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Hospira, Inc. (NYSE:HSP)

Q4 2013 Results Earnings Conference Call

February 12, 2014, 09:00 AM ET

Executives

Karen King - Investor Relations

F. Michael Ball - Chief Executive Officer

Thomas E. Werner - Chief Financial Officer and Senior Vice President of Finance

Sumant Ramachandra - Senior Vice President and Chief Scientific Officer

Analysts

David H. Roman - Goldman Sachs Group Inc.

Jason M. Gerberry - Leerink Partners

Christopher T. Schott - JP Morgan

Steve Beuchaw - Morgan Stanley & Co.

Marc Goodman - UBS

Matthew Taylor - Barclays Capital

Aaron Gal - Sanford Bernstein

Gregory B. Gilbert - BofA Merrill Lynch

Louis Chen - Guggenheim

Operator

Welcome to Hospira's Fourth Quarter and Full Year 2013 Conference Call. (Operator Instructions).

I will now turn the call over to Karen King, Corporate 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 webcast discussing Hospira's financial results for the fourth quarter and full year 2013 as well as our projections for 2014.

Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President, Finance, and Chief Financial Officer; and Sumant Ramachandra, Senior Vice President and Chief Scientific Officer.

I will remind everyone that 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 section in Hospira's latest annual report on Form 10-K on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

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

As usual we have posted a set of complementary material that summarize the points of today's call. It is for your reference to use as an enhanced communication tool. You can find the presentation on our website at www.hospirainvestor.com.

Finally, we will be ending the call at the top of the hour this morning. (Operator Instructions).

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

F. Michael Ball

Thank you, Karen and good morning everyone. Welcome to our fourth quarter and full year 2013 conference call.

Reflecting back on 2013 we stayed true to our dual path of reinforcing the foundation and turbo charging growth. We made significant progress in our remediation efforts this past year and at the same time we continued investing towards realizing the many opportunities available to us to drive future growth and financial expansion.

We consistently met our earning objectives throughout 2013 and have many key accomplishments, some of which I would like to highlight.

Starting with biosimilars, we had a year of multiple milestones achievements both from the perspective of our on-market biosimilars as well as molecules in development. Relative to our on-market biosimilars 2013 saw us surpassing the milestone of $100 million in combined revenue for Retacrit and Nivestim in Europe and Australia.

In the third quarter of 2013 we have received approval from the European Commission for all indications of Inflectra, our biosimilar infliximab which was developed by our partner Celltrion. We have co-marketing commercialization rights with Celltrion in Europe, the U.S., Canada, Australia and New Zealand. Remicade had sales in Europe in 2012 of over $2 billion. So this is a large opportunity for us.

As a reminder this is the first monoclonal antibody to receive approval in a major market. We have begun launch activities in 10 early-launch countries. Out initial focus will be on rolling out Inflectra in the smaller early-launch countries through 2014, moving to direct sales in the larger markets countries in 2015 as the patents expire in these countries.

In the United States, we are making good progress with our biosimilar EPO clinical studies. We announced at our Investor Day in December that we met all the primary and secondary end points of our Phase 1 study for EPO. Phase III is near in completion and we expect to submit our application later this year or in early 2015.

On the development side, as we discussed in early 2013 we entered in to an arrangement with NovaQuest, which is allowing us to accelerate the development of some of our internal biosimilar pipeline products to market.

Next, we met the commitments that we laid out with our global expansion plan successfully filing over 200 cumulative new-to-country submissions over the course of 2012 and 2013. We expect to file additional submissions in 2014, which will land us at over 250 cumulative new-to-country submission by the end of this year. While we are starting to receive approvals for some of our submissions and are planning to launch a handful of molecules in various markets this year we expect the bulk of the benefit to occur over the course of the next several years.

Moving to Precedex. It was a strong year for our proprietary sedation agent not just in terms of performance but also developments. Earlier in 2013 we received approval for our new pre-mix versions of Precedex. Since launching the new presentation we have transitioned approximately 50% of the market to our pre-mix versions. This is evidence of the wide acceptance of the pre-mix by our customers who value it for the additional benefits the ready to use formulation provides to pharmacist and patient care.

In addition, mid-year we received positive news for Precedex in Japan, where we have received approval for an additional procedural use indication in what is the second largest market for the drug. And in the second half of 2013 we received approval from Health Canada for an improved label including an indication for long-term sedation.

Moving to Vizag, our new state-of-the-art generic injectable pharma manufacturing facility in India, we successfully completed the first product demonstration batches at the facility in mid-2013 and subsequently submitted our first regulatory filing at the close of the year. We are preparing for pre-approval inspection sometime in this year and remain on track to start first commercial production by the end of 2014.

