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Hospira (NYSE:HSP)

Q1 2011 Earnings Call

April 26, 2011 9:00 am ET

Executives

Karen King - Vice President Investor Relations

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

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

Christopher Begley - Executive Chairman and Member of Science, Technology & Quality Committee

Analysts

Matthew Taylor - Barclays Capital

David Roman - Goldman Sachs Group Inc.

Frederick Wise - Leerink Swann LLC

Christopher Schott - JP Morgan Chase & Co

Marshall Urist - Morgan Stanley

Paul Choi - Caris & Company

David Buck - Buckingham Research Group, Inc.

Louise Chen - Collins Stewart LLC

Operator

Welcome to Hospira's First Quarter Earnings Conference Call. [Operator Instructions] I'd like to turn the conference over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone and welcome to our conference call and webcast regarding Hospira's financial results for the first quarter of 2011. Participating in today's call are Chris Begley, Executive Chairman of Hospira; and Tom Werner, Senior Vice President of Finance and Chief Financial Officer. We would also like to welcome Mike Ball, Hospira's new Chief Executive Officer to our quarterly conference call. We're thrilled to have Mike as our new CEO. Given his short tenure, on today's call, Mike will only be providing introductory remarks. Chris and Tom will help walk you through the quarterly performance and address your questions. I know many of you are eager to meet Mike, and we have plans in the works to introduce him to you. Mike is looking forward to sharing his thoughts on our strategy and the broader opportunity he sees at our Investor Day, which will be on August 31 here at our offices in Lake Forest. We picked a warm month so travel should be easy. Hopefully, you can stay and take advantage of all our great city of Chicago has to offer.

Now moving to our first quarter call. We'll be making some forward-looking statements today, which is subject to risks, uncertainties and other factors and may cause actual results to differ materially from those indicated. A discussion of these factors is included in the Risk Factors and MD&A section in Hospira's latest annual report on Form 10-K and subsequent Form 10-Qs on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments. In today's conference call, non-GAAP financial measures will be used to help investors understand Hospira's base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issued this morning and are also available on the Presentation page in our Investor Relations section of our website. Also posted on our website is a presentation of complimentary materials that summarize the points of today's call. We will not be speaking directly to the material, which is posted on the Presentation page at www.hospirainvestor.com. The material's for your reference to use as an enhanced communication tool. And with that, I'll now turn the call over to Chris.

Christopher Begley

Thank you, Karen and good morning, everyone. As many of you know, this is my last earnings call. I would like to start the call by thanking you for your support of Hospira during my time as CEO and for putting your trust in me over the past 7 years. I've had the privilege of working with an outstanding team of individuals at Hospira during that time, and I am very proud of what we have accomplished. I have watched Hospira grow from a fledgling startup to a respected industry leader. I now have the good fortune of viewing the company from a different perspective as Executive Chairman. And I am extremely pleased to be succeeded by an outstanding individual, Mike Ball. We found the perfect fit for the role of CEO with Mike with his proven track record of growing complex multinational businesses, with his demonstrated success in leading diversified health-care portfolios, with his dedication to his employees and with his strong commitment to creating value for all company stakeholders. Hospira is in good hands. I know Mike is already formulating ideas on how to extend our growth trajectory, expand our global reach and ensure that we keep driving towards sustainable top-tier financial performance. I will turn the call over to Mike so he can provide some perspective. Mike?

Michael Ball

Thanks, Chris for that warm welcome and hello, everybody. Needless to say, I am extremely pleased to have joined Hospira and I'm even more excited to be heading this company after my on-boarding experience over the past few weeks. I have literally met with hundreds of people, spending time on the road, visiting customers as well as back in the office, getting briefings from our senior management team and meeting with employees. I have met with every major function in the organization and I have been thoroughly impressed with the caliber of talent across the organization. Before accepting this position, when doing my final due diligence on Hospira, my sense was that the company's dual strategy of improving margins and cash flow and investing for growth was the right one. I'm even more convinced of that today. I see tremendous opportunity for future growth at Hospira. While we've done a good job of growing our businesses in the U.S. and maintaining our leadership positions, I see significant opportunity for further growth, both in the United States and around the globe. I look forward to sharing with you my thoughts and ideas on how we will take Hospira to the next level at our upcoming Investor Day in Chicago on August 31. But now, given that I was only here for 4 days in the quarter, I will let Chris walk you through the highlights. Chris?

Christopher Begley

The first quarter was a quarter marked by executing on our commitments, doing what we said we'd do at our last quarterly call. And they were significant commitments, ones that drive near-term gains and others that pave the way for future growth. We committed to launching docetaxel in the U.S. by the end of the quarter. We launched on March 17, shortly after receiving FDA approval. Docetaxel, which is used in the treatment of a variety of cancers, had branded U.S. sales of approximately $1.2 billion in 2010. We were the first generic to receive approval of our differentiated, single vial, 10-milligram per mL concentration, the original concentration that customers have used safely for many years and that we are already marketing in both Europe and Australia. We also received approval during the quarter to launch docetaxel in Canada. We committed to submitting our 510k application with the FDA for modifications to our Symbiq infusion system by the end of the quarter. We submitted the application on March 31. The submission, one of the first developed to align with the recent FDA draft guidance for infusion devices, incorporates modifications we are making to further enhance the reliability of the infusion pump. We are working closely with the FDA to ensure that we are following all the guidelines of the new 510k draft guidance and will be ready to resume new customer shipments of Symbiq once the 510k is cleared. And we committed to bringing a highly qualified CEO on board by the end of the quarter. Mike joined us on March 28.

