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analysisBlood moneyDr Joe Taylor and Dr Leonid Shapiro of Candesic argue �����������������(�����������������������������+(�������������������������������������

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The international market for plasma derivatives stands at $17 billion (£11 billion), following years of steady

increase. The outlook is attractive for all major fractions over the next five years, with increasing demand driven by earlier diagnoses, further indications and geographical expansion of the market. However, we expect that over the longer-term, both albumin and plasma-derived clotting factor markets will contract, leaving immunoglobulins (Ig) to drive growth and value share for fractionators as their use expands. For fractionators, this still represents a solid growth of revenues and opportunities for consolidation.

Plasma derivatives are isolated fractions of donated human blood, with three principal molecular product categories: Ig for the treatment of immune disorders, albumin for patients who cannot synthesis it or lose it from their blood, and clotting factors (primarily VIII and IX) for patients with inherited haemophilias.

Immunoglobulins Ig constitute the largest part of the plasma product market by value, representing $7 billion in sales and

growing at 8 to 10 % per year. Demand growth is being driven by new delivery methods. Ig is ordinarily delivered intravenously (IVIg), which limits the settings in which it can be administered. Newer subcutaneous delivery methods (SCIg) of the same human plasma derived Ig have been developed and are rapidly gaining traction due to their increased convenience, comfort, and ease of use, especially in the home. SCIg formulations, including Hizentra (CLS Behring), have seen double-digit growth and may prove to be even more popular after new regulatory approvals that are expected soon. For example, approval for the use of SCIg in chronic demyelinating neuropathies, which currently make up 25% of the US IVIg market, is expected within the next couple of years. Revenue per patient is also likely to prove higher with SCIg, as the dose requirements are around 40% greater compared against IVIg. Within the next 15 years the growth of the SCIg market is conservatively anticipated to reach $400 million.

Clotting factorsAlthough 30% more expensive, recombinant clotting factors are increasing market penetrance against

their plasma derived counterparts, unlike in the wider plasma protein market (figure 1). The principal driver seems to be perceptions in the US and EU that recombinant supplies are more stable and that recombinants do not carry the risk of cross-infection from donors, making patients and clinicians more comfortable with their use. In reality, the risk of infection from plasma derived products is not significant, with stringent safety measures, including quarantine, now in place. We’re a long way from the days when Hepatitis C was allowed to circulate in the donor blood pool. With growing demand in new geographies, where price sensitivity is greater, revenue increases from plasma derivatives are likely to outstrip recombinants, at least until price equivalence can be achieved.

Newer recombinant clotting factors, with improved pharmacokinetic profiles, are in the pipeline and will be a threat to plasma derivatives in the long-term. Biogen Idec’s Eloctate and Alprolix are examples of the next generation of agents for haemophilia, and both have now succeeded in their FDA Biologics License Applications. These agents promise a longer half-life than traditional recombinants or plasma derived factors, and could represent a major clinical advantage by reducing the frequency of

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FIGURE 1GLOBAL MARKET SHARES FOR PLASMA DERIVATIVES FOR LEADING COMPANIES

Source: Source: Marketing Research Bureau, Candesic analysis

Revenue, millions USD

935 1096 1294 1396 1549 1642

627 842 9551155

1479 1825

985 1217 1368

13541412 1494

500 618 740382 286 589

146 214 222 210 231 221177 189 202 202 223 180

1 2 3 4 5 6

Grifois CSL Baxter Octapharma Biotest LFB

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36 37

41

46

51 5154

0

10

20

30

40

50

60

2012 2013E 2014E 2015E 2016E 2017E 2018E

CAGR7.2%

Source: Source: Marketing Research Bureau, Candesic analysis

FIGURE 2US AND EU FRACTIONATION CAPACITYMillions of litres/annum

6,3006,800

8,500

11,000

17,000

20,000

5,100

5,3005,800

7,000

12,000

14,000

1,200 1,600

2,600

3,700

5,600 6,200

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Combined

Plasma derived proteins

Recombinantproteins

CAGR CAGR%, ‘98-’04 %, ‘05-’11

7.3 11.0

3.9 12.0

18.0 8.9

GLOBAL PLASMA PROTEINS MARKET

$m, 1998-2011

Source: Marketing Research Bureau, Candesic analysis

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prophylactic administration and thereby increasing patient compliance. It is likely that the market for Factors VIII and IX in developed countries will be much diminished in between five and 10 years’ time, however, there is scope for the developing world to increasingly use plasma derived clotting factors as prices fall.

AlbuminThe use of albumin in plasma expansion is controversial, with its selection being largely down to clinician preference. As evidence for the equivalence of saline for many indications mounts, albumin sales are likely to stagnate or even lose traction in the EU and US. However, sales have seen strong growth in China, where it is the only blood product allowed for import, with CSL Behring reporting an 18% CAGR over the past three years. Internationally, it is likely that expanded use in emerging markets will compensate for changing clinical practice in more established healthcare economies for now. However,

an over-reliance on albumin revenue is a weakness across the industry. This is particularly evident in the economics of fractionation. Like petrochemical fractionation, it is not cost effective to produce only Ig and clotting factors from donor blood (at least at current prices). Albumin must also be produced from the same blood for fractionators to make a profit. However, this may not always be the case. As demand for Ig grows, so will its price, and since production of Albumin and Ig is linked, Ig demand will potentially ‘pull’ Albumin into production. While this will lead to lower Albumin prices due to excess supply, much of this supply may be taken up by developing markets, partially driven by reduced prices. The same is true for plasma derived clotting factors. Even though they may eventually be replaced by recombinant ones, their drop in price due to the requirement of Ig production will only widen the price differential with recombinant factors and fuel demand by the developing world, which undertreats haemophilia at present.

