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

Good morning and this is Paul Knight, the analyst, covering West Pharmaceutical. I'm the analyst covering life science technology at KeyBanc. It's a real pleasure to have with us the management from West here today. Eric Green, CEO; Bernard Birkett, our Chief Financial Officer; and Quintin Lai, our Investor Relations. We have a group of questions we're ready to go with. The audience can ask as well. Now there's a spot on your screen where you can raise your hand and is to put in a question or you can e-mail me at paul.r.knight as well. But we'll kind of have Eric say a few comments first. That's good for you, Eric, and then we'll start to jump into some questions as well. But if you want to give an overview of West and have your view on the world today.

Yes. Great, Paul. Thank you for hosting us today, and we're looking forward to the conversation [ by Lai Quintin ]. Actually, 24 hours ago, we had a very special event that we participated and opened up the New York Stock Exchange. So it's great recognition of 100 years for West which started in 1923 by a gentleman named Herman O. West. So we had a great opportunity with about 100-plus of our colleagues around the world and different plants can join us in New York on that special occasion. And what's interesting kind of reflect back a little bit where we came from and where we are, but more importantly, where we're going. The portfolio itself is very robust. If you think about the -- our global leadership in primary containment and the devices for injectable medicines, and it continues to prove out the high-value product thesis that we've been driving which has given us accelerated growth and also margin expansion through a mix shift effect. And we're extremely pleased on how we continue to do really well in biologics, which you think about it about 4 or 5 years ago, that was roughly around 20% of our overall sales. Now it's over 40% of our sales, growing very strong double digits. And in the generics, we continue to gain market share in that space. And as you know, Paul, we started this journey a few years ago with a lower market share in that particular space. But by applying the value proposition market-led approach, we're able to gain more traction, we gain more share, meaningful share in that particular space. And then in the pharma, the small molecule space, we continue to have a very strong position in that area. So very confident of where we are about some work is going, and we have -- this great will reflect on what we have accomplished the more important of where we're going. And for those that have not visited our sites, next time there is a road chart. I'd encourage you to sign up because it's a great way to get to understand what we do at West each and every day, how we produce 47 billion components each day and each one has a patient name on it. So that's our focus. That's our purpose, and we're -- we continue to deliver and execute on the plan we have in front of us.

Eric, I know you've -- I don't know if you call it Six Sigma actually there, but I know you're student of it. Are you done with where you -- when your -- I guess, implementation of Six Sigma within West?

No. I won't say. Paul, I wouldn't say we're done. And you're right, there's -- part of the DNA of West really is around how do we drive more efficiency and more productivity not just in the manufacturing environment, but everything we do, all touch points we have, in our organization, what we call is One West. It's one of our core values here at West. We think about the 3 core values as for customers, leadership and quality and the One West team. And what that One West team has done for us, it's allowed us to globalize our organization and better align with our customers who are global. They require consistent service and products to service [ product developers ] across the globe. And this model of One West and leveraging the West business system has given us that platform that continues to accelerate. So Paul, I would say there's much more we can do, and we have significant -- we have several initiatives in place to allow us to execute around that One West. And one area I'm actually quite excited about is around automation. We've been talking about this. We've been moving in that direction. And I believe you see one of our plans with some of that automation, so we continue to have opportunities to invest further around automation, give us more higher quality, better safety, better yield and actually better productivity of our cost base. So a lot more to come, Paul.

And what does that translate into in terms of your margin goal, Bernard?

Well, it keeps into the continued margin expansion that we're building to our long-term construct so that 100 basis points plus. So it is a -- it's not -- doesn't have the same impact as mix has on that 100 basis point improvement in what is an integral part of continuing to support that. And as customers' expectations change, also, the -- our supply chain network has changed and we've seen that as we've come out of COVID aware and utilizing our network and particularly around high-value products. It feeds into that. So it continues to help us at greater level of stocks or higher level of volume and higher levels of quality and, as Eric said, greater levels of productivity and also bringing our lead times back down to more acceptable ranges and for our customers to actually expect it is. So it drives a lot of things, but it -- and part of that is into that margin improvement.

