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Hospira (NYSE:HSP)

Q2 2013 Earnings Call

July 31, 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 - Former Chief Scientific Officer and Senior Vice President of Research & Development & Medical Regulatory Affairs

Analysts

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

Steve Beuchaw - Morgan Stanley, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

Ami Fadia - UBS Investment Bank, Research Division

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

Jason M. Gerberry - Leerink Swann LLC, Research Division

David G. Buck - The Buckingham Research Group Incorporated

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

Operator

Hello, and welcome to Hospira's Second Quarter 2013 Earnings Call. [Operator Instructions] I would now like to turn the call over to Karen King, Corporate Vice President of Investor Relations.

Karen, you may 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 second quarter of 2013. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; and Tom Werner, Senior Vice President, Finance, and Chief Financial Officer. Also joining us is 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-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.

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 available on the Presentations page in the Investor Relations section of our website.

As usual, we have posted a set of complementary materials that summarize the points of today's call. 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]

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

F. Michael Ball

Hi, everyone. Welcome to our second quarter 2013 conference call. I will begin today's call by providing quarterly highlights and an update on our quality improvement efforts, followed by a discussion of our second quarter sales results, which were in line with our expectations and those of the Street. Tom will then give some more color on the financials, and I will wrap up the call with some closing comments.

We had some exciting milestones this quarter. We were very pleased in late June to receive a positive opinion from the EMA's Committee for Medicinal Products for Human Products, or CHMP, recommending the European Commission approval of our biosimilar, INFLECTRA, for all indications of the drug. INFLECTRA, just to remind you, is our branded infliximab. The brand, Remicade, had sales in Europe of over $2 billion in 2012.

This development represents a major milestone for biosimilars in general as it is the first monoclonal antibody to receive a positive opinion from the EMA, which we view as confirmation that INFLECTRA meets the EMA's very rigorous quality, safety and efficacy requirements. We look forward to the next step in the process, the marketing authorization review by the European Commission, which we expect to be completed in the next couple of months.

We are excited by the advances we are making in biosimilars, which will continue to be a key growth driver for us going forward.

Precedex, our proprietary sedation agent, delivered another great quarter as well. In addition to continued strong customer demand for our vial presentation globally, during the quarter, we began the transition of our new premix versions in the U.S. and have been pleased with the initial customer response. Customers have readily embraced the benefits and value these ready-to-use products provide for pharmacists and patient care.

The quarter also bought positive news for Precedex in Japan where we received approval for an additional procedural use indication. The new indication allows for sedation of non-intubated patients undergoing surgery or other procedures under local anesthesia. This is a great development for Precedex's second-largest market.

We also launched the oncolytic, epirubicin, in Japan during the quarter with Mochida Pharmaceuticals, our co-promotion partner.

We continue to advance our global expansion program and are well on our way with nearly 140 new-to-country submissions since the beginning of the program in early 2012, putting us on track to reach our goal of a cumulative total of 200 by the end of 2013.

And in keeping with our current project execution timeline, the first product demonstration batches were successfully completed at our new Vizag facility. Demonstration batches are not planned for commercial release, but are very important to the progress of the facility as the data from these batches will be used to support our first FDA regulatory filing.

Moving to our quality improvement initiatives and recent inspection activity. Early in the quarter, the agency inspected our Boulder API facility, which resulted in a 483 with 2 observations. We have responded to the FDA with our action plan to address those observations.

Mid-quarter, we filed 2 8-Ks regarding warning letters we received from the FDA on our device quality system site in Lake Forest and on our IKKT pharma facility in India. We have submitted our action plans addressing the comments in both letters to the agency and are now working through the commitments in those plans. For IKKT, the FDA recently sent us a letter that they agree with our proposed corrective actions and that the actions should adequately address the violations at issue if implemented appropriately. They also indicated that we should advise them when we have implemented all the corrective actions and request a follow-up inspection.

Late in the quarter, the agency inspected our Clayton facility, which resulted in no observations. Last week, the agency inspected our San Diego device software facility, which resulted in no observations.

