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Hospira Beats; Quality Issues Continue

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Hospira’s fourth quarter 2011 adjusted earnings of 51 cents per share fell short of the year-ago adjusted earnings by 26 cents. Earnings were hurt by the slowdown in production at the company’s facility in Rocky Mountain, North Carolina, which accounts for approximately 25% of the overall net sales. Earnings however got the better of the Zacks Consensus Estimate of 45 cents due to higher-than-forecast top-line results.

The company came up with revenues of $1.0 billion, up 2.2% over the prior-year quarter and also beating the Zacks Consensus Estimate of $954 million. The year-over-year improvement was driven by strong performance of the Specialty Injectable Pharmaceuticals (SIP) segment despite production slowdown at the Rocky Mountain facility.

In 2011, Hospira reported total revenue of $4.1 billion, up 3.6% over 2010 levels. In 2011, adjusted earnings per share were $3.04 versus $3.31 per share in 2010. The Zacks Consensus Estimates were $4.0 billion for revenue and $2.98 for earnings per share.

Quarter in Detail

The SIP business performed well in the quarter with sales from the segment climbing 2.8% to $621.9 million, driven particularly by the strong performance of the generic version of Sanofi‘s (SNY - Free Report) Taxotere. Medication Management Systems (MMS) sales improved 3.1% to $260.0 million. Sales in the Other Pharma division declined 2.1% to $132.1 million in the fourth quarter of 2011.

Geographically, the Americas, Europe, Middle East and Africa (EMEA) and the Asia-Pacific (APAC) markets contributed $786.6 million (up 1.0%), $133.5 million (up 3.5%) and $93.9 million (up 11.5%), respectively, to total revenue during the reported quarter.

Fourth quarter adjusted income from operations was $111 million, down 21.8% over the prior-year quarter. The decline was attributable to inventory losses and costs incurred due to quality actions undertaken in response to the FDA warning letter received in April 2010.

2012 Guidance

In addition to announcing the fourth quarter and 2011 financial results, Hospira management also introduced 2012 guidance.

In 2012, Hospira expects top-line growth in the range of -1% to 2% on a constant currency basis. Additionally foreign exchange is expected to have a negative impact of 1% on the top line. Adjusted earnings are expected in a band of $2.00–$2.30, down from 2011 levels due to the ongoing quality control issues with the company. Increased research and development activities, in a bid to expand its product portfolio, are also expected to bring down earnings this year. The earnings guidance assumes that productivity levels at the Rocky Mountain facility will improve in the second half of 2012. The current Zacks Consensus Earnings Estimate of $2.42 per share is above the company’s guidance range.

Hospira expects cash flow from operations in the range of $575 million to $625 million in 2012. Capital expenditures are expected in the range of $350 million to $400 million. Depreciation and amortization is expected in the range of $240 million to $260 million.

Our Recommendation

We currently have an Underperform recommendation on Hospira. The stock carries a Zacks #5 Rank (short-term ‘Strong Sell’ rating).

Hospira is going through a rough patch due to manufacturing and customer service related issues at its Rocky Mountain facility. Rocky Mountain is currently operating much below normalized levels. Though the possibility is remote, we cannot completely rule out shutdown of the Rocky Mountain facility, which could be devastating for Hospira. Moreover, the Symbiq and Plum pump issues remain matters of lingering concern.

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