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Hospira, Inc. (NYSE:HSP)

2013 Investor Day Conference

December 05, 2013 9:00 am ET

Executives

Karen King - Vice President, Investor Relations

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

Matthew R. Stober - Senior Vice President of Operations

Richard J. Davies - Chief Commercial Officer and Senior Vice President

Sumant Ramachandra - Senior Vice President and Chief Scientific Officer

Anil G. D’Souza - Corporate Vice President of Global Marketing & Corporate Development

Thomas G. Moore - President of Global Pharmaceuticals, Vice President and General Manager of Specialty Injectable Pharmaceuticals

Analysts

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

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

Matthew Taylor - Barclays Capital, Research Division

Christopher W. Kuehnle - Leerink Swann LLC, Research Division

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

Jeffrey B. Reich - Cramer Rosenthal McGlynn, LLC

Karen King

So we're going to get started. If you can take your seats please. Good morning, everyone, and thank you for joining us. We know that December is probably not the most ideal month for you to be here in Chicago, but the weather looks good. We have snow on the ground. So again, we really thank you for taking the time to be here.

I see a lot of familiar faces in the room. But for those of you that do not know me, I'm Karen King, I'm Corporate Vice President of Investor Relations for Hospira. And it is my great pleasure to welcome you to Hospira's 2013 Investor Day.

This is an event I know many of you has been waiting for. It's a chance for us to update you on our strategy, give out some of our longer term goals. And probably the single most frequently asked question that I get is, "2 years ago, you talked about your gross margin being in the mid-40% -- the mid-40s, are you guys still going to get there?" So we're going to answer that question today. Actually, they have probably already flipped to be under books and everybody knows everybody by now, but we're going to go through that and answer all your questions.

So I want to take 2 seconds first to acknowledge my Investor Relations team. They are a great team. And a lot of you spend time with them. And I wanted to put some a face to a name. So the first one I want to recognize is Ruth Venning. Ruth, if you can just stand up. Ruth is our Director of Investor Relations; Terry McRae, she's in the back booth here, is our newest member. She's our manager; And then, I think Judy Lane is running around, but she is our IR coordinator. And I just want to acknowledge them and thank them. They've worked really hard to put this event together today.

So with that, I'm just going to take you through the agenda a bit. Mike is going to start out the day, walking you through our vision and our strategy for the company. Some were going to -- instead of saving finance until the end, tom is going to do the financials a little bit earlier after Mike, so he can talk about our 2018, our 5-year financial goals. Following Tom is Matt Stober, who is our Head of Operations. And Matt is going to take you through everything from remediation to our network strategy, to how we're going to reduce cost over time across the network. After Matt, we're going to have Julie Sawyer Montgomery, who is our Device Expert and she's going to walk you through our device strategy, including IV Clinical Integration, which we're really excited about. After Julie, we're going to have Sumant Ramachandra, who's our Chief Scientific Officer. And then Richard Davis, who is our Chief Commercial Officer. And they're going to walk you through SIP including our pipeline, global expansion in emerging markets. And then they're going to wrap up the day with biosimilars, which we're very excited about. They've got a very robust presentation to take you through.

And instead of saving the Q&A for the end, what we've decided to do is kind of intersperse it throughout the day. So you've got a lot of opportunity, almost like 3 hours to ask your questions. So again, we know it'll be a very interactive discussion, and we look forward to that.

So I'm going to move on to the booth. We've got some booths. If you walk in, you saw some pods out there. We've got 3 different ones, please take the chance to visit them during the break. We've got 1 for SIP, we've got 1 for MMS and then we've got 1 for biosimilars. We'll have folks out there that can talk to you about the different products. We'll have products you can touch and feel, our new Sapphire pump will be out there. So again, please take the time to go through those.

So I'm going to now move to housekeeping items. The first one is assistance. Again, ask any of us on IR if you need any assistance. We also have people walking around that have purple badges. They can assist you in anyway. So again, if you need anything, ask them. And the second thing is the books. Again, you should all have books on your tables. It has biographies of the speakers, the agenda, all the presentations. In the back, it has a glossary of terms, if you need to look up anything. If you don't have a book, again, please ask somebody with a purple badge. But hopefully, everybody's got them today.

Electronics, please turn off your cell phones at this time if you have them or put them on silent mode. We also have outlets, you may not notice them, but they're under the table as you can plug into if you need them. The next is restrooms, restrooms are all the way down the hall on the north side. There are signs leading down there.

And Q&A. So when we ask you for Q&A, please just pause for a minute to let somebody give you the microphone. We've got lots of people on the webcast, and we just want to make sure all the Q&A is captured.

And transportation. Again, for those of you that pre-signed up for the bus shuttle, the bus shuttle will be here at the end of the day. It will be out front. And we'll be wrapping up probably around 3:00.

And safety. As you know, safety is one of our key areas, our focus at Hospira in the highly unlikely case of an emergency, please just exit from the doors behind you. And again, we'll have assistance there to take you out front. Also, Hospira is a nonsmoking facility.

So on the safe harbor today. Before we begin today's program, I'd like to remind everyone that we will be making forward-looking statements today, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those indicated. A discussion of these factors is included in the risk factors and MD&A sections in Hospira's latest annual report on Form 10-K and subsequent Form 10-Qs on file with the SEC.

And with that, I'd like to bring up Mike Ball, CEO of Hospira, to start out the day. Thanks, Mike.

F. Michael Ball

All right. Thanks a lot, Karen, and good morning, everyone. We're going to take a slight departure today because of, obviously, some late-breaking news. And so Tom and I are going to just go through the 8-K that just got filed this morning.

So we had a late-breaking event on Precedex. In your book is a copy of our 8-K that we filed this morning announcing a settlement agreement with Sandoz. I said late-breaking because the agreement was signed, says here, late last night, I'd say, late, late, late last night, after we put the investor materials to print. As reported in the 8-K, the settlement agreement provides for Sandoz to enter the market no later than December 26, 2014. The agreement also includes a number of accelerator provisions, which, if triggered, could lead to an earlier Sandoz market entry date. And this agreement is subject to standard contingencies and is otherwise confidential.

So with that, I'm going to bring Tom up to, again, talk about a couple of scenarios we have here.

Thomas E. Werner

Thanks, Mike. Also on your book, and I know I said, David Roman [ph] here, everybody flipped their first, so you've probably seen it all. But also, as an additional page, we distributed. And for those of you on the webcast, these materials are included in the presentations on the website. What the additional sheet indicates, and we had planned on giving some scenarios for earnings for 2014 today, it indicates potential adjusted earnings scenarios for 2014 in the range of $2 to $2.25 per share. First of all, we recognize this is a large range. It reflects the fact that there are multiple scenarios as to when Precedex could face generic competition. The upper end of the range is based upon the premise of the first generic entry would not occur until towards the end of 2014. However, we want you to understand that there are other scenarios that could push, as Mike said, that date up to earlier in the year. If an entry occurred early in 2014, then we'd be looking at something lower in the range that I communicated.

We expect to be in a much better position to narrow the range and give earnings guidance these are scenarios at this point, they're not guidance and our fourth quarter earnings call in February, which is, of course, the time we usually do that and provide earnings guidance for the new year.

So we did want to provide a range of scenarios because we wanted to at least bracket the potential impact of Precedex. So I know there's going to be a lot of questions on this. What I'd ask is, let's have Mike get the through the strategy session. I'm up, I'll go through the financials. We've got a Q&A session at that point and we can deal with any questions you have, including anything on the late-breaking news.

So thanks, and here's Mike.

F. Michael Ball

All right. Thanks a lot, Tom. So...

Karen King

So I know you guys are looking through your books, they're actually back in the finance section. So there's one page inserted in the book that we printed, that's got just the couple of slides in it.

F. Michael Ball

All right, thanks a lot, Karen. And thanks, Tom. So obviously, a good way to start the morning. But again, welcome to Chicago. Our weather is -- was 80 degrees, actually, yesterday. So it just cooled down a little bit here. All right, so I think we have a really great program for you today. It's going to be a long day but what we want to do is take the opportunity to really dive into depth on our business. I'm going to do just a 35,000-foot file over here and also do an overview of the organization and the business going forward. And then, as I said, others will delve into this.

I want to let you know where we've been, what we've done and why I believe the future for this company is absolutely tremendous. We're going to share with you, I think, a very compelling strategy that really goes along this 3-step plan to sustain global leadership. Now in investor meetings, I also talk about these 3-step plan. But I spend 90% of my time in investors meetings on the left side of this chart. I must have said the words remediate, Rocky Mount and gators several thousand times now over the past couple of years. So I'm going to give us all a break and I'm going to go to the really exciting part of this chart, which is the right side of this chart, and tell you why we believe we will be the #1 market share player in every market we play in, why we can believe that MMS growth will be there and will be profitable, why biosimilars is a great new opportunity and why we expect to win in it. We'll also talk about our operating margins and why we expect to get our cost position to world-class position. All of these adds up then to, I think, an impressive set of financials. We're talking about 5-year progress [ph] here. Great growth on top line. We're talking about gross margins going from the mid-30s to the mid-40s. We're talking about operating income going to the high teens. We're talking about EPS finally getting back on track and getting to high growth profile.

So I am very excited about where this is going. And we can do it because I believe this company is operating in what I'd call a sea of opportunity. And so what is the sea of opportunity, Mike, right? So let me show you.

We currently, as an organization, operate in an SIP market of approximately $9 billion. We operate in an MMS market of approximately $2 billion. This is all really concentrated in North America but we can make a very nice living here. But my contention is we can make a much better living if we globalize this company, if we pursue other marketplaces outside of North America with vigor. And what we see then is opportunities in the developed world of some $6 billion in market and in emerging markets, a further $5 billion.

So if you look at our SIP opportunity then, we believe that we can take for where we're playing in today $9 billion worth of market and play in something that's more than double that, $20 billion of SIP market. And of course, the SIP will be driven by a very robust pipeline. We've got a pipeline of $17 billion of local market value, but we also have a pipeline of biosimilar products of $40 billion. This is what we are taking dead aim at. And if you think about it, we are a $4 billion company. These are very large opportunities.

We are also assisted by global mega trends. So the developed countries have a phenomena now where the baby boomers are hitting the age of 65. And during this decade, the number of people over the age of 65 is going to explode. And with that, comes exploding health care cost because people over the age of 65, on a per capita basis, use about double the amount of health care. This is going to be a real issue and is a real issue for developed countries.

I was in Japan a couple of years ago, and Japan has one of the lowest generic penetration rates in the world. And at about 20%, 25%, and I went into the Ministry of health, and they were asking me if I had any good ideas of how to increase the penetration of generics in Japan. I told them I had a lot of good ideas. Now they just came out earlier this year and said that the government's objective in Japan is to move the generic penetration rate from 25% up to 60% in the next 5 years. That's the second largest market in the world.

Similarly, we have Southern Europe, again, facing real issues with low generic penetration rates. They're looking at a possible solution and are implementing it of increasing the generics used. So in the developed market, more generics will be used. And if you think about then, another great global mega trend, it's, of course, emerging markets. hundreds of billions of people this decade will move from poverty into the middle class. And their #1 social concern and their #1 social priority is health care.

China has said that by 2020, it wants all of its citizenry to be covered by some sort of health plan. This is going to cause, again, great demands on the health care systems, both in terms of utilization, but also cost. So if you look at these 2 dynamics then, aging in the developed world and the emerging market phenomena, obviously, this is good for the health care industry. Utilization will go up. And if you look behind me, pharmaceutical sales will go up, but the governments and payers are going to struggle with the cost. They are going to be demanding value. And basically, that's where we come in. We are a huge value driver. If you ever go to China, you can't believe the amount of injectable medicines used there, #1 in the world in terms of utilization. They need to get value. They need to get high-quality medicines. That is where we play.

IMS, the industry's really research reporting system, recently concluded, based on a lot of these dynamics, that generic -- the generic mix in the pharmaceutical industry will move from the current 27% to 36% over the next 5 years. 27% to 36%, that's phenomenal growth. So not only do we have expanding markets, but we have expanding generic share within those expanding markets to go after. And this is one of the reasons that I'm so excited. I believe we can get after this opportunity and we must get after this opportunity.

So how are we doing? Well, this is a progress report on what we've been up to. The #1 thing on this progress report talks about remediation. So we've been spending a lot of time, effort and money against remediation. But that is not the only thing that we've been up to, we have been investing heavily in the future, so that we have drivers of growth and financial expansion available to us as we emerge from this remediation. So things like increasing our capacity at Vizag, a low-cost place to do business. We've got vertical API integration that we're pursuing to lower our cost of goods. We have pricing that we're taking that better aligns the value of our products and the investments we're making in our products to the price that people will pay. We've been taking action on Precedex. You saw it this morning with the Sandoz agreement. We've also launched the premix.

Now Precedex, at the end of the day, has been a great financial driver, but it is not a strategic driver for this organization. Genericization will mean some financial pain, but I believe we can more than cover that with, what I said about the pricing increases, but our other drivers like globalization.

So when you look at our global expansion play then, what we've been doing is essentially building a machine to submit doses all over the earth. So, so far, we are almost at 200 submissions on a worldwide basis, cumulatively, over '12 and '13, and in a position now to send out hundreds more.

We're also obviously looking at our biosimilar portfolio. Biosimilar investments have been critical. We've upped our R&D expense to accommodate it. We've got a financing deal with NovaQuest to accelerate it. And you saw some of the fruits of the labor with the infliximab approval just recently announced in Western Europe.

With MMS, I believe, we have a winning strategy here. Now there's no question, we still have some short-term pain to get over with our MMS business. But we've announced and are doing our modernization and streamlining. There are opportunities to grow gross profit. We definitely need and will get in alignment with the regulatory authorities. So I think there's a good future there.

So again, we have not just been remediating, we have been investing. And those investings -- investments have set the stage then for accelerating our growth profile, accelerating our gross margin profile, getting supply out there reliably to our customers. And ultimately, then this adds up to great shareholder value.

I'm now going to turn to what I think are the 4 key drivers of this organization. And again, I'm going to cover this in a very high level that will be much more in-depth discussion here. But let me first turn to SIP.

Our objective here is to be the #1 SIP player in every major market we serve. Now we already are #1 in the world in terms of units. We have a 34% market share. But the truth is that much of that market share derives from the United States. We have a great global footprint, but we're subscale virtually everywhere. And let me give you the example I've given in the past.

In the United States, we market about 140 molecules: In Germany, 19; in France, 19; in Japan, 10 and these are top 5 markets. So the idea is simply to take the products that we already make and market somewhere in the world and basically get those submissions in there. Because in France, in stead of having 19 molecules, why not have 30, 40, 50 or 60 molecules to sell. The beauty of the Generic business is one sales rep can just as easily sell 90 molecules as they can 19 molecules. So our infrastructure is very leverage-able. So why not use it?

This gives us access then to another $6 billion of market. If you throw the emerging markets in that and do the same play, and you'll hear about that later on, that gives us another $5 billion opportunity.

And so last time we discussed this, we're just talking about it. Right now, we are actually doing it. So 100 submissions, new-to-country submissions went in last year. By the end of this year, over 200 will be in. And you can see from this graph here our intent is to put in hundreds more over the next few years. I think we've got a real good feel for this now, so I don't see why we shouldn't be able to do this.

This, then, is -- when you look at global expansion, it's complimented then by our new products, and then this forms our pipeline. So our pipeline in SIP, and Sumant will talk more about it, consist of 77 molecules with a local market value of some $17 billion, 80% of which will be launched over this next 5-year period, we believe. We are looking over this 5-year period at something like 700 new-to-country launches.

Now the lifeblood of pharmaceuticals is new products. And particularly, in generics, it's new products. I think you can see from what we're up to, we are simply driving new products into all the major markets around the world and that is how you win in this marketplace.

The other way you win in this marketplace is to ensure that you're getting the most value out of your portfolio, and we have a couple ways of doing that. One is differentiation. That is giving the customers what they actually want. So anybody can provide the products. We are actually providing them many times and formats that they desire, like a premix. Premix saves them a lot of money, a lot of time. And so that, at the end of the day, what you have is a reward both in price premium and/or market share.

If you look at our U.S. sales, a lot of our U.S. sales is tied to differentiated platforms, like premixes and advantage, et cetera. So differentiation is a great tool to get the most out of our portfolio. And what I continually say to the team is there's nobody more focused on this channel than us. There is nobody who should know this business better than us, which means that if we understand the needs, then we can bring out the products that our customers need and are willing to pay for.

The other way to bring value out of the portfolio is obviously with pricing. And we've been taking price up for the last year or so. And basically, in my view, we need to better align our pricing with the value of our products, but also, the investments we were making.

Now obviously, we're very conscious of the price pressures and cost pressures our customers are under. But in many instances, it just isn't only about price. And let me give you an example. I was at a pharmacy meeting probably 9, 10 months ago, again, with a number of pharmacists and I was talking to them about what we were up to at Hospira, some of these great visions. And one of the pharmacist stopped me and basically, I think, summed up with all the group was saying, and saying, "Mike, those are great ideas but you know what we really want? We really want our products when we order them. Enough of the big strategies. What about the backorders?" So I told them what we were doing to strengthen the supply chain, that we were doing modernization, that we were doing big capacity expansion, that we're building up inventories on API, so we wouldn't get shortage. That we we're going to do the sourcing again to do it, but I also told them this cost a lot of money. And their response back was, "Look, we are willing to pay more for a reliable supply. It's that valuable. This country has been laboring under drug shortage now for years with seemingly no end in sight. "

And so what I took away from that was these folks, if we get our supply back in gear, if we get our service levels up, then they are willing to absorb some of the costs. So the good news with that is we have made the investments and our customer service levels have turned around dramatically.

So starting in 2011, they plummeted through 2012. They were quite simply unacceptable. And you can see in 2013, we ramped up to the point now where we are at about a 90% service level.

Now we're trying to get to 95% or better, but 90% reflects very good progress. And as a consequence, I believe of our relationships with our customers and the improvement in customer service, our market share has completely turned around as well. So again, following customer service, we took a massive dip in market share. And in 2013, we have been bringing it back to the point where at the end of the third quarter, we were at near historical highs. I am very pleased, gratified and thankful that our customers have hung with us through a very difficult time.

Now remediation in SIP is not over. The bulk of the remediation is behind us, but it's not over. We still have work to do. But we are emerging from it stronger than we ever have been and in a solid #1 position. A great business. Global expansion, getting value from our molecules, a great pipeline moving forward. And I think this all adds up to a great future for our SIP business.

Let me turn now to MMS. So one of the questions I keep getting on MMS is candidly, "Why are you in this business?" And so let me explain it to you this way. We have a leading market share out there, some 25%. This share is very, very sticky. The reason it's sticky is customers tend to keep their machines for a very long time. And when I say very long time, almost a minimum of 7 years, often 10 years, often longer than that. So the turnover here is very, very slow. So we've got this great installed base that is very difficult to penetrate and from that installed base, we get a great annuity stream offset. This looks like a good play. In addition to that, what we've seen is there synergy with SIP where we have our machines, we have higher shares of our SIP business.

But I think the most compelling reason to be in this business, and candidly, the reason to be in this business, is I expect future growth and future profitable growth from this business. This is what this business needs to prove. Absolutely, we are going to endure some short-term pain and have injured it. But I think coming out the other side, we have drivers that will increase our profit in this business and get us back onto a very good growth trajectory.

Let me show you one of the profit improvement things, and it's what I've been talking about. It's about this modernization and streamlining idea. You can see, kind of a jumble of pumps up here going down to 3. We have taken essentially, and are taking, 9 platforms and bringing them down to 3 platforms. Now each of these platforms has multiple configurations, so the pump, for example, has 22 different configurations. We're going to bring that down to 6. I went now to our San Jose service center earlier this year. I've been in the San Jose service center towards the majority of pumps, our service in the United States, and I walked through and did a tour. I was shocked. What I was shocked was there were a myriad of different pumps, shapes, sizes, colors, almost beyond belief.

And I came back from that with 3 -- thinking 3 words: simplify, simplify, simplify. There has got to be a way to simplify this business. And that's exactly what we're doing. We're simplifying it so we can focus on quality on those remaining products. We're simplifying it for our plants and our service centers. We're simplifying it for our customers. And we're simplifying it to drive profits. Because at the end of the day, this can -- has to be a more profitable venture with way less machines in terms of styles out there.

So my view is that we are on this and we are going down the road to get this job done. The other big item here and again, Julie will cover it in more detail, is the future. So why do we think future growth? If modernization streamlining helps from a profit standpoint, why is this business going to grow? I think 2 major reasons.

One is, we have what's called IV Clinical Integration. It's a very big idea involving integration into the hospital systems and getting auto documentation and auto programming. And what this does is reduce medication errors and increases efficiency. And that is what hospitals are looking forward today. I think that's going to be a huge driver. Also, we have a number of next generation pumps coming to the market, and this will sit nicely on top of the franchise that we already have. We are in the best position to move new machines out into the marketplace.

So this business has something to prove. It needs to prove it to me and it needs to prove it to you, that it is worthy of the investment. From the plants we've seen, we believe this business will grow, it will grow profitably.

Now I'm going to turn to the fantastic world, I call it the biosimilars. Biologics are over $100 billion out there. $67 billion of those biologics are coming off patents by the year 2020. As I said before, we're taking dead aim at $40 billion worth of that value with our R&D pipeline.

Now a couple of years ago when we talked, again, there's still some of view that biosimilars were a fantasy. They're not. We're selling these fantasies right now in Europe and have 3 of them approved, getting great growth out of them. And in 2013, we will surpass the $100 million mark with them. So we are getting great traction with these products.

We just got infliximab approved in Europe. This is the first mab ever approved by a Western jurisdiction. This gives us an opportunity over the next couple of years to go after a $2 billion marketplace.

In the United States, we're doing EPO trials. We're in Phase III, we've completed enrollment. We expect to submit our EPO docs A [ph] in the United States some time later in 2014 or early in 2015. We are putting considerable research and development behind these efforts to get these products to market because they really are the future. And if you look at our future as to our pipeline, and Sumant is to go into this in huge detail, this is our pipeline, it looks extremely robust. And when you compliment that with the access we have to Celltrion's pipeline, we have one of the best pipelines in the entire industry, and did I mention, going after $40 billion of local market value. If I didn't, I apologize. I'll mention it now.

So from our standpoint, this is a great new frontier. Now I'm also getting the question, "Will biosimilars ever be used in the United States?" I think I can give you $0.25 trillion reasons why they will be. Some reports show that over a 10-year period, biosimilars will save U.S. health care some $0.25 trillion. With the health care budgets being as pressured as they are, this represents one of the biggest opportunities this country has to save money in health care. And I do not believe that this country will pass it up.

IMS projects that in the U.S., biosimilars will be somewhere between $6 billion and $13 billion by 2020. Worldwide, maybe up to $20 billion. So I'll say this to you. Biosimilars will be approved in the United States. They will be used in the United States, and they will be successful in the United States. That's just my opinion.

Now from a operations standpoint, because of course, operations underpins all that we do, let me talk to you about how we expect to get to a world-class position and how what we do on cost of goods is going to help us get there. So really, if you think about it, there's 3 things that we can go after in terms of reducing cost of goods. One is going after efficiency in our existing plants.

Now I haven't used the efficiency word around any of our plants in the last 2 years. The words I've been using are: remediate at any cost; get the supply out the door at any cost; and we'll worry about the rest of the stuff later. Well, we're getting into the point about worrying about the stuff later now. Because as I've shown, we are getting through this thing and we are emerging and it is time that we get after efficiency plays in our plants when we are at a point of sustained compliance and sustained supply. And I believe we're getting to those points now.

The other one to go after is API. And I'll explain active pharmaceutical ingredients in just a moment. But again, a vertical integration play helps us reduce cost of good. And then it's about manufacturing in low-cost-to-produce places. We, of course, had a huge initiative going here in India. We're building a huge manufacturing facility at Vizag. It's 1.1 million square feet. It will be one of the largest injectable pharmaceutical plants in the world. It will produce over 500 million units a year. We're also expanding on our other operations in India. We are increasing the number of lines at our IKKT facility. We're increasing the number of lines at our ZHOPL facility.

So what does this all mean? Well, it means we're expanding capacity outside the United States. If you look at our footprint right now, only about 10% of our units are actually manufactured outside the United States. By 2018, we think that number is going to be something more like 40% to 50% of our units will be manufactured outside the United States. This should have a profound effect on our cost profile.

Turning to API then. API can be a very expensive part of the cost of goods equation, especially in something like oncolytics. Right now, Hospira only produces, in fact, less than 10% of its own API. One of the ideas behind the Orchid acquisition is to up that percentage. By 2015, with the Orchid acquisition going through and a couple other things Matt will talk about, we should be up to somewhere around 30% of our API is coming from homegrown sources. And with a couple of other inorganic moves, we think we can get this number to 50% by 2018.

So if you look at it then, we've got great levers and we're doing them, not just talking about them, on a cost of goods side, both in terms of efficiency, in terms of where we manufacture and in terms of API. This, in turn, helps us then drive our gross margins. And this is what we've talked about then, moving from our 30% to 37%, up to somewhere in the mid-40.

When I first started with Hospira, one of the great opportunities I saw here was -- is going to be an opportunity to expand to gross margin. Because when I was doing the homework on the company and the industry, I noticed that seemed like everybody else was at 45% plus and Hospira was way down. It seemed like a great opportunity. We've taken a few years to get our remediation over, so we've gone the wrong way.

But between what we're doing on cost of goods, between what we're doing on pricing and mix, the biologics coming in to the mix, I believe that we can move and we expect to move our gross margin more towards the industry norms as opposed to being the outlier on the bottom. And I don't think that's an unreasonable proposition for us.

One of the key future milestones then that you all should be keeping an eye on over 2014 and 2015. Essentially, it's FDA reinspection of Rocky Mount; it's the Orchid acquisition being completed; it's the Vizag facility coming online, as I mentioned somewhere towards the end of 2014; it's our devices strategy completed; it's our next generation pumps getting onto the market; it's our EPO biosimilar being submitted in the United States and the formation of the biosimilars marketplace. These are the milestones you should be looking at as you look at this company over the '14, '15 stage.

And if we grasp these opportunities, if we move from these milestones, then I think we've got a great set of financials to talk about. Growth in the high -- mid to high single-digits. Gross margin, again, mid-40s. Op income margin, up into the high-teens, and and EPS growing in the mid- to high-teens.

So at the end of the day, then, I think we have made tremendous progress. It has not been an easy 2.5 years that I've been here, but I believe we are coming through this much stronger. We have made the right investments to take advantage of the opportunities in front of us. I believe we have done a really good job increasing the supply to meet the needs of customers on a worldwide basis. We are driving future profitable growth.

I said at last time, and I'll say it this time, I believe in this world, there are 3 types of people: people who make things happen, people who watch things happen and people who wonder what happened. This is the management team that is making things happen, that will, in my opinion, make this company everything that I thought it could be. We have a tremendous future. I look forward to showing you in more detail with the rest of my team how we're going to do it. Thank you very much. Tom?

Thomas E. Werner

Thanks, Mike. Good morning, everyone, thanks for being here today. I think the drapes here kind of blend in very well with our typical December gray sky here in Chicago. So that was by design. But thanks for attending our Investor Day. It's good to see so many familiar faces.

I'm going to take you through a 5-year overview of our financial outlook. I know there's going to be a lot of questions during our Q&A session, and then the one towards the end of the day. But we've tried to anticipate some of those questions ahead of time, and I'll kind of outline those for you.

So first, through my presentation, and then as you hear from Matt, Richard, Julie and Sumant and others, I think one question you're going to probably ask is where is the sales growth coming from? How much is a biosimilars? What's global expansion going to contribute? And we'll try to get to that.

Gross margin is probably the top question for everyone. Where's the expansion going to come from? What are the primary drivers. Third, R&D. As we start to move further into this world of biosimilars, what's our R&D spending profile going to look like? What's the payoff? Operating margins. Can we get operating margins back into the high-teens, where they were several years ago and how are we going to do it? And then last, but not least, cash flow. It's been under pressure lately. When are we going to see improvement?

