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

My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team here at Bank of America. For our next session, we're joined by West Pharmaceuticals. We're excited to host Bernard Birkett, CFO; and Eric Green, CEO. Gentlemen, thanks so much for joining us.

Thank you.

Thanks for the invitation.

Just to kick things off, we'll start with our usual question. You reported 1Q results a couple of weeks ago. Any high-level comments you want to make, how it play out relative to your expectations?

Yes. Well, first of all, thank you for the invitation. And also our colleague, John Sweeney, is here also that represents IR for West. Very productive day, I appreciate that. First quarter was a very good start for West. We delivered a solid quarter for both top line and also the EPS. It exceeded our expectations as we set guidance at the beginning of the year. And we also continue to support the guidance we set for the balance of the year. We did some adjustment upwards, but we can talk about that in greater detail. But what I'm pleased to see is that there is a continuation of focus on growth around rebounding of the high-value product components. As we think about throughout the year, we'll see a sequential improvement based on the demand profile of our customers. It's driven by both GLP-1s and the elastomer side of our business. Also, Annex 1 is showing early signs of positive success with a number of projects and customers and also continued focus around our biologics business. So it's a good start to the year, and we anticipate to kind of build off of that as we go throughout 2025.

Maybe I'll just start on the HVP components part because that's such a big part of the debate. In the packaging industry, the vial destocking was such a major theme for 2024. It looks like we're finally working our way through that. Can you give us an update on your customer inventory levels? What gives you confidence?

Yes. So, specifically, if we break it between the three customer segments that we focus on, on the biologics area, we have seen a continuation of some destocking in the first quarter of 2025. We actually anticipated that in our guidance and communicated that earlier. It is less pronounced than it was all of 2024, quite significantly different. We also see some continuation of destocking in generics, again, another area that we called out. And generics business is roughly around 50% of its high-value products. So again, it's really around the high-value product components that we've been seeing destocking and to see a little bit in the Q1. In the pharma small molecule innovative area, we have seen that dissipate in 2024. So we're seeing normal patterns of demand in the early part of 2025, we anticipate to see that throughout the balance of the year.

Okay. And in terms of the biologics and generics, just can you walk us through sort of the timing, how you expect that to fade? And just what gives you confidence that because it's been an area that's been tough to call previously in terms of like the level of destocking and level of inventory.

No, that's fair. And I'll start here on this topic. But in the biologics space, we -- it's based on our -- as you know, we're make to order. So a lot of our demand and firm orders that we receive in is more 3, 6, 9 months out. So the order patterns are getting stronger throughout the year, which lines up very nicely with the anticipation of high-value product components to be high single digits at the tail end of 2025. Generics, we do think that's going to persist a little bit longer as we communicated, but it's really around a couple of our larger customers, and it's been pretty consistent with the communication that we've had with them at the end of 2024 going into 2025. So generics will be a little bit longer in 2025. Biologics, we believe, will build from this point on.

And when you think about the results you saw in the first quarter, did you see any unusual order patterns there? Just thinking in the perspective of pharma tariffs, everything that's going on from a policy perspective, wearing your customers maybe moving some orders forward to get ahead of that?

We didn't. We didn't see order patterns change due to any discussions around tariffs. The discussions we have with our customers right now, we do have some tariff exposure for the balance of the year. I think we mentioned about $20 million to $25 million. And we are -- we do have programs that we're implementing to mitigate those tariff additional costs. We haven't communicated at this point in time what those -- the net impact will be. But with our customers, one of the benefits that we have established over the years with West is a lot of our assets from a manufacturing point of view is co-located to our customers. So as you think about our customers, it could be a global customer, but they're looking for demand in North America versus Europe versus Asia. We're able to leverage our high-value product facilities accordingly and co-locate with them in those regions. So it allows us to effectively manage the tariff challenges that may be coming ahead of us.

So is the mitigation primarily from manufacturing localization, supply chain? Is there any price...

