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Hospira (NYSE:HSP)

Q1 2012 Earnings Call

May 01, 2012 9:00 am ET

Executives

Karen King -

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

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

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

Analysts

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Matthew Taylor - Barclays Capital, Research Division

John M. Putnam - Capstone Investments, Research Division

David G. Buck - The Buckingham Research Group Incorporated

David H. Roman - Goldman Sachs Group Inc., Research Division

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Marshall Urist - Morgan Stanley, Research Division

Gregory Hertz - Citigroup Inc, Research Division

Robert M. Goldman - CL King & Associates, Inc.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Operator

Welcome to Hospira's First Quarter 2012 Conference Call. [Operator Instructions] I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone, and welcome to our first quarter 2012 conference call and webcast. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President, Finance, and Chief Financial Officer; and Sumant Ramachandra, Senior Vice President and Chief Scientific 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 MD&A sections in Hospira's latest annual report on Form 10-K and subsequent Form 10-Qs on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

On today's call, non-GAAP financial measures will be used to help investors understand Hospira's base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issued this morning and are also available on the Presentation page in the Investor Relations section of our website.

Also posted on our website is a presentation of complementary materials that summarizes the points of today's call. We do not speak directly to the material. It is for your reference to use as an enhanced communication tool. You can find the presentation on our website at www.hospirainvestor.com.

Finally, we will be ending the call at the top of the hour this morning. In order to allow as many of you as possible to ask a question, please limit yourself to one question.

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

F. Michael Ball

Thanks, Karen. Good morning, everyone. Welcome to our first quarter 2012 conference call.

I will begin today's call by providing you with an update on our quality remediation efforts and growth initiatives followed by a discussion of our first quarter sales results which, like our adjusted EPS, were in line with our expectations. Tom will then provide a deeper dive into the financials and wrap up with a discussion on guidance.

As I've said before, reinforcing the foundation is our #1 priority and that has not changed. On the quality front, as we progress with our remediation and move forward towards recovery, we are uprooting and resolving issues, we are preparing and responding to various FDA inspections. And with our strength in leadership, we are working cross-functionally across our plants to share best practices and to put the highest quality processes and procedures in place.

Let's start with Rocky Mount. First, we remain on track with our remediation efforts at the plant. As we indicated on our fourth quarter earnings call in February, we are currently maintaining our production and release levels in the 60% to 70% range and anticipate that we will remain at these levels through at least midyear.

Second, we are also making progress with our hiring efforts at Rocky. We have placed over 100 full-time employees at the plant since the beginning of the year. This is in addition to the more than 150 consultants we already have working on the plant floor with our employees and assisting us with our remediation efforts. We expect these consultants to remain with us for most of the year, after which we expect to steadily ramp down as our internal staff takes over many of the roles and responsibilities the consultants have been performing for us.

And finally, we have had continued -- we have continued our regular constructive dialogues with the FDA regarding our current progress at Rocky and continue to press forward with implementation of our remediation plan. The agency has told us they are willing to meet with us to discuss our plan, and we are communicating with them to finalize a date.

Moving to our Other Pharma facilities. At our Clayton plant, which is also cited under the Warning Letter with Rocky Mount, the FDA conducted an inspection in March. The inspection was not a full cGMP audit but a limited inspection focused on a specific issue. The agency had one observation regarding how we conduct investigations, which we did not deem to be critical in nature. We have already addressed and completed the corrective action for this observation.

In addition, during the month of March, we encountered some manufacturing issues at the plant and elected to shut down production to investigate. This has created a temporary shortage situation with propofol and has also impacted certain contract manufacturing customers. Last week, we completed the corrective action, which we believe addresses the issue. We have restarted production and will begin a staged release of quarantined product in the coming weeks.

At our Austin plant, we discussed on our fourth quarter earnings call that we had retained Lachman, a third-party consulting firm, to audit the completion of the plant's corrective actions. They concluded that all of the commitments we made to the agency in our action plan had been fully completed. In March, we received from the FDA what is referred to as an untitled letter. The letter clarified the agency's expectations regarding the scope of some of our corrective actions we took to resolve the observations in the 483 they issued last year. We have responded to the letter with our plan to address their concerns. And with the additional corrective actions in place, we'll be better prepared for their next inspection.

At our Lake Forest facility, the FDA recently performed an inspection of our stability labs and our adverse events reporting process, and concluded the inspection with 0 observations. On the device side of the house, the FDA recently inspected both of our device plants. Our Dominican Republic plant received 0 observations and our Costa Rica plant received 4 observations, none of which we deem critical and 2 of which were addressed prior to the completion of the inspection.

To wrap up our quality discussion, I'll take a minute to welcome John Elliot as our new Senior Vice President of Operations. John is a very seasoned global leader with more than 35 years of manufacturing experience, and he has advised some of the world's largest pharmaceutical companies. He's a great addition to our strength and quality in operations organization and will bring new insights and leadership to help us reinforce our foundation and drive growth.