Regarding Rocky Mount, we continue to make good progress at the facility. We are seeing improvements in many of our metrics. Our release levels are improving, our backlog levels have declined and our customer service levels are increasing. One of our automated visual inspection lines is up and running and our new lab will be operational over the next few months.

Regarding other device actions. Earlier this month, the National Standards Authority of Ireland, or NSAI, performed an audit of our Lake Forest site, which, as a reminder, houses the company's quality system for devices but does not manufacture any device products. NSAI recently issued an audit report that cites 3 major nonconformities and did not close out the nonconformities that remained open from previous audits of our device operations. NSAI advised us that the current suspension of the ISO certifications will not be lifted, and they indicated that their current intent is to withdraw the ISO certifications for our Lake Forest and Costa Rica sites, which would also negate the CE Mark product certifications for our device products.

NSAI has not yet finalized their decision to withdraw ISO certifications and has advised us that any withdrawal would take effect on a prospective basis within 30 to 90 days of the official action. For reference, NSAI is a notified body that issues CE Mark certificates for product in Europe and Australia. They also issue ISO certificates for our Costa Rica and Lake Forest sites that are leveraged by many x U.S. regulatory authorities.

Now these actions could potentially impact sales of our infusion pumps and related consumables in many countries outside the United States. To gain clarity, we will be continuing conversations with the NSAI to attempt to develop a path forward that recognizes the critical nature of the infusion pump and related disposables to patient care.

Relative to our device strategy overall, we have been communicating the details of our new device strategy to our customers during the quarter. While it is still early on, we believe our customers understand the strategy and many appreciate our commitment to a more focused portfolio approach. We have increased our level of communication to ensure that our customers are informed as we advance the strategy, and our goal remains to retain the majority of our installed base.

In the U.S., we will begin to transition customers in the upcoming quarters over to our streamlined portfolio of remediated devices. In the majority of the countries outside of the U.S., resolution of the ISO and CE Mark certifications will be required before we are able to move forward with implementing our remediation plans.

Turning now to our net sales results for the quarter. As a reminder, all references to net sales results are 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 down slightly compared to the second quarter of 2012. As expected, strong pricing and volume gains in Specialty Injectables products were offset by a decrease in Medication Management sales. By product line, global Specialty Injectable net sales increased 7% for the quarter.

In the Americas, Specialty Injectable sales were up 10% for the second quarter. The increase related to several factors: First, Precedex, our proprietary sedation agent. As I mentioned in my opening remarks, Precedex continued to perform well in the quarter. Wholesaler inventories were up as we began the transition in the U.S. of our new Precedex premix versions in April and initial customer response has been positive.

Second, price. We continued to benefit from the price increases we initiated on many of the undervalued molecules in our portfolio.

Third, supply recovery. As I mentioned in my earlier remarks, we made steady improvement at Rocky Mount in improving release levels and bringing additional supply to the market. In addition, we continued to ramp up our supply of propofol and saw progress with our ADD-Vantage format of generic Zosyn.

And finally, oxaliplatin. We saw strong contributions from this oncolytic drug, which we relaunched in the third quarter of 2012.

The gains from these positive factors were partially offset by expected year-over-year declines in docetaxel.

Turning now to the EMEA segment. Net sales of Specialty Injectables were down 2% compared with the second quarter of 2012. Strong performance in our on-market biosimilars, Retacrit and Nivestim, were more than offset by continued erosion in core oncology molecules and certain anti-infectives such as meropenem.

In APAC, net sales of Specialty Injectables increased 1% in the quarter, driven in large part by continued positive performance of Precedex in both Japan and Korea.

Turning now to Medication Management. Global net sales decreased 16% during the second quarter. This was primarily a result of placing most of our devices on ship-hold due to actions by various regulatory authorities. The one exception is Sapphire. We have exclusive rights to market and dispute this infusion device in more than 60 key markets across Europe, Asia and the Americas. We are in the early stages of selling Sapphire into various European countries and initial customer reaction has been quite favorable. We are awaiting approval for Sapphire in the United States.

