Overview

Hospira is a global specialty pharmaceutical and medication delivery company that develops, manufactures and markets products that help improve the safety, cost and productivity of patient care. Hospira's portfolio includes generic acute-care and oncology injectables, as well as integrated infusion therapy and medication management systems. Hospira's broad portfolio of products is used by hospitals and alternate site providers, such as clinics, home healthcare providers and long-term care facilities. In February 2007, Hospira acquired Mayne Pharma to increase its global presence in specialty generic injectable pharmaceuticals.

In 2008, Hospira re-aligned its segment presentation to reflect how the business is currently managed. Hospira has three reportable segments: Americas; Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC"). Prior year segment disclosure has been reclassified to conform to the current year presentation.

Cost-Reduction and Optimization Activities

As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize its manufacturing capabilities and capacity and related R&D operations. The costs related to these actions consist primarily of severance and other employee benefit costs, asset impairments, accelerated depreciation resulting from the decreased useful lives of the buildings and certain equipment, relocation of production, and other exit costs. Hospira will transfer related operations and production of the primary products from these facilities to other Hospira facilities, outsource certain product components to third-party suppliers, or cease activities entirely. For further details regarding the financial impact of these cost-reduction activities, see Note 5 to the consolidated financial statements included in Item 8.

2005 Actions. In August 2005, Hospira announced plans to close its manufacturing plant in Donegal, Ireland and closed the facility late in 2006. Products produced at the Donegal plant have been moved to Hospira facilities, primarily in Costa Rica and the Dominican Republic. During 2005, 2006 and 2007, Hospira incurred $8.5 million, $21.9 million and $0.7 million of restructuring charges, respectively, which are reported in the EMEA segment in cost of products sold.

2006 Actions. In February 2006, Hospira announced plans to close manufacturing plants in Ashland, Ohio, Montreal, Canada, and North Chicago, Illinois. Hospira closed the Ashland, Ohio manufacturing facility in 2007, and the Montreal, Canada manufacturing facility in 2008. Hospira is phasing out production at the North Chicago, Illinois manufacturing facility which is expected to be complete by the end of the first half of 2009.

The aggregate charges that Hospira will incur related to these plant closings are expected to be in the range of approximately $95 million to $110 million on a pre-tax basis, of which approximately $45 million to $55 million are expected to be reported as restructuring charges. During 2008, 2007 and 2006, Hospira incurred $13.6 million, $13.6 million and $21.7 million of restructuring charges, respectively, which are reported in the Americas segment in cost of products sold.

2007 Actions. In late 2007, Hospira made the decision to limit future research and development investments related to a non-strategic device product. As a result of this decision, Hospira recorded an intangible asset impairment charge in the Americas segment of $7.5 million, which is reported in cost of products sold.

2008 Actions. In April 2008, Hospira announced plans to exit manufacturing operations at its Morgan Hill, California plant over the next two years. Hospira expects to incur aggregate charges through 2011 related to these actions in the range of $29 million to $35 million on a pre-tax basis, of

which approximately $20 million to $24 million are expected to be reported as restructuring charges. During 2008, Hospira recorded in the Americas segment restructuring charges of $7.1 million in cost of products sold and $1.7 million in research and development.

Other Optimization Actions. Hospira has recently initiated a project ("Project Fuel") aligned with Hospira's overall strategy to improve margins and cash flow and drive sustained growth for Hospira. Project Fuel initiatives will include streamlining processes to improve efficiency in areas such as procurement, information technology, research and development, and finance; product portfolio rationalization to decrease complexity; and other optimization initiatives. The ultimate timing and amounts of related charges and cash expenditures cannot be determined at this time, as Hospira is still developing the project initiatives and stages. In addition, recognition of charges will be affected by the occurrence of commitments and triggering events as defined under U.S. Generally Accepted Accounting Principles, among other factors.

Hospira aims to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness and substantially improve its cost base. Cost-reduction and optimization activities involve risks and uncertainties. Hospira may incur more charges and cash expenditures than estimated and may not realize the expected cost savings on its planned time frame or at all. See "Item 1A. Risk Factors-Hospira's cost-reduction and optimization activities have resulted, and may continue to result, in significant charges and cash expenditures. These activities may disrupt Hospira's business and may not result in the intended cost savings."