Yes, there's some price that we're working through contracts with customers at the moment, looking at surcharges. What we wanted to do is to make sure we had all of those kind of locked down and in place before we commit to a number. So when we gave the number, $20 million to $25 million for the remainder of the year was really to show the exposure that we have without mitigation, and we'll chip into that our way at that as we move through this quarter, and we'll give an update on our Q2 call. And there's also been some changes with the tariffs with China over the last couple of days. So we'll cover all of that at the same time at Q2.

Okay. And then maybe it's a little too early to say, but do you have any thoughts on how tariffs would look for fiscal year '26? Like do you think you will be able to mitigate by the end of this year? Or is there going to be some lingering hit there as well?

I believe a lot of the mitigation we will actually have in place by the end of the year. We're working through it at speed at the moment to make sure that we have as much of that done by the end of Q2. So we have a clearer picture and we'll be able to communicate that at that time. Saying that, we have to see how the tariff landscape unfolds over the next number of months, and we'll adapt to any of those changes. But as Eric said, I think we're in a good position from how as a business we're structured, where we're actually going to have customers source product from. So some customers, we have to move. So we got to validate them at other sites. So again, that's underway. And there's a number of other kind of mitigation strategies that we have in place to be able to bring that number down.

Okay. Maybe let's touch on some of the other core drivers of the story. You talked about the guide update you provided on the quarter. You tweaked your HVP outlook for the year. Can you just sort of walk us through the moving pieces there?

Yes. I'll start with this one here. One of the areas that we have a constraint in one of our manufacturing plants in Europe, and I'll get into a moment of the cause of that constraint. But it's not a demand element. It's more of an ability to supply where we have a large volume of demand on a particular product that was going to be distributed through three different sites that due to how the product was filed and regulatory filings, we have to manufacture out of one of our sites. And therefore, we are scaling up on labor, adding more team members as we speak to be able to mitigate that constraint, and that should actually dissipate as we go throughout 2025. We wanted to call it out during the last call a reason why the HVP components we're looking at mid- to high single-digit growth. And we called it to saying that at this point in time with this constraint, we're looking at mid-single-digit growth. But obviously, we're -- since we can control that aspect, we're focusing on mitigating and return back to where we should be on delivering on the HVP components.

In terms of that manufacturing sort of reorganization, is that timing on that? When is that going to be completed? Is that already effectuated?

No, it's -- we are layering in additional team members as we speak, quite a considerable amount of new employees are coming on board at that site. And it does take 1 or 2 months to make sure that we have everybody adequately trained and ready to go before we start adding additional shifts and going towards a 24/7 model. And in all cases, with our HVP plants, we are able to pivot and continue to expand resources because we have added the capacity in over the last several years. It gives us the ability to address these demand surges that we're starting to see.

Is that -- I mean, does that happen often with your customers where there's requests like this to move manufacturing around? Can you just sort of give us an example as to what was the underlying reason for this?

Yes. So typically, if customers want to move around, we're able to facilitate it. This one is of a size that it's impactful. And originally, a customer had spec-ed in a part where we were able to supply it to them from three different facilities. So we had qualified three facilities for them. For reasons based on functionality of the product, they decided to move to a different SKU. And we're only able to supply that out of one facility for them at this point. So you're taking demand that was placed on three facilities and now putting it into one. So based primarily on labor, there is that short-term constraint that we'll work through. So it's really kind of not normal for us to see that. We're also looking at now qualifying that customer for that part from one of our other sites. So we'll kind of risk mitigate over time. But the first course of action is to increase the throughput pretty quickly for them. And as Eric said, it's primarily layering in more labor. And then the second part of it is validating a second site. So we'll work through it. It's a short-term problem. I think for us, it's not a demand problem. It's quite the opposite. It's a short-term supply issue, and we'll address it.

Okay. All right. I also want to talk to you about the CGM customers exiting the contract manufacturing business. Can you give us an update on the timing of both of those contracts, how that's working through?

