West Pharmaceutical Services Inc

NYSE:WST

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Second Quarter West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded.

I would now like to introduce your host for today’s conference, Quintin Lai, Vice President of Investor Relations. Please go ahead, sir.

[Quintin Lai, Vice President of Investor Relations]

Thank you, Chris. Good morning, and welcome to West’s second quarter 2019 conference call. We issued our financial results this morning and the release has been posted in the Investors section on the Company’s website located at www.westpharma.com. This morning, CEO, Eric Green, and CFO, Bernard Birkett will review our results, provide an update on our business and provide an update on the financial outlook for the full year 2019.

There’s a slide presentation that accompanies today’s call and the copy of the presentation is available on the Investors section of our website. On Slide 2 is the Safe Harbor statement. Statements made by management on this call and in the presentation contain forward-looking statements within the meaning of U.S. Federal Securities Law.

These statements are based on management’s beliefs and assumptions, current expectations, estimates and forecasts. There are many factors that can influence the Company’s future results that are beyond the ability, of the company to control or predict. Because of these known or unknown risks or uncertainties, actual results could differ materially from past results and those expressed or implied in any forward-looking statement.

For a non-exclusive list of factors which could cause actual results to differ from our expectations, please refer to today’s press release, as well as any further disclosures the company makes regarding the risks to which it is subject in the Company’s 10-K, 10-Q and 8- K reports.

In addition, during today’s call, management will make reference to non-GAAP financial measures including organic sales growth, adjusted operating profit, adjusted operating profit margin and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning’s earnings release.

I now turn the call over to West’s CEO and President, Eric Green.

[Eric Green, Chief Executive Officer]

Thank you, Quintin , and good morning, everyone. Thank you for joining us today. As you saw in our press release, we delivered another quarter of strong growth on both the top and bottom lines from strong sales gains across the organization. And as a result of efficiency initiatives, put in place by our global operations team. Our performance in Q2, has shown once again, our customers positive reaction to our market-led growth strategy, with two good quarters behind us, and given our confidence in the underlying strength in future growth of the business, we are increasing our sales and EPS guidance for the full year. Bernard will take you through the details of our updated guidance later in the call.

Let’s start with the specifics of our sales performance on Slide 4. Proprietary product sales grew by 7.5% in the quarter. Key to the growth strategy in this segment is customer adoption of our high-value products. These products offer higher levels of quality and productivity to our customers, seeking to meet the increase in regulations of the biopharmaceutical industry to improve their own manufacturing performance and to meet the demands of new molecules and therapies. High-value products make up more than 60% of our proprietary product sales and in Q2, organic sales of these products grew double-digits.

Now let’s take a look at the organic sales growth of our market units. Sales within our Biologics market unit grew strong double-digits. In Q2, we experienced and an impressive uptake of our NovaPure and Westar components. We continue to see growing interest from biologic customers for these types of product solutions, and this demand is coming from volume growth of existing drugs and from newly commercialized drug products. We also saw a good uptake of Crystal Zenith containment solutions and our SmartDose technology platform. CZ growth is coming from both commercially available drugs as well as from pre-commercial molecules.

We continue to experience high levels of customer activity across our SmartDose device platform for drugs in all stages of development. Looking ahead, we anticipate full year double-digit growth for the Biologics market unit. The Generics market unit had a solid quarter with high-single digit growth, high-value products also performed well in this market unit growing by double-digits. This was led by an increased uptake of Westar RS and RU products. We are pleased with the continued interest and adoption of our elastomer components, including the AccelTRA product line. In addition, we’re also seeing demand for our delivery and safety device platforms for use with generics medicines.

We expect high-single digit growth in this market unit for the full year. Our pharma market unit experienced a small decline in the quarter due to the previously announced Vial2Bag product recall. If we’d exclude this impact, we saw a mid-single digit growth for pharma, led by FluroTec and Envision product sales. We expect the pharma market units to deliver full-year performance of low single-digit growth.

A quick word about the Vial2Bag, as we noted on our last call, we remain committed to bringing this product back to the market. We are working to redesign certain aspects of the device, with the goal of returning to the market with enhanced product for hospitals and the patients they are treating.

