West Pharmaceutical Services Q2 2022 Earnings Report

West Pharmaceutical Services EPS Results

• Actual EPS: $2.47
• Consensus EPS: $2.19
• Beat/Miss: Beat by +$0.28
• One Year Ago EPS: $2.46

West Pharmaceutical Services Revenue Results

• Actual Revenue: $771.30 million
• Expected Revenue: $754.25 million
• Beat/Miss: Beat by +$17.05 million
• YoY Revenue Growth: +6.60%

West Pharmaceutical Services Announcement Details

• Quarter: Q2 2022
• Date: 7/28/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 27, 2022
• Conference Call Time: 8:11PM ET

West Pharmaceutical Services (NYSE:WST) is a global developer and manufacturer of components, systems and services that enable the containment and delivery of injectable drugs. The company focuses on high-quality packaging and delivery solutions for the pharmaceutical and biotech industries, producing primary drug packaging components and specialized drug delivery devices used for vaccines, biologics and other injectable therapies. West is known for its elastomeric closures, seals and polymer components that maintain sterility and compatibility with sensitive drug formulations.

In addition to component manufacturing, West provides engineered delivery systems and support services across the product lifecycle. Its offerings include stoppers and seals, custom-molded polymer parts, prefillable syringe systems and a range of delivery device technologies for self-administration. The company also offers development assistance, analytical testing, regulatory support and contract manufacturing, helping customers take complex parenteral products from design through commercial production while meeting stringent quality and compliance requirements.

West serves a global customer base that includes large pharmaceutical companies, emerging biotech firms and contract development and manufacturing organizations. The company operates manufacturing, research and development, and quality centers across multiple regions to support international supply chains and regulatory markets in North America, Europe, Asia-Pacific and Latin America. With an emphasis on innovation and quality control, West positions itself as a partner for customers seeking reliable containment and delivery solutions for advanced injectable therapies.

West Pharmaceutical Services Q2 2022 Earnings Call Transcript

Key Takeaways

• West delivered 13.1% organic sales growth in Q2, including 18.3% growth in proprietary products, driven by high-value components across biologics, pharma and generics.
• The company has completed its 2020 capital expansions and is installing its 2021 projects to boost capacity, shorten lead times and support rising demand, particularly in biologics and generics.
• West launched the Daikyo Crystal Zenith 2.25 mL insert-needle syringe system with a combination drug approved for a targeted 2023 launch and now has three FDA-approved biologics using its SmartDose OnBody platform.
• Full-year net sales guidance was lowered by $100 million to $2.95–2.975 billion, reflecting a $75 million FX headwind and an $85 million decline in COVID-related demand, partially offset by stronger base business growth.
• Adjusted diluted EPS guidance was cut to $9.00–$9.15 from $9.30–$9.45, incorporating an increased FX headwind (~$0.55/share) and reduced COVID sales, while maintaining $380 million in capex.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2022 West Pharmaceutical Services conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Quintin Lai, Vice President, Investor Relations. You may begin.

[Quintin Lai, VP of Investor Relations at West Pharmaceutical Services]

Thank you, Tawanda. Good morning, and welcome to West second 1/4 2022 conference call. We issued our financial results this morning, and the release has been posted in the Investor section on the company's website, located at westpharma.com. This morning, Eric Green and Bernard Birkett will review our financial results, provide an update on our business, and present an update on our financial outlook for the remaining full year of 2022.

[Quintin Lai, VP of Investor Relations at West Pharmaceutical Services]

There's a Slide presentation that accompanies today's call, and a copy of that presentation is available on the Investor section of our website. On Slide 4 is our safe harbor statement. Statements made by management on this call and in the accompanying presentation contain Forward-Looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates, and forecasts.

[Quintin Lai, VP of Investor Relations at West Pharmaceutical Services]

The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results, as well as those expressed or implied in any Forward-Looking statements made here. Please refer to today's press release, as well as any other disclosures made by the company regarding the risks to which we are subject, including our 10-K, 10-Q, and 8-K reports.

[Quintin Lai, VP of Investor Relations at West Pharmaceutical Services]

During today's call, management will make reference to Non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS. Reconciliations and limitations of the Non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to our CEO, Eric Green.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. I'm pleased to report that we delivered an excellent second 1/4. We grew 13% organically with over 18% organic sales growth in our proprietary product segment. Our base business continues to have solid demand across all 3 market units: biologics, pharma, and generics, which more than offsets a slight decline in COVID-19-related sales.

[Eric Green, President and CEO at West Pharmaceutical Services]

Again, our high-value products led the way to this impressive growth. Our continued success highlights the strength and the resilience of our proven strategy of execute, innovate, grow, which continues to set us apart as a trusted market leader. It is the strength of our one West team, guided by our purpose, that makes a meaningful difference in ensuring our customers have reliable supply of the components necessary to deliver drugs to patients.

