Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Hospira, Inc. (NYSE:HSP)

Q3 2009 Earnings Call Transcript

October 27, 2009 9:00 am ET

Executives

Karen King – VP, IR

Chris Begley – Chairman and CEO

Tom Werner – SVP, Finance and CFO

Terry Kearney – COO

Analysts

David Roman – Goldman Sachs

Rick Wise – Leerink Swann

Taylor Harris – J.P. Morgan

Greg Gilbert – Banc of America/Merrill Lynch

Marshall Urist – Morgan Stanley

Jayson Bedford – Raymond James

Junaid Husain – Soleil Securities

Operator

Welcome to Hospira's third quarter 2009 earnings conference call. All lines have been placed on listen-only-mode to prevent any background noise. Following the speakers remarks there will be question and answer period. I will now turn the call over to Karen King, 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 third quarter of 2009. Participating in today's call are Chris Begley, Chairman and Chief Executive Officer of Hospira; Terry Kearney, Chief Operating Officer; and Tom Werner, Senior Vice President-Finance and Chief Financial officer.

We will be making some forward-looking statements today, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those indicated. A discussion of these factors is included in the risk factors and MD&A sections in Hospira's latest annual report on Form 10-K on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

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

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

Chris Begley

Thank you, Karen. Good morning, everyone. The third quarter represented a milestone quarter for Hospira. With two key product launches in the US and an acquisition that further bolstered our biogenerics program.

This was our first quarter where net sales exceeded $1 billion, an increase of 9% year-over-year or 11% excluding the impact of foreign currency. Adjusted earnings per share of $0.90 represent a growth of 43% over the third quarter 2008 EPS of $0.63 cents.

Driving our net sales growth was strength in Specialty Injectable Pharmaceuticals with the majority of the contribution coming from our US launch of oxaliplatin, an ecology drug used in the treatment of colon cancer. The drug posted branded sales in US of approximately $1.4 billion in 2008.

In addition to our launch of oxaliplatin, other key achievements during the quarter and in recent weeks include the FDA approval and US launch of six new high-dosage presentations of therapeutic heparin in single and multi-dose vials. As a result, Hospira's portfolio of this important blood thinning agent is now one of the broadest available in the US market where the annualized sales of high dose heparin in 2009 are over $200 million.

Our biogenerics program continues to progress as well. Over the past couple of months we have announced two transactions that enable us to significantly expand our biogeneric portfolio and capabilities with measured investment and risk.

Last month, we announced the acquisition from PLIVA of worldwide rights to a biogeneric versus Filgrastim and an affiliated manufacturing facility in Croatia. This move will extend our reach in vertical integration in biogenerics. It also provides development and manufacturing capabilities for our Filgrastim and PEG Filgrastim pipeline products, as well as potential future biogenerics.

More recently, we announced a collaborative agreement with Celltrion, a South Korea based biopharmaceutical company to strengthen our presence in the global biogenerics market. With the addition of five new drugs, the agreement will augment our biogenerics pipeline, bringing the total to 11 and giving us one of the largest pipelines in the industry with a local branded value of $34 billion.

In addition to our oxaliplatin and Heparin launches in the US, we announced European marketing authorization under a decentralized procedure for the launch of generic docetaxel or Taxotere, as it is known in its proprietary form. We expect to launch the chemotherapy agent across most of Europe by the end of 2010. The drug had branded sales in Europe in 2008 of approximately $1.1 billion.

We also continue our successful rollout of several drugs in EMEA and APAC, including gemcitabine and we launched ten compounds already on the market into new countries around the world.

Another development in EMEA was our recent announcement of a ten-year contract with the Royal Marsden Hospital's National Health Service Trust to be its provider of aseptic compounding services. This is the largest outsourced compounding contract awarded by a trust and builds on the compounding capabilities we acquired with Mayne Pharma.

In our APAC region, Hospira has established a direct presence in Seoul, South Korea; the fourth largest healthcare market in the region with the opening of our Korean office, which will be focused initially on distribution of our oncology portfolio. We now have direct sales presence in nine markets in the Asia-Pacific region. We continue to make significant progress on Project Fuel. Our multi test program designed to drive operational excellence and top tier financial performance.

In the area of evaluating nonstrategic assets, we announced the sale of our Salisbury, Australia manufacturing facility, along its oral products and associated intellectual property. The facility and its products, which we acquired with Mayne were primarily used for oral contract manufacturing and were not central to our key areas of Specialty Injectable Pharmaceuticals and Medication Management Systems.

The transaction, which is expected to close in the next month, further advances our efforts to simplify our product line and focus on our key strategic areas, better enabling us to drive future growth.

In addition to Salisbury divestiture during the last week of August, we closed on the previously announced sale of Hospira's Critical Care Products to ICU Medical.

With regards to optimizing our product line, we have now identified approximately 55% of our 7,000 plus SKUs that can be eliminated over time. To date, we have eliminated more than 30% of the total SKUs, which compares to the 15% we announced approximately a month ago. The additional 15% is for Critical Care SKUs, we stopped commercializing as a result of the sale of our Critical Care Products. Hospira continues to contract manufacture a small portion of the list numbers during the transaction period with ICU.

We also continue to progress in streamlining our organizational structure. Of the targeted 1400 to 1500 position reduction goal, we have notified approximately two-thirds of the people whose positions will be impacted. The overall progress we have made with Project Fuel is freeing up additional funds for investment in our business and is enabling us to better execute on our longer term financial targets and business goals.