Eric, what was it like to run such a mission-critical company during COVID and what have you learned from going through that world crisis in terms of how you think about your business today and learning? What did you learn from that? What was it like and what did you learn from that?

A lot of learning, Paul, and I would say Bernard and I and other leaders, we are extremely proud on how our 11,000 team members across the globe reacted and responded. When we first got called, brought into the conversation in early 2020, we started to have visibility of the requirements to be able to provide the necessary components for primary packaging of these necessary vaccines to go global. And what I find interesting is just reinforce the criticality of West in health care. And we talk about that. We don't take that for granted. And you think about how West participated in a very short period of time to scale and to produce and cause [ thrill ] support, let's call it, 8 billion doses of vaccines in a very short period of time, it's actually quite impressive. But that reinforce, Paul, really when you think about what is the differentiation of West in the marketplace. One is on the technology. We had the platform that enabled us to be able to provide the necessary components to be able to contain pretty advanced biologics. Two was scale, the ability to flex our global network, particularly in the high-value product portfolio in our high-value product plants to be able to handle that type of scale while we continue to support the core business growing at or above our financial construct. In fact, I think there was a chart we showed publicly in the last couple of months, where during 2020 on every quarter are rolling performance on the revenue without COVID was still in the double digits. And that was driven by proprietary at contract manufacturing. And so that was -- that's the other aspect. And the third is just the trust with our customers to put in our hands and be able to drive it. So it taught us a lot about how we can better leverage our existing operating network, and we can accelerate that even further those are plans we have in place, level owner facilities more effectively. It showed the resiliency and just the level of engagement of our employees across the globe willing to come in during uncertain times and know that their value and the purpose that it brings to the table is actually quite critical and actually also just reinforce to our customers that West is there to support them and able to deliver in pretty tight timelines. So I think one last comment, Paul. I think those changed some of the optics of the lens of how we think about launches. And how can we scale with our customers faster so that we can support them on these drug launches. And that's proven in a very short period of time, it can be done. And so I'm very proud of the how we changed side with COVID.

And I guess it also brings question, we see a lot of major approvals like some of the diabetes treatments. A lot of our biologic approvals last year from the FDA, in fact, a record. What's the market telling you that they need in the years ahead? And what are you doing? Are you having to do continuing $300-plus million CapEx. So kind of your view on how the horizon looks would be helpful, Eric?

Let me start and then Bernard you can step in on this also because there's 2 ways of looking at what is from the market perspective, you're absolutely right, Paul, the significant focus around large molecule and our criticality in our high participation rate. That's due to continuously advancing the technology, continuously advancing the scale, particularly on higher end of HVP, which is [ NovaPure ] particularly. So there is a pull effect right now. And if you think about the obesity diabetes market, that's an opportunity that we can participate in from 2 different angles. One is from the elastomer high-value product plungers for refill syringes and also from the delivery device perspective through our contract manufacturing business. So we have really strong visibility of that particular market and the learnings of COVID has given us confidence. We're able to scale it at the right pace with our customers as they launch new molecules that could have quite meaningful impact on society and volume requirements around that. I think the other aspect that's first from the market perspective. There's a pull of factors, more biologics in the pipeline. You know our position. We are very focused on early stage with our -- whether it's small, medium, large customers, so we can [ probably ] see the market. We are continuously advancing technologies and partnerships that were beyond disciplines and moving to our systems. I know that's been used quite frequently in the industry, but we're down that path where we have technical data to support this in the conference capabilities. So I'm really excited about the direction we're going around the technology. But it does require investments that may be burned, to speak a little bit to that around the capital and how it has been allocated and how we're focused.

