Hospira Management Discusses Q4 2011 Results - Earnings Call Transcript

| About: Hospira, Inc. (HSP)
This article is now exclusive for PRO subscribers.

Hospira (NYSE:HSP) Q4 2011 Earnings Call February 14, 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

Ami Fadia - UBS Investment Bank, Research Division

Louise Alesandra Chen - Collins Stewart LLC, Research Division

Marshall Urist - Morgan Stanley, Research Division

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

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

Christopher Schott - JP Morgan Chase & Co, Research Division

Matthew Taylor - Barclays Capital, Research Division

Operator

Welcome to Hospira's Fourth Quarter and Full Year 2011 Conference Call. [Operator Instructions] I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone, and welcome to our conference call and webcast regarding Hospira's financial results for the fourth quarter and full year 2011, as well as our projections for 2012. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President of 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 conference call, non-GAAP financial measures will be used to help investors understand Hospira's base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issued this morning and are also available on the Presentation page on the Investor Relations section of our website.

Also posted on our website is a presentation of complementary materials that summarize the points of today's call. While we will not be speaking directly to the materials, it is posted on the Presentation page at www.hospirainvestor.com. The material is for your reference to use as an enhanced communication tool.

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, we're limiting each person to one question. We ask for your cooperation in this respect.

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

F. Michael Ball

Thank you, Karen, and good morning, everyone. Welcome to our fourth quarter and full year 2011 conference call. 2011 was a challenging year, but despite our manufacturing challenges, the fundamental growth opportunities remain intact and our future is bright. We wrapped up the year with sales of over $4 billion. We progressed with our quality remediation efforts. We met the high end of our revised earnings range and we set the groundwork to implement our vision of global expansion.

We're going to cover 5 things with you this morning. Number one, an update on our quality transformation; second, a discussion of our leadership changes; third, a review of our fourth quarter and full year 2011 results; fourth, a pipeline update; and finally, our 2012 guidance.

The most recent update we provided on our quality transformation was at the JPMorgan conference on January 10. I said at that time, and will reiterate on our call today, that reinforcing the foundation is our #1 priority. I continue to be personally involved in discussions with the FDA and am closely monitoring our progress. At JPMorgan, as you may recall, we discussed our headway to date at Rocky Mount, including submitting our comprehensive remediation plan to the FDA, closing out documentation more quickly to be able to more expeditiously release product, ramping up third-party assistance and oversight and bringing in a new team of leadership at Rocky Mount to drive sustainable cultural change. At the conference, we heard that there was some confusion regarding our planned maintenance shutdown of Rocky. Some investors had the impression that the shutdown was FDA-imposed. I want to clarify that this was not the case. Every December, Rocky shuts down for general preventative maintenance. We conducted our regularly scheduled maintenance shutdowns in late December as usual. We then elected to extend the amount of time the plant was shut down, as well as halted the release of product to allow us to work on certain issues and advance some capital improvements. At JPMorgan, we indicated that we expected production and product releases to resume in a staged manner over the coming weeks. So what has happened since our last update in January? Well, Rocky Mount completed its shutdown. In mid-January, the plant started producing product and over the course of the following weeks, began releasing product. Rocky's current production levels are returning to where they were prior to the shutdown, in the 60% to 70% range.

We have continued our regular constructive dialogues with the agency regarding our current progress. We have not entered into any discussions with the agency regarding a consent decree. As we have mentioned numerous times in the past, we would tell you if this were to happen. We are scheduled to meet with the agency in the next couple of weeks and expect that our remediation plan will be a topic of the discussion at that meeting. In the interim, we are continuing to implement the remediation plan as submitted.

At our Austin plant, you may recall we indicated that we had signed on a third-party consulting firm, Lachman, to verify the status of our 483 commitments. Lachman finished their audit and concluded that 100% of the commitments we made in our action plan have been fully addressed.

At our McPherson plant, we submitted our response to the FDA regarding the 483 observations from the inspection that closed out in early January of this year. We will be meeting with the FDA shortly to discuss our response and are proceeding to work through that plan. Finally, we continue to advance our efforts proactively and holistically across our manufacturing footprint to assess our readiness for future FDA inspections. I'll reiterate that I remain firmly committed to reinforcing our foundation and instilling a culture of high quality throughout this organization. I am confident that, as a result of our initiatives, Hospira will be even better positioned as the world's leading provider of the highest quality injectable drugs and infusion technologies.