Yes. So there are two different CGM agreements that we've had in place for close to about 10 years in both cases, where we were early on in earlier generation of technology that was installed. So in contract manufacturing, we obviously are working with customers, long-term agreements. We take their IP and their technology to install into our facilities, and we'll do the scale of mass manufacturing over periods of time. And there came a point in time where there's obviously other generation of technology that is being used by our customers, and we looked at the economics and it wasn't favorable for us. So as they are doing life cycle management, this technology is being moved out. Now the first agreement will be -- has come to an end, and that has occurred end of last year, early this year. And the second agreement, which we are going to be doing manufacturing all the way to the middle of 2026. And then after that, we will make the space available for other customers. We are in active dialogue. Right now, we're investing in the technology that will replace what was in Arizona. That's a combination of additional products like auto-injectors and also additional drug handling is an area that we're focusing on with our contract manufacturing to be able to support multiple customers and other therapeutic classes. The one that I'm referring to in Ireland will be -- we're working on several projects right now with customers identify through discussions and setting up contracts, what will be put into that location, but that would be in late 2026 when that space becomes available. So it's a pretty typical -- it's a typical model for our contract manufacturing, which is about 17%, 18% of our business. Yes, 7-year, 8-year, 9-, 10-year agreements are in place. But once the technology is being changed over to a new technology or some other delivery mechanism, that's when we have optionality of continue on or do we bring in other customers.

Okay. And you kind of just touched on this just now, but ability to backfill sort of how long is that going to take? How specific does that be? How close of a match does that to be? Are you looking for a one-for-one? Or would the economics be the same if you found 10 smaller customers?

Yes, it can be either/or. It doesn't have to specifically be one customer to take that full footprint that's freeing up. There could be a number of different customers going in there, so they can transition in over time. So as Eric said, we have a target list. We're working through that at the moment. And then when we have updates, we'll provide it at that time. For the exit that we're seeing this year, some of that space has already been backfilled by introducing smaller drug handling projects into that facility, and they'll ramp as we go through 2025. So it is part of the normal transition, I think, with the CGM because both came so close together that we thought it was appropriate just to give that visibility to people going out. And now we have 18 months plus to fill the space that's coming up in Dublin. So we're confident we're going to be able to do that and also get the correct economics that we need from that footprint.

As these projects are replaced is there and new ones are brought on, is there a margin ramp over time? I mean, so first week you're producing the product at the same margin after as it is after 10 years or.

No, it can vary. Usually, the margin can tick up as you go through the first couple of years of the project and then it kind of levels off.

Both from efficiencies, technical know-how, but also volume.

Yes.

I want to touch on a couple of other major topics. Let's start with Annex 1. You've been talking about this for a number of quarters now, kind of called it out a little bit more in the first quarter. What are you seeing there in terms of adoption in Europe? How is that going?

It's actually -- I know it's a European regulation, but actually, this is impacting all our customers globally. And the number of projects continue to increase. I think in the end of last year, we were roughly around 280 projects. And after the first quarter, we're about 340. The reason why we call that out is that, I mean, it's a significant number of projects, whether per customer or just a vast array of customers. It's -- sometimes there's a customer with multiple projects, but there is a desire and an interest to really accelerate the ability to provide higher level of quality product with the appropriate documentation for our customers. And what we're seeing is that it's not always from a standard product to a high-value product. It's also within the high-value product corridor, increasing such as pharmaceutical washing, sterilization and vision inspection. And they take about 18 months in duration. So there's a number of projects. It's starting to become noticeable as far as the revenues, and it just supports the HVP thesis and the margin expansion. We're not talking about different unit volumes. It's a similar number of units that they were already receiving from us, but it is providing more [indiscernible] for us.

Okay. When you sort of give us those metrics, 280 to 340 projects, anything you can say to help us frame that relative to sort of like what the opportunity is, what it could be over time?

Well, this is going to be a long journey. So I think some customers have a more accelerated focus to convert. Others are a little bit long term. I would say we haven't given a long-term outlook of that amount at this point in time, but we do think it is right now, as we said in the first quarter, about 2% of our 200 basis points of the sales, and that will continue to increase over time. But it is part of our long-term financial construct of 7% to 9% organic growth in the top.

Okay. All right. Other growth driver you've talked about for longer term is GLP-1s. You've given us a little bit more in terms of specifics on contribution of revenues, both within HVPs and contract manufacturing. Could you remind us sort of what the differences are between those 2 different participations?