Yes. So Paul, when we look at our CapEx and we compare the write-down of our CapEx to a number of years ago, what we're seeing is approximately 70% of the CapEx investment we're making now a growth focus and based on the demand that we're hearing from or seeing from our customers. And so, when I look back like, say, 3, 4 years ago, like that was about 50% of the CapEx employed goes on growth and 50% on maintenance. So that there is a shift. So the return that we're getting on the CapEx is a lot quicker than we would have seen in the past. The opportunities are closer at hands, again, then we would have seen that for this. So we continue to see that need for elevated levels of CapEx investment at this time. But as you'll see, even over the last number of years, our return on invested capital has been improved even though we had accelerated levels or higher levels of CapEx. We would expect that to continue over the next number of years. What we would expect to see over time that we would expect that CapEx to come more in line with our concert of 6% to 7%. Obviously, that's not going to be the case this year. But again, the investments are demand-driven. So it's not really speculative. So it's a different experience than what we have seen in the past.

What are your major site expansions going on right now? I know you ramped on up in Michigan this year early. What else is significant on the site finish and project work?

So the biggest one that we have coming online right now is in our Kinston facility, and we've been laying a high-value product capacity there, particularly focusing on plungers. And we expect that capacity to start coming online on the back end of the second quarter, and that will then ramp up because we get through here and question the final validations around those processes in that equipment. We continue to invest in our high-value plants, and that's predominantly Eschweiler Germany, Singapore, Waterford and Ireland and Jersey Shore and Kinston here in the West. Again, a lot of that 70% growth that we're talking about for the investment is really focused on high-value products, and much of that is around plungers where we're seeing potential demand going forward. That's the focus right now.

Are you -- should we expect the contract manufacturing business to be a slower growth business as you utilize time and talent for high value-add product work?

Yes, is the short answer.

Yes, we would forecast the contract manufacturing business to grow mid-single digits. Now step back a little bit from there in 2022 when we did follow up the reasons around that. But we would expect that mid-single-digit growth rate for that business. And so we're pretty selective on the contracts that we've taken.

And Paul, we are selective, as Bernard said, but we're also very focused at when we engage with the customer. We mentioned expansion in Grand Rapids, Michigan is that you will get the West experience. You will get the ability to scale to do mass manufacturing a high-level quality consistently, we're dedicated to that. So we do have customers that leverage or working with us, both on primary containment and delivery devices and does come together quite nicely. But as Bernard said, we want to be very selective. And the resource allocation is disproportionately towards proprietary high-value products.

And Eric, could you talk to the Corning joint venture; capital invested, the background on that JV. When we could expect revenue from that JV?

Yes. Well, that's going to take some time as we continuously develop different systems and provide all the technical data to support. I mean, we did have a launch earlier this quarter with a Ready Pack solution that is the Valor Glass of Corning around vials in our NovaPure stoppers, seals and vial seals, the new technology we came out with. And so that's the first entry point. And just to kind of frame up with why is that important? Going back to my earlier conversation about it, to get the high participation rates that we are experiencing, we have experienced and we are experiencing today, particularly around biologics, we are seeing the market. In order to see the market, this Ready Pack solution is really critical as a complete package that is going to our customers in an early stage so they lock in on their solution. And so this program will evolve and we're investing, both firms are investing nicely. We're constantly monitoring what we can do to continue to accelerate. We are in active discussions with customers and talking about the pull effect with the right story to authorities too, they want to see this movement occur. So that is a higher quality, higher predictability on the effectiveness of the drug in the primary containment. And so it's going to take some time, Paul. It's going to take multiple years to get to where we want to be. But just think about the NovaPure journey we were on, Paul. We started that several years ago, but we technically didn't really launch the commercial sign-up until 2016 and it takes our customers a couple of years to do stability tests and working with materials to be comfortable. And then now, right now, as we sit here and talk is that's meaningful. It's material and these investments we're making in Kinston or Waterford or other locations in high-value products, NovaPure is the front and center of the focal point. And that is going to be -- continue to be a major mix shift effect not just on revenues, but also the margins. So more work to be done, but we're proud of where we are, but we have a journey ahead of us.

One question from an investor is the -- apparently, your new proxy flags PSRU sales target of a 9.1% CAGR, '22 to '24. This person thinks the analyst community is closer to 6%. Any thoughts on that compound growth rate.

I'm sorry, Paul, is it the PFAS?

So it's in the proxy, it flags a PSRU sales compound growth rate.