I am very excited with the addition of new team members now reporting to me: Richard Davies is our new Chief Commercial Officer; Zena Kaufman is our new head of Quality; and now John Elliot is our new head of Operations.

Before turning to the sales result, I'll briefly mention that we also advanced our growth initiatives during the quarter. We began the registration process for several of the drugs targeted for our global expansion program, in addition to working on several other growth initiatives, including advancing our biosimilar programs. And our partner, Celltrion, delivered a major milestone with the European filing of infliximab in the quarter.

Finally, on another positive note, we were pleased with yesterday's positive outcome regarding Precedex. The judge ruled in our favor on the 2013 enantiomer patent, which provides us exclusivity through the life of the patent. We are currently conducting pediatric trials, which would extend the patent exclusivity by 6 months into early 2014. While we were disappointed with the judge's decision regarding our 2019 ICU sedation patent, we believe in the strength of our patent and will take appropriate legal actions to continue our defense on this patent.

I'll now turn to our sales results for the quarter. As a reminder, all references to net sales results will be on a constant-currency basis, which excludes the impact of foreign currency fluctuations. Our press release provides full details on the impact of foreign currency on net sales by segment and product line.

On a constant-currency basis, net sales were down 3% compared to the first quarter of 2011. By product line, Global Specialty Injectable net sales decreased 8% for the quarter.

By region, in the Americas, specialty injectables sales were down 10% for the first quarter. The decline related mainly to 2 factors: First, docetaxel. If you recall, we launched docetaxel in the first quarter of 2011, which made for a difficult year-over-year comparison. Despite the tough comp, docetaxel actually held up extremely well in the quarter. No new competitors entered the market, which enabled us to maintain our market share of close to 50%. Pricing remains fairly rational, declining to approximately 60% off the branded product pricing. The second factor was the impact of supply issues, primarily driven by remediation activities, which affected several of our products, including anti-infective and anesthetic drugs. Partially offsetting the decline in SIP in the Americas was continued strength in Precedex during the quarter.

Turning now to the EMEA segment. Net sales of specialty injectables were up 16% compared with the first quarter of 2011. Meropenem performed exceptionally well in the quarter. We have launched the product in most major countries in Western Europe and have captured a leading market share position overall in the region. Nivestim, our biosimilar filgrastim, also had a strong quarter in many of our EMEA markets. It has performed particularly well in France, where we recently added additional sales staff to support the product, which we believe is the fastest growing biosimilar filgrastim in that country.

In Asia Pacific, net sales of specialty injectables decreased 13% in the quarter. While market demand is still strong, we had some difficult year-over-year comparisons due to the timing of wholesaler buying patterns in Australia, our largest country in our Asia Pacific region. In Japan, net sales trends for Precedex remained strong.

Turning now to Medication Management. Global net sales increased 7% during the first quarter, primarily as a result of strong built-up demand for Plum device sales. During the quarter, we were very pleased to receive FDA clearance for our 510(k) application for the upgraded Symbiq software and have begun working with customers to upgrade the installed base of Symbiq devices with the new software. We expect to begin shipments to a select number of new customers later this quarter. We also continued to make progress on our comprehensive device review by conducting additional investigations to drive to root cause and implement appropriate actions.

Sales in our Other Pharma product line were relatively flat in the first quarter compared to the prior year quarter. Strong demand by certain third-party customers was offset by the impact of the quality remediation actions we have been taking at our pharma manufacturing facilities and the resulting delays in product release.

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

Thomas E. Werner

Thanks, Mike. Good morning, everyone. I'm going to take you through the income statement then talk a little bit about cash flow and wrap up with guidance and then turn it back over to Mike.

Adjusted gross margin as a percentage of sales, net sales for the quarter, was 37.0%, which was down from 42.3% in the first quarter of 2011. This is primarily due to costs associated with our quality initiatives, including some inventory losses, as well as price declines on 2011 U.S. launches and oncology products in the EMEA and Asia Pacific.

As expected, R&D expense in the quarter increased 21% to $69 million over last year, primarily as a result of higher clinical trial spending, as well as the initiation of our global expansion program.

R&D as a percentage of net sales was 7.2% of revenue, compared to 5.7% for the first quarter of 2011.

SG&A expense for the first quarter was $184 million, up 12% from $165 million for the same period last year. The increase is primarily associated with increased sales and promotional expenses, as well as slightly higher corporate expenses.

As a result, adjusted operating income was $104 million compared to $203 million in the first quarter last year. Adjusted operating margin was 10.8% compared to 20.3% of net sales in last year's first quarter.

Our adjusted tax rate in the quarter was 19% versus 23% in the first quarter last year. The reduced tax rate in the 3 months ended March 31 resulted from increased quality and product-related expenses in higher tax rate jurisdictions, combined with a greater mix of operating income in lower or tax-free jurisdictions.

