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HSP > SEC Filings for HSP > Form 10-K on 13-Feb-2013All Recent SEC Filings

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Form 10-K for HOSPIRA INC


13-Feb-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Hospira is a provider of injectable drugs and infusion technologies that it develops, manufactures, distributes and markets globally. Through a broad, integrated portfolio, Hospira is uniquely positioned to Advance WellnessTM 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 its product development programs and related costs through the following four categories: generic pharmaceuticals, biosimilars, proprietary pharmaceuticals and device products. For further information about these categories see the section captioned "Product Development" in "Item I. Business" and for information related to certain of Hospira's agreements for biosimilars and proprietary pharmaceuticals see Note 1 and Note 4 to the financial statements in "Item 8. Financial Statements and Supplementary Data" of this report.

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 December 31, 2012, Hospira's generic pharmaceutical pipeline consisted of 80 compounds. More than half of the overall pipeline consisted of compounds related to oncology and anti-infectives, with the remainder focused on cardiovascular, anesthesia and other areas.

Biosimilar Product Development

As of December 31, 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 biosimilar development program for infliximab and submitted a dossier, and Hospira submitted a duplicate dossier, to the European Medicines Agency ("EMA") in the first half of 2012. Celltrion submitted two dossiers for infliximab to Health Canada in late 2012.

• 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 2015.

Proprietary Pharmaceutical Product Development

As of December 31, 2012, Hospira has in development the following proprietary pharmaceutical products:


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• PrecedexTM is a proprietary sedative. Hospira is engaged in the following development programs to expand the clinical use of this product:

•            in 2012, Hospira completed its final Phase III pediatric clinical
             study required to fulfill the Pediatric Written Request and to
             support a pediatric use indication and submitted the data from the
             trials to the FDA in December 2012 (Based on this submission, and
             while no absolute assurance can be given, Hospira expects to receive
             a six month extension to the patents covering PrecedexTM. For
             details related to the PrecedexTM patents, and the related
             litigation, see Note 24 to the consolidated financial statements
             included in "Item 8. Financial Statements and Supplementary Data" of
             this report);



•            in 2012, Hospira completed Phase III clinical trials in Japan to
             support a procedural sedation indication in the use of PrecedexTM.
             Hospira submitted the data to the Pharmaceuticals and Medical
             Devices Agency of Japan in 2012, and the submission is under active
             review with that agency.



•            in 2011, Hospira submitted additional clinical data to the FDA to
             support the use of PrecedexTM beyond 24 hours. While Hospira has
             successfully gained approval for use of PrecedexTM for greater than
             24 hours in several non-U.S. markets, and Orion (the license holder
             for the product in Europe) has been successful in gaining European
             approval for use greater than 24 hours using the same body of
             clinical data, the FDA has not expanded the use beyond 24 hours.
             Hospira continues to consider clinical pathways available for
             expansion of use.

• DylojectTM is a post-operative pain management drug currently awaiting FDA approval. In 2010, Hospira received a complete response letter from the FDA regarding DylojectTM. 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.

Device Product Development

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

Concurrent with the comprehensive device review process discussed under the caption "Certain Quality and Product Related Matters" in this Item 7, Hospira is reviewing its device portfolio to determine which devices provide the greatest value for customers, have the greatest upgrade capabilities, and are in the best position to meet the heightened expectations of the FDA and other regulatory agencies. Hospira is developing a longer-term device strategy aimed at modernizing and streamlining the device platforms. Once this strategy is more fully developed, Hospira will seek input from the FDA. As this strategy is still under development, the implementation charges cannot be determined, but could be significant, and these costs, for the most part, are not included in the remediation charges for certain quality and product related matters, as set forth in greater detail in the section captioned "Certain Quality and Product Related Matters" in this Item 7. The potential benefits from implementing the long-term device strategy would include rationalizing and modernizing Hospira's installed base of medication management devices and allowing Hospira to better target its R&D efforts.

Research and Development Expense

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 year ended December 31, 2012 and December 31, 2011, specific project costs included EPO Phase III U.S. clinical trial expenses and other project costs which were approximately 16% and 8% of total R&D expense, respectively. As Hospira's biosimilar development program progresses, Hospira expects that over the next several years, the amount of spending on the biosimilar program will remain as a higher percentage of Hospira's total R&D expense. 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.

