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Hospira (NYSE:HSP)

Q4 2012 Earnings Call

February 13, 2013 9:00 am ET

Executives

Karen King

F. Michael Ball - Chief Executive Officer, Director and Member of Science, Technology & Quality Committee

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

Sumant Ramachandra - Chief Scientific Officer and Senior Vice President of Research & Development & Medical Affairs

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Matthew Taylor - Barclays Capital, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Marshall Urist - Morgan Stanley, Research Division

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Ami Fadia - UBS Investment Bank, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Operator

Welcome to Hospira's Fourth Quarter and Full Year 2012 Conference Call. [Operator Instructions] I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone, and welcome to our conference call and webcast regarding Hospira's financial results for the fourth quarter and full year 2012, as well as our projections for 2013. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President, Finance, and Chief Financial Officer; and Sumant Ramachandra, Senior Vice President and Chief Scientific 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 sections in Hospira's latest annual report on Form 10-K and subsequent Form 10-Qs 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 development.

On 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. Also posted on our website is a presentation of complementary materials that summarize the points of today's call. We do not speak directly to the material, it is for your reference to use as an enhanced communication tool. You can find the presentation on our website at www.hospirainvestor.com.

Finally, we will be ending the call at the top of the hour this morning. [Operator Instructions] We appreciate your understanding and thank you in advance.

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

F. Michael Ball

Thank you, Karen, and good morning, everyone. Welcome to our fourth quarter and full year 2012 conference call. Reflecting back on 2012, the year was one in which we made considerable progress in many areas of the business. And despite all the activity and challenges associated with reinforcing our foundation, we met both our net sales and earnings per share guidance while still expanding our investments in the numerous opportunities that we have for the long term. Let me highlight some of the key accomplishments during the year.

We invested in people, the right people who are reinforcing a quality culture and operational excellence throughout the organization. We built solid lines of communication with the pharma side of the FDA, including the districts where we have plants, as well as CDER, the Center for Drug Evaluation and Research. We invested in remediation actions across our global footprint to improve first-pass quality and to ensure consistent processes and improvement across our operational footprint. We are investing in modernization at our plants such as new labs and automated visual inspection equipment. We exceeded our goal of 50 new-to-country regulatory submissions and ended up filing in excess of 100 new-to-country submissions for several on-market molecules. We opened a direct sales office in China and signed a distribution agreement with Mochida Pharmaceutical in Japan. We continue to advance our biosimilar pipeline, submitting our dossier for infliximab in Europe and advancing our clinical trials for EPO in the United States. We successfully relaunched oxaliplatin in the U.S. and submitted our application for pediatric extension for Precedex to the FDA. We announced an agreement to acquire an API manufacturing and related R&D facility from Orchid to vertically integrate, improve our cost position and ensure supply in certain critical beta-lactam antibiotics. We advanced our India manufacturing investments, including the build-out of Vizag and expanding capacity at both our fill-finish beta-lactam antibiotic facility and our joint venture plant. And we ended the year with $4.1 billion in net sales and achieved our adjusted earnings per share guidance, coming in at $2.01.

As has been our practice over the past year, I will first update you on our quality improvement initiatives since our last earnings call and discuss our fourth quarter and full year net sales results. Tom will discuss the 2012 financials, followed by Sumant who will provide a pipeline update. Tom will then move into 2013 guidance, after which I will wrap up with closing comments.

Let me first discuss activity related to our pharma plants. The majority of our facilities recently went through their year-end preventative maintenance. These planned shutdowns, which started in late December, lasted anywhere from a couple of days to several weeks. We took advantage of the shutdowns to make further improvements to the plants, including manufacturing equipment and facility upgrades. I'm pleased to report that all of the plants came out of their shutdowns on schedule and are up and running as planned.

At Clayton, we restarted manufacturing propofol batches and building inventory in the fourth quarter of 2012 for an early 2013 relaunch. We recently released a limited number of batches to the market. Consistent with our relaunch plans, we are starting with a 20 mL presentation and intend to follow with the 50 mL and 100 mL offerings in the second quarter. We are pricing propofol above current market levels commensurate with the significant resources required to bring the product back to the market.

And at Rocky Mount, we continue to make progress. The next major milestone is the FDA's reinspection of the facility, which started yesterday. We believe, due to the size and complexity of the plant, that the inspection could be extensive and lengthy. Once the inspection is complete, we'll review the outcome, after which our plan is to disclose the results of the inspection.

At the other plants where we have 483s, we continue to work through the commitments in our various action plans that we made to the agency.

