That did not worry investors unduly. West Pharmaceutical's shares reached an all-time high of $54.75 on the back of the results, closing at $51.95.
While the Exubera manufacturing contract (shared with Bespak of the UK) helped to double operating profit in the Tech Group segment last year, the business' contribution to group sales and profit is dwarfed by that of Pharmaceutical Systems, which lifted its operating profit by 25 per cent in the first quarter.
Nor has the company changed its full-year sales forecast of around $1bn for 2007, which still assumes Exubera-related sales of $32m to $36m.
Overall, West Pharmaceutical registered consolidated sales of $257.6m for the quarter ended 31 March 2007, 15.6 per cent more than in the first quarter of 2006. A key growth driver was particularly strong sales of coated and Westar-treated products by the Pharmaceutical Systems business in North America.
Group operating profit was $39.6 million, up by 40.4 per cent on the same quarter last year, while net income was 46.4 per cent higher at $26.5m. West Pharmaceutical cited higher sales and associated gross margins in Pharmaceutical Systems, together with relatively lower selling, general and administrative costs and the favourable impact of a weaker dollar.
Tech Group sales reached $69m in the quarter, just 5 per cent or $3.3 million more than in last year's period. The Exubera contract pushed up sales by $6.6 million.
Commercial production of the inhalable insulin device started in the first quarter of 2006 and "continued at full scale during the current quarter," West Pharmaceutical noted.
There were also sales gains from packaging for customers' product launches, mainly in the healthcare sector and including positive contributions from two previously delayed projects. These gains and the Exubera contribution were partially offset, though, by declines in tooling revenues and sales of some maturing consumer and industrial products such as smart cards. The segment's main focus is on injection moulding services.
Gross profit in the Tech Group business was $8.5m or 12.2 per cent of sales, compared with $10.3m or 15.7 per cent of sales in the first quarter of 2006.
West Pharmaceutical attributed the margin decline to under-utilisation of tooling capacity and new business "that did not achieve desired production efficiency", as well as costs and interruptions associated with the relocation and expansion of a manufacturing facility in Michigan, US. Operating profit for The Tech Group was $2.8m against $4.9m in last year's quarter.
It is generally acknowledged that sales of Exubera since its launch last year have been substantially below expectations. According to Michael Anderson, West Pharmaceutical's vice-president and treasurer, however, that was not a factor in the poor first-quarter performance of The Tech Group.
He acknowledged that the indications from Pfizer were "not terribly encouraging". West Pharmaceutical's investors had been alerted to the risk posed by Exubera, although the extent of that risk had not been quantified. The company believed, though, that it was "covered in the range" of the financial guidance given for 2007, Anderson commented.
In the much larger Pharmaceutical Systems business, which develops, manufactures and sells components and systems for injectable, transmucosal, oral and pulmonary drug delivery, quarterly sales advanced 19.6 per cent to $191.3m, with foreign currency appreciation supplying 6.0 percentage points of that increase.
North American sales in this segment grew by 23 per cent and international sales by 17.4 per cent (9.7 per cent from currency conversion). Sales of pharmaceutical packaging components for vials and prefillable syringes incorporating the company's Westar post-production processing and its FluroTec and Reflon coating technologies continued to rise, West Pharmaceutical noted.
Gross margins in the Pharmaceutical Systems business improved by 1.7 percentage points to 37.6 per cent, thanks to volume-related production efficiencies and a more profitable combination of sales associated with the gains from coated and Westar-processed components. Price increases, coupled with volume-related efficiencies and savings from lean manufacturing, more than offset higher raw-material and energy costs. Operating profit in this segment rose by 24.9 per cent over the first quarter of 2006, to $44.7m.
Raises EPS forecast
While West Pharmaceutical held to its previous guidance on group and Exubera-related sales (the latter at a gross margin of around 30 per cent) for the whole of 2007, the company adjusted its guidance for earnings per diluted share upwards from between $2.20 and $2.35 to between $2.27 and $2.37.
The previous guidance did not include the effect of issuing $161.5m of subordinated convertible debentures this year, it pointed out.
Growth is expected to continue above previous expectations in the Pharmaceutical Systems segment during 2007 and to be slower in the Tech Group business.
"Sales from our high value-added products continue to grow at or above our longer-term expectations, largely as a result of the growing demand among our biotechnology customers for our advanced components," commented chairman and CEO Donald Morel.
The company would maintain its focus on developing capacity ahead of projected growth in its key product segments and markets, he stated, adding: "We also continue to aggressively pursue opportunities for The Tech Group to add higher-value healthcare business, including proprietary products that will improve their product mix and profitability over time."
Anderson said these might include delivery systems such as auto-injectors, pens and other pulmonary administration devices that incorporated plastic components. Ideally, he added, this would involve The Tech Group "owning something" - and taking a larger share of the profit - rather than just making it for someone else.