西式醫藥服務 (WST) 2007 Q3 法說會逐字稿

Welcome to the West Pharmaceutical Services Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Ms. Theresa Kelleher: from FD. Madam, you may begin.

Thank you. Good morning, everyone, and welcome to the West Pharmaceutical Services' Third Quarter 2007 Results 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 this announcement, please call FD 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 that may be made by management of the Company may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements set forth anticipated results based on management's plans and assumptions. Such statements give our current expectations or forecasts of future events. They do not relate strictly to historical or current facts.

In particular, these include statements concerning future actions, future performance or results of current and anticipated products, sales efforts, expense, the outcome of contingencies such as legal proceedings and financial results. We have tried, wherever possible, to identify such statements by using words such as "estimate", "expect", "intend", "believe", "plan", "anticipate", and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or conditions.

We cannot guarantee that any forward-looking statement will be realized. If known or unknown risks or uncertainties materialize, or if underlying assumptions are inaccurate, actual results could differ materially from past results and those expressed or implied in any forward-looking statements. For a nonexclusive list of these factors which could cause actual results to differ from expectations, please refer to the factors listed in today's press release. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company's 10-K, 10-Q and 8-K reports. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

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 to our taping.

Once management has concluded their remarks, we will open the floor for questions. At this time, I would now like to turn the call over to Dr. Don Morel, Chairman and CEO.

Thank you very much, Theresa, and good morning, everyone. I appreciate your taking time to join our call today. As Theresa mentioned, I'll be joined by Bill Federici, our Chief Financial Officer, and also by Mike Anderson, our Treasurer and primary Investor Relations contact.

Early this morning, West announced its earnings for the third quarter which continued on a solid growth track with sales overall of just over 11% of which 3.9% resulted from currency. Excluding the negative impact of a tax charge related to a prior period, earnings per share from continuing operations increased 20% to $0.42 per share versus $0.35 during the third quarter of 2006. Overall, it was a good quarter for the Company.

Looking ahead, we currently see fourth quarter sales of approximately $250 million and earnings in the range of $0.46 to $0.50 per share. Full-year earnings are thus expected to fall in the range of $2.32 to $2.36 per share compared with $1.93 in 2006.

Before I turn the call over to Bill to review our Q3 financial performance, I'd like to spend a little time this morning discussing both the short-term and the long-term outlook for our business and provide you with additional detail on the strength of our underlying core business and the positive long term industry and market trends we believe will enable us to achieve our growth objective.

Globally, our existing plants are effectively running at capacity for our core pharma packaging products. Our backlog remains very strong and demand across our portfolio of products remains robust, especially for high margin Westar and coated product lines. And although at times we will experience discrete events that impact our near-term results such as Exubera or the anemia drug reimbursement policy change. The combination of a diverse product portfolio, a globally diversified customer base, patient demographics, and a strong pipeline of biologics and vaccines bodes well for our long-term growth potential.

As you will see, we continue to believe that our growth strategy is fundamentally sound. That is, we will create long-term value for our shareholders through focusing the Company's resources on the development of proprietary value-added systems that assure the purity, quality, and safe administration of our customer's products. Simply put, we intend to drive value from our core packaging and delivery systems businesses by putting the right capacity in the right location, expanding geographically into selected developing markets and investing in the next generation of manufacturing technology and products. There are a broad range of opportunities in front of us and I continue to believe the Company is in the best possible position to capitalize on them to grow.

I'd like to begin by looking at 2008. Although the underlying rate of growth in our core business remains unchanged, we expect our overall revenue growth next year to slow as a direct result of some recent developments, the majority of which were external events outside of our control. These include the decision by Pfizer to step back from marketing Exubera, the impact of the reimbursement limits on several customer end-market sales, and the decision by one customer to take in-house production of a low margin diagnostic component. We're in the process of finalizing our operating plan for 2008 and will provide more detailed guidance in our February call; however, we believe the following sales projections will help quantify the impact of the issues now known to us and as you will note, we plan conservatively which we believe is the appropriate course of action under the circumstances.