[Eric Green, President and CEO at West Pharmaceutical Services]

An example of our one West culture in action is our team members in China, who I would like to thank for their inspiring efforts and commitment to our customers during the lockdowns in April and May. The relentless focus in our purpose enabled us to reopen our sites and continue to serve our customers with minimal impact.

[Eric Green, President and CEO at West Pharmaceutical Services]

Now moving to Slide 6. We made great progress in the second 1/4. Let me briefly share a few highlights. We continue to deliver the key drivers of growth in Q2, primarily driven by our HVP components, including NovaPure®, Envision, Daikyo Crystal Zenith, and self-injection devices. With a strong order book for our biologics and generics customers, along with pharma demand ramping up, we are seeing the benefits of our capital spending investments as we optimize productivity across our global operations.

[Eric Green, President and CEO at West Pharmaceutical Services]

Our 2020 capital expansion is now complete, and we're driving forward to complete the installation of our 2021 expansion. Turning to Crystal Zenith. We have been expanding capacity of our 1 ml syringe as our customer uptake has been robust. At the 2022 BIO International Convention, we launched the Daikyo Crystal Zenith 2.25 ml insert needle syringe system.

[Eric Green, President and CEO at West Pharmaceutical Services]

With the market trend for larger dose injections, we're able to answer the needs of more patients with a safe and reliable containment solution. The new CZ syringe system will help our customers bring a larger volume of product to patients with fewer or less frequent injections, enabling an easier patient experience.

[Eric Green, President and CEO at West Pharmaceutical Services]

As we continue to advance the standard of care for patients with our customers, I'm pleased to share that we have a combination drug approved using our newly launched CZ 2.25 ml system with targeted customer launch in 2023. In addition, we're seeing good progress with our SmartDose on body subQ delivery system and now have 3 FDA-approved biologic drugs using our technology. Shifting to Slide 7 and an update on ESG.

[Eric Green, President and CEO at West Pharmaceutical Services]

At the end of June, we published our 2021 corporate responsibility report on the company website. We are tracking well towards our 5-year targets. I'm proud of how our organization has connected our One West culture with our ESG initiatives. We know to fulfill our purpose effectively, we must progress our environmental sustainability goals, diversity and inclusion, and success around our charitable efforts.

[Eric Green, President and CEO at West Pharmaceutical Services]

Together, this makes for a better-performing company today and into the future. I'm also pleased to share that yesterday we announced that our board of directors has elected Dr. Stephen Lockhart as our newest member. As the former Chief Medical Officer of Sutter Health in California, his expertise will be a valuable addition to our board.

[Eric Green, President and CEO at West Pharmaceutical Services]

Before I turn it over to Bernard, I want to provide some high-level thoughts on our updated full-year outlook and implied second 1/2 2022 guidance. We have 2 headwinds, FX and slowing COVID-19 demand. On the positive, not only has our base business been strong in the first 1/2 of the year, but we also expect the generics and pharma market units to perform even better in the second 1/2 of the year with additional resources to address the demand dynamics.

[Eric Green, President and CEO at West Pharmaceutical Services]

For guidance, we're taking our overall sales down by $100 million for the full year. Incremental FX is going to be a $75 million headwind. In addition, we're seeing a decline in COVID-19 demand as compared to our April outlook that assumed modest growth over 2021.

[Eric Green, President and CEO at West Pharmaceutical Services]

While we're seeing some orders for stoppers for smaller vials to hold fewer doses, we do not assume a meaningful sales impact in 2022 and expect an overall decline of COVID-19 sales of 20% or $85 million from 2021 sales levels. To sum it up, changes in FX and COVID are causing headwinds well in excess of our $100 million dollar negative change to full year sales guidance.

[Eric Green, President and CEO at West Pharmaceutical Services]

On the positive side, we're expecting even stronger base business growth in the second 1/2 of this year from all 3 market units of biologics, pharma, and generics that is helping to moderate the guidance impact. Now I'll turn it over to Bernard.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2022 revenues and profits, where we saw another strong 1/4 of sales growth led by performance in our biologics and generics market units. I will take you through the profit drivers in the 1/4 as well as some balance sheet takeaways.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Finally, we will provide an update to our 2022 guidance. First up, Q2. Our financial results are summarized on Slide 8, and the reconciliation of Non-GAAP measures are described in Slides 17-20. We recorded net sales of $771.3 million, representing organic sales growth of 13.1%. Looking at Slide 9, proprietary product sales grew organically by 18.3% in the 1/4.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