So we continue to add to our track record for execution, as well as advance the business in other ways. For example, we received FDA approval and launched generic topotecans in the U.S. in February, another first to market generic launch. This medication, a generic version of Hycamtin is used to treat small cell lung cancer after failure of first line chemotherapy and had branded sales in the U.S. of more than $140 million in 2010. In Australia, we launched Nivestim, which is the country's first filgrastim biosimilar and docetaxel in February. And finally, we launched our new online catalog of products available in the U.S. Developed with customer input, the new website allows healthcare facilities and other medical care providers to search more than 1,200 products. The new website exemplifies our commitment to developing a series of comprehensive digital tools to address our customers' most pressing needs.

Before I turn the call over to Tom, I want to share with you some of the progress we are making with regards to our quality improvement and supply recovery initiatives. Regarding the 2010 warning letter we received from the FDA related to our two facilities in North Carolina, we mentioned on our last quarter call that the FDA completed the inspection of our Clayton facility with no observations. The next major milestone is the inspection of our Rocky Mountain facility, which we anticipate will occur during the second quarter. We have been diligently preparing for that inspection and look forward to the FDA's response. On the device side of the business, I already covered the 510k submission milestone for Symbiq. As it relates to Plum, we are on track with our field correction to receive the new component parts by the end of the second quarter. We will then start servicing pumps in the field, as well as replacing boards in our existing inventory. We anticipate that the remediation will continue through the remainder of 2011 and into the first half of 2012. I will reiterate that we continue to sell Plum devices to new customers while we are proceeding through the remediation efforts. In terms of the supply recovery, our efforts are paying off. We made further improvement, earlier than anticipated at our back order situation, reducing the back orders by another 30% this quarter from where they were at the end of 2010. We still have work to do, however, and aim over the next several quarters to reduce our back orders even further, with the goal of returning to service levels in the high 90% range, the level we maintained for many years and which our customers have come to expect from us. With that, I'll now turn the call over to Tom for an overview of our financial results. Tom?

Thomas Werner

Thanks, Chris. Good morning, everyone. I'll remind everybody that references to net sales results will be on a constant-currency basis, which excludes the impact of foreign exchange fluctuations. Please refer to the table in the schedules accompanying our press release for the impact of foreign currency by segment and product line. Global net sales for the quarter were over $1 billion but relatively flat in the first quarter of 2010. Adjusted gross margin was 42.3%, adjusted operating margin was 20.3% and adjusted diluted earnings per share were $0.93, significantly better than our original expectations and even slightly better than our recently revised expectations for the first quarter. By product line, global specialty injectables net sales increased 3% for the quarter. Despite a tough year-over-year comparison, strength in our core SIP [specialty injectable pharmaceuticals] business, coupled with strong performance from both docetaxel and Precedex, more than offset the first quarter 2010 impact of U.S. sales of oxaliplatin, which were temporarily suspended at the end of June 2010. By segment, specialty injectable net sales in the Americas were up 5% for the quarter. Docetaxel performed extremely well in the last couple of weeks of the quarter as did several of our other SIP drugs, Precedex, meropenem, Piperacillin/Tazobactam and gemcitabine. Drilling down into the growth drivers for the quarter, we saw exceptionally strong demand for docetaxel as wholesalers and distributors took inventory to ensure successful transition from the 20 milligram per mL single vial concentration on market to our 10 milligram per mL single vial, the concentration originally marketed and the version, which most of the medical community is most accustomed to. The market has currently evolved into a 2-player generic market, with only Hospira and the authorized generic participating and pricing has stabilized. With limited competition, we were able to capture between 30% and 35% market share in just a few short weeks. For Precedex, we saw another quarter of strong demand. This proprietary sedation agent saw solid growth throughout 2010, which we expect to continue throughout the remainder of 2011.

On meropenem, until very recently, when one other competitor entered the market, our meropenem was the only generic on the market in the U.S. and we experienced strong uptake in this anti-infective drug, which we launched in June of last year. We continued to gain market share in the quarter and currently hold over 50% of the total U.S. market. On Piperacillin/Tazobactam we're generic Zosyn, with the launch of our proprietary advantage system and some easing of supply constraints during the quarter, we saw strong performance for the product and picked up additional market share. And we continued to make progress with our 2-gram gemcitabine product. One other generic competitor entered the market at the end of January, with 180-day exclusivity on 2 other concentrations of the free-strike form of gemcitabine. This had the positive effect of further limiting generic competition for yet another quarter.

Turning now to EMEA, net sales of specialty injectables in the region decreased 3% in the quarter due to continued pricing pressure on various oncolytic products. This was partially offset by continued momentum in many of our recently launched molecules, such as meropenem, heparin, and docetaxel. For meropenem, this was a new launch in the region during the quarter and has performed exceptionally well in both the Nordics and in the U.K. Of note is that we've captured 70% of the U.K. market, 1 of the major markets in the region. We launched the product in 6 additional countries during the quarter and will be rolling it out into another dozen countries in the region this year. Heparin also showed strong performance in the quarter as a result of recent tender wins in Italy and docetaxel had solid volume gains in the quarter, partially offset by pricing pressure from a highly competitive market. We remain the market leader in Italy, France and the Netherlands and have made strides in gaining market share across the region.

And finally, on the Biosimilar front, Retacrit continues to hold its leading position of over 50% market share in the total short-acting EPO Biosimilar market in Europe.

Turning to Asia-Pacific, net sales of specialty injectables decreased 6% over the prior year first quarter. While the region was afflicted by 3 different natural disasters during the quarter, the floods in Australia, earthquake in New Zealand and the earthquake and tsunami in Japan, we were very fortunate that none of our employees were harmed and that there was no material effect on our business. Nonetheless, these traumatic events took a tremendous toll on the region. Our thoughts are with all the people affected by these disasters, and we're proud to be supporting disaster relief efforts in these countries. In terms of the region's performance during the quarter, strength in docetaxel and Precedex was more than offset by difficult year-over-year comparisons due to the timing of certain customer orders in the first quarter of 2010. To provide a little bit more additional detail on the region's growth drivers, we've recently -- we've quickly gained share of docetaxel on Australia since launching recently in the quarter, already capturing more than 50% of the market. Pricing has been competitive but outpaced by volume gains. Precedex continues to do well in Japan, the drug's second largest market in the world. We've recently increased our sales efforts in Japan to ensure continued growth for the drug throughout the year.

