West Pharmaceutical Services, Inc. ($WST)

Great. Good morning, everybody. I'm Luke Sergott, I cover Life Science Tools Diagnostics here for Barclays. With me, I have Eric Green, CEO; and Bob McMahon, CFO; and we have John Sweeney over there as well. So I guess we can just kick off. You guys a little bit of -- a little press release last night.

So just kind of walk us through the decision, the strategic plan here and how you feel like you're leaving the business off to the next generation, if you will.

Excellent. Thank you, Luke. And again, thank you for the invitation for Bob and I to participate today at the health care conference, fantastic venue and turnout. Yes. Last night, we had a press release. It was to describe my intent to retire once we have identified the right successor for West going forward. I had the honor to be the CEO of this great company for the last 11 years, and it's been a personal decision on the next stage of my life. Timing was important for me personally because you come really close to the organization, but it's the right time when you think about West is in a very strong operating position in the market. I think our strategic direction that we're going is extremely clear and it's informed by the macro trends that are occurring in the industry. And again, we're very well positioned for that. And third, I have to really say that we have a phenomenal executive leadership team that's been in place. We've finalized it last year. Obviously, my colleague to my left here, Bob has been added to that list. And we do have a very, very strong team that can continue to execute for a number of years to come. So it was the right timing. And also, we wanted to make it public working with the Board so that we have the best opportunity to bring in the next leader, the seventh CEO of West for this fantastic organization. So I will be here clearly full pedal down until we have a successor appointed and smooth transition, and then we'll go from there.

Okay. And internal, external both on the table at this point?

Well, we are going to engage with the external executive recruitment firm, and we'll be looking at this holistically, taking the opportunity to see what's in the marketplace today. So I think we're taking the right approach.

Great. Great. And on those macro drivers and kind of where you're leaving the business right now, significant GLP-1 ramp across the market, the elastomer business, high-value components, right? You just have a lot of good growth drivers right now with biologics coming back, biosimilars, there's -- like I said, there's a murderers row of good things coming from a tailwind perspective. But as we think about the near term and some of the noise or headwinds that we always get asked about like orals on the GLP-1s, given they're sizable of your business, plus the shift to the multi-dose side, like walk us through how you see and think about this stuff longer term playing out within the next 2 or 3 years?

Yes. Well, first of all, I'll start and then Bob can add.

Yes.

I think we want -- we need to stay the course. So you absolutely articulated very well. The macro trends you think about IV to subcu, we're very well positioned. They're not just in the wearable space, but the auto-injectors and multi-dose pens because our components are necessary for those devices to function properly, the primary containment. You think about the rise of biologics and biosimilars, we benefit West here in that category with over 90% of new approvals. West participates on those new approvals. You think about the onshoring effect that's happening in North America. There isn't a another firm in the space that has the footprint we do to build, support our customers across the whole globe with our 25 manufacturing plants. And then also think about the rise of the GLP-1s. In our criticality of West to participate in multiple modalities, whether it's in a vial, auto-injector, multidose pen configuration, we participate in all and above, right? So to start off, the macro trends are very favorable for us. These are long-term trends that we can drive. I think specifically around the GLP-1s, we're in a very formidable position. We're able to support the current customers in the marketplace. We do think that's more -- that growth we'll see into the end of the decade to build support because the market is still new. It's still growing. Orals is bringing new patients into the market. So the market is expanding with orals versus cannibalizing, we believe. We also hear that publicly from our customers. So we're very well positioned to support that growth. Bob, do you want to add?

Yes. The only thing I would say is, as you think about the clinical pipeline for GLP-1s, there's a lot of exciting opportunities that are continuing to come. We're really in the first generation of these products right now. And so as we think about throughout the course of the rest of this decade, we are expecting GLP-1s to continue to be higher than the company average growth. Now not at what we had in '25. But what we're seeing is a kind of a convergence to that HVP growth rate of high single digits, low double digits. And given the penetration, the increasing access today as well as the upcoming biosimilars and generics, we think there's going to be a significant expansion of market opportunity for GLP-1s, and then you couple that with all the other growth drivers that Eric was talking about, including things like Annex 1 as well, we feel we're very well positioned.

And as that market expansion, as you think about like GLP-1s going generic in pretty sizable markets, let's just say, put it lightly. How are you guys thinking about like where are you positioned there? Is that your HVP components? Or is that going to be standard components just as you're thinking about the generic opportunity?

