West Pharmaceutical Services Inc (WST) — Q4 2020 Transcript

Thank you, Catherine. Good morning and welcome to West's fourth quarter and full year 2020 conference call. We issued our financial results this morning, and the release has been posted in the Investors section on the company's website located at westpharma.com. This morning CEO, Eric Green; and CFO, Bernard Birkett, will review our financial results, provide an update on our business and present our financial outlook for the full year of 2020. There is a slide presentation that accompanies today's call and a copy of that presentation is available on the Investors section of our website.

Thank you, Quintin, and good morning, everyone. Thank you for joining us today. West had an extraordinary year of success in the face of the biggest healthcare challenge of our generation. A record-setting year of sales and margins were driven by the base business demand for our components, devices, and solutions, as well as the accelerating demand for components associated with COVID-19 vaccines and therapeutics. This was accomplished by our dedicated team working tirelessly across the globe to make a meaningful difference to customers and patients. I want to begin by acknowledging this incredible effort and say thank you. Starting on Slide five of the presentation, the past year has truly brought to light the importance of our mission and values that guide our work at West. We remain steadfast in our purpose to serve society and lead by example in our communities. Importantly, we continue to manage through these unprecedented times by focusing on two key priorities: one, keeping our team members safe, and two, ensuring an uninterrupted supply of high-quality containment and delivery devices required by our customers and the patients we jointly serve. The criticality of our business today is shown in the character and perseverance of our team members to deliver on our commitments as a trusted partner for our customers. The strength of our performance this past quarter and throughout 2020 demonstrates the forward momentum that we have built over time with our market-led strategy, globalization of our manufacturing network, and one West team approach to satisfy market demand.

Thank you, Eric and good morning. Let's review the numbers in more detail. We will first look at Q4 2020 revenues and profits where we saw continued strong sales and EPS growth, primarily in our biologics and generics market units and contract manufacturing. I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways and finally, we'll review our 2021 guidance. First up Q4, our financial results are summarized on Slide 11, and the reconciliation of non-US GAAP measures is described in Slides 20 to 23. We recorded net sales of $580 million, representing organic sales growth of 19.8%. COVID-related net revenues are estimated to be approximately $46 million in the quarter. These net revenues include our assessment of components associated with vaccines, treatments, and diagnoses of COVID-19 patients, offset by lower sales to customers affected by lower volume due to the pandemic. Looking at Slide 12, proprietary product sales grew organically by 25.1% in the quarter. High-value products, which made up more than 65% of proprietary product sales in the quarter, grew double digits and had solid momentum across all market units throughout Q4.

Great. Thank you, Bernard. To summarize on Slide 17, we have a critical role to support our customers as we work to resolve this global pandemic. The participation rate remains very high, and our products are being used in this battle. We have strengths in the underlying core business and long-term growth. Our focus on execution, innovation, and growth allows us to be more responsive to the changes in the industry. Our market-led strategy is delivering the right products and solutions to our customers. Our global operations network continues to flex and respond to increased demand and capacity requirements, and our investments to fuel R&D innovation in digital technology will continue to keep us at the forefront of the industry. The future is promising, but most importantly, we remain grounded by our mission and values each day at West because every component has a patient's name on it. Catherine, we're ready to take questions. Thank you.

Great. Good morning, guys and congrats on a great quarter and year in a tough environment. Thanks for taking my questions as well. My first question is, can you provide a little more color on the COVID expectations? I think you did about $100 million associated with COVID in 2020, maybe a little less, and about $250 million or $260 million for this coming year. Can you give us a breakout? Are you seeing more on the vaccine side? You mentioned some customers are using FluroTec on that side. Can you give us a higher level mix and any color you can add to that will be great?

Thank you, Larry, and I appreciate the question. When we started this journey in the end of Q1 early Q2 of 2020, the primary focus at that point regarding revenue was around diagnostics and a few therapeutics that were being approved for COVID-19. If you look at the tail end of 2020, it started to flip more towards vaccines. As we move into 2021, you'll see that most of the guidance, as you said, around $260 million for 2021, the majority will be vaccine-related. Our participation is very high, and the types of solutions that we're bringing to the customers tend to be around FluroTec and, in some cases, NovaPure. That's the transition you'll see in the mix of type of revenues to support the COVID-19 solution, and that aligns well with the investments we made in additional capital equipment and our facilities to support the increase in demand that we have visibility for over several quarters.

Okay. And it sounds like you've accelerated investments into NovaPure, Westar, and FluroTec. Is that acceleration, or continued acceleration, ahead of where you thought you might be even a quarter ago in terms of the outlook for this year spending-wise?

