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

Hospira (NYSE:HSP)

Q2 2014 Earnings Call

July 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

Sumant Ramachandra - Chief Scientific Officer and Senior Vice President

Analysts

Marc Harold Goodman - UBS Investment Bank, Research Division

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

Jason M. Gerberry - Leerink Swann LLC, Research Division

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

Gregory B. Gilbert - Deutsche Bank AG, Research Division

Matthew Taylor - Barclays Capital, Research Division

David R. Lewis - Morgan Stanley, Research Division

Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division

Michael Eric Faerm - Wells Fargo Securities, LLC, Research Division

David G. Buck - The Buckingham Research Group Incorporated

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

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

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

Operator

Welcome to Hospira's Second 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 second quarter of 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'll 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 Presentations 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's for your reference to use as an enhanced communication tool. You can find the presentation on our website at www.hospirainvestor.com.

We will be ending the call at the top of the hour this morning. [Operator Instructions]

And with that, I'll turn the call over to Mike.

F. Michael Ball

Thanks, Karen, and good morning, everyone. Welcome to our second quarter 2014 conference call. We had another strong quarter, driven mainly by continued strength in Specialty Injectable Pharmaceuticals. A couple of the key drivers that provided strength in the first quarter, price and supply recovery, continue to benefit performance in the second quarter, translating into better-than-expected sales and earnings.

As usual, I will begin today's call by providing highlights on some of our key initiatives and quality improvement efforts followed by a discussion of our second quarter net sales results. Tom will then walk you through the detailed financials and Sumant will provide a midyear update on our pipeline. We will then wrap up our prepared remarks with our revised 2014 guidance and closing comments before we move to Q&A.

We made good progress on many of our key initiatives, some of which I will discuss this morning.

Starting with pharmaceuticals. In early July, we were pleased to announce the completion of our acquisition of the penem and penicillin active pharmaceutical ingredient, or API, manufacturing and R&D facilities of Orchid Chemicals & Pharmaceuticals, which will help us advance our growth initiatives. With the additional API capability, we'll now be able to vertically integrate more of our anti-infective products, essentially controlling more of the production cycle.

You may recall, we mentioned at last year's Investor Day that API vertical integration is one of our strategies. And with the acquisition, we have increased the amount of API we produce internally from under 10% to approximately 30%.

Furthermore, by controlling the source of beta-lactam APIs, we'll be better able to support continuity of supply for key antibiotic products, enhance our cost competitiveness and profitability and pave the way for future API development.

Our global expansion program is going well. And we are tracking to exceed our cumulative target of 250 new-to-country submissions by the end of the year. While we have started to launch a few molecules in Canada and South America, the critical mass of launches will occur in the late 2015, 2016 time frame.

And on the biosimilar development side, we continue to advance our U.S. EPO clinical studies towards a planned U.S. FDA submission later this year or early 2015.

On the Device side of the house. We continue to execute on our Device Strategy and are gaining momentum in transitioning our legacy Plum customers to our remediated Plum A+ pump. We also are transitioning our GemStar ambulatory pump customers to our new Sapphire pumps, which continue to be well received.

Regarding our next-generation pumps. In May, our partner Q Core filed a 510(k) submission for Sapphire+, our next-generation Sapphire pump. While the current Sapphire pump is being used primarily in the ambulatory setting, the Sapphire+ pump, once approved, will give it the additional capability to operate as a general infusion pump.

In June, we filed a 510(k) for our Plum 360 pump, which is our next-generation Plum A+ general infusion device. We look forward to obtaining FDA clearance for both pumps and offering our customers 2 new state-of-the-art device options.

Moving to our quality and operations efforts. Early in the quarter, the FDA inspected our Lake Forest device design and control center. The inspection resulted in a 483 with 6 observations. We submitted our response with an action plan and commitments to address the observations.

Late in the quarter, the FDA inspected our Rocky Mount facility. Five inspectors spent 2 weeks at the plant, and I am very pleased to report that this much-anticipated inspection resulted in 0 observations. So you heard it, 0 observations. This is obviously a major milestone for us and reflects the tremendous work and significant investment we have made at the facility and throughout our quality system.

More importantly, this means that we are producing products at preshortage levels, helping to ensure ongoing continuity of supply for our customers. And while I've appreciated the need to spend the past couple of years discussing Rocky Mount and the gators, I am looking forward to focusing my conversation on other topics.

In July, we received correspondence from the FDA regarding our Vizag facility. If you recall last quarter, we shared that the Vizag facility had a preapproval inspection in March, which resulted in a 483 with 10 observations, and that we have responded to the FDA with an action plan to address those observations. A few weeks ago, the FDA issued an untitled letter pertaining to Vizag in regards to 2 of our corrective actions. As requested, we will be responding to the letter within 30 days.