Before I turn to our sales results, I want to take a minute to highlight some recent leadership changes. We are pleased to welcome 2 talented individuals to our senior leadership team. Richard Davies as our Chief Commercial Officer, and Zena Kaufman as our Senior Vice President of Quality. Richard is an accomplished and dynamic global commercial executive, and we expect to leverage his deep expertise, especially on the pharma and biologic sides, to advance our leadership position worldwide. Zena is a recognized global expert in pharmaceutical quality systems and compliance and will help establish quality as a strategic, competitive advantage across our global operation. With these 2 new appointments, I'm highly confident in my current senior leadership team. Our focus now is on relentless execution as we reinforce our foundation and drive growth.

I'll now turn to our sales results for the quarter and full year, after which Tom will discuss the financials. As a reminder, our 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 up 2% compared to the fourth quarter of 2010. For the full year 2011, net sales were up 2% versus full year 2010.

By product line, Global Specialty Injectable net sales increased 3% for the quarter and 7% for the year.

By region, in the Americas, Specialty Injectable sales were up 4% for the fourth quarter, primarily related to contributions from docetaxel in the U.S., as well as several of our other SIP drugs such as Precedex, gemcitabine and propofol. For the full year, SIP in the Americas grew 9%.

Turning now to the EMEA segment. Net sales of Specialty Injectables were down 6% compared with the fourth quarter of 2010. Exceptionally strong performance in meropenem and volume share gains on core injectables were more than offset by competitive pricing pressure, primarily on oncology molecules. For the full year, SIP declined 2%.

In APAC, net sales of Specialty Injectables increased 4% in the quarter and 3% for the year. Precedex in Japan had a record quarter for sales and both docetaxel and meropenem continued to gain momentum in the region, bringing the year to a strong close.

Turning now to Medication Management. The fourth quarter was a milestone for our Device business. For the first time in 2011, as a result of stronger device sales, we saw an increase in global net Medication Management sales of 3% versus the fourth quarter of 2010. As a reminder, we completed the validation of our remediated Plum alarm circuit boards in October. In addition to installing the new boards, in a portion of our existing inventory to meet demand for new devices, we have also been ramping up the field remediation of devices already in use by existing customers. While the bulk of the remediation will be completed in 2012, we anticipate spillover into 2013. Regarding our 510(k) process for Symbiq, we are in the process of responding to the second series of questions we received from the FDA. Once we submit our response, which will be by the end of this quarter, we're expecting a final decision from the agency.

We continue to make progress on our comprehensive device review as well. We have completed the risk assessment phase on our largest infusion pump families and are conducting investigations to assess the level of risk and drive to root cause.

Relative to the full year, global MMS declined 3%, mainly due to the Plum remediation that was pending for most of the year.

Sales in our Other pharma product line decreased 2% for the quarter on a global basis and 11% for the year. This primarily reflects the impact to our contract manufacturing business of the heightened quality transformation actions we've been taking at our pharma manufacturing facilities and the resulting delays in releasing product.

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

Thomas E. Werner

Thanks, Mike. Good morning, everyone. First, I'd take you through a brief review of the income statement for the fourth quarter and 2011.

Adjusted gross margin as a percentage of sales in the quarter was 34.0%, down from 39.1% in the fourth quarter of 2010. This was due primarily to inventory losses and certain quality actions. For the full year, adjusted gross margin finished at 38.5% which was in line with our revised guidance for the year.

Research and development expense in the fourth quarter was $67 million or 6.6% of revenue. For the full year, R&D expense was 6.4% of revenue.

SG&A expense in the fourth quarter was $167 million or 16.5% of revenue. And for the full year, SG&A as a percentage of revenue was 15.7%.

Adjusted operating income was $111 million compared to $142 million in the fourth quarter last year. For the full year, adjusted operating margin was within our revised guidance range at 16.5%.

Our adjusted effective tax rate in the quarter was 15.2%. This was due to a lower amount of taxable income in higher tax rate jurisdictions, and this brought our year-to-date effective tax rate to 20.5%, which was consistent with the effective tax rate last year.

Finally, adjusted diluted earnings per share for the fourth quarter was $0.51 compared to $0.77 last year. And full year 2011 adjusted EPS on a diluted basis was $3.04.

Turning to cash flow. Cash flow from operations for the full year was $434 million compared to $315 million generated in 2010. The increase this year is a result of lower comparative investments in working capital, which primarily reflect the timing of receivables collections and chargeback payments related to U.S. sales of oxaliplatin, as well as a discretionary pension contribution that we made in 2010.

Capital spending was $291 million compared to $209 million in 2010. The increase reflects investments we are making relative to capacity expansion efforts, primarily at our pharmaceutical plant under construction in Vizag, India.

Our cash balance at December 31 was $598 million, up from $527 million at September 30, but down slightly from $604 million at the end of last year.

