Hospira Q3 2007 Earnings Call Transcript

Nov. 8.07 | About: Hospira, Inc. (HSP)

Hospira Inc.(NYSE:HSP)

Q3 2007 EarningsCall

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 - BearStearns

Taylor Harris -JPMorgan

Glenn Novarro -Banc of America Securities

Matt Miksic -Morgan Stanley

Junaid Husain -Soleil Securities

Gregg Gilbert -Merrill Lynch

 

Presentation

 

Operator

 

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

 

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

 

Lynn McHugh

 

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

 

We will bemaking some forward-looking statements today, which are subject to risks,uncertainties and other factors that may cause actual results to differ materiallyfrom those indicated. A discussion of these factors is included in the riskfactors and the MD&A in Hospira's 2006 Form 10-K on file with the SEC. Weundertake no obligation to release publicly any revisions to forward-lookingstatements as the result of subsequent events or developments.

 

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

 

I will now turnthe call over to Chris.

 

Chris Begley

 

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

 

We reached asignificant milestone recently in our biogenerics initiatives, a keylonger-term growth driver for the company. Last month we received a positiveopinion recommending approval in the EU for our biogeneric version oferythropoietin or EPO. We were particularly pleased as the opinion includedindications for both oncology and renal for IV administration. The one keyindication we don't currently have is the subcutaneous indication for renal. Weare working on pursuing this indication with our alliance partner, STADA. Giventhe recommendation, we expect approval from the European Commission byyear-end, paving the way for us to launch our first biogeneric, marketed underthe name Retacrit, in a number of EU countries beginning in 2008.

 

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

 

In seeking acollaboration that would enable Hospira to be an early participant inbiogenerics, we analyzed many companies around the world who claim to have viableproducts in development. We believe STADA was among the very few with thenecessary capabilities to deliver on their claim. With Retacrit moving forward,we have also demonstrated that Hospira had the internal scientific competenciesnot only to understand the required science, but also to identify and evaluatea partner likely to succeed. These same competencies are being applied today tothe other biogenerics we have under internal development.

 

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

 

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

 

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

 

Our firstpriority, the Mayne integration, is proceeding well and on schedule. Terry willdiscuss our progress in greater detail.

 

Our secondpriority 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 $275million. Our intention is to pay down a total of $400 million of the debt byyear-end.

 

And then ourthird priority is to maximize the return on new products. Once again thisquarter, new products were an important growth driver and contributed to a richerproduct 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 rubberproducts we divested as part of our exit from the Ashland manufacturing facility, legacy Hospirasales grew 7% in the quarter.

 

Adjusted dilutedearnings per share were $0.49, in line with our expectations. And, also, onceagain aligned with the street's estimates. For the full 2007 year, we havereaffirmed our adjusted EPS projection of $2.11 to $2.16. We continue to expectsales growth excluding Mayne to be in the previously projected 3% to 4% range.

 

I'll come backat the end of our opening comments to say a few words about 2008. Here is Terryto 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 youthrough our sales performance Mayne's US and international sales have beencaptured on separate lines in our product line reporting.

 

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

 

We launchedseveral new products during the quarter. Fosphenytoin was introduced shortlyafter 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 ourSIP strategy to expand our portfolio of differentiated delivery systems, wealso launched two of our own market drugs, Erolic and Medazalan in our newiSecure syringe. We expect to further expand our offerings in this deliverysystem over the coming months, which will help drive adoption of thistechnology. We remain focused on differentiated delivery systems that provide acompetitive advantage. We are still projecting that specialty injectable salesgrowth for the full year will be in the 6% to 7% range on expectation of astrong fourth quarter.

 

Turning to our medicationdeliveries product line, infusion therapy sales increased 4% in the quarter and3% year-to-date. We saw increases across all product categories. VisIV, ourpremium priced IV solutions offering, had a very strong quarter, although itstill represents a very small percentage of our business. Customer interest inthis innovative product is accelerating, and we will be adding more VisIVcapacity in 2008 to support its expansion.

 

Medicationmanagement 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 thequarter's increase, with a growing contribution from client services.

 

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

 

This change isprimarily a result of our decision to move the broader launch of Symbiq, ouradvanced infusion device system into early next year. Because of the uniquenature of this new device with many features and benefits not seen before inthe industry, we first launched Symbiq on a limited basis to gain additionalcustomer input on the product. We wanted to make certain that this premiumsystem offers the highest value, and most appropriately meets customer needsand preferences before launching it on a broad basis.

