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West Pharmaceutical Services Research Report 1.30.2024

Ticker: WST
Sector: Healthcare
Industry: Medical Instruments & Supplies
Headquartered: Pennsylvania, USA
Moat: Wide – Intangible asset – Brand, Economies of Scale, Cost advantages

Action at date of this post

Accumulate as of 1.30.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying West. If you do not own it but are looking to buy this is an indication to open a position of no more than 25% of your intended, total position.

West Pharmaceutical Services Corporate Overview

West Pharmaceutical Services, Inc. is a global leader in providing innovative solutions for injectable drug administration and delivery. Headquartered in Exton, Pennsylvania, the company specializes in developing and manufacturing a wide range of packaging, containment, and drug delivery products for the pharmaceutical, biotechnology, and medical device industries. West’s offerings include vial containment and delivery systems, prefillable syringe systems, self-injection systems, and various technologies aimed at enhancing drug stability and administration safety.

Complementing its proprietary product offerings, West Pharmaceuticals has a significant presence in the Contract-Manufactured Products segment. This involves providing contract manufacturing services to pharmaceutical and biotechnology firms, manufacturing components for drug delivery systems, and producing devices for diagnostics and medical applications.

With a history dating back to 1923, West Pharmaceuticals has established itself as a trusted partner for pharmaceutical companies seeking advanced packaging and delivery solutions. With a global reach, West has a presence in key markets worldwide with 55% os sales happening outside the US.

West Pharmaceutical Services Segment Analysis

At the end of fiscal year 2022, the company operated in two segments – Proprietary products +/- 84% of sales and Contract-Manufactured products +/- 14%.

West Pharmaceutical Services Wide Moat Source

West is the global leader in primary packaging and delivery components for medical injectables. West has 70% of the global share for primary packaging. Due to its supply chain expertise and quality reputation West operates as an oligopoly. The moat for West is identifiable in its proprietary products – not so much on the contract manufacturing side. Switching costs are very high for drug makers as West provides high levels of service that cannot be matched by the drug makers of competitors.

West Pharmaceutical Services Growth Outlook

To understand the growth opportunity for West is to understand just how mission critical West’s products and services are to drug manufacturers. In addition, the companies sheer scale capabilities allow it to garner the confidence from drug makers that shortages will not happen. 

Consider that when a new drug is coming to market all components that come in contact with the drug have to part of the application to the FDA for that drug’s approval. This means West is involved early in the drug development cycle and stays with the drug while it remains on the market. Many drugs stay on market more than 10 years.  In addition, the value chain structure of West is an important factor in the company’s growth opportunities. Besides the physical products the company provides it also offers high margin services such as sterilization, washing and inspections. 

Since West’s products and services are mission critical to its clients, relationships tend to be sticky. Further, West’s reputation for quality and consistency has entrenched the brand within most major drug makers. The key in developed markets like the US and Europe is to move customers up the value chain to more profitable services. In emerging markets like China and India where pharmaceutical standards are growing, the company still has plenty of room to grow and establish a footprint.

West Pharmaceutical Services By The Numbers

Fiscal year 2022 was tough for the company as the COVID era comparable from the preceding years were hard to match numbers. Therefore, I’m happy to overlook the drop off in revenue and slower ROIC. But, I do note a strong ROCE (Return on Capital Employed). The company runs on very little debt and generates lots of free cash flow that helps the company defend its wide moat. West has been wise about share repurchases and took advantage of share price weakness in 2022 to retire more shares than usual. I like to see when companies retire shares when the prices are attractive. 

The company’s cost of capital is quite low which makes it quite easy for it to have returns far above its WACC. With gross profit margins stable, I have no reason to think West will not continue business as usual.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing, the author holds a position in West Pharmaceuticals.

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