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Hospira, Inc. (NYSE:HSP)

Q3 FY08 Earnings Call

November 5, 2008, 9:00 AM ET

Executives

Karen King - VP of IR

Christopher B. Begley - Chairman and CEO

Terrence C. Kearney - COO

Thomas E. Werner - Sr. VP of Finance, and CFO

Analysts

Gregg Gilbert - Merrill Lynch

Rick Wise - Leerink Swann

David Roman - Morgan Stanley

Taylor Harris - J.P. Morgan

Junaid Husain - Soleil Securities

Operator

Welcome to Hospira's Third Quarter 2008 Earnings Conference Call. All lines have been placed on listen-only mode to prevent any background noise. Following the speakers' remarks, there will be a question-and-answer period.

I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King - Vice President of Investor Relations

Thank you. Good morning, everyone. Welcome to our conference call and webcast regarding Hospira's financial results for the third quarter of 2008. Participating in today's call are Chris Begley, Chairman and Chief Executive Officer of Hospira; Terry Kearney, Chief Operating Officer; and Tom Werner, Senior Vice President, Finance and Chief Financial Officer.

We will be making some forward-looking statements today, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those indicated.

A discussion of these factors is included in the risk factors and MD&A section in Hospira's latest Annual Report on Form 10-K and latest Quarterly Report on Form 10-Q on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

In today's conference call, non-GAAP financial measures will be used to help investors understand Hospira's base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issued this morning and are also available on the Presentations page in the Investor Relations section of our website.

With that, I'll now turn the call over to, Chris.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you, Karen. Good morning, everyone and welcome to our third quarter call. We were pleased with our results for the third quarter. We delivered solid performance in our principals areas of strategic focus. Both our specialty injectible pharmaceuticals and medication management system product lines generated double digit sales growth.

And our adjusted EPS of $0.63 was up 29% compared with the third quarter of 2007. We also reached several key milestones that will help us continue to drive growth.

Last month, we received FDA approval for the procedural sedation indication for Precedex, our proprietary IV sedation agent. While the product label indication previously restricted use to the intensive care setting, the new makes Precedex available to a broader range of patients undergoing a wider variety of procedures.

We are also tracking to a first quarter 2009 approval of our long term label indication and our proceeding with our trials for pediatric exclusivity. We expect that through these expanded label indications we will be able to increase sales in future years from the roughly $70 million level week expect at year end 2008 to more than $100 million over the next 12 to 18 months.

During the quarter we further expanded our overall global portfolio of specialty injectables, launching 20 on-market compounds in 17 additional markets around the world. We also added another compound to our portfolio of drugs in our iSecure syringe system, our newest proprietary delivery format. This brings the total number of drugs available in this premium format to seven since its introduction last year.

We made significant progress in our biogenerics program as well. The Phase III clinical trials for G-CSF were completed ahead of schedule during the quarter, and we expect to submit the results to the European regulatory agency early in 2009.

Also during the quarter, we completed an agreement with Human Genome Sciences, which provides us with access to large-scale mammalian biologic manufacturing capabilities. This allows us to defer the immediate need to invest in additional facilities for manufacturing biogeneric products.

These capabilities allow us to meet our biogeneric development needs until a regulatory pathway is established in the United States. Finally, our first biogeneric product, Retacrit, continues to gain traction in Europe, and is positioned to launch in several key markets in the fourth quarter.

On the device side of the business, we recently announced the acquisition of the EndoTool glucose management system, a highly sophisticated software system. The acquisition highlights our growing focus in the area of clinical decision support systems as a driver of future growth in MMS.

While currently a standalone product, EndoTool will eventually be incorporated into our smart platform of infusion devices and is highly aligned with our commitment to our customers to improve outcomes, increase patient safety and enhance clinician productivity.

Before turning the call over to Terry, I would like to address two additional areas. The launch of generic Zosyn and the economic environment and it's implication for the balance of the year.

Regarding Zosyn, while we are hopeful for a third quarter launch the FDA has not yet approved any applications for the generic version of Zosyn. We anticipate that approval will be granted by the end of the year and we are ready to launch once we receive notification from the FDA.

Moving to the economic situation. As a diversified healthcare company, we believe we are better positioned to weather economic downturns than most industries... given the essential nature of our products... and the benefits to cost and productivity that they provide.

Most of our generic injectable products and the supply of consumable products for our MMS devices are medically necessary, meaning they're needed on a regular basis, regardless of economic conditions. We have a broad portfolio to offer our customers which should act as a buffer against an economic downturn.

Our MMS devices are also important products for our customers, particularly in the areas of reducing medication errors and improving patient safety. Our customers understand the value our products provide, and to date, we have seen only a minimal amount of tightening of demand. The placement of new infusion devices generally requires a capital outweigh.