With regards to Exubera, for planning purposes, we are assuming no revenue in '08, a reduction of approximately $33 million. This may change pending the outcome of Nektar's negotiations with Pfizer and their final decision with regard to the product. We're planning for a $7 million reduction in the sales of components for packaging of various anemia drugs sold by our customers and a projected sales reduction due to cessation of production of diagnostic components will be between $13 and $15 million. Collectively, these items which our solely near-term will reduce '08 revenue in the range of $50 to $60 million versus '07 at an average margin of approximately 35%; however, I'd like to reiterate that even with these near-term issues at the current time we believe the underlying strength and elasticity of our key markets will still produce sales growth of 3% to 6% overall in '08. Given these assumptions, we'd be very pleased with this result given our starting point at the outside of the year.

Although these factors will still have an impact on sales growth in the near-term, they do not affect our confidence in our long-term strategy. We believe over the next five years the long-term growth drivers for our core drug packaging and delivery systems businesses will generate sales growth in the range of 7% to 9% on average per year. Operating profit will grow in the range of 10% to 12% per year on average and earnings growth will be greater than operating growth.

How can West achieve this growth? Why do we have such strong confidence in our strategy? Fundamentally, we believe that the long-term trends favor our products and our global manufacturing footprint. Our investments in new product development are targeting specifically in unmet needs in the market. As I have stated in previous calls, the drivers of our core business have net changed and all support our continued long-term growth. Those are growth in chronic diseases, such as diabetes, arthritis, and cancer, that come with an aging population. The increasing number of biologic drugs and vaccines under development and the strength of our own innovation pipeline, growth of developing markets such as China and Indian, increasing cleanliness and quality requirements from global regulatory agencies, and growth in combination products.

I'd now like to discuss how management intends to achieve the Company's five year growth objective. What I hope to do is to provide some insight as to how management views the business and the opportunities we see in addition to breaking down the various segments of our revenue stream in greater detail to simplify both our strategy and the drivers of growth. To begin, 2007 full-year sales in the pharmaceutical system segments should be approximately $740 million. The most important growth drivers for this business remain the same; that is, global demographics and the year over year increase in chronic diseases such as diabetes and cancer which are more and more treated with drugs of biologic origin. More than 95% of these products are packaged using West's most advanced components and systems. It is a market growing in the 12% to 15% range per year from a revenue base of about $200 million. That average growth rate is expected to continue for the foreseeable future and is based on underlying market unit growth of high single to low double-digits and value price increases. These products carry gross margins substantially higher than our standard packaging components and this is where we are focusing the majority of our capital expansion efforts to meet increasing customer demands.

$425 million approximately of pharm system sales represents standard products, a market segment growing at a market unit growth rate of 2% to 4% which will also experience modes increased pricing. That average growth rate is expected to continue through the plan period with sales growth greater than the unit growth rate of the market as conversion occurs from standard products to Westar treated products. These products typically carry a 25% to 35% gross margin on average and capital plan for this business is mostly for maintenance purposes. It is important to note that the fastest growing segments of our core business, that is packaging and delivery systems for biologics and other injectable drugs, have the greatest regulatory barriers to entry and the highest margins as well.

Finally, the pharmaceutical systems segment also generates approximately $115 million of revenue from disposable device component sales. This segment is growing modestly at a rate in the low single digits of between 1% and 3%; therefore, we are projecting low per annum growth over our planning horizon. A large percentage of these sales will be covered by long-term contracts by year-end. Gross margins for this business range from the mid-single to mid-double digits and no significant new capital is planned to support this business.

Turning to the tech segment, our forecasted full-year 2007 revenues are comprised of approximately $52 million from drug delivery devices with gross margins of 29%. This group manufactures and assemble the Exubera device and various pen systems for our customers. The business is expected to grow in the low to mid-double digits on average, excluding the Exubera device sales over our planning horizon. Primarily on market unit growth of combination products and in the future pre-filled systems utilizing Daikyo CZ. Margins are expected to gradually expand due to increased capacity utilization and in the latter part of that timeframe, the introduction of new proprietary products. The delivery device business is also expected to benefit from our efforts to acquire bolt-on technologies and products and the majority of new capital to be invested.