With that, I'll now turn the call over to Terry for more details on the sales for the quarter. Terry?

Terry Kearney

Thank you, Chris. Good morning, everyone. I'll remind everyone that references to net sales results will be on a constant currency basis, which excludes the impact of foreign currency fluctuations. Please refer to the table in the schedule accompanying our press release for impact of foreign currency by segment and product line.

Global net sales grew 11% in the quarter on a year-over-year basis. mainly the result of strong performance from Global Specialty Injectables, which increased over 25% during the third quarter. Both of our key strategic areas, SIP and MMS showed growth across all three segments, Americas, EMEA and Asia Pacific.

Specialty Injectable net sales in the Americas were up over 30%, primarily attributable to our launch of oxaliplatin. We were the first market entrant with a generic solution presentation of oxaliplatin and we saw an exceptionally level of demand for the product from our customers. In fact, we believe that sales we had projected through the next couple of quarters have been accelerated into the third quarter of 2009 due to strong customer demand.

As a result of the limited number of competitors, offering a solution product, pricing remains relatively strong with erosion rates of approximately 55% to 65% of branded pricing. In addition to oxaliplatin, Precedex our proprietary sedation agent performed extremely well.

As an update of Precedex, Hospira received additional feedback from the FDA a few weeks ago on the pending application for a long-term indication. The long-term indication would allow for use beyond 24 hours. We are currently reviewing the FDA's feedback in considering our next steps. Based on a strong year-to-date performance and the publicized benefits of Precedex, through leading journals such as JAMA, we remain confident that this popular sedation agent will exceed annual global revenues of $100 million next year, regardless of the outcome of a long-term indication.

Our heparin launch was also a factor in the quarter's SIP performance. We introduced six new high dosage presentations in mid-September to a market characterized by competitor and supply issues, addressing a substantial market need for the product.

A favorable performance from our new product launches and Precedex was partially offset by softness we experienced in vancomycin. During the quarter we experienced some short-term capacity constraints as we worked to fully optimize the productivity of our new automated Lyophilizers. Through lean manufacturing efforts, we were able to resolve these constraints and are working to meet market demand in the fourth quarter with increased deliveries planned through the following quarters of 2010 to address any remaining backlog.

Moving to EMEA, net sales of Specialty Injectables in the European region increased 11% in the quarter. Driving the results were strong volume growth in the region, despite continued price erosion in leading and legacy oncology molecules.

Our new product launch of gemcitabine and favor results from Retacrit contributed to the quarter's strength in the region. Momentum for Retacrit continues to build across 15 countries where we have launched the product, with our share of a total short-acting biogeneric market in Europe surpassing the 35% mark.

Net sales of Specialty Injectables in Asia Pacific increased 3over the prior year third quarter. APACs growth was driven by strength in Precedex, in Australia proprietary pharmaceuticals including OXYTROL a newly launched proprietary drug that recently received government approval of reimbursement in Australia.

Moving now to devices. Net sales of Global Medication Management Systems increased 2% in the quarter with positive contributions from all three regions. However, the global headwinds from a recessionary economic environment continued to impact hospitals limiting capital investments.

In the Americas, net MMS sales increased 1% of the quarter. Hospital capital spending constraints have continued to pose a challenge and adversely impact customer signings and implementation time lines.

Our broad product portfolio is an advantage however, as it provides our customers with a robust selection of price and technology options. We continue to see greater than expected demand for Plum over Symbiq driven by price sensitive customers who can purchase Plum at an initial lower price point and upgrade over time. With the Symbiq devices that we are placing, we continue to see strong competitive cash risk with almost 80% of our Symbiq placements year-to-date coming from competitive accounts.

In the EMEA, MMS net sales increased 4% due to favorable performance in both our Plum and Gemstar devices and dedicated set sales. Growth during the quarter was aided by our recent tender award for Plum A+ with MedNet in a key hospital account in Saudi Arabia. MMS net sales in the Asia Pacific region increased 19%, also primarily the result of strong Plum and Gemstar.

As momentum continues to build in the region for these popular devices we are making solid progress with these devices in Japan as well. During the quarter, we completed all the necessary regulatory requirements to support the launch of our Plum A+ and Gemstar devices in this important market and expect to launch both product lines by the end of the year.

Slightly offsetting the SIP strength in the quarter was an 8% decline in other pharma, on a global basis. This was a result of an expected decline in sales to Abbott and lower compounding sales in the EMEA region, partially offset by favorable performance and large volume solutions as a result of both price and volume increases.

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

Tom Werner

Thanks, Terry. Good morning, everyone. First to take you through the income statement. Net sales in the third quarter exceeded our expectations at $1 billion, up 9% on a reported basis from the third quarter of 2008. On a constant currency basis, net sales were up 11%.

Adjusted gross margin in the quarter was 41.5% compared to 38.4% in the third quarter of 2008. The increase reflects favorable product mix, as well as improvements to manufacturing productivity driven by Project Fuel efforts. These increases were partially offset by the impact of certain product recall-related costs, as well as unfavorable foreign exchange rate impact.

R&D expense in the quarter was $58 million up from $51 million in the third quarter of 2008. This primarily related to the timing of investment in various new product development programs. R&D as a percentage of net sales was 5.7% versus 5.5% in the third quarter of 2008.

SG&A expense for the third quarter was $162 million up 12% from the $146 million for the same period last year, mainly a function of Project Fuel optimization initiative spending and higher annual compensation incentive provisions.