And finally, adjusted diluted earnings per share for the first quarter was $0.47 compared to $0.93 for the same period last year.

Turning next to cash flow. Cash flow from operations for the quarter was $87 million compared to $6 million for the same period in 2011. The increase this year is a result of -- or the increase over last year is a result of lower comparative investments in working capital, including inventory, and the timing of receivables collections, which more than offset the decline in net income.

Capital spending in the quarter was $67 million compared to $62 million in the first quarter of last year. And the spending this quarter includes the investments we're making relative to our capacity expansion efforts, primarily at our new pharma plant that is being built in Vizag, India.

Our cash balance at March 31 was $656 million, up from $598 million at the end of last year and $597 million at March 31 of last year.

Next, turning to our full year guidance. We're maintaining all data points that we provided on our 2011 fourth quarter earnings call in February of this year. We're maintaining our net sales guidance of down 1% to up 2% on a constant-currency basis, with foreign exchange contributing a negative 1%. Adjusted gross margin projections remain in the range of 35% to 37%, and adjusted operating margins in the range of 12% to 13%. This translates into adjusted EPS guidance of $2 to $2.30 per share.

I'd also like to remind you of some of the assumptions we provided when we delivered our 2012 guidance in February versus where we are today. First, for Rocky Mount. The lower end of our guidance range assumes that Rocky's production, Rocky Mount's production, remains at 60% to 70% throughout the entire year. Moving up in the guidance range assumes that the facility remains at 60% to 70% through the first half of the year but that production and the pace of product release accelerates in the second half of the year.

As we discussed on last quarter's call, one of the key factors relative to the guidance range is our midyear scheduled maintenance shutdowns at many of our pharma plants, which occur annually in early July. As we progress with our remediation efforts, we continue to find and respond to issues and as Mike said, we want to address any and all issues now, to get the foundation fully fixed rather than waiting until later. Therefore, when we shut the plants down in the third quarter, early in the third quarter, for preventive maintenance, we may take advantage of these shutdowns, as we did in the first quarter by possibly extending them in the downtime work, in the downtime to work on any additional issues we may uncover.

Next, regarding other 483s. Our guidance assumes that other facilities that currently have open 483s continue to make progress toward meeting the commitments communicated to the FDA and that future FDA inspections of our manufacturing facilities progress well.

Next, related to Symbiq. The midpoint of our guidance range assumed approval, FDA approval, of Symbiq by midyear, with sales beginning in the second half of the year. Relative to the second quarter, while we do anticipate some new sales, we are initially focused on remediating pumps that are already in the field and filling previously signed customer orders, which really won't have a significant impact on our guidance.

And finally with respect to Precedex, as Mike mentioned in his opening remarks, we were pleased that the judge ruled in our favor regarding the 2013 patent, and we're maintaining our guidance assumption that with an extension of the patent for our pediatric studies, we will retain market exclusivity in the U.S. until early 2014.

The remaining assumptions for the full year revenue guidance we outlined on the fourth quarter call remain unchanged.

In terms of calendarization, we expect adjusted gross margin in the second half of the year to be slightly weaker than the first half of the year, again, as the second half will be impacted by our scheduled preventive maintenance shutdowns. For R&D, we expect the full year to remain in the 7.0 to 7.5 percentage of net sales range. But based on the timing of clinical trial spending, R&D absolute dollars should rise in the second and third quarter. SG&A should ramp down approximately 5% to 8% in absolute dollars from the first quarter and then remain fairly flat throughout the year. As a result, we expect second quarter adjusted earnings per share to be relatively flat with the first quarter.

And with that, I'll turn the call back to Mike for some final wrap-up comments.

F. Michael Ball

Thanks, Tom. The first quarter was a busy one for us. We remain highly focused on our remediation efforts as I am determined that we are going to get this fixed and meet the FDA's expectations. We also have been communicating regularly and working diligently with the FDA and our customers to help manage the industry-wide drug shortage situation. I'll take this opportunity to say that we greatly appreciate the FDA's cooperation and our customers' patience in this regard. We continue to drive our growth programs and to tap into the many growth opportunities that exist for Hospira.

Looking forward for the rest of the year, we still have a lot of work to do relative to our quality initiatives. We've made a lot of progress. We have a great team in place and remain in control of the process, but there are still a number of unknowns out there. I told you before, I liken the process to one of draining the swamp. Which sometimes means you find gators you didn't know existed. As we travel down the road to recovery, issues are surfacing and we are jumping into action to resolve them.

I'll reiterate that I am committed to getting our foundation fixed over the short term, and when we do, Hospira will have an even greater competitive position in the industry. That, plus the work we're doing to capitalize on our tremendous growth opportunities, is positioning Hospira for longer-term success as the world's leading provider of injectable drugs and infusion technologies. It's an exciting and challenging journey and one I'm very excited to be leading.

