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West Pharmaceutical continues balancing act despite CMO uptick

By Natalie Morrison , 06-Aug-2012

West Pharmaceutical Services is sticking with plans to lessen CMO (contract manufacturing organisation) activities and boost proprietary products despite a hefty uptick in contract production in Q2.

The firm saw big wins in its packaging business – a large part of which does contract manufacturing of components and systems for injectable drug delivery– with a 6.1 per cent rise from $222.2m in 2011 to $235.8m this year.

Risk management strategies which led customers to stock up on products as well as new launches were largely hailed as the driving factor behind the rise in its Q2 results.

The firm also attributed the spike to the majority of sales being in “high value products,” like Envision, FluroTec and Teflon coated and Westar-processed components. As a result, management upped projected earnings for the year by $10m.

However, as per Q1 results, West appears to be going with plans to overhaul its business model – an 80/20 split between contract production and proprietary products, with CEO Donald Morel saying that packaging means only short term gains in the bigger picture.

At the time, Morel said the Crystal Zenith (CZ) syringe system in particular looks promising for the future, predicting up to $600m revenues by 2016 and promising to give more backing to the platform.

Construction of a new plant in Arizona, US, manufacturing facility in preparation for strong CZ demand is well under way, and according to Jefferies Equity Analyst David Windley the initial sample testing for the product which started in 2010 indicates that now is the time for formal stability testing.

“This represents a significant growth driver for the company and should lead to margin expansion,” he said.

Windley added that delivery systems will indeed be key to the company’s future growth, and said: “They only account for 20 per cent of delivery system revenue, but are expected to represent 50 per cent by 2016.”

Short term growth

Though the firm continues to predict short term stability for its packaging business, Jefferies is less certain.

Windley said the current uptick is largely a tailwind from 2011 price increases because of inflated crude prices, as well as the aforementioned inventory building and new product launches.

“West starts lapping last year's price increases in 4Q12, customers should begin to slow inventory rebuilding, and the foreign exchange headwind intensifies. All of these likely work together to slow sales growth to 3.0-3.5 per cent in 3Q and 4.5-5.0 per cent in 4Q,” he said.

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