High-value products, which made up approximately 73% of proprietary product sales in the 1/4, grew double digits and had solid momentum across biologics and generics market units in Q2. Looking at the performance of the market units, the biologics market unit delivered strong double-digit growth. We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

The generics market units also experienced strong double-digit growth led by sales of FluroTec and Westar components. Our pharma market units saw mid-single digit growth with sales led by high-value products including NovaPure® components. Contract manufacturing declined 8.9% for the second 1/4 due to a reduction in sales of components for diagnostic devices. We recorded $321.5 million in gross profit, $6.4 million or 2% above Q2 of last year.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Our gross profit margin of 41.7% was a 180 basis point decline from the same period last year. We saw improvement in adjusted operating profit with $227 million recorded this 1/4, compared to $211.2 million in the same period last year for a 7.5% increase.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Our adjusted operating profit margin of 29.4% was a 20 basis point increase from the same period last year. Finally, adjusted diluted EPS grew $0.01 for Q2, excluding stock-based compensation tax benefit of $0.01 in Q2, EPS grew by approximately 4%. Let's review the drivers in both revenue and profit. On Slide 10, we show the contributions to sales growth in the 1/4.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Volume and mix contributed $71.7 million or 9.9 percentage points of growth, and sales price increases contributed $23.4 million or 3.2 percentage points of growth in the 1/4. Looking at margin performance, Slide 11 shows our consolidated gross profit margin of 41.7% for Q2 2022, down from 43.5% in Q2 2021. Proprietary products' second 1/4 gross profit margin of 46.2% was 360 basis points lower than the margin achieved in the second 1/4 of 2021. The decline in proprietary products gross profit margin was caused by inflationary pressures impacting all plant costs, including raw materials, labor and overheads.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Partially offsetting these inflationary headwinds was improvements in our product mix, price increases and pass-through surcharges at approximately 90 basis points of benefits associated with one-time fees from COVID supply agreements. Contract manufacturing second 1/4 gross profit margin of 16.3% was 40 basis points below the margin achieved in the second 1/4 of 2021. The decrease in margin is largely attributed to mix of products sold in the period.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Now let's look at our balance sheet and review how we've done in terms of generating more cash. On Slide 12, we have listed some key cash flow metrics. Operating cash flow was $324.3 million for the 6 months ended June 2022, an increase of $91.2 million compared to the same period last year, a 39.1% increase.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Our operating cash flow in the period benefited from increased earnings, our working capital performance and timing of income tax payments. Our second 1/4 2022 year-to-date capital spending was $131.9 million, $20.3 million higher than the same period last year. Working capital of approximately $1.2 billion at June 30, 2022 increased by $58.1 million from December 31, 2021, primarily due to increases in accounts receivable and inventory offset by reductions in our cash.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Our cash balance at June 30, $718.5 million, was $44.1 million lower than our December 2021 balance. The decrease in cash is primarily due to our share repurchase program and higher CapEx, offset by our strong operating cash flow in the period.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Turning to guidance, Slide 13 provides a high-level summary. We are updating our full year 2022 net sales guidance and expect net sales to be in a range of $2.95 billion-$2.975 billion compared to our prior guidance range of $3.05 billion-$3.075 billion.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

There is an estimated headwind of $190 million based on current foreign exchange rates compared to a prior estimated headwind of $115 million. We expect organic sales growth to be approximately 11% compared to prior guidance of approximately 11%-12%. We expect our full year 2022 adjusted diluted EPS guidance to be in a range of $9-$9.15, compared to a prior range of $9.30-$9.45.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

This revised guidance includes our first 1/2 13-cent EPS positive impact of tax benefits from stock-based compensation. Also, our CapEx guidance remains at $380 million for the year. There are some key elements I want to bring to your attention to as you review our guidance. Estimated FX headwind on EPS has an increased impact of approximately $0.55 based on current foreign currency exchange rates compared to a prior estimated headwind of $0.38.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

We expect full-year COVID-19 related sales to be approximately $85 million lower than 2021 sales, and our guidance excludes future tax benefits from stock-based compensation.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

To summarize the key takeaways for the 1/4, strong top line growth in proprietary, growth in operating profit, solid adjusted diluted EPS despite FX and inflationary headwinds, and growth in operating cash flow, delivering in line with our pillars of execute, innovate and grow. I would now like to turn the call back over to Eric.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, Bernard. To summarize on Slide 14, our performance in Q2 has positioned us well to the second 1/2 of the year. We continue to have a strong base business, which is a testament to the foundation we have built over time with the right strategy and execution, leveraging the benefits of a global operating model to deliver the robust book of committed orders and continue to accelerate capital spending across our operations to meet current and anticipated future growth. Tawanda, we're ready to take questions. Thank you.

