Amazing. Good morning, everyone. Welcome to day one of the Morgan Stanley Global Healthcare Conference. I'm Kallum Titchmarsh , I'm the Life Sciences Analyst here at Morgan Stanley. Really pleased today to be joined by Bob McMahon, CFO of West Pharmaceuticals. Thanks, Bob, for being here.
Thank you for having me. It's a pleasure, and looking forward to the conversation.
Amazing. Just before we get started, for disclosures relating to this presentation, please see morganstanley.com/researchdisclosures. Bob, maybe we can dive straight in. Q2 results for the second consecutive quarter came in ahead of the top end of the guidance range. You obviously had the cyber incident during the quarter. Maybe just talk us through what you saw as the quarter evolved across the months, and how those drivers of growth compared to perhaps relative to your prior expectations.
Yeah, we were really pleased with how Q2 shaped up. Despite the fact of the cyber incident, we were able to overcome that and actually beat expectations, as you mentioned. Overall, we grew 13% on the top line, beating our expectations. What was really exciting to see is all business segments grew. That 13% was really led by our HVP business, which is almost 50% of our total revenues now. That grew 18%, with both GLP-1s and non-GLP-1s contributing. Our drug delivery device business actually and HVP drove the majority of the beats. We were actually able to overcome the cyber incident. We continue to see very solid and robust demand throughout the quarter.
Actually, obviously, May was a bit of a softer month, but we really came back in June as we ramped up the facilities. All the work that we have been putting in to drive additional capacity and utilization in our HVP plants really came to bear in second quarter. Drug delivery device also grew very nicely. Some of that was actually our stocking associated with the SmartDose in advance of the transaction. But if you even take that out, we still grew double digits in the rest of the business, and standard core business was up one. I would say our West Vantage business was up 1%. That was the one area that we still had some lingering effects of the cyber incident.
Just based on the way that business is geared, you can't catch up as fast. We do expect that about $7 million of revenues to catch up in Q3 and Q4. Overall, a very solid quarter. As a result of that strong Q2, we actually raised our full-year guidance to 10%-11% organic for the full year. That's up 250 basis points at the midpoint. So continued solid demand, and a good start to the year. Got a second half here and we're optimistic about continuing to execute.
Amazing. Focusing on the GLP-1 HVP growth, I think it's where 90% of my questions come from anyway, from investors. So remained really strong year-over-year. Bit of a sequential deceleration. Can we maybe just clarify some of the moving pieces here? I know you disclose a rounded percent of revenues for GLP-1s. I think there may have been some prior period reclassifications. Maybe we can just clear that up before we jump into some more specifics.
Our GLP-1 business continues to perform very well for us. If you look at it for the first half of the year, it led to growth across our business, high- teens in Q2, as you mentioned. We have just rounded up to 10% of revenues in the quarter. As you mentioned, we did have a small classification from non-GLP-1 to GLP-1. HVP was clean, $34 million in Q2 of last year. I would also say, as we did have the cyber incident, we had to change and adjust our production plan that we had at the beginning of the year to ensure that customers did not have any stock-outs. I think if you take these things into account, we are not concerned about the performance of our GLP-1 business. We expect it to continue to drive very strong growth.
When you think about, and I am sure we will talk about this, the overall market for GLP-1s, we are still very early innings in our view, not only here in the U.S., but around the globe, particularly when we think about the next generation, the biosimilars that are coming along, as well as the continued penetration of the existing products that are on market.
Little impact from the cyber incident on the GLP-1 business in Q2, and that comes back in the b ack half of the year.
Yes.
Okay, got it. That is really helpful. Just on that implied GLP HVP guide for the rest of the year, does imply a pretty sharp deceleration, despite the demand drivers being very resilient. Should we just attribute that to conservatism or are there stocking or pricing factors we should be keeping in mind?
Yeah. As we've done all year, we've got an upside bias to our forecast for GLP-1s. I would say, there's nothing fundamentally that we see in the market that has changed, and feel good about the rest of the year for GLP-1s.