Finally, on goodwill impairment. Although we perform our goodwill impairment test annually, as of September 30, the decrease in our stock price in the fourth quarter and updated projections for 2012 triggered an interim goodwill impairment test during the fourth quarter of 2011. As a result, we recognized additional goodwill impairment charges for the EMEA and APAC reporting segments.

Now before moving to guidance, Sumant will provide a brief update to our drug pipeline as we traditionally do at this time of the year. Sumant?

Sumant Ramachandra

Thanks, Tom. Good morning, everyone. You may recall that on our Investor Day in September of 2011, we revised how we present the pipeline to better reflect our strategy of globally expanding Hospira's portfolio. Instead of counting only the launches in limited major markets, as we previously did, we are now including all countries where the compounds in our pipeline are expected to launch. So for today's update, which is based on our pipeline as of December 31, 2011, is relative to the pipeline we discussed with you on Investor Day which was as of June 30, 2011.

As of December 31, 2011, our small molecule pipeline totaled 73 compounds, which represents a total of 603 new-to-country launches, including 40 in the U.S. The local market value of the small molecule pipeline now stands at approximately $17 billion. In terms of therapeutic areas, roughly half of the total small molecule pipeline, in terms of local market value, are oncology drugs, with anti-infectives as the next largest therapeutic segment category at almost 1/4 of the pipeline's value. Relative to launch timing, drugs representing slightly more than a quarter of the overall local market value of the pipeline are expected to launch in various countries across our regions in 2012 and 2013. Of the local market value of the expected launches for these 2 years, roughly 40% is expected to occur in 2012, with the remainder in 2013. While many of these drugs are smaller launches from a local market value perspective, they add incremental value to our broad portfolio, which is already one of the largest portfolios of Specialty Injectable Pharmaceuticals worldwide.

Moving onto our biosimilars pipeline, it remains to one of the largest pipelines in the industry, with 11 compounds and a global branded value of $40 billion. We are already reaping benefits from our 2 biosimilars on the market. Our biosimilar EPO, also known as Retacrit in Europe, and our biosimilar filgrastim, also known as Nivestim, that has launched in both Europe and Australia.

I now turn back the call to Tom, who will provide our 2012 financial guidance. Tom?

Thomas E. Werner

Thanks, Sumant. For 2012, we expect net sales to range between down 1% and up 2% on a constant currency basis compared with 2011, with foreign exchange unfavorably impacting reported net sales by 1% based on current exchange rates.

I'd like to take you through a couple of the assumptions we factored in to our net sales guidance. First for Rocky Mount, at the lower end of our sales guidance range, we have assumed that production remains at 60% to 70% throughout the entire year. As we move up in the guidance range, we've assumed that the facility remains at 60% to 70% through the first half of the year but that production and the pace of product release accelerate in the second half of the year. Regarding other 483s, our guidance assumes that other facilities that currently have open 483s continue to make progress towards meeting the commitments communicating to the FDA and that future FDA inspections of our manufacturing facilities progress well.

Now relative to product launches. First, those products launched in 2011. We anticipate further erosion for some of these drugs as more competitors enter the market. But we believe we can maintain strong market share positions, and in certain cases, even grow our market share. We've also planned additional country rollouts of products already in our portfolio, including Precedex, docetaxel, gemcitabine, meropenem, piperacillin, tazobactam and propofol.

Now for new pipeline launches in 2012, while we expect to launch numerous smaller drugs this year across our regions, as Sumant indicated, there are no new major drug launches assumed in the guidance. Relative to oxaliplatin, we're assuming an August relaunch in the United States as per our settlement. However, our guidance assumes that the market will be significantly more competitive for the drug than it was when we temporarily exited the market in 2010 as part of our settlement with the originator. On Symbiq, given that we cannot project the time line for FDA approval of our 510(k) application, we have dialed in 2 assumptions to guidance for Symbiq. At the lower end of the range, we've assumed that Symbiq does not receive approval in 2012. The midpoint of our guidance range assumes approval by midyear, with sales in the second half of 2012. And finally, on Precedex, we have assumed that we maintain market exclusivity in the United States throughout 2012.

Moving next to remediation costs. We expect these to remain in the $300 million to $375 million range that we highlighted on our last quarter call and at the JPMorgan conference in early January. As a reminder, that range includes costs related to both our pharma and device remediation activities. Now as far as the timing of these charges, we incurred $111 million of the $300 million to $375 million in the second half of 2011. Of the $111 million that we incurred in the second half of 2011, $76 million was recognized as onetime costs related primarily to third-party oversight and consulting costs, as well as costs associated with reduced production volumes at the Rocky Mount facility. The remaining $35 million of the $111 million was recorded as ongoing charges, and this was primarily related to inventory losses. Of the approximately $190 million to $265 million remaining of the $300 million to $375 million, we expect to incur about 60% to 70% of these costs in 2012 with the remaining amount in 2013. We do expect the proportion of onetime costs to ongoing costs to be more heavily weighted towards onetime. In addition to these costs, we are also ramping up our permanent internal quality hiring efforts at our facilities.

