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Hospira, Inc. (NYSE:HSP)

Barclays Global Healthcare Conference

March 13, 2013 8:00 am ET

Executives

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

Analysts

Matthew Taylor - Barclays Capital, Research Division

Matthew Taylor - Barclays Capital, Research Division

Good morning, and thanks for joining us for day 2 of the Barclays conference. We're really pleased to have Hospira joining us this morning. We have CEO, Mike Ball, and also Karen King out of Investor Relations. So try to hear some opening comments from Mike, and then we're going to do a session of Q&A.

So Hospira has been working through some manufacturing issues, but it's the world leader in injectables. They also have a robust pipeline where they're working on registering a number of their injectable products in countries worldwide, and moving into new geographies, and have a key biosimilar pipeline. They're looking forward to commercializing over the next couple of years, both through internal programs and an agreement through Celltrion. So a number of good things going on the pipeline. And with that, Mike, do you want to come up and...

F. Michael Ball

Great. Thanks, Matt. So as Matt said, I'll give a brief intro. Thanks, everybody, for coming inside from the heat to be with us today. The ocean is nice, but it's nothing compared to Lake Michigan, obviously. So what I want to cover off then is just a brief review of Hospira. As Matt said, we are the leading drug injectable and infusion technology company in the world. If you look at our businesses, it's split, about 75% is our SIP or Specialty Injectable Pharmaceutical business, and about a quarter is our Medication Management Systems. The SIP business is comprised of 3 business segments: the generic injectables, proprietary and biosimilar segments. We have about the broadest portfolio in the world, around 200 molecules, and as I said before, we are the world's leader there.

In terms of Medication Management, if you look at our market share in the United States for large infusion pumps, we sit at about 25% of the marketplace. So again, one of the world leaders and certainly a leader as it pertains to the United States.

Turning to the key initiatives of the company. So really, there's 2 of them. The first one is about reinforcing the foundation, and this really talks to then operational excellence within the company. And in that, we're investing significant funds, really to do 2 -- 3 things. One is to invest, to ensure compliance to the heightened regulatory standards of today. Two is to modernize our facilities, but also expand capacity, and that's around the world. Say for example, our new Vizag facility that we're building on a greenfield site in India, the 1.2 million square foot injectable pharmaceutical facility. And then three, we're investing in the right people. I strongly believe that leadership is critical to the success of any endeavor, and to that end then, we have brought in, in 2012, a new head of operations, a new head of quality, a new head of regulatory, a new chief medical officer. Of the 5 plants in the United States, all 5 have new plant managers in them. And if you look at the people reporting into those plant managers within the plants, about 60% of them are also new to the organization. So we have brought in a lot of new talent and capabilities into this organization to ensure that we achieve operational excellence.

The other side, the other priority is to invest for the future. And I'll just talk briefly about 2 key initiatives there. One is global expansion. If you really step back and look at Hospira, 80% of our sales are in North -- are in the Americas. And so from that standpoint, there's a whole globe out there that we can further penetrate. Although we sell in 90 countries around the world, we have a subscale operation outside the U.S., Canada and Australia. And therein lies a huge, I think, multibillion opportunity. Another big opportunity for us, as Matt mentioned, within the area of biosimilars. So biologics are a huge market. Globally, they're worth over $100 billion. Biologics are coming off the patent by mid-decade, some $50 billion of biologics will be off of patent. We are 1 of the top 3 companies in the so-called biosimilar area right now. And we are investing in what I think is a great pipeline of biosimilar drugs. So from these 2 key initiatives added on top of our already robust generic pipeline, I think we have really an outstanding growth profile.

So the net-net on the company is, invest heavily to reinforce our foundation, get this behind us as fast as possible so that we can take maximum opportunities of the growth opportunities in front of us. If you look at our fundamentals, essentially, we are in markets that are growing and will continue to grow, especially if you look at the aging population and the world's demand for more affordable health care. We are in a great market position. If look at us, we're leaders and substantial leaders in many of the markets, world leaders. And the barriers of entry into this marketplace continue to increase. And we've got some great opportunities out there, multibillion opportunities. We have global expansion and biosimilars, just to name a couple of them. And so with that, I believe that the company has a great future, and we will strive to do everything we can to get to that future as soon as possible.

So with that, Matt, I will join you.

