西式醫藥服務 (WST) 2003 Q4 法說會逐字稿

Good morning, my name is Holly and I will be your conference facilitator. At this time I would like to welcome everyone to the West Pharmaceutical's fourth-quarter and year-end conference call. All lines had been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions). Mrs. Wann (ph), you may begin your conference.

Thank you, operator, and good morning, everyone, and welcome to the West Pharmaceutical's Services 2003 fourth-quarter and year-end conference call. As you know, we issued our fourth quarter financial results earlier this morning. If you have not received a copy of this announcement please call us, Financial (indiscernible) at 212-850-5600 and a copy will be faxed to you immediately.

Before we begin, I would like to remind that certain statements made on this call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform act of 1995. The words -- estimates, expect, intend, believe, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties. The Company's actual results may differ materially from those expressed in any forward-looking statements, and are dependent on a number of factors, and a long exclusive list of those factors are included in the Company's press release and SEC filings. In addition, for the purpose of aiding comparisons of period results, references made on this conference call and this morning's press release to financial results determined by excluding certain unusual or nonrecurring items from each period. And by remeasuring results of the most recent period by eliminating the effects of changes in foreign exchange rates. These remeasured period results are not in conformance with the United States’ generally accepted accounting principle -- GAAP -- and are non-GAAP financial measures. These non-GAAP financial measures are intended to explain or aid in the use of (indiscernible) related GAAP financial measures.

This call is being recorded, on behalf of West Pharmaceutical services and is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's expressed permission. And your participation implies your consent to repeat this.

Once management has concluded the remarks, we'll open up the call for questions. With us this morning are Don Morel, Chairman and CEO; Bill Federici, CFO; and Mike Anderson, VP and treasurer. I would now like to turn the call over to Don Morel. Don, please go ahead.

Thank you, Julie, and good morning everyone, and thank you for taking time to join us for today's conference call. As Julie indicated, participating in the call from West with me today are Bill Federici, our CFO, and Mike Anderson, VP, Treasure and West Primary Investor Relations contact.

This morning West released earnings for the fourth quarter of 2003, and our consolidated results for the full year. 2003 was an extraordinary year on many fronts for the Company, which was reflected in the length and complexity of our earnings announcement. Today, Bill and I will be discussing our 2003 results in detail and the outlook for our business for 2004.

Before discussing our financial results, I would lead to reflect on our business performance in light of the challenges (indiscernible) by Kingston. Those of you have followed West know the terrible tragedy that took place on January 29, 2003 -- when a dust explosion destroyed our compounding and molding operations in Kinston, North Carolina -- injuring many people and ultimately resulting in six fatalities. In the aftermath of that accident, West is a Company focused on three things -- the welfare of our employees and the many people affected by the accident; our ability to serve our customers who are supplied from the plant; and running the business as efficiently as possible while implementing a disaster recovery plan.

In concert with that industry priorities we communicated with our employees, customers, board members and shareholders as frequently as possible. I believe that quickly setting those three priorities in the exact order resulted in one of the most remarkable years in our Company's history. Within six weeks our manufacturing network absorbed the loss Kinston capacity, while supply of compound to other North American facilities was shifted into North American facilities and qualified third party suppliers.

Our customers' requirements were met with virtually no disruptions in supply, and our customer relationships -- always strong -- grew even stronger as our recovery plan was put into effect, and they realized that our multisite sourcing capability would allow West to continue meeting their needs.

It was indeed a year which every employee of West can be proud of. As we speak, our new plant in Kinston is preparing to come online -- which I will review later in today's teleconference.

Several people who follow West have asked -- when are you going to stop dwelling on Kinston? Well, there are several parts to answer this question.

First, clearly our results for 2003 and our expectations for 2004 cannot be discussed without taking into consideration the impact of Kinston. West believes it is extremely important to communicate the significant financial implications of losing this facility so that our past and future performance can be accurately assessed, and the risk factors relating to Kinston be clearly understood.