So as I take you through, the first part here is really a sales, margin and earnings outlook. And then we'll talk to cash flow and capital allocation. But what I really want to demonstrate to you is that we think we've got a clear path to improve financial performance. As we've looked at the investment we've made in R&D, we've made a decision not to slow that down, and you're going to see how that's going to pay off. You're also going to see how the gross margin expansion is going to allow us to fuel even greater investment in R&D and take advantage of all the opportunities. I think the thing that excites me the most is it's been a long time since I've been in a company that has many opportunities as we have. And I think we're going to now get to the point where spending margins will be able to take advantage of some of those.

Okay. Not going, huh? Where do you want it? Okay, that's not changing back there, so I apologize. Okay. So now I got to go back. I'm sure why that's not in sync. Okay. So I'll start off first with sales.

We see our sales growth over the next 5 years in the mid-to high-single digits. I'll take you through a little bit about the product line areas and where we see it coming by operating segment.

All the comments I'm going to have here today this morning, relative to growth rates, are 5-year compounded annual growth rates. In terms of where we see the product line contribution coming from, obviously, generic injectables and biosimilars are going to drive the lion's share of the growth. But we've got new product introductions across all of our other product lines. What we've included here in other are the IV Solutions business, our contract manufacturing business, and a couple of other small ones. But we're going to see good pricing activity across the SIP portfolio, as well as in IV solutions, and that's going to help drive the growth over the 5-year period.

From an external reporting segment standpoint, this is how we report externally. In the Americas, which includes the U.S., South America, Latin America and Canada, we're going to see growth in the mid-to high-single digits. In Europe, driven by biosimilars, as well as global expansion, we'll see growth in the low-teens. And in Asia Pacific, growth in the high single-digits.

Also, we've mentioned that we're anticipating EPO as a reality in the Americas some time late 2015, early 2016, and that's going to drive a lot of the growth there. Mike talked about margins, I'll talk a little bit more detail here. The big driver, of course, is going to be cost improvement, which Mike talked about. Vizag, a big contributors, as that comes fully online in 2016. But we've also got a lot of cost improvement programs going on, which Matt will talk about, including API vertical integration as we complete the Orchid acquisition here, hopefully, soon within the next 4 to 6 months, we expect to do that.

Pricing, as I said, it's going to be a healthy environment, both in SIP and IV Solutions. Good new product introductions, all intended to offset potential loss of exclusivity from Precedex. Biosimilars and MMS, because those are higher-than-average company margin -- gross margin profile, that will also help move our gross margin profile up into the mid-40s.

R&D. I talked a little bit about this before. Just to reiterate. We never pulled our foot off the gas pedal here. Sumant is a very convincing guy when it comes to getting funding for all the projects. But it's a good thing we didn't. In fact, we actually stepped up our acceleration here. We've been spending R&D at 6% to 7% of sales back in 2011. Over the last couple of years, we've ratcheted that up to 7% to 8%, as we've been investing more heavily in biologics and the required clinical activities that we need to do there. We're going to be seeing that gradually uptick to 8% to 9%. This is funded by a lot of the gross margin expansion and the sales growth that we're going to see. So we've got a lot of opportunities we can take advantage up here. It's exciting to be able to begin to have more financial capability to get at this and to spend R&D at those levels.

Operating margins. We see this moving into the high-teens, approaching 20%, driven by sales growth, gross margin expansion, which we talked about. Talk a little bit about SG&A leverage. We're going to leverage the G&A portion of SG&A. So that will come out as a percentage of sales, although we don't separately report it. We will be continuing to invest in selling and marketing, primarily for biosimilars, as well as global expansion and moving into new countries.

Now R&D, as shown here, is a negative. It's just a mathematical negative. It's actually a real positive, but we see that as margin expands, sales expand, we can fund more R&D and at the same time, get our operating margins back up into the high-teens. And you'll see compound annual growth rates, high-teens approaching 20% as well.

Now one negative we've got, but it's actually a negative result of a positive driver, is our tax rate is going to go up. And we're anticipating that for a couple of reasons.

First, a lot of the rebound in our earnings is going to come in higher-than-average tax jurisdictions, united States, for instance. But tax rates in Europe are not the lowest in the world, either. We have a lot of programs in place that we are actively working to try to mitigate the tax rate down. But the fact is we expect the tax rate to go up in the United States. We don't -- were not anticipating that the extender bills are reenacted, so that hurts is a little bit. It's the R&D tax credit and the look-through provisions.

So in addition to a change in the mix of earnings, we're also anticipating increases in the statutory rates in most of the developed countries that we work in.However, it's still going to give us the ability to see EPS growth in the mid-to high-teens over the 5-year period. So despite a tax headwind, which is very substantial, I think the slide said we've got the tax rate going up into the high-20s over the planning period. We're still going to be able to deliver this kind of earnings growth over the 5-year period.

Let's talk a little bit about cash flow and capital allocation. For the last several years, it hasn't been easy, as Mike said. We've been completing the pharma and device remediation. We've been actively working our device strategy. We're modernizing our factories. We're not done with that yet. At the same time, we've restructured our debt, gone out and redeemed the bonds and then raised new bonds to take their place. As a result, we have a very nice maturity profile. I think our average maturity payout is 13 years, so that gives us some flexibility. You can kind of see our debt ratings here from S&P and Moody's.

But as I said, it hasn't been easy to balance this, and then still be able to invest in SIP and biosimilars, still drive global expansion, vertical integration of API through the Orchid acquisition, expanding capacity at Vizag. And those were contrast decisions that Mike and our board and our management team made to do in the face of a lot of difficult remediations. So I think we've got some credit there for staying in the course.

Our priorities for capital allocation going forward, and I'll talk a little bit about the methodology I use here in the next slide. But 65% to 75% of the operating cash flow we generate, and I'll kind of define that in a minute here, is going to go for investment. That's investment in R&D and in capital spending. We've still got a bit of modernization to get behind us, as well as the build-out in Vizag.

The other 25% to 35% is what I'd call discretionary. That'll be used. It's not earmarked in any set buckets for either of these areas right now, but that's for M&A, changes in the capital structure, including share buyback. Just to remind you, we've got $800 million left on the original authorization we received several years ago. We could also look at the timing of how we retire our debt. So that's sort of the mix, 65% to 75% into the business. The other 25% to 35%, outside the business, either to buy something or to return money to the shareholders or get the debt retired.

So how that breaks down? What I've done here is I take our operating cash flow and I take it before R&D. Because I consider R&D to be a discretionary investment, much like CapEx. So the way this breaks out. Over the planning horizon, this number is about $5 billion to $5.5 billion. About 1/3 is going to go to capital spending, and we'll talk about that in the next slide here in a minute. About 1/3 of it is going to go to R&D. And for those of you that are kind of into the accounting here, I've shown that on an after-tax basis because that's how the cash flow is going to work.

Remediation. This is the remaining cash that's got to come out of the balance sheet to finish off the remediation activities that we've already announced. We've got money in there, about $200 million earmarked for completing the Orchid acquisition. And then here's the remaining 25% to 30% of the cash that would be available for those activities that I mentioned earlier.

In terms of capital spending. We get asked this quite a bit, and this is how we're planning on allocating our capital spending out over the next 5 years. About 20% to 25% is going to go for maintenance and replacement capital. And that's been pretty consistent over the past 4 to 5 years. Now we've got about 35% going to modernization. Now you might say that some of that modernization should really be considered maintenance and replacement. But included in modernization are things like automated visual inspection, which is a new program. We've got some SIP investments we're making from an IT standpoint in there, and Matt will talk about that in a little bit. About 10% to 15%, I think closer to 15%, is to complete Vizag. Capacity expansion. We are going to be adding production lines, at least we're anticipating in our legacy factories that we've -- we currently operate. So as the sales grows along the mid-to high-single digits, we're going to need to add capacity, not just in Vizag.

The remainder, we've got pump remediation. This is primarily pump placements that we make, where we replace the pump with customers in exchange for a set-up charge. We've got to get that completed. It's a small amount, about 10% of the total spending of $1.7 billion to $2 billion. And the rest is other, which is a whole menagerie of projects. So that's really how the capital spending will break out over the 5-year period.

We were going to talk about 2014, but we've talked about that at the start. I didn't show the slide because we're kind of improvising there. But we'll talk to this during the Q&A session. But the earnings per share scenarios that we've outlined here are between $2 and $2.25. And I'm sure there'll be a lot of discussions and questions on that.

So as we wrap up here with my segment, and then we'll go to Q&A. I think, hopefully, you've seen, we've got a clear path to improve financial performance that should lead to greater shareholder value. We're investing in the right places. We're going to continue to invest there. We've got a good portfolio that's growing in the right places. It's going to deliver mid-to high-single digit sales growth and mid-to high-teens bottom line growth. We've talked about our gross margins expanding into the mid-40s, our operating margins into the high-teens approaching 20%. Our competitive cost position, which Matt is going to talk about after the Q&A session, I think you'll see how we're going to get there. And hopefully, throughout the rest of the day, you'll see how all this knits together to get back to a sustainable, long-term growth platform and delivering greater shareholder value. With that, Karen, I guess we're ready for Q&A. Thank you.

Karen King

Okay. So we've got about 30 minutes for this session. But as I said, we're going to have multiple sessions. So you'll have a chance to ask plenty questions. This is just going to be, again, Tom and Mike, so please kind of keep your questions to strategy ,d finance's right now so we don't jump ahead. And again, please wait for the microphone so that we get this on webcast. Right here, please.

Question-and-Answer Session

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

It's Chris Schott at JPMorgan. Can you just come back to one of the drivers of the gross margin? It seems to be priced and some of these new product initiatives. I know you guys have made very significant investments in manufacturing. Your customers seem to be willing to take some pricing increases and change that reliable capacity. When I look at the rest of the industry, there' a lot of capacity coming on board, especially when you look out to this 2018 time horizon. What makes you comfortable that you can maintain this kind of price dynamic in the industry? As these new competitors come to market, they're going to want gain share price. They might not be as disciplined on price. Can you really hold the price line if that kind of dynamic plays out in the industry? So I'm trying to understand what assumptions you make for price and kind of how do you get there as we kind of look out the next 5 years or so?

F. Michael Ball

Yes, I think our view is that we should be able to hold on to price, Chris. I think as you look across the industry, the amount of quality initiatives just across the base, I think, is driving up people's cost all over the place. There maybe new players getting into the market who haven't been exposed to those types of quality standards before. And as they become accustomed to those quality standards, they may have a change in terms of their thinking. But what I'm really looking at is, how are we going to compare to them from a cost of goods standpoint? And that's why I think it's important that we go after with state-of-the-art facilities, like in India, really expand that so that we, at the end of the day, have the best cost of goods position. So with the API vertical integrations, with our expansion, massive expansion into low-cost areas, et cetera, our breadth of portfolio and our historical customer relations, we are a formidable fall out there. And also, I should say, by far, we produce the most amount of units in the world. So at the end of the day, I think anybody can sell at a loss, but probably, only for a short period of time. As I look across the rest of the world, we see sporadic fighting, et cetera, with price. But essentially, then the world comes back to some rationality. So will there will be bumps, et cetera, down the road? Yes, absolutely, there might be. But as I look at it, I see a nice steady price on path. I should also say one of the intriguing things on biosimilars is, right, that there will only be likely a few competitors entering the market at any one-time, and those competitors will be thinking probably very rationally because they've had to invest $100 million or $200 million into R&D to get to these particular points.

So I look at pricing in this industry as very favorable.

Karen King

Okay. Ruth, over here please. David?

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

David Roman from Goldman Sachs. One for Mike and one for Tom. Mike, as I look at -- as you look at the plan that you've laid out, it contemplates a lot of drivers that are very much so forward-looking. So could you maybe just give us some perspective on what's in the plan here, your level of visibility, and maybe some perspective on what you've laid out here today, you sort of see right now versus what are sort of things that need to be developed in the future?

F. Michael Ball

Well, David, I think this is sort of the exciting thing because a lot of companies will look at opportunities and say, "We're developing products to meet this opportunity with a high risk of failure." The interesting thing about this company is our R&D, of course, has very high probabilities of success. And so if you look at our strategies, and let's just go through them, the global expansion one, we're actually just doing it. And I get an update on a monthly basis, how many new submissions we've made. And it's very, very predictable in terms of going into the markets. On the biosimilar side of the ledger, again, we've anticipated when products will get approved. Infliximab in Europe, that's been a correct statement. We're looking forward in terms of EPO. I mean, obviously, the clinical trials have to come out. Right? But so far, so good. The cost of goods improvement, so we're building Vizag. So it's going to come online. We've been doing exhibit batches towards the end of '14. We've taken the steps to buy and vertically integrate API. So what I would say to you, is kind of the vision we had a couple of years ago about how to get this place really going, we've actually been doing those things over the past couple of years so that my sense is we're getting closer and closer to fruition. So it's really less vision and more execution right now, which, in my mind, is a really great place to be.

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

That's helpful. And then for Tom, as you -- understandably, 2014, the ranges, are not guidance. They contemplate a number of different scenarios at either end there. But presumably, at some point, Precedex, there will be increase in your competition, maybe not 2014 but 2015. So as you look now in the context of the plan that you've laid out here, what percentage of this growth really comes in '17 and '18? Is it fair to say most of the acceleration, top and bottom line, is towards the latter year, 1.5 years of the long range plan? Or am I looking at that incorrectly?

Thomas E. Werner

I'll do a little simple math here. So the guidance we've got out there for this year that we had communicated before, and then looking at where this $2 to $2.25 would be, obviously, $2 to $2.25 is not growing in mid- to high-teens over here. So it's certainly not at that average rate in 2014. I don't think you need to wait for '17 and '18 to get all the accelerator. '16 is going to be a nice, interesting year as well.

Karen King

Ruth, in back now please.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

It's Greg Gilbert of BofA Merrill Lynch. Just sticking with the financial stuff, can you frame gross margin in '14 versus '13 if product mix were similar? How much of a lift do we get simply based on being further along with remediation and being more efficient? And then I'll ask Mike's question upfront too. Since you've joined the company, you've pointed out that injectables pricing is probably too low relative to the investment and the regulatory bar, et cetera. A bunch of industry players are worried that as Hospira claws back share and then gets another plan online, that you might actually be a price deflater, at least in the short to medium term. So could you put some context around that. I'm asking a comment on Hospira, not industry crystal-ball stuff.

Thomas E. Werner

So on the first one, obviously, we don't have guidance out there for '14. But let me just talk in generalities. You're not going to need to wait till '17 and '18 to see margin expand. We'll begin to reap the benefits of the cost improvement programs, we have and pricing, which is ongoing. That's right away. The lion's share of it though, we need Vizag to come online, and we're on track to have sellable product by the end of next year. '15 will be continuing to -- be ramping up. '16, I think as Matt will show you, that's the year where things were kind of clicking, but we don't need to wait all the way to the end to get some of the margin expansion. But it'll accelerate as we go on.

F. Michael Ball

And the way I would answer the question with our additional capacity coming online is we will be capable of deflating price. It doesn't mean we'll be doing it, but we'll certainly be capable of it. Where I'd like to see that additional capacity go to is our expansion initiatives overseas. So in Europe and the emerging markets. So if the plan comes together then, we should be able to utilize all that capacity around the world as we get all these submissions in, we get all of these launches going, et cetera. But why I think it's important that we continue to drive on this cost of goods side of things is not only to expand gross margins. But if we get into desktops with people around the world, we'll be more than capable of taking ourselves because in my mind, with low-cost manufacturing plants, with our own API and with being the largest volume producer in the world, we should be in better shape than anybody else. But that's not the route we're going at this point. But we can.

Karen King

Over here, Ruth? Yes. Ruth, right.

Thomas E. Werner

We're getting ready for a rough question. It's Ronnie [ph].

Unknown Analyst

Come on, I'm not that bad. I guess, my questions are primarily financial. The first one is around the cash generation. Kind of look at your slide around cash generation, it looks like you'll be throwing up something like $1.6 billion of cash in 5 years, just taking your 5 to 5.5 and dividing it by [indiscernible].

Thomas E. Werner

Close enough.

Unknown Analyst

For a company your size, that's actually relatively low cash flow yield. Can you just give us a feel -- I mean, are we really looking at the situation of the first couple of years as lost investments and we should see a nice expansion off free cash flow yields in the out years? Or when I think about your 2018, we should look at it as more of a linear development of the cash flows, in line of EPS.

Thomas E. Werner

Yes. Go ahead, finish.

Unknown Analyst

And second, a similar question on Vizag. Obviously, when you open a new facility, it's not running at full fledge. You're looking at a lower price point. Similar as my assumption is, you need to invest in SG&A before you get returns. So essentially, should we think about those 2 as relatively expanding very late in those -- in this 5-year horizon? Or again, should that be more of a linear expansion as a result?

Thomas E. Werner

Well, Vizag will be much more of a '16, '17, '18 event than it will be a '14 and '15. And then we have to really manage how the cost ramp up relative to the output coming out. There could be some onetime costs related to how we absorb our overhead over that time period, but we still have to do all the load balancing that Matt will talk about. Relative to cash flow, fair comment. I think you have to realize, we're going through a period, still, with pretty heavy capital investment. The capital spending that we had guided to for this year, we brought that down just because of natural delays in project spending. We didn't cancel anything. So there's going to be some spillover into 2014. So we're probably going to be spending at this capital level for next several years, then it will moderate down. So on that basis, you'll see better cash flow on the back years than you will the front. The other thing that is going on is as we get into biosimilars, this is a business, and Richard and Sumant and Matt to some extent will talk about, you've got to have a 100% service level. This is not -- 95% won't cut it. So a lot of folks expected we should be seeing some cash generation by a reduction in inventory levels. We're still -- we're just about up to the point we want to be on service levels, so we've built inventory throughout the year. But I don't see that inventory coming down, and I don't see it going up a lot either. But it's going to start to -- in-shop because we've got to carry much higher levels of biosimilar inventory. So, fair point. Cash flow will probably be more exciting in the out years as we get the investment behind us. But I get the point.

Karen King

Dan, up there please..

F. Michael Ball

That wasn't that difficult, Ronnie. I thought you were going to ask me about all the indications on infliximab but...

Karen King

He's never going to let you leave that out.

F. Michael Ball

Which I sort of know now.

David R. Lewis - Morgan Stanley, Research Division

It's David Lewis of Morgan Stanley. Mike, you made an interesting comment where your comfort in the investment spending is stemming from the fact that you have good visibility on the pathway of many of these R&D pipelines. I guess one piece I do want to come back to is you're going to dump 1/3 of the cash into R&D over the 5-year plan. I have to imagine a very significant portion of R&D is going into biosimilars, so maybe help me understand the confidence in that spending and return in the absence of a U.S. regulatory pathway for biosimilars.

F. Michael Ball

Well, it's one of the reasons I said that biosimilars will be approved in the United States. We have a lot of meetings, and Sumant is going to address that in his particular presentation. But we've had a lot of meetings with the FDA. There will be a path through. The patent still has to expire on EPO. We still have to get through our Phase III trials. So candidly, I'm not that worried about it. The fact that I talked about the megatrends was for a very good reason. This country is going to need to look for places to save money. Biosimilars have been in the European market for 5 years now. Europeans don't look a lot different than us. They talk differently, but they're not a lot different. So biosimilars has worked well in Europe. I see no reason why it won't work well in the United States, and there will be the added pressures of making them accessible for the population in the U.S. and making health care affordable. So I feel very confident and then feel very confident in those types of investments.

David R. Lewis - Morgan Stanley, Research Division

Just maybe -- Tom, just 2 follow-ups on that. Of the $1.8 billion or so of R&D over the next 5 years, what percent of that actually is going to go into biosimilars? And maybe just to follow-up in terms of David's question that he was trying to get at, margin expansion across that 5-year plan, what percent of the margin expansion is coming in the latter 2 to 3 years versus the first 2 to 3 years?

Thomas E. Werner

Yes. On the R&D, we've elected to not disclose specifics there. But we have said that each protein is between $100 million and $200 million in development. We've got 11 in there. It's a big portion of it, but it's not the entire portion. We've got global expansion going on. Julie is going to talk about some of the pump programs we've got for next-gen technology, so it's probably disproportionate but it's not the only thing we're going to be doing. And what was the second?

David R. Lewis - Morgan Stanley, Research Division

Margins [indiscernible].

Thomas E. Werner

Yes. I think I'm going to wait on that till February, till when we give guidance on '14. But I did say earlier, we should see some margin improvement in '14. It's not going to be a negative. Then we have to sort through the whole Precedex loss of exclusivity and how all that times out. All that said, it's going to be a little bit more on the back end. You've got Vizag that doesn't come online fully operating probably until 2016. But the other programs, MMS getting back to a more normalized basis, that will be a '15, '16 event. Biosimilars, as we said, we're going to eclipse the $100 million mark in Europe. EPO hits in '16. Those are some of the other drivers there. And the cost reduction programs that Matt's going to talk about, those are ongoing and accelerating. But to sort of specify it down, we've just elected to kind of look at the 5-year period. Thanks.

Karen King

Ruth, also up here. Matt.

Matthew Taylor - Barclays Capital, Research Division

It's Matt Taylor from Barclays. I wanted to ask on Precedex, if there's anything that you can share. I know there is some confidentiality to that agreement, but in terms of helping us understand what the probability that it will actually last till December or be earlier in the year, what some of those factors might be?

F. Michael Ball

I don't think we're in a position to comment on that right now. I mean, one of the reasons I emphasized it late, late, late night, we need to get through this. We need to study this, and we need the appropriate time to be getting back out there with guidance. And then we'll have a more full-some discussion in terms of narrowing the range and giving you some idea then as to what we believe the odds are for the end of 2014.

Unknown Analyst

Just a couple of questions. I guess, first, on margins. What are the financial implications of an all-clear at Rocky Mount? Are there -- can you accelerate production? Are there meaningful costs that fall off? What are the financial implications of that greenlight?

Thomas E. Werner

Yes, Matt's going to kind of take you through that in his segment. I'll just kind of at a high level say, not much. Because as you'll hear from him, we're getting towards optimum levels, as Mike mentioned, in the third quarter. There's still a little bit room we have to grow service levels, but I'd defer that now Matt is not -- I hope Matt didn't run off permanently because he'll plan to address that when he gets to his section, Jason [ph].

Unknown Analyst

Okay. So there's not a meaningful impact on the P&L, though?

Thomas E. Werner

No, no. Not with the amount of time that we've been through in ramping back up. It's been very gradual. The share is back. Customer service is there. Maybe a little bit but not a lot to move the needle.

F. Michael Ball

It's not constraining us in terms of manufacturing.

Unknown Analyst

Okay. And then I guess just on the top line, the mid- to high-single-digit growth, what's the assumption around pumps coming back to the market? And then what exactly has to happen for those pumps to get back to the market?

F. Michael Ball

Maybe we could defer that to Julie's presentation?

Thomas E. Werner

You'll see the time frames in there.

F. Michael Ball

If we could just defer that because she's going to take you through the whole timeline associated with the pumps, et cetera. That'll probably be a good time.

Karen King

Ruth, up here.

Unknown Analyst

Hi. Can you provide a -- what would be the size of your sort of -- the optimal acquisition that you would be looking at, size and sort of the types of acquisitions?

Thomas E. Werner

Well, we're really looking at tuck-in acquisitions in the main. So basically, those are acquisitions that either grow our critical mass x U.S. or get us to a place of vertical integration now in API. Now if other opportunities came by, we'd obviously, have to examine them. But the way we've defined it now is tuck-in acquisitions, sub $1 billion in size, the Orchid acquisition I think we've announced is just over $200 million in size. So again, we'd evaluate opportunities, but we're really looking at helping ourselves geographically expand and also getting into vertical API. But we will be opportunistic.

Unknown Analyst

[indiscernible]

Karen King

Wait, hold on one second, okay?

Unknown Analyst

No new segments or anything like that basically? So just -- working within the framework that you already have and just making that better?

F. Michael Ball

That's correct. So we aren't looking to get outside. When I said a sea of opportunity there, what I really love about this company is we don't have to do a huge number of inorganic moves to move ourselves into new places to fish, if you will. Lots of fish in the sea that we're in. So no. Our view is, and I've said this about proprietary pharma before and one of the reasons I said that Precedex is not a strategic driver is, we do not have the desire to get into proprietary pharma. Now if there's complementary products out there, definitely, we'd have a look at them. But I think the strategy you saw there, that's the place we're going to play in. To the extent that something adds to this strategy, obviously, we'll look at it. But those are the 2 key areas that we're looking at right now, what I just describe. And any opportunities would pretty much have to be in our strategic wheelhouse. We're not going outside that. We don't expect to.

Karen King

Questions back there?

Christopher W. Kuehnle - Leerink Swann LLC, Research Division

Chris Kuehnle with Leerink Swann. Could you just provided a little more color on your long-term tax guidance? That large step-up, is that mostly attributable to the loss of the tax credit on R&D? Or is that primarily the geographic mix of revenue?

Thomas E. Werner

It's more the mix of revenue. The R&D and the extenders is probably 200 to 300 basis points, but it's really as the earnings rebound takes place, it's just not hugely related to the tax havens. And we do get some benefit in India. We're in an enterprise zone there, but it's not enough to make enough of a difference in the rate. So short answer is it's really more due to the mix of geographical distributions in the earnings.

Karen King

Any other questions? Here.

Unknown Analyst

If you want to take a follow-up, the $100 million plus in biosimilar sales, can you give us a sense of what the gross margin is on that? And as we think about gross margins on biosimilars in the out years, that they begin to be influenced by the NovaQuest partnership, so how does the gross margin on biosimilars globally ebb and flow over time? And where is it now?

Thomas E. Werner

Well, it's above company average and will continues to be there even with the NovaQuest and the various agreements we've got in place. So I think you saw in the margin slide, it's accretive, but we really don't disclose specific margins there, except to say that it's accretive to the overall average and will continue to be as we go forward.

Karen King

Okay. Any other questions? Okay. A couple things before we just do a break here. You have little cards on your table, so we're trying some new technology. You can -- if you've got an iPhone, a smartphone, you can actually scan in, and it takes you to various places on our website that is representative of the pods outside. So you could try that. And then please, during the break again, go visit our booths. There's lots of really smart people out there that can talk to you about the pump. And again, you can kind of touch and feel everything. So we're going to break for about 15 minutes. We're going to reconvene at 9:40.

[Break]

Matthew R. Stober

Good morning. Good morning, everyone. So my name is Matt Stober, I'm the Senior Vice President of Global Operations, which means that I'm responsible for both pharmaceutical and biosimilar manufacturing, as well as a number of the functions, both technical and business function, that support Hospira's global operations.

I haven't had the pleasure to meet many of you in the room today, but I'm excited to be able to share with you, over the next 30 minutes or so, the great progress that we made in manufacturing, as well as a number of other things that Mike talked about earlier related to our network strategy and where we're headed in the future.

Just a quick introduction about myself. I'm a chemical engineer by training. I'm coming up on my 2-year anniversary here at Hospira. Actually, it's this week that I'll have been here 2 years. Prior to joining Hospira, I spent the last just about 25 years primarily in big pharma working for companies like GSK, Novartis and Merck.

I've run big organizations in the past, both on the biologics side and the pharmaceutical side. Extremely excited to be part of Hospira. I think, as you heard Mike and Tom both talk about, we've got a terrific future ahead of us in terms of the things that we're going to accomplish as we look towards that future, and I'm excited to be able to lead Hospira through that journey from an operation standpoint.

Thank you all for taking the time to be here. I'm primarily going to focus my comments today on pharmaceutical operations. I'll also touch a little bit on the quality side of what we've been doing. And of course, I'll be happy to take any questions related to that as we get to the end.

So let me take you a little bit through our agenda. I'd like to walk you through our global and quality operations partnership. Some of the advancements that we've delivered across organizations, as well as the future plans that we have. You'll hear all about the investments that we've made in our people, in our manufacturing plants, our manufacturing processes and technology over the course of the past several years. I'll review with you our current network footprint, so I'll take you through where our plants are. We'll also -- I'll also discuss the strategic levers that we have across our operations. I'll give you a view into the future network, including our biologics manufacturing area.

