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Hospira, Inc. (NYSE:HSP)

Q1 2010 Earnings Call Transcript

April 27, 2010 9:00 am ET

Executives

Karen King – VP, IR

Chris Begley – Chairman and CEO

Tom Werner – SVP, Finance and CFO

Analysts

Marshall Urist – Morgan Stanley

Rick Wise – Leerink Swann

Ronny Gal – Bernstein

John Putnam – Capstone Investments

Kevin [ph] – Goldman Sachs

Jayson Bedford – Raymond James

Operator

Welcome to Hospira's first quarter 2010 earnings conference call. All lines have been placed on a listen-only-mode to prevent any background noise. Following the speakers’ remarks, there will be a question-and-answer period. I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone, and welcome to our conference call and web cast regarding Hospira’s financial results for the first quarter of 2010.

Participating in today's call are Chris Begley, Chairman and Chief Executive Officer of Hospira; and Tom Werner, Senior Vice President, Finance and Chief Financial officer.

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

We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

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

Also posted on our website is a presentation of complementary materials that summarizes the points of today's call. We will not be speaking directly to the material, which is posted on the presentation page at www.hospirainvestor.com, the material is for your reference as an enhanced communication tool.

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

Chris Begley

Thank you, Karen and good morning, everyone. We started out the year with very strong sales and profitability, driven mainly by continued strength in Specialty Injectable Pharmaceuticals. The majority of the contribution came from oxaliplatin, a major oncology drug use in the treatment of colon cancer, and Precedex, our proprietary sedation engine.

Net sales topped $1 billion this quarter, increasing 17% year-over-year or 13% excluding the impact of foreign currency. Adjusted earnings per share of $0.94 represents a growth of 57% over the first quarter of 2009 EPS of $0.60. The first quarter included several significant developments for Hospira. We completed the acquisition of Orchid generic injectable pharmaceuticals business. Integration of Orchid Chemicals injectable formulation business represents a strong strategic fit.

Through this acquisition, we have enhanced our SIP portfolio by fulfilling a key manufacturing and development capability gap, and adding new beta-lactam antibiotic compounds to our portfolio. It also establishes a direct presence for us in India, providing a platform for future growth.

We reached a positive agreement on our oxaliplatin patent challenge since the third quarter 2009 launch of generic oxaliplatin in solution. We have seen extremely high levels of demand with only a limited number of competitors offering a solution product. This has resulted in extremely favorable performance over the past several quarters. However, ongoing litigation continued to provide uncertainty as to future prospects. By settling the litigation, we eliminate any litigation risk while we secure the right to relaunch our product in 2012 in advance of patent expiry.

On the biogenerics front, we were very pleased to be the first biogeneric to receive approval for subcutaneous use of Retacrit in renal anemia from the European Community. This development allows us to serve a broader base of the fast acting EPO market in Europe, where the subcutaneous indication of the drug represents more than half of the renal usage of the product.

More recently, we entered into a merger agreement and commenced a tender offer for all outstanding shares of Javelin Pharmaceuticals. Once approved the acquisition of Javelin will allow us to capitalize on the synergies between Javelin’s main product candidate, Dyloject, a post-operative pain management drug and Precedex. Both drugs are marketed to anesthesiologists, and will be sold through our Precedex sales force upon completion of the acquisition.

Finally, last week the US District Court for the Northern district of Illinois ruled in our favor in the ERISA lawsuit related to the spin-off of Hospira from Abbott. We are pleased with the court’s ruling, which validated our long-held position that Hospira had acted in compliance with the law at all times.

So, our list of achievements continues to grow, however, we have had our fair share of challenges as well. As you know, two weeks ago we received a warning letter from the US FDA related to the inspections earlier this year of our manufacturing facilities in Clayton and Rocky Mount, both located in North Carolina.

While the letter does not restrict production of shipment of our products from these facilities, it does address topics related to documentation policies and procedures and validation and investigation practices. More specifically, the FDA cites failure to adequately validate the processes used to manufacture products at Rocky Mount facility. Deficiencies related to particulate in certain emulsion products, namely Propofol and Liposyn at the Clayton facility and corporate oversight.

We take these actions very seriously. We are committed to filing the FDA’s regulations and company operating procedures to ensure that we address the FDA’s specific observations and overall expectations and timelines, we are working very closely with the agency, as well as with third party consultants. We are confident we can demonstrate to the agency our ability and commitment to not only implement these corrective actions, but also to ensure the global application of all improvements.

I am personally engaged in the process and committed to driving a positive resolution to this issue. Quite simply, we built Hospira on a strong foundation of quality and we intend to stay that course. That is part of the reason we elected to put a temporary hold on new shipments of Propofol and Liposyn products. As you may know, we have had challenges with these emulsion products, which are difficult to manufacture. We have submitted improvements to the manufacturing process for these products to the agency, including the installation of a smaller micron filter designed to filter out the microscopic particulate.

While we have manufactured both Propofol and Liposyn using the improved process, we will not ship any of the products manufactured under the new process until we receive the agency’s concurrence with our approach to addressing this issue. The FDA's increased focus on managing the safety and quality of health care is raising the bar, and we are raising our bar internally. To that end, we are looking across our global manufacturing operations to ensure that we meet the highest level of compliance with both our pharmaceutical and device products.

