West Pharmaceutical Services, Inc.

Good day, and thank you for standing by. Welcome to West Pharmaceutical Services' fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Quentin Lai, Vice President, Investor Relations. Please go ahead.

Thank you, Shannon. Good morning and welcome to West's fourth quarter and full year 2022 conference call. We issued our financial results this morning and the release has been posted in the investor section on the company's website located at westfarmer.com. This morning, Eric Green and Bernard Burkett will review our financial results. provide an update on our business, and present an update on our financial outlook for the full year 2023. There's a slide presentation that accompanies today's call, and a copy of that presentation is available on the investor section of our website. On slide four is our safe harbor statement. Statements made by management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our police and assumptions, current expectations, estimates, and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results, as well as those expressed or implied in any forward-looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risk to which it is subject, including our 10-K, 10Q and 8K reports. During today's call, management will make reference to non-GAAP financial measures including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results compared in conformity to GAAP are provided in this morning's earnings release.

I now turn the call over to our CEO, Eric Green. Thank you, Quentin, and good morning, everyone. Thanks for joining us today. We will start on slide five. For over 100 years, the West name has come to mean so much to so many people. We have grown and expanded from manufacturing primary containment components to designing and manufacturing delivery systems. This remains the same today. As a global market leader who continues to define the evolution of our industry, our 10,000-plus team members are motivated by improving patient lives. The past few years have been a reminder that the world doesn't stand still, and the needs of the healthcare industry are evolving and growing in complexity, with shifting treatment options from the hospital to home setting. we remain committed to the pursuit of scientific innovation and partnerships to address the changing needs of today and into the future. Moving to slide six. Looking back at the year, I'm pleased to report that West delivered overall organic sales growth of approximately 8%. This growth was generated despite a rapidly shifting pandemic landscape. We started 2022 expecting COVID-19 volume growth, but instead declining orders and demand from our customers actually resulted in a 15% decline in pandemic-related sales. Excluding COVID-19, we estimate their base organic sales growth was low double-digit, with mid-teens growth in proprietary products. and driving this base growth is demand for our high-value product offerings for both legacy as well as recently launched drugs. And we ended the year with a return to growth in Q4 and contract manufacturing. This performance is a result of the dedication and relentless focus of our team members across the globe. We are connected by a strong responsibility and shared values that continue to help us succeed each day. I want to acknowledge these efforts and say thank you. Looking ahead, we remain well positioned with the right growth strategy around execute, innovate, and grow. Our solid order book of committed orders reinforces the criticality of West's components and devices to address our customers' growing injectable drug demand. And we continue to deploy capital investments to support the increase in demand driven by the attractive end markets. Turning to slide seven. In addition to our financial momentum, there were several other notable accomplishments in 2022. We shipped close to 47 billion components, touching billions of patient lives. As scientific and technical leaders in the industry, our customers expect us to help solve their problems. We continue to broaden insights with our expertise through our webinars, published articles, and technical presentations. We partnered with Corning to build the next generation of leading elastomer glass systems. We launched Dicul CZ 2.25 ML insert needle syringe to support the biologics market. and secured three additional FDA-approved drugs using our smart dose technology as we continue to bring additional value to our customers. Lastly, we donated $2.75 million, but more importantly, our team members continue to volunteer their time to help our local communities with the greatest needs. Our heartfelt thoughts are with all those impacted by the devastating earthquake in Turkey and Syria, where we have provided aid through UNICEF. Shifting to slide eight, we continue to factor environmental considerations into every aspect of our business. Over the past five years, we have made tremendous strides across the six priority areas and newly defined performance indicators. I'm pleased that we're on target with 90% of our operational waste not being sent to landfills. Our pursuit of renewable energy alternatives has aided in a positive impact in the emission reduction. These efforts have been recognized with numerous ESG accolades in 2022. We look forward to sharing more detail in our corporate responsibility report to be published in the spring. Turning to slide nine. We continue to address the growing market needs with today's complex and sensitive molecules. At the recent PharmaPak meeting, we introduced several new products for large volume delivery and complete vial containment solutions. One available product is our West ReadyPak with Corning's Valor Ready-to-Use Vials. This will be the first of many products from our Corning partnership. The combination of these products eliminates the risk of delamination and reduces glass particulate in bulk filling lines. It is drug delivery innovations like this that ensures best-in-class performance with a value proposition to meet the increased regulatory expectations with a complete vial containment solution. Moving to slide 10, we are introducing four-year 2023 financial guidance. This guidance is based on demand trends as well as our current capacity levels. It is also reinforced by our strong West and Dicul participation rate in drug approvals, especially in biologics and biosimilars. we expect full-year overall organic sales growth of approximately 3% to 4%, which includes a $303 million year-over-year decline in pandemic-related sales. Excluding this impact, we expect mid-teens overall base organic sales growth, with proprietary products growth in the high teens and high single-digit growth in contract manufacturing. 2023 will represent a transition year for our margin profile as we see a headwind from COVID-19 HVPs. That said, our expected margins for this year are significantly above pre-pandemic 2019 levels. This underscores the strength of our financial construct with annual margin expansion of 100 basis points or more per year. In 2019, we posted operating margin of 16.1%. In 2023, we expect operating margin of 23 to 24%, which would represent an increase of approximately 800 basis points over a four-year period. Also, today we announced that the Board of Directors has authorized a new share repurchase plan, as our prior plan was completed last year. This program is authorized for up to $1 billion of share repurchase. We note that this new program does not have a specified end date. As comparison, in 2022, our 12-month program was completed at $203 million of buybacks, and in 2021, our 12-month program was completed at $137 million of buybacks. This new $1 billion program will provide for a continuation of our share count neutral strategy, which is assumed in our 2023 full-year financial guidance. We believe this program will also provide flexibility for incremental share repurchases depending on various factors such as economic and market conditions. Turning to slide 11. As you can see from our guidance, we see continued base momentum in 2023, and we're planning for further additional growth as our customers are preparing for expanded success of their current biologics portfolio and drug launches. As such, we continue to drive forward to complete the installation of our capital expansion plans for additional HVP capacity. The picture shows the progression of our ongoing efforts. On my recent visit to Kinston, it was impressive to see the additional space added to accommodate the installation of new manufacturing equipment to address the growth of HVPs and plungers. Together with other site expansions, this will support future demand across our global manufacturing network. Now I'd like to turn the call over to Bernard.

