West Pharmaceutical Services, Inc. ($WST)

My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And we're excited to be hosting West Pharmaceutical Services for our next chat, joined by Eric Green, President and CEO; and Bob McMahon, Chief Financial Officer. Eric, Bob, thanks so much for being here.

Great. Thank you for hosting us.

Of course. Thanks for being here. Format will be a fireside chat Q&A. As usual, if you've got questions, feel free to raise your hand, and we'll incorporate you in. Standard opening question, but we're going to pivot a little bit, just given the 8-K last night on the cybersecurity issue. I kind of have to lead off with that. Just curious what's your response to that and sort of give us a quick rundown of the situation.

Yes. Let me start with this, and Bob, if you want -- so last night, we did issue an 8-K and what has happened is back last -- early last week, we had noticed that intrusion into our systems. We followed protocol, quickly shut down all our systems across the globe so that we can better understand the situation that was at hand. On May 7, which is last Thursday, we identified that it was -- identified the intruder, identified that they had access to some of our data and were able to extract a portion of the data. We want to -- obviously, before that period of time, we already secured external support around the cybersecurity forensics. We brought in a well-known agency called Unit 42 out of Palo Alto Networks, who have been working with us side by side to do the forensics to understand the situation. Since that time, we -- so obviously, we wanted to make sure we got an 8-K, in particular to that reason alone, is that we felt that data was -- ensure that wasn't compromised. We know that data was encrypted, a portion of it, and we were able to, at this time, de-encrypt the data and also ensure that there was no additional data loss to the organization. At this time, we're able to -- all operating systems are up. We're able to do shipping and receiving for our customers. We're also able to -- all our ancillary systems are operating appropriately, and several of our sites are manufacturing and operating, including Eschweiler, in our global network. There are several plants that we are currently working on to bring up, but it's a very methodical, systematic process to ensure that we harden our systems at the sites that we are bringing up but we're making excellent progress. We believe that -- we feel that we have secure systems going forward as we are getting all our sites up across the globe as soon as possible. It's important for us because our #1 focus is to be able to support our customers to ensure that we're able to get materials to them in a timely fashion. And if -- and therefore, we are prioritizing our sites accordingly.

Maybe just two other quick things. We did take -- we made measures to ensure that the data that had been exfiltrated is not going to be disseminated. So we feel good about that. And then we're still finalizing the plans of when the sites are coming up. As Eric said, we've got a number of sites already up and manufacturing in addition to shipping and receiving. And we're not in a position right now to determine the financial impact, if in fact there is any impact. So we are making very good progress here, and you would expect to hear from us as the events unfold in the near future.

Yes. I mean, on that point, Bob, so May 4, that means that some sites were down for a couple of days up to a week. Some are now down for a week longer. As you said, you're bringing them back online. Can you talk about ability -- for the time that things were down, ability to catch up some of that either in the near term, meaning in the next month or two for 2Q or over the course of the year, inventory on hand that can help offset some of that downtime? I know you can't finalize, put a number on it, give us direction.

Yes. Do you want to take that? Yes. So as you know, our facilities do have flex capacity, and we will be running 24/7 to be able to do that. The demand is still there. I think one of the things that's important and why it's so important for us to work with our customers is these are proprietary products that are associated with the drug. And so that demand is still going to be there. Those revenues will not go away. And so we've still got several weeks in the quarter as we're moving forward. And so we are going to be putting a full focus on bringing back better, our sites hardened and up and running to be able to support our customers. And so -- that's the work we're doing right now. We do have the ability to actually increase capacity, given that we don't run 24/7 across all of our sites, and I'll leave it at that.

And when you talk about data being infiltrated, is that customer data? Is that -- is there any IP around that? Or is it...

Yes. All I would say is we're probably not at liberty to say what's that kind of data, but it was a material data breach, and we've taken measures to ensure that that data doesn't get out to the public.

And the last question, I guess, you said that 8-K this yesterday, I'm assuming you've now engaged with all of your customers that were impacted one way or another by this, which is a lot of -- so just any sense on how those conversations have gone? Any early feedback from them? Is it just -- what's the response then from the customers' side?

No, that's an excellent question because that's our primary focus. It's the first area that we focused on, reaching out immediately to our customers, had engaging conversations. We gave them an understanding of where we are, what has occurred and what we are going to be doing and also give assurance that we are -- we reached out to some of the best in the industry to support us on this process. And frankly, our customers have been very supportive. They understand -- we understand with them the criticality of our products, and they understand that we are working diligently to get the sites up and running in the near term.

