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

Joining our next session is with West Pharma and joining me on stage from West is Bob McMahon. Well, Bob.

Thank you. Great to be here.

So Bob, the West earnings report, it seems like forever ago. But I think this is your first public venue since Q3 earnings.

That's correct.

So why don't we start off by reflecting on the Q3 results. What did you find encouraging? And where is there more work to do?

Yes. It was a really good quarter for the company. The company grew 5% organic, which was ahead of our guidance. And I'd say the real standout was our HPP component business, which is almost 50%, roughly 48% of our total business that grew 13.3% on an organic basis. So that was a real standout. And with that strong growth, we had strong margins as well and achieved -- overachieved our earnings per share growth and targets for the guidance. So very excited about the broad-based nature of the Q3 results. It's a continuation of what we saw in Q2, actually an acceleration of the performance and -- we're expecting that to continue into Q4 as well and moving into '26. So I think from a standpoint of kind of the recovery of the business and the strong performance in the key growth areas of of HPP, we feel very good about kind of where that business is going. And then on a longer-term basis, with my coming into the business now here for about 3 months, the opportunities to continue to not only grow the top line but really drive margin expansion over time. I'm very excited about the opportunities, obviously, and I'm sure we'll get to talk about some of those things during our talk.

Okay. Well, one of the important therapeutic categories and HPP components is the GLP-1 category. And the disclosure the company provides is great. It began about 9 months ago, so now we can calculate GLP-1 revenue and non-GLP-1 revenue. And everyone is doing that math. And in Q3, the non-GLP-1 revenue, best I can tell, was a low single-digit grower...

A little higher than...

Ex-currency.

Yes.

Well, a little higher. But can you describe your degree of confidence that, that can return a high single-digit growth rate?

Yes. It's one of the things that as we talked about this at the very beginning of the year, we were still in the midst of recovering from destocking. And if you look at it on a quarter-by-quarter basis, of our high-value components business ex-GLP-1s, it's improved every quarter. And in Q3, it was roughly mid-single-digit growth on an organic basis ex GLP-1s, and we would expect that to continue into Q4. And so what we're seeing is the destocking is largely behind us. And so we feel very good about the recovery of that business. Our participation rate, which is our rate of West products on new products that are coming to market is still very high, particularly in biologics. It's greater than 90%, which is higher than our overall market share within the elastomers business. And so certainly, GLP-1s have been a growth driver for us for several quarters, and we expect that to continue, but we're actually seeing that recovery of the non-GLP components as well, which is a nice adder.

Got it. So the mid-single digits is specifically for components not total revenue.

That's not. That's correct.

Okay. I think I was doing math on total revenue, which includes the contract manufacturing.

Yes, that's correct as well.

So you would expect that to return to high single-digit growth in the fourth quarter if destocking is concluded or is it?

Yes. What we're seeing is that we would expect that to continue to improve on a sequential basis. And so if we think about our guidance for the quarter, that's contemplated in that. Yes.

Okay. Well, another GLP-1 topic, it's very much a current event. And that's the Eli Lilly, Novo Nordisk announcement last week with the Trump administration, you've, you've looked at the news, what are the thoughts from West Pharma on the implications for West?

Yes. Obviously, those are 2 very important customers for us. And it's obviously very early days. But if we think about the intent of this, it is to increase access, lower price, which will increase access and increasing accesses is, we think positive for West. It's positive for patients, but also positive for West, because we think that the more drug will get sold. And so this is an opportunity for us to continue to lean in and continue to support both of those very important customers, but also continue to grow our business.

And do you have thoughts on the oral vouchers that were included as part of that program, change your calculus and view on injectables versus orals.

It really doesn't. The oral products have been well telegraphed, and we were expecting them to be approved in '26, first half of '26. We do think that there's a role for both injectables as well as orals going forward and given the penetration of GLP-1s in the marketplace. And this was before the lower pricing. We actually think that there's a net positive here relative to where we're thinking the orals were coming in, because I just think there will be more access to patients with the lower pricing. And if we think about longer term, we do believe that orals will be roughly about 30% of the GLP-1 market by the end of the decade. There's various assumptions around there anywhere from low 10% to 15% up to 1/3. We're assuming in our calculus and that will be roughly 30%, but given the penetration of these businesses or this business as well as the additional indications that come out, which will largely be on the injectable side, we do think that injectables will continue to grow throughout the decade. So the pie will get bigger. And GLP-1s will grow both in injectables as well as orals.