Thank you, Eric, and good morning. We'll first look at Q4 2022 revenues and profits. where we saw low single-digit organic sales growth and a decline in operating profit and diluted ETFs. I will take you through the drivers impacting sales and margin in the quarter, as well as some balance sheet takeaways. And finally, we will review our 2023 guidance. First up, Q4. Our financial results are summarized on slide 12, and the reconciliation of non-US GAAP measures are described in slides 20 to 23. We recorded net sales of $708.7 million in the quarter, representing organic sales growth of 2.6%. COVID-related net revenues are estimated to have been approximately $55 million in the quarter, an approximate $69 million reduction compared to the prior year. These net revenues include our assessment of components associated with vaccines, treatment, and diagnosis of COVID-19 patients offset by lower sales to customers affected by lower volumes due to the pandemic. Looking at slide 13, proprietary product sales grew organically by 1.8% in the quarter. High value products, which made up approximately 72% of proprietary product sales in the quarter, were flat compared to the prior year. due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the generics market unit delivered double-digit growth led by Envision components and admin systems, while the pharma market unit experienced high single-digit growth led by Novacure and Westar components. And the biologics market unit saw a mid-single-digit decline due to a reduction in sales related to COVID-19 vaccines. Our contract manufacturing segment experienced net sales growth of 7% in the fourth quarter, primarily driven by sales of healthcare-related medical devices. Our adjusted operating profit margin of 22.4% with a 350 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 13.2% for Q4, Excluding stock-based compensation tax benefits of $0.06 in Q4, EPS declined by approximately 13.6%. Now let's review the drivers in both our revenue and profit performance. On slide 14, we show the contributions to sales growth in the quarter. Sales price increases contributed $28.1 million, or 3.8 percentage points of growth. Offsetting price was a foreign currency headwind of approximately $41.3 million and a negative mix impact of $8.9 million, primarily due to a reduction in COVID-19-related net demand. Looking at margin performance, slide 15 shows our consolidated gross profit margin of 37% for Q4 2022, down from 41.1% in Q4 2021. Proprietary products fourth quarter gross profit margin of 41.6% was 470 basis points lower than the margin achieved in the fourth quarter of 2021. The key drivers for the decline in proprietary products gross profit margin were unfavorable mix from a reduction in sales related to COVID-19 vaccine and continued inflationary pressures on our plant costs, including raw materials, labor, and overheads. The headwinds were partially offset by sales price increases. Contract manufacturing fourth quarter gross profit margin of 15.4% was 110 basis points below the margin achieved in the fourth quarter of 2021. The decrease in margin is largely attributed to mix of products sold. Now let's look at our balance sheet and review how we've done in terms of generating more cash. On slide 16, we have listed some key cash flow metrics. Operating cash flow was $724 million for the year, an increase of $140 million compared to the same period last year, a 24% increase. Operating cash flow in the period benefited from our working capital improvement. In 2022, we spent over $284 million on capital expenditures, a 12% increase over 2021. We continue to leverage our CapEx to increase our high-value product manufacturing capacity within our existing facilities in the US, Germany, Ireland, and Singapore. Working capital of approximately $1.4 billion increased by $252.6 million from 2021, primarily due to higher accounts receivable from our increased sales higher inventory levels and an increase in our cash position. Our cash balance at December 31st of $894.3 million is $131.7 million higher than our December 2021 balance. The increase in cash is primarily due to our operating results in the period offset by our share repurchase program and higher CapEx. Turning to guidance, slide 10 provides a high-level summary Full year 2023 net sales guidance will be in a range of $2.935 billion and $2.96 billion. There is an estimated headwind of $30 million based on current foreign exchange rates. We expect organic sales growth to be approximately 3% to 4%. We expect our full year 2023 adjusted diluted EPS guidance to be in a range of $7.25 to $7.40. Also, our CapEx guidance is $350 million for the year. There are some key elements I want to bring your attention to as you review our guidance. Estimated FX headwind on EPS has an impact of approximately 11 cents based on current foreign currency exchange rates. We expect full year COVID-19 related net sales to be approximately $85 million compared to $388 million in 2022. and our guidance excludes future tax benefits from stock-based compensation. I'd now like to turn the call back over to Eric. Thank you, Bernard.

To summarize on slide 17, the solid financial performance shared today continues to reaffirm that our growth strategy is working. We have a durable-based business proven by our market-led approach, which is delivering unique value to our customers. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we're continuing to progress capital spending across our operations to meet current and anticipated future growth. We realize that our products in pursuit of scientific innovations are critical to healthcare across the globe, which is why we're so committed to support patient health today and well into the future. Shannon, we're ready to take questions. Thank you.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Larry Solo with CJS Securities. Your line is now open.

Good morning, guys. Thanks for taking the question. Congrats on a good quarter, better than obviously we expected. Eric, let me just discuss sort of the long-range outlook. HVP, I know you mentioned 72% of revenue in the quarter, but can you speak to it more on a volume basis, and particularly some of the faster-growing and much higher margin, NovaPure, and as you kind of ascend up the HVP curve, if you will, and the opportunities over the next several years?

Yeah, thanks, Larry, and good morning. No, you're right. So if you think about HVP right now, the amount of units produced from our manufacturing sites is roughly around 23%. the total volume but as you brightly pointed out was about 72 percent of our sales in the last quarter and the the higher growth part of that high value product spectrum of the portfolio is coming from our Florida Tech all the way up to Nova Pier so Nova Pier is becoming more meaningful obviously it was a major element of the COVID-19 response and But with the number of biologic launches, the NovaPure is becoming a very attractive solution for our customers. So I would say it's early. The investments that we're making, particularly in our HVP plants of Kinston, Jersey Shore, are around NovaPure plungers and other types of plungers to address future launches. That's where the growth is really, our portion is coming from the higher end of HVP as we speak.

Okay, and how about just... Yeah, go ahead, I'm sorry.

You looked at the CapEx guidance as well, that approximately 70% of that CapEx number is really to support growth initiatives and productivity improvements, and much of that is around high-value products, so that ties in with the outlook that we would see for the next number of years, putting that capacity in place.

What about just generally in the industry? I know the trends have been biologics are obviously growing faster than overall drugs. Has that trend accelerated over the last few years, or what's the outlook there on a general macro level?

Yeah, we believe the biologics and biosilver space is going to be the fastest growing area for new drug launches. If you think about the last year, though, however, it was interesting to see the number of ANDAs and also small molecules approved into the market. And fortunately, we have a strong position in those areas also. But if you kind of fast forward, you'll still see biologics and biosilvers be the fastest growth area in our space.

Got it. And just lastly, can you just give us sort of a brief update? I'm not sure if you talked a little bit about corning at all, but just sort of where we stand there. I know I think last year you had even called out how much you're spending on R&D. I'm sure it's a pretty incremental piece this year as well. But I don't know what you could speak to on the R&D side and the cost, but maybe just sort of where we stand qualitatively, the revenue outlook, and how big this could be over the next few years. Thanks.

Yeah, Larry, it's a really strong partnership, and we're really pleased that earlier this month we were able to announce our first product launch of combining our West Nova Pier stopper and Corning's Valor vials. which what we what we label as a ready pack solution and just to remind everyone is that this is kind of a cedar seed program that we use in the development of new molecules so this has been very successful for us in the past we're leveraging this channel to introduce this combination going forward and You know, it's a great testament of the focus between the two firms on really bringing the products together as a complete solution. And so while this is early, we still have more work to do. We have a number of launches that we have scheduled, whether it's in 2023, 2024. Ultimately, where we want to get to is a complete solution with the one drug master file. So it's a complete, fully characterized system. And so that will continue to require investments. And so if you look at our R&D spend in 2023, it will be slightly up. And a good portion of that incremental piece will be around the West Corning Partnership.

Thank you. As a reminder, we ask that you please limit yourself to one question and one follow-up. Our next question comes from Matt LaRue with William Blair. Your line is now open.

Hey, good morning. Thank you for taking my questions. I just wanted to ask, you referenced sort of the committed order book, and I'm curious maybe if you compare the composition of that order book today versus pre-COVID, obviously, on the non-COVID part, maybe just in terms of what Novapeer and Floritech demand look like. I guess the question is, out of the potential Floritech customers who you start engaging with, what does the conversion look like, excuse me, on the Novapeer side? What do the conversions look like in terms of folks who ultimately end up choosing to go with NovaPure perhaps versus a few years ago?