Net sales in our other pharma product line were down 8% in the second quarter compared to the prior year quarter. This primarily relates to lower demand from certain contract manufacturing customers due to the genericization of certain products, as well as volume declines in solutions. We have begun increasing prices on our IV solutions to ensure their long-term sustainability and to better reflect the cost of the manufacturing and the value of our product. As a result, we have seen some volume declines, but they have been accompanied by overall improvements to the profile of this traditionally low-margin business.

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. I'm going to briefly walk you through the income statement and touch on cash flow and then guidance for the rest of the year.

As Mike mentioned, sales were down slightly compared to the second quarter of last year. Adjusted gross margin as a percent of sales in the quarter was 37.9%, up from 36.4% in the second quarter of 2012. This, due to favorable price and product mix during the quarter.

Research and development expense decreased 11% in the second quarter to $74 million, primarily as a result of the timing of spending on clinical trials. Research and development as a percentage of net sales was 7% compared to 8% in the second quarter of last year.

SG&A expense for the second quarter was $189 million, up 11% from the $170 million for the same period last year. This increase is primarily associated with our China expansion, Precedex-related incentives and intellectual property litigation costs.

Adjusted operating income was $126 million compared to $117 million in the second quarter last year. Adjusted operating margin was 12% compared to 11% in last year's second quarter. The adjusted tax rate in the quarter was 17% versus 19% last year. The rate last year did not include the benefit of various U.S. tax extender provisions that were enacted in 2013.

And finally, adjusted diluted earnings per share for the second quarter were $0.55 compared to $0.51 for the same period last year.

Turning to cash flow. Cash flow from operations for the 6 months ended June 30 was $51 million compared to $216 million for the same period in 2012. This decrease primarily reflects higher working capital investments related to some strategic inventory builds, as well as the timing of collections on receivables.

Capital spending for the first 6 months of 2013 was $153 million, up from $137 million for the same period last year. The increase was primarily due to additional spend for information technology projects.

Our cash balance at June 30 was $683 million, down from $772 million at the end of last year.

Regarding our debt, $400 million of our senior notes that come due in June of 2014 moved to short-term borrowings on our balance sheet this quarter. In July, we entered into $550 million worth of forward interest rate swaps to hedge against potential interest rate variability in consideration of refinancing both our 2014 and 2015 debt maturities.

Finally, turning to guidance. With the exception of lowering our capital spending projections, we are maintaining the other guidance we provided on our first quarter call on May 1.

Capital spending, we are lowering our estimate by $75 million to $350 million to $400 million, primarily as a result of the timing of spending related both to the modernization of our facilities, as well as the Vizag construction.

In terms of quarterly earnings per share calendarization. If you recall, the third quarter has traditionally been our softest quarter due to our summer maintenance shutdowns. Although the shutdowns went well, some did go longer than usual to address remediation actions. So margins will be down on a sequential basis due to both the maintenance shutdowns and less favorable product mix, which we anticipated, versus the second quarter. Research and development should be relatively flat with the quarterly trend we're seeing in the first half of the year. And we expect SG&A, while up from last year, to be flat to slightly down from the absolute levels we've seen in the first half of this year. As a result, we expect the third quarter earnings per share to be similar or slightly down versus the third quarter of 2012.

With that, I'll turn the call back to Mike for some final wrap-up comments.

F. Michael Ball

Thanks, Tom. In balance, the second quarter was a good quarter for us. Sales were in line with our projections with margins and earnings slightly above our expectations. And we made a lot of progress during the quarter. We are excited by the advances we are making in biosimilars, and we're very pleased with CHMP's milestone opinion on INFLECTRA, which we believe underscores the strength of our biosimilar program. We were also pleased with the positive customer response to our new Precedex premix presentations in the U.S. And we continue to make progress in supply recovery while advancing our quality improvement initiatives.

As I've said many times, reinforcing our foundation and driving quality improvements is our #1 priority. We are on the road to recovery, but the journey is not over yet. On the pharma side of the house, we are making good progress and starting to see more of the roadblocks in our rearview mirror. On the device side, we still have work to do and have enhanced our communication to regulatory bodies around the globe.