On the device side we finalized and are executing on our device strategy, which includes streamlining and modernizing our fleet of pumps as well as making improvements to our device quality systems. In addition we were pleased to launch in Europe the newest device in our portfolio, Sapphire, which is manufactured by our partner QCOR. Were also pleased to receive U.S. FDA 510(k) clearance for the device which is enabling us to begin transitioning our U.S. GemStar customers to the new device.

In terms of financial performance we ended the year as projected with $4.1 billion in adjusted net sales and $2.09 in adjusted earnings per share which was at the higher end of our earnings guidance range.

We have also had some positive news since the beginning of the year. Last month we've received approval from Health Canada for Inflectra, our biosimilar infliximab for four indications. This is the first biosimilar monoclonal antibody to be approved in Canada. And last week on the emerging market front we announced an agreement to acquire the Brazilian-based oncology distributor, [Evalovis]. The acquisition will add 15 on-market oncology products to our portfolio in Brazil and accelerate our strategy of expanding our injectable business. This development marks progress on our emerging market strategy in which Brazil is a major component.

Moving to the quality improvement front we are sitting today in a very different position than we were a year ago. While we still have work to do the bulk of the SIP remediation is behind us and we have started executing on our device strategy. I am also very pleased to inform you that we were recently verbally advised by FDA that the status of our Austin facility and the pharmaceutical operations at Rocky Mount have been changed to VAI status. VAI stands for voluntary action indicated and will free us to pursue new product approvals and export certificates for the site.

The warning letter for Rocky Mount cannot be lifted until Rocky Mount has a successful re-inspection. But we believe the change to VAI status for Rocky Mount's pharma operations is an acknowledgment of the progress we have made in responding to the issues that led to the warning letter.

I also want to provide a brief update regarding a development related to Precedex. As you know we announced in December that we entered into an agreement with Sandoz where they could enter the market no later than December 26 of this year. Then last month the FDA opened a public docket soliciting comments on issues which all relate to the FDA's ability to approve a generic Precedex through what we believe is an unprecedented carve-out process that we are vigorously opposing.

All responses to the docket were due by the end of January. The FDA has not given a time table by when they will make a decision on this matter. If the FDA were to approve one or more applications through a carve-out process those generics could come to market without respecting Sandoz's 180 day exclusivity period. As a result there is still uncertainty surrounding the date of the launch of generic Precedex which impacts how we think about 2014 guidance which Tom will discuss shortly.

I will now move to a discussion of our fourth quarter and full year net sales results. Tom will then discuss the 2013 financials followed by Sumant who will provide an update to our pipeline. Tom will then cover 2014 guidance and I will wrap up with my closing remarks. As a reminder references to fourth quarter and full year net sales results will be on a constant currency basis which excludes the impact of foreign currency fluctuations.

References to full year 2013 net sales are adjusted to exclude device strategy related charges. Our press release provides full details on the impact of foreign of foreign currency on net sales by segment and product line as well as details as on the device strategy related charges.

Net sales were relatively flat compared to the fourth quarter of 2012 primarily due to the ship hold in place on most of our infusion devices. For the full year adjusted net sales were up 1% versus full year 2012 primarily due to strong SIP sales which more than offset the decline in medication management.

By product line Global Specialty Injectable net sales increased 6% for the quarter. For the full year global SIP net sales were up 8% relative to full year 2012. By segment in the Americas, Specialty Injectables net sales were up 7% for the fourth quarter. The two major drivers of improvement were increased supply and price.

The increase in supply was two-fold. First our customer service levels continued to improve through 2013 allowing us to recover market share during the quarter. In fact by year end our global customer service levels surpassed 90% driving our market share close to the highest levels we've experienced over the past few years. And second many of our competitors had supply constraints. In some circumstances we were able to step in and provide additional supply to the market. The increase was partially offset by expected declines in docetaxel. For the full year SIP net sales in the Americas were up 9%.

Turning now to the EMEA segment; net sales of Specialty Injectables were up 2% compared with the fourth quarter and full year 2012. Retacrit and Nivestim, two of our on-market biosimilars continued to be top performers in the region, both showing double-digit growth, both in the quarter and for full year partially offset by softness in the antibiotic meropenem.

In APAC, net sales of Specialty Injectables increased 7% in the quarter, driven primarily by continued strength in paclitaxel in China and Nivestim in Australia where we've been more than doubled the sales of the biosimilars. Docetaxel also had a strong quarter as we launched the product in Japan through our partner, Mochida. For the fiscal year APAC SIP increased 7%.

