponding to 2005, indicates that the global plasma products market reached 7,000 million dollars, 20% more than in 2003 In recent years, the sector has experienced growing demand and rising prices. At the same time, the concentration which has occurred in the sector since 2002 means that five companies generate 55% of global sales. By geographical area, in 2005 the United States generated approximately 2,600 million dollars of plasma products sales, growth of 15.5% over Significant features of 2005 were the strong increase in demand for albumin and of IVIG, which also saw rising prices. The demand for plasma products (plasma derivatives) continues to grow In the medium term, the increase in patients who can be treated with plasma products, as a result of new treatments being approved and the entry into the market of new countries, makes it possible to predict growth for the sector. Development of operations Grifols business turnover stood at million euros, a rise of 23.8% Net profit was 45.4 million euros, 77.6% more than in 2005, and EBITDA grew by 29.2%, amounting to million euros The Bioscience division saw growth of 21% thanks to the increase in sales of IVIG, Factor VIII and albumin Sales in overseas markets rose by 30.3% to account for 74.4% of the group s total turnover In 2006 Grifols met its two key goals for the year: floating on the stock exchange and consolidating its presence in the US market. These were two milestones for the company and will underpin future growth both from an operational and a financial perspective. The consolidation of the business in the United States was clearly demonstrated by the achievement, at the end of 2006, of the United States FDA license to market the new Flebogamma DIF in the United States, where sales account for 37.5% of the group s total turnover. At the same time, the completion of the integration process initiated after the purchase in 2003 of the assets of Alpha Therapeutic Corporation, which included a plasma fractionation plant in Los Angeles, has made it possible to bring the technological and manufacturing standards up to those of the 16 GRIFOLS Annual Report 2006

15 manufacturing facilities in Barcelona, with the result that the group now has two cutting-edge plasma fractionation plants. The integration also meant that, during 2006, the number of plasmapheresis centers in the United States grew as a result of purchases linked to the main business line. The 22 new centers purchased are vital to ensure the supply of plasma over the medium and long term. Joining the stock exchange gives the group the possibility of obtaining finances directly from the capital market, if this is needed to fund new strategic investments, in addition to allowing it to compete on equal terms in the plasma products market, where the group is currently the fourth-largest by sales volume and third in terms of production capacity was marked by flotation on the stock exchange and consolidation in the US market In 2006, consolidated business turnover was million euros, an increase of 23.8% in comparison to The EBITDA stood at million euros, 29.2% more than during the previous year thanks, mainly, to success in containing operating costs. Financial expenses developed favorably as a result of the reduction of the group s debt levels. Excluding the impact of canceling non-voting shares in May 2006, financial expenses fell by 23.4% to a figure of 15.2 million euros, compared to the 19.8 million euros recorded the year before. The company s net profit was 45.4 million euros, growth of 78%. Development by business line All of the different business lines achieved significant growth during The Bioscience division, which brings together all those products and activities related to plasma for therapeutic use, generated 68% of the group s turnover. Sales amounted to million euros, an increase of 20.9% with respect to The Hospital division brings together all non-biological pharmaceutical products for the hospital pharmacy sector, such as parenteral solutions, parenteral and enteral nutrition products, medical supplies and integrated systems for hospital logistics. During 2006 the sales of this business line grew by 8% over the preceding year to stand at 62.9 million euros. This division currently contributes 9.7% of total income. The Diagnostic division brings together the manufacture and development of devices, instruments and reagents for clinical analysis laboratories. In 2006 it generated sales income of 74.6 million euros. In comparison with 2005, it grew by 7% and currently accounts for 11.5% of business. Finally, the Raw Materials & Others division, responsible for the sales of intermediary products and the sale of special albumin for industrial use or as a culture medium, generated sales of 71 million euros, 120.8% more than in the preceding year. This represents 10.9% of the group s total turnover. Of this turnover, 31 million euros correspond to sales of plasma to Talecris as part of a commitment taken on by PlasmaCare Inc before the company was purchased by Grifols. The existing contractual obligation ends on February 28, 2007, and after this date all the plasma produced by PlasmaCare will be assigned to the group. 1 1 Aerial view of Grifols industrial complex in Los Angeles, California GRIFOLS Annual Report