We will continue to drive forward and engage in constructive dialogue to ensure we are meeting the expectations of our customers and the various agencies.

We are diligently focused on execution. Execution in reinforcing our foundation, execution in rolling out our new device strategy, execution in being able to meet our customers' needs and execution driving our growth initiatives forward. We do have a lot on our plate, but these challenges and opportunities have only reinforced the importance of Hospira's role in the global health care system. I am confident that we have what it takes and the efforts we are making today will ensure we play a vital role in meeting the health care needs of tomorrow.

With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Schott with JPMorgan.

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

Just had one -- the question here is just can you clarify exactly what would happen here if the NSAI makes this determination in your CE Mark? Is this more about -- would you have to withdraw product or is this really about new pump placements? And I guess just as a follow-up to that, any comments on -- to quantify the sales impact if this decision is made and when you'll have clarity on that?

F. Michael Ball

Chris, it's Mike. So I'll take that one. So currently, the situation in Europe and in many countries around the world, they rely on ISO certifications or a CE Mark to enable you to sell your product. If those certifications are withdrawn, then you're not allowed to sell your product into those markets until the certifications or CE Mark are reinstated. So the products are not withdrawn from the market, but you would not be able to replace pumps. And if, in fact, consumables were covered by this, you would not be able to sell consumables into those specific markets. Again, under a variety of circumstances, there are mitigating options in terms of dampening that effect. And by that, I mean we are looking into alternatives in each individual marketplace of what we would do. And given the number of countries involved, I don't think I can say one size fits all. But that's the overall situation. Now with the NSAI, we continue to have conversations with them. We, again, are looking at exactly what they have said in their audit report. We just received the audit report yesterday, so we are still going through it. But what we do intend to do is move forward and meet with them, discuss the situation and look at what are the avenues available to us moving forward. And again, we won't get clarity on that until we've had an opportunity to talk to them and then perhaps to the regulatory authorities. And so, again, the situation is very fluid, but that's kind of the best we can lay it out for you right now.

Operator

Your next question comes from the line of David Lewis with Morgan Stanley.

Steve Beuchaw - Morgan Stanley, Research Division

It's Steve Beuchaw here for Dave. Wanted to focus on infliximab. I wonder if you could give us any granularity on the launch plan? What countries, if any, you might be able to access in the nearer term ahead of 2015? What contribution you might expect from any of those earlier launches? And at this point, is there any question whether it'll be a full label in terms of indications relative to the product currently on the market?

F. Michael Ball

So I'm going to let Sumant handle the label situation. What I'll talk to is just the market development. In terms of what countries are available in the nearer term, in 2013 and 2014, there's a host of smaller countries available, but they only represent a small percentage of the opportunity. The full opportunity becomes available to us in 2015. So when I look at this, I really see that 2015 is where we have a major opportunity to start to ramp up sales whereas 2013 and '14 is where we're getting feet wet in this market, although we certainly will be making some sales. And then with respect to the label, Sumant?

Sumant Ramachandra

Okay. Thanks, Mike. So in terms of the CHMP positive opinion on infliximab -- INFLECTRA, they have allowed for extrapolation to all the indications on the brand label, Remicade. So we do expect easy approval and a label that includes all of the indications that are currently on the brand.

Operator

Your next question is from the line of Greg Gilbert with Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

My question is about biosimilars. The financial details of how you'll benefit from the future biosimilars is not very clear between your deal with Celltrion and the arrangement you have with your financial partner. So I was hoping you could offer some quantitative color on when and to what degree these products will help Hospira. And curious if you think the EPO case study, in terms of commercial successes, is helpful and how you think about your sales ramp over time for Remicade, for example.

