We have downgraded Hospira Inc. (HSP) from Neutral to Underperform following poor fourth quarter results and issuance of lower-than-expected 2011 guidance.
Hospira’s fourth quarter 2010 earnings of 77 cents per share were much below the Zacks Consensus Estimate of 93 cents and the year-earlier earnings of 87 cents per share. The lackluster earnings performance was due to Symbiq pump issues, increased backorders in the Specialty Injectable Pharmaceuticals (SIP) segment (resulting in supply shortages) and higher research and development expenses. Following the poor fourth quarter performance, management issued a lower-than-expected guidance for 2011. Adjusted earnings per share are expected to be in the range of $3.90 to $4.00 per share. We have reduced our 2011 earnings estimate substantially by 44 cents based on the lackluster forecast from the company.
Hospira has put shipments of its Symbiq general infusion pump to new customers on hold due to reports of alarm failures in certain conditions. This significantly affected top-line growth at the company in the second half of 2010. Hospira upgraded the software for the product and submitted the package to the FDA for approval in late March 2011. The timing of FDA approval is uncertain and the pumps will be on temporary hold until then, thereby continuing to pull down the top line.
Management is also facing an issue with its Plum A+ pump regarding an alarm failure. Though management feels that this is not a large issue and the FDA does not require Hospira to recall the product, it could negatively affect revenues later, if not resolved in a timely manner. Due to issues with its Symbiq pump, Hospira provided a depressed outlook for the Medication Management Systems (MMS) segment. This combined with higher-than-expected spending led to issuance of the disappointing 2011 guidance.
Another major overhang for Hospira is the pending resolution of an FDA warning letter, which was received way back in April 2010, because of manufacturing problems at the facilities of the company in Clayton and Rocky Mountain, North Carolina. Hospira subsequently submitted a response to the FDA in May 2010. Though the company has addressed most of the issues in its response to the letter, we believe that any slip up on the company’s part to comply with the FDA’s quality control requirements will invite strict action from the agency. Such an action will weigh heavily on the stock.
To conclude, the regulatory concerns and an uninspiring performance have led us to downgrade our rating on Hospira.