Turning now to Medication Management; global net sales decreased 17% during the fourth quarter and adjusted net sales decreased 14% for the full year. This was a result of most of our devices being on ship-hold. The one exception to the ship-hold is Sapphire, where customer reception has been positive as we launched the device in Europe last year and more recently in the U.S.

With that I'll now turn the call over to Tom for an overview of our 2013 financial results. Tom?

Thomas E. Werner

Thanks, Mike, for covered aftersales. Good morning everyone I am going to take you briefly through the rest of the financials and as Mike mentioned I'll turn it over to Sumant for a pipeline update, come back to me to go through guidance and then Mike will do a brief wrap up.

So starting with gross margin, as a percentage of net sales in the quarter was 36.7%. This was up from 34.9% in the fourth quarter last year, due primarily to improved pricing and supply recovery somewhat offset by some expected declines in docetaxel. For the full year adjusted gross margin finished at 37.0% which was the top end of our guidance range for the year.

R&D expense in the fourth quarter was $84 million or 7.7% of net sales -- adjusted net sales that is which included spending for our U.S. EPO trials. This compares to a total spend of $85 million or 7.7% of net sales last year. For the full year R&D expense was 7.3% of adjusted net sales versus 7.4% in 2012.

SG&A expense in the fourth quarter was a $187 million at 17.2% of net sales, up primarily as a result of spending for both legal and employee-related expenses. For the full year SG&A expense was 18.1% of adjusted net sales.

Operating income therefore was $129 million for the quarter compared to $122 million last year and for the full year adjusted operating margin was at the high end of our guidance range finishing at 11.6%. Finally adjusted diluted earnings per share for the fourth quarter were $0.51 compared to $0.55 last year. Full year adjusted diluted EPS was $2.09 compared to $2.01 last year.

Turning to cash flow, cash flow from operations for the full year was $317 million compared to $478 million generated in 2012. The decrease year-over-year is primarily due to higher tax payments, primarily related to settling prior year tax audits as well as increases in inventory related to supply recovery.

Capital spending for the year was $354 million, up from $290 million last year. The increase primarily is a result of spending on plant construction and modernization as well as some IT projects.

Returning to Vizag, through the end of this year we had capital expenditures life to-date of about $240 million related to the construction of facility. We’re still expecting the capital spending over the life of the project to approximate $375 million to $450 million. As Mike mentioned previously we expect to begin commercial production at Vizag by the end of the year and then ramp-up production over the course of the following several years.

Before I get to guidance Sumant's going to provide a brief update to our pipeline as we traditionally do at the beginning of the year.

Sumant Ramachandra

Thank you, Tom. Good morning everyone. If you recall we provided an update to our pipeline through the end of the third quarter 2013 at our Investor Day on December 5th of last year. Today I will update you on our small molecule biosimilar and device pipelines. As on December 31, 2013, our small molecule pipeline totaled approximately 73 compounds which represent more than 700 new to country launches, including more than 30 launches in the U.S. over a multiple year period.

The local brand market value of the small molecule pipeline at December 31st totaled approximately US$16 billion. In terms of therapeutic areas, about 70% of the total small molecule pipeline's local brand market value is in oncology drugs with anti-infective as the second largest therapeutic category at about 15% of the pipeline’s value.

Relative to launch timing, drugs representing about 30% of the overall local market value of the pipeline are expected to launch in various countries across our segments in 2014 and 2015. Of the expected launches for these two years roughly a quarter of the local brand market value is expected to launch in 2014 with the remainder in 2015.

While many of these drugs are smaller launches from a local brand market value perspective, they add incremental value to our very broad portfolio, already the largest of Specialty Injectable Pharmaceuticals worldwide.

Our biosimilar pipeline remains one of the largest pipelines in the industry with 11 distinct molecules and a local market value of $40 billion. These 11 molecules are mixed between our internal efforts and the molecules we have access to in our agreement with Celltrion. We continue to focus our biosimilar efforts in three therapeutic areas, dialysis and chronic kidney disease, oncology and supportive care, and immunology.

The opportunity of these therapeutic areas is very large and creates a sizeable market for us to target. We also have a robust device pipeline with plans to launch three new devices over the period of the next couple of years; Sapphire+, Plum 360 and our next generation life care PCA device which will all be optimized for IV clinical integration or IVCI and the advanced MedNet offerings.

We’re very excited about being able to offer these options to our customers. These launches not only support our legacy replacement programs but we believe should also enable us to capture competitive market share.

I will now turn the call back over to Tom who will now provide our 2014 financial guidance, Tom.