Well, no, we were actually slightly ahead of schedule with implementation. The team has done a phenomenal job working with their suppliers and being innovative to get the materials into our sites, equipment, and validation process. They've been working literally around the clock, as many companies are, to get these lines up and running. The reality is that the new equipment we installed didn't have a lot of revenues associated with those in 2020; that started to pick up in 2021. There is additional equipment scheduled in the first half of this year, which is on track and consistent with the capital expenditures we previously talked about. So we're comfortable where we are, and further conversations with customers give us confidence that we're planning accordingly with current and potentially future demand.

And it looks like the back of the envelope suggests about 10% growth, excluding COVID from 2020 and ’21, which aligns with your sort of 6% to 8% organic growth targets excluding the COVID-related sales. Is that about right?

That's correct, Larry. We still see a lot of strength within the core business as Eric alluded to. We felt that through 2020, and we continue to see that as we move through 2021, with the COVID vaccine on top of that.

You're in the ballpark there. That continues to be pretty much in line with our long-term construct.

Thank you and congrats on the quarter. According to my calculations, generics grew about 42% year-over-year and I'd suppose that all of this is non-COVID related. Can you confirm whether or not this is correct and what drove this significant step up?

Generics was high single-digits, maybe double-digits; some are reaching 42%.

I'll check my math on that. And then can you give us an idea about the backlog of committed orders as of the end of 2020?

When we look at the backlog, I'll say that it's stronger than it was in prior years, and the mix is more towards high-value products. The other aspect of the order book is that we're having great success with customers having longer visibility, giving us better opportunities to plan accordingly in our manufacturing processes. So yes, it's a stronger order book, more towards our high-value product components, and along with the visibility of our core business and the vaccines, we have strong outlooks and responses planned for the next several quarters.

Thank you. And on the contract manufactured products, do you plan to add capacity in 2021? Is there a chance for that segment not to deliver double-digit growth in 2021 unless you add capacity?

We've been discussing the growth in contract manufacturing for a while. We've seen it gravitate towards mid-single-digit growth. It wouldn't reach the double-digit growth we saw over the last few years, just given the nature of that business. We continue to invest, and it's part of our CapEx forecast for 2021. There are several growth initiatives in that area, and the growth rate will align more with our overall construct. From a dollar perspective, Q4 numbers were pretty consistent throughout the year with contract manufacturing. The percentage growth rate appears lighter than previous quarters, but the absolute dollars are consistent with our expectations, where we communicated we would be, and we continue to invest in this segment of our business.

Could you talk about the negative COVID effect you mentioned? Could you qualify that, and is it possible to even quantify how much headwind you had in your past results?

We haven’t really broken it down, but we're concentrating on the net impact to our business. It's mainly been in animal health and some in dental, which are within our Pharma market unit. That's where we feel some slowdowns. It hasn't been overly material, and there were some elective surgeries as well that impacted us, but nothing drastic that I need to call out.

As you look at these capital expenditures, do you have flips that you can just turn around quickly, or do you have to go from greenfield sites? Ultimately, how quickly does this come online?

Very quickly, Paul. The work done by the team over the last couple of years to globalize operations and move from 29 plants to 25 has enabled us to think about future growth and leverage our existing assets. It's a short turnaround. The longest lead time is around getting the equipment built, and there’s always a validation process associated with that, but all this equipment is being put into existing facilities.

As you look at your progress on your goal of extreme business transformation since you started, are you halfway there, or what's your view on your accomplishments since you arrived?

There's a lot more to do, Paul. I honestly believe we're in a very good position to leverage not just what we built today, but what we can do tomorrow for our customers. We're having conversations beyond our current portfolio. We still have more work to do on the globalization of the enterprise. We have great opportunities to move towards more digital solutions. I'm extremely pleased with how the team implemented SAP S/4HANA during this pandemic in a virtual environment globally. It was quite a test, and that was achieved with our internal digital technology center out of Bangalore. So, you can hear from my tone that I see a lot of opportunities for us to have a meaningful impact on patients and support our customers as they move forward with innovative solutions, particularly in the biologics space.

Following up on Paul’s headwind question, as things hopefully reopen with the vaccine roll-out, when people return to doctors and take their pets to veterinarians, and elective surgeries resume, could there be upside to your expectations for growth in 2021 excluding COVID?

That's an open-ended question. Ideally, we would expect some level of upside when everything returns to normal, and we are focused on delivering within the guidance provided and ensuring we can meet vaccine demand to get everything back on track. If other markets open up, we will have the capacity to serve those also.