Turning next to medication management. Globally, net sales were down 5% versus the first quarter of 2010, primarily a result of performance in the Americas where net sales declined 6% in the quarter due to the fact that we were still selling Symbiq to new customers in the first quarter of 2010. As you know, in the second quarter of 2010, we put Symbiq on voluntary ship hold to new customers, which remains in effect. For Plum device sales, the quarter was in line with the expectation that we outlined on last quarter's call, which highlighted a general slowdown in device sales for the first half of the year as we work towards starting our Plum field correction midyear. Outside the Americas, medication management net sales were relatively flat in the EMEA and were down 1% in Asia-Pacific. Both regions had solid, dedicated set sales but were negatively impacted by both the Plum field correction and certain continued supply constraints.

Turning last to the Other Pharma product lines, sales globally decreased 16%. This was primarily due to the year-over-year impact from our divestiture of the Wasserburg contract manufacturing facility in early February last year, as well as timing of certain customer orders this quarter.

Moving down the income statement, although we are very pleased with the quarter's performance when compared to the first quarter of 2010, given oxaliplatin and the related favorable charge back adjustments, adjusted gross margin in the quarter was 42.3%, down 280 basis points from 45.1% in the first quarter of last year. The decline was the result of tough year-over-year comparisons, again driven by strong margin contribution from oxaliplatin last year, partially offset this year by docetaxel and better manufacturing efficiencies associated with Project Fuel. As a reminder, our docetaxel product is manufactured through our Indian joint venture and a portion of the ultimate profit margin generated by the docetaxel sales goes to the newly presented line on the income statement called equity income from affiliates. And this is in the form of joint venture income. R&D expense increased 10% in the quarter to $57 million, primarily a result of spending related to clinical trials. R&D as a percentage of net sales was 5.7%, up from 5.1% in last year's first quarter. SG&A expense for the first quarter was $165 million, down close to 8% from the $179 million for the same period last year as a result of timing, cost reductions associated with Project Fuel initiatives and the acquisition cost in 2010 that were not present in 2011. SG&A as a percentage of net sales was 16.5% compared to 17.7% in the first quarter of 2010. Adjusted operating income decreased 15% year-over-year to $203 million versus $240 million last year. Adjusted operating margin, at 20.3%, decreased 350 basis points versus the 23.8% in last year's first quarter.

Moving to Project Fuel, we have very successfully concluded this 2-year optimization initiative and not only consistently met our initial commitments but overachieved them, allowing us to reinvest the excess savings back into the business. We're on track to meet our estimate of $110 million to $140 million in net cumulative savings in 2011. Our adjusted diluted earnings per share for the first quarter was $0.93 compared to $0.94 last year. Turning to cash flow, cash flow from operations for the quarter was $6 million, resulting from strong operating performance, which was offset by an increase in accounts receivables, a temporary increase, related to the sale of docetaxel in the U.S. as well as higher inventory levels related to continued increased production cycle times, new product launches and inventory builds as we work towards continuing to improve our service levels. At March 31, 2011, our cash balance was $597 million compared to $604 million at December 31, 2010, and $646 million at March 31 of last year. Capital spending in the quarter was $62 million compared to $41 million in the same period last year. The increase primarily reflects investments we're making with respect to manufacturing optimization, as well as information technology initiatives.

Now, before moving to guidance, I would like to update you on our capital deployment strategy and priorities. We expect our operations to generate considerable cash over the next several years and have now solidified how we plan on using that cash. And as many of you know, we completed Project Fuel, our 2-year optimization project, in the first quarter of this year, and we're now moving forward and embarking on the next phase of our continuous improvement initiatives. In light of the supply issue that haunted healthcare in 2010 and as part of the future growth expectations of Hospira, we are investing capital today to ensure a sustainable, competitive advantage over the long term in the specialty injectable market. Now, when we purchased the Generic Injectable business of Orchid Pharmaceuticals last year, we indicated that the acquisition provided us with 2 benefits. First, a proven quality, cost competitive, generic injectable site and an associated R&D facility. And second, a direct presence in India with a platform for future commercial growth. While we're still finalizing the details of this growth initiative, we have started to expand our capacity in India. These efforts, which resulted in a slight increase in capital spending during the quarter, will drive greater competitive advantage and expand capacity to align with future growth. As a result, we're increasing our capital spending guidance this year from a range of $250 million to $275 million communicated with the fourth quarter call, now to a range of $375 million to $400 million. And we expect to spend at this higher level over the course of the next several years. We'll provide more detailed update on these efforts during our second quarter call and at our Investor Day on August 31.

Since our stint from Abbott 7 years ago, we've taken an extremely prudent approach to cash management, generating approximately $3.8 billion from operating cash flow, issuing $1.9 billion in debt to finance the main acquisition in 2007. We've also deployed approximately $5.4 billion in cash, which includes paying off close to $1 billion in debt, investing $2.6 billion for acquisitions net of divestitures, spending $1.5 billion in capital expenditures, as well as completing $400 million in share repurchases, while maintaining an average cash balance of $500 million during that period of time. We closely monitor our debt to EBITDA and cash to EBITDA levels. Going forward, we'll also continue to reinvest in the business and consider acquisitions and alliances if they are accretive to adjusted earnings per share in a 1 to 2-year period. We'll still strive to maintain our investment grade credit rating, and we feel very comfortable that we'll be able to do so with the current strategy. Our other priority for cash deployment is to return value to you, our shareholders. As such, as we announced yesterday after market closed, we recently received a new authorization from our Board of Directors for a $1 billion share repurchase program. This multiyear plan assures that we will be able to mitigate dilution from options, as well as deliver incremental value to our shareholders. While the amount of share repurchase activity may change from year-to-year, our intent is to be in the market every year repurchasing shares, depending of course on market dynamics and other factors.