Regarding devices. In terms of our comprehensive device reviews, in 2010, we made a commitment to the FDA to do a 2-year look-back to assess our customer report data. We completed the assessments and are initiating appropriate corrective actions. As a result, in recent weeks, customers have received a series of field notifications. As we mentioned at the JPMorgan Conference in early January, we also made the decision, as a result of this process, to look more broadly across our device families to determine which devices provide the greatest value for our customers, which have the most robust technology and which are in the best position to meet the heightened expectations of the FDA and other regulatory agencies. Based on this holistic exercise, we are developing a longer-term MMS strategy aimed at modernizing and streamlining the device platforms to best address our customers' needs and the near-term remediation issues. Our intent is to finalize the strategy, including seeking the input of the FDA. At that point, we will be in a better position to provide you with greater clarity, including identifying the appropriate costs entailed in implementing the strategy, which are not yet known but which could be significant.

Two weeks ago, FDA inspectors arrived at Lake Forest for another inspection of our device quality systems and just recently completed their work. We received a 483 with 10 observations, many of which were designated as repeat observations from our previous inspection that concluded in July 2012. At the inspection closeout, the investigators acknowledged some progress since the last inspection and strongly encouraged us to complete the execution of the numerous improvement plans that we shared with them. The observations reinforced our own assessment that there is still a lot of work to be done within our device operations.

On a positive note, we recently announced a partnership with Q Core, which gives us exclusive rights to market and distribute Sapphire in select markets across Europe, Asia and the Americas; I think a great addition to our line of ambulatory pumps.

I'll now turn to our net sales results for the quarter and full year, after which Tom will discuss the financials. As a reminder, references to net sales results will be on a constant currency basis, which excludes the impact of foreign currency fluctuations. Our press release provides full details on the impact of foreign currency on net sales by segment and product line.

Net sales were up 8% compared to the fourth quarter of 2011. For the full year, net sales were up 2% versus full year 2011. By product line, global specialty injectable net sales increased 12% for the quarter. For the full year, net sales were up 2% relative to full year 2011.

By segment, in the Americas. Specialty injectable net sales were up 13% for the fourth quarter. Similar to last quarter, we saw another strong quarter of demand for Precedex and continued strength in oxaliplatin. We also saw the positive impact of price increases on several of our core SIP drugs, offset by price erosion on a more recently launched drug such as docetaxel and meropenem. For the full year, SIP net sales in the Americas were flat.

Turning now to the EMEA segment. Net sales of specialty injectables were up 17% compared with the fourth quarter of 2011. We had another great quarter with meropenem and continue to see strength in our biosimilars with contributions from both Retacrit and Nivestim. SIP also increased 17% for the full year.

In APAC, net sales of specialty injectables were down 1% in the quarter versus the fourth quarter of 2011. Driving sales in the quarter was Precedex in Japan, which is more than offset by price erosion on certain oncology molecules throughout the region. For the full year, SIP decreased 2%.

Turning now to Medication Management. Global net sales increased 3% during the fourth quarter and 4% for the full year due to solid customer demand for smart infusion pumps and consumables. Sales in our Other Pharma product line increased 2% for the quarter on a global basis, driven by solid distribution of product in the fourth quarter. For the full year, Other Pharma net sales were up slightly.

With that, I'll now turn the call over to Tom for an overview of our financial results. Tom?

Thomas E. Werner

Thanks, Mike. Good morning, everyone. As Mike mentioned, net sales for the quarter were up 8% versus prior year.

Moving through the rest of the income statement. Adjusted gross margin as a percentage of net sales in the quarter was 34.9%, which was up from 34.0% in the fourth quarter of last year. This is primarily due to lower inventory losses, which were somewhat offset by higher quality and manufacturing costs. For the full year, adjusted gross margin finished at 35.3% of sales, which was in line with our guidance for the year. Research and development expense in the fourth quarter was $85 million or 7.7% of net sales. This primarily as a result of spending for our global expansion submissions, as well as EPO trials in the U.S. For the full year, R&D expense for -- was 7.4% of net sales, which was up 17% over 2011.

SG&A expense for the fourth quarter was $178 million or 16.2% of net sales, which is slightly below the percent of net sales in the fourth quarter of '11. For the full year of '12, SG&A as a percentage of net sales was 16.8%.

Adjusted operating income was $122 million compared to $111 million in the fourth quarter last year. And for the full year, adjusted operating margin was slightly above our guidance range at 11.1% of sales. Finally, adjusted diluted earnings per share for the fourth quarter was $0.55 per share compared to $0.51 per share last year. Full year 2012 adjusted diluted EPS was $2.01 for the year.