Let me begin with our quality and operations partnership. For the past few years, we've invested in a number of quality improvements to really create a robust foundation from which we can drive future growth. I'd like to focus on 3 key improvements in particular that you'll see on this slide: ensuring manufacturing stability, maintaining a reliable supply chain and enhancing our relationships with the regulatory agencies around the world.

So let me start first with manufacturing stability. We've established a manufacturing science and technology group whose job it is to make sure that we have strong and stable manufacturing processes in place. This group is responsible for ensuring that we have robust end-to-end manufacturing processes. They're the technical team that interfaces with quality, operations and the R&D teams across our organization. This enables us to quickly and effectively solve operational challenges with technically sound solutions that also improve our compliance.

From a reliable supply chain point of view, you're going to see later in the presentation, understanding and having a robust supply chain is absolutely critical to our success. It enables us to deliver optimum service levels and allows us the flexibility to respond to supply needs in the market by producing our products in the quickest, most compliant and cost-efficient manner.

And then, finally, the relationships with the regulatory agencies. We're enhancing our relationships with our global external regulatory partners. For instance, within the FDA, we're having key conversations with the center, as well as each of the districts to ensure that the agency is up-to-date with our progress and our timely deliverance against our commitments.

All of the components of this -- of the wheel that you see on this chart are absolutely critical to our success. We have been, and will continue, to focus on each of them as we go forward in our journey. At the end of the day, we here at Hospira -- we're here at Hospira to serve the customers and the patients. And each of the components that you see here are important for us to make sure that we deliver safe and effective medicines at a cost-competitive price.

Now let's talk about the compliance progress that we've made, because I'm sure you're all interested. As you can see, there are a couple of phases that we, as an organization, will progress through. When we started this, compliance remediation journey a couple of years ago, we had several objectives in mind: to ensure field compliance and strong management oversight; to strengthen our global quality systems; to build up our capability and our culture across all of our facilities and the corporate organization; to make sure that we have strong supplier qualification and maintenance programs in place across the network, and I'm happy to tell you that we've made significant progress on all of these objectives. We're well on our way to completing this phase of the journey across the pharmaceutical part of our business.

We expect to have the third-party oversight portion of our remediation journey primarily completed by the end of this year. That being said, some of the larger investments and the longer-term projects, things like automated visual inspection, our new filling lines, of course those will continue into 2014 and 2015.

We've already begun to move to the next phase of our journey, which I'll talk about, which is continuous improvement. Here, we'll focus on several key components. First, more thorough and effective investigations that drive the root cause. This is all about fundamentally understanding what the problems are and really eliminating the issues that we find across our business. We now have specialized metrics in place to measure and demonstrate our performance across the business. We've also had a significant amount of investigator training that was conducted by our third-party across the network.

Second, developing strong and sustainable relationships with our suppliers. So this is best represented through an example. Over the past couple of years, we've had recalls, and I'm sure some of you have seen those, due to the presence of embedded metal particulate in our glass vials. We don't manufacture the glass vials but, of course, we're held responsible for the quality of the entire manufacturing process, which includes the components that we receive from our suppliers. As a result, we've been working very diligently, side-by-side with the supplier, in this case, the glass supplier, to really help them drive to root cause and make sure that we implement a solution. This not only helps them improve their process but it supports our compliance responsibility, and it paves the way towards issue resolution. Fixing these issues will improve our performance financially from a customer service perspective and, of course, from a compliance point of view.

The third item, driving towards this culture of continuous improvement across the entire quality in operations organization, this means that all of our facilities, we have people that identify the challenges, develop solutions and drive performance improvement across the business. We're building quality manufacturing into our process every step of the way as we go through this. This is how operations and quality really function together as a team on a day-to-day basis. So we're moving from a remediation mindset that you've heard Mike talk about, and really moving into a culture of continuous improvement.

So I'll now move to some of the investments that we've made that I'm sure you're interested in. In people, and I think about this in 4 pieces, in the people; the plants, so the manufacturing facilities; the processes; and technology across our manufacturing network.

So quality and manufacturing operations are all about the people, the plants, the processes and the technology, those 4 pieces. All of them tie together to give us a strong roadmap in terms of what we're accomplishing and what we plan to accomplish as we think about the future. And I'll talk about each one of these in detail.

First and foremost, our people. They're the most important aspect of our manufacturing network. These are the folks that deliver the real performance in terms of what we're doing every single day across our organization. We've implemented strong cultural programs to ensure people really understand what they're accountable for and ensure they take ownership for the quality and performance of the products that they're manufacturing.

Quality and operations are functioning as a team from the top corporate levels in the organization, down to the line operators in our facilities. We've got both strong leadership and dedicated engagement from the employees on the shop floor, who understand the values and behaviors that we expect throughout our manufacturing network. We've been very deliberate in terms of how we're shaping the culture across Hospira, really recognizing and rewarding employees for their positive contribution to ensure that we continue to deliver a strong technical and quality mindset within our manufacturing and quality teams.

We're also holding people accountable for doing the right thing the first time, every time.

We've made significant investments in human capital, and this has helped us to achieve process robustness. We have 9 new site heads globally in our pharmaceutical facilities. A significant number of their site leadership teams are also new to the organization. As I said before, we've established what I believe to be a best-in-class manufacturing science and technology team. We've also expanded our manufacturing and quality operations team that we've integrated into the shop floor of our operations. Both of those teams are helping us bring science and quality to the manufacturing shop floor, making sure that people understand why they're doing what they're doing, not just how to do it. This has helped us continue to improve our operational performance. We've integrated new talent into the organization. We've hired over 125 new college graduates with mechanical and chemical engineering backgrounds. We brought them into our quality and operations organizations within our facilities and are rotating them through different functions. This brings a new level of energy and talent into our facilities.

From a training perspective, we've also spent over $15 million in very specialized training programs. Things like parental drug associations, aseptic manufacturing training programs for the line operators that we have in Rocky Mount, as well as global manager and supervisor training. We've also done a tremendous amount of training with our investigation approvers within the quality organization.

These teams are going through a formal certification process that was developed in conjunction with our external consultants. So to sum this up, all the changes that we've made from an employee point of view are enabling as to stand on our own, relying less on consultants and to shift our organization from remediation to continuous improvement.

As you know, we've made significant investments in our manufacturing plants. You heard Tom talk about this earlier. Here, we have a photo of our new chemical quality lab in Rocky Mount. We also have a new lab at our Boulder facility. In addition, we've done significant upgrades to many of our facilities across the manufacturing network, and I'll show these to you in detail when I speak to technology. We're making these investments with a real focus on first-pass quality, which means again, doing it right the first time, every single time on our manufacturing labs, as well as within our quality laboratories. The plants have aligned metrics to ensure consistency across the network. We've been balancing our efforts between supply and remediation, and you heard Mike talk about that, and it's no small path, but we've made a lot of progress in this regard. Our customer service levels have returned to a much healthier level over the course of the last 18 months. We're currently running at a little over 90%, with a goal of reaching 95% or better in 2014 and beyond.

These investments will not only give us significant quality performance improvement, but also help us drive greater efficiency within our manufacturing operations, which I'm sure you're all interested in. We're very excited about the reshaped network design, it could be better optimized and more efficient, as well as highly automated and, of course, compliant. An important component that we spend a lot of time over the last couple of years is improving our manufacturing processes. This includes things like also our quality processes, where we look at batch release improvements and how we're executing batch release. Because we built manufacturing quality into our shop floor teams and integrated the manufacturing and science and technology organization into our operations teams, we've been able to really drive down exception reports and expedite batch release. This is how we're really making sure that we understand our processes technically, and we're working to improve the performance from a laboratory and manufacturing shop floor point of view. We've seen a tremendous amount of progress in the reintroduction of products that we had off-market previously because of past technical challenges. A couple of specific examples, actually one of which you see on this slide. First is Aminosyn, made at our Austin, Texas facility; and THAM, made at our Clayton facility. We've been able to address the technical challenges and bring these products back to market, increasing the supply of these important drugs that have been experiencing drug shortage. To date, actually, in 2013, we've had more than $25 million in top line sales of products that we've returned to market.

So when it comes to technology, from my viewpoint, staying current is the key. Technology ties directly to the investments that we've made in our plants. You've heard us talk a lot about the implementation of our visual inspection program. Mike's talked about it, Tom has talked about it. We've already spent close to $30 million on automated visual inspection equipment across our network, with more investments that we plan to make in 2014 and 2015. This will enable us to ensure that we have robust compliance, give us much better efficiency and tighter control of our processes. And here, we have some pictures of -- we got ahead of ourselves.

Here, we have some pictures of the new equipment that's been installed in our facilities. Here we go. In addition to the 9 new filling lines stated to come online in -- sorry, in addition to the 9 new filling lines slated to come online in our Vizag, India facility, we've also made significant capacity and infrastructure upgrades at our existing manufacturing facilities.

Over the past several years, we've installed or are in the process of installing a dozen new filling lines across our existing manufacturing network. That's an impressive amount of investment when you think about 21 new filling lines. To reiterate what I said earlier, we're excited about a reshaped network that's designed to be highly compliant, better optimized, highly automated and, ultimately, more efficient.

So I'd like to move on to discussing the results and output of all of the investments that we've made. The information you see here is powerful. What the graph shows is that we've demonstrated steady improvements over the past 18 months and are on the right trajectory going forward. This chart actually shows our global customer service, demonstrating that we're moving towards our goal of 95% or higher. We're excited to be back at these levels.

So what I'd like to do now, actually, is take you on a virtual tour. I know a lot of you have had questions about our Rocky Mount plant, and I really want to be able to show you the amazing progress that we've made. So if we could, I'd like to take a moment and just roll the video.

[Presentation]

Matthew R. Stober

So what an awesome video. I hope that gives you a real feel for the team at Rocky Mount and the incredible progress that we've made over the past 18 months. We've had many questions from folks in this room and others around why is your remediation journey taking so long. Now that you've seen the video and listened to the number of investments that we're making across our network, I'm sure it's clear that we've been very busy, and also what we've been doing.

As you can see from the 2 slides that I have here and the pictures up above, you just heard the video of Rocky Mount, it's an enormous facility. And to reiterate what Mike said, the facility manufacturers, over 600 million units a year, 600 million units, that's a huge facility, tremendous amount of product that leaves that operation. We have staff at that site that work 24 hours a day, 7 days a week, delivering medicines to our patients. And as you can imagine, it takes a lot of effort to make changes to a facility of this magnitude and size and complexity. And many of these changes, of course, require regulatory approvals prior to implementation. So Rocky Mount's really done a nice job, increasing supply in the marketplace and improving customer service levels. It demonstrates that we're getting the patients the critical life-saving medicines that they need. In addition, this is a key indicator of the significant progress that we've made at Rocky Mount. We're ramping down the number of consultants that we have and turning the plant back to our experienced and trained employees. We're really nearing the finish line with our pharma remediation and continue to prepare for the FDA reinspection of the site.

So I'd like to now take you through our current manufacturing footprint and talk about the key strategic levers within operations, as well as our future network as we move into biologics manufacturing.

So let me start with a picture that really gives you an overview of what our manufacturing footprint looks like. And just to orient to you what you're looking at here, is if you turn your attention to the key up in the right-hand corner, you can see our current sterile injectable and large volume parenteral facilities, first, in the purple color, and then work your way down our API facilities, including our pending API acquisition, our biologics facilities and, of course, our device sites. And it's easy to see that we've got a very broad and large global manufacturing footprint, with over 4 million square feet and more than 1 million additional square feet coming online with Vizag. From a capacity perspective, Vizag enables us to have the ability to produce approximately 500 million additional units per year.

So there are 4 key strategic levers as I think about manufacturing operations in 2014 and beyond. The first one is our India operations. The second one is our API strategy, global expansion and then, finally, and most importantly, biosimilars. So Mike previewed all of these for you in his opening remarks, but let me first start with India operations.

We already have 2 facilities in India. We -- and those are -- those will help us to really expand in the low cost region as we globalize our manufacturing operations. From an API strategy point of view, we're vertically integrating API on select molecules where the API component of the molecule is high cost, things like oncology and our anti-infective space. This will really help us drive down our cost to goods, our unit cost and help us control the overall supply chain from a quality point of view.

And then from a global expansion perspective, you've heard Mike talk a lot about what we're doing on global expansion. You can see our manufacturing footprint is really expanding globally to support the vision that we have. It's critical in many of these global expansion countries to have a low-cost basis for our molecules, and our future platform will allow the flexible manufacturing cost position that Richard and his team need to compete effectively.

Last, but certainly not least, is our important biologics network, which you saw on the previous page, where we're located, where we have internal manufacturing operations, as well as where we're utilizing third-parties.

So now, let me spend a little more time on -- in going to each area in depth, starting first with our first strategic lever, and that's our India footprint. So Vizag is our most significant investment. We're investing almost $450 million in a brand-new state-of-the-art manufacturing facility. In that facility, we're going to have bio filling, ampule filling, lyophilization capabilities. And there'll be 2 separate operations, one for terminal sterilization, or TS that we refer to it, where you sterilize the product after it's filled in the final container, and then one for aseptic manufacturing, where you must maintain the sterility of the product throughout the manufacturing process. So this is really going to give Hospira significant capacity for future growth, as well as brings down the current conversion cost of our existing SIP portfolio.

Then we have our IKKT facility, and -- which is our beta-lactam in this facility in the southern part of India. And this is where we manufacture our cephalosporins, our penicillins and our carbapenem antibiotics, like meropenem and imipenem. So we're in the mix [ph] of expanding that capacity as well by adding 2 additional filling lines. In addition, near this facility, we also have an R&D Center of Excellence that's run by Sumant's team.

Then we have our joint venture with ZHOPL, where we're manufacturing many of our oncology molecules. We're right now in the process of expanding capacity at this facility and have made the decision, actually, to expand that joint venture to include the development of API for cytotoxic molecules.

Finally, we have our pending acquisition of our API manufacturing facility, Orchid, that will support our penicillin and carbapenem manufacturing in our IKKT ops.

So this is another step for us as we move further into the API manufacturing space and really allows us to continue our vertical integration strategy, which is our second strategic lever that I'll move to talk about now.

So relative to API integration -- I just talked about some of the things we're doing to improve our API position. We're focused on how we can drive down unit cost so that we can compete more effectively globally. So this strategy will really help us deliver more reliable supply. It will improve our cost efficiency, it will help us deliver higher-quality as we bring these operations into the Hospira network. Our API strategy also includes strategic partnerships, working with these partners to really make sure we not only have an efficient cost base, but also that we have strong quality and compliance performance. This will allow us to really be a reliable supplier of all the medicines that are important to our patients around the world.

And then finally, we have our global sourcing contracts that really underpin the whole strategy to ensure that we have these strategic partners in place for an extended period of time.

So for our key APIs, we are also investing in alternate source programs, and you heard Mike mention that earlier, and that will really help us to ensure that if there are interruptions of critical API supply due to regulatory or technical issues, we'll be able to mitigate them with these alternate sources.

So now moving to global expansion, which is the third strategic -- key strategic lever that I talked about. From an operations point of view, the focus of our initial effort is on the top molecules that drive the greatest value for the organization, and Sumant's going to touch on these later. We're really concentrated on driving cost down and improving quality across our supply chain to allow Richard and his commercial team to be able to better compete with these products on a global basis. And here, you can really see where we plan to manufacture these global expansion molecules on the chart that you see here. The majority of our first global expansion molecules will be produced in our India facilities and will give us, again, a great cost position there, as we think about expanding in those markets.

So now, for biosimilars. As we talk about future growth, one of the key strategic drivers for the corporation is biosimilars. The picture here is intended to show you the Hospira manufacturing facilities, as well as our key strategic partners, and illustrates how we're set up across the globe from a biologics manufacturing point of view. So several of our products are manufactured by partners such as GlaxoSmithKline and Celltrion, but we're really excited about expanding into this biosimilars portfolio and becoming a leader in the biosimilars space.

So now let me just wrap up and then we'll move to question and answers. So from an operations and quality portion for the day, we've made significant progress driving operational and quality excellence, and I'd like to leave you with just a few concluding thoughts.

We're firmly committed to reinforcing the foundation of our operations. We're making sustainable changes in our process and our quality procedures across our global manufacturing footprint. We've strengthened the foundation and are really preparing the organization to support the tremendous growth strategy that we have ahead of us. Our network strategy, assuming a constant product mix, is expected to deliver a reduction in annual operating expenses of about $200 million.

This -- that strategy is going to be implemented over the 5-year period that we've been discussing today. We're making big investments in the future, and you saw a number of filling lines that we're installing across the network and the investments in API, where we're vertically integrating.

We're investing in biologics with big strategic capacity coming in place. We've got best-in-class manufacturing processes, we've got best-in-class people as we think about our future. We're building on our quality investments that we believe position us very favorably for long-term success.

So with those points, I'd like to close. Thank you for your time, and open it up for questions.

Karen King

Pull your chairs up a little bit there. Okay, so we knew you'd have a lot of questions about operations. So we've got a little bit of time here before the product presentations. Ruth, can you and Ronny [indiscernible] up a little bit?

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

Hi. Everything's fine? No problem? Good. A question about biosimilars. I see your manufacturing footprint, but you currently still do not have your own cell [ph] manufacturing facility, [indiscernible] manufacturing facility. Eventually, to be competitive in this market, you have to have one. Where in there, your investment facility, do you actually have a capacity to this investment in manufacturing facility that is able to make monoclonals in a scale that will be appropriate for a global launch? And second, you kind of mentioned, the investment that you're making right now in Rocky Mount are essentially going to allow you to keep your current cost footprint. I guess the question is, should we think about this, the U.S. facility as essentially being kept out in the long-term. I know in the near-term they are, but should we think about you guys gradually moving away from manufacturing in the United States, taking capacity out of the U.S. market and moving it to expansions in India?

Unknown Executive

I'll take the first part on the bio, and then Matt can talk more on the technical and the engineering aspect. A matter of opinion whether we need it to be competitive. We know what the investment would be. I spoke to somebody earlier privately. In some ways, I'd like to have a facility there because it could help me with the tax structure, but it's not clear to us yet that making that type of an investment is absolutely necessary. We've been very happy with the partners we have and that's kind of how we look at it. We continue to look at it. We haven't made any final one way or the other decisions, but up until now, we've been pretty happy with the partnerships. Matt, maybe you take the second?

Matthew R. Stober

Yes. So I mean, I think -- let me start with the biosims piece, is we've seen or I've seen, personally, a lot of companies make investments too early in bricks-and-mortar. And as you're aware, these bricks-and-mortar investments are -- in bio manufacturing, is extremely expensive. So the prudent approach is, and where I've seen folks be very successful, is to do exactly what we're doing where we're using partners. And as the market share grows and as we launch these products, then we'll be looking at this carefully about what is the right time to make the investment and, again, where do we put it from a tax point of view. So our strategy right now is we're going to continue to launch these products, we'll continue to grow. We think we've got good partners in place, and then we'll make the right decision at the right time in terms of when to make the investment, so as not to saddle the company with a $0.5 billion biologics investment too early in the process, and I'm sure you've seen many companies go through that. So on the second piece, we're really looking at the SIP business as growing. So about half of the line [ph] investments that I've talked about, I've talked about 12 additional manufacturing lines that we're putting in place, but half of those will go into the U.S. space. We'll continue to manufacture our controlled drugs here for obvious reasons. There are other products like our large volume solutions that are, of course, from a shipping standpoint that we need to manufacture here. So the investment is going to be split. And you saw Mike sort of outline where our manufacturing capability is going to be. A lot of that investment is going to be very tied to how we get more efficient as well in our U.S. manufacturing operations as we install some of these lines, more highly automated, more efficient, gives us great compliance benefits, but also should give us some labor and efficiency benefits as well. So it's split, but we do see that growth on the SIP side of the business as well, which is why we're making the investments that we are from a global expansion point.

Unknown Executive

The other thing I'd add is just relative to today's capacity, as I hope you were able to see that Rocky Mount is a very complex facility with dozens of different lines. Some of the lines have plenty of capacity, some of them are capped [ph] out. We can't just run our products on whatever line we would want to run on. So we have some opportunities currently. Other lines are pretty well tapped [ph] out.

Karen King

We will take [indiscernible] questions over here.

Unknown Analyst

Matt, has Tom asked you to take a hard look at Ireland yet for his tax situation? That's not my real question. I have 2. Vizag, what's the first product, Matt, that you plan to plant there to get the FDA over to get the plant approved for the first time. My second question is a little more theoretical. Can you walk us through the process and the timeline if you were to move eventually a product from Rocky to Vizag, the process and timeline to accomplish that? And what would the COGS difference be, assuming both plants were running pretty well?

Unknown Executive

Sure. Initial products is pretty simple but...

Unknown Executive

Yes, the initial product, of course, just like anyone, right, when you're starting up a brand new facility, you start with the easiest one first. We're moving sterile water for injection first, all right? So that's the first one to go over. Actually, a number of the products that Vizag will be starting up are coming from our existing facilities, Rocky, McPherson, et cetera. So the timeline is for us to do the tech transfer, it takes approximately a year. The piece that's a little less predictable is the FDA approval portion. So that's kind of the timeline in terms of how long. Your question about cost, conversion costs between the 2 facilities that we see from Vizag to our U.S. based facilities, order of magnitude, 30% to 40% lower making out of those -- out of the Vizag facility, from a conversion cost point of view.

Unknown Analyst

So excluding API?

Matthew R. Stober

Excluding API, correct. So the piece around API we talked about, the oncology APIs could be -- and we're not making oncology there, but it could be very high. Sterile water for injection, you can imagine the API cost is fairly low. Conversion cost wise, what we're seeing, 30% to 40% lower. That's our -- that's what we're expecting.

Karen King

Okay, over here. Thank you, [indiscernible].

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

Just a couple, first on AP -- it's Chris Schott of JP Morgan. When we think about the vertical integration on API, can you maybe give us a similar magnitude of opportunity when you look at what you're doing today and when you bring this stuff internally? How much savings can we think about on some of those opportunities? The second question is, as we think about efficiencies in manufacturing, can you look a little bit through just the timelines of -- you've obviously been very focused on kind of fixing the infrastructure, and when we go to these efficiencies, is this something that comes onboard quickly as I imagine you don't want to go too aggressively, just given some of the issues historically, but when can we think about that playing through? Is that 2015 or is that really more '16, '17, '18? I'm trying to understand it's for [indiscernible].

Unknown Executive

I'll give a little bit on the timing, and maybe you can talk a little bit about the nature. So cost savings and manufacturing, we're going to continue to work the procurement side of things, API and other, and continue to drive down our cost of acquisition of [indiscernible]. That's ongoing all the time, hopefully, happening right now down the street. The efficiencies, it's largely first-class [ph] quality and automation, and I would characterize that as more gradual. Were going to learn a lot as we put automated visual inspection in, in terms of how that runs and what it does to yields.

Unknown Executive

And I think you hit it on the head right. So the timing as -- we're doing it now, right. So we're working on these things in parallel to a number of the activities. The compliance investments that we're making, many of them will help us gain efficiencies. So things like highly automated manufacturing lines, automated visual inspection, those kinds of things will help us pull through from an efficiency standpoint. The API vertical integration, we're actively working on those things now. The Orchid deal, obviously, is happening. We've got this partnership now with ZHOPL, related to oncology, where we see big things and we're starting to bring those. That will be gated over the whole 5-year period.

Karen King

David on the...

Unknown Executive

David over here.

Unknown Analyst

And maybe a [indiscernible] question for Matt. One of the things -- it's sort of tied to Tom's financial presentation as well, just about improving efficiency, as some of these plans on the margins. Clearly, due to the remediation process, you had some onetime costs over things like consultants, and you probably slowed down some processes for some of these that are dispatched. But are there processes that, right now, are sort of being overly burdened by you guys taking a very careful approach to manufacturing that will change once you kind of get the warning letter lifted, for example, processes that might take one person. Right now you have 2 or 3 doing that, whereby there's additional cost to take out once you get back to more of a normalized operating strategy versus right now when you have consultants and all and a lot of excess personnel.

Matthew R. Stober

Yes, so I think the way -- the areas, from an efficiency point of view, and how I would be looking carefully at this are the investments, we're making them right the first time. The investments that we're making in our processes will really help us on the efficiency side of things. So it's not necessarily that we have 2 or 3 or 4 people sitting there doing the same thing. It's just that we have a lot of additional work that's going on.

Unknown Executive

I talked about the fact that we're pulling consultants out of the business, so obviously, there's a savings there, as we continue to execute that. The other thing is we're making IT investments that'll help us make it much smoother to do the day-to-day things that we have to do, so we call it connected manufacturing, but really making sure that we've got the right IT investments to make peoples' jobs easier so that there's less, I'll say, work that a person has to do and more activity that the computer system will help us with.

Karen King

So let me just throw in a couple here that I also got, prior to you guys coming here. We had asked you for questions. So for Vizag, when will you submit your first regulatory filing for Vizag and what happens after you submit that filing? When does the FDA come in to inspect the facility?

Unknown Executive

Sure. So we're submitting the first submission at the end of this year, beginning of next, so -- and then, of course, the FDA timing, we can't predict when they'll be in, but Tom mentioned earlier that based on the timelines that we see, we are anticipating approval by the end of 2014, based on the timelines that we put together.

Karen King

Okay, and one more I have here too. Can you just comment on where you are with remediation with the other facilities? And also, if you've had any inspections since the last earnings call?

Paul Greenland

Sure. So I'll start with we're making good progress on the pharmaceutical side in terms of the interactions that we've got with FDA. As it relates to inspections, we have had one inspection. It was a device inspection of our Rocky Mount facility. Now many of you may not even be aware that we make devices in the Rocky Mount facility. We actually make one. A PCA empty container. That device inspection happened. It was a -- just for the device side of the operations. The person came out of the Atlanta district. We got 15 observations. Many of those are tied to the device strategy and the device action plan that we are actively working on. And we've got a dedicated team from the device side of the organization that will be working through those observations and working through those things. As I said, many of them tied [ph] to the device action plan that we already had in place. We do not expect that, however, to impact the remediation activities that we've got going on from the pharma side but, of course, we can't predict how the FDA views the 2 things together.

Unknown Executive

But it's an empty...

Unknown Executive

It's an empty container.

Karen King

Are there any other questions from the floor first? [indiscernible] over here.

Unknown Analyst

Just following up on that Vizag timing, kind of after that first products gets approved. How quickly should we think about once you get the first product approved that portfolio kind of ramping from there?

Paul Greenland

Yes, a very good question. So 500 million-unit capacity, we expect to bring that online over a 2-year period of time. So by the end of '16, we will have all of the manufacturing lines up and available for producing commercial product. The one piece that we can't lock in completely on, you guys know, is the FDA and regulatory approval timings because that can be variable based on their timelines, so -- but our ability to ramp the facility up, have it started, have it ready for commercial production, everything will be ready by the end of '16.

Karen King

Louis, up in the front row, please.

Unknown Analyst

I'm curious if there's any technology breakthroughs or anything on the manufacturing front that you're really excited that could vastly lower the cost of making biosimilars. And by vastly, I mean, get it down to, let's say, $20 million, $30 million, from the couple of hundred million dollars now.

Unknown Executive

Well, the couple of hundred, when we put that out there, that's more related to R&D and regulatory and clinicals, but cost to manufacturing, I'll let these guys...

Unknown Executive

Sumant might be better from a technology point of view.

Unknown Executive

Maybe we'd do it at the -- let's -- can we just note that question and so -- Sumant will be up here later to talk more [indiscernible] about the whole biosimilars, biologics area. So that's probably a good place to address that question.

Unknown Executive

Relative to technology, though, I don't know if Matt brought it out but he's got a cadre here now of engineers, technology specialists, a lot of grads right out of college. We're much more on the cutting edge of technology than we've been in the 7 years I've been here. So it's our intent to stay out ahead of this and not be a lagger. We want to be a leader in the new technology.