Yeah, thank you for the question, Matt. So, when I look at the order book versus pre-pandemic and then strip out the COVID piece, overall, it's a net increase from where we were at that point in time. When you look at the composite of the growth of that order book, it is really driven by our high-value products, and particularly the higher end of HVPs. We're seeing a healthy growth in plungers, not just in the NovaPeer sector, but in other categories of HVP. So from a committed order book perspective, that's kind of the characteristics we're seeing right now. In regards to The adoption rate is actually quite high. So our participation rate, particularly in the biologics and biosomers, is very, very strong. And what we are doing is we're seeding with the NovaPeer portfolio. And once that is locked in in the development phase, as they go through into commercialization, that's the end result. better outcomes for our customers, obviously better compatibility with the drug molecule. So we're very excited to see the continuation of that adoption of Novapyr. And that's hence the reason why we're putting these investments in place. And we're seeing more of a transition from vials to pre-filled syringes, which will require our plungers. So that's where we are, but it's a very, very healthy growth profile of the higher end of HPPs.

Thanks, Eric. And then just maybe a cleanup one on the equipment issues you referenced on the third quarter call. How did that end up impacting fourth quarter results relative to expectations of where do things stand, you know, now halfway into the first quarter of 23?

Yeah, so those issues are resolved. The team did a really great job to resolve the issues and get our production facilities back up online. fully validated, characterized, and be able to support commercial production. That was done in, I'd say, mid part of Q4, a little bit later in that part of the quarter. So we're full out right now in Q1. And I'm excited that we have that at this point to allow us to get some of the backlog caught up in the early parts of this year.

Thank you.

Thank you. Our next question comes from the line of Jacob Johnson with Steven. Your line is now open.

Hey, thanks. Good morning. Congrats on this quarter. Maybe kind of following up on that last question, just, Bernard, as we think about how the year plays out, anything you'd highlight in terms of seasonality or kind of margin progression, revenue progression throughout the year, and maybe along those same lines, can you just remind us when you had the toughest comps from COVID that you'll be lapping from 2022?

Yeah, so I think from a cadence perspective, you know, going back to what we would have seen kind of pre-COVID, where first quarter is usually a little bit lighter, picks up a bit in the second quarter and then levels out in Q3 and Q4. And from a comp perspective, You know, I think a lot of the COVID revenues we would have had would have been, you know, in the first half of 2022. So that's where I won't say a challenge is, but that's where the biggest comps are going to be from that perspective. And then some in Q3, and then obviously lighter in Q4.

Got it. Thanks for that. And then... On contract manufacturing, nice to see a return to growth there, you know, uptick in revenue in the quarter. I think gross margin was down sequentially. Can you just hit on what drove both and maybe related? You're pointing to, I think, pretty robust growth in 2023. Were there some investments you're making for this year and kind of, again, along the same lines? What's driving the growth in that business in 2023? Yeah.

Yeah, I think as you'll remember when we were talking through 2022, a lot of the challenges we faced within contract manufacturing was really around one customer mainly and a shift in their business. And so as that kind of tailed off towards the back end of the year, it allows us to be able to return to growth. Then we actually saw demand increase from our existing customer base probably a little bit ahead of where we would have anticipated going into the fourth quarter. So that was, again, positive to see. And what we would expect as we move into 2023, that we will be seeing mid-single digit growth for contract manufacturing on our existing business and then layering in new business at the same time. So we continue to make some investments in that area.

Got it. Thanks for the question.

Thank you. Our next question comes from the line of Paul Knight with KeyBank. Your line is now open.

Yeah, thanks, Eric and Bernard and Quinton. The question is, I, you know, touched on it, I guess, is COVID probably starts slow, then they manufacture more product Q2, Q3, right, and then less in Q4. That's a question that's One, and then the other would be regarding this pre-filled syringe market. Is that really what you're seeing as biggest opportunity right now?

Yeah, good morning, Paul. That's a good question. So the first part is that when we think about the COVID, we're looking about right now approximately 85 million for 2023. It's relatively... kind of evenly spread. We can't get any more granular than that at this point, but as you know, we were much higher than that last year, so we do have the capabilities to manufacture accordingly. In regards to the pre-filled syringe, when you think about our investments, particularly in the last couple years and working with some of the launches and anticipation, around plungers, which obviously supports the pre-filtering space, is actually, we're anticipating higher growth in that area. And that is, equipment's coming online as we speak. I mentioned a little bit in my remarks about Kinston. A lot of the additional equipment in there is really geared around plungers. And so I'm excited to be able to support that part of the market as we see the pre-filled syringe market continue to expand with high growth. So we're going to play in that, and we're prepared for it, and that's where investments are really focused on today. Thanks. Thanks, Paul.

Thank you. Our next question comes from the line of Derek from America. Your line is now open.

Hi, good morning. Morning, Derek. So can you talk a little bit about sort of like pricing? You got about 4% in 4Q. How should we think about that in 23? I know you were debating taking some higher pricing or looking at your pricing dynamics as things are going forward. And I guess, have you done that? And have you seen any pushback from your customers?

Yeah, thanks for the question. So you're right. We have implemented in the fourth quarter of 2022, obviously discussions with our customers about the 2023 calendar year. Our net price increase will go up in 2023. And that is obviously for all the right reasons, particularly with some of the inflationary challenges. and so forth that I think all industries are being faced with. So I think the team responded appropriately. I believe we took a very well-balanced approach. We do have certain customers on contracts, so we do have some limitations. However, overall, with the new pricing team and strategy we put in place a couple of years ago, we're starting to see that pay off. So that will be rolling out as we speak and already this quarter and be rolling throughout 2023. But, Bernard, do you want to provide more color on that?

Yes, or I think in the fourth quarter we said we did about 3.8% of pricing for targeting. 5% to 6% on price as we move through 2023. So it is a bit of a step up. Part of that is to take into account the inflationary cost pressures that we're also seeing. But as Eric said, you can see the trajectory in our price increases over the last number of years and how we're approaching that. That's also been on the increase.

Great. Just a little bit of an accounting question. What was the tailwind from stock-based comp in 22? And your initial tax rates are never what you end up being with for the full year. So is it reasonable to think you get a comparable benefit in 23?

We guide without it because it's very hard for us to estimate us. If you look at Last year, it was about 22 cents, I believe. So we guide without a reason because it is so hard for us to predict. That's kind of outside of our control.

Got it. And if I can squeeze one more in, if you don't mind. How should we think about the economics on the pre-filled syringes? I mean, obviously, there's a lot of new drugs coming out for metabolic disease, for obesity. And how should we think about your potential profitability or the revenues associated with one of those units? And just give some way to sort of like ballpark what your, I mean, what your revenue contribution could be on, something like that.

Yeah, so if you think about the pre-filled syringe area and the plungers, we are, it depends on, if it's Nova Pure, it's pretty comparable to, we talk about the $0.80 to over a dollar a unit. But if it's not the NovaPeer, other types of HVPs, you have a very large range between, you know, let's call it 40 cents per unit. So you can see the range that we're operating in. From a margin perspective, again, it is HVP, and that could range anywhere between 55% to 80%. So I'm giving you a very broad range because not all molecules have the same requirements. um but what's what's good around our investment thesis in our facilities to get around plungers is that the equipment and the processes are somewhat fungible so um we can leverage the existing assets we're putting into the current drug launches but also the anticipated areas of potential growth so we're we're positioned well okay thank you very much thank you thank you

Our next question comes from the line of John Sorbier with UBS. Your line is now open.

