Good morning, rather good afternoon. This is Paul Knight, the analyst, covering Life Science Technology at KeyBanc. Glad to have Bernard Birkett, CFO, and John Sweeney, Investor Relations Head, to talk about the business and the industry. You know, with that, I guess, Bernard, I guess I would open it up with, you know, the stock situation in the world. How do you feel about that right now?
Yeah, Paul, thanks for the invite to talk here today. Appreciate it. Yeah, on de-stocking, you know, this has been a challenging one to predict over the last 12 to 18 months. What we have been seeing as we went through the back end of 2024, you know, we continue to see de-stocking in our generics business and also within our biologics market unit. That is something that we called out. We said it was gonna take place. I think it has materialized pretty much in line with our expectations. What we have seen in 2024 is our pharma market unit actually come out of de-stocking, and we are starting to see some growth there. It was the first one to experience de-stocking when all of this began.
As we roll into 2025, we would expect to see continued de-stocking within our generics market units, and that's really around, you know, a couple of specific customers and some of the larger ones. You know, we're seeing some bleed into Q1 of biologics de-stocking. Again, we have to see how that plays out. I think, you know, the more experience we've got with de-stocking over the last 12 to 18 months, I think it's kind of making us a little bit more cautious in how we approach this. From my perspective, you know, I think we gotta see how things play out over the next couple of quarters. We gotta see demands returning to normal and get a level of sustainability and consistency around that.
But it is playing out, you know, as I said, you know, pretty close to what we have expected over the last number of quarters. Again, it has been hard to predict. Hopefully, we're getting closer to the end.
Yeah. I mean, the vial producer in this conference had said, demand dropped 50%, so it was a pretty harsh setback over a two-year period.
Yeah, it was. You know, I think it for us, and for the sector, it, you know, I think the length of it and the depth of it has been a little bit surprising. You know, it encourages us to go back, and we gotta figure out, okay, why is that the case and understand what are the drivers of this so we can prepare better for the future. I know part of it for us was that our lead times had extended so much during COVID and shortly with the aftermath of COVID and trying to respond to that, that it caused unusual things within the supply chain and how customers were ordering, the quantities and the timing of that. We are seeing that normalize now.
We have, you know, greatly reduced our lead times across many different product offerings through, you know, layering in extra capacity through our HVP sites. Also with customer demand normalizing, it has, it has allowed us to get back to pre-2020 lead times. You know, and that, and that, that'll help us to respond to the market better and hopefully avoid something like this in the future or at least manage it in a different way.
Yeah. Yeah. You know, the positive wave coming seems to be GLP-1s. Can you talk about where you are with the opening and progression in Michigan and also in Dublin?
Yeah. There is the GLP-1s is one of the three major drivers for our HVP component business. And it, it's also one of the, you know, main contributors to the growth around contract manufacturing. What we are seeing in 2025 is a step up in GLP-1 growth within our component or HVP component segment, which is very positive to see. You know, we've layered in the capacity to be able to support that over the last number of years, and now we're starting to see traction with that. On the contract manufacturing side, Grand Rapids is ramping as we speak, and we'll see that continue as we get through 2025. In Dublin, we're seeing the initial phases of the ramp of that facility that will continue through 2025, particularly around auto injectors and pens.
As we get later into 2025, we will start to see some impact with drug handling and then see the full greater impact of that in 2026. It is ramping those two facilities. Grand Rapids is a little bit more advanced than Dublin in that process at this stage. Dublin will see improvement as we go through the year.
Is Dublin recognizing revenue yet? I think, or is that more like starting in 2H, Bernard?
It'll start. We'll see a small amount in H1, but really the greater impact, obviously, as we ramp, will be in 2H. You can see that on the growth trajectory and the cadence within contract manufacturing. We would see contract manufacturing growing low single digits for 2025. First half of the year, we would see, you know, revenues and profitability, you know, be down. That rebounding in the second half of the year as that Dublin capacity starts to get utilized. You see an improvement in revenues and margin in H2. I think in around GLP-1 and components, probably a little bit more consistent throughout the year.
Okay. CapEx has been running at around $370 million-$380 million. Is it fair to say maintenance is around $70 million annually?