On the device side of the business, we continually monitor and evaluate our infusion devices to determine whether changes are needed to improve the quality of the systems. We pay close attention to customer feedback, and take action when we see heightened levels of activity. For example, we have recently seen an increase in customer complaints related to the failure of (inaudible) at the end of infusion therapy in certain conditions. Regardless of the clinical practice, we need to make certain our pumps have the appropriate safeguards and interfaces under all conditions to achieve the highest level of safety and efficacy.

As a result, we have decided to hold new customer shipments of the Symbiq devices until our investigation is complete. While we make the appropriate modifications to the product, we have alerted our customers of the end of infusion condition. This voluntary shipping hold is another step that demonstrates our commitment to continuous improvement.

Turning now to Project Fuel. We remain on track with our optimization program, which is designed to simplify our business and drive quality and operational excellence to obtain top tier financial performance. Since the initiative’s inception a year ago, we have eliminated approximately 45% of the total identified list number of SKUs, which compares to the 30% we announced in early February. And we continue to progress in streamlining our organizational structure, having notified over 80% of the people impacted by our target reduction goal of 1400 to 1500 physicians.

Furthermore, bolstered by the strong progress and gains from Project Fuel, we have recently made some leadership changes to increase our focus. First, Terry Kearney, our chief operating officer, continues to lead the global operations organization, but now is focused on driving improved quality, efficiency and collaboration across the supply chain and manufacturing organizations. Although he will no longer be joining us on our quarterly conference calls, he remains a key member of our leadership team, spearheading our lean initiatives and driving optimization through the entire business.

Ron Squarer, previously in charge of our global marketing and corporate development activities has moved into the newly created role of chief commercial officer. In this new role, Ron is responsible for delivering long-term sustainable revenue growth across our three regions and our contract manufacturing business.

Finally, before turning the call over to Tom, I like to touch on a key development during the quarter, the passage of healthcare reform legislation in the US, which brings increased access to healthcare for millions of Americans. On the whole, we believe the legislation represents a positive opportunity for Hospira. It is focused on the key areas of quality of care, cost containment and enhanced productivity is the foundation of what we do at Hospira.

And unlike many large pharmaceutical companies, our focus on genetic injectable products for the acute care non-retail market means we do not expect a significant impact from the changes to Medicaid that resulted from the legislation. Where we do expect an impact, a positive impact, is in the establishment of a regulatory pathway for biogenerics in the United States. Hospira has long championed for a biogenerics pathway in the interests of bringing lower cost, high quality biogenerics to the American public. So we were pleased that this was incorporated into the healthcare reform legislation.

Overall, we believe the bill is sound with the exception of the ever greening provision, which as currently written will allow for an additional period of exclusivity as a result of minor modifications to an existing drug, thus creating a potential monopoly for branded biologics. We will continue to work to improve the biogenerics legislation, just as Hatch-Waxman has evolved favorably for small molecule generics since it was passed 25 years ago.

The 12-year exclusivity period in the bill will allow for other innovative life-saving products come to market, which might not have otherwise been available. It will not impact any of the 11 biogenerics in our current pipeline, and will ensure a robust future pipeline for Hospira. We are working at full speed to be able to launch biogeneric products in the United States, when the branded biologics patents expire.

Finally on the device side, that will be an impact from the medical device excise tax component of healthcare legislation. The 2.3% tax will affect a smaller subset of our total revenue beginning in 2013, when we expect the tax will result in an annual after-tax impact of less than $0.10 per share.

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

Tom Werner

Thanks Chris. Good morning everyone. Since I'm now going to now cover everything from sales to earnings, the format of our call will be slightly different than in the past. I encourage you to use the complementary material that Karen referenced earlier as support for some of the statements I will be making.

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

Global net sales grew 13% in the quarter on a year-over-year basis, mainly the result of strong performance from global specialty injectables, which increased 37% during the first quarter. In the Americas, specialty injectables net sales were up 43%, primarily attributable to greater than anticipated performance of oxaliplatin and Precedex. Excluding the impact of oxaliplatin, the base business grew in the high single digits.

Due to limited competition and continued strong demand for oxaliplatin solution, both volume and price in the quarter were better than we had anticipated, resulting in stronger sales and a favorable adjustment to our charge back provision recorded in previous quarters. During the quarter, approximately three quarters of the oxaliplatin sales were related to wholesaler demand with the remaining one quarter from this change to our original charge back estimate, reflecting more stable and pricing than our original projections.

Looking forward, we have been monitoring market behavior and price erosion over the past month since we announced the settlement. Today, we have sold around half of the allotted volume agreed upon in the settlement at prices reflecting a more stable price environment. We anticipate selling the remaining volume during the second quarter, as our end date to sell product is June 30.

Today the erosion rate of the branded price remains at approximately 65% to 75% depending on the channel, which is in line with what we saw in the first quarter. Also contributing to the positive quarter’s SIP performance was strong demand and momentum for both Precedex, our proprietary sedation agent, and a new high dosage heparin [ph] presentations we launched in the third quarter last year.