Can you share what is the growth rate for GLP-1s that you've included in your long-term construct?

Yes. We're working through the long-term construct. It's inclusive of -- it's not added to our long-term contract. It's included in that -- what I would say is we're expecting it to be faster growing than the overall long-term construct. I'll just leave it at that right now. For '26, we are expecting the growth to slow from where it is this year, but still be very healthy and significantly above the total company.

Okay. And as we talked a bit on the Q3 call, there are a lot of moving parts in the GLP-1 injectable market or orals aside between auto-injectors, pens, vials, the different formats and those have different implications for the amount of elastomer somebody might need per dose -- how are you trying to incorporate all that complexity into your thinking?

Yes. That's one of the elements that we are incorporating certainly as you have multi dose injectors and so forth, that requires fewer elastomers and so forth. And so that's 1 of the reasons why we think while the, the expansion will continue. It won't continue at the same level of growth that it is today. And so we are building that in the assumption around these multiuse formats or multi-platforms as well as vials and so forth. Now I think the other opportunity for us is to look globally. Today, the U.S. is the largest market, but there are opportunities in GLP-1s beyond the U.S. and Europe, and we will participate in that as well as we think about the long term over the next decade.

Is that specifically a comment on generics? Or are there other?

It's both. It's both. I mean certainly, generics are more near term here in 2026. In Canada there will be a generic version where we will participate there as well. And so -- we think we're in a very good position to take advantage of GLP-1s, whoever the ultimate end manufacturer is as well as geography.

Okay. Talk to us a bit about the other drivers and biologics besides the GLP-1s?

Yes. So if you think about our Biologics business, it grew 8% in Q3, that included an incentive payment last year, a onetime incentive payment of roughly $19 million. So if you took that out, it grew nice double-digit growth. And if you looked at GLP-1s, GLP-1s was a little less than half of the growth in biologics from an end market perspective. If you -- and so what we're seeing is nice growth across that end market. And if we think about where the pipeline of pharmaceutical products are, the majority of them are actually injectables. And so our participation rate is higher on biologics. It's north of 90% relative to our market share overall and elastomers. So as more products come out, we're -- we have a better participation rate or a better market share, so that helps drive that growth. And so we're very excited about the continued not only participation on the elastomer side, but then we also have the drug delivery device opportunities there as well.

Okay. The drug delivery opportunity, meaning SmartDose or other?

Yes. SmartDose and our other drug delivery device products.

Understood. So are you fully settled on SmartDoses' position in the portfolio.

Yes, we're still evaluating. So for the benefit of the folks on the call. SmartDose, we had talked about this at the beginning of the year that we were evaluating options, all options on the table. We have done a really nice job of taking out costs on our SmartDose 3.5 in particular, every quarter, that cost per unit has improved. We've improved the reliability, reduce the scrap costs and taking costs out of the system, and we'll continue to drive that to the benefit of West. In addition, we're also evaluating whether we're the best owners of this long term. And so we're moving with a sense of urgency on both of those analyses and our goal would be to have clarity on this before we give formal guidance in 2026.

Okay. So the -- by the Q4 call.

By the Q4 call.

Got it. I got excited for a moment and thought we had incremental disclosure. Yes. Next time.

Next time.

Can you talk a bit about Annex 1 in the implications for your business?

Yes, Annex 1is a European regulation talking about contaminants in particulate. And so it is an opportunity for us to upgrade standard products into higher value products and providing additional value-added services, things like washing, sterilization and in automated inspection and so forth. And what we're seeing is an opportunity to upgrade standard products into higher-value products. And -- we are -- we've got 371 active programs today, active projects today that are actually in process of transitioning standard products to high-value products and have accelerated the growth or the mix shift there over the last, I'd say, several quarters. We thought it was going to be a roughly 150 basis point improvement in our revenue. It's now 200 basis points. And so we see this as a mix shift that will not only help benefit our customers, because it's higher value product, it's going to provide higher quality and efficacy for their products, but it's also good for us. And we're still very early into kind of this, I'd say, multiyear kind of transition of products. We think there's about 6 billion components of opportunity out of the $40-plus billion that we produce on an annual basis. And we are still early days in converting that $6 billion to high value.

Okay. I was trying to think about how to frame the revenue opportunity after the Q3 call. And I took the, the 200 basis points of tailwind turned that into a dollar figure, that was $60 million and divide that by the number of the 370-odd projects and came up with a couple of hundred k per project. Is that a useful framing at all? Or is there a different way I should approach it?