Yes, it's interesting in the biosimilar space in generics, many of the new approvals are used in our HVP portfolio, and -- which is exciting for us. So as you think about the biosimilars for the GLP-1s, particularly you think about China, India, Canada, Brazil, I think now in Turkey. These are all markets that we play in. So the expectation is for us to continue to have participation. We can leverage our existing assets to be able to manufacture those products, very similar to the branded GLP-1s in the marketplace, and we do have the capacity and capability to support our customers in that. So it's an additional growth driver for us in that category.

Okay. And as you see that playing out from a single-dose versus multi-dose, how do -- like -- I guess how do you see that playing out, I guess, is the question?

Yes, we see that it's historically multi-dose is quite prevalent in the European markets, not as so much in the North American markets. Just to give you a little bit of background, we do have great lens on what type of delivery devices are being used in the market because of our contract manufacturing business. As you recall, we have expanded significantly in Grand Rapids, Michigan. We also expanded in Dublin, Ireland just for those types of products. These are installed capacities are on auto-injectors and multi-dose pens. So we have a lens, and they take about 2 to 3 years to get the assets up and running and start commercializing. So as you think about the next 3, 4, 5 years, we do have a lens what type of demand is starting to be installed. So there will be some multi-dose pens in North America, but it's -- the auto-injector will be the dominant delivery device, we believe, for the rest of this decade.

Okay. And then from a demand or order perspective, like how much lead time do you guys need outside of the contract manufacturing. So if you're coming out and is it like do they order with you every 2 twice a year? Or is that like almost as a just-in-time basis?

Yes. In the GLP-1 space, specifically, it's pretty consistent with other therapeutic classes with other drug companies, particularly the larger blockbusters. We have a lens of multiple years, but then we have ongoing regular monthly, sometimes weekly discussions adjusting forecast. So our lead times could anywhere between 10 to 14 weeks for manufacturing of high-value products, sometimes a little bit longer. So all that's taken into consideration when we will look, book with our customers. So there is -- but that conversation is active. It's dynamic because the portfolio of our customer might shift from one molecule to the next, but still in the same category, and we're able to pivot and support them as we go forward. But overall, the demand continues to increase.

I think the other thing, Luke, that's important and exciting about our manufacturing footprint is our assets are fungible. And so you have the ability to pivot products in the manufacturing facilities depending on what our customers need. And our customers also know that it takes 2 to 3 years to get a piece of equipment up and running. So we do have those long lead time. They're not POs, but forecast. They help us inform what our capital forecasts are going to be looking like as we look at our manufacturing network. But then on a more frequent basis, we do have those updated supply plans, and we're able to move things around to manage and ensure that we're delivering to our customers.

And with that in mind, I mean, on 4Q, you guys had a little bit of an issue from the supply-demand dynamic, particularly in Europe. Kind of walk us through what the issue was? And is this like something that -- basically, is there a risk that some -- because they weren't able to supply it, like a secondary supplier or tertiary came on and kind of ate that share? Are you going to get that back?

Yes, I'll start with the latter part of the question first. No, there's low risk because we are working with our customers and making sure that we can adjust our lead times or deliveries to support their campaigns. But you're absolutely correct. We -- in 2025, we started to have a bottleneck in our German plant. And it was really around labor, not assets because as you think about the destocking effect that happened after COVID, we actually adjust resources appropriately, and now we're back up in the ramp-up phase. So I'm actually quite pleased on the momentum we have coming in -- with new labor team members coming on site in our facilities. But we're also seeing demand increase outside of that particular facility into other high-value product locations, both in Europe and the United States. So it really is a labor planning perspective. It was a faster ramp-up of demand than we anticipated in 2025, which we're working through as we speak today.

Yes, I was going to say, I think that's the important piece. When you look at what that plant was able to deliver in Q4 versus Q1 of '21 -- or excuse me, '25 was significantly higher. So we have been ramping capacity. It's a good problem to have, I guess, demand has increased even faster than supply. So we're actually adding additional resources into that plant in order to satisfy that demand. And as Eric was mentioning, that demand is still in our order book. We expect that to normalize throughout the course of 2026, and it's not going -- it's not lost business. It's just a greater-than-expected backlog coming into 2026.

Okay. And at what point are you going to need to -- because obviously, if demand just keeps coming up faster than what you're forecasting, you might need to invest a little bit more CapEx in the facility. Like talk about kind of the runway you guys have there?