With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Gregg Gilbert with Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

I have an FDA question, surprise, surprise. What happened with the FDA meeting that was going to happen a few weeks after the last call but that was canceled and not rescheduled? And then what is the actual trigger to make the production levels go from 60% to 70% to something much higher? Is that an inspection you would -- a reinspection you would expect? Or could that occur without a reinspection? Can you just put some color around what drives materially higher production level after the planned shutdown?

F. Michael Ball

Okay, Gregg, I'll take the FDA question first. With respect to the timing around the meeting with them, we have been discussing with them, for a number of months, a meeting. It's simply been a scheduling issue. We feel that we will, in this quarter or certainly before the next call, we feel we will have an opportunity to get a face-to-face meeting with them. And obviously, then we can give you an update as to what occurs then. So it's simply been a scheduling issue with respect to the FDA. Turning to your second question on what then gets our ramp from 60% to 70% up to something higher. Essentially, I believe, it's uncovering these issues, getting our plants up in terms of first pass quality, getting the tough exception reports that we need to get through our labs behind us and getting to more of a free flow of product. So as we continue to go through our remediation, we are uncovering issues. This causes then a slowdown in our manufacturing or a backup behind our lab as we seek to ensure that the products are safe and effective. Once we get through this particular period, I believe that the plans will, or at least Rocky Mount, will get better than at the release process. We will have less issues as we've taken care of the issues and then we should start to see a ramp-up in terms of supply. I should also say that product supply is somewhat dependent upon the amount of remediation that we have to do. As we find things, a lot of times, we have to divert resources away from the product supply area into looking at detailed remediation on a specific issue, and this causes a slowdown in the system. So again, as we get these remediation efforts behind us, I believe we will see a ramp-up then from the 60% to 70% level.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

So no reinspection required to achieve that?

F. Michael Ball

My opinion is there will not be a reinspection required in order to get these volumes moving forward.

Operator

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

Christopher Schott - JP Morgan Chase & Co, Research Division

Just one quick one and a follow-up. Relative to your last update with us in February, are you feeling better, the same or worse, about the state of your manufacturing as you've learned more about what you have to do as you're working through some of these issues? Just how are you overall feeling this process is going? And then the second question is a longer-term question. When all this work is done, how much higher is your cost of manufacturing going to be relative to prior, when this process has started? Seems like you're hiring people, you're going to have more manufacturing oversight, you're upgrading suites, it seems like it points to higher marginal cost of production going forward. Is there anything you can do just talk to us on that front of how much of an impact this is? Can you quantify it at all just as we're thinking about our longer term models here?

F. Michael Ball

Okay. So I'll take the first question, Chris, and Tom will handle the second. So how is the process going, is it in line with our expectations? I would say, yes, it is. We are making progress on the remediation front. As I said before, we're uncovering a number of things. We have a, I think, great expertise now, resident in the plant, both from a consultant standpoint, but also from the new hires we've made. And we've been essentially moving through issues and knocking them out one by one. But there are a lot of issues. It's a big plant. So even as I think we've been very good at progressing, there are still lots of work to do. And as I mentioned before, we're still uncovering things as we move forward. So this is in line with our expectations. As I indicated to you before, I didn't think this was going to be an easy process, but it's absolutely a necessary process. And again, I just want to express my determination that I want to get all this stuff behind us. So we are just driving to root cause, getting these solutions then done right now, and moving forward so that as we move through 2012, we can say we did a great job at reinforcing the foundation.

Thomas E. Werner

Chris, the cost structure, I'll kind of explain a couple of different ways. Coming into this year and going back as far as almost to the end of 2010, we've added at least 300 basis points of cost to our cost structure. And depending on how you look at it, it could be more than that. And we had been running, I think, if you normalized our margins for oxaliplatin, as well as some of the early quality issues we began to have in 2010, near as I could tell, we were running normally around 41%, 42%. So we've seen at least a 300 basis [indiscernible] drop off. I think it's slightly more than that depending on how you look at it. Whatever it is, we're not intending to sort of stop there and have a permanent impact to the cost structure. As Mike said, the key here is getting our first pass quality up so that we're not writing, we call them, exception reports or basically production deviation reports where something isn't right with the production or something's not right with the documentation. I've been through quality training before, and the cost of quality, when you can get to first pass quality, it's a -- I won't say it's exponential, but it's a magnitude in cost savings on what you think you're actually spending. So we've had to add these costs in. Some of them are people. The consultants will go away towards the end of the year or early next year, as Mike said. We're going to get more efficient with the existing people we have. We're adding automation. We will begin to modernize, particularly Rocky Mount, potentially some of these other factories, to help gain more efficiencies. But the key is getting to first pass quality, and that's where we intend to drive to get our cost back in line because we can't stand still with the cost structure we have right now. But it's just going to take some time.

F. Michael Ball

And the other thing I had mentioned is we have to continue to look at pricing as well, because the industry -- across the industry, all of our competitors have been plagued with these issues to some extent as well and we have to really hard -- take a hard look at pricing.

