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

Good morning. I'm Dave Windley with Jefferies Healthcare Equity Research. I'm based in the States, and I cover CROs and pharma supply chain players. In this case, a sterile injectable container manufacturer supplier, West Pharmaceutical Services is a company that I've covered for about 15 years and enjoyed it. It's a very interesting and complex business and fun to cover. Having said that, I haven't had the opportunity until today to meet Bob McMahon in person. So that's a great introduction. Very much appreciate, he and John Sweeney, the company's Investor Relations lead to be here at our Jefferies London Conference soon into your tenure. So Bob is the CFO. I didn't mention that, but recently joined West as the CFO.

So that leads us into, bob, just talk about your early experience in these first few months at West. What have you seen? Where do you think some opportunities are and just kind of lay that out for us.

Great. Thanks, David, and good morning, everyone. It's certainly a pleasure to be here. A lot of excitement and energy in the room and in this conference. It's my first time here in London in this conference as well. So -- and super excited about being here at West. I've been here for a little over 3 months now. And one of the things that drove me to West was really the strength of the core business, our core elastomer business, which we are the leading provider there. And over the last 3 months, I've had a chance to visit many sites, meet with folks, both customers internally and external stakeholders as well. And I'm coming away from those meetings really energized about the opportunities that are in front of us on a couple of facets. One is around the core growth recovery of the business. I think we've seen that in the last couple of quarters, most recently here in Q3, growing 5% on an organic basis, really led by our high-value products, our HVP components growth of 13%, which represents about 13% -- or 48% of the company. And then just as importantly, the opportunity to really improve the operational execution of the business. Eric Green, the CEO, has brought in a number of new leaders, myself included, and moved into an operating unit structure, which has really helped us drive, I think, increasing accountability and focus. And I think that really helps set the stage for not only the rest of this year, but going into the back half of this decade, driving very strong growth. So excited about the opportunities, a lot ahead of us, but looking forward to having a chat here with you, David, and continuing to dive in.

Yes. Great. Thank you. So you mentioned the HVP components business, certainly the biggest contributor to the revenue stream, very important in an area where investors are highly focused, a business that you have a lot of competitive advantages in. So one of the questions that I know you've gotten that we get is the relative contribution and mix of GLP-1s in that business, the growth that you've seen there and then by complement the perhaps lower growth or less growth in the non-GLP 1s. So maybe talk us through the balance of that business and where the relative drivers are falling for your components elastomers business.

Thanks, David. Yes. As I mentioned, our HVP components are almost 50%. 48% of our business and grew 13%. That growth has really been driven by both GLP-1s as well as the core business. If we look at across our quarterly progression, both GLP-1s as well as the core business has continued to improve quarter-on-quarter. And we would expect that to continue into Q4. As many of you know, we've been dealing with some production constraints in one of our facilities here in Europe. We've hired the folks that are needed. It's not a machinery constraint. It's really a labor constraint. And so those folks are up and running and those constraints are being alleviated through the second half of this year and should be continuing to drive additional production capacity in 2026. And so certainly, it's good to be a leader in the GLP-1 business. But certainly, that is not the only thing that's driving our growth in HVPs, our HVP business grew mid-single digits ex GLP-1s in Q3 and expect -- and the expectation is that will continue to drive recovery into Q4 and 2026.

The -- so I want to make sure I heard that last point right. So ex GLP-1s, the remaining business grew mid-single digits.

That's correct, in Q3.

In Q3 year-over-year. .

Yes. Yes.

In -- the biologics pipeline has been quite strong, approvals of injectable drugs is a tailwind for you. And you mentioned this capacity constraint. So I guess I want to try to take those 2 things together and understand how much is the capacity constraint limiting growth in the core business?

Yes. Yes. So certainly, our Biologics business, one of the things that is even better for West is our participation rate on biologics is even higher than our total market share. So our total market share is 70% to 75% of elastomers. But on the biologics side, it's an -- our participation rate is in excess of 90%. So certainly, as more biologics and injectable medicines are coming to market, that benefits West long term. And we expect and are looking to continue to drive that. . As you are talking about our capacity constraints, I would say it has probably disproportionately impacted our core business just because of the number of different SKUs and so forth. But we're seeing both that capacity constraint being alleviated both in GLP-1s as well as in our core business.