Partially offsetting these factors were the impact of foreign exchange as well as Project Fuel cost reduction efforts. SG&A as a percentage of net sales was 16.1% compared to 15.7% in the third quarter of 2008.

Adjusted operating income increased 28% to $207 million versus $162 million in the third quarter of last year. Adjusted operating margin at 20.6% improved by more than 300 basis points

versus last year's 17.5% for the quarter.

Interest expense decreased 9% to $25 million in the third quarter down from $28 million last year, primarily due to lower interest rates on our floating rate notes.

Our effective tax rate on an adjusted basis in the quarter was 19% down 150 basis points from our first half 2009 rate. The lower rate was primarily a result of a tax benefit, related to the expiration of statutes of limitation on certain unrecognized tax benefits, which was partially offset by the negative tax impact of oxaliplatin sales in the quarter.

Adjusted diluted EPS for the third quarter was $0.90 compared to 0.63 last year or an increase of over 40%. Three charges were excluded from our adjusted EPS for the quarter, first Project Fuel charges including project related impairment and other asset charges, which total $0.13 a share.

Second facilities optimization initiatives total $0.02 per share and last, intangible amortization related to the Mayne Pharma acquisition totaled $0.04 a share. So in aggregate, these items totaled $0.19 for the quarter.

Turning to cash flow, our cash flow from operations in the third quarter was $305 million up from $146 million in the third quarter last year, driven primarily by the increase of net income adjusted for noncash items.

Turning to the balance sheet, at September 30, our cash balance was $921 million compared to $609 million at the end of the second quarter this year and $287 million at September 30 of last year.

Also, a couple of weeks ago we entered into a new $700 million revolving credit agreement, which can be used for working capital and other purposes. The revolver replaces our prior $375 million revolving credit agreement and has similar terms. Details to the agreement are available in the 8K we filed on October 16.

Capital spending in the quarter was $41 million, relatively consistent with the third quarter of 2008. Depreciation and amortization of $58 million in the quarter included $15 million of intangibles amortization. In total this compares to depreciation and amortization of $64 million in the third quarter of 2008.

Next I'd like to move to our guidance, our full-year projections. As you recall, we increased our global net sales guidance on a constant currency basis on our Investor Day in September to 5% to 7% growth, up from 4% to 6% and we're maintaining that guidance for full-year 2009.

Three primary factors influenced our full year net sales guidance. First, we experienced extremely favorable SIP growth in the third quarter as a result of strong oxaliplatin sales. While these sales have a favorable impact on full-year SIP performance, we believe that sales from future quarters were accelerated into the third quarter, therefore, we don't anticipate a significant amount of oxaliplatin sales in the fourth quarter of this year.

Second factor, that relates to the pandemic flu opportunity. Our contract manufacturing organization has proven full-finish capabilities for H1N1 vaccines. As we indicated on Investor Day, we've been in active discussions with various contract manufacturing customers to help them meet the demand for vaccines.

Included in our 2009 guidance at Investor Day was the assumption that a contract would transpire this year and that we would be recognizing revenue in 2009. However, due to the delays the industry's experienced with vaccine supply, our production has also been delayed, and as a result, we now expect only a small amount of sales in 2009, with the bulk of the sales occurring in 2010, impacting both the Americas and EMEA reporting segments.

Third, for MMS as Terry mentioned, we're not seeing any positive changes that would lead us to believe the restraints on hospital capital spending would ease up in the near future. We believe we'll continue to see a product mix shift, with stronger demand for our Plum device from price sensitive customers throughout the balance of the year.

So as a result, while we are maintaining full-year net sales guidance for the Americas region of 6% to 8% growth, we believe the mix of growth will primarily come from our SIP business versus our MMS business. We now expect annual net sales guidance for the EMEA region to the flat to slightly down versus full year 2008 and we are maintaining our annual guidance for Asia Pacific region of 5% to 10% growth.

Moving to EPS; due to the tax benefit we received this quarter from the expiration of statutes of limitation, we're adjusting the guidance for the full-year effective tax rate to a range of 20% to 21% and as a result, we're increasing full-year adjusted diluted EPS guidance to a range of $2.85 per share to $2.90 per share, which represents 13% to 15% growth over prior year.

We are also increasing our guidance for cash flow from operations to $700 million to $750 million as a result of strong US oxaliplatin sales in the third quarter.

In addition, we're increasing our depreciation and amortization guidance to $225 million to $235 million.

With that, I'd like to turn the call back to Chris.

Chris Begley

We made significant progress in the third quarter with the launch of both oxaliplatin and heparin in the US and the advancement of our biogenerics platform being among the most significant achievements. We are pleased with our strong performance, with top line growth of 11% and adjusted earnings per share growth topping 40%.

We remain focused on Project Fuel. At the same time, we are advancing our strategic areas of growth. We believe we are well-positioned to meet our financial projections this year and look forward to reporting the results of both the fourth quarter and full-year at our call next quarter.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from David Roman with Goldman Sachs.

David Roman – Goldman Sachs

Good morning, Chris and everybody. Thank you for taking the question. Could you just maybe talk just a little bit more about heparin, what was in the guidance and then remind us of the still unfinished capabilities, whether that's internal or external?

Terry Kearney

David, relative to heparin, we did get approval in late September. It really had somewhat insignificant impact on the quarter's results. We do expect that they continue to evolve over time and going into the fourth quarter into next year and we are very confident that we'll continue to be able to expand our market presence beyond the 15% that we have in the US markets, both for hospital and alternate sites. So, we think we're in very good shape and we do have the capability of full finish. We secured the API and then we do the full finish in our plants in the US.