On a broader note, we are seeing a heightened focus by the FDA on facilities outside of the U.S., and some of our inspections have not met FDA expectations. So while we are proud of our progress and success at Rocky Mount, our work is not done. We remain dedicated and focused across our global network to ensure that we are meeting all the requirements of the agency and other regulatory bodies in executing on the commitments that we have made in our various action plans.

Before I move to sales results, I want to provide a quick update on Precedex. If you recall, the agency solicited comments earlier this year on issues that relate to the FDA's ability to approve generic versions of Precedex to what we believe is an unprecedented carveout process. The agency has not provided a timetable for its decision on this matter, and we haven't received any additional information since that time. However, the potential for an earlier-than-planned introduction of the generic version of the drug remains, which is why our earnings guidance range remains broad.

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. Information on the impact of foreign currency on net sales by segment and product line is available in our press release.

Net sales were up 11% compared to the second quarter of 2013, primarily related to strong pricing and volume gains in our Specialty Injectable Products. By product line, Global Specialty Injectable net sales increased 14% for the quarter.

In the Americas, Specialty Injectable net sales were up 17% for the second quarter. The increase related to a couple of factors which resulted in strong performance. First, price continued to be a large contributor to the year-over-year upside in the quarter, and second, we continued to make progress in returning to historical supply levels.

In EMEA, net sales of Specialty Injectables were down almost 2% versus the second quarter of 2013. Strongest performers in the quarter continued to be the on-market biosimilars, which were more than offset by continued price erosion in core oncology and anti-infective products.

In APAC, net sales of Specialty Injectables increased 13% 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. Global net sales increased 1% during the second quarter. The increase was primarily due to nondedicated set revenue and sales from our newest pump, Sapphire.

Net sales in our Other Pharma product line were up 9% compared to the second quarter of 2013, primarily driven by strong performance with our solutions products, which benefited from continued strong demand due to lingering shortages in the market.

With that, I'll now turn the call over to Tom for a financial overview of our second quarter results. Tom?

Thomas E. Werner

Thanks, Mike. Good morning, everyone. As Mike mentioned, we built on a solid start to the year with a strong second quarter with net sales being up 11%. Adjusted gross margin as a percent of net sales in the quarter was 40.9%. This is the highest since 2011, up from 37.9% in the second quarter of 2013. This, due primarily to favorable price and product mix during the quarter.

Research and development expense increased 2% in the quarter to $76 million. R&D as a percentage of net sales was 6.7% compared to 7.3% of net sales for the second quarter of last year, primarily related just to the timing of the spend.

SG&A expense for the second quarter was $211 million, up 12% from the second quarter of last year, due mainly to higher employee-related compensation expenses and higher selling and promotional expense related to both expansion in emerging markets as well as biosimilars.

Adjusted operating income was $179 million compared to $126 million in the second quarter last year. Adjusted operating margin was 15.8% compared to 12.3% in last year's second quarter.

Our adjusted effective tax rate in the quarter was 28% versus 17% in the second quarter of 2013, due to the shift in the mix of earnings to higher tax rate jurisdictions as well as our updated guidance, which I'll outline shortly.

Finally, adjusted diluted earnings per share for the second quarter were $0.72 compared to $0.55 for the same period last year.

Turning to cash flow. Cash flow from operations for the 6 months ended June 30 was $176 million compared to $51 million for the same period last year, primarily results of the higher earnings.

Capital spending for the 6 months ended June 30 was $185 million, up from $153 million for the same period last year. The increase reflects planned spending related to our new Vizag, India facility, as well as modernization initiatives.

Cash balance at June 30 was $797 million compared to $683 million at June 30 last year and $798 million at December of 2013.

Before I move to guidance, Sumant's going to provide a brief update to our pipeline as we traditionally do at midyear. Sumant?

Sumant Ramachandra

Thanks, Tom. Good morning, everyone. Today, I will provide our traditional midyear update on our Small-Molecule and biosimilars pipeline. Mike already provided some exciting news on the progress of our Device pipeline and our next-generation pump submissions.

As of June 30, 2014, our Small-Molecule pipeline totaled 65 compounds, which represents close to 700 new-to-country launches over a multiple-year period, including more than 30 launches in the United States.

The local brand market value of the Small-Molecule pipeline at June 30 totaled approximately $15 billion. The decline since the end of last year represents a net combination of launched molecules, added molecules and molecules that we have elected to remove from the pipeline due to reallocation of funding to other higher-priority products in the pipeline.

