West Pharmaceutical Services Inc (WST) — Q1 2021 Transcript

Thank you, Stephanie. Good morning and welcome to West's first quarter 2021 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.

Great. Thank you, Quintin, and good morning, everyone, and thank you for joining us today. Starting on slide 5. I am pleased to report that we had an exceptional first quarter. This was driven by strong organic sales growth in both our base business and the accelerating demand for products associated with COVID-19. Our high-value products continue to fuel increased gross and operating margins. Together this has resulted in record EPS for the first quarter. The strength of our performance is demonstrated in our ability to execute the market-led strategy, leverage the power of our global manufacturing network and rally as a one West team to meet the increased market demand. I am proud of how our team members have focused on our priorities and emphasized the importance of our purpose and values during these times. Turning to slide 6. We have highlighted the key drivers of growth in Q1. We continue to see strong uptake of HVP components, including Westar, FluroTec, Envision and NovaPure offerings as well as Daikyo's Crystal Zenith.

Thank you Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q1 2021 revenues and profits where we saw continued strong sales and EPS growth led by strong revenue performance primarily in our biologics pharma and generic market units. I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways. And finally, we will provide an update to our 2021 guidance. First up Q1. Our financial results are summarized on slide 9 and the reconciliation of non-US GAAP measures are described in slides 17 to 20. We recorded net sales of $670.7 million, representing organic sales growth of 31.1%. COVID-related net revenues are estimated to have been approximately $102.9 million in the quarter. These net revenues include our assessment of components associated with vaccines, treatment and diagnosis of COVID-19 patients offset by lower sales to customers affected by lower volumes due to the pandemic.

Hi, hello good morning. Congratulations on the quarter. I guess my first question was...

Thank you Juan.

Thank you. My first question is regarding the pediatric and potential booster opportunity. One of the most significant points you made on the call, which aligns with our thoughts, was about the ratio of packaging components to dosages possibly being closer to one-to-one compared to the initial rollout. Could you provide more insight into your visibility on the packaging configuration for future boosters and how you see that opportunity developing?

Yes, Juan, you are absolutely right when you mention that we are in discussions with our customers regarding different delivery methods. We are engaged in conversations about smaller doses per vial and the possibility of transitioning to prefilled syringes. This shift will impact the volume we produce to support our customers, which is why we are making certain investments. Additionally, as we look ahead to the coming quarters, there are still many variables at play. We do have clarity regarding the demand for vaccines that extends into 2022, and we are confident in our position. However, we recognize the need to adapt as the number of doses per unit changes, as it will necessitate adjustments in product configuration.

Thanks. I appreciate that. And how would you characterize the inventory management trends across your COVID-19 vaccine customers specifically. Do you have any concerns about customers stocking up on inventory of packaging components any pull-forwards that you see, or would you say that your current sales are pretty well-aligned with the pace of vaccine distribution?

Yes. Juan, within the vaccine distribution our pace is well in line. In fact, we are engaged with the companies that have vaccines in the market, but also the firms that are working on development of gaining the approvals to be into the market shortly and those are on a regular basis, so we can stage our demand whether it's weekly or monthly as we go forward. But, I'm pleased on the team's response and we're able to keep up with the demand where we sit today.

All right. Thank you. I’ll get back in the queue. I’ll leave it there for now. Appreciate you come back again.

Thank you.

Hi. Can you hear me?

Yes. Hi, Paul.

Hey, how are you? I have a question about whether you are seeing orders for COVID-related products heading into 2022. What is their expected duration at this point, Eric?

Yes. Paul, when we look at our order book, roughly one-third of it is COVID-related and it is extended into 2022. So obviously of what we're doing today, but the visibility we have is going into the following year.

Okay. And then, how are you running on capacity at facilities globally? Are you hitting any ceilings yet, Eric?

We are nearing our capacity levels in certain areas. As you know, we operate multiple facilities around the clock, especially for our high-value products. We are also making various capital investments. The first phase will be completed in the coming months, which will significantly boost our HPP, and we have another phase planned for the next six to twelve months. We are managing to keep up, but it does require the installation, validation, and immediate transition to commercial production with the new equipment we have in place.

And then lastly, on the core biologics demand, ex COVID, obviously seems to be accelerating. Could you talk to that and what your outlook is there?

That’s an exciting area for us, especially within our company. In the biologics sector, we're seeing a strong approval rate for new molecular entities, and our participation remains robust. I'm proud of how our teams are supporting our customers, particularly during these pandemic times. We're also noticing an increase in the volume of several recently launched biologics, which is contributing to additional growth for existing products in the market. Additionally, we've seen significant growth in biosimilars in our Asia Pacific region. Altogether, this represents a bright spot for us outside the COVID-related discussions about our core business.