And we'll soon be seeing those next-gen GLP-1s enter the market, arguably more biologically complex than the molecules we saw earlier on. Should that be viewed as a positive mix shift for the higher-end HVPs, like the NovaPure and Westar range? Then we'd run some maths on that premiumization. Felt like it could be maybe 100- 150 basis points added to that CAGR out to 2030. But what's your just early impression of those next-gen GLP-1s?
Yeah. I think one of the things that we are really excited about is not only the continued indications of the existing products that are on market, which is going to continue to expand just the number of patients that are eligible for these products. But to your point, the next-generation products are more biologically complex. And what does that mean for us? That means typically, that they would have a higher HVP product, could have a barrier coat on, which would actually increase the economics of a more sensitive molecule that creates either a FluroTec barrier coat, which the current products don't have, or a NovaPure, which both of those would be higher than the current economics. So when we think about that, not only is it good for patients, it's good economics for us and good economics for our customers. We're very excited about that.
And I know you don't disclose this, so no issue if you can't provide the info, but any just rough sense of how premium those premium ASPs are versus perhaps the existing range?
Yeah. Given competitive dynamics, we typically wouldn't provide that. But I would say that those are on the higher end of our HVP portfolio pricing.
Got you. The oral debate for GLP-1s was pretty significant earlier this year. I think that now seems better understood, as it seems more of a TAM expansionary element. We've obviously seen strong uptake as well of these multi-dose pens as the coverage expands. You have pretty good visibility into those trends because of the West Vantage business.
Yes.
Maybe just talk us through what you're seeing on the ground, and how we should be thinking about the economics for West if a customer switches from single to multi-dose pens.
Yeah. If we think about the markets, I would probably characterize them in two. If we think about Europe, it's already primarily multi-dose pens. Really what we're talking about is the U.S. market, where we're currently injectors or vials. Now with the addition of not only the oral products, but then the multi-dose pens. What we're actually seeing today, very similar to what we saw with the launch of the orals, is it's actually expanding the market. We don't see a whole lot of switching if you look at based on the data that we see within the scripts, from multi-dose or from pens to, excuse me, auto-injectors to multi-dose pens. Our view is that there will be multiple delivery mechanisms here in the U.S. It's actually playing out kind of just exactly as we expected.
To your point, our expectation based on the view that we have through our West Vantage that produces both types of formats, there will be plenty of opportunity for both of those here in the U.S. To the economics point, the auto-injectors do have a better economics. Just basically for a monthly dose, you would have four plungers versus a pen that would have a plunger and a lined seal. It's not a quarter of the economics, but it is. I would think about that more in terms of an opportunity to actually expand the market. When you think about that, here we are with the Medicare expansion here and just starting in the U.S. in July. That opens up a whole opportunity beyond the current existing number of patients that could be covered by insurance.
When you also think about in the U.S., about 50% of all employers are covering GLP-1s for obesity. As that continues to grow, I think that will expand and create more and more market access, particularly as the price is coming down, which is going to be good for patients and for West. Then you think about, I'm sure we'll talk about the international opportunity, particularly in the areas of biosimilars and generics, which are just really getting started. I think have a long runway of opportunity for us.
These biosimilars typically stick with the same components, correct?
Yeah, they do. They typically have the same primary containment for a couple of reasons. One is speed to market. They don't want to have to do additional testing. It also is additional cost to prove equivalency if you do change that out. For a relatively small piece of the cogs, you typically don't see that. We also see very high participation rate from West in the biosimilars. If we're on the innovator drug, it's a very high likelihood that we will also be on the biosimilar.
I trust my pharma team's modeling of GLP-1s much more than my own modeling. They have volume growth for the broad category accelerating next year versus this year, given the drivers we spoke to. I am sure that won't be the message you will be giving out the gate, but is that totally off the cards in your view for West ? If so, why? Is there some volume-based pricing discounts we should be thinking about? Maybe just again, level set.
What I would say is we are very optimistic about the long-term growth of GLP-1s going forward. There are multiple tailwinds behind it. Many of the things that you just talked about. But we will talk about 2027 when 2027 comes.