In terms of therapeutic areas, about 60% of the total Small-Molecule pipeline's local brand market value is in oncology, with anti-infectives as the next largest therapeutic category at about 20% of the pipeline's value.

Our biosimilars pipeline remains one of the largest pipelines in the industry, with 11 molecules and a local market value that has increased to over $40 billion. The 11 molecules are mixed between our internal efforts and the molecules in our agreement with Celltrion. All of the molecules in our pipeline are in 3 therapeutic areas: dialysis and chronic kidney disease; oncology; and supportive care and immunology, which create a sizable market opportunity for us to target.

Now I will turn the call back to Tom, who will provide an update on our 2014 financial guidance. Tom?

Thomas E. Werner

Thanks, Sumant. Moving to guidance. Through the first half of the year, we've seen underlying strength in our SIP business as a result of price, increased recovery of supply, as well as increased demand due to competitor supply issues. As a result of these favorable trends, we now expect net sales growth in 2014 to be between 6% and 9% on a constant currency basis, with no material impact expected from foreign currency.

Adjusted gross margin this year is now projected to be in the 39% to 40% range compared to roughly 37% for the full year last year.

Research and development in the second half of the year will be higher than the first half of 2014 due to the timing of biosimilar clinical trial spending. For full year, we expect research and development to be approximately 14% to 16% higher on an absolute dollar basis than 2013. As a reminder, original guidance was to be flat with spending levels last year.

We expect SG&A expenses in 2014 to remain in between 17.5% to 18.5% as a percentage of net sales. As a result of these factors, we're now projecting 2014 adjusted operating income in the 13.5% to 14.5% range compared to 11.6% for the full year last year.

Given the increase in operating income from higher tax rate jurisdictions, we now expect our adjusted effective tax rate for 2014 to be in the range of 25% to 27%. You'll note on a year-to-date basis, the tax rate is 26.5% for the 6 months.

Moving to adjusted earnings per share. We're projecting adjusted diluted earnings per share to now be in the range of $2.30 to $2.50, with our outstanding diluted shares to be around 170 million. The guidance range continues to reflect uncertainty over whether we'll see generic competition for Precedex before Sandoz comes to market at the end of the year.

Now comparing our projected operating results for the second half of this year versus our first half. We do expect adjusted gross margins to decline from the rates generated in the first half of the year due to our planned third and fourth quarter annual plant maintenance shutdowns, and we expect R&D to increase in the second half of the year due to the timing of spend on biosimilar trials and postmarketing studies as well as development work on generics. As a result, adjusted operating income and earnings per share are expected to be lower in the second half of the year versus the first half.

Talk a little bit about sales. Based on our projected range for sales, this is going to depend highly on the various scenarios for Precedex generic competition. At the bottom end of the range, if we assume that generic competition for Precedex occurs before Sandoz comes to market at the end of the year, sales in the back half of the year could be down slightly when compared to the first half of the year.

On the other hand, if there's no decision made on the FDA docket, we expect that Sandoz will launch exclusively at the end of the year, in which case, sales could be up 4% to 5% compared to the first half. This all depends on channel partner buying behavior during the fourth quarter and the timing of Sandoz's launch.

Turning to cash flow, and then I'll turn it back to Mike. Cash flow from operations projection for this year has improved due to stronger results and our improved outlook and is now in the range of $275 million to $375 million. Capital spending remains the same. It's projected to be between $375 million and $425 million. And depreciation and amortization range also remains the same, and is expected to be between $225 million and $275 million.

So with that, I'll turn the call back to Mike for some final comments.

F. Michael Ball

Thanks, Tom. The second quarter was another strong quarter for Hospira. We delivered strong financial results, and the business continued to perform well. We also reached a significant milestone in the quarter in reinforcing our foundation with the successful reinspection of Rocky Mount. We've worked hard towards this outcome and continue to work to ensure that we meet the compliance requirements of regulatory agencies around the world.

The Rocky Mount reinspection was one of the key milestones over the 2014-2015 time frame that we highlighted at our Investor Day last December. But Rocky Mount wasn't the only accomplishment. In early July, we also completed the acquisition of Orchid's API facility and are progressing well, executing against the other milestones.

As a reminder, the other key milestones we are executing towards are: Vizag facility online. I discussed earlier that we're working to resolve the issues identified by the FDA and are moving toward first commercial production.

Device strategy completed. We're making progress in transitioning our legacy pump customers and expect to complete the transition in 2015.

Next-generation pumps on the market. A 510(k) was filed for both our Plum 360 pump and Sapphire+.

Global expansion. We expect to exceed the projected cumulative target through 2014 of 250 new-to-country submissions.