Moving next to gross margins. Adjusted gross margins in 2012 are projected to be in the 35% to 37% range compared to 38.5% for 2011 and 34% in the fourth quarter of 2011. The decline, relative to the full year of 2011, is expected to be driven by higher manufacturing costs related to reinforcing the foundation, lower volumes due to reduced output and some targeted inventory reductions. While continued price erosion on gemcitabine and docetaxel make for a difficult year-over-year comparison, we do expect lower inventory losses, as well as a positive mix effect from increased Precedex sales, will offset most of that negative impact.

In 2012, we expect research and development, and SG&A as a percentage of sales, will both increase approximately 80 to 90 basis points. Now the increase in R&D reflects the regulatory activities we are undertaking for our global SIP portfolio expansion, as well as advancements in our biosimilars program. The increase in SG&A reflects investments we are making in information technology, intellectual property litigation and sales and marketing. As a result of these factors, we're projecting 2012 adjusted operating income in the 12% to 13% range. Our adjusted effective tax rate is expected to decline in 2012 to a range of 18% to 20%, primarily due to lower earnings in higher tax rate jurisdictions in 2012 versus 2011. Equity income from affiliates will decline by roughly half due to lower expected revenues and related margins from docetaxel.

Moving to earnings per share, we're assuming outstanding shares to be steady at $166 million which does not include any share buyback activity or option exercises, and we're projecting adjusted diluted earnings per share to be in the range of $2 to $2.30.

Moving to cash flow, cash flow from operations projection for 2012 is in the range of $575 million to $625 million. Capital spending is projected to range between $350 million and $400 million, again, primarily related to the new facility we're building in Vizag, India, as well as modernization initiatives at some of our existing facilities. Depreciation and amortization is expected to range between $240 million and $260 million.

In terms of quarterly calendarization, we expect that both net sales and adjusted earnings per share will be stronger in the second half of the year than in the first half of the year as a result of some of the factors I mentioned in my earlier remarks. Those are improved productivity levels at Rocky Mount, potential approval of our Symbiq 510(k) submission and the August relaunch of oxaliplatin.

Revenue in the first quarter is expected to be down 5% to 7% from the fourth quarter of 2011, primarily as a result of our extended shutdown at the Rocky Mount facility in January. We expect revenue to ramp up from first quarter levels over the remaining quarters of the year.

We expect adjusted gross margins to be up around 200 basis points from the fourth quarter of 2011 and stay relatively flat throughout the year. Improvements to margins from increased production levels in the second half of the year are somewhat offset by scheduled factory maintenance shutdowns at some of our plants, midyear, and over the winter holidays.

For research and development, we expect a run rate every quarter in the range of 7% to 7.5% of sales. SG&A also should remain at an absolute run rate similar to the fourth quarter of 2011, with the exception of first quarter of 2012 which will be up due to the annual grants associated with our long-term incentive plans.

Now finally, I'd like to update you on our long-term financial goals. We remain confident that the earnings potential for the company remains strong. We're making progress with our remediation efforts, we believe that, toward the end of the year, our production levels at Rocky Mount will increase and we will be releasing more product. We expect improvements should accelerate as we complete our remediation efforts, commence manufacturing at our new factories in India and successfully launch our first biosimilar in the U.S. As we proceed through 2012, we hope to be able to quantify our longer-term financial goals.

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

F. Michael Ball

Thanks, Tom. 2011 was a year focused on quality transformation, transformation to make us an even better Hospira and an even stronger, more competitive global company. But transformation comes with a price. Our results have been impacted, and we will continue to feel the impact over the near term. But we are making progress, and we will continue to move forward throughout this year. By the end of 2012, while our remediation efforts will not be entirely complete, we believe that we will have incurred the majority of the remediation costs. At the same time, we remain committed to drive toward sustainable growth, that's why I've charged the organization with advancing our global portfolio expansion efforts. It certainly isn't easy to undertake both of these major initiatives simultaneously, reinforcing the foundation and turbocharging growth, but from my relatively short time at Hospira, I know the organization has what it takes.

2011 turned out to be a very different year than I had imagined when I walked in the door here 10 months ago. But I can tell you, I remain as excited about Hospira's tremendous growth opportunities as the day I joined the company. Our business prospects and organic growth potential is strong. Our pipeline is rich with new opportunities, including biosimilars. It benefits from a great R&D model, short cycle times with a high probability of success. With approximately 80% of our business in the Americas today, we also have an unbelievable opportunity for globalization. And with the investment in our new flexible manufacturing plant in India, we will have the ability to drive substantial margin expansion. To boost our growth and profitability, we're investing for the future, with strategic capacity, best-in-class processes and people. Once we get through these short-term challenges, and we will, I'm firmly convinced that Hospira's quality improvement efforts will position us favorably for long-term success, cementing our leadership position as the world's leading provider of injectable drugs and infusion technologies. I look forward to keeping you updated on our journey.