Turning now to cash flow from operations for the full year was $478 million compared to the $434 million generated in 2011. The increase is a result of lower comparative investments and working capital in 2012, which more than offset the decrease in adjusted net income. Capital spending for 2012 was $290 million, flat with 2011. To date, we've spent a little over $150 million related to our build-out of Vizag, our new manufacturing plant in India, with the timing of the capital spend slightly slower than projected. The total scope of the project has been expanded as we made the decision to add automated visual inspection equipment, as well as an additional production line. This will now bring the total expected capital commitment for Vizag to a range of $375 million to $450 million. We expect to spend approximately $90 million of that in 2013 with the remaining amount to be spent in the coming years. We still expect Vizag to commence commercial production in the second half of 2014 and ramp up production in the following 12 to 24 months.

Moving to remediation. On our third quarter call, we indicated we'd incurred charges of approximately $300 million from the start of the program and expected we would be above the upper end of our previously projected range of $300 million to $375 million. We've now recognized charges of almost $375 million. And based on the status of our current remediation plans, we continue to believe that we will exceed the upper end of our range, but the future charges are not expected to be significant compared to prior years. This does assume the reinspection at Rocky Mount goes well and that the FDA accepts our current device field notifications. Just to be clear though, we are still working through the development of a longer-term MMS strategy aimed at modernizing and streamlining the device platforms. Once we have completed this exercise and have communicated our objectives with the FDA, we will be able to provide you with greater clarity, including the associated costs, which could be significant.

Before moving to guidance, Sumant is going to provide you a brief update to our drug pipeline as we traditionally do at this time of the year, so I'll turn it over to him. Sumant?

Sumant Ramachandra

Thanks, Tom. Good morning, everyone. We provided an update of our pipeline as of December 31, 2012, at a high level at the JPMorgan Conference about a month ago. I'll provide some additional details this morning. As a reminder, our small-molecule pipeline totals 80 compounds, which represents approximately 800 new-to-country launches, including over 40 in the United States. The local brand market value of small-molecule pipeline now stands at approximately $18 billion.

In terms of therapeutic areas, slightly more than half of the total small-molecule pipeline's local brand market value are oncology drugs with anti-infectives, the next largest therapeutic category, at about 1/5 of the pipeline's value. Relative to launch timing, drugs representing almost 1/3 of the overall local market value of the pipeline are expected to launch in various countries across our segments in 2013 and 2014. Of the expected launches for these 2 years, roughly 40% of the local brand market value is expected to launch in 2013, with the remainder in 2014. While many of these drugs are smaller launches from a local brand market value perspective, they add incremental value to our broad portfolio, which is already one of the largest portfolios of specialty injectable pharmaceuticals worldwide.

Moving on to our biosimilars pipeline. It remains one of the largest pipelines in the industry, with 11 compounds and a local branded value of $40 billion. Our biosimilars on market, including biosimilar EPO, also known as Retacrit in Europe, and our biosimilar filgrastim, also known as Nivestim, that has launched in both Europe and Australia, have both been strong drivers of growth in their various segments.

I will now turn the call back to Tom who will provide our 2013 financial guidance. Tom?

Thomas E. Werner

Thanks, Sumant. For 2013, overall, we expect net sales to grow between 1% to 3% on a constant currency, as well as a reported basis over 2012. We expect first quarter net sales to be our softest quarter, but to increase sequentially quarter-to-quarter as a result of continued progress on our quality improvement initiatives, which will drive improved supply levels and recapture of market share.

Adjusted gross margins in 2013 are projected to be in the 35% to 37% range compared to roughly 35% for both the full year and the fourth quarter of 2012. As we said at the JPMorgan Conference regarding our plant's priorities, we're in the midst of the first phase where the emphasis has been on reinforcing the foundation and investing for growth. In this phase, we focus more on adding the appropriate resources to ensure successful remediation and operational excellence than we have on cost reduction. Our plan is to continue our remediation efforts while improving supply and recovering share. And once this is accomplished, we can turn our focus to margin expansion and optimization. In 2013, we expect research and development spending as a percentage of net sales, excluding any onetime items, to be around 7%. There'll be some variability quarter-to-quarter as we saw in 2012, primarily due to the timing of spend on clinical trials.

SG&A expense, this is in the first quarter, we expect the spending to be slightly ahead -- or slightly higher than the first -- fourth quarter of 2012 and remain at that run rate for the rest of the year. As a result of these factors, we're projecting 2013 adjusted operating income in the 11% to 13% range. Our effective tax rate for 2013 is expected to remain fairly consistent with 2012 and be in a range of 18% to 20%. Equity income from affiliates will continue to decline due to lower pricing and related margins from docetaxel.

Moving to adjusted earnings per share. We're assuming outstanding shares to be steady at 166 million, and we are projecting adjusted diluted earnings per share to be in the range of $2.05 to $2.20, which represents a 2% to 9% growth over 2012. The $0.15 spread in guidance is based on the expected rate of supply recovery and share gains, as well as improvements in quality and manufacturing performance.

