West Pharmaceutical Services, Inc. (WST) Earnings Call Transcript & Summary

Welcome, everybody. I'm Dave Windley with Jefferies Healthcare Equity Research. I want to thank you for your interest in Jefferies Virtual Global Healthcare Conference. We -- I know folks who have probably been through a multitude of these, and we look forward to the opportunity to do conferences in person at some point in the not-too-distant future. For the time being, we're still conducting virtual IT care and pharma services, contract manufacturing, contract research and related for Jefferies. And one of the key companies in that space is West Pharma Services. WST is the ticker there. We are going to have a fireside chat with their management. CEO, Eric Green, is with us as well as Bernard Birkett, the company's CFO. So we welcome you two, and thank you for your time today.

Thank you, Dave. It's good to be here.

Sure. So let's just dive right in. Your business has performed really well. You benefited from being involved in some key programs that are helping with global health. But certainly, there's some underlying trends that were already in place and that the pandemic has served to accelerate, one of those being the shift toward high-value products. So as a general question, before I dive into a little bit more detail, maybe you could talk about the conversations you're having with clients at the development stage and how the selecting of your high-value products is increasing in those conversations.

Yes, Dave, that's the current momentum that we're seeing is around the adoption of our high-value product portfolio, particularly around FluroTec and all the way up to our NovaPure platform. And we are having discussions early on in their phase of development that enables them to think about using a -- in particular, like a NovaPure as a platform for a number of biologics that are going through their pipeline. I would say that we're really -- it's not just the small firms that are looking at the highest level of HVPs at West, it's the entire portfolio of customers. We're seeing the adaption. As you recall, we launched NovaPure back in 2016, 2017. It takes a couple of years for development. Our customers get comfortable with the data pack, the -- making sure that is the right primary packaging containment for their solution. And it has -- the growth that we've seen is very, very attractive as we speak now. So we believe there's good runway ahead of us on -- in HVP, but the conversation -- as you said earlier, the conversation starts early on that journey, and we're seeing it through the approvals that are coming through as we speak.

So maybe to flip the question on its head. Are there or what would be the examples of client products that don't choose a high-value product these days? It seems like the selection has gotten pretty high from a percentage -- a percentage of new, I should say.

Yes. Yes, right, Dave. That's exactly the point. Most of the new products being launched or leveraging a mastery of the high-value product portfolio at West. We came out with a targeted line around the Generics segment with AccelTRA and that was strategic in regards to addressing speed, quality, reproducibility and a technical data pack that is ready to go. And therefore, there is a high adoption rate in that particular area for ANDAs. And in the biologic, in the biosimilar space, it really is -- well, the key differentiator, the technology is the FluroTec coating. So the interaction between the barrier coat between the elastomer and the drug molecule continues to be the industry standard. So to get back to your point, a lot of the standard components, which we still produce billions of components every year across the globe, is needed in the marketplace. These are like needle shields, blood collection stoppers, disposable plungers in the marketplace. But if you think about new molecules coming to the market, HVP is the target area.

Got it. Okay. So then drilling into that a little bit. Your Proprietary Products segment grew a little over 8% in 1Q ex-COVID. Your high-value products, so including COVID and non-COVID, your high-value products are now up to like 70% of revenue in the segment. That's continued to march higher. Is there -- I think the answer is going to be no, but is there an upper limit to that? How should we think about that continuing to trend?

Yes. There's a couple of drivers here. First of all, I just want to reiterate that the Proprietary business without or ex COVID for 2020 was double digits. In the first quarter, it was also double digits. So that's a very strong, healthy core base business growth in the organization. It's being led by our biologics growth, frankly. In biologics , the key components that are being used is FluroTec, NovaPure and Crystal Zenith, the alternative to glass solution for the most complex biologics being approved. When you think -- you think about longer term of the biologics, we see double digits in that business, very robust. Again, without COVID, we believe that will continue to grow nicely, high single to low double digits for a number of years ahead of us. You've got generics around mid-single; and pharma, the small molecule, around low single to mid single. So you blend that all together, it continues to be very attractive growth here at West. And the biologics piece is becoming more meaningful. So the upper balance is hard to define because our challenge in our R&D group is to continuously evolve that high-value product portfolio. We don't believe NovaPure is the end result. It's an element of the portfolio. And so we want to continue to convert new customers towards high-value products and/or new molecules. And we also want our customers, and particularly in biologics, if they're using a particular configuration for the platform like Westar, move up to Envision all the way up to NovaPure. So there is a conversion even with high-value products that we're focused on, which will give us that effect more attractive economics for us, but a better product, a better end result for our customer.