We anticipate that capital constraints could make purchasing decisions more difficult for some hospitals. And to help address this challenge, we are working proactively with several leading banks to provide flexible financing options for these customers.

And now I'll turn the call over to the Terry, who'll provide some additional detail on the sales for the quarter. Terry.

Terrence C. Kearney - Chief Operating Officer

Thank you, Chris and good morning everyone. As I take you to the highlights of each of our geographic segments. I will be referring to net sales increases or decreases on the third quarter and year to on a constant currency basis. That is excluding the impact of foreign currency fluctuations.

There is a table on these schedules accompanying our press release to help you better understand the impact of foreign currency by segment and product line.

Let me start with the Americas. Net sales grew 9% in the quarter and 6% year-to-date. Driving the quarter's results were strong performance in both Specialty Injectables and Medication Management Systems.

Specialty Injectables in the Americas were up 14% for the quarter, mainly driven by growth in our base business. We benefited in the quarter from additional sales related to our expanded GPO contracts as well as competitor supply issues.

In addition, we experienced strong growth in new products, which we identify as compounds launched over the past 12 months, such as ciprofloxacin premix, irinotecan and fosphenytoin.

Regarding wholesaler buying patterns, the stocking levels of our major wholesalers returned to normal in the third quarter after the unusual de-stocking we experienced in the second quarter.

Turning to Medication Management, we had another good quarter for MMS in the Americas. Sales grew 12%, with continued progress in capturing competitive accounts with Symbiq. Given our competitive captures with Symbiq, we are confident that we are gaining market share in MMS.

On the GPO conversion front, during the quarter we began placing infusion pumps in the IV accounts we gained from our new contract with HealthTrust. As we previously mentioned, the focus of the conversion in the first half of the year was on IV solutions.

With that part of the process now behind us, the third quarter was the first full quarter where we pulled through pump captures, a process we expect to continue into 2009.

We have also begun promoting our pump platforms and IV solution offerings to premier member in preparation for the start of our new contract in February of 2009.

The demand for Symbiq, coupled with the benefits from the HPG contract and the expected benefit from our new Premier contract, are all contributing factors that we believe will drive sustainable growth in our MMS business over the long-term.

Turning now to our European region, overall sales were in line with our expectations up 3% for the quarter and 5% on a year-to-date basis.

Specialty injectable sales in EMEA declined 2% during the quarter while we experienced modest sales gains in three of our key products irinotecan, gemcitabine and paclitaxel. These increases were offset by lower sales in oxaliplatin as more competition has now entered the market.

Retacrit our biosimilar version of EPO continues to gain traction. Each month we see new customers and sales. To date we are serving Retacrit in ten countries and expect further launches before the end of the year in several additional countries including the key markets of Spain, France and Italy once we receive pricing approval.

On the device side, MMS sales in the European region increased 13%. Primarily, our continued strength in both France and UK for GemStar our ambulatory pump.

Asia-Pacific had another good quarter with sales increasing 17% on strong performance for both specialty injectables and MMS up 20% and 15% respectively. On the year-to-date basis overall APAC sales grew 13%.

On the pharma side, Precedex continues to do well particularly in Japan, the second largest market in the world for this proprietary drug.

In addition to Precedex's positive results, we have made considerable progress towards expanding the labels, the product's label indication.

During the quarter we completed trials for the long term sedation label expansion for the Japanese market and plan to submit the application in early 2009.

We've already filed applications for expanded indication for Precedex in Australia and the Philippines positive results for these submissions would not only augment APAC specialty injectibles revenues, but also contribute to Precedex's global revenue profile.

In addition to Precedex APAC also post its strong hospital sales in anti-infectives during the quarter and an increase in sales in specialty generic oncology drugs in Australia, a solid market for us in this key therapeutic area.

On the device side, we are excited about the potential for Symbiq in Australia. The device is currently being trialed at one of Australia's largest trauma hospitals. Early indications have been positive, and clinician response to Symbiq is very favorable... not surprising to us.

In addition, demand for GemStar remains strong in the region.

With that, I'll now turn the call over to Tom, for financial details. Tom?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Thank you, Terry, and good morning, everyone. Net sales in the quarter $926 million, a healthy 10% increase over last year, or 9% on a constant currency basis. year-to-date, net sales grew 9% year-over-year, with foreign currency contributing 3 percentage points.

Adjusted gross margin was 38.4% for the quarter, compared to 37.8% in the third quarter of 2007. Driving this increase was improved manufacturing performance and product mix, partially offset by higher freight and distribution expenses.

Although sequentially the trailed over second quarter gross margin due to the factory maintenance shutdowns we traditionally perform in the third quarter, third-quarter margin performance was in line with our expectations.