Second, while operational planning and execution remain strongly linked to our recovery plan for Kinston. Even now, with the facility coming up to operational capability, more than 90 Kinston employees remain in temporary assignments away from home. Tens of millions of dollars of production are being pulled through other facilities, operating above their intending capacity. Our production teams have done a tremendous job in maintaining our production levels to meet our customers' demand; and as a result, virtually no business has been lost and no interruptions to customer product supply occurred.

Finally, there some important lessons which can be learned from this tragic event. First is the significant value West brings to our customer base in the markets they serve. Second, we can never lose sight of the importance of what we do as a Company on a daily basis. Third, while all Companies have a set of guiding principles or values, not many get the chance to live up to them under such trying circumstances. West did, and our recent performance speaks volumes about the underlying importance to all of us here of setting high standards and adhering to our values to achieve our goals.

Turn to our fourth quarter financial performance -- on a GAAP basis, West reported earnings per share of $1.14, a net income of $17.1 million -- compared with $3.4 million or 27 cents per share for the same period in 2002.

Excluding onetime items and charges, earnings for the quarter would have been 40 cents per share.

Sales growth, again, was very strong for the period, increasing 18 percent, 8 percent of which was due to exchange to 126.4 million. Sales growth in the period was again driven by continuing strong demand for our core injectable products in the pharmaceutical systems division, and also strengthening orders for the clinical services segment in the drug delivery division.

As you will have noted from our release, there were two extraordinary items in our Q-4 and 2003 full year results. The first of these relates to the Kinston insurance claim settlement, which contributed a onetime pre-tax gain of $28.7 million. The second item relates to a $7 million pre-tax impairment charge, due to a substantial delay in a major customer project at West (indiscernible) plant.

West is currently evaluating strategic options for the facility in light of the delay in anticipated revenues developing for this project.

For the year, sales growth was as strong as it has been in years, with sales up 17 percent versus 2002, 7 percent of which was due to foreign exchange, to $490.7 million.

GAAP earnings were $2.19 per share versus $1.28 per share in 2002, or $1.88 per share for 2003 -- excluding onetime gains from the Kinston insurance claim and the impact of the device manufacturing plant impairment charge.

Let me turn now to pharmaceutical systems. The pharmaceutical systems division again produced strong sales growth in the quarter, with sales increasing 16 percent, 8 percent of which was due to foreign exchange, from $106.5 million in 2002 to $123.8 million in 2003.

For the full year, sales totaled $483.4 million versus 412.8 in 2002. This represents some of the strongest annual revenue growth in the Company's history for its core injectable delivery products.

As previously noted in our second and third quarter calls, our significant sales growth was driven by a combination of rising demand for West, Westar treated products, serum and (indiscernible) closures for biotech drugs that employee West proprietary cutting technology and pre-plug (ph) syringe components.

Our 2003 sales in the division were also positively impacted by some surge orders for the war earlier in the year. Biotech sample orders for stability testing and manufacturing trials for new products set for approval in 2005 and beyond. And some safety inventory ordered by certain customers in response to the Kinston capacity loss. Several biotech customers also ordered safety stock for selected component impacted by raw materials change.

We anticipate these inventories being worked off in the first two quarters of 2004. However, even with these considerations factored in, our backlog at the end of January was extremely healthy and only slightly behind the level of January 2003.

Operating profit in the division rose sharply from $65.1 million in 2002 to $88.2 million in 2003. Our operating efficiencies also improved as our consolidated gross margin increased from 28 percent in 2002, to 31.8 percent in 2003. Driven by efficiencies in Europe as new capacity in France and Germany was effectively utilized, and a favorable product mix in both Europe and North America.

On a positive note, we have completed and filed new PFPA (ph) the drug master file for our Lunugion (ph) facility -- which now has the capability to produce Westar product to United States standards.

Work continues on preparing the documentation for our Eschwiller (ph) and Singapore facilities so that they also are capable of producing Westar product. Those filings are planned for late 2004 and 2005, and will bring these plants to a single global product standard, so that customers can be supplied with exactly the same product, through specifications that are equivalent from all of these facilities.

This global production strategy is a critical component of the risk mitigation plans West delivers with our key multinational pharmaceutical and medical device customers. Overall, the division is well positioned for continued growth in 2004.