David Roman – Goldman Sachs

Okay. Great. So it's fair to say not a lot in expectations now for heparin?

Terry Kearney

Again, I think we have an ability to expand our share again and again it would take some time over the next intervening quarters, but I think it should be part of our growth that we'll talk about in 2010 that we'll come back in February.

David Roman – Goldman Sachs

Then maybe on MMS side, you mentioned that you're not seeing a lot of evidence of an improvement in the operating environment but some other companies have reported look to see at least some stabilization. Could you maybe give us some sense to what the conversations are like right now of hospital purchasing managers, maybe how they compared to six months ago and the types of data points you're looking for to suggest an improvement.

Chris Begley

Sure, David. I'll take that question. I agree with you. There seems to be some conflicting opinions around hospital CapEx environment lately. In my sense from speaking with hospital CEO's is that there's still a fair amount of uncertainty that exists out in the marketplace and I don't believe we're going to see a great deal change in the CapEx environment until there is more of a feeling that the recovery is on its way and it's sustainable for some time period. If I don't see that changing by year end, I would envision that continuing as we move through 2010 as well. Now, having said that, I think the encouraging piece is as it relates to CapEx priorities, smart infusion pumps, still end up being in that upper quartile from a priority standpoint, but with the lack of cash and credits that is available to our hospital customers, I don't see a change in the CapEx spending in the near-term or as we look into 2010 as well.

David Roman – Goldman Sachs

Then lastly on cash; you're generating a ton of cash. You just raised guidance. There's no major debt payment. Could you maybe just remind us where we are through use of cash priorities and then whether we should expect to see a strategic activity pick up?

Tom Werner

Hi, David, it's Tom. We have a $375 million paydown that’s due early next year and we're either going to make that on time or slightly ahead of schedule. The other thing I'd remind people of is that, given the situation with oxaliplatin, we sell to wholesalers, and then they forward the product on to hospitals and alternate sites and we have to work our way to the charge back and rebate cycle. So some of this buildup of cash in the third quarter is somewhat temporary and I don't think it will reverse much in the fourth quarter but the timing we usually see, I would expect that there will be some reversal of that in the first quarter of next year. So for now, we're pretty much staying the course, getting the debt paid down, working our way through this chargeback and rebate cycle. I would say, strategically, there's really nothing that's in the crosshairs at this point. So it's really the same strategy we laid out at Investor Day.

Operator

Our next question comes from Rick Wise from Leerink Swann.

Rick Wise – Leerink Swann

Let me start with sort of an ungrateful question since given the magnitude of the beat. Given consensus, and it seems like you beat by $0.20, $0.25. Basically, you're only raising the full-year guidance a nickel. I heard you say that you think some sales got pulled forward and the H1N1 got delayed, but it still seems you have an awfully, lets say the weakest, the easiest comp of the year, year-over-year versus the fourth quarter of '08. Why so conservative given all of the positive things that are happening, Chris?

Tom Werner

It's Tom. I'll take the question. It's not necessarily an ungrateful question but it's a good one. We did to consensus, we did beat by $0.21, $0.22 cents depending on how you look at it. Again the guidance is going up a nickel primarily due to taxes as we said. So if you go back to investor Day, once we were aware of the oxaliplatin and to a much lesser degree heparin launches, we did take guidance up dime at that point. Most of that change would appear in your models that have placed into the fourth quarter. Then as the oxaliplatin sales, as Terry mentioned, it would appear to us in a lot of these sales accelerated into the third quarter. It's really just a timing difference. So, if you look at the $0.22 beat, a dime of it relates to the uptick in guidance we gave at Investor Day. The rest of it is the nickel for tax, and then the remaining $0.06 to $0.07 really is the effect of the delay in the vaccine order, actually the reduction in the vaccine order into next year. So, simple math is $0.22 less $0.10, less $0.05 less about $0.06 or $0.07, sort of accounts for the whole difference there.

Rick Wise – Leerink Swann

Okay. A couple of follow-ups still. Does the tax rate stay here in 2010 roughly or does it go up or down, Tom?

Tom Werner

No, it won't stay here. We had a small benefit from statutes that expired from prior years that rolled through. That's the way we account for things. I would expect, absent any legislation that we'd get back to roughly the rates we had originally guided for this year, which was I think 2% to 22% and depending on where legislation goes, I don't see our tax rate going down. If anything it's going to be going up over the next three to five years. It's just a question of how much.

Rick Wise – Leerink Swann

Just a couple of quick quantification. How big was oxy in the quarter and how do we think about sort of a normal or hope for normal quarterly run rate from here. Maybe if you will just update us on Zozyn just what's going on there. Thanks so much.

Terry Kearney

I will take the oxali one and then maybe Terry can do the Zozyn question. We're not going to disclose the amount of oxali except most to the extent stated, most the beat that we had was related to oxaliplatin and also visibility into future quarters, it's a very evolving situation. The demand has been extremely strong, but based on the demand we're seeing so far in the fourth quarter, we don't expect that there's going to be much sales of oxaliplatin to the wholesalers in the fourth quarter. We also believe that sales could have accelerated into the third quarter from as far out as the first quarter of next year. So for now, I wouldn't expect much in the fourth quarter and we'll just have to see how the situation evolves into the first quarter.

