Good morning. This is Paul Knight, the analyst covering West Pharmaceutical. I'm the Analyst covering Life Science Technology at KeyBanc. It's a real pleasure to have with us the management from West here today. Eric Green, CEO, Bernard Birkett, Chief Financial Officer, and Quintin Lai, Investor Relations. You know, we have a group of questions we're ready to go with. The audience can ask as well. Now, there's a spot on your screen where you can raise your hand, put in a question or you can email me at paul.r.knight as well. We'll kinda have Eric say a few comments first, if that's good for you, Eric, and then, you know, we'll start jump into some questions as well.
If you want to give an overview of West and how, you know, your view on the world today.
Great, Paul. Thank you for hosting us today. We're looking forward to the conversation with Bernard and Quintin. Actually, 24 hours ago, we had a very special event that we participated in opening up the New York Stock Exchange. It's great recognition of 100 years for West, which started in 1923 by a gentleman named Herman O. West. We had a great opportunity with about 100+ of our colleagues around the world and different plants come join us in New York on that special occasion. It was interesting to kind of reflect back a little bit where we came from and where we are, but more importantly, where we're going. The portfolio itself is very robust.
You think about our global leadership in primary containment and devices for injectable medicines. It continues to prove out the High-Value Product thesis that we've been driving, which has given us accelerated growth and also margin expansion through a mix shift effect. We're extremely pleased on how we are continues to do really well in biologics, which you think about it, about four or five years ago, that was roughly around 20% of our overall sales. Now it's over 40% of our sales, growing very strong double- digits. In the generics, we continue to gain market share in that space. As you know, Paul, we started this journey a few years ago with a lower market share in that particular space.
By applying the value proposition market-led approach, we're able to gain more traction and gain more share, a meaningful share in that particular space. In the pharma, the small molecule space, we continue to have a very strong position in that area. Very confident of where we are, but also where we're going. We have, it's great to be able to reflect on what we have accomplished, but more importantly, where we're going. For those that have not visited our sites, next time there is a roadshow, I'd encourage you to sign up, because it's a great way to get an understanding of what we do at West each and every day. How we produce 47 billion components each day, and each one has a patient name on it.
That's, that's our focus, that's our purpose, and we're continuing to deliver and execute on the plan we have in front of us.
Eric, you know, I know you've, I don't know if you call it Six Sigma actually there, but I know you're a student of it. Are you done with where in your, you know, your, I guess, implementation of Six Sigma within West?
No, I wouldn't say Paul, I wouldn't say we're done. And you're right. There's part of the DNA of West really is around how do we drive more efficiency, more productivity, not just in a manufacturing environment, but everything we do, all touch points we have-
Yeah.
in our organization. What we call is One West. It's one of our core values here at West. We think about three core values: passion for customers, leadership and quality, and One West team. What that One West team has done for us is allow us to globalize our organization and better align with our customers who are global. They require consistent service and products and service at quality levels across the globe. This model of One West and leveraging the West Business System has given us that platform to continue to accelerate. Paul, I would say there's much more we can do, and we have significant, well, we have several initiatives in place to allow us to execute around that One West. One area I'm actually quite excited about is around automation.
We've been talking about this, we've been moving in that direction. I believe you've seen one of our plants with some of that automation installed. We continue to have opportunities to invest further around automation, give us higher quality, better safety, better yield, and actually better productivity of our cost base. A lot more to come, Paul.
What's that translate into in terms of your margin goal, Bernard?
Well, it feeds into the continued margin expansion that we've built into our long-term construct, so that under basis points plus. It's not doesn't have the same impact as mix has on that under basis point improvement, but it's an integral part of, you know, continuing to support that. As our customers' expectations change, also the, our supply chain network is changing. We've seen that as we've come out of COVID, how we're
Utilizing our network, and particularly around High-Value Products. You know, it feeds into that, so it continues to help us at higher levels of quality and higher levels of quantity, as Eric said, greater levels of productivity, and also bringing our lead times back down to, you know, more acceptable ranges, and where our customers actually expect it is. It is, it drives a lot of things, and part of that is into that margin improvement.