Sure. So you're absolutely correct. So GLP-1s, we support in both businesses, Contract Manufacturing segment and also within our Proprietary segment. In proprietary, we are providing elastomeric components for -- and we're involved with most of the approved GLP-1s that are in the marketplace. And these are long-term relationships we had in that space. It's a natural transition with what is -- what we're able to do is leverage the existing operations that we put in place. If you think about COVID, we had to put in a tremendous amount of manufacturing capability and capacity for HVP processing. All that is fungible to support the GLP-1 growth. So we have a very, very high participation in all the GLP-1 sector there. The types of products that you'll find that we're supporting our customers on is like NOVACHOICE. This -- you'll find between $0.15 to $0.30 per unit and margins of 50% to 60% type range. So it's accretive to the overall and also the enterprise averages. And then the other area in the contract manufacturing area is where we are awarded certain parts of the auto-injector and pens manufacturing. Again, the customers own the IP, installing it in our facilities. We're doing the scaling and the mass manufacturing over time. We're doing this in Dublin and also in Grand Rapids, Michigan. Grand Rapids started the ramp-up last year. There's still some optimization in 2025 for further output. And then Dublin, we're commissioning and starting to ramp up as we speak. That will be throughout 2025. What's unique about this is that we're starting to go down the workflow and start -- the drug handling is an aspect that we're bringing into the equation with GLP-1s in our contract manufacturing in Dublin. What that means is for us, the economics are more favorable from a revenue, less capital intensity to do drug handling. And so it's a complete solution from producing the auto-injector all the way to assembly of the drug itself and then going into the market. So those are the two businesses that we currently have. The economics are different and -- but we're able to be competitive and growth oriented in both areas.

You kind of just touched on this a little bit there, Eric, but can you talk about the margin contribution, especially in contract manufacturing? Is this above rest of contract manufacturing margin?

Yes. So we typically target that higher margin within our contract manufacturing business. So we target overall growth within contract manufacturing of mid-single digits. So it's been really selective in the projects that we onboard. And we have to manage the mix of our business given that the contract manufacturing business is typically lower than what we would see in our core HVP business. So it's managing that effectively. And I think with this GLP-1 business that we've onboarded with the drug handling also helps improve the margin profile of the contract manufacturing business and expands the services that we're offering to our customers. That's really what we're targeting and how we're able to target that higher margin versus other contract manufacturers in the space, again, but we're very targeted in the investment that we'll put into that business. It's been a little bit more accelerated in the last number of years as we've put the footprint in place for the GLP-1s expansions, we'd expect the capital intensity within contract manufacturing to reduce over the next number of years, given what we've done in, I think, '23 and '24. So that's really -- we're very targeted in the type of business that we go after there.

Okay. You're touching on CapEx to support future growth. I have to ask you about oral GLP-1s, increasing questions on that and sort of how that's going to play into the market. Can you talk about what you've seen and heard from your customers in terms of anticipated future demand for injectables in light of oral data?

Yes. I think when you think about the orals, so this is an area that we've always contemplated when we think about the investment thesis around GLP-1s and working with our customers. And there will be a place, we believe, for orals around the GLP-1s. But we also see that the injectable space is very attractive and will remain very attractive. So we understand that there will be a balance potentially. And we've actually -- our models have supported that balance. So more to come, more to understand and also the patient adherence and the patient outcome are obviously supporting our customers as they move through this.

Okay. I have a couple of minutes left. I want to touch on other topics. But first, are there any questions from the audience? We'll keep going. Can we talk about the delivery device milestones you saw in third quarter and fourth quarter? I think it would be helpful if you sort of walk us through your expectations for the rest of the year for this year in the delivery device part of the business subsegment. And just sort of what are the criteria that drive that from quarter-to-quarter?