F. Michael Ball

So Greg, it's Mike, and then I might throw it over to Sumant or Tom for additional comments. So going back to the NovaQuest deal, the reason we did the deal again was to put more money behind our biosimilars so that rather than running our trial sequentially, we would be able to run them more in parallel. Remember, last call, I said there were some $7 billion out there with respect to EPO, filgrastim and pegfilgrastim. And what this deal did was give us the ability to access this $7 billion sooner than we otherwise would have. So it seemed like a very good deal and NovaQuest has obviously experience in this area, having worked with a number of big pharma companies. So from a financial standpoint, I see that one as very attractive because at the end of the day, we should be accessing the market sooner and also being one of the first players to hit the market, both of which should help us out. So financially, from our standpoint, very strong. In terms of Celltrion, we have not released the details of our arrangement with them. I think what we have said is that we expect that the gross margins associated with our biosimilar sales should be accretive to our regular gross margin. So they should be higher. So we see, Greg, that this will be, again, very positive from a financial profile moving forward. And then in terms of market development, in Europe, basically, EPO and filgrastim were the 2 first biosimilars launched in the marketplace. The market now has about 5 years worth of experience with those products. So I think the market is getting more comfortable with the idea of biosimilars. Having said that, we'll have to see what the ramp-up is and I think it will be incumbent upon us to do good job in terms of talking to the marketplace about the safety and efficacy of these products, followed by the cost savings. And when I look at filgrastim, I honestly see a very nice ramp-up in even the developed countries of that product. So I would say that as we move through the next year or 2, show that the product is safe and effective as demonstrated by the clinical trials I'm looking for a very nice ramp-up for us as we get into that European market and a very positive driver for us.

Operator

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

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

I have 2 questions. The first one is around APP. We have seen a pretty sharp decline in their volumes they shipped to the marketplace as a result of some Warning Letters. Is that an opportunity for you in the second quarter? How could you see this potentially impacting your -- both your top line revenue and margins? And then I've got a follow-up.

F. Michael Ball

So on APP, Ronny, like many our other competitors, people are going in and out of the market on a number of molecules. Sometimes we're in position to take advantage of it if we have supply. And in other cases, we just can't react fast enough to get more supply out there. I would say that the Office of Drug Shortage is doing a great job in terms of notifying us when they see impending shortages to give us an opportunity to ramp up. But we have found it incredibly difficult to try and predict on our financials what a competitor outage could bring to us anywhere a quarter in the future. We do keep a list of everybody who's under Warning Letter and anybody who publicly states that they may be running short and we do have an eye to ramp up production of those products, if it's possible. But I will tell you, having tried to do this over the last 6 months, it is just very much guesswork. It's molecule by molecule. So nothing that we could give you any comfort on that we necessary build into our financials beyond the normal course of competitive activity.

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

Got you. So I think you're telling us that right now, there's nothing -- no additional benefit that you can see near term, but there could be some in the second quarter -- in the second half, if you're able to be nimble enough to take advantage of this. Is this fair?

F. Michael Ball

That would be fair. Again, it all depends on what molecule it is and do we have the capacity to handle it. For some molecules -- most molecules, we are focused on ones that are either medically necessary or are in drug shortage in terms of our priorities. So if the product that is going short is either medically necessary or will cause a shortage in the market of an important product, then we would pursue it. If there's many other competitors out there, then that would fall to kind of third place in the list, if you will.

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

Got it. And follow-on about the Remicade biosimilars, and congratulations on the approval. There are news today on the lines that Celltrion might be in discussion with a large pharma company. And that kind of like raised my eyebrows because I know that they have co-marketing rights in your territory and themselves will not be much of a competitor. But if it falls on the hand of large pharma, by 2015, there is a chance there'll be a capable marketing and sales force selling the same product in Europe. I just was wondering if you have any rights in case Celltrion is acquired by a third party to do something, to -- essentially, do you have any rights in case they're acquired?

F. Michael Ball

Well, we keep all of the rights that we have today in the case that they get acquired. But what I should say is I don't really worry about who acquires them. What our focus is and the focus of Celltrion, or if they get acquired, the acquirer, is to take as much share as possible from the brand name biologic and convert it into biosimilars. And that could only be good news for us. So I don't worry about that side. The prize right there is the biologic. There is lots of money out there for everybody, and I think we would do very well competing against anybody in that particular marketplace. So it doesn't concern me.

