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HOSPIRA corp

Carly Helfand/MEDILL

Lake Forest-based Hospira Inc. is hoping avoid further FDA intervention after experiencing a temporary plant closure in a North Carolina facility. 


Hospira's horizon dotted with question marks

by Carly Helfand
March 06, 2012


HOSPIRA graph

Carly Helfand/MEDILL

Hospira posted a net loss of $214 million in the fourth quarter of 2011.

Things have been looking up recently for injectable pharmaceuticals and medical device producer Hospira Inc. after a year colored by increased costs and a temporary plant shutdown on account of manufacturing practice violations. The company’s remediation measures seem to be appeasing regulators, and shares recently jumped despite the company’s fourth-quarter loss.

But Hospira isn’t out of the woods yet. With the threat of increased Food & Drug Administration intervention still looming, the Lake Forest-based company also is facing a patent exclusivity issue and increased competition in 2012 – leaving its short-term future cloudy and uncertain.

“The company is still in the process of communicating with the FDA, the outcome of which is still unknown,” said David Roman, an analyst with Goldman Sachs Group Inc., in a note. “We see the biggest question out of the quarter relating to the true normalized earnings for the company, as lost market share and the timing of a ramp-up in manufacturing remain unknown.”

Problems for Hospira began back in April 2010 when the FDA sent a warning letter regarding code violations observed in two of its facilities during an inspection. What resulted was an extension of a routine shutdown of the company’s Rocky Mount, N.C. plant, responsible for about 25 percent of the company’s production, earlier this year.

Hospira has responded to FDA scrutiny on several fronts. The company now has 150 consultants working on quality issues, and CEO Michael Ball hired six new employees last month, including a senior vice president, to oversee quality control and regulatory compliance efforts. Ball replaced then-CEO Christopher Begley, who retired amid quality control concerns in March 2011.

“We remain confident that the earnings potential for the company remains strong,” Chief Financial Officer Thomas Werner said in a February conference call. “We’re making progress with our remediation efforts. We believe that, toward the end of the year, our production levels at Rocky Mount will increase and we will be releasing more product.”

Investors have been encouraged by the company’s positivity – so much so that shares jumped from $34.22 to $36.30 after the announcement of fourth-quarter results. Hospira posted a net loss of $214 million but a sizeable portion of that was related to cleanup costs.

Analysts have not been as quick to accept the company’s progress reports. According to Werner, Hospira’s guidance for 2012 assumes that production at Rocky Mount remains at 60-70 percent for the year. Many fear that estimate may be too optimistic.

While the FDA has not yet communicated any intention to shut down Hospira’s facilities, temporary plant closure remains a possibility. The government is expected to make an announcement in coming weeks concerning whether or not it will present Hospira with a consent decree, which analyst Ronny Gal of Sanford C. Bernstein and Co. Inc. says usually amounts to “an additional cost and a slow-down in manufacturing.” Gal estimates the possibility of a consent decree at 50-50.

Analyst Shibani Malhotra of RBC Capital Markets LLC believes the possibility of further FDA action is even greater. According to a note, RBC’s consultant sees a 65 percent chance of action that would “significantly impair Hospira’s recovery.” Malhotra warns that the company’s turnaround may “take longer than investors realize.”

Malhotra cited the 2010 consent decree issued to Cambridge, Mass.-based Genzyme Corp., which came after “significant progress” had been made on remediation.

“The FDA could be preparing a consent decree even though there has been no discussion of this with Hospira,” she cautioned.

Hospira is also facing a patent challenge for Precedex, an intravenous sedative for patients in intensive care that Gal estimates to be responsible for about 20 percent of the company’s earnings. Hospira, along with Finnish company Orion Corp., which owns the medication’s European rights, filed a patent infringement suit against Sandoz, the generics division of the Swiss company Novartis International AG, in 2009. If Hospira loses, other companies will gain the opportunity to produce a generic version of the drug – a loss in market share Gal said would cost Hospira 20 cents to 30 cents of earnings based on current annual estimates.

Hospira is aiming to offset potential losses in market share with new launches of its own. The company currently has 73 compounds in its pipeline with 603 new-to-country launches on the horizon that reflect management’s global expansion strategy.

Of the products in Hospira’s pipeline, 25 percent are expected to launch within the next two years with 40 percent of those launches anticipated for 2012. One product in particular – an advanced intravenous infusion system from the company’s medical devices segment known as Symbiq – is currently awaiting FDA approval after being recalled.

The company’s mid-range of guidance assumes a mid-year approval with sales coming in the second half of 2012. Gal said the approval of Symbiq could add as much as 10 cents to 20 cents to earnings on an annualized basis.

“That’s going to be positive if it happens,” he said in a phone interview. “I think it will be a very good development for them.”

Michael Waterhouse, an analyst for Morningstar Inc., said in a note that an approval of the Symbiq pump in combination with resumed production at the Rocky Mount plant, “should begin to bolster profit margins as restructuring and product-related charges cease while operating scale climbs.”

Hospira is also among the leaders in the development of generic versions of biologic drugs. Commonly called biosimilars, these compounds – composed of living cells or once-living material such as sugars or proteins – received draft guidance from the FDA last month.

Hospira, which already markets two biosimilars overseas, has 11 biosimilar compounds in its pipeline. One of these compounds, intended to treat problems associated with chronic kidney failure, entered Phase III human testing in the U.S. in January.

Still, according to Roman, “lost market share and the timing of a ramp-up in manufacturing” – two unknowns – remain the most important factors set to influence earnings in 2012-2013. He believes geographic expansion and biosimilar development efforts will affect the company’s earnings in 2014 and beyond.

For most investors, Hospira has been a big disappointment. Trading around $40 in 2007, the shares fell to a the mid-$20s in the spring of 2009. They rebounded to a peak of close to $60 for much of 2010 and 2011 before plunging to below $30 when the quality problems surfaced.

Hospira currently has no price/earnings ratio. Nine of 14 analysts surveyed by Bloomberg LP recommend holding shares until some of the questions about the company’s short-term future are answered. Two recommend selling Hospira shares.

“It’s clear that Hospira continues to work tirelessly at resolving its ongoing quality control and regulatory issues,” wrote Rick Wise, an analyst for Leerink Swann LLC, in a note. “But with a still-uncertain 2013 outlook – depending on whether remediation efforts slip well into next year – we’re inclined to remain on the sidelines for now.”