Acquisition of Mayne Pharma

On February 2, 2007, Hospira completed its acquisition of Mayne Pharma for $2,055.0 million. As Mayne Pharma had strong market positions in Europe and Australia and a significant commercial infrastructure outside the United States, the acquisition has substantially increased Hospira's international presence. The acquisition has also broadened Hospira's specialty injectable pharmaceuticals product line. The results of operations of Mayne Pharma are included in Hospira's results for periods on and after February 2, 2007, which has affected comparability of the financial statements for the periods presented in this report and will affect comparability in future periods. For further details, see Note 2 to the consolidated financial statements included in Item 8.

In connection with the acquisition, Hospira recorded $137.9 million of charges relating to purchase accounting during 2007, including $84.8 million of acquired in-process research and development and $53.1 million of inventory step-up charges. Hospira also allocated $518.2 million of the purchase price to other intangible assets in connection with the acquisition, which are being amortized over their useful lives (which had a weighted average life of 10 years). Mayne Pharma related intangible asset amortization was $62.8 million and $47.6 million for 2008 and 2007, respectively, and is recorded in cost of products sold.

In connection with the integration of Mayne Pharma into its operations, Hospira incurred cash expenditures for the two-year period after the closing, which reduced earnings, and operating and investing cash flow. These cash expenditures included integration expenses related to the closure of facilities, termination of lease agreements and employee-related benefit arrangements with the remainder related to purchase accounting items and capital projects. Cash expenditures were completed by the end of 2008. Through completion, approximately $114.4 million of cash expenditures were incurred, of which $70.9 million ($27.1 million and $43.8 million in 2008 and 2007, respectively) were integration expense. In addition to integration expenses, Hospira recorded other Mayne Pharma acquisition-related expenses of $6.5 million in 2007.

To finance the purchase of Mayne Pharma, Hospira incurred substantial borrowings. For further details, see Note 10 to the consolidated financial statements included in Item 8. On an ongoing basis, Hospira will incur significantly greater interest expense than it incurred in prior periods, and will be

required to dedicate a substantial portion of its cash flow to servicing its debt. Please refer to "Liquidity and Capital Resources-Debt and Capital" later in this Item 7 for further details.

Acquisitions and related transactions are subject to various risks and uncertainties, including risks relating to the integration and risks relating to incurring substantial indebtedness in connection with an acquisition. Please see "Item 1A. Risk Factors-Hospira may continue to acquire other businesses, license rights to technologies or products from third parties, form alliances, or dispose of businesses, and any of these actions may not be completed in a timely or cost-effective manner, or at all."

Transition from Abbott

Hospira became a separate public company pursuant to a spin-off from Abbott on April 30, 2004 ("spin-off"). Under the terms of the spin-off, the legal title to certain assets and operations relating to Hospira's business outside the U.S. were transferred from Abbott over the two-year period after the spin-off. Hospira paid $116.7 million in 2005 and $126.2 million in 2006 to acquire these assets. These transfers and related payments were completed during 2006.

The two-year period after the spin-off was a transition period during which Hospira incurred expenses on a non-recurring, transitional basis as a result of the spin-off, including expenses relating to the establishment of new facilities, the build-out of independent information technology systems, and product registration and re-labeling. Hospira incurred $35.0 million of these expenses in 2006.

Results of Operations

Net Sales

    A comparison of product line sales is as follows:

                                                                            Percent change
   Years Ended December 31 (dollars
   in millions)                         2008        2007        2006       2008       2007

   Americas-
   Pharmaceuticals
      Specialty Injectables           $ 1,328.9   $ 1,240.9   $ 1,021.2       7.1 %     21.5 %
      Other Pharma                        522.0       549.2       543.4      -5.0 %      1.1 %

                                        1,850.9     1,790.1     1,564.6       3.4 %     14.4 %
   Devices
      Medication Management Systems       558.9       501.3       466.2      11.5 %      7.5 %
      Other Devices                       368.5       367.5       365.6       0.3 %      0.5 %

                                          927.4       868.8       831.8       6.7 %      4.4 %
   Total Americas                       2,778.3     2,658.9     2,396.4       4.5 %     11.0 %
   EMEA-
   Pharmaceuticals
      Specialty Injectables               287.4       255.4        20.3      12.5 %   1158.1 %
      Other Pharma                        152.1       162.3        87.2      -6.3 %     86.1 %