Moving now to EMEA, net sales of specialty injectables in the region increased 13% in the quarter, driven by continued momentum in many of our recently launched molecules.

We had another strong quarter for Retacrit, with our share of the total short acting biogeneric market in Europe increasing to more than 50%, and we also introduced docetaxel to various smaller countries throughout Europe.

In Asia Pacific, net sales of specialty injectables increased 19% over prior year first quarter driven by solid growth in Australia in what is traditionally a sluggish quarter for generics in the region, as well as strength in gemcitabine.

Moving now to devices, net sales of global medication management systems were up slightly versus the first quarter of 2009. In the Americas, net MMS sales grew 2% in the quarter, placements were up significantly on a year-over-year basis with competitive capture rates remaining strong at 70%. We continue to see positive demand for Plum, driven by price sensitive customers who remain capital constrained.

In EMEA and APAC, first of all in EMEA, MMS net sales decreased 6%, and they were flat in Asia Pacific, mainly due to the timing of certain contracts. Dedicated set sales continue to remain favorable providing a consistent stream of revenue. Sales in both other pharma and other device product lines decreased across all regions in the quarter. This was primarily due to the divestitures of two of our contract manufacturing facilities in Salisbury, Australia and Wasserburg, Germany, as well as the sale of our critical care product line.

Moving down the rest of the income statement, adjusted gross margin in the quarter was 45.1%, up 560 basis points compared to 39.5% in the first quarter of 2009. Contributing to the improvement were favorable product mix driven by oxaliplatin, as well as improvements to manufacturing productivity mainly as a result of Project Fuel efforts.

R&D expense in the quarter was 52 million, up 3% over the first quarter of 2009. As a percentage of net sales R&D was 5.1% versus 5.8% in the first quarter of 2009. This was less than we anticipated, but it is primarily related to the timing of projects pending, which will occur later in the year.

SG&A expense for the first quarter was 179 million, up 23% from 146 million from the same period last year. The increase reflects temporary spending associated with Project Fuel optimization initiatives, as well as additional expenses related to the Precedex sales force expansion, intellectual property legal expenses, partially offset by Project Fuel cost reduction efforts. SG&A as a percentage of net sales was 17.7% compared to 16.9% in the first quarter of 2009.

Adjusted operating income increased 60% to 240 million versus 150 million in the first quarter last year. Operating margin adjusted at 23.8% improved by almost 640 basis points versus 17.4% in last year's first quarter. Interest expense decreased 13% to 23 million in the first quarter, down from 27 million last year. This primarily reflecting the 2009 pay down of debt related to the main acquisition.

Now our effective tax rate on an adjusted basis in the quarter was 27%, up from our first quarter 2009 rate of 21.5%. While the increase reflects a slight shift in the mix of earnings versus the first quarter of 2009, somewhat due to oxaliplatin, it is more due to the impact of the failure by our federal government to renew several tax extender bills that we expected to be enacted in the first quarter of 2010. This was contrary to what we had expected, but we do believe that the extenders will be renewed in the second quarter of 2010. Therefore we are still comfortable with our original guidance for an adjusted tax rate of 22% to 23%.

Adjusted diluted EPS for the first quarter was $0.94 compared to $0.60 last year, an increase of 57%. Turning briefly to cash flow and the balance sheet, cash flow from operations in the first quarter was actually an outflow of 6 million versus an inflow of 89 million last year. This is primarily due to the expected payout of chargebacks during the quarter, as the sales of oxaliplatin moved from wholesaler to end-user.

Our cash balance at March 31 was 646 million compared to 946 million at the end of last year, and 529 million at March 31, 2009. As expected the decline was primarily related to the acquisition of Orchid Pharmaceuticals' injectable business.

Capital spending in the quarter was 41 million compared to 34 million in the same period last year as a result of Project Fuel related spending.

Finally moving to guidance, moving to our full-year projections on our fourth quarter 2009 and year-end earnings call in February, we projected 2010 global net sales to be relatively flat on a constant currency basis or flat to slightly up on a reported basis. We also projected EPS in the range of $3.25 to $3.35 per share. Since the time of the call, several variables have surfaced that could positively or negatively impact guidance.

I'm going to walk you through each of these variables, which ultimately will result in an increase in both sales and adjusted EPS guidance relative to our prior guidance. Starting with the positive variables, first the Orchid acquisition. When we provided full-year guidance on our fourth quarter call, we indicated that our sales guidance did not include sales associated with the as yet not closed acquisition of Orchid’s generic injectable pharmaceutical business. Now having completed the acquisition last month, we are updating 2010 guidance, net sales of Orchid for the nine months of 2010 since the close date will add about 55 million to our sales, distributed fairly evenly through the remaining three quarters.

In addition to Orchid, the other positive factor relative to our full-year guidance is oxaliplatin. There are two dynamics that we have to consider when discussing oxaliplatin that being timing and pricing. Our initial projection for oxaliplatin in 2010 assumes continued price erosion throughout the year, with sales relatively consistent quarter-to-quarter. The terms of the recent settlement, however, calls for us to stop selling oxaliplatin on June 30, 2010. So we now anticipate that the sales we had previously assumed for the second half of the year will be accelerated into the first half.

