西式醫藥服務 (WST) 2005 Q3 法說會逐字稿

Welcome to the West Pharmaceutical Services third quarter 2005 results call.

(OPERATOR INSTRUCTIONS)

I would like to turn the meeting over to Ms. Julie Huang. You may begin.

Thank you, Judy. Welcome to the West Pharmaceutical Services 2005 third quarter conference call. As you know, we issued our results this morning. The release has been posted on the Company's website located at www.westpharma.com. If you have not received a copy of the announcement, please call Financial Dynamics at (212)850-5600 and a copy will be sent to you immediately.

Before we begin, I would like to remind you that certain statements in the release and certain statements that may be made orally by management of the Company may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as estimate, expect, intend, believe, plan, anticipate, and other words in terms of similar meaning in connection with any discussion of future operative or financial performance or conditions.

In particular, these statements include concerning future actions, future performance or results of current and anticipated product sales, efforts, expenses and the outcome of contingencies such as legal proceedings and financial results. Because actual results are affected by risks and uncertainties, the Company cautions investors that actual results may differ materially from those expressed or implied in any forward-looking statement. For a non-exclusive list of those factors which could cause actual results to differ from expectations, please refer to the factors listed in the Company's press release and SEC filings.

The Company assumes no obligation to update forward-looking statements as circumstances change. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company's 10K and 10Q reports.

Once again, this call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material. It cannot be re-recorded or rebroadcast without the Company's express permission. Your participation on this call implies your consent for its taping. Once management has concluded their remarks, we will open the floor for questions.

At this time, I would like to turn the call over to Dr. Don Morel, Chairman and CEO.

Thank you, Julie and good morning, everyone. Joining me for the call this morning are Bill Federici, West Chief Financial Officer, and Mike Anderson, our Treasurer and primary investor relations contact. Also joining us for the Q&A session will be Steve Ellers, our Chief Operating Officer.

As 2005 comes to a close, West is a very different than three years ago. We have completed the divestiture of non-core businesses, significantly strengthened our core injectable components business, and completed three key acquisitions that provide a platform for accelerated revenue growth going forward. Revenues during this period have approximately doubled, and I believe the Company is very well positioned for the future.

The third quarter of our operating year is always the most difficult to predict and 2005 proved no exception. This morning's release reflects the normal challenges we face as a result of our plant shutdowns in Europe and customer inventory management decisions, compounded by a sharp shift in product mix in North America and the impact of the Gulf hurricanes on a range of our raw material suppliers.

While our operating plans remain on track from a revenue standpoint, our overall operating profitability was lower than anticipated as a result of three contributing factors. First, our product mix in North America was extremely unfavorable, with Teflon orders taking a sharp downturn. Second, like many manufacturers, we experienced a sharp rise in energy and raw materials costs. Third, the Tech Group experienced delays and as a result, higher costs as we ramp up production on several key programs. Bill and I will address the specifics behind each of these issues in a few minutes.

Overall, sales for the quarter grew from $133.1 million in 2004 to $181.6 million in 2005, with acquisitions accounting for 41.6 million of the increase. As expected, revenue growth in our core components business moderated during the third quarter to slightly over 5%. Our consolidated gross margin for the quarter declined from 27% in 2004 to 24.1% as a result of the inclusion of the lower margin tech business and tooling sales. However, on a positive note, our gross margin in the pharmaceutical systems business remained flat versus prior year despite the unfavorable product mix.

Consolidated operating profit was $13.2 million in the quarter versus $10 million in the prior period 2004, resulting in net income of resulting in net income of $7.1 million versus $6.8 million prior year. Fully diluted earnings per share were $0.22 for the quarter, equal to the same period in 2004. From a transactional standpoint, West completed the divestiture of our clinical services business to Covance in August, which generated a gain and also closed our acquisition of Medimop. This accomplishes a major objective for the management team, having fully focused the Company's growth prospects on our core manufacturing expertise, covering both our primary injectable packaging and delivery system business, and the market for assembled devices in both the healthcare and consumer markets.

In August, West also announced an increase in the annual dividends of a penny per share, effective in the fourth quarter. This represents an increase of approximately 9% and is West's 13th consecutive annual increase in dividends. This reflects management's ongoing confidence in the ability of our business to generate cash in excess of our ongoing business requirements.