For the fourth quarter, we expect adjusted margins to be higher than the first three quarters of the year. Adjusted R&D expenses were flat for the quarter at $51 million.

During the third quarter of last year, we ramped up R&D spending for the Precedex clinical trials. While spending for these trials decelerated this year, increased R&D for biogenerics has offset the decrease.

Adjusted R&D as a percentage of sales was 5.5% versus 6.1% in 2007. Adjusted SG&A expenses were $143 million versus $129 million in the third quarter last year, an increase of 11%. The change was primarily a result of increased sales and marketing support in the Americas to support Precedex's label expansion, as well as support cost for new product launches outside the Americas.

Adjusted SG&A as a percentage of sales was 15.5%, versus 15.4% in 2007. Adjusted operating income for the quarter was a $162 million compared to $136 million last year, an increase of 19%. Adjusted operating margin was 17.5% versus 16.3% a year ago.

Interest expense declined 21% to $28 million in the third quarter, primarily a reflection of this year's lower outstanding debt. And our tax rate on an adjusted basis in the quarter remained at 25.5%, which was consistent with the first two quarters of this year.

Moving to EPS performance, adjusted diluted EPS increased 29% in the third quarter to $0.63, compared to $0.49 last year.

Several items which fall in two categories are excluded from the adjusted diluted EPS. First, items related to Mayne and other acquisitions; and second, expenses related to our facilities optimization initiatives.

The acquisition related items represent $0.09 in the third quarter 2008 GAAP diluted EPS; facilities optimization expenses netted to $0.03 per GAAP diluted share.

Turning to the cash flow, our cash flow from operations totaled $146 million in the third quarter, compared to $183 million in the same period last year. The change is due to increased inventory levels for new product launches as well as new GPO contract awards and higher receivables, which were primarily due to the increased level of sales in the third quarter of 2008 versus the same period last year.

Despite this increase in working capital, we saw improvements in both inventory turns and days sales outstanding compared to the third quarter of 2007. Capital spending in the quarter was $40 million, flat with the third quarter of 2007.

Depreciation and amortization were $64 million in the quarter, including $15 million of intangibles amortization related to the Mayne acquisition. This compares to depreciation and amortization of $60 million in the third quarter last year.

Now before proceeding to guidance, I would like to address our liquidity in relation to the current credit markets.

As many of you know, we stated at the beginning of the year that we were targeting to pay down in 2008 a total of $475 million of Mayne acquisition debt, with the majority of that to be paid in the fourth quarter.

Year-to-date, we've paid down $90 million. We will pay down an additional $10 million by the first of the year, for a total of $100 million. The remaining $375 million was an anticipated prepayment on debt due in 2010.

Although we continue to generate healthy cash flow, we believe that given the uncertainty surrounding the credit markets; it is more prudent from a liquidity perspective to maintain higher cash balances. We have therefore made the decision to pay the remaining $375 million when that debt matures in early 2010.

By the end of this year, we will have paid off a cumulative total of approximately $500 million since we began paying down the acquisition debt in 2007.

Regarding our near-term debt obligations, the next maturity is for $300 million of debt, which comes due in June of 2009, and we are on track to make that payment.

We've discussed with the rating agencies the decision to delay the $375 million prepayment and pay the $300 million June maturity, and they don't view this change as having any impact on our commitments to them or to our current credit rating.

In addition to our cash on hand, we have a committed bank revolver of $375 million to draw upon. So when combined with our projected year end cash balance, this gives us access to over $900 million in liquidity to meet our future needs.

Moving now to our projections for the full year.

During our last earnings conference call on August 6th, we indicated that we had seen approximately 4% sales benefit in the first half of the year from the impact of changes in foreign currency rates. And to reflect this first half benefit, we made the decision to increase our annual sales guidance by approximately 2%.

On hindsight, the decision to include foreign exchange movements in our sales guidance probably added complexity to the issue. So we've made the decision that going forward, we will not predict foreign exchange rates quarter-to-quarter, but will reflect net sales growth projections on a constant currency basis.

We now expect net sales growth of 6% to 7% for the year on a constant currency basis. Our adjusted EPS projection remains at the previously disclosed range of $2.50 to $2.55.

Any potential negative impact of foreign exchange to Q4 earnings should be offset by a favorable tax rate as a result of tax legislation signed into law in October extending the U.S. Federal R&D tax credit.

Our previously disclosed assumptions for adjusted gross margin, R&D, SG&A and operating profit as a percentage of sales remain unchanged as well. We expect adjusted gross margin to be between 39% and 39.5%; adjusted R&D between 5.8% and 6.1%; and adjusted SG&A between 15.3% and 15.8% of sales.

