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

Thanks, everyone, for coming to -- sticking around with us for day 3 of the Wells Fargo Healthcare Conference. We're really excited to have Bob McMahon, CFO of West Pharmaceutical Services with us here today. So thanks a lot for coming.

Maybe as a place to start, new CEO, Michel, how do you think about leadership change is going to impact the business?

Yes. First of all, Evan, thanks for having us. It's great to be here. This was 1 year ago, this was the first conference that I had coming to West and it's been a great year, but I will tell you, there's still a lot more opportunities going forward, so I feel really good about the business. I would say Michel is joining the company at a really great time. As you guys know, we are the market leader in really serving a critical role within the pharmaceutical supply chain. And we've had some very nice momentum this year, and I'm sure we'll talk about that. And I think there's opportunities even to continue to expand that. And speaking with Michel, it's his week 2. And I think what's really great about him is he knows our markets extremely well. I mean he knows our customers and the fact he's already spent time with our customers. He's on a site visit going around looking at our sites and talking to our employees. And so I think he will continue to accelerate the work that's already being done. And actually, I think, elevate our conversations with customers, which I think will be good not only in terms of our current opportunities, but future opportunities. And so I expect not only a seamless transition, but an acceleration of the opportunities that we have in front of us.

Great. Maybe just -- I mean you reported 2Q recently, a strong beat, $35 million, 4.2% organic revenue beat. What were the kind of -- what kind of exceeded your expectations? And what were the kind of the puts and takes in the quarter?

Yes. We were really pleased with Q2. The momentum of the business continues to be strong. The market's constructive demand continues to be there. It's very good and had -- I'm very pleased with Q2. As you mentioned, we beat by over $35 million. And really, the area that beat was our HBP components business, which is really over 50% of our business and our -- the business that we expect to continue to have the strongest lines going forward. And really both HBP, non-GLP-1 as well as GLP-1s performed very well. And this was on the back of recovering out of a cyber attack as well. And so we're very pleased with the team. The biggest contributor actually was non-GLP-1 HBP. And when you think about the growth drivers going forward, the continued rise at biologics, where we have greater than 90% participation rate the regulatory requirements around NX1 and just the overall kind of mix shift there. We feel very good about the continued momentum in that side of the business. We took our -- as a result of Q2 we actually took our guidance up by 250 basis points at the midpoint, and that's now 10% to 11% growth for the full year and very, very good.

Yes, that's right. I mean that was where I was going to head next was on the guidance. And that's -- I mean, across the peer group, that's among the highest. What were the drivers of that increase? And then just kind of as we flow that through to margins, what kind of margin expansion are you now anticipating for within the guidance?

Yes. We started the year -- the strong growth is really driven by our HPP business, as I was mentioning before. Of that 10% to 11%, that's over 8 points of growth is HBP components growth. So very strong performance there, really driven by the underlying factors that I just kind of mentioned and we expect that to continue as we move forward. The rest of the performance was actually in our drug delivery device business, particularly in the first half of the year. But what's really nice is the HPP business also drives very nice margin expansion. And so with the addition of that, going from 7% to 9% to 10% to 11% for the full year, we are now forecasting greater than 200 basis points, almost 250 basis points of margin expansion growth for the year, that's 50 basis points higher than what we had seen in our previous guide. So very, very good start to the year. Not done yet, but feel good about the momentum in the business.

That's great. I mean you mentioned a couple of times, HPC and the strength that you're seeing there. It was up, I think, high teens in the quarter, you mentioned. What were some of the underlying drivers of that performance? And were there any particular impacts within that segment from the cyber attack that you also mentioned. And should -- how should we think about any, I guess, follow through acceleration in that growth as you go through the rest of the year?

Yes. We're really pleased about the recovery that we had in Q2. And although there was some mix shift within -- the HPP growth that's really been driven by a couple of things. We talked a little bit about this continued mix shift really driven by NX1 or the regulatory requirements. That's been driving very strong performance, not only last year, but continues to do that this year. When we think about the number of programs. This is a regulatory framework that's come out of Europe and then we're actually starting to see some of those requirements and changes here in the U.S. as well. We had initially sized that at 6 billion components. We're about 1 billion into that right now. So still a long way to go, and that was just the European side. If you think about the U.S., that would obviously expand that 6 billion to even more, and we're actually seeing a potential acceleration in that. The number of programs that we have year-on-year was greater than 50% higher than it was this time last year. And so really feel good about that. The biologic approvals continues to be very strong, and that's where we also have a very good performance and participation. I mentioned our overall market share in the elastomer side is greater than 70%. But in biologics, it's greater than 90% as we measure it by participation. So as that goes we feel good. And then we've been ahead of our plan from a pricing perspective as well. And then obviously, GLP-1s, which I'm sure we'll talk about.

I mean just you mentioned approvals, just came to my mind. I mean is that the best leading indicator to think about your business and potential growth? I mean, just because your attachment rate there seems so high I was just thinking that is that...

Yes, it's one of them. I would look at it in two elements. One is just the number of biologics that are in the pipeline, the clinical pipeline relative to small molecule the majority of biologics are used, injectable drugs. And so that as even a further leading indicator and then certainly more -- in a more near term would be a number of approvals. I would also say, as we think about kind of going forward, the opportunities that we have because of the way that our -- we were specked into these businesses. And so we have a very sticky business as some of those products are our molecules are going off a patent. When you talk about biosimilars, it's a real opportunity for us to actually continue to capture the volume there and potentially could even be greater because of lower pricing and greater market access. And so we also see that as a more of a longer-term growth opportunity for us as well. whereas -- and I think that's kind of a unique kind of opportunity that we're well positioned to take advantage of.