[Operator]

Thank you. As a reminder to ask the question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A order. Our first question comes from the line of Derek DeBruin with Bank of America. Your line is open.

[Derik DeBruin, Analyst at Bank of America]

Hi, good morning, everyone. Thanks for taking the question.

[Eric Green, President and CEO at West Pharmaceutical Services]

Good morning, Derek.

[Derik DeBruin, Analyst at Bank of America]

Hi. Could you be a little bit more specific on the COVID headwind? I mean, you called out $85 million versus prior, and you would, but your prior guide had included some growth with it. Basically, I'm just trying to make sure, trying to back into a more specific number for the overall organic revenue growth boost to the core business. It looks like I'm backing into roughly a 3% increase from your prior guide, just so we get. I just would like to work the math out a little bit better to give you some a little bit more guidance.

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah, Derek DeBruin, let me give you a little more color on that. If we think about 2021, our revenues for COVID was approximately $460 million. What we're seeing in 2022, based on the current visibility and discussions with customers, we're looking at about a 20% reduction of that number, which is about $85 million. If we kinda look at this again, this is based on the variability that we're seeing in the industry right now. If you think about moving forward for 2023, we do believe-

[Derik DeBruin, Analyst at Bank of America]

Yep.

[Eric Green, President and CEO at West Pharmaceutical Services]

We'll find another 30 or maybe up to 50% reduction of the 2022 number. That's kind of the glide path we see with COVID-19 demand right now. You are correct. There's an implied base business increase, and that's what we're seeing with particularly around biologics and a stronger pharma and generics in the second 1/2. The Ex-COVID business, if we would look at the proprietary, it was roughly around 23% growth in proprietary for the second 1/4. That's robust and we're seeing that continue for the balance of the year.

[Derik DeBruin, Analyst at Bank of America]

Great. Well, thanks for preempting my 23 COVID question, which is gonna be the Follow-Up to that. I guess the question, but then that also begs the question is like, have you de-risked the number enough for 2022, right? Is there further downside to that $85 million?

[Eric Green, President and CEO at West Pharmaceutical Services]

Well, based on the information that we have right now, you know, what we believe we have to risked it enough. You know, based on the facts that we see, again, you know, there's always this changing landscape with it, depending what's gonna happen this year and probably into 2023. You know, we have taken a conservative view, I would think, around COVID.

[Derik DeBruin, Analyst at Bank of America]

Got it. It looks like you called out a 90 basis point margin boost to PP. Was that related to a cancellation fee that might have come in the 1/4 from COVID projects?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yes. That's correct.

[Derik DeBruin, Analyst at Bank of America]

Okay. Any issues in terms of, I mean, this comes up, this is coming up frequently in terms of my incoming questions in terms of customer inventory stocking. You know, is it just sort of any signs of anything that cuts in the supply chain?

[Eric Green, President and CEO at West Pharmaceutical Services]

Right now, Derek, if we look at the order book today, one area that we're focused on is our lead times. As you can imagine, the last couple of years with the COVID demand, we had to pivot and prioritize in certain parts of our product portfolio. Our focus right now is to reduce lead times back to where they should be.

[Eric Green, President and CEO at West Pharmaceutical Services]

That's why you hear us talk about we have capacity that is being installed as we speak, but also into 2023, which will give us more capability to support our customers on the increase in demand we're seeing, and particularly around biologics and in particular on the higher end of high-value products. That's the focus we have.

[Eric Green, President and CEO at West Pharmaceutical Services]

We don't see, based on the demand and discussions with customers, it's not a large, restocking, concept going on right now with the underlying core business.

[Derik DeBruin, Analyst at Bank of America]

Great. Just a quick question from a client, can you just qualify the cancellation fee? How big a number that was?

[Eric Green, President and CEO at West Pharmaceutical Services]

Approximately $12 million.

[Derik DeBruin, Analyst at Bank of America]

Great. Thank you very much.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, Derek.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Paul Knight with KeyBanc. Your line is open.

[Paul Knight, Managing Director, Equity Research Analyst at KeyBanc Capital Markets]

Hi, Eric. Thanks for the time. Regarding the 23% proprietary growth, you know, obviously we are seeing biologic approval strong, but one area that seems to get numbers around is biosimilars. How big is biosimilar benefit in the market and to West? Do you have a quantitative or qualitative read on the biosimilar tailwinds?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah. No. Thank you, Paul, for the question. No, we're seeing the benefits of the biosimilar approvals and entry into the marketplaces all over. Although I would say it's relatively small in the scheme of the entire biologics portfolio, and there's a high-value product adoption. When you think about the packaging configurations with our biologic customers, it's near identical to what we see with the biosimilars.