Below the operating line, we are forecasting interest expense and non-operating items in the aggregate to be in the $105 million to $110 million range.

We continue to expect to Q4's adjusted diluted earnings per share to be the highest quarter for the year. Our full year adjusted diluted EPS guidance translates into a fourth quarter adjusted EPS projection of $0.75 to $0.80 per share.

As we discussed on our last quarter call, the major drivers of 2008 earnings projections are, first, strong new product growth including the anticipated launches of generic Zosyn and Rocuronium.

Second, an increase in the pharmaceutical based business and third, strong MMS sales including related sets and services.

Our estimate for cash flow from operations hasn't changed, still projected to be between $575 million and $625 million. We are, however lowering our capital spending guidance reflecting some additional capital spending controls we've implemented given the uncertainty of the economic climate.

We now project capital spending to range between $170 million and $190 million. Our projection for depreciation and amortization remains unchanged and is expected to be between $190 million and $200 million, excluding the amortization related to Mayne.

With that I'll turn the call back to Chris

Christopher B. Begley - Chairman and Chief Executive Officer

The third quarter was a very good quarter for Hospira. We achieved double digit growth in both of our key strategic areas specialty injectables and Medication Management Systems. We also generated 29% growth in adjusted EPS and we continue to make considerably advances in both global pharma and global devices, developments which we believe will contribute to the businesses growth going forward.

Furthermore, as we head toward the close for 2008, we remain on track to meet our guidance for the full year.

Looking forward we expect 2009 to be a year in which we continue to build on the strong momentum we have gained in 2008. While we feel good about the tailwinds we will bring with us in 2009. The weakening macro economic environment creates uncertainty that we, like all corporations, are carefully considering as we develop our 2009 plans.

Let me cover some of the challenges and opportunities we see today, starting with challenges.

The recent economic environment poses challenges in planning for 2009, where is the economy headed and what is the potential impact on demand for healthcare products? As you know, the good news is that healthcare product companies tend to perform better than many other industries during slower economic times. And with our MMS and SIP product lines, we are presuming two key unmet needs in the hospital, medication errors and the high cost of pharmaceuticals.

These are not going away and Hospira is well positioned to meet these needs. The question then becomes will the economy see continued tightening in the credit markets that could translate into the various challenges such as delays in hospitals purchasing decisions that are capital intensive and declines in electric surgeries and drug demand if people elect to forego medical treatment as a result of higher jobless rates.

Foreign exchange rates have also shown of a high degree of volatility throughout 2008. Where our Americas business segment is not materially affected by these changes, both our EMEA and Asia-PAC regions can experience shifts in both sales and earnings due to foreign exchange rate fluctuations.

To deal with these challenges, we have already discussed some of the actions we are taking to stay ahead of the headwinds such as capital spending controls, preservation of cash and cost containment.

We are well positioned to grow our business on a constant currency basis and are putting in the right measures to prepare for economic uncertainty in 2009.

Moving to opportunities; first, HPG and Premier. We expect to benefit we've been seeing from our new contract with HPG to continue in 2009, as we place additional pumps in the HPG accounts.

We also look forward to the opportunity our new Premier contract presents. We will be able to offer Premier members, our solutions and smart pumps when the contract takes effect in the first quarter of '09.

Precedex, our label expansion for Precedex gives us a larger market to pursue for this proprietary drug. We are hopeful that we will receive approval for the long term sedation indication in the first half of 2009, which would further expand the marketplace opportunity.

Symbiq, we expect continued momentum with Symbiq as it gains further traction, both from our new GPO contracts and also from continued positive customer response to this device, the most technologically sophisticated pump of its kind.

Other opportunities within MMS include our new clinician support applications like VeriScan and EndoTool, as well as additional pump translations to further markets outside the U.S.

Specialty Injectable launches, we are scheduled to launch several compounds from our drug development pipeline in 2009.

Plus, we'll continue to expand several of our on-market drugs in new markets around the world and in additional presentations and formats. We also expect to receive a full year benefit from our GPO pharmacy awards and some of our soon-to-be launched generics in 2008, such as generic Zosyn and Rocuronium.

We are currently in the midst of our planning process for 2009 and are examining the potential impact of all of these factors. The delicate balance is to make sure we are taking full advantage of the opportunities we have created in the marketplace while also prudently managing spending in these uncertain times.

I would like to reiterate that we remain committed to our long-term financial goals of growing EPS in the low to mid teens, and to the strategies that have guided us since we became an independent company four and a half years ago... investing for growth and improving margins and cash flow, strategies that have laid a solid foundation for Hospira, and one on which we continue to build for the future.

We're now ready to take questions, operator.