Let’s now turn to Contract Manufacturing. The segment of our business, once again posted strong sales of 10% over the prior year’s quarter. The majority of the growth continues to be in the diabetes market, led by sales of medical and drug delivery devices, and services. For the balance of the year, we expect that quarterly sales will be in line with the performance of the segment in Q1 and Q2 of this year, but that growth will moderate as this business runs up against more difficult year-over-year comparisons. We anticipate full year growth of high-single digits in Contract Manufacturing.

I’d like to now review some business highlights from the quarter on Slide 5. We discussed at our last quarterly earnings update, the importance of expanding our Company’s reach to help us grow in the important Asia-Pacific region. We have established a direct presence in the very attractive South Korean market, through the acquisition of our distributor. Another example comes from our China team who recently hosted more than 200 customers from 70 companies for our West sponsored educational event reinforcing the technical expertise we can bring to our customers in this market.

Our scientific and technical team continues to be at the forefront of the industry, presenting at numerous conferences, publishing their work in partnering with our customers to shape best practice in our field. We’re also pleased to announce that our NovaGuard Safety system recently won two India Packaging Awards for Excellence. This product is designed to help prevent accidental needle stick injuries, which is a serious concern for healthcare practitioners and their patients.

Customers recognize the value of this product and as a result, we are seeing increased uptake. As our commercial team works with customers to provide solutions for their most demanding injectable containment and delivery needs, our operations team is working to help our business work more efficiently. They are driving for improve safety, higher quality, better service and increase profitability. We have implemented a number of lean initiatives across the organization through our One West management system that are really starting to pay off.

I recently visited our plants in Europe, and saw firsthand the improvements that team has made to streamline internal processes, improve quality standards and address customer feedback more effectively. Customers are knows into and have provided us with very positive feedback at the conclusion of several recent audits. We’re also working to consolidate and optimize our global manufacturing network. By the end of the year, we will have 25 plants, a total reduction of four sites over the past two years. This broad restructuring program announced in Q1 of 2018 is on track to be completed by year-end and will provide significant savings for our business in the future.

As a result of these efforts, and the growth of our high-value product portfolio, we achieved more than 180 basis points of consolidated gross profit margin expansion in the quarter. Thanks to margin improvements in both our Proprietary and Contract Manufacturing segments.

At this time, I’d like to turn the call over to our CFO, Bernard Birkett to go into more detail around our financial performance. Bernard?

[Bernard Birkett, Chief Financial Officer]

Thank you, Eric, and good morning, everybody. So let’s review the numbers in more detail. We’ll first look at Q2 2019 revenues and profits, where we saw a continued solid growth led by strong Proprietary Products performance especially in our Biologics market unit. I will take you through the margin growth we saw in the quarter and how we see it continuing to improve in 2019. In addition to some quarter end balance sheet takeaways. And finally, we’ll review the guidance for 2019.

First up, Q2. Our financial results are summarized on Slide 6 and the reconciliation of Non-U.S. GAAP measures are described in Slides 11 to 15. We recorded net sales of $469.7 million, representing organic sales growth of 8.1% and 20 basis points of inorganic growth related to a recent acquisition. We also saw growth in two of our proprietary product market units and in Contract Manufacturing with double-digit organic sales growth in our Biologics market unit.

We are pleased to see continued improvement in gross profit. We recorded $157.9 million in gross profit, $15.7 million or 11% above Q2 of last year. And our gross profit margin of 33.6% was 180 basis point expansion from the same period last year. We also saw improvements in adjusted operating profit with $81.9 million recorded this quarter, compared to $62.5 million in the same period last year for a 31% increase. And our adjusted operating profit margin of 17.4% was a 340 basis point expansion from the same period last year. Finally, adjusted diluted EPS grew 27%.

So what’s driving the growth in both revenue and profit. On Slide 7, we show the contributions to sales growth in the quarter. Volume and mix contributed $33.9 million or 7.6 percentage points of growth. Sales price increases contributed $3.4 million or 0.7 percentage points of the growth. And changes in foreign currency exchange rates reduced sales by $15.1 million or a reduction of 3.4 percentage points.