So now, operator, we are ready for questions.

Question-and-Answer Session

Operator

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Mike, I know you're not going to predict FDA's behavior. But, given your extensive interaction with the agency in your consultants, what is your opinion as to whether a consent decree is on the table as a possibility? And then secondly, I have a bigger picture question. When you joined the company ,you seemed pretty confident that having pumps and drugs under one roof make sense for Hospira, and I was curious as to whether as you've dug deeper on that issue and whether you still conclude the same thing.

F. Michael Ball

Hey, Gregg. Yes, with respect to any speculation on a consent decree, I just don't think that, that's wise or possible. We are moving along, as I said before, in a partnership with the FDA, and I feel like we are doing the best at getting better, and I think the agency sees the extent of our efforts. A lot of the ongoing dialogue with the agency is to further reinforce that perception and, also, the fact that we will have a meeting with the agency over the next few weeks, which will include the discussion around our mediation efforts. I think will go, I hope again, a long way in cementing this partnership of getting our remediation plans blessed by the FDA and get us moving in a positive direction. Again, you never know what the agency's going to do. But at this particular juncture, as I've said, we have had no indication from them of, or any discussion with them of a consent decree. With respect to the second question on pumps and drugs being under the same house. Coming in the organization, I like the fact that both of these things flow through the same customer channel and from my standpoint, there is leverage between these 2 areas. I see some leverage, I indicated at the Investor Day that where we have pumps, we have approximately a 20% increased uptake of SIP. From my standpoint on going forward, I believe that we can continue to leverage these 2 areas and I believe that the company is much stronger having both of these product lines together under the same roof, then splitting them apart. As I think I've mentioned before in a previous life, I think there was very good reasons to spin out device because I did not believe that there was appropriate leverage. However, in a previous life as well, we've brought device back in because there was leverage with the pharmaceutical portion. And I believe that is the case as we see it here today.

Operator

Our next question comes of the line of Ami Fadia with UBS.

Ami Fadia - UBS Investment Bank, Research Division

Firstly, could you give us a sense of which products are expected to be impacted by the production level assumption of 60% to 70% in your guidance? And could you explain why you assume that the productivity level remains at 60% to 70% throughout the year? And what will it take to drive it above that?

Thomas E. Werner

Okay, it's Tom, I'll take the second part of your question. Our assumption, at the lower end of our guidance, is that it would remain at 60% to 70% for the full year. At the midpoint, we're assuming it begins to improve. After the first half of the year, we'll go into our July shutdowns and then we would expect that levels would improve. So we haven't assumed at 60% to 70% for the year accept in the lower end of the guidance. As far as the products in Rocky Mount, Rocky Mount produces a high number of anesthesiology drugs. I don't think there's any anti-infectives coming out of the facility to speak of. And the best list that you can probably look at, to get an idea, unfortunately is the drug shortage list. There are quite a few drugs coming out of Rocky Mount that are showing up on the list. Propofol comes out of our Clayton facility, so that's not impacted by Rocky Mount. But those are some of the drugs and the families that they're in.

Ami Fadia - UBS Investment Bank, Research Division

And then, just as a follow-up, what production levels have you assumed for your other plants?

Thomas E. Werner

We've got so many facilities here. I don't have that data handy. We're not assuming that any of them are impacted to the extent that Rocky Mount is, but we can get you that information off-line.

Ami Fadia - UBS Investment Bank, Research Division

Okay, and then just a second question on the pipeline. You mentioned in your guidance that you assumed minimal new product launches. But on Slide 14, where you talk about the launches expected in 2012, it seems to imply that products with local fair market value, $1.7 billion (sic) [$17 billion], would be launched in 2012. Could you sort of try to connect the two and tell me what we're missing here?

F. Michael Ball

I think a large part of that, and Sumant will fill in details, is probably oxaliplatin because we're referencing local market value pre the 2009 launch. So that's really, I think, the single biggest drug in there and it probably does distort the LMV. But it is what it is. Sumant?

Sumant Ramachandra

That's correct. So I'll tell you it is a large portion of that LNV and then there are number of small molecule launches, also, in there but of smaller local market value.