Biosimilar EPO U.S. submission. We are on track for a planned U.S. FDA submission later this year or early 2015.

Biosimilars U.S. market formation. We expect to be among the first, if not the first, to launch biosimilar EPO in the U.S. when the market forms.

These milestones are positioning us well to meet the long-term operational and financial goals we provided at Investor Day. Top line growth in the mid- to high-single digits, adjusted gross margins in the mid-40s, adjusted operating margins in the high teens and adjusted EPS growing in the mid- to high teens.

In addition, our investments are paying off, contributing to our results and supporting our vision of Advancing Wellness around the world. Backed by the diligent efforts of Hospira's employees, we remain committed to serving our customers, driving profitable growth and delivering shareholder value.

I look forward to reporting back to you on our continued progress again next quarter.

Now before we move to Q&A, I'll mention that we have received a lot of media coverage and inquiries regarding press speculation about acquisition activity. We have said in the past and will reiterate today that we are always looking at opportunities in the marketplace to drive shareholder value, and that we assess them based on many strategic and financial considerations. As a matter of course, we do not comment on specific acquisition opportunities or market speculation. And as such, we respectfully request that you focus your questions today on our quarterly earnings results.

With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Marc Goodman with UBS.

Marc Harold Goodman - UBS Investment Bank, Research Division

Yes, obviously there was a lot of strength in the U.S. Injectables business. Can you give us a sense of what products were particularly strong and comment on Precedex, specifically, as well.

Thomas E. Werner

Marc, it's Tom. Across the board, the portfolio was -- performed very well. The pricing levels that we saw in the first quarter pretty much held through the second quarter. And if I were to boil the beat that we had, we came in better than we thought we were going to come in as well. It was mostly related to pricing. There was some volume pickup, particularly in some of the anesthesia drug areas and then just continued supply recovery. But I think vancomycin had a pretty good quarter for us but beyond that, it's just a number of products that individually aren't all that great.

F. Michael Ball

Yes. Just commenting on Precedex for a moment, it really was a broad beat here and was not driven by a Precedex beat.

Operator

Our next question will come from the line of Ronny Gal with Bernstein.

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

I got 2 or 3 of them. Sumant, I guess, the first one is for you. Can you help us a little bit understanding what's happening with Herceptin, we are hearing across from other companies basically saying that the Herceptin that was taken to the end of Phase III is not submittable in Europe. Do you still expect that product to go through EMA without a clinical or additional trial or will that be needed or an additional trial will be needed? And similarly, for next year, we are aware that you had a pretty good position on CUBICIN and Angiomax, are there any other product that potentially could be launched next year, or are those basically the 2 which we'll be looking for? And third, and I guess this is for Tom. I'm kind of surprised Europe has been down after what should have been, based on the scripts, a very strong year in biosimilars in Europe. Can you give us an idea about how big is biosimilars as a percentage of revenue in Europe right now? Is it 0.5%, is it 0.25%, is it 10%, is it 2%, just so we can have ability to compare the trend lines?

Sumant Ramachandra

Okay. So Ronny, this is Sumant. So we'll start with trastuzumab or biosimilar Herceptin. Celltrion has actually been engaging with the European medicine agency on this particular program. As you know, we -- they are the developer and they do the initial registration. We follow with the parallel registration at the same time. But they've been talking to EMA on this program. And as part of our agreement, because Celltrion is doing that development work, we don't comment on the submission or the launch timing of such programs until actually Celltrion is ready to comment on them publicly. So that's all I can say at this point regarding the trastuzumab program. In terms of they -- you asked about essentially bivalirudin at the Angiomax brand name and our efforts in there. We don't -- the Power 4 [ph] programs are publicly known. But we don't comment specifically on launch timing of any program. But the Power 4 programs [ph] are a big chunk of our portfolio, there are known [indiscernible], so there's some pretty large molecules in that mix. We obviously participate in those. And you know which ones they are. But several of them are going to start becoming available at end of this year and sometime in next year. We certainly hope that the market's form will be part of that.

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

I'll ask you more about other submission other than those 2. Are there any significant additional products you will point out that might be launched between now and the end of 2015?

Sumant Ramachandra

Yes. So if you look at the Power 4 [ph] ones, which we can publicly talk about rather than the other ones that are not Power 4 [ph]. We won't discuss the non-Power 4 [ph]. Several of them have market formation dates on the generic side that fit within that window. I won't say much more than that. But to say that if the market does form during that time frame, we will be ready as a company to be there.

Karen King

And Ronny, on the third question, we're going to back to you afterwards because we've got to move on just to give people a chance to ask a question.