Hi. Thanks for taking the questions. I guess maybe digging in a little bit more on the new capacity coming online in the CapEx. Any color just on pacing there for the year? And then just to follow up on that equipment and the delays at 3Q, I think that was around a $30 million a month headwind. Can we assume now that this is up that that's contributing around $30 million a month as well?

The impact in Q3 was about $30 million. And that may vary depending on volume and mix as we go through each quarter. So it's hard to say it's $30 million each quarter. It would be difficult to commit to that at this point. But in saying that, all of those problems that we had, in Q3 have been resolved, as Eric kind of talked about earlier, and much of that happened as we progressed through Q4. On the pacing of layering in UCAP-X, that will happen as we move through 2023. So it's not all at once. We'll see some of it as we get into the back end of the second quarter, particularly in Kinston where we are getting new parts of our facility up and running with the equipment that we've installed there. And then as we progress through the year, there will be equipment layered in in the other HVP sites.

I appreciate it. And then I guess just maybe on COVID, it looks like, you know, you lowered the guidance there slightly. I guess just any thoughts on just, you know, where, you know, endemic levels go from here? You know, how much more further drops do you think that you see coming down from COVID beyond 2023?

It's hard to estimate that. We're given our best estimate based on the information that we have today. If we thought it was going to drop any further, we would have included that in the guidance. But based on what we see today, that's where we think it's going to play out.

Thanks for taking the question. Thank you.

Thank you. Our next question comes from the line of David Windley with Jefferies. Your line is now open.

Hi, thanks for taking my question. I hope you can hear me. I've got a couple of follow-ups, but I wanted to start with just asking if you would level set where the market units are with kind of generics having a strong end of the year and biologics down. Those are kind of opposite directions than is normal. What's the kind of relative sizing of your four for segments of the business so we have a base to work off of? Thank you.

Yeah, so if you look at biologics as we go into 2023, the biggest drop or the biggest impact of COVID revenues reducing is within the biologic segment. So we do see a reduction there. But if you back that out, we're actually seeing very strong double-digit growth within the biologic segment for our core business. And then as we progress through 23 on generics, again, we would be looking to see high single-digit, early double-digit growth, pharma, high single-digit, and then contract manufacturing, as we said earlier, mid-single-digit growth.

Okay. And, Barnard, so to – Apply those. So is it like I think biologics was 40 to 45%. I'm just looking for should I think about with the kind of COVID correction that it's closer to the 40. I'm just looking for kind of, you know, the percentages to apply those growth percentages to.

Yeah, biologics was mid 40s. It's going to come back a slight bit. So you're probably 40 to 45%. And then I think contract was about 17 or 18. That's fine.

I can follow up offline. On the installation of the equipment and, Eric, we talked about in Kinston the washing equipment and that process, I guess I was under the impression that that was specifically NovaPure and maybe even more specifically NovaPure plunger equipment but Berner's answer to the last question that it kind of varies you know that that 30 million a month will vary based on volume and mix maybe I misunderstood what you know how fungible that equipment is across your product line so perhaps you could further elaborate on that please

yeah no absolutely so specifically of the equipment that we discussed about q3 um that that was ongoing operations not specifically just nova pier so you have you have washers that wash pharmaceutical washing capability that supports really the high value product portfolio the vision that you uh to envision the equipment that you um that you were able to see that is for NovaPeer. So some of the equipment is not fungible, but the core elements of the equipment is. But the growth that we're having based off of that equipment you looked at was really around The heavy part about it is Novapeer. There's some mixed effect to it. And then the future investments we're making that you saw in Kinston, that is, again, it's a wide range of high-value products. Floratech all the way up to Novapeer.

Okay. So where I wanted to go with that, and I'll make this my last one, is you're – You're losing the year-over-year COVID, you know, $300-ish million. Management's made the point that that has been very high gross margin, high incremental margin revenue. And so that creates, I think, contributes to this transition year on margin, Eric, that you mentioned in your prepared remarks. It seems like as you've put some of this equipment in place that was the holdup in 3Q, again, your last answer helps me to understand that better. but the revenue potential that that equipment unlocks is in the neighborhood of the revenue that you're losing from COVID. I guess I now understand that maybe the margin on that revenue that's coming in is perhaps not quite as rich as COVID. You could confirm that for me, but just thinking about that and any other factors that we should be keeping in mind that influence that margin transition, you know, that are not as rich as the COVID revenue that is coming off. Thanks.

Yeah, Dave, I'll take that. And just going back to your last question on the splits, just to clear that up. So as a percentage of proprietary sales, biologics is like mid-40s, generics mid-20s, and then pharma... and a low 30% range. That'll get you to the split. With regard to your question on margin, it's not as simple as one product coming out and another product going in. So we're looking at it where there's a mixed impact, obviously, with the COVID, revenues falling off, and there have been higher margin products. And we've also got the impact of inflation on our cost base So you've got those two headwinds. And then as we alluded to, or we talked about earlier, is the increase in price that we're seeing is above what we would normally see in our business. So that helps offset some of this margin pressure. And then we have very specific cost initiatives within our business, both from an operations manufacturing perspective and then on SG&A and R&D, really looking at cost control and cost management. And that is delivering a number of efficiencies for us. So it helps us to overcome some of the margin challenges, but not all of them. And then that goes back to the point earlier where we're not actually margin is stepping back to pre-COVID levels. We're maintaining or holding on to a lot of the improvements that we made or the gains that we made.

That's very helpful. Thank you.

Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.

Hi, good morning, everyone. Just piggybacking on Dave's question, can you help us understand, and maybe it's a range of sort of what the margin profile is on the C-19 business, and then with respect to the new capacity that's coming online in 2023, can you help us understand how that phases in? Is it You know, is it more second half loaded? Any color there would be helpful.

So the margin on the COVID products, you know, would have been at the higher end of our margin range, you know, because a lot of that was Nova Pure. So you could have been looking at, you know, a range of 60% to 70% plus. And then on the CapEx piece, on that being layered in, A lot of it has been layered in and commissioned as we speak, but to see the impact of it will be more so in the back half of the year when it's fully operational and we're able to put a lot of volume through.

Understood. And then just a quick one on China. Maybe a status update on the two plants over there and any thoughts on how that impacts the progression of the year?

In China, our business impact for West overall is quite low. A lot of the activity that manufacturing we do in China is for China. And so we have a really strong team there in our facility in Qingpu that continues to capture more share within the market, but our reliance on our team there to export is very low. And again, overall, values or revenues and profits to the corporation is very small. So that's our impact in China. Our supply chain, if you think about procuring materials, is not heavily dependent on that part of the world. The team's done a really good job. Many of our products are co-located to our manufacturing sites. So that's how we've set up our procurement and supply chain of raw materials.

That's helpful. Appreciate it. Great.

Thank you.

Thank you. I would now like to turn the conference back over to Quentin Lai for closing remarks.

