Hospira Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Hospira, Inc. (HSP)

Hospira (NYSE:HSP)

Q1 2014 Earnings Call

April 30, 2014 9:00 am ET

Executives

Karen King

F. Michael Ball - Chief Executive Officer, Director and Member of Science, Technology & Quality Committee

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

Analysts

David R. Lewis - Morgan Stanley, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Jessica M. Fye - JP Morgan Chase & Co, Research Division

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

Shibani Malhotra - Sterne Agee & Leach Inc., Research Division

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

Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Operator

Welcome to Hospira's First Quarter 2014 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 first quarter of 2014. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; and Tom Werner, Senior Vice President, Finance, and Chief Financial Officer. Sumant Ramachandra, Senior Vice President and Chief Scientific Officer, who is traditionally on the call, cannot join us today but will be with us again next quarter. 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 sections in Hospira's latest annual report on Form 10-K and 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 Presentation page in the Investor Relations section of our website. As usual, we've posted a set of complementary materials that summarize the points of today's call. It is for your reference to use as an enhanced communication tool. And you can find the presentation on our website at www.hospirainvestor.com. Finally, we'll 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

Thanks, Karen, and good morning, everyone. Welcome to our first quarter 2014 conference call. I will begin today's call by providing highlights on some of our key initiatives and a brief update on our quality improvement efforts, followed by a discussion of our stronger-than-expected first quarter net sales results. Tom will then walk you through the detailed financials, and I will wrap up with some closing comments before moving to Q&A.

The first quarter was one of great progress on many key initiatives. We continue to advance our biosimilars, both those on market and in development. Our newest biosimilar, Inflectra, is gaining traction in our early-launch markets. We are currently offering Inflectra in 11 countries across Eastern and Central Europe. As part of our launch efforts, we're educating physicians and key influencers about the safety and efficacy of our product. These efforts will lay the groundwork for the launch of Inflectra in the larger Western European market starting in 2015.

In addition, during the quarter, Health Canada approved Inflectra, the first biosimilar monoclonal antibody to be approved in Canada.

On the biosimilar development side, we continue to make good progress with our U.S. EPO clinical studies. This month, we completed 2 of the studies that will be part of our EPO submission to the FDA, which we expect to submit later this year or in early 2015.

Moving to global expansion, we continue to file new submissions and are tracking towards achieving our cumulative target of 250 new-to-country submissions since the program's inception by the year end.

We closed our acquisition of Evolabis, a small Brazilian-based oncology distributor, which augments our SIP portfolio in Brazil and supports our emerging market strategy. We started seeing initial sales in the quarter from these oncology products.

On the device side of the house. We were excited to welcome David Endicott as our President in Medical Devices in the quarter. David is a seasoned industry veteran with a tremendous track record in delivering results. With David's appointment, we have a dedicated leader driving both our device strategy and global device growth initiatives.

And regarding our device strategy, we have made significant progress in the quarter. We have started transitioning both our Plum and Symbiq legacy customers to our remediated Plum A+ pump and our GemStar customers to Sapphire in the United States. Customer reception to our streamlined and modernized pump platforms remains positive. In addition, our next-generation Plum device and our next-generation Sapphire device with our partner Q Core are on track for 510(k) submissions this year.

Moving to the operations quality front. We had numerous interactions with the FDA and other global agencies since our last earnings call. The 2 I want to call to your attention are: The FDA concluded a pre-approval inspection at our Vizag, India site in March, which resulted in a 483 with 10 observations. We have responded to the 483 and are working with the FDA to address these issues. We expect to receive a decision on the approval of the facility in the near future.

In April, the FDA issued an untitled letter for the IKKT facility in India. If you recall, the facility received a warning letter in May of 2013 and was subsequently inspected in December of the same year. The untitled letter was based on the December inspection and our corresponding response. We will be responding to the untitled letter in due course, but do not expect it to have significant impact to the financial or operational performance of the plant.