Operator

[Operator Instructions] Our next question comes from the line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to follow up on some of these thoughts around remediation. I guess the question is, in your comments earlier, you talked about taking advantage of the shutdown later in the year to potentially do some extended maintenance. I mean, should we read that as kind of giving a nod to the lower end of guidance despite your Symbiq approval? And I guess the other piece of that is, in terms of the progress on the 483s, do you view some of these 483 issues that have cropped up here as being incrementally negative? You seemed to say that they weren't really a big deal in your comments.

Thomas E. Werner

Yes, Mike, I'll take the 483s. Matt, there's -- we're not giving a nod to any end of the guidance. We're sticking with the $2 and $2.30. The statements we're making is just to remind people that we have preventative maintenance shutdowns in the second part of the year, and that's the best time for us to take advantage of an opportunity. If we find some issue that we think is foundational and needs to be fixed, we're going to do it. We don't know of any issues. If we did, we would factor that into the guidance. It's just that when you shut everything down and clean everything out and flush it, you tend to find things. And we just wanted to remind people. So I wouldn't read anything more into it than that. Relative to the 483s, Mike?

F. Michael Ball

Yes. So on the 483s, Matt, getting a 483, obviously, is not a great thing. But as I look at the first quarter and just the, what the observations are now, where we have got a 483, I feel much better. So recall that both the labs here at Lake Forest, and that was a 3-day inspection, the Dominican Republic was another intensive inspection. And we got no observations on those 2. So I feel good about that. With respect to Clayton, as I said, there was an issue there. The FDA came in to look at, and we responded, I think, very well to that particular issue. And then as we turn to Costa Rica, again, more observations, 2 which were handled right on the spot, 2 which we did not deem to be critical. So as we look at it, we take it as an overall positive. Obviously, I want to get to a place where we're not getting 483s, but the 483s that we seem to be getting now and the general inspection results that we're getting, seem to be that we are making progress on that front.

Operator

Our next question comes from the line of John Putnam with Capstone Investments.

John M. Putnam - Capstone Investments, Research Division

Traditionally, when you shut down for the planned maintenance, have you frequently or infrequently, I guess, found problems that you just had not -- just didn't -- that needed to be remediated?

F. Michael Ball

So on the past, let's say, example in the shutdown, there were opportunities there with issues that we had identified beforehand, to make a fulsome fix, if I can call it that way, by extending the shutdown. And also during the shutdown, during the preventive maintenance, things are also found there. So it's kind of a combination of the 2 things. We don't see anything in Rocky right at this moment, which would say, "Gee, we're going to have to have an extended shutdown." What we're referring to in that third quarter shutdown is that it does represent an opportunity which we will take if we see an advantage to it to get some major thing fixed or something that is easier to get fixed during a shutdown. So that was the purpose behind our statement. So nothing I see right now. But if the opportunity presents itself, we will not hesitate to move forward and get this thing fixed even if it impacts our ability to, on service levels.

Operator

And our next question comes from the line of David Buck with Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

Two questions. First on the shutdown plans for the third quarter and then into fourth quarter, can you talk a little bit about if there is any impact you'd expect on gross margin from that, given the remediation that's ongoing? Or should that be within the overall -- I guess, from a quarterly basis, is there any dip that we should be expecting in either service levels or gross margin? And then secondly, on price, to follow up on what Tom said previously, have you reached out to your customers at all in terms of pricing? And what's the initial reaction then in terms of trying to get more value for your quality efforts, et cetera?

Thomas E. Werner

Yes, it's Tom. As far as the shutdowns, we've always said that margins would dip down in the back part of the year, over 100 basis points for the back half of the year in each quarter relative to the plant shutdowns, and that will continue to be the case this year. Sometimes, you don't see the impact as distinctly in the fourth quarter because sales are typically higher and we leverage that, but you definitely do see it in the third quarter. You can go back and look at the historical information in that regard. And then on pricing, I'll let Mike kind of talk to that. I guess the lead-in there is that with all the competitors in this space right now having similar issues, pricing is a pretty -- I don't know if it's a popular topic, but it's often talked about. So Mike, any...?

F. Michael Ball

Yes. I think from my standpoint, we obviously need to look at pricing in this particular marketplace. I think marketplace overall pricing is depressed. And I think there needs to be a hard look, and we are doing that at pricing in this particular marketplace. So my view is we'll definitely look at it and continue to look at it. It is obviously easier to do when we are in a robust supply situation than when we're not in a robust supply situation. So I guess the answer, at the end of the day, to the question is we will definitely be looking at price over this year and next year.

David G. Buck - The Buckingham Research Group Incorporated

But just to clarify, in terms of actually taking up price that will probably be waiting a return to more normal supply?

F. Michael Ball

So what I would like to think is that when we achieve more normal supply, the pricing opportunities will be there.