Thomas E. Werner

Thanks Sumant. As Mike mentioned earlier in his remarks as a result of the continuing uncertainty surrounding Precedex and the timing of generic entry some of our guidance ranges are broader than we’ve normally traditionally provide at this time.

We expect net sales in 2014 to be between negative 2% and positive 3% year-over-year on a constant currency basis with a flat to negative 1% impact from foreign currency. Adjusted gross margins in 2014 are projected to be in the 37% to 39% range compared to roughly 37% for both full year and the fourth quarter of this year ’13 that is.

In 2014 we expect R&D on an absolute dollar basis to be flat to slightly up from 2013. We expect SG&A in 2014 to be in the 17.5% to 18.5% range similar to 2013. As a result of these factors we are projecting 2014 adjusted operating income in the 12% to 14% range.

Our adjusted effective tax rate for 2014 is expected to increase from 2013 that is and be in a range of 22% to 25%. We have assumed no United States tax extenders in 2014. Equity income from affiliates will decline due to expected further erosion of docetaxel pricing.

Moving to adjusted earnings per share, we are projecting adjusted diluted earnings per share to be in the range of $2 to $2.25 with diluted outstanding shares to be around $168 million. The earnings guidance assumes that at the lower end of the range generic entry for Precedex occurs earlier in the year and at the higher end of the range, generic entry does not occur until the end of 2014.

Now in terms of quarterly adjusted earnings per share calendarization we expect earnings in the first quarter to be flat to slightly down from the first quarter of 2013, assuming Precedex does not face generic competition in the first quarter of 2014, this year. But if you recall in the first quarter last year we had a significant tax benefit. We recognized that was related to the retroactive reinstatement of the United States Federal R&D tax credit, these extender bills and other corporate provisions for both 2013 and 2012. So when comparing things without this benefit in the first quarter of ’13 our earnings per share would actually be slightly up comparing to the first quarter of last year.

Cash flow from operations projection for 2014 is in the range of $100 million to $200 million. We’re entering the year with almost $800 million in cash at the end of last year. Capital spending is projected to range between $375 million and $425 million, again primarily related to additional modernization efforts at our plants, some IT improvements as well as the timing of spend at our new facility in Vizag, India. Depreciation and amortization is expected to be between $225 million and $275 million.

Just to emphasize some key assumptions in the guidance we already discussed the various scenarios around Precedex and their impact. Secondly, on the supply front our assumption is that our FDA inspections progress well throughout the year and that we continue to improve global customer service levels.

From a pricing standpoint our assumptions are that we continue to receive benefits from price in both our SIP and solutions products, this reflecting more accurately the investments we have made and the higher cost of quality we are experiencing across our global pharma network.

Nextly related to Orchid we are assuming that the acquisition of Orchid’s API facility closes by midyear 2014 and lastly on the device front we are assuming that we are successful on our device strategy execution and are able to maintain the majority of our legacy pump customers.

With that I will turn the call back to Mike for some final wrap up.

F. Michael Ball

Thanks, Tom. In summary, 2013 was a year of significant accomplishments and progress. We made great strides with our pharma remediation efforts putting the bulk of the SIP remediation behind us. And we have a solid action plan in place for devices which we are now in the process of executing.

As I highlighted for you at the beginning of the call we were not focused solely on remediation during the year. We also made considerable progress advancing our growth initiatives in multiple areas. We aligned our pricing better to reflect the value of our product -- that our products offer as well as the increased investments made in our facilities and supply chain, investments that also reflect the higher cost of quality across the industry. I am very pleased that in part due to these investments we have improved supply of many of our products to our customers and in turn have increased our customer service levels.

We advanced our global expansion efforts by achieving our goal of over 200 cumulative submissions since the program began. We also expanded our portfolio in emerging markets such as China and more recently Brazil. We launched products from our SIP pipeline across the globe and we made significant progress with our online market biosimilars particularly with the launch of inflector in Europe.

At the same time we've been focusing our efforts on capacity expansion in India, primarily with the build out of Vizag and also on advancing vertical integration of API to select products with high -- both off which will reduce our overall manufacturing cost.

All of these things highlight the sea of opportunities as I call it that we have available to us. And while we may face generic competition for Precedex I want to remind you that this is not a strategic driver for the company and will not drive our long-term growth trajectory.

As we close out 2013 and begin 2014 we believe we are well positioned with both our remediation efforts and our growth initiatives. We have significant opportunities and we are working to realize them towards our goal of delivering sustainable growth and shareholder value as the world's leading provider of injectable drugs and infusion technologies.

And with that operator we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc.

Thank you. Good morning and I obviously give it the one question. I was hoping if you could just expand a little bit more on the pricing environment in generic injectable. I believe the FDA a division of drugs shortages had a report out either late last week or early this week where they recorded the number of drugs on shortage that’s gone from 251 in 2011 down to 38 as of between Q1 and Q3 of 2013.