Yes. I think if you look, particularly in our high-value product plants, this is where most of the demand is coming in at a faster clip. And we do have capacity from an asset perspective in the HVP processing. That's pretty much -- what you're seeing is 2 effects here. One is we already anticipated the biologics and biosimilars ramp up. Then you have the GLP-1 ramp-up, but also the Annex 1, which is relying more on our HVP finishing processes. And so a lot of the assets are in place. We believe, based on the new capital allocation plan that Bob and team have rolled out is that we believe we are comfortable at the 6% to 8% of our sales corridor for capital expenditures for our facilities, and this portion of that is going to be in our high-value product components. And the way to think about it is roughly around 60% to 70% of that spend is going to be around growth orientation, and the delta is around infrastructure and maintenance. So I think we've talked about how we had significant investments over the last 3 or 4 years, particularly around the COVID period of time. As Bob mentioned earlier, a lot of those assets are fungible. While they were with the COVID vaccines, now the HVP processing is able to used for Annex 1 for biologics, biosimilars and also GLP-1s. So we do have head space with our capacity. The constraints more recently has been around team members or labor, and which we're normalizing at this point in time. But we do believe that corridor of 6% to 8% will have a comfortable growth to ensure that we get that long-term growth construct we talked about.

I think the other thing, Luke, as we think about kind of -- if we take a step back and look at what's happening in the macro pharmaceutical industry, what we're seeing is actually a lot of onshoring, moving out of places in Europe into the U.S., and we actually have more capacity in the U.S. And so we're actually working with our partners and the customers on actually what we call a tech transfer. So actually moving some of the formulations out of Europe into our U.S.-based plants that does 2 things. One, it helps reduce tariffs and do the local for local, which is what our customers really want, and it helps to level load our capacity. And so we think we're well positioned to be able to do that. We'll always continue to invest in capital expansion, but I don't see -- foresee a huge capital expansion like we saw during COVID, at least in the next several years.

Great. And then thinking about ex GLP-1 -- sticking on the high-value components piece here. After all the destocking, that's really started to come back, strong exit to the end of the year. And as you think about it, and how that factors into your overall guide, it seems like there's a little bit of conservatism considering the 4Q jump-off point. So just kind of walk us through the puts and takes that you guys are baking in there from an upside downside perspective?

Yes. We would call our guide a prudent to start the year, but we are entering 2026 certainly with momentum. When we think about the growth rate of 5% to 7% on the top line, at the midpoint, most of that growth is going to come through our HVP components business, which is our most profitable business as well and fastest-growing. 80% of that growth is really the non-GLP-1 business. So we feel good about the opportunities there. As we think about kind of where we're set up, we have probably more bias towards the upside, particularly on GLP-1s. We talked about at that midpoint, GLP-1s only growing 10%. That would be a significant step down. And quite honestly, we're expecting more than that. And so I think we're in a good spot from that standpoint. We continue to see that demand grow in our non-GLP-1 business which is good to see. And then we're expecting continued performance in the rest of our business as well. And so I think we're set up well to continue to execute here in 2026 and have a good year.

And as we walk down the P&L, I'm thinking about the margin side, considering that ramp or kind of sustainability...

Yes. The beauty of the business today is our high-value products helps with product mix, as I mentioned. So we've built into our guidance greater than 100 basis points of margin expansion. Some of that as a result of -- in the second half of the year, the divestiture of the SmartDose business. But a lot of it is also just the fundamentals of mix and then being able to fill the factories. And so the nice thing is as you get more product through these factories, given the fixed asset base, it actually drops to the bottom line quite nicely.

And on the SmartDose sale, you're talking about that being in the second half. You walked through the strategic optionality and like full review on that one. Kind of walk us through why better as a sale, it couldn't -- from a margin perspective, is it just -- you couldn't get it up to where you guys needed? And then we kind of assume basically if the sale happens, let's say, June 1, like right into the second half, probably about a 20 basis point tailwind to margin, if we're thinking about that right for the year?

Yes. For the full year, it would be closer to the 40% to 50%, or 50 basis points in the second half of the year. So your math is good as you know.