Amazing. Understood. Just sticking with HVP, non-GLP growth has been really strong through the first half of the year. It is a clear acceleration from the growth rates we saw last year. Commentary a little bit more ambiguous here, just given your high participation rate across a lot of drug categories. But what has stood out to you the most from the non-GLP and HVP business?
What we are really pleased about is it is not just one category. We are really seeing it across multiple therapeutic modalities. When you think about the pipelines, injectable drugs are the fastest growing modality within pharma. To your point around the biologics, we have a very high participation rate there. We ended 2025 with greater than 90%, almost 95% of all drugs that were launched have a West product on them. Halfway through the year here, we are continuing to drive that very strong growth. You are seeing a number of tailwinds, not only across multiple therapeutic areas like immunology, oncology, respiratory, and so forth.
But also what you're seeing is actually some of the drugs that are currently on market also moving downstream to doing subcu and other more patient-friendly mechanisms of drug delivery, which actually on a long-term basis really, I think bodes well for our business going forward. And obviously we've benefited, I'm sure we'll talk about it, primarily in Europe with Annex 1, which is the upgrade of products that were currently on market from basically a standard or a core product, which is one to three cents up to a HVP product, which can be anywhere from $0.10 to $0.25 and so forth. We're very excited about that opportunity.
In Europe, specifically Annex 1, where are we in that conversion, I guess, how big's the pipeline and how long can that growth be boosted for?
Yeah, we think this is a multi-year tailwind. In Europe, we size the opportunity of roughly 600, or excuse me, 6 billion components that are currently eligible or potentially have the ability to be upgraded. We're just over 1 billion today. We've talked about a 200 basis point incremental tailwind associated with Annex 1 as upgrading. And actually what we're starting to see now is more and more conversations, in the U.S., for the same Annex 1 like upgrades. Let me get back to a couple other data points. When we think about the number of projects that we have, at the end of Q2, we had almost 800 projects between both projects that had been completed as well as projects that are ongoing. That's a 50% increase, versus Q2 of last year.
You can see actually a very strong, nice pipeline. What we're seeing in the U.S. is if that continues, those kind of conversations, that 6 billion units will certainly grow. We think that just provides additional durability for the Annex 1 upgrade opportunity that we're uniquely positioned for.
I know Annex 1 relates to drugs sold into Europe irrespective of where the manufacturing's done.
Got it.
How much overlap is there between kind of European Annex 1 versus kind of U.S. Annex 1?
Yeah, the Venn diagram is increasingly overlapping right now. There's really a couple of reasons. One is, while there aren't any formal regulations in the U.S., FDA is starting to, when they're doing their inspections, inspect at a higher level for good manufacturing practices. If you look at observations that are happening, you're starting to see more and more observations in this area around particle containment, contamination control, et cetera. What that is doing is facilitating conversations about the potential to upgrade. Regulatory scrutiny is probably the primary reason where we're actually starting to see more and more conversations happening in the U.S. and actually projects starting. But also to your point around pharmaceutical supply chains.
You talk about kind of reshoring, which I know, we're kind of towards the back end of that, but having those conversations, bringing those products into the U.S. does a couple of things. One is in order to move that product and get it up and running, they want to use the same protocols and procedures that they have in Europe as an example in the U.S. They will take those High-Value Products already and move them over into the U.S. And then that provides also flexibility in the pharmaceutical supply chain. If you have a plunger or a stopper that's being produced for a product that is identified in a, let's say, a European facility, if you're using that same process in the U.S. now, they have much more flexibility around their supply chain, which is good for us.
We've actually been helping with that with our tech transfers, moving products out of, let's say, Europe into the U.S. to help level load. We're actually seeing kind of a confluence of opportunities here that we do think that will have a multi-year kind of benefit for us going forward.
Interesting. And just similar to the question on next-gen GLP-1s. Can you maybe just unpack mix-wise what you're seeing in the kind of core HVP business, like which products specifically you've been seeing good traction for across product categories?