Before I move to sales results, I want to provide a quick update on Precedex. During our last earnings call, we briefed you on the developments with Precedex and the FDA's public docket. If you recall, the agency solicited comments on issues which related to the FDA's ability to approve generic versions of Precedex through what we believe is an unprecedented carve-out process, which we are vigorously opposing. All responses to the public docket were submitted by the end of January. The agency has not provided a timetable for their decision on this matter and we haven't received any additional information since that time. However, as we said previously, the potential for premature introduction of generics to Precedex is why we have provided a broad earnings guidance range.

Turning now to our net sales results for the quarter. All references to net sales results are on a constant currency basis, which excludes the impact of foreign currency fluctuations. And as a reminder, first quarter 2013 net sales were adjusted to account for customer accommodations related to our device strategies. Details around that adjustment are in our press release, as is information on the impact of foreign currency on net sales by segment and product line.

Net sales were up 8% compared to the first quarter of 2013. Strong pricing and volume gains in specialty injectable products were offset by the expected decrease in Medication Management sales. By product line, Global Specialty Injectables or SIP net sales, increased 11% for the quarter. In the Americas, Specialty Injectable sales were up 13% for the first quarter. The increase related to several factors that, coupled together, resulted in better-than-expected performance. We saw a much stronger flu season at the beginning of this year versus last quarter and first quarter of 2013. This seasonal increase in demand for many of our antibiotics helped to drive the strong results. We also made incremental progress at Rocky Mount and other facilities in bringing additional supply to the market, and were able to step in and help customers dealing with certain competitor supply issues.

Price was another large contributor to the year-over-year upside in the quarter, and we continue to see year-over-year volume increases in Precedex, driven from both bio and pre-mix sales. The gains from these positive factors were partially offset by expected price erosion on docetaxel and oxaliplatin.

Turning now to the EMEA segment. Net sales of Specialty Injectables were relatively flat with the first quarter of 2013. Strength in our on-market biosimilars were offset by continued price erosion in core oncology and anti-infective products. Retacrit and Nivestim continue to be the top performers in the region. As I mentioned, Inflectra, our newest biosimilar, also started to gain momentum in the smaller markets in Eastern and Central Europe.

In APAC, net sales of Specialty Injectables increased 11% in the quarter, driven in large part by continued positive performance of Precedex in Japan and Korea and strong sales of paclitaxel in China.

Turning now to Medication Management. Adjusted global net sales decreased 8% during the first quarter, primarily due to lower pump sales, reflecting the impact of the ship-hold put in place midway through the first quarter of 2013.

Net sales in our Other Pharma product line were up 19% compared to the first quarter of 2013, primarily as a result of increased solution sales. The strong solution sales were a result of increased demand due to the heightened flu season and competitor supply issues, as well as our initiative to align price with value. As a result, we have depleted much of our safety stock inventory in the first quarter and don't expect to see the same high level of unit volume for the remainder of the year. With that, I'll now turn the call over to Tom for an overview of our first quarter financial results and full year projections. Tom?

Thomas E. Werner

Thanks, Mike. Good morning, everyone. As Mike mentioned, we started out the year with a strong first quarter. Adjusted net sales on a constant currency basis were up 8%. Adjusted gross margin as a percent of adjusted net sales in the quarter was 40%, up from 36.4% in the first quarter of '13, this, due to favorable product mix, as well as pricing during the quarter. R&D expense increased 13% in the first quarter to $83 million, primarily related to the timing of spending on EPO U.S. programs. R&D as a percentage of net sales was 7.9% compared to 7.5% for the first quarter last year.

SG&A expense for the first quarter was $186 million, which was relatively flat with the first quarter of last year. Adjusted operating income was $152 million compared to $101 million in the first quarter last year. Our adjusted operating margin was 14.4% compared to 10.2% in last year's first quarter. The adjusted tax rate in the quarter was 24.5% versus only 1% in the first quarter of last year. As a reminder, the lower adjusted rate in 2013 was primarily a result of a tax benefit we recognized last year in the first quarter related to the reinstatement of the United States federal R&D tax credit and other corporate provisions for the 2012 and 2013 tax years.