Question-and-Answer Session

Matthew Taylor - Barclays Capital, Research Division

Sure, exactly. Please have a seat on our smurf captain chair here. So let's start a couple of questions. Can maybe give us an update on the remediation first. Last week, there was a -- 483 was on observation at Rocky Mount. Can you talk about how that compares to your expectations, and so what some of the next steps with the FDA will be around that?

F. Michael Ball

Sure. Well, if we look at the 483 and Rocky Mount, so the FDA comes in and does an inspection at a given point in time. So the given point in time, in this case, is in the February time frame. So from a remediation journey standpoint, we had done a lot of work, but we also know that we've got a lot of work in front of us to do in Rocky Mount. So the fact that they came in and had 483 observations is not a big surprise. What we said success looked like, though, was success would be measured by how much progress they said we made. Did we live up to our commitments? Do our plans look right as we move forward? Have we struck the right balance between remediation and supply? And those are things that we will be talking to the agency about, because a 483 is simply a negative document about what issues they found in the plant. It doesn't talk from a holistic standpoint about those other things that we have talked about. So it's simply one part of the puzzle. So as we go through the next several weeks, or maybe a couple of months, we will be discussing with the agency to get their perspectives on what exactly did they see on these other items as well. I should say, too, in terms of the observations, many of these were things that we had already self-identified, that we already had plans against or we're in the middle of finalizing the fixes for them. But of course, inspectors can't consider that. They're in there at a point in time to observe what is going on right now at this moment. The fact that you may be finished with that observation in a week or so is nice, but it's not relevant to them at that point. But that's what's relevant to the agency, and those again, are the types of discussions that we'll be having. There is a response due to do them in 15 business days, so that is approximately then, at the end of March. But we will be continuing to dialogue with them as we move forward.

Matthew Taylor - Barclays Capital, Research Division

I guess on the Rocky Mount section, what were you happy with and what weren't you happy with in terms of the result in the 483?

F. Michael Ball

So again, when you look at the 483, it's 20-observation 483, it's a very complicated document. So we have 2 sets of people, our external consultants and also our employees reviewing that right now, and doing their expert analysis on what exactly it says. So again, as we analyze it, we'll be talking about the analysis to the FDA and see if our analysis is correct or not. But again, on the face of it, I think many of the things that are things that we have addressed. But again, there are other things that we're going to have to talk to the FDA about and get their take on them.

Matthew Taylor - Barclays Capital, Research Division

Okay. I think we're going to start out with a audience question. So we had some audience feedback. If you weren't in the room yesterday, these green, blinking things in front of you are hand-held devices where you can input your answers. So our first question is, how long do you, the audience, think that we may experience lower production levels in Rocky Mount due to some of these issues? And Hospira issued guidance per share as -- since pulled out as they're discussing things with the FDA. So the answers here are: should begin soon, ramp by end of '13, first half '14, second half '14 or 2015.

[Voting]

Matthew Taylor - Barclays Capital, Research Division

So it seems like the audience thinks like, this may take a little while to resolve and maybe hard for you to answer that given that you need to discuss things with the FDA before you can move forward. But maybe do you want to talk about the balance that you're striking now. And how you think that's been appropriate given what the FDA has asked of you so far and how you're approaching things in this period before you're talking to FDA again?

F. Michael Ball

Yes, so from our standpoint then, as I've mentioned on a couple of the calls, we've been increasingly ramping up our production slowly. And again, what I've consistently said is, that if the supply situation, that is increasing supply, interferes with remediation, we will go the remediation route and back off of supply. Right now, our game plan is essentially to continue with the rate of supply we have and incrementally increase it. Now we have to talk to the FDA about the inspection that we had and see if there's any reason to modify that at all. Perhaps, we don't have to modify it all, perhaps there are just slight fine-tuning associated with it. But again, we have to talk to the FDA and see exactly where they net out on that. So with respect to this chart, I mean, it is tough to comment on. Our intent, as I've said, is to continue to ramp through 2013 and also continue to remediate as we go through 2013. So we're doing both things.

Matthew Taylor - Barclays Capital, Research Division

Moving aside from Rocky Mount, can you give us an update on some of the other plants that you have out there? And talk about any progress or inspections that you've had at Austin or McPherson or other places?