[Paul Knight, Managing Director, Equity Research Analyst at KeyBanc Capital Markets]

Is the trend to a single-dose syringe pretty dramatic or changing in your view?

[Eric Green, President and CEO at West Pharmaceutical Services]

That's one area where we're investing heavily, specifically giving really specific areas around NovaPure® plungers. It supports what you're saying is that there's a tremendous movement towards prefilled syringes. In the biologic space and the biosimilar space, they're looking for. It's a high adoption of NovaPure®. That's where our investments are going. We have installations going on in 2022, but also in 2023 to start getting ahead of the curve, with our customers.

[Paul Knight, Managing Director, Equity Research Analyst at KeyBanc Capital Markets]

Okay. Last, Bernard, the FX guide that was $115 million for this year, and now it's -$190 million for the full year. Is that what you said earlier?

[Eric Green, President and CEO at West Pharmaceutical Services]

That's correct.

[Paul Knight, Managing Director, Equity Research Analyst at KeyBanc Capital Markets]

Okay. Thank you.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, Paul.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Larry Solow with CJS Securities. Your line is open.

[Larry Solow, Managing Director at CJS Securities]

Hi, good morning. Thanks. Same questions. Just bouncing through on a couple other calls here too. Can you just review so for the guidance, Eric, so the currency impact is $75 million, and then the net sales impact, I guess, is $25 million. Did I get that right? It's $85 million less COVID, and then you're adding back essentially $60 million plus from the base business. Is that? Am I capturing that?

[Eric Green, President and CEO at West Pharmaceutical Services]

That's correct, Larry. You have that accurate.

[Larry Solow, Managing Director at CJS Securities]

Okay, great. You just mentioned you kind of called out, in terms of COVID-related sales, vaccine-related sales dropping this year, like you said, 20%. You think there may be another 50% drop in volume demand in 2023. I think I caught that right.

[Larry Solow, Managing Director at CJS Securities]

The offset to that, obviously, hopefully, some offset there would be a move to more, I know, you know, to the prefilled syringes or less doses per vial. It sounds like a little bit is happening in that in 2022. Can you just give us sort of an update on how you see that, you know, transforming in 2023 and then as we go on?

[Larry Solow, Managing Director at CJS Securities]

Are you still confident that we'll, you know, we'll see a pretty good transformation on the COVID side onto single dose?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah, Larry, you summarized that well. I just wanna add one comment, though.

[Larry Solow, Managing Director at CJS Securities]

Sure.

[Eric Green, President and CEO at West Pharmaceutical Services]

In 2023, we do think it's more of a range.

[Larry Solow, Managing Director at CJS Securities]

Okay.

[Eric Green, President and CEO at West Pharmaceutical Services]

30%-50%. It's, again-

[Larry Solow, Managing Director at CJS Securities]

Okay.

[Eric Green, President and CEO at West Pharmaceutical Services]

There's a lot of variability, so we're trying to be conservative on our

[Larry Solow, Managing Director at CJS Securities]

Absolutely.

[Eric Green, President and CEO at West Pharmaceutical Services]

current view. Your point is valid that there is a shift that is starting to occur with less doses per vial. So that configuration is obviously, in some cases, some customers, it's moved from a 20-millimeter down to a 13-millimeter stopper. What we're seeing right now is more in the vial configuration versus prefilled syringe. We-

[Larry Solow, Managing Director at CJS Securities]

Okay.

[Eric Green, President and CEO at West Pharmaceutical Services]

We see that more into 2023 and beyond. I do wanna just state, you're right, there's less doses per vial, which is a net benefit to West. The key variable that is very unpredictable right now is the number of patients taking the dose.

[Larry Solow, Managing Director at CJS Securities]

Right.

[Eric Green, President and CEO at West Pharmaceutical Services]

The data is widely available in the market, and you're seeing a low uptake as we speak right now, but yet to be determined as we get through 2022 and also into 2023.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Yeah.

[Larry Solow, Managing Director at CJS Securities]

Right. Yeah, please.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

To add to that, the prefilled syringe uptake that Eric just mentioned when answering the other questions is really within our core business.

[Larry Solow, Managing Director at CJS Securities]

Right.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Within biologics, that's where we're seeing a lot of increased demand move in or move through '22 and into 2023.

[Larry Solow, Managing Director at CJS Securities]

Right.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

That's really layering in capacity. That's for core business.

[Larry Solow, Managing Director at CJS Securities]

Right. So that big sort of that switch on a macro level, prefilled syringes are certainly increasing across the biologic space and not just specifically the COVID vaccine. We're hopeful that will happen, and there's certainly some talk of that, I'm sure, with your customers. But you're talking in general that trend, that multiyear trend, which you've talked about for a while.