Turning back to Kinston for a moment, I am pleased to report that those injured in the accident are recovering well. Many attended the memorial service held by West to mark the one year anniversary of the accident.

Construction on the facility is proceeding on schedule, and the first of the displaced employees have returned to the plant. (technical difficulty) and we hope to be back at full molding capacity in the new facility by the fourth quarter.

Early in the year, we will focus on sampling key customers, supplied from the plant, so they can complete their validation and manufacturing trials before West begins commercial shipments from the new plant.

On the investigation into the cause of the accident, West have completed its internal investigation and does not anticipate incurring additional expenses in 2004 at a rate comparable to 2003. More importantly, we have completed detailed safety audits of all our rubber manufacturing facilities worldwide. And while we did not find any substantial issues, we have completed a broad range of safety initiatives and upgrades to these facilities.

As of today, there remains only one lawsuit against the Company arising from the accident.

Turning to drug delivery systems, the division experienced a difficult operating year in 2003. Several anticipated licenses did not materialize in the first half of the year, and the decision was taken to accelerate one significant clinical trail to improve the licensing opportunities for one product.

On the positive side, demand for Phase I clinical trials through the division's trial unit increased substantially versus the first half of '03, and demand looks to be strong for the early part of 2004. Sales for the division totaled $7.3 million for the year -- a slight improvement over the 6.9 million booked in 2002.

The division's loss for the full year widened slightly from $15 million to 17.5 million, with the difference attributable to West's decision to accelerate the clinical trial I mentioned earlier during the third and fourth quarters. That trial was successfully completed and a range of licensing discussions with potential partners for the product are underway.

Despite the financial performance of the unit, several goals were achieved. First and foremost -- the division's management team has been significantly strengthened with the addition of Dr. Bruce Moore (ph) in April to lead the group.

Second, we have hired an experienced business development person to lead North America's efforts to focus specifically on near-term licensing opportunities for our products in technology. In the first quarter, West completed a license with Chiron (ph) for the application of West's ChiSys technology to a proprietary vaccine product for the fureor (ph). Three additional development partnerships were established, and two additional major clinical trials were completed.

For 2004, in order to hold expenses more in line with the anticipated revenues, several projects have been eliminated from our development portfolio. The focus of the group going forward will be on our near-term opportunities as they relate to our lead nasal platform -- ChiSys -- and the development of our target technology for colonic (ph) targeting.

Major milestones for the group include planning and executing three Phase II trials, focused on nasal Fentanyl pertain (ph), 40 Budesinide(ph) utilizing our capsule technology for the treatment of irritable bowel disease and nasal luprualie (ph) for the treatment of endometriocis (ph).

In addition, our partner, IDDS, continues to pursue a dual pass (ph) strategy looking at possible filings in both North America and Europe for our nasal morphine product.

In summary for 2003, I am very pleased with our performance and the position the Company finds itself in as we begin 2004. Given the challenges presented by Kinston at the outset, the Company's extremely well positioned for the future -- with growth opportunities in both of our business segments.

I would now like to turn the call over to Bill Federici, who will review the details of our Q4 and full year 2003 financial performance.

Thank you, Don, and good morning everyone. As indicated in this morning's press release, we reported fourth quarter net income of 17.1 million or $1.14 per diluted share, versus net income of 3.4 million or 24 cents per diluted share recorded in the fourth quarter of 2002.

Reported results in this year's quarter includes the 20.2 million net pretax positive effect of the proceeds from the recent insurance settlement of our claim related to the Kinston losses incurred, less the uninsured costs related to Kinston, and a $7 million pretax charge to earnings to reflect the impairment of the carrying value of our assets at our Louis (ph) UK plastics facility.

This impairment charge was due to the loss of our principal customer's marketing partner.

Reported results in last year's fourth quarter included net 3 cents per share of expense from various restructuring related activities, and the profitable results from our discontinued operations.

To provide a better comparison of ongoing operating results, we have excluded the effects of these items from each year's quarters. Excluding these items, fourth quarter 2003 earnings were 40 cents per diluted share, comparing favorably to 2002 Q4 earnings of 27 cents per diluted share.