Turning to pharmaceutical systems, our operating performance in all of our business regions was in line with expectations, with the notable exception of North America. Sales in the Europe Asia Pacific region were very strong, with sales increasing significantly versus prior year, again being driven by demand for insulin packaging and delivery systems in pre-filled syringe components. This offset a decline in North America sales of approximately 3.5%, which was due exclusively to the sharp decline in coated product orders during the quarter, which impacted operating profit by approximately $2.5 million.

While there remains some order uncertainty in the fourth quarter as customers to work down the safety stocks built during the end of 2004, we strongly believe full-year orders will normalize during 2006. It is important to note that the downturn in orders in the coated product segment in no way represents any loss of business for the segment. Rather, as we have pointed out in prior calls, it is result of customer work downs in inventories toward the end of their fiscal years.

A key issue we are confronting is securing our supply chain of several critical raw materials in the aftermath of Hurricanes Katrina and Rita. Many suppliers of petroleum-based polymers suffered damage and plant shutdowns due to the hurricanes. We've received force majeure letters for more than ten suppliers as they work through getting their operations back to full production. We work very closely with these suppliers on an ongoing basis to ensure an uninterrupted supply of materials, and to date, have experienced no shortages. We continue to believe our inventories will supply us for all of our near-term needs, and we continue to monitor this situation very carefully going forward.

At the end of the third quarter, our backlog in the pharmaceutical systems division came to about $149 million versus $140 million for the comparable period in 2004. The composition of the backlog indicates that while backfill orders are returning to normal levels, orders in North America for Teflon, while increasing, will remain behind Q4 2004 levels.

European orders are very strong, with orders fully booked for the quarter. Our operating cash flow was very strong at $24.3 million for the quarter and $53.3 million year-to-date. Capital expenditures are currently below plan at $32.6 million for the year. In looking at the Tech Group, sales were $38.9 million for the quarter, of which approximately $8 million were tooling sales. While sales were fully in line with expectations, operating profit fell below expectation due to a product mix and delay in manufacturing on several key programs in preparation for eventual launch.

A very positive development during the quarter for tech was the FDA advisory panel vote on Exubera. As you know, on September 8, an FDA advisory committee voted to support approval of Pfizer's NEL insulin drug candidate, Exubera, for the treatment of type one and type two diabetes. While the FDA usually follows the advice of its advisory committee, it is under no obligation to do so. Additionally, on October 13, the Committee for Medicinal Products for Human Use of the European Medicines Evaluation Agency, issued a positive opinion on Exubera, recommending that a marketing authorization be granted. The European commission is expected to act upon that recommendation early next year. Once approved by regulators here and around the world, Exubera will provide an important new way for patients with type 1 and 2 diabetes to administer their insulin.

Tech is one of two manufacturers, and the only US-based manufacturer, under contract to manufacture devices for the Exubera products.

Tech also was awarded several new major programs with existing customers, which are expected to launch in 2006, as well. Overall, the integration of the operations is proceeding smoothly and in line with the timelines announced post the acquisition in May.

During August, we also finalized the acquisition of Medimop Medical Projects Ltd., an Israeli medical device company specializing in reconstitution systems and devices for fluid transfer for injectable drug administration. During the quarter, Medimop contributed revenues of $1.7 million.

From a revenue perspective, both Medimop and Tech are running in line with our original expectations, and I continue to be very pleased with the overall integration process for both companies. However, as a result of increased interest costs and the timing uncertainty of several key programs, we now believe these acquisitions will likely result in neutral or modest earnings increase for the year.

I would like to turn the call over to Bill Federici for more detailed commentary on our financial performance during the quarter. Bill?

Thank you, Don and good morning, everyone. Before we get started, I would like to mention that our results for the quarter include the results of Medimop Medical Projects, an acquisition we completed in August. Medimop will operate within our pharmaceutical systems segment. Also included with our release is a table that breaks out our reported results by segment, and details the impacts of our acquired businesses. That table should help you follow along with my comments today.