Operator

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

Louise Alesandra Chen - Collins Stewart LLC, Research Division

So the first thing, I just wanted to follow-up on Gregg's question earlier. Some of your competitors have noted that they don't think a consent decree is likely because the FDA is going to show leniency towards Hospira given the number of critical shortage drugs being manufactured at Rocky Mount. Do you disagree or agree with this comment?

F. Michael Ball

Well, as I said before, Louise, we are working aggressively on our plans for remediation, and we have instituted a number of changes that we have communicated with the FDA. We have changed out, I think, as I showed at JP Morgan, the leadership in the ops group, the leadership in the quality group. We have brought in 150 consultant experts to do everything from oversight to training our people to ensure that our remediation is going forward. So from my standpoint, we are doing the right things here in terms of moving the business forward. In terms of what the FDA thinks, in terms of how they think about consent decrees, again, that is not my business to speculate. All I know is that we are doing the best job possible of getting the situation fixed, continuing to dialogue with the FDA to ensure that they're on board and know what we're doing. And I think, in that respect moving forward, I like our chances. But again, I don't think anybody ever really knows.

Louise Alesandra Chen - Collins Stewart LLC, Research Division

And just a quick follow-up. Could you talk, qualitatively, about how sales could improve if your remediation efforts remain on track? And when can we see a return to historical earnings for HSP, say in the $3 plus range?

Thomas E. Werner

Yes. I'll discuss the earnings. I think we said in the prepared comments that, commenting on our longer-term financial goals at this point, we'd like to get a little bit further through the year, a couple quarters behind us and therefore in a position to update those numbers. We will, but at this point, we really have no comment. And in terms of the sales progression, we said that sales would be down 1% to up 2%. So they're basically kind of flat. We've got an FX headwind, and we think that Precedex is going to drive some growth and offset some of the year-over-year price declines we're seeing on the 11 launches, plus oxaliplatin. So it's a very modest range of year-over-year revenue change. Mike or Sumant, anything to add?

F. Michael Ball

I think just as the supply, the hope, as Tom said in the mid-part of our guidance, is that we do see a ramp up of supply in the back end of the year. And if we get more supply, our backorders will go down, our service levels will increase and we will see higher sales as a consequence of that is our view.

Operator

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

Marshall Urist - Morgan Stanley, Research Division

Just 2 things for me. The first one is, maybe just to help everyone understand, what is pacing at this point the potential for improvement in the back half of the year? Will you have better visibility of that from this FDA meeting that you're going to have in a few weeks? You're going to feel comfortable that you're going to be able to get to increasing production levels in the back half of the year? So just a little bit better understanding of what are the variables and when we'll have visibility on those things as we move through the year. And then secondly, just Tom, I think to that earnings base question. I know you guys don't want to talk specifically about where it is, but I think it will be helpful, just when you think about the operating expense base that you guys envision between R&D and SG&A this year. Should we be thinking that, going forward even as these remediation -- as you work through these problems that, that's a good level to about, and then you'll have volume leverage off of that going forward as things recover or are there more -- could we see more expenses come off as we get into 2013 and beyond just depending on the pace of remediation?

F. Michael Ball

Okay. So, Marshall, I'll take the first question and I'll throw the second one over to Tom then. So in thinking about the variables associated with production, moving forward, it is a factor of talking about with the FDA with respect to remediation. It also is a process here that we're in that as we uncover things, we drive to root cause, and in some circumstances another set of issues presents itself which have to go and solve. And that, in some ways, was the reason behind the extended shutdown in January at the Rocky Mount facility. Now, we are in a shutdown mode anyway, so it made remediation of these issues easier. But as you drive to root cause, you find these things. So it is very difficult to see exactly when these issues are finally solved and you can start moving up the supply recovery pathway, if you will. And then in conjunction with that, the FDA needs to be on board with the remediation plan. So we felt, as we looked at the year, that if we're going to have a theme for this year, it was going to be increasing the supply, that's the midrange. So getting the supply increased, high remediation efforts. It was going to take a lot of money. The question is to when the inflection point, of when supply starts to increase from that 60% to 70% level, is the one we're wrestling with, and given the range of our guidance, this is something that we're still wrestling with now. What I would say to you is, as we go through the first quarter and then into the call in the second quarter, we should have greater clarity on when that inflection point occurs and, hopefully, we can do something about narrowing the range. But right now, that's the situation we're in. As you look forward to 2013, what we're looking at there is, if we get this return to a better supply situation in the back half of '12, then we'll be looking stabilize that supply situation in '13, continue with remediation through '13 and we'll still have high expenses, but hopefully improving. And as you look out at '14, there's where I see that we're in an optimal supply situation, remediation should be completed, we're driving cost savings in the organization now, and then we get Vizag online. So as you step back, there's just a question now, as to precisely when we get that inflection point and it comes up. And what we've been looking out for this year is it occurs halfway through the year in the midpoint of our guidance or we continue at the same rate at the low point of our guidance.