Operator

Your next question will come from the line of Jason Gerberry with Leerink Partners.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just maybe on the 2014 top line guidance. It looks like about you're raising top line in incremental $250 million in new products sales. I'm just wondering if you could sort of break out the increase. How much of that is base business, pricing versus Precedex versus sort of this volume on supply recovery? And then just secondly, on the raise in tax rate, is there any reason for us to think about Hospira on a standalone basis as maybe the long-term tax rate guidance in the high 20s is maybe going up a touch.

Thomas E. Werner

Yes. I'll take the tax rate question first. During the quarter 2, as we looked at our outlook for the year, the rate this quarter was about 28%, which the guidance is 26% to 28%, I think, or 26% to 27%. Sorry, 25% to 27%. So year-to-date, we're at 26.5%, which is kind of right in the middle of that range. It's just to catch up the first quarter, we had to book at a higher rate, and we continue to think that the range will be 25% to 27%. As far as looking out to information we shared at Investor Day, I wouldn't update any of that at this point. We indicated the rate was going to go up into the high 20s. And you can kind of see it happening. One of the other things is that, as you compare to last year, not only were the U.S. tax extenders in place, but we also had a catch up for '12, 2012 that is, that we booked. So you've got a very artificially low tax rate because of the catch up and then a lower tax rate last year because the extenders were in place. In terms of the revenue guidance, you had mentioned new products. It's really not new products. Our outlook on Precedex ranges have not really changed. I think what you're seeing is that the majority of our beat, as I've said on the opening call, it's mostly price with some supply recovery and volume as well. Solutions have been pretty strong for the first half of the year, as we said in Mike's comments, dealing with the shortages. But I point to more price than volume in terms of what's causing the uptick in the guidance.

Operator

Your next question will come from the line of Sumant Kulkarni of Bank of America Merrill Lynch.

Sumant S. Kulkarni - BofA Merrill Lynch, Research Division

In terms of your longer-term mid- to high-single digit revenue growth goal, what type of pricing erosion or growth assumptions are built into that? And how should we think about the annual cash flow from operations through 2018?

Thomas E. Werner

Sumant, it's Tom. On the cash flow question, we're really focused on just discussing this year. We're not really here to update anything that we've provided out through 2018. We're very encouraged by the strong cash flow. We've been paying quite a bit of attention to our receivables levels and working with our suppliers to improve our terms with them. But the lion's share of the improvement in the operating cash flow has been the better income situation, the better operating income. And in terms of pricing and the outlook for the high single-digit revenue growth, I really wouldn't have anything to update on what we shared last December.

Operator

Your next question will come from the line of Gregg Gilbert with Deutsche Bank.

Gregory B. Gilbert - Deutsche Bank AG, Research Division

So no deal questions or no gator questions?

F. Michael Ball

No. Really.

Gregory B. Gilbert - Deutsche Bank AG, Research Division

So I'll pick a different one. How did you do on the GPO bids or contracts that have played out since the last call? I think that was one of the things holding you back from raising after a strong quarter, and Tom, that's for you. And broadly speaking, do you think the underlying gross margin improvements that Hospira's seeing can overwhelm the gross margin hit you will take when Precedex does see its demise in December, whenever that happens, sort of the 12-month period following that hit. Can your underlying gross margin kind of weather that storm?

F. Michael Ball

Maybe I'll just respond to the GPOs here, Gregg, and I'll let Tom take the second one. With respect to the GPOs, we're going through this contracting cycle that we mentioned. We're satisfied with the end results as we move forward. Obviously, no one enjoys getting price increases. But across the industry, the cost of quality has gone up as people made these quality investments. And again, as we've talked to customers, the surety of a robust supply is absolutely critical in order dealing with this chronic drug shortages. And of course, building in a more robust supply chain also has its cost. So I think, as a company that is dedicated to getting its service levels back up to where we're approaching customer satisfaction, then, I think, we will get a premium for our products. So we're satisfied with what's happened with the GPOs so far. But again, still more work to be done.

Thomas E. Werner

Hey, Gregg. In terms of the margin question, our guidance for the year started out at $37 million to $39 million, and we've now moved that up 100 to 200 basis points, depending on where you put yourself in the range. And most of that's pricing, but manufacturing is having a good year this year as well. Our service levels, as we look at them, are back to where we need them to be. The IMS data that came out yesterday and the day before, we think we've hit a new dollar market share level in the served available market. We're still kind of checking the data but the market shares are all coming back really well. In terms of relating that to a loss of Precedex scenario, I'm just -- I'm not really go out on a limb at this point and talk about 2015. We are very encouraged with the margin performance, and that's what is really behind that's taking up the guidance.