Turning last to an update on 2011 full year guidance, we're maintaining our net sales guidance of 5% to 7% growth on a constant-currency basis, with foreign exchange contributing a 1% benefit. Adjusted gross margin projections remain in the range of 43.5% to 44.5% and adjusted operating margins in the range of 22% at 23%. This translates into adjusted EPS guidance of $3.90 to $4 per share, representing strong growth of 18% to 21% over 2010. I'll reiterate, this 2011 guidance does not assume resumption of sales of Symbiq devices to new customers in 2011 but it does assume that we will receive approval of gemcitabine solution by the end of the year. In terms of quarterly calendarization, given the very strong first quarter launch in the U.S. of docetaxel and the fact that our expected sales of docetaxel in the second quarter were effectively pulled forward into the first quarter, we now expect the second quarter to be our lightest earnings quarter for the year. We also expect continued softness for medication management revenues through the remainder of the second quarter due to projected limited Plum sales until we can remediate our devices and inventory. We expect adjusted gross margins in the second quarter to be less than the first quarter given the pull forward of docetaxel sales and in the second quarter, higher manufacturing costs. But we then expect gross margins to ramp up as initially projected for the remainder of the year. As we projected on our fourth quarter call, research and development will gradually ramp up going forward during the year and SG&A will remain fairly flat in absolute dollars throughout the year. With that, I'll turn the call back to Chris.

Christopher Begley

With our strong execution in the first quarter, Hospira is on track to deliver a great year. The momentum we gained with several of our existing and newly launched drugs, as well as the advancements we made to expand our global business, position us for continued success. We also continue to make progress on our quality improvement and supply recovery initiatives. We are working diligently to ensure we are delivering the highest quality products to our customers and patients at the service levels they expect. And, we signed on a great new CEO. I know Mike looks forward to updating you on our second quarter call in July. I have truly appreciated being given the opportunity to lead this great company for the last 7 years and look forward to continuing to serve you going forward as Executive Chairman. With that, we are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Roman from Goldman Sachs.

David Roman - Goldman Sachs Group Inc.

I was hoping we could start with the guidance a little bit. Tom, maybe you could help articulate the sort of $0.15 of overperformance relative to your revised guidance range that you came out with in, I think, at the end of March? Is that all inventory stocking associated with docetaxel and some of the new products or is there any underlying performance of the business that contributed to some of the upside?

Thomas Werner

Yes, the upside, we had given a range of a couple of percent. So depending on which number you pick, it's somewhere between $0.10 and $0.14. Virtually all of it was just related to a very strong launch on docetaxel, and as we did on oxaliplatin last year, we caucused ahead of time and the commercial operations as well as our manufacturing people executed flawlessly and we're just delighted to be able to get this product to market after it unfortunately being delayed for so long, and deliver cost savings to healthcare. So the beat was mostly docetaxel and as Chris mentioned in the opening comments, we did a unexpectedly better job of clearing back orders down in the quarter and that helped us to drive some of the beat as well. So those are the two causals I would point to. The other thing that we did which probably doesn't show up too much in the numbers is that with the uncertainty around the docetaxel launch at the beginning of the year, we put in place some very tight cost controls and we saw a little bit of favorable spending as well. So those are the key drivers.

David Roman - Goldman Sachs Group Inc.

Okay. And then in the guidance for the year, it doesn't sound as though you're seeing much of a deployment of the $1 billion share repurchase authorization you announced last night with the exception of offsetting the potential impact of options being exercised?

Thomas Werner

We kind of take it as we go and see what the impact to the share price is. We've already, as you'll see in the cash flow statement, there were option exercises in the first quarter. And to live up to our commitment to keep the share count flat, we will be getting into the market pretty shortly here to offset that because that's already happened. Beyond that, we really need to see how the share price progresses, what the level of option exercises are and then what might be left over for share count reduction.

David Roman - Goldman Sachs Group Inc.

Okay. And then lastly, Chris, in your prepared remarks, right when you talked about Mike's hire, you mentioned through a global growth. And Mike, in your comments, you also talked about the international opportunity. I mean it's through the 1 area where we haven't seen -- as significant growth at Hospira's been a non-US operations. Maybe you sort of comment on what you see is the opportunity there, whether it's more from a top line perspective or margin standpoint and then whether there's something structural about the business that has to change or it's just a different management of the existing assets?

Christopher Begley

David, let me take that. As I have said publicly, one of the areas of disappointment that I have in the past 7 years is that we haven't been able to grow international as fast as I would like to, all right? Now, having said that, the main acquisition did a great job of taking and expanding our footprint and giving us some nice momentum outside of the U.S. as it related to SIP and quite candidly, the MMS product line as well when we were shipping Plums and Symbiq, et cetera, all right? And of course, Mayne also gave us some great tailwinds as it related to Paragraph IVs in the U.S. and around the world. And so, as I look at international, we've got to continue to expand our footprint both in the depth, okay, of the countries that we're in but also there's some geographic opportunities that exist for us. We are undersized, underscaled in some countries and those countries that are strategic, we are looking for any type of tuck-in acquisitions that would make sense to continue to build out international. The other key piece that we've talked about is our delivery systems in the SIP area. We've got 50% of our SIP business in this country, it's differentiated and I believe it's 20% or 25% is proprietary. We have not been able to take and launch differentiated delivery systems outside of the U.S. And so that's still hanging there as an opportunity. And the Indian opportunity and -- that Tom talked about in his comments, very well could play nicely into that. We have to still sort through that but it is a possibility that from a location and a cost standpoint, making some unique differentiated delivery systems in India could be very advantageous from an international growth standpoint.