As noted in this morning's press release, West reported third quarter 2005 income from continuing operations of $7.1 million or $0.22 per diluted share versus income from continuing operations of $6.8 million, also $0.22 per diluted share reported in the third quarter of 2004.

The results of the 2004 third quarter contain Kinston accident recovery and legal costs of $3.4 million, but did not include the cost of accounting for stock options, which are included in the results of our current year quarter.

The effect of these two issues net to $0.07 of additional cost that is contained in our 2004 third quarter results. Although sales growth, as expected, slowed somewhat from prior quarters, the Company's core pharmaceutical systems division continued to perform well in the quarter, with sales of $127.4 million, 5.7% above 2004 third quarter sales, excluding the impact of acquisitions, with .5% of the increase due to currency.

Yearly sales growth was approximately 5% in the division, with all of the unit growth from our international markets, most notably through Europe. International revenue growth at 12.2%, excluding exchange effects, was driven by increased demand for pre-filled injection components and for the Company's serum stoppers in both Europe and South America. . Much of the European growth was in support of the insulin market. Domestic revenues in the division, as expected, actually declined versus prior year quarter as customers continued to work down inventories of coated products built in late 2004. As we indicated in prior calls, customers increased their inventories in 2004 in advance of a formulation change. Consequently, sales of advanced coating products continued to slow in Q3 2005 as customers work off these inventories, resulting in a decrease of operating profits of approximately $2.5 million or $0.05 per share. This pattern is expected to continue in Q4 and in 2006, we expect a return to normal order levels for the full year.

Domestic demand continued to increase for the Company's high value Westar products and customer funded (ph) product development and production tooling projects. The Tech Group division, which includes West's existing plastics unit, achieved sales of $56.1 million in the quarter, substantially greater than its prior year quarter due to the $38.9 million of sales generated by the recently acquired Tech Group . The acquired business increased sales by more than 30% over those achieved in Q3 2004 under its prior ownership due it a variety of new programs established with existing as well as newly acquired customers.

Sales in the division's previously existing plastic unit increased by 1% from the prior year quarter.

As noted in our release, consolidated gross profit margins for the quarter were 24.1% versus the 27% margins we achieved in the same quarter of 2004.The decline this quarter is largely due to the effect of relatively lower margins generated in the acquired Tech Group business, which reduced overall gross margins by approximately 3.5 margin points, the impact of less rich mix of sales in the core business, noted above, which impacted overall gross margins by approximately 1.5 margin points, and the continued increases in raw material costs, component costs and overhead, which resulted in increased Q3 expenses beyond our ability to pass those costs to our customers of $1.5 million, or three-quarters of a margin point.

The raw material and energy cost increase in Q3 was muted by existing supply and customer contract, which generally provides for cost increase pass-throughs on a lag basis. These raw material and energy cost increases are expected to negatively impact Q4 by approximately $2 million, and we expect that the price increases expected to take effect January 1, 2006 will offset the foreseen raw material and energy cost increases in 2006.

Reported operating profit for the combined business divisions was $20.9 million in the quarter compared to $17.5 million in the year earlier quarter. The increase was largely due to the strong operating results achieved by our European operations, and the approximately $1 million of operating profit generated by our Tech Group and Medimop acquisitions for the quarter.

During the third quarter 2004, the Kinston related recovery cost for the pharmaceutical systems division were approximately $3.1 million pretax.

Consolidated selling general and administrative expenses increased by $4.9 million in the quarter versus the prior year quarter. Over 80% of the increase is due to the SG&A expense of our Tech Group and Medimop acquisitions. Other increases over prior year include increased compensation costs, the expense associated with expensing stock options, and the cost of director and employee stock-based compensation due to the rise in Company stock price in the quarter. Increases were partially offset by declines from the prior year in outside services costs and the costs associated with the Company's restricted stock plan.

As a percentage of sales, Q3 2005 SG&A expenses decreased by 2.4 percentage points from third quarter 2004 levels of 19.4%. Net interest expense was $3.7 million in the quarter, $1.8 million higher than last year's third quarter expense at $1.9 million. The increase was due to increased borrowing associated with the Tech Group and Medimop acquisitions, and a 200-plus basis point increase in borrowing rates over the past 12 months.