Hey, Eric, what was it like to run such a mission-critical company during COVID? What have you learned from going through that world crisis in terms of how you think about your business today and, you know, learning, what did you learn from that? What was it like, and what did you learn from that?
A lot of learnings, Paul. I would say Bernard and Quintin and I and other leaders are extremely proud in how our, you know, 11,000 team members across the globe reacted and responded. You know, when we first got called, brought into the conversation in early 2020, we started to have visibility of the requirement and to be able to provide the necessary components for primary packaging of these necessary vaccines to go global. What I find interesting, it just reinforced the criticality of West in healthcare. We talk about that. We don't take that for granted.
You think about how West participated in a very short period of time to scale and to produce close to full support, let's call it 8 billion doses of vaccines in a very short period of time. It's actually quite impressive. That reinforced, Paul, really when you think about what is the differentiation of West in the marketplace. One is around the technology. We had the platform that enabled us to be able to provide the necessary components to be able to contain pretty advanced biologics. Two was scale, the ability to flex our global network, particularly on the High-Value Product portfolio in our High-Value Product plants, to be able to handle that type of scale while we continue to support the core business growing at or above our financial construct.
In fact, I think there was a chart we showed publicly in the last couple of months where during 2020 on every quarter, our rolling performance on the revenue without the COVID was still in the double digits. That was driven by proprietary, not contract manufacturing. That's the other aspect. The third is just the trust with our customers to put it in our hands and be able to drive it. It taught us a lot. It taught us a lot about how we can better leverage our existing operating network. We can accelerate that even further, and those are plans we have in place. Level load our facilities more effectively.
It showed the resiliency and just the level of engagement of our employees across the globe, willing to come in during uncertain times, and know that their value and the purpose that it brings to the table is actually quite critical. Actually also just reinforced with our customers, that West is there to support them and able to deliver on some pretty tight timelines. I think one last comment, Paul, I think it does change some of the optics or not optics, the lens and how we think about launches and how can we scale with our customers faster, so that we can support them on these drug launches. That's proven in a very short period of time. It can be done.
I'm very proud of how the team responded during COVID.
I guess it also begs the question, we see a lot of major approvals like some of the diabetes treatments, a lot of biologic approvals last year from the FDA, in fact, a record. What's the market telling you that they need in the years ahead, and what are you doing? Are you having to do continuing, you know, $300+ million CapEx? Kind of your view on how the horizon looks would be helpful, Eric.
Let me start, Bernard, you can step in on this also, 'cause there's two ways of looking at it. One is from the market perspective. You're absolutely right, Paul. The significant focus around large molecule and our criticality and our high participation rate is due to continuously advancing the technology, continuously advancing the scale, particularly around higher end of HVP, which is NovaPure particularly. There is a pull effect right now. If you think about the obesity and diabetes market, that's an opportunity that we can participate in from two different angles. One is from the elastomer High-Value Product plungers for prefilled syringes and also from the delivery device perspective through our Contract Manufacturing business. We have really strong visibility of that particular market.
The learnings of COVID has given us confidence we're able to scale it at the right pace with our customers as they launch new molecules that could have Quite meaningful impact on society and volume requirements around that. I think the other aspect that's less from the market perspective is the pull effect. There's more biologics in the pipeline. You know our position. We are very focused on early stage with our whether it's small, medium, large customers, so we can help seed the market. We are continuously advancing technologies and partnerships that look beyond just components and moving towards systems. I know that's been used quite frequently in the industry, but we're down that path where we have the technical data to support this and the competency and the capabilities.
I'm really excited about the direction we're going around the technology. It does require investments. Maybe Bernard can speak a little bit to that around the capital and how it's being allocated and how we're focused.
Paul, when we look at our CapEx and we compare the breakdown of our CapEx to a number of years ago, what we're seeing is approximately 70% of the CapEx investments we're making now are growth focused and based on the demand that we're hearing from and seeing from our customers. When I look back over, like, say, three, four years ago, like, that was about 50% of the CapEx deploy was on growth and 50% on maintenance. That there is a shift. The return that we're getting on the CapEx is a lot quicker than we would have seen in the past. The opportunities are closer at hand again than we would have seen before this. We continue to see that need for elevated levels of CapEx investment at this time.