Karen King

Dan, up here please.

Matthew Taylor - Barclays Capital, Research Division

It's Matt Taylor from Barclays. I wanted to just ask about your comments on automation. You mentioned that you added about 400 folks in Rocky Mount, so about 20% increase in the headcount there. How do you think about the headcount over the strategic plan? And is the automation going to be something that you invest in and see a step function in? Or is there something that you'll slowly invest in in different lines or other factors over time? Can you give us a sense of some of the projects that will contribute there?

Paul Greenland

Yes, so I mentioned the number of lines that we're putting in across the network. So we've got the 9 lines in Rocky -- or I'm sorry, in Vizag. We've got a dozen lines across our existing manufacturing. As we implement those, those are much more highly automated lines, for many reasons, from a compliance standpoint, but also from an operational efficiency standpoint. In terms of headcount and the impact, the 400 people that you're referring to, related to Rocky Mount, many of those were not line operators, all right? So when we look at those, those are more folks that we put in place from an MQ point of view, manufacturing quality, where we build quality into the shop floor. Science and technology, where we really put the technical resources in the manufacturing facility. We'll have to see as we think about the overall network strategy and how we become more efficient, how the headcount piece plays out across our manufacturing network. But it's certainly something that we're very interested in to make sure that we are as cost-efficient and as compliant as possible. And so we're looking at that dynamic very carefully. And as Mike mentioned, we spend a lot of time on non-compliance, a lot of time on remediation. As we make these investments, we're really going to be looking carefully at how do we make the right investments so that we deliver the balance of the two things well.

Karen King

I have got one more "how would I think about" question. So we've seen a host of recalls this year. Are recalls now part of this new regulatory environment or will it -- they eventually go away?

Unknown Executive

Yes, so again, a good question. I've touched on some of the things that we're doing there. For us, we're making an incredible investment from a science and technology point of view. Now these things, we've already seen that begin to help us to drive down the number of recalls. Now when we look at this, we look at the metrics and the data here very carefully. The manufactured material from earlier, so let's look at 2012, the "when it was manufactured" time frame, we saw a higher level of recalls. The material that we've made more recently, that's

[Audio Gap]

things are, we're absolutely rolling that out across our entire network, not just on a facility-by-facility...

Unknown Executive

Or in the case of Vizag, a very clean layout and then separate aseptic and terminal, which are some things we've learned along the way.

Unknown Executive

Right, well designed.

Karen King

Jeff, [indiscernible].

Jeffrey B. Reich - Cramer Rosenthal McGlynn, LLC

Jeff Reich, CRM. Just to drill down a little bit more on David Roman's question, and trying to understand a little bit more on the manufacturing and efficiency goals. So efficiency can be measured any number of ways, utilization, yield, cycle times, et cetera, et cetera. So if we roll that up and just call it, globally, efficiency, from where are you now compared to where you want to get to in rough percentage terms? You think you're 50%, 75%, 90% of what your aspirational goals are, just to help us think about it in a broad way?

Unknown Executive

So when I talked about the $200 million, I talked about $200 million in annual cost improvement that we expect to deliver by the end of 2018, when we think about on an equivalent basis from a volume point of view. It's in that number. Now have we broken it down on -- and that includes API vertical integration, that includes as we move to Vizag, so we're that science and technology group that I talked about is working on a lot of the things that you talked about, yield, productivity, our performance, in terms of how we run our ops everyday, we haven't, though, decided to break it down further to give folks how much of that is in each bucket.

Jeffrey B. Reich - Cramer Rosenthal McGlynn, LLC

Right, right. I'm expecting you'd give us each bucket but that's -- I'm just saying in just rough percentage terms, where would you -- how would you guess you are now to where your aspiration is?

Unknown Executive

So I wouldn't want to guess necessarily, right?

So...

Unknown Executive

We've got a ways to go. We -- there's definitely opportunity lots of opportunity for improvement, I'll say.

Karen King

Are there any other questions? Okay. We are going to move on to our device, our MMS presentation. Thank you.

Julie Sawyer Montgomery

Hello, everyone. It's a pleasure to join you today to talk about our device business. First, let me introduce myself. I have been at Hospira for the last 3 years as the Head of Device Marketing. During my tenure, I've had the privilege of leading the development of our device strategy and helping communicate that strategy to regulators all around the world, spearheading execution of some key quality initiatives, including our recent successful audit with our European regulator, the National Standards Authority of Ireland, and also, cementing our pipeline strategy, including a commitment to a leadership position in IV Clinical Integration. I'm also responsible for our strategic partnership with Q Core medical. So all things that we will cover today.

The first thing I want to highlight is that Hospira's device business drives key revenue streams for this corporation. There are a couple of dynamics of the market that are really important for you to understand.

First, customers value our technology. Our pumps have unique proprietary workflows, valued by our customers and also connected to pharmacy and hospital IT systems. So changing pump platforms requires a lot of training, and time is not something a hospital undertakes lightly. This creates a very sticky customer base.

So if you have a sticky customer base, market share, or our share of that hospital real estate, is absolutely critical. It's critical to us because we drive an annuity revenue stream from dedicated sets, which is the major revenue driver in medication management today. This sticky customer base also gives us the opportunity to sell our customers additional software and services.

Finally, it's not just about the pumps, the dedicated sets and the software, Medication Management also gives us revenue opportunities from gravity sets and solutions as these are typically contracted together with the pumps.

In general, the pump business increases our relevance and presence in the hospitals. So as a result, we believe our device business enhances our full portfolio, including our SIP business. As Mike said, the pump market is a $2 billion market where we have approximately 25% share, which means we're the #2 player. We have changed our market share method since last Investor Day to focus on the pump types and countries where we compete. It's important to understand that under either method, our market share has remained flat despite some challenges. And I'm asked about this, given that most of our pumps are on ship-hold today. As I've said before, this is a very sticky market. And it's also important to note that every player in the infusion pump industry is experiencing [indiscernible] recalls or sales disruptions so Hospira's need for quality improvement is not unique. In fact, everyone in the space is working to meet a more stringent regulatory bar so it makes it tougher for new entrants into this space.

So let's dig into how the pump business generates these multiple revenue streams using 2012 as an example. The 10% of the associated revenue is in the sale of new pumps, 36% is generated from dedicated sets that are associated with those pumps; 29% from other consumables such as our gravity sets; and 21% from solutions. So we'll not often discussed as a device business, but we're often contracted with our pumps. And only 4% today, but a very important 4%, comes from software and services, which includes annual software license.

So the real estate we have is a very important platform for us to enable additional sales. And as we'll discuss later in this presentation, we have immediate opportunities to grow some of these additional revenue streams.

The top priority of our device business is executing the device strategy. The device strategy addresses 3 major areas. First, our quality systems. We are improving our quality systems and training our organization on those new procedures. Second, our on-market devices. We are remediating or replacing our installed base of pumps in the field. Specifically, we are remediating the Plum A+ and LifeCare PCA devices and we're replacing legacy devices, Symbiq and GemStar, with robust, modern technology both from Hospira's own portfolio and from our strategic partnership with Q Core Medical. And third, we continue to bring new technology to the market.

The device strategy is designed to generate very significant benefits, including improved safety and reliability of our fleet, resulting in fewer future recalls; the lifting of import alert in the U.S., which will allow sales to new customers; a very significant streamlining and modernization of our installed base resulting in complexity reduction in lower on-market support cost; and maximized retention of our current installed base.

We are making rapid progress on our plan and our recent audit with our European regulators, the National Standards Authority of Ireland, was very encouraging in this regard.

So let's go deeper on the modernization and complexity reduction of our fleet. Moving forward, we are going to focus on just 3 core platforms: Plum, Sapphire, and the LifeCare PCA device. So how is that going to happen? Let's start with our general infusion pumps. You'll see on the flow, Symbiq, Plum 1.6, Plum XL, we are retiring those pumps and replacing them with Plum A+, and then upon regulatory approval, the Plum 360. The Plum device is highly valued as proven technology with unique clinical differentiators. We are also, through our partnership with Q Core medical, developing Sapphire Plus, a compact device with a unique color touch screen user interface and support features that can be used for general infusion. So the basic Sapphire has just been approved in the U.S. Sapphire Plus will require separate 510 K approval. It will connect the Sapphire to Hospira MedNet and also, enable the pump to operate wirelessly.

In pain management, we will retire legacy PCA devices and move to the LifeCare PCA. The LifeCare PCA pump is the market leader valued for its unique safety features including an integrated bar code reader to ensure the correct drug and concentration of pain medication is delivered.

And lastly, in ambulatory, we will retire GemStar and other legacy devices and move to Sapphire and Sapphire Plus through our partnership with Q Core medical.

Importantly, Hospira's market leading MedNet safety software and the ability to perform IV Clinical Integration will be available on all of these pumps. The complexity reduction is very significant. And frankly, it's even more significant than the picture painted by this slide. As Mike said, all of these devices have sub-configurations. So for Plum alone, we have 22 hardware configurations in the field today. Moving forward, we will have 6.

So with this kind of complexity reduction, we spend less time and cost to manage these configurations. So this schematic shows the implementation of our device strategy, how the retirement of old pumps and the launch of our new pumps will lead to cost improvements over time. But through 2013 and 2014, we are seeing higher costs associated with remediating pumps and replacing pumps. We see stabilization as we complete our replacement programs in 2015 and a new steady-state in 2016 and going forward, where we have a streamlined portfolio, a remediated base of pumps and much more focused R&D spend.

We are retiring those pumps and replacing them with Plum A+, and then upon regulatory approval, the Plum 360. The Plum device is highly valued as proven technology with unique clinical differentiators.

We are also, through our partnership with Q Core Medical, developing Sapphire+, a compact device with a unique color touchscreen user interface and support features that can be used for general infusion. So the basic Sapphire has just been approved in the U.S. Sapphire+ will require separate 510(k) approval. It will connect the Sapphire to Hospira MedNet and also enable the pumps to operate wirelessly.

In pain management, we will retire legacy PCA devices and move to the LifeCare PCA. The LifeCare PCA pump is the market leader, valued for its unique safety features including an integrated barcode reader to ensure the correct drug and concentration of pain medication is delivered.

And lastly, in ambulatory, we will retire GemStar, and other legacy devices and move to Sapphire and Sapphire+ through our partnership with Q Core Medical. Importantly, Hospira's market-leading MedNet safety software and the ability to perform IV clinical integration will be available on all of these pumps.

The complexity reduction is very significant and frankly, it's even more significant than the picture painted by this slide. As Mike said, all of these devices have subconfigurations. So for Plum alone, we have 22 hardware configurations in the field today. Moving forward, we will have 6. So with this kind of complexity reduction, we'll spend less time and cost to manage these configurations.

So this schematic shows the implementation of our device strategy. How the retirement of old pumps and the launch of our new pumps will lead to cost improvements over time. But through 2013 and 2014, we are seeing higher costs associated with remediating pumps and replacing pumps. We see stabilization as we complete our replacement programs in 2015 and a new steady state in 2016 and going forward, where we have a streamlined portfolio, a remediated base of pumps and much more focused R&D spend.

We are also undertaking additional advances to further reduce cost. So I won't speak to all of these, but I'll give you some examples. One, we are establishing useful life guidance on our pumps. So in one region, for example, the average age of our pumps is 17 years. I don't have appliances in my house that are 17 years old. By replacing these aged devices, our fleet would be less expensive to maintain.

We are also rolling out a remote software download, and this is very important. So instead of technicians having to go into the field, disrupt the customer to download software in the pump, we will, starting with Plum 360 and Sapphire+, be able to push out software updates remotely, like a Windows upgrade. This will not only be extremely beneficial to our customers, but it also will reduce the cost of software upgrades immensely. These measures combined should have a very significant, positive impact on our future cost base.

We're also gaining focus through strategic clarity. Our pipeline focus is in North America, where margins are the most attractive. We will continue to sell opportunistically and serve customers in other markets, but these North American markets are our sweet spot. In these markets, customers understand the value of our leading safety software and IV Clinical Integration, and this allows us to match price without value, which supports our goal of improved profitability for this business.

So with that, let's talk about a subject about which I am very passionate, which is our pipeline. So over the period of the next couple of years, we are currently expecting 4 new launches. We've got Sapphire in the U.S. in January; Sapphire+, Plum 360 and our next-generation LifeCare PCA device, which will be optimized for IV Clinical Integration and advanced MedNet offerings. There are not many companies out there that can say that they have 4 new launches in the pipeline, so we are very excited about being able to offer these options to our customers.

These launches not only support our legacy replacement programs, but will also enable us to capture competitive market share. You see here the anticipated timing of our launches throughout the period. So 2013 into early 2014, we, of course, have already launched Sapphire outside the U.S. In early 2014, we will launch it here. We will also start the replacement of our remediated Plum A+ in select markets.

In 2014, we are anticipating launching Sapphire+ with Hospira MedNet for the general infusion segment and also starting the replacement of our remediated LifeCare PCA and releasing the next version of MedNet and IV Clinical Integration. In the latter part of 2014 through 2015, we are planning on releasing our Plum 360 device, our newer version of the LifeCare PCA, our pain management pump. So we are entering an exciting period of new pump offerings and a new MedNet release that we're going to be able to offer to our customers.

A question I get asked is how Plum 360 and Sapphire+ are differentiated and what that combination does for Hospira. And the exciting thing here is that these products will offer unique advantages that are attractive to different segments of the market. First, they do have some important similarities, both will offer market-leading safety software and IV clinical integration capabilities. But they also have differences. Plum 360 will build on some unique clinical differentiators that are not found in any other products on the market. And because they have a unique clinical workflow, they drive very strong customer stickiness.

For hospitals who are not accustomed to these workflow advantages, the Sapphire pump offers different and very valuable features. These include market-leading size and weight. And if you've seen the Sapphire outside or on the wall, you see that it weighs less than 1 pound and fits easily into the palm of your hand, in a large color touchscreen that it's highly intuitive to use, much like an iPad. So we believe the combination of Plum 360 and Sapphire+ is absolutely exciting. It allows us to best optimize retention of our current strong share position and also attract new customers.

So I referred to IV Clinical Integration throughout this presentation and it's important that you understand what it is, because it is very important to our strategy. While there are a limited number of IV clinical integration live sites today, customers are planning for integration when they make their pump purchase now. In fact, we believe IV clinical integration capability is a leading factor in over 50% of hospital purchase decisions today.

So what is IV Clinical Integration? IVCI is a software system where the pump is connected to the pharmacy order, the patient and electronic health record. A number of exciting features can develop from this closed loop. At the heart of IVCI is auto programming and auto documentation. Auto-programming allows the nurse to use a bar code scanner to automatically populate the physician order on the pump. This, of course, allows for faster programming, which is nice, but even more importantly, safer programming, because the risk of transcription error is removed. Auto-documentation reliably and automatically captures infusion activity near real time in the electronic health record so nurses do not have to spend their time documenting infusion. This is a very significant increase in productivity. I'm very proud that Hospira was an early pioneer in IVCI and that today, we are recognized by industry publications as #1 in this space.

IVCI drives the trifecta of what hospital customers want: Safety, productivity and fiscal savings. Early experience from our pilot accounts has been extremely impressive. We had one nurse describe it to us as Christmas morning. So for example, a 27% reduction in nursing time to start a new infusion. It's a nice productivity benefit. 5 minutes, down from 120, to document a code blue. And if you've ever seen one of these emergent situations, you have nurses documenting infusion information on paper towels, on scrubs. And now, it's just automatically captured in the electronic health record by the pump. And a 32% reduction in heparin errors, which is a huge safety benefit. And at one typically-sized account, $6.8 million in financial benefits per year by potentially avoided adverse drug events.

So we are the leader today and we are investing to retain this leadership position. As we move forward to our next-generation pumps, we believe we will deliver some market-firsts in the space. One, we anticipate being the first to support auto-programming and auto-documentation on our PCA pump. This is very important when delivering potentially dangerous narcotics medications. Second, we also believe we'll are the first to support remote nurse notification alarms. So with this feature, the pump alarm detail can be seen at the nurse station, on the nurse's pager, so the nurse knows whether to walk or to run to attend to that alarm. And finally, planning is underway for the next generation of MedNet, as we continue to expand our clinical support features and drive additional software licenses.

So I just referred to expanding software licenses. This is a big deal for Hospira. We expect the annuity per pump to grow significantly with technology adoption. What you see across the axes is 3 scenarios of annuity across the revenue stream per pump in U.S. hospitals: Without safety software, with safety software and with IV Clinical Integration.

Our ability to drive revenue per pump ranges from $1,500 without safety software, to over $2,000 with full adoption of the offerings that are available to our customers today. And this will further increase as new software licenses and services are added, such as IVCI for LifeCare PCA and remote nurse notification of alarms, about which I just spoke.

So we see a 35% difference in per pump annuity today as a result of features that we already offer. Our annual revenue per pump will grow further as hospitals adopt safety software and IV Clinical Integration and take advantage of the new features and services that we currently have under development.

We are going to save our customers hundreds of millions of dollars through IVCI and MedNet and Hospira will share in that value. We expect to see an increase in adoption over the time period, near full adoption of safety software and between 30% to 40% adoption of IV Clinical Integration by 2018.

So I hope in this brief time, I've conveyed our enthusiasm for this business. We remain excited about the return and growth prospects for medication management. Our device strategy is progressing well and is expected to streamline and modernize our installed base, reduce cost and complexity and help to remove our import ban so we can protect and grow our installed base.

We have strong, focused plans to grow the device business by focusing on technologies most valued by the high-margin markets of North America and continuing to lead in safety software IV clinical integration and translating that leadership position into increased annuity revenue. We will also continue to leverage internal development and our partnership with Q Core Medical for 4 upcoming new product launches and continue to use our pumps to support a suite of related products.

So I look forward to answering your questions over the lunch hour. And I'll now turn it over to Richard and Sumant, who will walk through our specialty injectable business.

Karen King

Yes. I just wanted to say, after SIP again, we're going to roll through the SIP, but we've got lots of time over the lunch hour. We're going to be eating in here. They're going to be up here for questions. So again, write down your MMS questions. Julie had a lot of great information in there and we'll get them all answered.

Richard J. Davies

Okay. Well, good morning, ladies and gentlemen. It's a pleasure to be here this morning with you and with my colleague, Sumant. My name is Richard Davies. I'm the Chief Commercial Officer here at Hospira, which is a very fancy way to say that I'm accountable for driving our revenues with our team worldwide across all 3 of our platforms.

Now, I have never had the pleasure to talk to you, and so to introduce myself, I joined Hospira about 18 months ago. And prior to that, I spent 8 years with Amgen in a whole variety of roles worldwide, but it's always been in country management and regional management, driving revenue. Prior to that, I was -- 13 years with Eli Lilly. And again, whole range of different roles, but I started off in that company originally as a sales rep. So a pleasure to be with you here today.

So today, Hospira is the market leader in the specialty generic injectable market, and that's something we fully intend to keep. Through our presentation, we're going to take you through the market, how we're building our leadership position, how we're expanding our portfolio in the geographies we're already in and how we're expanding with the geographies that we're not in and how we're improving our implementation skill set.

So our view this morning, we'll take you through the global marketplace. And through this, I really want to touch on our 2 major markets, the U.S. and Europe. And finally, we're going to focus on our prospects for future growth and how we intend to expand.

Okay. So as Mike took you through this morning, we see 4 major forces driving our market. The first one is health care expenditure is increasing. And this is driving as the payers struggle to afford health care. This is driving increased genericization of our market where, again, our payers are eager to try to control the costs in this market. Medicines continue to come off patent. And whilst they're coming off patent, note the rates of a few years ago, they're still attractive growth drivers for the generic SIP market.

Access to health care worldwide is increasing, be it through something like the Affordable Care Act here in America or through the emergence of the middle classes in countries such as China and Brazil, to name a couple. And finally, the aging of the population. It's a sad fact and it's something that always is just sobering.

But if you look at [ph] demand, each and every one of us, of medicine that we'll consume in our lifetime and the costs associated with that, 80% of it gets spent in the last 18 months of our lives. So if the baby boomers come through, that's where you start to see these costs go up and the desire of health care systems around the world to focus on genericization to achieve the savings they need.

So we're in a powerful position to participate in that growth. Our remediation efforts are bearing fruit in terms of both quality and volume. We have great buyer relationships with the GPOs in the U.S, and we're setting ourselves up to succeed in highly competitive marketplaces like Europe.

We're expanding geographically to ensure that we are there to take our share of the health care dollars associated with the growing pharmaceutical demand coming from the emerging markets worldwide. And so we see a robust R&D engine, a revitalized manufacturing capability and strong commercial implementation skill sets. They all enable our leadership of a $9 billion market.

So let's start off with our presence worldwide. I mean, we're currently in about 100 markets, and we do this in 3 different ways. So firstly, what you see in purple are our traditional businesses. This is where we have a presence on the ground. We have Hospira offices, we have Hospira sales reps. Secondly, we're driving and developing a very successful business through our regional distributors. These are our partners in regions or DX [ph] markets. We develop this in the Middle East, where we've been highly successful. We replicated this in Asia. And in countries like Vietnam, the #1 supplier of oncology medicine to the people of Vietnam is actually Hospira through our distributor locally. And third, we're driving some direct partnership in a few key markets, such as Japan, and I will talk about those shortly.

So we're a market leader in a $9 billion market worldwide. And these -- the markets still remain dominated in value by the U.S. and by Europe, but we're seeing significant growth coming now from our emerging markets. When [ph] we say leader, it's important to note, our share is larger than the addition of the next 3 companies. So if you add those up, they still don't get to the amount of share that we have, okay, which highlights our leadership position.

So let's switch to the U.S. And the good news is, we're gaining share in the U.S., and it saw an upswing since quarter 2 2012. Now Mike took you through this earlier, but let's look at what we're doing to drive the [ph] share. Clearly, all remediation efforts that Matt and his team have done are paying off. We're meeting the new quality standard with improved volume. And simplistically, to me and to my team, this means we just got more stuff to sell worldwide.

We spent considerable sums of money remediating our manufacturing capability. And it's important that we're able to reflect and capture that value our product lines bring. And this means that the value needs to be fairly priced. And that's something we've worked hard on for the last 12 months and we see it paying off for us. And we're sensitive to the cost that our customers have to assume. If we're going to continue be a leader, what makes us unique and what's our value proposition?

So I really, for you, today, want to highlight 3 things. Firstly, our broad, diversified and differentiated portfolio supports us in the marketplace. Secondly, our differentiated delivery systems are highly valued by our companies, particularly in North America. Third, our strong GPO relationship allow us significant channel strength.

So our tactics to continue this growth include: We stay ahead of the regulatory requirements, pull through volumes associated with the 95% service level, bid and contract as volumes increase and finally, price better to reflect the value our medicines bring. Overlay this a robust pipeline, we remain in a unique position to continue to capture share in the U.S. market.

Now just for a second, I want to come back to the value for a moment. And intrinsic to this is our price. As Mike mentioned this morning and as I talked about earlier on, we spent considerable sums of money remediating our factories and ensuring that we can stay ahead of the quality and regulatory requirements. So it becomes important that we can sensitively reflect the cost and associated value our products bring. This [indiscernible] value needs to be fairly priced, and we've been working hard on this, particularly in the U.S., over the last 12 months.

So I want to turn now to Europe. It's a tough, tough market, okay? So why shouldn't it be a market that we succeed in? 400 million people would [ph] -- 400 million in Europe seek health care. Companies, including us, are successful there. We make money there. Now we do believe there is going to be consolidation in the European market, that we are well positioned to grow in this market.

We're focused on systematically understanding and competing on price, whilst at the same time, improving our cost of goods through the developments that Matt and his team are making to our manufacturing network. We've built 2 regional packing centers, which again improves our capability to react and win in a fast-paced market. And our dedication and focus is already paying off for us. So we're going to be in a good place. We believe consolidation is going to happen in that marketplace and we fully anticipate to be a leader in post-consolidation and to do that in a profitable way.

Okay. Let's move on to sharing our future growth. So having demonstrated to you our strengths in both the U.S. and in Europe, let's now focus on how we intend to capture growth globally. So we're going to cover our strategy in much more detail, but it pivots on 3 things. One, pipeline expansion. Products continue to come off patent and they come off patent in the years to come.

Two, emerging markets, and I'd like to tee [ph] this up this morning. And it's all Hospira, as the world's leading specialty injectable generic pharmaceutical company, taking a significant share of those rapidly growing health care dollars. And finally, commercial excellence, sharpen the saw, enhance our commercial capability.

So having outlined for you the 3 pillars of our growth strategy, I'm now going to pass it over to my colleague, Sumant, who is going to take us through our R&D efforts.

Sumant Ramachandra

Great. Thank you, Richard. Most of you know me, been in Hospira for quite a while, so hopefully got to interact with several of you over the years.

So I wanted to go over the R&D part of the presentation or what makes our SIP portfolio. But I want to actually address one thing. In this presentation and the next presentation, you will see why our R&D model that Mike continues to refer to is very different than the R&D models of big pharma generic companies or biotechnology companies. Because essentially, what you will see is that we are pursuing tried and true molecules that have already been there in the market.

So what we need to really create in the value creation of SIP, for example, is that we have to have an R&D engine that hums along and gives products to our manufacturing facility to make and for Richard's team to continue to sell. So hopefully, I'll convince him of that as we go through this particular presentation.

So the R&D engine is actually one component in the SIP value creation realm. Along with IP driving market formation, and we've done some early market launches because of our intellectual property abilities and having a strong differentiated pipeline coupled with that, taking that forward. And that's why we're one of the leaders, not only in the breadth of our portfolio, but also in the differentiated formats that we offer in the marketplace.

So what capabilities are critical? So from the top, you can see, in this particular slide, that things like active pharmaceutical ingredient, formulation, regulatory capabilities, intellectual property capabilities, as well as a very strong manufacturing network are needed. Now given some examples of molecules that have either tapped [ph] into one or many of these capabilities and what happened as a result of that.

So starting from the top on API. It's been actually discussed quite a bit, so I won't belabor it. But API is fundamental because it's an active raw ingredient that goes into our product. But we don't need to be fundamental to API all across the board. We need to be fundamental in the areas that we believe are highly specialized or drive a lot of value into the molecule. So which ones are those?

Here's an example of the beta-lactam API area, and that's a highly specialized area. And why is that? You actually have to make this API in specialized facilities, and you just can't co-mingle it with a number of other APIs. So make sense for us. We'd have to get it in -- from highly specialized API plants. The other area's oncology. That's actually critical for us because oncology API tends to actually be made also in specialized facilities and in some situations, tend to be higher cost. So by vertically integrating there or looking for strategic partners there, we actually help drive also lower API cost that go into our products.

Next is formulation. At the heart of what we are, we are a great formulation company. That was the basis of what Hospira was spun off to be in the SIP business. Precedex premix is the most recent example of that. And actually, it just wasn't the R&D side coming up with their premix formulation. Tom Moore and his team on the commercial side said, "Customers are saying, 'Precedex will be great if it was just ready to use.'"

And so the challenge of the R&D team and the regulatory team with coming up with a strategy to create a product that was customer-friendly and would improve safety, and because this is a critical care product that's given most in the ICU and in procedural centers to really make this particular product and you've seen the result of that.

From a regulatory standpoint, we actually leverage existing IP strategies and say, "How do we get to market with new forms of a particular product?" First, so there was no 2-gram gemcitabine. So Hospira said, "Let's make a 2 gram because the customers are saying that 2 grams is more valuable to us." Sounds simple, doesn't it? It sounds like we need to just talk to customers and how they use our products and then we can innovate around it. And that is essentially what we did, by creating a unique format and being first to market with this.

And then intellectual property. In the case of docetaxel, which, by the way, has given us tremendous value at Hospira, we use our IP strategies to help force open the market and be one of the first few players out there. And we reap those benefits over a long period of time.

But we also use our IP knowledge in other ways. We use our IP knowledge, as in the case of zoledronic acid, sometimes not to launch [ph] and make a decision to defer that launch to a later period of time because we believe that there's a residual risk in launching. So we use IP in both ways: Early launch and make a decision time [ph] to defer our launch, and I think that was the right decision to make in the case of zoledronic acid.