The Company's effective tax rate of 31% for the quarter was slightly higher than the prior year quarter rate. We estimate our effective tax rate for 2005, excluding the provision associated with tax repatriation under the AJCA, will be approximately 29%. Earnings of affiliates decreased by 600,000 or $0.02 per share, due to lower sales of coated products produced by Diakyo, our Japanese affiliate.

The Company's cash balance of September 30 was $20.9 million and working capital totaled $91.7 million. Debt at September 30 was $260.7 million, a decline from the $278 million outstanding at the end of the prior quarter due to the repatriation of funds completed in the quarter in connection with the AJCA, net of the cash portion of our Medimop acquisition. The Company is continuing to evaluate whether repatriation of further investments in our international operations under AJCA is warranted.

The debt to total invested capital ratio at the quarter end was 44.8%, a reduction from last quarter end due to the repatriation program. Operating cash flows were $24.3 million for the quarter and capital expenditures during the quarter were $14 million. Year-to-date, the Company has made capital investments of $32.6 million with nearly 80% of the year-to-date capital focused on normal maintenance and replacement manufacturing equipment and tooling.

Regarding our earlier earnings guidance provided for the full year of 2005, we are continuing to project full year sales in the increase of the range of 8% to 9%, excluding our Tech and Medimop acquisitions and currency. As a reminder, we guided to full year 2005 earnings of $1.33 to $1.51 per diluted share, excluding currency effects and the tax expenses associated with AJCA. We stated that the guidance included $0.025 for Tech and Medimop would be earnings neutral. We also stated that full year gross margins for our Pharm Systems segment would be approximately 30%.

Since we originally gave that guidance, a number of issues have impacted our results. Currency negatively impacted our results by $0.02 in Q3 and is expected to negatively impact Q4 by $0.03 versus where we expected currency rates to be. The tax expense associated with our $67 million of repatriated cash from overseas was $0.04. Further repatriations are currently being examined, but we have not yet determined the amount or timing of any further repatriation under AJCA this year. Our revised guidance takes into consideration the reduced profit expectations for our Tech Group acquisition, due to a delay in the timing of certain key programs. We now expect Tech to be marginally profitable or earnings neutral for 2005. We continue to expect Medimop to be earnings neutral for 2005.

Our revised guidance reflects increased raw material and overhead costs. Those increases were $1.5 million in Q3 and are expected to be approximately $2 million in Q4. We expect that price increases will offset the foreseen raw material and energy cost increases in 2006. Our plastics group price increases are generally passed through to our customers on a quarter lag basis.

Our Pharm Systems 2005 gross margin is expected to be approximately 31%. Our guidance reflects the reduced sales and mix of sales in North America related to the Teflon and B2 customer orders packs. In Q3, operating margins were negatively impacted by approximately $2.5 million and a similar negative impact is expected for Q4. We expect that customer order patterns for our advance coating products will return to normal for the full year 2006. Based on the above, we project full year reported 2005 earnings will be in the range of $1.30 to $1.35 per diluted share.

Some of the items impacting our results also impacted our previous guidance. Our current projections of 2005 earnings of $1.30 to $1.35 per diluted share includes AJCA tax expense of $0.04, currency impacts of $0.02 for Q3 and an additional estimate of $0.03 for Q4. Actual raw material and energy cost increases of $0.03 in Q3 and an expected $0.04 in Q4. These items total $0.16 per share.

Our order backlog is approximately $9 million higher than at the end of Q3 2004. For the remainder of 2005, we will continue to focus on monitoring and controlling discretionary spending and through our lean manufacturing initiative, focus on increasing operating efficiency.

In summary, we have accomplished a lot this year with three acquisitions, and despite the challenges confronting us this year, our business fundamentals remain strong. We believe we are poised to continue to grow sales and margins into the future. This concludes our commentary for this morning. We now would be pleased to answer any questions you have.

Thank you, sir. (OPERATOR INSTRUCTIONS)

One moment for the first question. The first question is from Mr. Arnold Ursaner with CJS Securities.

Hi. Good morning. A couple of questions if I can. One is more mechanical relating to your SG&A line, which was much lower than I had put in my model. I know, Don, your bonus pool is driven by a binary, you-have-to-hit-85%-of-goal-to-get-bonuses, kind of all or none. Was there a reversal of any bonus accruals in the quarter to reflect whether you would or would not make those goals?