And in the first quarter we experienced very little price erosion to oxaliplatin compared to fourth-quarter pricing levels. Since we had assumed greater erosion rates throughout the course of the year, the increase in volume at higher price levels in the first quarter had a significant impact for us. As a result, we are modifying our full year guidance based on these factors.

Now offsetting these possible contributors are the voluntary actions we have decided to take that may have a negative financial impact to future results. First, as Chris discussed with you earlier our recent warning letter from the FDA and what we are doing to bring the issues identified to a positive resolution. While we are in the process of implementing corrective actions and are manufacturing Propofol and Liposyn today, we will not start shipping these products until we receive the agency’s concurrence with our approach to addressing this issue.

We recognize there is a market shortage of these important drugs and are hopeful that we will be able to demonstrate resolution to FDA quickly. However, to be as transparent as possible we have chosen to remove future sales of both Propofol and Liposyn from our full year 2010 guidance.

Second, the voluntary hold we placed on shipments of Symbiq to new customers. The pumps will remain on hold until we can complete our investigation, and make the appropriate modifications. While we are working diligently on the issue, we can't predict the timing of resolution. As a result we are removing future sales of Symbiq devices from our full year 2010 guidance.

Between the addition of Orchid sales and better anticipated performance of oxaliplatin in the first quarter, partially offset by certain product shipping holds, we are still increasing our guidance for global net sales to 3% to 5% on a constant currency basis with foreign exchange contributing a positive 1%. As most of the impact will be to the Americas region, we are increasing net sales in the Americas to 2% to 4%. Net sales guidance for EMEA and APAC will remain at the previously disclosed ranges of 7% to 9% for EMEA, and 2% to 4% for Asia-Pacific.

Margin contribution from oxaliplatin will be partially offset by the ship hold issues, as well as increased R&D spending in the back part of the year from the acquisition of Orchid, and increased Project Fuel IT expenses. Accordingly, gross margin and operating margin percent guidance will remain unchanged.

I mentioned earlier in my discussion that we are maintaining our adjusted tax rate guidance of 22% to 23% for 2010. We do believe that the extender bills will be renewed in the second quarter of 2010 having a favorable impact on our second quarter tax rate as we bring the year-to-date to our initial guidance.

Moving finally to EPS and then cash flow, while the Orchid transaction is immaterial to EPS in 2010, the results of strong performance with oxaliplatin, offset by the product shipping holds still will result in an increase in full-year adjusted diluted earnings per share guidance now to a range of $3.35 to $3.45 per share, an 8% to 11% growth rate over the prior year.

We expect that second-quarter EPS will be the softest quarter with sequential earnings growth in the latter half of the year. We are also increasing our guidance for cash flow from operations up to $625 million to $675 million due to strong US oxaliplatin sales in the first quarter. Depreciation and amortization will increase to $250 million to $260 million mostly as a result of the Orchid acquisition and guidance for capital spending remains unchanged.

With that I will turn the call back to Chris.

Chris Begley

Thank you Tom. We delivered impressive results for the first quarter, driven mainly by the continued strong sales of oxaliplatin and Precedex. It was also a quarter of several significant developments, including the acquisition of Orchid’s generic injectable business, the settlement of the oxaliplatin litigation in the US, the beginning of our roll-out of docetaxel in Europe, and additional progress on Project Fuel.

We are redoubling our commitment to quality, proactively addressing certain product issues to ensure they meet our high standards. We are working diligently and aggressively to resolve those issues, and are holistically addressing the concerns of the FDA.

We are confident in our ability to address these challenges and emerge an even stronger company. We are committed to delivering our increased full year guidance for sales and adjusted EPS, and we are on track for another positive year. I look forward to sharing our progress with you on next quarter’s call.

With that we are now ready to take questions. Operator.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Marshall Urist with Morgan Stanley. Please go ahead with your question.

Marshall Urist – Morgan Stanley

Yes, hi everyone. Good morning.

Chris Begley

Good morning.

Marshall Urist – Morgan Stanley

So, first question, obviously many moving parts in guidance, so Tom maybe if you could just help us through quantifying, I appreciate some of the Orchid, some of the Orchid comments, but maybe quantifying the positive on the oxali side, should that be sort of consistent with what you saw in the quarter, kind of less the charge-back adjustment. But maybe help us think through, you know, how much of the headwind are you guys building in for Propofol and Symbiq through the back half or through the rest of the year, excuse me?

Chris Begley

Absolutely good question. Let me just first touch on oxaliplatin. We hope we call the charge back reserve correctly. We will have to see how the second quarter plays out with respect to price erosion, and then as you know at June 30 we are done. So, you know hopefully we don't have any spillover for charge back adjustments into the third quarter, but you know the amount of product that has been purchased by the wholesalers, it is pretty difficult to tell exactly when it is going to run out, when the chargebacks are going to come in.

But as you look at EPS, you know, we're up a dime, and I will just kind of take you through the major pieces and you know without specifically quantifying oxali, I think those here on the call can probably piece it together. So first thing that we have, I guess, called in correctly was our share count. And you may note in our 10-Q that we have slightly changed the language on the share buyback authorization.