And then of course, manufacturing. Matt has spoke to you quite a bit about this, but it's critical that we have multiple contract manufacturers, as well as joint venture partners, so as to take the strain off our existing organization that is remediating, that is building a huge footprint and taking that manufacturing organization, and Matt's leading that with third-party manufacturers, we're still able to deliver the pipeline, both internally and to our partners. And that is a critical capability that we have to all put together. Now it's not just one capability that makes us successful, but it's the interplay amongst these capabilities that helps to drive value. And that is the story of Hospira, multiple capabilities being brought together to deliver value at the molecular level and at the portfolio level for the market.

So we, at the core, are an incredible SIP company. That's our core when you think about it. Around that core, we have built other businesses. Those businesses are things like biosimilars that drive us to higher margin and higher growth. It's differentiated delivery platforms that take our core and put it into specialized formats to make it convenient for the customer. It's actually medication management systems that our drugs flow through, so our core is SIP and we have continued to invest in it.

And both Tom and Mike have said this. It's not hard to convince someone to invest in this R&D portfolio. It has nothing to do with me. It has to do with the fact that we have more opportunities, frankly, than anyone can ever fund. Because between the commercial teams and the R&D teams, we're coming up with ideas of what to do next. And I am a good beggar, and I will continue begging for more money in R&D, so I can fund a lot of our core and a lot of the ideas that we have around our portfolio.

So on the SIP side, starting from the top. We actually think of our SIP portfolio in 4 buckets. On-patent originator products. These things are still exclusive, but we are going after. And then most of the time, frankly, we are participating in a majority of this. We can't participate in all of this. Either we don't have the capability or the bandwidth or the funding, okay, so -- but we are participating in the majority of the on-patent originator products. And as you know, that is a huge portion of the value driver, things like being first on docetaxel and gemcitabine and other molecules.

The next category are generics that have already been launched as generics but they're new to Hospira. For some reason, we did not launch them earlier whether it's a value creation reason or something else, and we're catching up now. We're actually quite selective here. We actually look at the molecule and say, "Are we better off with the generic molecules, even though it's gone generic, rather than without it?" And it adds a strategic value to our portfolio, whether it's in a region, or in a particular therapeutic area, because it drives the overall portfolio forward. So we do invest in that, but in a limited fashion.

The third area is generics global expansion, and Mike has touched upon this quite a bit. I will touch upon it in a little bit later. But the idea is quite similar. And Mike, as with anybody [ph] who first joined the company said, "Hey, Sumant, you've like 140 molecules approved in the U.S., what's going on? Why aren't you launching in other parts of the world?" And I kind of stammered a little bit, and I said, "Well, I need funding." He saw [indiscernible] "Here's funding, go do it." Okay, all excuses gone.

So what we're doing is we're driving our current molecules to other parts of the world. We're making it any way, either internally or through a partner. Why not get registration to other parts of the world? And that's exactly what we're doing. We teamed up very closely with the commercial team and the operations team because it does add a lot of molecules, a lot of formats to many countries. You've got to have an incredible supply chain engine and commercial team on the ground. So it's just not about getting to approval, it's getting beyond that approval stage. So that is the portfolio that we're heavily focused on.

There is the area of complex generics. Now complex generics, I would love to pursue it. It's a little bit like it has a proprietary bend to it. But it just carries higher risk, more time, and many times, requires a bioequivalent study. Complex generics has helped with something like our sucrose, for example. In this particular area, we are very limited in pursuing this area. And the reason why is that we have chose to actually put a lot of our money behind areas like biosimilars, which also is a huge opportunity. And frankly, you will see in the next presentation, it is unbelievable how big the opportunity is. And we are playing into today and we'll continue on playing in it.

So the complex generics, unless there's a technology partner for that unique platform complex generic, we will usually opt not do it, because these are not usually leveragable technologies. So things -- for example, our molecules that are in pegylated liposomal format, we're not a pegylated liposomal company. You'd have get that unique technology put a molecule in it, and there's only one molecule that's in that format or 2 molecules at the most. So it's not highly leveragable. So you've got to find the right technology partner and then pursue those type of opportunities.

So if you take our total pipeline, which is 77 molecules, with a local market value of $17 billion, and those are the numbers I'll keep referring to over the next few slides. It's important to remember those numbers, 77 molecules at a $17 billion local market value, quite large. We break it down by region, and the 3 regions we focus on are the Americas, EMEA and Asia Pacific. And you can see that the majority of molecules, about 65, are being launched in the Americas, 35 in EMEA and 30 in APAC. Obviously, that adds up to more than 77 because there are several molecules we are launching in more than one region, obviously. So that's what adds up to more than 77.

Then you take those -- that local market value of $17 billion, and you break it up by therapeutic area. So what's Hospira's focus? The majority, you can see, is oncology, and oncology drives enormous value in the market. The next is anti-infectives, then acute care and then the catch-all category of other. Now because you see oncology and anti-infectives our 2 largest categories, remember my comment on API and where we want to get fundamental on? Anti-infectives, oncology. Makes sense, right? Largest value, where our focus is, gets fundamental across the value chain.

Next, we take this particular value of $17 billion and say, "Where is it in terms of geographic region?" Majority in Americas, not surprising. U.S. and Canada, bulk of it. Because you have more price per value in these type of markets; and they are evenly split between EMEA and APAC, the rest. But also because we still have not taken our molecules all over the globe. And I think, over time, what you'll see the Hospira story unfold with, is as we launch more and more of these molecules x U.S., you will see that growth and value of the breadth of the portfolio that we offer, the story that we see in the U.S. all the time.

So again, you take the $77 billion and you say, "In general, where does it launch? Sumant, is this a story about the next decade or is this the story of today?" I'm here to tell you that a lot of this value creation is over the next 5 years. A bit over 80% actually is over the next 5 years. And the majority of this will be between 2015 through 2017, in terms of the value creation, as you can see on this pie chart. So these are mid to near-term opportunities, and we will continue feeding the pipeline, because there are things I don't fund. I'm a good beggar. I can get all the money I want, okay, so -- but there are things I will -- we will hopefully continue to fund over the outer years, and this will continue to grow and the breadth of our portfolio continue to grow.

Now I'm going to go on to geographic expansion. This is kind of a bubble landscape chart. And in this particular chart, I've laid out that our focus areas in global expansion are anti-infectives, oncology, recurring theme, anesthesia and analgesics and then a catch-all category of others, which is the majority of our pipeline, as you can see in 3 therapeutic areas and there's a big category of others.

And then if you look at what we're focused on, we are focused on the top 25 molecules. It doesn't mean -- there's 119 dots in there by the way. I'm pretty sure there are. But it's 119 molecules, okay? And those 119 molecules -- we'll first focus on the value-based approach. Everyone who's met with me, I'd say, "On the SIP portfolio, we are a value-based approached investment company." So we look at the value of the molecules of the top 25 and we then pursue those on the SIP site.

Once we get through that tranche, we look at the next and then the next. And the reason we do that is we do rational-based investment on SIP, because it's an engine that exists, we can lever it and we know in general where the markets are going to form and how they're going to form. Because we have so much experience over many years in this particular area. And that, by the way, helps drive a lot of conversations. Because when we focus on the top 25, it drives a lot of conversations with ops and commercial as to which APIs are important, how do we distribute these products, okay, and how do we create the maximum value for those products. If I just dumped 119 molecules on this -- I could say [ph], this is what I'm doing, they'll just create chaos. So we're doing a very systematic fashion as we drive value through our new products.

And then, in this particular chart, if we take those top 25 molecules and map it out to the top 13 markets -- many times, you hear about our top 10 markets. And our top 10 markets are listed here: They're Australia, Canada, U.S., Japan, Korea and the big 5 in Europe. Here, the top 13, and Richard is doing this top 13 concept, is let's think about the emerging markets, please, and those are China, Brazil and Mexico. High value, emerging markets. So we created this top 13 market concept.

And then we do a heat map of the top 25 molecules to the top 13 markets. And you can see in these colors, in gray, we are already on market. So we don't have to really do anything there from an R&D perspective. The one in purple are the scope of our global expansion program, and the one in pink is out of scope. Even though we don't actually have it in that market, the value in that particular market is very low or the product may not be registered in that market. That's usually the 2 reasons why we not -- we don't want to go there.

Now global expansion is more than the top 13 markets. It's actually everything we have presence in, it's eligible for global expansion. We spoke about Vietnam, it's eligible for global expansion, but it's not on the top 13. The ones that are outside of the top 13 have to utilize the strategy and portfolio of the top 13. So we also want to contain this program that we don't create every form of every drop for every market, because there's just complexity and can create chaos. So outside of the top 13, those markets utilize the portfolios that we're doing for the top 13. And many times, you find that it's actually quite easy to do. It can actually utilize the same portfolio.

So that's really the concept behind global expansion. And what are the results? So in this particular slide, we already mentioned to you that we had over 100 submissions in year 1 of the program, which is 2012. And this year, we are on track to achieve over 200 cumulative submissions. Now, we're going to have this continuously ramp up to very high submission levels that will result in launches. And so not only is our R&D and manufacturing engine important, but the launch engine is very important for these particular products too.

I am hoping to show, over the years, that as we have [ph] to get these molecules registered, it frees our budget and are going to next tranche. So these numbers just keep rising and rising and rising, again, but rationally, not just to rush or anything -- everything everywhere, but in the right places where value will be created.

I'm going to shift gears a little bit. We've talked a lot about numbers and value, because our SIP portfolio is made up of those 4 segments, and there's a lot of numbers in there and there's a lot of value in there. But we also want to stay relevant to the marketplace. We really want to take our products and meet customer needs.

In some markets, they're actually willing to pay when we do it. U.S. is a very good market for actually differentiation. And if we take our products and put it into drug differentiated formats, drug device systems, we're doing it to reduce medication errors, because we understand how the product is used in the market, reduced waste, reduce infection risk and this will improve the overall safety for both the patient and the health care provider and improve productivity. And this is our fantasy. We've actually seen it.

I'm a physician by training. If I'm given the drug in a vial, I've got to pull the drug out in emergency and use it. If Hospira gives me a drug in a prefilled syringe, which many times we do, I can just pull it out of the Pyxis cabinet, in the U.S., and use it on the patient. That step reduction has no pharmacies involved in it, or can the nurse can administrate, if appropriate? It actually adds productivity into the system and safety, for both the patient, as well as health care provider.

Our major categories have been prefilled syringes and then the other categories admixes and premixes. And we constantly look for these opportunities of putting things in more convenient formats so that the health care provider can use them without the number of steps it takes from a vial or an ampoule to a patient's vein or an injection in some other place.

So that is why Hospira has been a leader in this category. But it's been a leader because we actually derive benefit from it. As a company, we're going to derive benefit if we're going to pursue something. And it's actually driven us to a higher margin versus vials. And when competitors come in, in standard vial formats of -- or ampoules, it actually provides some level of share and volume protection, as well as some price protection, and we have been able to put it into our portfolio of offerings to customers, and Tom will be here later on, you can ask him about that, of how this works when people see these differentiated formats with our standard vials out there and sees [ph] mix of the portfolio that we offer.

I want to point out one thing. People have said, "Well, other people are coming out of prefilled syringes." But if you look at our prefilled syringes, because they were built over the years, and because we understand how they're used by the customer, they actually have diversion detection in there, as for example. So we put narcotics in some of these syringes. If you don't have that, someone can actually withdraw that narcotic and divert it. We have actually built that into our systems, so that we can actually detect if that happens. Those are advantages of not just convenience, that's advantage of overall safety and avoiding things like diversion. So it's not just about putting your drug in a syringe, it's what you can do with that syringe that can answer the issues that happen in healthcare.

Now before I hand over back to Richard, great news about Precedex this morning. I mean, congratulations to the team that made it happen. It is very exciting for someone like me, because I know I'm going to go and ask for more money, okay? I really think Precedex is a great drug. And it's a proprietary drug. And, of course, it's not strategic, but it brings enormous value to patients and to customers worldwide. And our premix version, we did it very quietly. I think 2 years ago, someone asked me a question, "What life cycle are you doing?" I think it was you, Ronny. And I said, "I'm not going to tell you what it is," but we were doing this. We were working on premix and trying to get it launched, registered, and then launched at a strategically right time.. And that has gotten, obviously, a lot of value from Hospira as a part of this. We'll take this premix product, now that we have it in the U.S. and registered other markets: Japan, Brazil, Canada and other smaller markets. Because we will take this value and take it to other markets that need it.

But in addition to just taking this new formulation and new presentation outside, we have also pursued getting additional indications for Precedex in the ex-U.S. market. And that is, for example, in Japan, we recently received PMD approval for procedural use indication, use outside of, let's say, the ICU setting, when they're doing, for example, endoscopies or other types of procedures, or use in Canada for greater than 24 hours. Because frankly, Precedex, actually has enormous value when it's used for the patient, when it's used more than 24 -- more than a day, because it has a very stable profile in many of these patients. So it's not just about the presentation, that's also about getting the new indications in those various markets, and that's how we drive value.

Now we've shown you our core capabilities. I certainly do hope that the FDA does give us a chance with Dyloject, which is another proprietary agent. It's in a differentiated format to diclofenac, given in injectable format. And we will use the same capabilities in helping drive value there. We're waiting for the FDA on that one. We've responded to their Complete Response, and we hope that we'll be given this opportunity to drive a key pain medication to use in patients that need it.

Thank you, and I'll pass it back on to Richard.

Richard J. Davies

Okay. So continuing our growth strategy. Let's talk about the emerging markets. So I'm sure you've all seen a slide like this before, this is the latest one from IMS.

It always staggers me. It always staggers me how these markets move. I've been in and out of China, personally, for about 15 years now. And I've seen it move from position 6 in the market to position 3 and fully anticipate this is going to become the second largest pharmaceutical market in the world. As Mike referenced earlier on, this is an injectable market. You go into a hospital in China and you'll just see a room like this with bags of IV hung up on patients receiving their injectable medicine. It's a huge opportunity for us.

Now a similar strong growth in Brazil. Brazil's rapidly becoming a middle-class society. And we see it moving from position #10 to potentially a position #4, all opportunity for a company like Hospira. So our strategy is clear. In the emerging markets, the middle class has emerged. The one thing we know that the middle classes want, it's access to healthcare. Dollar spent on medicine increases, and Hospira needs to be positioned to be able to take our share of that growth pharmaceutical dollar.

So how do we implement our emerging market strategy? It's really tailor made to the dynamics of each individual country. So for example, do we decide to go direct? Do we go with a partner, like a Dx partner? Do we go with a joint venture? Or do we wish to acquire a company in the local market? On the product side of the marketing mix, can we out bring out differentiated drug delivery systems to bear? Or do we want to go with a standard vial? And this is a more price-driven market. So do we have a direct sales force versus our distributor and our public markets and our private markets? And we even have the capability to succeed in all of these settings. And so, it's not really about "or" in many of these markets, it can also be about the "and."

Okay. So we're focusing on China and Brazil. You saw from the IMS chart, no surprise there. These are all big plays, but also Japan. But we know Japan's not an emerging market. But for Hospira, Japan in the generic space, really does behave like an emerging market, where there's budget spends on generic medicine is poised to increase sharply, where, again, we need to position ourselves to ensure that we get our fair share of the gain of that pharmaceutical dollar.

So what I'll do now is walk you through each one of these opportunities. So last July, we entered China with our own direct sales force. We're doing really well for some really modest beginnings. We focused on Tier 3 cities, places like Beijing, Shanghai and the Class 1 hospital, which correlates to approximately 400 priority hospitals for our sales force. And in doing so, so far, we're 1 of only 3 branded, multinational players with a preferred listing for our brand of paclitaxel which is Anzatax.

We're now commercializing our second product there, leucovorin. Beyond that, we've just started to set up our regional headquarters in Shanghai. We did know that in order to succeed in the medium or the long run, we're going to need a local partner. Having a local manufacturing partner is going to enable us to reduce the costs of our regulatory clinical study program and also give us the opportunities to expand our portfolios rapidly.

Let's move on to Brazil. Brazil is really an example of a different strategy. We already have a strong go-to-market capability in Brazil, which we've built through the commercialization of both Precedex and our devices. Now we need to augment that team and our existing portfolio through small tuck-in acquisitions, or as Mike referenced, we gain access to other M&As or the product flows. And we can fit that new portfolio into our existing sales team, and this would also give us access to local manufacturing capability, which we know is important in the Brazilian market and will enable us to succeed in both the public and private settings within that country.

And finally, for Japan, we've really customized our strategy and partnered with national companies. National companies in Japan are very strong in the local market, and we do this rather than build it ourselves. We already have a very successful partnership on Precedex with Maruishi. We are growing revenue of 30% a year, and we both share the go-to-market effort. We've also moved into oncology with a partnership that we announced late last year with Mochida. Mochida bring a very, very successful commercial organization to bear on our portfolio, and we're looking forward to our first launches in 2014.

And finally, I want to spend some time with you on how we continue to sharpen the saw of our commercial capability. And this splits into 3 components. How do we drive our tender and pricing strategy? How do we drive launch excellence? And how do we increase the effectiveness of our sales forces worldwide? Now I'll take each one of these one by one.

So, firstly, let's talk about tender and pricing excellence. It is really paramount to our success. We focus on insuring. We understand the competitive bid processes worldwide. We drive this information not only to successfully tender, but we drive this information back into our supply chain to ensure that we have the very best cost of goods and the best pricing strategy that allows us to maximize and exploit volume and win worldwide.

Secondly, when it comes to launch in the generic market, it's really important that we launch at the point the market forms, especially, in our top 13 countries. We have a strong capability in this, and we continue to build on it, and it's important, because we know that, in generics, the maximum size of the market is the day the market forms, and we need to be there, and we need to be able to participate.

And finally, one of our biggest investments we make in the commercial world is our sales forces, our people and our team worldwide. We ensure we have the best trained sales people. We have optimal coverage geographically. Our sales people know which customers to call on. They have the data that allows us to pull through volume. And finally, we have a CRM or customer relationship management system that enables us to keep all of this straight as we go forward.

The global injectable market, for us, remains highly, highly attractive. It's a market of continuous growth, and we have significant opportunity. Today, we're the market leader in the generics, especially injectable pharmaceuticals. And our objective is to remain the leader. We are building on our position through a robust pipeline, which through expansion of our existing portfolio -- through expansion of our portfolio into new -- into existing markets and through expanding into new markets, and we're becoming better and better at leveraging our commercial techniques. We underpin this with a remediated supply chain that enables us -- that gives us products that meet the global quality specification and standard. It gives us volumes, and it gives us competitive cost of goods. And that combination, we really believe, is a winning combination. Thank you.

Karen King

Okay, so we're going to break here shortly. And we're going to the Q&A, as I mentioned, over lunch. So if you give us just about 20 minutes. We're going to come back here at noon. We're going to get all the lunches out and you guys can eat, while we're doing Q&A in here. Ask your questions about MMS and SIP. Please, again, visit the booths. I know I hard time getting some of you in here, so you can go back and, again, touch our pumps and the drugs. All right. Thank you.

Richard J. Davies

Don't touch the drugs.

Karen King

Well, don't touch the drugs.

[Break]

Unknown Analyst

Sumant, I have a couple of questions for you. Can you talk about whether enoxaparin and iron sucrose are under development at this point? And can you also talk about how many ANDAs are pending at this point in the U.S.? You had the overall global pipeline. But how many ANDAs are pending? And roughly how ripe are they? Which ones are tied to Rocky or -- versus not? Just give us some flavor around the rollout of those ANDAs, if you could?

Sumant Ramachandra

I'll talk about the complex generic ones first. Can you hear me?

Unknown Analyst

Yes.

Sumant Ramachandra

Good. So I'll talk about -- so as I mentioned in my slides, in my talk, if the right opportunity comes along from a low molecular rate happening like enoxaparin or the right type of technology platform with iron, we will pursue it. Right now, as you know, with iron, the guidelines for iron sucrose just came out a few weeks ago, right? So just, like, literally, 3 weeks ago. And so I think we have to make sure that we understand fundamentally how this product is going to work in the body, as one of the -- and the technologies that will help drive to a successful approval. So we continue to be interested in iron and as a key molecule, but we'll actually look for the right type of investment to take it forward. That means it's in the portfolio from a exploratory perspective, but not in full development.

Unknown Analyst

[indiscernible]

Karen King

Hold on a second, Greg [ph].

Unknown Analyst

You said you had the enox previously under development, as well as iron sucrose, previously, under development. So I guess, I'm just asking, can you confirm that both are no longer under development, present tense?

Sumant Ramachandra

Present tense, neither one of them is under full development, no. Under exploratory only, yes.

Karen King

Over here, Shannon [ph].

Sumant Ramachandra

You had a second question on products.

Karen King

Oh, hold on.

Unknown Analyst

On ANDAs.

Sumant Ramachandra

And so we don't comment on number of ANDAs. We don't break it out that way. So, obviously, U.S. is our largest market. So a number of submissions that do happen in the U.S. as a result of that. As you saw, I think I said 65 of the 77 are going to be in the U.S. within the development pipeline, so that there is a large number, obviously, within these. We don't break that particular aspect down. And then you asked about whether which of those products are, for example, in Rocky or other places. We made a decision about 2.5 years ago, so -- and this is around, right before the last Investor Day, we said "Where do we place our products?" And that's why I said, where do we place our products to take the strain off the manufacturing network at the time the manufacturing network is going through that strain? And so there are no meaningful products in places like Rocky or Austin. Most of them are in the other parts of the network or with joint venture partners or with contract manufacturers. Well, obviously, when places like Rocky and others come online for business, for us, we will be putting products there. We'd love to use our facilities. But until we get that signal, we have gone to other places.

Karen King

Okay. Over here.

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

Chris Schott at JPMorgan. Can you talk a little bit more about the European kind of portfolio rollout? When we look at when manufacturing is going to be ready to support any kind of meaningful push into that market, when the approvals come together, I mean, how do we think about timing of that? Is that '15, '16, '17? Is that going to be coming out of the one-off bases? Or is this going to be kind of big groups of products coming to market? So I just wanted to understand a little bit more about that piece of the story, I guess.

Sumant Ramachandra

So I'll speak with the approval cycles, and I'll get Rich. So the -- some global expansion and the pipeline, when we submit a dossier in Europe, it can take anywhere from 12-plus months to get through the approval cycle. So we will start seeing some of the benefits of global expansion models that were submitted in 2012 and early parts of 2013 start flowing in '14 and '15, okay? So that's in terms of the submissions we have across Europe. And because Europe has a number of countries within 1 region, it multiplies in terms of the number of launches as a result of that, because of the number of countries. So that's the general timing. So if you take a molecule and say, we submitted in a particular year, you add anywhere from 12 to 24 months, you can expect those molecules to start appearing in Europe. That's how you should [indiscernible].

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

And do you have the capacity when in that time horizon to go after those opportunities? Or do we really have to wait for Vizag to really ramp up before you can fully go after that?

Sumant Ramachandra

No, actually, the way global expansion has been scoped is that we do have the internal capacity to do it. We will pick up more capacity over the manufacturing network, as Matt has described before, and that will give us the ability to drive down the conversion costs and be more competitive in those markets in several of the molecules.

Richard J. Davies

I mean, it's pretty. The launches are pretty even through the period, so...

Unknown Analyst

Is there any benefit -- is there some critical mass when you have -- as you get more filings, obviously, it leverages your infrastructure. But is there any kind of share benefit, et cetera, you get from going from, as highlighted, 19 products in France. When that goes to 40 or 50, do you actually get more share per molecule? Or is this really a molecule-by-molecule kind of tender system?

Richard J. Davies

Yes. I think the way -- to start with this tender-by-tender system, right? But what it does do is, the more molecules we have, the more relevance we have to customers, okay? And so you just have a greater presence with that particular custom bidder region, say, in Italy, a hospital in France or a sick fund in Germany. So to me, I think about it like that. The bigger we become in Europe, the more of a leadership position we can get. We fully believe there's going to be, as I said, a consolidation. It's going to be based on the rising quality and regulatory standards that we fully anticipate, that we're going to be a key player within Europe and register molecules, get more molecules to sell. To me, it's some pretty simple equation.

Karen King

We have David [ph] over here.

Unknown Analyst

Just 2 questions. First, on the molecules that are under development. I know you don't disclose specifically what you're working on. But can you maybe give us some sense on how you'd characterize those molecules. Are these molecules that are more like eloxitan and docetaxel that have the potential of very few competitors, because there are some complexities involved in the development? Are they more like gemcitabine that have the potential of more competitors? Any way, you could help us frame the types of molecules that are under development? I have a follow-up.

Sumant Ramachandra

Yet. So within the the slide I showed you with the 4 categories, take out the last category of complex generics, focus on the other 3 categories. So the way we think about it is that we have first-to-market opportunities within the coming off-patent or coming off-exclusivity molecules, originator molecules. We aim, if the value is there, we aim for those. Absolutely want to be first to market, or near first to market on those kind of things. And we've shown a history of that. And also, within there are some power for opportunities. And the ones we have disclosed and talked about are, actually, daptomycin, bivalirudin, paricalcitol, doripenem are the -- are 4 of them that we've talked about quite publicly. Doripenem is a lot smaller than the other 3. Those we absolutely pursue, because they're -- the potential first to market, there's a power for opportunities that drive enormous value. So that's very clear. The other molecules that we talk about -- and remember, Hospira pipeline so there's things that are first-to-market and high value, the things that are power for and high value, and there's some power for that may be low value. We sometimes make decisions not to pursue them. Then it becomes a volume game, okay? It really becomes about pursuing many molecules in our portfolio and driving a number of molecules forward so it's a breadth of portfolio equation. So if you're talking about -- there'll be a lot of followers to this? Sometimes not, because some things require, for example, very specialized manufacturing capabilities, like a cold chain process. Those you're probably not going to find a ton of competitors. While others will be very standard format, very standard drugs, they happen to be biggest originators, but they will decline over time, okay? So it really depends on how specialized it takes to make them. Oncology tends to be very specialized. Anti-infectives, beta-lactams tend to be very specialized. Cold chain manufacturing tends to be specialized. Those things you're going to find just a small number of competitors.

Unknown Analyst

And then I think a comment that you've made in the past, and you have made in a while, so I may mess this up. But these are the, especially injectable markets, something like $4 billion, $5 billion of which you only compete in a sliver of it, because the other pieces of the market are in those more commodity-type segments where it wouldn't be that profitable to go after them. I think, originally, one of the logic developing manufacturing in India was to be able to more essentially go after the entire SIP markets. I guess, where are you in sort of your efforts to go to address the entire market in SIP?

Sumant Ramachandra

So SAM versus TAM, you're talking about?

Unknown Analyst

Yes.

Sumant Ramachandra

Okay. So part of our strategy of manufacturing network, is that, I mean, Richard can also address this. But from a pipeline perspective, the ability to have lower conversion costs and more competitive API positions makes our product costs lower, right? So that's just simple math. And that makes us more competitive. Then we can therefore go after those particular molecules. And that's what global expansion, actually. That's a conversation, frankly, that global expansion or going to markets like Europe drive. Because in certain markets, there's going to be a different price-for-value discussion than in U.S., where there's more flexibility in price-for-value for discussion. So from the pipeline perspective, the discussion that happens between Matt's team, Richard's team and my team is specifically around, "Hey, Sumant, you have this in the pipeline, how can we get a process that's optimized for Matt to make? And then the API source that's qualified that can actually drive the costs lower? And then the conversion costs from India, as Matt has mentioned, is about 30% you mentioned or lower? Okay, that'll actually make the costs obviously lower for those particular molecules. That helps drive our ability to take the molecules in the pipeline and take it to parts of the globe where there are just these pricing pressures.

Karen King

Another question.

Unknown Analyst

I have to get Julie involved here. I was curious on your perspective, as to whether it helps in any specific way, in the pump selling effort that you're attached to a large generic drug company? And then maybe I can get a higher level discussion on that, as well, in terms of the different things that you need to be convinced by to agree that the 2 businesses sort of fit together.