As a result of the settlement of our insurance claim, we recognize that the recoverable full impact of business interruption losses of 9.8 million for the year -- including 4.9 million for the fourth quarter.

For the full year, the Company reported earnings of $2.19 per diluted share, including the impact of the items referred to above, compared to a $1.28 for the full year 2002, which also includes various special items.

Again, excluding these items from each year's results to facilitate the comparison of normal operations, 2003 earnings of 1.88 per diluted share compare favorably to 2002 earnings of 1.24 per diluted share.

Of particular note is that 2002 -- 2003 results contain 9.1 million of additional pension expense than 2002 did, equating to 43 cents per diluted share.

Consolidated net sales for the quarter were 126.4 million, and full year sales totaled 490.7 million, a 17 percent increase over 2002 full year sales, with over 7 percent of the increase due to currency.

The Company's consolidated gross margin for the quarter and full year were 33.4 and 31.8 percent respectively. 5.7 and 3.8 percentage points higher than the margins achieved for the same period in 2002. As previously stated, our 2003 operating margins were negatively impacted by business interruption losses totaling 9.8 million. However, we have also included in 2003 an equal offsetting 9.8 million of business interruption recovery, related to those losses incurred since the Company's Kinston accident in late January.

Despite the effects of the Kinston accident, the pharmaceutical systems division performed extremely well in 2003, with sales of 483.4 million, a 17 percent increase over full year 2002 sales with nearly 8 percent of the increase due to currency.

Domestic sales grew 10 percent over full year 2002 sales, and sales in our international markets, again, grew steadily with sales 25 percent higher than prior year sales -- 16 percent of which was due to currency.

Operating profit in pharm systems was 88.2 million for the year -- an increase of 23.1 million, over 2002 operating profits of $65.1 million. Again, business interruption losses were offset by insurance recoveries, and therefore, operating profits for 2003 are unaffected by business interruption.

Contributing to the improved profit performance in pharm systems were higher European sales volume, price increases in Europe and North America, improved manufacturing efficiencies and overhead absorption in Europe due to increased production capacity, and the favorable impact of exchange rates.

In the drug delivery (technical difficulty) systems division, full year revenues of $7.3 million was slightly higher than comparable 2002 revenues, due to increased demand for our services.

Operating losses of 17.5 million in the drug delivery division were $2.5 million higher than in the prior year.

Consolidated selling, general, administrative expenses increased by 10.3 million in the quarter, and 28.4 million for the full year -- versus prior year costs. The increase in both periods is largely due to increased pension expense, higher compensation costs, and incentive compensation costs, increased outside services, much of which was for R&D services, and the effect of foreign exchange.

Net interest expense for the year of 7.5 million was 2 million lower than the 2002 expense -- due primarily to lower U.S. borrowing rates on floating-rate debt, and lower average outstanding debt, as well as higher interest income on customer advances for tooling and development services.

The 36 percent effective tax rate for '03 includes a 6 percent unfavorable effect of the impairment charge mentioned above, for which no tax benefit is being recognized. The 24 percent effective rate for 2002 includes a 14 percent reduction from the change in U.S. tax law, and an unfavorable 6 percent increase associated with the other 2002 special items we have mentioned before.

With regard to Kinston, we have agreed with our insures to settle our business interruption and property losses at the policy maximum of $66 million. Through December, we have incurred incremental costs of approximately 37 million in our restoration and recovery efforts -- including over 11 million of uninsured costs. With the book value of the assets destroyed in the explosion at 11.7 million, a pretax gain of $17.3 million has been recognized on the settlement.

We expect to continue to incur incremental costs from inefficiencies related to our inter-manufacturing plant well into the third quarter of 2004, until full-scale production is restored at the rebuilt Kinston molding facility.

As reported previously in 2003, our increased operating costs have been largely recovered through business interruption insurance recovery. Without any additional insurance recovery anticipated for 2004, gross margins in our North American region are expected to decline below normalized levels for much of 2004.