As you'll see, even over the last number of years, our return on invested capital has been improving, even though we've had these accelerated levels or higher levels of CapEx. We would expect that to continue over the next number of years. What we would expect to see over time, though, we would expect that CapEx to come more in line with our construct of 6%-7%. Obviously, that's not going to be the case this year. Again, the investments are demand driven, so it's not really speculative. It's a, it's a different experience than what we've seen in the past.
What are your major site expansions going on right now? I know you, what, ramped one up in Michigan this year early. What else is significant on the site finish and projects work?
The biggest one that we've coming online right now is in our Kingston facility. We've been layering in the High-Value Product capacity there, particularly focusing on plungers. We expect that capacity to start coming online at the back end of the second quarter, and that will then ramp up as we, like, get through the year and do final validations around those processes and that equipment. We continue to invest in our high-value plants, and that's predominantly Eschweiler, Germany, Singapore, Waterford in Ireland, Jersey Shore and Kingston here in the U.S. Again, a lot of that 70% growth that we're talking about for the investment is really focused on High-Value Products. Much of that is around plungers where we're seeing potential demand coming from. That's the focus right now.
Are you well, should we expect the contract manufacturing business to be a slower growth business as you utilize time and talent for high value add product work?
Yes is the short answer.
Yes. We would forecast the contract manufacturing business to grow mid-single- digits. Now it's set back a little bit from that in 2022 when we did call out the reasons around that. We would expect that mid-single digit growth rate for that business. We're pretty selective in the contracts that we take.
Paul, we are selective, as Bernard said, but we're also very focused that when we engage with a customer, you mentioned.
Yeah.
The expansion in Grand Rapids, Michigan, is that you will get the West experience, you will get the ability to scale and do mass manufacturing at a high level of quality, consistently. We're dedicated to that. We do have customers that leverage or are working with us both on primary containment and delivery devices, and it does come together quite nicely. As Bernard said, we wanna be very selective, and the resource allocation is disproportionately towards proprietary High-Value Products.
Eric, could you talk to the Corning joint venture, you know, capital invested, you know, the background on that JV, when we could expect revenue from that JV?
Yeah, Paul, that's gonna take some time as we continuously develop different systems and provide all the technical data to support. I mean, we did have a launch earlier this quarter with a Ready Pack solution that is the Valor glass of Corning around vials and our D Sigma stoppers, seals, and LyoSeal, which is the new technology we came out with. That's the first entry point. Just to kind of frame up with why is that important. Going back to my earlier conversation about is to get the high participation rates that we are experiencing or we have experienced or we are experiencing today, particularly around biologics, we are seeding the market.
In order to seed the market, this Ready Pack solution is really critical as a complete package that is going to to our customers at an early stage, so they lock in on a solution. This program will evolve, and we're investing. Both firms are investing nicely. We're constantly monitoring what we can do to continue to accelerate. We are in active discussions with customers and talking about pull effect and the regulatory authorities too. They wanna see this movement occur, so that is a higher quality, a higher predictability on the effectiveness of the drug in the primary containers. It's gonna take some time, Paul. It's gonna take multiple years to get to where we wanna be. Just think about the NovaPure journey we were on, Paul.
We started that in several years ago, but we technically didn't really launch the commercial side until 2016. It takes our customers a couple of years through stability tests and working with materials to get comfortable. Then now, right now, as we sit here and talk is that's meaningful, it's material. These investments we're making in Thisted or Waterford or other locations in High-Value Products, NovaPure is the front and center, the focal point. That is continue to be a major ship effect, not just on revenues but also margins. More work to be done, but we're proud of where we are, but we have a journey ahead of us.
One question from an investor is the apparently your new proxy flags PSU sales target of 9.1% CAGR, 2022-2024. This person thinks the analyst community is closer to 6%. Any thoughts on that compound growth rate?
I'm sorry, Paul. Is it PFAS?
It's in the proxy. It flags a PSU sales compound growth rate.
Yeah, it's just the overall compounded growth versus. Are you asking versus the long-term construct?
Yeah.
Yeah. So, how, you know, describe, you know, what we're doing and how the growth is?