Yes. So it's just the overall compounded growth versus -- are you asking versus the long-term construct?

Yes.

Yes. So describe what we're doing and how the growth has performed versus the long-term contract?

Yes. So we have been performing above the long-term construct. If you think about the last 5 years, we've grown the CAGR has been around 14%. And we went from approximately $1.7 billion to $2.9 billion, round numbers. And over that period of time, and that's really all organic, just to be very clear on that -- puts and takes with the currency and so forth. But what's driving that growth? And it's a really good question because when you think about the markets, the markets are driven by volume, right, the number of injections or drugs administered, and this is succeeding on aggregate. We know that generics is probably mid-single, pharma small molecule is full single, but biologics from a volume perspective is high single. And our performance is on the higher end of all those 3 categories. It is really driven, the major driver of that is biologics. And we know that contract manufacturing has been up and down slightly, but overall mid-single. But biologics is our fastest-growing segment. If you step back in 2016, it was the smallest market unit amongst the 4 that we speak of with the strongest growth. In 2022, it's the largest market we have with greater than 40% of our sales out at West and with the strongest growth and that dynamic has powered our strong consolidated growth to get through those CAGRs that we've had. Going forward, we're -- our focus is to continue to deliver at or above 7% to 9% construct. We've communicated -- I'm very proud of the team to take COVID out of the equation, I think that kind of [ managed ] the water a little bit. The last 2 or 3 years have been very transparent in the slides that we provided in the past, that we are growing faster than construct right now. But that's what we're focused on Paul and if they accelerate and will continue to be accelerating this biologics in our high participation rate [ of our focus ].

Okay. And Eric, we are seeing a lot of new therapeutic types, whether it's cell and gene therapy, antibody-drug conjugates, single interferon RNA, et cetera. Are you having to modify your technology offering in light of all of the new things we seem to be -- that are developing in research and development. How is it changing your offering?

Yes. So if you think about -- you're right. So just looking at 2022, just to put on a level set here. Our participation on all advanced therapies, and we were on all advanced therapies and all monoclonal antibodies in most of the biosimilar giving kind of perspective of our position. And yes, we're continuously putting investments around R&D development agreements with our customers outside of obviously they're pushing work with our customers around NovaPure. We're looking at Crystal Zenith syringes and/or vial cartridge configurations. We're also focused on ultra-containments, additional new delivery platforms and new administration systems. That's a piece of the business. [ Vial transfer ] is an example that we're very quite good at. So we are -- as these advanced therapies evolve, and we are continuously looking at ways to enhance the portfolio, broaden the portfolio. But many of them are really been developed, conjoined with our customers through developers. And then we're allowed to platform that and go out externally. So it's an interesting journey. But the best part about those, Paul is, we are at the table, almost in all conversations. That gives us optionality and ability to leverage our technical expertise.

In your conversations with customers, Eric and Bernard, is there -- what's it like in terms of the number of conversations or proportion regarding they are looking at a ready-to-use single-dose syringe versus vials. What's that like now versus 5 years ago?

Different. Different, and we see it obviously because of our position and what we provide, we're going to see that transition. But it doesn't mean that the vial configuration isn't as important or cartridge systems are used in devices like our SmartDose device. But you're right, there is a there's a push and the fastest-growing sector is the prefilled syringe, right? And that's why if you think about our investment thesis, particularly over the last couple of years, it was coming online what Bernard was talking about in Kinston because the equipment and the capacity we're putting in is all around distance. And we had some investors that actually went through there. We opened the doors for a day and it's impressive. It's impressive, and that's coming on online. Online is there, and we have to do more. So the demand in that area of the business is growing faster than we had really anticipated, but we're making the investments as we see it.

Right. Okay. Another question from investors has been is this, everybody, a lot of excitement around GLP-1 drug, obesity therapies. Can you talk about what you perceive as the opportunity with the GLP-1 therapies?