Chris Begley

I'd add to that, Rick, with oxaliplatin, it's really going to depend on the number of entrants into the marketplace and their pricing behavior. We do see a number of competitors in the markets today beyond just Teva. Sandoz other way is in the marketplace with a solution product and Fersanis ABP [ph] is in the market with the freeze dry product. To Tom's point, we believe that sometime in the first part of 2010 we'll see additional approvals, mainly in the freeze dry products. I think it's going to take some time for the market to settle down. Again, the more competitors enter the market, then more likely the price will erode very quickly to what you would traditionally expect to see on these types of products. So we're going to continue to monitor it. Again, that's the way we read the market right now.

Relative to Zosyn, you all remember we took Zosyn out of our guidance earlier this year, but with the approval recently of one of our competitors, we certainly thought that our approval also would be imminent. Unfortunately in further discussions with our partner it became evident that they continue to work through some labeling deficiencies with the FDA and as a consequence of these discussions and we will continue to have more discussions with them. We are not expecting to launch Zosyn in 2009. Again, we'll update you on our expectations for 2010 in February when we come back to you with our fourth quarter results.

Operator

Our next question comes from Taylor Harris with J.P. Morgan.

Taylor Harris – J.P. Morgan

Good morning, Chris. Thanks a lot. So with oxaliplatin, maybe just a couple of questions on that front, you appear to have gotten the lion's share of the generic markets so far. Just wondering, is that simply due to the fact that you are the first to launch or should we be thinking differently about your share capabilities on new product launches like this going forward?

Terry Kearney

Taylor this is Terry. Clearly, being the first to launch a solution product and being well prepared from an inventory perspective, we did extremely well as we talked about that, so when there was a demand from our customers, we're able to satisfy that demand. I think over time, though, again it's going to be a crowded market and we will see how that plays out relative to pricing and the like. So we are very excited about what we've accomplished to date. I think it's going to be too premature and too early to really describe to you where we think this is going to settle down. Again, a lot of entrants coming to market and again, as new people come to market, they're going to compete with price. So we expect pricing to come down very quickly. At the end, though, I would say that as we typically say with of most of our new product launches, we still strive for a robust share of somewhere between 20% to 25% and maybe higher. That's what we're still thinking about in this product line.

Taylor Harris – J.P. Morgan

Understanding you're not going to tell us the exact sales level this quarter, but it sounds like very little is going come in the fourth quarter. Probably down the first quarter. Knowing what you know now, would you say that oxaliplatin in 2010 is higher or lower than what you are doing in 2009?

Tom Werner

Taylor that’s tough to say. We've got to see how the pricing plays out, but given what we saw in the third quarter, I've got to believe it's going to be lower next year.

Taylor Harris – J.P. Morgan

Okay. So Chris, in previous years, you would have given us, you've looked forward to the following year and given us some of your pluses and minuses on what's going to be happen in the following year. As I think about that right now for you, it seems like you've got a lot in the pipeline for next year between heparin and Taxotere in Europe and Zosyn. You've obviously got Project Fuel working for you. So is there anything else you would add to that list? Then maybe what would you put on the minus column?

Chris Begley

That's a great question, Taylor, and I'll be happy to give you and the rest of our listeners some color around that. Let me just build on one thing that Terry mentioned, that you asked about our launches of generic drugs. The organization on oxaliplatin did an excellent job of executing crisply. That's what enabled us to get the share that we got and be first to the market with product out in the channels and with the customers, and that's our goal on all the major launches that we do around the world. So we'll continue to strive for that. Achieving that every time isn't going to be possible, but that's our goal, especially on the large molecules is to come out and execute as crisply as we did on oxaliplatin.

As I look to 2010, I guess a couple comments that I'd make, and we obviously are going to come back and talk about guidance when we do our fourth quarter call, but a couple points that I'd make to your question, one is, I think, fundamentally, the way you and everyone's kind of looking at 2010, I think, is fundamentally appropriately the right way to look at it. Then a couple of the major things that I would comment on are the bigger items would be really the following. One is in 2009, we launched oxaliplatin, giving us as sizable benefit that we don't expect that will repeat in 2010. So I think we need to keep that in mind as it relates to oxaliplatin. We also have some divestitures that will impact 2010 from a negative standpoint, especially as it relates to sales.

We've talked about Critical Care, the recent divestiture of the oral solid plant in Salisbury, Australia is another fine example, and we may have another one or something before, 2010 gets all finalized here. Then the point that you made, I think, is an excellent one. We have a very strong SIP pipeline. Obviously with the launch and approval of heparin towards the end of Q3, we'll have heparin momentum throughout 2010 from a year-over-year comp standpoint. We've talked about getting the approval of docetaxel in Europe. So we'll have momentum on that key molecule, which is a significant molecule in Europe and for that matter around the world. So our SIP pipeline and the momentum of the approvals we already have are very robust as we look at 2010.

Then, as it's been well quantified, we expect the benefits from Project Fuel in 2010. As we continue to mention, we're tracking extremely well on Project Fuel. It continues to be our number one priority as an organization and it will be in 2010 as well. Then, as I commented earlier, on this whole hospital capital spending environment, we don't see a change at this point in time either positive or negative to what we have seen from a cap spending standpoint at the hospital level.

Now, having said that, we're very pleased with the fact that we've got a multitier product line and we've seen, a pickup in our Plum technology placements but obviously that of lower ASP, which changes the mix versus Symbiq placements. So I wouldn't see a change in the whole CapEx in the US or for that matter around the world as we look at 2010. So those are really the bigger items as I look at 2010. Hopefully that helps, Taylor.

