IntroductionThis article is a primer on packaging tools, also dubbed the “injectables” or “fill-finish” tools companies. These companies are similar to their bioprocessing counterparts, partially because they technically live within the bioprocess. However, there are also a few key differences, many of which are good things relative to bioprocessing.The packaging space is home to a handful of high-quality companies with very stable drivers that enable above-average long-term organic growth.Note to reader: if you are current on my work, feel free to skip to “How We Consume Drugs” - much of what comes before is recap material.Recapping the Healthcare AlgoI add this section with various permutations to every primer that merits it, and this is one such piece. As a reminder, the reason healthcare is a compelling investment space is because it enjoys secular volume growth globally. While there are winners and losers, these trends support long-term growth well above GDP, which makes it a fertile ground for finding investments that benefit from this long-term growth.The global 60+ population grows at a 2.5% CAGR vs 0.8% for the broader population.People become bigger users of the healthcare system as they age.The industry is highly regulated, which complicates the business landscape but also creates significant benefits to scale for many companies participating.Obesity has risen globally (which may change in the future) for decades. Obesity triggers several chronic conditions and compounds one’s reliance on the healthcare system as he/she ages.With a patient population growing 2.5% annually and requiring more care with advanced age, it’s easy to see how the broader industry grows volumes anywhere from 3-6% in a given year. Some companies in healthcare are more or less levered to these types of trends, however, and some lack pricing power, which creates a large spread of actual growth trajectories for each player.For example, Zimmer Biomet had negative pricing in its hip/knee implant business for nearly a decade. It arguably still does in a normalized inflation environment. Despite hip/knee surgeries being a beneficiary of aging, the company has grown ~LSD% organically.Positive vs negative pricing power effectively determines if organic growth is 4-6% with margin growth or 1-3% with flat margins. In the case of packaging, the industry only partially benefits from the aging trend, but enjoys solid pricing power among other tailwinds.Why Packaging is Attractive to InvestorsBefore going into the specifics, it’s worth summarizing why the space is attractive to investors:Oligopoly industry*High barriers to entryRegulatory capture of existing businessSells mission-critical components into a production processComponents are a small % of total costsSecular underlying volume drivers for end productsUniversal pricing powerAdditional secular tailwinds further supporting growth* refers to the containment part of the spaceSound familiar? That’s because it is, if you’ve read my bioprocessing primer. Almost every one of the reasons to own the space listed above holds true in bioprocessing to varying degrees. In fact, the packaging industry technically exists as part of the bioprocess.These companies sell glass, plastic, and rubber, but they are not commodities - they are “spec’d-in” like any piece of bioprocessing equipment. Recapping the Bioprocess - One Last StepLooking above, it’s no surprise that I’ve shown a preference for writing on bioprocessing given the variable-cost, mission-critical nature of the inputs that companies in the bioprocessing space provide. However, if you’ve looked at diagrams of the bioprocessing workflow, you’ll notice that one or two steps routinely get left out:All of the discussion covers the part focused on getting a lot of cells into a production bioreactor, and then filtering/separating the drug substance from to get the final product. But what happens once you have a bunch of drug substance?From flask to filter, you are only getting halfway to the patient. The last step in a bioprocess is shared with all other drug modalities: the fill-finish step, where drug substance is preserved and moved to another facility, where it is placed into a containment format of choice before it goes into the bottle or box that the patient or hospital receives.When a batch of small molecule substance is complete, it gets packaged into any one of a variety of different formats, but in the case of biologics, it is universally packaged into an injectable format.There is an entire supply chain focused on these last couple of steps, but when a drug is going into pill form, there isn’t much left for the tools industry to do to support it. However, when the drug comes in the form of an injectable, there is an entire ecosystem involved with supplying fill-finish facilities with reliable components.The focus of this primer is on these component makers, but it makes sense to first walk through why this ecosystem exists at all.How We Consume DrugsWe’ve all consumed drugs - your personal experience absolutely applies here. For the sake of being thorough, they are listed below, in order of prevalence:Oral consumption: Tablets, capsules, liquidsInjection: Injected directly, IV, etc.Topical application: Gels and creams applied to skinOther: Inhaled drugs, other niche formats such as via mucous or earThis is all common knowledge, but it’s useful to think about why there are so many in the first place - each of these formats is designed to address the need to 1) deliver the drug substance to the part of the body that needs it via 2) the most patient-friendly medium.Most everyday drugs are consumed orally via pills. We as patients prefer these because washing something down with water forgoes the drawbacks of bad-tasting liquid or a needle. However, it’s not always possible to get a drug to do what you want it to when you run it through your digestive system. For this reason we have topical creams for skin conditions, inhalers for respiratory use, and so forth. For everything else, there’s injection.Why We Inject: Bioavailability, Molecule StabilityIn a perfect world, every drug would just be a pill. However, pills go the way of food - through the digestive system, which nature designed to break solid food down into soluble molecules that the body can absorb. The acids and enzymes that help accomplish this also degrade drugs and make them soluble to more parts of the body than likely intended.When consumed orally, a high percent of the drug is degraded, but not all of it. Whatever is left is generally what has the intended therapeutic effect. The portion that makes it is considered “bioavailable”.Since only a small percent of a drug taken orally is bioavailable and the rest is absorbed by the body, more of it is needed, in total, to deliver the same therapeutic effect compared to if it was delivered exactly where it needs to go. If you ratchet up the amount of drug you’re digesting, you amplify all the negative side effects of the drug. High doses of most drugs are toxic to the body. This is a key reason the original vaccines were injectable-only - they work by micro-dosing your body with a harmless version of a virus, and needing 100% that amount for an oral version would defeat the purpose.For more modern drugs, the molecules themselves are already more complex and less stable, making it less likely that they’d survive a trip through the digestive system with the intended effect.The industry has tried to innovate around this with capsules that release more slowly or better resist stomach acids, but they only mitigate this effect. Injection today is nearly unavoidable in many cases.How We Inject: From the Hospital to the HomeDepending on how an injection is done, the need for various levels of medical attention also varies. There are many ways to inject a drug - one can supply an injectable drug to the bloodstream, but it’s also possible to target specific muscles, organs, or even layers of the skin. One targets these layers simply by changing the angle of injection.The two types of injections that matter for the purpose of this primer are intravenous and subcutaneous. The container for each is a part of the FDA filing - regulators want to know how the drug is contained, what conditions it is stored at, and what is used to deliver it. Each delivery method also uses different components.Intravenously-Delivered DrugsIntravenous injections deliver a drug directly into the bloodstream, which is ideal in many ways, such as delivering with 100% bioavailability and guaranteeing the shortest time between injection and therapeutic effect. It also gives perfect control over dosage and guarantees the patient is getting other needed nutrients, or even just staying hydrated, while getting the drug. All biologics are injected today, and most are delivered intravenously.However, this format is also somewhat burdensome on the healthcare system. To deliver a drug this way, a trained professional is needed to set up an IV, which inserts a cannula into a vein. The cannula connects to a larger tube, which is attached to a bag of fluid, which hangs above the patient and uses gravity to continuously deliver fluid to the patient at a controlled rate. The bags themselves can contain needed vitamins or medicine, but most drugs, especially biologic ones are injected into the stream the IV creates via injection ports in the cannula.It sounds/looks like a lot of hassle, and it is, though it’s also considered necessary given the amount of control an IV gives a medical professional over drug delivery. There is a whole sleeve of the medical device industry dedicated to serving the IV bag component of the healthcare market.For the drug itself, the substance is generally contained in a vial (multiple doses) or the occasional ampoule (single-dose). Delivery is done via syringe, which both withdraws the drug from the vial and injects it into the correct IV port. In many cases, you have to use one needle/tip to withdraw the drug and a different one to deliver it.The above image looks simple, but there are many individual components in both the syringe and the vial itself, and that’s just the tip of the iceberg - there is also the rising nuance of whether the drug is packaged in a vial or packed into a pre-filled syringe.For vial-based drugs, the syringe is its own entity, and needs to have certain certifications met. The biggest part of responsibility for the drug company becomes the vial itself. Both have a plethora of components that work together:Pre-filled syringes, on the other hand, treat