Looking at margin performance, Slide 8 shows our consolidated gross profit margin of 33.6% for Q2 2019, up from 31.8% in Q2 2018. Proprietary Products second quarter gross profit margin of 39.5% was 230 basis points above the margin achieved in the second quarter of 2018. The key drivers for the continued improvement in Proprietary Products gross profit margin were favorable mix of products sold, focusing on high-value product, sales price increases and increasing plant efficiency and utilization, partially offset by increased labor costs and the impact of the voluntary recall of Vial2Bag products.

Our high-value products represented 62% of Q2 Proprietary Product sales and generated double-digit organic sales growth. Contract Manufacturing second quarter gross profit margin of 14.3% increased by 120 basis points compared to the prior year quarter. The year-over-year increase in margin is primarily due to improved production efficiencies. Adjusted operating profit margin grew by 340 basis points over Q2 2018, as we continue to expand gross profit margin and closely manage our operating expenses as we execute on our 2019 goals.

Now let’s look at our balance sheet and review how we’ve done in terms of generating more cash for the business. On Slide 9, we have listed some key cash flow metrics. Operating cash flow was $152.7 million for the year-to-date 2019, an increase of $25.7 million, compared to the same period in 2018 a 20% increase. Our year-to-date capital spending was $57.1 million, $8.9 million higher than a year ago. Working capital of $631.1 million at June 30, 2019 was $20.4 million higher than at December 31, 2018, primarily due to the increase in our accounts receivable and inventory balances.

Our cash balance at June 30th of $326.7 million was $10.7 million less than our December 2018 balance, primarily due to an increase in the cost for purchases of our common stock in 2019 and the acquisition of our distributor in South Korea.

Turning to guidance. Slide 10 provides a high level summary. First despite increasing FX headwinds, we are raising our expectation of 2019 full year, net sales to be in a range of between $1.81 billion and $1.825 billion compared to the prior guidance range of between $1.79 billion and $1.82 billion.

We expect organic sales growth to be at the higher end of the previously communicated range of 6% to 8% over 2018, reported net sales, which assumes a headwind of $42 million for the full year 2019 sales based on current foreign currency exchange rates, compared to the prior guidance of a full year negative impact of between $34 to $37 million. Second, we are raising both bottom and top end of our adjusted EPS guidance range by $0.20. Our new range for the full year 2019 adjusted diluted EPS will be $3 and $3.10, compared to the prior guidance of between $2.80 and $2.90.

There are some key elements I want to bring your attention to as we – as you review our guidance. At this point, guidance does not include any revenues for Vial2Bag in 2019 and forecasted costs of remediation are included in our EPS guidance. Estimated FX headwind has an impact of approximately $0.10 on adjusted diluted EPS based on foreign currency exchange rates, compared to the prior guidance of $0.08.

To summarize the key takeaways for the quarter, strong top line growth in both Proprietary and Contract Manufacturing, gross profit margin improvement, growth in operating profit margin, growth in adjusted diluted EPS over Q2 2018 and growth year-to-date in operating and free cash flow. Organic sales and EPS projections for 2019 and performance to date are in line with our long-term construct of 6% to 8% organic sales growth, operating profit margin improvement of greater than 100 basis points and EPS expansion.

I’d now like to turn the call back over to Eric.

[Eric Green, Chief Executive Officer]

Thank you, Bernard. To summarize, our Q2 performance together with the results we saw in Q1 have contributed to a very strong start to the year. As we look to the remainder of 2019, we know that our market-led growth strategy will continue to drive value for our stakeholders. We have the top experts in our field working at West and that technical and scientific expertise is an asset to our customers.

Across all market units, customers are driving demand for our high-value products, and we are delivering those products and solutions with a more efficient and cost-effective manufacturing initiatives. This is translating into better margins and increased return on invested capital. We feel confident in the continued strength of our business and look forward to a successful remainder of 2019.

Chris, we’re ready to take questions.

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of John Kreger with William Blair. Your line is now open.

[John Kreger, William Blair]

Hi. Thanks very much. Could you just give us a little bit more info on the acquisition, and should we be thinking about acquisitions perhaps is a little bit more active part of your capital deployment strategy going forward?