Yeah, we're really seeing it across our business. We talked a little bit in Q2 about NovaPure, as well as West lined seals, obviously moving up that chain. The Annex 1 is primarily finishing. When we think about that as envisioned, inspection, pharmaceutical grade washing, sterilization, those types of activities, which help come right off our manufacturing line and are really value added, not only for our customers, but also improve the outcomes on the manufacturing side. We're actually seeing very nice growth and positive mix from that standpoint. And that's really helping, and you can see it in our margins.
As HVP continues to grow, that helps lift our overall gross margin business, because if you think about on a standard basis, our standard products or our core products gross margins in the 20%-25% range. Our HVP business is 50%- 60%, sometimes even higher than that.
Clearly a lot of top-line drivers at play, demand in a really strong place. Are you comfortable now that you have the production footprint and the supply chain sophistication to service that demand? Like any bottlenecks we should be considering? Maybe just talk about that footprint you have today.
Yeah. We've been really focused on the HVP footprint, and we've got two plants in Europe, two plants in the U.S., and then one in Singapore. From a footprint standpoint, we actually kind of mirror the way that the pharmaceutical supply chain works, which is really helpful for our customers. As you know, last year, we had supply outstripping demand, and we put a lot of effort into adding some additional labor, primarily in the molding of the units over the last, I would say six months, and I feel like we're in a much better place from demand meeting supply, or supply meeting demand, excuse me. And one of the areas that we're continuing to focus on is continuing to invest for growth in our CapEx.
We've talked about while CapEx has come down to about 6%-8% of revenue this year, we're disproportionately investing behind our HVP business to ensure that we do have the capacity going forward. And particularly in that finishing area, we do believe that we have enough molding capacity across our footprint to handle. Sometimes we'll have to add some additional labor to get utilization there. But we do feel like we have the ability to flex capacity, and we kind of showed that through our cybersecurity incident that we were able to recover quite quickly.
One of the interesting things from the disclosures across the quarters, APAC's been really strong lately.
Yeah.
I think nearly 30% growth there. What's driving that uptick and how do you feel positioned competitively there versus your U.S. and European footprint?
Yeah. We feel really good about the performance there. To your point, I think we grew 29% organically in Q1, grew 27% in Q2, so it certainly is driving a lot of nice growth. When you think about our revenue, just overall, it's about 10% of the total company. I think we have a lot of opportunity to actually increase our penetration there. I would say competitively, we feel very good, particularly at the high end. What's driving that today is a couple of things. One is GLP-1, the generic opportunities. Our fastest-growing markets are China and India to capture that, and we feel we have very good participation rate on those GLP-1 opportunities, not only in those markets, but also many of those companies are actually selling products outside of those two markets as well. We're seeing very nice growth there.
Then I think on the biologic side, particularly in China, what you're seeing is an explosion of innovation happening, so novel molecules. We have a very good. That's where we focus really is at the high end within China, which is where that plays. These would be barrier-coated products. What you're seeing is those new products that are being developed or those new molecules that are being developed, they're not just having eyes for selling those products in country or in China. They're actually looking to multinationals to partner with and bring those products into places like Europe and the U.S. One of the ways they want to lower risk is actually having the same primary containment mechanisms that you would see in the U.S.
That's where we think we're really well positioned to be able to continue to take advantage of that. This is one of the areas where I think we're just kind of scratching the surface as we think about the business going forward. My predecessor in company had a big business in Asia, as did Michel Lagarde 's business before. I think we've got some experience about how to make sure that we stay on top of that and actually maybe accelerate it even further.
Maybe for those investors newest to the story, maybe just level set the participation rate that West has in Europe, U.S. and that market share, because I think it's perhaps underappreciated at times.
Yeah. If we look at our overall market share, I'll start there and then look at participation rate. We have roughly 70%-75% of all elastomers in the world. That participation rate is strongest in the U.S. and Europe, so it's slightly higher than that. In Asia, maybe a little lower, but still very solid, and particularly on the high end around the biologics. Our biologics, as I mentioned before, our participation rate, which is really how many products that just got launched or approved, have a West product on them. We know this because they ask for access to our Drug Master File was greater than 95%, or it was 95% in the U.S. in 2025. If you think about our participation rate in the fastest-growing areas of medicine is actually higher than our overall market share.