Finally, adjusted diluted earnings per share for the first quarter were $0.60. This compares to $0.52 the same period last year.

Turning to cash flow. Cash flow from operations for the 3 months ended March 31 was $18 million compared to $21 million in the same period last year.

Capital spending for the first 3 months of this year was $95 million, up from $69 million the same period last year. The increase reflects additional planned spending related to plant modernization efforts and the development of our new Vizag facility. Our cash balance March 31 was $677 million compared to $798 million at the end of last year.

Moving to guidance. While we had a strong quarter due to the numerous positive developments we discussed and are clearly seeing underlying strength in the business, we believe it's prudent at this point to maintain our annual guidance due to continued uncertainty related to the FDA's decision on the Precedex docket. We believe our second half results will be lighter than the first half of the year due in part to the fact that we don't expect certain positive factors that benefited performance in the first quarter to be as robust the rest of the year. This would include things such as the positive impact from the strong flu season that Mike mentioned, the recovery of certain off-market products by competitors, as well as increased demand due to their issues. Also as a reminder, we also have our typical plant maintenance shutdowns in the third and fourth quarters as well.

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

F. Michael Ball

Thanks, Tom. We were pleased to start the year out with a -- such a strong quarter. I believe that much of the benefit we're seeing reflects the fact that our investments are beginning to pay off. I truly believe our progress on multiple fronts is due to our disciplined focus on meeting the milestones and commitments we laid out for both our growth and quality improvement initiatives. This focus will continue to be critical as we navigate through the rest of the year. We are registering additional global expansion molecules across the globe, continuing our rollout of Inflectra, transitioning legacy pump customers to our newer streamlined platforms and preparing to submit our next-generation devices for 510(k) approval. We have a great deal ahead of us, but I'm confident we have what it takes, especially when I consider what we've accomplished the past few years.

And before turning to your questions, I want to take a moment to recognize an important milestone for all Hospira employees and stakeholders. Many of you know we launched Hospira as an independent company 10 years ago on May 3, building from our foundation as Abbott Laboratories' Hospital Products Division. This week, we are celebrating our 10-year anniversary, which is a big milestone for us. We are in a very different place than where we were a decade ago.

We started out at spin with a handful of products in development. Today, as the world's leading provider of generic injectable drugs, we have approximately 70 molecules in our pipeline representing more than 700 potential launches. With approximately 200 SIP products, our portfolio offering is one of the world's broadest. We are pioneers in the development of biosimilars, a drug class that didn't even exist 10 years ago. And we're the first company to implement groundbreaking IV clinical integration connecting our smart infusion pumps with Hospira MedNet safety software to pharmacy orders and electronic patient records.

And as we enter our next decade, our cost-effective and safer product will be needed more than ever as baby boomers strain developed countries' health care budgets and the developing world demands access to more affordable, high-quality care. We believe we are better positioned today than we have ever been to capitalize on the megatrends in health care with our broad portfolio of products, healthy pipeline and our reinforced foundation.

All of us at Hospira stand ready to build on our rich history. We remain committed to putting patients first, ensuring that Hospira's people, products and partnerships are advancing wellness for communities around the world. I'm confident that with our disciplined approach, we are creating a strong, sustainable platform for Hospira to build on and deliver long-term profitable growth.

With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Mike and Tom, I appreciate you talking about some dynamics in the quarter that may not be sustainable in the back half, but one of the dynamics that may be more sustainable is pricing. And you talked about last quarter that you expected pricing strength to moderate across the year. You didn't cite pricing as one of those things you expect to moderate. So can you talk to us about the pricing strength in the quarter and the visibility that pricing may be a little more sustainable throughout the year than you first thought?

Thomas E. Werner

David, it's Tom. I'll take that, and if Mike or Karen have anything to add, invite them, too. As we said, it was one of the primary drivers for the strong SIP performance. It was focused on -- across the broad product line, but heavily in certain drugs that we've taken some price increase on. The cost of quality across the industry has gone up and as we try to provide our customers with more sustainability of supply, the pricing we're putting through, we hope accurately reflects the true cost to manufacture.