Julie Sawyer Montgomery

So having a device business definitely drives our relevance in the hospital. And when you go into the hospital, frankly, you feel it. You have a different kind of conversation with that pharmacist, and the device side of the business has worked with him for hours to develop a customized MedNet drug library, and you would if you don't have that device portfolio. So you definitely, in my view, see real synergies.

Richard J. Davies

Yes, I think about [indiscernible] sort of questions just at one level, and if you think about Hospira providing solutions. And we have that relevance, where we've got strong device business and a strong SIP business and a strong biologic or biosimilar business.

And that's what global expansion -- actually, that's a conversation, frankly, that global expansion or going to markets like Europe drives. Because in certain markets, there's going to be a different price for value discussion than in the U.S. where there's more flexibility of price per value for discussion. So from the pipeline perspective, the discussion that happens between Matt's team, Richard's team and my team is specifically around, hey Sumant, you have this in the pipeline, okay, how can we get a process that's optimized for Matt to make and then the APIs source and that's quantified that can actually drive the cost lower and then the conversion cost from India, as Matt has mentioned, is about 30% you mentioned or lower, that will actually make the cost go obviously lower for those particular molecules. That helps drive our ability to take the molecules in the pipeline and take it to parts of the globe where there are just these pricing pressures.

Unknown Executive

Another question? Back there.

Unknown Attendee

I have to get Julie involved here. I was curious on your perspective as to whether it helps, in any specific way, in the pump selling effort that you're attached to a large generic drug company. And then maybe we can get a higher level discussion on that as well in terms of the different things that you need to be convinced by to agree that the 2 businesses sort of fit together.

Julie Sawyer Montgomery

So having a device business definitely drives our relevance in the hospital and when you go into the hospital, frankly, you feel it. You have a different kind of conversation with that pharmacists and the device side of the business has worked with them for hours to develop a customized MedNet drug library than you would if you don't have that device portfolio. So you definitely, in my view, see real synergies.

Richard J. Davies

Yes, I think about [indiscernible] as you also take that sort of questions just up 1 level, and if you think about Hospira is we're providing solutions and we have that relevance where we've got strong device businesses and a strong SIP businesses and a strong biologic or biosimilar business. These have like a way greater relevance to the healthcare system, doesn't matter what country you're talking to. That gives you the access to decision-makers, allows you to have those conversations then, so you can put forward the value proposition that we have in Hospira, doesn't matter which one of those 3 platforms we specifically want to talk about. So it really does become one of the largest sort of solution set and relevance to the key decision-makers.

Unknown Executive

Okay. There was I think [indiscernible]

Unknown Attendee

Yes, I have a follow-up on the MMS as well. Just in terms of when does the remediation start in earnest? Do you have to get the Plum devise reapproved to replace Symbiq?

Julie Sawyer Montgomery

Yes. So there's remediation in the -- then there's our replacement program, right? so we're remediating, in earnest, the Plum A+ and LifeCare PCA device today, going in and executing the recalls that we had. And then once we have all those recalls built into new manufacturing, which we will have in very early 2014, then we begin the replacement program's full throttle.

Unknown Attendee

And do you need approval from the FDA?

Julie Sawyer Montgomery

So when we first begin those replacement programs, it's under a medically necessary protocol. So to be clear, it's to existing customers and we have discussed that with the FDA and they're comfortable with our approach.

Unknown Attendee

Okay, and just lastly, in terms of your installed base on pumps, what is it? Because I do the quick math on 25% share of the 2.7 million, you get to a little under 700,000 pumps, which is a lot higher than I thought you were at, so what is your installed base?

Julie Sawyer Montgomery

Yes, we've always said, we have greater than 575,000 pumps in the world. Your math is good math.

Unknown Executive

Up here.

Unknown Attendee

I just had another follow-up on the MMS business, so, kind of 2 questions. One is what kind of visibility and what's the timing on getting your approval to get back to new customers? You seem to imply it was kind of late '14 in your presentation. And then going forward, can you talk about a, I guess, the mix of Sapphire pumps that you could foresee over that 5-year timeframe and also the margins on the software.

Julie Sawyer Montgomery

Sure. Okay. So -- what was the first part of your question? Remind me, because it's 3 parts. Yes, so we're, of course, selling freely to new customers with the Sapphire pumps today, right? So there's no restraints there. And then we will broaden that footprint further to new customers as we have Plum 360 approved, which we anticipate being a 2014 submission, and that we also have Sapphire+ improved, which is a great general infusion pump. So when you look at this split between Plum 360 and Sapphire+ over the planning period, it's going to be really interesting to watch. Plum is a great product with this really unique clinical differentiators that's very important to our healthy market share that we have today, that existing installed base. Sapphire shows really well, and so customers who aren't used to that unique clinical workflow, they are very impressed with the small size of the pumps, the great color touchscreen and the fact that it's so intuitive that it reduces the training burden they have and that you can use the same pump now for ambulatory and pain management and then we'll extend that with general infusion with Sapphire+. So Sapphire is definitely a big part of our competitive capture over the planning period.

Richard J. Davies

To add just on what Julie said, Sapphire+, particularly in the U.S., where it's just been registered and we're right in throws of launching it right now. This is a major launch for us. We're very excited about it for all the reasons Julie said, and so plenty of opportunity for our U.S. team to sell in 2014 and to expand the base and capture competitive share.

Unknown Executive

We have another one, Dan, up here.

David R. Lewis - Morgan Stanley, Research Division

David Lewis, Morgan Stanley. Just coming back to the SIP business for a second. I think one of the messages we heard this morning is that with the investments in quality, we feel pretty good about taking price up the next several years. I wonder, do you expect these price improvements to continue throughout the LRP to 2018? And so the second question, Mike made a comment earlier about the ability respond, if you had to, on price. You're not the only company that's vertically integrating with API, doing different things, I guess my question is in the latter parts of the LRP, as you have multiple competitors who've are also vertically integrated, you have multiple competitors that have just taken cost out of the system and they could use price as an arbiter of taking shares. So help me understand how you think price in the first half of the LRP versus the second half and some of the strategic dynamics that I laid out in terms of how that impacts the price across the LRP.

Richard J. Davies

So it is something that Mike mentioned and I talked about in my section, we've worked hard on price over the last year. We're very sensitive to it in terms of, obviously, our customers. Again, we spent a considerable amount of money on remediation of our factories around the world and trying to figure out how we take value and, therefore, in turn [indiscernible] price. So far so good. It's an important part of our marketing mix, we understand that. And we're going to have to see how sort of competition plays out, over time. We do believe that there is a new regulatory standard in place, a new quality standard in place, and it's highly likely and we'd anticipate fewer people can meet it, okay? We also understand from our customers worldwide and, again, come back to Mike's analogy, which I've seen myself, customers understand the value of continuous supply as well, okay? So to me it's sort of, it's very hard to answer your question precisely but it is an important part of our mix and how we answer challenges from competitive threats going forward.

Unknown Attendee

How about longer term? We read all about global competitive conversion rate [indiscernible]

Richard J. Davies

So and am I worried about competitors in the longer term, how to use the LRP being able to take be much more price competitive, that's the essence, of course, if you ask me. Now we spend a lot of time and as I talked about a little bit, we become much more sophisticated in our pricing and tendering capability within what's in public realms, we understand pricing and we track pricing very, very closely particularly in the price competitive market. And we have sort of an active group who meets on a very regular basis that looks at price versus what we call true economic costs, which is the lowest cost, we believe, that's stuff can get made for around the world. So we got a very good handle on where this could go and then as Matt works hard with this team, we improve our manufacturing footprint, we work on our cost of goods. We see no reason why we wouldn't compete -- or we wouldn't be able to compete in the volumes. We're vertically integrating an API, we're manufacturing in inexpensive parts of world, so why not us.

Unknown Executive

Let me maybe just add to that as well, we are the world's largest unit producer in this particular area and this whole global expansion notion should build upon that leadership. So while others may be vertically integrated as well, they won't necessarily have the volume we have and if they do, they will be probably going after other competitors other than ourselves. In a lot of times, in a global market, 'Hospira's coming in, so what?' At the end of the day, we wanted to be, 'Oh no, Hospira's coming into the market.' So as much as people can compete with us, as we go into the markets, I believe we will be a very determined competitor going through with vertical integration and the largest unit flow, which should give us big competitive advantage.

Unknown Executive

[indiscernible]

Unknown Attendee

A fairly generic company, you have like a disproportional contribution from several large products that are selling for relatively nice prices, that's very normal. When I look at your kind of like successful products, which probably contribute to the majority of the operating profit on a marginal basis, I'm left wondering what you have that will replace them as more competitors come in. I mean the concern always with competitors coming to the market is not that they will be able to compete with on a product you make for $1 and sell for $1.20. They will compete with you for the product that you sell for $1 and make for $1 and sell it for $5 or $10. If you kind of think about that dynamic, what would be your answer, how would you be able to maintain your higher margins with new launches. I know you cannot talk about everything you've got, but you can talk about the molecules that you believe that are in the public demand that can support your margin assumptions.

Matthew R. Stober

So I'll start and then Rich can answer following that. So new products on the SIP space is one way of doing it, okay? So -- and obviously, some of these new products are quite large but, yes you're right, they're not merely as large as the oxaliplatins and those [indiscernible] that were launched previously. But the other part is frankly that we doing the volume of products and the breadth of that portfolio. It does make a difference. Now you have to remember, our pipeline, which is it's a very obvious fact, I'm just going to say it's a very obviously fact, generic pipelines are based on originator pipelines. If originator pipelines are going up, the number of the generics go up, right? So it's a simple fact. So that's one of the reasons why Hospira made, it's a very conscious decision several years ago, to invest in places like biosimilars and biosimilars is one way of actually maintaining value at an aggregate level in the areas that we're good, which is in specialty injectable pharmaceuticals. We break it down by generics and biosimilars but at the end of the day, a doctor or a nurse or a pharmacist who's handling an injectable and injectable for a variety of diseases. So biosims will make up lot of that. The other side of the equation is that we can life cycle some of our generic products. So we talked about differentiation as one way. One of the reasons we haven't focused maybe as much on differentiation is because we had so many other opportunities due in terms of new molecules. So we can drive towards differentiation of these -- and offerings of these molecules as one way of adding value back to the customer. We know in U.S., Canada and certain markets are willing to pay for this differentiation. We hope with the right type of differentiation, maybe other markets are. Rich just told me that some emerging markets are willing to pay for differentiation and that's what entry pack. And frankly, if you have a great differentiator, it's one way of getting past the bid and tender process also. So that means we have to think about that. So our existing base, we can differentiate around. And then working with Matt's team, is to lifecycle manage our existing portfolio and drive it to optimum efficiency, bring back products to market that were taken off for a variety of reason and bring it back -- so it's a multipronged approach. It's not a 1 for 1 replacement, just because this has gone down. There are a number of factors in our favor for just going the opposite way. And when we get to biosimilars presentation, we talked about a $9 billion served available market. We're talking about potential $40 plus billion biosimilar available market that we are pursuing in the near future, in the near to mid-term and long-term future. So I think that's so big and that is such a great opportunity that's one way of doing this also.

Richard J. Davies

That is why I enjoy working with Matt so much, because he could actually do my job. Yes, the only thing I would add to what Matt said is if we look, for example, in Europe, we've developed our packaging centers. So once they have to be very competitive in a certain country, on a certain molecules, on a certain bed, my packaging and repackaging centers enables to me to react extremely quickly to short notice tenders and that allows me to take a high price, high margin. And so it really becomes this mix, okay, the mix across the molecules.

Unknown Executive

Wait hold on Ronnie. Can you give him a mic.

Unknown Attendee

Some other companies were just giving out the ballpark figure, but what kind of an operating margin do you think is achievable in Europe?

Richard J. Davies

I don't think we can pull out, right Tom, specifically?

Unknown Executive

[indiscernible]

Unknown Attendee

Conceptually, 10% to 15%, 20%...

Thomas E. Werner

Question is what's the operating margin there?

Unknown Attendee

Conceptually, if you guys are running across the continent and you brought your volumes up, what do you think is a good run rate of an operating margins for a generic injectable business this year in Europe?

Thomas E. Werner

I mean, today, we're profitable prior to charging and all the corporate overhead, et cetera. If we say the operating margins of the company are going to start to approach 20, Europe won't get there over the 5-year time horizon. However, if biosimilars really kick in bigger than we expect, it could be possible. It doesn't need to be a 20 to make the whole machine work.

Unknown Executive

Okay, Dan, over there.

Unknown Attendee

Steve Sloner [ph] just curious with the user free act on the generic side, we have expected some improvement in review times there and, currently, they seem to have been going up not down. So timing and some resolution there at the backlog and what do you think are reasonable review time on the SIP business for your filings in the U.S. should be 2 or 3 years out?

Sumant Ramachandra

Sure. So starting in October 2012, the PDUFA fee got started getting charged and the hope is that PDUFA fee actually results in improvement in approval timelines, right, so review costs gets shortened. It's been going the other way for a reason, okay, and the FDA recently published their 1-year report as a result of that 1-year fee collection, because they have to do it under transparency guideline, is that they have to go and do a backlog of not just the finished products, but they actually took on API on top of it. So API, as well as finished product manufacturers are now subject to that same type of review process. And as part of that, what the FDA is trying to do, I can't speak fully for them, but I've heard Janet Woodcock speak on stage several times, is, literally, that they're trying to prioritize the application first based on the quality of the application that goes in and then if it passes the quality of hurdle, it gets filed -- accepted for filed and then the review clock. So the thing that we can do that's important is that we make sure that it's in our control, we have a good quality application that goes in. It goes into a system and if that makes the good quality hurdle, it is going to get accepted to file. We do expect the timeline to start coming down, no question about it because they're going to be held responsible and accountable at the FDA, because they're collecting fees on this one now. But they're going to do it by prioritization based on the quality of the application and then the quality of the data to get to approval. So it's gone the other way, and I think it will start contracting. And also hiring staff, if you've ever been to the FDA campus in Wide Oaks, there's a lot of buildings being built. It's a lot. I was shocked by what I saw. But that's probably for all the staffing that they need to do a lot of reviews. I can only assume that.

Unknown Executive

Other questions? Okay, Anil, since you have not answered a question, can you talk about how big the opportunity is in the emerging markets and spend a little bit of time talking about what you're doing in Japan and in China.

Anil G. D’Souza

Sure. So with regard to Japan, Mike already mentioned that with a rapidly aging population and workforce that's burdened with that, the Japanese government has established a 60% goal by 2018, more than double where they are now in terms of generic penetration. While we feel this is actually exciting for us, we think we know the pathway to actually get at that. Now, if you look at individual pure generic companies in Japan, their success rate has been getting about 5% market share penetration. What we've found is that hybrid companies, companies that actually detail in both proprietary and in generics, they're more successful, because there's a halo effect that doctors have in terms of the confidence of a rep who's actually able to detail on both product lines and those companies are getting somewhere in the 25 to 50 and sometimes higher than the originator brands in terms of penetration. That's why we actually entered the partnership with Mochida. Richard mentioned the national companies are excellent companies in terms of driving local share. Mochida, we believe, is at the top of that level. If you look at statistics for Japan in terms of rep productivity, they've always been in the top 3 in the number of details per rep. Moving on to China, you've got just all the trends going in our favor. It's about 70% of the market in terms of dollars, it's actually in injectables. You've got, in the next 20 years, about the size of the United States moving into urban cities. You've got a higher rate of cancer increasing and there's a high brand of generic market in China. There's a differentiation. So in paclitaxel, for example, which we detail, there's about 38 players, but only 3 really operate in the high quality segment of the market and those 3 players actually operate at a much higher share than anyone else. So that's where we're going after and we believe that as we expand our portfolio there, it's such a great opportunity for a multinational like Hospira to succeed.

Unknown Executive

So, Richard, obviously, you've [indiscernible] in differentiation, what kind of -- do you use differentiation outside the U.S. to capture market share and/or price?

Richard J. Davies

So if we look at the U.S. reporting of what, about 40% of how our medicines are presented in differentiated format. What we found in Europe is that the European tender base system, as it currently is, does not value differentiation, it's where you try to seek the lower price, which tends to be a vial. What's been really interesting to me over the last 18 months is that when we go and do market research in countries like China, and we test our differentiated drug delivery systems, we scored really, really highly in terms of preference share over a standard vial. So it's going to be form a big part of how we think about our expansion into China and I think it's very, very exciting. Anything else you're going to add?

Thomas E. Werner

Yes, no it's -- once again, this is a branded generic market. When we were describing about how you go into these large infusion centers, the one thing about the Chinese is they're very capitalist. I mean, there's drugs and the consumer is actually picking the quality level of the drug and they want high-quality. And so there's a real ability to actually sell differentiation at a high quality level either in terms of brand name, but also in terms of differentiated systems that can be explained to the doctor and the consumer.

Unknown Attendee

Other than that, that doctor-sales-rep trust you mentioned, of having maybe brands and generics. What can the government actually do to get to their goals on the generic side without relying on what you just described? I mean, what's been the challenge so far?

F. Michael Ball

I think that in the end, ultimately, the Japanese government's going to have to look at reimbursement. That's really the major way you actually can draw shifts. Up to this point, we haven't seen that, but I think that they're considering that type of policy. What we're trying to go do is work closely with the government and try to make sure that we're coming in with a sales organization that knows how to explain the value and the safety and the quality of generics. What the Japanese really wants, the Japanese consumer, the Japanese doctor, is high-quality medicine. So to the extent that we can actually make that transparent to them, we're helping the government do what they need to achieve.

Unknown Attendee

I'm interested in that process for getting that -- the process for getting that clean bill of health in Rocky Mountain, right? And I'm picturing like this movie with Matt Damon in I (sic) [We] Bought a Zoo -- that's the thing, right? where, I mean, is this how it goes? I mean, is there -- does the guy, the FDA, does he come in with, literally, a clipboard with the boxes in it and then just go and check this off and then at the end of the day, they give you -- here you go -- off you go and now you're all clean or is...?

Unknown Executive

So you're going to put this right there -- head of operations. I was really hoping the commercial guy was going to tell you how to get that done. The -- no, so I mean, the FDA comes in and they'll send different inspectors in each time and look at what we've accomplished, the things that we've gotten done. The other thing I would -- as I mentioned before is we've been going and reviewing our progress with them fairly routinely so every month we send them updates, we also have -- go and sit with them on a certain frequency, but it is unpredictable, all right? So I can't tell you at the next time when they come in, do they remove the Warning Letter? I couldn't predict that for you today. And it's not because we don't think we've made the progress or that we haven't given them updates or they haven't been responding favorably. It's just an unpredictable situation in terms of their ability to, from an external point of view for them to come in and take a look at our facilities and say, "Hey, I, as an individual, think that now I should lift the Warning Letter." So we'll see how the next one goes. We're anticipating doing well but obviously we need to get through that.

Unknown Attendee

Okay. And maybe one more, regarding the China growth, this explosive growth that you're seeing in China, is that product going to be supplied from product made outside of China?

F. Michael Ball

So I think it's going to be a little bit of a mix but we believe there's a huge advantage from a -- to have a local manufacturing. One of the reasons that's an advantages is to actually bring a drug, even a generic drug, to China, you actually have to do clinical trials. However, local manufacturing allows you to actually potentially waive that requirement, bring the drugs to market, cheaper and faster. We believe that the way we would have to go do that is through a partnership. So we're exploring that today. But there will be some drugs that we think might be best supplied from the United States, it's just going to have a different approval cycle.

Unknown Attendee

So paclitaxel today is supplied from multi fronts?

Unknown Executive

Correct.

Unknown Executive

Right.

Unknown Attendee

As I understand, one of the reasons why you can get the premium pricing in margins in China is the product is actually made outside of China, right? Consumers in China value that aspect of it, right?

F. Michael Ball

So we've looked into this fairly deeply. There's absolutely a premium if you are built and manufactured in a FDA, for example, approved facility outside of China. However, there is a value in a premium also to a multinational manufacturer that's actually establishing high-quality standards in China. It's not the same level of premium but there is a premium. So how we optimize the manufacturing strategies some products potentially coming out of Australia, some coming in China in partnership with a high-quality branded Chinese company with a multinational China -- better than China 2010 standards that actually is something that you can market in the market that actually get a premium.

Unknown Attendee

Maybe just one more, just kind of maybe out of a -- but on that chart that you had, that showed with the different countries, the top 20 countries and how it's changing, one of the countries I know which was just really weird to me, it's -- was Venezuela under. It just came out of nowhere. And Venezuela that goes into top 10 from being not even on the chart. I mean, what is going with Venezuela?

F. Michael Ball

So look, Venezuela is -- there's oil revenue and also the government has found that one of the biggest ways of actually satiating the population is actually providing health care. And so while there's all sorts of challenges in the Venezuelan market from import issues to currency fluctuations, the spending on health care has been increasing and that's why it's probably on that chart.

Richard J. Davies

I think that Venezuela is the second largest Latin American market.

Unknown Attendee

There's one other that I wanted to ask Julie. So spending a lot of money to streamline your device platform, how do you avoid the same expansion of software and versions from happening in the future?

Julie Sawyer Montgomery

That's a good news story for us. So there's a couple of points there. One, we're instituting this youthful life guidance so we don't have the 17-year-old pumps in our installed base anymore. And then a lot of our complexity has come from software configurations, and moving forward, our technology will allow us to upgrade software similar to the way Windows upgrades your software, and by that I mean relatively painlessly much, much less painlessly than today. So we don't think were going to get into that kind of situation where we have this version proliferation, which is good news for our margins.

Unknown Executive

Any questions from the audience? Okay. We are going to -- it's almost 12:45. We just need about 15 minutes, we're going to clear the room and just clear all the garbage out of here, so if you can just again give us 15 minutes, we'll start back in with biosimilars.

[Break]

[Presentation]

Unknown Executive

We're going to get started with the biosimilars presentation. Okay, so we are in the final stretch here and we're going to now talk about biosimilars, which is, of course, a very exciting presentation. And hopefully again, we've got a panel coming on so after Sumant and Richard talk to you about biosimilars in the presentation, we're also going to add a couple of experts in the field that a lot of you have met. They've been out there publicly speaking. We're going to add Tom Moore, who is our President of the U.S. region and then also Paul Greenland who runs all of the European biosimilars as well. So again you've got everything covered here from development to technical to commercial. And with that, I'll let you 2 gentlemen get started.

Sumant Ramachandra

Good afternoon, again, it's the Richard and Sumant show. And you guys had a pretty heavy lunch, so this is your protein shot. This is biosimilars, all right? So you'll get a bit of an understanding of biosimilars are through this presentation and why we believe this is such an incredible opportunity for us and how we're progressing this in this exciting new world.

So as you can see from the agenda, that I will essentially walk you through this opportunity of getting from the bench side -- the benchtop through the biosimilar pathway and to the patient's bedside. And what Richard will walk you through is the experience he already had in Europe, how that translates to us preparing for the U.S. and other markets and then why this is not just a great idea for Hospira, but for our customers, patients and healthcare systems. So just like on the generic side, biosimilars needs an engine. In needs the front-end engine that has to have a well-defined regulatory strategy. Here we started slightly different than SIP. Because this area is new, regulations are still forming and evolving, highly defined regulatory strategies are key as a starting point to drive the rest of the engine. Then you have to have a robust R&D engine that takes that regulatory strategy and develop a molecule that is as similar as possible to the originator biologic. I'm going to keep using that term over and over again. The biosimilar has to be as similar as possible to the originator biologics. And I'll go over why later on. And then importantly, because you need it for approval and you also need it for market acceptance, you have to have high-quality clinical development data and even post-marketing data so that the prescriber, the payors and the healthcare systems will accept this biosimilar to be used just like the originator. Now it's not just an R&D engine again, we got to get it through a robust manufacturing network where we talked about near-perfect customer supply, high-quality and no patient ever misses a dose to a commercial launch engine that Richard will touch upon. So intuitively you know this, but I'm would just going to walk you through it. There are clear differences between a small molecule, represented here by aspirin and a biologic drug like a biosimilar represented here by a monocle antibody in size, complexity, stability. Here you can see that the small molecule for size versus the biosimilar is 1,000x less in molecular weight than the biosimilar, 3 logs, 1,000 times. That adds enormous complexity, a small molecule is pretty much made synthetically and so it can be replicated every single time. A biologic, like a biosimilar, is made in a living system and that living system has inherent variability, that living systems typically tends to be, someone mentioned before, CHO cells. CHO cells are mammalian cells. We're mammals. But this happens to be Chinese hamster ovary mammalian cells. That's what CHO stands for. And bacterial cells, and because it's created in those systems, they have inherent variability from there. That's important to recognize because they'll play into the definition of biosimilarity. So you can tell, size matters no matter what people say, so they say, okay, in this field. And because biosimilars and biologics are actual proteins, they have to be given by a route where they are stable and effective. The most likely route is an injectable route whether it is intravenous, subcutaneous or intramuscular. While a small molecule tends to inherently be much more stable and can be given by a variety of routes, some you don't want to know about. So this variability of the biosimilar to a originator is the reason why it's called biosimilar. It's not called biogeneric, or generic -- actually some people tried to push that term 5 years ago. It's because you can't make an exact copy of the originator. And by the way, the originator can't make an exact copy of themselves in every batch. In every single batch, an originator makes of its product in the manufacturing facility, there is variability. So their release criteria or what is called the acceptance range tends to have a range. And we, as a biosimilar company, have to show some very rigorous signs that our variability fits within their variability. So they have this range, we have to fit within their acceptance range. So our controls actually have to be very tight because we are comparing ourselves to them. They are not comparing themselves to anyone else. They have set the range. So you can imagine the front end of development of creating the product is extremely important because it determines everything else downstream. You get that wrong, you can forget everything else. So here, I talked to you about biosimilars and I take the molecule that's shown there. On your left-hand side is the originator product to the biosimilar product on the right-hand side. At a macro and micro level, there are virtually no difference. It's extremely hard to see the differences, but whatever differences there are, they can't have a clinically meaningful impact. So that's why you have to do a clinical study to show that if there is a small difference, it does not impact the patient in any way that's either better or worse and you have to remember that people ask us, well, if it is better, it is good for you, right, Hospira, so you can actually get in there and get a better molecule. Well, that's called a field of biobetters. So think of it this way, a biosimilar is an exact clone of me, standing next to me, made at this time. Two of me, that's great, okay? But, well, Tom thinks there'll be 2 beggars in the room. So you have these clones, but the moment the creation occurs, there's going to be some inherent variability because we're both living systems. We're not identical twins. We are clones of each other. There's going to be minor differences. By the time we're created, we're going to be near perfect matches. The field of biobetters, I'm the originator, that's my biobetter right there. It's an improved version of me, tall, dark and handsome. Well, actually I'm the dark one. Tall and handsome, that's all you get, and it has a cool British accent to go with it, even though I was born in England, I got the American accent -- a little bit of Indian in there. So that's a different field. We are not focused on biobetters, guys. If we have a better molecule, we have to go down the originator pathway. We have to have a biosimilar molecule. Now I want to make that very clear. We are committed to the biosimilar pathway and at times in rare occasions, we may go down the BLA originator pathway, not because we don't have a biosimilar, it's because it's easier to get it registered from that route. And there are rare exceptions to that. So in this particular slide, you see what is in the middle upper side is a gel electrophoresis, that shows you the size of the originator and the biosimilar are generally the same. That's one level of testing, you're doing an analytical comparison. You got to take that molecule and then run it through to what is called a chromatogram, which is in the lower left-hand side. And because a biosimilar has or biologic drug has many different forms in it, you have to actually characterize every form of it, also called isoforms. You've got to characterize it, and you've got to match those. You can't have some weird peak show up because you just happen to have more of something else. It just will not get accepted as a biosimilar. So you have to have the ability to come as close as possible to the originator drug. That's called analytical similarity. And I'm focused on analytical because you start with analytical structure, then you move to analytical function so my clone has to also not only look and be exactly like me as close as possible but has to behave like me. That it means function, so that protein has to behave the same way as the originator in all the nonclinical testing. But again, that's not enough. You got to take this on the nonclinical testing and you have minimum -- you have to do a Phase I bioequivalence -- pharmaco and bioequivalence study, and you got to test it in 2 parameters. You got to make sure the drug levels behave the same way when you inject it, and it gets cleared, and if it has an impact on some marker in the body, like if you give Epo [ph] that something's supposed to happen when you give Epo, red blood cells go up, hemoglobin goes up. It's supposed to show that this marker behaves the same way in the Phase I study. And then it's Phase III. Phase III studies may or may not be a requirement depending on how much work you do up front. We think that you do require it for the market and we are doing Phase III because that will help market acceptance and that's when you confirm all of the data you had from the nonclinical and Phase I studies. So I walk you through this carefully because it's a setup for the rest of my talk. And I'm unfortunately the biosimilar. So the FDA also agrees with our definition, that biosimilars and originator biologics are just biologics. So don't let anyone confuse you out there, that biosimilar is some different type of protein. It has to be as similar to the originator as possible and the definition of a biosimilar is approved too in the U.S. with the 351k pathway, the original biologic is through the 351a pathway and that's why it's called the reference biologic, we refer to that. The difference is in the biosimilar pathway, we have to show that we are highly similar to the reference product that was approved through the 351a pathway with no clinically meaningful differences in safety, clinical activity; purity, analytical comparison; and potency, how much activity you've had. That's the definition by the FDA, and they agree with us, these are both biologics. They just approved to a biosimilar pathway.