Can you talk about where you're seeing demand for COVID vaccines and therapeutics by geography? Is this largely focused on opportunities in the US and Europe, or could there also be opportunities in Asia-Pacific?

It's global. Some of the firms that are currently in the market for emergency use are not just in the United States; they also have partnerships in other regions of the world. Because of our position and global assets, we're able to support them whether they decide to go externally with a partner, we are there to support them with primary containment solutions. In Asia, there's a higher demand for prefilled syringes, particularly in China, while in Europe and Asia, the demand for vial configurations is consistent. We provide consistent products to all our customers, with the FluroTec coating being a primary driver.

How have you been able to handle your non-COVID work? Have you had to defer that underlying order flow, or have you been generally able to keep up with the typical non-COVID orders?

In general, we've been able to keep up; however, I would say there have been times where we had to engage with our customers to determine if we had to pivot and respond to particular COVID orders. Our customers have mostly been very supportive, and for the most part, we've managed to respond. Within our proprietary business, we do over 30 billion components a year. So when you think about the demand we place on our operations for the additional COVID solutions, it is significant, but it's not overtaxing our global operations.

Are you getting the sense that some of the non-COVID work has been backburned by clients due to the need to meet COVID challenges, or has the normal flow of non-COVID work remained stable?

Interestingly, we are finding that if you look at the timeline, approvals from the FDA in 2020 versus 2019 show a pretty consistent pattern. We do work with certain customers that may have faced delays in clinical trials, but overall, our participation rates remain strong. We are not seeing significant deviations from the last couple of years.

Can you remind us why generics tend to grow faster than pharma, and as you look out towards 2021 or 2022, do you anticipate the same trend continuing, or do you expect a normalization between the two buckets?

Two comments: First, when we initiated our market-led approach a few years ago, it became evident that the generics market had a lower market share among the three, giving us a significant opportunity for growth. We repositioned new portfolios like AccelTRA to be very attractive for that segment. Second, the pharma business includes segments such as dental and other ancillary areas outside of just branded small molecules, leading to potential softness in that market. However, we see strong numbers of ANDAs, which drive growth for West's generics business.

It's a matter of our market share differing within those two market units, which provides more room for us to grow in generics. The market units allow us to focus and accelerate our business within generics, and we still have opportunities to continue that growth and introduce new products to strengthen our position in the generics market.

Regarding the COVID contribution you quantified for '21, do you view that as durable for the future, or more as a bolus likely to decline in '22 and '23?

We've looked at the mix of our COVID-related business. As Eric mentioned, it started out more with diagnostics and therapeutics, and as we progressed, the focus has shifted more onto vaccines. We've communicated that we feel vaccines present the biggest opportunity for us. Essentially, it depends on how the vaccine market evolves over the next few years and whether booster shots will be required, and that's how we're framing our planning.

Thanks to your team as well, and I hope to get the vaccine soon. I was hoping for a series of clarifications. In your COVID contribution to '21, should I interpret that the $100 million base in '20 stays in that same mix, and the vaccine is the $160 million contribution on top of that? Or does most of the $260 actually become vaccine revenue as we move into '21?

Yes, primarily the growth we see is in the vaccine segments. Initially, there was a large focus on therapeutics in COVID-19, but now the significant portion of revenue growth is tied to vaccines. There is still some revenue from therapeutics and diagnostics, but it's mainly vaccine-related.

It sounds like your clients are making high-value product choices globally. Is that correct, or are you seeing a downshift to standard in developing economies?

We are observing consistency in demand for our high-value products, particularly FluroTec and its relationship with vaccine molecules. We're not experiencing any downshift from the high-value product portfolio; it remains globally consistent.

Broadening out from COVID, has your experience over the last year, especially in responding quickly to clients and ramping up capacity for high-value products, stimulated higher adoption of those products in the non-COVID opportunities?

Yes, within our biologics portfolios, we have a very high participation rate. We are also seeing a growth in conversation about NovaPure due to increased scale and understanding of primary packaging containment. That demand driven by vaccine delivery spills over into our platforms moving forward, hence our continued push to support customers in advancing NovaPure for their new molecules.

Can you give us some sense of how the mix has shifted within high-value products? For instance, from Westar at the entry-level to NovaPure at the higher-end, how does that evolution look?

We don't disclose exact numbers for each area, but what you would see is that higher growth—and therefore higher revenue—is coming from the upper range of the spectrum, as opposed to the lower end. We are seeing adoption rates increase, so the higher growth is on the upper end, which is promising for our future.

Thank you, Catherine, and thank all of you for joining us today on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can get a replay through Thursday, February 25, by using the dial-in numbers and conference ID provided at the end of today's release. That concludes this call. Have a nice day.