Yeah.
versus the long-term construct.
Yeah. We have been performing above the long-term construct. If you think about the last five years, we've grown, the CAGR's been around 14%.
Yeah.
We went from approximately $1.7 billion-$2.9 billion round numbers. Over that period of time... That's really all organic. Let's be very clear on that.
Sure.
You know, you can put some pace with the currents and so forth. What's driving that growth, and it's a really good question because you think about the markets, the markets are driven by volume, correct? Number of injections, or drugs administered. And this is exceeding, on an aggregate. We know that generics is probably mid-single %, pharma, small molecules, low single %. Biologics from a volume perspective is high single %, and our performance is on the higher end of all those three categories. The major driver of that is biologics. And we know that contract manufacturing has been up and down slightly, but overall mid-single %. Biologics is our fastest-growing segment.
If you step back in 2016, it was the smallest market unit amongst the four that we speak of, with the strongest growth. In 2022, it's the largest market unit with greater than 40% of our sales at West.
Yeah.
With the strongest growth. That dynamic has powered our strong, you know, consolidated growth to get to those CAGRs that we've had. Going forward, our focus is to continue to deliver at or above the 7%-9% construct we've communicated. I'm very proud of the team. If you take COVID out of the equation, I think that kind of muddies the water a little bit the last two or three years. We've been very transparent in the slides that we provided in the past that we are growing faster than construct right now. That's what we're focused on, Paul, and the big accelerant, and will continue to be the accelerant is biologics and our high participation rate.
Okay. Eric, you know, we are seeing a lot of new therapeutic types, whether it's cell and gene therapy, antibody-drug conjugates, signal interference, RNA, et cetera. Are you having to modify your technology offering in light of all of the new things we seem to be developing in research and development? How is it changing your offering?
Yeah. You're right. Just looking at 2022, just to put it on, just a level set here. Our participation on all advanced therapies, we were on all advanced therapies and all monoclonal antibodies in most of the biosimilars, to give you kind of perspective of our position. Yes, we're continuously putting investments around R&D development agreements with our customers outside of, obviously, we're pushing, we're working with our customers around NovaPure. We're looking at Crystal Zenith syringes and/or vial cartridge configurations. We're also focused on ultra-cold containment, additional new delivery platforms, and new administration systems. That's a piece of the business we do with Bio transfer, as an example, that we're quite good at.
we are as these advanced therapies evolve and we are continuously looking at ways to enhance the portfolio, broaden the portfolio. many of them are really being developed conjointly with our customers through development. we're allowed to platform that and go out externally. it's an interesting journey, but the best part about this, Paul, is we're at the table-
Yeah.
almost in all conversations, and it gives us optionality and ability to leverage our technical expertise.
In your conversations with customers, Eric and Bernard, what's it like in terms of the number of conversations or proportion regarding they are looking at a ready-to-use single-dose syringe versus vials? What's that like now versus 5 years ago?
Different.
Yeah.
Different. We see it. Obviously, because of our position and what we provide, we do see, we see that transition. It doesn't mean that the vial configuration isn't as important or cartridge systems are used in devices like, our SmartDose device. You're right, there is a, there is a, there's a push, and the fastest growing sector is the prefilled syringe, right? That's why if you think about our investment thesis, particularly over the last couple of years, and what's coming online, what Bernard was talking about, in Kingston. The equipment and the capacity we're putting in is all around pistons. We had some investors that actually went through there. We opened the doors for a day. It is, it's impressive. It's impressive.
That's coming out online this year, and we have to do more. The demand in that area of the business is growing faster than we originally anticipated, but we're making the investments as we speak.
Right. Okay. Another question from investors is this, everybody, a lot of excitement around GLP-1 drugs, obesity, therapies. Can you talk about what you perceive as the opportunity with the GLP-1 therapies?
There's two ways of looking at that. One is, first, I would encourage the around the impact on patients and the society as a whole, really focus on the drug companies, let them kind of drive that conversation. From a supporting our customers on those launches, we have two different lenses that we have with our customers. One is, I'll start with the first one, is contract manufacturing. There's requirements for delivery devices, whether it's auto-injectors or other type of delivery devices, particularly around that space. We are participating with some of our expansions. As you know, Paul, we've been very transparent about this.