So may be if you could just help us understand how much of the pricing over the past year or so has come from the existence of drugs shortages versus some of the elements that you laid out such as the higher cost of business and higher quality that you look for which you are looking to gain value?

F. Michael Ball

Okay. David so it's Mike and let me just take that and I will ask Tom to add in. Let's just step back and look at the whole environment here that we're operating in. If you look the entire industry it's pretty much having to make quality investments here which of course as we've found it is driving up cost particularly in the short-term.

And even those folks who are not manufacturing in the U.S. regulatory scrutiny is extending over to places like India and China. So I believe people will continue to have to make quality investments to come up to the standards of today. And one of the things those reports point out is that coupled with the new quality standards and the poor pricing typically found in this environment this has led to constrained manufacturing capacity in the industry.

From our standpoint what we've been trying to match up is ensuring that there is fair pricing for fair value. Net-net at our core we are a value driver and we take price out of the market through a number of actions such as paragraphs fours et cetera. I think if you look over the past couple of years because of our action on paragraph fours we have saved healthcare something like $2 billion, some enormous number.

However, on a number of products across our lines we've been looking to ensure that either for reasons of investments in quality to ensure that pricing is fair but also as it relates to the supply issues our customers are demanding that they get product and the feedback from them is that they will pay for more surety of supply.

So in response to that then we've been making substantial investments in strengthening our supply chain, things like dual sourcing, increasing our inventory levels, redundant capacity all things that cost money but our sense is that there is not only a lot of capacity coming on to the market other than what we talked about with respect to Vizag that the supply chain does need to be strengthened because essentially the customers have put up with years of drug shortage and I think their patience is at an end.

So I think we've made the right steps there are costs associated with it. So I think it’s not just products and drug shortage, David but more broadly across the industry where we have looked at where prices need to increase. However, with the overall objective of ensuring that this company ultimately drives value for our customers.

David H. Roman - Goldman Sachs Group Inc.

That’s helpful. Thank you.

Operator

And our next question comes from the line of Jason Gerberry with Leerink Partners.

Jason M. Gerberry - Leerink Partners

Hi, good morning. Thanks for taking the question. Just quickly on OpEx outlook for 2014, you historically gave guidance on those line items. I understand that SG&A expense probably can flex up and down depending upon Precedex scenario but just curious you know on R&D should we kind of expect that mid to high single digit year-on-year increase and if you can comment on whether the plan includes Phase III development of the two GCSF products as well as support of post market studies and gastro indications for inflectra. Thanks.

Thomas E. Werner

I will take -- this is Tom. I will obviously take the first part of the question and I will then turn over to Sumant for the second part. Well what we said in the prepared comments was that R&D dollar wise is going to be pretty flat year-over-year. So depending on the revenue range you could see some fluctuations as a percentage in net sales but the dollars should be flat.

Relative to the clinical activity and some of the post market activities I will turn it over to Sumant.

Sumant Ramachandra

Thanks, so couple of things. One is that as you know that our pipeline funding is all internal investment which is relatively flat, but we signed a deal with NovaQuest which gave us the option to actually draw down some money from this external source that is primarily to accelerate our biosimilars pipeline.

That biosimilars pipeline is inclusive of the two GCSF products you did mention and but it’s inclusive of that. In addition to that we are committed to obviously provide the right data in the market for inflectra and that means that if needed we will at the right time do the type of inflammatory bowel disease study to provide that data into the market. And I will say that we are very happy at the extrapolation we got in Europe and our data is very strong with inflectra and I think we are committed to providing the clinicians the needed data.

Jason M. Gerberry - Leerink Partners

Okay, great. Thanks.

Operator

And your next question comes from the line of Chris Schott with JP Morgan.

Christopher T. Schott - JP Morgan

Great, thanks very much and first congrats on that VAI status. It sounds like a nice move forward for those facilities. My question was on cash flow obviously it seems like cash flow is depressed this year. Can you maybe first talk through the bridge between your expected adjusted EPS net income and your cash flow guidance? It’s a multi-part question. Second part of that question was when we think out to 2015 is that a more normalized year for cash flow and CapEx or do we have to wait till 2016? And then when I think about cash flow does this impair cash flow really change your business development targets or priorities or do you have the capacity you need to pursue the transaction in near term. Thanks very much.

