West Pharmaceutical Services, Inc. ($WST)

This is Paul Knight, the analyst covering life science at KeyBanc Capital Markets. With me today is Anne Snopkowski, who's on my team as well. we'll be running some Q&A. And then we have, of course, Bob McMahon, the Chief Financial Officer of West Pharma; John Sweeney, Head of Investor Relations. But that kind of pops into my first question, Bob. Agilent, of course, very, very well-known firm, I followed it since the '99 spin, I believe, from HP. What do you like about the West business now that you've been here a little bit?

Yes. Yes, Paul, Great. Thanks to you and Anna for having us. We really appreciate it. And what I'd say is the thing that's really super exciting about West is I think it's a business model that's fairly rarely matched in the industry. And when I think about that, a business that's got a very strong market share 70% to 75%, kind of, market share with even more opportunities ahead of us as we move into kind of biologics, where we have even a higher participation rate and the durability of the business long term. So when we think about the competitive moat that we have once we're spec-ed into a product, we are on that product for the life of that product. And so it's very rare that we lose a molecule. And so whether that be a branded molecule or even a generic molecule. And so the nature of the long-term secular tailwinds behind us, the strong market position and the competitive moat that we have gets me super excited about this. And then as I look forward, those things are still there. And then I think we have an opportunity to continue to drive even better execution in the marketplace and even more margin expansion. Now that I've been here for 6 months. And so I'm really happy to be here with the West team.

Anna, I'll let you start with some questions.

Okay. Sounds good. And thank you, John. Thank you, Bob, for both joining us today. We really appreciate it, and we look forward to this conversation. But I thought maybe before we jump into 2026, we could just take a look back at what we've seen this year. I feel like we saw a bunch of dynamics, including vials starting to normalize. GLP-1 is accelerating, but you also have a customer loss on the contract manufacturing side. So do you think you could just level set with investors where we sit today and how you feel entering into 2026?

Yes. It's -- 2025 was a really, I think, really an important transitional year for the company. And as you look through kind of where we started the year versus where we ended we made a tremendous amount of progress. The second half of the year, we really started seeing the momentum on a number of different fronts come through. Not only on GLP-1s, but on our core business going forward. And we exit 2025 with, I think, some really good momentum. At the beginning of 2025, we talked about a number of things that we wanted to get through. One is destocking on our high-value components business. We feel like we've gone through that. We talked about rectifying the economics around our SmartDose product. We exited this year with the announcement that we made in January a few months ago. of transitioning that business over to AbbVie. And I think that's a win for them and a win for us. And then we're in the midst of transitioning our contract manufacturing, the CGM business and really ramping up our drug handling business, which I'll actually have better economics going forward. And so on a number of different fronts, I think we made very good progress throughout 2025, and we exited 2025 with a lot of momentum, exceeding expectations and actually demand was greater than our supply on our non-GLP-1 business. And so we sit here in start of 2026 with, I think, a really solid momentum, and I'm sure we'll talk about 2026 and kind of how we think about it. But really pleased with the progress that we have and I think a lot of those things are behind us, and we're really starting to see the business shine and what it's capable of.

Absolutely. That's really good insight on, kind of, what we've seen in 2025 and it seems like most of those headwinds are behind us at this point. But that brings us maybe to the 2026 guide. I think you guys are going to 5% to 7% top line growth. But I think there are a couple of conservative assumptions going into that guide. You mentioned the 50% GLP-1 growth in '25, I think you're guiding to 10% in '26. So, obviously, there's also the non-GLP-1 component we'll get into, but could you just walk us through your framework for setting your guidance and visibility you have today.

Yes. Yes. Thanks, Anna. And it's the beginning of the year. So I'd characterize our guidance as prudent to start the year. And that 5% to 7% top line growth. Really, there's a couple of components and the majority of that growth is actually going to be coming from our non-GLP-1 business. And so if we think of kind of just the midpoint of that guidance is 6%, 5% of that points are actually coming from our HPP business, which is -- will be over 50% of the total company, so call it, high single-digit, low double-digit growth there. And to your point, we're baselining GLP-1 at 10% or 1 point of that growth. Now that's coming off a growth of 50%. Quite honestly, we'd be disappointed if that's all we did. That -- and so we have probably more bias to the upside from that standpoint. But we obviously also recognize there's a number of variables that are coming into play there with things like oral GLP-1s, and I'm sure we'll talk about those as well. But we wanted to make sure that people understood kind of the underlying business is very healthy with the high single-digit, double-digit growth that's really driving that. And so when we think about that 10% oral GLP-1 growth, that's actually a much more aggressive impact of GLP-1 orals than what we're expecting. We still believe that by the end of the decade, it's roughly going to be 30%, growing both injectables as well as orals. That 10% would indicate roughly 40% to 50%. So a more aggressive or conservative forecast from where we think the numbers are and where we're planning. And so we think we're well positioned to come into the year with continued momentum, and we'll see how things play out, but we like where we're starting.

