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Hospira, Inc. (NYSE:HSP)

Q4 FY07 Earnings Call

February 28, 2008, 9:00 AM ET

Executives

Lynn McHugh - VP of IR

Christopher B. Begley - Chairman and CEO

Terrence C. Kearney - COO

Thomas E. Werner - Sr. VP, Finance, and CFO

Analysts

Matt Miksic - Morgan Stanley

Rick Wise - Bear, Stearns & Co.

Junaid Husain - Soleil Securities Corporation

GreggGilbert - Merrill Lynch

Operator

Welcome to the Hospira's Fourth Quarter and full year 2007 Earnings Conference Call. All lines have been placed on listen-only mode to prevent any background noise. Following the speaker's remark, there will be a question-and-answer period.

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

Lynn McHugh - Vice President of Investor Relations

Good morning, everyone. Welcome to our conference call and webcast regarding Hospira's financial results for the fourth quarter and full year 2007, and our projections for 2008.

Participating in today's call are; Chris Begley, Chairman and Chief Executive Officer of Hospira; Terry Kearney, Chief Operating Officer; and Tom Werner, Senior Vice President, Finance and Chief Financial Officer.

We will be making some forward-looking statements today which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those indicated. A discussion of these factors is included in the risk factors and the MD&A in Hospira's latest annual report and Form 10-K on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

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

I'll now turn the call over to Chris.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you, Lynn, and good morning everyone. In 2007, Hospira continue to deliver and its promise to shareholders by making substantial progress on all our key initiatives, and keeping with our commitment to transform Hospira into a growing, profitable, and innovative company. We built on the momentum we've generated over the past several years. A list of achievements for 2007 is significant.

First, we completed the acquisition of Mayne Pharma and made considerable progress integrating the companies tracking to our cost synergies. We also paid down $400 million of the debt we incurred in connection with the acquisition. In tandem with the acquisition, we created a new leadership structure across our commercial operations to foster a stronger growth global perspective, and even greater connection with our customers and markets.

In addition to appointing our three regional Presidents, we also focused the business by the delineating the company's products in two areas; global pharmaceuticals; and global devices. In global pharma, we launched a number of new products during the year. Four new compounds were launched in selected countries from our R&D pipeline in 2007. We also introduced 22 generic compounds already in the company's on-market portfolio in two additional countries around the world.

In the U.S., we augmented our portfolio of proprietary delivery formats with the addition of iSecure an innovative prefilled disposable syringe and launched four on-market drugs in iSecure. And Vis-IV, our environmentally friendly IV solution container continued to win new customers.

Our biogenerics program saw an historical milestone with the European commission's marketing authorization in the fourth quarter of our first bio similar Retacrit. In late January, we launched Retacrit in Germany with other countries to follow over the course of the year. We made progress as well with our clinical trials for expanded label indications for Precedex our proprietary IV sedation agent used in intensive care settings.

We submitted the results of the procedural sedation trials to the FDA in the fourth quarter, and we were particularly encouraged by the positive results of the long-term sedation trial, which we received in the fourth quarter. The results, which we're recently presented at the Society of Critical Care Medicines Annual Scientific Congress will support our upcoming submission to the FDA for approval of safety and efficacy for grater than 24 hour use.

In global devices, we made significant progress as well. We began the full scale U.S. rollout of Symbiq the most technologically advanced infusion device of its kind. At the end of the fourth quarter 2007 also saw the expansion of Hospira MedNet, our safety software application outside North America with its introduction in Australia.

In the fourth quarter we were awarded contract positions for both IV solutions and pumps with the HealthTrust purchasing GPO, which now also includes Consorta. Both product categories represent new incremental opportunities for us providing greater access to HealthTrust membership. We were pleased with these awards, as well as the innovation contract extension we told you about on our last call.

Financially, our strong fourth quarter results topped off another successful year for Hospira. Fourth quarter sales including Mayne grew 34%, excluding Mayne sales increased a healthy 8% with particularly strong performance from our specialty injectables and legacy Hospira international product lines. This performance came despite less than expected results from medication management.

Adjusted diluted earnings per share, for the fourth quarter were $0.63 versus $0.43 last year. For the full year 2007, adjusted earnings per share were $2.19 compared to $1.94 last year. A lower than anticipated tax rate push our earnings beyond our most recent estimate. And our cash flow from operation at $551 million well exceeded our expectations.

Terry and Tom will provide more detail on the quarter and the year, and our expectations for 2008. After which I'll finish with a few more comments before we take questions.

So at this point I'll turn the call over to Terry.

Terrence C. Kearney - Chief Operating Officer

Thank you, Chris, and good morning, everyone. As I review each product line I'll touch on the sales performance for the fourth quarter and full year 2007, and follow with our expectations for 2008.

With the integration of Mayne, our comments regarding the projected sales growth rates for 2008 are calculated with Mayne sales included in the appropriate product lines for both 2007 and 2008. The 2007 Mayne sales are for 11 months versus 12 months in 2008.

Specialty injectables had a very strong quarter up 18% year-over-year, with growth across the board. Both Precedex and new products were good contributors, but the largest driver of the quarter's performance was our base business of generic injectables. We saw robust sales of anti-infectives and anesthesia products, as well as drugs old in our differentiated delivery systems.