Hospira's R&D expenses were $303.6 million in 2012, $258.8 million in 2011, and $300.5 million in 2010. 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.


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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 and cash flow. 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 construction 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 production expected in the second half of 2014 and with production increases expected in the subsequent twelve to twenty-four months. In aggregate, Hospira estimates Vizag, India capacity expansion capital expenditures of $375 million to $450 million up from the previous expected range largely due to expanded scope associated with the addition of automated visual inspection equipment and an additional production line. Hospira has incurred total capital expenditures of $153.1 million through December 31, 2012. For the Vizag, India capacity expansion capital expenditures were $73.4 million in 2012 and $79.7 million in 2011. Capital expenditures in 2013 are expected to be approximately $90 million with the remaining amounts to be capitalized in subsequent years.

In addition, Hospira initiated plans to qualify and validate, over the next two to 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 the joint venture and the 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 $170 million to $190 million, up from the previous range due to amounts associated with the expanded Vizag facility scope noted above as well as unabsorbed production costs expected as the facility transitions from start-up to normalized production levels. Activities related to these projects began primarily in the second half of 2011. In aggregate, charges incurred through December 31, 2012 were $21.7 million, primarily related to start-up and facility validation activities and recorded in Cost of products sold. For the years ended December 31, 2012 and 2011, charges of $17.9 million and $3.8 million, respectively, were recorded in Cost of products sold. 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 and corresponding regulatory outcomes in connection therewith.

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 7.

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 $18.6 million and may incur lease contract termination charges upon final exit from the operations of up to approximately $5 million in 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 restructuring charges related to this action of $42.5 million. In 2011 and 2010, Hospira incurred charges of $1.1 million and $16.9 million, respectively. In May 2012, Hospira sold the Morgan Hill, California facility for approximately $5 million.

Project Fuel


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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, including aggregate restructuring costs and other asset charges of $72.0 million. During 2011 and 2010, Hospira incurred charges of $9.6 million and $39.2 million, respectively.

As part of Project Fuel initiatives, Hospira committed to dispose of certain non-strategic businesses and the underlying assets. In February 2010, Hospira completed the disposal of a facility in Wasserburg, Germany for $69.3 million and recognized a gain of $11.4 million, included in Restructuring, impairment and (gain) on disposition of assets, net in 2010.

Other Restructuring

In 2012, Hospira initiated plans to exit various non-strategic product lines. As a result, in the Americas segment, Hospira incurred equipment impairment charges of $24.1 million and contract termination charges of $1.6 million. In addition, Hospira incurred other asset (inventory) charges of $5.4 million. Additionally, in 2012, Hospira sold a non-strategic product line and recognized a $1.9 million gain upon disposition.

In addition to the programs discussed above, from time to time Hospira incurs costs to implement restructuring actions for specific operations. In 2012, Hospira incurred costs of $6.9 million, primarily in the APAC segment, to optimize the commercial organizational structure and exit device products in certain markets. The costs include severance charges of $3.8 million and contract termination charges of $3.1 million. In 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 consolidated statements of income (loss) line
items as follows:
(dollars in millions)                                      2012         2011         2010
Cost of products sold                                   $   23.3     $    9.6     $   26.4
Restructuring, impairment and (gain) on disposition
of assets, net                                              49.3         11.5          7.0
Research and development                                       -            -          0.1
Selling, general and administrative                            -          1.2         11.2
Total net charges                                       $   72.6     $   22.3     $   44.7

As Hospira continues to consider each continuous improvement activity, the amount, the 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. Hospira may incur more charges and cash expenditures than estimated and may not realize the expected improvement or cost savings on its planned time frame or at all. See the section captioned "Hospira's continuous improvement 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 improvement or cost savings" in "Item 1A. Risk Factors" of this report.

Acquisitions

Orchid (Penem and Penicillin Active Pharmaceutical Ingredient Business)

On August 29, 2012, Hospira, through its wholly-owned subsidiary, Hospira Healthcare India Private Limited, ("Hospira India") entered into a definitive agreement (the "Agreement") with Orchid Chemicals & Pharmaceuticals Ltd. ("Orchid") to acquire from Orchid its penem and penicillin active pharmaceutical ingredient ("API") business for $202.5 million in cash. As part of the Agreement, Hospira re-characterized $15.0 million of previous inventory supply advances as an advance payment of the purchase price to be settled at closing. The pending acquisition includes an FDA-approved manufacturing facility located in Aurangabad, India, and a research and development facility based in Chennai, India, along with the related assets and employees associated with those operations. Orchid is a current supplier of APIs to Hospira and will continue to supply cephalosporin APIs following the pending closing.