Okay. All right. I want to pivot to talk about everything else in the business, but glad we kind of got some time to touch on that. So let's turn to a little bit better news. First quarter result, how the quarter came in relative to expectations, very strong, very broad strength across the board. I feel a lot more constructive about the year outlook. I mean, very positive surprise, frankly, relative to what we were expecting, to what a lot we were expecting. Can you kind of just give us a quick rundown of how the quarter played out relative to your expectations? Why was it so much stronger sort of...

I'll start here on this one. It was a great start to 2026. I'm very pleased on how the team has performed, but this is a continuation of the work that we were doing in 2025. We knew that the key area of growth that we knew the demand was there was around HVP non-GLP-1 components. We had very strong double-digit growth in that area. This is really driven by -- fueled by biologics and biosimilars. Our position in that area continues to be very high and participation rate is greater than 90%. The second area we see continued success and growth in are Annex 1. This has -- this opportunity for West to be a critical partner with our customers to take existing molecules in market to support them on their strategy through the Annex initiative has been very positive. Our total number of projects that we're working on with our customers continues to grow. And as they convert to commercialization, that continues to grow also. And the third area is the underlying growth of the market continues to be attractive in the injectable medicine space. So a very strong start to the year, particularly around the HVP components.

Yes. I think the one thing to just add to what Eric is saying, one of the things we're really proud of is really a broad-based beat. Every one of our major product lines did better than what we anticipated, led, as Eric was saying, by our HVP, both GLP-1, which I'm sure we'll talk about, and non-GLP-1. So nice momentum going into the year. That continued through Q1. One of the things that we talked about was supply or demand outstripping supply at the end of the year. We are building an additional capacity in our Eschweiler plant. That really came online quite nicely, better than what we anticipated. As they were ramping up, the team has done a fantastic job there. And by the end of the quarter, demand and supply were more in line. And so -- and demand continues to be robust. So we feel good about kind of where we are for the year. That was probably one of the biggest areas, just better execution from us and continued robust demand in the marketplace.

Yes. I want to touch on that a little bit. You called that out during the call a number of times was just being able to bring on additional capacity in line. If you think of CapEx expansion or capacity expansion in this field, it's multiyear project, multiyear investments, it's the heavy lifting. This seems like it was a little bit more on the execution side than on the CapEx side. Can you talk about that, how meaningful it was, sort of how long that was in the works and how you were able to fine-tune it to get that uplift in 1Q?

Yes. Actually, the benefit we saw in Eschweiler was really an expansion of number of team members being added to the organization. Over the years, we've added tremendous amount of capacity in our HVP plants, the five plants around the world, particularly on the HVP processing steps such as washing, sterilization and vision inspection as an example. And so throughout the end of 2025, we started to ramp up with a number of new team members into the site, the training, getting it prepared. So as you think about Q1, at that particular site, we saw a sequential improvement throughout the quarter. So we exited Q1 at a very strong output rate of productivity with the resources we have on site there that is now more in line with the supply and the demand equilibrium. I also would say that, just to be clear, that Eschweiler is also a site that feeds into Waterford. So we saw a benefit -- net benefit with more output supporting our Waterford plant, again, another HVP finishing location, to be able to support our customers. The third key initiative around outside of just adding resources is around level loading our operations and working with customers to validate a secondary site for HVP on particular SKUs for particular drug molecules in market. And that is going well. And we want to continue to do that to open up, free more capacity in Eschweiler as we have the capacity already available in Jersey Shore in Kinston as an example.

Bob, maybe to a point you brought up in terms of sort of equalizing demand and supply exiting the quarter, I just want to be clear. So you had demand outstrip supply last year. You're bringing this capacity online, so expanded your ability to handle that. Was 1Q a benefit of sort of just like a onetime burn through of that excess? Or is this the new run rate going forward?

Yes. If you think about it, there wasn't any onetime -- there was -- I'll talk about it from an HVP standpoint, which we're talking about right now. There wasn't any onetime pull forward or kind of bolus in the numbers. And I think if you looked at kind of how we're thinking about Q2, it's very consistent with that kind of measurement. In full transparency, the one area that we did outperform in HVP delivery devices, about half of that outperformance was a result of our partner for SmartDose 3.5 ordering more than what we anticipated in anticipation of the transaction. But even if you took that out, we still -- that was about $10 million-plus greater than what we anticipated. So even if you took that out, very strong HVP, what we were talking about before, and then even the overall total company, very strong performance.