Operator

Your next question will come from the line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

So I guess, I just wanted to ask some questions around the pricing dynamic a little bit more because that is one of the more important factors here in the quarter. So last quarter, you said that most of the increase in the Americas business was due to pricing. And I guess, you've been modulating your pricing up over the last several quarters and had kind of hinted that you weren't sure if it was going to stick and you going to start lapping some of those increases. So my question, for the rest of the year, does the pricing year-over-year comp get tougher? And now what kind of confidence do you have in those increases sticking or the ability to take further increases?

Thomas E. Werner

We typically do price increases at various points in the year. And so far, what we've taken has stuck. I think when you look at the comparability to last year -- because I was looking at this last night, Q3 last year, I don't have all the causals off the top of my head, was a pretty light quarter for us for a variety of reasons. Q4 was pretty strong. So the comparability to last year is tougher in Q4 than it probably is in Q3. But as I look at that, the way we're kind of factoring in the pricing, it's -- the comparability is not really related to any different expectations on pricing. It's just a difficult or unusual compare, Q3 to Q4, based on volume.

F. Michael Ball

And I would just add that a lot of it has to do with again, competitors in and out of the marketplace. So there's a number of dynamics here and one of them is there a competitive availability here and are the competitors, if they have product available, willing to price at a cheaper rate. The market is still suffering from chronic drug shortages out there. So there's a lot of dynamics at play here, but the net-net, so far in the first half of the year is the prices of stock, and we will see, as we move forward, whether that continues to be the case.

Matthew Taylor - Barclays Capital, Research Division

And just on Rocky Mount. Are you running fairly close to full supply now? Or is there more room to increase that?

F. Michael Ball

So we are running close to full supply. We are getting our service levels up to what I would call, the acceptable level. So there's perhaps a little bit to go, but I would say that we're very close to the top end now.

Operator

Your next question will come from the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Mike, there was a -- thinking about the Analyst Day last December, there was a lot of talk of margin expansion of biosimilars, gators, if you will. But there really wasn't a lot of talk about, when you say shareholder value creation, what that really means to Hospira. I wonder if you could just talk to us about what shareholder value creation that you referenced this morning means as it relates to returns on invested capital, ROEs, accretion, time to accretion, things of that nature. Because I don't think we really gotten that recently from management.

Thomas E. Werner

Yes. I think ROIC is probably the core metric that underpins a lot of what we look at, either internally or externally. And you can start to see that our return on invested capital has been gradually improving, largely due to the improvement in profitability. In terms of accretion, if we were to do some type of M&A transaction, we'd like to see accretion within the first couple of years. And in terms of earning back-weighted average cost to capital or getting to acceptable levels of ROIC, I would like to see that in the first 4, 5 years kind of thing. And there's lots of other ways to create shareholder value. Right now, I think one of the things that we're excited about is with the improved financial performance. We've said all along that there are many other things that we'd like to be doing in R&D. But we've been living within the constraints of a floor that we put on earnings per share at $2, and you can see that's exactly what we're going to be doing this year, as some of it is certainly timing-related, but we have the ability to take our R&D spending up and work in a more expedited way on some things that had the earnings not been so strong, we might not have been able to do.

David R. Lewis - Morgan Stanley, Research Division

Very helpful, Tom. And maybe just a quick one for Mike. Mike, you mentioned the pump business. I'm wondering just given the performance of this quarters and some of your commentary about product mix there, are you in a position where you believe you stop losing share or do you think a share gain position in that business is possible the next several quarters?

F. Michael Ball

We really need to get the pump business off of ship-hold in my opinion to start talking about a pickup of market share. So the job one for the Device business now is to make sure that we have a satisfactory response back in -- on our Lake Forest Device operation back to the FDA. We have asked the FDA to come into our Costa Rica facility to give us another inspection there. So we have to pass that one. And then we have to then have a discussion with the FDA as to whether these kind of 2 things, coupled with our completion of our compliance master plan, if this has been enough to lift the ship-hold. And then on top of that, get these new entrants into the marketplace, the Sapphire+ I was referring to as well as the Plum 360. So from my standpoint, market share will be possible when those things line up. So over the next couple of quarters, I do not expect our market share to tick up in the Device business.

Operator

Your next question will come from the line of Louise Chen from Guggenheim.

Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division

So the first one I had was regarding Rocky Mount. So just to be clear, has the warning letter been lifted or is it still going to take some time from here? And what would it take for the warning letter to be lifted? And then, just second question here is on impact of Precedex in '15. I know you're reluctant to give a number here. But if I just look at the low end of your initial guidance and the high end of the current guidance, it implies about $0.50 difference. I'm wondering how we should think how much of that is Precedex and how much of that is just better-than-expected functioning of the base business.

