Grifols shares plummet after Gotham report

In a dramatic turn of events, the share price of Spanish pharmaceutical company Grifols fell sharply, its market value fell by 40%, and its market value evaporated by approximately US$3.83 billion. The move follows accusations from hedge fund Gotham City Research that raised questions about the company’s accounting practices. Grievous has vehemently denied any wrongdoing in response to the accusations.

The Gotham Research report found that Gerry Falls overestimated his earnings and attributed nearly all of his profits to “noncontrolling interests.” These interests are mainly concentrated in satellite companies such as Haema AG, BPC Plasma and Grifols Diagnostics Solutions, which according to the report contribute 96.8% of Grifols’ revenue. However, the report noted a potential conflict because Scranton Enterprises, a family office with ties to the Grifols founding family, also reported income from those subsidiaries. The report highlighted that both entities could not declare these revenues at the same time, raising questions about the legality of the reported profits.

Grifols addressed some of these issues in a statement to Spain’s financial regulator, explaining the management of the Biotest and Haema plasma centers and the purchase of plasma from these entities. However, the company did not directly respond to the accusations of double-reporting profits.

Another controversial issue raised by Gotham City involves the ownership of Haema AG and BPC Plasma. Grifols includes earnings from these companies in its financial statements because it retains the option to repurchase shares. However, the report criticized the practice, saying calculating revenue from entities not owned by Grifols was problematic.

The hedge fund report also accused Grifols of underreporting debt. It claims that the satellite company debt omitted from Grifols’ accounts, if included, would significantly increase the company’s debt burden. Specifically, a $95 million loan to a Scranton business in 2018 was not disclosed in Grifols’ records. Grifols claimed it was not affected by the loan because it was not involved in negotiations, financing or acting as guarantor.

In addition, the report mentioned that Grifols sold a stake in a U.S. diagnostics subsidiary to Shanghai RAAS, but noted that Grifols did not remove the subsidiary’s total revenue from its accounts. Grifols asserts that the terms of the sale enable it to continue to recognize these revenues.

The report also warns of the potential risks posed by high levels of corporate leverage in Scranton. If Scranton Enterprises enters financial difficulty, there could be a significant impact on Grifols due to intercompany debt. Grifols responded that all transactions between the two entities were recorded and publicly disclosed.

In a related development, General Industrial Partners, a joint venture of Gotham City Research and Portsea Asset Management, disclosed a 0.57% short position in Grifols on Monday. Following the release of the Gotham Report and the subsequent drop in Grifols’ share price, the hedge fund made a profit of approximately €20 million.

Gerry Falls expressed confusion over the “interpretation” of the report, suggesting the purpose of the report may have been to manipulate the company’s share price for profit. The company announced plans to issue a follow-up response to aspects of its business mentioned in the Gotham report.

Reuters contributed to this article.

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