Thomas E. Werner

Marshall, it's Tom. Relative to spending, I think we still, generally, stand by the statements we've made at Investor Day, and since then, relative to research and development. Those expenses will tick up in 2012. And until we determine otherwise, the portfolio expansion, as well as the biosimilars efforts will continue. So I think it's safe to say R&D is going to be around that range. As far as SG&A, the general administrative expenses, there is some leveragability there. The selling expenses, depending on portfolio expansion, where our new Head of Commercial would like to take the various regions -- I'd kind of hold off on commenting what selling expenses might look like another component of that, but there should be some leverage in SG&A. But really I don't want to get too far ahead of ourselves in commenting on longer-term numbers.

Operator

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

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

Wanted to evolve on Tom's point there, regarding where the new Head of Commercial would take the various regions from a sales and marketing perspective. Should we anticipate any type of material change in terms of strategic direction on the commercial side with someone new in place there? And if not, what is that person's mandate from here on a go-forward basis? And when will we get some type of update?

F. Michael Ball

So, David what we were looking for when we hired a new Chief Commercial Officer is a real broad experience across a range of pharmaceuticals to biologics but also extensive international experience. One of the things that I've been talking about since I've come here is about the opportunity for globalization. So when you look at Richard's background, it is rich in globalization. Heading up Asia Pacific, Japan, Australia, Europe in several different countries. So somebody who's a very big internationalist, who also has a great deal of biologic experience because of course, that's the next big frontier as well. So I found, with that individual, I think the combination of skill sets that I was looking for to drive forward on those 2 platforms. From a strategic standpoint, it's not a difference from what I outlined at Investor Day, or have been talking about consistently, that we have big opportunities in terms of globalization of the business and the biologics pipeline.

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

Okay. And maybe just a follow-up on the guidance, Tom. If I sort of read through the commentary regarding first half or second half and the pacing of a recovery on the operating margin profile, et cetera, it sounds like the fourth quarter is probably a better picture of closer to where a normalized run rate might be. So if I just look at the midpoint of the guidance, it's sort of $2.15 and assume that more comes in the second half than in the first half and then you have your traditional seasonality in Q3 that makes Q4 a little stronger. That puts Q4 in the $0.70 range, I think, and that would kind of lead to an annualized number below $3 on a normalized basis. Would you disagree with that math?

Thomas E. Werner

Well, that's a long question. I wouldn't take the fourth quarter and with the number you came with and project that out. We've got, as I said, got a couple quarters behind us. We'll look at updating the longer-term guidance at that point. With respect to your other comments, the back half of the year typically is stronger. We have the shutdowns in the third quarter and our launches. We said there was not much in the way of launches in 2012. The 2 more significant ones are oxaliplatin, which would happen in August, and then the relaunch of Symbiq, which we're anticipating in the midrange, would be after the first half of the year. But trying to take that fourth quarter number and sort of projecting it out, I think it's premature to do that.

Operator

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

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

First one is around the attitude among the clients. One thing you typically see with an organization that has some problems with its suppliers is going ahead and qualifying additional vendors. But does your market intelligence tell you this is currently happening with the GPOs? Are they qualifying more vendors or the situation is fairly controlled there? And second, for Sumant, we've not heard an update on the branded pipeline. Can you give us an idea where you stand with the full launch of Precedex and additional branded products?

Sumant Ramachandra

So let me start first and then I'll hand over to Mike. So in terms of the branded pipeline, where we are today is that, with Precedex, we are focusing -- submitted our long-term -- responses to our long-term dossier questions that the FDA had. As you know, the basis of that submission were the original study we did and the 2 studies from our partner, and so 3 studies have gone into the FDA and we'll wait in terms of a PDUFA clock response to our response back to the FDA. And then we'll also focus on completing the pediatric program, to go ahead and submit that for the potential for an additional 6 months of statutory exclusivity. And then on Precedex, we are continue globally expand. The label of Precedex in a variety of markets continues to expand. We've gotten long-term approval in South Korea and we're looking for long-term approval in other countries. So that's Precedex and kind of the investment we've made there. And on our life cycle side, we are working on other forms of Precedex, in terms of other formulations, so that's something also that we have talked to you about previously that continues to progress. In the non-Precedex side, in terms of POSIDUR or Dyloject. With POSIDUR, we are continuing to look at this data with our partner DURECT. DURECT is planning to have a meeting with the FDA, I believe, towards second quarter of this year. So by mid-2012 we'll know better where we are. That is a 505(b)(2) application, so we'll know more on our discussions -- DURECT's discussions with the FDA. And Dyloject will continue to progress. We told you last time, that sometime in 2012, we'll have good technical clarity as to resolving some of the issues that were raised as part of the CMC package and that we are still on track at this point for a potential launch in 2013, second half of 2013. And that has not changed. So we continue to track against that. Mike?