In terms of quarterly EPS calendarization, we expect that the first quarter EPS will be similar to the first quarter of 2012 and then ramp throughout the year. Other key assumptions in our guidance are: number one, that our FDA inspections progress well, particularly at Rocky Mount; number two, that Symbiq, for financial projection purposes, is off market in the U.S. for the full year of 2013 since we can't project the time line for receiving another round of 510(k) clearance from the FDA; and finally, relative to the Orchid transaction, we've assumed that the acquisition of this API facility closes in the first half of 2013, allowing us to assure supply, as well as to vertically integrate into the critical beta-lactam antibiotics and improve our standard cost position.

Our cash flow from operations projection for 2013 is in the range of $350 million to $400 million. Capital spending is projected to range between $425 million and $475 million, up from 2012 levels, primarily related to additional modernization efforts at our plants, some IT improvements, as well as the timing of spend in our new Vizag, India facility. Depreciation and amortization is expected to be between $255 million and $275 million.

So that wraps up the guidance section, so I'll turn the call back to Mike for his wrap-up comments.

F. Michael Ball

Thanks, Tom. In summary, 2012 was a busy year for us. We made a tremendous amount of progress, both on reinforcing Hospira's foundation and advancing our remediation activities. At the same time, we pushed forward with our growth expansion initiatives with considerable achievements throughout the year. Reinforcing the foundation remains a key focus for us in 2013 as we continue our journey of continuous improvement. We believe 2012 represented a peak year for our pharma investments as we surfaced issues, becoming increasingly proficient at identifying root cause and driving towards resolution. As you all know, the next key milestone for our pharma business is the FDA reinspection of Rocky Mount, which is currently underway. We have been working hard to ensure a successful inspection, which we would define as recognition from the agency that we have met our commitments to date, are making progress and that we do not need to change the scope or trajectory of our remediation efforts. This would allow us to continue increasing our supply of products to the market. As I mentioned in my opening remarks, we are planning to disclose the results of the inspection after it is completed.

On the device side, we will continue to advance our device actions and work on a holistic MMS strategy designed to better meet our customer needs and the near-term remediation issues, while delivering long-term value and return on the portfolio. We also continue to work on establishing a cooperative and constructive relationship with the device side of the FDA.

Relative to our growth initiatives, we will continue to submit global expansion molecules for regulatory approval, expand our portfolio in emerging markets, launch products from our SIP pipeline and grow our expanding biosimilar platform. We are also working on setting pricing that more appropriately reflects the value of our broad pharma portfolio and the higher cost of quality we're seeing across the industry today, focusing on vertical integration of API for select products, expanding capacity, ensuring duplicative manufacturing sources for many of our larger products and reducing our cost position through our build-out of Vizag in India and continuing to make strategic investments like Q Core that complement our existing product portfolio. We will update you on how all of these initiatives play into our longer-term goals at our Investor Day this year.

Before I wrap up my comments, I want to make -- I want to take a minute to thank our employees for their tireless efforts over the past year. The entire organization has been working in alignment around our 2 platforms, reinforcing the foundation and turbocharging growth. Their dedication and commitment is the reason for our significant progress. We are also grateful for the continued support of our customers. We know the industry-wide supply situation is a challenging one. We worked hard to keep our customers apprised of our actions and appreciate their understanding and business as we advance our efforts. As well, I want to thank you, our investors and analysts, for your continued support through this time of transformation. I can tell you, transformation is not easy. But at the end of the day, I feel very good about our business prospects, which remain strong. We are building upon our market-leading positions and are investing today to ensure we can maximize the opportunities of tomorrow. These investments will provide a promising future as we position Hospira to be an even stronger company, delivering sustainable growth and shareholder value as the world's leading provider of injectable drugs and infusion technologies.

With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I was hoping we could -- I will do my best to keep this in one question. I'm trying to reconcile some pieces of the guidance as it relates to the P&L and then the cash flow. Tom, you're guiding to an improvement in overall growth and operating margins in 2013 but a decline in operating cash flow, as well as free cash flow. Can you help us maybe put the pieces together there? And I don't understand why the cash flow dynamics wouldn't actually be better given the expansion in operating profitability.

Thomas E. Werner

Yes. In terms of free cash flow, the real difference there is the increased capital spending we're going to have in 2013, some of which, as we mentioned, was related to Vizag, as well as modernization in the existing U.S -- primarily U.S. facilities. A big piece of the modernization is visual -- automated visual inspection. So that's a big factor -- a big swing factor in the free cash flow. And in terms of operating cash flow, this year, being '12 that is, we had some very substantial improvements in working capital. And while we'll keep a tight handle on that for next year, we don't expect it to be at the same level. I'll kind of browse through my detail here as we move through the questions, and if I notice anything else, David, I'll either mention it or speak to it when we follow up with you later.