16 1 SUMMARY OF ACTIVITIES Turnover and growth by division in 2006 (millions of euros) Turnover % growth % of turnover Bioscience Hospital Diagnostic Raw Materials &Others Development by business line Bioscience Hospital Diagnostic Raw Materials The central testing lab for plasma collected in the US plasmapheresis centers 2 18 GRIFOLS Annual Report 2006

17 Internationalization of Grifols International expansion was the principle engine of growth for Grifols in % of sales were generated outside of Spain. Grifols sales turnover from overseas markets to the end of financial year 2006 represented 74.4% of total business turnover. International sales grew by 30.3% and reached million euros, a trend which is likely to continue in the coming years. The group s strategy of giving priority to the US market, in particular in the Bioscience division, was confirmed in In the United States, the principle market for the plasma products sector, Grifols turnover rose by 62.7% and reached million euros. As a result, sales in the US market at the year end represented 37.5% of total turnover. Promoting sales in the United States has led, in relative terms, to the weakening of sales in Europe. These amounted to million euros in 2006, an increase of 6.4% which generates 52.4% of the company s income. The company has also had a presence in the Asia-Pacific region through subsidiary companies in Malaysia, Thailand and Singapore since 2003 and has commercial links with countries such as China and India through its International Division. Geographical distribution of the group s operating income: (millions of euros) % of total sales % of total sales 31/12/06 31/12/05 European Union % % United States % % Rest of World % % Consolidated % % In Latin America, Grifols achieved growth of 23.1% and in Asia, a key geographical region in the company s expansion strategy, it grew by 21.2%. While it only accounted for 3.5% of sales in 2006, the company expects to gradually increase its presence. As a result, in the third quarter of 2006 a representation office was set up in Japan, where Grifols currently markets diagnostic devices. Representation office in Osaka, Japan In March 2006 Grifols opened its representation office in Japan, with the aim of paving the way for the future commercialization of its products there. The company currently has a presence in the Japanese market through its Diagnostic division. It sells devices and instruments for immunohematology diagnostics to Japanese companies which are technological world leaders. 3 3 The main entrance to the plasma derivatives production plant in Los Angeles, USA GRIFOLS Annual Report

18 1 SUMMARY OF ACTIVITIES Grifols has a presence in over 90 countries around the world and has 18 subsidiary companies UK 1997 Germany 1997 Poland 2004 USA 1990 Mexico 1993 France 1999 Portugal 1998 Spain Italy 1997 Czech Rep Slovakia 1999 Singapore 2000 Thailand 2003 Japan 2006 Brazil 1998 Malaysia 2003 Chile 1990 Argentina GRIFOLS Annual Report 2006

19 Analysis of results The net profit attributable to Grifols at the end of 2006 was 45.4 million euros, an increase of 77.6% over the preceding year. The gross margin over sales was 39.6%, more than one percentage point lower than in This slight fall is due principally to the increase in the price of plasma and the set-up costs incurred by the new facilities of the Hospital division, designed for the production of 3-liter irrigation bags. It should be noted that EBITDA rose to million euros and represents 20% of sales. This was an increase of 29% over 2005 due to the improvement in operating costs. These accounted for 24.3% of income, compared to 26.5% the preceding year, a reduction of 2.1 percentage points, to a total of 156 million euros. The company s EBIT was million euros, 36.5% higher than in The financial results have continued to develop positively as a result of the reduction in the group s debt levels. Excluding the impact of the cancellation of non-voting shares in May 2006, these fell by 23.4% to 15.2 million euros, compared to the 19.8 million euros recorded the previous year. The increase in the gross operating results (EBITDA) in 2006 and the significant improvement in working capital allowed the group to reduce its debt ration (net financial debt/ebitda) to 2.3, compared to the figure of 2.7 for the previous financial year. The net financial debt amounted to million euros at the close of the year. Balance sheet At the end of the year, Grifols total consolidated assets amounted to million euros, compared to million euros in Particularly noteworthy are the 33.7 million euros increase in the commercial fund as a consequence of purchases made in 2006 of the company PlasmaCare, which permitted Grifols to integrate 14 plasma collection centers into its structure, and of 8 plasmapheresis centers from Baxter. It is also worth mentioning the increase in the creditors account during the year as a result of higher activity levels. Accounts due totaled million euros, compared with 155 million in This increase reflects the inclusion of interest due on late payments from organizations funded by the Spanish social security system after the approval of the European Directive Combating Late Payment in December Subsequent to this date, the gradual adoption of this directive by the various regions of Spain has significantly reduced the company s payment periods from a range of bodies. The current average payment period for the year is 97 days, and this has helped to reduce financial requirements. The company s debts reduced during the year, falling to million euros from the figure of million euros recorded in While long-term debt with institutional lenders remained at similar ratios, standing at million euros at the end of 2006, the entry for other creditors fell by more than 260 million euros. This was principally due to the amortization and cancellation of non-voting shares after the capital increase prior to the company s flotation on Spain s Mercado Continuo. At the end of the year, the majority of the financial debt held by Grifols related to the syndicated loan taken out in April 2006 for the sum of 225 million euros. Net worth On December 31, 2006, Grifols net worth amounted to million euros compared to the 55.9 million euros recorded in This increase was fundamentally due to the capital increase carried out by the company by means of an Initial Public Offering (IPO), prior to all Grifols securities being listed on Spain s Mercado Continuo on May 17, The corporate capital was increased by 35.5 million euros by the issue and circulation of 71 million ordinary shares, each with a nominal value of 0.5 euros. On May 15, 2006 the price of the shares which were the object of the capital increase was set at 4.40 euros per share, representing an issue bonus of 3.90 euros per share. The increase meant that at the end of 2006 the subscribed capital had a value of million euros. The heading Other Reserves includes the share issue bonus for a value of million euros, reduced by the costs of canceling the non-voting shares, the main purpose to which resources obtained by the company in the IPO were allocated. The other differences recorded under the group s shareholder s equity for the preceding year were due to the increase GRIFOLS Annual Report