The remainder of the tech business is comprised of approximately $225 million of contract, manufacture, and assembly of customer health care and consumer product. The business is expected to grow at mid to high single digits on average, comprised mostly of unit growth and also incorporating some modest price increases. This business has gross margins in the range of mid-singles to mid-teens, which are expected to grow driven by increasing plant efficiencies, rationalizing low margin products, and lean savings activities.

From management's perspective, our operating priorities remain as follows; driving maximum value from our pharm system's core product lines, operating as efficiently as possible via lean, building the right capacity in the right location, expanding our market presence into developing countries, continuing to shift the tech business model to proprietary products over the long-term, and delivering on our innovation investment. Taking these factors collectively into account, we'll be starting '08 with a revenue baseline of approximately $950 million from which sales are forecasted to grow roughly 9% to 11% or approximately 3% to 6% from the full-year 2007 estimate of just over $1 billion.

To reiterate, the driving fundamentals of our business remain strong and we are focused on the right programs for the future. The industry has an improving new product pipeline with many biologics and financially our balance sheet remains solid. I have no doubt we'll work our way through the short-term issues and we remain very confident in our ability to generate growth of 7% to 9% per year and earnings growth in excess of 12% per year on average over the planning horizon.

Now I'd like to turn the call over to Bill Federici who will discuss in more detail our Q3 financial performance. Bill?

Thank you, Don, and good morning, everyone.

As indicated in this morning's press release, West reported third quarter 2007 income from continuing operations of $12.2 million or $0.36 per diluted share. Results in this year's quarter included severely discrete tax items that on an [F] basis increased tax expenses by $0.06 per diluted share. Excluding the net negative effect of these tax items on current period earnings, third quarter 2007 earnings per share from continuing operations were $0.42 per diluted share, $0.07 better than last year's third quarter earnings of $0.35 per diluted share. The Company's consolidated sales in the quarter were $242.7 million, an 11.2% increase over third quarter 2006 sales with 3.9% of the increase due to foreign currency.

Sales growth in the pharmaceutical systems segment continued to be strong. At $173.8 million, third quarter sales were 13.1% above 2006 third quarter sales with 5% of the increase due to currency effects. Pharmaceutical systems growth was relatively balanced geographically in the quarter with international sales increasing 9% over third quarter 2006 sales excluding exchange effects and domestic sales growing at 6.5% over the prior year quarter. Growth in dollar terms was strongest in the European and North America business units which collectively accounted for 80% of the segment's growth. As in prior quarter, much of the growth was driven by continued increased demand for our advanced coated products and Westar processing. Demand for pre-filled injection system components was also stronger in the quarter.

The tech group segment generated sales of $71.4 million in the quarter, 6.8% above sales in the prior year quarter with 1.2% of the increase due to exchange. Tech's growth was driven by increased demand for several specific products including packaging for a customer's weight loss product, components used in an intra-nasal delivery system treating allergies, and a device used in cardiac surgery.

Turning to margins, consolidated gross profit margins for the quarter were 26.5% compared to 27.2% margins we achieved in the third quarter of 2006. As we've addressed previously, our margins are historically lower in the third quarter, due to the reduced production output resulting from our summer plant shutdown.

Gross margins in the pharmaceutical systems segment were 31.8%, 1.2% lower than in last year's third quarter. In this year's quarter, the positive impact of the segment's increased sales prices, volumes, and a favorable product mix were more than offset by increased raw material, labor, and other manufacturing costs. The margin decline primarily reflects the impact of increased manufacturing and engineering expenses mainly in Europe, Asia, and North America business units. And higher production demands in Europe due to capacity constraints.

Margins will continue to be under pressure in the near-term from our capacity expansion coupled with running certain plants at or near capacity and inflation costs offset by favorable mix shifts, pricing, volume increases, and lean savings. Bringing the capacity expansions online later in 2008 allows for increased production of high value, high margin products, and drives our expected margin expansion over the planning period.