[Eric Green, Chief Executive Officer]

John, good morning. When we look at the acquisition in South Korea, it’s really a key strategy to have a direct presence, and what I would call it a very attractive biopharma marketplace that we historically work with the dealer. And one of West’s strengths is to have that direct interaction with our clients across the globe. So we believe that is an opportunity to step-in directly and actually reinforce our focus in the Asia-Pacific market.

Looking forward to other types of M&A transactions, we feel that we’ll continuously look at bolt-on technologies that will enhance our current portfolio, but also look at ways to – look at adjacent spaces to really continue to support our existing customer base.

[John Kreger, William Blair]

Great, thanks. And then also just to clarify, I think a comment you made earlier on the call that you think of pharma growth will be low-single digits for the year, I assume that is burdened with the Vial2Bag recall?

[Eric Green, Chief Executive Officer]

Yes, John. It’s correct. It does that low single-digit does include the Vial2Bag recall that occurred last year.

[John Kreger, William Blair]

Great, great. And then lastly, any sense about when you think you can re-launch that product, is that something that could be feasible for next year?

[Eric Green, Chief Executive Officer]

Well, we have guided this year’s revenues without any Vial2Bag revenues. And again, we are working towards the resolution and will be working with the regulatory authorities to get it back as soon as possible. So until we have affirmation from the regulatory bodies, we can’t comment on exactly when this will be returning.

[John Kreger, William Blair]

Okay. Thank you.

[Eric Green, Chief Executive Officer]

Thank you, John.

[Operator]

Thank you. And our next question comes from the line of Paul Knight with Janney Montgomery Scott. Your line is now open. And if your phone is on mute, Paul please unmute it.

[Paul Knight, Janney Montgomery Scott]

Hi, Eric. Congratulations on the quarter.

[Eric Green, Chief Executive Officer]

Great. Thank you, Paul and good morning.

[Paul Knight, Janney Montgomery Scott]

Can you talk to demand? Is it coming from the record number of approvals last year or is it – and the second question is, in the cell and gene therapy, there’s obviously a lot of things in the pipeline. Is that a significant part of your business, your containment systems on the cell and gene side. And I guess, the first question though is, are you seeing this approved therapy in total from last year. Is that part of what we’re seeing in this growth rate?

[Eric Green, Chief Executive Officer]

Yes, Paul, if – when you think about the growth rate we have today and looking at the committed order book that we have in the near-term, that really is due to the robust pipeline that’s coming through. In addition to that, it’s uptake of molecules have been introduced in the market a couple of years ago. So it’s a combination of existing molecules, but also new launches over the last 12 to 18 months.

On the cell and gene therapy here, it’s too early to comment. A lot of that is in early phase as you know. We obviously have a role to play in the containment of the very important therapies, but the volumes will be small. And – but it’s too early to tell. It’s not – that is not impacting our numbers as of today.

[Paul Knight, Janney Montgomery Scott]

And then secondly, Bernard, I noticed obviously operating cash flow up 20% and free cash up 21%. I guess, you’re still in the early days of your improvement of capital and management of capital, facility consolidation. I mean, is this a couple of year process ahead of us, where we’ll see better utilization, turnover on cash and facility utilization. Could you talk to us about that overall program that you’ve embarked upon and where – how long it goes?

[Bernard Birkett, Chief Financial Officer]

Yes. It’s a multi-year process, and we will be continuously looking for improvements in operating and free cash flow generation, and it is a big focus for the organization across a number of different areas. So it’s not just on CapEx, it’s across all aspects of our business. As we believe, it is very important for us, obviously, to focus on that. So again, we have a lot of people looking at it in different areas and we’re very focused on cash flow generation and disciplined in our approach. And that...

[Paul Knight, Janney Montgomery Scott]

What do you think your maintenance capital expenditure is?

[Bernard Birkett, Chief Financial Officer]

It’s probably between $40 million to $50 million a year.

[Paul Knight, Janney Montgomery Scott]

Okay, thank you.

[Eric Green, Chief Executive Officer]

Thank you, Paul.

[Operator]

Thank you. And our next question comes from the line of David Windley with Jefferies. Your line is now open.

