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HSP > SEC Filings for HSP > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for HOSPIRA INC


1-May-2013

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 execute the Device Strategy and 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 or other corrective actions, withdrawals, device product remediation, replacement and retirement programs, launch delays, import and export bans or restrictions, suspensions, sanctions, seizures, litigation or declining sales;
(iv) Hospira's ability to protect intellectual property rights, including the patents related to PrecedexTM; (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, or the manufacturing, registering, importing or selling of products, 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, including any modernizing and streamlining activities.

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, 2012 (the "2012 Form 10-K") as updated by this Form 10-Q and (ii) the factors described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2012 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 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 these product development programs and related costs through the following four categories: generic pharmaceuticals, biosimilars, proprietary pharmaceuticals and device products.

Generic Pharmaceutical Product Development

In 2011, Hospira adopted a 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 March 31, 2013, Hospira's generic pharmaceutical pipeline consisted of 80 compounds.

Biosimilar Product Development


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As of March 31, 2013, 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.

On April 29, 2013, Hospira and NovaQuest Co-Investment Fund I, L.P. ("NovaQuest") entered into a collaborative arrangement for the following biosimilar products (the "Products"): Hospira's EPO (in the U.S. and Canada), filgrastim (in the U.S.) and pegylated filgrastim (globally). Hospira will be responsible for development, regulatory approval, commercialization and distribution of the Products. NovaQuest will contribute up to $150.0 million of development funding, and such amounts will be recorded as an offset to Research and development expense as incurred. Hospira will fund the remaining development costs associated with the Products. This agreement is in alignment with Hospira's pre-existing biosimilar strategy to expand its portfolio and capabilities with measured investment and risk. For further information related to the NovaQuest agreement, see Note 5 to the condensed consolidated financial statements included in Item 1.

Proprietary Pharmaceutical Product Development

As of March 31, 2013, Hospira has in development the following proprietary
pharmaceutical products:

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



•            in 2011, Hospira submitted additional clinical data to the FDA to
             support a new indication to use PrecedexTM beyond 24 hours. While
             Hospira has successfully gained approval for an indication to use
             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 the greater than 24
             hours indication using the same body of clinical data, the FDA has
             not expanded PrecedexTM's indication beyond 24 hours. Hospira
             continues to consider clinical pathways available for expansion of
             its labeled indications;



•            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 March 2013, the FDA granted pediatric exclusivity for PrecedexTM
             and Hospira received a six-month extension to the patents covering
             PrecedexTM;



•            in March 2013, Hospira received FDA approval for premix versions of
             PrecedexTM and in April 2013, Hospira launched new premix versions
             in the U.S.

• 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.

In May 2013, Hospira announced its Device Strategy, an initiative over the next two to three years that establishes a streamlined and modernized portfolio to address customer needs and position Hospira for future innovation and growth, while supporting continued advancement of device remediation and improvement efforts. Under this initiative, Hospira will focus on investment in and development of next-generation pump technology while furthering Hospira's position in providing I.V.


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clinical integration technology, which integrates infusion systems with electronic health records. In addition, Hospira's development efforts for on-market products will focus on the Plum A+TM, SapphireTM and LifeCare PCATM platforms. For further information related to the Device Strategy, see the section captioned "Device Strategy" in this Item 2.

Research and Development Expense

Hospira's research and development ("R&D") expenses were $73.8 million and $69.1 million for the three months ended March 31, 2013 and 2012. 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 months ended March 31, 2013 and 2012, specific project costs included EPO Phase III U.S. clinical trial expenses and other project costs which were approximately 16% and 9% 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 a higher percentage of Hospira's total R&D expense. Other than EPO Phase III costs, the costs attributable to any other specific project were not individually material to Hospira's R&D expense line item for the periods presented.

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, manufacturing start-up, product validation and registration charges, exit costs, and contract termination costs.

Facilities Optimization and Capacity Expansion

In 2013, Hospira continues to advance construction in Visakhapatnam ("Vizag"), India of specialty injectable manufacturing capacity, which began in 2011. 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 capacity expansion capital expenditures of $375 million to $450 million. Hospira has incurred total Vizag capital expenditures of $166.0 million through March 31, 2013, including $12.9 million for the three months ended March 31, 2013. Vizag facility related capital expenditures in 2013 are expected to be approximately $90 million with the remaining amounts to be incurred in subsequent years.

Hospira currently manufactures certain oncology drugs at Hospira's joint venture, Zydus Hospira Oncology Private Limited, a pharmaceutical company located in Ahmedabad, India. Hospira continues to advance its plans, initiated in 2011 and continuing through 2015, to qualify and validate manufacturing and related activities to support certain other oncology compounds at this location.

For both the joint venture and the Vizag, India facility 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. In aggregate, charges incurred through March 31, 2013 were $25.4 million, primarily related to start-up and facility validation activities and recorded in Cost of products sold. For the three months ended March 31, 2013 and 2012, charges of $3.7 million and $1.9 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 sections captioned "Certain Quality and Product Related Matters" and "Device Strategy" 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. In April 2013, Hospira terminated its lease contract without incurring significant lease termination charges upon final exit from the operations.

