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TMFHelical (98.85)

Go West Young Biotechnologist

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September 15, 2007 – Comments (0)

So much to cover in the last week or so, but let me stick with some background commentary on my latest CAPS pick West Pharmaceutical Services (NYSE: WST).  I had this in my CAPS port before (and am the current score leader based on having ended the pick after a run up - dumb luck).  The company is ~30% off its 52 week high and trades at a reasonable 16 P/E and 14.5 forward P/E.  Margins have been steadily improving.  The company crashed in August on "the company said earnings for all of 2007 would come in below analysts' estimates due to expected reductions in orders for certain products and higher spending on research and development."  For someone on the sidelines, this is excellent.

But this isn't going to be about the financials (margin info is in my reply to pitch), lets talk about the company, their products, and my experience with them.  West makes packaging components for the biotechnology industry.  When your physician sticks a needle into a little liquid filled vial and fills it up before sticking it in you, he is using West products, particularly the rubber stopper / seal on that drug bottle.  How does this play into drug development and why will West continue to do well - let's step back a bit and I'll explain?

When a lead drug is being brought to the clinic, there are primarily two manufacturing steps to be concerned with - the first is the 'drug substance' (the lingo took me some time to get consistent).  Drug substance is the chemical compound - the result of the synthesis or bioproduction.  It is what many think of as the drug.  But it is not what the FDA thinks of as the drug, which is termed the 'drug product'.  Drug product is what you buy or use.  It is every component in the actual drug, from the inert materials, buffers, flavor agents, colorizers, and even the packaging.  Durg substance (which is the active ingrediant) is only a component of the drug product. The manufacturing step of making drug product from drug substance is termed 'fill and finish'.  So when you file with the FDA, the CMC section (chemistry manufacturing and controls - I've had a hand in overseeing the writing of one for an IND filing) contains detailed instructions, part numbers, manufacturers, suppliers, etc. i.e. every component that goes into the drug product and how it is used.

The point.  If you want to change the rubber stopper on the bottle, it involves communication and alteration of your filing with the FDA.  In other words - you're not going to change it! It's too costly and not worth the risk or effort.  You also need to do materials compatibility testing i.e. insures that no component from an item like a stopper is leaching into your drug.  I've visited and contracted with drug product manufactures for an injectible product (fill and finish CROs), they all suggested West stoppers as a starting point for material compatibility testing - I would consider them the industry standard. [Note: did you know that many inks used on labels are known to leach through many types of plastic bottles and can contaminate the components contained within - testing gets that detailed].

So if there is concern that West is going to suffer materials increases, which they will since many products are petroleum based, there should be little to no concern about the ability to pass these costs on to customers.  The fortunes of West will rise and fall with the cash flow into the biotechnology / healthcare industry.  This is quite solid right now and West is a buy on recent weakness.

Zz 

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