Thanks, Shannon. And thank all of you for joining us on today's conference call. An online archive of the broadcast will be available on our website at westfarmer.com in the investor section. Additionally, you may access a replay for 30 days following this presentation by using the dial-in numbers and conference ID. provided at the end of today's earnings release. That concludes this call. Have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. you Thank you. Thank you. Good day, and thank you for standing by. Welcome to West Pharmaceutical Services' fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Quentin Lai, Vice President, Investor Relations. Please go ahead.

Thank you, Shannon. Good morning, and welcome to West's fourth quarter and full year 2022 conference call. We issued our financial results this morning, and the release has been posted in the investor section on the company's website located at westfarmer.com. This morning, Eric Green and Bernard Burkett will review our financial results, provide an update on our business, and present an update on our financial outlook for the full year 2023. There's a slide presentation that accompanies today's call, and a copy of that presentation is available on the investor section of our website. On slide four is our safe harbor statement. Statements made by management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our police and assumptions, current expectations, estimates, and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results, as well as those expressed or implied in any forward-looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risk to which it is subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to non-GAAP financial measures including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results compared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to our CEO, Eric Green.

Thank you, Quentin, and good morning, everyone. Thanks for joining us today. We will start on slide five. For over 100 years, the West name has come to mean so much to so many people. We have grown and expanded from manufacturing primary containment components to designing and manufacturing delivery systems. This remains the same today as a global market leader who continues to define the evolution of our industry. Our 10,000-plus team members are motivated by improving patient lives. The past few years have been a reminder that the world doesn't stand still, and the needs of the healthcare industry are evolving and growing in complexity, with shifting treatment options from the hospital to home setting. We remain committed to the pursuit of scientific innovation and partnerships to address the changing needs of today and into the future. Moving to slide six. Looking back at the year, I'm pleased to report that West delivered overall organic sales growth of approximately 8%. This growth was generated despite a rapidly shifting pandemic landscape. We started 2022 expecting COVID-19 volume growth, but instead declining orders and demand from our customers actually resulted in a 15% decline in pandemic-related sales. Excluding COVID-19, we estimate their base organic sales growth was low double-digit, with mid-teens growth in proprietary products. And driving this base growth is demand for our high-value product offerings for both legacy as well as recently launched drugs. And we ended the year with a return to growth in Q4 and contract manufacturing. This performance is a result of the dedication and relentless focus of our team members across the globe. We are connected by a strong responsibility and shared values that continue to help us succeed each day. I want to acknowledge these efforts and say thank you. Looking ahead, we remain well positioned with the right growth strategy around execute, innovate, and grow. Our solid order book of committed orders reinforces the criticality of West components and devices to address our customers growing injectable drug demand. And we continue to deploy capital investments to support the increase in demand driven by the attractive end markets. Turning to slide seven. In addition to our financial momentum, there were several other notable accomplishments in 2022. We shipped close to 47 billion components, touching billions of patient lives. As scientific and technical leaders in the industry, our customers expect us to help solve their problems. We continue to broaden insights with our expertise through our webinars, published articles, and technical presentations. We partnered with Corning to build the next generation of leading elastomer glass systems. We launched Dicul CZ 2.25 ML insert needle syringe to support the biologics market and secured three additional FDA approved drugs using our smart dose technology as we continue to bring additional value to our customers. Lastly, We donated $2.75 million, but more importantly, our team members continue to volunteer their time to help our local communities with the greatest needs. Our heartfelt thoughts are with all those impacted by the devastating earthquake in Turkey and Syria, where we have provided aid through UNICEF. Shifting to slide eight, we continue to factor environmental considerations into every aspect of our business. Over the past five years, we have made tremendous strides across the six priority areas and newly defined performance indicators. I'm pleased that we're on target with 90% of our operational waste not being sent to landfills. Our pursuit of renewable energy alternatives has aided in a positive impact in the emission reduction. These efforts have been recognized with numerous ESG accolades in 2022. We look forward to sharing more detail in our corporate responsibility report to be published in the spring. Turning to slide 9, we continue to address the growing market needs with today's complex and sensitive molecules. At the recent PharmaPact meeting, we introduced several new products for large volume delivery and complete vial containment solutions. One available product is our West Ready Pack with Corning's Valor Ready-to-Use Vials. This will be the first of many products from our Corning partnership. The combination of these products eliminates the risk of delamination and reduces glass particulate in bulk filling lines. It is drug delivery innovations like this that ensures best-in-class performance with a value proposition to meet the increased regulatory expectations with a complete vial containment solution. Moving to slide 10, we are introducing four-year 2023 financial guidance. This guidance is based on demand trends as well as our current capacity levels. is also reinforced by our strong west and dicule participation rate in drug approvals especially in biologics and biosimilars we expect full year overall organic sales growth of approximately three to four percent which includes a 303 million dollar year-over-year decline in pandemic related sales excluding this impact we expect mid-teens overall based organic sales growth with proprietary products growth in the high teens and high single-digit growth in contract manufacturing. 2023 will represent a transition year for our margin profile as we see a headwind from COVID-19 HVPs. That said, our expected margins for this year are significantly above pre-pandemic 2019 levels. This underscores the strength of our financial construct with annual margin expansion of 100 basis points or more per year. In 2019, we posted operating margin of 16.1%. In 2023, we expect operating margin of 23 to 24%, which would represent an increase of approximately 800 basis points over a four-year period. Also, today we announced that the Board of Directors has authorized a new share repurchase plan, as our prior plan was completed last year. This program is authorized for up to $1 billion of share repurchase. We note that this new program does not have a specified end date. As comparison, in 2022, our 12-month program was completed at $203 million of buybacks, and in 2021, our 12-month program was completed at $137 million of buybacks. This new $1 billion program will provide for a continuation of our share count neutral strategy, which is assumed in our 2023 full-year financial guidance. We believe this program will also provide flexibility for incremental share repurchases depending on various factors such as economic and market conditions. Turning to slide 11. As you can see from our guidance, we see continued base momentum in 2023, and we're planning for further additional growth as our customers are preparing for expanded success of their current biologics portfolio and drug launches. As such, we continue to drive forward to complete the installation of our capital expansion plans for additional HVP capacity. The picture shows the progression of our ongoing efforts. On my recent visit to Kinston, it was impressive to see the additional space added to accommodate the installation of new manufacturing equipment to address the growth of HVPs and plungers. Together with other site expansions, this will support future demand across our global manufacturing network. Now I'd like to turn the call over to Bernard.