Thomas E. Werner

Hi, Chris, it’s Tom. So the way I kind of look at the cash flow is as follows and I hope that I will touch on all your points. So we ended the year at just under $800 million in cash, $798 million and the guidance for the year was 2 to 2.50, we finished at 3.17 so roughly cash flow from operations we were $100 million better than the midpoint of where we thought we were going to be. A lot of that is timing. There were some things that we thought that we could affect this year that we had initially planned to affect next year.

So I kind of look at next year’s cash flow first of all it's not normal. We are not going to be spending capital like that forever and ever. The other thing to remember is that we are continuing to build inventory to get supply back to where we would like to have it and I think you heard or you will hear in some of our other comments that while the drug shortage seems have got shorter there are more and more competitors experiencing issues.

We have got a very tight supply on IV solutions right now which we may talk about later but we want to build our inventories back and get them to the level that we’ll be able to step in, should anyone else not be able to. So that’s part of the increase year-over-year in inventories.

The rest of it’s really related to the timing. I think the other piece is that as we had said at the outset when we booked the cost for device strategy that those would be sort of accounting heavy as we book them, but cash light and now as we’re working through the real heavy lifting of the remediation those accruals are going to work their way down in the balance sheet as the cash to effect the remediation and strategy really takes place.

So I’d look at ’15 as not a normal year from that standpoint but I’d also look at it in combination with the favorability we had in the fourth quarter this year.

Christopher T. Schott - JP Morgan

And can you just on the business development side, can you just talk about how that this kind of near term cash flow dynamic how that’s does that affect your business development priorities or just how do we think about that piece of it? Thanks.

Thomas E. Werner

I say it’s always a concern but we continue to look at things and be opportunistic as long as they’re kind of close to the core and support our strategy. If we had to do anything we’d have to sort through whether it was the right time and what it would take to finance something but I don’t think it really closes our eyes to opportunities right out of the gate.

Christopher T. Schott - JP Morgan

Thanks very much.

Operator

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

Steve Beuchaw - Morgan Stanley & Co.

Hi good morning this is Steve Beuchaw here for David. Thank you for taking the questions. I wonder if you could spend just a minute on MMS. Now that we’re into a year where the comps are quite a bit easier are we getting close to a point where the revenue there stabilizes and we get back to growth, and I wonder if you could comment a bit with some expansion on your comments in the prepared remarks around your customer base and installed base is 80% or 90% a good objective in terms of the retention of the customer and installed base? Thanks.

Thomas E. Werner

Yeah I’ll take first of that and then Mike or Sumant or KAREN can help me out with the second part. But yeah, this year is I'd say it’s a bit of a transition year. We’re going to be actively replacing and upgrading pumps. There will be some revenue we recognize depending on what we’re able to place in terms of new pumps and then the value that we’re going to be giving back to customers for pumps that are going to be switched out.

So we’ll get back to growth at some point, but this year again it’s a remediation year, it’s a bit of a transition year. In terms of what we hope to hold on to I don't think we’ve put a number on that Mike or Sumant. We think if we can execute this according to plan that we should hold on to the lion's share of the installed base and that’s sort of the assumption that we’re working under.

F. Michael Ball

I really think that what we’re looking to do this year is really get the platform stabilized so essentially we’re going out and doing remediation, have the FDA come back in, and have a look at our quality systems, have the FDA come back look at Costa Rica again with an objective then of getting ourselves set up to get out from underneath this ship-hold at some point, whether that’s this year or next year remains to be seen.

We have the new Sapphire then, that we’ve got so we’re moving forward with that from a sales standpoint. So I think overall if you look at the pump business it's again we've got the Sapphire to sell, we’re remediating the rest of the pump line and then we’re also making some key submissions with our Plum360 with our Sapphire+, so I really think as we get again stabilized this year we really enter 2015 in a very different place, in a what I believe to be a business that has real opportunity for growth, both on top line as well as margin expansion.

Steve Beuchaw - Morgan Stanley & Co.

Really helpful thanks everyone.

F. Michael Ball

You’re welcome.

Operator

And your next question comes from the line of Marc Goodman with UBS.

Marc Goodman - UBS

Yes just back to the previous question on the devices, and you’re saying you’re going to maintain the majority of the legacy customers. I’m wondering is that a goal or have you had enough real negotiations in discussions with the customers to feel comfortable that this is actually going to happen?

And then I guess the real question secondarily is in SIP Americas can you talk about how much of the growth is coming from supply problems of the customer in the fourth quarter and how much do you expect that's going to help you in 2014, is there anyway to quantify like you say one percentage point of growth or two something like that, can you help us with that? Thanks.

F. Michael Ball

So let me take the MMS one first. So yes it is a goal absolutely to hold on the lion's share of the business. I think that the initial feedback and again this is early days that we've had out there, that seems to be an obtainable goal. So the feedback has been very strong.