Fourth quarter 2003 cash flow from operations was $18.9 million, making full year cash flows of 69.2 million -- the highest recorded by the Company in several years. Company's cash balance at December 31 was $37.8 million, and working capital totaled $97.8 million. That stood at $175 million at December 31st, and our debt to total invested capital ratio at year end was 40.5 percent, continuing its favorable, consistent decline, largely due to the effect of 2003 income and exchange rates.

CapEx during the quarter were 26 million, including the costs associated with rebuilding the Kinston molding facility. Over half of the quarter's expenditures were focused on new products and expansion activities.

Full-year CapEx was $60.8 million with over 14 million devoted to capital related to replacing Kinston production capacity.

I would now like to turn for a moment to our guidance. Our expectations for 2004 are as follows -- we expect sales in our foreign systems division to grow at a rate slightly ahead of the growth in the markets it serves, or 5-7 percent at a constant exchange rate.

The strength of our core business remained for 2004, although the first two quarters of 2004 are expected to show slower growth than the latter half of 2004, due to be timing and nature of customer orders and customer inventory management.

Our drug delivery division expects substantial improvement in operating results, due to anticipated licensing revenue, as well as cost containment programs. We expect growth in operating margins to continue to improve slightly versus 2003 levels, excluding the 2004 Kinston impacts and the 2004 period costs associated with our Louis UK impairment.

We anticipate diluted earnings per share to be in the range of $2.05 to $2.15 per share, excluding the 2004 costs associated with Kinston and Louis, which we currently estimate to aggregate 12 to 14 million, or 52 to 61 cents per diluted share.

While we have recognized the entire insurance settlement related to Kinston in 2003, including amounts to cover future costs associated with business interruption, we will incur those business interruption costs in 2004 with no recovery offset. This is a timing issue due to the application of applicable accounting rules governing these type settlements.

We expect a business interruption cost to be heavily weighted in the first three quarters of 2004. As outlined in our forward-looking statements, we expect our results to be impacted by industry trends -- including but not limited to -- mergers and acquisitions among pharmaceutical medical device (ph) in both biotechnology (ph) Companies, industry cost containment and price control initiatives, and our customers' inventory control programs.

We expect our results will be impacted by the timing of revenues and expenses in our drug delivery division due to uncertainty in the completion and timing of licenses and milestones, and the timing and ability to carry out and complete critical clinical trials.

I would now like to turn the program back over to Don Morel. Don?

Thanks, Bill. As Bill mentioned, we expect 2004 to be another good operating year for the Company. Our order backlog remains solid in our core pharmaceutical systems business, and though low sales growth will moderate in the first half of the year, we do expect full year sales to increase between 5 and 7 percent at constant exchange rates, translating to an increase of earnings of $2.05 to $2.15 cents for fully diluted share before the impact of Kinston production costs associated with product dislocations and relocations, and the period charges associated with Louis.

We also expect a substantial improvement in the financial performance of our drug delivery unit as product licensing opportunities are recognized during the year.

However, as Bill did mention, the revenue stream will remain unpredictable as it has been in past years, due to the nature of completing the complex negotiations (technical difficulty) the licenses of these products. Overall, 2003 was a terrific year, and we look forward to a good 2004. Thank you for your time -- I would now like to open the call for any questions you may have.

(Operator Instructions). Stephen Costal (ph), Lehman Brothers.

Thanks. Can you guys elaborate on the comment that growth in pharma systems should accelerate in -- you know, as we go on through the year? Is that primarily a function of the inventory work down, or as you also eluded to in the press release, is it also related to an expectation of increased in demand by your customers towards the end of the year?

There's really two things, Steve. The first one is exactly as you mentioned -- we do expect some inventories to be work down by key customers. The second is usually -- the 12 to 15 month time lag between when we have sampling activity and validation activity before new products get approved.

So, we saw an extraordinary amount of new product development activity in the first half of the year, and orders that resulted from that. Now what we will see is a bit of a lag as the approval process takes its course. Once those approvals head (ph), we think we'll begin to see orders ramp-up again in the latter part of the year. And that applies principally to many of the drugs that are in the biotech pipeline for our customers.

Fair enough. And (indiscernible), could you guys talk about the capacity expansion of the Jersey Shore facility? And kind of related to that, can you discuss, kind of, your expectations for operating cash flow and capital spending in 2004? And what you would think is normalized capital spending?