Yes. What I would say is every project is different. But I think we've got enough body of work right now to say that that's a reasonable approximation going forward.

And these are all development projects, correct? So the real opportunity is when the conversion standard and high-value occurs.

Yes, that's correct. And so these are open projects. So as they are completed and move a standard product into a higher value product than it becomes part of our commercial run rate. And it's -- so those are ongoing opportunities that haven't shown up in our revenues yet. They're showing up as standard products, but not yet into the higher value. And that's the beauty of this is it's -- we're not increasing volumes necessarily. We're increasing additional services and procedures of existing business that we already have. And so that's what's great. It's really our opportunity to help our customers. And really ours. And so that is a long term -- we see this as a multiyear kind of opportunity to continue to drive this.

What's the right way to convert that $6 billion unit opportunity into a dollar figure? Should I multiply them by $0.10 per unit? Or like I know there's going to be a wide range, but it might be a useful rule of thumb.

Yes. I think that, that is a reasonable number.

$0.10.

Yes.

Okay. And final clarification here. That $6 billion, those are just drug products sold within Europe, right? So that doesn't include any assumption that there is a standardization across geographies from your customers.

That is correct. That is a product that is being produced for the European marketplace. Now that being said, what we are starting to see is some customers, some pharma customers looking to standardize across the globe. And so -- we are seeing some opportunities where they're going to say, just to simplify their supply chain, they're going to do this for both Europe and U.S. products, but we're only taking right now the -- that would be upside to kind of that $6 billion, if that became a bigger opportunity. Certainly, the FDA -- this is a European regulation. It's not a U.S. regulation. Certainly, if the U.S. would adopt something similar that could also increase the number of opportunities, but we're not building that into our calculus.

Okay. Well, this is a good time to transition to the concept of mix shift overall. I think 10% of your last -- I'm sorry, 25% of your elastomers are high value today. Where does that go over time? And how quickly.

Yes, that's a great question. And to kind of frame 25% of our volume is high value, but 75% of the revenue. So it kind of just shows you kind of the value of being able to upgrade. We haven't put out a specific target. But our goal is, if you think about kind of the pipeline of products that are coming down the pipe, they are largely high-value products. And so that 25%, if we think about where we're disproportionately investing or plan to disproportionately invest in capacity, it is in our high-value product network. We've got 5 centers of excellence today. What's unique about West is we've got 2 in the U.S., 2 in Europe and then 1 in Asia. So we're able to support our customers where their supply chains are. So not only in terms of being able to support them as our products are rolling out around the world, it also eliminates or minimizes the tariff costs associated with that. So over time, that our goal and expectation is that 25% will continue to grow. If we think about high-value components overall, we think of that is -- which is 48% of the total company. And that business we would expect to grow high single-digit, double-digit growth throughout the rest of the decade. It was probably in the low 40s, high 30s. 5 years ago, it's 48% and I would expect that to continue going forward.

Okay. So accretive to the long term.

Accretive to the long term, and that's the beauty. I don't see it being a step change, because the products that are on the market will continue to stay on the market. And certainly, we'll upgrade them over time with things like the Annex 1, but then as new products come on the market, you'll have that higher value components and participation.

Okay. Can you talk a bit about the pricing environment? I thought the price increase you achieved in Q3 was a little light versus your 2% to 3% construct. I'm hoping you could address that.

Yes, it was a little less than 2%. Year-to-date, we're right at 2.4%. So any one quarter, depending on kind of how things are working can change, but we're still within that 2% to 3% construct. And as I think about pricing, I do think that we have an opportunity to build on our history here of 2% to 3%. We're building some capabilities around price. So I wouldn't -- one quarter, I wouldn't over interpolate or interpolate one quarter here. And in fact, I think there's opportunity over time to actually potentially improve that or to improve that. And it's not only pricing for value and thinking about moving up, but also looking at the long tail of lower standard products as an example, to actually price them to help incentivize people to move to higher value. And so that will happen over time. One of the things that we're looking at is really a portfolio approach to our pricing, which is the first time rather than just a contract-by-contract approach. And that will roll out over the next several years as contracts come up for renewal and we are working with our customers. So I feel really good about our pricing construct. And I think there's probably more bias for upside than downside going forward.

So you're doing a lot of work on the pricing for...

Yes.

I appreciate that. Anything to flag outside of the portfolio approach versus contract by contract.