Yes, that makes total sense, and I think a smart way to frame the GLP-1 outlook. But you mentioned your non-GLP-1 business, I think that saw strong demand in 2025. So could you walk us through some of the drivers behind, I think, you're guiding to high single-digit to low double-digit non-GLP-1 growth in '26? And then I know you mentioned supply versus demand situation. So are you seeing more of that capacity ramp support that?

Yes. Yes. It's probably a good way to kind of take a step back and look at kind of how that progressed throughout 2025, as we were talking about before. In Q1 of last year, that was down double digits. It was down slightly in Q2. And then the second half of the year, both Q3 and Q4, we were up mid-single digits. So you saw that momentum throughout 2025, really show up in that non-GLP-1 business. we're forecasting high single-digit to low double-digit growth going into 2026. And the reason is a number of things. One is actually, we are actually seeing demand stronger than supply. We saw that in Q4, and we are building additional capacity, adding more labor into our plant in Germany and Europe. And we think that, that will benefit us in the first half of this year. And then you think about kind of the ongoing products that are coming on market with the biologics, we exited 2025 with greater than a 90% participation rate for the products that were being approved. And then that capacity expansion is just kind of part of the story because we continue to actually be very positively benefited by Annex 1. And so at the beginning of last year, we said Annex 1 was going to be roughly 150 basis points of our growth. It ended up being 200 basis points, and we're expecting for another 200 basis points here in 2026. And that's really taking products that are currently on the market and upgrading them to high-value products. So it doesn't really add more volume, it adds more value to our customers and so forth. And so when we look at the order book and the momentum that we have, as well as kind of the underlying drivers around biologics, Annex 1 and then we talked about GLP-1 before. We really feel good about the ability to kind of continue that accelerated growth in '26. And we talked a little bit about this in -- throughout 2025, ordering patterns suggest that, that's one of the reasons we saw the demand continuing to grow. We're expecting that to continue to happen here in '26 as well. So I think we're well set up.

Do you feel like Annex 1 is now starting to hit the demand side of the equation as companies comply and transition?

Yes. It's a good question, Paul. And we are seeing a -- what I would say is, it certainly has spread beyond Europe. For those who probably may be not as familiar, Annex 1, it was a regulation that required certain levels of particulate in contamination, lower levels of particulate in contamination, which required kind of higher levels of standard products from us. And so we've been on this journey of upgrading kind of standard products to HPP products. And while it was a European regulation, what we're seeing is other -- our customers adopting it for non-Europe uses. And so I do think that it is something that is helping drive kind of overall revenues beyond just kind of that 6 billion unit opportunity that we have. And we think this is a multiyear opportunity, Paul and Anna, not just a kind of a onetime, one and done. And so when you take -- these are existing products and then you add on HPP and biologics, which are typically high-value products already, you've got a kind of a multiplier effect, which is pretty exciting.

And I think two follow-up questions just on that Annex 1. You mentioned -- you said 6 billion units. I think your standard value or your standard components, there's 25 billion units. So could you help us understand why 6 billion is the right way to think about it? And then -- oh, sorry.

Go ahead. No, no, go ahead.

I was just going to mention you said Annex 1 has spread outside of Europe. Is that a recent trend? Is that the back half of '25? Or when did you start seeing?