In the tech group, margins decreased over the prior year quarter for four-tenths of a margin point to 12.7%. The decline largely results from the incremental plant overhead costs incurred with the start up and transition to our new Michigan facility and additional raw material and labor costs. Those margin pressures are expected to begin to abate later this year and into 2008 as utilization at the new Michigan facility increases.

Our third quarter 2007 R&D expenses increased by $1.2 million over Q3 2006 due to increased development activity and spending on increased staffing within our innovation group. Consolidated SG&A expenses increased by $2.8 million or 8% in the quarter versus the prior year quarter. The increase was primarily due to increased compensation costs, mostly in the pharm system segment relating to head count additions in support of our growth programs, annual merit increases, and severance charges, increased outside service costs relating to information system development activities - again, mostly in pharm systems - and the impact of foreign exchange. SG&A costs increases were partially offset by lower director and officer stock-based compensation expense, lower incentive compensation expenses, and lower costs associated with the Company's U.S. pension plan. As a percentage of sales, third quarter 2007 SG&A expenses at 15.5% were 0.5% lower than third quarter 2006 levels.

Reported results for the quarter also included a discrete charge of $8.6 million to increase our reserves for various taxes in Brazil. The increase provision followed a recently completed review of the status and prospects for successful resolution of several tax issues pending in Brazil. Interest expense was $700,000 below Q3 2006 expense, mostly due to lower debt levels on our higher cost revolving credit facility and additional capitalized interest associated with the Company's capital expansion activities. Contributions from affiliates were $800,000 higher than in the prior year quarter. The 2006 third quarter results included West's $700,000 share of a plant write-off at our Daikyo affiliate. The effective tax rate for the quarter was 28.5% and the annual effective tax rate is expected to be 29.1% which excludes the out of period tax items.

Our balance sheet is strong and business continues to provide necessary liquidity. The Company's cash balance at September 30 was $151.4 million, a substantial increase over the year-end due mostly to the receipt of proceeds from a debt offering we concluded earlier this year. In the third quarter, we used $28.3 million of our cash to repurchase 691,300 shares of our common stock at an average price of $40.93 per share. Working capital totaled $274.4 million at September 30, nearly $150 million more than at year-end also due to the debt offering. Debt at September 30 was $393.6 million and our net debt to total invested capital ratio at quarter end was 33.2%, 2.1% higher than at year-end due to the stock buyback. Operating cash flow was $24.2 million in the quarter and we incurred capital expenditures of $23.9 million in the third quarter with more than 50% of the capital focused on new product and expansion activities, mostly in pharm systems.

We are deliberately investing our expansion capital expenditures to support demand growth in our high value, high margin products. In summary, we experience another solid operating quarter, improving earnings excluding discrete tax items by 20% over the prior year quarter. Looking ahead, our order backlog at September 30 remains strong at $236 million, significantly higher than our September 2006 backlog of $208 million but less than our year-end backlog of $250 million. The decline from year-end reflects the seasonal receipt of orders from customers.

We expect fourth quarter earnings to be in the range of $0.46 to $0.50 per diluted share which will put projected full-year 2007 earnings between $2.32 and $2.36 per share including the $0.03 dilution expected from the 2007 convertible debt offering but excluding the impact of the discrete tax items we've recorded in the second and third quarters. We are maintaining our full-year sales guidance at just over $1 billion and continue to expect consolidated gross margins at 29%. Pharm system's gross margins are expected to be approximately 34.8% for the year. We now expect tech segment margins to be 13.1% for the year which continues to assume $33 million of Exubera device sales and assumes a fourth quarter improvement in operations, particularly at our new Michigan facility.

We continue to expect R&D expenses for 2007 to be $17 million reflecting increased spending related to our first quarter injection pen technology acquisition and increased development activities. We also expect that full-year capital expenditures will be approximately $120 million. In China, we're still experiencing delays in obtaining necessary land use certificates from the local government but expect to receive necessary approvals by the end of the year.

I'd now like to turn the call back to Don Morel. Don?

Thanks very much, Bill. This concludes our commentary for this morning and we'd now be pleased to answer any questions you might have. Operator?

