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HSP > SEC Filings for HSP > Form 10-Q on 1-Aug-2012All Recent SEC Filings

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Form 10-Q for HOSPIRA INC


1-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward looking statements within the meaning of the federal securities laws, including statements related to accounting estimates/assumptions, litigation matters and related outcomes, the research and development pipeline, continuous improvement initiatives, the anticipated costs and impacts to remediate quality, other predictions of earnings, revenues or expenses, and all other statements that do not relate to historical facts. Hospira, Inc. ("Hospira") intends that these forward looking statements be covered by the safe harbor provisions for forward looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward looking words such as "may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "intend," "could" or similar expressions. In particular, statements regarding Hospira's plans, strategies, prospects and expectations regarding its business and industry are forward looking statements. You should be aware that these statements and any other forward looking statements in this document only reflect Hospira's expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions, many of which are beyond Hospira's control, and may cause actual results and performance to differ materially from its expectations. The statements are based on assumptions about many important factors, including assumptions concerning the following: (i) the continuing growth of our currently marketed products and developments with competitive products; (ii) additional actions, legislation, regulation or other governmental pressures in the United States or globally, which may affect pricing, biosimilars, quality, reimbursement, taxation or other elements of Hospira's business; (iii) product quality or patient safety issues, leading to product recalls, withdrawals, launch delays, sanctions, seizures, litigation or declining sales; (iv) Hospira's ability to protect intellectual property rights, including the patents related to Precedex™; (v) future actions of the U.S. Food and Drug Administration ("FDA") or any other regulatory body that could delay, limit or suspend product development, manufacturing or sale or result in seizures, injunctions, monetary sanctions or criminal or civil liabilities; (vi) product development risks, including satisfactory clinical performance and the general unpredictability associated with the product development cycle, including the risks associated with biosimilar development; (vii) the availability and pricing of acceptable raw materials and component supply; and
(viii) Hospira's ability to realize the anticipated benefits of its continuous improvement initiatives.

Other important factors that could cause Hospira's actual results to be materially different from its expectations include (i) the risks and uncertainties described in "Item 1A. Risk Factors" in Hospira's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K") and (ii) the factors described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2011 Form 10-K, as updated by this Item 2. Accordingly, you should not place undue reliance on the forward looking statements contained in this report.

Overview

Hospira is a leading global provider of injectable drugs and infusion technologies that develops, manufactures, distributes and markets products. Through a broad, integrated portfolio, Hospira is uniquely positioned to Advance Wellness™ by improving patient and caregiver safety while reducing healthcare costs. Hospira's portfolio includes generic acute-care and oncology injectables, as well as integrated infusion therapy and medication management products. Hospira's portfolio of products is used by hospitals and alternate site providers, such as clinics, home health care providers and long-term care facilities.

Product Development and Product Launches

Hospira's product development programs are concentrated in the areas of specialty injectable pharmaceuticals and medication management. Hospira manages these product development programs and related costs through the following four categories: generic pharmaceuticals, biosimilars, proprietary pharmaceuticals and device products. For purposes of reporting the generic pharmaceutical and biosimilar pipelines, Hospira considers a new compound to be introduced in one or more countries to be a "compound" in the pipeline.

Generic Pharmaceutical Product Development

In 2011, Hospira adopted a new program related to its generic specialty injectable pharmaceutical product line. This program will be executed over the next several years and will require Hospira to qualify certain of its on-market products into new countries, and to pursue other on-market generic products that are not currently in Hospira's portfolio. As of June 30, 2012, Hospira's generic pharmaceutical pipeline consisted of 71 compounds.

Biosimilar Product Development


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As of June 30, 2012, Hospira's biosimilar pipeline, including co-exclusive commercialization rights for biosimilars developed with Celltrion, Inc. and Celltrion Healthcare, Inc. ("Celltrion"), consisted of 11 compounds and updates for certain products in the pipeline include the following:
• Celltrion completed its development program for one of these biosimilars, infliximab, and submitted the dossier to the European Medicines Agency ("EMA") in March 2012. Hospira submitted its duplicate dossier to the EMA in May 2012. Celltrion is in the process of completing its development program for a second biosimilar, trastuzumab.