                                          439.5       417.7       107.5       5.2 %    288.6 %
   Devices
      Medication Management Systems        75.9        66.4        54.5      14.3 %     21.8 %
      Other Devices                        68.4        68.0        65.4       0.6 %      4.0 %

                                          144.3       134.4       119.9       7.4 %     12.1 %
   Total EMEA                             583.8       552.1       227.4       5.7 %    142.8 %
   APAC-
   Pharmaceuticals
      Specialty Injectables               205.4       168.9        23.7      21.6 %    612.7 %
      Other Pharma                         15.2        14.1         0.9       7.8 %   1466.7 %

                                          220.6       183.0        24.6      20.5 %    643.9 %
   Devices
      Medication Management Systems        19.9        16.7        14.2      19.2 %     17.6 %
      Other Devices                        26.9        25.5        25.9       5.5 %     -1.5 %

                                           46.8        42.2        40.1      10.9 %      5.2 %
   Total APAC                             267.4       225.2        64.7      18.7 %    248.1 %

   Net Sales                          $ 3,629.5   $ 3,436.2   $ 2,688.5       5.6 %     27.8 %

Specialty Injectables include generic injectables and proprietary specialty injectables. Other Pharmaceuticals include large volume I.V. solutions, nutritionals and contract manufacturing services (including former "Sales to Abbott"). Medication Management Systems include infusion pumps, related software, services and administration sets. Other Devices include gravity administration sets, critical care products and other device products.

Net sales for 2008 and 2007 include twelve and eleven months, respectively, of Mayne Pharma net sales. As Mayne Pharma was acquired in February 2007, there are no Mayne Pharma sales in 2006.

2008 compared to 2007:

Net sales increased 5.6%, or 4.8% excluding the impact of changes in foreign exchange rates.

Net sales in the Americas segment increased 4.5%. The growth in net sales of Specialty Injectable Pharmaceuticals was due to increased volumes from Group Purchasing Organization ("GPO") contract awards, new product introductions, increased volume for Hospira's proprietary drug Precedex®, and the impact of competitor supply issues. Other Pharma net sales decreased due to lower demand from certain contract manufacturing customers, partially offset by increased large volume IV solutions sales due to GPO contract awards. Net sales in Medication Management Systems increased due to strong demand, particularly for Symbiq®, Hospira's newest general infusion system. Other Devices net sales increased due to volume growth in gravity administration sets.

Net sales in the EMEA segment increased 5.7%, or 1.6% excluding the impact of changes in foreign exchange rates. Specialty Injectable Pharmaceuticals net sales increased primarily due to an additional month of Mayne Pharma net sales in 2008 and sales of newly launched biogenerics, partially offset by expected price decreases in oncology products. Net sales of Other Pharma were lower due to declines in demand from certain contract manufacturing customers. Net sales in Medication Management Systems increased due to higher sales volume of ambulatory and large volume infusion systems.

Net sales in the APAC segment increased 18.7%, or 16.1% excluding the impact of changes in foreign exchange rates. The increase was primarily due to volume growth in Specialty Injectables anti-infectives and certain oncology products and an additional month of Mayne Pharma net sales in 2008. The remaining increase was due to higher volume growth in Medication Management Systems, Other Pharma and Devices.

2007 compared to 2006:

Net sales increased 27.8%, of which 23.7% is related to the addition of Mayne Pharma and 0.9% is due to the impact of changes in foreign exchange rates.

Net sales in the Americas segment increased 11.0%. Net sales for Specialty Injectable Pharmaceuticals increased due to the acquisition of Mayne Pharma, combined with growth in the base product portfolio, and new product launches. Growth in the base product portfolio was driven by increased sales of certain anti-infective products, drugs sold in differentiated delivery systems and Hospira's proprietary drug Precedex®. Other Pharma net sales increased due to higher nutritional and large volume I.V. solutions volume offset by lower demand in contract manufacturing from existing customers and by the planned exit of certain products manufactured in Ashland, Ohio. Net sales in Medication Management Systems increased due to higher volume infusion systems and related infusion therapy products and services. Other Devices net sales increased due to higher volume in gravity administration sets.