Operator

Your next question comes from the line of Greg Gilbert with Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Last call, you had a slide that detailed the inspections that had occurred through the first 3 quarters of the year. Could you, Mike, update us on everything that occurred, inspection-wise, across the company in the fourth quarter, please?

F. Michael Ball

So in the fourth quarter, Greg, we basically had -- well, since our last call, let's put it that way, since our last call, we've had one inspection and that would be the device inspection at Lake Forest that I referred to in our prepared remarks, then we're having this inspection going on at Rocky Mount. So that's the total of what's happened in terms of FDA inspections across the company since our last call.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. And what you're releasing from Clayton, you mentioned limited quantities. Is there anything holding you back in terms of getting back to, I guess, normal might be a strong word, but any context around the pace of launches from there?

F. Michael Ball

Not really. We're just starting up the plant again and we need to build up an inventory. As you know, propofol is in relatively short supply in the marketplace, so basically anything that we make gets absorbed pretty quickly. So we're basically releasing small batches right now. We don't want to get completely spread out everywhere and then immediately go into a backorder situation. So we're trying to make some batch releases to try and take care of the shortage in the market while building up inventories and then we'll expand our distribution.

Operator

Your next question comes from the line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to clarify a couple of things around Precedex. So can you help us with what your assumptions for Precedex are in the guidance and then when we might see pediatric extension? And also, looking forward, what the likelihood is of some of your product line extensions helping to protect that product?

Thomas E. Werner

Matt, it's Tom. Just on the guidance for that, I'll handle that and then flip it over to Sumant. Before I get into there, just, if David's still on the phone, the other thing that's driving the cash flow a little bit lower next year is that a lot of the remediation expenses we've accrued will start to be paid out and spent next year. But relative to Precedex, we have assumed that we'll get pediatric extension and that should take us through the end of the year. In terms of where that's at with submission in the FDA and other things related to life cycle management, I'll turn that over to Sumant.

Sumant Ramachandra

Great, thank you. So for Precedex, as you know, we have submitted an application for the pediatric exclusivity to the U.S. FDA. And that's currently under review. We know that because we have been in communication with the FDA around that. We do expect to hear from the FDA the first half of this year and then we will find out. Hopefully, all will be on before the July 2012 -- '13 date. And that should carry us through around mid-January 2014 in terms of exclusivity. In terms of life cycle management, we have mentioned this a few times but just to let you know, for competitive reasons, we are not mentioning what life cycle management program we are in the process of executing but we are, as a company, enhancing the product profile more to meet the needs of the customers out there and how they use Precedex. That's all I can say at this point.

Operator

Your next question comes from the line of Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

And I guess it's no surprise it's going to be around manufacturing and remediation. I guess, Mike and Tom, can you just talk about what we saw with Bedford and the consent decree recently? And when you talk about a successful outcome, your guidance already assumes that the FDA is going to let you continue manufacturing products as you have been and ramping up. So I guess, what changes? And could you be more specific on, I guess, what you mean by successful outcome as it relates to the Rocky Mount inspection?

F. Michael Ball

Okay. Thanks, Shibani. So first of all, I'm excited that they're actually there. It's like studying for a test for 1.5 years and finally, it arrives. So I think it's good news. I think the FDA inspection will serve as an excellent checkpoint for us in terms of our progress there. As it relates to Ben Venue and their consent decree, I really can't comment on that. Every situation is very unique. So I think what I would rather do is just focus then on the Rocky Mount situation. As I said, success, to us, would really entail the FDA saying, "Yes, you've made progress. Yes, you've met your commitments. Yes, the cadence of remediations seems appropriate." And if we get those types of responses, then the net-net from that will be that we will be able to continue to increase the release of supply out of Rocky Mount, in my view. So that's what success would look like. I know that's a little loose, but I think that's a pretty good definition of it. As it relates to our guidance, our guidance does assume that outcome from the FDA. And so we go into this thinking that we have prepared extremely hard. We've put new management teams in place as I've told you before. Literally used tens of thousands of consultant days to help us get ready. We have invested a ton of money, over $100 million, into the Rocky Mount facility. As Tom mentioned, we've got modernization going in there with automated visual inspection. We've trained our people. It is the big plant at the end of the day. There are 3,000 people working in that plant, so it's a big task, but I think this serves as an excellent checkpoint to us as to how we're doing.

Operator

Next question comes from the line of Marshall Urist with Morgan Stanley.