Taylor Harris – J.P. Morgan

Yes, that definitely helps. Would you be willing to comment on whether you think the consensus number for 2010 is something you are comfortable with at this point or not?

Chris Begley

Taylor, I think that's getting a little bit too specific.

Operator

Our next question comes from Greg Gilbert of Banc of America/Merrill Lynch.

Greg Gilbert – Banc of America/Merrill Lynch

Chris just to follow up on what you're talking about for next year, given that the Taxotere trial in the US has just started. Can you frame that opportunity beyond just the sales potential? Can you talk about at least in general what your arguments are there and to what extent you think you have an opportunity potentially to pull that into 2010? That's my first question.

Chris Begley

Again, I don't want to start giving in 2010 guidance, but I will comment on docetaxel opportunity you Taxotere opportunity for the US, which is really what you're asking, Greg. We really see that as more of an early 2011 type of opportunity right now. Now that may change over time, depending upon how things progress, but I would not see it as 2010 for the US. If it was an opportunity, it would be, very, very late in the year or something. Our anticipation is that even though we've seen some different strategies as it relates to oxaliplatin, at this point in time we don't see a spillover of those as it relates to docetaxel. Does that help?

Greg Gilbert – Banc of America/Merrill Lynch

Yes. Okay, Tom, on SG&A, I realize your sales were behind the quarter. What drove the absolute dollar growth in SG&A from 2Q to 3Q? Is that increase specifically linked to the higher sales or were there some decisions made there to spend some of the upside?

Tom Werner

No. Really, there were not any decisions made to accelerate any spending. The majority of it, I'd say two-thirds of it was really related to various incentives around the oxaliplatin a sales as well as cash flow. The other thing is, included in those expenses related to oxaliplatin we continued to incur legal expenses related to sort of the ongoing back and forth with Sanofi and beyond that there wasn’t anything strategic or tactical done to use of some the favorability. I think as you go to the fourth quarter where it's usually our seasonally high for revenues, I think SG&A is going to still be fairly flat with the third quarter, but we are convinced and remain convinced that Project Fuel is on track. So I don't think there's any real issues there. Just some unusual related to oxaliplatin and some of these legal cost that we continue to incur.

Greg Gilbert – Banc of America/Merrill Lynch

Okay I will finish off with a couple of high level and for Chris, can you share your latest thinking on biogeneric stimulus legislation this year and also, could you comment on what you make of Pfizer's comments about what seems to be pretty intense interest in the injectable space in the US and globally from a generic standpoint? Thanks.

Chris Begley

As it relates to healthcare legislation or healthcare reform, obviously, the whole topic is heated up tremendously in the past week as we're going through this week and progress is being made. There's a long ways to go. The legislation is being shaped and formed as we speak, and I still think this is just personal opinion, I still think there will be President Obama's, final touch on the whole legislation as well, his fingerprints on it and so this will continue to evolve. I do believe that biogeneric legislation will be a component of it because it's a way of paying for a public plan or increased access.

I believe we're going to end up with some type of increased access, whether it's a public plan or not. So biogeneric legislation will be a key cornerstone from a cost standpoint, and as I said before, it is a hard cost savings and one of my concerns I have as it results to healthcare legislation is there's not enough hard cost savings to pay for the increased access. So I don't see biogeneric legislation going away. As it relates to a couple of the key terms of that legislation around exclusivity and as it relates to evergreen, those efforts of trying to get that legislation shaped the way Hospira would like or for that matter rest of the generic industry is still underway.

We have not given up, but I will tell you it is an uphill battle, regardless of the outcome of that. It's still a great opportunity for Hospira in the medium to long-term. So I think that's basically on healthcare reform as it relates to Pfizer and their comments. Obviously, this generic injectable space is a very good market and so it's attracting other interests, and it's attracting interests of people like Pfizer. I will tell you having been in this space for two decades now, having partnerships and relying on partnerships is an extremely difficult way of being successful long-term and having a major market share in the generic marketplace. The reason for that is you end up splitting profits.

So as a short-term strategy, it might be a good strategy to get your toe in the water, but to be fundamental in it it's important to be backward integrated as we are and it's also important to have a pharmaceutical and a device core competency. Because a big piece of our strategic advantage today and moving forward is the fact that we're able to deliver these unique delivery systems that bring incremental value whether it's around patient safety, worker safety, or reducing labor. So with that, we end up getting an upcharge in the marketplace. So, without having those key capabilities, I think it's very difficult for someone to be successful, short and long term.

Operator

Our next question comes from Marshall Urist with Morgan Stanley.

Marshall Urist – Morgan Stanley

So I wanted to ask about a couple of things. Maybe just first Project Fuel as it relates to gross margins, and maybe kind of walk us through where you guys think you were relative to the low '40s target. Maybe what some of the impacts were in the quarter and how we should be thinking about that in 4Q and in 2010?

Tom Werner

I'd say without the oxaliplatin and the rich mix, we're still not there I think we had a 40% plus quarter last year in the fourth quarter, I'd have to verify that, which I will, but we're not there on a constant basis. So as we look into next year and see an incremental $60 million to $70 million of fuel savings probably slightly more than half of which is due to gross margin, you'd pick up 80 basis points to 100 basis points and that would start to break us through the 40% level. I think the guidance we've got for are this year is 39.5% to 40.5%. So without oxali this quarter, we probably wouldn't be reaching the 40% mark. I would say as we get into the back part of next year, even with shutdowns, we should start to see that on a fairly regular basis.