Net sales in the EMEA segment increased 142.8%, which is primarily related to the addition of Mayne Pharma and higher volume in Specialty Injectable Pharmaceuticals. Net sales in Other Pharma increased due to contract manufacturing demand from certain customers, partially offset by expected

volume declines from sales to Abbott. Net sales in Medication Management Systems increased due to higher sales volume of ambulatory infusion systems.

Net sales in the APAC segment increased 248.1%, which is primarily related to the addition of Mayne Pharma and higher volume in Specialty Injectable Pharmaceuticals and Medication Management Systems.

Gross Profit

                                                                          Percent change
   Years Ended December 31 (dollars
   in millions)                         2008        2007       2006       2008        2007

   Gross profit                       $ 1,322.0   $ 1,173.9   $ 939.2        12.6 %    25.0 %
   As a percent of sales                   36.4 %      34.2 %    34.9 %

2008 compared to 2007:

Gross profit increased $148.1 million, or 12.6%, in 2008 compared to 2007.

The gross profit increase is primarily the result of higher sales volume, including an additional month of Mayne Pharma gross profit in 2008, the impact of changes in foreign exchange rates, improved manufacturing performance, and favorable product mix driven by Medication Management Systems. These increases were partially offset by higher freight and distribution expenses. A portion of the increase in gross profit results from the absence in 2008 of purchase accounting charges for Mayne Pharma, which in the prior year included inventory step-up charges of $53.1 million. Gross margin increased to 36.4% for 2008, from 34.2% for 2007.

2007 compared to 2006:

Gross profit increased $234.7 million, or 25.0%, in 2007 compared to 2006. Of this increase, approximately $200.3 million, or 21.3%, is related to the addition of Mayne Pharma.

The gross profit increase is primarily related to the addition of Mayne Pharma, offset by related Mayne Pharma inventory step-up charge resulting from purchase accounting and amortization of the acquired intangible assets. The remaining gross profit increase is primarily the result of product mix improvement, lower costs associated with the planned manufacturing plant closures, and favorable price in the Americas segment. These increases were partially offset by inflation and other manufacturing costs, intangible asset impairment charge, and incremental freight and distribution costs.

Research and Development

                                                                        Percent change
    Years Ended December 31 (dollars
    in millions)                         2008      2007      2006       2008        2007

    Research and development expense    $ 213.6   $ 201.2   $ 161.6        6.2 %     24.5 %
    As a percent of sales                   5.9 %     5.9 %     6.0 %

2008 compared to 2007:

Research and development ("R&D") expenses increased $12.4 million, or 6.2%, in 2008, compared to 2007. The increase was primarily related to higher spending on product development related to new compounds in Hospira's generic injectable drug pipeline, including biogenerics, and device pipeline, partially offset by lower proprietary clinical trial spending.

2007 compared to 2006:

R&D expenses increased $39.6 million, or 24.5%, in 2007, compared to 2006. Of this increase, $47.2 million is related to the addition of Mayne Pharma. Excluding Mayne Pharma, R&D expenses decreased due to the combination of upfront payments made in 2006 related to collaboration agreements for biogeneric products, and lower spending in 2007 on medication management systems projects due to new product launches. This was partially offset by higher spending on new product development related to new compounds in Hospira's generic injectable drug pipeline and proprietary clinical trials.

Acquired In-Process Research and Development

In 2008, as part of an acquisition, Hospira allocated and expensed $0.5 million to acquired in-process research and development related to pipeline products.

In 2007, as part of the Mayne Pharma acquisition, Hospira allocated and expensed $84.8 million to acquired in-process research and development related to Mayne Pharma's pipeline products. Additionally in late 2007, Hospira purchased certain clinical studies related to a compound that will be used to file for expanded medical indications. The cost for these clinical studies was $3.2 million and was recorded as acquired in-process research and development expense in 2007 as the studies have no alternative future uses.

In 2006, as part of an acquisition, Hospira allocated and expensed $10.0 million to acquired in-process research and development related to pipeline products.

Selling, General and Administrative

                                                                        Percent change
    Years Ended December 31 (dollars
    in millions)                         2008      2007      2006       2008        2007

    Selling, general and                $ 590.1   $ 582.1   $ 428.0        1.4 %     36.0 %
    administrative expense
    As a percent of sales                  16.3 %    16.9 %    15.9 %

2008 compared to 2007:

Selling, general and administrative ("SG&A") expenses increased $8.0 million, or 1.4%, in 2008, compared to 2007. The increase was primarily due to sales and marketing support within the Americas and support costs for new product launches in the EMEA and APAC segments, partially offset by lower costs related to the integration of Mayne Pharma.