[Larry Solow, Managing Director at CJS Securities]

And then on NovaPure® itself, can you just give us, like, an idea? It seems like I know you don't break out percentages and penetration, but it seems like we're still relatively in the early stages. Can you just, like, maybe qualitatively compare, like, the penetration of NovaPure® to, say, FluroTec or Westar, one of your more highly penetrated HVPs?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah. I would say what's commercial in the market right now, the NovaPure® is a lower percentage than the other parts of the high-value product portfolio. When you look at the pipeline or newly approved drugs that are ramping up in the marketplace, there's a higher percentage that's utilizing the NovaPure®, particularly around the plungers.

[Eric Green, President and CEO at West Pharmaceutical Services]

That lines up very nicely to the investments we're making this year and next year that we committed to already to have installation and capacity expanded quite significantly. That's where we are in that journey. While it's a lower percentage, it has tremendous value proposition to our customers, and that's why we see the pipeline as very attractive, particularly in the biologic space.

[Larry Solow, Managing Director at CJS Securities]

Great. Just lastly, Eric, you spoke a lot about, and it sounds like you're really enthusiastic about sort of the outlook for the self-injectables. You mentioned. Can you just give us sort of, I know you've talked a lot about the CZ and the new 2.25 milliliter insert. Can you just give us sort of an update on SmartDose®, where we stand with that and, you know, how you see that unfolding over the next few years? Thanks.

[Eric Green, President and CEO at West Pharmaceutical Services]

Well, Larry, this is an area that we've been working on for a number of years.

[Larry Solow, Managing Director at CJS Securities]

Absolutely.

[Eric Green, President and CEO at West Pharmaceutical Services]

What we talked about more recently is our customers are looking at ways of taking new molecules, but also current molecules in the market, reformulate and move it from an IV to a sub-Q delivery mechanism.

[Larry Solow, Managing Director at CJS Securities]

Mm-hmm.

[Eric Green, President and CEO at West Pharmaceutical Services]

Particularly around lifecycle management. That is actually quite exciting. Hence, when you think about, I mentioned on the call in the prepared remarks that we now have 3 combination device approvals with biologics. We're starting to gain momentum to start moving products into the commercial environment versus still in development.

[Eric Green, President and CEO at West Pharmaceutical Services]

When I look at the development projects we're working on with a number of customers, it is now more gravitating towards the larger volumes, existing molecules in the marketplace, and it's around lifecycle management. It's exciting. I believe we are in a good point in time. More work investments need to occur, and it's gonna take some time to get into really large, meaningful revenues. We're definitely in the right direction with that, with that part of the portfolio.

[Larry Solow, Managing Director at CJS Securities]

Great. Excellent. Appreciate all the color. Thanks.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Thank you, Larry.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Justin Bowers with William Blair. Your line is open.

[Justin Bowers, Financial Advisor at William Blair]

Hi, good morning. Congrats on the 1/4. I'll just start off with a simple one, I guess. Do you have any plans for any, you know, further price increases for the rest of the year? Just trying to get a sense of what's assumed in your guidance.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Well, right now it's continuing with the pricing strategy that we've had as we progress through 2022, where we've done some specific price increases for customers, general price increases, and then we continue to monitor if there are further surcharges that we need to implement as these inflationary costs continue to hit us as we move through the second 1/2 of the year.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

It's something we review on a monthly basis. I've nothing to announce to say there's any specific increase at the moment, again, but we are tracking it pretty closely and offsetting as much of that cost increase as we can. As we've talked about before, there's sometimes a lag as to when we experience a cost increase itself and then when we can pass it on. Again, that's something we're working through.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Again, it's fluid.

[Justin Bowers, Financial Advisor at William Blair]

Got it. Can you remind us how we should think about, you know, margin cadence for the rest of the year? And I guess, what are the underlying assumptions around, you know, raw material costs, right, and overall supply chain?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Yeah. We see that margin continue to step up as we move through the remainder of the year. Again, that's based on, you know, what we have been communicating since we gave guidance in February of this year. We would continue to see that happening as we improve our levels of efficiency and layer in extra capacity.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Some of the things that we're having to do right now is to, you know, replace the COVID demand that we've just called out that's decreasing with, you know, other products and other demand within our ne2rk. You know, we've started doing that as we progress through Q2, that will continue to Q3 and Q4. The demand is there essentially to fill many of our facilities, and it's that growth is reflected in the guidance that's embedded.