Michael Ball

So I think that was well said, Chris. And so David, the last 8 years of my career have really been spent focused on the international market and strategies in growing the international market. So obviously, it's just been a month here but one of the reasons for coming to Hospira was this opportunity on the international side. So we're developing the strategies and down the road I'd be happy to share them with you. But I'm very excited about the opportunities in the international arena.

David Roman - Goldman Sachs Group Inc.

Thank you very much.

Operator

Your next question comes from David Buck from Buckingham Research.

David Buck - Buckingham Research Group, Inc.

Thanks for taking the question. First, on the medication management business in the U.S., I guess for Chris, can you talk about whether the sales for the quarter were actually better than your own expectations and maybe give us some flavor on what happened with Plum shipments during the quarter? And if it was better, are you expecting the second quarter to actually dip down a little bit before improving second half of the year? And then for the SIP business, can you talk a little bit about in the European market what the trend was between say biosimilars and the oncology products where you referenced pricing would be weak? And just for the second quarter, perhaps, a look at the comparison to what you expect versus still the remaining docetaxel from last year? Thanks.

Thomas Werner

Okay, a lot of questions in there. I'll do the medication management one and then we'll kind of volley back and forth here between the 3 of us on the other 1. So, MMS came in a little better than we expected for the quarter. We had dialed in virtually no sales of Plum during the first 2 quarters of the year in the U.S. and we did have some sales. So it wasn't a huge beat but we were favorable to what we had expected, sets, consumption and pricing remain fairly stable in the quarter as well. So it's a little bit of a help but nothing that huge.

Christopher Begley

Let me start out with the SIP question concerning Europe. And if you look at Europe, the trends from an SIP standpoint have been we continue to do well as it relates to our biogenerics or biosimilars in Europe and Tom referenced the share that we've been able to take in and continue to maintain in Europe on erythropoietin. And so that's a very positive growth standpoint. In the oncology area, we did see some continued pricing pressures in Europe and so the real growth is in the biosimilar area for us right now.

Thomas Werner

And then what was the last one? I...

David Buck - Buckingham Research Group, Inc.

Just if we look at the second quarter for SIP, particularly in the Americas, can you talk about what the expectation is for whether you'd see sales up given that you had oxaliplatin still in the June quarter of last year?

Thomas Werner

No, sales won't be up in the second quarter. We're going to sell substantially less docetaxel. And effectively, what we're seeing for docetaxel is the second quarter became the first quarter and the first quarter became the second quarter. So, don't expect sales to be up.

David Buck - Buckingham Research Group, Inc.

Okay, thank you.

Operator

Our next question comes from Chris Schott from JP Morgan.

Christopher Schott - JP Morgan Chase & Co

Thanks. Just, the first question was can you help us understand what type of drag on your -- are your manufacturing improvements and optimization efforts having on gross margins? And I guess overall operating profits at this point?

Thomas Werner

You mean the cost of these programs or -- I'm not sure...

Christopher Schott - JP Morgan Chase & Co

Cost for the program and then just kind of any sales, opportunities that have been, I guess lost out as you've been pursuing this?

Thomas Werner

Well, on the sales side, and Chris or Mike can add to this, we know that as we've gone through these supply issues, that we haven't been gaining the traditional amount of share that we gain. And while clearing the back orders is certainly an obvious positive for us. We're highly focused on getting the service levels back up and we expect that as we get the service levels back to their traditional high 90s range, that we'll be -- get back to gaining share like we have been over the last 6 to 7 years. So it certainly had an impact as things have been out of supply where customers have had to go elsewhere. In terms of the cost, I did mention that manufacturing cost might be a little higher in the second quarter. We've got a whole new series of cost improvement programs that are following on the heels of Project Fuel, and we're just off a little bit slower than expected start. But that'll get back on track as we enter the third quarter.

Christopher Schott - JP Morgan Chase & Co

Great. And then on generic Taxotere, can you just elaborate a little bit more on the latest market share and price dynamics in the market and what you're assuming in your guidance for the remainder of 2011 at this point?

Thomas Werner

What we had seen through the first several weeks of launch was a 45% to 50% discount and I think the share numbers we quoted in the script were 30% to 35%. In terms of pricing for the rest of the year, we're not going to disclose that at this point. It's an educated guess at best, and we're assuming that Sun [Sun Pharmaceutical Industries Ltd] will be entering in, in the second quarter with a double vial system. And while the market has been effectively fully converted over to single vial, albeit at these 2 different concentrations, we think that they'll be at a bit of a disadvantage with a double vial system. But to offset that, we're expecting very aggressive price. So right now, I'd just prefer not to talk about how we've assumed pricing will behave throughout the year. And as you know, they're not -- we don't know that they've launched. As of yesterday, they hadn't. But we're expecting that they will launch sometime here in the second quarter.

Christopher Schott - JP Morgan Chase & Co

And then just a final question, I know you touched on this earlier, but on guidance, I know some of the strength in the quarter was Taxotere stocking that was better than expected, but we've got a pretty healthy Taxotere market dynamic at this point with only 2 players out there. I know you've mentioned a couple of areas that are tracking a little bit better than expected, including Plum. We now have the share repo in here. Should we just think about the guidance for the remainder of the year with numbers not moving up as just being conservative at this point? I guess I'm just trying to get my hands around the dynamics a little bit better here. Thanks.