Question And Answer

Operator

[Operators Instructions]. Our first question comes from the line of Gregg Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks good morning. First one's for Tom, on currency perhaps you could help us based on current rates what would you expect the impact on '09 in revenues to believe. And then could you walk us through to what extent that hit would be hedged by the time you get down to net income?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Yes, Gregg as far as 2009 goes I really don't want to speculate what that would mean, the rates have been bouncing around so much lately it's one of the reasons we've sort of backed off and going back to constant currency of guidance. So at this point I wouldn't want to speculate.

In the terms of hedging we don't yet have any income or equity hedges in place; we do hedge transactions between our affiliates. We also hedge receivables that the entities may have in other foreign currencies but, in addition to some natural hedges we have in place within the various entities we don't do anything beyond hedging specific transactions.

So, as you've seen the P&L impact this year, I think in this quarter was another penny or so given the top-line impact in the previous quarters we've already talked about those amounts.

Gregg Gilbert - Merrill Lynch

Good. And then, following up on your comments on tax rate. Considering the tax credit, what do you specifically expect the 4Q level to be and then what's a good annual rate to use that after. I assume 4Q is sort of artificially low due to a catch down, type of situation?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Yes, the full year would come in at about 24.8 off of the 25.5 that we've had in the fourth quarter. I think what had to be done some where around 23.2 or so.

Gregg Gilbert - Merrill Lynch

Okay.

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

I'll check to verify that yes 23.2 and 24.8.

Gregg Gilbert - Merrill Lynch

And then that annual rate should be a good guide for going forward.

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Well we'll get to that when we fully go through our 2009 planning. We do not see anything that would cause it to be terribly different but we have to go through our earnings mix and really figure out what next year is going to look like.

Gregg Gilbert - Merrill Lynch

And one last for Terry and Chris. How would you char... on your Zosyn prediction of a 4Q launch? How would you characterize the level of interaction between you and your partner and your partner and the FDA? And can you get to the bottom end and of your EPS range of that ones does not occur in '08? Thank you.

Terrence C. Kearney - Chief Operating Officer

Gregg this is, Terry I'll try to answer that. We have had ongoing dialogues with our partner and I think they've been very, very transparent with us relative to the status of the review process. And the best of our knowledge is what they have shared with us today the product application has cleared all the tactical hurdles with the FDA.

What's really the outstanding today is just final labeling as well as the ruling on the citizens petition. So that's where we stand and again we remain very confident that we'll see a launch of Pressells in the fourth quarter as yet.

Relative to impact on our guidance as we told you in last quarter's call, we don't expect if we were to see Zosyn slide out of the fourth quarter into early next year that would have an impact on our earnings guidance this year.

Gregg Gilbert - Merrill Lynch

Thank you.

Operator

Our next question comes from the line of Rick Wise with Leerink Swann.

Rick Wise - Leerink Swann

Good morning everybody.

Unidentified Company Representative

Good morning, Rick.

Rick Wise - Leerink Swann

Couple of questions, just remind us on Precedex. I assume margins here are among the highest, and maybe if can give us some sense on how'd fall in? It's going to be a positive for '09 as well?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

The margins are when the highest and it will be a positive for '09, Rick.

Rick Wise - Leerink Swann

Okay. On the pump front and market shares, I realized that nobody's is going to report, I think about it similarly, but we've heard Dexter argue they lost no share in the third quarter if just read in the Cartel transcript, they implied gaining share in competitive account. I feel like everything adding up to 100% plus market shares with in beginning share. Can you give us a little more color are you winning these upgrades in existing account or gaining share in new accounts? Thanks.

Terrence C. Kearney - Chief Operating Officer

Rick. Let me answer that. We've seen a lot of competitor's catches obviously with Symbiq and on a year-to-date basis about 75% of Symbiq places we've made have been a competitive accounts. So, we are gaining certainly share in that regard.

So, I'm not sure, what they are the people are looking at but I recognized that some of the published data that's out there maybe a bit dated in the sense that I think if you refer to the MDI data, that data for the first half of the year really is if information was collected early in the year prior around somewhere in February, March time frame.

It really doesn't highlight the impact Symbiq has had on the market place since it's brought in reduction. So, we again are very confident that we are gaining share. We are actually again 60%, 70% or so of our Symbiq placement in the third quarter where competitive cash is again 75% on a year-to-date basis have been competitive cash or so, again we believe we are gaining share and that's where we stand with that.

Rick Wise - Leerink Swann

Two last quick ones. First in core SIP had a terrific quarter in the America's. How much of that is the wholesaler restocking that we saw, destocking in the second quarter, maybe just help us understand the dynamics there and last if I could, Tom maybe comeback to the gross margin comments again, I mean could guys, can maybe just have to understand little better. When I look at last years third quarter versus second quarter '07, gross margin was essentially flat despite the seasonal manufacturing shut down for maintenance et cetera.