In that part of the business, our customers own the IP, and they come to us and say, we would like to invest capital with dedicated facilities and space for those investments and then we scale up, and these are long-term agreements. They rely on two or three different suppliers to provide that portfolio. Fortunately, West participates, but it's not like our proprietary business where it's somewhat binary. Either you're on or you're off the drug.
Yeah. Okay.
On the elastomer side, Paul, it's really around the heavy focus is around prefilled syringes. For us, it's the plungers. That's what's exciting about where we are. Fortunately, we've made those investments, and we'll continue to make those investments to stay ahead of the curve, but the demands are definitely, we're in conversations today with the customers to help fulfill those demands.
Okay. Bernard, you know, operating margin, you know, we've obviously seen a transition here as COVID dissipates. You validate other production technology. Of course, there's this fight with inflation. Can you talk about, you know, I think margins are guided to increase throughout the year. If you could talk about, you know, the issues around your thinking on margins and, you know, why it can improve over time.
Yeah. For 2023, we approached it from a number of different angles. Obviously, said we do have the inflationary pressures, and, you know, that has kind of helped advise what our pricing strategy should be as we move into 2023. That's reflected in, you know, the kind of higher-than-normal price, again, that we would particularly see in our business. We've moved from 1%-2% in previous years. We were closer to 3%-4% last year. This year we're forecasting 5%-6%. Again, a lot of those conversations are taking place with customers. The other piece that we've seen is that, you know, the transition from COVID vaccine business, and changes that we're seeing there, obviously, we're selling a lot of High-Value Products into that area.
you know, we've had to offset some of those, margin headwinds again.
Yeah.
We looked at the cost base within our business. We've made adjustments to our cost structures, both from a manufacturing perspective and within OpEx. Again, that was something that we were working through as we got to the back end of 2022. Also what we are continuing to see the mix shift, that, you know, we that can be embedded into our long-term construct from a revenue growth perspective and an operating margin expansion perspective. That has been taking place even without COVID as we moved through 2020- 2021. We were seeing that operating margin expansion on our core business. That, you know, together with the opportunities that, you know, we've been talking about just here and the investments that we're making.
That informs how we're looking at the long-term construct and what we expect to see over the next number of years. That continued operating margin expansion that builds into, you know, what we've talked about. It's really more of what we've seen in the past. It's that mix shift to continue to execute on our operating plans and then, you know, pretty tight controls around our cost base within our business. It's, you know, more of what we've seen over the last number of years. The demand
Right.
You know, that's the positive thing. The underlying demand is there, particularly around the High-Value Products and mix shift.
Okay.
That's what's informing our whole process now.
Kind of wrapping up, with COVID, is, are the container formats changing? Are we down to five dose vials? Are we now at single-dose syringe? Where is technology on COVID delivery right now, Eric?
Yeah. Just a couple things I could update on COVID. I mean, last year we did about $388 million of material to the market. This year we've guided a little while back about $85 million for 2023. We will obviously update guidance, you know, at the end of the quarter. That's what we're focused on is be able to deliver for our customers there. We are seeing sales for 2022 where both, you know, we think about it as large and small stoppers, if you wanna call it the 20 mm and the 13 mm, which implies moving towards smaller vial configuration. We are seeing that, but I won't get into specifics around volumes and so forth.
Yeah.
We are seeing that shift. One thing just a reminder, just to re-comment on, I guess, is that our assets that we've put in place to respond to this pandemic are not dedicated to a customer or to a product. What we're able to do, particularly on High-Value Products, and I think this is what the team did a great job at, is bring our customers to our High-Value Products. It's fungible, the way I look at it. We'll support all customers around the High-Value Product portfolio. We'll leverage our assets. If there's more demand required, we'll be able to respond. If it's less, we'll be able to redeploy.
Got it. Okay, super. With that, we are done with adequate time. Appreciate your presence here, Bernard, Eric, Quintin . As usual, a great conversation and look forward to many more here in 2023.
Great. Thank you, Paul, for your time.
Okay. Take care.
Yeah.