F. Michael Ball

Okay, and then Ronny, with respect to the first question around the GPOs and could they be qualifying other suppliers. I think I've been out to see a couple of GPOs, obviously they're not happy about the supply situation from across the industry. So this is an industry-wide situation. I continue to believe that we have excellent relationships with respect to the GPOs. I think we have an excellent offering for the GPOs and their customers. Just to remind you, that about 50% of the SIP we sell in the United States is in differentiated format. So we do have competitive advantage there. So, overall, I don't think anybody's happy with the supply situation. But it's not just us, it extends over a number of manufacturers. So hard to say what exactly the GPOs will do, but I said expect that we'll go forward in partnership with them.

Operator

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

Christopher Schott - JP Morgan Chase & Co, Research Division

First one was just on the Lachman associate update at the Austin plant. Is there any read across from that review as it relates to your efforts at Rocky Mount? I guess, how similar were the steps you implemented in Austin as relative to Rocky Mount? And the second question was on industry pricing dynamics. As you just mentioned, you and many of your peers are struggling with manufacturing. Do you see the reduced industry capacity we're currently experiencing and what seems to be higher cost levels over time translating to an improved pricing outlook for injectable generics over time, or do you see the price dynamic not really changing as we go through this process?

F. Michael Ball

Okay, with respect to the Austin situation, I don't know that there's a good read across over to the Rocky Mount situation to be honest with you. The Austin situation, in many instances, had some similarities, but there were some key differences. And one of the biggest ones was just the absolute size of the plant. Austin is quite a bit smaller than our Rocky Mount facility. And from my standpoint, as you look at the 483s, in my view, Rocky Mount had a lot more work to do than the Austin facility. Having said that, the Austin 483, as we mentioned before, was not great. And so I was very pleased that the plant went through the remediation process. They indicated to us that they've completed all their commitments. As I mentioned before, a couple days later then we sent in Lachman to get a third-party verification on that. So I was extremely happy that everything is 100% a-okay from their standpoint. And we are looking, and continuing to look at, third parties reviewing our plants to ensure that, a, we're living up to our commitments, but also, b, that we have a state of FDA readiness as the FDA comes through with another round of reviews and inspections. In terms of the pricing situation, that's an interesting question. I think that, as the FDA continues to review and bring up the standards to which plants much operate under, then I think, necessarily, that can do a couple of things. One, it can certainly increase cost, but number two, it can increase barriers to entry. And from my standpoint, what I'm excited about is, I believe that we have a great opportunity here to meet the absolute highest quality standards. Obviously, it's painful right now, but I think we can meet those high-quality standards, and perhaps many others won't be able to or if they less critical mass, it won't be worth it to them to do it. So from our standpoint, I ultimately see that this will be a great competitive advantage for us moving forward.

Operator

And our last question comes from Matt Taylor with Barclays Capital.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to clarify something on the FDA discussions you've been having. I know you moved back the call to hopefully give us some more feedback on those discussions, and with your guidance today, you had to make some assumptions about how things are going to progress with remediation. So, long-winded, but with that said, with your 60% to 70% assumption, is that sort of assumed that your internal remediation plan progresses as you think it will without any kind of overarching recommendations coming in from the FDA? And, I guess, what exactly do you expect to discuss with the FDA at your upcoming meeting?

F. Michael Ball

So the 60% to 70% output and that we've said for the first half of the year and then from the midpoint, guidance standpoint and inflection midpoint from the year, assumes that we remain, as we are today, in control of the situation without an outside force like the FDA changing our particular activities in a substantive way. With the remediation plan, as we go forward, I don't want to get into details around the remediation plan because, again, we have not discussed those with the FDA. But in looking at it, we think it's a very good plan to move forward. And I feel very confident, in terms of meeting with the FDA, taking them through it, that it will be accepted. Now, again, that doesn't mean that there won't be any changes associated with it, but our assumption is that we will go forward and this is what our plan, this year, is based upon.

Matthew Taylor - Barclays Capital, Research Division

And just mechanically, is the 60% to 70% level -- is that caused by the same factors you discussed kind of in the back half of last year, with slower batch release due to increased oversight?

F. Michael Ball

That's exactly correct. so we have oversight in place, and this necessarily then leads to slower release.

Karen King

So, thank you. We're at the top of the hour, so we're going to conclude our call for today. Thank you for joining us. Operator, we're now ready to end the call.

Operator

This concludes Hospira's Fourth Quarter and Full Year Conference Call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!