(OPERATOR INSTRUCTIONS) Our first question comes from Arnie Ursaner from CJS Securities. Your line is open. You may ask your question.

Hi. Good morning.

Good morning, Arnie.

Pretty crowded press release today. The one area I'd like to try to focus on a little bit more if I could is your view about 2008 revenues and the $55 million or so that you - $50 to $60 million that you're highlighting on change. Exubera I think most of us had counted on and sort of new. I want to focus on the other two if I can. Your anemia drugs, you had about $16 million in revenue. Is that correct?

A little bit lower - given as the forecast for '07.

Okay. What is that forecast, please?

I think we talk about $14. The $7 is about half. We're projecting about half.

Got it. And the diagnostic -- the client bringing an in-house production of a diagnostic. I think this is new information.

Yes. It's a fallout from the contract negotiations that are underway. We bid aggressively for the business but it got to a point where it didn't clear our hurdle rates and it made no sense for us to pursue the business.

Okay. So let me go through the math if I can. If I take Exubera revenues of $33 million that was a roughly 30% margin business. The anemia drugs are roughly a 50% margin business. The revenue then -- if it's $13 to $15 million and you're talking about a blended margin of 35% than the margin on the business that you lost has got to be in the high-30s if not low-40 range. That's just the math. Is that correct?

No. I think it's actually lower than that.

That $13 to $15 million, Arnie, is at a --

That's low single-digit item.

But there is some overhead absorption associated with that item. So while the margin in and of itself is not great, taking it out of the plant and that plant is not something where you can, as you know, overnight just put something new in and start producing it. So there will be some loss of overhead absorption in the range of approximately $4 million.

Got it. Okay. Let's see where I want to go next. On your tech group margin, obviously you continue to be impacted by the start up in Michigan. If I recall, your previous guidance for margin in the second had been 15%. You're bringing it down to 13%. Can you quantify the impact in Q3 from Michigan and also give us your best feel for the impact in Q4 from Michigan?

The impact in Q3, Arnie, was $1.6 million negative which if you take that and translate it into margin points, it's almost 2.5 margin points. So adding that back, you get close to that 15% we were talking about previously.

Isn't that dramatically higher than it was in the last quarter and also in Q1?

No. Year to date, Arnie, the impact of Grand Rapids is $4.3 million. So it's a little bit higher than the second quarter but it's on par -- pretty much on par with the first quarter.

My final question is for Don. As you obviously have had four major contract renegotiations that we haven't had any disclosure on that have to, I guess, be resolved by year-end, you've had dramatic increases in the prices of your raw materials and these are major contracts where I know there's a give and take but can you update on sort of what you're seeing and how much -- who's got -- kind of update us if you could on what you're seeing in these major contract negotiations. Obviously you walked away from one piece of business because you didn't like the terms. What is the status of the others?

As you said, there's four in total, Arnie. One has been signed. One is circulating for signature. Commercial terms have been agreed on the remaining two and we expect to have the formal legal work around the documents done during the fourth quarter. All of them should be wrapped up by year's end. Those contracts basically focus in the disposable medical device markets with our customers in that segment and the good news is that those contracts cover business anywhere from a range of three to seven years. So they're going to fairly long-term. And on an annual basis, the sum of those contracts falls into the $150 to $175 million range. So that business is going to be tied up for the long-term.

The one thing I take a little disagreement with is on the raw materials side. We're actually not seeing great pressure there right now because of the structure of our purchase contracts. We'll probably see a little pressure in '08 but for right now we're running a positive purchase variance on our raw materials for the year.

Okay. I'll jump back in queue. Thank you.

Thanks, Arnie.

Our next question from Ross Taylor, CL King. Your line is open.

Hi. Couple questions.

Hi, Ross.

Good morning, Ross.

Hi. How are you all doing?

Good. How are you?

Good. Can you outline for us again when some of the additional capacity in your pharmaceutical segment is going to come online? I guess in particular what I'm referring to is the areas where you are capacity constrained. Can you outline the timing as to when the additional capacity might come on in 2008 and for how long into 2008 might we continue to see some pressure on the pharmaceutical margins?