Our shares are up almost 8 million shares from the first quarter of last year. They were at 161. They are now up to 169 million. So we are going to begin to evaluate whether there is some steps we can take to at least stabilize the share count. As it stands, the assumption right now is that the share count won't get any higher and the increase obviously is related to the high level of option exercises.

If the share count doesn't get any higher that is about a negative $0.08 per share impact, and that is just – it was hard to estimate the number of exercises. Collectively, the product holds and the costs that we believe are necessary to get things fixed. That is about a quarter of negative, and then between oxaliplatin and some other moving pieces in various parts of the business, primarily in the US and in EMEA that is sort of a delta that would allow us to take the guidance up about a dime.

And the positive oxaliplatin is a large portion of it, but it is not the only item that is swinging in our favor.

Marshall Urist – Morgan Stanley

Okay, great. And then maybe just some comments on gross margin in the quarter, obviously very strong, is it right to think that most of that is oxaliplatin driving – on driving that gross margin and should we think about that sort of reverting at least in the back half of the year?

Chris Begley

Well, we are still sticking with our guidance of 42% to 43%. So, you know, we started out at 45.1%. As we said in the prepared comments, earnings in the second quarter would be the softest for the year, and that's going to be driven by lower margins. So we had to sort of wind off of oxaliplatin. There will be you know, much less of oxaliplatin recorded in the second quarter, and then margins will begin to rebound in the back part of the year, aided by better manufacturing performance, as well as increased savings from Project Fuel.

Within the quarter, you know, I went back yesterday and did an analysis that took the oxaliplatin, and put the charge back adjustments into the correct quarter, and as we said today it's about 25% to 30% of what we recorded this quarter was chargeback related, but as you recall, we sold very little product in the fourth quarter. So most of the chargeback goes back to the initial bunch of sales that we did in the third quarter of last year. So when you get the chargebacks into the right period, margins have been pretty stable and we had taken some reserves in the third and fourth quarter last year related to some of these product actions, Propofol, Liposyn and some other things to power cord [ph] as well, and you know, when you clean that out margins look fairly stable. So the 45% this quarter if you get the chargeback out of there, you know, it's not 45%, you know, it is 200 some basis points less than that. So Q2 will drop-down and then, we’ll begin to progress back up and still be able to hit the 42% to 43% for the year.

Marshall Urist – Morgan Stanley

Okay, great. And then just one last one from me, as we start to think about Orchid for next year, how should we, you know, how should we think about what that's going to mean for you guys and from an accretion point of view and you know, is that going to come on, going, are you going to be in a position to realize that, you know, at the beginning of ’11 or is that something that's going to take some time before we start to see that, you know, impacting margins?

Chris Begley

Well, we sort of would-be neutral this year and it basically is, you know, we've got a forecast and it is a couple of pennies either way. So it basically doesn't make a difference. So next year will be better but it's a little bit too early to talk about margin improvement and what Orchid is going to mean. A lot of the products that we really had in the cross hairs when we did the deal don't really hit until beyond next year. So I think later in the year, we’ll be able to give a little bit more clarity to 2011 in general, as well as the Orchid impact.

Marshall Urist – Morgan Stanley

Okay, great. Thanks guys.

Chris Begley

Which is too early right now.

Operator

And our next question comes from the line of Rick Wise with Leerink Swann. Please go ahead with your question.

Chris Begley

Good morning Rick.

Rick Wise – Leerink Swann

Good morning. How are you?

Chris Begley

Good. How about yourself?

Rick Wise – Leerink Swann

Very good. A couple of questions on the Symbiq ship hold, it's you know, maybe just a broader perspective, the FDA does seem to be raising or increasing regs on infusion pumps, maybe if you could give us some perspective there, you know, how does Symbiq you know, are you optimistic you can resolve it before everything, although FDA hearings and everything, but maybe longer term, how are customers reacting now, how is that going to impact your share longer-term? Thanks.

Chris Begley

Sure. Thanks Rick. Let me take that one. First of all, let me give a little context to the Symbiq ship hold. First of all, in 2009 if you looked at our shipments of infusion pumps, approximately 80% of them were our Plum technology-base and about 20% we Symbiq. For the first quarter, we've seen a shift to 90% Plum, 10% Symbiq, and the primary reason for that shift is we're beginning to see the availability of capital with our customers, but the amount of capital that is available is less.

So capital is beginning to free up but they are really looking for a lower price point than where Symbiq was, and so for Q1 we ran a 90:10 split of the two different technologies, all right. And on Symbiq specifically, let me give some additional color. The ship hold is a very recent occurrence, and it occurred because we were monitoring our data from our customers, okay, their complaint data, and we saw a spike in our (inaudible) complaints from you know, certain clinical practices, and we really believe when we saw that that we needed to take a deep breath and do a thorough investigation to make sure that we understand how perhaps clinical practices have shifted or how Symbiq might be used in the clinic versus other infusion pump technology.

