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

Good morning, everybody. Thank you for joining us. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. With me, I have the pleasure of Eric Green, CEO, Chair of the Board and President of West Pharmaceuticals and you guys have a [indiscernible].

[indiscernible]. I appreciate the invitation here to the Barclays Healthcare Conference. [indiscernible] for the great list of one-on-ones today. Great. Before we get started, I wanted [indiscernible] you can find it on the deck posted on our website and I will post them here on the screen. Let's start about West. And April 14, it's a pretty major milestone for us at West. It will be 100 years of our existence. And it's been true to reform around supporting patients across the globe. when you think about the level of innovation, global expansion and where we are today in this whole process in the last 100 years. What gets us excited at West is that it's not really just looking back [indiscernible] what has been accomplished [indiscernible] are in the [indiscernible] going forward. So it's a very exciting time right now for us globally around West, and it's the past individuals that participate with West, current and also the future. Let's talk about our business. Those that don't know the story, we're very clear about our purpose. We're a purpose-driven company. It's about serving patients and [indiscernible] patient lives. We are a critical manufacturer in health care. We did about 47 billion components last year. And each and every one of them, we feel, is a high level of quality. And the purpose drives us to make sure that each and every one goes out as thinking about patient, patient needs on that one product. We have a very clear strategy. We'll get into greater [indiscernible] execute, innovate and grow. And this has been our framework in our business for the last several years, and it continues to service well [indiscernible] effort globally. Simplistically, if you want to break our business from a product point of view into 3 buckets, what does West do? Well, at West, we're a major manufacturer of vial containment and syringe components. We're involved with administration products. If you're in the hospital setting, you'll see our products used on a daily basis. And obviously, we have moved more towards drug delivery and diagnostic devices. This gives us a very strong foothold when you think about being the leader in containment and delivery of injectable medicines, very attractive space in health care. It's a fast-growing space of health care, and we're very well positioned with a pretty broad portfolio [indiscernible] service to our customers. The diversity of our portfolio, think about it from 3 different angles. One is from the geographic point of view. Over 50% of our revenue is outside of the United States, in the Americas. Thinking from a product category, not many years ago, I sit here and talk about 30% or 40%, but now 60-plus percent of our business in what we call high-value products is around components and delivery devices that we provide our products. And that's one of the main thesis of the growth algorithm at West, which I'll talk further. What's also very exciting is that our participation across all the different categories of biologics, generics and pharma continues to be very strong. Biologics is over 40% of our total enterprise revenue today, with about 17% of contract manufactured. 2022 was a significant year for us. There's a lot that we have accomplished. One, over 47 billion components we deliver to our customers across the globe. Two, as we expanded our product portfolio in many different ways, most notable is that we're moving from a component to a system approach, and the partnership with Corning gives us technology and capabilities that we did not have in our portfolio that we'll be able to expand on. We added new products to the portfolio and expanded lines around SmartDose and Crystal Zenith. It's also important to note that we continue to expand capacity. If you think about investing capital into the enterprise, we're best to redeploy the cash that we generate, back into the organic growth story that we have West. Significant capital expansion is going to cross the whole of the global network. And lastly, it's important for us to continue to fill up the communities where we live and work. We truly believe that's part of the DNA of West, started back with our founder, Herman O. West. And we continue to dedicate time and resources to support our local communities, which also drives our ESG strategy, which is not an initiative. It's built into who we are into our framework as a business. We talk about market led, and what does that mean? Market-led is when you think about from a customer commercial perspective, it's identifying what are the unique value propositions we need to use to bring to the table to expand our portfolio and capabilities that gives us differentiation and helps our customers deliver those critical components of drug molecules to patients across the world. It also informs our R&D and our technical area of our business. So how do we broaden our portfolio to be more effective versus inwards out, it's out in concept. And then also, this market-led journey has allowed us to globalize our operations to really level load and be more effective to leverage the assets we have across the globe. And so when I think about -- starting with the first part of this is around the market-led approach on the commercial side. We have a very healthy participation in all areas. As you know in injectable space, it's roughly around low single-digit volume growth. The fastest growth of the injectable space is around biologics, and our participation rate in biologics is extremely high. And as you think about whether it's the innovative biologic or biosimilar, we view that as consistent. Our value proposition is very, very similar. And if you think about our participation