Thomas Werner

I don't know. You've been working with us for a while and perhaps thought [ph] conservative. But we're 1 quarter of the way through the year. We have many things that need to happen in the back part of the year, the earnings just heavier weighted -- more heavily weighted to the back part of the year. The Q1 beat really was docetaxel which came out of Q2 and a quicker-than-expected beat on getting the back orders down. So we've got a number of new product launches which we're very confident will happen in the back part of the year. We're expecting gemcitabine solution. We start selling Plum again. We get through the Rocky Mountain inspection. Maybe after we get through the second quarter, we might take a different view on it. But we still view it, we got half a dozen significant things that need to fall into the win column and then we'll be fine.

Christopher Schott - JP Morgan Chase & Co

Okay, appreciate that color. Thanks.

Operator

[Operator Instructions] Your next question comes from Paul Choi from Caris & Company.

Paul Choi - Caris & Company

Thanks for taking the question. Maybe starting with medication management. Do you have any comments on whether you've had any FDA interaction since submitting the 510K for Symbiq and if the agency has come back with any additional requests at this point?

Christopher Begley

It's really early in the process. We know they have received the submission. We know they're reviewing it and it's going to take some time before they start coming back with any potential questions. And so it's a little bit early to expect that they would have questions at this point in time but they clearly have received it, they're reviewing the submission and so more to come on that topic when we do our next call.

Paul Choi - Caris & Company

Okay, thanks for that. And then maybe talking a little bit about the supply constraint improvement this quarter. Can you maybe comment a little bit on what we're seeing with Cytarabine and where you are also with propofol versus last quarter? Thank you.

Thomas Werner

Yes. I'll talk about propofol. Cytarabine, I'll toss that one over to Chris. We are in really good shape on propofol. We've had one of our strongest production quarters in recent memory. As you may know, we were not originally a significant player in this business prior 2008. So production is in really good shape, and we're rapidly working down the back orders. There are always some mixed issues with respect to the various presentations. I think we've got 100 mL, a 20 mL, is it a 10? Chris, I don't know what the other presentation is, but we're really in good shape on the 2 smaller ones and getting in good shape on 100. So I feel really good about that in the U.S. Now in Canada, we're not quite back there. It's not a significant top line issue for us but we did incur in the quarter some failure to supply penalties with respect to Canadian propofol and we're working with Health Canada to try to see what solutions we might be able to come up with there. Chris?

Christopher Begley

Let me address the Cytarabine question and let me first of all start out with we realize the overall importance of Cytarabine from a patient standpoint and so we have prioritized manufacturing of Cytarabine ahead of all other products and are working as extremely as hard as we can to increase supply since other suppliers have gone off of the market. I think it is important though to understand that Cytarabine is the smaller product for us. It's a couple of million dollars and it's actually a smaller market as well. That doesn't make it not important to us from delivering the product on time and on a regular basis to patients who need it. And so we've got it on the top of our priority list, we've got product, it's flowing out to customers now, and we're trying to fill in for the other suppliers that are off of the market. And I believe one of the other suppliers has recently come back in the market as well. And so I believe patients will be able to receive the needed product and there should be no shortage issue there or whatsoever.

Operator

Your next question comes from Matt Taylor from Barclays Capital.

Matthew Taylor - Barclays Capital

Thanks for taking my question. First question, I just wanted to try to understand a couple of the line items here. With the income from docetaxel coming in, you said a portion of it was in that line. Can you help me understand what portion is in the sales and gross margins so we can compare apples to apples?

Thomas Werner

Yes, more of it is in sales and gross margin and less of it is in the JV income. But specific amounts, we're really bound by the JV agreement with the other partner not to disclose the splits, and we would just prefer to stand abidance with the contract. The way the accounting works is that we end up showing that amount below the line on an after-tax basis, and not to get too much into the detail here but we're in a special economic zone in the joint ventures so we've got a very favorable tax rate in place. But explaining the split, and what's where -- all I tell you is there's a cap on the gross margin and then the rest of the profit comes through the joint venture but we're really not at liberty to disclose the math.

Matthew Taylor - Barclays Capital

Okay. And then on dose, you said that you had up to 30% to 35% share in a few weeks. I know before you have said because of the formulation you thought maybe you could get a little bit more share, 40% to 50%. Do you think your share is still going to rise and you have more time in the market here or do you think that 30% to 35% is sort of your equilibrium?

Thomas Werner

Well, the one thing that we've seen is that Winthrop has been very, very aggressive in the market and the authorized generic, it's -- I might be saying this in layperson's terms but it's basically the Sanofi product with a winter play plot. So it's the same stuff. And they've been more active and aggressive than we thought. I don't recall, I just kind of turned to Karen or Chris here, whether we had said we had share up in the 50% range. That might have been with an earlier launch, back in November, December, January but with all the time that's passed by and the fact that Winthrop, we think almost by accident, got there slightly ahead of us and now with the expected entry of Sun, we think these share numbers are going to hold where they're at.

Christopher Begley

Yes. I think, Tom, I think that's very fair. And then over time, as other competitors enter the marketplace, our 25% to 30% share that we are always able to maintain and hold is probably a good number longer term. But I think Tom's summary was excellent.

Matthew Taylor - Barclays Capital

Okay, thank you very much.

Michael Ball

Thanks, Matt.

Operator

The next question comes from Louise Chen from Collins Stewart.

Louise Chen - Collins Stewart LLC

My first question is on basically the long-term guidance and what you think about your business, given the management changes, are you thinking about that any differently than you have before and does this include any share repurchase in M&A?

Thomas Werner

Louise, let me take the second part there and then Chris and Mike can take the first part. M&A, we don't have an allowance or an amount that we earmarked for M&A. So we're always looking to fill in product gaps and to fill out the portfolio and expand geographically. But estimating that and locking us into a dollar amount is just not the way we run the business. Then on the share repurchases, what we factored in for our longer-range guidance is a flat share count. So beyond that, we have not factored at any share reduction simply because it's difficult to predict exactly how much of that billion is going to be needed for keeping the share count flat. And then on the first question, I'll put that one on these two guys.