 

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

 

As I saidearlier, we currently expect to begin the broader rollout of Symbiq early nextyear. We remain very excited about Symbiq and its prospects with the broaderlaunch in 2008. Despite this development, based on current and pendingcontracts in the pipeline we still expect a strong fourth quarter for MMS.

 

In contractmanufacturing as projected, sales in the quarter and year-to-date were belowlast year for both our One 2 One business and sales to Abbott in the US In bothinstances, however, sales are running above our original expectations.

 

Sales in theother product category, which primarily includes alternate site and criticalcare, decreased 2% in the quarter and increased 1% year-to-date. Off-sitecontinues to perform well with strength in both generic injectables andmedication delivery products.

 

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

 

Mayne's thirdquarter sales in the US were $26 million. As we referenced lastquarter, we launched a solution presentation of Epirubicin in August on thepatent expiration date. And currently have a combined contracted share of about50% in the hospital and alternate site channels for this presentation of adrug. Paclitaxel also saw strong sales during the quarter.

 

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

 

Sales to thirdparties, which represent the majority of our international segments, increaseda very solid 10% on a constant currency basis, with Canada and Latin America posting the strongest performances inlocal currencies.

 

From our productperspective, we generated double-digit increases for medication management inevery region once again this quarter. We began our first installation inAustralia of MedNet enabled pumps, and on the drug side we launched Vancomycin inJapan.

 

Year-to-datelegacy Hospira international sales have increased 9%. This includes a 4percentage point benefit from foreign currency and unfavorability, again asexpected, from lower sales to Abbott outside the US, which negatively affected growth byabout 4 percentage points.

 

Sales to thirdparties grew approximately 11% on a constant currency basis. Mayne salesoutside the US totaled $139 million in the thirdquarter. Oxaliplatin in Europe continues to drive sales with acontribution from Irinotecan as well. Paclitaxel continues to experience verystrong increases in volume, which have been more than offset by lower pricing. Epirubicinalso experienced a very good quarter.

 

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

 

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

 

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

 

Before turningthe call over to Tom, let me give you an update on our Mayne integrationinitiatives, which continue to go very well. We remain on target with ourprojected schedule of completing the integration by year-end 2008. We began theconsolidation of the Mayne business operations on SAP in October in select countriesin both the EMEA and Asia-Pacific regions, with no disruptions to customers orsupply. This allows us to streamline the IT infrastructure and eliminateredundancies.

 

We attributemuch of the seamless business as usual nature of the rollout through theexperience we gained, as we built our international infrastructure when weseparated from Abbott. Our non-recurring integration expenses are runningslightly favorable due to timing, and in terms of achieving our expensesynergies, we are tracking on our projected $50 million of synergies for 2008.

 

I will now turnthe 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. Netsales in the third quarter were $838 million, a 30% increase over last year.Excluding Mayne sales were 4% higher. Improved volume and mix, favorablepricing and benefits from foreign currency all drove the increase in the legacyHospira business.

 

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

 

On a sequentialbasis, the gross margin in the third quarter was the same as in the secondquarter, as the impact of our summer factory shutdowns was offset by, a richerproduct mix and stronger manufacturing performance.

 

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

 

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

 

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

 

The increase inother income was from the net gains on investments that were part of thebalance sheet when we spun from Abbott. Our tax rate on an adjusted basis was27% in the quarter, and we expect this to be the full year adjusted rate aswell.

 

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

 

We recordednon-cash pretax charges of $13 million for the amortization of intangibles. Weincurred $8 million of integration costs that were primarily cash. And togetherthese items represented $0.09 per share. Also excluded from our adjusted EPSare the expenses related to our manufacturing optimization initiatives, whichtotaled $8 million pretax or $0.03 per share in the quarter.

 

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

 

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

 

Looking at a fewother cash-flow items, our cash flow from operations for the quarter was $183million, 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 aswell, and we continue to estimate that our full year cash flow from operationswill be in the $450 million to $500 million range.

 

Capitalexpenditures in the quarter, decreased to $40 million from $44 million lastyear. Most of this decline relates to less spending this year on ourmanufacturing optimization initiatives. For the 2007 year, we now expectcapital spending to be in the $220 million to $240 million range.

 

Depreciation andamortization of $60 million in the quarter includes the $13 million ofintangibles amortization, related to the Mayne acquisition that I referencedearlier.