Operator

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

David H. Roman - Goldman Sachs Group Inc., Research Division

I wanted just to sort of, Mike, see if you could put a lot of the moving parts here into perspective for us. When I sort of think about what's happening here, you have a major quality control initiative underway, while at the same time, trying to reinvest to invigorate long-term growth, as well as a number of management changes at various levels of the organization. Could you maybe help us think about the pacing of each of these initiatives, the impact they're having on reported results and when we start to see things operating on a more normalized level on all 3 of these areas?

F. Michael Ball

So the way I like to think about it then is we have 2 major objectives in this organization, reinforcing the foundation and turbocharging growth. So this is how we have defined it for our organization. On the first then, what we are trying to do, obviously, is, all these initiatives that we have pointed out around quality, to get the foundation very solid. But what I want to ensure is that when we do have that foundation solid and fixed that there are great growth opportunities out there. So we can't let the whole organization be dragged down, fixing the foundation route. We need to have a lot of the organization focused on the opportunities that are in front of us. So as we've basically divvied up the work, what we've done is added a considerable amount of expertise and talent and people into this, reinforcing the foundation idea. And as you look at the new hires that we have brought in, be it our new head of Quality, Zena Kaufman, or our new head of Operations, John Elliot, they bring in heavy experience. And below them, we are also bringing in the talent there. And it's those folks then -- and they are hitting the ground running -- that we're tasking with this reinforcing the foundation. I should also say that these individuals also have a great deal of credibility with the FDA. So I believe that the agency sees, both at that level and levels below them, highly credible people doing those positions and those jobs extremely well. So moving that aside then, we have a number of initiatives then on this turbocharged growth idea, which is essentially our globalization platform. So I talked about it in the prepared remarks, that we are moving ahead with globalization, and you heard Tom talk about the increase in research and development up over 20% over last year. So we are putting funds behind that. We also getting behind our biosimilars program, in addition to continuing with, developing our SIP pipeline and our IV clinical integration. So I do believe that the organization has enough bandwidth to achieve these things. So we've got part of the organization dedicated to fixing this foundation, another part dedicated to ensuring that we take opportunity with a great, great potential that we have as a company. But I've also said, of the 2 then right now, if we have to, let's say, on the third quarter, take longer to fix certain issues at Rocky Mount, we will do that. Because at the end of the day, if we've got this solid foundation then, we've got excellent opportunities to move forward. So I think with the new folks coming in on the fix the foundation side or reinforce the foundation, they are excellent. Now as I turn to turbocharged growth, I mentioned Richard Davies, who we hired from Amgen, who is our Chief Commercial Officer, who is truly a global executive. And so we have him right now out in the international parts of our business. He has not been in the U.S. much. He's basically been out in the international arena, looking at how we grow our business. But we're not waiting. We know that the opportunity is there by expanding the number of products we market. So we're working diligently in R&D to do that. So I think we've now brought in great expertise into the organization that is helping us with both things, and we're moving aggressively on those opportunities' fronts. And that's why we want to continue to investing in this thing because once we do get this supply issue behind us -- and it is not a question of if, it's simply a question of when. It is difficult to say when, but when we do, we will have these opportunities then in front of us that we'll be able to take full advantage of.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And maybe just to clarify from a management perspective, have most of the changes you plan to make already been put into place? Or should we expect more movement at various levels of senior management?

F. Michael Ball

So with respect to senior management, I'm very satisfied with the team that is in place right now. I think it's a team that can take us to the next level, both from an ops quality standpoint and also from a commercial standpoint. So we always continue to review and evaluate our talent. I am, at the end of the day, a results-oriented individual and I expect the organization to get to those results. Having said that, with what I've seen so far, this looks like an excellent team to take us to the next level.

Operator

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

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Two of them. The first one is around Taxotere. Tom, can you remind us what assumption you are making for Taxotere for this year? I guess the product, so far, enjoyed a pretty good run. Are you assuming that will continue for the rest of the year? Or are we assuming some more competition here? And the follow-on, I noticed an FDA recall around morphine sulfate, just from the outside, it looks like a pretty severe thing to release, morphine -- overfilled morphine syringes. Can you just give us an idea about the level of significance of that event? Is it isolated? Or should we be more concerned about that?

Thomas E. Werner

Ronnie, it's Tom. I'll take the docetaxel and either Mike or Sumant will talk about the morphine sulfate. But docetaxel has held up pretty well through the first quarter of this year. We are anticipating more competition. Apotex recently got approval. We haven't seen them out there in the channel yet. It's a 2-vial system. So that may have some impact on their ability to gain share. Sandoz has remained relatively rational but we're still holding around 50% share, but we do think that our share, over time, will probably slide or decline down to the traditional 25% to 35% and there will be additional pricing decline. Now should that not happen, obviously, it would obviously be a positive for us. And then on the morphine sulfate, either you guys want to...?