We've been increasing price for a couple of years with the SIP contracts as they come up for renewal. We're almost at the point where these contracts are starting to lap. So our first quarter results reflect benefits from price increases we're able to secure on SIP early in the year. It's just too early to tell right now whether those price increases are going to stick. We're going to be going through another couple of GPO contract renewals here in the next several months. We also have seen some early uptick on pricing in solutions, but our view on it right now is 90 days into the year is just a little bit too soon to call whether that's going to sustain. I think we'd like to get through the 2 upcoming GPO renewals and then pause and reflect at that point.

David R. Lewis - Morgan Stanley, Research Division

Okay, and then maybe just a quick follow-up for Mike. You obviously mentioned the MMS leadership change. I just wanted to be sure that's -- what's a reasonable time frame for sort of a -- your new business leader to sort of come back to us with what's the strategy for the business from both a quality perspective, as well as just an operational perspective, so sort of a new strategic vision? Is that something we can expect sometime during the balance of '14 here?

F. Michael Ball

Yes, absolutely. I think we will be giving him some time on the ground, obviously. And so what I would expect to see in the next 6 months or so is our declaration of exactly our direction on the MMS business. Now I think we have laid it out reasonably clearly, however. From my standpoint, it's getting the device action plan completed. So that's getting the remediated pumps into the field, getting the legacy pumps out of the field, streamlining and modernizing the products and then getting our 510(k) submitted, as I mentioned in the prepared remarks, on the new-generation Plum, as well as the new-generation Sapphire. So as we go through the year, things are continuing to happen, but my expectation to you all is either a confirmation of that direction or some additional strategic insights that, again, we'll share with you in the next 6 months.

Operator

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

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

I wanted to start on the biosimilar side of the business. Mike, I think in your prepared remarks, you referenced the potential filing of EPO in the U.S. towards the end of 2014 or early 2015. Can you maybe update us on your latest thoughts regarding pathway and ultimately, how you see that product coming to market, either what time frame or what form?

F. Michael Ball

Yes, absolutely. So with respect to the pathway, we will go down the 351(k) pathway. The FDA has not finalized the guidance, obviously, around the 351(k) pathway, but we, as I've mentioned before, are in constant communication with them and ensuring that we understand what their expectations are and fine-tuning our studies as we move forward here. What I said in the prepared remarks was that we had completed 2 core studies. This is a very important point for us. This will allow us then to continue to wrap up other studies and then look for the filing towards the end of the year beginning of next year. Typically, what happens when a product is submitted is there's a cycle time of probably at least 10 months. So if you take that time, you'll be looking at an approval timeline sometime later 2016. Given these are obviously new products with the FDA, could that cycle time be extended beyond that time frame? It's absolutely hard to say. So I'd say something in the order of 10 months to something past that, whether it's 18 or 20 months, that just remains to be seen. We're doing all we can in terms of ensuring that the package going in is what I'm describing to this company as what I want, is a first-cycle-approval type package, so ensuring that we understand clearly what is required here and ensuring that we get the job done right so that we can have a good shot at that first-cycle approval time.

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

That's helpful. And maybe just one quick follow-up for Tom. Tom, your adjusted net income grew very strongly this quarter, I think in the 20% range, but operating cash flow, flat to slightly down in the quarter. When can we start see those directional metrics converge?

Thomas E. Werner

Yes, I think as we gave the guidance at the start of the year, this is going to be a year that we worked down the remediation reserves and accruals that we put up, so you'll start to see a better link up, I think, more in 2015 than you will this year because the net income won't really tie out to what's going on with cash flow because of all the things that are working their way through the balance sheet. Actually, cash flow in the quarter was better than I thought it was going to be, partly buoyed by the improvement in net income, but we had a really good quarter for receivables collections and the timing on some of our other liabilities just was slower than I thought. So despite it being on -- kind of on par with last year, it was better than I thought. But the flipside of that, much the same is true with the net income and EPS guidance that some of that is going to reverse, most of it will reverse during the rest of the year. But I think we need to get those accruals behind us and then you'll see a better correlation between operating income, net income and cash -- operating cash flow.