 

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

 

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

 

We continue toestimate that integration expenses for 2007 that runs through the incomestatement will be in the $45 million to $55 million range. And we also stillexpect other cash expenditures related to the acquisition, to be approximately$30 million to $40 million for 2007. And this spending is primarily forseverance and capital projects.

 

With that I’llturn the call back over to Chris for some additional comments before we takeyour questions. Chris?

 

Chris Begley

 

Looking outtowards next year, we are in the midst of our 2008 planning process. Theprocess each year involves not only a detailed examination of the businessopportunities, and any challenges for the upcoming year, but also a scan of thecurrent macro environmental and the competitive landscape.

 

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

 

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

 

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

 

Next: we willneed to further leverage previous product launches and meet our timetable fornew launches, with subsequent successful introductions in the marketplace.

 

On the globalpharmaceutical side, based on current information, we would expect to includegeneric Zosyn in this new products category, as well as several other productslaunched from our drug development pipeline.

 

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

 

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

 

In globaldevices, we will need to continue to upgrade our US customers to MedNet-enabled infusionsystems. The complete rollout of Symbiq in the US is also a key success factor. Outsidethe US the availability of certain infusionpumps, and new languages is one of the components of our international marketexpansion initiatives for MMS.

 

On the costside, another $15 million in savings is expected from our manufacturingoptimization initiatives in 2008.

 

These are someof the factors we currently see as important to our performance in 2008. Ofcourse, we will continue to take actions to support the strategies we haveimplemented since day one, to invest for growth, and improve margins, and cashflow. As we head towards the conclusion of another year of progress forHospira, we are focused on building on our accomplishments and on achievinganother good year in 2008.

 

And nowoperator, we are ready to take questions.

 

Question-and-Answer Session

 

Operator

 

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

 

Rick Wise - Bear Stearns

 

Good morningeverybody.

 

Chris Begley

 

Good morning,Rick.

 

Rick Wise - Bear Stearns

 

Maybe let'sstart with, if you could give us a little more color on the generic EPO issueor the Retacrit issue? I understand, if I heard you clearly, Chris, you aresuggesting that launching the product and investment for some time is going tooffset 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 orthree years to five years? How you want to convey it, in terms of sales and theimpact it could have on Hospira?

 

Chris Begley

 

Well, first ofall Rick on EPO, we are creating a new market. The first biosimilar in Europe was just recently launched, and it isreally 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 oneindication we did not receive for renal subcu is worth approximately 25% ofthat $2 billion marketplace. And we expect some time in 2009 we would end upwith that indication. And so, as we look at '08 and '09, I would view both ofthose years as an investment mode for us.

 

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

 

Rick Wise - Bear Stearns

 

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

 

Chris Begley

 

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

 

Rick Wise - Bear Stearns

 

Okay, secondquestion: Can you talk a little bit more about the impact of rising energycosts and what kind of risks that might present to the '08 outlook and to whatdegree, 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

 

Regardingpetroleum prices, we continue to try to offset the increases we are seeingthere 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 thinkas Tom has indicated, we certainly are under pressure as many of themanufacturers who use a lot of the oil-based products in their product linesare. We have, as you know, and Tom alluded to, we continue to look for costreduction opportunities to offset that. And in the meantime we've done a lot ofwork with our GPO customers to educate them about the impact of these costincreases on our inputs, and how they need to be passed on to them. And as evidencedby the contract that we extended with Novation. I think the message isresonating with the GPO customers. It's very evident that they are starting tounderstand it. They may not like it, but they do understand it. And again, Ithink that's the way we are going to be able to help mitigate the impact ofhigher energy prices, is by passing it on to our customers in a manner that isnot only fair to Hospira, but also fair to them, because again they have thesame pressure as we have, relative to cost containment. So, we think when we gothrough these negotiations with each of our GPO customers, the outcome will bea balanced outcome for both parties.

 

Rick Wise - Bear Stearns

 

Thanks so much.

 

Operator

 

Your nextquestion 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 youdetailed, seemed to be positive factors going into '08. You also mentionedgenerally that you would take in competitive activity in the macro landscape. SoI just wanted to make sure: is there anything incrementally foreboding on thecompetitive or macro side that we should be considering in particular?