If you look at the strategies for example basically what we are doing is going out with the Sapphire and offering it as a replacement for the GemStar. You have seen the Sapphire it's a very nice looking pump, the feedback we've had from our European colleagues is very positive. I was actually just at the sales force meeting in Europe. So that thing looks like a real customer pleaser in my opinion. So again our view is that should work well.

As it pertains to the legacy pumps, again when you are working with a particular operating system the pump seems to be an excellent go to pump. So the sense that we've had is that yes we should be able to retain these. But again it's all in the execution and we will see moving forward. So I can't sit here and give you absolute assurances but what I can tell you is the goal it seems to be backed up by the initial feedback as we are moving through this. Tom did you want to talk about SIP?

Thomas E. Werner

Yeah. Just in terms of the sales growth, Mark, if you look year-over-year or sequentially it's probably under 1% of the growth that we can have. It's very tough to pin point what's supply and what's not but as near as we can see it certainly was a positive. So was pricing there is a lot of other moving pieces in there year-over-year, docetaxel kind of going down, pricing up and supply but it's probably one percentage.

And as we said in some of the earlier questions and prepared comments that we expect service levels to continue to increase throughout the year. And we will have to see how the overall industry supply situation pans out.

F. Michael Ball

And let me just add to that too Tom. Mark from my standpoint when we look at where the market shares have bounced back to they have interestingly bounced back to where we were back in something like late 2010, early 2011. So a good share recovery. So I am not sure if we -- if you would characterize it as an unfair share recovery because of other peoples issues, I tend to agree with Tom's analysis of the situation.

Operator

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

Matthew Taylor - Barclays Capital

Hi, good morning and thanks for taking the question. I just wanted to ask one on Precedex given your comments and clearly this is an unprecedented situation as you mentioned. I want to know in your guidance if you have any feedback or discussions with the FDA or if you considering any of the comments in helping you to understand when you might see a decision and ultimately might see generic competition in Precedex this year?

F. Michael Ball

Well. We have put in our submission into this docket process. As I mentioned in my prepared remarks the docket process closed at the end of January. And then really we've had no communication subsequent to that. So unfortunately there is just no way to guess when they may come out with a ruling. I will say that as I mentioned this is an unprecedented situation in our view and I hope that it is very well considered before anything is ruled on.

But unfortunately we just can't predict what the outcome will be, never mind about when it will be put forward. So at this point this is why we are going with such a broad guidance range which I am sure is frustrating for everybody. But at this point given this is sort of a wild card out there, we really don't have much choice.

But again at the end of the day from my standpoint as I said this is certainly been a financial driver for us and at some point I believe there will be a generic. I believe the appropriate timing will be at the end of 2014 and as I said we're vigorously pushing that particular position forward.

Matthew Taylor - Barclays Capital

Thanks a lot.

Operator

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

Aaron Gal - Sanford Bernstein

Good morning and thank you for taking my question. Just very quickly on biosimilars, I guess it's a two part question the first one is, are you guys going to have breaking out the revenue there for us just so we can track down this very important driver?

And second just looking out at 2015 and 2016 if I think about your operating margin around the 12% right now. If you net out Precedex loss let's call out to the assumption the product is going to be gone, are we looking at operating profit improvement in 2015 and even going earlier in 2014 should we see quarter-by-quarter improvement in the operating margin of the company?

Thomas E. Werner

Okay. So relatively to - it's Tom, the second part of your question well, let me do the first part because that's easy. What we said on Investor Day was we eclipsed the $100 million mark for biosimilar and right now we have no plans to further break that out. We're pleased with the growth but we don't have any plans to further break that out.

In terms of the operating margin I would go back to Investor Day and refer to some of the charts we had there in terms of the progression this year, or next year is going to be the Precedex transition year. And in terms of 2014 we had -- with our range of guidance $2 to $2.25 and we had said that the first quarter would be slightly down to last year which I think was $0.51 or $0.52 last year.

So you can kind of do the math and see that there will be some improvement, sales should be growing sequentially assuming that Precedex is an end of the year event rather than earlier in the year event. And from an operating margin standpoint certainly from a gross margin standpoint biosimilars are an uplift and from an operating margin standpoint for on market products it's a positive but there continues to be heavy R&D spending. So hopefully that touched on various points of your question.

Aaron Gal - Sanford Bernstein

Okay. So 2015 assuming Precedex is gone should we see an improvement in the operating margin over 2014 or is it essentially going to be flattish?

Thomas E. Werner

Let me if I got anything here Ronny and I'll make the comment before we close the call if I can get anything here.