Yes. I think you quantified that as a 100 bps tailwind. So organic growth would have been 14%.

Exactly.

Okay. The other -- I mean the other question we had was -- the other expectation for the quarter was oil input costs as far as it relates to resin, the Middle East conflict from late February through March, could that have had an impact on numbers? Just sort of -- did you see that impact demand? Was there any stocking related to that? Was there any change in customer purchasing patterns? Sort of how have those conversations played out since then?

Yes. We really didn't see anything. The conflict started late February. That's well within our manufacturing lead times. And so even if there was a bolus of demand, it wouldn't have shown up in revenue, and we didn't see anything like that. And so we're seeing just continued strength, but not any stocking in anticipation of that or in anticipation of trying to get ahead of potential price increases or cost increases associated with the price of oil.

Sure. And now it's been a couple of weeks since you reported earnings. It's been a couple of months since the conflict broke out. In your 10-K and your filings, you talk about you have a little bit of a buffer built in, in terms of your hedge on oil. But...

Yes, one of the things we...

They remain elevated, right?

Yes. Yes. One of the things we did say in our Q1 earnings is we forecasted in our updated guidance roughly a net impact of single-digit millions for the full year. So we do anticipate being able to recover a large majority of the cost increases. I can tell you we've already communicated that that is a potential going forward as part of what we would call a surcharge.

And so yes, you've relayed that to your customers. Sort of what's been the feedback? I mean, I guess that's as expected and not really much to say about that, right?

Right, yes.

It's built into contracts to begin with, yes?

Correct. This is over and above the normal contractual increase. I mean we've seen this in the past when we had inflationary aspects back in -- a couple of years ago, same mechanism. So we're deploying that, and we typically have good recovery from that standpoint. And one of the things we're going to do is be very judicious about doing that, working with our customers as opposed to trying to take advantage of the situation.

All right. And then let's talk about the implications of the first quarter beat, sort of how that flows through for the full year guide. So 1Q, 15% organic growth. You're guiding about 8% in the second quarter and you have the full year at 7% to 9%. So the implied second half is more of in the mid-single-digit range. Just talk through the moving pieces there and sort of what are the underlying assumptions for that?

Yes, I think, first of all, first quarter there's an element of prudence in there as we think about going through the first quarter of the year. Now that being said, we do have the CGM contract in our contract manufacturing, our West Vantage business that ends the end of June. And so that's about a $40 million headwind in the second half of the year that's not showing up in the first half of this year. Partially offsetting that is what we've already talked about with this drug handling. That's about $20 million for the full year. That's probably about $15 million in the second half of the year to help offset that. That's one. And then I think we're well positioned to kind of -- to continue to execute going forward.

But anything you can talk about in terms of degree of conservatism in the guide, or are you...

No, I would just say it's prudent.

All right. We'll take that. Let's dive into some of the subsegment performance and then the results that you've seen. Eric, you touched on HVP components as being a big driver of the growth, really strong in the first quarter. Given the size of the business and how important that is to the company, that was a big part of the beat, both GLP and non-GLP. You've had a little bit of an easy comps dynamic there, but still very, very robust results. Anything to say in terms of what's driving that besides the capacity expansion and some of the other things we're talking about there?