Operator

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

Matthew Taylor - Barclays Capital, Research Division

So just going back to your comments before about pricing. I mean, could you give us some kind of a more specific bridge to some of the components that helped you improve gross margin this quarter and how sustainable you think that is? I mean, there's a lack of visibility on some of the key inputs, I realize, but can you help us bridge year-over-year?

Thomas E. Werner

Yes. As we look at the quarter, I'll first talk to just versus our expectations and then I'll give you a little bit of commentary to last year. But we had really good product mix this quarter. Pricing, as we mentioned, Precedex was strong. Competitor supply issues many times results in off-contract pricing, which is at better prices than typically you would see in contracts. Not clear whether that's going to continue. Those are a couple of things that we saw in the first quarter. Relative to last year, the big driver was price. Certainly, last year's margins were at 36.4%. Price was the majority of the increase. As I look at other factors here, the mix impact from biosimilars and Precedex helped us out. And then, as I mentioned, the off-contract pricing and then shortages just on some of our higher-priced, higher-margin products contributed to the rest. And again, as far as sustainability, as I mentioned before, we want to get through this next round of GPO renewals. Precedex, it's depending on whether -- when the loss of exclusivity would occur. As we said in February, with our guidance for this year, the high end of our guidance assumed it would occur towards the end of the year. If that happens, we would expect that inventory levels will start to be depleted at the wholesalers as we approach that time. So those are some of the factors that sort of came into play versus where we thought the quarter was going to come in and then how it performed to prior year.

Matthew Taylor - Barclays Capital, Research Division

And just to follow up, anything new on Rocky Mount with regards to inspections? You mentioned the incremental progress there.

F. Michael Ball

So with respect to Rocky Mount then, we have not had any new inspections there. Recall that we had our last inspection on a -- from a pharma standpoint back in February 2013. We did mention that we'd had a device inspection, again, a different type of inspection at Rocky Mount on our Empty PCA vial, and we picked up a 483 and a warning letter on that. So from our standpoint, the progress at Rocky Mount, specifically on the pharma side -- but also device, but the pharma side domain [ph] continues to move forward. Our sense is that the FDA normally comes in 12 to 18 months after its last inspection. So I would expect that the FDA will be back into Rocky Mount sometime in 2014.

Operator

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

David G. Buck - The Buckingham Research Group Incorporated

Just a couple of quick ones. First, on Precedex. Mike or Tom, could you talk a little bit about where you are in terms of the conversion at this point? And Tom, you had mentioned the inventory drawdown that you're expecting towards the second half as we approach generics. Can you talk a little bit about the -- again, where you are in terms of switch to share and what you expect to maintain from that?

Thomas E. Werner

Yes, a -- no, go ahead, David. I'm sorry.

David G. Buck - The Buckingham Research Group Incorporated

And then just the other follow-up is with the full year margin of 37% to 39%, can you just talk about how we'd get down to that level, what some of the factors are coming from 40% the first quarter?

Thomas E. Werner

Yes, I'll take the back half of that first and then talk about Precedex, too. So just to remind folks that the back half of the year, we've got our plant shutdowns. That always affects gross margin negatively. We've had that just every year since I've been here. That's one of the factors. And then, we're just cautious right now on calling whether some of these other factors are going to continue as strongly as they did in the first quarter. We'll take a look and see how the second quarter plays out and if we need to do any updating of guidance at that point, we would. Relative to Precedex, we're still running about 50/50. It's pretty much in balance. The vial and the premix are now at a price parity point. And we expect that, that 50% balance, despite what you might see in IMS, there's some aberrations and timing differences there, but we're running just about halves-y halves-y, and the pricing is now at parity. So it's a pretty equal situation between the 2 presentations.