Yes. Yes. It's exciting. Sorry I was interrupting. I get so excited about Annex 1, I wanted to jump right in. Because I think, again, this is one that we're kind of uniquely positioned given our position in the marketplace. And so the 6 billion, think about -- your numbers are right, the 6 billion is really only the European opportunity. So the 25 million would be kind of our global number of standard units. Not all of the standard units would fall under the category of Annex 1 requirements. We do have some lower regulatory barriers. But if you think about that, if you just looked at our revenue, you could say that the entire population, if the U.S. would go that way, could double that opportunity. So we do have kind of bigger runway. And to your point around the U.S., while there's not a specific regulatory requirement for this, what we are seeing is and we saw it throughout the course of 2025 and probably picking up through the back half is more companies being cognizant of it. Actually, what we're seeing is FDA is when they were going in to do audits and so forth. They were calling this out as an opportunity for improvement in observations more than they had in the past, which will help accelerate some of that opportunity in the U.S. And then if you think about kind of the other events that are happening with more of the onshoring opportunities, what you want to have is kind of a standard process across both Europe and in U.S. And so we see a number of things that are kind of helping you create kind of a spillover effect into the U.S. Now what could accelerate that is if, in fact, the FDA created a formal regulation. We haven't seen that yet. But we are seeing companies look to simplify their supply chains and have kind of one product across multiple products or manufacturing sites, which is actually very good for our business.

Seems like there's a lot of areas of upside to the Annex 1 assumptions just given everything you've been saying with onshoring.

Yes. We certainly think so, Anna. And one of the things that we've seen is that when we look at our pipeline, our pipeline of opportunities within this continues to grow. It's not something that's going to all happen all in one year. It really is somewhat dependent on. Because there is -- there are resources that are required from not only us but our customers to be able to demonstrate equivalents with the different procedures and processes with this -- it doesn't open up the drug master file per se. But it does -- they do need to do the appropriate level of testing and so forth. And these projects can last anywhere from 6 to 18 months. And so the nice thing about this is we believe that this is going to be a multiyear opportunity for us as opposed to kind of a one-and-done opportunity.

So the FDA, are you able to edit your drug master file and go to a higher-value solution. I feel like that would probably be an easier process than vice versa. Is that an opportunity?

Yes. It certainly is easier to upgrade than downgrade. It would be -- we don't see that for sure. I would say though that customers are generally hesitant to open up that drug master file just given -- particularly for something like this. And so what we do is we work to make sure that it's -- there is a consistency between the processes and so forth, so that there isn't any difference so that they don't have to do that as an amendment to the file as opposed to opening up the drug master file. And so that's kind of how that process is working.

And I just wanted to circle back on an earlier point you made about non-GLP-1 [indiscernible] '25. I think you said it was down in the first half, up mid-single digit in the back half. When we look at biologics, they're growing, I think, 10.5%. So what's the discrepancy between the muted first half you saw versus what we view as market growth? And is that just over spell of some destocking that was happening?

Well, there certainly was -- in the first half of last year, there certainly was still the remnants of destocking, and we saw that in kind of the non-GLPs. Our biologics, when you look at that aggregate that also includes GLP-1s, and so that certainly helped drive that. We were talking about the non-GLP-1 piece here. And if you looked at our HPP business in total, last year, it actually grew 9%. Now that was largely on the benefit of GLP-1. But now what you're seeing is rather than the non-GLP 1s, which was roughly flat, maybe a little high across that. we're actually seeing that also contribute to growth, which is actually one of the things that's really exciting about 2026 and beyond.

That's great. And we touched on a couple of drivers. You mentioned Annex 1, but we're also seeing, obviously, biologics is driving growth, but biosimilars is starting to be a topic of conversation. So is that starting to show up in your revenue at all?

Yes. Yes. We -- when we talk about biologics, we actually include biosimilars into our numbers as well because they're largely the same kind of economics for us. when we talk about kind of a 90% kind of participation rate in '24 as well as '25, that also includes biosimilars. And so when we see more of these opportunities come down the pipe, it's actually a big benefit for us because what we just see as kind of the volume shift from maybe a branded to a biosimilar because we still have the same level of participation. And the economics for us are generally the same. You don't see a biosimilar, kind of, downgrade to the earlier point that we were just talking about, their primary containment they're looking for the fastest way and the least risky way to get product on market. And so -- and we're still a relatively small piece of the overall COGS of that drug. And so what we see is a real opportunity there. First in -- across the entire biologic portfolio as some of those products do come off patent over the next several years, I think we'll continue to see traction. And then even in GLP-1s, where you're seeing outside the U.S., some opportunities for generics. So that's another area where we think we have an opportunity for -- we've put very modest growth expectations in 2026 there. And so we think that there's probably more upside than downside for the potential uptake of some of the generic GLP-1s in places like China, Brazil, Canada, et cetera.