Michael Ball

And so Louise, it's Mike. I'm aware obviously of the 2011 guidance, the longer-term guidance and based on what I've seen so far, I really don't see any reason to change our profile over that type of guidance. Now obviously, as we go forward, we're going to be working through a plan but at this point, I don't see any reason to change it.

Louise Chen - Collins Stewart LLC

And then just on the second question, can I ask what gives you confidence that the issues that have been related to MMS business are on track to be resolved and is this business still a strategic fit for your core franchise?

Christopher Begley

This is Chris. First of all, let me take the strategic fit piece. We believe the MMS or the infusion pump marketplace is an excellent marketplace. There's a big unmet need around reducing medication errors and having your infusion systems be connected to all the other HIT systems. And that's not going to go away in today's healthcare marketplace. In fact, that's going to become a greater and greater need over time. Having said that, when we were shipping Symbiq and Plums around the world, at one time, we had that product line growing in the low double-digit percent from a growth standpoint. And that's something that we believe we can achieve again when we have the full product line available. In addition to that, as I've talked about before, we do find that there is a pull-through that occurs as it relates to our Generic Drug business when we have the Infusion System business in a integrated system or hospital. We've tested that with outside party here just last year and they came up with the same results and actually even a little bit stronger than what our numbers had shown. And so, the Infusion Pump System business, the MMS business, is a very good and important business to us both strategically and from a tactical standpoint and drives a nice gross profit margin as well.

Operator

The next question comes from Marsh Urist for Morgan Stanley.

Marshall Urist - Morgan Stanley

First question was just maybe talk about where we stand, in a little bit more detail, on backlog progress. What are the kind of what's left to be done? And then maybe, also in terms of the Rocky Mount inspection, kind of where things stand there, what our timeline is and as we look out beyond that, the path to getting all of this very completely behind the company?

Thomas Werner

Well we'd like to have another quarter on the back orders similar to what we saw in the first quarter to get this thing down another 30-or-so percent. But we have to, at this point, I think be equally or maybe even more heavily weighted at looking at customer service levels because back orders are not the only indicator out there. And as we start to get back into full supply and experience the share gains that we had experienced in the past, it's really -- we got to look at both metrics, back orders as well as customer service, but another quarter like the one we had and we should be just about there. There's always going to be selected shortages from place to place. I mentioned the Canadian propofol, which is a slightly different formulation. It's not a lot of sales but the various supply penalties occurred. Vancomycin, where, I mean we've maybe got 1 or 2 more back orders out there. And we're in really good shape on Vanco and as you could see, we're gaining share back. So I think another quarter like the first quarter. And then the first part of the question for Chris.

Christopher Begley

Concerning the Rocky Mount upcoming inspection, we've been preparing diligently for that inspection and feel very confident about the quality changes that we have made in response to the initial warning letter. We've had numerous consultants on board helping us out. Our new head of quality has been down to the Rocky Mountain facility a couple of times already and he's thinking it's looking very well for the FDA inspection. So we're looking forward to the inspection and believe it will occur in the second quarter. The other part of your question is around the fact that what we've done is we've taken our learnings from both the Clayton facility and the Rocky Mount facility and have made those holistic changes that we're making across all our manufacturing facilities. And that's tracking very well and it's raising the bar internally for us, which we're very pleased and believe it's appropriate to do. And quite candidly, we believe it's going to be a competitive advantage as we move forward here. As I've said many times, typically what happens is as the largest supplier of injectable generic drugs in the U.S., you tend to be first out of the gates as it relates to new expectations from the FDA and we're meeting those new expectations and we know that, that will occur throughout the industry, and we've already quite candidly had seen some of that as it relates to the drug shortages that we're experiencing in this country.

Thomas Werner

And the only thing I'd add there is the FDA is in our facilities, I won't say at all times but at any given time, they could be in there. They've been over to the Orchid Penham [ph] facility. We received a clean bill of health there. And they've also been to our factory in Croatia and we received a clean bill of health there as well. So we're encouraged with the inspections that have taken place at other facilities and we're looking forward to getting through the Rocky Mount inspection as well.

Marshall Urist - Morgan Stanley

That's helpful. And I was going to ask and I appreciate the detail there on the kind of the manufacturing base outside of the U.S. for SIP. Are there more sort of big inspections planned for this year that you will feel better about the FDA maybe has moved on from you guys at this point or is it going to be sort of regular inspection frequency from here on out?

Michael Ball

That's a very interesting question that you're asking because there is not a planned type of schedule as it relates to any regulatory body inspecting your facilities, okay? Those inspections just happen. They happen for a variety of reasons all the way to when you submit a new product, there's typically a inspection that occurs before the new product is approved. And so the more new products that we take and launch, the more inspections we have. And that goes for our own products and products that we make for third-party suppliers as well. And so, at any point in time, in any week, week and a half, believe it or not, as many as 10 inspections going on around the world from different agencies around the world. And so it's a way of life, okay? It's something that to be successful in this market, you need to know how to deal with and always be shooting ahead of the duck, which is why we are making all of our changes from the recent warning letter holistically around the world. Because the agencies, the different regulatory bodies around the world tend to, over time, gravitate to a standard. It may take some time but it does gravitate to 1 standard.

Marshall Urist - Morgan Stanley

Perfect, that's helpful. And then 1 last 1 for me, interesting development in the quarter, too was 1 of your competitors getting a generic IV iron approved, obviously a product you guys have been working on. Any movement there to think that the FDA has finally gotten comfortable with standards there and maybe we can see some progress there this year?