Pricing was a modest positive. It appears that wholesaler buying patterns were a meaningful factor in the quarter. As a result of a strong Q4 performance, we expect SIP sales growth in the first quarter of 2008 to be tampered as wholesaler inventories are worked down.

For the year specialty injectables were up over 8%. Both the base business growth and new products were important factors. On the new product front, we benefited in particular some ampicillin sulbactam, ondansetron, propofol and ciprofloxacin in vials.

For 2008 we anticipate or we estimate sales in the U.S. specialty injectables will grow 7% to 9%. Again I want to remind you that this growth rate is calculated including Mayne sales in both 07 and 08.

In the U.S. the most significant products we expect to introduce during the year are; irinotecan which we launched this week, Piperacillin and Tazobactam better know to most of you as Zosyn, azithromycin, ciprofloxacin in a premixed version, and rocuronium. The total branded sale of these drugs and several other small compounds, later to be launched in the U.S. is approximately $1.3 billion.

To update you on our drug pipeline, on December 31st, 2007 our pipeline had a total of 43 compounds, which reflects both the launch of several compounds and the addition of several new ones during 2007. Of the total drugs in development five are biogenerics, because we anticipate launching many of the 43 compounds in multiple regions around the world, our pipeline represents 76 regional launches. The global branded value for the small molecule compounds in the pipeline remains at approximately $14 billion.

Coincidentally, this market value as well as the number of compounds and regional launches are all exactly the same as they were last year. Of the pipelines 43 compounds, 22 have been submitted-for-approval in one or more regulatory agencies. Our local market value of the submitted-for-approval small molecule compounds is about $8 billion. Of that dollar value nearly three quarters relates to compound that were currently challenging the patterns. So the potential launch timing is less certain.

This information on our pipeline is available in graph format in the Investor Relation section of our website in the supplemental table section.

Turning now to our medication delivery product line, Infusion Therapy sales increased 4% in both the quarter and full year. Driving the fourth quarter's performance were higher sales of our large volume solutions and nutritional. Vis-IV our premium price IV solution offerings also contributed. For 2008, we expect sales growth for infusion therapy to be in the 3% to 4% range.

Medication management systems is also a year with lower than anticipated, with growth for 2007 at 5% in line estimated market growth rates. Our expectations for the year were not met primarily due to delays in certain contract decisions in competitive accounts. 2007 sales growth came from both our higher number our device placements and revenue from our growing base of client services.

We ended the year with MedNet's penetration of our U.S. installed base of MedNet compatible device at 51% up from 49% last quarter. Nearly 80% of our MedNet compatible device placement for 2007 included MedNet. In the wireless version continues to be the most popular, more than 80% of the MedNet placements in the year were for the wireless version.

On a global basis, in 2007, our installed base of infusion devices grew approximately 5% over the previous year. We remain very optimistic about our long-term MMS opportunity. We will continue to aggressively attack the market leveraging our broad portfolio of technologically advanced solutions. We are focused not only on upgrading our own installed base, but also on competitive captures.

Symbiq's broader launch was initiated in late December and its advanced user-friendly features make it the right product for targeting competitive accounts. In addition, with our new contract position with HPG, we've increased our overall access to hospital customers.

For 2008, we are projecting medication management system's sales growth of 8% to 12%. We are expecting Symbiq placements to increase significantly, I am sorry, to contribute significantly to year-over-year performance. There has been a great deal of activity with Symbiq in terms of trials and implementation. Overall, the customer response is in very positive, who have more to say about our progress on our first quarter call with you.

Turning to contract manufacturing, the performance in One 2 One was better than we expected for the year, due to higher than anticipated demand for certain customers. This product lines 2008 sales, are projected to be about even with 2007. Contract manufacturing continues to gain new business, but many of the recent agreements are for products that are still in clinical trials, and not yet commercialized.

U.S, sales added as expected will decline again in 2008 with an estimated range of 12% to 15%. Sales in the other product category, which primarily includes alternate site and critical care decreased 2% in the quarter and were flat for the year. Alternate site growth for the quarter came mainly from generic injectibles and for the year was derived from higher sales across all of its major product categories.

For both the quarter and year, however, alternate site growth was offset by a decrease in revenues from our OEM and retail rubber products which were divested with our exit from the Ashland manufacturing facility and continued softness in critical care.

We project the other product category will grow in a 7% to 9% range in 2008. We anticipate the increase will be driven by strong sales in the alternate site channel and part related to new injectible product launches. Mayne sales in the U.S. were $25 million in the quarter in line with of our expectations. Epitaxial, carboplatin, multivalence [ph] all recorded a strong quarter.

On a sequential quarter basis lower sales for Nipent which is now seeing generic competition had a negative impact on results. For the year Mayne's U.S. sales performance was driven by the strength of the introduction of epirubicin and the full year impact of the acquisition of Nipent by Mayne in mid 2006.

Turning to our performance outside the U.S. international sales for the legacy Hospira business was strong for both the quarter and year. Sales, which exclude Mayne increased 22% in the quarter about 10 points of the increase came from foreign currency. Sales to Abbott were a minimal factor in the quarter's growth. Sales for third parties in the quarter, which represents the majority of our international segment increased 11% on a constant currency basis with all regions outside the U.S. coast entire sales.