Okay. That's very interesting. Thinking about the generics opportunity. I feel like usually just mentioned about biosimilars, but interesting point. And then maybe my last question on the non-GLP-1 part of your business, your core business is high single digit to low double digit, a good way to think about this business growing at just in a normalized environment.

Yes. We really do believe so. When we think about -- and there's a couple of things. We've obviously talked about Annex-1 at length. That's a big growth driver that we think will continue here to be able to drive just positive mix shift that will help the high-value products. In addition, the number of biologics that are currently being developed or in the clinical pipeline. That should benefit that as well and then you have underlying volume demand. And so this high single digit, low double digit for HBP, non-GLP 1s, we're certainly guiding to that for 2026, but we think that that's a good way to think about that for a longer-term growth algorithm as well.

And maybe I think we've talked about the non-GLP-1 growth drivers. If we could just quickly pick on GLP wines. How much of your outlook, I think, 10% in 2026 is supported by these long-term contracts? And can these orders be canceled? Just trying to understand the structure of these contracts and how insulated you guys are?

Yes. That's a good question. And so I feel the underlying market demand or the -- what I would say, the customer demand, the way I would frame it is if we only did 10%, we'd be disappointed. I would say that the requests are higher than that. There is for -- we have high participation for the two largest players in the market today. There are an element of kind of take-or-pay or minimum volume requirements there. So if -- there is a change by molecule or what have you. We do have the ability to continue to get revenue. And then what I would say is we've been -- when we think about our guidance here, one of the things that we've done is that, okay, we understand kind of the orals are coming in. We think we've taken a very conservative or prudent approach to kind of how that is. The data that we've seen continues to support the 30% or less kind of oral cat penetration. It's really bringing new patients to the market as opposed to switching from injectables to orals. Certainly, since the oral of Adobe has launched. We think that, that will continue that way so that both will continue to grow. You think about a couple of areas. Medicaid, the pricing there, that really hasn't come into play yet. We haven't built a whole lot more access into our numbers. So we think that there's an opportunity there. And then if you look at even employer pay right now, roughly only 50% of employers are covering GLP-1s for obesity. And so as the price comes down, it will be more affordable to employers, certainly in the U.S. And so that should increase access. So volume should be a very good benefit, we should be a beneficiary of that volume. So I kind of went in probably a little longer than what you said. We do have kind of minimum floors, but I think that there's also other things that are there that would suggest that those numbers could be better than the 10%.

Yes. That makes total sense. And we just hosted a GLP-1 panel, but it seems like volumes could even be higher than mid-teens. But it seems like your assumptions right now, you're assuming.

We'd all be happy. When and if that happens, we'll be happy to supply our customers with that incremental volume. We are planning our level, loading our capacity for higher than that number. Let me just put it that way.

And while we're on the topic, we have an investor question. Just about generics with GLP-1. So given we're seeing semaglutide rolling off patents rolling off in India, I think in the coming weeks then also China and Brazil in the coming months. Are you seeing any elastomer ramp-up for the generic GLP-1 launches? And are you exposed to generic GLPs.

We do participate with them. So we have a very good participation rate with the generic companies. And we have seen some of that. If you looked at our GLP-1 business just in 2025, just for reference, 90% of it was still branded, but roughly 10% was other than the two largest players, but that was the fastest growing piece, some of which -- a large piece of that is, in fact, preparing for the generics and so forth. So -- and we've not assumed an outsized growth there, but we are seeing the request and demand for that, and we're on those drugs for the large -- in large part.

Okay. So 90% was still branded in '25. Is that -- and that's where you saw the most growth? Or was that the non-branded?

The non-branded grew faster than the branded. And so -- and we would expect that -- certainly, there's an opportunity for that to continue as these products come on. So that is a real nice opportunity that we really only had very modest expectations built into our numbers.

I think Paul, if you have...

Well, CapEx is what this year? And what is maintenance now, do you believe?