[Justin Bowers, Financial Advisor at William Blair]

Got it. That's very helpful. Just one last one for me. Sort of longer term, you know, that 100 basis points of margin improvement each year, I guess, is that predicated on inflation and supply chain pressure, you know, easing in 2023? Or, you know, can you achieve that without the situation improving? In other words, you know, will the continued uptick in, you know, high-value products alone help drive that, obviously along with sort of the continued increase in efficiency?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Our expectation is that would be the case. You know, our target is to continue to expand margins by 100 basis points. That's, you know, based on what we can see today. Now, if some black swan event or something happens, you know, that's outside of our control, that's a different story. Based on what we have in front of us today, the intention is to continue that 100 basis point expansion.

[Justin Bowers, Financial Advisor at William Blair]

Sounds good. Thank you.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Good. Thank you, Justin.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Jacob Johnson with Stephens. Your line is open.

[Jacob Johnson, Analyst at Stephens]

Hey, good morning. Just one quick housekeeping question first. On the COVID revenue in 2Q, you talked about 23% growth Ex-COVID and proprietary products. That seemed to imply that COVID revenues were maybe $110 million in the 1/4. Is that in the ballpark?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Yeah. It's pretty close.

[Jacob Johnson, Analyst at Stephens]

Okay. Thank you. Eric, you mentioned the potential for pharma and generic demand to pick up in the second 1/2 of the year, and you also mentioned adding some resources there. Can you just talk about, you know, the resources you're adding there? Were you somewhat capacity constrained for those end markets in the first 1/2 of this year?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Yeah. It's resources more around the demand to be able to deliver on the demand that's been given to us specifically in generics and pharma. There are discrete customer projects. We're feeling good about the work that's ahead of us, but we do need to allocate resources appropriately to deliver those demands that are for the second 1/2 of this year.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

That was the intent of that comment, particularly with pharma and generics. If you take the first 1/2 of the year compared to the second 1/2, those 2 units will be growing a lot faster than they were in the first 1/2. That's. I just wanna make sure that was clear.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

That, that's gonna be occurring from our plants both in Europe and, obviously, the United States.

[Jacob Johnson, Analyst at Stephens]

Helpful. Last question for Bernard Birkett. Just on R&D expense, they're kind of flattish sequentially. I think if I remember correctly, you know, there are going to be some investments flowing through the R&D line, maybe around the Corning relationship and some other efforts. Just how should we think about R&D expense maybe back 1/2 of this year into 2023?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah, we would expect it to tick up in the second 1/2 of the year, and that there are gonna be 2 drivers around that. One is the level of DAs that we're seeing coming through our pipeline. Then all that's really on, you know, our delivery devices. Then also looking at the Corning Incorporated partnership that we have in place, we'll be adding additional cost. Again, it's all embedded in the guidance, and it's been planned for the year, but that'll happen in the second 1/2 of the year, more so in Q4 than in Q3.

[Jacob Johnson, Analyst at Stephens]

Okay, perfect. Thanks for taking the question.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, Jacob.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of David Windley with Jefferies. Your line is open.

[David Windley, Analyst at Jefferies]

Hi. Thanks for taking my question. Good morning, gentlemen. I was hoping to try to shine a little bit more light on the comments around bias toward prefilled syringe NovaPure® stoppers. Or excuse me, NovaPure® plungers that you mentioned, CZ uptick and work around syringes there.

[David Windley, Analyst at Jefferies]

Like, how much of that is related? Like, so as clients want prefilled syringe, is that still predominantly glass and you're supplying what you traditionally have but in NovaPure® high value, or is that also driving uptick in CZ resin syringes? Just anything you can add there would be much appreciated.

[Eric Green, President and CEO at West Pharmaceutical Services]

No, Dave, good morning. CZ is a great application when you start thinking about silicone-free. But from what the preference is still glass.

[David Windley, Analyst at Jefferies]

Got it.

[Eric Green, President and CEO at West Pharmaceutical Services]

Hence the investment in the work we're doing with partnering with Corning. There are certain molecules, certain applications that CZ is particularly well-positioned for, and we're able to capture some of that demand. Now, when it comes to NovaPure® plungers, really the comment is around the glass PFS solution and also more around the biologics and biosimilars than anything else.

[David Windley, Analyst at Jefferies]

Okay. Eric, in your comments around addressing shortening lead times, I wanna make sure. I mean, it sounds like the base business is accelerating to I think it was Larry's bridge or maybe Paul's bridge around the $60 million of the base that makes up for some of the weakness.

[David Windley, Analyst at Jefferies]

How much of that is, you know, I'll say, pulling forward activity because space and you know, productive capacity is freed up by, you know, the lowering of COVID and to help to shorten lead times for your clients versus kind of underlying steady state flow of demand? Can you help us to understand the difference there?

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah, Dave, long-term construct, we still believe in the 7%-9%. When we start talking about 23% in the 1/4 for proprietary excluding COVID, that is obviously outsizing that long-term construct. There's 2 elements to that. One is we do believe the freeing up some of the capacity, which is obviously not just dedicated to COVID.