Once again this quarter we generated double-digit increases in medication management systems in every region outside the U.S. Our first installation of wireless MedNet enable pumps in Australia was completed successfully with a very smooth startup and a positive customer feedback. We are the first and only company to offer a wireless version of safety software in Australia.

Turning to the full year, legacy Hospira international sales grew 12% including a 5 percentage point benefit from currency. Offset by corresponding negative impact from sales to Abbott. Sales of third party for the year on a constant currency basis increased 11%.

Mayne sales outside the U.S. totaled $155 million in the fourth quarter. Irinotecan and epirubicin showed solid results in the quarter. Epitaxial sales were lower due to pricing pressure while volume continued to grow. In Europe, oxaliplatin reported strong sales on significantly higher volumes, partially offset by lower pricing.

For the year some of the growth drivers of Mayne's international performance were irinotecan, as well as oxaliplatin and epirubicin. Both of which were launch in key markets beginning in 2006. Global Mayne sales for the year were $638 million at the higher end of the range of our original projection.

For 2008 we project sales for total international including Mayne and sales to Abbott to grow 8% to 10%. As expected sales to Abbott outside the U.S. were continue to decline next year. This is expected to affect international growth rate by roughly 3 percentage points.

On the pharma side we are planning a few modest-sized new product launches from our pipeline outside the U.S., as well as launches of some already on-market products into new countries. From our strategic stand point a most important launch in 2008 for international pharma is a Retacrit introduction in Europe.

As Chris mentioned we have launched in Germany and recorded our first sale, but it's still too early to provide more color on performance. We expect to launch the product in other countries in Europe throughout 2008, as we receive pricing reinvestment and other approval from individual countries. In Europe we expect volume growth for all of our key on-market molecules. The pricing on mature molecules will be a negative it has been our experience with this market.

On the device side outside the U.S. we are forecasting another year of double-digit growth by for our medication management systems, as we launch our broader portfolio and increased pump placements.

In summary, in 2007 we reached a high-end of our most recent sales guidance principally through excellent performance in the U.S. specialty injectables and international. And while medication management systems lagged expectations in the U.S., we believe we are well positioned to generate greater growth in this product line in 2008.

In the aggregate our sales projection for total Hospira of 6% to 8% growth in 2008 represents further improvement in our growth over historical rates.

Before turning the call over to Tom let me give you two additional updates. The first is on our Mayne integration initiatives, which continue to go very well. We remain on target with our projected schedule of completing the integration by the end of this year. We continued converting Mayne's business operations to SAP adding several more countries in Asia Pacific and Europe with no disruptions to customers. And we are achieving our cost synergy and integration expense targets.

Finally, let me update on our manufacturing optimization initiatives. We are making very good progress on these activities. We closed our Ashland plant in 2007 on schedule. As a result of having exited Ashland and Donegal we achieved cost savings of $15 million in 2007, with another $15 million of incremental cost savings still projected in 2008. As a reminder, not all savings dropped to the bottom line, as inflation tends to offset a portion of the benefit.

Finally, both Montreal and North Chicago are tracking to their timelines for exiting those facilities.

I'll now turn the call over to Tom.

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

Thanks, Terry, and good morning, everybody. I'm going to quickly cover some of the key highlights for the fourth quarter, and then the full year of 2007, and then we'll move to 2008.

Net sales on the fourth quarter were $946 million, a 34% increase over the last year. Excluding Mayne net sales grew 8%. Net sales for the year were $3.4 billion, an increase of 28% doing great part to the addition of Mayne, excluding Mayne net sales growth was a little over 4%.

Fourth quarter adjusted gross profit rose nearly 41% to $364 million. The adjusted gross margin in the quarter increased 180 basis points to 38.4% majority of the increase came from improved volume and mix in the Hospira legacy business.

For the full year adjusted gross profit grew 33%, adjusted gross margin was 38.6%, 160 basis point improvement over 2006. The increase was driven by the inclusion of Mayne, and better product mix and volume in the Hospira legacy business, which was partially offset expected impact of lower manufacturing volumes.

Adjusted R&D expense in the fourth quarter was %53 million a decrease of 2% versus the fourth quarter last year when we completed the STADA EPO transaction. As a percentage of net sales adjusted R&D in the quarter was 5.6% in 2007 compared to 7.7% of the previous year. So for the full year adjusted R&D increased 26% to 200 million or 5.8% of sales compared to $158 million or 5.9% of sales in 2006 including the impact of the Q4 2006 STADA transaction.

Here again the addition of Mayne and the clinical trials for both GCSF and Precedex's label experience drove the dollar increase. Adjusted SG&A costs were $157 million in the quarter compared with $106 million last year with Mayne accounting for a good portion of the year-over-year increase. The timing of some expenses, as well as higher selling expenses accounted for the remainder of the increase. We've begun adding sales resources for Retacrit in Europe, as well as expanding our sales force for Precedex. We expect both of these investments to provide a return for shareholders over the coming years.

Adjusted SG&A as a percentage of net sales was 16.6% compared with 15% in 2006. For the full year adjusted SG&A as a percentage of net sales was 15.9% compared to 14.9% in 2006.