Thank you, Eric, and good morning. We'll first look at Q4 2022 revenues and profits. where we saw low single-digit organic sales growth and a decline in operating profit and diluted ETFs. I will take you through the drivers impacting sales and margin in the quarter, as well as some balance sheet takeaways. And finally, we will review our 2023 guidance. First up, Q4. Our financial results are summarized on slide 12, and the reconciliation of non-US GAAP measures are described in slides 20 to 23. We recorded net sales of $708.7 million in the quarter, representing organic sales growth of 2.6%. COVID-related net revenues are estimated to have been approximately $55 million in the quarter, an approximate $69 million reduction compared to the prior year. These net revenues include our assessment of components associated with vaccines, treatment, and diagnosis of COVID-19 patients offset by lower sales to customers affected by lower volumes due to the pandemic. Looking at slide 13, proprietary product sales grew organically by 1.8% in the quarter. High value products, which made up approximately 72% of proprietary product sales in the quarter, were flat compared to the prior year. due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the generics market unit delivered double-digit growth led by Envision components and admin systems, while the pharma market unit experienced high single-digit growth led by Novacure and Westar components. And the biologics market unit saw a mid-single-digit decline due to a reduction in sales related to COVID-19 vaccines. Our contract manufacturing segment experienced net sales growth of 7% in the fourth quarter, primarily driven by sales of healthcare-related medical devices. Our adjusted operating profit margin of 22.4%, with a 350 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 13.2% for Q4, Excluding stock-based compensation tax benefits of $0.06 in Q4, EPS declined by approximately 13.6%. Now let's review the drivers in both our revenue and profit performance. On slide 14, we show the contributions to sales growth in the quarter. Sales price increases contributed $28.1 million, or 3.8 percentage points of growth. Offsetting price was a foreign currency headwind of approximately $41.3 million and a negative mix impact of $8.9 million, primarily due to a reduction in COVID-19-related net demand. Looking at margin performance, slide 15 shows our consolidated gross profit margin of 37% for Q4 2022, down from 41.1% in Q4 2021. Proprietary products fourth quarter gross profit margin of 41.6% was 470 basis points lower than the margin achieved in the fourth quarter of 2021. The key drivers for the decline in proprietary products gross profit margin were unfavorable mix from a reduction in sales related to COVID-19 vaccine and continued inflationary pressures on our plant costs, including raw materials, labor, and overheads. The headwinds were partially offset by sales price increases. Contract manufacturing fourth quarter gross profit margin of 15.4% was 110 basis points below the margin achieved in the fourth quarter of 2021. The decrease in margin is largely attributed to mix of products sold. Now let's look at our balance sheet and review how we've done in terms of generating more cash. On slide 16, we have listed some key cash flow metrics. Operating cash flow was $724 million for the year, an increase of $140 million compared to the same period last year, a 24% increase. Operating cash flow in the period benefited from our working capital improvement. In 2022, we spent over $284 million on capital expenditures, a 12% increase over 2021. We continue to leverage our CapEx to increase our high-value product manufacturing capacity within our existing facilities in the US, Germany, Ireland, and Singapore. Working capital of approximately $1.4 billion increased by $252.6 million from 2021, primarily due to higher accounts receivable from our increased sales higher inventory levels, and an increase in our cash position. Our cash balance at December 31st of $894.3 million is $131.7 million higher than our December 2021 balance. The increase in cash is primarily due to our operating results in the period offset by our share repurchase program and higher CapEx. Turning to guidance, slide 10 provides a high-level summary Full year 2023 net sales guidance will be in a range of $2.935 billion and $2.96 billion. There is an estimated headwind of $30 million based on current foreign exchange rates. We expect organic sales growth to be approximately 3 to 4%. We expect our full year 2023 adjusted diluted EPS guidance to be in a range $7.25 to $7.40. Also, our CapEx guidance is $350 million for the year. There are some key elements I want to bring your attention to as you review our guidance. Estimated FX headwind on EPS has an impact of approximately 11 cents based on current foreign currency exchange rates. We expect full year COVID-19 related net sales to be approximately $85 million compared to $388 million in 2022. and our guidance excludes future tax benefits from stock-based compensation. I'd now like to turn the call back over to Eric. Thank you, Bernard.

To summarize on slide 17, the solid financial performance shared today continues to reaffirm that our growth strategy is working. We have a durable-based business proven by our market-led approach, which is delivering unique value to our customers. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we're continuing to progress capital spending across our operations to meet current and anticipated future growth. We realize that our products in pursuit of scientific innovations are critical to healthcare across the globe, which is why we're so committed to support patient health today and well into the future. Shannon, we're ready to take questions. Thank you.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Larry Solo with CJS Securities. Your line is now open.

Good morning, guys. Thanks for taking the question and Congrats on a good quarter, better than obviously we expected. Eric, maybe you could just discuss sort of the long-range outlook. HVP, I know you mentioned 72% of revenue in the quarter, but can you speak to it more on a volume basis, and particularly some of the faster-growing and much higher margin, you know, NovaPure, and as you kind of ascend up the HVP curve, if you will, and the opportunities over the next several years?

Yeah, thanks, Larry, and good morning. No, you're right. So if you think about HVP right now, the amount of units produced from our manufacturing sites is roughly around 23%. of the total volume, but as you brightly pointed out, it was about 72% of our sales in the last quarter. And the higher growth part of that high value product spectrum of the portfolio is coming from our Floratech all the way up to NovaPeer. So NovaPeer is becoming more meaningful. Obviously it was a major element of the COVID-19 response, But with the number of biologic launches, the NovaPure is becoming a very attractive solution for our customers. So I would say it's early. The investments that we're making, particularly in our HVP plants of Kinston, Jersey Shore, are around NovaPure plungers and other types of plungers to address future launches. That's where the growth is really, our portion is coming from the higher end of HVP as we speak.

Okay, and how about just... Yeah, go ahead, I'm sorry.

You looked at the CapEx guidance as well, that approximately 70% of that CapEx number is really to support growth initiatives and productivity improvements, and much of that is around high-value products, so that ties in with the outlook that we would see for the next number of years, putting that capacity in place.

And what about just generally in the industry? I know the trends have been biologics are obviously growing faster than overall drugs. Has that trend accelerated over the last few years, or what's the outlook there on a general macro level?

Yeah, we believe the biologics and biosilver space is going to be the fastest growing area for new drug launches. If you think about the last year, though, however, it was interesting to see the number of ANDAs and also small molecules approved into the market. And fortunately, we have a strong position in those areas also. But if you kind of fast forward, you'll still see biologics and biosilvers be the fastest growth area in our space. Got it.

And just lastly, can you just give us sort of a brief update? I'm not sure if you talked a little bit about corning at all, but just sort of where we stand there. I know I think last year you had even called out how much you're spending on R&D. I'm sure it's a pretty incremental piece this year as well. But I don't know what you could speak to on the R&D side and the cost, but maybe just sort of where we stand qualitatively, the revenue outlook, and how big this could be over the next few years. Thanks.

Yeah, Larry, it's a really strong partnership, and we're really pleased that earlier this month we were able to announce our first product launch of combining our West Nova Pier stopper and Corning's Valor vials, which what we label as our ReadyPak solution. And just to remind everyone that this is kind of a seeder or a seed program that we use in the development of new molecules. So this has been very successful for us in the past. We're leveraging this channel to introduce this combination going forward. You know, it's a great testament of the focus between the two firms on really bringing the products together as a complete solution. So while this is early, we still have more work to do. We have a number of launches that we have scheduled, whether it's in 2023, 2024. Ultimately, where we want to get to is a complete solution with the one drug master file. So it's a complete fully characterized system. And so that will continue required investments. And so if you look at our R&D spend in 2023, it will be slightly up. And a good portion of that incremental piece will be around the West Corning Partnership.

Thank you. As a reminder, we ask that you please limit yourself to one question and one follow-up. Our next question comes from Matt LaRue with William Blair. Your line is now open.

Hey, good morning. Thank you for taking my questions. I just wanted to ask, you referenced sort of the committed order book, and I'm curious maybe if you compare the composition of that order book today versus pre-COVID, obviously, on the non-COVID part, maybe just in terms of what Novapeer and Floritech demand look like. I guess the question is, out of the potential Floritech customers who you start engaging with, what does the conversion look like, excuse me, on the Novapeer side? What are the conversions look like in terms of folks who ultimately end up choosing to go with NovaPure perhaps versus a few years ago?

