West Pharmaceutical Earnings: Maintaining Valuation as Base Business Sees Solid Growth and Margins

West Pharmaceutical WST saw a 2.3% net sales decline in the second quarter, with a sharper decline in adjusted diluted EPS, but management slightly raised expectations for both measures for the full year. Our earnings forecast was already above the high end of prior guidance, so we are maintaining our $290 fair value estimate.

Overall, while West is now at the peak of its COVID-19-related headwinds, the firm’s base business is performing well, with midteens growth in proprietary products excluding COVID-19-related demand. With additional capacity for high-value products in proprietary products (approximately 75% of this segment’s sales), the firm should be able to meet demand increases from customers. The smaller segment of contract-manufactured products grew by 15.3% in the quarter, largely due to injection-related device components. Gross profit margins across the business fell by three percentage points as COVID-19-related sales fell, but this was partly offset by strong pricing power in the base business as well as efficiency improvements, which we think bodes well for the long term, once COVID comparisons end. We expect West to benefit both from continued ability to increase prices at a low-single-digit level as well as improved product mix that increasingly favors high-value products.