And so we have underway a thorough investigation to better understand this and then we've been dialoguing with the FDA ever since we saw the spike, and then subsequently when we put the product on hold towards the end of last week. And so we don't have an answer yet at this point in time. The other thing I would share with you though is we do believe it is something that we can solve. We actually have a newer version of software with Symbiq, which is scheduled to go into the FDA towards the end of this quarter. And so what we're targeting is to have our investigation completed, understand if there is any changes that need to be made or further education with the customer base, and then if a change needs to be made to incorporate it into that new software version that we plan on following at the end of Q2.

Then obviously because it is a new filing, it's got to go through all of the processes that a new product would, you know, with the FDA, and we believe it was a prudent thing to do because of the nature of the event and we did it before the FDA went public with this increased, heightened awareness around infusion pumps, okay. And so it's not a reaction to that, but obviously I think we did the right thing in trying to make sure that we understand this and that we have the very best product out there for all different types of clinical applications.

Rick Wise – Leerink Swann

Okay, just last question on docetaxel, can you remind us what next year and does the competitive warning letter make you more hopeful or confident that you could be only generic on the market? Thanks Chris.

Chris Begley

Rick, on docetaxel, you know, from a US standpoint we don't have it in the 2010 guidance. We all long have said, you know, there is a possibility you know, we may get it late in the year. You know, the situation with the competitor you know, I really can't comment on because we don't have a tremendous amount of insight into you know, what's going on there, and so you know, what we are really focused on is you know, once the product you know, is ready to go and we have all clearances regulatory and legal wise, et cetera we want to be ready to go and make those attacks all into a success just like we have oxaliplatin.

Rick Wise – Leerink Swann

Thanks so much.

Chris Begley

Thank you Rick.

Operator

And our next question comes from the line of Ronny Gal with Bernstein. Please go ahead with your question.

Ronny Gal – Bernstein

Hi, good morning, and thank you for taking the question.

Chris Begley

Good morning Ronny.

Ronny Gal – Bernstein

Good morning. That's around the pumps, I kind of tried to look at the draft guidance, the FDA and the problem I think I'm having on the other side, is putting into the context of what you guys are submitting right now. In terms of what the FDA is asking for, can you just – is it essentially do you have to like redesign those products or essentially is this fairly close to what you're doing right now with just some added some added scrutiny to your current effort. Essentially, to start manufacturing if you have to redesign the products from this point on or this is just an improvement on the existing product portfolio?

Chris Begley

Yes, you know, Ronny, I would view it more as an improvement, okay, on the existing portfolio and an improvement from a practice standpoint of what we do or not do before we submit a product, okay. And obviously the guidance document is new and we are in the process of, and it is a guidance document at this stage and we are in the process of trying to better understand it. What our take is it's more around what we have to do before we submit a product into the FDA and the increased rigors of that, and then the surveillance that occurs afterwards, okay, as it relates to customer complaints.

And one of the things in their press you know, release that they mentioned is that the software surveillance system that they have, you know, they'll be happy to open that up to, you know, any of the suppliers to you know, take a look at how they are cutting and slicing the data as well, and so that's our initial take on it Ronny. Did that help?

Ronny Gal – Bernstein

Yes, thank you. And Symbiq, when you say you are going to submit Symbiq by the end of the quarter, would that be under the description as the guidance document currently suggests?

Tom Werner

First of all, the software that we'd be submitting into the FDA is something that we've been working with the FDA on, and we would try to get as close to the current guidance document as we understand it today, okay, keeping in mind that also is an evolving target. And so we've had, and will continue to have numerous conversations with the FDA on that.

Ronny Gal – Bernstein

And last on this topic, is it your impression or is that your internal guidance impression that the first people to actually have a pump compliant [ph] with what the FDA wants will essentially have a significant advantage in the marketplace that is, once there is compliant Tom it will be very difficult for a hospital to buy new pumps that are not compliant?

Tom Werner

Ronny, no, not at all. I mean, first of all the pump market place is a very sticky marketplace here in the US, and you know, the way the FDA has historically worked as it raises its expectations from a quality and a compliant standpoint is if they bring the market up to that level. And so obviously, you know, the more we can do to improve patient safety and if you think about, I was thinking about this last night as you read through the press release and the guidance document, drug libraries fit perfectly into what they're talking about, all right, because the incidences that they are giving are the wrong drugs being delivered to the wrong patient or the wrong amount.

And so what the industry is doing from a drug library standpoint is fantastic, all right, and so what we need to do is increase the adoption of that in the marketplace and perhaps get some regulations, whether it's state or federal to drive the increased usage of drug libraries, because what they're talking about, at least on the surface you know, a drug library implemented appropriately and that worked with a hospital pharmacy system and a barcode system would take care of those misadventures, and as we talked about you know, with our analysts, with our shareholders, our employees, and quite candidly our customers, this whole issue of drug misadventures is not a new one at all, okay.

It's something that we are highly focused on. It's why we've made some of the investments that we've made and some of the call it fringe software technologies to incorporate those into our infusion pump technology. And so I think we are positioned well to help and assist the patient to reduce the level of drug misadventures.

Ronny Gal – Bernstein

And last one before I get into the queue, any idea about the impact of the healthcare reform law on the number of hospital days that obviously the closest metric tied to your volumes?