Turning to operating income for the quarter, was $154 million up 57% year-over-year, the adjusted operating margin for the quarter was 16.2% compared with 13.9% to 2006. For the full year adjusted operating income grew 33% to $580 million and the full year adjusted operating margin was 16.9% compared to 16.2% in 2006.

Below the operating line the increase in adjusted interest expense to $33 million in fourth quarter is related to the debt taken on for the Mayne acquisition, and the increase in other income was due to foreign currency transaction gains, and that gains on the sales of some investments that were part of our balance sheet at the time of the spin-off.

Our tax rate in the quarter on an adjusted basis was 21.5% compared to 27.7% last year, and this rate in the fourth quarter of 2007, four year adjusted rate to 25%. The lower rate was driven by a higher mix of income from lower tax rate jurisdictions, as well as some additional state tax credits.

As a result of the lower tax rate our adjusted diluted earnings per share for the year came in above the top end of our previous estimates. Adjusted EPS was $2.19 for 2007 compared to $1.94 in 2006 increase of 13%. For the fourth quarter adjusted EPS was $0.63 versus $0.43 a year ago. There are several items not included in our adjusted earnings for the fourth quarter.

First the items relating to the Mayne acquisition are as follows. We recorded non-cash pretax charge of $13 million for the amortization of intangibles. We incurred $12 million of integration costs that were primarily cash, and together these items represent $0.10 per share impact in the diluted GAAP EPS in the quarter, expenses related to manufacturing optimization initiatives totaled $4 million pretax or $0.02 a share in the fourth quarter,

Also during the fourth quarter we acquired the product rights to a small niche oncology drug currently marketed primarily in several European countries. The drug will be synergistic with our Retacrit sales efforts. As a result we recorded $3.2 million pretax charge or a penny per share for acquired in-process R&D related to this purchase. And part of the purchase included a certain clinical studies related to that drug that will be used to file for expanded label indications.

Turning briefly to the balance sheet our cash balance at year end was healthy $241 million. As you know we've been using our operating cash flow to pay down the debt related to the Mayne acquisition. And during the fourth quarter we re-paid an additional $125 million of debt bringing them total for 2007 to $400 million in line with our commitment the ratings agencies for the year. Our efforts to closely manage working capital paid off as both receivables and inventories decrease from Q3 levels. Factory maintenance shutdowns in fourth quarter also contributed to the decrease in inventory levels.

For 2007 we generated 551 million in cash flow from operations. Capital spending for 2007 was $211 million compared to $235 million last year. Most of the decline here reflects the fact that for part of 2006, we were still completing the build-out of our independent infrastructure. We also spend less capital this year on our manufacturing optimization initiatives compared to 2006.

Depreciation and amortization of $235 million in 2007 includes $47 million of intangible's amortizations related to the Mayne acquisition. In 2006 depreciation and amortization was $157 million.

So now I'd like to shift our attention to our projections for 2008. Top line net sales growth for 2008 is forecast to be 6% to 8%. And as Terry mentioned previously that growth rate assumes inclusion of Mayne sales of 11 months in 2007, and 12 months from 2008. We are projecting adjusted diluted earnings per share in the range of $2.45 to $2.55 representing year-over-year growth of 12% to 16%. The adjusted earnings per share exclude the charges relating to the Mayne integration and our facilities optimization initiatives, as well as the intangibles amortization relating to the Mayne acquisition.

Now, from the quarterly standpoint right now, we expected the fourth quarter will again be our largest EPS quarter. The second and third quarter are forecasted to be within a few pennies of each other. We do expect Q1 adjusted EPS however, to be lower than last year due to the timing of some expenses and the change in the date to the first quarter for our annual grant of stock based compensation.

Beginning in 2008, these awards will occur in the first quarter instead of the second quarter. Therefore, of the estimated total $46 million of pretax annual stock option expense for 2008, $17 million to $18 million is expected to be recorded in the first quarter with the remaining quarters expensing about $10 million per quarter. The changes in the timing of the equity awards alone are estimated to have a negative impact on our adjusted EPS of about a nickel in the first quarter, and the changes in the timing of other expenses may have an impact of a few sets.

Looking at more detail behind our adjusted EPS forecast, the estimated range for 2008 adjusted operating margins is 17.5% to 18%. The assumptions behind this range are as follows. We believe adjusted gross margins will be in 39% to 39.5% range increase of 40 to 90 basis points over 2007. This increase is expected to be driven by a better product next, as well as manufacturing efficiencies being partially offset by inflation. We expect adjusted gross margins to have slightly less quarterly fluctuation in 2008 than in 2007, with second and fourth quarter margins slightly higher than the margins in the first and third quarters.

Adjusted R&D expense is projected to be in the range of 5.8% to 6.1% of net sales. Exclusive of the stock option expense impact in the first quarter, we expect R&D spending to ramp up gradually throughout the year. Adjusted SG&A expense as a percentage of net sales is expected to be in 15.3% to 15.8% range for the year.

We are making investments in the sales force in two areas in particular. The first, we've discussed often throughout the past year and that's the investment in sales resources related to the launch of Retacrit in Europe. And the second relates the Precedex where we are increasing the size of the sales team and preparation for the expanded label indications that we expect to receive approval for in 2009.