Yes. So on the drug delivery part of our business, we have a lot of focus on improving the economics around that business and particularly as we talk about SmartDose. So there's a couple of things on the cost side where we're focusing on the two production lines we have at the moment, focusing on productivity and on the yield we're getting off those lines. So we're getting traction there. So we are seeing some improvements from a cost basis. The second thing is we're also looking at introducing a fully automated line, which should be towards the back end of 2025 into early 2026. That has a significant impact on the cost profile of the business as that fully automated line gets up to capacity. So again, we see improvements on that perspective. We're also looking to see are there areas where we should or can expand that business to get better economics on it. But again, that's probably a longer-term play, and that's something that we need to work through. So for right now, what we can control is the cost base of that product line and working that through. And then there are other conversations that we need to have around that business. We have no real update on it at the moment. And if we have more information, we'll share it on our Q2 call. But again, there's a lot of other areas that we're looking at. We've kind of referenced them in our Q1 call. But until we have something more concrete to kind of talk about, I think it's better if we leave it until the Q2 call.

Okay. Thinking about sort of your long-term algorithm kind of rolling it all together, both on the top line and on the margins, previously, you talked about what level of top line performance is needed to hit certain thresholds of margin expansion. Just given all these moving pieces between tariffs, Annex 1 GLPs, is that general framework still intact? Or sort of what are the pushes and pulls there?

Yes. I'll start on this. Absolutely. I think if we think long term, if we kind of break it down to the volume of injectable medicines is about 1% to 2%. It's based on units. And from there, we look at our ability to capture price, which is 2% to 3%. And then from there, it's -- you think about the mix effect of our portfolio. What drives mix is clearly driving the HVP components is the #1 driver and the elements of HVP components would be around biologics and our participation rate remains extremely high in that category. I think about 90-plus percent of participation on newly approved molecules. You think about the effect of GLP-1s in the marketplace around the injectable space, and our participation there is extremely high, and we're able to support that, leveraging our HVP manufacturing capabilities. And then you think about the Annex 1, which is an accelerant or another acceleration of transitioning up the curve of HVP, which is better ASP and better margins. Looking at -- and then if you look at from the contract manufacturing side of the business, we believe long term, that business is about a mid-single, so 5% type of growth algorithm. And if you take that look as a combined element, you're looking at about 7% to 9% organic. That does mean HVP components is a double-digit growth part of our portfolio, which has been what we have been doing before COVID and after the COVID effect and then the destocking effect, as we think about our demand profile going forward, that's -- we believe that's where we will be with the HVP components, and those are the drivers to get us there.

In terms of the margin?

Yes. So once you get the double-digit growth in HVP, you create that mix shift, and that predominantly drives 100 basis points of margin improvement. So the two of them are like closely linked. And if you look back at our business when we were expanding through 2019, 2020 and '21, that's exactly what was happening. We were getting very high growth rates in HVP and getting margin expansion way above 100 basis points, particularly in the COVID year. So you can see the power of the mix shift. And so that's the critical piece. And as Eric said, the drivers are there to do that as GLP, Annex 1 and the biologics. So it's really getting back to the LRP and then seeing that mix shift.

Okay. I have a couple of seconds left. We'll go with our standard closing question. Eric, Bernard, what do you think is most misunderstood or underappreciated about West?

I'll start. I think the fundamentals of West are very unique. It's a very durable business. The criticality of West to support on the injectable market space and how we are supporting multiple customers, multiple drug molecules across the globe, it only gets stronger. And the technology that we have, the capabilities we have and the sheer scale that we have at West gives us an added advantage in order for us to support that growth. So I think we're very well positioned. We've been in the business for 100 years. We anticipate to continue to grow long term. And the fundamental drivers of the injectable space are very well intact. Bernard, anything to add?

Yes. A lot of what Eric said, I think it is the participation rates around those fundamental drivers and what is driving the pharma industry and being at the forefront and supporting those customers with a very high level of market participation and plus having put the capacity and infrastructure in place to be able to deliver on that over the long term. I think over the next number of years, people will see the benefit of that capital deployment that we've done over the last couple of years, which kind of I can understand why people question it today, but it is going to prove itself out. It's a strong, resilient business.

Great. Thanks. And with that, I think we're out of time. Thanks, everyone.

Thank you.