Operator

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

Matthew Taylor - Barclays Capital, Research Division

I wanted to ask one about Rocky Mount and the price increases that you talked about. So could you just give us more of a forward-looking update in terms of how you think that you'll be able to ramp production at Rocky Mount? And on the pricing, you talked about some puts and takes. In the U.S., was your pricing a net positive and could you help us in terms of the impact on margins there?

Thomas E. Werner

On pricing, Matt, I can help a little bit on Rocky, too, and then Mike or Sumant can fill in. Yes, pricing was a net positive in the U.S. About the only negatives that really stuck out for us were docetaxel, which was expected due to additional competition, and the same reason for meropenem. But price increases across the broader portfolio were a net positive in the quarter and that was nice to see. As far as Rocky Mount is concerned, we're comfortably ahead of the production levels we were at last year and we're continuing to gradually take those up. And again, as we had in the first quarter with the sales performance we saw in the Americas, that's very difficult to achieve without Rocky Mount executing very well and they had an excellent quarter. They're up out of their shutdown. I was down there week before last and the place just looks incredibly different than it did 1 year ago or 2 years ago. So they're executing very well.

Operator

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

Ami Fadia - UBS Investment Bank, Research Division

So I had maybe 2 questions. Firstly, just the gross margin did very well this quarter. And if you could clarify for us how much of that was due to mix and how much of it was due to pricing? And secondly, on Precedex, what percent of the sales have switched to the premix version and if you could give us a sense of what's your target in terms of how much you think you could switch before a generic enters the market?

Thomas E. Werner

Okay, great. I'd say half of the performance was -- a little bit more than half was price, the other half was mix. As we mentioned in our comments, we expect the pricing to continue and the mix won't be as strong in the third quarter, and a lot of that is just related to the conversion of Precedex. And the question on what the conversion has been, we estimate about 20% is converted to the premix. And we're still in the middle of that, that conversion. The 20% number, we'll continue to refine that because it's difficult to know what's actually going out to the end market with only a couple of months of IMS data. But everything going well there. I think the only slight negative is that the mix in the third quarter won't be as strong.

Operator

Your next question comes from the line of David Roman with Goldman Sachs.

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

Just a follow-up question on the Specialty Injectable segment and maybe just in each of them in the Americas. Can you give us some sense what the contribution was to the top line growth from volume, price and maybe inventory build on the premix solution for Precedex? And then on the x Americas piece of the business, you obviously had a very, very strong year in 2012 and both growth in Asia Pacific and EMEA was slower this quarter. Is that just an issue of the comps or is there something else going on there?

Thomas E. Werner

Yes, in terms of the contributors, we don't really spell those out beyond the specifics that I gave Ami in terms of mix and price. And a fair amount of the mix was this dynamic we saw with converting the market to premix, heavier Precedex. But we really don't single those things out. When the IMS data comes out, you'll probably be able to see that but we don't spell it out. In terms of Europe, great biosimilars growth. We're going to get to the point -- at some point we're going to have to start to line item out the biosimilars. They're both doing very, very well. Pricing hanging in there. The oncolytics just happened to be a quarter where the comps were a little bit tough. We had some tenders last year that we didn't have this year, but very good bright spot on the biosimilars.

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

And then just quickly on the CapEx drawdown relative to your prior guidance, is that a 2013 dynamic or have you sort of reassessed the capital needs of the business whereby the $350 million to $400 million is more of a normalized run rate or should we see the original guidance that you -- I think the $425 million to $475 million, or is that a better number to reflect the sustainable CapEx needs?

Thomas E. Werner

Yes, I wouldn't read anything into that. Most of it is going to slide into next year. When we get to Investor Day in December, we'll try to give you a good idea on what the future capital needs are. I think this is simply that we just have a lot going on and things naturally slide. We've not canceled anything. It's just a lot of work that's going on and it just slipped a little bit, but it'll spill into next year.