2007 compared to 2006:

SG&A expenses increased $154.1 million, or 36.0%, in 2007, compared to 2006. Of this increase, $102.9 million was related to the addition of Mayne Pharma. The remainder of the increase was primarily due to additional costs related to the integration of Mayne Pharma, partially offset by the absence in 2007 of costs related to the implementation of Hospira's new independent infrastructure as a result of the spin-off.

Interest Expense

Hospira incurred interest expense of $116.2 million in 2008, $134.5 million in 2007 and $31.0 million in 2006. The decrease in 2008 compared to 2007 was primarily due to lower debt outstanding in 2008, the 2007 write-off of costs associated with the issuance of debt incurred related to the Mayne Pharma acquisition, and lower interest rates on floating rate notes. The increase in 2007 compared to 2006 was primarily due to the issuance of additional debt and related costs due to the Mayne Pharma acquisition. Refer to the Liquidity and Capital Resources section below, as well as

Note 10 to the consolidated financial statements included in Item 8, for further
information regarding Hospira's debt and credit facilities.

Other Income, Net

Other (income) and expense for 2008, 2007 and 2006 primarily includes amounts relating to foreign currency transaction gains and losses, interest income, and other items. Foreign exchange (gains) for 2008, 2007 and 2006 were $(2.2) million, $(1.6) million and $(1.1) million, respectively. Included in 2007 is $5.7 million of foreign exchange losses realized due to the Mayne Pharma acquisition. Interest (income) for 2008, 2007 and 2006 was $(9.3) million, $(15.1) million and $(17.1) million, respectively. In 2007, Hospira also had net gains on investments of $(5.0) million.

Income Tax Expense

The effective tax rate was 21.3% in 2008, 27.2% in 2007 and 26.8% in 2006. The effective tax rate for 2007 and 2006 included the impact of expensing non-deductible acquired in-process research and development of $84.8 million and $10.0 million, respectively. Excluding the effect of these items, the 2007 and 2006 effective tax rates were 18.7% and 26.0%, respectively. Both 2008 and 2007 effective tax rates include certain non-recurring items such as purchase accounting, integration and restructuring charges and interest expense generating benefits in higher tax rate jurisdictions. The higher 2008 effective tax rate compared to 2007, excluding the impact of expensing non-deductible acquired in-process research and development, was due primarily to the impact of higher earnings in higher tax rate jurisdictions. The decrease in the effective tax rate in 2007 compared to 2006, excluding the impact of expensing non-deductible acquired in-process research and development in both years, was due primarily to lower earnings in higher tax rate jurisdictions in connection with the Mayne Pharma acquisition. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in certain jurisdictions outside the U.S.

Liquidity and Capital Resources

Net cash provided by operating activities continues to be Hospira's primary source of funds to finance operating needs, capital expenditures, and repay debt. Other capital resources include cash on hand, borrowing availability under a $375.0 million revolving credit facility expiring in 2010 and access to the capital markets. Hospira believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its revolving credit facility and access to the credit and capital markets will be sufficient to finance its operations, including debt service obligations, capital expenditures, product development and investments in cost reduction and optimization activities for the foreseeable future.

Beginning on February 2, 2007, Hospira's operating cash flows include operating cash flows generated by Mayne Pharma. In connection with the integration of Mayne Pharma into its operations, Hospira incurred cash expenditures for the two-year period after the closing of $114.4 million, of which $70.9 million ($27.1 million and $43.8 million in 2008 and 2007, respectively) were integration expenses. In addition, as a result of the debt incurred to finance the Mayne Pharma acquisition, Hospira must dedicate substantially greater cash to service debt obligations and related interest expense on an ongoing basis compared to periods prior to 2007.

Summary of Sources and (Uses) of Cash

    Years Ended December 31 (dollars in millions)     2008        2007        2006

    Operating activities                            $  584.1   $    551.1   $  424.2
    Investing activities                              (264.9 )   (2,228.0 )   (251.3 )
    Financing activities                               (60.1 )    1,580.2     (377.7 )

. . .