No. It's still -- it's still early days. When I say that, we've got a number of new leaders in Shane Campbell, who's running our proprietary business has been with the company for about 6 months. I've been here 3 months, and we're building some capabilities here. You get an opportunity to reset price roughly once a year in this time frame. So as our customers are setting their budgets. So this will be a multiyear journey of looking at opportunities and -- so there is a lot of work being done, but I would say more of it is still ahead of us.

Okay. We've been talking a lot about your proprietary product segment. Maybe we can move on to contract manufacturing. What update can you offer on the discussions to replace the lost CGM revenue?

Yes. So maybe for the benefit of the audience, we talked about this on the Q3 call. We've got a CGM business that is expected to exit at the end of the second quarter of next year, which roughly is a $40 million headwind. And it's a contract that we've had for a long period of time and we announced this back in February of last year. We're in active discussions on a number of programs to replace that program. One program that we already have is drug handling, which will be ramping up in our Dublin facility. It's roughly $20 million to $30 million of revenue next year, which will help offset. It's not in the same space, but that is certainly one thing that doesn't show up in revenue this year, but we would expect it next year to help. And then -- we've got a number of programs that were in proposal with to take over the space when the CGM business is exiting. Now -- and we'll communicate to you when we have more news. But what I would say is we're not dependent on any one program right now. We're looking at either multiple programs to fill that space as well as a potential for a larger program as well. And so we're looking at multiple opportunities there.

Okay. Can you talk about the fit of the contract manufacturing business within the broader organization?

Yes. I think one of the things that is interesting for us is the, the ability for us to provide services to customers across the continuum and injectable continuum. So certainly, we are the leader in the elastomer side. Obviously, things like CGM don't have as a cleaner fit. But as we think about drug handling as an example, we are -- there's an opportunity to provide more value there to customers. That's one proof point of being able to move down the continuum of not just elastomers, but primary containment and it's higher-margin business within CGM -- or excuse me, within our contract manufacturing business and so forth. So that's kind of the idea of being able to be more relevant to our customers across that continuum. And we've got to prove that, though, in terms of having more than just one opportunity. That drug handling, as an example, wasn't a strategic element that we did. Actually, our customers were asking us to do -- our customer was asking us to do that. So they actually see the value of us being able to provide more service to them. So those are some of the areas of how it would link just being more relevant or a bigger wallet share of our customers across both elastomers and contract manufacturing.

Okay. and to be determined if you could scale that example to other customers.

That's our intent is to move up that value chain where we would have lower value or just injected molded assembly but providing higher value capabilities, which would also be higher margin for us as well.

All right. Let's move on to the margin front. Can you [indiscernible] the different margin levers you have between mix, which we've talked about a lot and any other opportunities you have in the pipeline to improve the margin profile of West?

Yes. I would say, certainly, if we think about margin improvement, mix and price are obviously the biggest drivers here that were already on the journey, and I think we can look to other ways to accelerate both of those elements. But even outside of that, if I think about the opportunities to kind of leverage the level of investment that we've made in our capital and capacity, we're talking about tech transfers to be able to kind of level load or more effectively load our facilities. That's not -- that's an opportunity to help really help our customers too, so that they have products in multiple locations as they ramp up. That helps build out existing capacity or fill existing capacity without incremental or significant incremental revenue -- or excuse me, CapEx -- and so that incremental cost is much lower than building out. So there's an opportunity from that standpoint. And then if I think about longer term, it's how do we actually get more productive on our gross margin side. We're looking at optimization, how do we drive better yields and efficiencies through the plant and then also optimizing our network longer term. We think about kind of logistics, how do we get products shipped around the world. I think there's opportunities there to better look at ways of shipping products around and lowering our costs. So I think about cost improvements as kind of near-term pricing in the HPV upgrades and then medium term is also pricing mechanisms and then longer-term network optimization. And so I would say that we've got a series of actions that we're putting in place today that makes me feel comfortable that we will be able to continue to expand our margins at 100 basis points at least for the next -- to the end of the decade.

Okay. Is that tech transfer and network optimization, you mentioned, is that related to the reshoring headlines or?

Yes. It's certainly helping that. So as products and manufacturing is coming back to the U.S. we've got -- particularly for our high-value products, we've got 2 of those centers of excellence here in the U.S. that were built out largely for the COVID time frame. That we can then transfer products that are being produced in Europe today into the U.S. as they're bringing products back into the U.S. And so there's a nice synergy there for our customers. .