Aaron Gal - Sanford Bernstein

Great, thank you.

Karen King

Let's go to the next question please.

Operator

And your next question is from the line of Gregory Gilbert with Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch

Thanks, good morning. Mike sitting at the start of year to get a gaiter update from you. So my question within that is so you're confident you find them all at this point and when do you expect key inspections, I know you can't predict but when do you expect key inspections and are the tentative approval for Angiomax telling in anyway as it relates to your regulatory status in any of the facilities? Thanks a lot.

F. Michael Ball

All right so I'll take the first one and then I'll throw the second one over to Sumant. So I never say never in terms of the gaiters but I think we've got the swamp drained. There might be one or two hiding deep in the mud but I think we're pretty much dug most of the stuff out Greg.

The change in status to VAI really is a special moment for us, really the first public acknowledgment that we've made that type of progress that I've been talking about that we've kept our commitments and that the FDA is in favor of our plans moving forward.

So I feel very good right now about the pharmaceutical landscape now. Just as you're pointed out we still have inspections to go. So we're still under a warning letter and we'll still need to have a satisfactory inspection. Now when that inspection occurs I suspect it will be sometime this year their last inspection I believe was February or March of last year. So call it 12 to 18 months from that point in time so may be mid-year some time might not be a bad guess on that.

So I think once we get through that inspection then from a pharmaceutical side in the United States at least we should be in great shape. As it pertains to IKKT, which is our India plant which is currently under a warning letter we’ve provided, I think very strong responses, we’ve got the vast majority of issues that they had brought up resolved, at least taken care of it in our mind. We’ll see if they agree. So I think we’re making good progress down that line.

As you turned then to our MMS business, I can tell you there has been a sea change in our relationship with the device side of the agency. The dialog now is much different than it was a year ago. I feel like they believe that we’ve got a good plan in progress and really it comes down to what I talk to this organization about all the time, which is execution. So we need to execute on that MMS strategy. So essentially I feel like we found the gaiters and we’ve developed action plans to take care of them and more than that plans that the agency seems to be aligned with.

So I feel more in our hands now Greg to get the thing executed. So that would be my view and I’m going to turn over the question to Sumant.

Sumant Ramachandra

Okay and Angiomax as the brand name is known in the market, as you know we got roughly two approvals and one of them is on a differentiated format. We’ll go in to detail on what that is. And one of them is in the standard format. The point is that we’ve been getting approvals from the FDA regardless of our status in the facilities. We’ve actually been getting both tentative approvals and final approvals on a variety of products over the last couple of years. And we have multiple facilities that we make these products from.

So we’re confident, actually very happy that we got this VAI status in Rocky Mount as well as in Austin. We feel there are potential other products in the future that we can place in those particular facilities and then we’ll plan our pipeline accordingly as part of this process.

I do want to mention one thing from Ronny's question I think Tom answered it from a breakout on biosimilars but Mike and I have been actually quite transparent in breaking out from a qualitative perspective, we’ve been talking about the molecules in our pipeline, the status of those molecules, and generally where we’ve been launching in the regulatory environment. So from a qualitative perspective we will be breaking out biosimilars and talking about it in terms of what we’re doing.

Karen King

Operator I think we may have time -- I think we have got time for one more question here.

Operator

Okay. And your next question is from the line of Louis Chen with Guggenheim.

Louis Chen - Guggenheim

Thanks for taking my question, and squeezing me in. So my question is then on your first margin, we’ve gotten a lot of push back from people on how are you able to get to that sort of 45% gross margin overtime in light of the fact that it’s going to be more expensive to do business in generic injectable and also with Precedex going generic sometime this year. So I was hoping you could help walk us through that. Thank you.

F. Michael Ball

Yes thanks for the big question. I think as we said at investor day, most of the remediation is behind us. The sort of permanent impact to the cost structure we don’t see that getting any worse margins are projected to increase this year over last year. And the key drivers are we’re going to have at some point, I think we said half of our production will be coming from outside of the U.S. at much lower conversion cost, pricing continues to be a positive lever for us.

We get vertically integrated in API, our factories returned to talking about things like productivity and efficiency, continuing to work at better first test yields which will also free up capacity, should we need it and product mix will help us, biosimilars come in I think that sort of covers the waterfront there. But we feel confident that those drivers can get us where we need to be and I think you can see with the guidance we’ve provided today we’re starting to come back.

Karen King

Alright, that concludes our call for today. We thank you all for being on this morning with us and have a great day.

F. Michael Ball

Thank you.

Thomas E. Werner

Thank you.

Operator

Thank you. This concludes Hospira’s fourth quarter and full year conference call. You may now disconnect.

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