There's 2 ways of looking at that. One is, first, I'd encourage the -- around the impact on patients and the society as a whole, really focused on the drug companies, let them kind of drive that conversation. From supporting our customers on those launches, we have 2 different lenses that we have with our customers. One is, I'll start with the first one is contract manufacturing. And there are requirements for delivery devices, whether it's our injectors or other type of delivery devices, particularly around that space. And we are participating with some of our expansions. But as you know, Paul, we've been very transparent about this and that part of the business. Our customers on the IP. And they come to us and say, we would like to invest capital with dedicated facilities and space for those investments and then we scale up and these are long-term agreements. But they rely on 2 or 3 different suppliers to provide that portfolio. Originally, West participates, but it's not like our proprietary business where it's somewhat binary, either you're on or are you off the drug. On the elastomer side, Paul, it's really around -- the heavy focus is around prefilled syringes. And for us, it's the plungers. And that's what's exciting about it, where we are. Fortunately, we have made those investments and we'll continue to make those investments to stay ahead of the curve. But the demands are definitely -- we're in conversations today with the customers to fulfill those demands.

Okay. And Bernard, operating margin, we've obviously seen a transition here as COVID dissipates, you validate other production set of technology. And then, of course, there's this fight with inflation. Can you talk about -- I think margins are guided to increase throughout the year, but if you could talk about the issues around your thinking on margins and why it can improve over time?

Yes. So for '23, we approached this from a number of different angles obviously, say we didn't have the inflationary pressures and that is kind of [ buying side ], what our pricing strategy should be as we move into 2023, and that's reflected in the kind of higher than normal price gap that we have particularly seen in a business when we moved from 1% to 2% in the previous year, we were close to 3% to 4% last year and this year, we're forecasting 5% to 6% and a lot of those conversations already taken across our checking base with customers. And the other piece that we've seen is that the transition from COVID vaccine business and changes that we're seeing there, obviously, we're selling a lot of high value products into that area. And we've had to offset some of those margin headwinds again, but we're looking at the cost base within our business. We've made adjustments to our cost structure, both from a manufacturing perspective and within OpEx. And again, that was something that we were working through as we got to the back in 2022. And also, we are continuing to see the mix shift that we embedded into our long-term construct from a revenue growth perspective and an operating margin expansion perspective. And that has been taking place really without COVID as we move through 2020 and 2021. We were seeing that operating margin expansion in our core business. And so that, together with the opportunities that we've been talking about just here on the investments that we're making, that informs how we're looking at the long-term construct and what we expect to see over the next number of years. And that continued operating margin expansion that builds into what we've talked about. So it's really more of what we've seen in the past is that mix shift to continue to execute on our operating plans and then pretty tight controls around our cost base in our business. So it's more of what we've seen over the last number of years. Demand wise, that's a positive thing that the underlying demand, they are particularly around the high-value products mix shift. So that that's what's informing our whole process.

And then kind of wrapping up with COVID, is -- are the container formats changing? Are we down to 5 dose vials? Are we now at single-dose syringe, where is technology on COVID delivery right now, Eric?

Yes. Just a couple of things I could update on COVID. I mean, last year, we did about $388 million of material to the market. And this year, we guided a while back to about $85 million for 2023. And we will obviously update guidance at the end of the quarter. But that's what we're focused on is to deliver our customers there. We are seeing sales for 2022, where both -- we think about those large and small stoppers, if you want to call it the 20-millimeter and the 13-millimeter which implies moving towards smaller vial configuration. And so we are seeing that, but I won't get into specifics around volumes and so forth. But yes we are seeing that shift. And one thing, just a reminder, just to comment on, I guess, is that our assets that we put in place to respond to this pandemic are not dedicated to a customer or to a product and so what we're able to do, particularly on high-value products. And I think this is what the team did a great job at is bring our customers to our high-value products is fungible, the way we look at it. We'll support all customers around the high-value product portfolio. So we'll leverage our assets. If it is more demand required, we will be able to respond and if it's less, we'll be able to redeploy.

Got it. Okay. Super. With that, we are done with adequate time, but appreciate your presence here, Bernard, Eric, Quintin. As usual, a great conversation and look forward to many more here in 2023.

Great. Thank you, Paul, for your time.

Okay. Thank you.