Tom Werner

I'm sorry Ronny, you broke up, did you say beds or days?

Ronny Gal – Bernstein

Days.

Tom Werner

Days, days, okay. I just wanted to make sure that's what you said. Oh boy, you know, that's a great question, and it's too early to tell, okay. I think as we – as I’ve watched our hospital customers over the years, whether it's on you know, days, set change policies et cetera you know, they look for more and more ways to improve their overall efficiency, okay, and productivity. I mean, think about it. You know, a couple of decades ago if you had a birth of a child, you were in the hospital for several days, you know, now that's you know, not the case whatsoever.

And so it keeps changing and it's more of a gradual change than it is a revolutionary change, and so I think the point you're making is an excellent one, and it's one that we've got to watch and we've got to monitor not only from a demand standpoint, but how our products are used as well because as our customer pushes the envelope on the use of our technologies, we as suppliers have to raise the bar to make sure that the product meets those demands. Does that make sense?

Ronny Gal – Bernstein

Yes, thank you very much.

Operator

And our next question comes from the line of John Putnam with Capstone Investments. Please go ahead with your questions.

John Putnam – Capstone Investments

Yes, thanks very much. I was wondering if you might comment a little bit on, or give us some color on the Javelin acquisition, particularly on Dyloject, and what you think the potential might be there Chris?

Chris Begley

Sure, sure, sure, I'd be happy to talk about that. You know, and obviously it has not closed yet, but it is something that we are very pleased with the opportunity and we believe it will close and we believe it fits perfectly, and with what we've talked about in our doing as it relates to proprietary products in the acute care, you know, space. And it's very, very, very synergistic with our Precedex sales organization, and we believe from the clinical data that we've had an opportunity to review thoroughly that Dyloject you know, can be an excellent product for us, and for those listeners who aren’t as familiar with it, it is a pain drug, okay.

And as you look at the pain marketplace, there is really three different segments to the pain marketplace; mild, moderate, and severe, and, you know, the mild, you know, market is taken care of by things like Tylenol, you know, Advil, et cetera. It's not a market that interest us whatsoever, but the moderate to severe is one that is right in our wheelhouse, because it's what takes place from a hospital standpoint, and from everything that we can tell on Dyloject, you know, it does a good job of taking care of both the moderate and severe pain segments, and it doesn't have the side effects that are associated with opioid drug products such as nausea and constipation, because this is a non-opiate pain product.

And the other beauty of it is it's not an infused product, it's a syringe push product. So the delivery of it and the convenience of it, you know, is much nicer for our customers. From a potential standpoint, we see this with a similar type of potential as what Precedex has, and quite candidly we keep raising the bar and the performance level on Precedex as it is being accepted more in the US, and quite candidly around the world where, you know, we believe you know, Precedex and Dyloject have the potential of generating northward you know, of $150 million worth of sales.

John Putnam – Capstone Investments

Together?

Chris Begley

No, no, individually.

John Putnam – Capstone Investments

Separately, okay.

Chris Begley

And clearly, you know, greater than $150 million number.

John Putnam – Capstone Investments

That's great, thanks. What about their other products? They have a couple of other products in late clinical trials, don't they?

Chris Begley

John, they have some other products and we are currently assessing the options on those other products and it's too early, you know, to comment on you know, our views of those other products at this point in time.

John Putnam – Capstone Investments

Thanks. Just one follow-up question on the FDA’s initiative here, is this really in reaction to your situation or is it in reaction to all of the competitors do you think?

Chris Begley

Are you speaking specifically about infusion devices?

John Putnam – Capstone Investments

Correct, yes.

Chris Begley

You know, their public announcement on infusion devices that actually took place here in Chicago last week is a reaction to what they are seeing in their database on all infusion devices, and let me elaborate on that. Not just hospital infusion devices, but you know, infusion devices associated with delivering insulin for people who are diabetic, and it all ties I think perfectly to, you know, the report that was done you know, several years ago around the level of misadventures that occur in drug delivery, and that occurs on the injectable side, but it also occurs on the oral solid side and our biggest interest is in the injectable side.

And, you know, the very high level are heard [ph] as two things. We keep the high cost of proprietary products down with our generic portfolio and the other thing we do is we reduced our medication errors. And so that is part of what we do. It's part of the fabric of our culture and you know, we will do whatever it takes from a technology, you know, quality improvement you know, standpoint to make sure that we are able to deliver the best product out there.

You know, it's interesting. We now have, I believe it's either, I think it's free now, sites up and running with auto programming, where the infusion pump is actually automatically programmed by the wireless network system in the hospital, and what the nurse does is she walks up, reads what’s in the pump, confirms it and hits run. And so if you think about that from a reduction of misadventures from a drug delivery standpoint, it's perfect and it's also perfect from a productivity enhancement.

John Putnam – Capstone Investments

Great, thanks very much Chris.

Chris Begley

Yes, thank you John.

Operator

Our next question comes from the line of David Roman with Goldman Sachs. Please go ahead with your question.

Chris Begley

Good morning David.

Kevin – Goldman Sachs

Hi guys, this is Kevin [ph] stepping in for David. How is it going?