in biologics and what has that resulted is that in the last 5 years, it's gone from low 20% to over 40% of our revenues are generated by the biologics space. If you think about number of BLAs, the pipeline and our participation in the pipeline as it comes out to be commercial, we're in a very strong position to continue to have accelerated growth in the top line of our business. And we're also driving what we call high-value product portfolio. It is taking customers on a journey from the lower to bottom section of the chart all the way to the upper right. As we think about new drugs and biologics and some other unique molecules and small molecule areas, we're pushing -- we're discussing with our customers around NovaPure. [indiscernible] was around NovaPure, the higher end of the trajectory of this portfolio, and we're also now getting involved with devices. And these devices, we have 4 -- last several years, we have new wearables 4 approved FDA [indiscernible] devices with wearables, which is exciting as you think about the smart shift between IV to subcu. We're in a very good position to support that transition and support our customers and ultimately the experience of the patient. Leading by the science. It's interesting -- when you think about where we -- we just opened up a new R&D facility last couple of weeks ago in Pennsylvania. What's exciting about that facility, it's really driving more material sciences and drug interaction with materials, allowing us to identify what is the next generation of the portfolio to drive value to our customers. So we do look at the portfolio expansion. We're continuously looking at new technologies that we're scouting for, and we will bring them in, as we've done in the past several years. And we're also looking at product life cycle management. So those are the key levers and drivers we're looking at within R&D and delivering that as we go forward. One area of growth, and we talk about top line growth, is we [indiscernible] top line is 7% to 9% organic growth. And when you think about the drivers of that obviously biologics is the fastest area of growth in that area. It's being led by a high-value product portfolio. COVID had an impact on our business. I believe we, as an organization, responded significantly in order to help with the pandemic to provide the critical components used to be able to deliver the vaccines across the globe. So West had a very important role in that process. If we take that out of the equation, the organic growth of the base business, which you'll find here, since 2020 has been growing in the double digits. That's taking it out of the equation. And most of that growth is around high-value products. What you'll find is that during that period of time, there's a margin expansion that nationally to mix shift that occurred. As we think about -- specifically, we mentioned on the February call that COVID was about $388 million of our business in 2022. And we estimate at this point in time, about $80 million to $85 million will be COVID. So you can see the headwind of about $300 million, and we're projecting growth in 2023 -- organic growth in 2023 and a number of initiatives that we've launched, the number of the demand pull effect of the non-COVID business as we see here continues to grow quite well, and we anticipate that to continue on. From a margin perspective -- so the growth thesis of West is 7% to 9% organic growth on the top line and about 100 basis points margin -- operating margin expansion year-over-year. Again, COVID out of the equation. In 2019, our operating margin is roughly about [ 16% ]. And this year, we're targeting between 23% and 24%, implied [ 23%, ] 24% operating margin, a significant growth [indiscernible] taken out of the equation. Why is it important to -- when you think about the margin expansion, the majority of that is mix shift due to the high-value products. Think about the number of products we produce every year was 47 billion components. Roughly about 20% of that is high-value products, but that equates to over 60% of our revenues associated to high-value products. So every year, you can assume, if you look at the model, it's roughly about 100 basis points expansion on units of high-value products due to new drug launches, conversions, growth in the biologics space, in particular. That gives us about 100 basis points of unit expansion on that 47 billion. When you think about from the -- how that translates into top line revenue, you see here, clearly, it's accelerated from the 40 -- mid-40% to mid-60% over that same time period. So as we go forward and continue to see the market around the fastest areas of injectable medicine where we believe that we'll continue to able to leverage our organization with a mix shift and other initiatives like automation, pricing gives us continued expansion on margin here at West. When we globalized our operations, we're now able to be more effective to level load the demand. And today, we have 26 manufacturing sites across the globe, 5 of which are heavily focused on high-value products and processes. And so what we have effectively done is drive more efficiencies through our global operations. We have more opportunities ahead of us, I'd say, early on in the automation journey. And we're excited that this is an enabler for us to be able to support our customers and mitigate risk of their supply chain and continue to appreciate the high participation rate in all different areas of biologics, generics and pharma. Talking about expansion. This last couple of weeks ago I went to our Kinston, North Carolina facility. We actually had a tour of investors that came through. And we are literally almost doubling that site. The HVP plunger expansion is on its way to be completed in the second quarter, validation, and we'll be able to support the demand that already exists with plungers around HVP, particularly on NovaPure. And also HVP processing capabilities will be done later in