The capacity is going to start coming online in the middle part of '08. We've got a lot of the physical infrastructure work done. We'll be in the process of moving machinery and equipment in during the fourth quarter and first quarter of next year and of course what follows that is the running of validation and all the studies necessary to get your customers to run line trials and then get their acceptance. So capacity will start coming online in the middle to latter part of '08.

It's going to continue into early '09 and as we discussed in our commentary, the majority of that capacity is focused on Westar washing and processing as well as the molding of Teflon coated components. So we would expect that margins for the year next year, probably under some moderate pressure in the beginning of the year. But on a full-year basis, our expectation at the current time is that we'll maintain our current margins and we believe we've got some opportunity to expand that.

We're still working our way through the '08 plan development and we'll be giving you much more detailed guidance on that in our year-end call in February. But as we sit here right now, even with the hits that we're taking on the revenue side, the other programs in place, through lean, through pricing, what we'll do in terms of SG&A controls, capital controls, we think we're going to have a solid year next year and that there's room for improvement over the 29% that we're forecasting for this year on a gross margin basis.

Okay. And if I can dig a little bit, just where the Company is overall, can you give any additional comments as to where margins for the entire Company might go next year?

That is for the entire Company.

Okay.

That was a consolidated number, the 29%.

We guided to 29% this year, I believe for the full-year. Right now as we're looking at the plans, we think they'll be at or above 29% for the full-year next year.

Alright. And, let's see, I guess going back to the $50 to $60 million in revenues that you added up you're going to lose next year, is there any variable SG&A expense associated with any of those products or should we assume that none of those overheads are really absorbed?

Yes. On the -- we mentioned on Arnie's question about the $13 million of disposable medical device, we're not going to see a whole lot of drop out from that. So that's part of that overhead absorption issue. On the other products, you would have some but it's not a linear number, as you know, Ross. It's not for every $1 of revenue you pull out, you're not going to pull out $1 of SG&A. There will be a little bit. There are -- Don talked about our lean activities that our ongoing in the plant. Those aren't just plants. They also cover a lot of our SG&A costs as well and those are expected to continue to provide some benefit into the future.

The only other thing I'd add to what Bill said, Ross, is that there's opportunities to sell to capacity for the Teflon coated products that won't be sold into the anemia franchise. That's where the demand is highest. So there won't be any change there. But the other issue is the complexity of the Nektar contract. We're just going to have to wait and see how that situation unfolds but in terms of the fixed assets, most of - the contract covers all of those costs in terms of a shutdown if it gets to there.

Okay. And my last question relates to Exubera. Can you quantify how much Exubera revenue you expect to have in the fourth quarter? Just your revenue number is a little bit higher than I'd expected it might be for the --

We think it's going to be about $6 million.

Alright. Thank you.

You're welcome.

Thank you.

Our next question from Steven Postal from Lehman Brothers. Your line is open.

Thanks and good morning.

Good morning, Steven.

First, I'd like to thank you all for the detail you provided. It was very helpful and quite appreciated. You guys did a great job there.

Thank you.

You may have mentioned some of these things. I hopped on kind of late. But I wanted to start with the international business. You said that you're capacity constrained. It was interesting to me that you showed this 9% growth in international. Can you maybe just elaborate on what was driving that business there and how much were you constrained there? Where could that have growth been if you did have that extra capacity?

The constraints that we talked about are mainly in the high margin products, the Westar treated and especially in the coated area. But the growth is being driven fundamentally by continued growth in pre-filled as well as closures and standard closures and some new products that we've launched in the field.

When we talk about capacity constraints, we're really talking about the fact that we don't like to run at 100% and 21 shifts per week. We continue to do that to meet demand but clearly that's running a risk because of the mechanical nature of our production systems. They do fatigue and they do break down which is why we typically like to plan on full capacity of about 85%. We're running about 17 shifts per week. So we can meet the increased demand to a certain point by running the extra shifts but we do it at some risk given the nature of our product systems.