Marshall Urist - Morgan Stanley, Research Division

Another guidance question for me. Could you walk us through the top line guidance on the 1% to 3% on the top line? You guys highlighted some positives next year in terms of propofol coming back. You'll get the full year of oxaliplatin. It seems like price in the U.S. should be positive as well. So I just wanted to get a sense of, are there -- how much dilution is there actually from Symbiq next year and kind of what are your more detailed assumptions there to get to the -- just the 1% to 3%?

Thomas E. Werner

Yes, Marshall, it's Tom. The Symbiq, it'll certainly be a bit of a drag on the top line. We've said before that Symbiq, in any given quarter, has represented roughly 10% of MMS hardware sales, so it's not the lion's share of the product area but it will have some drag. Pricing, we have taken prices up in the U.S. on certain molecules, reflecting the higher cost of manufacturing and the higher quality levels that we're putting in. It's hard to see that though because we're going to continue to have price declines on things like docetaxel, oxaliplatin. Gemcitabine continues to decline, so that is kind of masking things. In terms of launches, there's really nothing hugely significant for next year. I think the assumption that we have in there is that supply continues to recover. And as you'll see and I think, in the IMS data, while market shares have stabilized, it would appear we're regaining some share in the fourth quarter. Certain wholesalers took their inventories up as supplies of hydromorphone and morphine sulfate and a few other drugs became more plentiful. We don't see that coming down in the first quarter. I think they're going to intend to keep those levels at -- where they're at today, at least for the near term. But those are kind of the detailed areas I'd point to.

Operator

Next question comes from the line of Chris Schott with JPMorgan.

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Maybe just following up on that last question on revenue. This year, it seems like you're assuming Rocky Mount capacity is continuing to come back, yet the company is only growing 1% to 3% in the top line. Could you -- as we're just thinking about the longer-term model, can you just walk us through what it's going to take to get a bit healthier top line for the company? Given some of your initiatives on Misfit seems like it could lead to maybe a protracted recovery in that business as well. I'm just trying to understand when we should think about a healthier top line for the company.

Thomas E. Werner

Yes. Chris, I'll make a couple of comments there and then Mike, Sumant or Karen can jump in. Precedex is going to continue to grow as well next year and that should help. In terms of getting to higher single digits or beyond, we really -- we've got the patent expiry for Precedex in '14. But then we begin to roll into biosimilars continuing in Europe and then becoming a reality in the U.S. So I'd say that's really where the future big drivers of revenue increases would come from. Mike or Sumant or Karen, anything to add?

F. Michael Ball

No, I think this year we will be, again, bringing the Rocky Mount facility up. It just depends at what pace we're able to do that. We're assuming that the pace is slow and steady, given that we still have remediation to do. Just to be clear on the FDA inspection, we have work to continue to be done no matter what the outcome there. So we continue to make inroads in terms of getting remediation done, but supply will always, at least as we move forward, will always be dictated in some way by how much remediation we have to do. And as I said previously, if we suspect that our remediation is coming off the tracks, we will then have to slow down the supply release. So we are, again, expecting a slow, steady increase out of Rocky Mount so we've not made any dramatic assumptions about some dramatic recovery. We also have to figure out really what the top end of Rocky's production capabilities are. We gave you the 60% to 70% range last year as sort of a yardstick to give you an idea. Are we moving up or down in that particular range or away from it? But we still have to assess, when Rocky is fully healthy, exactly what we can release out of that plant. And I think the FDA inspection will probably give us a few hints around that although not the total picture as we move forward.

Sumant Ramachandra

The only other thing I would add is hopefully from the end of 2014 onwards, for the next 12 to 24 months, Vizag will be ramping up, which will also pick up, obviously, additional supply and capacity to our system.

F. Michael Ball

And I think also, Chris, as it pertains to the Investor Day I mentioned, when we get to Investor Day, I think we will have a better idea then of the cadence in terms of what we would commit to in top line growth.

Operator

Your next question is from the line of Ronny Gal with Sanford Bernstein.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

1.5 questions, if you don't mind. First, I'm, like the rest of the gang, kind of struggling with the projections for revenue in 2014. If you just take the fourth quarter and you analyze it -- annualize it, you end up about $200 million higher in your projection. Perhaps it's a matter of a mix between the quarters. Maybe we can narrow it down to SIP. Maybe perhaps you can give us an idea how quickly you expect SIP to be growing constant currency. And second, regarding the biosimilar project. One thing we're hearing from other companies is the large level of investment you need to do to get the monoclonal antibodies past the FDA. If you kind of think to your -- towards your clinical trials for the 2 monoclonal antibodies you're currently developing on your own, can you give us an idea what will be the incremental R&D that we could expect and roughly when should we see it?