Yes. So yes, we've continued to -- we had invested over the last couple of years pretty heavily. Our CapEx forecast for 2026 is $250 million to $275 million. About 40% of that would be considered maintenance and 60% kind of growth CapEx. That's down from -- I think we did $285 million and roughly $285 million in 2025. But if we think about kind of where we have capacity, we -- our capacity constraint that we were talking about in Europe, in our German plant has been labor. It hasn't been CapEx. And so we'll continue to invest for growth across our business with a disproportionate part towards HBP, but we're also doing these tech transfers as well, working with our customers because, again, thinking about the onshoring. They want their products, some of these -- their supply chain closer to where they're manufacturing and so forth. And so we have the ability, we probably have more capacity in the U.S. than we do in Europe. And so being able to work with them to transfer some of the products to the U.S. has the benefit of not only supporting our customers and lowering their tariff rates, but it also has the benefit of kind of level loading our factories even better. That's a multiyear kind of journey. But we expect to still be within that kind of 6% to 8% kind of percent of sales framework for the next several years, Paul.

I'm guessing that customer, it takes probably, what? More -- somewhere around 3 years to bring capacity online?

Yes. From their standpoint, yes, yes, because that's a good -- we have a good approximation for that, not only history, but also our own CM business, when we think about kind of the drug handling as an example, that's kind of back the back end. Our drug handling business is coming online. In fact, we are shipping commercial batches right now, but it's going to take us. It took us a couple of years to get that product planned up and running. And then we're saying that that's a $20 million opportunity here for our contract manufacturing business this year in '26. But that's not at peak. And so '27 and '28 will even be higher than that is probably going to be at peak 3-plus that potential. But that will take a couple of years to ramp.

And you've had some glucose monitoring contracts, obviously, they're rolling off and at a role of I'm assuming you're trying to fill that capacity over time, correct?

That is correct. Absolutely. Yes. And we -- we've got a number of opportunities that we're in discussion with. Nothing to kind of announced yet. But we're actively working to kind of fill that capacity as well as continue to look for opportunities in other places as well and gain new business. Drug handling is a perfect example.

Okay. And then one question we get, it's always a new one every other month, but it was auto injectors versus pens. So I think there's pen announcements, but our view on a pen, right, would be maybe a pen does last 4 weeks or a month. But that also includes -- could include the "elastomer and the plunger", right? It's two components in a pen, is it not? And then...

That's correct.

What are your thoughts about this trend of pens or is it...

Yes. So we think it has the opportunity, first of all, where we are in the GLP-1s business, it's so underpenetrated today. We expect both will grow. So we don't think that this is going to be one or the other. You're absolutely right, Paul. There's two components in a multidose pen versus an auto-injector or a single dose pen today. We -- and in the U.S. the auto injectors are so ingrained. We do think that there will be some transition, but it will happen over time. It's not going to be an immediate. And as we expand market access, there's an opportunity for both of those things to really grow. For all the reasons that I was just talking about in terms of whether it be Medicaid, employer pay, the reduction in price and all these things, I think, have the opportunity to do that. And so -- and then I would just say the last thing, they're currently bound by capacity constraints. So there was a tremendous amount of capacity that was being built sterile to finish as well as kind of the production capacity of the auto injectors and pens, that installed capacity is not fungible, unlike our business with elastomers where you can move products from it. That is an auto-injector. You can't move that product to make it a multi-dose pen. And so there is a multiyear kind of ramp up to just to get to the capacity that we have in auto-injectors in the U.S. as well. So we think that there will be multiple formats of this, and we will participate on both auto injectors as well as multi-dose pens. And we don't think it's an either/or, it's either or demand.

Right. And then Lilly announced this $3.5 billion program in Lehigh Valley, your backyard, basically. When do you think a company like that would start to have discussions with West about things they need from you? Is it three years before they have a facility build or one, what is the time line out of curiosity?

Yes, it is for a company, we have good discussions with them. and to have good ideas of kind of what they're building in a factory like that already today. So we'll have some of those discussions early on as part of their overall kind of demand planning and helping us make sure that we have the demand and the capacity to help support them when their factories are coming up. And so for us, when we do have to add new equipment, it isn't like we can just add equipment. It does take 18 to 36 months -- or 18 to 24 months to mature the equipment and install and validate. So we do need some lead time. And companies like Lilly are great partners for us and help us with understanding of how we need to level load our factories. And that just speaks to the ongoing demand of injectables, not only in the U.S. but around the world. So we're excited to help support them on that journey.

With that, we are out of time. Really appreciate your time, John, Bob, thank you very much.

Thank you, Paul. Thank you, Anna.

Thank you.