Other Restructuring


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From time to time Hospira incurs costs to implement restructuring actions for specific operations. In late 2012 and continuing in 2013, Hospira incurred costs, primarily in the APAC and EMEA segments, to optimize the commercial organizational structure and exit device products in certain APAC markets. The aggregate costs include primarily severance charges of $7.9 million and contract termination charges of $3.1 million. Of the aggregate costs, $4.1 million and $6.9 million were incurred in the three months ended March 31, 2013 and December 31, 2012, respectively.

Financial Related Impact

The charges incurred for the above continuous improvement activities
collectively were reported in the condensed consolidated statements of (loss)
income line items as follows:
                                       Three Months Ended March 31,
(dollars in millions)                         2013                    2012
Cost of products sold          $           3.7                       $ 1.9
Restructuring and impairment               4.1                           -
Total charges                  $           7.8                       $ 1.9

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. 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, 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

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 March 2013, the FDA issued a Form 483 listing observations after inspection of the Rocky Mount facility which identified further areas for remediation and improvement. A number of the observations deal with matters for which remediation was already underway but not yet complete or are matters previously self-identified for remediation by Hospira that were scheduled to be addressed in the latter part of Hospira's remediation and modernization plans. Hospira responded to the specific FDA observations received in March 2013, and continues to seek input from the FDA regarding the scope and timing of remediation efforts at the facility.

Warning Letter (August 2012) and Related Matters


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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.

In November 2012, the FDA issued an import alert that prohibits the importation of SymbiqTM infusion pumps into the U.S., and on February 13, 2013, the FDA expanded the import alert. The expansion received on February 13, 2013 prohibits the importation into the U.S. of the PlumTM, GemStarTM, and LifeCare PCATM infusion pumps which are manufactured in Hospira's Costa Rica facility. The FDA's import alert did not restrict the importation of Hospira's other medication management products, including consumables or Hospira's other infusion pumps accessories. Following the February 2013 FDA notification, other regulatory agencies have restricted the supply of new Plum™ and GemStarTM infusion pumps into certain international markets for an initial period of 90 days due to the number of current field safety notices and the recent temporary suspension of Hospira's infusion pump certifications. Hospira cannot predict when the FDA import alert, or other regulatory restrictions or suspensions for the above infusion devices will end. The FDA import alert is not expected to be lifted until re-inspection of the Costa Rica facility, and perhaps other related facilities, occurs and the FDA is satisfied with the results. For certain international markets, after the 90 days, the certifications suspension may be lifted or extended, or the certificates could be revoked. In the interim, Hospira intends and continues to support the repair and service of all impacted pumps to existing customers.

Hospira's Response to Warning Letters and Related Matters

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 and related subsequent Form 483 observations. The remediation plans involve commitments by Hospira to enhance its facilities, employee training, quality processes and procedures, and technology. For certain remediation plans, Hospira has engaged third-party experts to assist with the remediation activities, established remediation project management teams, deployed new site leadership, and is hiring additional permanent employees in the manufacturing operations and quality organizations. 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, the plans 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 or other regulatory bodies. Until the violations are corrected, Hospira may be subject to additional regulatory action by the FDA or other regulatory bodies. 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, or other regulatory agencies, will be satisfied with Hospira's response or corrective actions.

The above disclosures include information about Form 483 observations relevant to the facilities subject to 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, which are not included above. 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. For example, third-party oversight and consulting costs for remediation activities have been and will continue to be incurred at a number of other manufacturing sites.

Device Remediation Matters

Comprehensive Medication Management Product Review

Hospira committed to the FDA that it would engage in a comprehensive product review for each of Hospira's medication management products to confirm compliance with current regulatory requirements and document safety and performance of the products. Hospira completed the product review investigations in 2013. As an outcome of the reviews, certain remediation actions, such as product recalls which require deployment of a fix to the installed customer base, design history file updates, incorporation of certain corrective actions into new production or other corrective or preventive actions for Hospira's medication management products will continue to be advanced over the next few years. Examples of such remediation actions


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include deployment of a remediated battery and door roller assembly on the Plum A+TM pumps and deployment of a remediated door on the LifeCare PCATM infusion pumps to the installed customer base.

In May, 2013, Hospira announced its Device Strategy, which builds on Hospira's comprehensive device review of its global installed base of infusion pumps. In this regard, see matters discussed under the caption "Device Strategy" and "Product Development and Product Launches - Device Product Development" in this Item 2.

Overall Financial Impact

The charges incurred for certain quality and product related matters
collectively were reported in the Cost of products sold line item in the
condensed consolidated statements of (loss) income as follows:
                                                                 Three Months Ended March 31,
(dollars in millions)                                              2013                  2012
Warning Letters Related
Third-party oversight and consulting                        $         16.2         $         18.6
Other charges (primarily extended production downtime
related costs and failure to supply penalties)                         4.9                   14.9
Inventory charges                                                        -                    3.4
Device Product Related
Third party consulting and other charges (product review
and remediation activities)                                            4.5                    1.2
Corrective action (credits) charges                                  (14.9 )                  2.2
Total Charges                                               $         10.7         $         40.3

In 2013, Hospira expects to incur aggregate charges of approximately $100 million related to these quality and product related matters which are primarily . . .

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