Letting Go of a Favorite
Don't fall in love with a stock is an expression heard a lot around Foolish parts, and it is clearly good advice. But honestly, we all probably have holdings which we don't always view quite so objectively. One stock that I would put in that category for me is West Pharmaceuticals.
What? Never heard of them? Well, while the name may imply they are a flashy biotech drug developer, they aren't. What the company does is make components for the packaging of injectable drugs, such as the rubber stoppers on the vial of a drug solution that you pierce with a needle to fill a syringe. This is a good (perhaps great) way to steadily play in the biopharmaceutical / biotechnology market without having to bet on individual drug approvals. Let me list some praises.
- Respected and responsible management.
- Large barrier to competition.
- Committed customers.
- Recent profitability masked by Capex used to expand manufacturing in emerging markets.
- Growing dividend with modest payout ratio.
I found out about this company through the day job, which is/was overseeing the manufacturing of an injectable drug in development and preparing the regulatory documents related to those processes. I talked with a number of aseptic drug manufacturers, a process known as fill/finish which involves dissolving up the active pharmaceutical ingredient and putting the solution into vials under sterile conditions. All recommended I first consider using West stoppers. There is also pretty extensive testing that goes into the development of an injectable drug, such as insuring stability and compatibility with all the packaging components (like the stoppers). We report to the FDA the results of these tests. What we consider a 'drug' is often just the active ingredient, but what the FDA considers a 'drug' includes the package, label, inert ingredients, ect. - the entire pill or solution and the bottle it comes in. That is why once you select a West stopper as a component for your drug product, you're very unlikely to switch (and would have to report any such change to the FDA). That is a barrier to competition and customer loyalty most companies would dream of.
So why sell?
Well, try as I might to justify a value proposition, I just find West to be at worst fairly valued right now. With a current PEG less than 1 and a price per sales of only ~1.3, that may sound odd, but the growth proposition has been challenged of late in my opinion. I read a lot of biotech news and literature, and one excellent and recurring piece is in Nature Biotechnology (abstract) authored by Saurabh Aggarwal. The author looks at the biopharmaceutical market, which is almost entirely injectable drugs, measures the sales and comments on the growth prospects of its components (antibodies, vaccines, growth factors, insulin, fusion proteins, etc.). It is an excellent industry overview. While many sectors of the biopharmaceutical market, such as vaccines, are seeing growth, sales (and thus volume) has seen growth drop. Sales growth of over 40% in 2003 has diminished to just over 4% in 2008. A big driver was the drop in the market for erythropoietin derived products (Aranesp, Procrit), a category which was a large portion of biopharmaceutical sales.
Combine the diminished growth in the biopharmaceutical market with the increasing cry for cost-effective treatment (biopharmaceuticals are often quite expensive), and despite the attractive favored vendor position West may indeed hold, the industry as a whole may not supply the growth to justify holding the stock at this time. At least I don't think so, and thus I let it go in real life (a couple weeks back) and just recently as a favored CAPS holding. It was a tough decision, as I've 'invested' a fair amount of time getting to know and respect the company. I don't doubt I'll own it again, but I hope at a better price. My major concern is that I've not adequately accounted for the growth opportunity / cost reductions provided by establishing manufacturing capacity in emerging market locations, where development programs and pharmaceutical markets are growing rapidly (the latter from a relatively small base).
Also, as a score leader in CAPS on WST, I feel a little added pressure to be right about when to buy, sell, and hold this stock. I will not be red thumbing it, as I don't think it is due to fall, but just don't feel the opportunity the stock provides is right for my portfolio (CAPs or real-life) at this time. Under $34 or so, I'm likely back on the bandwagon.
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P.S. - The main reason for writing this was selfishly therapeutic. I really, really struggled to sell this company and have found myself disproportionately obsessing on the decision of late. The psychological aspect of investing is always the hardest to master in my opinion.