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West Pharma's gloomy outlook overshadows 3Q profit

By Wai Lang Chu , 21-Oct-2005

Drug packaging maker West Pharmaceutical Services release its 3Q results, which indicate a rise in profits but fell short of analyst estimates, due to slow sales in some segments and high raw material and energy costs.

Higher raw material costs, particularly petroleum-based, as well as soaring energy costs have had a significant effect on pharma manufacturing, which would more than offset any sales growth, further price increases and positive effects of performance improvements companies have made over the past 18 months.

The effect has also sent West Pharmaceuticals share price down to their lowest for nearly a year, adding to its woes.

 

The company had recently expanded bank debt, freeing up resources for a series of acquisitions in the US firm's core activities in closure systems and syringe components for use with injectable drugs.

 

It wasn't all bad news. Third-quarter net income rose 81 per cent to $7.8 million (€6.5 million), or 24 cents per share, compared with $4.3 million, or 14 cents per share a year ago.

 

The company said earnings from continuing operations were 22 cents per share on sales of $181.6 million.

 

"Third quarter sales and results are always difficult to predict because of summer production shutdowns in the industry and some of our customers' fiscal year-end inventory management practices," said Donald Morel, West's chairman and CEO.

 

"While our top line grew in line with expectations, slower sales of our Teflon and B-2 coated closures depressed our results."

 

West cuts its full-year earnings outlook to between $1.30 and $1.35 a share, from a prior forecast of $1.43 to $1.51 per share, citing charges related to currency fluctuations, higher raw material costs, and tax from repatriating foreign earnings. The expectation had been at $1.48 per share.

 

"We believe that sales of coated products will recover in 2006, because there is no indication of any change in the expected downstream demand for our customers' products and because we have been experiencing an increase in orders for some of those products as we enter the fourth quarter," added Morel.

 

"So long as we don't experience another round of significant raw material and energy cost increases, we expect that we will be able to compensate for higher raw material costs through price increases and cost savings programs in 2006."

 

In an update provided by the Pennsylvania-based company, 2006 revenue was expected to be between $810 million and $830 million, a 16 per cent to 19 per cent increase over estimated 2005 revenue.

 

In West's Pharmaceutical Systems segment, quarterly sales were $127.4 million, a 7.9 per cent increase over the 2004 quarterly sales of $118.0 million.

 

Strong European sales, together with growth in all of West's international markets, offset a 3.5 per cent decline in North American revenue.

 

The sales gains outside of the US were attributed to continued growth in demand for pre-filled syringe components.

 

West attributed its North American decline in the Company's coated pharmaceutical components to slow sales of coated products in 2005.

 

"In earlier periods, particularly during 2004, customers increased their inventories of West's coated products as part of their strategies for dealing with formulation changes," the company said.

 

Operating profit in the Pharmaceutical Systems segment was $18.8 million and the operating profit margin was 14.8 per cent in the quarter, despite the sales mix issue, compared to $17.1 million and 14.5 per cent, respectively, in the comparable 2004 period.

 

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