F. Michael Ball

Yes. Obviously, Ronnie, I'm not happy about the recall situation, but it looks isolated. It affected one lot only. It's not had a material impact. So we are driving to root cause on this particular one and have an investigation in place. And we're putting in controls to prevent the reoccurrence.

Operator

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

Marshall Urist - Morgan Stanley, Research Division

So I apologize if I missed it, any update on McPherson. I know you're supposed to meet with the FDA there as well. So it will be helpful to get an update on any progress on that front.

F. Michael Ball

So with respect to McPherson, as I said on the last call, we had a inspection there in December, 3 weeks, 3.5 weeks or so, with 3 inspectors. In January, we got the report. It was a 483 with 6 observations, none of which we deemed critical. And we have responded to the questions at the FDA. So we are not anticipating having a meeting with the FDA on the McPherson plant at this point.

Marshall Urist - Morgan Stanley, Research Division

Okay, helpful. And then just a question on Precedex, two parts. One, Tom, could you just help us, now that we at least have one court ruling, could you give us a sense of what the operating margins are on Precedex? And then second, strategically, how are you guys thinking about the kind of branded, the branded piece of the business? There's been a couple of attempts to have things to take over for Precedex longer term, but how are you thinking about that? And is that something you're going to continue to pursue?

Thomas E. Werner

Yes. I'll handle the financial side and then either Mike or Sumant can handle the product side. But I'm going to kind of dance around this. This is a proprietary drug, so out of the gate, great proprietary-type margins. We do pay a royalty to Orion. So that shaves some money off. We have additional R&D programs going on for pediatric and then still with the long-term sedation application. And then outside the U.S., heavy ramp up in sales force. So long and short of it, they are great margins, far in excess of company average. That's about all the color we'll give you on that.

F. Michael Ball

Yes. And so with respect to our plans for Precedex, we are looking at life cycle management, which you would look at on any product that you believe have some good legs in it and very good indications associated with it. So we continue to look at those, and we have not discontinued our efforts in that area.

Marshall Urist - Morgan Stanley, Research Division

But then in terms of other branded products, I know we got the news from DURECT and then the sort of progress on Javelin. Or should we expect to see you bring in more products there to try and leverage that business or kind of plug for Precedex post-2014?

F. Michael Ball

So what we're looking at doing is bringing in products that are either very close to the end of their Phase III trials, approved or currently marketed to supplement it. What we won't be doing is bringing in, let's say, Phase II products or conducting Phase III trials. I think our money is much better spent, quite candidly, on SIP, biosimilars and our device businesses. We've got tons of opportunities there. So we will continue to pursue other branded products for those sales forces at that call point, but it will be a different type of pursuit than we've done it in the past.

Marshall Urist - Morgan Stanley, Research Division

And then just one last quick one. On the Celltrion infliximab filing, what are timelines there look like? And are we going to get the opportunity to see the data, because I think they ran a reasonably-sized Phase III trial for that?

F. Michael Ball

Okay. So I'll let Sumant take that one.

Sumant Ramachandra

Marshall, so with infliximab, the submission with the European health authority occurred through Celltrion. We're working, obviously, very closely with Celltrion, as mentioned, I think, in the past. This will be a co-effort with Celltrion and with 2 different brands of the same drug in Europe. We had the fastest, frankly, approval timeline with filgrastim and that was, I think, at around 14 or 14.5 months or so in the past. And so typically, in Europe, it will take longer than that. And we just have to remind ourselves that this is a monoclonal antibody. It's the first one going through the European health authority for a biosimilar. So we expect the European health authority to ask a certain amount of questions. With that being said, Celltrion, I think, is in the best position to estimate the timeline, but I think it will take probably longer than our filgrastim filing, which occurred actually, as you know, got approval last year. So that would place us somewhere in the 2013 onwards timeframe.

Marshall Urist - Morgan Stanley, Research Division

And the data for that product?

Sumant Ramachandra

The data for that product. Celltrion has to determine when best to release the data for the product. We have reviewed the top line data of that product, and it looks very promising. We are very excited.

Operator

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

Gregory Hertz - Citigroup Inc, Research Division

A couple of quick ones. On the inventory levels, obviously, there's been some impact on the manufacturing side, but the inventory levels continue to kind of move higher sequentially. And I'm just wondering if you can kind of comment on that. Is there -- is that part of a build in anticipation of the second half of the planned maintenance shutdowns? And then secondly, maybe as it ties to that, the pace of the sequential improvement throughout 2012, I think, was part of the initial 2012 outlook. Is there still expected to be a continued sequential improvement on the top line? Or should we maybe have some, maybe ratchet those expectations down as it relates to some of the comments on Rocky Mount for 3Q?