Yes, there was revised downward modestly, Arnold, about $250,000.

The second question I have is just a clarification regarding your sales growth guidance for next year. I would assume that that-- I'm trying to understand if you are doing that on a pro forma basis for the full year as if you had had Tech Group the full year?

The guidance for the core business obviously is for the full year. For Tech, let me make sure I get the answer right. I think the 10% to 12% is as if we had owned it for the full year.

No, the 10% to 12% is on a straight comparison basis. On GAAP basis, Arnold. If you take the acquisitions out, it brings it down to the numbers we presented there.

Bill, I'm sorry. I'm a little unclear. Again, mathematically, are we implying something in the range of $820 million which would be, I think, consistent with six core and 10 to 12 overall, assuming you had had the full year?

We are implying that-- and I won't comment on your number directly. But yes, we are implying that sales were increased-- just straight mechanical numbers over where we expected to come out to this year-- by 10% to 12%. And if you do it on a comparative of apples to apples basis, it is 6% to 8%.

One of the things from a disclosure point of view is because of the acquisition, you really almost have two completely different businesses with very different gross margins, so I want to be as clear as I can be and perhaps give you the opportunity to be as clear as you could be. You have not run gross margins anywhere near these levels prior to acquiring Tech Group. So can you give us a much better feel for the spread in gross margin between both of your businesses, so we can fill that in going forward please?

We have talked about it before and we'll comment on where we expect them to be for the full year. Because I think that is the best way to do it. Right now, our pharmaceutical systems division through nine months, if you look at our-if you look at the numbers year-to-date for Pharm Systems division, we are running at gross margins of 31%. And if you look at what the Tech Group-- and that includes both the acquired business and West's existing plastics business- it's running right around 14% on a gross margin basis. That is through nine months, Arnold.

If you look at it for the year, what we expect for the year, the full-year number we expect to be closer to 31% for the Pharmaceutical Systems division and our full-year for Tech, including both the acquired business and the plastic group, will be approximately the same, just around 13.5%. That's on a gross basis.

Frequently, as you discussed next year, you talked about orders and margin improvements, if you will, related to the full year. Are you-an again, we obviously have problems occurring in Q4. But are you hinting or suggesting strongly they may continue at least to some early part of next year?

I think what we are saying, Arnold, and we are trying to be as clear as we can here, is that when I look at the 2002 to 2004 period, and I look at the growth factor for coated products, when we smooth that curve it is a consistent 10% to 12%. When we got to the end of 2004, we saw a very dramatic ramp-up through the third and fourth quarter in those areas that skewed the curve a little bit. This year we thought it was going to happen in the beginning of the year, and end with a return at the end.

Instead what we saw were stronger orders in Q1, a slight decline in Q2, and in North America and Teflon in particular, a drop off in Q3. And we believe that is going to continue, although the orders are starting to increase in the inventory cycle again. But it won't return to where they are in Q4.

As we look ahead, we look at 2006 and we normalize that curve through the bump at the end of 2004, we think they are going to return to their normal sales levels. But we want to make sure that we do it on a full-year basis rather than comment on the beginning of the year. And to be honest, we will have a lot more visibility into that I think when we have our February call.

I will jump back in queue. I have a few more but I will come back later. Thank you.

Steven Postal with Lehman Brothers, you may ask your question.

Good morning, guys. I just wanted to drill down on the raw materials point. I think previously you guys have talked about these automatic escalators in the rubber business and also the resin business. Can you just clarify what kind of changed and why you are now being impacted by rising raw material costs?

I think that we've got to be clear and kind of separate the two. In our plastics business, there are several contracts that have automatic escalators that go into effect immediately and then there's the range of contracts that have a 90-day lag. So obviously, until those get implemented, we are absorbing the lag periods. But they will go in effect come January 1.

On the rubber side of the business, the contracts are typically adjusted on the annual basis, typically based on a PPI or some kind of perimeters that measures cost changes in a basket of goods. So what we are looking at right now is above and beyond our ability to pass through increases of roughly $1.5 million in the third quarter, and probably a little bit north of $2 million in the fourth quarter. Those will catch up eventually because of the contracts, but right now that is what we're absorbing in the second half of the year.