Right. No, Bob covered that quite well on the capacity expansion, which allows us to be able to respond to our customers quickly and efficiently, and also improve productivity. But I do think the #1 driver of growth in that sector, the HVP area, is around the biologics and biosimilars. We continue to see a number of new launches that are occurring not just in North America or Europe, but also outside the region that continues to leverage our products and services that enable them to launch and keep in the market for a long period of time. I think the second area that we see is around the Annex 1. What I'm really proud about there is that there's really a pull effect. Our customers are bringing us into the discussions real early when they start developing their contamination control strategies and leveraging West's experience and capabilities really around primary containment, which is what is -- what was the change in, I guess, August of 2023 that we're benefiting from. But it's -- there's a number of customers that are looking for us to provide those solutions. And what's really unique about this opportunity is that as we take existing formulations that are on their molecules in the marketplace today by providing that washing and vision and sterilization capability, we're able to help them support on that -- their strategy going forward. That is giving us at least 200 basis points of growth over the total business. We're also seeing drivers around that, as historically it's been around the European Union as far as end consumption of those drug molecules. We're starting to have conversations with our customers where they're looking to simplify their supply chain to be able to support them in other parts of the world. So it's kind of a broadening effect. And we're also seeing more regulatory audits being done, particularly in the United States that are -- there's more observations around this area around contamination control strategy. So those conversations are starting to build up and that we participate in with our customers. I guess when we started framing the opportunity, we talked about 6 billion components out of the 25 billion components we produce every year. We do believe that could enlarge over time as the expectations of the regulators and of our customers outside of Europe require the same type of solution. You talked about the GLP-1s a little bit earlier. It's another growth driver for us. And we're excited to be able to participate on all the GLP-1s in the marketplace. We're also excited about the new biosimilars that are being introduced in the market that we participate on and also the pipeline. And there's a number of new developments in works that we are -- we have visibility of, and we're very proud to be able to support them as they go through their clinicals and eventually into commercialization. So we feel really good about our position in GLP-1s. I think earlier in the year, there was -- we were cautious because of the oral introduction, but what we're seeing happen there is that it's expanding the market versus cannibalizing the injectable space. So we do believe there's growth opportunity both for oral and the injectable space where we play on GLP-1s, not just near term, but for long term. So yes, many different excellent growth drivers in that part of the business.

Okay. Since you brought up GLPs, I'm going to bite and go after that for a little bit. We estimate -- you have $150 million of GLP-1 revenue in the first quarter. Yes, $100 million a year ago. 4Q was $137 million. So even quarter-over-quarter, it still grows nicely, goes to your point on orals. Just as the quarter played out, was there any change in conversation? You have a very, very close relationship with the major GLP-1 drug manufacturers. As they saw oral uptake over the last five months, has there been any change in those conversations in terms of future demand? I imagine you have very long-term conversations with those customers about future trajectory?

Yes. I'll stay away from conveying on behalf of our customers, but I'll say that from our position, -- we are -- as you know, we're involved with all the injectables within GLP-1s, multiple customers. And we built the capacity and capabilities to be able to support the growth we believe that will happen with injectables. I mean we modeled long term that potentially the orals will be about 30% of the market. Now if that plays out that the initial introduction of orals may not have taken on the same path to get to the 30%, but we still do believe there will be a portion of the -- the whole overall market will be orals. But the injectable space is very still attractive on growth. We're very well positioned to be able to support them. But what we're finding is that different products are growing faster than others, but the sum of the whole is still very attractive growth, which again we play in, on the whole.

Yes, I think the only thing I would add to that, Mike, is if you look at -- the way we were modeling it, and we went into depth about that at the end of the year, it's playing out exactly what -- as we expected. It's still early days, as Eric was mentioning. But when you look at -- you can look at the Scripps data, 8 out of every 10 people who are on orals are new to the market as opposed to being switched from an injectable. And that is pretty consistent when you hear the others talk about kind of the expansion of that market opportunity. So we still see GLP-1s, both in the near term. We haven't seen any -- in aggregate, very constructive, continues to be. We actually took our guidance up for the expectation for the full year to high teens in that from roughly the 10% that we had before. And I think there's opportunities to continue to grow beyond that, not only this year, but if you think about all the other things that are coming in, in terms of increasing access here in the U.S., lowering price is actually really good for us because we're a volume play. And then you think about kind of the next-generation opportunities around indications that are still in the clinical trial pipeline, and then the biosimilars and generics that are outside the U.S. right now. And so that's a very small piece of our business today, but holds a lot of promise. And we're taking, I would say a muted view of that only because we want to make sure that we see that uptake going forward. We have a very strong participation in those products as well. And so -- and we're preparing for faster uptake than what we've built into our numbers.

Yes. I mean to that point, Bob, you just touched on it. I think when you were starting the year, you talked about 10% GLP growth year-over-year in HVP, it's factored into your guide. You took it up post-1Q, but your 1Q growth was so strong that it still feels relatively conservative. Is that the prudence you were talking about earlier, or...

Yes. I think if you looked at -- if we -- if the market continues to do what we're seeing and doing and expecting it to do, there's upside there. There's an opportunity for beating that. And we've got to execute, and it's going to continue to go that way. Obviously, the second pill hadn't been launched. Again, early days, but it's tracking the way the first one on the market is as well.

