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HSP > SEC Filings for HSP > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for HOSPIRA INC


7-Nov-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 related matters, 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, import and export bans or restrictions, sanctions, seizures, litigation or declining sales; (iv) Hospira's ability to protect intellectual property rights, including the patents related to Precedex™; (v) Hospira's ability to prevail against the intellectual property rights of third parties related to our research and development pipeline; (vi) 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; (vii) product development risks, including satisfactory clinical performance and the general unpredictability associated with the product development cycle, including the risks associated with biosimilar development; (viii) the availability and pricing of acceptable raw materials and component supply; and (ix) 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, and the factors described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2012 and June 30, 2012, 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 September 30, 2012, Hospira's generic pharmaceutical development pipeline consisted of 76 compounds.


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Biosimilar Product Development

As of September 30, 2012, Hospira's biosimilar development pipeline, including co-exclusive commercialization rights for biosimilars developed with Celltrion, Inc. and Celltrion Healthcare, Inc. ("Celltrion"), consisted of up to 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 2014.

Proprietary Pharmaceutical Product Development

As of September 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 outcome 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 and the data was
             submitted 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 2009, Hospira and Ivax International GmbH ("Ivax") (formerly ChemGenex Pharmaceuticals Limited) entered into a collaborative agreement to develop, license, and commercialize an oncology product candidate in EMEA. In 2012, Hospira and Ivax 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.

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 nine months ended September 30, 2012, specific project costs included EPO Phase III U.S. clinical trial expenses and other project costs which were 10.9% and 14.8% of total R&D expense, respectively. Other than EPO Phase III costs, the costs attributable to a specific project were not individually material to Hospira's R&D expense line item for the periods presented.


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Hospira may periodically 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 up 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 Vizag, India capacity expansion capital expenditures of $275 million to $325 million and Hospira has incurred $135.2 million in aggregate to date. For the Vizag, India capacity expansion, capital expenditures were $79.7 million in 2011, are expected to be approximately $85 million in 2012, with the remaining amounts in 2013 and 2014. In the nine months ended September 30, 2012, capital expenditures were $55.5 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 September 30, 2012 were $15.2 million, primarily related to start-up and facility validation. In the three and nine months ended September 30, 2012, charges were $4.1 million and $11.3 million, respectively. For the three and nine months ended September 30, 2011, Hospira incurred $1.5 million of charges. 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 quality 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 installing additional automated visual inspection equipment, at other existing facilities. As a result, primarily in the Americas segment (includes the United States, Canada and Latin America), Hospira incurred equipment and facility impairment charges of $17.4 million and may incur lease contract termination charges upon final exit from the operations of up to approximately $5 million by late 2012 or early 2013.

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 nine months ended September 30, 2011, Hospira incurred restructuring costs of $1.1 million in the Americas segment, with $0.3 million reported as restructuring costs. In May 2012, Hospira sold the Morgan Hill, California facility for approximately $5 million.


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Project Fuel

In March 2009, Hospira announced details of a restructuring and optimization plan ("Project Fuel") that 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 nine months ended September 30, 2011, Hospira incurred charges of $9.6 million, with $3.4 million reported as restructuring costs.

Other Restructuring

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, which is reported in Restructuring, impairment and (gain) on disposition of assets, net. 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, both of which are reported in Cost of products sold. Additionally, in August 2012, Hospira sold a non-strategic product line and recognized a $1.9 million gain upon disposition reported in Restructuring, impairment and (gain) on disposition of assets, net.

In March 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.
Financial Related Impact

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

                                                Three Months Ended September 30,         Nine Months Ended September 30,
(dollars in millions)                              2012                    2011                 2012             2011
Cost of products sold                      $           4.1           $           1.5     $           17.1     $     7.3
Restructuring, impairment and (gain) on
disposition of assets, net                            (1.9 )                       -                 27.6          11.5
Selling, general and administrative                      -                         -                    -           1.2
Total net charges                          $           2.2           $           1.5     $           44.7     $    20.0

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 generally accepted accounting principles in the United States ("GAAP"), among other factors. For further information regarding the impact of these continuous improvement activities, see Note 3 to the condensed consolidated financial statements included in Item 1.