It sounds like in the rubber business that is not an automatic increase. You said it is based on a basket.

That is right. It is not automatic. That's correct.

So in terms of negotiations with customers, is there any challenge in passing along 100% or a vast majority of what is hitting you?

Oh, always. Sure.

Absolutely.

And a clarification. I think in your prepared remarks, you suggested that the price increases in 2006 would offset what is hitting you in the raw material side. But in the press release, I think you said that it came out to me that you are saying the exact opposite, that raw material costs rise faster than those price increases.

Mike was, in the release, was speaking to the fourth quarter. And then in 2006, we do believe that the price increases that we expect to take effect on January 1, 2006 will offset what we see at this time. Now obviously, if there are significant changes in that, another dramatic increase due to storms, et cetera, then we would have to go back and re-look at it. But right now, with what we see, can see into the future on our raw materials, we believe we've got it covered with price increases.

Fair enough. Can you talk about what-- I think your historical price increases were in the 100 to maybe 200 basis point range. Can you talk about what you are seeing now in terms of price increases and for 2006?

You are absolutely right. On our passing on price to our customers, it has been in that 1% to 2% range. We are looking toward-- and you said it right, it doesn't mean it is automatic. But we are hoping and projecting that will be in that 5% to 6% increase in price.

I see.

Yes, it is relatively different environment now, Steven. And over the last couple of years, of course, we have had, for all intensive purposes, relatively stable pricing on our cost of goods. The increases have been in the 1% range. They have been very stage. With oil price spiking dramatically in the early part of this year, and probably a third of what we use being petroleum-based products, it is kind of an exceptional year.

Then I also wanted to drill down a little bit on your comments regarding the Tech acquisition. I think basically what you are saying, previously you said $0.02 to $0.05 accretive in 2005, and now you are saying it is going to be neutral to earnings. Can you just clarify in more detail what the issues of the Tech Group that caused the change in profit contributions?

Yes. Very simply put, one is an increase in interest cost that Bill described during his commentary. And the second is that we've got a couple of key major programs that are going through the ramp-up and validation phase prior to hitting the market. And one of the difficulties in managing these programs is that as you approach launch, you obviously have to run your validations on the systems. And that takes away from your productive capacity to build inventory ahead of the product launch.

And what happened to us was that-- and this is all positive-- both of those programs underwent some extensive validation work in the third quarter. We think the best news with regard to Tech, and we will have to see what Pfizer comments on in their call this morning, is that the FDA issued a positive opinion out of its advisory committee to recommend approval, as did the European side. And I think you have to go to the outside to look at the predictions of what that product could do in the marketplace. But for the future, I think that it bodes very, very well for Tech.

You don't want to give us a sense of what the contribution from Exubera-related product sales could be?

We are not really in a position to do that now, Steve. And I'm hoping to be able to provide a little bit more color when we get to February. It is all going to hinge upon the timing of the FDA issuing its final opinion.

And just a couple more things. You mentioned the order backlog increasing year-on-year. I presume that the orders from the Tech Group are now included in that?

No, excluding Tech. That's just for the core business.

That's the same store basis.

Bill Federici Yes, it is the same store.

Can you just talk about your view of acquisitions now? You made a couple. Has anything changed or do you still view yourself as being acquisitive?

The answer to that is it would be opportunistic. We would have to see a really good opportunity at a really good price that fits with where we want to go strategically. I really like the Tech acquisition and I really like the Medimop acquisition because, as we described before, our criteria related to those has to be manufactured from materials that we know. We prefer to have contact with the drug interface or a significant component in intellectual property involved in our manufacturing. And they have to relate to the healthcare and consumer market. So I'm comfortable with where we are right now.

Those acquisitions are going to drive our future growth, compounded with organic growth in the core. We need to make them work and we need to make them produce where we think they can produce. So, it would have to be relatively exceptional opportunity for us to do something quickly.

Okay. Thanks a lot.

Beth Lilly, Woodland Partners, you may ask your question.