Yes. And let me add to this. The strategic rationale, what we looked at, beginning of the year 2025, we had 2 key messages that we were saying about SmartDose 3.5. That's one, the team was to drive cost out of the system and really improve the profitability of that product. They actually made some significant progress. I'm very proud of what they have accomplished, whether it's through more lean initiatives that are put into the site, more automation, higher quality, higher yield. It was a very, very strong presence and movement in the right direction. Now when you think about the market itself for the 3.5, it is a limited market. The wearable market is actually much larger, but it's the larger -- when we talk about IV to subcu, you're talking about larger volumes, and the 3.5 is limited based on its size. So 3.5 represents 3.5 mls as max. And so you start thinking about auto-injectors and other delivery modalities that start encroaching on that. And so we have a very -- we had an important customer with significant patients on the device. We want to make sure that we are able to support those patients, ongoing patient adherence, patient adoption and user -- ease of use was very high. And it's proof of point that these wearables are actually going to be part of the future in the market. So we made the strategic decision as best to be able to divest this for our customers and now focus on larger scale, but with all the learnings that we've had over the last 10, 15 years of the previous products. So we do have new technology focused on a larger -- much larger scale, larger market, more customers, more molecules that are in the marketplace today. And we'll continue, but we'll be very focused on making sure it's the right economics for West. We're not going to repeat what we have done in the past.

That's great. On the -- I want to talk about -- a little bit about the standard products. And like as we're thinking about strategic rationale across the different businesses. I understand that that's -- that's the legacy business that you foothold into the lot of the door. But as HVP components and Annex 1 and all these other regulations start rolling out and pretty soon, HVP components are just going to be your standard components. And so as I think about from a time perspective of when that becomes very [Technical Difficulty] ultimately, is there a strategic reason to even keep that business at that point? Or...

The short answer is yes. But you're absolutely correct that there will be a natural transition from the standard products to HVP and to supplement that is our innovation, our R&D group is focused on the next generation, which will elongate the curve for HVP components that we provide in the market, plus we're obviously getting to a total combination device like Synchrony, but its recent launch, we'll put that to the side for right now. But the whole thesis of elongating the high-value product portfolio in the spectrum and more added services and capabilities with those products. But getting back to the standard products. If you think about it in the proprietary area, the elastomers and primary containment, about 70 -- a little over 70% of the volume is standard products. The delta is high-value products. But from a revenue point of view, it's inversed. And so you can't assume that 100% of the standard will become high-value products. There's several products in the marketplace that aren't -- they don't have the regulatory aspect to it as we've been talking about Annex 1. But majority do. And so this Annex 1 regulation change, regulatory change has been one catalyst that we think will be multiyear and will expand. So what we're seeing today is out of about 25 billion, 26 billion components we produce that are standard products, roughly around 6 billion of those components are really targeted as great candidates to transition to HVP. To remind everyone, these are existing drug molecules in the marketplace today. And so as we transition to whether it's in vision inspection, washing, sterilization, what that does for us, it keeps the original formulation on the drug molecule. So we don't have to reopen with our customer, the whole FDA file. And therefore, it's an easier transition, but it does create better economics for us, higher quality for our customers and allows them to keep the drug on the market much longer. So yes, as regulations change, as our customers looking at the global aspect of their portfolio and not try to earmark just for the European region, you'll see that 6 billion become larger -- right now, we're roughly just slightly over 10% of that 6 billion has been converted into commercial revenues as we speak today. But the -- so there's a long runway ahead of us. And we're ready to take this on because we have the assets in place, particularly around our HVP processing.

And last year, last minute, I would say. As you think about -- and just going back to your '26 guidance, just thinking about that roll on, it's more about as the drugs get approval, it's just going to be a slower burn. But can you remind us what happened because we haven't seen a lot of approvals right now in the first quarter of the year, right? So -- and there's a thinking that you're actually going to see this kind of maybe weigh on your growth trajectory for the year. And remind us what you have baked in from a guide perspective. How meaningful are like the mid-single-digit type approval growth that we've seen in the past for -- to hit your guide? Or is that more of just an out year like this kind of continues? This is going to be more of a headwind to the out year?

Yes. One thing to take a look at, I'll start here and Bob want to add is that if you think it's focused on the biologics, biosimilars, the number of approvals last year were 55-plus there, and our participation is very, very high. We're still -- that's still very healthy. So we're really confident, but that's more long term. It takes a while for that to ramp up, but I don't know if you want to...

Yes. I was going to say our -- Luke, our guidance for 2026 has been independent on the number of approvals I think that's more of a long-term opportunity for us. And as we think about it -- and again, it's not just the U.S. We have to look globally because we are the global leader there as well. So we feel well positioned.

Yes. That's okay. Had to ask it. Thanks. Excellent.

Thank you.

Thanks, Luke.