Supply constraintHeavy CapEx requirements and stringent regulatory frameworks explain the five to seven year lead-time for a new fully functioning fractionation facility. The fractionation industry has traditionally struggled to deliver the capacity required for increasing market demand, especially for Ig. In addition, there have been a number of recent supply shocks, including Octapharma’s call-back of IVIg stocks in 2010 and Baxter’s California production facility going offline for refurbishment. However, their impact was modest and 2014 will see the global plasma derivatives supply capacity back on track. Furthermore, in 2010-11 nearly all major players announced significant capital investments to scale up their production capacity (Baxter +4.6 million litres, CSL +4 million and Grifols +3 million). Supply is now anticipated to increase by CAGR 7.2% through to 2018 (figure 2). At the same time, fears have receded over Ig undersupply resulting from increased demand for use in

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FIGURE 3CHINA’S ALBUMIN MARKET SHARE STRUCTURE%

Source: Source: Marketing Research Bureau, Candesic analysis

CSL26%

Baxter12%

Octopharma12%

China Biologic Products

13%

Hualan8%

CNBG7%

Tonrol5%

Grifols4%

Shnyang3%

Other10%

dementia. Baxter’s Phase-III Alzheimer’s Disease (AD) trial, reported in May, did not achieve its primary endpoints and it is now unlikely that a similarly large market will open up without significant forewarning.

Expanding geographiesGlobal plasma market dynamics are currently positive, led by rising IVIg demand in all three major regions; established US and EU markets have developed at +8% and +10%, respectively, with the rest of the world outstripping them at +15%. Although the US and EU still represent 75% of the global market, opportunities for strongest growth lie outside of these

traditional territories. Whilst a number of countries have

attempted to implement local collection and fractionation programmes, their success has been limited. As demand grows, countries such as China, Japan and Korea may opt to relax their prohibition of foreign plasma product import. The opening-up of these markets would constitute significant new opportunities for existing international players, just as the liberalisation of import controls did in the Middle East.

Of significance, emerging markets are much less consolidated than they are in established markets. For example, China’s albumin market remains reasonably fragmented, with the leading

three firms holding only half of the market in comparison to the between 75 and 90% held elsewhere (figure 3). Both international and local players are looking to capitalise on increasing demand in emerging markets, although the latter remain less efficient than their larger and more experienced competitors.

Market entryAlthough major players look well positioned to maintain and even drive-up margins, barriers to market entry are too great for new entrants without acquisition of moderately sized existing assets. The $100 million CapEx that is required for a 100,000 litre fractionation

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Dr Joe Taylor is an engagement manager and Dr Leonid Shapiro is managing partner of Candesic, a specialist healthcare consultancy focused on commercial due diligence and strategy work for private equity, corporates, and the NHS. Lshapiro@candesic.com Tel: 020 7096 7681

Candesic

FIGURE 4M&A ACTIVITY HIGHLIGHTS

*Plasma fractionation assets onlySource: Company Press Releases, Bankia Bolsa Analyst Report, Mergermarket, Candesic analysis

Grifols acquired Talecris for $3.4bn

Aventis Behring

Swiss Red Cross*

CSL

Bayer

Talecris

Grifols

Alpha Therapeutics

Baxter

Octapharma

Biovitrum

Kedrion

Biotest

LFB

BPLBain Capital bought

an 80% stake in BPL from the UK government for

$370m

2000 2001 2002 2003 2004 2006-2010 20112005 2012 2013

Investitori AssociatiSGR sold a 32.5%

stake in Kedrion for$270m to the

Marcucci family

capacity is only part of the challenge. Fractionators with their own integrated plasma supply source have an absolute cost advantage, and building networks for blood collection is lengthy and technically challenging. Administrative hurdles create delays in market entry equivalent in impact to proprietary learning curves. Furthermore, there are significant economies of scale, making it difficult for small-scale entrants to establish a competitive offering. Consequently smaller players have tended to be incorporated into larger entities over the past decade, with Grifols’ acquisition of Telecris being a recent high profile case in point, as the market has consolidated (figure 4).

A number of smaller players still exist, and could represent good upside

to gain exposure to this resilient and growing industry. Bain Capital’s recent acquisition of BPL, previously a British government operator, suggests the market is taking interest in the sector as an area of potential growth. Italian plasma fractionator Kedrion saw a large stake sold between investors and has mooted an IPO. However, Octapharma may prove a more interesting platform asset for a new investor as strategic acquisition is unlikely for anti-competitive reasons. There is significant interest too in LFB, the public French fractionator, which may be privatised in the near future.

ConclusionsThe global plasma derivatives market has a positive outlook over the next five

years, but beyond then we’re likely to see falling albumin demand as clinical practice matures and the replacement of plasma derived clotting factors with superior recombinants. It may be too early to tell if Ig demand will grow enough to make this transition easy for fractionators, however, it is unlikely that the industry will fail en masse and that normal microeconomics around Ig will support producers. Today, growth can be achieved through supplying into emerging markets and taking advantage of increasing demand at home. Future growth in plasma fractionation will be driven by expanding demand and wider applications for human Ig. In either case, with only a few producers in the market, owning one of them will make for a strong business case for investors. �