20 1 SUMMARY OF ACTIVITIES in legal reserves, in accordance with Spanish legislation on reserve funds, and the increase in accumulated profits as a consequence of retained profits corresponding to 2005 in line with the group s dividends policy. R&D: A step forward Research was central to the origins of the company: in 1951 Dr. Josep Antoni Grifols i Lucas developed the technique of plasmapheresis used across the globe. Ever since then the company has promoted investigation into more efficient processes, the search for new applications for plasma products, and the research and development of new products. This is Grifols commitment to science and to people. In Spain, resources allocated to R&D in the health sector in 2006 exceeded 700 million euros, a figure which represents 20% of total research investment. According to the latest data from Farmaindustria, the R&D sector employs over 4,000 people in the pharmaceutical industry, with research into new drugs driving the sector and representing one of the key bases of competitiveness in our country. The leading pharmaceutical companies have a long record of allocating significant resources to R&D, although the latest data shows a slowdown in comparison with previous years. During the period the average annual growth rate was 18.9%, while in 2005 growth was only 5.5%. This trend is probably also reflected in the rest of Europe, where forecast R&D investment could fall over the coming years. Grifols allocates 25.6 million euros to R&D in 2006 While the current trend appears to point towards a reduction of resources for R&D, Grifols remains committed to staying one step ahead. The company will continue to be a pioneer in the research and development of new applications and processes in the areas in which it operates, principally in the plasma products and diagnostic sectors. For this reason it allocates around 6% of its annual turnover to R&D activities, translating into expenditure of 25.6 million euros in 2006, 11.4% more than in Grifols also employs 132 people in R&D, the majority of whom work in Spain. The company s main concern is to ensure the maximum safety of its products. This is such an important issue that there is a specific research line dedicated to it. Among the milestones of 2006 a key achievement was the new Flebogamma DIF, a liquid intravenous immunoglobulin approved in December 2006 by the FDA. The company also promotes collaboration agreements for the joint development of research projects. A major development in 2006 was the agreement signed with the Research Foundation of the Germans Trias i Pujol Hospital in Barcelona for the development and evaluation of new clinical nutrition products, biotech products, and diagnostic products in the field of gastroenterology. Grifols R&D policy is set after taking into consideration the products manufactured by the company. The research areas and the principal projects on which work is currently being conducted are: 4 Detail of the Quality area laboratory in Los Angeles 4 22 GRIFOLS Annual Report 2006