• In October 2011, Hospira began its Phase III U.S. clinical trial of its biosimilar erythropoietin ("EPO") for patients with certain renal dysfunction who have anemia. This development program is expected to continue into 2013.

Proprietary Pharmaceutical Product Development

As of June 30, 2012, Hospira has in development/co-development the following
proprietary pharmaceutical products:
•      Precedex™ is a proprietary sedative. Hospira is engaged in the following
       development programs to expand the clinical use of this product:


•            in 2007, Hospira completed its clinical program for the long-term
             use of Precedex™ (greater than 24 hour infusion), and is continuing
             to work with the FDA, but the timing of resolution is uncertain (it
             has achieved approval of this indication in certain markets outside
             the U.S.);


•            in 2009, Hospira began clinical trials in its Phase III development
             for the use of Precedex™ in the pediatric setting. Hospira is in the
             process of completing this program in preparation for submission to
             the FDA;


•            in 2011, Hospira began clinical trials in Japan in its Phase III
             development for a procedural sedation indication in the use of
             Precedex™. Hospira has completed these trials, with submission to
             the Pharmaceuticals and Medical Devices Agency of Japan in the third
             quarter of 2012.


•      Dyloject™ is a post-operative pain management drug currently awaiting FDA
       approval. In 2010, Hospira received a Complete Response Letter from the
       FDA regarding Dyloject™. Hospira and its third party manufacturer continue
       to work closely with the FDA to address all items raised as part of the
       regulatory process, but the timing of resolution is uncertain.

In 2010, Hospira entered into a licensing agreement with DURECT Corporation ("DURECT") to develop and market DURECT's POSIDUR™, which was under Phase III development at the time Hospira entered into the agreement. In January 2012, DURECT announced the top-line results from the Phase III clinical study, which did not reach statistical significance. Subsequently in 2012, Hospira and DURECT entered into an agreement that terminates Hospira's rights and obligations with respect to POSIDUR™ going forward.

During 2012, Hospira and Ivax International GmbH ("Ivax") (formerly ChemGenex Pharmaceuticals Limited) entered into an agreement that terminates Hospira's rights and obligations with respect to Ivax's oncology product candidate going forward.

Device Product Development

Hospira's key device programs include the development of advanced infusion platforms and systems, program/software updates to those platforms and systems as well as consumable product development.

In 2011, Hospira submitted a 510(k) application with the FDA for modifications to its Symbiq™ infusion system. In March 2012, Hospira received regulatory clearance from the FDA under the new draft FDA regulatory guidance for 510(k) infusion pump submissions. Hospira is working with existing customers to upgrade Symbiq™ devices in the market and began shipments of new devices to previously contracted customers in the second quarter of 2012.

Research and Development Expense

Research and development ("R&D") expense includes costs identifiable to specific projects, general costs which are essential to all of Hospira's R&D operations, and one-time initial and development milestone payments associated with external collaborative arrangements. For the three and six months ended June 30, 2012, specific project costs included EPO Phase III U.S. clinical trial expenses and other project costs which were 22.4% and 16.4% of total R&D expense, respectively. Other than EPO Phase III costs, the costs attributable to a specific project are not individually material to Hospira's R&D expense line item for the periods presented.


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Hospira's R&D expenses for the three months ended June 30, 2012 and 2011 were $83.6 million and $65.8 million, respectively. As a percentage of Net sales, R&D expenses were 8.1% and 6.2% for the three months ended June 30, 2012 and 2011, respectively. Hospira's R&D expenses for the six months ended June 30, 2012 and 2011 were $152.7 million and $122.7 million, respectively. As a percentage of Net sales, R&D expenses were 7.6% and 5.9% for the six months ended June 30, 2012 and 2011, respectively. From time to time, Hospira may enter into collaborative arrangements with third parties for the development, license or commercialization of certain products. The timing and terms of such collaborative arrangements can be uncertain and unpredictable. Hospira expects that R&D as a percentage of net sales may increase to approximately 8% of net sales over the next two to three years to support Hospira's strategy to expand and advance its generic pharmaceutical and biosimilar product portfolio, exclusive of any one-time initial and development milestone payments associated with collaborative arrangements.