Marshall Urist – Morgan Stanley

Okay. Great. Then maybe also talk about FX a little bit and how that's obviously going to impact numbers in, probably starting in 4Q and into 2010? So could you give us some of your current thoughts there as with well?

Tom Werner

During the quarter I did some work on this the other day. If you look at the FX drag that we saw in the first two quarters, it was about 5.5%, 5.7% and 5.3% Q1 and Q2 respectively. In the third quarter it was actually just slightly less than 2% negative. Based on the rates that we have in place today, we actually should see some slight positive year-over-year FX in the fourth quarter based on our most recent forecast as the Euro continues to appreciate, the pound has come back, although not quite to last year's levels and the Australian dollar continues to be quite strong and it will be particularly strong against December of last year. So I think assuming rates hold as of where they are, a week or so ago, the negative impact and drag that FX has had on the top line should be behind us at least for the fourth quarter.

Marshall Urist – Morgan Stanley

If you could just talk about the earnings impact of what you think the earnings impact has been this year and what the sort of upside could be in 2010 and is there any of that in the guidance number?

Tom Werner

Well, we haven't given guidance for 2010.

Marshall Urist – Morgan Stanley

I meant for '09.

Tom Werner

For '09, there's only one quarter left, and it's very, very small impact. What we typically see is that the drop through positive or negative typically runs at less than company average, because it's international and the margins outside the US are typically on an operating margin basis lower. So for every dollar of FX, you're typically seeing, 13%, 14% operating earnings impact. However, this year, we've actually seen a larger negative impact than we would have expected from costs of goods sold because of the various time periods that are in play when we manufacture goods in one entity and then transfer to another and hold the inventory. So overall it's been a negative impact to us from the cost of goods sold standpoint this year because of the timing of the various pools.

Marshall Urist – Morgan Stanley

Then next year, I think its now going to be a positive benefit. So would you expect things to sort of revert to the kind of drop through at less than the company average?

Tom Werner

This year we actually expected about an 11 to 13 negative impact, but I think, when we put our plans together FX was hurting us $0.11 to $0.13. I thought I covered all the bases with FX in the work I did the other day, but this is one area I didn't cover. I suppose there could be an impact, positive impact next year if the rates hold, but I have to play through the math to see if we're getting back to roughly 2008 rates, because I don't think we are. Besides when we do 2010 guidance, we'll specify that out. Overall, I think it would be positive but I have to look at the basic currencies because Australian dollar's been behaving strangely and I'm not sure it's going to be the same mix.

Marshall Urist – Morgan Stanley

Okay. Great. Just one other question on oxaliplatin was, you guys said you don't expect to ship anything to wholesalers in this quarter. Is that based on what you've seen so far that you guys haven't shipped anything or is that kind of your read of demand of kind of how much you shipped in the quarter and what you would expect to happen?

Tom Werner

It's the latter.

Marshall Urist – Morgan Stanley

Okay. Great. Thanks. One last one on SG&A. I know this was asked before but could you just help us, I mean absolute dollars you said is going to be flat probably in the fourth quarter kind of? Is there an area you guys are reinvesting there or investing in or something else kind of going on there that we're not seeing?

Tom Werner

Well in the fourth quarter, we've got some sales meetings coming up, but we don't spread those out over the year. So there is nothing in terms of SG&A investment. I suppose this might be a little bit for EPO sales force and Precedex sales force that bubbles over to the fourth quarter a bit. It's really just some seasonality, we have end of the year sales bonuses that get trued up. We're going to have some sales meetings and some other seasonal expenses. So beyond some things we've already talked to you about, we would only be investing in S, we are not investing in G&A. Next year as fuel kicks in, we should start to see that come down on a fairly ratable basis throughout the year.

Marshall Urist – Morgan Stanley

Okay, great. Thanks a lot, guys.

Tom Werner

Thank you, Marshall.

Operator

Our next question comes from Jayson Bedford with Raymond James.

Jayson Bedford – Raymond James

Good morning, guys. A few questions, can you just talk about the hospital's response to some the SKUs that you've eliminated. Meaning have you successfully moved these folks up to other Hospira products or you've willing to kind of lose some less profitable business?

Terry Kearney

This is Terry. Let me give you a quick update on that. Initially a number of the SKUs that we eliminated were really somewhat low impact to our customers, so really not much of an impact early on. Clearly, as we've been going through this process and identifying the SKUs that we want to eliminate, we've also been working through how the plans we will take forward with our customers in a more robust manner and how this will positively impact them as well. And much of that work is going to be started here in the fourth quarter, and we carry it through in the first quarter. So far so good. We do believe that the story we have to share with our customers is a positive one. We believe they're also interested in the same benefits we are relative to a streamline and standardized product line. Again, at the end of the day, they will still have plenty of choices to make on which products they want to use. It's not like there will be no choice or limited choice. They'll still have plenty of choice and we think they will be satisfied and very happy with the outcome of this project for them as well, because I think they suffer from the same issues of complexity as we suffered or have suffered from in Hospira.

Jayson Bedford – Raymond James

Right. That's helpful. And just on the end of MMS side, can you maybe talk about pump growth versus disposable growth? I guess maybe on the pump side, are you still looking at on the down 10% year-over-year numbers?

Terry Kearney

When we put the guidance together it was from a capital perspective, overall capital perspective. We thought that would be down. What we're seeing is that there is this mix shift, radical mix shift from our plan and expectations. More in favor are our lower costs and lower ASP Plum devices versus the higher ASP Symbiq. So the capital portion on a dollar basis is lower than we anticipated going into this. Not necessarily because they're units, but more so because of the ASP mix that we're seeing today. Relative to disposables, the concept there is quite honestly, if your installed base grow so would your disposables and we are seeing continued expansion for our installed base and as a result of that we are seeing some disposable expansion as well on a year-over-year basis.

