West Pharmaceutical Earnings: Solid Top-Line Growth Continues; Weaker Demand Expected in Near Term

Wide-moat West Pharmaceutical WST reported third-quarter earnings in line with our expectations. Total organic net sales grew 5.7% year over year, signifying the wind-down of COVID-19-related sales declines. Base sales excluding COVID-19 products increased by over 20% organically year over year, but management trimmed net sales guidance for 2023 to reflect the potential impacts of customers’ restocking trends in the fourth quarter. We are maintaining our $290 fair value estimate as our top-line forecast was lower than previous guidance. Shares dropped 11% after the earnings release but still look overvalued to us.

West Pharmaceutical’s proprietary products segment recorded a year-over-year organic sales growth of 3.2%, led by high-value products and components. Proprietary products’ gross margin declined by 20 basis points to 43.4%. We believe the recent actions of inventory management among customers will only be a short-term challenge. As West continues to ramp up production through 2024, the company will have more capacity to work with customers on new designs and packaging, solidifying its dominant market position supported by intangible assets and strong switching costs. We see strong pricing power across West’s offerings as around two thirds of incremental sales in third-quarter 2023 compared with third-quarter 2022 come from sales price increases, offsetting unfavorable volume and mix.

The contract-manufacturer products segment grew by 17.4% year over year, mainly driven by drug-injection devices and diagnostic devices. For now, we don’t think GLP-1-related self-injection sales would materially affect the long-term growth perspective, but we believe West’s 70% market share in injectable primary packaging sets it up for a nice position to compete with other suppliers like narrow-moat Aptar. We welcome management’s decision to orient two thirds of capital expenditure to growth, preparing for the potential recurring revenue opportunities in the injectables space.