Okay. Shifting Bob, to balance sheet priorities. You have a good looking balance sheet. What are the thoughts around that?

Yes. It's one of the areas that when Eric and I were talking about me coming on board. I think we can do a better job of allocating our capital. And I was talking to the Board of Directors 2, 3 weeks ago about being more deliberate about our capital allocation. And so I think we've done a good job of continuing to invest in CapEx. I don't think we've done as good a job of making sure that we've over investor or not overinvested, but disproportionately invested in our highest growth opportunities. So I think we'll be more deliberate about how to think about our capital CapEx spending. But more importantly, with the excess cash, how do we think about that relative to either deploying that back to shareholders or more importantly, I think, deploying it for growth. We have not been a company that has invested a lot in M&A. I think there's an opportunity to look at technologies as well as potentially adjacencies to kind of leveraging our strength in the elastomer side of the business and leverage our strong balance sheet to bring in new technologies to the company over time.

What would be strategically interesting to West?

I probably won't go into a whole lot. But what I would say is if we think about kind of where we play, we're a central and a very important component into the injectable medicines business. And so we think there's a number of different ways that we can play to expand our wallet share as well as our importance to customers. An example of this just real quickly wishes an organic one is the launch of our prefillable syringe that or Synchrony S1 that we just kind of rolled out at CPHI in Germany last year and will be commercially available in, in January. This is an opportunity where we take the elastomer in the rest of the syringe and not just bundle it together, but it is all put together so that there is a -- it's kind of a single component that's reliable, it's tested from a clinical perspective so that they know that the product interaction is defined as opposed to trying to put all these pieces together. Only West can do that, we believe, because we -- the most important piece there is the elastomer. So these would be types of opportunities to actually not only provide new products but also look at opportunities down the road.

That's a perfect segue. My next question was on Synchrony. I know you were in Frankfurt. And my European colleagues covered the event. I'm curious for a bit more framing thoughts on how we should think about that opportunity for West.

Yes. This is really -- think about it as a platform. We're thinking about this as a way for us to kind of really support our customers in a much broader way of providing them with the entire components of a syringe so that they can fill it. Obviously, there are players in that marketplace today, but they buy various components. We're a player in that now. And so think about this as a way to improve the quality. It's a singular quality QMS or quality system that these components are under. And we think that, that will improve yield and output for our customers. So it's a value add that today, not really anyone can provide.

Okay. How does that fit in with the work you're doing on Crystal Zenith and your relationship with Corning.

Yes. So Corning is a -- and Crystal Zenith are important businesses -- important partner for us and Crystal Zenith is an important business for us, and it will continue to be. I think about them as adjacencies, not a substitute.

Okay. So they would have their different each -- they're unique.

They have different Yes, exactly. They have different markets that they serve.

Okay. mean how big this broader integrated drug delivery opportunity, how big a business that be for West over...

Yes, we haven't framed it. It's going to take some time because the way we're thinking about this is it's going to be opportunities for new molecules coming on board, not necessarily taking an existing molecule and transferring it to our business. But as we think about kind of our long-term construct, this could be a pretty meaningful business for our proprietary business over time. We don't see -- this is being the only product that we are launching. There will be a series of other products that we're going to be working on in that same continuum. But very excited about this.

Okay. Maybe just to finish it off here in the 2 minutes. Are there any visible headwinds you'd flag that would detract from your long-term construct as we think about 2026 besides the CGM revenue that you have to replace.

Yes. We're going through the budgeting process right now. And I think we've talked about a couple of -- most notably the headwind that you just talked about. I don't see any right now. That's one of the things that's exciting and one of the things that -- one of the reasons I came to the company is to really help to chart the next phase of West growth, but stay tuned until we give formal guidance. But we're exiting the year here with momentum and in our most important businesses, which is the high-value component business, that's the highest margin business as well. And certainly, we expect that to continue into next year.

Okay. So destocking will no longer be a topic.

Yes. Based on what we are seeing today, the ordering patterns are normalized are largely normalized. That's largely behind us. And so we're anticipating that destocking is going to be behind us in 2026 for sure.

Okay. And the Annex 1 tailwind would --

The Annex 1 tailwind. We expect that to be very consistent with what we're seeing this year as well, probably 200 basis points of continued improvement. And so we've got some nice opportunities ahead of us.

Okay. Well, with that, we're out of time. Bob, thank you for joining us.

Thank you. Appreciate it.