 

Chris Begley

 

Taylor, first of all, we are still goingthrough the planning process and are exercising our assumptions aroundcompetitive situations and the macro-environmental situation that could occurin '08 or even in '09. And so, that's an exercise that we will continue to dountil 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 keepopening up the paper and reading about the escalating oil prices, which has animpact on our materials and energy. And so that's something that we are goingto have to continue to watch and continue to offset. The other one is obviouslyon the Banco front and competition on Banco, and so that's something that as wecomplete our '08 planning process we will really exercise and get as good of intelligenceas we can to better understand, if there will be competition in '08 or '09 orfurther out, I will mention those specifically on Banco. We have done a wholelot in the area around contracting and developing differentiated packagingsystems to take and actually have proprietary systems on Banco, which covers apiece of that marketplace.

 

In addition onBanco, I think it's important to keep in mind that it really is verycapital-intensive. And so any new entrant, if they were to come in themarketplace, would not be able to take and serve the entire market, but wemight experience some type of price pressure. And so, I think the organizationhas done a very good job of taking and managing the situation from an overallmitigation standpoint and we will continue to do that. And it's just too earlyright 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 reallyhelpful. On the Banco front, is there a time period after which if somebodylaunched the product in '08 it would be difficult for them to get onto GPOcontracts? Before that year?

 

Chris Begley

 

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

 

Taylor Harris - JPMorgan

 

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

 

Terry Kearney

 

Taylor, this is Terry. Let me answer that. Acouple of things: First and foremost, historically, we always see a fairlystrong fourth quarter as the wholesalers stock-up on anti-infectives and otherproducts related to the anticipated flu season. So that's usually a pretty gooddriver for fourth quarter growth. The other thing that we typically see ispretty 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 thenfinally, the other thing that we are certainly taking into account is thecontinued good momentum we are having with Precedex, and we expect another goodstrong quarter for Precedex. Those are probably the three factors that come tomy mind why we believe again, we are going to have a good quarter in SIP.

 

Taylor Harris - JPMorgan

 

Okay. Great. Andlast question on the pump business: Would the Symbiq delay the full launch tillnext year? Are there customers who are waiting for Symbiq? Is it just really thatthey were pushed out of revenue realization or is there some other factorexplaining the reduction in guidance this year?

 

Terry Kearney

 

Well, let mejust keep it all in perspective. As you remember, we didn't have a great firstquarter. But, clearly, second and third quarter were really strong quartersfrom a growth perspective, both being in the 15% range. And again, if you lookat 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 wesee in our current and pending contracts. So, we believe that gives us reallygood momentum going into 2008, which will be further enhanced with the launchof 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 Iwouldn't say they're not. But the base business continues to do very well, andagain, I think the last few quarters of performance are indicative of that.

 

Chris Begley

 

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

 

Taylor Harris - JPMorgan

 

But it wouldseem that in essence this probably just protracts the period of time in whichyou are going to get a nice mix benefit in that business. It's just you are notgetting it all at once in 2007. Is that there?

 

Tom Werner

 

I think Taylor, that's very fair.

 

Taylor Harris - JPMorgan

 

Okay. Thanks alot.

 

Operator

 

Your nextquestion comes from Glenn Novarro with Banc of America Securities.

 

Glenn Novarro - Banc of AmericaSecurities

 

Hi, goodmorning, guys.

 

Tom Werner

 

Good morning,Glenn.

 

Glenn Novarro - Banc of AmericaSecurities

 

Couple of questionson the injectable side: If I am looking at my model correctly, it looks likethe Mayne business in both the US and OUS was down sequentially in 3Q. Isthere some seasonality to the Mayne business that we are not aware of? Anycolor would be appreciated, that's question one. And then the second questionon 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 productout there? Thanks.

 

Terry Kearney

 

Let me try totackle that Mayne question for you. Really, I think what's happening and whatyou need to reaffirm in your mind is that we still see Mayne overall saleshitting our original projections of that $620 million to $640 million. So, theevolution of the sell-through for the year, are really still tracking ouroriginal expectations. Relative to the sequential decline, one of the thingsthat may be impacting that and certainly would be impacting that, is the factthat we had to divest a number of products as part of the FTC ruling. So that'shaving somewhat of a sequential impact as those products have been divestedover the early part of the year. Other than that, I think it's indicative ofany generic market in the sense that it really depends on what new products arelaunched in any one given year and the size of those new products and this hasbeen a relatively light year, as far as new product launches in the Mayneportfolio. 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'snot any different than the expectations we had. And again like the rest of ourgeneric portfolio, we will have a period of time where the market isn't growingas quickly because of lack of new products. But in those periods where newproducts are abundant and large, you would expect much higher growth.