Good morning. I was wondering if you spend a minute and talk a little bit more about working down a safety stock by customers. It is interesting, I think this is now the second time this has happened in the last year or so. And if you can shed some light on how that works with your customers and how much visibility you have, just so we can get a sense of-it seems to me that this catches you off guard, or just any insight that you could provide that would be helpful.

It is a very difficult issue to manage. And I think what this one relates to, and I will specifically address the Teflon issue with the third quarter. We talked in prior calls about the material change that happened. And what made this one a little bit different is that when we submitted all the information we needed to the FDA, it was a pretty protracted delay in their responding to the information request for approval. And what that resulted in over a six to nine month period was our customers ordering stocks, probably to a much larger extent than they ordinarily would, for a material change that would receive a faster OK from the regulatory authority.

Just on a comparison basis, the European authorities acted within, I believe it was about two to four weeks. And therefore, the answer was clear. Because of the uncertainty associated in the United States, you had folks ordering basically an extra nine to 12 months of inventory to protect against the possibility that it wouldn't get a favorable response from the FDA.

So this situation, I believe, is really a timing situation related to this specific issue. It will normalize in 2006 and coated products overall will return to their growth factor over the next couple of years.

On the other side of the coin, outside of the Teflon, our customers typically have fiscal years that end in June, end in September or end at the end of the year. And we have to balance off, obviously, our production plans versus their order patterns. And like most folks, they of course are looking at inventories at the end of the year. And we have to manage accordingly. It is a very difficult issue to manage.

So, to get back to Arnold's original question in terms of guidance for 2006, can you repeat then the 6% to 8% core versus the 10% to 12% overall. I want to get clear on that.

It is 6% to 8%, Beth, on a same store kind of basis and it is 10% to 12% if you just take a mathematical increase over prior year.

But the only thing I would add to that is the 6% to 8% is obviously outside of currency, and that is in the core pharmaceutical system's injectable segment, what we call our core business. We are looking to layer on top of that the revenue contribution from Medimop and from Tech.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

One moment, please. Mr. Morel, at this time there are no further questions.

A question just came up. Two questions just came up. Steven Postal, you may ask a question.

Just one follow-up. On the Tech Group, do you anticipate, with what you know now about Exubera and the other issues, that it will be accretive in 2006?

Yes. And as I said, we will have a lot more color on that three months down the line and we will be able to give more definitive guidance on revenues for 2006 when we get to our February call.

Okay. Thanks a lot.

Arnold Ursaner, CJS Securities, you may ask your question.

A couple more questions. One, in your 10% to 12% guidance for next year for revenue growth, I'm assuming you have built in some Exubera sales into that?

Yes.

Okay. And just a technical question related to Exubera. I know you can't, by definition, disclose views of what potential volumes would be. But at some point, if it is material to you, won't you have a disclosure issue where shareholders will be required to disclose more this?

I think from our standpoint, we would defer to the actual licensee to comment on the unit growth in the market.

I think if we believe that it is significant to our results, then I think we would have to-- we may have to put out an 8K. But that is a legal question, Arnold. And that's how we feel about it right now. If there's a significant change, obviously it would impact us and therefore we may need to put out something.

Don, over the last few months, you've talked about expansion opportunities or a desire to enter China, which I think you indicated you hoped to be in by the middle of next year. To the extent that you hope to be there by the middle of next year, you have got to be pretty far along in the process now. Can you comment where we are?

We have spent an awful lot of time in China evaluating options in terms of existing operations. China is a very unique environment because the state FDA effectively issues license our states for manufacturing of synthetic stoppers for injectables. We have got a couple of candidates that we really like. We are going to pursue evaluating them on a much more rigorous basis, and hopefully by the early part of next year or a little later than that, we will have some positive news. But we're really right in the middle of the process now. We have learned a lot about the market. We have learned a lot about the individual players within the market. We are trying to identify the right partners for West.

Again, a technical question on Tech Group. You have got an earnout that would be met if they meet certain goals. Given that you are now implying it would be neutral as opposed accretive this year, is it possible they have not met the goal you had and would you not have an earnout issue?

Arnold, let me just back up. They have-- the earnout is in two pieces. The first piece is based on their fiscal year, achievement of their fiscal year plan which ended on June 30, 2005. And they did meet their goals and we did actually release to them the first piece of the earnout, which was roughly half of the amount that they were going to earnout.