Yeah. The CapEx in 2025, we've targeted to be around that $275 million mark. A pretty sizable step down from the investments that were made in 2024. You know, that's primarily to finish off some of the larger projects—excuse me—some of the larger product projects that are in flow at the moment. As we progress past 2025, we will be targeting to get back to CapEx spend of 6-8% of revenues, you know, where needed. There may be some years where we may not need to do that given the capacity that we have installed at the moment. You know, our utilization rates, given de-stocking, are lower than what we would typically experience. We have room to grow.
We have a number of growth drivers that we have to support over the next number of years. With the CapEx investments that we've made, pre-2025, we reckon we're in a pretty good position to be able to support Annex 1, GLP-1, from a containment perspective and the growth within biologics.
The Annex 1 regulations, those were really concluded, what, a year ago, and it's now you're starting to see more and more impact from that.
Yeah. I mean, I believe it was around mid-2023, 2024.
2023.
Yeah. Late 2023, and we are seeing a lot more traction around Annex 1. The number of projects we're working on, you know, is greater than 200 projects at this point. That number continues to grow. We're seeing some revenue impact in 2025 projects that had started a couple of years ago. Again, it's gonna be a small part of our revenue within 2025, but again, expecting that to grow over the next number of years as customers make that transition. You know, it's predominantly affecting Europe at the moment. So we've kinda sized the number of units that could potentially be impacted by that.
However, you know, some customers will be looking at make-or-buy decisions, whether they do it themselves depending on scale or whether they'll come to somebody like West to provide that uptick in taking a standard product, moving it to HVP, which would typically encompass pharma wash, vision inspection, sterilization, some packaging in port bags. You know, there are a number of elements that play into it. It's like picking from a suite of products. You pick the ones you need that are offerings. They may not pick everything. Yes, now starting to see more traction in that space. My sense is it's gonna take a number of years for it to build out, given that today there's no drop-dead date as to when it has to be complied with.
You have some customers who are more proactive in how they look at these things. They've been working on it for a number of years. They're making the conversions. There are some who will probably wait until much later in the process before they convert, and then there's some in the middle. A big opportunity for us. The capacity has been put in place to be able to support this. We have the right level of analytical testing, documentation, and filing support to help our customers transition. We'll just have to see, you know, how that plays out over the next number of years. That feeds into the growth algorithm that we have out there for the long-term construct.
You are, you know, obviously, you know, it translates to more high-value products. Clearly, the margin profile is what for HVP at this time?
Yeah. It could be like these are typically standard products. You know, the margins are like 20% plus. When they try and transfer to HVP, you know, the margins could be 40%, 50%, 60%. Again, it depends on the configuration that the customer chooses and how many, you know, of those HVP processes that they add. Again, you know, from a revenue perspective, you know, strong growth driver feeds into the 7-9 over the longer term, and also, you know, supports that 100 basis points operating margin expansion over the next number of years. Again, you know, depending on where customers land, you know, it could be stronger. We have to see how it plays out. I think it's early stages.
Okay. In this era of GLP-1s, are contracts different? Meaning, are they contracting out and contract manufacturing for three years, one year? Do you specify, is there a time that you can talk to?
On the contracts regarding contract manufacturing, you're typically looking at five to seven years. It would be very, very rare that somebody would enter into a contract in that business for a year given the infrastructure that has to be put in place both by West as a contract manufacturer and by our customer who, you know, they put in a lot of all of the automation and assembly lines. It requires investment by both parties upfront. Typically, the contracts run five to seven years. In reality, a lot of our contracts run 10 years plus. And some we've had run much longer than that. It's not a short-term investment.
Yeah. Yeah. The price escalators are based on what? Just raw material costs, etc.?
Yeah. If it's from a competitive perspective, I'm careful what I say, but there are escalators across the cost base as to what it takes to produce the product. So you have in-build protection if your costs are increasing within certain parameters.
Okay. Lilly has announced plans to invest $27 billion in four sites. I know you've mentioned that you've signed one of two GLP-1 players. Will you need to maybe keep that CapEx at a little higher than the $275 million run rate?