Operator

Your next question comes from the line of Chris Schott with JPMorgan.

Jessica M. Fye - JP Morgan Chase & Co, Research Division

It's Jessica Fye, on for Chris. I was just wondering if you could talk about the types of issues the FDA cited in the Vizag 483. Can you just maybe characterize the degree of difficulty in resolving them or are these all resolved at this point?

F. Michael Ball

With respect to what's going on with Vizag then, so the FDA came in, gave us 10 observations associated with the inspection. Five of them, we had already previously self-identified ourselves. We feel that the issues that are being focused on are things such as training and supplier quality. So we feel that these items are things that we are equipped to deal with. We will be providing responses back into the agency and having a discussion with them as we move forward. But overall, we still are expecting, or at least our assumption is that we'll get approval for this plant sometime this year.

Operator

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

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

Just in terms of the 13% growth in U.S. -- or Americas SIP, how much was volume price and then how much of the growth was helped by the competitor supply issues you talked about?

Thomas E. Werner

Yes, the competitor supply issues, that's always hard to kind of put a finger on, and I don't want to get into the specifics on price. I would just say the majority of the increase came from price, but we did have, to a lesser extent, volume improvements relative to supply recovery and other people being off-market. But I'd prefer not to split it out at this point.

Operator

Your next question comes from the line of Shibani Malhotra with Sterne Agee.

Shibani Malhotra - Sterne Agee & Leach Inc., Research Division

Just, I guess following up on David Buck's question around Precedex. Currently, how should we think about -- what's the feedback you're getting from your customers in terms of how this market could play out, if there is a generic to this product? And -- like how much of the premix would you keep? And then second, as we're modeling the uncertainty, could you just help us understand how important a contributor Precedex is to the overall margin and to your overall [indiscernible] so that we can adjust accordingly in case?

F. Michael Ball

Okay. So I'll take the first part of that question, Shibani, and Tom will take the second half. So with respect to customer feedback, it has been very robust on the premix offering. So we've been very pleased with how that particular presentation is going. At the end of the day, as I've said many times before, though, this is not like the retail market where an extension like the premix is invulnerable to generic competition. So from our standpoint then, obviously, we're doing the right thing in getting as much business into the premix as we can at this point. But what happens when the product goes generic, there will be a value that pharmacists and hospitals ascribe to the premix. And so I believe it will have some sort of a premium over the vial product, but we don't really know what that premium will be. So I do believe that the premix will continue on as a very important presentation for the Precedex family. We will just have to see in terms of what price we have to price it at in order to recognize that, at some point, there's such a premium for the product that the business would switch over to the vials. So a difficult one to model out. We have looked at precedent models and what I can tell you is it does look pretty good in a presentation like that in terms of preserving volume. What we don't know is -- exactly is how much price we will preserve.

Thomas E. Werner

And then relative to the contribution from Precedex, last year, in the U.S., the drug was close to $300 million in sales. We've disclosed that before. It's got proprietary type margins, but we do pay a royalty off to people that hold the patents there. We have a dedicated sales force as well. We've said that the major swing factor in the $0.25 guidance range that we provided in February was Precedex, but Precedex does contribute more, at least the loss of exclusivity would impact us more than the $0.25. We've said that to offset some of that, we have some cost control measures that we would put in place to sort of help stem the tide there from Precedex. But that's about all that we've really disclosed in terms of its financial impact.

Shibani Malhotra - Sterne Agee & Leach Inc., Research Division

Mike, can I ask you a follow-up, and it's a broader industry question? Obviously, we're hearing a lot of news around M&A in the sector, and everyone's looking at consolidation. And I guess one of your previous companies is also involved in the situation right now. Can you just give us your thoughts on the broader consolidation in the industry? And do you see Hospira as taking part in that consolidation, or do you expect to remain independent for a while?

