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Hospira’s (HSP - Analyst Report) first quarter 2014 adjusted earnings of 60 cents per share surpassed the Zacks Consensus Estimate by 11 cents. First quarter 2014 earnings were above the year-ago figure by 15.4%, aided by higher revenues.

Including one-time items, the company posted earnings of 40 cents per share in the first quarter of 2014 compared to the year-ago loss of 46 cents.

First quarter revenues (excluding the impact of customer sales allowances pertaining to Hospira’s device strategy launched in 2013) climbed 6.3% year over year to $1.1 billion, surpassing the Zacks Consensus Estimate of $1 billion. Strong sales of drugs in the company’s Specialty Injectable Pharmaceuticals (SIP) division benefited the top line. Foreign exchange movements negatively impacted sales during the quarter.

The First Quarter in Detail

The SIP segment, the biggest contributor to Hospira’s revenues, performed well in the first quarter of 2014. Favorable pricing as well as volume contributed to the strong segmental performance. The volume growth was driven by continued supply recovery along with competitor supply issues in the U.S. Segmental sales climbed 9.9% (up 11.1% at constant currency) to $716.3 million.

The Medication Management (MM) segment performed disappointingly during the first quarter of 2014 due to low device sales. Sales in the segment declined 9.9% (down 8.3% at constant currency) to $206.2 million. The segment has been going through a rough patch. In Feb 2013, the FDA expanded the import ban on certain Hospira products issued in 2012.

In Nov 2012, the FDA had issued a directive prohibiting Hospira from importing Symbiq medication infusion pumps, manufactured at its Costa Rica facility, into the U.S. The U.S. regulatory body issued a fresh directive in Feb 2013, preventing Hospira from importing Plum, GemStar and LifeCare PCA infusion pumps, manufactured in Costa Rica, to the U.S. The device ship-hold had a negative impact on segmental sales during the quarter. Sales in the Other Pharma division improved 6.3% (up 7.5% at constant currency) to $128.3 million.

Geographically, the Americas, Europe, Middle East and Africa and the Asia-Pacific markets contributed $841.8 million (up 8.3% at constant currency), $132.7 million (down 1.9% at constant currency) and $76.3 million (up 15.2% at constant currency), respectively, to total revenue in the first quarter of 2014.

2014 Outlook Maintained

Hospira maintained its outlook for 2014 that was provided in February this year while releasing the fourth quarter and full year 2013 results. Hospira still expects top-line growth in the range of negative 2% to positive 3% (on a constant currency basis). The company still expects 2014 adjusted earnings in the range of $2.00 to $2.25 per share. The Zacks Consensus Estimate currently stands at $2.13 per share, well within the company’s guidance range.

The company still expects cash flow from operations for 2014 in the range of $100 million–$200 million. Depreciation and amortization is still projected in the range of $225 million–$275 million. In 2014, capital expenditures are still forecasted in the range of $375 million–$425 million.

Our Take

Hospira’s impressive top-line growth in the first quarter of 2014 driven by its SIP segment is encouraging. However, the MM segment still remains under pressure. We believe segmental revenues will remain under pressure until the issues facing it are resolved.

We are impressed by the global strategy announced by Hospira last year regarding its devices portfolio. Through this strategy, Hospira aims to modernize and streamline its device portfolio in order to drive growth and serve customers in a better manner. We believe that this strategy will enable Hospira to sustain long-term growth.

We are also positive on the company’s focus on biosimilars. In Sep 2013, the European Commission approved Inflectra, the biosimilar version of Johnson & Johnson (JNJ - Analyst Report) and Merck & Co. Inc.’s (MRK - Analyst Report) blockbuster drug Remicade. This is the third biosimilar marketed by Hospira in the EU. Biosimilars are resulting in massive cost savings in the EU.

Hospira is preparing to enter the U.S. market with biosimilars. The biosimilar market in the U.S. is expected in the range of $6–$13 billion by 2020 resulting in massive cost savings. The company stated at its investor day late last year that the value of a biologic going off patent in the U.S. or EU will rise with time. The company has a lucrative biosimilars pipeline, potentially worth multi-billion dollars.

Hospira carries a Zacks Rank #3 (Hold). Perrigo Company (PRGO - Analyst Report) is a better-ranked stock in the medical sector. Perrigo carries a Zacks Rank #2 (Buy).

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