Yeah, thank you for the question, Matt. So, when I look at the order book versus pre-pandemic and then strip out the COVID piece, overall, it's a net increase from where we were at that point in time. When you look at the composite of the growth of that order book, it is really driven by our high-value products, in particular the higher-end HVPs. We're seeing a healthy growth in plungers, not just in the NovaPeer sector, but in other categories of HVP. So from a committed order book perspective, that's kind of the characteristics we're seeing right now. In regards to The adoption rate is actually quite high. So our participation rate, particularly in the biologics and biosimilars, is very, very strong. And what we are doing is we're seeding with the NovaPeer portfolio. And once that is locked in in the development phase, as they go through into commercialization, that's the end result. better outcomes for our customers, obviously better compatibility with the drug molecule. So we're very excited to see the continuation of that adoption of Novapyr. And that's hence the reason why we're putting these investments in place. And we're seeing more of a transition from vials to pre-filled syringes, which will require our plungers. So that's where we are, but it's a very, very healthy growth profile of the higher end of HPPs.

Thanks, Eric. And then just maybe a cleanup one on the equipment issues you'd referenced on the third quarter call. How did that end up impacting fourth quarter results relative to expectations of where do things stand, you know, now halfway into the first quarter of 23?

Yeah, so those issues are resolved. The team did a really great job to resolve the issues and get our production facilities back up online. fully validated, characterized, and be able to support commercial production. That was done in, I'd say, mid part of Q4, a little bit later in that part of the quarter. So we're full out right now in Q1. And I'm excited that we have that at this point to allow us to get some of the backlog caught up in the early parts of this year.

Thank you.

Thank you. Our next question comes from the line of Jacob Johnson with Steven. Your line is now open.

Hey, thanks. Good morning. Congrats on this quarter. Maybe kind of following up on that last question, just, Bernard, as we think about how the year plays out, anything you'd highlight in terms of seasonality or kind of margin progression, revenue progression throughout the year, and maybe along those same lines, can you just remind us when you had the toughest comps from COVID that you'll be lapping from 2022?

Yeah, so I think from a cadence perspective, you know, going back to what we would have seen kind of pre-COVID, where first quarter is usually a little bit lighter, picks up a bit in the second quarter and then levels out in Q3 and Q4. And from a comp perspective, You know, I think a lot of the COVID revenues we would have had would have been, you know, in the first half of 2022. So that's where I won't say a challenge is, but that's where the biggest comps are going to be from that perspective. And then some in Q3, and then obviously lighter in Q4. Got it.

Thanks for that. And then... On contract manufacturing, nice to see a return to growth there, you know, uptick in revenue in the quarter. I think gross margin was down sequentially. Can you just hit on what drove both and maybe related? You're pointing to, I think, pretty robust growth in 2023. Were there some investments you're making for this year and kind of, again, along the same lines? What's driving the growth in that business in 2023? Yeah.

Yeah, I think as you'll remember when we were talking through 2022, a lot of the challenges we faced within contract manufacturing was really around one customer mainly and a shift in their business. And so as that kind of tailed off towards the back end of the year, it allows us to be able to return to growth. Then we actually saw demand increase from our existing customer base probably a little bit ahead of where we would have anticipated going into the fourth quarter. So that was, again, positive to see. And what we would expect as we move into 2023, that we will be seeing mid-single-digit growth for contract manufacturing on our existing business and then layering in new business at the same time. So we continue to make some investments in that area.

Got it. Thanks for taking the question.

Thank you. Our next question comes from the line of Paul Knight with KeyBank. Your line is now open.

Yeah, thanks, Eric and Bernard and Quintin. The question is, I, you know, touched on it, I guess, is COVID probably starts slow. Then they manufacture more product Q2, Q3, right, and then less in Q4. That's a question that's One, and then the other would be regarding this pre-filled syringe market. Is that really what you're seeing as biggest opportunity right now?

Yeah, good morning, Paul. That's a good question. So the first part is that when we think about the COVID, we're looking about right now approximately $85 million for 2023. It's relatively... kind of evenly spread. We can't get any more granular than that at this point, but as you know, we were much higher than that last year, so we do have the capabilities to manufacture accordingly. In regards to the pre-filled syringe, when you think about our investments, particularly in the last couple years and working with some of the launches and anticipation, around plungers, which obviously supports the prefilled turn space, is actually, we're anticipating higher growth in that area. And that is, equipment's coming online as we speak. I mentioned a little bit in my remarks about Kinston. A lot of the additional equipment in there is really geared around plungers. And so I'm excited to be able to support that part of the market as we see the pre-filled syringe market continue to expand with high growth. So we're going to play in that, and we're prepared for it, and that's where investments are really focused on today.

Thanks.

Thanks, Paul.

Thank you. Our next question comes from the line of Derek from America. Your line is now open.

Hi, good morning. Morning, Derek. So can you talk a little bit about sort of like pricing? You got about 4% in 4Q. How should we think about that in 23? Are you I know you were debating taking some higher pricing, or looking at your pricing dynamics as things are going forward. And I guess if you have you done that? And are you have you seen any pushback from your customers?

Yeah, thanks for the question. So you're right. We have implemented in the fourth quarter of 2022, obviously discussions with our customers about the 2023 calendar year. Our net price increase will go up in 2023. And that is obviously for all the right reasons, particularly with some of the inflationary challenges. and so forth that I think all industries are being faced with. So I think the team responded appropriately. I believe we took a very well-balanced approach. We do have certain customers on contracts, so we did have some limitations. However, overall, with the new pricing team and strategy we put in place a couple of years ago, we're starting to see that pay off. So that will be rolling out as we speak and already this quarter and be rolling throughout 2023. But, Bernard, do you want to provide more color on that? Yes.

I think in the fourth quarter we said we did about 3.8% in pricing for targeting. 5 to 6% on price as we move through 2023. So it is a bit of a step up, you know, and part of that is to take into account the inflationary cost pressures that we're also seeing. But as Eric said, you can see the trajectory in our price increases over the last number of years and how we're approaching that, you know, that's also been on the increase.

Great. Just a little bit of an accounting question. What was the tailwind from stock-based comp in 22? And your initial tax rates are never what you end up being with for the full year. So is it reasonable to think you get a comparable benefit in 23?

We guide without it because it's very hard for us to estimate it. If you look at Last year, it was about 22 cents, I believe. So we guide without a reason because it is so hard for us to predict. That's kind of outside of our control.

Got it. And if I can squeeze one more in, if you don't mind. How should we think about the economics on the pre-filled syringes? I mean, obviously, there's a lot of new drugs coming out for metabolic disease, for obesity. And how should we think about your potential profitability or the revenues associated with one of those units? And just give some way to sort of like ballpark what your, I mean, what your revenue contribution could be on, something like that.

Yeah, so if you think about the pre-filled syringe area and the plungers, we are, it depends on, if it's Nova Pure, it's pretty comparable to, we talk about the $0.80 to over a dollar a unit. But if it's not the NovaPeer, other types of HVPs, you have a very large range between, you know, let's call it 40 cents per unit. So you can see the range that we're operating in. From a margin perspective, again, it is HVP, and that could range anywhere between 55 to 80%. So I'm giving you a very broad range because not all molecules have the same requirements. but what's what's good around our investment thesis in our facilities to get around plungers is that the equipment and the processes are somewhat fungible so we can leverage these existing assets we're putting into the current drug launches but also anticipated areas of potential growth so we're we're positioned well thank you very much thank you thank you

Our next question comes from the line of John Sorbear with UBS. Your line is now open.