In the second quarter despite the SIP missed year-over-year gross margins were up 180 basis points. But only up 60 basis points in the third quarter when you really had a strong SIP help me understand what I'm missing?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Well, do you want to start with the SIP?

Rick Wise - Leerink Swann

Sure, either way.

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Certainly on sequential basis, these stocking effect that we saw on the second quarter and the normalization into third quarter had a positive impact but that was one of the contributors. We continue to see the positive effect of our expanded GPO awards. We obviously on the year-over-year basis continue to see strong growth on our base businesses as well given our position with across all GPO contracts and finally new products sold. All were contributors and that none of them really individually stand out as the key driver.

Christopher B. Begley - Chairman and Chief Executive Officer

Rick, in terms of the margin, last year was fairly flat from Q2 to Q3. Shutdowns occurred same time last year as they do this year Q3 and Q4. As I looked at last year we did has some mix issues that worked on our favor from Q2 to Q3 and that really offset the shutdown.

This year as we looked at our modeling and forecast here, we didn't see the mix shift that we saw last year from Q2 to Q3 and really what ends happening is that the shutdown sort of drops through.

So despite the margins being up 60 basis points over last year, they were down sequentially but it's coming in exactly as we expected perhaps we did communicate little more currently with you all but the margins are right where we peg them to be.

Rick Wise - Leerink Swann

I appreciated that thanks.

Operator

Our next question comes from the line of David Roman with Morgan Stanley.

David Roman - Morgan Stanley

Good morning everyone. Thank you for taking the question. Could you just have a couple of minutes on Tom, I think, one of is the obvious concern out there on hospital capital expenditures, that maybe you can sort of just give us some context as to where... bid in as for the overall through hospital food chain from room renovation to a larger scale purchases?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

Well David, I just want to make sure first and for most, we clarify that over 60% of our MMS revenue is from this are disposable trail. So capital is an important component of our revenue. But it's not certainly, the most important component of our revenue.

I think the question of where smart pumps fit in the food chain I think it varies by institution and can I ask you what are the priorities they may have whether its expansion of facilities or whatever.

We still see a high interest in smart technology I think a lot of over the last two years as a growing momentum and the adoption of smart technology. So, we still feel very strong that this, this is an important piece of the overall quality of tier that a hospital can deliver, and I think that hospitals do recognize that.

And relative to how they may ultimately place those pumps in the future we have always offered flexible or different types of financing options for our customers, predominantly it has been out right sales but we do offer other alternatives as Chris, alluded to and again we still remain very bullish on the adoption of this technology and that it is in need that the hospitals recognize.

David Roman - Morgan Stanley

And is there a way to characterize that type of institution who are buying through the smart pumps to those with integrated IT systems, is it urban, is it rural? Is there any way to bucket where you are having the most success?

Christopher B. Begley - Chairman and Chief Executive Officer

David, this is Chris. Let me try to help you out on that. Really, it sounds that adopt the smart pump technology. Now those accounts that understand that where healthcare change is going, and that change will occur into a paper performance, improvement in quality and the smart pumps truly do reduce medication errors, enable the hospital to drive down to root cause analysis.

On that, there is no stereotype that the small accounts or the big accounts or the accounts with integrated IT systems get that message. It's really; the leading hospitals that understand that quality will ultimately reduce their accounts and that where their reimbursement is going longer term from the federal government is to take and drive down issues as it relates to poor quality like medication errors. And so, that wave I believe will continue into the future.

David Roman - Morgan Stanley

Alright, And then lastly, just on the decision to the further the debt payment you wanted to do, could you just talk a little bit about is there any change here in priorities with respect to capital deployment. I mean previously you have been saying that the number one priority was to reduce that is there something specific that we should be aware, you sort of talked about being conservative, is there anything else in that decision?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

No absolutely not, I think there is a number of things that kind of relate to this, as Chris said the announcement with the HPS, that's allowed us to defer some capital that otherwise we would be looking at investing in a biogenerics facility.

We're just trying to be prudent here, there is, we're going to hold on to the cash and invest it and then ride this out until we get to June and make that pay down. And then just sort of wait and see how things go. So there's been absolutely no change in our desire to pave things down.

We had good discussions with the agencies and I think their encouraged by what we're doing many it's a many companies have already drawn their revolvers that we haven't done that yet I don't think there's no plans to do that. But at this point it's the same priorities it's just a matter of holding onto the cash versus paying it down so we don't intend to do anything else with it

David Roman - Morgan Stanley

Okay, thank you very much.