F. Michael Ball

So from the standpoint of the market, obviously, it's extremely active right now. I do expect that we will remain independent going forward. But of course, we will do what is in the best interest of the shareholders. We obviously are actively looking at the marketplace, making sure that we're aware of opportunities out there that could bring value to us and our shareholders. So we're taking an active interest is the way I would describe it in ensuring that we continue to have our pulse on what the market is doing. I think this company is very well positioned for the long term in terms of moving ahead on an organic basis, but obviously, an inorganic move, if it made a lot of sense to us, would be something we would obviously consider.

Operator

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

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

I got 3 questions. The first one, Tom, on Precedex. It looks like the proactive is probably running around 320 [ph] today. I know you've been asked that. But if you just even apply 50% operating margin to that, it's $1 contribution to EPS. I understand you can do something kind of like near term, but if we think about the swing factor of this, it looks a lot bigger than $0.25. Can you just give us an idea on a full year basis when you think about -- as we try to model 2015, how big is this movement there based on the outcome on Precedex? Second, on EPO, I think you mentioned 2016 as approval window. Is it the FDA approval which is the gating factor here, or is the back and forth on the legal side in terms of the dossier, a potential of being sued in the dossier, warning about -- 6 months warning and all that. What is -- in your mind, what is the gating factor there, is it the legal side or the FDA side? And last, I don't know if you've mentioned that, but can you comment please on the Remicade biosimilar in the U.S.? Your partner, Celltrion, is doing some interesting moves there. Can you give us a little bit of background? And obviously, if they're successful in knocking out the Johnson & Johnson IP, would you benefit from that?

Thomas E. Werner

Yes, I'll take the Precedex questions first, to the extent I can give you any additional color. It certainly is greater than the $0.25 range, as I mentioned to the previous question. But a look into '15, we have to model out various scenarios as to when the exclusivity would be lost. If it's lost towards the end of the year, we then have to better understand how many competitors are going to be in the market, which I think is the critical question whenever the exclusivity is lost, as well as understanding what the premix penetration ends up being and how much of that we hold onto due to the factors that Mike mentioned relative to safety and efficacy and just ease of delivery. So really, I don't want to bracket any numbers. We've got some cost control actions that I mentioned we would take as well, but it's certainly greater than the $0.25, but that's about all I'd hazard to comment on at this point. So sorry about that.

F. Michael Ball

And then Ronny, with respect to your EPO question, really, the gating item is the FDA, not the legal side. So as I said in my remarks and the answer to a previous question, we're really working with the FDA to understand the pathway here. We think we have a good understanding of what it's going to take to get this through the FDA and we're ensuring we're doing the types of studies and types of analyses that will do that. So that -- the FDA, in our opinion, is the gating item. And as I said, I'm hopeful, in terms of getting a -- what I really define to this company is a first-cycle approval-worthy submission into the agency, that's really what we're gunning for. Now we'll see what happens at the end of the day, but I feel good about our communication with them. With respect to Celltrion's activities on Remicade in the United States, I think I'd ask you to ask them, but I will tell you that we would benefit if J&J's patent on Remicade was knocked out by the Celltrion action. As you know, we're Celltrion's partner on infliximab. And to the extent that this clears the way for the product to be approved in the United States, that's obviously a big plus for us.

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

So they've predicted first half 2015 approval of -- FDA approval of this product. Do you guys concur?

F. Michael Ball

So as I said, Ronny, this is a very delicate thing that I think Celltrion is in a better position to answer than us.

Operator

Your next question comes from the line of Louise Chen of Guggenheim.

Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division

I just had a few -- so first question I had was on what is actually driving the pricing increase in generic injectables? Secondly, is any of the sequential improvement in gross margin sustainable over the longer term? Just wondering, given the progress you've made on manufacturing, on price increases, how much of that 40% going forward is actually sustainable? And then maybe if you could provide an update on the profitability of your EU business, that will be helpful as well.