Great. Okay. Thank you.

Good morning, John, you there? No.

Hey. Good morning, guys. Congrats on the quarter. I guess my first question is just on guidance. If I annualize your first quarter revenues, I get to something above your guidance for the year. What puts or takes could there be in the future quarters that would result in revenues being below this first quarter or maybe more simply just any seasonality you'd call out this year as we think about modeling?

Yes. In the prepared comments, we mentioned a one-time amount of nearly $12 million related to some cancellations. This was a one-time fee we could recognize, primarily due to COVID. When you're calculating the run rate, you should exclude that, as it gets you closer to our guidance.

Got it. That makes sense, Bernard. Thank you. And then, a question, it seems like a lot of these COVID vaccines are using FluroTec or NovaPure. Is the decision there just based on customer preference, or are there any particular types of vaccines that require NovaPure versus FluroTec?

Yes, the vaccines currently on the market require a barrier coat that we are well-known for in collaboration with our partner Daikyo, specifically our FluroTec, which is a fluoropolymer barrier. This has become the industry standard. Consequently, we are witnessing adoption of this technology in the vaccines available and those being developed. In some instances, we are utilizing our NovaPure product line because our customers seek assurance of the highest quality. These factors are the main drivers of our choices, focusing more on the science and technology rather than anything else.

Got it. Thanks for taking the questions. I’ll leave it there.

Great. Thank you.

Good morning. I want to thank you for the efforts your organization is making to get vaccines administered. Eric, congratulations on your focus on ESG; it’s impressive that you've achieved high ratings in this area despite potential challenges from your business model. My question is about your HVP. I appreciate that you consistently share market unit growth, and it’s encouraging to hear Bernard highlight strong double-digit growth alongside 30% top line growth. I’m curious if you could provide more specifics on what strong double-digits refers to. Given the 30% top line growth, it could represent growth in the three, four, or even five range. Could you offer more clarity on those growth figures by market unit?

I'll start, and first of all, thank you for your comments. The value of ESG is embedded in our organization’s DNA at West for many years. Regarding HVP, you’re absolutely right; most of our incremental growth at West, especially in the recent quarters and looking ahead, comes from the HVP portfolio. We're excited about the strong uptake at the higher end of that range, which provides a more attractive economic profile for us. This has also resulted in excellent performance for our customers in terms of value. Currently, over two-thirds of our growth is coming from the high-end of our HVP. If you do the math, you’ll arrive at the 30% figure you mentioned, representing very strong growth. In West, we focus more on the number of units than on percentages related to specific lines like NovaPure. We aim to double or triple that portfolio in a short time frame. That’s about as much context as I can provide on this. Bernard, if you want to add anything...

I prefer to maintain our current reporting approach, but we are experiencing significant growth in biologics, which primarily consist of high-value growth products. We are also noticing growth in generics and pharmaceuticals, though not to the same level; the majority of our high-value product growth is driven by biologics.

Got it. So maybe that was a foul ball. I didn't completely miss the ball. But in terms of your – Eric, your commentary on the high-end, just to be specific, you're talking NovaPure the very highest one, or are you talking about a couple?

That's a good point, Dave. I'm referring to FluroTec vision all the way...

Okay.

… up to NovaPure.

Understood. Another perspective to consider is on the margin front. Historically, we have mentioned that high-value products tend to generate gross margins exceeding 50%, compared to around 30% or lower for standard products. Could you provide insights on the overall gross margin for high-value products and how it changes as demand shifts toward the higher end of your high-value product range?

Going back to your previous comment, if you consider where we are focusing our investments and where a significant portion of our capital expenditures is directed, it is towards products like FluroTec and NovaPure. This aligns with our strategy of prioritizing high-value products, and we are starting to see the results. The margin expansion we observed in the first quarter, with proprietary products achieving over 40% gross margin for the first time, illustrates this trend, aided somewhat by a one-time event related to COVID agreements we needed to account for. Now, we are seeing margins exceeding 50%. As we continue to invest and observe growth in this area, we expect this trend to persist. This is all part of the long-term strategy we have established, which boosts our confidence in our ability to consistently expand gross margins and operating margins. This has been a part of our narrative for a long time, and now we are witnessing it manifest on a more sustainable basis. Stephanie, please proceed.

Thank you. I will drop back in queue again. But thanks for the answers. I appreciate it.

Thanks, Dave.

Thank you, Stephanie. We apologize to John Kreger at William Blair for his technical issues, and we'll sort that out later. Thank you for joining us 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 may access a replay through Thursday, May 6, by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.