In addition, as we become more active in patent challenges, the related litigation costs reside in SG&A. However, even after taking the Q1 higher stock option expense in the consideration at this point we expect the quarterly fluctuation of adjusted SG&A expense would be no more in a few million dollars. Now below the operating line, we are forecasting net interest expense and other non-operating items in the aggregate to be between $95 million and $100 million. Then regarding the adjusted tax rate we're currently estimating that the rate will be roughly equal to the 25.5% adjusted rate in 2007.

So for adjusted diluted earnings per share calculation, we are assuming diluted shares outstanding will increase to approximately 162 million shares and this negatively affects EPS by about $0.03 per share. We are projecting net cash flow from operations for 2008 will be in the range of $575 million to $625 million. Capital spending is estimated to be in $190 million to $210 million range.

Depreciation and amortization and that's excluding approximately $59 million of amortization related to the Mayne transaction is expected to be $185 million to $195 million. A priority for free cash flow in 2008 again remains paying down the debt related to the Mayne acquisition. It's our intention to direct $475 million of our cash to this purpose in 2008.

And now I'll turn call back to Chris, for some final comments.

Christopher B. Begley - Chairman and Chief Executive Officer

As you may have already concluded from Terry and Tom's comments we are going to have a very good year in 2008. With a pick up in growth rates for both sales and adjusted earnings per share, and the continued achievement of adjusted operating margin improvement that we've seen each year since the spin. We are within the ranges we set for our financial goals two years ago. You may recall we said that we were aiming to begin reaching this goal in 2008 and beyond timeframe.

To remind everyone these financial goals are as follows; sales growth in the high single-digits; adjusted operating margins in the high-teens, and adjusted earnings per share growth of low to mid-teens. We consider these to be the appropriate financial goals for Hospira for the foreseeable future as we continue to build on our success by crisply executing our strategies, leveraging our core strengths and increasing our focus on innovation across the organization.

And now we'll be happy to take your questions. Operator?

Question And Answer

Operator

[Operator Instructions] Your first question comes from Matt Miksic. [Morgan Stanley]

Christopher B. Begley - Chairman and Chief Executive Officer

Good morning, Matt.

Matt Miksic - Morgan Stanley

Thanks for taking the question. First, just wanted to you had this news yesterday on Camptosar or irinotecan which I can never pronounce...

Christopher B. Begley - Chairman and Chief Executive Officer

Irinotecan.

Matt Miksic - Morgan Stanley

We'll stick with Camptosar. Can you talk a little bit about share expectations for that kind of market and maybe if that's the same kind of your expectations you have for some of the other products, what your goals maybe, and any color you can give us on your ability to secure the various GPO relationships for that product in the U.S.?

Terrence C. Kearney - Chief Operating Officer

Matt, this is Terry. In regards to irinotecan as you know we did launch it just a day or so ago and from a sure expectation perspective the first thing I think you should understand that we believe today there is at least eight people launching, eight companies launching into the market at this time with probably three or four yet to come to the market so it's going to be a highly competitive environment for this molecule. As far as share expectations in the hospital sector, we are targeting somewhere between 20% to 25%, which is in line with what we normally do in most of our first the market launches if you will. In the alternate site where there is significant volume for this drug as an oncology drug, we are targeting somewhere between 10% to 15%, so not as strong but again a very highly competitive market with very a number of competitors coming to market at this time.

Matt Miksic - Morgan Stanley

And what's the... if you were to look at the share of the market is split across alternate site and core hospitals do you have a feel for that distribution?

Terrence C. Kearney - Chief Operating Officer

No,the majority of sales are in the alternative site market.

Matt Miksic - Morgan Stanley

Okay. And if you look at the other products you're launching, I mean that 20 to 25 is the target that you've seem to use consistently for your goal on the hospital market, can we look at these 10 to 15 as a goal that you apply across these other drugs as well?

Terrence C. Kearney - Chief Operating Officer

No,I am not sure that's a general rule of thumb to use in the alternate site market. It really again depends on the number of competitors there are entering the markets in that everything we are going after necessarily is going to have the same model of competitors what we've currently seen with the irinotecan, but... so our goal is to do better than that.

Matt Miksic - Morgan Stanley

Okay. The other thing you mention the iSecure launches that you rolled out, I think four products as this year you mentioned. Can you talk a little bit about what that means to the business or those products in terms of is it share, or is it price or mix where is the benefit going forward?

Terrence C. Kearney - Chief Operating Officer

Well again we did launch four in iSecure this last year and really the whole idea behind iSecure is to offer a differentiated delivery platform if you will again to look at the market that highly competitive in amps and vials and to offer to our competitor... I am sorry, to our customers a delivery platform that offers convenience in workflow and safety. We believe the opportunity here is to get a better margin overtime, as well as again the differentiators are offering from those of our competitors so that we can secure our market share, and hold on to it for a longer period of time.

Christopher B. Begley - Chairman and Chief Executive Officer

Matt three other products that we've launched in 07, drug wise were ondansetron, midazolam and ketorolac in the iSecure format.