21 Bioscience Division: Flebogamma DIF (Europe) Flebogamma DIF: Indication ITP (United States) Flebogamma Antihepatitis (Spain) Liquid IVIG Fibrin Adhesive Antithrombin III (United States) Indication: von Willebrand Factor VIII (Europe) Clinical trial: Alpha 1PI Incorporation of nanofiltration to other plasma products 5 Hospital Division: Grifill 3.0 Pre-diluted drug solutions Solutions of hypernitrogenized aminoacid Diagnostic Division: Q Coagulometer Wadiana F-100 Hemostasis Reagents In the Bioscience area various clinical trials are in progress into the use of plasma proteins with known applications in other illnesses. During 2006, clinical trials aimed at extending the application of these products were conducted, such as the treatment of von Willebrand disease with complexes of FVIII/VWF, in addition to other studies with immunoglobulins (polyvalent and specific), albumin, alpha-1-antitrypsin and antithrombin. The first of these has been designed to perform immunohematology tests on DG Gel cards, with a high capacity and increased autonomy without requiring intervention from the operator. It has been planned as a flexible analyzer which can be loaded with new samples without the need to stop tests already undergoing analysis. The second instrument will be the new generation of Triturus, which will also increase its capacity and flexibility to perform Elisa techniques. Finally, in the Hospital division efforts have been focused both on the enteral nutrition and fluid therapy areas and on the design of machines and equipment which make it possible to make sterile intravenous mixtures in the hospital pharmacy. Key developments in 2006 were the approval by the Spanish Agency for Medications and Health products of the Tauramin 8% and 10% aminoacids solution, and obtaining registration for a 10% and 20% lipid emulsion in Spain, Italy, the United Kingdom and Germany. There are also plans to present registers for new lipid emulsions and All in One nutrition bags (for parenteral nutrition) during The Diagnostic division focuses its innovative efforts on developing technical solutions in the field of in vitro diagnostics. During the year, projects have focused on the design and development of two new automatic analyzers. 5 Flebogamma DIF. The results of a decade of research and development in Spain GRIFOLS Annual Report

22 1 SUMMARY OF ACTIVITIES information technologies Activity in the information technology field has focused mainly on restructuring and improvements in Quality Management. Quality Management - Sap Quality Management This was launched in 2006, and is expected to be put into operation during In the first phase the system will be integrated into all the group s industrial companies in Spain, and will then be rolled out in the international subsidiaries. Its introduction will ensure high levels of automation in the quality control functions, and it will therefore be a basic tool for supporting the functions of the technical areas of the companies involved. The fact that this system is based on SAP facilitates its integration with the information handled by the other departments, and because it is being implemented in all the companies it will make it possible to standardize criteria and methods. Centralization of use of Plasma Donations Control System Most of Grifols plasmapheresis centers in the United States are managed using the DMS system (Donor Management System) on an outsourcing basis with a supplier in that country. In 2006 we began the process of transferring this service to the Grifols Data Processing Center in Spain, at the same time as designing contingency procedures and infrastructures for disaster situations at the new Grifols DPC (data processing center) in the United States, currently under construction. This reorganization will deliver higher quality services and greater continuity guarantees. There will also be increased internal control of a system which is vital to the group s activities. Finally, this change will also provide the opportunity to renew the communications network of the plasmapheresis centers, with the aim of increasing their capacity and redundancy levels, and this will lead to significant cost reductions. Implementation of the SAP System at PlasmaCare Inc. and Grifols Argentina The group s standard management system has been implemented at PlasmaCare, after it was acquired in As a result, in addition to integrating the company s internal management, this will lead to the standardization of processes and will facilitate control and accounting consolidation. SAP has also been implemented in the Argentina subsidiary for the same reasons. Purchasing management in the Industrial division 6 In 2006 a SAP-based electronic workflow system was implemented, automating the cycle of request, authorization and control of receipt for purchases of the Industrial division, and this will be extended to other units of the group. One of the Biomat USA plasmapheresis centers 6 24 GRIFOLS Annual Report 2006

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24 2 DIVISIONS - Bioscience DivisionS Bioscience Division Diagnostic Division HOSPITAL DIVISION 26 GRIFOLS Annual Report 2006

25 Bioscience Division The Bioscience Division encompasses the company s products and activities related to human plasma. In addition to plasma derivatives, it also includes a plasma inactivation service for hospitals in Spain. GRIFOLS Annual Report

