$West Pharmaceutical(WST)$ $S&P 500(.SPX)$
West Pharmaceutical Services designs and produces containment and delivery systems for injectable drugs and healthcare products. It operates through two segments: Proprietary Products (82% of FY23 sales) and Contract-Manufactured Products (18% of FY23 sales). The Proprietary Products segment offers proprietary packaging services and solutions. The Contract-Manufactured Products segment manufactures customer-owned components. The Company operates mainly in US (45% of FY23 sales) and Europe (42% of FY23 sales).
Investment Overview
West is a market leader in pharmaceutical packaging with elastomers. West is the largest elastomer supplier for drug makers globally, with products including vial stoppers and syringe plungers. The demand for packaging is growing, with global daily medicine dosage increasing from c.3 trillion doses in 2018 to c.3.4 trillion doses in 2023. The increased dosages would translate into higher demand for packaging materials such as elastomers. West will be able to leverage on the uptrend.
Much lower price pressure, higher revenue certainty. Price cuts are one of the largest risks for drug manufacturers worldwide, but the risk of price cuts on elastomers is much smaller as: 1) the price pressure often comes from governments or hospitals. West sells elastomers to drug makers, not directly to governments or hospitals; 2) the cost of elastomers only make up c.1% of medical products’ average selling price, hence the drug makers do not have much incentive to reduce the cost of sourcing elastomers. Once a drug maker has selected an elastomer supplier, it rarely makes changes as when the FDA approves an injectable drug, it also evaluates approval to use the elastomer from the specified supplier. It would take time to identify and get approval for another elastomer supplier. This explains why West generates >90% of revenue from existing customers.
Weight loss drug label expansion as share price catalyst. West has announced it provides packaging materials to weight loss drug leaders Novo Nordisk and Eli Lilly. In Aug 2023, Novo Nordisk announced clinical trial data indicating its weight loss drug could reduce the risk of cardiovascular events by 20%, potentially expanding the weight loss drug’s market size to cardiovascular disease, which affects c.600m patients globally. West saw its share price grow 5.6% upon this announcement. West is expected to continue benefitting from positive weight loss drug news in 2024, such as indication expansion to usage for chronic kidney disease which affects c.700m patients globally.
Improvements in drug efficacy may decrease dosing frequency. West’s sales are largely dependent on the sales of drug products delivered by injection, and packaging of drug products. If drug products developed by customers have higher efficacy and therefore require less frequent dosing, West’s sales and profitability could suffer, such as drugs that move from one daily dose to one weekly dose.
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