F. Michael Ball

Sure. So starting with Clayton then, so Clayton is one of these things where we're in the remediation situation. And primarily, Clayton manufacturers propofol. It became evident to us that we could not ensure that propofol could be continuously produced at a high-quality level, and therefore, we essentially shut the plant down, made some significant modifications to Clayton, and then brought the plant up at the end of the fourth quarter. So we're now producing in Clayton and moving propofol out of the plant. So that's the Clayton facility, and I think, so we're doing reasonably well there. As it concerns McPherson, the plant had a few FDA inspections last year, I think did reasonably did well on those FDA inspections. We still have some remediation to do there, but I feel very good about the McPherson facility, and it's up and running at pretty much full speed. As it pertains to Austin, it was one of the plants that we identified that we needed to introduce third-party oversight into. And this is ahead of the FDA's inspection last year. In fact, the FDA inspector showed up on the same day that our oversight consultants arrived at the facility. So again, it was in the process of being remediated. The 483 was not a big surprise in that particular plant. We are continuing to remediate with the plant and having dialogue with the FDA concerning the Austin facility. But again, I believe we're making good progress there. So overall, we're making good progress moving forward.

Matthew Taylor - Barclays Capital, Research Division

Okay, and maybe switching topics a little bit. Can you talk about the pump import ban letter that you received? And maybe, in that context, I know you're working on some MMS remediation plans as well that you were going to discuss with the agencies. So can you give us some color around that situation, and what the next steps are, and what that could mean for your pump business this year?

F. Michael Ball

Okay, so as we look at the MMS business, just to ground everybody, we had agreed with the agency back in 2010 to do a 2-year retrospective comprehensive review of our devices. And that was coming to completion around the third quarter of 2012. So we alerted the agency to a number of the things that we had found, both issues, but also opportunities for improvements with the pumps and notify them that we would, which we need to do, send out notifications both to them and to customers relative to the fixes that we would be going forward with. At about a similar time, we've been coming up with a strategy, which I talked about in the first quarter and actually on the fourth quarter call, about streamlining and modernizing our pumps. We have many different platforms out there, many different versions. And our view is that we need to simplify these group of pumps in order to, I think, get the best quality outcome for those pumps, make it -- make them more serviceable, that is remediation-friendly, if you will. And I also think from a cost standpoint, it makes a lot more sense. We focused down on a few pumps rather than the huge number of pumps we have, as I said, and legacy pumps out there. So we already had a game plan in place to streamline and modernize our pump family. At the same time, or shortly thereafter, the import ban came on our pumps, I think the agency saw all the field corrective actions that were going out, which again, we knew what happened because by necessity, to move your pumps into the fixing stage, you have to do that. So from my standpoint then, this import ban doesn't change the big picture on our pumps. We have, I think, a very good game plan going forward. We have to meet with the FDA, describe this plan to them, and get their buy-in. So although the import ban is certainly unpleasant over the short term, from a long-term perspective, I don't think it really changes our game plan. I should also say that, from our standpoint, moving share in this market is a long process, it does not doesn't happen overnight. So although 2013, as we mentioned, will cost us some sales, over the long haul, I don't think this is a significant detour for us.

Matthew Taylor - Barclays Capital, Research Division

I guess, looking forward on the plant side, can you talk a little bit about the Vizag plant that you're building in India and how that provides additional capabilities for production? And so what the process is to move product to there and when we should expect that to come online?

F. Michael Ball

Okay, so we're building probably what will be the world's largest injectable drug facility in Vizag, India. So it's a greenfield start. It's a 1.2 million square foot facility producing hundreds of millions of units. Essentially, what it will do then is greatly expand our capacity as a company, but also do it in a state-of-the-art facility. And so as we look at global expansion moving forward, I mentioned this whole notion of getting other products registered around the world, as those products are coming online, so too, are we anticipating Vizag coming online towards the back end of 2014, and I think really starting to get traction in 2015. So from my standpoint then, if you look at it, state-of-the-art facility, large facility in India, looking to backward integrate into API, so we will have a very holistic manufacturing situation coming out of India, which I think talks a great deal about our competitiveness as we go forward.

Matthew Taylor - Barclays Capital, Research Division

I think this is a question, I mean, I know the answer to, but how does the remediation in the U.S. impact the ability to bring products online and in Vizag? Is that a separate process?

F. Michael Ball

So it's very much a separate process. But kind of the good news is, as we've been going through these discussions with the FDA, we've been taking all of our learnings there and applying them to Vizag. So in terms of equipment, in terms of what we're agreeing with the FDA needs to be done in some of our plants there, we're just immediately applying it to the Vizag facility. So what I want when it comes online is something that I know is state-of-the-art and right in the bull's-eye of what the FDA wants, and that's basically what we're trying to do. But the current inspections, et cetera, that are going on won't delay our Vizag movement.