26 2 DIVISIONS - Bioscience BIOSCIENCE ACTIVITY IN 2006 In 2006, 68% of the company s total turnover was generated by the Bioscience Division, with sales from this division reaching million euros. Compared to 2005, Bioscience grew by 20.9% due to an increased volume of sales of the majority of products and the upward trend in prices of some plasma derivatives. This year saw an increased demand for Factor VIII in the United States, which grew 35.1% compared to The price of albumin increased in the United States and both the price and demand for intravenous immunoglobulin (IVIG) rose. Income generated by the sale of Flebogamma grew 24.2% compared to the previous year as a result of the higher sales and the rise in prices in the United States. Grifols is fourth in the world in the sale in plasma derivatives In December of 2006 the Food & Drug Administration granted a license to market a new product: the new generation of intravenous immunoglobulin (IVIG). This plasma derivative, launched in 2007 under the name Flebogamma DIF, is manufactured in the new US FDA-certified IVIG production plant located in Parets del Vallés (Barcelona). Last year the agreement with Gambro Renal Products (GRP) was renewed, extending the distribution of the MARS liver support therapy. This product is currently sold in Brazil, Chile and Mexico. The World Health Organization (WHO) estimates that 12 million people worldwide suffer from severe liver diseases and that more than 70,000 people per year could benefit from the MARS liver support therapy based on albumin dialysis. Collecting plasma for fractionation Plasma derivatives are purified plasma proteins with therapeutic properties obtained through fractionating human plasma. These proteins require thorough treatment and purification and are the products manufactured by Grifols. The majority of plasma Grifols uses for fractionation comes from Grifols plasmapheresis centers in the United States. At the end of 2006 and after the acquisitions carried out that year, Grifols had 73 plasma collection centers supplying approximately 2 million liters of plasma per year. Currently, Grifols is the second largest plasma provider in the world and collects the raw material in order to be able respond to the market demand for plasma derivates. The incorporation of 22 new plasmapheresis centers has strengthened the company s vertical integration, specifically in the Bioscience Division. In 2006 Grifols acquired 22 plasmapheresis centers in the United States to ensure the company s supply of its main raw material, plasma. 7 Inside one of Grifols plasmapheresis centers in the USA 7 28 GRIFOLS Annual Report 2006

27 Diagram of the increase in Grifols plasmapheresis centers: Centers (000) liters 80 2, , , Biomat USA PlasmaCare Liters Origin of fractionated plasma Liters Liters US Plasma Sales of plasma though contract obligations Total US plasma available European plasma Specifis plasma Total plasma Plasmapheresis centers incorporated into Grifols structure in 2006: 14 plasmapheresis centers after the acquisition of the US company PlasmaCare in March Baxter centers in April Main plasma fractionation plant in Los Angeles GRIFOLS Annual Report

28 2 DIVISIONS - Bioscience Plasma fractionation In 2006 Grifols fractionated 1.8 million liters of plasma, 13.4% more than the previous year. The majority of plasma came from the United States: 1.5 million liters from the US compared to 362,000 liters from Europe. Grifols has fractionated 1.8 million liters of plasma in 2006, almost 13.4% more than in The company has achieved a significant level of autonomy in terms of raw materials: 74% of the plasma Grifols fractionates comes from the company s own plasmapheresis centers. This trend will continue in the future and will nearly eliminate Grifols dependence on outside suppliers. Grifols will therefore be able to exercise greater control on the cost of its plasma and increase margins. Biomat, a Grifols company located in Spain, offers a plasma inactivation service called IPTH (Inactivation of Plasma for Transfusion in the Hospital), aimed at preventing virus transmission through the transfusion of plasma units. In 2006, 85,591 units were inactivated through photo-inactivation in the presence of blue methylene. These 22,400 liters came from Transfusion Centers from different areas of Spain. In June 2007, Biomat inactivated the millionth unit since this service was first launched. In July of the same year the IPTH program celebrated its tenth anniversary. Plasma derivatives production facilities in Barcelona, Spain 9 30 GRIFOLS Annual Report 2006