Thomas E. Werner

Ronny, it's Tom. I'll try to take the sales one and then the others here can take on the biosimilars. If you take the fourth quarter and annualize it, that's one way you could look at things but I just want to highlight some of the things that happened in the fourth quarter that won't continue to happen or occur in the first quarter. As I mentioned, we were clearing backorders down in the fourth quarter and we think that, that was sort of a onetime event. There could be some additional clearing of those backorders post the inspection in Rocky Mount but not in the first quarter. The other thing is that, if you look at the levels of docetaxel and oxaliplatin in the fourth quarter, pricing is going to come down faster than volume is going to go up. So that's going to be a headwind. We also had a very strong end of the year with Plum. And we did have Symbiq on the market for a portion of the quarter and that won't be the case in the first quarter. And then finally, we had some timing issues on contract manufacturing orders that moved from quarter-to-quarter. So on that basis, I wouldn't say the fourth quarter is a good proxy for what the first quarter would entail. But once we get through the first quarter, which has traditionally always been our softest quarter and supply becomes a little bit more available post a, hopefully, good inspection outcome at Rocky Mount, you'll start to see sales come back up. In terms of specific to SIP, I've got to dig through what I have here and see if I can give you any color on that or do that on a follow-up call later. Then with respect to the biosimilars, just the overall comment is I think we said, depending on the complexity, we'd spend $100 million to $200 million per drug, but I think Mike and Sumant can probably add some color on that better than can I.

Sumant Ramachandra

Ronny, this is Sumant. We have seen on our trials and our discussions with the FDA and looking at their draft guidance documents, and obviously, they released a more recent draft guidance document on immunogenicity, that we believe that the range is still in the $100 million to $200 million range. A lot of it will depend on a few factors, Ronny. You can examine those documents, too. But the amount of characterization that you do with a particular molecule becomes very, very important in terms of the size of the clinical trial that you have to do. The better you characterize it, the more similar you have it from a quality perspective. You probably do not have to do as large of a specific trial. And then, of course, what impacts the trial is actually the type of endpoints and the population you're going to be studying it in. So our discussions with the agency have been very consistent for that. It still drives us to the range of $100 million to $200 million per molecule. And in terms of our 2 internal monoclonal antibodies, while we are developing them internally, we always do have the option because they do overlap with our partner, Celltrion. If their programs ahead of ours are more advanced, we could always opt to go that way. So those are the options that we have on the table in terms of both biologic development, as well as monoclonal antibody within biologics development.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

So just, Sumant, versus your spend today, I mean, if you actually were to decide to take those through to the clinic somewhere between 2014 and 2016, we should see extra $200 million of R&D expenses to take those to the clinic?

Sumant Ramachandra

Over several years.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Yes, so essentially 3 years, 3 years. Assumption of 3 years to clinical trials time between '14 and '16.

Sumant Ramachandra

Yes, so it's about 3 to 4 years of clinical trials, including Phase I and the pivotal stage trial and each of the programs. So it will be about 3 to 4 years of trial. That's what we're seeing with EPO, for example.

Operator

Your next question comes from the line of Ami Fadia with UBS.

Ami Fadia - UBS Investment Bank, Research Division

Could you give us a better sense of what assumptions you've put in within the midpoint and the high end of your guidance range with respect to production levels of Rocky Mount and also give us a sense of -- any specifics with respect to new product launches and what you expect for Remicade in EMEA?

Thomas E. Werner

Yes, it's Tom, Ami. In terms of the guidance, the upper and lower end, we're not going to quote any specific output numbers out of Rocky. We've been reconfiguring lines down there and making some changes, so I think the 60% to 70% number is becoming less relevant to us. And I think the way I'd sort of generalize it is just to say at the upper end of the range, we see that we can take those production levels up beyond where they are. At the lower end, they sort of stay where they're at, the production levels, and as Mike said, we wouldn't want to sacrifice anything related to remediation or quality improvement just to increase the output. But that is one of the bigger swing factors there. And in fact, it's the swing factor in the guidance that we have.

Sumant Ramachandra

In regards to Remicade or infliximab and our development program that we're doing with Celltrion, I think there's a few factors you have to consider. First of all, this is obviously a very large molecule in Europe right now and used primarily in inflammatory bowel disease and rheumatoid arthritis and psoriasis. So a lot of it will depend on, first of all, the current review process and how long that will take. This will be the first monoclonal antibody going through the EMA review process. And just to kind of set a benchmark, Hospira actually got the fastest review clock with G-CSF, our filgrastim program, at 14 months. So it could be around 14, it could be longer than 14. Most programs in the EMA have been longer than that. So we'll get approval in Europe, then across Europe, then we have to make a decision of reimbursement. So to file for reimbursement and that can take weeks to over a year, depending on the country. And then we launch based on the intellectual property status in each of the countries. And that's important to note because if you look at the map of Europe and where the patents start expiring, it starts probably in the Eastern European side and moves towards the West, and of course, the higher market values are in the West. So this will be a multiyear process in terms of launch. And of course, as I mentioned, getting the indications, whether we get 1 or 2 or 3 indications depending on this concept. The extrapolation based on the primary data we submitted also will impact in terms of revenue. So there's a lot of variables here and we are closely working with both Celltrion and the European Medicines Agency on this particular project.