That participation rate is pretty consistent across the globe. It's a huge opportunity for us, big responsibility also to continue to drive that, but we feel very good about that. It's one of the things that I think is perhaps underappreciated, is the interaction and the technical expertise that our teams have. When a pharmaceutical company or biotech startup is looking for packaging, West is viewed as the gold standard in that technical expertise of the interaction between the drug, the delivery mechanism, and how to ensure the safety and efficacy of that. That's a really important element. In many of these startups, they don't really have a whole lot of packaging expertise.
They'll look to companies like West to help them solve those important problems. As they move up the value chain or, excuse me, throughout the development, once you are locked in, you are specced into the regulatory dossier, very unlikely that people will change primary containment. That creates a very strong competitive moat and very sticky business. Getting that participation rate up front is really important for all long-term growth opportunities.
Gets a lot less attention just given what is going on in the core business. West Vantage, the mix shift here, away from those CGMs, in with more drug handling. You also added a lot of capacity through 2023 and 2024 there. How does that capacity utilization look across the footprint today?
For those who may not know, West Vantage is our contract manufacturing business, and it is roughly about 20%, about 17% in Q2 of our revenues. We have had a long history of producing pens as well as auto-injectors across that business. One of the things that we have been looking to do is move up the value chain here in what we call drug handling. Taking the manufacturing or the assembly of those pens and then bringing in the cartridge that is already filled with drug substance, testing it to ensure it is the right drug substance, and then putting it into a pen or an auto-injector for a finished good. We had built a facility in Dublin, and that is ramping very nicely. It is about a $20 million opportunity here this year.
Most of that actually in Q3 and Q4, about $15 million of it, but it is a $60+ million program when fully ramped, which is probably in 2028. We are looking for more opportunities around that. One of the things, if we look across our factory footprint in West Vantage, the utilization of the equipment is fairly high because you are kind of geared towards the units that are produced. But we do have opportunities to expand and add more additional programs, not only in Dublin, with the exit of our ADC business, which was a med tech business that we are wanting to get out of and move into higher value pharmaceutical products, as well as here in the U.S.
What drug handling also does, to give you a perspective, our growth margins for our overall business today, for West Vantage are mid to high teens. West Vantage drug handling has the opportunity to be above 30% gross margin. You can see the improvement expectations that we would have as that business ramps.
Any rough sense of how much of the West Vantage mix drug handling could become with time? Any rough numbers there?
Yeah. Certainly, that is our key strategy going forward. What I would say is, that is the strategic intent to expand that. We've got to have more than one program to really drive that. But it will be a more and more significant portion going forward.
Then just on the gross margin, more specifically, another standout, I think for Q2. How much of that came from structural changes like price and mix relative to timing or broader volume leverage?
Yeah. I am glad you brought that up. One of the things that we really do have an opportunity is, given our fixed base, when we actually drive volume through our plants, we do get a lot of volume leverage. Most of it has been volume leverage, particularly in our HVP plants, given the strong performance that we have. But we have seen better efficiency as well. One of the things that we may mention in here is the opportunities to expand our margins beyond just mix and volume leverage. It is just starting to show up and then certainly price plays a role as well. We are slightly ahead of our price realization expectations through the first half of the year, which is helping that across the board.
And maybe just a little more color on that midterm margin construct, and how you are thinking about that. Just given the mix seems to be in a really have volume leverage coming through. I think those investments are starting to pay off now. Maybe just paint us a picture over the midterm there.
Yeah. One of the things I think is probably maybe underappreciated a little bit about the opportunities that we have, particularly in our cost of sales, is the margin expansion opportunities beyond the mix shift, and the pricing opportunities. If we think about it, I kind of bucket it into three buckets. One is near term, midterm, long term. In the near term, we are already actioning this with some of the activities that we did at the beginning of the year with the expansion capacity utilization in Eschweiler, like taking some of the lessons learned there to improve our yields, taking it throughout the network to really drive capacity. That is driving margin expansion as well.
