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Hospira, Inc. (HSP - Analyst Report) recently announced its intension to acquire an active pharmaceutical ingredient (API) manufacturing facility and an associated research and development (R&D) facility from India-based Orchid Chemicals & Pharmaceuticals Ltd. for around $200 million.

The agreement is sanctioned by both the companies and is expected to conclude by the fourth quarter of 2012.

The state-of-the-art API manufacturing facility is approved by the US Food and Drug Administration (FDA). The API facility will help Hospira reduce costs and support the continuous supply of key antibiotic products. As per the agreement, Orchid Chemicals & Pharmaceuticals will continue with its cephalosporin API business and facilities as well as supplying its associated API to Hospira.

Orchid Chemicals & Pharmaceuticals will continue with its cephalosporin API business and facilities as well as supplying its associated API to Hospira.

We note that in 2010, Hospira had acquired the generic injectable finished-dosage form pharmaceutical business of Orchid Chemicals & Pharmaceuticals for $381.0 million, which included a beta-lactam antibiotic formulation manufacturing complex and a pharmaceutical R&D facility.

Post-acquisition, the facility is expected to have a marginal impact on Hospira’s earnings for the first year, less transaction related expenses like purchase accounting charges, integration costs, and the amortization of intangible assets.

Notably, during the second quarter this year, Hospira paid around $30 million to a supplier for the purchase of APIs.

Meanwhile we note that Hospira recently received a warning letter from the FDA regarding an inspection of the company’s La Aurora de Heredia, Costa Rica device manufacturing facility in April this year. The Costa Rica site manufactures the majority Hospira’s infusion devices and sets.

The warning letter did not mention any restriction in production or shipment of Hospira’s products from the site. The company is currently evaluating the concerns raised in the letter. The FDA can take further regulatory actions if the issue is not solved.

Our Take

We are pleased with Hospira’s decision to acquire Orchid Chemicals & Pharmaceuticals’ manufacturing facility. However the warning letter for the Costa Rica facility is a matter of concern.

We note that this is this is not the first time that Hospira has received a warning letter for its manufacturing facilities. The company received warning letters from the FDA for its pharmaceutical and device manufacturing facilities in Clayton and Rocky Mount, North Carolina. Hospira has been working on addressing and correcting the issues raised by the agency. We expect investor focus to remain on the company’s manufacturing issues.

We have a Neutral recommendation on Hospira. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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