For information related to Hospira's patents, see the section captioned "Patents, Trademarks and Other Intellectual Property" in Hospira's 2011 Form 10-K. For further information related to certain of Hospira's development agreements for biosimilars and proprietary pharmaceuticals, see the section captioned "Product Development" and Note 4 to the financial statements in Hospira's 2011 Form 10-K.

Continuous Improvement Activities

Hospira aims to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness to improve its cost base. As part of its strategy, Hospira has taken a number of actions to reduce operating costs and optimize operations. The net charges related to these actions consist primarily of severance and other employee benefits, accelerated depreciation resulting from the decreased useful lives of the buildings and certain equipment, impairments, relocation of production, process optimization implementation, manufacturing start-up, product validation and registration charges, other asset charges, exit costs, contract termination costs and gains or losses on disposal of assets.

Facilities Optimization and Capacity Expansion

In 2011, to ensure Hospira's manufacturing capacity aligns with expected future commercial growth and demand, Hospira began expansion in Vishakhapatnam ("Vizag"), India of specialty injectable manufacturing capacity. Capital expenditures and related start-up charges are anticipated for this three to five year project, with the first commercial product release expected in 2014. In aggregate, Hospira estimates India capacity expansion capital expenditures of $275 million to $325 million and Hospira has incurred $120.3 million in aggregate to date. For the Vizag, India capital expansion, capital expenditures were $79.7 million in 2011, are expected to be approximately $100 million in 2012, with the remaining amounts in 2013 and 2014. In the six months ended June 30, 2012, capital expenditures were $40.6 million. In addition, Hospira initiated plans to qualify and validate, over the next three years, manufacturing and related activities for certain oncology compounds at Hospira's Joint Venture, Zydus Hospira Oncology Private Limited, a pharmaceutical company located in Ahmedabad, India. For both this and the above Vizag, India capacity expansion activities, Hospira expects to incur manufacturing start-up, validation (facility and product related) and registration costs in the aggregate of approximately $100 million to $120 million, for which timing will lag facility construction. Activities related to these projects began primarily in the second half of 2011. In aggregate, charges incurred through June 30, 2012 were $11.0 million, primarily related to start-up and facility validation. In the three and six months ended June 30, 2012, charges were $5.3 million and $7.2 million, respectively. Hospira anticipates the timing and recognition of charges and capital expenditures will be affected by various facility construction and product validation and registration timelines throughout the duration of the projects.

Furthermore, Hospira expects higher capital expenditures related to modernization and streamlining at its existing facilities. Hospira anticipates the timing and recognition of charges and capital expenditure will be affected by various facility construction and product validation timelines throughout the duration of the projects as well as remediation activities and timelines as discussed in the section captioned "Certain Quality and Product Related Matters" in this Item 2.

In June 2012, as part of its effort to streamline and modernize existing facilities, Hospira initiated plans to exit a specialty injectable drug packaging and inspection finishing operation at one facility and commence modernization of drug finishing operations, including automated visual inspection capabilities, at other existing facilities. As a result, primarily in the Americas segment, Hospira incurred equipment and facility impairment charges of $17.4 million and will incur lease contract termination charges upon final exit from the operations of approximately $5.0 million later in 2012.

In April 2008, Hospira announced a plan to exit manufacturing operations at its Morgan Hill, California facility. In March 2011, Hospira completed the process of transferring related operations and production of products to other Hospira facilities or outsourcing certain product components to third-party suppliers. Hospira incurred aggregate charges related to this action of $42.5 million. These charges included aggregate restructuring charges of $27.8 million. During the six months ended June 30,


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2011, Hospira incurred restructuring costs of $1.1 million in the Americas segment (includes the United States, Canada and Latin America), with $0.3 million reported as restructuring costs. In May 2012, Hospira sold the Morgan Hill, California facility for approximately $5 million.

Project Fuel

In March 2009, Hospira announced details of a restructuring and optimization plan, ("Project Fuel"), which was completed in March 2011. Project Fuel included the following activities: optimizing the product portfolio, evaluating non-strategic assets and streamlining the organizational structure. Hospira incurred aggregate charges related to these actions of $132.5 million. These charges included aggregate restructuring costs and other asset charges of $72.0 million. During the six months ended June 30, 2011, Hospira incurred charges of $9.6 million, with $3.4 million reported as restructuring costs.