I will let Bill handle the second one -- I will tackle the expansion question. Jersey Shore is our league facility for Westar, and as we talked about in past calls, we really have seen strong demand and growth in that product line. The expansion at the facility really is geared towards putting in two additional Westar processing lines so that we can meet demand that we forecast will come at the end of '04 and the beginning of '05.

With respect to CapEx, CapEx as we stated, was 60.8 for the year including 14 or so for Kinston. We believe that our CapEx should start to return to normal levels. In '04 there will be some continuing impact at Kinston -- we think those normalized levels are more in the 40 to $45 million range.

Just a clarification on the impairment charge, if you could elaborate on that a little bit? And also, in one area in the press release it said it was a $7 (ph) million charge? (indiscernible) I thought it also said that there was no tax benefit to that, so in the reconciliation of 7.5 (ph) -- just a little confused on that?

Yes, it is a little confusing, let me try and walk you through it. It is 7 million on a pre-tax basis, and that primarily relates to fixed assets, some statutory severance, and some other costs associated with that. That totals about $7 million. There is a preferred tax asset on the books related to that property that we're also writing down -- and that is obviously in the tax line. So pre-tax is 7, full impact is 7.5. There is no tax benefit as it relates to the loss, because of where the loss is being generated in the UK based on prior losses; and therefore, it is a dollar for dollar right to the bottom line.

Got you, that makes sense. And Dr. Morel, can you provide any update on the regulatory process for the nasal morphine product? I think you guys previously said you expected it to kind of progress in the first half of 2004? Is that -- are you still the same?

That is still where we are at. I would have to defer to our licensing partner on that. They're actually handling the regulatory discussions with the FDA.

And then, on the facility in the UK, for potential alternatives for that facility -- when do you anticipate, kind of, coming to a decision on that?

Basically, we believe that shortly we will have some understanding of where our paths are going. There are some regulatory -- not regulatory -- statutory issues about facilities in the UK. We will be working through those over the next 6 to 9 months.

Just a couple of more here. For pension expense, do you guys view that to be kind of in line with '03 for '04?

We actually think what was driving the '03 number, if you remember, was a decline in our asset base due to the decline in the stock market. The pension assets were down substantially in 2002. That has actuarially delayed the accounting work gets rolled into 2003. And it was a $9.1 million delta between '03 -- between '02 and '03, in terms of our pension expense.

As it relates to going forward, our asset base and the pension plan has recovered, and we expect that the pension expense impact will decline going forward. The exact number is somewhat due to a bunch of assumptions on rates, etc., so I won't get into that. But, from a trend perspective, you can expect it to go down.

Fair enough. And then -- can you guys elaborate, perhaps, on the profitability in the drug delivery segment with clinical services versus development revenues? Is there a difference there? Kind of -- what is driving the profitability trends in that segment?

I think there's two things that impact this, Stephen. Clearly on the clinical side it is purely volume through the Phase I unit. In the second half of the year, we saw a significant upturn in trails that were booked. We see strong trends (ph) continuing into the early part of '04. That fortunately is being driven, I think, by the emerging strength of our customers -- Phase I development programs.

On the other side, with the drug delivery business, it wholly is dependent on the timing of license and milestone revenues -- for the most part -- to offset expense. And our own internal management of the expense profile relative to those anticipated revenue streams. So, it is really those two things.

Okay, great, thanks for the comments.

Thank you.

Shy Garcon (ph), Corsner Capital (ph).

Hi, guys, good morning -- how are you doing today? I may have missed this, but could you talk about the balance sheet -- I guess where the cash and the debt sort of stands after all these insurance settlements?

Where it stands today?

Well, I mean -- or if you can, or if you (indiscernible) the year and then kind of what it would look like pro forma for the insurance settlement?

I'll do the best I can on that. At the end of the year, debt was at 175 million. Our cash balance was $37.8 million. And our debt to total invested capital was 40.5 percent.

We will have some impact from the settlement. We expect to receive approximately $41 million within the next -- shortly -- within the next month or so. The settlement has been finalized, as the paperwork gets done and the checks get cut.