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The Agreement contains customary covenants by Hospira India and Orchid. The transaction is subject to customary closing conditions and regulatory approvals and it is possible that the Agreement may be further modified by Hospira India and Orchid prior to the pending closing to reflect additional negotiations and regulatory considerations. Hospira expects to close the transaction during the first half of 2013, but can give no assurance that the transaction will be consummated during that time period, or at all.

Javelin Pharma

In July 2010, Hospira completed the acquisition of Javelin Pharmaceuticals, Inc. ("Javelin Pharma") for a purchase price of $161.9 million, which included Javelin Pharma's main product candidate, Dyloject™, a post-operative pain management drug currently awaiting FDA approval. In October 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 2011, Hospira recognized an impairment charge of $7.3 million associated with the DylojectTM in-process research and development intangible asset due primarily to changes in the expected product life-cycle management spending. The future impact of DylojectTM on Hospira depends on the various product development and commercialization efforts, and the timing of resolution of the regulatory process in connection therewith.

Orchid (Generic Injectable Pharmaceutical Business)

In March 2010, Hospira, through its wholly owned subsidiary, Hospira India, completed an acquisition of the generic injectable pharmaceutical business of Orchid for $381.0 million. The acquisition included a beta-lactam antibiotic formulation manufacturing complex and pharmaceutical research and development facility, as well as a generic injectable dosage-form product portfolio and pipeline. Hospira also acquired some of Orchid's long-term land leases in India, which were held by Orchid for anticipated future expansion.

Financial Related Impact

Hospira recognized acquisition and integration-related charges as a result of these transactions, the majority of which were reported in Selling, general and administrative ("SG&A"). In 2012, Hospira incurred $1.0 million related to the pending Orchid penem and penicillin API business transaction, and in 2010, Hospira incurred $20.2 million related to the Orchid generic injectable pharmaceutical business and Javelin Pharma acquisitions. The impact of these acquisitions was not significant to Hospira's results of operations, exclusive of the acquisition and integration-related charges. Hospira expects to incur additional acquisition and integration-related costs in 2013 related to the Orchid API acquisition transaction. For further details, see Note 2 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this report.

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. See the section captioned "Hospira may continue to acquire other businesses and assets, license rights to technologies or products from third parties, form alliances or dispose of businesses and assets, and any of these actions may not be completed in a timely or cost-effective manner, or at all" in "Item 1A. Risk Factors" of this report.

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, including, but not limited to, inspection observations (commonly called Form 483 observations in the U.S.), untitled letters, warning letters or similar correspondence, product recalls, import and export bans, consent decrees, seizures of violative product, civil penalties, and criminal prosecution. 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


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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 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 follow-up inspections 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 started their re-inspection of the Rocky Mount facility on February 12, 2013.

Further, in March 2012, Hospira encountered manufacturing issues at the Clayton facility. Hospira elected to shut down 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 began to manufacture products at the Clayton facility in late 2012 and upon replenished inventory levels, reintroduced certain impacted products to the market in 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 April 2012 inspection of Hospira's La Aurora de Heredia, Costa Rica device manufacturing facility 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 did not restrict production or shipment of Hospira's products from this facility, but in November 2012 the FDA issued an import alert that prohibits the importation of Symbiq™ infusion pumps into the U.S. The FDA's import alert did not restrict the importation of Hospira's other medication management products, including Symbiq™ consumables or Hospira's other infusion pumps and consumables.

Hospira's Responses to Warning Letters

Hospira takes these matters seriously and has responded fully, and in a timely manner, to the FDA's Warning Letters (the FDA's Warning Letters are publicly available on the FDA's website). Hospira has submitted comprehensive remediation plans to address the items raised in the 2010 Warning Letter and 2012 Warning Letter. The remediation plans involve commitments by Hospira to enhance its facilities, employee training, quality processes and procedures, and technology. Specific to Rocky Mount, under the remediation plan, Hospira is investing in capital improvements and facility modifications, including modernization of production lines, improvements to sterile process flow, a new quality control laboratory and the installation of additional automated visual inspection equipment. Hospira is also implementing information technology solutions to . . .

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