[David Windley, Jefferies]

Thanks. Quick follow-up on that last question. Bernard has the maintenance number, is that something you’ve been able to compress or has that been fairly stable and it’s been the growth capital that you’ve compressed?

[Bernard Birkett, Chief Financial Officer]

It’s been – we haven’t compressed a lot of growth capital. I think, if you look back at the way we were spending before we were investing a lot in facilities and that expanded the CapEx. So the focus is on utilizing and improving the utilization of what we have, the infrastructure that we have in place. We believe we have a lot of capacity, the maintenance CapEx has been pretty stable over the last number of years.

But just to be clear, we’re not impacting growth, we are investing in growth on a continuous basis and that’s where we invest a lot of our capital and that’s where the allocation goal. So it’s a very, very measured approach, but the difference being that we do not have to invest in large building projects at this current time.

[David Windley, Jefferies]

Yes, great. Good clarification. And my question was an intend to do imply that you were sacrificing growth at all. But just where the decline in the budget was coming from? A kind of a similar theme, as you are seeing some nice operating margin – gross margin, operating margin improvement in the quarter, is that in any way, driven by the facility rationalization that you’re doing. Is that showing up already or are those facilities not yet offline, and so that’s actually still in front of us?

[Bernard Birkett, Chief Financial Officer]

Yes, that’s still in front of us. Again, it will be over the next number of years. Beginning in 2020, we’ll start to see the benefits of the rationalizations coming through. So the drivers right now is, we’ve seen a lot of HVP growth, which is a key strategy for us and we expect to see that continuing, and that’s been supplemented by the improvements in overall utilization and productivity gains that we’ve been seeing coming through our plans with the implementation of lean initiatives and globalization of operations. And the important aspect that we saw, again in this quarter, was the improvement in margins in Contract Manufacturing. And that’s also been a plus and now that’s back on track. So there are a number of drivers for overall operating margin expansion.

[David Windley, Jefferies]

And on your comment on Contract Manufacturing, did improve year-over-year. I think the second quarter of last year was kind of the low point?

[Bernard Birkett, Chief Financial Officer]

Yes.

[David Windley, Jefferies]

Is that now on a fairly steep improving trajectory or I think the highs for that business are still 700 basis points above the 2Q levels that you just achieved. How could you might describe the trajectory to those prior levels?

[Bernard Birkett, Chief Financial Officer]

That’s correct. So, we would expect to see the continuous improvements for the remainder of the year and improvement into 2020. As we get back to 2016, 2017 levels of gross margin within that business. I don’t believe it’s going to happen overnight, but we have made some changes within our contract manufacturing business. We’re taking a lot of the learning’s that we’ve had within our Proprietary Business from an operational point of view and applying those within our Contract Manufacturing division and we’re starting to see the improvements come through there, but it’s not an overnight fix and it will take a little bit of time. So you’ll see a phased in, but there will be continuous and sustained improvement.

[David Windley, Jefferies]

Great, thanks. And last question, Eric, this one, I may be able to bring you in on this one. The – your generic clients are buying up into high-value products that’s been, I think one of the kind of pleasant surprises of your kind of segmentation at the end market from when you joined to CEO. Some of those clients are under some, – what seems to be a little bit of financial duress, at this point, some stocks trading, it’s a really, really low prices. Is there a way – do you think that of impacts demand for your products at all? And is there a way for you to protect yourself or diversify yourself in the event that maybe one of these, presuming it’s not all of them, but one might be more negatively financially impacted?

[Eric Green, Chief Executive Officer]

Yes, it’s a good question. And to your point is that we are diversified within the generic space. So we continuously work with the broad array of the generic players today. I would say we’re in early stages as we move our generic customers from standard packaging components to the high-value products by leveraging the recently launched AccelTRA program. We think about the adoption rates with our clients, it takes one-to-two years to get the adoption and to have them retool their operations, which frankly, at the end of the day is taking cost out of their system, even though they’re moving up the high-value products and ASPs slightly higher.

So we’re supporting them by bringing better prior to the market, driving better yield of their manufacturing in final fill finish, and given the assurance that this total cost of ownership, cost continues to drive down their overall cost. I would say summarize though we are – we do diversify, and if there is a issue with one client, we typically see that particular drug molecule to be picked up by another. And that’s why it’s a good situation with our diversity.