Operator

Our next questions comes from the line of Taylor Harris with J.P. Morgan

Taylor Harris - J.P. Morgan

Hi good morning.

Unidentified Company Representative

Good morning, Taylor.

Taylor Harris - J.P. Morgan

Clearly the GPO contract wins that you've had are helping out the business. And I'd like to focus on the injectables business, is there anyway you guys could quantify for us how big is the other impacts that having on the U.S. injectables business and not just in the second half of this year but also looking in the 2009?

Terrence C. Kearney - Chief Operating Officer

I can't give you exact numbers but it clearly it is part of the drivers of our year-on-year growth. As we talked in the second quarter, we took a very strategic plan and approach number of GPOs were market share positions weren't as large as others and we believe that we needed to increase our share position with select GPOs and we have done that and that is carrying through into the third quarter results. And again since many of this current were up in these latter part of the first quarter early second quarter, you should expect to see some annualization impact into 2009.

Taylor Harris - J.P. Morgan

Okay. The fourth quarter of last year you had a very strong U.S. injectables number and I think some of that was stocking, maybe $15 million to $20 million. What should we expect for the fourth quarter this year? I just want to make sure we do not get surprised. I understand there are some positive fundamental dynamics going on but it is a tough comparison?

Terrence C. Kearney - Chief Operating Officer

It is and again, we're not anticipating in our forecast any significant full service stocking in the fourth quarter. We're obviously monitoring that and so again in our net forecast we expect normal purchasing patterns based on the demand for our products in a relative share across the GPO contracts that we have.

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

The other things, Taylor, its Tom, is as you look at our overall sales guidance without FX of 6% to 7%. It's about where we're tracking through the third quarter this year and while it may not mix out exactly as it has through the first nine months of this year. The fourth quarter shouldn't be terribly different to come back into those that range of growth.

Taylor Harris - J.P. Morgan

Really I mean I guess what I worry about is about 6% to 7% for the first three quarters of the year, there was some benefits in the first quarter from Mayne and you're talking about a potential weakness in capital purchases at the end of the year and then we got this tough comp. I just want to make sure that we're ready for that. So, specifically with the U.S. injectables business should we assume the same kind of growth year-over-year that we saw in the third quarter or not?

Thomas E. Werner - Senior Vice President of Finance, and Chief Financial Officer

I remind you, the fourth quarter, we've got some new products that are anticipated to be rolling out so that helps to offset somewhat what happened last year. In terms of specific product line guidance for the fourth quarter, really not in a position at this point to discuss that, it's...we are just really sticking with this 6% to 7% range and I think it shouldn't be terribly different.

Taylor Harris - J.P. Morgan

Okay, great. And then, Chris one bigger picture question for you which is, as you guys have formulated your long term guidance historically to get to the low, to mid teen from the bottom line, you've contemplated in upper single digit top line. And you haven't quite gotten there yet and I'm just curious, do you think you have to be in the upper single digit revenues in order to be low to mid teens EPS grower going forward or not?

Christopher B. Begley - Chairman and Chief Executive Officer

Hey, Taylor. We do not have to be in that upper single digit sales growth rate to hit our EPS growth goals that we have long term and so we don't have to be there every year. We may be there one year and not there the next year but we don't have to be there every year.

Taylor Harris - J.P. Morgan

Okay, great. One last question just on the ongoing situation, any update to your product plans on that front?

Christopher B. Begley - Chairman and Chief Executive Officer

Not really, and again as we talked about in the second quarter, we understand the clinical significance of the drug and we continue to work with our customers to make sure that there is a safe supply of this product in the marketplace and that includes our increasing our manufacturing capacity as demands dictates. So that's were we stand at this point in time.

Taylor Harris - J.P. Morgan

Okay. Thank you guys.

Operator

Our next question comes from the line of Junaid Husain with Soleil Securities.

Junaid Husain - Soleil Securities

Good morning everyone.

Christopher B. Begley - Chairman and Chief Executive Officer

Good morning Junaid.

Junaid Husain - Soleil Securities

Relative to Medication Management Systems in your Premier contract, could you tell us what kind of traction you're getting with your Premier hospitals especially if your sales guides, work the halls of Premier hospitals, any metrics you can give us quantitatively or even qualitatively in terms of what kind of traction you're getting on?

Terrence C. Kearney - Chief Operating Officer

Junaid this is Terry. It's quite too early to give you quantitative measures and again I think we'll be in a much better position to have a more fulsome discussion in February when we go through our projections for 2009 but qualitatively and again we are making calls on the Premier membership. I think they are very positive to our technology and the ability for us to offer a full market basket of products to them.