the entire syringe like part of the drug itself. In this case, the pharma adopts the responsibilities of its medical device counterpart in many ways. This means that the syringe itself is more predictable: every single one comes from the same manufacturing setup based on a very rigid FDA filing. Compared to vial-based, the container becomes a cartridge, and the rest of the syringe has many specific components that surround it and start to matter.What is constant across both formats is that the container for the drug is part of the drug itself. Based on what’s in the filing, the criteria for which company’s syringe gets used to deliver a specific drug might be slightly more flexible. What’s not flexible, however, is the vial that contains the drug.Within the supply chain, the companies most-focused on supporting pharma tend to sell the parts that go into the FDA specification, rather than compete in the more commodity-like syringe market. This is because the end-customers are different for syringes - medical device companies have much more experience and channel dominance here. It’s no accident that Becton-Dickinson is #1 in syringes but not in vials or cartridges.Subcutaneously-Delivered DrugsSubcutaneous injections, on the other hand, deliver the drug to the tissue beneath the skin. While they sacrifice some amount of bioavailability, dosage control, and time to effect, what these injections gain is a reduced burden on the healthcare system, and in many cases, allow for self-injection.A medical professional can use the same vial-syringe setup pictured above to perform a subcutaneous injection, but for self-injection, the drug goes into a cartridge, which is then delivered by a self-injection pen.Self-injection pens themselves have a lot of individual components. Below is the most common example of such a device - an insulin pen:All of these components are covered in the FDA filing as well - these are basically pre-filled syringes, with the only difference being that you don’t need a skilled operator to deliver the shot.To be clear, not all drugs that are delivered subcutaneously are delivered at home, but the removal of the IV bag creates flexibility either way.Smart Delivery - Automating At-Home InjectionInjection pens specifically may not be a guaranteed megatrend, but the theme they fall under is a more obvious one. Self-administration is ideal for both the patient and healthcare system. No patient wants to go to the hospital or an outpatient facility just to get the drug he/she needs. Hospital systems don’t want to be doing IV delivery either - they want to maximize the portion of time doctors are spending on performing surgery or triaging patients who will eventually need it, not delivering people their bi-weekly dose of medication. Patients coming in for dosage of a drug without being admitted are a low-ROI use of bed space for the hospital given the opportunity costs. As such, pharma companies that can create a format you can do without an IV, will. Demand is just one incentive.Being able to deliver a drug without an IV opens up a world of possibilities from a technology standpoint. The above image, which shows the insulin pen, is a great example of the innovation we’ve already seen. Companies like Tandem Diabetes and Insulet are marketing automatic insulin pumps in the form of wearables. Below is a patient wearing Tandem’s pump:These devices are life-changing for patients, who previously had to self-inject several times a day. Communication with healthcare providers also benefits when software is involved. Insulin is a very old, non-biologic drug, so it’s important to note that while automatic pumps are a far more recent innovation than insulin, the concept isn’t just going after legacy drugs.Below is the auto-injection device for SKRIZI, a blockbuster biologic drug that is indicated for 4 different conditions, including ulcerative colitis.While the patient needs to get Skyrizi injected via IV the first few times, the rest is done at home via an on-body injector. Skyrizi is one of a handful of mabs approved to date that can be delivered subcutaneously at all, and is already employing such a device.For the same type of injection, you’ve already seen a pen, a pump, and a patch to deliver drugs. This begs the question: with all of these novel delivery methods appearing, who captures all of the value?Before we can answer this question, it’s important to understand a key nuance of what changes and what doesn’t.Containment vs DeliveryThere are two components to everything you’ve seen above: in a traditional injection, an ampoule or vial is used to carry the drug before being withdrawn later by a syringe. You can categorize the vial as the containment device, and the syringe as the delivery device.While injections pens and patches/pumps look extremely different, this categorization doesn’t change at all - the drug is still “contained” somewhere. In these cases, the container is usually a cartridge. See the image below from Skyrizi’s instruction manual.Regardless of how user-friendly it looks, the cartridge has a key job - it has to contain the in a highly sterile fashion just like anything else.This is a long-winded way of showing that containment is consistently necessary regardless of delivery format. You’ll see