Is it right to think on that, that you mentioned both GLP-1s and core. Is it right to think that because of maybe not to the extreme when you weren't with the business during COVID, but during COVID, supplying COVID vaccine got preferential treatment. Is it right to think that GLP-1s are getting some amount of preferential supply ahead of the non -- or sorry, the non-GLP-1 or the core.

Yes. What I would say is we're trying to provide support to all our customers. And given the strong growth in GLP-1s, that is becoming a bigger piece. It is a fewer number of SKUs. So that certainly has helped from that standpoint as -- from an efficiency standpoint. But I would say both of them, we're continuing to work and support our customers in providing the critical products that we are producing.

Got it. Okay. I want to come back to a point that you made about Eric adding the number of leaders that the earlier part of this year, I think late last year or one of the other investor questions that we got fairly often was turnover in the senior executive, kind of probably the executive committee level of the organization. Talk about the kind of the bulking up of the executive leadership team. And is that complete? Is that a stable group now?

Yes. It's -- I think one of the most challenging things to do is always continue to look at do we have the right leaders to take the business to the next level. And I think Eric has been able to do that over the last couple of years. What he's been able to do as part of the developing the operating unit structure is increase kind of the accountability, as I mentioned before, but also focus. And with people bringing in folks like myself and Shane Campbell, who runs that business, we've got experience from the larger companies, global experience. And I think bringing in new ideas about how to run the business and not just look at things the way that they have been done in the past, but how do we actually continue to improve them. And so I think that the team is gelling very nicely. I think it's a team that's really focused on the future and driving improved execution. And I think we've got probably one more role to fill, which is our General Counsel, who is -- our current General Counsel is retiring at the end of the year, and we're recruiting for that right now. And so I think it's actually a real good time for me to come in because everyone else is working nicely together in driving the next chapter of growth for West.

Got it. Let's come back to GLP-1s and focus on that for a moment. The business is -- the market environment is growing rapidly, the aspirations for GLP-1s continue to be high. We recently ran an update there, and I was surprised to see that it was still $150 billion in terms of kind of peak sales expectations. One of the things that seems to be a growing talking point is around the delivery of those medicines, getting enough of that medicine into the market. What do you see in terms of a switch from single dose to multi-dose. And are you -- how would your economics vary between a single-dose, say, syringe versus a multi-dose vial or cartridge?

Yes. So I think that if we look at that, first of all, maybe I'll take a step back and look at just a recent development that happened in the United States where 2 of the leading companies in the GLP-1 market struck an agreement with the Trump administration to increase access to a fairly large population of the U.S. And we see that as just symptomatic of continued development and growth in the opportunities and in terms of increasing access and driving a continued penetration of this market, not only in the U.S., but then as we also think about worldwide. So we're very optimistic about the long-term growth opportunities within GLP-1s. To your specific question, we see a platform of both self-injection or auto-injectors as well as multi-dose pens. In Europe, you probably have more the multi-dose pens versus the self-injectors in the U.S. We don't see that changing too much over time, maybe some more going into multi-dose, but that will be a transition over time as opposed to a fast transition just given kind of the convenience and the use of the current formats. Obviously, there is some economic -- the economics are slightly different for us. We've taken that into account in terms of our long-term growth algorithm and still expect GLP-1 growth going forward. Maybe not at the level that we have here in '25, certainly which has been outsized growth, but we do expect GLP-1s to grow faster than the overall company market throughout the rest of this decade.

Okay. Has West been participating or benefiting from the compounders participation in this market?

Yes. It's -- we do participate in that. That's part of the GLP-1 ecosystem, so to speak. It's a relatively small component, but growing. I would also say we also participate or expect to participate in the upcoming generics as some of those products are going generic in places like Canada, Brazil and China as an example. So that's one of the strengths of West is we are viewed as the key leader in elastomers. And so when we think about those products, they do come to us for -- not both branded, but also generic opportunities.