Based on the capital that we have deployed over the last number of years and based on the level of automation we have around some of these high, high-running products, you know, I would be targeting still around that 6-8% of revenues. However, if something did happen where we had to flex and add in more capacity based on a pretty solid growth projection, yeah, we have the ability to do that. Again, based on what we have in place today, we have the capacity to support both customers. So one, we have an agreement where we are the supplier. The second one where the number one supplier and I know they are doing a second sourcing exercise, which is ongoing. We do provide both GLP-1 providers at this point.
Okay. What's the latest on the Corning joint venture?
Yeah. We're making a lot of progress with integrated systems. You can see from our step up in R&D in 2025 that we, you know, we're continuing to develop that product, develop that offering. You have to quit, we're going to market in 2026.
'26.
In '26, we'll have the first offering.
'26.
Yeah. We're making a lot of progress. Project is on track. What I do think is it's gonna take time, you know, for it to become a material part of West. It'll be a number of years.
Yeah.
Before we see numbers. However, it's the next step in, you know, that HVP offering to customers, providing a full solution to them.
We have a call with Samsung Biologics the other day, and we also noticed that you've, what, added, to people in Korea as well. Are you able to win Samsung business, or can you talk to that?
We don't talk specifically about specific customers. It's not our practice to call them out. But we are working with the vast majority of the major players. Our operation in Korea is more sales and distribution based. We don't have manufacturing there. So our manufacturing for that region will be in Singapore.
Okay. What other CapEx projects are going on in the world besides Dublin and Michigan?
We're finishing an expansion in Jersey Shore. We have some work that has to be done in our French site, in Louvain-la-Neuve. They will be the major ones at this point. Once we get through these larger projects, Dublin specifically, Grand Rapids is less. There in Jersey Shore, we have to finish out some capital expansion there. The rest are kind of mainly, you know, more regular type capital investments. The larger projects, you know, I would expect to see those kind of slow down over the next year or two based on what we've already done.
I think it's important in a lot of aspects to have the capacity in place before the demand comes because what we don't want to find ourselves in a position like we did in COVID where it becomes so difficult to respond. We have to start prioritizing customers, and our lead times go way out. You know, we have this problem with stocking, destocking. That's something that we're actively trying to avoid. In our business, because it takes 12-24 months plus to put the capacity in place, we've learned a lot from the past that in certain areas, we do need to have that in place before the demand comes. There may be a time lag as to when it arrives.
You know, for us to respond in the most efficient way possible, you know, we have to be always looking ahead of that curve and have some level of investment going on.
You think the, you know, we've seen a record number of biologic approvals the last two years in 2023, 2024. Are you seeing that in your business?
Yeah. We're still seeing very strong participation rates around biologics, clinical phase one and two, and, you know, that funnel remains very strong for us. And that's important because that feeds biologics over the next number of years. We haven't seen any shift in that from a negative perspective. Again, the participation rate is high. Yeah, we'll continue to support whoever comes to market with the drugs.
Yeah. You know, and, you know, one of the interesting things about a visit to your facilities, where you are, is getting an understanding of what's being tested in stability trials like, you know, cell and gene therapies. I think cell therapies maybe were being tested when I was there years ago. What are you seeing new? Is it antibody drug conjugates now that customers are starting to move more and more into?
I think in general, on cell and gene, when we look at it, it's a different type of business model for us because cell and gene is much lower volumes. So it's really looking at, you know, how do we support that market? What services do we need to have in place to be able to, you know, further develop that? Because if it's really low volume, it doesn't really impact our business too much. We're currently looking at how do we support that market in different ways.
Yeah.
I think that's where, you know, right now, we're looking at biologics, higher volumes, biosimilars, higher volumes. Cell and gene is different. And how we approach that will be different.
Okay. I would guess that antibody drug conjugates were being more, I guess, stored. Tox is probably not the right word, but it seems to be a perfect fit for your high-value products, right?
Oh, yeah. Any drug where there's a high level of complexity fits the high-value product portfolio, and particularly at the higher end. Really targeting NovaPure, NovaPure for supporting anything like that coming to market. That's where our focus would be.