Matthew Taylor - Barclays Capital, Research Division

These all kind of feed into our next audience question. Can we go to that question? I want to talk about gross margins. So the question is, what is your expectation perhaps of Hospira's gross margin in '15 to '16. So the midpoint of the old '13 guidance was 36%. You have a number of choices up here.

[Voting]

Matthew Taylor - Barclays Capital, Research Division

So kind of a widespread. I mean, maybe there's just some uncertainty here with the current dealings with the FDA. I don't know if you want to talk a little bit about your plans longer term to improve gross margins. Vizag's certainly a key component of that.

F. Michael Ball

Yes. So again, if you step back and look at exactly what we're doing here, as you correctly indicated, we're in the mid-30s in terms of gross margin. But actually, in the past 18 months, nobody has used the E word, efficiency, around the plants. We have used the word remediation that, that is the #1 priority. And the #2 priority is to get supply out almost no matter what the cost. Because our view is, as I said, we need to get remediation behind us, both in terms of our own well-being, but also from an FDA standpoint and other regulatory bodies around the world. So we can't confuse plants by saying to them, one hand, you've got to do everything you can to be efficient, while doing everything you can to remediate. So what we've chosen to focus down on remediation and spend whatever it takes to get that remediation done. And then on supply, because obviously, there's a drug shortage crisis in this country, we're trying to get supply out the door again to address drug shortage, but also our market share situation. And so, the instructions to plants are: to the extent it doesn't interfere dramatically with remediation, get supply out at almost no matter what the cost. So if we have to have lots more processes, et cetera, to get product out, very expensive people to help us get product out, we are doing that. So it's not like we're trying right now to be efficient. We're trying to get remediated and get supply out. As the remediation finishes, then we can start turning our attention then to efficiency. And as a consequence of remediation, we think efficiencies will come naturally. For example, things like first pass quality. So a first pass quality, that is the number of batches you put through without an issue. If that goes up, then there's a lot less cost at the end of the production cycle for running around trying to do exception reports, et cetera. So I do believe at the beginning, quality costs money, but at the end of the day, building quality into your processes will result in a more efficient outcome. That's number one. Number two, as we identified, we're also looking at not only modernizing our plants but building the added capacity with something like Vizag. So obviously, built in India with cost of goods in mind, state-of-the-art plant. As I said, we're making some moves in terms of backward integration into API. So from our standpoint, we should be very good from a cost of goods standpoint as we're buying API and getting it, either ourselves or from the best suppliers in the world, putting it through the India plant, and then selling it out the door. Obviously, there are some other components, too, and one would be pricing. The regulatory bodies around the world have upped the standards. We have to pay for those increases in quality, and we will be passing through some of this to our customers to ensure that the product that we're producing reflects the value to them. Ultimately, we are still a great value producer to customers, but our products must reflect the appropriate pricing so that we, again, can do the appropriate things. So from my standpoint, there is a number of things that we are doing that are moving or will cause gross margin to move forward. I have said before that if you look at our gross margin being in the mid-30s and our peer competitors being in the mid-40s, one would think that there should be something that we can do to move our gross margins up the line. I'm not necessarily saying to that level, but what I am saying is, there's probably more pressure, positive pressure, to move those margins up than for them to stay the same or go down.

Matthew Taylor - Barclays Capital, Research Division

And I know you said, you're going to update guidance on the first quarter call. Can you talk at all about 2013 expectations in terms of the biggest variables now that would move the needle one way or the other? And how you might expect revenue and earnings to ramp throughout the year?

F. Michael Ball

Yes, I think if you cut through everything, there's obviously things at the edges. It basically comes down to Rocky Mount and the supply situation out of Rocky Mount. So from my standpoint, if the game plan, we agree with the agency, is essentially to continue to release supply, make sure we have the remediation priorities agreed with between us and the agency, but continue to ramp up supply. That's a big driver. Obviously, if the supply is fine-tuned somewhat, that could have a minor impact. If it's majorly impacted, then that could have a major impact. So that's what we are working through right now.

Matthew Taylor - Barclays Capital, Research Division

Great. Well, thanks a lot for your time. We're going to have a breakout in Poinciana 4, if you want to join us.

F. Michael Ball

All right, thank you.

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