Other Restructuring

In addition to the programs discussed above, from time to time Hospira incurs costs to implement restructuring efforts for specific operations to reduce complexity, such as optimizing the product portfolio, and improve margins.

In June 2012, Hospira initiated plans to exit a non-strategic product line. As a result, in the Americas segment, Hospira incurred equipment impairment charges of $12.1 million in the three months ended June 30, 2012. In addition, Hospira incurred other asset (inventory) charges of $4.9 million and contract termination charges of $0.9 million related to the product line exit during the three months ended June 30, 2012.

During the six months ended June 30, 2011, Hospira incurred costs of $7.8 million to terminate distributor contracts in the Americas segment related to the restructuring of certain Latin America operations.

No additional restructuring costs are expected to be incurred for these committed actions.

Financial Related Impact

The net charges incurred for the above continuous improvement activities
collectively were reported in the condensed consolidated statements of (loss)
income line items included in Item 1 as follows:

                                                           Three Months Ended June 30,                          Six Months Ended June 30,
(dollars in millions)                                          2012                         2011                   2012                   2011
Cost of products sold                         $              11.1                       $        -     $         13.0                  $     5.8
Restructuring, impairment and (gain) on
disposition of assets, net                                   29.5                                -               29.5                       11.5
Selling, general and administrative                             -                                -                  -                        1.2
Total net charges                             $              40.6                       $        -     $         42.5                  $    18.5

As Hospira continues to consider each continuous improvement activity, the amount, timing and recognition of charges will be affected by the occurrence of commitments and triggering events as defined under accounting principles generally accepted in the United States ("GAAP"), among other factors. For further information regarding the impact of these continuous improvement activities, see Note 2 to the condensed consolidated financial statements included in Item 1.

Certain Quality and Product Related Matters

Hospira's pharmaceutical and device products are subject to extensive, complex and evolving regulations and increasing oversight by the FDA and other governmental authorities. Hospira's manufacturing and other facilities are subject to periodic inspections to verify compliance with current FDA and other governmental regulatory requirements. This regulatory oversight may lead to inspection observations (commonly called Form 483 observations in the U.S.), warning letters, consent decrees, voluntary or involuntary product recalls, injunctions to halt production and distribution of products, monetary sanctions, delays in product approvals and other restrictions on operations. Any of these regulatory enforcement actions as well as Hospira's inspections, reviews and commitments may require remediation activities with respect to products, production facilities and quality/production policies, procedures and processes.


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The following information provides additional detail regarding certain quality and product related matters.

Warning Letter

In April 2010, Hospira received a Warning Letter from the FDA (the FDA's Warning Letter is publicly available on the FDA's website) in connection with the FDA's inspection of Hospira's pharmaceutical and device manufacturing facilities located in Clayton, North Carolina and Rocky Mount, North Carolina. Since issuing the Warning Letter, the FDA has completed multiple reinspections at both the Clayton and Rocky Mount facilities. In January 2011, the FDA did not issue a Form 483 after inspecting the Clayton facility. In May and August 2011, the FDA issued a Form 483 listing observations after each inspection of the Rocky Mount facility which identified further areas for remediation and improvement. In March 2012, the FDA conducted a focused inspection at the Clayton facility and issued a Form 483 with one observation related to the thoroughness of certain of Hospira's internal investigations. In July 2012, the FDA issued a Form 483 after inspecting the Clayton facility listing observations regarding stability studies, sampling documentation and methodology and equipment validations. The FDA will likely conduct additional follow-up inspections at one or both facilities in the near future.