Operator

Your next question comes from the line of David Buck with Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

Question on quality and I'll try to keep it quick. Just in terms of the penalty that you're seeing in gross margin, for Tom, from quality so far in pharma, any sense of what we might be seeing in terms of additional expenses from medical device remediation? Can you give a range of what's sort of in there and the gross margin guidance for this year? And then secondly, Janet Woodcock recently has been proposing a new quality system, sort of a rating system, for companies. And essentially, the view is that the payers don't pay for quality and would be interested, Mike, on your thoughts on whether that's a feasible program and what the support level for that might be.

Thomas E. Werner

David, I'll take the first one, it's Tom. In terms of the quality impact, I think what we've been saying is that if you go back to when margins were in the low 40s, that there's been a 300 to 400 basis point impact related to higher manufacturing costs and higher quality costs. The other factor, to sort of connect the historic margins with today's, was just the pricing we saw on oxaliplatin in that time period also buoyed margins up quite substantially. In terms of remediation assumptions, most of the expenses related to device remediation are assumed to be treated as onetime and therefore are generally not affecting the guidance. And then the Janet Woodcock, that's probably for Mike or Sumant.

F. Michael Ball

Right. So maybe I'll just go after it. There's a number of different plans being put forward around how to alleviate drug shortage. We're being open minded, honestly, about all of them and having a look at what we think would work in the marketplace. So the plan that Dr. Woodcock put out, we're evaluating it at this point to see if, in fact, it could lead to some alleviation of the drug shortage issue. But again, we're looking at a number of other things, including a G [ph] pharma initiative around the same thing. So we continue to work forward. From our standpoint, what we can do most aggressively in the short term to assure drug supply is ensure that we are doing everything we can on the remediation front so that our plants get back to full capacity and we're able to supply these much needed drugs. So that's what we're focused on. I want to just also go back to the gross margin question, too, because I've talked about this a couple of times. Really, if you think and just step back from the table on gross margin, we have not been focused on really anything other than remediation and supply in our plants. After we get those sorts of things done, then we'll be looking at efficiency. So I can tell you in 2012, we've not been putting lean programs in. We've not been asking people to be more efficient. What we've asked them to do is spend to get the remediation right. And even if it costs incremental money to release drugs, even with the expense of consultants, in order to get supply back in shape, we have done that. Also, I want to emphasize the point around devices. The device inspection that we had here in Lake Forest over the last couple of weeks was particularly rough. I'm not -- I'm disappointed, I'll tell you, at the outcome. What it indicates, which isn't a big surprise to us, is we've got a lot of work to do there. And we're attacking it in both ways, which is backward-looking, which is cleaning up past practices, which really talks to quality systems, but also looking forward, which we mentioned on the call, which is not only remediation but the modernization and streamlining of the device business. And this is why we deliberately said the cost to do all of that could very well be significant but we need to work through the agency. So this is something that I just want to bring to everybody's attention because we will be talking more and more about that, I'm sure, as we progress through the year.

Operator

And your final question comes from the line of Jayson Bedford with Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Two questions that require very short answers. How long will the Rocky Mount inspection last? Meaning, when do you expect it to be complete? And then two, when do you expect to finalize the device review?

F. Michael Ball

So on the first question, Jason, typically, these things last a number of weeks or a month or even more than that. So this is a particularly big plant, so we'll just have to wait and see. And a lot of times, they'll come in and, with really no set time line, they just basically will take the time that it requires to get through the plant. There's 5 inspectors in there so they should be working not very vigorously and expeditiously on it. But again, we will get back to you once it's completed with what the outcome of it is. And with respect to the second question...

Karen King

The timing of the MMS strategy.

F. Michael Ball

The timing of the MMS strategy, thank you. So with respect to that, we are just finalizing the plans now. We need to go to the FDA to review the MMS strategy with them. Again, getting in to see the FDA and getting concurrence around a plan can take a period of time, and we will update you on the first quarter call as to where we are on that.

Karen King

Thank you, everyone. That will wrap up our call today. Again, we really appreciate you sticking to the one question that allowed everybody to ask one, and have a great day.

F. Michael Ball

Thank you.

Operator

This concludes Hospira's Fourth Quarter Conference Call. You may now disconnect.

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