So, you can assume that a portion of that will be able to drop to our debt number. But there are, as we indicated in our release, and our comments, there are additional costs that will be associated with Kinston go-forward. There is CapEx, that we talked about, and there is ongoing business interruption and other out-of-pocket costs related to Kinston.

Right. And the tax rate for '04 -- where should that, kind of, come in?

I don't want to get pinned down to a number, but we think that the number is trending upward. We think the number will be more in the 35 percent range.

The operating profit margin on the pharmaceutical side was a little bit over 18 percent in the, for the fourth quarter -- can you, kind of, give us a flavor of what the margin should look like, or would look like, in kind of normalized environments, let's say a year from now, where that margin should sort of stand?

We believe that margins will continue to increase slightly. I obviously -- the problem with the margin is that is where our business interruption losses will be incurred in 2004. And as we indicated in our comments, we don't have any insurance recoveries to offset against that. So it will be a dollar for dollar impact to the operating -- to the gross margin line.

Historically, what was the operating margin on the pharmaceutical business? I mean, before this whole Kinston thing happened, what sort of --?

We were running at -- gross margins were running at 32 to 35 percent in pharm systems.

And the operating margins?

Operating margins were -- operating margins in the pharm systems division were running at around the high 20s.

Okay, high 20s.

It would be more in the range of the low 20s.

High 20s sound a little high to me. Okay, that's what I thought.

Now on the -- in the guidance and your assumption for drug delivery -- without I guess, it sounds like you don't answer specific numbers -- but, are we assuming that is going to be breakeven next year? I'm just trying to understand where that kind of fits into the guidance. Can you kind of give us a ballpark range of what you're thinking on the drug delivery side?

It is difficult to do, because with the timing of the license revenues, we do expect that we'll see a substantial improvement versus the loss we incurred in '03. And that will come from a combination of -- one, expense control for programs we have eliminated that are not close to commercialization; and two, some licensing opportunities we expect to come to fruition in the first half of the year.

Okay. And just so I'm totally on your guidance, the 52 to 61 cents -- that sort of thing -- if there was no Kinston, whatever, and we had no of these sort of unusual charges, we would do whatever it is, 260 to 275, whatever the guidance is -- that's, I'm understanding that correctly?

The other way around. The guidance of the 205 to 215 would assume that we could book the business interruption insurance that (indiscernible) into '03 as part of '04.

Got it.

But because of the accounting rags (ph) and cash settlement, the fact that it is not tied to a future event, all of the insurance settlement has been booked in '03, despite the fact that we will still incur some expense in '04.

So, in other words you're saying -- 205 to 215 -- but does that -- that does assume sort of still some depressed margins from having employees flying back and forth, etc., over time cost, that kind of thing?

Yes, a little bit. It's going to come down. The majority of those expenses would occur in the first two to three quarters of the year. And what you're going to see is kind of a crossing line between the expense that we are incurring and the revenue ramp up as we go through the year.

What we're hoping is that the validation trails and the sampling runs that have to be done for our customers are completed in the second and third quarters, and that we're close to full production by the end of the year. Right now, that is our target.

Alright. Thank you very much, and you're doing a great job.

Thank you.

(Operator Instructions). Stephen Costal, Lehman Brothers.

You guys mentioned about the pharma consolidation, I think, in your risk factors. Can you elaborate on that? And, kind of, your view of how that would -- (indiscernible) any additional consolidation would affect your business?

It does not affect the business near term, in terms of the ongoing sales. But what you find is a year to a two-year lag as the merge entities begin to call out their product portfolio. If there's overlap, it's typically after divest products? Where it really hits us is kind of in the three to five year downstream timeframe, because of the development projects.

Really, things tend to come to a halt as the R&D groups merge, and as the consolidated entity begins to put into place their R&D strategy, and their product development priorities. So that is really where impacts us.

So, would you say that -- you have then really have not seen the full effects of, say, the consolidation that has happened over the past 3 to 4 years?

We have seen some of it in terms of our own R&D pipeline and some of our development projects. In the base business itself, because of the underlying stability, the drugs themselves tend not to go away -- they may go to another producer or another marketing agent.

