EUR 850.00 For Business Accounts Only

Morningstar | West Pharma's Wide Moat Supports Substantial Future Margin Expansion

Founded in 1923, West Pharmaceutical Services has spent the past 95 years building an impressive business that we think has been effective in constructing a wide economic moat. The success of the franchise has rested upon management's decision to focus on reinvesting behind the firm's core competency, namely, the manufacture of rubber-based components used in the packaging, storage, and administration of injectable therapeutics. Instead of utilizing the firm's balance sheet to acquire assets and expand its manufacturing capability into adjacent verticals, management has decided to fortify West's position in an industry that lends itself well to establishing durable advantages. This has put the firm at the forefront of an oligopolistic market, and deeply ingrained the firm's products in the supply chain and manufacturing processes of its customers. In combining its manufacturing and materials expertise, the regulatory requirements inherent to pharmaceutical manufacturing, and its existing position as the go-to supplier for injectable components, we think West has put itself in a position that will be exceedingly difficult for competitors to supplant, even over the long term.In our view, this sets the stage for West to consistently expand its margin profile over time, utilizing its position to convince customers to further outsource noncore manufacturing and finishing activities that, while margin accretive to West, comprise only a fraction of total input costs. The company's ability to aggregate scale across the industry, provide improved levels of quality, and ensure sufficient supply make it the obvious choice for pharmaceutical and biotechnology companies that would prefer to reinvest in research and development activities rather than in capacity expansion.We forecast revenue growth that averages near 6% annually over the coming five years, roughly in line with management's long-term outlook. However, we expect further adoption of higher-value components to drive the bulk of this growth, leading to a little more than 100 basis points of margin expansion on an annual basis, which we believe will prove durable over time.