Certain Quality and Product Related Matters

Hospira and its' suppliers are subject to extensive, complex and evolving regulations and increasing oversight by the FDA and other governmental authorities. Hospira's manufacturing and other facilities, and those of its suppliers, 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 and other corrective actions, injunctions to halt production and distribution of products, import and export bans or restrictions of products, monetary sanctions, delays in product approvals and other restrictions on operations. Any of these regulatory actions as well as Hospira's inspections, reviews and commitments may require remediation activities with respect to products, facilities and quality/production policies, procedures and processes.

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

Warning Letter Matters

Warning Letter (April 2010) and Related Matters

In April 2010, Hospira received a Warning Letter from the FDA ("2010 Warning Letter") in connection with the FDA's inspections of Hospira's pharmaceutical and device manufacturing facilities located in Clayton, North Carolina and Rocky


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Mount, North Carolina. In the 2010 Warning Letter, the FDA cited current good manufacturing practice deficiencies related to particulate in certain emulsion products at the Clayton facility and the failure to adequately validate the processes used to manufacture products at the Rocky Mount facility. The 2010 Warning Letter also asserted other inadequacies, including procedures related to the Quality Control unit, investigations and medical reporting obligations. The 2010 Warning Letter does not restrict production or shipment of Hospira's products from these facilities.

Since issuing the 2010 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.

Further, in March 2012, Hospira encountered manufacturing issues at the Clayton facility. Hospira elected to shutdown production at the Clayton facility to investigate and remediate these issues which has disrupted the supply of product to the market as well as to certain contract manufacturing customers primarily in the Americas. Hospira expects to manufacture and replenish inventory levels through the remainder of 2012 to support a reintroduction of the impacted products to the market in late 2012 or early 2013. Specific to these issues, Hospira has and may continue to incur costs related to extended shutdown, failure to supply penalties and inventory loss due to non-conformance with specifications.

Warning Letter (August 2012)

In August, 2012, Hospira received a Warning Letter from the FDA related to the FDA's inspection of Hospira's La Aurora de Heredia, Costa Rica device manufacturing facility in April 2012 and corresponding Form 483 ("2012 Warning Letter"). In the 2012 Warning Letter, the FDA cited current good manufacturing practice deficiencies related to the failure to correct and prevent recurrence of nonconforming product; the failure to implement changes in procedures needed to correct and prevent identified quality problems; the failure to evaluate suppliers on their ability to meet requirements; the failure to establish adequate procedures for acceptance of incoming product; and the failure to maintain appropriate device history records. The Costa Rica site manufactures most of Hospira's infusion devices and administration sets. The 2012 Warning Letter does not restrict production or shipment of Hospira's products from this facility.

Hospira's Response to Warning Letters

Hospira takes these matters seriously and has responded fully, and in a timely manner, to the FDA's Warning Letters. Hospira has submitted comprehensive remediation plans to address the items raised in the 2010 Warning Letter and 2012 Warning Letter. Hospira will continue to work through the commitments made in its remediation plans or responses and interact and work closely with the FDA to ensure that all items noted in the Warning Letters and related subsequent Form 483s are appropriately addressed. While Hospira has submitted remediation plans, they are subject to update and revision, based on issues encountered by Hospira or its third-party consultants during the remediation process, or on further interaction with the FDA. Until the violations are corrected, Hospira may be subject to additional regulatory action by the FDA, including those identified within this "Certain Quality and Product Related Matters" section. Any such actions could significantly disrupt our ongoing business and operations and have a material adverse impact on our financial position and operating results. There can be no assurance that the FDA will be satisfied with Hospira's response or corrective actions.

Hospira has disclosed information about the Form 483 observations relevant to the facilities subject to a warning letter that are received subsequent to the issuance of a 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 FDA issued untitled letters or comparable inspection results from other governmental regulatory agencies. Hospira is working to ensure all of its 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 strengthening, quality, compliance and production processes at other facilities.

Device Product Related Matters

Symbiq™ Infusion Pumps


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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. 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.

In August 2012, Hospira notified customers of potential issues with the touchscreen on Symbiq™ infusion pumps. The FDA has classified this voluntary action as a Class I recall although the FDA is not requiring Hospira to remove any Symbiq™ pumps from the market. Hospira is re-notifying customers of this issue and offered instructions to confirm correct infusion settings and how to stop an infusion if problems arise. Hospira is working on a software solution to address the main cause of the issue which will be deployed in the field when available. In October 2012, Hospira placed a voluntary hold on all shipments of Symbiq™ infusion pumps to new U.S. customers. Hospira cannot predict when it will lift this voluntary hold.

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 . . .

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