So I think with the flood approach that we have with SIP which is always been a contract Premiere and now with the smart pumps as well as IB solutions, we offer very good alternatives to other vendors that are in the marketplace and again we think we're going to do pretty well with the Premier as we move forward and we will see more of that obviously once the contract starts in February 2009.

Junaid Husain - Soleil Securities

Okay that's helpful. We've heard that... working on a new infusion come with a regulatory dosage that's already in front of the FDA. So the first question is have you heard about their latest infusion complement. Secondarily from a competitor prospective had you baked in your expectations that you've got maybe in more competitive in 2009?

Christopher B. Begley - Chairman and Chief Executive Officer

Right now Junaid, we've heard only sampler of fewer words I don't have any idea what his pump might be or what features it might offer. So it's really hard to speculate at this point in time, what kind of impact it might have. We do know that introducing new technology into the market place is not an easy thing to do. So I think you are going to look at play out over time. If in fact there is something credible there.

Junaid Husain - Soleil Securities

Fair enough and then on the we'll get to a question of hospital spending if you look at to the fourth quarter in 2009, could you help us understand maybe some of the specific product areas of your business that could come under some spending scrutiny by your hospital customers is it MMS is it injectables is it critical care et cetera, et cetera.

Christopher B. Begley - Chairman and Chief Executive Officer

This is Chris let me just reiterate what I said in my opening comments okay? And that is as we look at the product line that we have is going after two key on net needs. The high cost of proprietary pharmaceuticals and reducing medication errors and on the generic drug side that goes after the high cost of proprietary pharmaceuticals all those products are really related to taking care of the acute patient in the hospital.

And so we don't see an impact there, whatsoever from an SIP standpoint, and as we talked about in the MMS business 60% of that business is actually disposables that are required by the hospitals for patients who come into the hospital to be treated for those acute care diseases.

The balance then is the capital placement fees and as we've talked about we've seen just a very, very small bit of tightening from a capital availability standpoint in the hospitals. And to offset that we're offering a variety of different plans that we've worked with different banks on, and so we really don't as we look at 2008, see that initiative whatsoever.

Junaid Husain - Soleil Securities

Okay. And then last question for you relative to your supplemental to your NDA for Precedex I think I might have missed the where were the NDA for the use of Precedex in mechanically ventilated patients in the ICU? Did you say early '09?

Terrence C. Kearney - Chief Operating Officer

No well first the procedural sedation of our indication has been approved. And what were still have under has been filed and had to be approved is long term sedation indication we expect to hopefully be approved early at first quarter sometime in 2009. We have two NDAs under the that we filed for Precedex the first one has been approved for procedural sedation. The second one which was filed in the first quarter of 2008 should be about 12 month's approval time frame so that's when we expect accrual there

Junaid Husain - Soleil Securities

That's all I got, thanks guys.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the lines of Rick Wise from Leerink Swann. And our final question comes from the line of Gregg Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Couple of last follow up's Terry are you still seeing a flattish effect of freight on sales growth for the U.S. as our key business?

Terrence C. Kearney - Chief Operating Officer

Gregg we are seeing adverse price on a year-over-year basis on our oncology portfolio but that is being somewhat offset set by the CPI escalators that we have on our SIP contracts as we had also talked in the second quarter and I just a little too earlier when we expanded our presence in certain GPO contracts from an SIP perspective we did seek selective strategic price actions that are planned through into the third quarter. But to somewhat minimal effect but that does have a little bit of downward pressure in the third quarter. But putting those aside generally we expect prices to be flattish.

Gregg Gilbert - Merrill Lynch

And lastly Chris can you take out your crystal ball and comment on the outlook for buyers similar as legislation in the new regime thanks.

Christopher B. Begley - Chairman and Chief Executive Officer

You know.

Gregg Gilbert - Merrill Lynch

You have all night to think about it Chris.

Christopher B. Begley - Chairman and Chief Executive Officer

Yes I have and it was quite a celebration here in Chicago. Obama and his staff are very supportive of biosimilar legislation so let me start out with that. In addition of that, my recent visits to Washington, I really believe our politicians realize that we have to find ways to cut spending and to cut cost to offset this tremendous amount of debt that we've now taking on with the bail out. And they realized that and they view biosimilar legislation as a way of taking in, reducing spending in healthcare. And so, I'm optimistic that we will get legislation, let's say within the next 12 to 18 months.

Gregg Gilbert - Merrill Lynch

Thank you.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you.

Karen King - Vice President of Investor Relations

Thanks Chris. That's concludes our call for the quarter. Thank you for joining us today. Ashley, will now ready to end the call.

Operator

This concludes Hospira third quarter 2008 conference call. You may now disconnect. .

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Source: Hospira Inc. Q3 2008 Earnings Call Transcript
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