The second piece of the earnout ties directly to their results in 2006 related to the Exubera product. So, that one is still, again, what we see today. We are continuing to monitor that and that will happen. We will look at that at the end of June 2006, as to whether they have met their goal for operating profits coming off of the Exubera product.

Arnold Ursaner Okay. Thank you very much.

Gregory Mcaskov with Lord Abbott, you may your question.

Thank you. With regard to Exubera, could you just talk about the general structure of that contract? I assume it was negotiated by Tech Group.

It was. And it effectively is a fairly standard manufacturing and supply agreement.

Does that mean that the pricing ramps down as volumes ramp up pretty aggressively or -

It is actually a fairly complicated structure that has to do with a three-year period in the beginning, given the investments that Tech has made in the facility and then goes according to volume after that.

Okay. And then with regard to the inventory surge that had been discussed I guess in the first quarter or in the first half of the year to some extent, as you now look back and forward has it -- has that surge come as expected? Was there anything-- I realize it has come a little later than you expected. But could you just comment on where you thought you would be and where you are now?

I think overall, we are a little bit below where we expected to be. We expected this would come in the early part of the year. And our first quarter earnings were a little bit stronger than we had anticipated, and I think we discussed that in the call. And as a result, it has happened more precipitously in the third quarter. Hindsight doesn't do us a whole lot of good here other than to look at our forecasting mechanisms and the way that we actually build up our forecasts in these key areas.

But the broader analysis in terms of the lifetime of the product segment is the bigger concern and we see no changes there. As I said, the important thing is that in 2006, this is going to work itself out. It is a timing issue and we are going to return to a more normal growth factor for next year and the years beyond that.

As a result, do you have or are you gaining any better insight into your customers' inventories going forward?

A little bit. We have instructed our sales guys to, especially in this segment, to work a lot more closely with the purchasing groups so we can do our plant manufacturing planning accordingly. And we are hoping to have a little bit clearer picture going forward. Again for us, because of the uncertainty toward the second half of the year and the difficulty in predicting the third quarter, we like to talk about the full-year basis. And again, with the work that we are doing, I think that we are very comfortable returning to normal growth in 2006 for the full year.

You made some fairly strong comments about European orders, particularly with regard to insulin. This is -- are these pre-filled syringes and is this sort of as expected or--?

Yes, our unit growth and our sales growth in insulin and components for insulin packaging and delivering really has followed the overall growth in the market. But it is a combination of both packaging for vials, but it is really dominated by cartridges and pre-filled syringes.

So that business is kind of moving along as expected?

It is a very strong growth driver for us. All you have to do is follow the incidence of diabetes in the global market and our growth pretty much tailors that.

Are you seeing anything in other continents besides Europe and the United States or North America?

We are seeing it only through our customers. We don't get visibility into some of the geographic segments, Greg. I think it goes without saying that as healthcare improves in some of the developing countries, and as they adopt a more western diet, it is likely that increases are going happen there, as well.

(OPERATOR INSTRUCTIONS)

One moment, please. Mr. Morel, at this time there are no further questions.

Thank you very much, operator. As we have discussed, overall 2005 has been a productive year through the first three quarters. We have completed a broad range of key objectives to position the Company for the future. While we believe sales growth for the full year will be between 8% and 9%, excluding currency and acquisitions, we still believe there are some risks associated with the fourth quarter which must be taken into account, namely the product mix we have discussed during this morning's call and the final timing of production ramp ups of key programs within Tech.

Looking ahead, I remain very confident that West is well-positioned to not only address these challenges, but also to generate sustainable revenue and profit growth in our core components business and through Tech and Medimop over the next several years.

The underlying fundamentals of our business remain very solid. The primary issues that we experienced during the quarter, which principally relate to product launch and order timing, will self-correct in 2006. Based on our business prospects for 2006, we believe that full-year sales growth will be in the range of 6% to 8% in our pharmaceutical systems group and 10% to 12% on consolidated basis, with an ongoing improvement in gross margin overall, leading to solid EPS growth. We will provide more detailed guidance for 2006 in our year-end February 2006 call. Thank you very much for your time today.