By Nell Mackenzie
LONDON (Reuters) - Shares in Grifols fell as much as over 40% on Tuesday, wiping $3.83 billion off its market value, after hedge fund Gotham City Research questioned its accounting, prompting the Spanish drugmaker to "categorically" deny any wrongdoing.
Below are some of the main points from the report and company comments - translated from Spanish - from a response it had sent to the Spanish financial regulator and shared with Reuters.
OVERSTATED EARNINGS
Gotham City Research said that Grifols received almost all of its earnings from so-called "non-controlling interests."
These satellite companies a few of which the shortseller focused on in its report, include blood donation firm Haema AG, plasma donation company BPC Plasma and testing firm Grifols Diagnostics Solutions, account for 96.8% of the company's profits, the report says.
However, Scranton Enterprises, a family office set up by members of the Grifols founding family, also reports earnings from the same subsidiaries, according to the report, which said Grifols sold Haema AG and BPC Plasma to Scranton Enterprises in 2018.
Both Scranton Enterprises and Grifols cannot claim those earnings at the same time, the report said.
Grifols said in its statement to the regulator that under a management contract it continued to manage the plasma centers of Biotest and Haema and bought all the plasma obtained by these companies. It did not address Gotham's claim of double-reporting of profits in its statement to the regulator or in its response to a Reuters request for comment about that claim.
OWNERSHIP OF HAEMA AG AND BPC PLASMA
Grifols reports the earnings of Haema AG and BPC Plasma on its accounts because it has an option to buy back the two companies' shares, Gotham City says. But the shortseller argues that counting earnings from companies that it doesn't own is "highly suspect."
In its statement to the regulator, Grifols said that accounting rules meant it did have control of these companies through voting rights attached to the options.
UNDERSTATED DEBT
While Grifols included satellite companies' earnings in its accounts, the firms' debts are not included in Grifols accounts, and would add to its debt burden if they were, says Gotham City.
A $95 million loan to Scranton Enterprises in 2018, is not disclosed in Grifols’ filings and only appears in Scranton filings, the report says.
Nothing material is hidden here, Grifols said in its statement. Scranton Plasma, which bought Biotest and Haema, asked for financing from "credit institutions" and a lender required Grifols to provide a "vendor's financing" loan to Scranton Plasma for the transaction, the company said. Grifols is not affected in any way by the loan, did not participate in its negotiation, does not have the power to finance it and is not its guarantor, said the statement.
Grifols was involved in a share stake sale of one of its U.S. diagnostics subsidiaries with Shanghai RAAS (SRAAS) but has not removed its total earnings from accounts, says the Gotham City report.
Grifols says under the sale terms and agreement it could still recognize these earnings on its accounts.
The Gotham City report also said that Scranton Enterprises, the Grifols' family entity, was highly leveraged and if it were to fail, that would be material to Grifols because of the debt owed between the companies.
Grifols said in its statement that transactions between the two entities have been recorded on the books of the company and in its public accounts, presented to the Spanish regulator and the company has filed forms with the SEC in the United States, so there is no new information that can be considered hidden, Grifols said in its statement.
SHORTSELLER PROFITS
General Industrial Partners, a joint venture between hedge funds Gotham City Research and Portsea Asset Management took a short position of 0.57% in Grifols on Jan. 8, a regulatory filing with the Spanish regulator CNMV shows.
The hedge funds would have made around 20 million euros in profit when Grifols shares tumbled by up to 40% after Gotham City's report was published.
Grifols said in its statement it did not understand the report's " interpretation" unless its only objective was to lower the company's share price and profit from it.
Grifols said in its statement to the regulator it planned to issue another response regarding aspects of the business mentioned in the Gotham City report.
($1 = 0.9142 euros)