 

Glenn Novarro - Banc of AmericaSecurities

 

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

 

Terry Kearney

 

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

 

Glenn Novarro - Banc of AmericaSecurities

 

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

 

Chris Begley

 

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

 

Glenn Novarro - Banc of AmericaSecurities

 

And just afollow-up: How big is Zosyn on the branded front and how many other genericsare going to be launched in next year? How many competitors do you think willbe 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 alot of good intelligence of anybody else behind us at this point in time. Sothere certainly could be others. Clearly, when there is a large product likethis, there's lot of interest in it. But right now, we really don't have anybetter intelligence than what we know with our dialogues with Sandoz.

 

Glenn Novarro - Banc of AmericaSecurities

 

Okay, great.Thank you.

 

Operator

 

Your nextquestion comes from Matt Miksic with Morgan Stanley.

 

Matt Miksic - Morgan Stanley

 

Hi, can you hearme okay?

 

Terry Kearney

 

Yes Matt.

 

Tom Werner

 

Yeah Matt, goodmorning.

 

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 oncologyapproval in addition to the renal. And I know you are taking kind of aconservative view on the contribution of this product and the rate at which youcan grow it and so on. But that seemed like it was something that was a bitmore positive. Am I reading that right, or on the margins, should we thinkabout this as, you have an oncology sales force on the ground now with Mayne onthe margin that improves the potential traction and uptick you could get withthat product over the next couple of years?

 

Chris Begley

 

Matt, that's agreat question. Yes it is a bit more positive than what we had thought. We didnot think we were going to get both indications. So that is a positive. And aswe are beginning to put our launch plans in place, I think there is are acouple of things to keep in mind. On calling on the nephrologists for the renalindication, 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 thatourselves with existing resources. But there are other countries in Europe, where we are going to have to createthe sales force, because we really don't have the bandwidth to call on theoncologists or the expertise. So it will be a mixture. And probably the otherthing that's worthwhile mentioning is, as I mentioned earlier on the call thatthe subcu renal is about 25% of the 2 billion, but that really varies bycountry. And so what will happen as we launch in Europe is we won't be able to launch all acrossEurope, all at once, in '08. We will get onecountry at a time that will end up getting approval, whether that is for thecountry or for the pricing that will be authorized. And so it will be a gradualrollout as we look at '08 on Retacrit. Does that help?

 

Matt Miksic - Morgan Stanley

 

Yes, that'shelpful. Another question on Europe and international: Your, I guess coreHospira international numbers came in a little stronger. I'm wondering: is anyof that driven by -- I think you have pumps in there, correct? So, I was justwondering to what degree you are seeing synergies with the international Mayneorganization?

 

Terry Kearney

 

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

 

Matt Miksic - Morgan Stanley

 

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

 

Chris Begley

 

No it's just toopremature to comment on that. That's one of the things that we need to fullyexercise as we finalize this '08 plan.

 

Matt Miksic - Morgan Stanley

 

And so any othercolor 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 thepackaging?

 

Chris Begley

 

It is a lyophilizedproduct 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 haveany sense of how much share you have in the branded market with ADD-Vantage, doyou?

 

Chris Begley

 

Actually noneright now because the innovator had taken ADD-Vantage off the market and sothere is none and so we will have to, when we launch it, create thatmarketplace.

 

Matt Miksic - Morgan Stanley

 

Reintroduce it?

 

Chris Begley

 

Yes reintroduceit 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 thatformat, and we are able to come in with our generic version of it. This is the onethat we will have to create.

 

Matt Miksic - Morgan Stanley

 

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

 

Terry Kearney

 

Matt, I guessour 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 verystrong quarter, and again it's really premised on the current and pendingcontracts in our pipeline and as we've talked in the past, very extensive processesgoing through each of our contracts customer-by-customer, and going through andrisk adjusting the likelihood of a close. The likelihood of implementation andso forth. So that forecast that we have, that we presented today is reallybased on that deliberate exercise. And so we still think, again, we see goodmomentum in the market and when we look at the market share data, that it isevident 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 nextquestion comes from Junaid Husain with Soleil Securities.

 

Junaid Husain - Soleil Securities

 

Good morningeveryone.