So you mentioned Annex-1 a couple of times. What was the -- I mean if you can kind of contextualize the contribution from that and HCP components conversion in the quarter. What's driving this? And how should we think about that going forward? I mean I think maybe you are able to frame the actual number of projects in the quarter, so that would also be helpful.

Yes. So we've talked about NX1 contributing an incremental 200 basis points of growth for the total company. So if you think about kind of the component, the business, for HPP, it obviously has even a bigger impact for the HPP side. That continues to be very robust in terms of the number of projects that's approach a little over -- almost 800 projects now, which is 50% greater than where it was this year. That's a combination of projects that are currently being in production or development as well as production. And so you're starting to see those come through as higher value, moving up that value chain. And as I mentioned before, from a penetration standpoint, we're still relatively early innings, so to speak, of kind of that penetration. And then -- so we're very optimistic about the continued growth of NX1 opportunity for us going forward. As I mentioned, it's been primarily in Europe, but we are now seeing opportunities come in those projects in the U.S., which would expand that $6 billion market opportunity to even further. And so we see this as a multiyear tailwind for us. that we're uniquely positioned because we're on these drugs already. And so being able to take a standard product into an HBP, we are the supplier of choice from that standpoint, a partner of choice.

Got you. Another thing that you mentioned a couple of times are GLP-1. It's very high level. Could you just talk about the trends you're seeing there? I know oral people were talking a lot about the orals and how that might be impacting the injectables. So any comments related to those?

Yes. We're still very optimistic about the GLP-1 business. It is about -- from an elastomer side, about 10% of our revenues. But we think there's still a long runway of that market in terms of just the amount of penetration to date. In the U.S. as well as the rest of the world. It's just getting started. Orals have been -- I know that's been a lot of talk, it's kind of playing out as we expected, which is actually bringing new patients into the into the market as opposed to cannibalizing the injectable side. The injectables still have benefits in terms of better efficacy, lower side effect profile. And if we think about kind of the additional opportunities going forward, there certainly are additional indications that are being investigated with the current drugs on market. There's a very robust pipeline of next-generation GLP-1s that will have even better side effect profiles, better weight loss or better efficacy. We have a very strong participation in those as well, so I think we're very well positioned to continue to drive that business going forward. And we have continued to increase our expectations for the GLP-1 contribution to growth throughout this year.

Great. Sticking with GLP-1s, again, you mentioned generics. It sounds like some companies are not using West. You indicated -- I mean you indicated here as well as previously that you have strong participation in generics in India, Canada, China, Turkey and Brazil. So maybe just talk about just broadly, what's going on in the generic space with GLP-1.

Yes. I think if we think about kind of the GLP-1 space in general, I'll answer your question directly in just a second. There is still, as I mentioned before, a very long runway. And not only in the emerging markets through generics, but also in the developed markets with some of the things that I was talking about. And so we're very optimistic about the continued volume growth of this. What generics bring is a lower price point, and you're actually even seeing a lower price point in the U.S. and in certain markets in Europe as well. We actually see that as very positive for us because that actually increases access for patients more affordability. And so even in the U.S., not every -- not all employers cover GLP-1. So as more and more employers cover it, as the government covers it, there will be more patients on -- that'll have access to these drugs. And so we see that as very good in the developed markets. To your point specifically about generics, we have very good participation. You can see that in our numbers. In Q2, we had very strong growth in Asia Pacific over 25% growth on an organic basis. That was really driven by, in large part, some GLP-1 business in places like India and China. And I would also say, as we think about kind of the path for whether it be GLP-1s or biosimilars in general, the fastest path typically is to use the same delivery mechanism or packaging as the innovator drug is because you don't have to do as many studies, it lowers the regulatory and you had a potential risk and actually speed to market is critical there. And so what we see is if we're on the innovative drug or the branded drug, the biosimilar or generics will come to us and use the same elastomer equipment or same elastomers as the branded drug and use that in their process. And so there's a very small kind of drop out from that standpoint. And so we feel very good about our participation, to go back to your original question, in the generic marketplace for GLP-1s, I think more broadly for biosimilars.

Maybe moving to the standard products. Slower growth there, but you were up 1% in the quarter. Maybe talk about what drove the performance there?

Yes. So standard products, roughly about 20% of our revenues. Think about that as the feeder pool into what we were just talking about as part of the HBP upgrade mix. So these are products that really are out in the marketplace today, but really have the opportunity, not all of them, but a lot of them have an opportunity to be upgraded to HBP over time. So we see this as -- so some of that is actually being impacted by -- as we are moving up the value chain, the growth rate in standard products kind of gets offset by that. But we think about this as kind of a really important pipeline for HPP going forward. And so it is a lower grower -- low and growing business. But we think about that as a way to upgrade stay with customers and then upgrade over time.

Got you. I mean just thinking -- I mean it sounds like slower growth there is coupled with higher growth elsewhere is actually good in the initiation, right? Not just for your business, but also from a margin.

Yes, that's exactly right. One of the things that as you think about moving up that HVP value rate, the number of units actually doesn't change, but the value that we're providing to our customers and able to capture ourselves is very beneficial. And so to the extent that, that continues to be a source and the HPP business growing faster, that's actually a good thing for us. It says that strategy is working.