Matt Miksic - Morgan Stanley

Okay. And then one question on just the general sequence of the numbers in Q4 and Q1 you talked about, it sounded like there was some buying in Q4 that you are expecting to underline a little on the SAP side in Q1. Is that you are looking and obviously it sounds like a sequential... a sequentially down Q1, which is somewhat the norm for your Q4 to Q1 in SIP. Can you give us any help us to how far down that will go and you know, like to give quarterly guidance, but any quarterly direction here would be helpful?

Terrence C. Kearney - Chief Operating Officer

I think you sort of characterize it fairly well. It's far as a buying aspect and the wholesale of buying patterns in the fourth quarter. We believe that our estimated that to be about $15 million to $20 million impact in the quarter and again driven by a number of different factors, some of which could be related to buying and anticipation of a strong flue season. Also we know that some of our competitors were not able to supply the market during the fourth quarter. They may come back in the first quarter, time will tell us. So it's not a factor that's throughout that buying if you will, but again, because of that and then because of the stronger inventories, we anticipate our wholesalers to have, we do expect the first quarter sales will be tempered.

Matt Miksic - Morgan Stanley

Okay. And the last thing, on you mentioned fair amount three quarters of the products that you have filed involve some sort of patent challenge, which is... it sounds like a change in strategy that one you've talked about heading into this year doing more patent challenge around your new launches, is that three quarters of the products, is that three quarters of the dollar opportunity?

Terrence C. Kearney - Chief Operating Officer

It's three quarters of the dollar opportunity that I mentioned.

Matt Miksic - Morgan Stanley

And when you say a little bit longer if could just maybe give us some uncertainty around the launch, give us some additional help or color around what that would mean to that part of the pipeline, and I'll just jump off and take the answer off line?

Terrence C. Kearney - Chief Operating Officer

Okay. I think it's important to remember what these patent challenges we know different than anybody else who are pursuing those is that... is the good deal variability based on these challenges work their way through the court systems. So I think safest thing to tell you from our planning expectation perspective without getting into too much detail which we will not do for competitive reasons. Is that we expect these modules that are pursuing patent challenges to launch in the next two to four years.

Matt Miksic - Morgan Stanley

Great. Well thanks again for the questions.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you Matt.

Operator

Your next question comes from Rick Wise. [Bear, Stearns & Co.]

Rick Wise - Bear, Stearns & Co.

Good morning, everybody.

Christopher B. Begley - Chairman and Chief Executive Officer

Good morning, Rick.

Rick Wise - Bear, Stearns & Co.

Maybe you could expand a little bit more on your comments and MMS being a bit lower than you expected, I mean and maybe several perspectives; one, I mean what's challenging to forecast, but obviously this has not been a great year for your projections of what the markets... what your business might do, how do we think about your projections or your suggested growth rates for 08 and what has to happen to get there. And maybe talk a little more about the extended contract decisions to the accounts and you've talked about it before, but does this ever end?

Terrence C. Kearney - Chief Operating Officer

It'sa great question Matt, and wish me all had a better answer for you, I mean, Rick, sorry. Matt asked so many questions, that it's hard to keep in him in mind. Anyway, relative to MMS in 2007, certainly we didn't hit our expectations and a large part of that was really driven by the fact that we get a number of opportunities that we were counting on closing before the end of the year in competitive accounts. And again because of the situation we've experienced throughout the last couple of years the timing of those decisions really dragged down for a quite long time. And again one of those opportunities was HPG, which we didn't get a decision until after the close of year. So their was something we thought what's going to happen much earlier in the 2007 timeframe at least in the third/fourth quarter. So that was part of it... they drove our decisions... our performance for the year.

The other aspect, but again as you know we consciously decided to limit the broad market launch of Symbiq in 2007 based on feedback when we receive from customers and a preferences that they wanted us to add back into the pump to make it more robust device for their needs and workflow. And again we launch now Symbiq to a broader market here in 2008. So when you look at... again we are disappointed into the degree with the performance in MMS in 2007, but again it's important to recognize with we did grow with the market actually we believe, we actually gained a little share, so really wasn't, you know that bad it just could meet the expectations we had set. But, from a market perspective it certainly performed well.

In 2008 it will give us confidence about our projections of 8% to 12% are following, again the broad market launch Symbiq we've already seen a high degree of customer interest in this device, especially in competitive accounts, and that's very rewarding to see that happening. And as we've talked already we have greater access to our GPOs with the HPG award, so that gives us a broader marketplace to go after. And finally, quite honestly we've seen a lot of good feedback from our customers related to our quality, our service, and our technology that we offer to the marketplace. As you know we have a very broad portfolio of very advanced technology to offer to our customers whether its Symbiq or Plum A+ product line with MedNet, our LifeCare PCA, as well as GemStar which is our ambulatory devices. So I think we're starting to see some uptake in traction based on just a record of again quality, service, and technology. So those three factors combined give us the optimism to support the 8% to 12% range that we have provided.

Rick Wise - Bear, Stearns & Co.

Thank you, for the thorough answer. Turning to EPS briefly you talked about the first quarter below a year ago and if I am remember correctly year first quarter 07 was $0.59. Tom can you help us think through... it'd be nice to... to get a little higher range I mean is it do you think the first quarter can get to that still $0.55 to $0.57 range, is that a reasonable place to be, and maybe help us thinks through a little bit how the main cost savings are playing into all this, I would have thought that since, and my and I remembering correctly the $50 million in cost savings or something like that in synergies from Mayne you are going to really start to see that kick in the first quarter why doesn't that all set some of this short-term noise on options or whatever more meaningfully?