Okay. Okay. And then on to the comments on guidance for 2008. You mentioned that the sales impact and the margin impact. How should we think about overhead and any unabsorbed overhead that you have?

The big chunk, as Bill covered, was the situation where the diagnostic component is coming out of a plant in the UK and that's number on the order of about $4 million. Clearly as a management team we're going to have to focus intently on the cost side of the equation next year then take a look to see where we've got opportunities to cover that.

Also, Steven, on the tech side, as Grand Rapids starts the utilization of the new Michigan facility increases, we'll get some better absorption there as well.

Okay. And on the Michigan facility, where are you in terms of visibility of seeing improvement in the cost structure and the margins there. You mentioned seeing improvement in the short-term but is there anything there that caught you off guard that could potentially continue over the next few months?

No. I think it's really working through the validation of the lines as they come into the factory. As you remember, we initiated going into that facility because of winning a very large contract with a customer. We have been actually transferring the lines from their production facility into Grand Rapids. So in some respects the timing relates to our ability to get those lines running but it also relates to the customer taking product and running it through their lines and giving us the final go ahead while we're doing the validation studies. So pretty complicated situation driven in large part by the timing of getting those validation studies done.

Okay. And can you comment on the acquisition environment? With some of these short-term challenges that you're facing, are you going to have a biased focus on operations or are you still looking around to potentially add to the portfolio?

The very strong bias is on operations. That's in large part directly within our control. The success of our customer's product outside and external factors, clearly, we don't have a lot of control over. But the number emphasis is on the operating environment, making sure we maintain and grow our margin. We see selected opportunities on the acquisition front but the change in the environment with Exubera and the anemia drugs in particular isn't necessarily going to force us into looking aggressively at an acquisition to cover the shortfall. We're going to continue to be selective and as we've talked about before, we strongly believe that opportunities for new technologies and new products that support the franchise are where we ought to spend our time. So in that order, it's operations and then as we see opportunities on the acquisition front, technology and products.

A final question from me, you mentioned the share repurchase done in the quarter. How should we think about share repurchase in the future and what drives the decision going into the level of repurchase?

We're going to continue to look at opportunities there. There's nothing on the horizon but the decision is fundamentally one where we look at how best to use our capital.

Okay. Alright. Thanks a lot.

Thanks, Steven.

(OPERATOR INSTRUCTIONS) Your next question comes from Carlos Garcia-Tunonfrom Morgan Stanley. Your line is open.

Hi. Good morning. Thanks for taking the question. I just wanted to ask a question with regards to these capacity additions. You may have talked about this a little bit in the past but if you can help us just understand the new capacity that comes online, is that going to be for new launches of products or does it just mean that your entire capacity will be slightly less utilized and is the implication that your current customers are just dealing with lower levels of inventory now as a result of your capacity being stretched thing?

There's a whole bunch of questions in that questions. I'll try and start with a little bit of background on the expansion itself.

There's currently several different programs going on, the first of which relates to Europe where capacity because of our recent growth is fairly constrained in certain product lines. So there we're simultaneously expanding four different plants and also expanding capacity within the tool shop. We expect all of those to be done -- pardon me -- in the early '09 timeframe.

We're also undergoing expansion at one of our major North American facilities and that is purely to serve growth in the advanced pharmaceutical packaging components market. So we're adding mixing capacity to that plant. We're adding water for injection into that plant and we're also increasing our molding capability in that plant.

Along with that because of developments internationally, we've been looking at putting a facility into China for plastics. And that facility is being driven predominantly by the need for a single customer whose product we produce in Germany needing excess capacity not only to serve European markets but more importantly to serve our expansion into China. So it's an optimal way for us to get started through existing products, approved substantial current volumes and one we know how to run.

Behind that, we're looking at the opportunity for a rubber facility in China on the heels of that to serve the domestic Chinese market. We've operated in China for many years. We make money there. We have good growing revenues there supporting the multinational but we clearly have an opportunity with the domestic sales as well. We're also beginning to look at India because of the development of the generic industry there.

