West Pharmaceutical Services made cuts in December and the short-term financial impact began to be felt in the fourth quarter. These costs contributed to operating income dropping year-on-year by 73 per cent but West says the actions were needed to adjust the environment.
The cuts allow West to “keep our production capabilities and cost structure in balance with the expected changes in demand”, said Donald Morel, CEO and president at West. The move cost $14.5m (€10.7m) in the quarter and associated expenditure will continue for the next two years.
However, completion of the plan is expected to result in annual savings of $12m. This positions West to prosper beyond 2011, after which it expects to accelerate growth of both businesses by meeting demand for “cleaner, high-quality component products and delivery devices”, said Morel.
New normal
Before then West must navigate 2011. The market challenges of recent years, such as fewer drug approvals and pricing pressures, are still in place, said Morel in a conference call with investors. In fact, some of the changes, far from being temporary, appear to be the new reality.
For instance, fourth quarter results were impacted by clients managing their capital at the end of the year. This has pushed some work over into the first quarter, strengthening an already busy period, and Morel thinks this may continue in future years as clients face financial pressures.
Although work was moved into the first quarter the main issues affecting the latest sales figures were the lack of H1N1, which contributed revenues last year, and impact of foreign currency exchange. These factors underpinned a $16.6m year-on-year drop in fourth quarter revenues.
Declining sales were concentrated at the packaging systems unit, which benefited from H1N1-related sales last year. In contrast, the smaller delivery systems business grew revenues, despite unfavourable currency exchange, as a result of growth at the contract manufacturing unit.
Emerging markets
While West is cutting back on operations in the US and Europe it is moving forward with emerging market expansion plans. Morel said West will begin construction of a plant in China in the third quarter and start building in India early the following year.
West has experienced strong growth in both countries, mainly from multinational clients, and is keen to bolster its operations. The focus will remain on serving multinational clients but West also hopes to take some of the domestic market, but pricing pressures in the sector are intense.
Shares in West closed the day down one per cent at $41.03. Jeffries & Company lowered its rating on West from “buy” to “hold” following the financial results.