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

Hi, Rick. As far as the synergy is going the cost savings exiting 07 we were pretty much tracking it to $50 million rate, so sequentially you are not going to see much year-over-year you should, but the impact of the options being moved, and then we've just got some expense timing that's the reason we expect that Q1 this year would be softer than last year. And as far as be in more specific on it, our approach is to try to give some relative guidance, but no more than that. So it's really expenses, and then shift in the options and then some other softness that Terry spoke about with the wholesaler stocking patterns that will come in to set in the first quarter this year as well.

Rick Wise - Bear, Stearns & Co.

But basically from whatever the first quarter level is that we should see sequentially steadily stronger quarter as we proceed to the year I guess?

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

Well, I think what we said is Q1 down, Q2 and Q3 about even, and then Q4 will be the strongest quarter again so.

Rick Wise - Bear, Stearns & Co.

Okay, I am sorry, I guess I missed that. Just the last point on EPS, you've given us... I appreciate there is lot of operating leverage into Hospira and a lot of moving pieces, but can you just help us understand some of the big factors that drive you towards the low-end or towards the upper-end range is it product, is it cost, I mean just 12% to 16% of EPS that's the big range?

Christopher B. Begley - Chairman and Chief Executive Officer

Rick as we look at that we thought $0.10 range was appropriate for our company our size, and so that's why we ended up going with this $0.10 range what I hearing you question, as well as is one of the upsides and downsides that could occur as we look at 08 that would put us either at low-end or the high-end of that range. And as I look at I mean start with kind of the upsides first clearly, it's a richer products sales mix across the different product lines, and that could be different product lines, but also within the product lines as well. The other upsides that could be there from a sales perspective would be in the SIP area as it relates to supply issues that are competitors would occur in the marketplace during the year, which are very difficult for us to forecast in fact impossible obviously. But, that would be another potential that upside that we could see as we look at how the years going to unfold here. On the downside we like a lot of other companies we'll continue have to deal with commodity, prices and what's going on in the marketplace overall. We've done a very good job with our manufacturing optimization programs to more than offset that year-over-year but that will continue to be a challenge.

On Vancomycin, we assumed no Vancomycin competition in 2008, so that potentially could be a downside, and then if we had any delays in the launches of the generic drugs so that Terry, covered. And the final potential one that's hanging out there from a swing standpoint is what's happening in the overall economy and we are pretty recessive proof from an economy standpoint the type of business we are in. But one of the things that does happen is, as people loose jobs and don't have discretionary spending is elective surgeries like an arthroscopy on a knee could be postponed six months or nine months, and so that could impact volumes at hospitals but it would not impact significantly whatsoever. So hopefully that answers the question.

Rick Wise - Bear, Stearns & Co.

I appreciate that you're sharing your thoughts, Chris. Thanks.

Operator

Your next question comes from Junaid Husain. [Soleil Securities Corporation]

Junaid Husain - Soleil Securities Corporation

Good morning, guys.

Christopher B. Begley - Chairman and Chief Executive Officer

Good morning. How are you?

Junaid Husain - Soleil Securities Corporation

Good. Chris or Terry there has been a lot of noise again on the erythropoietin's with the general article from earlier this week. Help us to understand how we should be thinking about the Retacrit launch in Europe relative to some of these safety issues?

Terrence C. Kearney - Chief Operating Officer

Well, obviously both the European Medicines Agency, as well as the U.S. FDA are still debating and deliberating on what to do with the labeling relative to EPO, but we're really still seeing as a very strong opportunity in both Europe as well as U.S. because obviously if you offer a low cost alternative to the current innovator is probably going to be a very essential part of the overall healthcare mix within these areas. You think about us from the size of how large EPO is at least the first generation product or EPO is in Europe being $1.5 billion to $2 billion, and then in the U.S. $4.5 million or so, even if there is a label change that may restrict somewhat the use of the product I think it still going to be a very large opportunity one that makes a lot of sense for us to go after.

Junaid Husain - Soleil Securities Corporation

Thanks, that's helpful. And then relative to Retacrit specifically in Europe could you give us a little bit of color on customers that have been placing orders, are these existing Mayne customers or legacy Hospira customers, help me understand where the Retacrit customers are coming from?

Terrence C. Kearney - Chief Operating Officer

Well,I really can't give you a whole lot of color on that today, but again I think just to make sure categories to market, we are selling both into the oncology segment, as well as the renal, so those renal customers are all new to us, so that's where the new piece is clearly, on the oncology side we do have established relationships with oncologists, so we are calling on them as well, but the renal piece would be entirely new to us.

Junaid Husain - Soleil Securities Corporation

Okay. And then switching gears a bit there has been a lot of chatter lately about Heparin and the potential for our nationwide shortage, given from back-stress [ph] problem. I do realize that Heparin is a tiny business for you, but have you noticed a pick up in this business throughout couple of weeks?