Michael Ball

Yes, let me take that and let me kind of give a background for all of our listeners, okay? And the short answer is we don't anticipate receiving approval for an iron product this year whatsoever and we don't see that even on our outside list at this point in time. Iron sucrose or Urbina is one of the compounds that's in our pipeline and we have talked about the fact that it is in our pipeline. We are not working, just so everyone's clear, on prolicit [ph]. We believe the other opportunity is larger for iron sucrose and that makes more sense. And the other thing that we've talked about before is these are very difficult products to make. They're complex molecules and so we have a submission, we're working it and it's too premature to talk about putting it into a forecast or guidance or anything like that. And so you can anticipate that over the next couple of years versus 2011.

Marshall Urist - Morgan Stanley

Okay, great thanks for taking the questions.

Michael Ball

Thank you.

Operator

The next question comes from Rick Wise from Leerink Swann.

Frederick Wise - Leerink Swann LLC

Just turning back to a couple of financial questions. Tom, could you talk a little bit more about the gross margin flow? I mean you had said on the fourth quarter call that we're going to get to the, I think 43 to 45 -- 43.5 to 44.5 and is that still your thoughts for the year? And how do we think about the flow now as we go through the second quarter issues that you talked about?

Thomas Werner

Rick, thanks. That's the expectation. We said in the opening comments we're remaining with the guidance there. Essentially, in just about all respects, as I said before, Q2 and Q1 sort of changed places and we had expected margins to be softer in Q1 without the heavy docetaxel launch. So margins will dip down Q2, come back a little bit in Q3 and then Q4 will be the strongest.

Frederick Wise - Leerink Swann LLC

Here's what I'm not understanding. If back orders are going to be reduced substantially again in the second quarter and I'm guessing that helps margins in manufacturing volumes, et cetera, and if there's still -- I appreciate that there's going to be some competition but it's still going to be substantial incremental docetaxel sales. What am I missing, Tom about the second quarter gross margin weakness?

Thomas Werner

Well, the impact of docetaxel is not insignificant. We're going to sell a heck of a lot less. Certainly, maybe pricing plays out better, Sun doesn't enter the market and we could -- we'll have a different view on it. But right now, with our visibility, we're going to sell substantially less and that'll impact things pretty heavily. Also, as I mentioned, we've had a slower than expected start on some cost improvement programs that are following on the heels of Project Fuel. And that's going to weigh a little bit in the quarter. The other thing is that we held back from spending on manufacturing projects, capital spending, as well as the stuff that flows through the income statement relative to those projects until we could get better visibility on docetaxel and a few other things. So that's what's really driving it. I don't really think you're missing anything, but with a lot less docetaxel and continued delays on some of these cost improvements, that's going to be really what drives it.

Christopher Begley

Rick, this is Chris. You didn't ask this specifically, but let me frame it a little bit differently. I mean, Tom is right as you talked about Q2 but let me talk about the next 3 quarters because I've got Mike to give our listeners all a good perspective. As we look at the next 3 quarters, there's a couple of things we need to get done in order to continue to drive improvement in gross margins. First, is the continued service levels improvement and end up hitting the 90% level, high 90% level, I'm sorry, in the fourth quarter. What that results in then is it puts us in a position from an SIP standpoint, Rick, where we can begin to take and start gaining market share or maintaining our share depending on what quarter we're talking about versus losing share, okay? And so by doing that, we actually end up then getting through the gross margin is improved product mix, okay? And as that improved product mix flows, you see the margin go up. In addition to that, as we look at the next several quarters, our manufacturing efficiencies continue to improve. And then finally, there is 2 real key things that occur from a gross margin standpoint the back half of the year is we restart capital sales, okay, on our infusion pumps in Q3 and Q4 and then the gem solution launch that we've got planned for Q4. And so you really end up seeing improved product mix the back half of the year. You see some manufacturing efficiencies kicking in the back half of the year and all of that on top of it is you see the back orders reducing, which then enables us to be more aggressive from a share gain standpoint.

Frederick Wise - Leerink Swann LLC

That's very helpful, Chris. 2 other quick ones. I want to make sure I understood the tax benefit impact going forward, Tom. Is this now a permanent part of every quarter and so taxes are going to be offset by the income from affiliates? How do we quantify it going forward?

Thomas Werner

Well, a couple of things that happened with taxes in the quarter, not shown on the ongoing results was the resolution of the audit of the 2006 and 2007 that was flushed through as a one-time benefit on the GAAP statements. So I'm assuming you're not talking about that.

Frederick Wise - Leerink Swann LLC

Right.

Thomas Werner

On the JV, we really have to show -- the accounting rules are that we would show the JV income after tax. So the effective tax rate, you have to take the income taxes and divide that by the pretax income before the income from the joint ventures since the income from the joint venture is showing on an after-tax basis. So if anything, it might cause the reported effective tax rate to be at the higher end of that 22% to 23% as opposed to the lower end.

Frederick Wise - Leerink Swann LLC

That's exactly where I was going. And last, maybe a last question for Mike, Mike it's a -- have you -- a tough agenda that you got to extend growth, you got to expand global reach and you got to drive top-tier financial performance. I assume you signed up for all of that. But I'd just be curious as what you view as top-tier financial performance? Thanks, everybody and congrats on everything, Chris.

Christopher Begley

Thank you.

Michael Ball

Why do top-tier financial performance is in the top quartile? So as we look at the performance of this company moving forward, when I came here from Allergan to join a winning company and I think that there's a recipe here and opportunities here to really drive this company and build on the great job that Chris and the team have already done. So I'm looking for that top-tier performance.

Frederick Wise - Leerink Swann LLC

Thank you.

Karen King

Thank you. We are going to be concluding the call at this point. Thank you for joining us today. And we're now ready to end the call. Thanks.

Michael Ball

Thank you.

Thomas Werner

Thank you.

Operator

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

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