why this matters later.Below is a graphic from Gerresheimer showing the array of containment components out there:Delivery, on the other hand, can take many different shapes in the future. For most drugs, syringes are still #1 today, but wearables could have a wide range of different possible impacts.With that in mind, it’s time to focus on the behind-the-scenes industry that quietly supports all of these innovations.Introducing Packaging: Injecting Safety & Sterility into the Supply ChainThe mission-critical nature of these components and the presence of heavy regulation has given rise to the industry I’m covering in this primer. The companies providing the inputs to every injection play in a space that has been dubbed “fill-finish” or “packaging” or “injectable” tools.For simplicity’s sake, I will refer to this space as the “packaging tools” space.I’ve covered above what makes this industry attractive to investors, but it’s worth hammering home how important quality and safety are to this particular part of the supply chain.When you make a batch of drugs, you can test a sample from the batch to capture contamination or defects. If contamination is present, you can just throw out the batch, no questions asked. When the drug goes into a vial or a cartridge, you have no such luxury. You need to be 100% certain that the drug stays just as pure as it was when it went into the vial, and that nothing changes when a needle is inserted several times to withdraw a dose.The dynamic is similar with delivery devices - no room for error. Needles need to be 100% sterile, the plunger needs to be able to push out exactly the same amount of fluid every time, and the stopper needs to be able to slide back and forth without letting any of the drug to get by.Unsurprisingly, the FDA and various regulatory bodies across the globe increasingly demand proof of these characteristics. The documentation required to support this is a source of significant regulatory complexity. Like with bioprocessing equipment, regulators require specifics on every component supporting an injectable drug, from vial to needle.The result in these situations are always the same: regulatory capture. Like in aerospace parts, small, mission-critical components that would otherwise be easy to mass-produce become subject to so much regulatory overhead that a consolidated base of providers for each component emerges. This is done in the name of patient safety, making it a necessary evil that creates great business opportunities for players that can adhere closely to the strict rules of regulators.In general, the more regulatory complexity present, the fewer players you’d expect to see - packaging is no different, especially in containment.Key Packaging Tools PlayersWhile there are a lot of ways to get exposure to packaging, few of them are pure-play, and even fewer are considered great businesses today.The names that matter (the “Big 4”) from an investment perspective are as follows:West Pharma (WST, $15B market cap)Stevanato (STVN, $6B)Schott Pharma (1SXP GR, $4B)Gerresheimer (GXI GR, $4B)Additionally, investors in the space should be at least aware of Becton Dickinson (BDX), Nipro (8086 JP), Aptar (ATR), and Datwyler (DAE SW). Each is a conglomerate with a market cap above $2B and a presence in drug containment.I made the distinction between containment and delivery here for a key reason - only one resembles an oligopoly space today. In my view, containment is the truly attractive part of the packaging ecosystem, even if delivery is a faster-growth industry.This is because the future of drug delivery is uncertain, and this will likely remain the case for years to come. What won’t change, however, is the fact that the drug goes into a container before it is injected, no matter what form that injection takes. This makes containment a soft choke-point for the space, given incumbents ample levers to pull to win in delivery over time, either by creating end-to-end solutions or via selective partnerships with winners in various delivery niches. Delivery is also far more crowded than containment. Below is a clipping from a Stevanato market landscape (CCS = containment, DDS = delivery).Note: The chart itself is somewhat misleading because it only compares areas where Stevanato competes.While delivery has more players than one could fit in the above chart, only 6-7 businesses are meaningful in containment (Stevanto’s chart leaves out Aptar, an industrial company that also competes in vial stoppers where Stevanato is absent). “Delivery” is a broad category - it includes everything from syringes to insulin pumps. All of the containment players have some presence in delivery - this should be unsurprising when one considers that the most common “high-value” delivery device is just a pre-filled syringe.I won’t go into great detail comparing each of the names in this primer. I believe that isolating the players who dominate containment narrows the aperture of the discussion sufficiently that learnings from one can be applied broadly. Some key comparison, however, is below. If you are interested in specific product mixes and market positions, it’s all out there - most of these companies give or have given detailed product mixes/boasted their winning market positions over the years.