Terrence C. Kearney - Chief Operating Officer

Notreally, again the issue, we've been out to our customers and making sure to understand what we have in our product portfolio relative to Heparin products. They are in different delivery forms and dosages and what was on the market and being recalled today. So there is a little bit of our decision has to be made by our customers to whether or not they want to adopt these different dosage and delivery forms. We do expect to see some upside overtime, but I can't tell you that a huge upside at this point in time.

Junaid Husain - Soleil Securities Corporation

And then last question for you guys, relative to your distribution agreements with ICU Medical. The critical care products portion has been somewhat of a laagered, is there anything that will be done on the Hospira front from the sales and marketing perspective to help possibly reinvigorate this franchise?

Terrence C. Kearney - Chief Operating Officer

Well I guess, maybe we didn't talk about in the past, but I thought we have, but I'll just reiterate what we have done, you know, we have refocused the sales effort in the U.S. with a dedicated team under a dedicated General Manager. We will be introducing some new products to the market. So again we probably lost a lot of traction over the last few years for a lack of investment and perhaps focus, but in 2007 timeframe we believe we've addressed that, and we are aggressively going after this... into this market, because we think we have good products that our GPO customers will want.

Junaid Husain - Soleil Securities Corporation

Great.Thanks so much, guys. That's all I've got.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Gregg Gilbert. [Merrill Lynch]

Christopher B. Begley - Chairman and Chief Executive Officer

Hey, Good morning, Gregg.

GreggGilbert - Merrill Lynch

Good morning, a couple of generic questions. Chris, you touch on this earlier about Vancomycin you are not building any competition in 08 in your guidance which is helpful color. Can you give us the sense of what kind of lead-time you would get in knowing about one competition would show up and sort of what's your big picture of thinking on the timing there? Secondly, are you assuming that generic pricing is again a modest positive in your 08 guidance? And last is there still a possibility that FDA could grant Watson citizen's petition on campus are or is the behavior and interaction with FDA and yourselves, just sort of two... two sort of real time for that to be the case? Thank you.

Christopher B. Begley - Chairman and Chief Executive Officer

Okay. Gregg there were several there, let me take the first one, around Vancomycin and lead-time. The type of lead-time you would get revolves around contracting attempts that may occur from the competition. And so, we are constantly out there talking to our customers and so we get a lead-time from that which could be anywhere from a couple of months to maybe a quarter or something. And then obviously the other key piece will be an approval that we all will see. And then typically what happens is upon an approval, there are some people like ourselves who are able to implement on day one and are prepared to do that, but a lot of times it takes a while to gear up from a capacity standpoint and filling of the pipeline, and that could take roughly about a month. So we probably dealing with something that's look like around 90 days type of lead-time.

GreggGilbert - Merrill Lynch

Thanks. And then on pricing for the whole portfolio assumption?

Terrence C. Kearney - Chief Operating Officer

When we quote price to typically we are really quoting on the U.S. SIP business or again contracted through GPOs and...

GreggGilbert - Merrill Lynch

Right.

Terrence C. Kearney - Chief Operating Officer

I think it's a safe assumption that we'll see slightly positive price on year-over-year basis.

GreggGilbert - Merrill Lynch

And on Camptosar the CP situation?

Terrence C. Kearney - Chief Operating Officer

It's a good question, I really don't know if I have an answer, but I think typically we'd thought that FDA were ruled on citizen's petition prior to approval and this case a did approve a number of products to the market so it's hard to really say where they stand on that citizen's petition at this point in time.

GreggGilbert - Merrill Lynch

And lastly if I could just take one more on generic...

Christopher B. Begley - Chairman and Chief Executive Officer

I think we just have the key piece there is as the products were approved...

GreggGilbert - Merrill Lynch

Right.

Christopher B. Begley - Chairman and Chief Executive Officer

We did not prevent the products from being approved.

GreggGilbert - Merrill Lynch

Understood that is important. And lastly on generic Zosyn anymore specific color you can provide there in terms of CP process, and you know, how material it is in your 08 guidance? Thank you.

Terrence C. Kearney - Chief Operating Officer

Relativeto Zosyn and we are currently in our plan assumptions assuming a mid year launch and again there will be that date is somewhat variable based on the time to take for the FDA to rule on the citizen's petition that is out there today. So again just for planning purposes we are assuming mid-year, again there is a degree of variability about that that we cannot control. So we are hopeful that we will be a right with that assumption, but time will have to play out over it.

GreggGilbert - Merrill Lynch

That's one partnered, right.

Terrence C. Kearney - Chief Operating Officer

It is partnered, that's correct.

GreggGilbert - Merrill Lynch

Thanks you, guys.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you, Gregg.

Lynn McHugh - Vice President of Investor Relations

Operator, are there any other questions.

Operator

At this time there are no further questions.

Lynn McHugh - Vice President of Investor Relations

Well if that's the case, then why don't we conclude the call for the quarter. Thank you everybody for joining us today. We are now ready to end the call.

Christopher B. Begley - Chairman and Chief Executive Officer

Thank you.

Terrence C. Kearney - Chief Operating Officer

Thank you.

Operator

This concludes Hospira's fourth quarter and full year 2007 earnings conference call. You may now disconnect.

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Source: Hospira, Inc. Q4 2007 Earnings Call Transcript
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