 

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 mainsales force with the expertise in oncology products? You know, with Retacrit inthe fold, I think that would make you the only guys with oncology drugs and EPOin an infusion pump. So do your European customers view this Trifecta assomething that is a fairly compelling value proposition to them?

 

Chris Begley

 

Time will tellon that. As we go out and launch, we believe we have an oncology channel playthat we are developing here, that will include exactly what you talked about.The generic oncology drugs, EPO and then some other vial similar, that, theoncologist is the customer. And then we've got the infusion pumps that fall inthat category. And I've talked before about the fact that we would like to beable to take and add some proprietary oncology drugs, small proprietaryoncology 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, bothsecuring all the different products and then we believe the marketplace willrespond very favorably to that. Both at the professional level and we think ithas got some potential from a contracting standpoint also.

 

Junaid Husain - Soleil Securities

 

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

 

Terry Kearney

 

Junaid, this isTerry. As you know, we did acquire G-CSF rights in the Mayne acquisition. Theyhad a deal done with Pliva prior to our acquisition. And we are continuing withthat investment and I believe we are in Phase III trials as we speak today. Andagain as you know, I think the patent expiration is in the 2010 timeframe andthat'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 goingon with the clinical trials for Precedex, your biogenerics initiatives and thenmaybe some more development work on Symbiq. So should we think about R&Dexpense maybe a tad higher into the back half of the year?

 

Tom Werner

 

No. I think forthe quarter we are still running in that 5.6 to 6.0 range that we communicatedbefore.

 

Junaid Husain - Soleil Securities

 

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

 

Tom Werner

 

I can do thatfor you, Junaid. As you know, we have many trials going on to expand a labeland the first largest trial that we undertook was a long-term sedation trial, whichis to allow us to expand the indication beyond 24 hours. That trial is nowcomplete and we are still waiting for the results to be unblinded. But we areexpecting hopefully to be able to submit that filing in the first quarter of2008. The second trial was our procedural sedation trial, which had really twotrials within it. That study is now complete and the studies have met theirprimary endpoints. So we are very positive and excited about that. We expect tosubmit this filing to the FDA by the end of 2007. The third trial that we aregoing after is our pediatric indication. We have had a very productive dialogwith the FDA over the year and we expect to initiate these trials in 2008. Andas 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, theway this has worked we really believe there is a good rationale to go afterthis study. But early in the enrollment state, the incidents of delirium thatwe received, was significantly lower in both the control and study groups.

 

So, with that wethink it probably relates to the fact the way the trial protocols were puttogether and negotiated with the FDA. And it's possible that with these trialprotocols that in many ways perhaps, we eliminated the factors that bring ondelirium in anesthetized patients. So to make a long story short, we are notgoing to pursue the delirium trial any longer. Again it's not anything to dowith safety. It's just the way the trial was structured and what we negotiatedwith the FDA. We didn't see the incidents of delirium. So that doesn't reallyaffect us relative to our thinking of this product. We still believe thisproduct has a lot of legs behind it and we still expect that with the othertrials that we have ongoing and will submit that will have a product that iscapable of achieving well over $100 million in sales.

 

Junaid Husain - Soleil Securities

 

Thanks so much,Tom.

 

Tom Werner

 

Thank you.

 

Operator

 

The finalquestion comes from Gregg Gilbert with Merrill Lynch.

 

Gregg Gilbert - Merrill Lynch

 

Thanks goodmorning.

 

Tom Werner

 

Good morningGregg.

 

Gregg Gilbert - Merrill Lynch

 

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

 

Chris Begley

 

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

 

In addition tofurther understanding the market and characterizing the marketplace for us. Andso, those are the types of activities that we are doing, as well as on themanufacturing front, assessing where is the best location to make the product. Sothose are the activities from a US standpoint. On the AMT standpoint, youknow, Gregg, that's a great question. And I think it will have and I said AMTsorry, AMP, and for those of you who are listing this happens to do with thelisting 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 onprices, 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 happenswith price in this marketplace. Now obviously that has to play out and we haveto see how it plays out in the marketplace. But that would be my initialreaction to your comments or your question.

 

Lynn McHugh

 

You think thathelped, Gregg.

 

Gregg Gilbert - Merrill Lynch

 

Yes. Thank youvery much.

 

Lynn McHugh

 

Operator? Iguess, Operator, that's it and if so that concludes our call for today. Thankyou for joining us.

 

Operator

 

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

 

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