In addition, we think we have an opportunity to be better at procurement and logistics to really drive down our raw material costs going forward. That is probably in the one to three kind of year timeframe based on the way the contracts work and so forth. That will help drive that. In the medium term, we also have, I think, a big opportunity to kind of leverage automation in our factories. We have still got a fair amount of manual processes in the factories. By increasing automation, that will drive not only reliability but increased output, and that will continue to drive. Longer term, I do think there is an opportunity for network optimization.
When you think about it, we have 26 sites. Five sites make up half of our revenue, so the other 21 sites are the other half. I think over time, there is an opportunity to better leverage that. When you think about the 100 basis points that we have talked about, we get a good head start just on mix. This has an opportunity from an aspirational standpoint to even be better than that.
It clearly did not impact anything earlier in the year, but we saw energy prices again recently rising up. I think you have offsets within contracts to help there.
Maybe just give us a little more color on what high energy prices mean for West.
Yeah. Obviously, we are impacted by oil in two ways. One is logistics, the other is some of the raw materials on the rubber side, and so forth. We have seen increased costs. We have the ability to pass those through via surcharge, where we are able to offset those costs, not at a margin case. It is not margin accretive or anything like that, but be able to offset that. We have talked about a roughly mid-single-digit impact for the year, and it is really just timing the way that the costs come in through the system. We are well-positioned to be able to pass on the majority of that cost, going forward.
Then we are continuing to work some of these other areas to help offset as well, in terms of better yields and so forth. We think we are well-positioned there to be able to manage that on a go-forward basis.
Maybe on capital allocation, you may have the SmartDose 3.5 divestiture earlier this year. Zooming out, just how comfortable are you with the existing portfolio, and how should we think about appetite to expand inorganically over the coming years? I have sensed maybe a bit more of a bullish M&A tone from you recently, but maybe just level set us.
Yeah. When you look at our balance sheet. First of all, when you look at our cash flows, we have very good cash flows. We're continuing to drive more and more free cash flow conversion, and have a very good balance sheet right now. I would argue that there's an opportunity to be more efficient with our balance sheet going forward. SmartDose is a perfect example. We had a product that was dilutive to our overall margins. We made a transaction, and it's in better hands today than what we can do. That's actually benefiting our margins for the full year this year by 50 basis points. That's been built into our guidance. That's another 50 basis points next year as we just closed that in July.
We'll continue to be objective about our portfolio. We feel good about it where it is right now. But to your point, I do think that there's an opportunity to leverage our strong balance sheet to look for ways to continue to expand our business. Certainly, we have a lot of opportunities organically. I think inorganic opportunities will continue to be evaluated and, as we look forward, could be a bigger and bigger role for the company.
You think packaging is a focus here or perhaps looking beyond that?
I think what we would want to do is to ensure that we leverage our core strengths, which is around the elastomer, the opportunity to provide more solutions or products to our customers. If you think about the pharmaceutical supply chain, there's a number of different players, a number of different touch points. It's very complex, and it's only getting more complex with the number of new therapeutic modalities that are happening and so forth. I think we've got a unique position because the elastomer touching the drug is a critical component to ensuring safe and efficacious drugs going forward. We think that there could be an opportunity to solve more customer pain points going forward.
I do think that that would be an area of opportunity. I don't think, on the flip side, getting more into the West Vantage inorganically is something that we would be interested in. We want to do that more organically.
Got it. Michel obviously joined the CEO a couple of weeks back. Any early sense of where his priorities will be sitting near-term and how those discussions have been together thus far?
Yeah. I'll let him speak for himself, but what I can tell you is he's hitting the ground running. He obviously comes from a great company, great experience, knows our business very well, was a customer of West, so knows the markets inside and out. I think one of the areas that he'll want to impress upon the company is certainly ensuring that we're delivering the best we can to customers. It gets back to that comment that I was just talking about before in terms of helping solve customer pain points. I would expect that to continue to be a focus. He's out on a listening tour himself, talking to customers, talking to our employees over in Europe, looking at some of our key sites and so forth.
I'm super excited to have him as part of the team. He's coming in at a great time, and I think with his experience in global scale, that will only accelerate the things that we've been doing here at West.
Amazing. I think that's all we have time for, Bob. Thank you so much.
Thank you.