Thomas E. Werner

Greg, it's Tom. On the inventory, this is just kind of more of an aberration. Inventories are going to come down during the year. That's still the plan. The reason they're up is we still have some inventory sitting in Rocky Mount in quarantine. And that's largely the cause for the increase there. So we'll get that worked back down. The shutdowns will naturally bring some of the down automatically, but the build right -- the increase in inventory, there's no intentional build there in anticipation of shutdown. We have plenty of inventory on products where we don't need it. We don't have enough inventory on products where we do need it. So it's getting it back in balance and then breaking the bottlenecks or the log jam in Rocky Mount. And relative to sales, I think we stand by our guidance of down 1% to up 2%. And in terms of how that cadences out, you can look at previous years. The fourth quarter is always the strongest for us. Certainly, we have to execute on some product releases, but we're sticking with the guidance. And how that plays out, I think, historically, is probably a good way to look at it.

Operator

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

Robert M. Goldman - CL King & Associates, Inc.

Just back on Precedex, could you outline what your legal options are on the 67 [ph] patent? And since I thought there was a 67 [ph] patent that was the subject of your litigation with Sun Pharma, is that -- as the court yesterday did not agree with Hospira on the 67 [ph] patent, does that pave the way for Sun Pharma to enter the market with a generic?

F. Michael Ball

So we're, Bob, just evaluating our options at this particular point, so too early to comment. And literally, the ruling just came out yesterday afternoon. So we will have to get back to you on that one.

Robert M. Goldman - CL King & Associates, Inc.

Okay. And on the second part of the question, anything you need to evaluate, the ruling?

Thomas E. Werner

You mean on Sun?

Robert M. Goldman - CL King & Associates, Inc.

On Sun, yes.

Thomas E. Werner

Yes, it's same answer. We're still digesting all this. I mean, we got word of the ruling yesterday about 4:00. So we're still reacting.

F. Michael Ball

So just to clarify though, Sun can't enter until the first patent expires. So I can tell you that. So we need to evaluate the rest of our strategies, but Sun can't enter now until that first patent expires.

Operator

And our next question comes from the line of Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

So a question for Mike. And Mike, I know you hate talking about the consent decree, but I just have to ask you this. Last time, during the quarter, you said that you were confident about your chances, based on your interaction with the agency, and we recognize fully that you are doing everything you can to fix the issues and you will get them fixed. But can you just talk about how you feel at the moment given the new 483s? And are you at all -- I guess, how should we read into the fact that the FDA is inspecting your plants so often? Yes, I guess that's the question.

F. Michael Ball

Okay, so I just want to address quickly on the confidence around the consent decree. I think just to be absolutely clear, we cannot predict what is going to happen with respect to any consent decree, whether it will or will not happen. So I want to be clear on that point. What I can tell you is we've had no discussions with the agency around a consent decree. And if we had, we would have informed you. So I want to just put that on the table. We do continue a very constructive dialogue with the agency. I'm obviously looking to finalize a time to meet with them on a face-to-face basis to go over our remediation plan. And again, I am hoping that will be in the second quarter or at least before the next call. And as you pointed out, in the meantime, we're doing everything we can. So I think the agency is definitely looking at safety, and we have the interim controls to ensure product safety. We've got those 150 consultants at Rocky Mount looking at -- doing oversight, training, remediation, helping us with supply. I think they also, the agency that is, looks at what are you investing behind this. We're investing a tremendous amount of money behind both human capital, equipment and the facility in order to ensure that we are driving towards sustainable change and to keep in rhythm with that culture change. We also have brand new management. And as I mentioned before, I believe this new management has a tremendous amount of credibility with the FDA. On the remediation front, we continue to progress. So when we do get in front of the agency, we will be able to point out to them just how much progress we've made there. And with respect to the number of inspections we've had, I take that as a good sign, because we're able to show, I believe, that we are living up to our commitments. So as I mentioned, I think that quarter 1, actually, when you look at the number of inspections and, I believe, how well the organization did, given that no 483 is a good one, but given that's an improvement of where we've been in the past, I think this is actually a positive. And I've sent third parties out to make sure that we are living up to our commitments. So as I mentioned before, we've had Lachman out reviewing our commitments. We've had other third-party consultants reviewing our labs across the U.S. network. We are currently doing our quality units with a third party to ensure that we are living up to our commitments there. And then I think at the end of the day, the agency looks at the CEO to say, "Is the CEO involved or committed?" And I can tell you I am committed to this process, and we're doing everything we can to demonstrate that and doing everything we can to communicate that. So on that basis, if we are judged by our actions right now, I feel we are doing everything we can. But at the end of the day, there is no guarantee at all about a consent decree one way or the other.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Okay, great. And can I just clarify that when there's a scheduling issue around the remediation, discussing the remediation, is it you or is it the FDA that's having the problem with the dates?

F. Michael Ball

So the agency, as I'm sure you can appreciate, they are extremely busy. We are ensuring that we do everything we can to make ourselves available for any meeting any time.

Karen King

We're at the top of the hour. So we're going to conclude the call at this point. So thank you for joining us. And operator, you can disconnect. Thank you.

Operator

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

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