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Executives

Sumant Ramachandra - Chief Scientific Officer and Senior Vice President of Research & Development & Medical Affairs

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

Analysts

Matthew Taylor - Barclays Capital

David Roman - Goldman Sachs Group Inc.

Jayson Bedford - Raymond James & Associates, Inc.

Gregory Gilbert - BofA Merrill Lynch

Robert Goldman - CL King & Associates, Inc.

Jessica Fye - JP Morgan Chase & Co

Alan Sonnenfeld

Frederick Wise - Leerink Swann LLC

David Buck - Buckingham Research Group, Inc.

Marshall Urist - Morgan Stanley

Louise Chen - Collins Stewart LLC

Gregory Hertz - Citigroup Inc

Hospira (HSP) Q2 2011 Earnings Call July 27, 2011 9:00 AM ET

Operator

Welcome to Hospira's Second Quarter 2011 Conference Call. [Operator Instructions] I will now turn the call 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 second quarter of 2011. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; and Tom Werner, Senior Vice President of Finance and Chief Financial Officer. We'd also like to welcome Sumant Ramachandra, Senior Vice President and Chief Scientific Officer, who will be joining us for Q&A.

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 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 presentations page in the Investor Relations section of our website.

Also posted on our website is a presentation of complementary material that summarizes the points of today's call. We will not be speaking directly to the material which is posted on the Presentation page at www.hospira.com. The material is for your reference to use as an enhanced communication tool.

Finally, we'll be ending the call at the top of the hour this morning. [Operator Instructions]

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

Michael Ball

Thank you, Karen, and good morning, everyone. Welcome to our second quarter earnings call. I'm excited to be leading the call today and pleased to be sharing with you highlights from the quarter.

We had strong global net sales performance of $1.1 billion, representing a 10% increase over the second quarter of 2010. We ensured that our customers and patients had access to Docetaxel and other pharmaceutical products, as we made progress towards improving our customer service level goals.

Adjusted gross margin was 40.7%, and adjusted operating margin was 19.9%. This translated into adjusted diluted earnings per share of $0.94, a 9% increase from the second quarter of 2010.

I've spent a good deal of my time over the past few months meeting with our customers around the world to better understand their needs and what they are looking for from Hospira. As a result of my discussions, I am firmly convinced that Hospira is uniquely positioned to address customers' most pressing needs around cost, productivity and safety. And so to be able to provide our customers with the highest quality and best selections of products when and where they need them, I've directed the organization to sharpen their focus to ensure that, first and foremost, we have the right processes in place across our global operations to produce the highest quality products for our customers and to complete the remediation of our infusion devices; second, that we have enough supply on hand to make certain our customer service levels meet our customers' needs and demands; and third, that we are taking action today to accommodate future growth needs with regard to capacity in our plants to ensure that we will be able to meet customers' demand in the future.

Now, why am I telling you this? Because these objectives will be important for us over the next several quarters. They will drive improved customer service levels and market share, both areas in which we have already seen positive results in the second quarter. But this focus will also create some near-term challenges, such as temporary increases to inventory levels and a delay in implementing certain manufacturing improvement efforts. This will in turn affect our margin performance and has, in fact, caused us to revisit our full year margin projections, which Tom will discuss when he addresses the quarter's financial performance and guidance.

But this focus on meeting our customer needs and providing them with valuable solutions is what will drive Hospira's growth and longer-term success. I’ll look forward to discussing this overall concept in more depth with you at our upcoming Investor Day in September.

In the meantime, I will now highlight our strong sales results for the quarter, as well as update you on the progress we're making with our quality and supply efforts, after which Tom will discuss the financials.

As a reminder, references on this call to net sales results are on a constant currency basis which excludes the impact of foreign currency fluctuations. Our press release provides full details on the impact of foreign currency on net sales by segment and product line.

As I have mentioned, we were pleased with our strong global net sales performance for the quarter. On a constant currency basis, net sales represented a 7% increase over the second quarter of 2010.

By product line, Global Specialty Injectables net sales increased 14% for the quarter. Despite a tough year-over-year comparison, strong sales performance from both docetaxel and gemcitabine, coupled with market share gains and strength in our core SIP business, more than offset the second quarter 2010 impact of U.S. sales of oxaliplatin, which were temporarily suspended at the end of that quarter.

By segment, Specialty Injectables net sales in the Americas were up 16% for the second quarter. Docetaxel performed extremely well during the quarter, as did many of our other SIP drugs, including meropenem, gemcitabine, Precedex and others.

Drilling down into the growth drivers for the quarter, first, docetaxel. We saw exceptionally strong demand at the tail end of the quarter for this generic drug. Due to limited competition and continued strong demand for docetaxel, both volume and price in the quarter was better than we had anticipated, resulting in stronger sales and a favorable adjustment to our chargeback provision.

We were able to obtain peak market share levels over 50% at stable pricing levels of 40% to 45% off the branded product pricing. Although we have begun to see small amounts of Sun and Accord product in the channel, pricing has remained rational. Both competitors launched a dual-vial product versus our single-vial product. We expect more significant pricing pressure during the third quarter when Sandoz is expected to launch its single-vial solution product.

Meropenem. We continued to maintain a significant market share for this anti-infective during the quarter, holding just under 50% share of the total U.S. market. With only one other competitor in the market, pricing remains strong, and we expect continued momentum through the rest of the year.

Gemcitabine. We have over 15% market share with our 2-gram gemcitabine powder product, despite other competitors entering the market at the end of our exclusivity period in May. Teva's and APP's 180-day exclusivity period for the standard presentations expired a couple of days ago, and we have since launched our 1-gram and 200-milligram powder presentations. This, combined with the approval we expect on our gemcitabine solution product in the second half of the year, means that by year end, we should have a full portfolio of powder and solution product to offer our customers.

Turning now to the EMEA segment. Net sales of Specialty Injectables were relatively flat compared to the second quarter of 2010. Significant volume share gains on injectables were offset by expected competitive pricing pressure, primarily on oncology molecules.

We launched meropenem in most major countries during the first half of the year and have become the largest generic provider of the drug, maintaining a significant market share position across the region. We also launched imipenem, our second penem product, in several countries during the quarter and anticipate additional launches throughout the second half of the year.

Docetaxel continues to gain volume in the countries we participate but faces steep price erosion due to the significant number of competitors for this product. And on the biosimilar front, Retacrit continues to perform well. We recently secured another 6 months of stability, which extends the shelf life of the product to 30 months versus the standard 24 months. We and our partner STADA are the only biosimilar player in the market to attain this extended stability, which speaks to the quality of our product. The penetration of biosimilars across the region continues to climb, and Retacrit is maintaining its leading position of over 50% market share in the total short-acting EPO biosimilar market in Europe. We also continue to progress with the launch of Nivestim, our biosimilar G-CSF product.

Net sales of Specialty Injectables in Asia Pacific increased 12% over the prior year second quarter, primarily a result of strong performance by docetaxel and Precedex. We now hold 45% market share of docetaxel in Australia since launching the product last quarter. Volume gains continue to outpace fairly aggressive pricing as a result of competition in the region. Precedex has gained significant momentum in Japan. Approval of our long-term indication last year, coupled with recent increases in our sales force, drove significant volume growth in the country.

And on the biosimilar front, we are quickly taking a leading position with our Nivestim product, which remains the only biosimilar G-CSF in Australia. Using some of our learnings from Europe, we executed an extremely successful launch. We have secured access to a significant portion of the market and estimate we have captured around 15% to 20% of the market from the originator product.

Turning now to Medication Management. Global net sales declined 3% versus the second quarter of 2010, primarily a result of performance in the Americas where net sales decreased 4% year-over-year due to a difficult comparison to the second quarter of 2010. We saw softer sales of Plum device versus last year's quarter in line with expectation we outlined on our fourth quarter call, which highlighted a general slowdown in the device sales as we work towards starting our Plum field correction. As a reminder, our Plum devices are not on shiphold. However, we believe many customers are waiting to purchase the devices until remediated pumps are available.

Outside the Americas, Medication Management net sales were up 5% in EMEA and 3% in Asia Pacific. Both regions had solid dedicated net sales but were impacted by the Plum field correction situation.

Sales in our Other Pharma product line decreased 5% on a global basis, primarily due to softness in solutions, as we work to improve product mix.

In summary, the second quarter was a very good quarter from a sales standpoint. We also made progress with regards to our quality and product supply improvement initiatives.

Regarding the 2010 warning letter we received from the U.S. FDA related to our 2 facilities in North Carolina, we mentioned on our last quarter call that the FDA completed an inspection of our Clayton facility with no observations and that they were expected to be in our Rocky Mount facility in the second quarter.

During the second quarter, the FDA completed an inspection of Rocky Mount as expected. While we received verbal feedback acknowledging that we had made progress with respect to our validation processes, the agency was not fully satisfied. We received observations and are aggressively working to address their areas of concern. We have submitted a full response with corrective and preventative actions. We continue to interact and work with the agency to resolve our warning letter and fully comply with their expectations.

On the device side of the business, regarding our 510(k) submission for Symbiq, we are in the process of responding to a series of questions from the FDA on our filing, which will be submitted during the third quarter. We expect continued dialogue through the second half of the year as the FDA works its way through the submission.

Relative to our Plum devices, while we had hoped to start remediating pumps in the field at the beginning of the third quarter, we are still in the process of validating the replacement boards. We expect field remediation will start in a couple of months and continue through 2012. While we are disappointed with this development, we are fully focused on quality and want to ensure reliability of the new boards before we proceed with the remediation. As a reminder, we are still selling Plum devices while we advance our efforts but believe many customers are waiting for the remediated pumps.

In addition to the Plum replacement boards I just discussed, as part of our quality initiatives, we are engaging in a comprehensive product review of all of our device products. In the interest of transparency, I will mention that while we are still in the earlier stages of this process, there is a possibility that additional remediation efforts could surface as a result. Over the next couple of quarters, as we complete the infusion device reviews and proceed with the investigative stage, we will have a better sense of any potential implications.

In terms of product supply, our efforts are paying off. We continue to make improvements in decreasing backorders and improving service levels. If you recall, we were targeting high 90% service levels by the end of the year, the levels our customers deserve and have been accustomed to for many years. Mid-year, we are already at the mid 90% level, the best we've seen in almost 2 years, and expect to continue to climb a few more percent during the second half of the year to reach our goal.

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

Thomas Werner

Thanks, Mike. Thanks, and good morning, everyone. Moving down the income statement, although we're very pleased with this quarter's sales performance, adjusted gross margin in the quarter was 40.7%, down 230 basis points from the 43.0% we saw in the second quarter last year. The decline was primarily the result of a tough year-over-year comparison, really driven by the strong full margin contribution from oxaliplatin in the second quarter last year, which was partially offset this year by docetaxel performance. But as a reminder, our docetaxel product is manufactured through our Indian joint venture, and a portion of the ultimate profit margin generated by docetaxel sales is not included in gross margin, but it's accounted for in the equity income from affiliates line in the form of joint-venture income. So the margin has to be looked a little bit in tandem when looking at docetaxel.

In addition, as Mike mentioned in his opening remarks, our focus on driving higher-quality manufacturing processes and products has impacted the timing of certain of our cost improvement and lean optimization efforts in manufacturing. These items, along with the impact of foreign currency, resulted in near term negative impact to margins.

R&D expense decreased 18% in the quarter to $66 million. In the second quarter of last year, R&D expense included an initial milestone payment of $27.5 million under a licensing agreement with DURECT for the anesthetic product POSIDUR. Excluding that payment, R&D as a percentage of net sales was 5.5% last year in the second quarter compared to 6.2% this quarter with the year-over-year increase primarily a result of higher clinical trial spending in 2011.

SG&A expense for the second quarter was $156 million, down 8% from the $170 million for the same period last year. This reflects some higher spending last year in the second quarter due mainly to a litigation settlement payment and related charges, spending associated with Project Fuel optimization initiatives, as well as acquisition and integration charges. SG&A as a percentage of net sales was 14.6% compared to 17.5% in the second quarter of 2010.

Adjusted operating income was $212 million compared to $213 million in the second quarter last year. Operating margin at 19.9% decreased 210 basis points versus the 22.0% in last year's second quarter. Equity income from affiliates, as I mentioned before, our joint-venture income was $12 million compared to less than $1 million in the second quarter last year as a result of the significant contribution from docetaxel that's produced at our Indian joint venture. The result was a strong adjusted diluted earnings per share for the second quarter of $0.94 compared to $0.86 last year.

Turning to cash flow. Cash flow from operations for the quarter was $247 million. Much of the increase in this quarter compared to last year relates to the timing of chargeback payments in both periods, which was tempered in part by higher inventory levels related to new product launches and inventory builds as we work toward improving our service levels.

Capital spending in the quarter was $76 million compared to $39 million in the same period last year. The increase primarily relates to investments we are making with respect to capacity expansion and IT initiatives. At June 30, our cash balance was $601 million, compared to $604 million at the end of last year and $783 million at June 30 of last year.

Before moving to guidance, I'd like to update you on our share repurchase progress. You may recall that we received a new authorization from our board of directors in April this year for a $1 billion share repurchase program. And we conveyed that our intent with this multi-year plan was to both mitigate dilution from options as well as deliver incremental value to you, our shareholders. We were able to do both this quarter. We entered into accelerated share repurchase or ASR agreements, which we completed in early July, and under the agreements, we were active in buying back 3.7 million shares for a total of $200 million during the quarter.

Turning finally to guidance, we are increasing our net sales guidance and now expect to grow 7% to 9%. This is up from the previous 5% to 7% guidance. Of course, this is on a constant currency basis. The positive contribution from docetaxel in the first half of the year, coupled with additional market share gains, expected increased pump sales and new product releases in the back half of the year, all contribute to strong growth and an increase in our full year sales guidance. Additionally, foreign exchange is expected to contribute an incremental 2% benefit. With that being said, we are lowering our adjusted gross margin projections to a range of 41% to 42% and lowering adjusted operating margin guidance to the range of 20% to 21%. As Mike mentioned, our near-term focus on quality and product supply has delayed implementation of certain of our manufacturing improvement initiatives, which in turn, has created a negative near-term impact that we expect to affect the rest of the year's operating and gross margin performance.

In addition, we believe with increased competition for docetaxel in the third quarter, our market share position on this product will come off its peak share levels and that pricing will erode in the second half of the year further than we had initially expected. We are maintaining our adjusted earnings per share guidance of $3.90 to $4, representing strong growth of 18% to 21% over last year. The range does assume that Plum remediation starts by the end of the third quarter, that our gemcitabine solution receives approval by the end of the year and that we continue to reduce our backorders and improve our service levels.

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

Michael Ball

Thanks, Tom. In summary, we are very pleased with our second quarter sales and earnings results and the strong demand for our Specialty Injectable products. In addition to making significant progress with our recent new product launches, we drove momentum in gaining back market share in some of our existing core products.

Where we fell short is in our operational performance. We are not happy with where our margins are today, nor where they will be at the end of the year. As I mentioned at the outset of my comments, our primary focus is providing our customers with the highest quality and best selection of products, when and where they need them, even if this creates some short-term challenges. We see this as a temporary obstacle and believe we can convert our current actions into a long-term advantage for Hospira.

The organization made a commitment to you in February to grow our earnings per share to $3.90 to $4. The path forward will be different and more challenging than what we initially envisioned, but we remain focused on achieving our previously projected range given this commitment and our expected strong sales performance subject to product approvals and progress on our remediation and service-level efforts.

We believe we are on track. As I mentioned, our backorders are decreasing, our customer service levels are steadily improving and we have started to build momentum in gaining back market share.

I look forward to meeting many of you and sharing more about my learnings from my first 150 days at Hospira at our upcoming Investor Day on September 7, when we'll also be highlighting some of the key drivers and areas of opportunity we see for the company going forward. In the meantime, we will continue to focus on driving value for our customers, patients and you, our investors.

With that, we are now ready to take questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

Let me start off with the gross margin, and maybe you could as well tie this into some of your initial reactions to joining Hospira. You said you're not happy with where it is today. I understand that, and you're not happy where it's going to be at year end. Where should they be -- with your fresh set of eyes -- where should they be in your mind? And as you resolve these sort of near-term issues, maybe talk about how you think you're going to get to longer-term where you think they should be.

Thomas Werner

Rick, it's Tom. I'm just going to get a little backdrop here and then turn it over to Mike. Our margins in the quarter came in about where we thought they we're going to come in. We're not happy at 40.7%. If you look at last year, we were at 43%. However, if you sort of make an adjustment for this joint venture and get apples-to-apples, we're sitting around a little bit over 40%, right around 42%, 42.5% on an apples-to-apples basis. So we're not pleased, but we're not that far off of last year. The other thing that's happened is that losing oxaliplatin and having it replaced by docetaxel, it works through different lines on the income statement, and that distorts it. So that's the first point. We also got hit this quarter for about 100 basis points of foreign exchange primarily related to the unbelievable strength of the Australian dollar. We've taken you guys through the cost structure here and how, when that happens, it tends to hurt us. But as we came into the year, we felt that oxaliplatin would be offset by docetaxel and that Project Fuel savings plus additional cost savings in manufacturing would more than offset the increased quality cost that worked their way into the system after last year. Unfortunately, as we explained, with the focus on quality and improving service levels and building back supply, we've just gotten off to a much slower start this year on cost improvement programs than we had originally anticipated. So that's sort of the backdrop for the quarter. It's not where we'd like it to be. We understand it. Mike and I have had some dialogue on where he'd like to see margins. And I thought with that, I'd turn it over to him.

Michael Ball

Thanks, Tom. So I think the thing, Rick, is that we do see opportunities in the gross margin line. And at the Investor Day, I think we'll be in a position to talk a little bit more about that as we sort through precisely what we are going to do from a strategic standpoint. But given where the gross margins are today, I do see opportunities, obviously, to take them up. And that in my mind is a very big deal. The leverage I think we can get with this company in terms of the operating performance is tremendous. And from a sales standpoint, if we can keep the sales line going and improve that operating performance, then at the end of the day, we should have great bottom line accomplishments.

Operator

Our next question comes from the line of Louise Chen with Collins Stewart.

Louise Chen - Collins Stewart LLC

The question I had was with respect to your guidance that you gave earlier this year, 17 launches in various regions with slightly over half in second half '11. How many more of those launches are you expecting in the second half? And then maybe if you could give the brand sales magnitude of those launches, how they compare to what you see for docetaxel.

Thomas Werner

Well, to give you the precise numbers, we'll probably have to do that in a separate call. But we're expecting gemcitabine solution to be approved by the end of the year. Imipenem is awaiting approval. We've got a couple of products that have just launched yesterday, our additional presentations of gemcitabine and docetaxel in more full launch throughout Europe, as well as both meropenem and imipenem. But, Louise, precise numbers, I'd have to dig those out, and we can get those to you when we chat.

Karen King

It's Karen. We normally do, do a pipeline update midyear, but because the Investor Day is coming up in a month, we're kind of holding off, so we'll do a full pipeline update at that event.

Operator

Our next question comes from the line of Marshall Urist with Morgan Stanley.

Marshall Urist - Morgan Stanley

Another gross margin question. I was wondering if you could just give us a little bit more granularity into what were the moving pieces between the delay in some of these manufacturing improvements, Taxotere pricing that kind of lead you to the underlying assumption for gross margin for the second half of the year. And then I guess related to that, obviously you're not going to give 2012 guidance right now, but maybe just how you're thinking about these cost savings and flowing through over the next 6 months. And does that also delay maybe where people were thinking you would enter 2012 from a gross margin perspective?

Thomas Werner

Marshall, it's Tom. I'll take the first part of that and if Mike or Sumant want to add anything, I'm sure they will. So docetaxel really doesn't impact our gross margin terribly. The way the whole joint venture agreement is set, there's a cap on gross margins, and the cap is not terribly different than our company average gross margins. So that really doesn't -- assuming we don't drop below certain thresholds, docetaxel by itself doesn't really move the percentages. The dollars it certainly does, but from a percentage standpoint, it's not going to move the needle. In terms of manufacturing, year-over-year, we're probably $70 million to $80 million behind where we needed to be from a cost improvement program standpoint. We're not spending any additional dollars on the quality initiatives beyond what we initially expected. It's simply the situation with the bandwidth or the plant management teams, they're only able to do so much. And our focus right now is on product quality and getting our supply levels built back up. And unfortunately, it's caused the cost improvement programs to shift. Now with respect to 2012, certainly, we're not going to enter the year with the numbers where they're at. We expected to exit this year with higher margins, the original guidance obviously was much higher. But the projects are still out there, and they're specific projects, plant by plant. And we will get to them. It's just a matter of getting the quality and product supply issues in the rearview mirror and then being able to focus fully on LEAN and cost improvement. Mike or Sumant, anything?

Michael Ball

Just echo what Tom said. Really it's what I talked about in my prepared remarks. We need to ensure that we are making the highest quality products with the highest quality processes. We have to get things remediated. That really, in my mind, is job #1 at this point. I think from a margin standpoint, those margins will come as we improve the quality, we improve our processes. As Tom said, there's a number of initiatives that we have that I think will drive margins up.

Operator

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

Alan Sonnenfeld

It’s actually Alan Sonnenfeld on for Ronny. We had a quick question on the specialty pipeline and marketed products. Was wondering if you could comment on the Precedex litigation and then also the price pressures that you're seeing with new entrants in the heparin and Vancomycin markets.

Thomas Werner

It's Tom. I'll handle the pricing, and then Sumant can try to talk about where the litigation is at. Heparin pricing has been a little tough. There were a few new entrants into the market. We think the pricing has stabilized, and we're expecting to see strong growth in the back part of the year. Vancomycin, we've gained a tremendous amount of share back. Pricing is down a little bit year-on-year but not terribly beyond what we expected. But we're back, flush with supply, no backorders and gaining share, and hopefully getting back to the levels we were at before. With respect to the litigation, there's not much new there, but I'll let Sumant kind of update us.

Sumant Ramachandra

This is Sumant. As part of the litigation process, all summary judgment motions have been filed. And we have no expectation that either of the patents that are being challenged and pursued will be invalidated on summary judgment. So that's the current status. Nothing has changed since I think we have last updated the markets.

Operator

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

Jessica Fye - JP Morgan Chase & Co

It's actually Jessica Fye on for Chris. Just on the Rocky Mount plant. I know you're working really closely with the FDA here, but can you all maybe offer some, just some color on what specifically these observations were and also potential timing and cost about fully resolving it?

Thomas Werner

It's Tom. I'll take the first part of that, and Mike can add in here. The FDA was back in the facility. We did receive a 483 with some observations really, again, relating to quality practices and processes and, more specifically, related to how investigations of exceptions are conducted. We did respond to the 483 a couple of weeks ago. There's no set time frame for the FDA to get back to us on that. We're not expecting there to be a substantial amount of additional cost. It's just heavy lifting and working through it. It's just a little bit too early to predict the timing and the cost of it. We did receive some verbal acknowledgment that we had made some good progress. But unfortunately, it was not to the full satisfaction of the agency, and we're working very cooperatively with them to move forward.

Michael Ball

Absolutely, a couple of additional things. We're taking all necessary steps in order to support Rocky Mount. We have sent down a team from Lake Forest, what I'd describe as the A-Team of quality specialists, LEAN specialists, process specialists in order to give them all the help they need. We have deployed consultants at the actual floor level, as well as higher-level consultants. We have increased the number of quality people in Rocky Mount by some 20 folks, going to 30 more people. So we are doing everything that can be done to ensure that we ramp things up as quickly as possible to get to the quality levels that both we want and the FDA wants. And I think at the end of the day, when we get through this thing, we'll have a very high quality plant making extremely high quality products.

Operator

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

David Roman - Goldman Sachs Group Inc.

I wanted just to come back to the full year guidance. If I look at the first-half performance on a revenue and earnings basis, I think you grew, at least according to the files you sent out, 2.4% for the first half of the year on a constant currency basis and did about $1.86 in earnings for the first half. If I annualize those results, it's still below what you're guiding to for the full year. So I'm just hoping you could help us articulate what specifically is going to get you from the first-half performance of 2.5% up to a double-digit number in the back half and whether in fact those things are materializing today or they are events that are yet to materialize to get you to those numbers.

Thomas Werner

It's Tom. Two things, top line and manufacturing. Top line, we started to see, late in the first quarter, early in the second quarter, an uptick in demand. And frankly, we weren't sure whether it was sustainable and long term or if it was a blip. It's our feeling now that it is sustainable, and as you look at IMS data to the extent you want to believe it month-to-month, we are seeing some real strong share gains, particularly in the U.S. So when you look at the Vancomycin, heparin, propofol, hydromorphone, the whole Carpuject product line, we're really seeing strong demand. I'd add to it, the wholesalers look to have dropped their inventories down from the end of last year. I don't know whether that's an upside for us or not. But the sales growth in the back part of the year, half of it's coming from the U.S., and it's across the broad product line, plus getting Plum back into an order-taking mode, plus gem solution, plus imipenem. And then the other half is coming from outside the U.S., primarily from Precedex in Brazil and Japan, as well as biosimilars and some other products that were either launched late in the second quarter this year or are going to be launched in the back quarter. So the top line is driving quite a bit of it. The other piece is manufacturing. We are seeing that there's been an improvement in the number of cost reduction programs that we’re able to get at. Is it where we'd like it? Absolutely not, but it's better than it was. And one of the things that we see as we progress through the back part of the year as we do our -- the bulk of our preventive maintenance shutdowns in the third quarter. So margins typically drop. But as these cost improvement programs, we think, are starting to take hold, the accounting for all that, there's a bit of a delay before it hits the income statement. So I know when you take a $1.86 or $1.87 and then just annualize it out, we don't get to $3.90 to $4. We need, what, I think $2.13 or something on that order. And we expect to get there. And a lot of it is driven by a top line, and we're seeing the demand. The other thing that's going to help us a little bit just on the bottom line is the share count. We’re going to be assuming a share count of about 169 million shares for the rest of the year as opposed to the number we had before. So that's helped us out a little bit. We're also having tight cost control in the SG&A area. Nothing that we feel is going to harm the longer-term prospects for the business, but just some good common sense things we can do in light of the manufacturing situation we're facing. But we see it turning around, and we're really excited. If the sales numbers play out like we think, we're going to grow in high single digits. And this quarter was also a record quarter for the company from a sales standpoint. So for the first time in a while, it looks like we're starting to see the high single digit growth, and that's going to carry a lot of the load in the back part of the year.

Operator

Our next question comes from the line of Matt Taylor with Barclays Capital.

Matthew Taylor - Barclays Capital

Just wanted to ask a question on the pumps. Can you give us a little bit more color around the delay and then the confidence that you have in it returning? It sounds like you're saying now more in the fourth quarter, but maybe in the context of Baxter's recall, I think they said they're through about 3/4 of their account. How are you thinking about the opportunity there as well?

Michael Ball

So I'll take that one. With respect to the Plum, then, as I mentioned in the compared remarks, we’re working on the validation of the board for the piezo alarm. And we expect that to be resolved during this quarter, and we expect to have it in our new machines at the end of the quarter and start shipping them then at the end of the quarter. So it should hit end of third quarter and then the fourth quarter. So that’s our expectations around the Plum. With respect to the colleague opportunity, while we've taken advantage of colleagues' misfortune, unfortunately ourselves, we have not been in position to take full advantage of it. There's still a number of large accounts in play. I think that window closes by the end of this year or certainly by the first quarter of 2012. So it really is to the degree that we can get the Plum back on the market, we'll dictate a lot of how much of advantage we are able to take care of that particular situation, as well as our Symbiq, which as you know is in the FDA for review with the 510k. At what point do we get that, and we are assuming will have that product at the very end of the year.

Operator

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

David Buck - Buckingham Research Group, Inc.

Two quick ones. Tom and maybe Mike, if you could just review the pricing overall for your base business without docetaxel. And Mike, you talked about delivering a different way the $3.90 to $4 for this year. Can you talk about maybe the opportunity to deliver what the goals have been for 2012, 2013? Is that still intact or do you see challenges now in making at least the EPS forecast that people were counting on?

Thomas Werner

David, it's Tom. For pricing, I'd really talk about it in 2 pieces. In the U.S., pricing was down a little bit, less than 1%. Most of it's coming out of heparin and Vanco and primarily out of heparin, but nothing that we didn't really anticipate happening. On Vancomycin, we're really focused on getting our share back, and we see some good momentum there. In Europe, we did have strong volume gains, but we continue to see pricing pressure on the oncolytics, including docetaxel, that sort of washes out the impact we're seeing from volume. But we've got a strategy right now to drive more volume through our factories and, hopefully, target some lower costs in the end. So this is not unanticipated. So I’d sort of concluded by saying, it's down a little bit, but nothing that we're surprised or concerned about.

Michael Ball

And David, when I said make it in a different way, of course, what I was referring to is with the gross margins not being where we would like them to be, then the pressure goes to the top line to increase sales. And we are feeling very confident that if in fact we get the product approvals on time, that we get this continued share expansion, that we get the Plum in a situation where we're able to ship it at the end of the quarter, that sounds like a very good way to offset the gross margin. As you look forward into the following years, obviously, a better sales trend is extremely positive. And still having the opportunity on gross margins, I think, is another tremendous opportunity.

David Buck - Buckingham Research Group, Inc.

Okay. So we shouldn't take this as any concern about the targets that were in place when you came on board?

Michael Ball

I think what I said and, again, in the prepared remarks, is that this is definitely a different way of doing it. The company's perspective earlier on was that things within or at least what it thought was in its control, that is, cost containment and cost improvement in the plants would carry the day. Now, we are looking at it being a sales growth situation where product approvals, which are not always in our control, the relaunch of Plum at least in terms of the remediated boards, is not entirely within our control. So there are other things that have to go right in order to make this particular guidance. Having said that, though, in meeting with the senior leadership team of this company and looking them all in the eye in terms of this $3.90 to $4, everybody is standing behind it. And I think we owe it to the investors to go for this particular number.

Operator

Our next question comes from the line of Gregory Hertz with Citi.

Gregory Hertz - Citigroup Inc

I've got a question for Tom. Tom, you know I like to pin you about the charge back reversals. So this morning, you guys provided your 10-Q. I calculated the $19.5 million charge back reversal added around $0.08 EPS and around 180 basis points to the gross margins. So my question is, if pricing for docetaxel was generally consistent with the initial views when you initially commented about the aggressive pricing environment, that's appeared to be consistent with what you mentioned on today's call of 40% to 45% discount to branded. Then can you comment more specifically about what caused the meaningful adjustment?

Thomas Werner

The charge backs, the number you calc-ed is probably not all bad. That does not drop to the bottom line like oxaliplatin. It has to go -- you're looking at it from the balance sheet side, which is one way to look at it, but as it works its way through the income statement, we've got to share some of that profit back to the joint venture. So it's not the $0.085. It's something less than that. But it did contribute. And I think the second part of the question was why the adjustment. Well, Mike asked me the same thing. And these are pretty turbulent situations when you do a launch like this. We had expected to see Sun, and we didn't really see much product in the channel. Intas, also we expected to see. Accord, I guess, is the brand they're marketing under. So we thought there would be a little bit higher competitive activity when we closed out the books for the first quarter. And that simply was not the case. But the impact on EPS is not nearly what you think.

Gregory Hertz - Citigroup Inc

Okay. So maybe half of that just based on the structure that you gave me [ph].

Thomas Werner

Probably not a bad guess.

Operator

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

Jayson Bedford - Raymond James & Associates, Inc.

Just a quick clarification. The increase in the revenue guidance for 2011, your comments suggest that the increase is just not Taxotere-related. And I guess, is that fair? And then you also mentioned, I believe, MMS is a little stronger, yet the timeline on Plum seems to be a little more extended. So if you can give a little more detail as it relates to the guidance.

Thomas Werner

It's not docetaxel. Only a little bit is docetaxel. It's really, globally, Precedex growing very, very strong. Share gains across the broad product line of the U.S. SIP business, some product launches outside the U.S., Biosimilars. But docetaxel is not the predominance of the first-half, second-half increase by any means. And what was the second part of the question?

Jayson Bedford - Raymond James & Associates, Inc.

You kind of alluded to MMS being stronger in the second half, and it just seems like the Plum timeline has been pushed out a bit.

Thomas Werner

I mentioned it. The MMS growth, there's some good growth outside the U.S., Canada, where we had Symbiq approved. And we don't -- we're not experiencing the severity of the Plum issue in Canada. We're going to see some good gains there in the back part of the year. And the Plum number we've got in for the U.S., if Plum doesn't get remediated in order for us to take orders in time to record revenue in the fourth quarter, that issue by itself I don't think is going to be something that would cause us to come off of guidance. So we've got a little bit in there. It's just when you're not selling much in the first part of the year, anything you sell in the back part of the year looks like a pretty big increase. But it's not a huge number.

Operator

Our next question comes from the line of Robert Goldman with CL King.

Robert Goldman - CL King & Associates, Inc.

A couple of questions on helping us to model based on docetaxel. I suspect you won't be giving us the dollar sales of docetaxel in the quarter, but could you characterize what those sales were relative to the first quarter, or if not that, perhaps what the incremental docetaxel sales were in the first half relative to what oxaliplatin was in the first half? And the second piece related to that is on gross margin. I understand a piece of the docetaxel margin is under the operating line. But on gross margin, how does the docetaxel gross margin compare to that of oxaliplatin?

Thomas Werner

Okay. I guess the first question was what's the year-over-year -- the quarter-over-quarter impact of docetaxel. We did, even with the charge back adjustment, we sold probably 20% to 25% less in the second quarter than we did in the first quarter. Relative to oxaliplatin, how that looked in the first half of last year, we're probably 30% less in docetaxel than we were on oxaliplatin. And oxaliplatin was -- the first quarter was real strong because there was big charge back adjustment from the prior year, but the unit sales were probably a little bit more in line. And in terms of the gross margin, because of the way the joint venture accounting works, the gross margin on docetaxel isn't anywhere near oxaliplatin. They're not even close.

Operator

Our next question comes from the line of Greg Gilbert with Bank of America Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

What do you make of Pfizer's approval of the one size of heparin, and should we be anticipating additional price pressure in this molecule as the year progresses?

Thomas Werner

It's Tom. We're all kind of looking at each other. I suppose we should know about this. Anybody in the room know anything about Pfizer and heparin? I haven't heard this.

Gregory Gilbert - BofA Merrill Lynch

I'll have a couple of bigger picture ones for Mike, and hopefully they're not premature, Mike. But as you spend some time digging into the realities of Hospira and also listening to some external perception, do you see any major disconnects yet?

Michael Ball

Just stepping back, Greg, and looking at it, I think the big positives I've seen here, definitely quality of people is very, very high. So I've been very pleased at the quality of the teams I’ve found here. The product lineup is extremely good as you know. Nice channel concentration, great market shares in those channels. So very positive from that standpoint. I think it's still a lot of opportunities there on focusing on the channels, cross-selling, et cetera. I really like the R&D model, high probability of success products. So you go through the R&D area, the uncertainty associated with the proprietary company is really taken away there. And I've been traveling for weeks outside the United States, and I'm really excited about the international opportunities. Basically with Biosimilars, I think many, many big countries do not have a lot of our products approved or have low generic penetration. So some big opportunities there. Kind of on the disconnect downside, I've obviously not been very happy with the backorder situation, the service levels. So I think that has been a major issue that we need to get resolved as I said in my opening remarks. So that's been the major disconnect. Certainly from a quality and issues around our plants with the FDA, the warning letter in Clayton and Rocky Mount, that obviously has been a bit of a disappointment. But I think the good news here is that these are internal issues, and something we can do about. We're still riding these global mega trends in a very positive way. So from an internal standpoint, I think it's great to have these issues that we can resolve ourselves. There's something we can do about them. I didn't come here, Greg, expecting to find perfection. Just opportunity. And I think there's lots of opportunity. So my net-net is I'm very pleased to have come here, despite Chicago's weather.

Gregory Gilbert - BofA Merrill Lynch

If I could sneak one more in, Mike. How have you, or maybe more relevantly, how will you assess the company's desire to have drugs and devices under one roof? Clearly, you were part of an assessment like that at your prior employer, and I know where the previous team stands on that. But how do you look at that issue and over what time frame?

Michael Ball

At our previous employer, as you said, one of the issues was we really didn't see a lot of connection between the devices and our pharma business. And we also did not see them to be a high growth, high opportunity area. Now you'll note, Greg, as you know that we eventually got back in the devices because we found some devices that were very relevant to our particular channel that our customers wanted and that we thought there was great cross-selling opportunities. As I look at this, and we'll talk more about it at Investor Day and in discussing it with customers around the globe, I do think there's some really nice opportunities here in terms of marrying our pharmaceutical products, the MMS products, clinical integration techniques. So I do think that there is some real relevance here in this particular customer channel. But again, I've been looking at it through the lens of my previous experience as you would expect, but so far, my expectation is they can live under one roof. And I believe from a customer standpoint, we can do more with the customers and provide them with a greater value proposition having a whole bundle together than splitting it apart.

Gregory Gilbert - BofA Merrill Lynch

That's helpful.

Karen King

Operator, thank you. We're ready to end the call at this point. Thank you, everyone, for being on today.

Operator

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

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