the year. But we have a number of key initiatives that are underway to be able to invest on the organic growth here at West. And [indiscernible]. What you'll find, though, most of it concentrated, one, around high-value products; and two, around these 5 sites that we have designated for HVP globally. Thinking about the use of cash. Since 2016, we deployed over -- almost $2.5 billion of cash into various sectors of our business. The #1 area that we have, about 50% of it we focused around the capital expenditures expansion. And you think about our CapEx of $1.2 billion, in the last few years, what you're seeing is about 70% of our annual CapEx is being deployed for growth initiatives, while the other 30% is around maintenance, around IT infrastructure. Historically, before -- a few years ago, we're about 50-50. It's heavily weighted towards higher growth. And the guidance we gave for 2023 was roughly around $350 million. Again, around 70% of that is growth orientation. The other area of investment of that cash has been around inorganic just to complement our organic growth story. We have done a couple of transactions that have allowed us to get license, equity and further enhance partnerships. One in particular this year is the 50th year of partnership with Daikyo Seiko in Japan, a phenomenal company that we've been coexisting for a long time and they're able to leverage our technologies of both firms to truly differentiate the market. Obviously, when you think about giving back to shareholders, quarterly dividend, and then the share repurchase in the last 5 years, we've been focused on share count neutrality. So basically, keeping the share count neutral. And as you can see here, we have succeeded over that time period. And one area that I think the organization has done a great job is this transition into more free cash flow in the organization in cash. So as of the end of 2022, our net cash was close to $700 million. And this gives us very strong footing as we think about the growth here at West. Now last month, we did approve $1 billion share repurchase program, which is obviously larger than we've done historically. We do not have a specified expiration date, but one of the key themes there is that we are going to continue to keep the share count neutral and then deploy at the appropriate times additional repurchase throughout the next several multiple quarters. And again, there's no expiration date on that. As I said in the beginning, we're driven by focus. And one of the areas around ESG is if you think about our strategies, these initiatives are built into the fabric of our organization. These are not initiatives off to the side, and they're managing as part of who we are, and it's been part of us for a very long time. We have 6 key priorities for 2023 and beyond. These are pretty typical. I think you think with a lot of firms, and we're making great progress. In many cases, we're actually ahead of the programs. What's exciting is that not only -- and we will have a publication coming out shortly. So you can look for our corporate responsibility report that we published -- 2022 in the next several weeks. But what's exciting at West is that this is a continuous process improvement mindset, and we're kind of continuously looking at ways to make an impact. One area I'm extremely proud of is -- just an example is our safety program where we have really literally cut it in half twice in the last 5 years, which provides a better environment for all of us in a safe environment to work across the globe here at West. So to conclude on the discussion here, really, West is in a very strong critical position in health care. Our participation rate on these new drug molecules remains very high. We're excited about the future of injectable medicine space, particularly around biologics. And we continue to leverage our global operations to truly differentiate and to be able to meet our customers' demand and needs not just in the near term, but over long term. We're investing in new technologies and new capabilities that will give us another look at from components of systems. As an example, I'm really excited about that initiative to really create another wave of high-value products for West and also our pull effect that we're having in the wearable space and injectable medicine space that we believe we can be a major player from the IV subcu phenomenon that is going to occur and support patients again across the globe. We've a very strong balance sheet. We have strong opportunities to continue to invest in our business, but also look at adjacencies. And we'll continue to stay focused on each and every component that we produce has a patient name on it. So thank you for your time, and I appreciate your interest in West. And we're available to take any questions. Thank you.

Any questions?

[indiscernible] .

We're very, very high in that area of roughly 90-plus percent in biologics. We also -- just to be very clear in our communication is that we also classify biosimilars in the same category. The value proposition is the same, similar products, similar economics. So we're very strong in the biologics space.

And you had the slide up there on the high-value products. Talk about what you guys have from cell and gene therapy perspective because it's a different delivery model versus anything that's been out there. And so how you see that ultimately shaking out? And where you guys are positioned?

Currently, we do participate in cell and gene therapy. We are positioning our Crystal Zenith portfolio. Obviously, NovaPure in addition to that. So we are participating in all the delivery of those products. The volumes are not anywhere near other types of therapy classes, but we are participating in that area. And we are continuously also looking at ways to expand that capability to go beyond just containment. So that's where we currently are, but we're participating in every CGT.

Okay. Thank you very much.

Thank you.