Chris Begley

Good morning Kevin.

Kevin – Goldman Sachs

Thanks for taking the question. So going back to guidance, you said Symbiq off of 2010 guidance. I would have assumed that gross margin guidance would have come down given the premium over Plum. So is it fair to assume that the implied difference is due to the acceleration of oxaliplatin sales, or there's something else going on?

Tom Werner

Actually the margins between Symbiq and Plum has pushed them fairly close. There is a dollar difference obviously because of the higher price point, but there is really very little difference from a percentage standpoint.

Kevin – Goldman Sachs

Okay. All right, that makes sense, and then on the Asia-Pacific guidance, so if you are increasing or if you're adding in Orchid sales, why would we not expect APAC guidance to go up?

Chris Begley

That's a good question. The Orchid sales for Asia Pacific.

Tom Werner

You know, Tom, I believe they are mainly focused in you know, in rest of the world, but let's get back.

Chris Begley

Yes, we’ll have to get back on that one. That's a good question. I don't know the answer, but logically you would think that's where it would go and –

Kevin – Goldman Sachs

I think 40% of Orchid is India, right, or someone in that range?

Chris Begley

The percentage number is – we'll have to get back to you on.

Kevin – Goldman Sachs

Okay, all right. That's fine.

Tom Werner

Specifically on the India piece you know, we are not going to be picking up the India you know, sales and marketing piece because all of that was done via a third-party and with what is called unregulated product, okay, not manufactured even by Orchid, that make sense at a much lower cost point, and so that's something that we, if that's what you're thinking of, we’ve stripped that out and that you know, actually you know, does not come with us.

Kevin – Goldman Sachs

And then last question. The R&D at 3.9% even backing out oxali sales or adjusting for it in the quarter is still pretty low compared to what guidance might imply and also year-over-year. Any color on that?

Tom Werner

Yes, I think you said 3.9%, and that's not correct. Our R&D was right around 5% and we still expect it to come in where we indicated, which I think was about 6.7%, 6.8%, and it's just the timing of spending and various projects. So we expect that, you know, we’ll take that spending backup in the final three quarters of the year but 3.9% is not a correct number.

Kevin – Goldman Sachs

Okay, all right, then I’ll check that. All right, thanks.

Chris Begley

Thank you.

Karen King

And I think we have time for just one more question here.

Operator

Our final question comes from the line of Jayson Bedford with Raymond James. Please go ahead with your question.

Jayson Bedford – Raymond James

Good morning and thanks for fitting me in. Just a couple of questions, just for clarification Tom, you mentioned earlier that product holds/cost would be “a quarter negative” and just is that $0.25 or is that 25% of some other number?

Tom Werner

It's a quarter, $0.25.

Jayson Bedford – Raymond James

Okay, and then SG&A in the quarter grew at the same pace as sales, absolute level was a little higher than we expected. Any of that spending kind of one-time in nature, is it more fixed?

Tom Werner

As we said, some of the spending is, you know, when you say one time you probably mean one quarter. So we've got some spending going on related to IT projects as part of Project Fuel, but the accounting rules say we can’t take those off to one-time. So eventually those will work their way out towards the back part of the year. We also saw an increase in stock-based compensation expense year-over-year because of the accounting rules there and retiree eligible options, we saw an increase there. We also have an increase related to Precedex sales force and then some legal expenses. So some of this stuff will go away as we progress through the year. The stock-based compensation expense was sort of a one timer as well.

Jayson Bedford – Raymond James

And then just lastly can you update us on the long-term indication for Precedex?

Chris Begley

The long-term indication for Precedex, you know, we continue to work with the FDA. We obviously in JAMA last year, there was an article that was published which has had a significant impact on the usage of Precedex, but we continue to dialogue with the FDA on the other indication that's not approved yet.

Jayson Bedford – Raymond James

Is that indication assume in your guidance?

Chris Begley

No, it does not, but the effects of the JAMA article, okay, which sometimes can be just as significant are factored into our guidance.

Jayson Bedford – Raymond James

That's fair. Thank you.

Chris Begley

Thank you. Let me wrap up with one last thing before we end the call, and I didn't get asked about you know, the positives and the negatives or upsides and downside as it relates to guidance, but let me cover that because you may find it helpful from a guidance standpoint. The following are the upsides that we see potentially. Any positive developments related to docetaxel and/or gemcitabine litigation in the US, also an upside lesser than assumed price erosion for oxaliplatin, FDA approval of Zosyn, since Zosyn is not in the guidance that we just covered, the release of ship hold for Propofol and/or Liposyn since both of those products are taken out of the new guidance, better overall product mix and faster than expected recovery of hospital capital spending environment in the back half of 2010 as it relates to our overall pump business.

And then from a downside standpoint, any further negative developments related to the warning letters or costs associated with the warning letters, greater than assumed price erosion for oxaliplatin and the ability to execute Project Fuel. So that's how we would frame the upsides and downsides to the guidance that we just covered. So with that our call is over and we’ll turn it back over to the operator. Thank you.

Tom Werner

Thanks everybody.

Operator

This concludes Hospira’s first-quarter 2010 earnings conference call. You may now disconnect.

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