Hi. Thanks for taking the questions. I guess maybe digging in a little bit more on the new capacity coming online in the CapEx. Any color just on pacing there for the year? And then just to follow up on that equipment and the delays at 3Q, I think that was around a $30 million a month headwind. Can we assume now that this is up that that's contributing around $30 million a month as well?

The impact in Q3 was about $30 million and that may vary depending on volume and mix as we go through each quarter so it's hard to say it's $30 million each quarter. It would be difficult to commit to that at this point but in saying that all of those problems that we had in Q3 have been resolved, as Eric kind of talked about earlier, and much of that happened as we progressed through Q4. On the pacing of layering in UCAP-X, that will happen as we move through 2023. So it's not all at once. We'll see some of it as we get into the back end of the second quarter, particularly in Kinston where we are getting new parts of our facility up and running with the equipment that we've installed there. And then as we progress through the year, there will be equipment layered in in the other HVP sites.

I appreciate it. And then I guess just maybe on COVID, it looks like, you know, you lowered the guidance there slightly. I guess just any thoughts on just, you know, where, you know, endemic levels go from here? You know, how much more further drops do you think that you see coming down from COVID beyond 2023?

It's hard to estimate that. We're given our best estimate based on the information that we have today. If we thought it was going to drop any further, we would have included that in the guidance. But based on what we see today, that's where we think it's going to play out.

Got it. Thanks for taking the question. Thank you.

Thank you. Our next question comes from the line of David Windley with Jefferies. Your line is now open.

Hi, thanks for taking my question. I hope you can hear me. I've got a couple of follow-ups, but I wanted to start with just asking if you would level set where the market units are with kind of generics having a strong end of the year and biologics down. Those are kind of opposite directions than is normal. What's the kind of relative sizing of your four for segments of the business so we have a base to work off of? Thank you.

Yeah, so if you look at biologics as we go into 2023, the biggest drop or the biggest impact of COVID revenues reducing is within the biologic segment. So we do see a reduction there. But if you back that out, we're actually seeing very strong double-digit growth within the biologic segment for our core business. And then as we progress through 23 on generics, again, we would be looking to see high single-digit, early double-digit growth, pharma, high single-digit, and then contract manufacturing, as we said earlier, mid-single-digit growth.

Okay. And, Barnard, so to – Apply those. So is it like I think biologics was 40 to 45%. I'm just looking for should I think about with the kind of COVID correction that it's closer to the 40. I'm just looking for kind of, you know, the percentages to apply those growth percentages to.

Yeah, biologics was mid 40s. It's going to come back a slight bit. So you're probably 40 to 45%. And then

was pharma and contract was about 17 or 18 um that's fine i can follow up offline um on the uh on the installation of the equipment and and uh eric we talked about in kinston the um you know washing equipment in that process um i guess i was under the impression that that was specifically NovaPure and maybe even more specifically NovaPure plunger equipment, but Berner's answer to the last question, that it kind of varies, you know, that that $30 million a month will vary based on volume and mix. Maybe I misunderstood what, you know, how fungible that equipment is across your product line, so perhaps you could further elaborate on that, please.

Yeah, no, absolutely. So specifically the equipment that we discussed about Q3, that was ongoing operations, not specifically just NovaPeer. So you have washers that – pharmaceutical washing capability that supports really the high-value product portfolio. The vision that you – the envisioning equipment that you – that you were able to see that is for NovaPeer. So some of the equipment is not fungible, but the core elements of the equipment is. But the growth that we're having based off of that equipment you looked at was really around The heavy part about it is Novapeer. There's some mixed effect to it. And then the future investments we're making that you saw in Kinston, that is, again, it's a wide range of high-value products. Floratech all the way up to Novapeer.

Okay. So where I wanted to go with that, and I'll make this my last one, is you're – You're losing the year-over-year COVID, you know, $300-ish million. Management's made the point that that has been very high gross margin, high incremental margin revenue. And so that creates, I think, contributes to this transition year on margin, Eric, that you mentioned in your prepared remarks. It seems like as you've put some of this equipment in place that was the holdup in 3Q, again, your last answer helps me to understand that better. but the revenue potential that that equipment unlocks is in the neighborhood of the revenue that you're losing from COVID. I guess I now understand that maybe the margin on that revenue that's coming in is perhaps not quite as rich as COVID. You could confirm that for me, but just thinking about that and any other factors that we should be keeping in mind that influence that margin transition, you know, that are not as rich as the COVID revenue that is coming off. Thanks.

Yeah, Dave, I'll take that. And just going back to your last question on the splits, just to clear that up. So as a percentage of proprietary sales, biologics is like mid-40s, generics mid-20s, and then pharma... and a low 30% range. That'll get you to the split. With regard to your question on margin, it's not as simple as one product coming out and another product going in. So we're looking at it where there's a mixed impact, obviously, with the COVID, revenues falling off, and there have been higher margin products. And we've also got the impact of inflation on our cost base So you've got those two headwinds. And then as we alluded to, or we talked about earlier, is the increase in price that we're seeing is above what we would normally see in our business. So that helps offset some of this margin pressure. And then we have very specific cost initiatives within our business, both from an operations manufacturing perspective and then on SG&A and R&D. We're really looking at cost control and cost management, and that is delivering a number of efficiencies for us. So it helps us to overcome some of the margin challenges, but not all of them. And then that goes back to the point earlier where we're not actually marginally stepping back to pre-COVID levels. We're maintaining or holding on to a lot of the improvements that we made or the gains that we made.

That's very helpful. Thank you.

Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.

Hi, good morning, everyone. Just piggybacking on Dave's question, can you help us understand, and maybe it's a range of sort of what the margin profile is on the C-19 business, and then with respect to the new capacity that's coming online in 2023, can you help us understand how that phases in? Is it ratable or is it? You know, is it more second half loaded? Any color there would be helpful.

So the margin on the COVID products, you know, would have been at the higher end of our margin range, you know, because a lot of that was Nova Pure. So you could have been looking at, you know, a range of 60% to 70% plus. And then on the CapEx piece, on that being layered in, A lot of it has been layered in and commissioned as we speak, but to see the impact of it will be more so in the back half of the year when it's fully operational and we're able to put a lot of volume through.

Understood. And then just a quick one on China. Maybe a status update on the two plants over there and any thoughts on how that impacts the progression of the year?

In China, our business impact for West overall is quite low. A lot of the activity that manufacturing we do in China is for China. And so we have a really strong team there in our facility in Qingpu that continues to capture more share within the market. But our reliance on our team there to export is very low. And again, overall... values or revenues and profits to the corporation is very small. So that's our impact in China. Our supply chain, if you think about procuring materials, is not heavily dependent on that part of the world. The team's done a really good job. Many of our products are co-located to our manufacturing sites. So that's how we've set up our procurement and supply chain of raw materials.

That's helpful. Appreciate it. Great.

Thank you.

Thank you. I would now like to turn the conference back over to Quentin Lye for closing remarks.

Thanks, Shannon. And thank all of you for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the investor section. Additionally, you may access a replay for 30 days following this presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.

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