And in terms of how the customer base is changing -- is it fair to say, obviously, that biotech revenues, or revenues from your biotech customer base, are much faster than, kind of, big pharma? And how does that evolve and how does that product mix evolve? And also, the pricing to those two customer bases?

In recent years, certainly we have seen a faster rate of growth in biotech than we have in traditional pharma. If you look at the new product pipeline and the approval cycles that are going through the FDA, biotech products are really starting to form a significant percentage of those products, because biotech products are protein or peptide base, they're monoclone (ph) antibody -- they tend to be much more sensitive and much more difficult to deliver in package effectively.

So, whereas the standard injectable antibiotic may use our standard product offering, the biotechnology products typically would use a coated product that has gone through Westar, for example.

So, it is a real value chain for us, in terms of what we provide. And I think that trend is going to bode very positively for us in the future. Certainly with the number of new products that are coming through Phase III, and are now in the approval (technical difficulty) that is good news us.

Okay, (indiscernible), thanks for the comment.

One item of clarification -- back on the question about operating profit percentage. We went back and looked at the calculations -- we would expect normalized operating profit percentage to be in the high teens -- just to clarify.

Shy Garcon, Corsner Capital.

Two questions I missed asking before. What is the G&A number, or expectation for '04?

What was the question?

Depreciation and amortization (indiscernible) for '04?

In the low 30s.

And can you maybe just take us through -- if there are any discussions at the Board where we stand on paying a dividend? And what the thought process is there and if that is up for discussion?

We review at our annual basis with the Board. Right now, we see no change in our current position.

Okay, thank you.

(Operator Instructions). Stephen Costal, Lehman Brothers.

Sorry, I have one more for you guys. How much -- in pharma systems, can you breakdown price contribution, volume and mix?

It is kind of difficult to do. Roughly -- I mean, our business really splits into four components that we follow. One is medical device, one is pharma, one is biotech, and one is diagnostic and delivery components. The majority of the business falls into the device and the pharma segments. But you do see subtle shifts from time to time in that mix.

But, I think last quarter, you guys alluded to, like, a few hundred basis points of the constant dollar percent growth came from price? Would that have been -- in terms of price increases -- would that have been similar in the fourth quarter?

Yes, I think that is pretty consistent. We have got kind of a rolling cycle -- roughly about half of our business at any given time is covered by 1 to 3 year supply contracts. But on the remaining 50 percent of the business, you'll typically see price increases ranging into 1.5 to 3 percent, average (indiscernible).

But you do not see price increases that take place at a particular -- largely at a particular point of the year? They're rolling throughout the year?

They roll throughout the year. The only exception is on our business side, it is based on plastic resins where we have escalators and deescalators tied to the resin price -- those get adjusted on a quarterly basis.

Okay, thanks again.

Thank you.

At this time there no further questions.

Thank you, operator. 2003 clearly was a remarkable year for West Pharmaceutical Services around the world -- even with the tragic loss of the Kinston facility, the Company managed to deliver one of its best operating years in its 80 year history.

Credit for producing this remarkable performance goes to the Company's more than 4,000 employees worldwide. Without their hard-work and often personal sacrifices, the Company would not be in the position it finds itself in today.

I would also like to extend a thank you to our customers, our Board and our shareholders for their support through a very challenging year.

To summarize, our core pharmaceutical business systems is solid, our customer relationships are stronger than ever, and we're nearing completion of our rebuilding efforts in Kinston, and our capacity expansion projects from Jersey Shore, Pennsylvania, and Stolberg (ph), Germany.

2004 looks to be another good year for the Company. Again, for the full year, we're looking for pro forma earnings-per-share to increase approximately 9 to 14 percent, and follow in the range of $2.05 to $2.15 before any extraordinary items.

Due to the complexity in reporting our financial performance as a result of the Kinston insurance settlement, we will continue to report on both a GAAP and a pro forma basis to provide as much clarity in our financials in 2004 as we possibly can. Thank you again for joining us today.

Thank you for participating in today's West Pharmaceutical's fourth-quarter earnings and year-end conference call. You may now disconnect