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Morningstar | Headwinds Building For Victrex in 2019

U.K.-based Victrex is the creator of and dominant market leader in polyetheretherketone, or PEEK, a lightweight ultra-high-performance plastic that suits the most demanding applications in transportation, oil and gas, and electronics. It serves these industrial markets through its industrials segment, which accounts for around 80% of sales. The company has broadened applications of PEEK to healthcare, notably implantable spinal fusion cages. Healthcare sales are housed in the medical segment, which contributes the other 20% of sales, but has higher margins than the industrial business. Total market demand for PEEK is small, currently around 6,000 tonnes per year. Victrex has succeeded in its efforts to expand the market for PEEK, as evidenced by mid-single-digit volume growth at the company over the past decade. We think the market for PEEK has plenty of room to grow by capturing increasing demand for metal-replacement products. Indeed, Victrex believes annual demand for PEEK could ultimately grow to 80,000 tonnes, a reasonable view given that the market size for many specialty polymers is 2-3 times larger.While PEEK has been off-patent for many years, competition has been benign with only a handful of suppliers entering the market. However, competitive dynamics may be on the cusp of change, with Solvay recently making a sizable investment in PEEK capacity. We don’t see a price war on the horizon, given strong market growth and the specialty, tailor-made nature of PEEK. However, some volume loss to Solvay is more likely, particularly in the lower-value consumer electronics business. Victrex’s strategy is shifting to prioritise moving downstream into semifinished and finished products and specialty applications, in order to capture a larger portion of profits in the value chain. Currently, these products account for about 30% of sales. Victrex’s pipeline of downstream products under development could easily double current sales, but a material impact on group profit is probably several years away.