Got it. On that conversion point that you make, that's an area where I think the acknowledgment has always been, look, the good news is, once it's [ specked ] in, it's really sticky. The bad news is once it's [ specked ] in, it's really sticky. They don't necessarily want to change. Is the attitude toward doing the validation work and changing to moving up the ladder of high-value products, is that -- is there a more accepting attitude of that? And if so, do the clients do that in portfolios or groups of products? Or is it really kind of one in a time decision?

It's both. It depends on the client. A few clients will do one at a time, particularly in the new pipeline. We have other clients who are looking at doing a platform approach. So as they approve it, not just on new molecules, they're looking to convert existing. And so when they refile for those particular drug molecules. So that within our life cycle management process. So it's a combination of both, and we're taking the opportunity to work with our customers in both scenarios.

Do those changes for them require machining changes in their manufacturing lines? Or is that not really required for the level or part of their filling?

For the most part, no. There's this calibration and minor modifications. For us, there's alteration, obviously. But for them, it's minimal.

Got it. So coming back, you mentioned -- I want to make sure I understand the point you're making about continuing to expect double-digit growth. Is that in total? Or do you think about that as ex COVID? And if the latter, let's also talk about what -- kind of what visibility do you have for continuation of a certain level of COVID work beyond the current year?

I'll start off, and then I'll pull Bernard into the conversation also. But if I look at term, long term, long term, we still believe in the construct of 6% to 8% organic growth in our business, core business. And you're right, we've been producing higher than that over the last couple of years and entering into 2021. We see a key driver of that is continuation of high participation rate in biologics. We -- and also a continuation of growth in HVP. But I don't know, Bernie, if you want to add a comment about the 6% to 8% in long-term growth.

Yes. So there's a couple of things. With the 6% to 8%, as Eric said, that's over the long term. And that's where we've seen our base business outperform that through probably through to 2020 and into early 2021. The one thing that I would say is that the growth profile of our business is shifting a little bit, where now we're seeing a lot of the growth come in biologics. Generics and pharma are still pretty close to where we would expect them to be, with pharma in the low single-digit to mid-single-digit and the generics mid-single to high. And where we have seen a shift is the growth in our contract manufacturing business, which was growing early double digits, now is probably normalized, about a mid-single-digit growth rate. So the 6% to 8%, even though people will say, oh, it's still the same name. It's -- the mix is much better for us. And so it is a stronger type of growth. And then when you look at the numbers that we're growing off. So from each year, the comp gets a lot more difficult. So 8% or 9% next year isn't the same as 8% or 9% this year. So that's what we've got to kind of be cognizant of as well as to -- the numbers are getting a lot bigger. So 6% to 8% means a lot more now than it did in the past. So when we look at it, we want to be relatively confident about the guidance we're giving. Now if we can beat that and if there's more demand there, we're in a position to be able to satisfy them and grow faster. But we are reasonably -- we're confident around that 6% to 8% trajectory over the long term.

Got it. And then when you think about the -- I guess, I'll call it, the intermediate term, the contribution from COVID, what's your longer-term visibility on that? Certainly, we and others have identified and published commitments by the major manufacturers of vaccine into the 12 billion doses next year. I mean certainly, if they continue with those commitments, it looks like '22 will grow. But what visibility might you have to the persistency of the COVID supply?

Yes. Go ahead, Eric.

No, no. Take it, Bernard, please.

Yes, so we're continuously reviewing this. And you can see how we've approached the incremental layering in of extra CapEx since May of 2020, where we're doing it in phases based on the growth and demand that we're seeing, both for COVID -- responding to COVID, particularly on the vaccine side and then also on our core -- our business for growth. So we had our CapEx. We did an incremental investment in May, June of last year. That's coming online probably throughout the first half of 2021. Some of it was online in the back end of 2020. We did a second phase, got signed off in December of 2020, and we expect that equipment to layer in, in late 2021 and through 2022. We continue to review those CapEx requirements based on demand. So it's changing all the time. But what we're seeing is that there's more of a likelihood of vaccines being required for the short to medium term, if not long term, where initially people may have thought it would be a one and done. Well, that doesn't appear to be the case. We're still gathering information on that. So for 2021, it's -- we got, [ what's it ], $345 million in our guidance. Our core or base business growth is probably at the high end of our construct based on the guidance we've given. And so again, still very strong growth. And we're getting visibility into 2022, but we're still pulling that together and assessing from a capacity point of view what do we need to do to support that.