[Eric Green, President and CEO at West Pharmaceutical Services]

It will be able to support our core business and to bring some of those lead times in line. It's not the entire portfolio, but specific area, probably more around the high-value products. When you think about the market units, biologics is still really strong. What I mean by that is, we think about our confirmed order book. It continues to increase from the end of last year, and one of the major drivers of that is biologics.

[Eric Green, President and CEO at West Pharmaceutical Services]

We, when you dig a little bit further, it's a combination of recently launched molecules that are having a very strong success in the marketplace. Secondly, is now preparing for the pipeline for new, newly approved drugs that will be approved or have been approved recently.

[Eric Green, President and CEO at West Pharmaceutical Services]

There is always inventory management going on with our customers, but I would say in the last 2 or 3 years, we were not in a position to be able to oversupply any one particular customer. We're trying to bring the lead times back in line. That's constant work that we're focused on. I wanna state that the underlying growth of the business is extremely healthy across all market units, especially biologics.

[David Windley, Analyst at Jefferies]

Got it. Thanks. I guess to rephrase that last point that you just made, you're confident that customers are not, say, stocking because you basically couldn't produce enough for them to overstock. Maybe to flip the question, were they understocked or, you know, I guess a version of that would be kind of dependent on longer lead times than are comfortable, and so you're kind of catching up and getting them shored back up to what normal should be. It sounds like.

[Eric Green, President and CEO at West Pharmaceutical Services]

Dave, you're right.

[David Windley, Analyst at Jefferies]

Is what you're saying.

[Eric Green, President and CEO at West Pharmaceutical Services]

Yeah, Dave, you are correct. There are some cases, not across the whole portfolio, but there are some cases where, with the relationships we've had with our customers, is to establish very robust schedules or tight schedules to make sure that we're not creating any issues of you know, availability of material.

[Eric Green, President and CEO at West Pharmaceutical Services]

There was some of that, and we're working through those as we speak. That's one of the reasons why we highlighted that some of the capital investments that we made, committed to that are rolling in this year and also into next year, particularly around NovaPure®, is to really alleviate to support the growth in the biologic space. That's, it's definitely needed to get in there to stay ahead of the curve.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Yeah, and I-

[David Windley, Analyst at Jefferies]

Got it.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

The way I would frame it is to bring lead times back to where they are Pre-COVID, and then it's to be able to maintain those lead times, as the business is actually growing, rather than having the lead times go back out.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

That's where we have to layer in the capacity. It's actually managing 2 things at once. It's not just one. We're seeing this acceleration in growth in some areas of our business and plus trying to get customers to stock levels where they feel comfortable if that's the case. That's gonna take a period of time. That's not an instantaneous thing.

[David Windley, Analyst at Jefferies]

Sure. Bernard, on your point on layering in the capacity, just to confirm, or does this change in your COVID expectations change the amount of CapEx investment or the pacing of those projects at all relative to bringing on additional capacity?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

The projects that we have right now, it does not change any of those. The projects that Eric mentioned about, particularly on the plunger side, we're continuing to layer in that capacity. That's specifically around growth that's inherent in the market right now and the changes that we're seeing. There's no change there. If we could actually accelerate that onboarding, you know, that would be more beneficial for us if we could do that because the demand is there today.

[David Windley, Analyst at Jefferies]

Yeah, it seems like a strong sign. Last question for me. In regard to stoppers versus plungers and components that you supply for Pre-filled syringe, I think you've answered in the past that you're relatively economically agnostic to form factor. Is that true, or is there any nuance that we should think about there?

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

No, that holds true. The economics aren't that vastly different between the 2.

[David Windley, Analyst at Jefferies]

Okay. Thanks. I appreciate your answering all my questions.

[Eric Green, President and CEO at West Pharmaceutical Services]

Thank you, David.

[Bernard Birkett, Senior VP, CFO and Treasurer at West Pharmaceutical Services]

Thank you.

[Operator]

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Quintin Lai for closing remarks.

[Quintin Lai, VP of Investor Relations at West Pharmaceutical Services]

Thanks, Tawanda. 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 Investor section. That concludes this call. Have a nice day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Bernard Birkett, Senior VP, CFO and Treasurer
• Eric Green, President and CEO
• Quintin Lai, VP of Investor Relations

Analysts

• David Windley, Analyst at Jefferies
• Derik DeBruin, Analyst at Bank of America
• Jacob Johnson, Analyst at Stephens
• Justin Bowers, Financial Advisor at William Blair
• Larry Solow, Managing Director at CJS Securities
• Paul Knight, Managing Director, Equity Research Analyst at KeyBanc Capital Markets