Hospira has implemented a comprehensive remediation plan to address the items raised in the Warning Letter and FDA Form 483s. Hospira will continue to interact and work closely with the FDA to ensure that all items cited during inspections and noted in Form 483s and the Warning Letter are appropriately addressed. Hospira has disclosed information about the Form 483 observations relevant to the Clayton and Rocky Mount facilities because of the April 2010 Warning Letter. All of Hospira's manufacturing facilities and related operations are subject to routine FDA inspections and some of those facilities have received Form 483 observations or comparable inspection results from other governmental regulatory agencies. Remediation activities associated with these observations have and may continue to require additional capital expenditures, have and may continue to cause slowdowns in production and product releases, penalties for failure to supply product to certain customers, higher inventory loss due to non-conformance with specifications and quality standards, and costs associated with reduced production volume, and extended production downtime. Hospira is working to ensure all of its manufacturing facilities and quality policies, procedures and processes align with the commitments made to the FDA, and as a result, Hospira has incurred and will continue to incur additional costs for enhanced quality oversight at other facilities.

During the three and six months ended June 30, 2012, Hospira recognized charges specific to the aforementioned matters, in Cost of products sold, of $49.4 million and $86.2 million, respectively, for third party oversight and consulting, costs associated with reduced production volume, extended production downtime, production process issues, higher inventory loss and penalties for failure to supply product to certain customers.

Symbiq™ Infusion Pumps

In April 2010, Hospira placed a voluntary hold on all shipments of Symbiq™ infusion pumps to new customers pending FDA regulatory clearance of a 510(k) application for software updates to enhance the reliability of the infusion system, and to correct several recall issues impacting the device. Hospira submitted the Symbiq™ 510(k) application with the FDA in March 2011 under the FDA's draft regulatory guidance for 510(k) infusion pump submissions. Hospira has also submitted the appropriate applications for modifications to its Symbiq™ infusion system to regulatory agencies in various countries.

In March 2012, Hospira received regulatory clearance from the FDA for the Symbiq™ 510(k) application. Hospira is working with existing customers to upgrade Symbiq™ devices in the market and began shipments of new devices to previously contracted customers in the second quarter of 2012. No additional charges related to the remediation activities associated with the application were incurred during the three months ended June 30, 2012. In the six months ended June 30, 2012 and 2011, Hospira incurred charges of $4.6 million and $0.4 million, respectively, associated with the application, including remediation activities for the devices in the market.

Plum™ Infusion Pumps

In December 2010, Hospira informed the FDA that it had received a number of customer reports associated with the Plum A+™ and Plum XL™ family of infusion pumps regarding failure of the pump's audible alarm under certain conditions. Hospira notified customers of the corrective action plan to address this issue. For the Plum A+™ pumps, the alarm failures are associated with the alarm assembly. For the Plum XL™ pumps, the alarm failure is associated with fluid ingress and physical damage to the alarm assembly over time. Plum XL™ customers were instructed to follow the proper cleaning procedure and inspect the alarm assembly for physical damage during routine maintenance. The Plum A+™ and Plum XL™ actions have been classified as a Class II field recall and the FDA is not requiring Hospira to remove any Plum™ pumps from the market or halt production. In 2010, Hospira recognized an initial charge of $26.0 million for the estimated costs of the field recall. In the three months ended June 30, 2012 and the three months ended December 31, 2011, Hospira recognized incremental charges of $4.0


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million and $12.5 million, respectively, based on its recall plans and estimates for completion. In late 2011, Hospira began the replacement of components for the Plum A+™ and expects the deployment activities to extend into 2013.

Comprehensive Medication Management Product Review

In connection with certain matters above, Hospira committed to the FDA that it would engage in a comprehensive product review for each of Hospira's medication management products. The product reviews are designed to confirm compliance with current regulatory requirements and document safety and performance of the products. The product reviews will also include retrospective assessments of customer experiences with these products for the preceding two years. The product reviews will provide Hospira with important information for enhancing the reliability of these products and future products. The product reviews (retrospective assessments and related investigations) and remediation are ongoing. The initial retrospective assessments were completed on Plum™, patient controlled analgesia (PCA) devices, GemStar™, Acclaim infusion devices, suction containers and administrative sets. For these products, investigations are underway and certain investigations are completed. All retrospective assessments are expected to be completed by the end of 2012. Certain remediation actions, such as product recalls, corrective field actions or preventative actions, for Hospira's medication management products have been, and may be required upon finalization of the product reviews, investigations and remediation milestones. Hospira expects that the product reviews will be completed by 2013 and expects . . .

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