Thomas E. Werner

Okay. So with respect to Rocky Mount then, so the FDA came in, did the inspection. We got no observations. The plant is currently under VAI status. And as I mentioned the previous call, when you're under VAI status, essentially then, you're allowed to get new products approved, et cetera, et cetera, et cetera. So the lifting of the warning letter doesn't really have any material impact on the plant. Of course, it would feel really good as yet another milestone to be hit. The FDA, as I said, has just recently completed this inspection. I'm sure they will be giving us some feedback over the next several months as to whether the warning letter is lifted or not. And sometimes it is and sometimes it isn't. So we'll be waiting for the FDA and hopefully, hear something towards the back end of the year. But the reason that we are so pleased with the current situation, obviously, is it appears that the plant has returned to health that is meeting the expectations of the regulators, and we will be able to, again, introduce new products from the plant, as well as produce at full steam ahead.

F. Michael Ball

Hi, Louise. And relative to Precedex, we've never really come out and commented on the benefit from Precedex that we see quarter in and quarter out. The difference in the guidance range, $0.20 to $2.30 to $2.50, doesn't reflect the full value of the drug. And we always have had cost containment measures and levers that we could pull to offset some of that. But in the back half of the year, the earnings spread fees related to Precedex is greater than the $0.20 that we gave you. But there's other things that we would do to respond and mitigate that.

Operator

Next question will come from the line of Michael Faerm with Wells Fargo.

Michael Eric Faerm - Wells Fargo Securities, LLC, Research Division

On the Vizag untitled letter. Could you give us a sense of how or if that those issues and the resolution of those issues could impact your time line towards ultimate approval and bringing that plant online?

F. Michael Ball

So maybe what I'll do, just give you the process in which I think Vizag will be reviewed. So we got this untitled letter. The untitled letter took issue with 2 of our responses back to the FDA as a result of the 483 we saw. We are working hard then to resolve those, and we will be back to the FDA in 30 days. And our expectation is that the FDA will find our responses satisfactory. However, we do believe that this then will require the FDA to come back and reinspect the plant. If they do so over the next several months and the plant passes the inspection, then our time line should be the same. If they require reinspection but don't come back this year, then that would move the time line out slightly. However, given the importance of this plant, we do expect that the plant should move ahead on schedule. Now we will be able to make commercial batches in the plant and are planning to do so at the end of the fourth quarter. The FDA inspection and subsequent approval is required to actually release those batches. So we are still working in the plant. We still have a lot of things to do in there. We are addressing their concerns, et cetera. So the assumption that we are using right now is that the plant should come on stream, reasonably consistent with what we said before. If, however, the FDA delays the inspection, then there will be some delay out there. Now one other point on Vizag, right? It's what I've been talking about overall is barriers to entry into the Injectable space. Nothing is easy in terms of getting new plants approved or getting plants through inspection. So we feel like that we've got the right personnel behind this and the right equipment, state-of-the-art equipment, I should say, to get this job done. We've just also recently assigned our Head of U.S. Quality to our Head of International Quality, so she will be directly responsible for the plant as well. So I feel good about the response we'll have back into the agency. Hopefully, the agency will be back in a timely manner. We will get then a satisfactory inspection, and we'll be able to move forward as planned. And that's our working assumption right now.

Operator

Next question will come from the line of David Buck with Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

So just a couple of quick ones. First for Tom, can you give us a sense of the annualized gross margin impacts you'd expect from the Orchid acquisition now being closed? And also, what year 1 of Vizag production could mean in terms of gross margin benefit? And then for Mike, you talked a little bit about shareholder value, enhancing moves. Can you talk about whether the company and the board will be prepared to redomicile as part of M&A in seeking potential transactions. Obviously, your home state senators has been a critic of those transactions. If there is a deal that's attractive from a shareholder value standpoint, would you be prepared to transact, including potential for an inversion?

Thomas E. Werner

Yes. On the gross margin, David, we haven't really given any timing and impact of what Orchid's going to do. We had hoped to get this thing closed earlier in the year. At some point, it will be accretive in terms of the margin impact, it's part of the whole API strategy. As we indicated, we'd only made 10% of our own API. This should take us up to 30%. Relative to Vizag in year 1, I know that at Investor Day, we indicated that Vizag and our overall network strategy was a big piece of the margin improvement. In year 1, we're still going to need to be balancing out how we get those lines loaded up and what the timing is going to be, but we haven't really broken out the timing of how that margin improvement is going to go. Just realize that the plants got to come up and then get to some level of production that can start to leverage the fixed overhead.