Jayson Bedford – Raymond James

Okay. So there's been no real change in disposable growth at all?

Terry Kearney

No.

Jayson Bedford – Raymond James

Okay. And then just last couple here, thinking about the divestiture as we model in 2010, what was the revenue associated with the Salisbury facility and can you just remind us of the critical care business in terms and its annual contribution?

Tom Werner

We did talk about critical care I think we said it was roughly $780 million. That one should have minimal bottom-line impact, I think as we talked at Investor Day, business was not very profitable for us. In terms of Salisbury, we really prefer not to give any details until the thing actually closes. We have signed an agreement but the other company has to get shareholder approval and just from a confidentiality standpoint, we'll hold off on that until we give 2010 guidance.

Jayson Bedford – Raymond James

Okay, fair enough. And then, just the last question. I don't mean to get too granular and the question is a little bit redundant, but looking at the implied fourth quarter guidance, more on the EPS side, if SG&A is flat quarter-on- quarter, it looks like earnings are coming down year-over-year and I'm just wondering , is it all on the gross margin line? Are there big R&D expenditures that you expect in the fourth quarter?

Tom Werner

In terms of sort of the sequencing here, no, there's really nothing going on with R&D. R&D and SG&A should be fairly flat. As you look at last year, we are spending versus – I'm talking sequentially versus last year, R&D and SG&A are both up. And margin is going to be up slightly. So it really is year-over-year and impact of some larger spending in the fourth quarter. I think spending in the fourth quarter last year was abnormally low. As I mentioned to one of the other folks, we've got some seasonal spending coming in the fourth quarter. We didn't have a sales meeting last year, for instance. So those expenses are hurting this year and not last year. So it's really not anything related to margin per se. In terms of dollars its more spending year-over-year and then sequentially R&D and SG&A should be fairly constant with Q3.

Jayson Bedford – Raymond James

Okay, thank you.

Operator

Our last question comes from Junaid Husain with Soleil Securities.

Junaid Husain – Soleil Securities

Good morning, gentlemen. Terry, you guys are now about nine months into the IV therapy contract with Premier Hospitals. I know you probably don’t want to get into the specifics, but can give us a sense for how this GPO contract is faring? When could we see a material pickup here MMS business on Premier?

Terry Kearney

Great question, Junaid, and again had it not been for the recessionary environment that we're working in, we would have certainly thought we'd have made greater strides. We are making good strides in the Premier business albeit slow because of the limited availability of capital in the hospitals. I think we've talked about in the past, our strategy with the Premier business is to really to lead with technology as opposed to IV solutions. And again, we are making progress, but I think it's been somewhat tempered because of the economic environment.

Junaid Husain – Soleil Securities

When I look at the installed base of infusion pumps in the US, I get the sense that this installed base is getting fairly old now especially with the lot of the COLLEAGUE pumps that are nearing the end of their useful life. So I guess I would argue that we should start to see a bolus of pumps come in to the market over the horizon. Is that a fair way to look at this market? And then when would you expect this bolus to start to flow?

Terry Kearney

I don’t want to be too righteous with the response, but quite honestly it's not a question of if, it's really a question of when. And again, I think there is still a pent-up demand too, as Chris alluded to earlier where many hospitals are interested in our newer technologies, especially with medication, reduction software. So that is a pent up demand, but again until the recovery really starts to take hold, I don't think you'll see a lot. Once it does take hold, certainly, I think you'll see as Chris indicated this is a high priority item for it. Our technology plays very nicely into the needs of the hospital, relative to pay for performance and things like that. So I think there will be an uptick. It's just a question of when hospital CEOs and their CFOs are more comfortable releasing capital to go after these upgrades.

In the meantime, we do recognize that because we have a very broad portfolio, we have been successful for those hospitals that do have access to capital, but are concerned about price. We have been successful with Plum and that's a real positive for us, because I know how our competitors are per se doing, but we continue to make placement and it's just unfortunate the mix isn't what we had called for. But Plum has been very successful in this tough environment because of its lower price point and the opportunity for customers to acquire the Plum to upgrade capabilities over time, whether it be the MedNet software or the wireless capabilities. So it does give them the ability to get a foothold and then with newer technology and upgrade as capital becomes available.

Junaid Husain – Soleil Securities

Fair enough. And then last question for you on oxali. Could you give us an update on its legal status? When would you expect the legal wrangling with Sanofi to be over? And are there any key legal milestones that we should be watching for on this front?

Chris Begley

Junaid, this is Chris. Let me take that and let me kind of cover a couple different things as it relates to the legal situation around oxaliplatin. First of all, we've got very strong confidence in our legal position as it relates to the oxaliplatin litigation. And as you look at some key milestones, they have gone for an injunction, and as it relates to that injunction, the court date is set for mid-November, and so if you're looking for a key milestone that would be a key milestone date. But again, we feel very confident in our legal position as it relates to the lawsuit that we have with Sanofi.

Junaid Husain – Soleil Securities

Thanks, guys. That's all I got.

Chris Begley

Thank you.

Karen King

Thank you and that concludes our call for the quarter. Thank you for joining us today. Operator, we can now disconnect the call.

Operator

This concludes Hospira's third quarter 2009 earnings conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hospira, Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts