Hospira Q3 2007 Earnings Call Transcript

Hospira Inc. (HSP)

Q3 2007 Earnings Call

November 8, 2007 9:00 am ET

 

Executives

 

Lynn McHugh - Vice President of Investor Relations

Chris Begley - Chairman and Chief Executive Officer

Terry Kearney - Chief Operating Officer

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

 

Analysts

 

Rick Wise - Bear Stearns

Taylor Harris - JPMorgan

Glenn Novarro - Banc of America Securities

Matt Miksic - Morgan Stanley

Junaid Husain - Soleil Securities

Gregg Gilbert - Merrill Lynch

 

Presentation

 

Operator

 

Welcome to Hospira's Third Quarter 2007 Earnings Call. All lines have been placed in a listen-only mode to prevent any background noise. There will be a question and answer period following the speakers' remarks. In the interest of saving time please limit your questions to two per person. If you have additional questions you may re-enter the queue.

 

I will now turn the call over to Lynn McHugh, Vice President of Investor Relations. Lynn, you may begin your conference.

 

Lynn McHugh

 

Thank you. Good morning. Welcome to our conference call and webcast regarding Hospira's financial results for the third quarter of 2007. Participating in today's call are Chris Begley, Chairman and Chief Executive Officer of Hospira; Terry Kearney, Chief Operating Officer; and Tom Werner, Senior Vice President, Finance and Chief Financial Officer.

 

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 the MD&A in Hospira's 2006 Form 10-K on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as the result of subsequent events or developments.

 

In today's conference call, non-GAAP financial measures will be used to help investors understand Hospira's based business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release issued this morning and available on the presentations page in the Investor Relations section of our website at www.hospira.com.

 

I will now turn the call over to Chris.

 

Chris Begley

 

Thank you Lynn and good morning everyone. With the year drawing to a close we continue to feel good about our 2007 performance, having completed another solid quarter. We made progress on both our near-term priorities and on our overall strategies, positioning the company for future growth.

 

We reached a significant milestone recently in our biogenerics initiatives, a key longer-term growth driver for the company. Last month we received a positive opinion recommending approval in the EU for our biogeneric version of erythropoietin or EPO. We were particularly pleased as the opinion included indications for both oncology and renal for IV administration. The one key indication we don't currently have is the subcutaneous indication for renal. We are working on pursuing this indication with our alliance partner, STADA. Given the recommendation, we expect approval from the European Commission by year-end, paving the way for us to launch our first biogeneric, marketed under the name Retacrit, in a number of EU countries beginning in 2008.

 

While still in the formative stage the opening of the biogeneric market for the first generation EPO affords us the opportunity to penetrate this roughly $2 billion branded market in Europe. We are well positioned to do so, with only one other company's product receiving approval to date. This speaks very well of the achievements of our alliance with STADA on EPO.

 

In seeking a collaboration that would enable Hospira to be an early participant in biogenerics, we analyzed many companies around the world who claim to have viable products in development. We believe STADA was among the very few with the necessary capabilities to deliver on their claim. With Retacrit moving forward, we have also demonstrated that Hospira had the internal scientific competencies not only to understand the required science, but also to identify and evaluate a partner likely to succeed. These same competencies are being applied today to the other biogenerics we have under internal development.

 

We've said before that any financial benefit from Retacrit over the next few years is expected to be top line only. We will be making appropriate investments in the commercial resources required to market a biogeneric, since it will be necessary in many cases to detail Retacrit directly to oncologists and nephrologists. These investments will help establish Hospira as a leading biogenerics company in Europe. And build our reputation, as we look to participate in the larger US markets, when it opens in the next decade.

 

We are also pleased to announce the two year extension of our contract with Novation, which begins in June of 2008. The contract provides for price increases for IV solutions, based on predetermined inflation indices. Given the cost pressures, we've experienced from raw material prices over the past several years, we believe this contract represents a fair outcome to both Hospira and the Novation member hospitals.

 

Since our last call we have also made further progress on our three near-term priorities.

 

Our first priority, the Mayne integration, is proceeding well and on schedule. Terry will discuss our progress in greater detail.

 

Our second priority is to pay down the debt from the Mayne acquisition. We repaid a further $125 million in the third quarter, bringing the total at September 30th to $275 million. Our intention is to pay down a total of $400 million of the debt by year-end.

 

And then our third priority is to maximize the return on new products. Once again this quarter, new products were an important growth driver and contributed to a richer product mix on a year-over-year basis. Looking at our third quarter results, sales increased 30% primarily due to the Mayne acquisition.

 

Without Mayne, sales increased 4%. Excluding the impact of the sales to Abbott and the rubber products we divested as part of our exit from the Ashland manufacturing facility, legacy Hospira sales grew 7% in the quarter.

 

Adjusted diluted earnings per share were $0.49, in line with our expectations. And, also, once again aligned with the street's estimates. For the full 2007 year, we have reaffirmed our adjusted EPS projection of $2.11 to $2.16. We continue to expect sales growth excluding Mayne to be in the previously projected 3% to 4% range.

 

I'll come back at the end of our opening comments to say a few words about 2008. Here is Terry to tell you more about our performance for the quarter and year-to-date. Terry?

 

Terry Kearney

 

Thank you, Chris, and good morning to everyone. As a reminder please note as I walk you through our sales performance Mayne's US and international sales have been captured on separate lines in our product line reporting.

 

Sales in the legacy, specialty injectables product line increased 5% for the quarter and year-to-date, with a richer product mix in both periods. New products especially ampicillin, sulbactam, and ondansetron drove a portion of the growth. The base business also posted an increase with both positive pricing and strong year-over-year sales of Precedex contributing to performance.

 

We launched several new products during the quarter. Fosphenytoin was introduced shortly after the branded drug's patent expiration in August, and we captured over 50% share of the hospital market for this modest sized drug.

 

As part of our SIP strategy to expand our portfolio of differentiated delivery systems, we also launched two of our own market drugs, Erolic and Medazalan in our new iSecure syringe. We expect to further expand our offerings in this delivery system over the coming months, which will help drive adoption of this technology. We remain focused on differentiated delivery systems that provide a competitive advantage. We are still projecting that specialty injectable sales growth for the full year will be in the 6% to 7% range on expectation of a strong fourth quarter.

 

Turning to our medication deliveries product line, infusion therapy sales increased 4% in the quarter and 3% year-to-date. We saw increases across all product categories. VisIV, our premium priced IV solutions offering, had a very strong quarter, although it still represents a very small percentage of our business. Customer interest in this innovative product is accelerating, and we will be adding more VisIV capacity in 2008 to support its expansion.

 

Medication management systems sales in the quarter rose 15%, year-to-date sales are up 8%. Higher placements of our infusion devices were the primary driver of the quarter's increase, with a growing contribution from client services.

 

Our MMS sales mix remains very favorable relative to our expectations. Year-to-date, about 80% of our MedNet compatible placements, included our MedNet software, and of those placements more than 80% were for the wireless version. For the year, we are adjusting our MMS sales projection and now expect growth of approximately 10%.

 

This change is primarily a result of our decision to move the broader launch of Symbiq, our advanced infusion device system into early next year. Because of the unique nature of this new device with many features and benefits not seen before in the industry, we first launched Symbiq on a limited basis to gain additional customer input on the product. We wanted to make certain that this premium system offers the highest value, and most appropriately meets customer needs and preferences before launching it on a broad basis.

 

While our current Symbiq customers, who are already using an earlier version of the software, continue to be very pleased with the system. We have received some valuable customer feedback that we are incorporating into a new software version. These new software enhancements center around workflow, and other customer preferences, that will improve the system's utility, and performance. As a result we decided not to expand the Symbiq launch until work on the enhanced software is complete.

 

As I said earlier, we currently expect to begin the broader rollout of Symbiq early next year. We remain very excited about Symbiq and its prospects with the broader launch in 2008. Despite this development, based on current and pending contracts in the pipeline we still expect a strong fourth quarter for MMS.

 

In contract manufacturing as projected, sales in the quarter and year-to-date were below last year for both our One 2 One business and sales to Abbott in the US In both instances, however, sales are running above our original expectations.

 

Sales in the other product category, which primarily includes alternate site and critical care, decreased 2% in the quarter and increased 1% year-to-date. Off-site continues to perform well with strength in both generic injectables and medication delivery products.

 

Partially offsetting off-sites growth, however, was continued softness in critical care and the decrease in OEM and retail rubber product revenues. As a reminder these rubber products have been divested as part of our exit from the Ashland manufacturing facility.

 

Mayne's third quarter sales in the US were $26 million. As we referenced last quarter, we launched a solution presentation of Epirubicin in August on the patent expiration date. And currently have a combined contracted share of about 50% in the hospital and alternate site channels for this presentation of a drug. Paclitaxel also saw strong sales during the quarter.

 

Turning to our performance outside the U.S, total international sales for the legacy Hospira business, excluding Mayne, grew 10% in the quarter to $125 million. Included in the increase was a benefit of more than 5 percentage points from foreign currency, and the expected negative impact from lower sales to Abbott outside the U.S, which hurt growth by over 6 percentage points.

 

Sales to third parties, which represent the majority of our international segments, increased a very solid 10% on a constant currency basis, with Canada and Latin America posting the strongest performances in local currencies.

 

From our product perspective, we generated double-digit increases for medication management in every region once again this quarter. We began our first installation in Australia of MedNet enabled pumps, and on the drug side we launched Vancomycin in Japan.

 

Year-to-date legacy Hospira international sales have increased 9%. This includes a 4 percentage point benefit from foreign currency and unfavorability, again as expected, from lower sales to Abbott outside the US, which negatively affected growth by about 4 percentage points.

 

Sales to third parties grew approximately 11% on a constant currency basis. Mayne sales outside the US totaled $139 million in the third quarter. Oxaliplatin in Europe continues to drive sales with a contribution from Irinotecan as well. Paclitaxel continues to experience very strong increases in volume, which have been more than offset by lower pricing. Epirubicin also experienced a very good quarter.

 

Product introductions for Mayne during the quarter were mostly centered in Europe. Launches included the freeze-dried format of Oxaliplatin in France and Epirubicin solution in Italy. We also launched Irinotecan in Italy and in parts of Eastern Europe.

 

Global Mayne sales remain on track to meet our original 2007 projections of to $620 million to $640 million.

 

To summarize our overall sales results, it was a good quarter with growth in all of our key product categories. For the year if you look at our projected sales performance, without the impact of our exited product lines, as well as contract manufacturing for both Abbott and our One 2 One business, we expect legacy Hospira sales to grow a healthy 6% to 7% in 2007.

 

Before turning the call over to Tom, let me give you an update on our Mayne integration initiatives, which continue to go very well. We remain on target with our projected schedule of completing the integration by year-end 2008. We began the consolidation of the Mayne business operations on SAP in October in select countries in both the EMEA and Asia-Pacific regions, with no disruptions to customers or supply. This allows us to streamline the IT infrastructure and eliminate redundancies.

 

We attribute much of the seamless business as usual nature of the rollout through the experience we gained, as we built our international infrastructure when we separated from Abbott. Our non-recurring integration expenses are running slightly favorable due to timing, and in terms of achieving our expense synergies, we are tracking on our projected $50 million of synergies for 2008.

 

I will now turn the call over to Tom for more detail on the financial results for the quarter.

 

Tom Werner

 

Thanks, Terry. Good morning, everyone. I would like to run down the income statement. Net sales in the third quarter were $838 million, a 30% increase over last year. Excluding Mayne sales were 4% higher. Improved volume and mix, favorable pricing and benefits from foreign currency all drove the increase in the legacy Hospira business.

 

Adjusted gross profit in the quarter grew 33% to $317 million. The inclusion of Mayne as well as improved volume and mix in the legacy Hospira business contributed to the rise. The adjusted gross margin in the third quarter was 37.8%, a 110 basis point improvement over last year.

 

On a sequential basis, the gross margin in the third quarter was the same as in the second quarter, as the impact of our summer factory shutdowns was offset by, a richer product mix and stronger manufacturing performance.

 

Adjusted R&D was $51 million in the quarter compared to $36 million last year. On this line as well, the addition of Mayne was the major factor in the higher expense. Spending for clinical trials related to Precedex's label expansion was also responsible for part of the increase. Adjusted R&D as a percentage of sales was 6.1% compared to 5.6% last year.

 

Adjusted SG&A for the third quarter was $129 million compared to $100 million last year. Here again the majority of the year-over-year increase was related to the inclusion of Mayne's results, with general inflation also a factor. Adjusted SG&A as a percentage of sales was 15.4%, the same as in last year's third quarter.

 

Adjusted operating income for the quarter increased 34% to $136 million. The adjusted operating margin in the quarter was 16.3% compared to 15.7% last year. The increase in interest expense to $35 million in the third quarter, from $8 million last year, is a function of the additional debt we incurred to fund the Mayne acquisition.

 

The increase in other income was from the net gains on investments that were part of the balance sheet when we spun from Abbott. Our tax rate on an adjusted basis was 27% in the quarter, and we expect this to be the full year adjusted rate as well.

 

Summing up the line item review, our adjusted diluted earnings per share for the quarter was $0.49 compared to $0.45 last year. There are several items not included in our adjusted earnings for the third quarter. Those relating to the Mayne acquisition are as follows.

 

We recorded non-cash pretax charges of $13 million for the amortization of intangibles. We incurred $8 million of integration costs that were primarily cash. And together these items represented $0.09 per share. Also excluded from our adjusted EPS are the expenses related to our manufacturing optimization initiatives, which totaled $8 million pretax or $0.03 per share in the quarter.

 

Turning to the balance sheet, our cash balance at September 30th was $236 million. We continue to use our cash flow from operations and any excess cash we have to pay down debt. Through September 30th we have repaid $275 million of the debt associated with the Mayne acquisition.

 

By year-end, we expect to pay down a total of $400 million of the debt. Receivables in the quarter declined $14 million from June. Inventory increased from June 30th, but this was primarily due to the impact of changes in foreign exchange rates.

 

Looking at a few other cash-flow items, our cash flow from operations for the quarter was $183 million, which was above the cash level generated in last year's third quarter. Year-to-date, our cash flow from operations is running ahead of last year as well, and we continue to estimate that our full year cash flow from operations will be in the $450 million to $500 million range.

 

Capital expenditures in the quarter, decreased to $40 million from $44 million last year. Most of this decline relates to less spending this year on our manufacturing optimization initiatives. For the 2007 year, we now expect capital spending to be in the $220 million to $240 million range.

 

Depreciation and amortization of $60 million in the quarter includes the $13 million of intangibles amortization, related to the Mayne acquisition that I referenced earlier.

 

So, regarding our projections for the 2007 year, as Chris told you, we have reaffirmed our projection for 2007's adjusted EPS in the range of $2.11 to $2.16 per share. We also continue to estimate that sales growth will be in the 26% to 28% range for the year. Expectations for sales growth, excluding Mayne, also remain as previously projected, in a range of 3% to 4%. The range estimates we provided you last quarter for gross margin, R&D, and SG&A as a percentage of sales as well as operating margin all remain unchanged.

 

Regarding projections related to the Mayne integration, the amortization of intangibles is now expected to be approximately $49 million in 2007 for the 11 months included in our financial statements. The increase is due to the impact of foreign exchange, since we made our original projections. The majority of the intangible assets are denominated in Australian dollars and euros. So, the amortization will continue to fluctuate with exchange rates.

 

We continue to estimate that integration expenses for 2007 that runs through the income statement will be in the $45 million to $55 million range. And we also still expect other cash expenditures related to the acquisition, to be approximately $30 million to $40 million for 2007. And this spending is primarily for severance and capital projects.

 

With that I’ll turn the call back over to Chris for some additional comments before we take your questions. Chris?

 

Chris Begley

 

Looking out towards next year, we are in the midst of our 2008 planning process. The process each year involves not only a detailed examination of the business opportunities, and any challenges for the upcoming year, but also a scan of the current macro environmental and the competitive landscape.

 

We will provide full year 2008 guidance on our fourth quarter call in late February. But in the meantime, I’ll share with you some of the factors that we believe will be necessary to drive our success in the coming year.

 

First: is the achievement of the previously projected $50 million in cost synergies from the Mayne acquisition. We continue to believe we are on track to achieve this target.

 

Second: is our progress in paying down the debt we took on with the Mayne acquisition. As I said earlier, repaying the debt is a key priority for our use of cash. We’ve made good progress this year and plan to continue using most of our cash flow from operations for debt reduction in 2008.

 

Next: we will need to further leverage previous product launches and meet our timetable for new launches, with subsequent successful introductions in the marketplace.

 

On the global pharmaceutical side, based on current information, we would expect to include generic Zosyn in this new products category, as well as several other products launched from our drug development pipeline.

 

I will remind everyone again that, while the launch of Retacrit in Europe next year is a strategic milestone for us, with some incremental sales, it will not benefit earnings, since we will be in an investment mode for this product over the next several years. We will also continue to expand certain drugs in our portfolio into new countries and in differentiated delivery formats.

 

And finally: the expansion of our VisIV premium priced products is also important. As Terry said, we need additional capacity next year for VisIV to support its growth.

 

In global devices, we will need to continue to upgrade our US customers to MedNet-enabled infusion systems. The complete rollout of Symbiq in the US is also a key success factor. Outside the US the availability of certain infusion pumps, and new languages is one of the components of our international market expansion initiatives for MMS.

 

On the cost side, another $15 million in savings is expected from our manufacturing optimization initiatives in 2008.

 

These are some of the factors we currently see as important to our performance in 2008. Of course, we will continue to take actions to support the strategies we have implemented since day one, to invest for growth, and improve margins, and cash flow. As we head towards the conclusion of another year of progress for Hospira, we are focused on building on our accomplishments and on achieving another good year in 2008.

 

And now operator, we are ready to take questions.

 

Question-and-Answer Session

 

Operator

 

(Operator Instructions). Your first question comes from Rick Wise with Bear Stearns.

 

Rick Wise - Bear Stearns

 

Good morning everybody.

 

Chris Begley

 

Good morning, Rick.

 

Rick Wise - Bear Stearns

 

Maybe let's start with, if you could give us a little more color on the generic EPO issue or the Retacrit issue? I understand, if I heard you clearly, Chris, you are suggesting that launching the product and investment for some time is going to offset any incremental sales profit. Can you give us some color on how it might? The opportunity that you envision over the next two years to four years or three years to five years? How you want to convey it, in terms of sales and the impact it could have on Hospira?

 

Chris Begley

 

Well, first of all Rick on EPO, we are creating a new market. The first biosimilar in Europe was just recently launched, and it is really too early on that launch to tell: how the market is going to perform? We’ll launch beginning of 2008, and as I talked about in my opening comments, we are very pleased with the indications we received.

 

The one indication we did not receive for renal subcu is worth approximately 25% of that $2 billion marketplace. And we expect some time in 2009 we would end up with that indication. And so, as we look at '08 and '09, I would view both of those years as an investment mode for us.

 

And then, we have to see how the market takes form and shapes. And then that will catapult us into 2010, and get us ready for the launch in the U.S, which really has a much larger market opportunity for us. And so, that hopefully gives you the little bit of additional color on the Retacrit launch.

 

Rick Wise - Bear Stearns

 

So, I can't get you to say you think this is, over time? Potentially pick your number of a $300 million, or a $1 billion opportunity for Hospira? Again just how would you like to roughly frame it?

 

Chris Begley

 

Rick, it's just too early to do that, because this is a brand new market. I'm old enough that I was around in the 80s when the generic injectable business was formed and created and it will take some time to develop. We have a lot of learning to do and so it's just too early to go out and say this is going to be X size business for us.

 

Rick Wise - Bear Stearns

 

Okay, second question: Can you talk a little bit more about the impact of rising energy costs and what kind of risks that might present to the '08 outlook and to what degree, all things equal, and nothing of that Novation price increase, separately might offset as we just think about margins looking out a year? Thank you.

 

Tom Werner

 

Regarding petroleum prices, we continue to try to offset the increases we are seeing there in resin prices with improved cost reductions in the manufacturing plants. And relative to the Novation contract, I will hand that over to Terry or Chris.

 

Terry Kearney

 

Again, I think as Tom has indicated, we certainly are under pressure as many of the manufacturers who use a lot of the oil-based products in their product lines are. We have, as you know, and Tom alluded to, we continue to look for cost reduction opportunities to offset that. And in the meantime we've done a lot of work with our GPO customers to educate them about the impact of these cost increases on our inputs, and how they need to be passed on to them. And as evidenced by the contract that we extended with Novation. I think the message is resonating with the GPO customers. It's very evident that they are starting to understand it. They may not like it, but they do understand it. And again, I think that's the way we are going to be able to help mitigate the impact of higher energy prices, is by passing it on to our customers in a manner that is not only fair to Hospira, but also fair to them, because again they have the same pressure as we have, relative to cost containment. So, we think when we go through these negotiations with each of our GPO customers, the outcome will be a balanced outcome for both parties.

 

Rick Wise - Bear Stearns

 

Thanks so much.

 

Operator

 

Your next question comes from Taylor Harris with JPMorgan.

 

Taylor Harris - JPMorgan

 

Thanks a lot. Chris, on your comments on the '08 general outlook, most of the items that you detailed, seemed to be positive factors going into '08. You also mentioned generally that you would take in competitive activity in the macro landscape. So I just wanted to make sure: is there anything incrementally foreboding on the competitive or macro side that we should be considering in particular?

 

Chris Begley

 

Taylor, first of all, we are still going through the planning process and are exercising our assumptions around competitive situations and the macro-environmental situation that could occur in '08 or even in '09. And so, that's an exercise that we will continue to do until we actually finish and lock up the plan. More specifically oil is one, and I think Terry just talked a little bit more about oil. But all of us keep opening up the paper and reading about the escalating oil prices, which has an impact on our materials and energy. And so that's something that we are going to have to continue to watch and continue to offset. The other one is obviously on the Banco front and competition on Banco, and so that's something that as we complete our '08 planning process we will really exercise and get as good of intelligence as we can to better understand, if there will be competition in '08 or '09 or further out, I will mention those specifically on Banco. We have done a whole lot in the area around contracting and developing differentiated packaging systems to take and actually have proprietary systems on Banco, which covers a piece of that marketplace.

 

In addition on Banco, I think it's important to keep in mind that it really is very capital-intensive. And so any new entrant, if they were to come in the marketplace, would not be able to take and serve the entire market, but we might experience some type of price pressure. And so, I think the organization has done a very good job of taking and managing the situation from an overall mitigation standpoint and we will continue to do that. And it's just too early right now to say whether or not we expect competition in '08 or '09 or later on, on Banco. So those would be to come to mind, Taylor.

 

Taylor Harris - JPMorgan

 

Okay. That's really helpful. On the Banco front, is there a time period after which if somebody launched the product in '08 it would be difficult for them to get onto GPO contracts? Before that year?

 

Chris Begley

 

Yes. I don't off the top of my head know if there is a specific time period. We have very good relationships, especially from a contracting standpoint on Banco with most of the GPOs. But I don't know if there is a specific time period in '08 that would make it more difficult than not.

 

Taylor Harris - JPMorgan

 

Okay. And then, a couple of questions about the fourth quarter: You mentioned that you expect a good quarter in the US injectables business and I'm wondering is that due to inventory movements? Or new product launches, or some combination of that?

 

Terry Kearney

 

Taylor, this is Terry. Let me answer that. A couple of things: First and foremost, historically, we always see a fairly strong fourth quarter as the wholesalers stock-up on anti-infectives and other products related to the anticipated flu season. So that's usually a pretty good driver for fourth quarter growth. The other thing that we typically see is pretty high-end hospital activity in the form of surgeries and so forth. So, the demand on our product line is a little higher in the fourth quarter. And then finally, the other thing that we are certainly taking into account is the continued good momentum we are having with Precedex, and we expect another good strong quarter for Precedex. Those are probably the three factors that come to my mind why we believe again, we are going to have a good quarter in SIP.

 

Taylor Harris - JPMorgan

 

Okay. Great. And last question on the pump business: Would the Symbiq delay the full launch till next year? Are there customers who are waiting for Symbiq? Is it just really that they were pushed out of revenue realization or is there some other factor explaining the reduction in guidance this year?

 

Terry Kearney

 

Well, let me just keep it all in perspective. As you remember, we didn't have a great first quarter. But, clearly, second and third quarter were really strong quarters from a growth perspective, both being in the 15% range. And again, if you look at the guidance we provided relative to the 10% growth on a full year basis, that pretty much infers a very strong fourth quarter as well, based on what we see in our current and pending contracts. So, we believe that gives us really good momentum going into 2008, which will be further enhanced with the launch of Symbiq. So, we don't really see a lot of necessary holding back from Symbiq. We know that perhaps, there are some customers who are waiting for it. So I wouldn't say they're not. But the base business continues to do very well, and again, I think the last few quarters of performance are indicative of that.

 

Chris Begley

 

Taylor, the one thing I would add to that is probably in hindsight, we froze a piece of the marketplace with the launch of Symbiq, and then not being able to bring it out broader than what we would have liked to.

 

Taylor Harris - JPMorgan

 

But it would seem that in essence this probably just protracts the period of time in which you are going to get a nice mix benefit in that business. It's just you are not getting it all at once in 2007. Is that there?

 

Tom Werner

 

I think Taylor, that's very fair.

 

Taylor Harris - JPMorgan

 

Okay. Thanks a lot.

 

Operator

 

Your next question comes from Glenn Novarro with Banc of America Securities.

 

Glenn Novarro - Banc of America Securities

 

Hi, good morning, guys.

 

Tom Werner

 

Good morning, Glenn.

 

Glenn Novarro - Banc of America Securities

 

Couple of questions on the injectable side: If I am looking at my model correctly, it looks like the Mayne business in both the US and OUS was down sequentially in 3Q. Is there some seasonality to the Mayne business that we are not aware of? Any color would be appreciated, that's question one. And then the second question on Zosyn: now you are saying with confidence that you'll launch the product in '08. What's changed, that's giving you the confidence that Zosyn can be launched in '08? Maybe some timing, is it a 2Q or 3Q event, and how big is the branded product out there? Thanks.

 

Terry Kearney

 

Let me try to tackle that Mayne question for you. Really, I think what's happening and what you need to reaffirm in your mind is that we still see Mayne overall sales hitting our original projections of that $620 million to $640 million. So, the evolution of the sell-through for the year, are really still tracking our original expectations. Relative to the sequential decline, one of the things that may be impacting that and certainly would be impacting that, is the fact that we had to divest a number of products as part of the FTC ruling. So that's having somewhat of a sequential impact as those products have been divested over the early part of the year. Other than that, I think it's indicative of any generic market in the sense that it really depends on what new products are launched in any one given year and the size of those new products and this has been a relatively light year, as far as new product launches in the Mayne portfolio. The biggest product that we are enjoying growth from is Oxaliplatin, but that was actually launched last year in Europe. So we see it, we understand it, but it's not any different than the expectations we had. And again like the rest of our generic portfolio, we will have a period of time where the market isn't growing as quickly because of lack of new products. But in those periods where new products are abundant and large, you would expect much higher growth.

 

Glenn Novarro - Banc of America Securities

 

Can I just ask a follow-on? Obviously, if you're projecting very strong injectable business for the fourth quarter, does that include Mayne? Should we assume that Mayne in the fourth quarter is sequentially up for you guys?

 

Terry Kearney

 

No, that reference is really only going back against our product line reporting, which is the SIP business in the US, excluding Mayne.

 

Glenn Novarro - Banc of America Securities

 

And then on Zosyn, what's changed on Zosyn that gives you the confidence?

 

Chris Begley

 

Let me start out on the Zosyn piece. What has changed, Glenn, is really the following: we know the FDA is reviewing the package, okay, and so the package review is progressing, and we know that our partner has been in dialog with the FDA on the filing, responding to questions. And so that's a very positive sign. And then to date there has been no ruling on the Innovator Citizens Petition however. And the other piece of your question was the timing for '08, and again that's one of the things that we haven't completed yet, as we are doing our planning process is we have not locked in on an assumption of what quarter the launch will be. But obviously, we will complete that here by the end of the year.

 

Glenn Novarro - Banc of America Securities

 

And just a follow-up: How big is Zosyn on the branded front and how many other generics are going to be launched in next year? How many competitors do you think will be launching with you?

 

Tom Werner

 

Glenn, I believe, the branded product is about $600 million. Clearly, we are working with Sandoz. So, the expectation is there will be at least two of us. But we don't have a lot of good intelligence of anybody else behind us at this point in time. So there certainly could be others. Clearly, when there is a large product like this, there's lot of interest in it. But right now, we really don't have any better intelligence than what we know with our dialogues with Sandoz.

 

Glenn Novarro - Banc of America Securities

 

Okay, great. Thank you.

 

Operator

 

Your next question comes from Matt Miksic with Morgan Stanley.

 

Matt Miksic - Morgan Stanley

 

Hi, can you hear me okay?

 

Terry Kearney

 

Yes Matt.

 

Tom Werner

 

Yeah Matt, good morning.

 

Matt Miksic - Morgan Stanley

 

Good morning, thanks for taking the question. Just one follow-up on Retacrit and in Europe it looks like you've got the oncology approval in addition to the renal. And I know you are taking kind of a conservative view on the contribution of this product and the rate at which you can grow it and so on. But that seemed like it was something that was a bit more positive. Am I reading that right, or on the margins, should we think about this as, you have an oncology sales force on the ground now with Mayne on the margin that improves the potential traction and uptick you could get with that product over the next couple of years?

 

Chris Begley

 

Matt, that's a great question. Yes it is a bit more positive than what we had thought. We did not think we were going to get both indications. So that is a positive. And as we are beginning to put our launch plans in place, I think there is are a couple of things to keep in mind. On calling on the nephrologists for the renal indication, we clearly need to create a sales organization in that area. And then, calling on the oncologists, there are some countries in Europe, where we will be able to handle that ourselves with existing resources. But there are other countries in Europe, where we are going to have to create the sales force, because we really don't have the bandwidth to call on the oncologists or the expertise. So it will be a mixture. And probably the other thing that's worthwhile mentioning is, as I mentioned earlier on the call that the subcu renal is about 25% of the 2 billion, but that really varies by country. And so what will happen as we launch in Europe is we won't be able to launch all across Europe, all at once, in '08. We will get one country at a time that will end up getting approval, whether that is for the country or for the pricing that will be authorized. And so it will be a gradual rollout as we look at '08 on Retacrit. Does that help?

 

Matt Miksic - Morgan Stanley

 

Yes, that's helpful. Another question on Europe and international: Your, I guess core Hospira international numbers came in a little stronger. I'm wondering: is any of that driven by -- I think you have pumps in there, correct? So, I was just wondering to what degree you are seeing synergies with the international Mayne organization?

 

Terry Kearney

 

Matt, this is Terry. I think there is clearly synergies that are happening with the acquisition of Mayne. It gave us a much stronger critical mass from a sales force perspective and there has been a lot of training that has been going on to train the Mayne sales forces to understand the device business. I think they are starting to grasp it and they see this as a great opportunity to augment the growth. And one of the areas they certainly are focusing on, are those oncology centers, where not only do they need drugs, but they also need devices to infuse those drugs. So that seems to be a nice synergistic play for us.

 

Matt Miksic - Morgan Stanley

 

Okay. And just one follow-up: There have been some questions on Zosyn, but in terms of the size and timing, it sounds like you're not sure yet whether it's sort of first half or second half?

 

Chris Begley

 

No it's just too premature to comment on that. That's one of the things that we need to fully exercise as we finalize this '08 plan.

 

Matt Miksic - Morgan Stanley

 

And so any other color you can give us maybe on the formats of this market? I mean: is this 100% lyophilized vials or is there some advantage that you have in terms of the packaging?

 

Chris Begley

 

It is a lyophilized product and it comes in both vial and then also in our ADD-Vantage format, which is a proprietary delivery system.

 

Matt Miksic - Morgan Stanley

 

You don't have any sense of how much share you have in the branded market with ADD-Vantage, do you?

 

Chris Begley

 

Actually none right now because the innovator had taken ADD-Vantage off the market and so there is none and so we will have to, when we launch it, create that marketplace.

 

Matt Miksic - Morgan Stanley

 

Reintroduce it?

 

Chris Begley

 

Yes reintroduce it and create it, which will take some time and some active selling, etcetera. And so it's not like where we typically already have X% of the market in that format, and we are able to come in with our generic version of it. This is the one that we will have to create.

 

Matt Miksic - Morgan Stanley

 

And then just one final: Historically, this fourth quarter has been pretty good in terms of visibility since we are getting into the midst of November and with Thanksgiving and the holidays, you have a lot of Q4 already behind you. By my estimates your full year pump numbers project an 17%-18% growth number for Q4. First, is that accurate? And then, second, I guess: am I correct in thinking that your visibility into this Q4 number is good so far? I mean, should we feel confident about that number?

 

Terry Kearney

 

Matt, I guess our math is a little different than yours. I think it's more in the 15% to 16% range. But you don't need to be that precise. But yes we expect it to be a very strong quarter, and again it's really premised on the current and pending contracts in our pipeline and as we've talked in the past, very extensive processes going through each of our contracts customer-by-customer, and going through and risk adjusting the likelihood of a close. The likelihood of implementation and so forth. So that forecast that we have, that we presented today is really based on that deliberate exercise. And so we still think, again, we see good momentum in the market and when we look at the market share data, that it is evident that we are gaining share. So that's a positive as well. So, altogether, I think we still feel very good about our MMS business.

 

Matt Miksic - Morgan Stanley

 

Thanks.

 

Tom Werner

 

Thank you, Matt.

 

Operator

 

Your next question comes from Junaid Husain with Soleil Securities.

 

Junaid Husain - Soleil Securities

 

Good morning everyone.

 

Tom Werner

 

Good morning. How are you today?

 

Junaid Husain - Soleil Securities

 

Good. Chris, relative to Retacrit, help us understand the importance of leveraging your main sales force with the expertise in oncology products? You know, with Retacrit in the fold, I think that would make you the only guys with oncology drugs and EPO in an infusion pump. So do your European customers view this Trifecta as something that is a fairly compelling value proposition to them?

 

Chris Begley

 

Time will tell on that. As we go out and launch, we believe we have an oncology channel play that we are developing here, that will include exactly what you talked about. The generic oncology drugs, EPO and then some other vial similar, that, the oncologist is the customer. And then we've got the infusion pumps that fall in that category. And I've talked before about the fact that we would like to be able to take and add some proprietary oncology drugs, small proprietary oncology drugs to that offering. So we could really have a strong channel play. So, that's where we're going strategically. We need to have that play out, both securing all the different products and then we believe the marketplace will respond very favorably to that. Both at the professional level and we think it has got some potential from a contracting standpoint also.

 

Junaid Husain - Soleil Securities

 

Thanks. That's helpful. And then could you give us an update on G-CSF and where you are with this product? I can't remember if you started the clinical trials or not, but if you haven't, when do you expect to and then should we be thinking about G-CSF as maybe a 2010 event in Europe?

 

Terry Kearney

 

Junaid, this is Terry. As you know, we did acquire G-CSF rights in the Mayne acquisition. They had a deal done with Pliva prior to our acquisition. And we are continuing with that investment and I believe we are in Phase III trials as we speak today. And again as you know, I think the patent expiration is in the 2010 timeframe and that's what we're targeting for.

 

Junaid Husain - Soleil Securities

 

Okay, thanks. And then Tom, on R&D expense, you have got a lot of development stuff going on with the clinical trials for Precedex, your biogenerics initiatives and then maybe some more development work on Symbiq. So should we think about R&D expense maybe a tad higher into the back half of the year?

 

Tom Werner

 

No. I think for the quarter we are still running in that 5.6 to 6.0 range that we communicated before.

 

Junaid Husain - Soleil Securities

 

Okay. Then last question for you, then I will jump back in queue. Could you tell us where you are with the clinical trials for Precedex?

 

Tom Werner

 

I can do that for you, Junaid. As you know, we have many trials going on to expand a label and the first largest trial that we undertook was a long-term sedation trial, which is to allow us to expand the indication beyond 24 hours. That trial is now complete and we are still waiting for the results to be unblinded. But we are expecting hopefully to be able to submit that filing in the first quarter of 2008. The second trial was our procedural sedation trial, which had really two trials within it. That study is now complete and the studies have met their primary endpoints. So we are very positive and excited about that. We expect to submit this filing to the FDA by the end of 2007. The third trial that we are going after is our pediatric indication. We have had a very productive dialog with the FDA over the year and we expect to initiate these trials in 2008. And as you know, this will allow us to have a six-month extension on the patent. And finally the fourth thing that we should mention is our delirium study, the way this has worked we really believe there is a good rationale to go after this study. But early in the enrollment state, the incidents of delirium that we received, was significantly lower in both the control and study groups.

 

So, with that we think it probably relates to the fact the way the trial protocols were put together and negotiated with the FDA. And it's possible that with these trial protocols that in many ways perhaps, we eliminated the factors that bring on delirium in anesthetized patients. So to make a long story short, we are not going to pursue the delirium trial any longer. Again it's not anything to do with safety. It's just the way the trial was structured and what we negotiated with the FDA. We didn't see the incidents of delirium. So that doesn't really affect us relative to our thinking of this product. We still believe this product has a lot of legs behind it and we still expect that with the other trials that we have ongoing and will submit that will have a product that is capable of achieving well over $100 million in sales.

 

Junaid Husain - Soleil Securities

 

Thanks so much, Tom.

 

Tom Werner

 

Thank you.

 

Operator

 

The final question comes from Gregg Gilbert with Merrill Lynch.

 

Gregg Gilbert - Merrill Lynch

 

Thanks good morning.

 

Tom Werner

 

Good morning Gregg.

 

Gregg Gilbert - Merrill Lynch

 

Two questions: First on EPO in the US: What are you specifically doing now to get ready, regardless of when legislation passes and what it looks like? And secondly, Chris: how do you think the AMP rule could affect your US generics business, if at all, in particular, if legislation is not passed to change the status quo? Thanks.

 

Chris Begley

 

On the EPO front in the US, what we are doing to get prepared is laying out our developmental program and actually beginning to implement the developmental program. Not from a clinical standpoint, but from a product standpoint. Where it will be manufactured? How it will be manufactured? Quantities, etcetera? And so we obviously are preparing to get to the point where we will actually begin clinical studies. That is ways away. We are doing all the pre-prep for that.

 

In addition to further understanding the market and characterizing the marketplace for us. And so, those are the types of activities that we are doing, as well as on the manufacturing front, assessing where is the best location to make the product. So those are the activities from a US standpoint. On the AMT standpoint, you know, Gregg, that's a great question. And I think it will have and I said AMT sorry, AMP, and for those of you who are listing this happens to do with the listing of the Average Manufacturer Price. I think it will have some impact, because it will obviously make pricing more visible, all right, and more transparent. I will tell you though, in the US and in this generic injectable space, pricing tends to be fairly tight. Okay. There are not a lot of variants on prices, because they are generics. So even though it will be more transparent, I'm not sure it's going to change our ability to give price or what happens with price in this marketplace. Now obviously that has to play out and we have to see how it plays out in the marketplace. But that would be my initial reaction to your comments or your question.

 

Lynn McHugh

 

You think that helped, Gregg.

 

Gregg Gilbert - Merrill Lynch

 

Yes. Thank you very much.

 

Lynn McHugh

 

Operator? I guess, Operator, that's it and if so that concludes our call for today. Thank you for joining us.

 

Operator

 

This concludes Hospira's third quarter 2007 Earnings Call. You may now disconnect.

 

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