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We are maintaining our Neutral recommendation on Hospira, Inc. (HSP - Analyst Report) with a target price of $34.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Hospira performed disappointingly in the second quarter of 2012. While earnings fell short of the year-ago figure by 45.7%, revenues were 2.9% lower than the year-ago figure. Adverse foreign currency movements and the slowdown in production at the company’s facility in Rocky Mountain, North Carolina hurt results during the quarter.

Hospira is facing continued manufacturing problems at its Rocky Mountain facility, which accounts for approximately 25% of overall net sales. Rocky Mountain is currently operating at 60%–70% of the normal level. The company is working hard to resolve the issue.

Moreover, in August 2012, Hospira received another warning letter from the US Food and Drug Administration (FDA) following the inspection of the company’s La Aurora de Heredia, Costa Rica device manufacturing facility in April 2012. The facility at Costa Rica makes most of Hospira’s infusion devices and sets (Symbiq, Plum etc.). The FDA stated that the company’s response (in May 2012) to the inspection in April 2012 was unsatisfactory. The agency further stated that Hospira’s manufacturing facility at Costa Rica was flouting the rules laid down by the FDA. We believe Hospira’s top and bottom-lines will rebound once the ongoing manufacturing issues get resolved.

The Specialty Injectable Pharmaceuticals (SIP) segment is the biggest contributor to Hospira’s top line. Although second quarter 2012 SIP sales declined 4.6% (down 1.7% at constant currency) to $644.2 million from the year-ago period, we note that year-over-year comparisons were tough as Hospira’s generic version of Sanofi’s (SNY - Analyst Report) Taxotere was approved in the US in March 2011. The August 2012 re-launch of Hospira’s generic version of Sanofi’s cancer drug, Eloxatin, should strengthen the SIP unit, which should perform well going forward. Another factor favoring the segment is the promising pipeline, which contains many injectables going off-patent in the next few years.

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