Operator

Your next question is from the line of Jason Gerberry with Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just curious on gross margins. It sounds like productivity's up. You're looking at potentially taking product opportunities from competitors. I'm just wondering this issue of failure to supply penalties, Tom, maybe if you can just comment, is that largely in the rearview mirror now?

Thomas E. Werner

Yes, we did not see the magnitude of failure to supply this quarter that we did the same time last year. I'd like to hope it's in the rearview mirror as supplies are getting fuller. Certainly, dealing with other people's shortages makes for a sort of dynamic customer service setting. But I don't think there's anything large looming on the horizon. But those things can quickly materialize and surprise you, but I don't really see anything at this point. The other thing on gross margin, just to remind everyone, that we do have the shutdowns in the third quarter and we'll have shutdowns in the fourth quarter and dribbling into the first quarter next year. But for a variety of reasons, we did an extended shutdown in one of the plants planned to do more remediation and re-layout of the facility. And another one we delayed out of late June into July. So the shutdown impact in the third quarter and then not happening in the second quarter, you've got to kind of balance that out between the margins that we saw in the second quarter and expect to see in the third quarter.

Operator

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

David G. Buck - The Buckingham Research Group Incorporated

First question is on Specialty Pharmacy. SIP revenues for the first 6 months, the 9% constant currency growth, the 7.4% constant currency growth for the current quarter globally, can you talk about how much it might have been affected by any stocking on Precedex premix? I think you mentioned about 1/2 of that was perhaps pricing? But can you talk a little bit about what we should be expecting in terms of launch outlook for core SIP for next year and how we should be handicapping the risk of generics to Precedex next year?

Thomas E. Werner

Yes, it contributed a little bit to the uptick in the growth from 7.1% to 7.4%, but it's not the majority of the 7.4%. And some of that'll subside into the third quarter. As far as outlook for launches next year, we really haven't talked about that. I would expect we might, as we get to Investor Day, give some better visibility into that.

F. Michael Ball

And then also, David, as we mentioned, there was an uptick on Precedex inventory in the second quarter. As you launch a new product, there, again, is combined inventory out there. So overall, the net effect in the second quarter was increased inventories on Precedex, which will probably moderate over the third and fourth quarter.

Operator

Your next question is from the line of Jayson Bedford with Raymond James.

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

You mentioned the 2 Warning Letters that you received this quarter. I think you said that the FDA has accepted your proposed fixes in IKKT. Just wondering, did you get a similar acceptance from the FDA with respect to the proposed changes in Lake Forest? And then what are the next steps at Lake Forest? And then finally, is there anything new at the Austin facility?

F. Michael Ball

So just quickly on the Austin facility. There's nothing new there. We continue to have very constructive dialogues with the FDA just overall with the center, but also with all the districts. So we, on the pharma side, continue to have those ongoing dialogues. As it pertains to Lake Forest, as I mentioned previously, we did meet with the FDA. They did express support for our device action plan. I think we are building up our relationships with the device side of the agency, but we need to ensure that we show them good progress when they come back to Lake Forest. So we have not had an indication of when they might be back in to Lake Forest. From my standpoint, what needs to happen next is we continue to make this great progress. We need to, in the next few months, roll out our remediated Plum device, get the FDA's okay in terms of rolling this out to customers and then have a satisfactory inspection of Lake Forest. I can tell you, like at other sites, we are working with tremendous dedication and resources to fix the quality systems that were identified as deficient by the FDA and other regulators in Lake Forest and have virtually an army of not only Hospira people, but also consultants in against this task. So we continue to move forward. But I'll be honest with you. There is still more work to be done. And in terms of where we are, if you look at pharma and devices, the devices trail the pharma remediation by approximately 6 months to 1 year. So we basically have more work to do there.

Karen King

So I just want to thank everybody for kind of sticking to limited questions. We were able to get through the call in a concise manner, and we appreciate your time this morning. So we're going to conclude the call, and thank you for joining us.

F. Michael Ball

Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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Source: Hospira Management Discusses Q2 2013 Results - Earnings Call Transcript

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