[David Windley, Jefferies]

Okay, great. Thank you.

[Eric Green, Chief Executive Officer]

Thanks.

[Operator]

Thank you. And our next question comes from the line of Derik DeBruin with Bank of America. Your line is now open.

[Juan Avendano, Bank of America]

Hi. This is Juan Avendano for Derik. Congratulations on the quarter, guys.

[Eric Green, Chief Executive Officer]

Yes. Thank you, Juan.

[Juan Avendano, Bank of America]

My first question is, can you give us your thoughts on the 4 plus 7 generic program in China. Have you evaluated the situation and is any potential impact from this fully embedded in the revised 2019 guidance? Also if you could tell us what your revenue exposure is through the Chinese generics market?

[Eric Green, Chief Executive Officer]

Well, Juan, when you look at our revised guidance. This is not being driven by China. So either way, we have a – our business in Asia Pacific is roughly – last year is about 8% of total West and China is a portion of that. Obviously, a larger localities are China, India and Japan, and also in Southeast Asia. But the 4 plus 7 we refer to the Chinese – in the market, that does not impact our current business and we don’t have a lot of exposure to the local generics. Our growth in that market and where we’re seeing the growth and we’re investing, is really the multinationals they’re pulling us into the market for them to be able to manufacture into either use the local consumption or export. The two areas that we’ve seen most of the growth in is in the pharma and biologic, very less so in the generic space out of China.

[Juan Avendano, Bank of America]

Okay, good. Thanks. And then my second question is, for the full year 2019, you still expect the pharma business to post low single-digit organic growth. I think that in order to achieve this, I estimate the pharma growth would need to be at least in the high single-digits in 4Q given that in the next quarter of the prior year a comp is difficult. And so what gives you confidence in the strong rebound in the pharma business in the fourth quarter and what is the downside risk to this?

[Bernard Birkett, Chief Financial Officer]

So if you look at that from a comp perspective, we had a large credit in the fourth quarter of 2018 regarding the Vial2Bag recall. So, that adjustment in Q4 2018 within the pharma sector. So when you comp it from the growth perspective that’s how we’re going to see the high single-digit growth within this year within Q4...

[Eric Green, Chief Executive Officer]

Within pharma.

[Bernard Birkett, Chief Financial Officer]

...within pharma.

[Juan Avendano, Bank of America]

Okay. All right. Good. And then my last question if I may. One of the phrases in the press release that I’ve piqued my interest towards that one of the reasons why you are raising guidance for the full year in 2019. Was that you are encouraged by the growing backlog of committed orders. You used to provide this number on a quarterly basis before, but over the last year, you have only provided annually. I was wondering, if you could tell us what that backlog is the absolute dollar value of if it’s less than $0.5 billion. What was that – what was it year-to-date as of the second quarter?

[Bernard Birkett, Chief Financial Officer]

Well, instead of calling out that the exact number what we’re seeing is a large growth in the our order book compared to the same time last year. So we’re seeing the order book strengthened as and that’s been happening as we’ve been going through the year. So it hasn’t just all happened at once, and that gives us confidence and to be able to use that a support for raising the guidance. So that we’re seeing strong fundamental growth in the market.

[Juan Avendano, Bank of America]

Okay. That was it. Thank you.

[Bernard Birkett, Chief Financial Officer]

Thanks, Juan.

[Operator]

Thank you. And our last question comes from the line of Larry Solow with CJS Securities. Your line is now open.

[Larry Solow, CJS Securities]

Great. Thanks, guys, and congratulations on a really good quarter and very impressed on the margin side. Just a few summary questions and most of them have been answered, but on the – on sort of I guess related to the backlog. I know you guys obviously improved your throughput significantly in the last few years and that it skewed backlog as lead times to came down a lot. Part of our thesis was that as supply really start to improve and overall – eventually, you would start seeing some legacy products, start transitioning to some of your higher value products. And Eric, I think you mentioned in your prepared remarks there that you are seeing some – part of the growth this quarter was sort of on existing products, not only on new and improved products. So are you seeing sort of maybe not inflection point, but older pharmaceutical and older products starting to transition or at least move up the chain in the high-value products area?