F. Michael Ball

And then David, with respect to the inversion question. From my standpoint, there's many aspects that make a company competitive, inversion could be one of them, but one needs to consider the whole range of things out there from an M&A standpoint or even from a competitive advantage standpoint. So from my standpoint, not really a comment on the inversion side of things.

Operator

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

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

I was hoping you could spend a little bit of time just talking about the commercial strategy around Remicade, generic Remicade in Europe. And obviously, 2014 is the year where you don't have access to some of the larger markets and I'm sure you heard J&J's commentary on the earnings call regarding what they were seeing, thus far, to respect the competition. But maybe you just help us think about the rollout in 2015, and thereafter, as you start to have access to some of the bigger markets.

F. Michael Ball

So from my standpoint -- I'll let Sumant jump in any time. So from my standpoint, the launch of generic or biosimilar Remicade is just underway in Europe, and as you recall, in the various small countries. So what we're trying to do is ensure that we're putting in place the strategies and getting the clinical and medical data so that we can do an effective job in terms of launching in the large countries when they become available to us in 2015. So I think I've said it on previous calls, I don't take a lot of stock in what's going on in the marketplace right now. This is basically a prelaunch effort in order to get prepared for the big marketplaces.

Sumant Ramachandra

And just the only thing to add as Mike covered it very nicely, is that, as we get into the larger markets, obviously, the registration data is key to the discussion. But also, we have postmarket studies that are enhancing our product in the postmarket setting and a variety of the disease states that we have approval for. So I think we have said this before, biosimilars is not going to behave like a generic market, but it will form over time. And that it'll form over the time that there's a huge economic benefit. Payors will see that. And also the fact that, as we generate more data, people get confidence that biosimilars are high quality and they really do make an impact in both economics and patients' lives.

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

And can you just go into maybe just some detail on what you're doing in terms of that market formation effort? And how much of prework you can do ahead of having full access to the bigger markets for infliximab, for example?

Karen King

David we're going to follow up with you on that because we're running out of time here and we still have people on queue.

Operator

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

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

Congrats on the results from the Rocky Mount reinspection. Just 2 quick ones here. First, the pricing environment. Can you quantify at all what type of year-over-year gains you're seeing across the portfolio? And when we think about competitors returning to the market, do you feel you have enough data points at this point to comment on the sustainability of the type of pricing we're seeing right now? I guess, those returning to market, are they remaining disciplined? Are you seeing what you need to see to get comfortable that we can see can see this trend continue. And then the final one was just on the international sales and marketing infrastructure. Do you feel you have critical mass, the critical mass you need to fully execute on this pipeline? Or do you think the company could benefit from a larger footprint x U.S. as you think about commercializing the pipeline?

Thomas E. Werner

Hey, Chris, it's Tom. Just in terms of the pricing, sales were up 10% or 11% second quarter over second quarter. And but I always said is, as the majority of that was -- but not all of it, was pricing. In terms of the second 2 parts of the question, Mike's going to deal with those.

F. Michael Ball

Yes. In terms of the international present, what we said at Investor Day, and what I said consistently is we're interested in building our critical mass x U.S. and growing our global presence, and I've said both organically or inorganically. So the -- we definitely need some more critical mass in my view out there.

Karen King

So we have time for maybe one last question.

Operator

Our final question will come of Shibani Malhotra with Sterne Agee.

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

I'm just wondering, could you comment on your view on how you can materially deploy capital in the face of continued regulatory issues with the FDA, so that's global, and how you are focusing your time on fixing current issues with manufacturing as you've done so diligently in the past versus looking at opportunities for business development?

F. Michael Ball

So I'll just take that, Shibani. So from a big picture standpoint, I've obviously spent a lot of time on the regulatory side working with the FDA and other regulators around the world to ensure that we were meeting their expectations and reinforcing the foundations so that from the very top of this company, we were aware of what their requirements are we're acting diligently to ensure that we get things done. I'm blessed now to have an extremely good staff working for me that is able to translate what we hear from the agency and other regulators and do tremendous action and I think, as you've seen, tremendous results. So as we move forward then, some of my time, as I indicated in the prepared remarks, is being freed up. And one of the areas that I would definitely like to look at is, obviously, strategy, which includes M&A and other sources of competitive advantage. So my time is now much freer than it was, what I would say, 1 year or 2 ago. Although I'm still at the forefront of our regulatory efforts.

Karen King

So thank you, everybody, for being on the call today. We appreciate it. And operator, we can end the call.

Operator

This concludes Hospira's second quarter conference call. You may now disconnect.

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

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

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

Source: Hospira's (HSP) CEO Michael Ball on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts