West has applied a pricing surcharge to offset rising raw material costs that dragged on margins in the second quarter.
Rising prices for raw materials such as natural rubber and synthetic butyl have prompted West to apply a surcharge to its pharmaceutical packaging products. West believes it is necessary to pass on the extra costs to its clients but has encountered some resistance.
“To date we’ve had hard push back from one customer”, Donald Morel, CEO of West, said in a conference call with investors. Most clients have shown understanding as they face similar problems.
By adding the surcharge to its prices West expects to recover almost all of the raw material price increases in the back half of 2011 but margins and operating income dipped in the second quarter.
“Steeply rising commodity prices are more difficult to pass along to customers on a timely basis”, David Windley, equity analyst at Jefferies & Company, said in a note to investors. The surcharge West has applied is a fixed percentage and as such the company could be impacted if volatility continues.
West has also been hit by activities at two clients. Regulatory problems at one customer’s production facility and another’s switch from single to ten-dose vials have knocked millions of dollars off sales.
Production at the client’s plant had been expected to resume but the company continues to have problems with the US Food and Drug Administration (FDA). Morel said the move is part of the FDA’s shift to a more active approach to good manufacturing practice (GMP) compliance.
Margins were also hit by readjustments to pricing. “Management called out contractually lower selling prices for two Euro customers in packaging systems this quarter. These are small, but emphasise the company's need to upsell”, said Windley.
Long-term growth at West will depend on the success of high-value products it is introducing. The Crystal Zenith (CZ) range, designed to avoid problems faced by glass , is one element of this plan and West continues to see strong interest, with firms now requesting custom sizes and configurations.
Clients have also shown considerable interest in West’s electronic patch injector, called SmartDose, prompting the company to accelerate research and development. Giving financial backing to the SmartDose project is one of a number of investments West is making to support long-term growth.
“West is making significant investments to support product opportunities that can drive growth over the next decade. This includes two new manufacturing facilities in emerging markets and a CZ capacity expansion in Arizona”, said Windley.