So that kind of covers the expansions in a quick nutshell. The majority of those expansions are to meet demand for existing products due to growth of our customer's products in those market segments. In the outer years of our plan, there is also substantial capital that is going to go into new product production and principally into the production of a new packaging material that we call CZ. So that's going to unfold kind of in the 2010 to 2011 timeframe.

Near-term there will be some moderate pressure on margins as we bring extra capacity online. We don't recognize the sales off of it but we've got to put the expense in to make sure we validate and fit out the lines properly. But as sales come on, we expect to expand our margins not only through the unit volume growth but the incremental drop through that comes from the higher margin on the value added product.

So overall it's a very good story. We like the trends in the marketplace. The drivers really favor the high margin part of our product portfolio. That's where the fastest unit growth is taking place. We just need to make sure that we're in a position to supply the market.

Okay. Thank you. That's helpful.

Thank you.

Our next question comes from Arnie Ursaner from CJS Securities. Your line is open.

Hi. A couple of follow-up questions if I can. You obviously mentioned the one contract that the customer took back in-house. You also mentioned you pretty much have wrapped up your other commercial opportunities or major contracts. Do you have any other products that you have lost that we should at least be aware of as we think about next year?

No. No. The one where the customer's taking it back in-house is actually a fairly unique product. It's used in diagnostics. We've produced it for many years. It's a very cost-sensitive part of our revenue base because it's fundamentally a throw away for diagnostics. There's nothing else on the horizon I can think of. And again, that was one where we negotiated hard to maintain the business but in the end didn't make much sense for us to produce it at what was being offered.

Right. And focusing a little bit on your views towards next year, can you break it down a little between pharma and tech group in terms of rate of growth? And also if you can the way you're thinking about price versus volume going in for the revenue growth, your assumptions you're talking about for next year?

Yes. On the pharmaceutical systems side with the drop outs that we're looking at, you're kind of looking at mid-single digits growth, somewhere in the 5, 6, 7 kind of range. Tech because of the overall impact of Exubera hitting is probably going to be flat to slightly defining on the revenue front.

Okay. And again, within that mix, what would be price versus volume?

On the pharmaceutical systems side, the price increases are going to be again kind of low to mid-single digit type of range. We'll see some volume increases in there as well. It's probably going to be split even.

And there's mix, obviously, a richening of the mix too, Arnie.

Again, I'm just trying to go through the math. If you're having mid-single digit if you will price increases and you have some volume growth, revenue growth should be higher.

We're getting -- as Don said, about half and half of that.

Yes. We'll be able to clarify it for you when we get to February. We're still in the process of working through some of the purchase orders and things in the fourth quarter.

Okay. And shifting to tech group, when you first bought it, it was very clear that Exubera was not the only key product you found in their portfolio. You mentioned they had a lot of others. You also mentioned you had to eliminate or exit some customers that were at margins that were unattractive. Can you kind of freshen us up on where we stand generally in that process? Are some of the products that were in that portfolio much closer to commercial application? And what sort of new wins are you getting? Again, you didn't disclose any material tooling revenues. Trying to get a feel for what might be in the backlog for tech group.

The new products that are approaching commercialization, the majority of them are on the device side. These are the ones that are always longer to get to market that you wouldn't expect. We expect two or three of those to come to fruition in 2008. That will help us make up for some of the short fall of Exubera but clearly not all of it. We've got a couple consumer items that are going to expand. One or two new consumer items that are going to hit the market as well. Tooling orders are not what they've been in the past. We are seeing a pickup. We have some pretty nice orders in on the device side of the house there. And we continue to rationalize the portfolio. It's one of the reasons that sales are going to be flat to declining for next year. Again, the success for that business longer term is going to be predicated upon us moving proporietary products in and that's where we're going to focus our energies. But it's not going to happen overnight.

Okay. Thank you.

At this time there are no more questions. I'd like to turn the call back over to Dr. Morel.

Thank you very much, operator. 2007 will be another record year for the Company with significant earnings growth and although we have several short-term issues to address, we're confident that our strategy directly supports the major trends in our market and that we will continue to generate above market sales growth and earnings growth over the next few years. Thank you again for your time today.

Today's call has concluded. All parties may disconnect.