Thomas E. Werner

So the first question was just what's contributing to the pricing. And then -- just so we remember who's answering what here. Then the margin sequentially and what's sustainable, I'll take that. And then, Mike, we can kind of tag team on EU. But the pricing, we've been cycling through the various 7 or 8 GPOs. And with the exception of certain anti-infectives and oncology drugs, as we've looked at the increased cost of manufacturing, we've developed a pricing strategy that more accurately reflects what we're -- it's costing to make these products. And it's not been a vanilla, "one size fits all" price increase across everything. We're also seeing some uptick in IV solutions prices. But it's really been across the broader portfolio. And then as I mentioned, when other competitors have issues and their customers come to us in a non-contracted basis or manner, the prices we see there are much better. In terms of the margin sustainability, it's pretty much the same story. It's hard to compare the fourth quarter margins to first quarter because we've got the plant preventive maintenance shutdowns in the fourth quarter and that negatively affects the margins. So it's not quite the best comparison. But I think I would kind of fall back on the comments we made earlier relative to the margin improvement over prior year. And as you look at what drove it, pricing and the issue there is are we successful in continuing to see the price increases hold and then getting through the next couple of GPO contract negotiations, and then we'll begin to see the price increases anniversary themselves so you won't see the impact you saw before. And I think, second, we had strong mix, much of it Precedex. Third, the competitor off-market issues, and that's back to the non-contract pricing. And then relative to EMEA, the profitability on a segment basis, as I looked at it, was fairly flat with where it had been in the previous quarter. When I look at -- yes, it's actually gotten a little bit better this quarter and I -- as you look at last year, I think the drivers there are biosimilars. We're growing 30% to 40% in units on the first 2 biosimilars that were on market, we've got Inflectra in launch. And this is what global expansion has all been about, although we haven't launched a lot of those yet as we're still awaiting approval, it's to get scale in Europe and really be able to leverage the infrastructure we have there. So year-on-year, we were better off. We were better off sequentially there. And I think a lot of it's just due to the strength in biosimilars.

F. Michael Ball

And I would agree...

Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division

I think maybe just a... Yes, go ahead.

F. Michael Ball

I said I would agree with Tom. I think just on going back to the price for a moment. Across the industry, people are making decisions in terms of quality investments. We've taken a substantial position in terms of making huge quality investments. And other folks have decided either they aren't or can't and are getting out of this marketplace. So I think what you're seeing is that the cost of doing business in this marketplace is increasing. Second of all, this country has suffered from chronic drug shortages, and these shortages cost the system a tremendous amount of money in patient morbidity, in the cost of drug switching, in pharmacy time, trying to hunt down drugs. So there's a lot of cost here. And what we're trying to do is strengthen the supply chain, which, of course, involves a lot of investment itself. So I think at the end of the day, I definitely have sympathy for customers who are under severe cost pressures. But I think at the end of the day, we will be, again, a value driver in this whole system as we deal with drug shortages. And as I also look at our other strategies around pyrophores [ph] and new products coming out, we definitely take a lot of money out of health care costs, some $2 billion over the last few years. And with biosimilars going forward, we'll continue to do that.

Operator

Your final question comes from the line of Sumant Kulkarni with Bank of America.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

This is a slightly bigger-picture one. How would you characterize your level of interest in building out a larger branded presence in the hospital channel? We've seen some of your competitors, like Mallinckrodt, make some moves there.

F. Michael Ball

I think that if the opportunity presented itself, we would opportunistically look at things like that, especially if it built on our Precedex call point. Right now, in our pipeline, we have a product called Dyloject, which is a proprietary product which would do just that. We're looking to get Dyloject approved for next year. So my hope then is that we bring, again, to places where we're at our Precedex call point, we can bring new products then into the marketplace. However, what we will not do is spend significant research and development dollars on proprietary products. We're after R&D dollars that go against high probability of success products, like generics, like biosimilars, like MMS-type products.

Karen King

So I think that is -- that concludes the call for the quarter. Thank you for joining us today. Operator, we're now ready to end the call.

Operator

Thank you. This concludes Hospira's First Quarter Conference Call. You may now disconnect.

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