[Eric Green, Chief Executive Officer]

Yes, Larry, the – we look at our – the order book, the committed orders that we have on hand today as Bernard mentioned a little bit earlier, is that we’re seeing a very healthy uptake. And the driver of that, I would say, two or three years ago, we were spent a lot of time talking about lead times from our operations. Today, that increase in demand is not due to lead times in our operations. I am very convinced the when we globalized the operations and the focus that we have, and the lead initiatives there in our operations is really driving quality, is driving delivery and service to our customers.

So if you spoke to our customers, you’ll hear quickly that there hasn’t been any really change of the really improved performance we’ve seen over the last one or two years. The demand that we’re seeing at this point really is – mostly a combination of volume of existing drugs in the marketplace and new product launches that are – have been planned and will be planned in the near future.

I’m very encouraged by this, because this is not just in one of the segments. This is across all segments and this is showing us the underlying health of the different markets we serve. Obviously biologics has a healthier market growth rate than the small molecules and pharma, but when I see the growth that we’re seeing, to me, it shows that we’re maintaining share, if not capturing new share with new products going through the pipeline.

[Larry Solow, CJS Securities]

All right. And it seems like you’re also now is your mix of high-value products rising, but within that mix, because I know, like NovaPure is, it sounds like it’s starting to really pick up some steam, but I eventually guess, it’s still represents a pretty small fraction of overall in terms of penetration of that relative to other high-value products. Is that fair to say?

[Eric Green, Chief Executive Officer]

Right. If we, if we look at two areas that you one of them you spoke that was NovaPure. We’ve talked about that in the past, but the adoption is now get into commercial drug molecules in the marketplace. We’re seeing the same thing with the Crystal Zenith. And so now it’s becoming more meaningful these numbers and the growth is quite significant. So while we don’t give out specific numbers of each product line. Those two areas alone are contributing to a good portion of the growth, in particularly in the biologics area and helps a little bit in the CZ side, also helps out with the pharma side.

[Larry Solow, CJS Securities]

And that also lead into my next question. Could you without quantifying maybe give us a little more color on the CZ side? Maybe how many new primary products you have commercialized today or something changed from the last couple of years or any more color there would be great.

[Eric Green, Chief Executive Officer]

Yes, what you’ve seen on the CZ side is that we’re – and the commercial number of products is about three are being launched in 2019. So that’s incremental and particularly around the 1 ml insert needle that we are manufacturing in our Scottsdale, Arizona facility. This is obviously great work done by both our partner Daikyo and also our internal engineers will get into the scale up as our customers and I won’t mention specifically of our customers are increasing their demand and for these launches, is also causing this as Bernard talked earlier about where are we invest in our capital. That’s a specific area where we’re investing in additional capital not facilities, but actual line, cell lines to build and produce more Crystal Zenith 1 ml insert needle and also frankly in the NovaPure line too. So, it’s – we’re seeing the uptick Larry, we’re seeing it and now in sort of really pre-commercial and development. These are starting to take off very encouraged by it.

[Larry Solow, CJS Securities]

Excellent. And then just last question just miscellaneous one for Bernard, on the, there was the $2.5 million credit, I guess, in the operating income line. What’s that related to?

[Bernard Birkett, Chief Financial Officer]

FX.

[Larry Solow, CJS Securities]

It is an FX. Okay, great. Thank you.

[Bernard Birkett, Chief Financial Officer]

Thank you, Larry.

[Larry Solow, CJS Securities]

Thank you.

[Eric Green, Chief Executive Officer]

Great. Thank you, Larry.

[Operator]

Thank you. And this concludes today’s question-and-answer session. I would now like to turn the call back to Quintin Lai, Vice President of Investor Relations, for any further remarks.

[Quintin Lai, Vice President of Investor Relations]

Thanks, Chris. And thank you everyone for joining us on today’s conference call. An online archive of the broadcast will be available on our website at www.westpharma.com in the Investors section. Additionally, you can get a replay through Thursday, August 8 by dialing the numbers and conference ID provided at the end of today’s earnings release. That concludes the call and have a nice day.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.