Okay. All right. I kind of want to take a step back and just think about how the year -- your latest year view is in the context of the longer-term algorithm, right? Where you raised the guide, guiding to 7% to 9% organic, that's also the LRP effectively, right? So for the last couple of years, it has been a story of getting back there, getting back there, getting back there. After one quarter, you suddenly kind of jump back into it. There are a lot of moving pieces in terms of how this year is playing out. You also talk about CGM headwinds. You've got divestments, the extra capacity coming online. But just from a high level, is there any reason I think that this isn't sustainable going forward or that there are any things that would be moving pieces as we head into next year and beyond?

Let me start on this, Bob. If you think about the market itself, the fastest-growing area of healthcare is injectable medicines. And then the subset of injectable medicines is biologics and biosimilars, where our participation rate is very high. So we feel really good about long-term trajectory on this business around the core of the company. And when HVP components are growing, we saw this in Q1, we've seen it historically. We had a tremendous margin expansion in our business, so we can reinvest that back into the capital investments back into our facilities. So I'm feeling really good about it from a market perspective and position us very well. We do know that the market roughly in injectable medicine space is 1% to 2% of the volume just in general across the whole sector. We do see if you kind of build it up from a base 2% to 3% on price, and the balance is really the growth areas we talked about. It includes mix in there. So I think looking long term, the tailwinds or the secular macro trends that we're seeing, particularly around the biologics, but also the Annex 1, the regulatory changes that are occurring, these are permanent, and they are multiyear events or event that will take place. And we're very well positioned for this because of our market share, but also more importantly, because of the technology and capabilities we bring to the table. So we see that as a very long-term growth algorithm for us. And then you have the GLP-1 aspect there, too. So I'm feeling really good about -- if you think about building it from the back, what are the trends that are allowing us to get to that long-term financial construct, those are the key drivers into that 7% to 9%.

The only thing I would add is, as you think about where we are, we've got a very strong market share. And when you think about the participation in those areas of growth, our participation rate is even higher than our current market share. And so that's a very good leading indicator for us to continue to be able to take our -- help drive the market ourselves and take advantage of those market tailwinds.

Okay. And then kind of same question on 2026 margin expansion versus long-term construct margin expansion. You've got a lot of moving pieces this year in terms of the divestment, mix shift, CGM headwinds, oil price around war, but still seems to be very strong margin expansion year-over-year. Previously, you talked about, at 7% to 9%, you're getting 100 bps. Are you kind of locked in into that?

Yes, we feel very good about that. And actually this year, obviously, when you look at it, we're guiding to higher than that. And volume really helps drive a significant amount of that margin -- or excuse me, volume and mix shift. And so when you think about the long term, at 7% to 9%, I feel very confident that we have several years of opportunity to drive 100 basis points or more expansion, not only in terms of being able to drive that mix shift that we've been talking about from a revenue perspective, but then if you add on the efficiency efforts that are ongoing in the plants, things like automation, the level loading that we were talking about before, getting back to our 6% to 8% CapEx construct will help drive incremental gross margin expansion. Pricing is a lever that I think we have an opportunity to continue to develop over time to really make sure that we're pricing for value across our portfolio. And then you look at it even longer term, things like procurement and other areas where we can kind of bundle our spending and drive efficiencies with fewer suppliers, increased quality, lower price and so forth. So there's a number of things -- steps over the near and medium term that feel good about on a gross margin basis. And then with that 7% to 9%, reducing our spend or not having our OpEx spend at that same level through AI and other efficiency opportunities will help drive additional margin expansion. I think the only other thing I would add, and I know we're running up against time, is in Q1, we started driving below-the-line leverage as well, whether that be through improved tax rate as well as the capital deployment. And so I think those are two levers that haven't been fully contemplated as we go forward and certainly something that I'm very focused on.

I want to ask one last one for you, Eric. It's been a great run. Thanks for coming to our conference all those many years. It's been a pleasure covering you. Any updates you can give us on the CEO search or just maybe your plans post-retirement?

No, I'm excited actually to be here, so thank you again for the invitation for West. It's a great story. It's a great company. We're on track. Looking at second half of this year to do a seamless transition, and the company is operating extremely well. The strategy is very clear, and we have a phenomenal executive team. So I'm very confident that there will be a smooth transition and a lot more success ahead of us.

Yes, thank you.

Thank you so much. Really appreciate it. It's been a pleasure. Thank you, everyone.