29 Plasma derivative production plants In order to fractionate plasma and obtain different proteins for therapeutic use, the raw material undergoes different processes and treatments which separate and precipitate each of these proteins. Once they have been obtained, they undergo rigorous processes of inactivation and purification before being bottled. Plasma fractionation and the production of plasma derivatives is carried out in Grifols two plants located in Barcelona (Spain) and in Los Angeles (United States) which are licensed by the FDA and European Union health authorities. Together, their fractionation capacity amounts to 3.6 million liters per year. Barcelona Plant: Fractionation Capacity: 2.1 million liters/year. Los Angeles Plant: Fractionation Capacity: 1.5 million liters/year. The fractionation plants are not currently functioning at 100% capacity. In 2006, Grifols fractionated 1.8 million liters of plasma, putting to use only 50% of its total capacity, which clearly demonstrates the company s growth potential. Development of Grifols fractionation capacity (000) liters 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Barcelona capacity L.A. capacity Throughput In March, the FDA granted a license for the new IVIG production plant designed and built by Grifols in Parets del Valles, Barcelona, where the other Bioscience manufacturing facilities are located Minifrac. New plasma fractionation plant, in the process of validation. This plant will increase fractionation capacity by 700,000 liters in the Los Angeles facilities GRIFOLS Annual Report

30 2 DIVISIONS - Bioscience Investments in 2006 In 2006, the Bioscience Division s investments were aimed at improving R&D and the plasma derivatives manufacturing facilities in Barcelona and Los Angeles. A number of improvements were carried out to bring the US production plant up to the standards of the Spanish plant. Another important investment was the construction of a new building in the Los Angeles industrial complex. The first floor houses the new sterile filling areas currently undergoing validation. The second floor will be home to the coagulation proteins purification area, and the technical and service areas will be located on the third floor. Portfolio of products Bioscience Division products are aimed at health professionals for the treatment of patients with different conditions. Grifols large portfolio of plasma derivatives are recognized for their maximum levels of quality and safety. They are used in the following therapeutic areas: Coagulation Hemophilia disease Intensive Care Immunology Construction of a new plant for the purification and bottling of albumin was also begun. 11 At the Barcelona plant, investments have gone toward improvements in production and the construction of a plant for the purification of residual water from the production of plasma derivatives. Partial view of the Los Angeles industrial complex including the new 325 building GRIFOLS Annual Report 2006

31 Plasma derivative Commercial Name Clients Factor VIII Fanhdi Hemophilia Units Alphanate Hemophilia Units Factor IX Novix Hemophilia Units Alphanine Hemophilia Units Prothrombin Complex Profilnine Hemophilia Units Intravenous Immunoglobulin IGIV Flebogamma Immunology Hematology - Neurology Flebogamma DIF Immunology Hematology - Neurology Albumin Albúmina Humana Grifols Hospital Pharmacy - Hepatic Units Burns - ICU Surgery Albutein Hospital Pharmacy Intramuscular Immunoglobulins Pharmacy Anti-thrombin III Anbin Hemostasis Unit Alpha-1 antitrypsin Trypsone Pneumology Unit Raw materials and others Clients Albumin for non-therapeutic use Intermediary R&D Biotech Centers Plasma Fractionations products and Pharmaceutical Industry Alpha-1 fractionation service Pharmaceutical Industry GRIFOLS Annual Report

32 2 DIVISIONS - Bioscience Grifols obtains the US FDA license to market the new Flebogamma DIF in the United States in 2006 Flebogamma DIF (Double Inactivated and Filtered) is the only product on the market which incorporates two specific inactivation steps and 20 nanometer ultrafiltration into its production process, improving its safety margin even further. Grifols efforts in research produced a new manufacturing method which significantly improves the yield per liter of plasma used in the production of Flebogamma DIF. This project spanned over the course of 10 years, involving efforts in the research, development, validation and registration of the new Flebogamma DIF. This new generation IVIG forms part of Grifols commitment to its patients in offering the best product possible to guarantee their health and well-being. This R&D team upholds this commitment by devising new processing methods and incorporating the newest technologies available in the sector. In the United States, Flebogamma DIF is indicated for the replacement treatment in primary immune deficiencies. Projects carried out in 2006: FDA licensing of the new Flebogamma DIF in the United States. Launch of Anbinex in Italy, the main European market for Antithrombin. Launch of Alphanine (Factor IX) in Germany. Launch of the 1500 IU presentation of Fanhdi (Factor VIII) in several countries. Projects carried out in 2007: 12 Flebogamma DIF marketed in the USA. Flebogamma DIF licensing obtained in Europe. Pending approval from the European Agency for the Evaluation of Medicinal Products (EMEA). Approval of the indication of von Willebrand disease for Alphanate in the USA. The indication is approved later in the EU. Approval of the indication of von Willebrand disease for Fanhdi (Factor VIII) in the EU. Exterior view of the purification and production plant for Flebogamma DIF in Barcelona, Spain GRIFOLS Annual Report 2006