In contract manufacturing, obviously, you've got the runoff going on in glucose monitoring. You know, we've been to those factories, with you. How that, that factory, how easy or difficult is it to, to convert to a different type of contract manufactured product, Bernard?
Yeah. So typically for contract manufacturing, what we supply is really the footprint, the injection molding machines and the resources to run those. And then our customer actually provides the automation lines that the, you know, products will be run through and then the packaging lines. When a customer is exiting, they take out all of their equipment and they free up that space. Typically, the business that we're competing for, we're able to reuse the molding equipment that we have in-house. Now, the number is maybe slightly different, but they're fungible. We can move those around our network. There's some work to be done given configuration, and there may be some facility work, but it's relatively quickly to get that can be done relatively quickly.
The space in Dublin and given the track record of our, our Dublin facilities is, you know, premium space within contract manufacturing. We're already having discussions about, you know, who would occupy that space, what we would put in there. Again, it has to meet the return criteria that we have, you know, for, for us to participate in that business. You know, I, I think as, as you've seen that with the building three that we put in place in Dublin, we had commitments for that, that footprint before the building was even finished.
Yeah.
There is demand there for that footprint. We are working through a number of different opportunities. When we are in a position to be able to communicate what we have done in that year, we will be clear on that. There is demand for that space. On the exit within our Phoenix and our Arizona facilities based on the CGM exit there, that is an area where we are looking at a number of drug handling projects with a number of customers. It is not just one. They are not GLP-1 related. That is an area of the business where we are looking to expand and build on. Again, as we look at how we change the economic profile of contract manufacturing and improve the returns in that business.
You know, the expansion in Dublin building three, do you, what's the size of that in terms of square meters or feet versus, you know, what was there already?
It's probably about 160,000 sq ft. It's probably the largest facility we have of the three that we have at Dublin. I'd have to go back and check and see what the other ones were exactly. But it is probably our largest contract manufacturing facility.
Okay. And then, you know, I know Waterford, you know, finished construction quite a while ago. The factory looked very busy a year ago. Do you need to put another footprint, footprint down in Waterford?
I would love to say yes on many aspects. As of today, I don't see us doing a major expansion there in the next, say, 12-24 months. You know, we're doing a lot of the activity within Waterford has increased, you know, considerably over the last number of years. It's really, you know, utilizing the space that we have, driving more efficiencies is what we're targeting at the moment rather than adding more space. Again, if there's a specific request and, you know, the growth is there and we have commitments around it, we can do it. Yeah, nothing in the next 12-24 months.
Yeah. Yeah. Okay. You know, I guess the last question would be, you know, regarding the growth rate that you've had historically. You've been targeting kind of a long-term on, I believe, seven to eight, Bernard?
Seven to nine.
Seven to nine. Sorry. With the advent of GLP-1s, why wouldn't that be going higher?
Yeah. You can, I'll just be open with you. People ask, why isn't the higher with GLP-1s and Annex 1 and biologics?
Yeah. Yeah.
What I'd say on that is, like, we have to see these materials, these revenues materialize. And these markets are evolving. Annex 1 is evolving. We're just starting to get early traction. You know, we believe it's going to be a strong growth driver. I would say, hey, that feeds into the 7-9. GLP-1 feeds into 7-9 because you're growing on those numbers every year. It's not as if you don't count those in your growth. And then strong growth with around biologics. What I would frame it is that there's a lot of support just for 7%-9% construct.
Yeah.
If the opportunities are greater than that, you know, we have the capacity in place to be able to deliver on those and to support them. You know, I'd hope they are. Like, seven to nine, organically, you know, and to do it over a year, over a year, over a year, you do need a number of growth drivers to support that.
Yeah.
They all have to hit together, and you got to get the timing right. That is how I would frame it. You know, if we do better, great. We'll take it.
Yeah.
We have the ability to do that. You're also growing seven to nine up a much bigger number.
Yeah.
It's not the same as it was five years ago. That's how I would frame it.
Great. Good. Thank you so much for your time today. Good luck with these. I know you're doing more meetings, and I appreciate that.
Thank you.
Thank you, Paul.
Okay. Talk soon.