Now over a decade of debate of biosimilars, people didn't believe it can be done. We talk about people in the last decade, they said no company can make a copy of a biologic, no way, it can't happen. Then it was done. First, the legislative pathway came, then the regulatory pathways came in Europe first, in 2005. 2006, biosimilar gets approved. Australia adopts the European regulatory pathway. The world would've been a lot simpler if all of us pivot around the same regulations but we're all independent all over the world, so every parts of the world start coming up with their own pathway. So it's not globally harmonized yet, but I hope the world will come to harmonization at some point. Japan comes on board, WHO, World health Organization, comes on board, Canada comes on board and the last is U.S. The U.S. is not because the FDA was not willing to. FDA was willing to go down this route, it's just there wasn't no legal framework for this until the Affordable Care Act came into place in 2010, giving the FDA the authority to regulate this pathway. They have come up with draft guidances to help companies -- they're still drafts and they're supplementing them with meetings with sponsor companies like us and they started charging fees already, as of October 2012, to meet with companies so that we can get guidance along the way. So the draft guidances are supplemented with meetings and we have people going out there when regulators are speaking and hearing them speak because they are actually -- the FDA is messaging out there in conferences as to their expectations and as their thinking is evolving even though they are in draft guidances. So someone said -- asked a question before, "Hey, you know, how certain do you feel about biosimilars, given that there is no pathway?" There is a pathway. It's in draft form. They're meeting with us, they're telling us what they expect, and we believe that's sufficient to at least get into a submission stage. So there is a pathway existing and even though the challenge is in there, we believe there's enough conversations to get us clarity to get to submission.

Now, the 351k biosimilar pathway was based off of something that's already existed for original manufacturers. It's called therapeutic equivalence. So you have heard that original manufacturers make a change to their product either in manufacturing or somewhere else.

Now the 351k biosimilar pathway was based off of something that already existed for original manufacturers; it's called therapeutic equivalence. So you have heard the original manufacturers make a change to their product, either in manufacturing or somewhere else. When they do that, they have to show that their, let's say, I'm going to use an example here so it can go, well, their Epogen version 1 was changed to Epogen Version 2, actually, compared during that change, right? That's called therapeutic equivalence because Amgen was doing that change. But because it's a same company doing that change, they know their product really well, they know their manufacturing starting materials really well, and they know their process really well. So they can work within their framework, which is all part of their system.

What the 351k pathway is, is based off of that. But we are a bit of a disadvantage, right? So we have to actually buy their product from the open market, we have to deconstruct and analyze it. And we have to just not buy one vial, we have to buy it over a period of time because we have to look at their variability over a period of time to understand their parameters. We have to understand their molecule deeply as ourselves. We have to understand their formulation, we have to understand their drug substance or API, the excipients inactive materials that are in there, the vial they're in. So we have to do a very deep analysis of the originator product before we start ours, but we have to do it from scratch. There are some public domain information we obviously be use, but we have to get the real product and analyze it, then we start building our product. We reverse engineer our product into their biosimilarity. And that's how we go.

And then we do the Phase I study, the Phase III studies, head-to-head studies, and we have post-marketing commitments, and that's really part of the 351k pathway.

There is this concept only in the U.S. of a 351k interchangeable biosimilar. In Europe, it doesn't exist; Australia, it doesn't exist; Canada, it doesn't exist, but biosimilars are felt in the U.S. by legislation only at this point, that they could be interchangeable.

Interchangeability is different than substitution, but interchangeability is a scientific and clinical definition that you could have enough data of the biosimilar, compared to the originator that they are deemed interchangeable. It's not exactly the same, but think of it is like an A, B rating for generic, okay?

So in this particular paradigm, there's no regulation as of now. We can pursue it either in one feltsome program or in 2-stage program. We do think it requires a switching study between the originator and you. So you start off parallel and then you switch to the other drug. We need think you need that, but again, there's no guidance. We think the bar for interchangeability needs to be higher than biosimilarity. We're very vocal on this one, okay?

It's important to all to recognize why. The interchangeable designation means that the person is saying that they can be interchangeable between the products. So it requires more time, complexity and resources as you move from the left to the right of this particular slide.

Now let's go to the development and regulatory pathway. The originator, the reference biologic, published data, it takes about $800 million plus, and I emphasize plus, to get one originator drug our, whether it be a small molecule or biologic, it entails a lot of money. Okay. But why is it a lot of money? First of all, a lot of molecules fail along the way, so there's risk of discovery phase. And there's failures along the way in originator development. And they have to do, of course, a Phase II dose finding study. Those are the 2 phases that don't exist in the biosimilar pathway. Why? We are actually working with a secondary generic phase on a molecule with known activity. We know the activity works in the clinic if you can get as biosimilar as possible to the originator.

So our focus is on that development phase of creating a product in structure and function as close as possible, and then taking to the rest of the phases. Our cost, it's around $100 million to $200 million per molecule. Our failure rate, we're new to this, in a sense we have 3 right now out there, we have several in the pipeline I'll go over, is not very high. So we actually can get almost all of them through, just like a generic. Risk is pretty low, but the risk is really from the regulatory standpoint and then in the post-regulatory standpoint in the commercial sphere of how the molecules are going to be used. And then what we have to do is do the right clinical testing to get data to convince prescribers that this is the right molecule to use. That takes the product from the cell line to the product in the vial or syringe.

Less time, less money, less risk than the originator because we're based off of the originator. So the slide actually goes over that. Now Hospira, as a company, has always been this way. We actually are not a not-invented-here syndrome, what people call NIH syndrome. We are actually open whether the product comes from inside the company or through a partner. And we have taken this approach of saying, we can develop the products wholly as a biosimilar internally, develop the product internally with -- supplemented by external funding, it's a hybrid model, or completely go with an external partner like Celltrion. So that middle model is like the NovaQuest fund, so there's 3 models in there.

Now based on that of Hospira pure-make versus Hospira bio partner, the upfront costs are different, but so are the revenues and the profitability. Okay. So you share the risk in the second model of the bio partner model, but you actually then have to share the profits, right, make sense. I was going to put skin in the game, they want something back at the other side. So that's really our decision-making, and they are key drivers to help us drive down that decision path; one is intellectual property and the projected timelines for approval, gating of the development cost. We can't stack 3 programs at once, and absorb everything in Phase III one time. So it's always good to get a partner to work through with that. Potential size of the opportunity. There may be some opportunities that someone else can do, they're smaller. We may do some of the larger ones. There's operational manufacturing capabilities, whether we want to do it internally or not. We have GSK as a great contract manufacturer for our EPO program, sell through and manufactures this drug substance or the molecules that we -- monoclonal antibodies we have through them.

There are also therapeutic coverage. We feel we're quite good in the supportive care molecules because we've had great inroads in Europe. We will continue there. Celltrion has done a lot of monoclonals, they're doing it still. Maybe they're focused in those areas, so we can actually share, okay, where we are.

And then there is the opportunity to accelerate investment. That's one of the reasons we did the NovaQuest deal because there were some things we just couldn't get to, because the R&D budget is actually one that has so many ways it can be spent on. But getting NovaQuest in, we were able to accelerate some of these opportunities, starting and moving on onwards. So that's our criteria.

Now this pyramid shown here, pyramid shape shown here, is really an inverse of the originator. Remember, many of you cover originator companies. Their greatest risk lies in showing that they actually are clinically active and safe. We actually are working on a molecule that's been proven to be clinically active and safe, as long as we can get it to be biosimilar. The base of the pyramid for us, the start of the program, is where we try to put enormous effort to make sure that we get that right, and that the other should flow properly, versus the originator because they're now comparing themselves to someone else. They start here, and they have to move up and there's risk by moving up. The costs also go up because they have to show that they have active for the first time.

The FDA, the European Medicines Agency, have encouraged companies like us to take a step-wise approach. Don't go and start doing clinical studies if you haven't gotten your product correct, biosimilar, first. Work in a step-wise fashion. It derisks you. And they said that when we submit the dossier, they're not going to look at just one part of the pyramid, they're going to look at what is called the totality of evidence. They're going to look at all the data and say, "Does this meet the criteria for biosimilarity?" Because sometimes, you could have some variability in the product, but it could show in the clinic there's no difference, and they're willing to accept that. So those are the kind of things have to take into consideration when we develop products.

There are many issues in any new area if -- this is truly a new market formation. It's based off of a biologic paradigm, but we're creating a biosimilar market. Think of it like the generic market was created years ago. So there are going to be countries, and we are active and thought leaders in every one of the areas listed here on the slide. Some biosimilarity and what the definition of that is, to naming the international nonproprietary name of a molecule, that's so foundational, to something as important as extrapolation, which is why the field of biosimilars make sense.

And I'm going to walk you through 2 of those examples in the next slide with Inflectra. So we were very happy when September of this year, we got this approval from the European Commission based on European Medicines Agency and CHMP guidance. This study was done in 2 indications: rheumatoid arthritis in Phase III and ankylosing spondylitis, both are rheumatology diseases, rheumatic diseases.

But if you look on the other side of the slide, on the right side of the slide, we actually have all the indications. We got what is called extrapolation of indications. Even though we did rheumatology, we got rheumatology, gastroenterology, IBT, inflammatory bowel disease, and dermatology in there. And that means that the bar was set quite high for clinical and scientific evidence, and we have the exactly same label and indications as REMICADE, the originator.

And by the way, because the molecule Inflectra was shown to be so biosimilar to the originator, the name of Inflectra is infliximab, the INN, and the name of REMICADE is infliximab. And it actually says in the assessment, these are the same active ingredients because the science and the burden of evidence was so high. And that's an important thing.

Now I'm sure the originator companies are really upset about all this, but we and our partner, Celltrion, showed this evidence, and that's important. It's a win for the field.

A lot of things have to come together at individuals stages, as well at tying together, starting from the cell line, going to preclinical testing and manufacturing, going to the clinical side, and then going through regulatory approval and then to commercialization in the marketplace, where the opportunity to create value.

In this funnel, all of these factors need to come together, both at individual level and tying together. They are not discrete. That's where this field is very, very important, to tie these pieces together. And a company like Hospira, just because you can do small molecules a company say -- can say I'm just getting to biosimilars. We have proven that we are able to do both biosimilars and small molecule generics. Not every company can say that. And the hurdles are quite high because the cost of development is high. You need manufacturing partnerships, so not every company is going to get in there. So there won't be as many competitors, we believe, in the marketplace.

So what's the market opportunity in the pipeline? Now in this chart, based on, actually, annual reports of various companies and what they're estimating their [indiscernible] will happen, we put together when we think value will be created. Look at this as a directional chart.

The reality is, over the next several years, up to 2018, there is anywhere from $1 billion to $5 billion of value going to go off exclusivity every year. There has not been this type of value creation ever in the specialty injectable market, ever, and biologics is driving this. This is the biologics, and there are big products in here. 7 of the 10 largest products in terms of revenue globally are biologics. And that's why this is a huge opportunity for Hospira to participate in and being -- help drive cost savings in this health care system, and improve patient access, which is what we work for, helping patient lives, helping savings and helping ourselves as part of that process.

Now this has been shown by Mike; a lot of money is on the table here. If I was an originator company, I would defend this money also, that makes sense. It's $127 billion, and the growth rate -- compounded annual growth rate is close to 9%. So it's growing very fast. You just take one molecule, like Humira, from AVI, that molecule alone had drawn somewhere in the order of almost $3 billion just in 2 years. It's huge. It's like 3 point -- $9.3 billion, somewhere in that range in 2012, still growing. It's one molecule.

When that goes off exclusivity, it creates huge opportunity for biosimilars, and then you take that, you do infliximab, REMICADE, take that and do Enbrel. They all happen be anti-TNF, take that and do an oncology like Avastin, massive opportunities coming off the table. And we have to be ready to deliver that.

And by the way, we focus on the highly-developed markets, which is the bulk of the $127 billion out there. Now we're in focused therapeutic areas. So I'll go over what the local market value that we are pursuing is.

Our pipeline is focused on 3 areas: dialysis and chronic kidney disease, oncology and supportive care, and immunology. Immunology is a broad field; it's made up of dermatology, GI and rheumatology. We're really focused on rheumatology and GI IBD as part of it. The molecules are listed here. The size of these markets of these therapeutic areas are very big in terms of both the therapeutics in there. And we are targeting biologics within this particular area that add up in that second line of target, biologics, anywhere from $2.5 billion to $3.5 billion in dialysis and kidney disease to $27 billion in the oncology molecules, plus supportive care in the immunology area.

And the molecules are listed here. This is a mix between our internal efforts and the molecules we have access to through the Celltron agreement, and that's what we call our Hospira pipeline.

So where are these molecules? So when you look at the development paradigm, EPO is in late-stage Phase III, and EPO is used for anemia. And anemia is the low -- it's really about low red blood cells. Low red -- red blood cells carry oxygen, and oxygen is very important to the body, obviously, right? So by improving anemia, you improve oxygen-carrying capacity. And that typically happens in patients with chronic kidney disease and patients who have gotten cancer chemotherapy.

The next 2 areas are pegfilgrastim and filgrastim [Audio Gap] anemia and that's when you have low white blood cell count and you're prone to infections. Typically happens when you get a cancer chemotherapy, typically, and this is for the treatment of that. Rituximab is used in a number of blood cancers and in rheumatoid arthritis, and that's MabThera in Europe, rituximab -- RITUXAN here, and that's in -- has been in the clinical phase in our program. And then there's bevacizumab or Avastin, which is actually in the cell line process to overlap molecules that are listed here, and I'll discuss them on the next slide. This is the -- our pipeline through the Celltrion agreement. Infliximab is already launched in Europe, and it's being worked on for U.S., Canada and Australia, and New Zealand. And trastuzumab is still a global program in Phase III, okay. So these are both Phase III programs, and this is what we have access to as part of the Phase III development.

We'll be ready to take trastuzumab once Celltrion prepares the dossier and hands it over to us for a review, and then our submission. There are a number of other molecules -- trastuzumab, by the way, is receptin for use in breast cancer and a few other cancers. Infliximab, I've already gone over. The number of other molecules, have already gone in rituximab and bevacizumab, but adalimumab is the 800-pound gorilla, that's Humira.

Then there's China sent, which is Enbrel, also an anti-TNF. And then there's cetuximab, Erbitux. And then there is palivizumab, which is Synagis, which is used for respiratory syncytial various in pediatric patients who get this virus and then have problems with breathing and infection from that.

This total local market value of this pipeline is just over $40 billion globally that we have access to. Okay, in the markets that we have access to. Now I want to take a deep dive on the EPO program.

The EPO program is on track. Phase III is near complete. We have completed enrollment already. The study is expected to complete sometime in the middle of 2014, between second to third quarter of 2014. We have a team ready to prepare dossier as part of that. One part of the dossier, and then a submission in the later part of 2015, early 2015, as Mike has said. And we are aiming for first-cycle approval at the FDA, which means a 10-month clock. We're aiming for it, I don't know if the FDA will give us that, but what is in our control is a high-quality dossier with data laid out so that the FDA can give us that approval. And if that all happens, the timeline shows you where we could be in the market.

We are aiming to be first with a biosimilar EPO in the U.S., but our EPO program is based off the European program. It's called Retacrit in Europe. Same cell line, by the way, we took in from Europe. We changed manufacturing facilities. We are now comparing ourselves to the U.S. reference product, Epogen, and that's why we have to do a new program. At the time that we do the European program, we were nearly the same amount of data. In fact, a little bit more than the originator.

And now we're going to have even more data as part of the U.S. program, as part of this experience base. And we've had all that market experience with Retacrit.

So this is quite exacting as you look at this program, that's our lead program. And we really do hope that the U.S. FDA -- they say they're open for business. There's a dossier that's waiting to go to them. Once we give it to them, we hope that it take this, and they put it within the 10-month clock.

And I have to also say, very happy that an intermediate step, which is extremely important for biosimilarity is that we completed our Phase I study, and we met the primary and secondary endpoints of our Phase I study for EPO. This is the first time where we revealed it publicly today. And that is one step in the biosimilarity pathway. We've met primary and secondary endpoints on our Phase I study with EPO, major milestone. We hope to continue that success moving forward. Now with that, I'll hand it over back to my bio-better.

Richard J. Davies

Let me find a good way to respond to that. Okay. So what I thought would help you and over the next few slides is to really talk through our European experience; what we've learned, how it's relevant and how it's relevant for the future growth, not only in the European Union, but also here in the U.S. as the market forms.

And this experience is real. We've been competing against the originators, as well as the biosimilar companies for several years now in a number of therapeutic areas. I think it's useful to discuss what works, what the markets look like and how they're evolving. And we've really gained a wealth of data through this.

And this data and this experience is very relevant to how we think the biosimilar industry and our role within that industry is going to evolve in the U.S. And to succeed in both, we really sort of focused on 3 things. We have to have razor-sharp commercial implementation skills. We've got to have excellence in launch, pricing and reimbursement. And what we build in terms of our EU experience, not only helps us in the European Union, but we're really going to be able to apply it to the U.S. market formation.

As I've talked to physicians and I've talked to payers and providers here in the U.S. about Hospira's biologic capability, it surprised me how much they're asking about our European experience. Well, I thought about it. Okay, why is this? Why are they asking me that? And it really comes down to, they're looking to us to give them confidence to be able to prescribe biosimilars. We have the confidence because we've done this in Europe.

We have 5 years of experience in Europe and over 5 million doses of our biosimilar medicines have been administered to patients within Europe. That's 5 years of experience of being a biosimilar leader. 5 years of discussing our clinical data with clinicians. 5 years of working with payers. 5 years of building our capabilities, and 5 years of competing.

And we've seen a variety of uptakes across these markets, and there are really 2 major learnings from the whole thing: Prescribers really want to see the data associated with the safety and efficacy of our biosimilars. And it's key that they've become confident in prescribing biosimilars. And the payers, it's simple. They want to see the cost savings that are associated with the entry of biosimilars to the market. And the ability to participate and convince, drives both our biosimilar brand uptake, as well as penetration of biosimilars versus the originators in the market.

And we see this in the market data for our 2 major products: Retacrit,[indiscernible], and Nivestim, which is our daily G-CSF. And overall, we're really pleased on how we're doing. Mike spoke this morning to us about how we wanted to be a top 3 biosimilar company. Now we're all competitive people. And I can tell you we're delighted to say that we're in a solid #2 position across both medicines.

For R&D capital, we don't get tied up into our biosimilar brand versus biosimilar brand battle, okay? Because whilst it is very important to us, the bigger prize out there is the penetration of the biosimilar into the originator prescribing.

So coming back to Retacrit, this is now one of the largest EPO brands in the EU, and we continue to gain share. We continue to invest in this product. You can see that in our uptake curve. We continue to drive for commercialization, and this product continues to grow very, very nicely for us.

If I move to G-CSF, which is Nivestim, we're now #2 in the market, and we have overtaken Teva. Now we entered this market slightly later, and what you see is that we've been able to apply the learnings from the launch of Retacrit to the launch of Nivestim. And you can see how it's driving our uptake pretty aggressively.

Since we launched in October, 2010, we've continued to capture share. And with our new expanded manufacturing capability in Croatia, we now have sufficient volume to continue this growth, and are fully anticipating that this curve to grow more rapidly than we've seen in the past.

Now the previous 2 slides address brand uptake. But as was mentioned a couple of times, it's important for you to also understand how biosimilar penetration versus the originators works. A key learning and a key to takeaway from this is that originators compete and will compete using a similar sort of tactics to us. And we will use similar set of tactics that the originators use.

We all end up meeting on the same soccer pitch or football field here in America, with the originators discounting of price to maintain share. Most companies like us generate clinical data to enable us to gain confidence and share with our prescribers.

So let's use G-CSF biosimilar uptake to demonstrate a couple of things here, including the intensity of competition from the originators even after 3 years. So what you see in this chart is how much penetration varies in Europe country-by-country.

It demonstrates a couple of things. The first one is, significant savings have been generated across the system and across the countries in Europe due to the uptake of biosimilars. The second thing is the rates of penetration are really governed by the payer system. And if you'll indulge me for a second, I'm going to use 2 country examples to try to illustrate that.

So picking first on my friends and colleagues in Belgium. Belgium has a fairly unique reimbursement system that has some peculiarities that encourage the use of the originator. So if you're a hospital administrator, okay, the difference between the price you buy the drug for versus the price it's reimbursed at, you can pocket that into your income stream as a hospital. That encourages you to buy expensive medicines, so you get this perverse incentive to keep the originator on your former areas as long as you can.

And I compare that with Hungary. Hungary has a national tender, it's winner takes all, full conversion of the usage of the patient to that product. We happen to have won that tender. And now you see almost 100% conversion of the biologic usage to the biosimilar, and in this case, Nivestim. And I hope through those 2 examples that you shows you one, and very, very important point. How the payer system sets up -- regulations that are put into place to encourage use of biosimilars, so governments can achieve the cost saving is very, very important to the uptake of biosimilars.

So let's focus for a few moments on the significance of the cost savings. From a recent report, cost savings through the use of biosimilars are expected to have generated between EUR 11 billion and EUR 33 billion across 8 major EU countries in the 2007 to the 2020 timeframe. That's really, really significant. And it means to me that these markets will not only continue to grow as European clinicians become more confident in the data and the various health care systems understand better the savings they can capture.

So our commercialization experience has taught us that it's very critical to have these 3 stakeholders aligned. Prescribers need to understand the rigor of a data package that we have in our regulatory submission, but feel comfortable and confident in our ability to prescribe biosimilars. Payers need to understand cost savings and how to contract for them and the regulators and the policymakers need to support the biosimilar uptake and market formation. And as a think about the U.S. especially here provide clear definition and direction of the pharmacy substitution.

So before I leave Europe, if you really miss with me, then I'll talk about our latest baby, right, which is the launch of infliximab or Inflectra into the European Union. And we're we really, really excited about its approval of this. Any commercial person will tell you anything you get to launch is an exciting moment and an exciting time for you.

So our launch landscape is governed by the existing intellectual property landscape in Europe and the timing for P&R, or pricing and reimbursement. If you focus on the graph, what you see in yellow, this indicates the countries that we're are launching and right now, over the next 12 months, we still tend to be the predominantly smaller Eastern European countries, whereas the countries which are designated in blue, or the later-launch countries, predominantly the bigger ones, the France, the Germany, the Italy, which will be through 2015.

Now earlier Sumant said, Inflectra was approved with extrapolation. And this is a complex chart, but I do want to take you through it because I think it illustrates a couple of things. It means we come to market with all the indications associated with the originator. And we can compete with Remicade on all these indications.

Now I'll walk you through these 3 sets of pie charts because it illustrates something I feel -- I believe, and we believe, is important. First pie chart on the left shows the split of Remicade versus the other anti-TNF products that you're probably familiar with, so it's 25% share there for Remicade, the other ones would include things like Humira, Enbrel, SIMPONI, et cetera.

And if we split the Remicade sales into the 3 major categories of disease, you have rheumatic diseases, which take up about 30% of the current Remicade usage. You have 60% that goes to IBD, which is the gastric diseases, inflammatory bowel disease. And then the psoriasis, which is relatively small share, about 12%.

But finally, on the far right, you see the proportion of new patients, whether its 10% for the RA diseases, up to 30%, 35% for the IBD.

Now for commercial success, and for payor systems to maximize the savings from the uptake of Inflectra, we see a launch progression. In the initial stages of launch, it's going to be about new patients, gaining that clinician confidence, explaining the quality and the thoroughness of our data, building their confidence to prescribe. But for commercial success, we know it's critical that we start to gain switch patients, and our plans that we have in place fully intend to exploit this.

But you know there's one -- in this as well, it's why the left hand pie chart is so important. As governments, payers, start to understand the savings that they can achieve by the use of Inflectra to treat their IBD patients and their RA patients, we should see a share of infliximab, driven by Inflectra, start to grow again in the anti-TNF market space. It's a really, really important concept. And it really show the payers, the systems, the payers -- the payer systems, the money they can save on the usage and the encouragement of these biosimilars, but for us, in particular, Inflectra.

So as we've learnt from our marketing of Retacrit and Nivestim over the last 5 to 6 years, market success really hinges on the following couple of things: build awareness of Hospira as the leader in the biosimilar market, convert key stakeholders to Inflectra to be Inflectra advocates, effectively communicate our message to build prescriber confidence and ensure we have rapid pricing and reimbursement uptake.

Now we believe the extensive experience we have in Europe since the formation of the biosimilars market, and with 5 million doses administered, plus our strength in the U.S. hospital channel, this really, really gives us a unique experience. And we recently ran some market research here in the U.S. And it generally supports what we've seen and our experience in Europe.

Once physicians are aware of the extensive clinical efficacy and safety data, they gain confidence in the prescribing of biosimilars to their patients. Activities that supports biosimilar communication, including clinical detailing, are essential to ensure the physicians can quickly become comfortable using biosimilar medications.

As we've talked earlier and we see in Europe, it's also critical to be able to identify the savings associated with the use of biosimilars, and to be able to contract that with the payer or the private payer or the provider systems.

So in summary, establish the confidence with the clinical data for clinicians to prescribe. Second, identify and capture savings for payers and providers.

The established cost savings benefit of biosimilar use in the U.S. is anticipated to be significant. U.S. biosimilar savings are projected, through several different reports, to be maybe $250 billion over 10 years. That's a huge, huge amount of money.

Now I know, and I'm really talking to this audience, I know everyone in this room is data driven, data-oriented people. I'm sure if we have that piece of analysis on the table in front of us, we could poke holes in pretty much all of it. But what if it's half right? What if it's half right? Still a major savings for the system. There's a potential of these types of savings that are really going to ensure that these markets do form in the U.S. and will drive the usage of biosimilars.

So if I look at the U.S. from a commercial perspective, the patent landscape drives 3 major therapeutic areas where we can anticipate the introduction of biosimilars in the U.S., we the dialysis market and CKD, or chronic kidney disease, oncology, including supportive care and immunology.

We are fully anticipating being an early participant, if not the first, and launching to each one of these segments through this decade. Success in the U.S. is going to require a complex interplay of tactics. It's likely that no 2 molecules will be launched with the same set of strategies, but our ability to bring to bear our European experience, with the confidence we bring to the market, will be crucial. As I said earlier on, and I mentioned to a couple of you at lunch time, through my interactions with payers, providers, physicians in the U.S., as we talk about our biosimilar experience, it's really that European experience they're interested in. And they're interested because they're looking to us to provide them with the confidence, the confidence to prescribe and the confidence to be able to take savings through the payer system.