And I think I'm glad you brought it up, the generic opportunity kind of got highlighted on the last call. Where do you see the generics specking in from a SKU standpoint, what's their preference in terms of level of quality.

Yes, it's a great question. So the biosimilars or the generics typically have the same product spec as -- from the standpoint of GLP-1s and even biologics as the branded products. And so it is at a higher product, the high-value components, not a standard component, which generates the higher profitability for our standpoint. And why do they do that? They want to increase their chance and reduce the risk of their regulatory path, and we're a relatively small piece of that cost. And so they just basically take the same packaging components that are on the branded product and transfer that into kind of their drug master file.

Got it. So maybe a bridge question here would be, in addition to the elastomers participation in GLP-1s, you're also seeing quite a strong push in other parts of your business, namely contract manufacturing and the molding of the device. Maybe talk about how that is growing. How many -- how diversified is that revenue stream in and of itself. And then I want to take you into integrated systems after that.

Okay. Sure. Yes. So I think we're unique from that standpoint where we both have the elastomer side of the business as well as our Contract Manufacturing business. Our Contract Manufacturing business is fairly diverse, although we have a higher participation rate or penetration of GLP-1s in that business. It's roughly 40% of the total contract manufacturing and 8% of the total company. And if we think about that business going forward, one of the things that we are looking at continuing to drive efficiencies in that business and drive into higher-value contract manufacturing. Drug handling is a perfect example of that. And that's where not only do we make the device, but now what we're doing is putting the active pharmaceutical ingredient that's in the cartridge into the device to produce the final finished good. What that does is that actually helps -- the thesis here is that it improves the cycle time for our customers because you don't have to ship the components to somebody else and then make that final part. But it also should be something that, given that we know how to make those -- the pens and injectors that should create higher yields as well and for our customers. And so something that's more profitable. So we're moving up the value chain, driving profitability. And so still early days there, but our goal is to be more diversified from that standpoint and then being more important to our customers.

Got it. So on your diversity point, so you're more diversified in that you're generating revenues, you're touching the customer in multiple ways across that GLP-1 continuum.

That's correct.

The elastomer, the device, the compilation, the assembly of all of those pieces, how are you contractually protecting yourselves relative to this point. We talked about moving to multi-dose. There's oral potential approvals that we didn't talk about, but another factor that can influence the growth of the GLP-1 class itself as it relates to number of containers essentially. How are you contractually protecting yourselves across these various revenue touch points?

Yes. We typically don't provide a lot of details about our contracts with customers. But that being said, with contract manufacturing, typically, you do have a 5- to 7-year contracted life. We work very closely with our customers in understanding what the capital requirements are, what the tooling requirements are from that standpoint. So we do understand what the forecasts are from that standpoint. And it's important to be able to do that to not only support our customers, but then also have good visibility into what the footprint looks like. So I'd leave it at that. And I think also as we think about our elastomer side of our business as well as we're trying to define kind of the capacity across our network, we work very closely with our customers to understand what their demand forecasts are because these -- as we build out capacity, it's not something that we can do in 6 months. It usually takes multiyears to be able to put in incremental capacity. And so we do have, I'd say, constant conversations with our customers, not just in GLP-1s, but more global -- more broadly to understand kind of what that demand is. I think one of the things that's important is while we were talking a little bit about a capacity constraint in Europe. We do have capacity available in the U.S. And so as we think about some of the onshoring capabilities that are happening with our pharmaceutical partners, the ability to produce product in the U.S. is something that not only from a tariff perspective, but being close to where they manufacture product is something that they're also looking at as well. And so I think we have that opportunity to kind of leverage that capacity over time. One of it is through tech transfers, taking products from existing facilities and moving into other facilities, but then also driving better utilization across our network.

On that capacity optimization, how long do those tech transfers take? How -- we should set our expectations up.

It can take 12 to 18 months depending on timing from an engineering perspective. It also requires sign-off from our customers. So it's not something that we do to our customers. It's something that we work collaboratively with our customers on. So it is something that we've got some of those in flight already today in terms of being able to manage across our network, but it isn't something that you can just move from one quarter to another. It does require planning.

So I want to transition to what I'll integrated systems but in a loose sense. And I guess the way I think about the trade-off of West has -- in the elastomers business has this beautiful business, wide moat, high participation rate, as you said, lots of regulatory kind of protections around that, you're spec-ed in, but there's 15 -- I think we learned during the pandemic that the supply chain for an injectable drug to ultimately get to us has 15 different pieces. And you're kind of aspiring to be more than one of those pieces. How does West move longitudinally into those other pieces in a way that is economically competitively attractive to the beauty of the existing core business.

Yes. That's a great question. And to your point around the integrated systems. So one of the things that we see and one of the reasons that we have such a strong, I'd say, competitive moat is the importance of the elastomer to the drug and the interaction thereof and the fact that we are in almost every one of these drug master files. And so how do we actually leverage that strength across kind of the containment continuum, so to speak. Our first is the West Synchrony integrated prefilled syringe, which we launched at CPHI in Frankfurt, soft launched and will be commercially available in January. And what this is, is really taking the elastomer, but then also adding the syringe components to it to have a fully verified kind of platform from a single supplier. You have platforms today, but they're bundled. So they'll take an elastomer from West. They'll take the glass from somebody else and put it together with a syringe. What we are doing is providing a platform from a single supplier. It's got a single design verification and characterization package so that the drug master file only has to point to one supplier as opposed to multiple suppliers the way it currently does today. And so we think that, that will be a streamlined submission process for our customers. And we think that, that will be value added over time. Now this is something obviously that is more -- got more players in it than the elastomer side. And so we do think that this is a way to be more important to our customers, but also we think it's going to grow over time. It's not going to be something that will be immediately hit. We don't -- we're not planning on drugs actually switching to this. It would be more on a go-forward basis.

Got it. So -- and on the -- so interesting point that you make about not a compiled solution, but a single vendor solution. And so on the elastomer, obviously, we know where that comes from. The glass piece is what? Is that Valor? Is that your Corning partnership feeding into that? Is that your Crystal Zenith material feeding into that? Where does the...

Yes. So both of those are -- Corning is a very important partner to us as well as Crystal Zenith being an important product for us. It actually is Gerresheimer that is the exclusive supplier for the syringe. It's actually our specifications and detailed design, but they are the exclusive manufacturer at this time for that first product.

Okay. Got it. And then this sits alongside -- I assume these other initiatives continue forward.

That's correct.

Got it. Okay. And then while maybe not under the umbrella of specifically integrated systems, another angle to this, how do you participate more are your high-value devices. So let's talk about those a little bit and particularly like a SmartDose. So how does the desire to kind of commercialize proprietary delivery devices, be they on-body like SmartDose, how does that fit into this broader strategy of wanting to participate more.

Yes. That's exactly what it does. It's providing unique delivery devices to our patients -- or to our customers and to ultimately to patients. So with SmartDose, that's something that is IP owned within West, which is different than the contract manufacturing side where the IP is owned by our customers. And so this is another way of delivering product -- active pharmaceutical ingredients to customers. And so obviously, we're -- with SmartDose, we've got 2 large pieces. We've got the 3.5 milliliter as well as the 10-milliliter. We're evaluating the options on 3.5. We're going down a cost-down journey as well as looking at whether or not we're in that best position to own that long term.

Yes. And I'll sneak in a last one here. On the SmartDose and on the automated line, you've said you're on track to kind of have that in place early '26. That will need to ramp. But I think management maybe even before you arrived, described that, that would double the productivity of SmartDose. How should we think about that mathematically from a margin standpoint?

Yes. So what I would say is margins in '26 should be much better than in '25 as that product ramps. And that's a big -- that will ramp over time in '26. So exiting '26 would be significantly better than '25, should we choose to stay the course path, which is keeping that business.

And so if I remove time boundaries, doubling productivity cuts COGS in half, not for the full year.

It's probably not all that way because you've got a capital piece to it.

I guess what I'm wondering is, is it -- like do I still need to think about raw material as staying the same and then reduce the -- the value-add portion.

That's correct.

Okay. All right. Fine. Thank you for being here.

Thank you.