Now we know we're not going to be alone, okay? To big a market, too many people are talking about it. We're not going to be alone here, okay? So who else is going to be there with us? So we kind of tried to divide this into 3. From the left-hand side, the current leaders: Sandoz, Hospira, Teva. We've worked damn hard to be on the left-hand side. In the middle, we've tried to lay out the partnerships, okay, because a lot of people in this market are talking about partnership. And again, with our partnership with Celltrion, we've been one of the first companies to merge and launch a monoclonal in a highly-regulated Western market.

First set of companies. And that partnership with Celltrion labs, we see those early results. Now you have the companies on the right, players like Pfizer, Boehringer Ingelheim. People who have aspiration. People who have aspiration to be in this market, but have yet really to emerge.

And while there's a lot of companies on this list, we know this is difficult. We know its rigorous. We know its expensive. We know its complex. The rewards are huge, but there won't be that many companies that are really going to emerge and join us on the left-hand side.

So let me summarize the investment thesis, and with a couple of slides, what we think this thesis is to you and what we believe this means for us as Hospira.

So it's in our best to believe these are the factors to keep in mind when evaluating a biosimilar player. The cost savings associated with this and the potential cost saving for the health care system are so large, this market will fall. The ability to develop your own biosimilars is going to be critical. And I mean, to drive your pipeline, but also to give you the understanding, what is required to succeed at the partnership level. The level of scientific rigor is significant and the development path to approval is challenging. The cost of manufacturing and the technical side of manufacturing is difficult in the high, both of which is going to keep the number of competitors low. Your ability to explain data to clinicians and negotiate competitive contracting with payers is going to be paramount. And finally, we do believe the partnership, to share development risk, is going to be key.

So Hospira's uniquely positioned to succeed. You have the key levers defined. We know what it takes to be as a leader. And we know what it takes to deliver in the market. Biosimilars represent a significant opportunity to us. We will continue to lead in the biosimilar market. We're one of the largest biosimilar pipelines with 11 molecules and a local market value of over $40 billion. We have 5 years of experience on market, 3 products, number of different therapeutic areas. Within those 3 products, we were the first company to get a mab registered in a highly-regulated market, the European Union. And we're on track to be an early participant, if not the leader, in the U.S. market with the erythropoietin. Our portfolio, strategy, risk is mitigated between our internal development program and our external partnership. And finally, biosimilars and our biosimilar business, are key drivers for our future revenue growth and our improved margin. Thank you for your time.

Karen King

Okay. So we are going to head into Q&A. Tom, Paul. If you gentlemen can come up. Some of your chairs is up as well.

Unknown Analyst

At JPMorgan. A couple of questions, first on Inflectra. Can you talk about the relative difficulty of marketing this product in the RA setting versus like GI, where you once said you have more data, other settings, you don't have the data? I want to just give you the challenge given how much the use of Remicade is outside of RA when you think about commercializing that product in Europe?

Richard J. Davies

Yes. So as I showed the balance in Europe, some of the greater waiting is really in the GI diseases of IBD, which is crohn's and ulcerative colitis. I think what's going to be important in this is explaining to clinicians, no matter whether they're rheumatologist or GI doctors, explaining to them the quality of the data set that went into the regulatory submission. The reason I say that is because European Union did approve this under extrapolation. And that means that we met the regulatory quality and the rigor of the data hurdles to enable that to happen. And that's a high bar to get over. So I think that's going to be a big part of it. In the early days, I think it's going to be that experience. People are going to want to try the drug and that's why I think the new patient segment is important to understand because we see and we've seen it with all the biologics, that it's physicians need to experience. But I do see that the market has evolved a couple of times. From the early days of lunching EPO, clinicians understand biologics now in Europe way better. So I would expect the uptake curve to go faster. Paul, do you want to -- because I know you had some experience on Europe on this...

Paul Greenland

Yes, I mean, I think our experience in Europe shows that actually, communicating to new groups of physicians is really important for all the biosimilars. So whether it's in indications where we've got data or indications where we haven't, we've got to do a comprehensive communication program. I think there will be physicians in the IBD who are resistant to using very early on because they haven't seen data that they're traditionally used to see. But we already know from having talked to people in the markets, that there's a huge amount of interest in using something that allows them to reduce the cost. So I think you've got this tension here between the physicians. In actual fact, once they have something, they can help them reduce cost because the cost of these TNF alpha products is very high. And some concerns about is, this product going to be safe in application to our patients? In actual fact, donor experience from the other biosimilars is this takes a bit of time. But eventually, they will come to the point of being in comfortable in using it.

Sumant Ramachandra

Let me just add 1 thing to that. One is that we are committed to generating future data in the right indications, right? So it's not like the field is going to stay static. We are working with our partners in trying and creating that right data over a period of time. Extrapolation is an extraordinarily important concept to grasp because that is one of the key tenets of biosimilarity. So you don't have to replicate the entire program the originator did. But you replicate the portions that are valuable. The other thing is that the Europeans Medicines Agency, and I was in a meeting with them a few weeks back, have also going to come out probably with the position paper in this year and talk about why the biosimilarity have happened, why the approval came by through extrapolation. So we have key opinion leaders within that European Union who actually are going to write this paper. And that's important because it's not possible trying to explain ourselves, but it's actually regulators and key opinion leaders saying, "This is how we thought of the molecule biosimilarity and why they got extrapolation." I think that dual-pronged approach will make the market win.

Unknown Analyst

And just a second question there, when you think about the commercial opportunity, your partner is also going to be having their own product in market. How do you think about that dynamic as you -- with your pricing, as you think about share? I mean, how do you get comfortable with what that means to the commercial opportunity is?

Richard J. Davies

Yes. So we have a co-marketing agreement with Celltrion in Europe. So that means they have their brand. They manage their brand. We have ours. So I can't comment on how they think about this or how they work. So I just focus on our brand. And I think it's important to our people, right, they're talking about biosimilars, and biosimilars [indiscernible] for the very reasons you just talked about it. It's going to take more than just 1 company to cut the trail on this, and I think now the company, they're driving in sort of the penetration of biosimilars, firstly, into the use of Remicade and achieving those savings for governments and likely into the overall entity in that space, I think.

Karen King

Yes, go ahead. Over here.

Unknown Attendee

On the biosimilar side, it was helpful for you to give us some perspective on the unit growth that you've experienced with some of your products. And I know you've been resistant to disclose the revenue component. Is there any -- can you give us any perspective on what pricing is like or if you care to disclose the revenue or what the logic is in not doing so?

Richard J. Davies

I can't describe. Thomas is going to have to help me with the logic of the...

Thomas G. Moore

[indiscernible]

Richard J. Davies

The pricing, what's publicly available will tell you that it's kind of 30% off originator's pricing [indiscernible] about right.

Unknown Attendee

And then maybe if you could just go into a little more detail. Certainly, I can appreciate the label you got from infliximab having -- giving you tremendous flexibility in the ground you can cover. Maybe just walk through a little bit more detail, the commercial strategy, where you have a sales presence, where you need to build a sales presence, how you think that might roll out as you look at the different countries that you can address. And then I guess, this is just a logistical question, do the patents on Remicade, are those by indications or any of those countries were by some of the larger country you can launch in, in certain categories and not others? Maybe just give us a little more flavor on the pacing there?

Richard J. Davies

Yes. So let me take the last question first, because it, frankly, is the easiest one for me to answer. So our shade, the blue, and the yellow countries, the yellow being where the patent landscape is open now. It's open for all indications. And the same with the blue ones. They, the bigger countries in 2015. When they open, they open on all indication. Now to be straightforward. Sorry, remind me again of your...

Unknown Attendee

Sales resource.

Richard J. Davies

Oh, sales. Sales resource. Paul, do you want to take that...

Paul Greenland

Yes, I mean, we've been on the market with our other biosimilars in Europe now for nearly 6 years. So we already have infrastructure in all of our -- in our key markets. Now, what we've done until now in the markets that are currently launching as early markets, is we have added some additional strength in the areas that we need specific expertise. So gastroenterology, rheumatology. And this is the similar model that we'll use in our later launching markets when these come up front. But a lot of our markets in this early launch phase are as well -- these are distributor markets as well. So in that situation, the distributors that we were with have also been adding infrastructure to be able to sell in pledge.

Richard J. Davies

So 1 thing I would say though, that infrastructure is relatively modest, right? I'm not here to recreate the size of the sales force of one of the originators. A lot of these markets are tender. A lot of them are pricing and reimbursement affected, and the key then is really figuring out what do we need to do from a communication to be able to pull-through, particularly on switch.

Karen King

Greg [ph], go ahead. Greg and then Ronny[ph].

Unknown Attendee

I have 2. First for Richard. What are you specifically using in your out year financial target that Tom laid out before in terms of share and price for the U.S. biosimilar experience. Since that's a framework you've provided today, maybe you could tell us how you're modeling that.

Unknown Executive

Yes. There we go. The first one to hit is going to be EPO in '16, so there's not a heck of a lot in there. But if you look at some of the market conversion rates, and maybe Paul can talk about them, in Europe, it's not too difficult with pretty conservative numbers, to get to pretty nice market positions. Paul, maybe you can kind of take us through some of the conversion and the share positions we're seeing now?

Paul Greenland

Yes, I think for EPO, which has been a slower converting market. We're up in the mid-30% conversion of that reference market. But for G-CSF, we're up at the mid-60s. So the conversion of the filgrastim market is in the mid-60s. And that's a market that's been in progress for just over 4 years.

Unknown Attendee

So in the U.S., you would use maybe 30% after a few years for EPO and at what kind of price discount?

Paul Greenland

Yes, I mean, I can't give you any numbers on that.

Karen King

We can't give on it.

F. Michael Ball

It's difficult to project at this point in time. But I guess I don't see the price dynamics meaningfully different in U.S. as they've unfolded in Europe. It's really early to tell right now. But that's kind of how I view the market today. And share, it's going to be interesting to see how the market emerges. I guess, I'm up the belief that in the U.S., one of the benefits we have is the actual visibility to these products for 5 years in Europe, and the safety and efficacy profile. So if I use Richard Stern [ph], or phrases he's used a couple of times today. And that is giving the physicians a confidence to prescribe, I think that's a tremendous benefit, having that safety and efficacy record for 5 years in Europe prior to the U.S. market emerging. So my belief is and some of our market research would indicate this, that the market adoption could potentially be more rapid in the U.S. than it has been in Europe. Now, I'm projecting the future here, but that's kind of what our research might indicate.

Unknown Attendee

And my other question for Sumant about the INN debate. Not all of your generic competitors agree with GPhA and your position, one of them might be partnering with Amgen. Is this sort of a political ra ra we should all get behind INN and being upheld? Or are there some actual details that make it very different in the biosimilars space, such as dealing with product liability, et cetera. Is it so obvious to you that upholding INN for biosimilars makes sense? Or is it more of a political push for now?

Sumant Ramachandra

Yes, I think you want to think of first principle is that, if you're going to challenge a system, there has to be a fundamental reason why you're challenging the system. So there is no fundamental reason why you want to change INN. So I think the proposals on the table right now are that INN can remain intact and they would be some kind of thing added to it. And that thing is not part of the INN but it's really a part of tracking and tracing. Fine with that, as long as the physician's not required to remember to write infliximab-some crazy thing after it every single time. Which physician is going to remember 5 different names for the same drug? So if anything, it's probably a tactic to say that like the originator companies to say, "Hey, you know what, we will cause this." and I think it'll cause more confusion, actually, to having these many names out there. We already have a brand name for these products. Companies are not launching biosimilars without a brand name. So I think this INN debate is kind a bit of a red herring. I mean, you need to keep the system in tact, it's an international, non-proprietary name. Emphasis on nonproprietary. The moment you start adding a bunch of stuff to it, it becomes proprietary. So I've that point to the World Health Organization when I was there in October. And so I don't think -- I'm hoping that they won't dismantle because it's been working for decades frankly.

Karen King

Ronny [ph]?

Unknown Attendee

So I'd like to expand a little bit about Greg's question. We assume in general that the U.S. system has been very unable to deal with even small differences. And we've all seen in the small molecules that even small differences, that are not clinically relevant, are able to drive a significant conversion to the new drug, and that volume is usually kept by the new drug when the first generic come -- generic will first one come into line. And so the life cycle management of small molecules. To some extent, you guys are relying on that for your own Precedex, right? So when you talk to the innovators. I just came from hearing it from Novo. And they'd keep on saying, "Look, we have the gold standard." Why would you ever use the product, why would any physician ever use a product which does not have the gold standard label on it? And currently, in the United States, those physicians still has the ability to decide what product they're going to use. If you talk about the payers, we have 101 different ways [indiscernible] incentive structures for the innovators to prevent the adoption from happening. So if the U.S. is unable us to switch even between, let's call it, in a slightly -- slight differences in small molecules, why would biologicals be switched to biosimilars?

F. Michael Ball

Well, I'll take a stab at that. Well, I'm going to approach this from a very simple answer, okay? Because I've talked to a lot of folks out there, different stakeholders and influencers and so forth, in the marketplace. And I think they clearly understand that if they don't adopt biosimilars and they don't embrace the concept of biosimilars, they're going to go away, all right? There's not going to be a biosimilar market. And there's too much money on the table with respect to health care economics to not embrace biosimilars. So will the brand companies compete on price? Absolutely compete on price because if they don't, I don't think they're going to be able to maintain their shares. Will they do it early or not? Or will they do aggressive counter detailing? Certainly, they'll do aggressive counter detailing. But at the end of the day, and I've had the benefit of seeing -- being old enough to see the small molecule market emerge, generic market emerge a number of years ago, and some of the same battles that we're fighting today, with respect to biosimilars, got fought in small molecules 30 years ago. And so I actually come to the table with a sort of the concept of inevitability. It's inevitable that these things will be embraced because the health economic standards and health economic benefits, I should say, are too high. That's my belief.

Richard J. Davies

So Ronny, I would just add in. Look at the payers and that the providers, the commercial plans, I believe. They also highly sophisticated systems they're driving to lower-cost, more affordable medicines as well, right? And so I think the system equally balances the other way around the GPOs also.

Unknown Executive

[indiscernible] Ronny, one of the reasons I spend as much time as I did on the mega trends is I think the reason people won't be using gold standard drugs is there won't be enough gold around to use. I mean, that's the whole premise. The world is changing. There is such pressure on the health care system. You're talking about patients paying -- no, not patients. Payers paying thousands of dollars. I believe you will be able to have access to your gold standard product if you're willing to pay a few thousand dollar co-pay. Again, as Tom said, this is no different than the generic wars. And in fact, the FDA had to enact legislation so that brand name companies wouldn't demean the generic competitors. Now whether or not that happens or not, but we still will have to have the clinics out there to show that we are worthy of use in terms of safety and efficacy. But I think this trend, a pressure on our health care system from a cost standpoint, is going to cause people to want to go after that $0.25 trillion.

Sumant Ramachandra

And I just want to add because it's important. The definition of gold is how much data you have to actually talk, right? So it's not like we're working in with a prognate [ph] and a lab into a manufacturing facility and we're taking a vial out there. There's been a number of studies and actually, such a large number of patients, to show biosimilarity. Yes, they can say they have years of experience, but you actually have clinical data at the time of registration. And a company like us, an ethical company like us is also committing to post-marketing fall-up as part of this. So it's not like we are one of those companies that say, "Yes, just create the thing from sell line and put it in a vial and put it out there." We actually are generating clinical data. And frankly, those companies, the train have left the station, Ronny. I think it'll leave the station -- it's up stationed in Europe. It's going to leave it here. People will adopt this. And that's my firm belief after talking to people in the medical community.

Unknown Attendee

[indiscernible] last money we're betting against the inefficiency of the U.S. healthcare system. But let's move that one aside. Let me give you the other objections I'm hearing, which is from the other guys who are now developing biosimilars. Novartis, Boeringher Ingelheim, Amgen, Pfizer, and their argument is, look, in the end of the day, you'll have to convince -- this will have to the physician. You have to go physician by physician and convince them that you are part of the quality. And the brand behind the biosimilar matters. And here, you might be a year ahead of the market in the U.S. here or there. But at the end of the day, when Amgen rep or a Pfizer rep shows up in the oncology offices or the RA office and begin to talk about biosimilars, they'll be in a much better position than Hospira that currently does not the brand and infrastructure. And therefore, it is not necessarily the first one to the market. In our facility, they think that you'll be the first in everything, but rather, the one with the biggest brand and the biggest commercial infrastructure that would win.

F. Michael Ball

Well, I guess one way I'd counter that. Let's say an oncologist office, you're talking about. I guarantee you, when you walk into that oncologist office today, there's a lot more Hospira drugs on that shelf than there are Pfizer drugs. So it's not like we don't want to be present there. Albeit, we have not been out there creating brands with small molecule generics. But at the same time, it doesn't mean we can't. Keep in mind, one of the things about -- if you think about commercializing these products, we're not actually creating demand for the medicine itself. Okay. The demand has been created. There's $40 billion of demand that's already been created. We are, once again, it's Richard's words here, we are creating the confidence to prescribe the biosimilar. And I think that's different. And quite frankly, in the oncology community, I think that's an area, where once again, referring to our market research, that's an area that I think that we're going to see significant adoption of biosimilars.

Richard J. Davies

It's not like we're not known there. And why do they know us? Because they trust us, because of...

Paul Greenland

I mean, the other thing that I would add is this isn't a pure-play proprietary market, either. I mean, from our experience in Europe, this is a hybrid of a generic and a proprietary play. And I think the experience that we have gained in Europe actually puts us in a very strong position. And I think we can also leverage that into the U.S. But knowing how to work in the biosimilar market is important. And if you've not been there, then to some extent, you've got to get in there and start to learn. I think the other thing that we've got to remember as well here is that this is about expanding markets as well. And I think that we're not just looking at taking drug or product away from the originator. In actual fact, it is allowing access to more patients. So actually, what we see in Europe is that the EPO alpha market has expanded since biosimilars came in. The filgrastim market has actually expanded by over 50% since biosimilars have come in. So this isn't just about going out and taking share from other companies through standard proprietary detailing. This is actually about providing some a new offering that gives you better access for patients as well.

Karen King

Any other questions? [indiscernible] up here.

Unknown Attendee

So I was wondering and curious, as you go through all the markets in the world, curious how many of those markets -- specifically to biosimilars, right, the thing in biosimilars. So as you go through all these markets, how many of them would accept a clinical package that was done in another country as basis for approval?

Sumant Ramachandra

So as we look across the highly regulated markets, other than the exception of let's say, potentially doing something in Japan for Japan, not on emerging markets, I'm talking of the highly regulated ones. They are accepting of clinical trials done in other countries. And that's because at the end of the day, the highly regulated markets do believe a human is a human is a human. Okay. And that if you do a diversified study amongst humans of different races, you will actually get relatively good and same data. There are some nuances in markets, and we've knowledged that. Actually, Anil has mentioned China as an example, in emerging markets side. We know Japan requires some sort of bridging study. But in general, where the money lies, those highly-regulated markets, they're accepting data.

Unknown Attendee

Okay. So in other words, you could use the package for FDA, you could use it for approval in Brazil or India or China or...

Sumant Ramachandra

Well, I said China, they may require, potentially, a clinical trial as part of that. India is not a highly -- so it's not a high market in terms of revenue, but you guys an tell me...

Unknown Attendee

That's for a vast majority of markets where you are seeking to enter, you do not need to do separate clinical trials?

Sumant Ramachandra

If you do a global program.

Unknown Attendee

Yes. Okay.

Sumant Ramachandra

The biggest issue is reference product. I just want to mention that. You have to have a good reference product. That's important.

Richard J. Davies

So let's be clear on what our strategy is. Our strategy is the highly regulated Western markets. That's where we'll be proactive in what we do. Now if something we've already created makes sense and we can use it in emerging markets or another market, that's great. But I don't think we're going to pursue specifically a registration, let's say, in China, where we'd have to do clinical studies in country.

Unknown Attendee

And then, so maybe just get back to a question I had earlier about the cost. Is there anything in the horizon that you see that could significantly reduce the cost of developing a biosimilar?

Sumant Ramachandra

Yes, so there's a few things. I think there's this cost of development and there's cost of manufacturing. So let me start with cost of development. So I think the most important thing that one can do in the development phase is actually make sure that you have heavily characterized the protein product with all the glycol solution sugar residues around it so that it's so well characterized that you have a very high certainty that when you take it to the clinic, you're actually going to get the results you intended. So the size of that study will be smaller. But that's to get to approval. The reality is we're also committed to generate some level of clinical data, either prior to approval or after approval, for market acceptance. So that's the most important thing, get the characterization right. In the manufacturing front, the best thing the R&D group can do in a manufacturing site is new technologies and disposable technologies with smaller reactors that are actually in place now that people are testing. So you actually have some ability to now move to different back sizes and disposable technology as part of biosimilar development. And just remember, our EPO product is actually being created with our partner GSK, with modern technology. The EPO product from the originator is still in roller bottles. We're in tanks. So we have actually adopted already modern technology in the production of our product. The originator is still in roller bottles. I just want to point that out. And so that -- those are issues and then we can bring the cost down by going down to tanks. And if you go to disposables, you can actually customize the market as part of this. So there's a number of steps. And there's another area that people are working on, is improving cell line yield. So the cell that produces a particular protein, there are ways of now improving the protein yield. You improve the protein yield, you have less batches to make. You can even do smaller batches. You have smaller batches, you have more control. Those are things and technologies that are happening right now that biosimilar companies like us are adopting in our current programs and continue through life cycle management. That's what I meant by life cycle management in the manufacturing phase. It's a partnership between manufacturing quality and R&D [indiscernible].

Karen King

Other questions?

Unknown Attendee

Just a couple of quick detail ones. You mentioned Erbitux in your slides. Any expectation where you're going to have that product into clinic? And then on IP, the IP on both Enbrel and RNS [ph] IP, intellectual property, the IP on both Enbrel and RNS [ph] goes up quite a bit out beyond the time when you should probably have your product approval. Are we talking here of -- are you expecting that the -- some of those biosimilars would involve patent challenges against the innovators? Or are you essentially going to wait until the innovators pat out composition of manner of patents expire?

Sumant Ramachandra

So a couple of things. Let me answer the IP question, and then I have to remember your first question. So on the IP side, the Enbrel patent in the U.S., the submarine patent that got revealed, I think early this year or last year, that is yet to be challenged. But Enbrel opens up in ex-U.S. markets earlier. So that is an opportunity for coming with a biosimilar version of Enbrel. RNS [ph] it's not in our pipeline. We're not pursuing it. The market actually has some dynamic changes in it. As you know that shorter acting EPO is sometimes preferred in many settings for the treatment and control of anemia, and the treatment of that area. So the market, when the price starts dropping, I think this is what Richard was inferring to, is you may actually -- you're not just competing against your -- in your sandbox. The sandbox started changing on you. Because now, the price makes other possibilities occur in the sandbox, so sandbox starts getting better. And I think that's what's going to happen in the EPO field. And I'll give you an example of even in U.K. Under [indiscernible]. So the approval of infliximab for psoriasis, all right, [indiscernible], is moderate to severe in U.K. The coverage by nice [ph] is very severe. That's a small segment of the population. When that price of infliximab comes down, something nice [ph] has to a new technology assessment. And patients who deserve infliximab start getting paid. The reimbursements starts appearing. Market start getting creative because of biosimilars. And I think we have to remember that this is going to not just impact from a financial perspective, but patients actually get access to drug they just didn't have access to before, and that's important. And that's why this tenet from the originator of biosimilar companies won't survive. I'm quite passionate because it will survive because patients need us to survive.

Richard J. Davies

[indiscernible] question was Erbitux [indiscernible].

Sumant Ramachandra

Yes, so we have not actually -- Erbitux is one of our partnership program with Celltrion. You have to ask them that question about Erbitux. We have a lot of discussions with them on this. But I think that's a question based best for Celltrion.

Karen King

Okay. So I just had a couple here that I had gotten in. This is for Tom. How do you think about substitution in the U.S. and how important is it to you?

Thomas G. Moore

So it's an interesting question because it's sort of a hotly-debated topic among a lot of companies that are pursuing biosimilars. Ronny's laughing over there. So he hears a lot about. So I don't think that -- I would say that most companies out there don't believe that substitution or the concept of interchangeability which forms the foundation of substitution is likely to occur early up in the launch of these molecules. I think most people are viewing a more conservative position out there, that the FDA was [indiscernible]. Now, it may well -- very well evolve over time, and it will probably will. But I don't think it's something you're going to see coming out of the gate. At the end of the day, these products are all going to be branded and the biosimilar companies are going to create commercial machines out there to drive adoption through all the various stakeholders out there. I think what is important to know about substitution or the concept of interchangeably going forward is that once it does occur, and I think it will occur with the products, is that it doesn't end up becoming a fragmented market out there where you're seeing substitution in some states and not in others and so forth. So it's important, I think, for biosimilar companies to -- if there is going to be ultimately interchangeability in the concept of substitution out there that would be done uniformly across the country.

Karen King

I've got a question up here.

Unknown Attendee

So I'm curious taking Humira, for instance, as an example. How likely do you think it is that once Humira loses patent protection that they would seek to discount that price aggressively to try to hold on to the market share?

F. Michael Ball

So the stakes are high, okay? Humira's the largest drug in the world. So I fully expect the brand companies to ultimately compete on price. Whether they do that coming out of the gate, I think is a question in my mind. You will see aggressive counter detailing out there. I believe Paul can talk to that about some of the experiences he's had with competing in Europe with brand companies. But ultimately, I think you are going to see brand companies compete on price. Question is how early in the cycle of introduction of biosimilar competition does that occur?

Richard J. Davies

And I think -- I mean, the stakes are high. And I think you'll see a number of things from competitor companies. But what we've seen primarily in Europe is that the initial competition comes from a communication standpoint. So really, it's communication about why physicians shouldn't be using biosimilars rather than competing on price. We have seen some competition on price. But certainly, the competition on price has been relatively small. And I would agree with Tom. I don't think we will see huge competition on price in any of these markets.

Unknown Attendee

And maybe 1 more. Have you seen, in terms of the competition for term for researches right, as you look to develop these biosimilars. Have you seen a lot of former big pharma scientists? Have you been able to hire them? Is there a lot to pick from there?

Sumant Ramachandra

Yes. So having come from a big pharma myself.

F. Michael Ball

You got big pharma guys right here. I'm the only generic guy up here.

Sumant Ramachandra

The answer is yes. And I think the people who do come believe in 2 things. Number one, they actually believe in the opportunity and the vision that's been laid out by Hospira as the leader in this field, or they wouldn't come. And number two, I think, fundamentally, as people, they want to make a difference. The people who are in this field know that they're entering a field that is creating a market. You only get to do this maybe once in a few lifetimes. Markets are not created every day. And I think people want to be part of that story, and they come with their talents from that. And it's not just research development, it's across the board. People come for that reason. We have laid out the vision, but they really want to make that difference and be part of the story.

Richard J. Davies

I think it's the same in the commercial side. People come because they want to create a market. They want the excitement of it. They want to drive the passion [indiscernible] I believe in it.

Sumant Ramachandra

It's high times.

Karen King

Sumant, I have 1 for you. The FDA hasn't issued final clinical guidance. Has this impeded you so far or in any way from moving forward?

Sumant Ramachandra

No. Actually it has not impeded us. I mean, Hospira is a company in this area, I'm very proud to say that we are cutting edge. We made the decision to go into biosimilars before other U.S. companies did, number one. Number two, we made the decision to start the EPO program without even the lobbying path before 2010. We made the decision to start the study before rough guidances came out. But that's because we took a first principle approach to everything. That means market will form. We know that. We do know exactly when. We know that the law would support the market formation because there's massive health care pressures. We know that the regulations will be based off of therapeutic equivalence, which is the concept I presented on that slide. So we weren't starting from no knowledge. And I think the other thing important to note is that the FDA, we've been following what they have been saying along the way. So we based our program based on a lot of what they were saying, but maybe not putting in writing. And even though they have not put out final guidances out there, they continue to put more draft guidances. They actually have open forms. We participate in nearly every open forum possible.

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