Hospira (HSP)

Q3 2011 Earnings Call

October 26, 2011 9:00 am ET

Executives

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

Karen King - Vice President Investor Relations

Michael Michael Ball - Chief Executive Officer, Director and Member of Science, Technology & Quality Committee

Analysts

Gregory Hertz - Citigroup Inc, Research Division

Robert M. Goldman - CL King & Associates, Inc.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Jessica Fye - JP Morgan Chase & Co, Research Division

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

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

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Marshall Urist - Morgan Stanley, Research Division

David G. Buck - Buckingham Research Group, Inc.

Louise A. Chen - Collins Stewart LLC, Research Division

Presentation

Operator

Welcome to Hospira's Third Quarter 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 third quarter of 2011. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President of Finance and Chief Financial Officer; Sumant Ramachandra, Senior Vice President and Chief Scientific Officer, will also be joining us for Q&A.

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 section 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.

In 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 Presentations page in the Investor Relations section of our website.

Also posted on our website is a presentation of complementary material that summarizes the points of today's call. We will not be speaking directly to the material, which 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. [Operator Instructions] And with that, I'll now turn the call over to Mike.

Michael Michael Ball

Thank you, Karen, and good morning, everyone. Given the circumstances prompting our third quarter pre-release last week, I'd like to first address the quality-improvement initiatives and resulting slowdown in manufacturing production impacting our financial results, and then we'll walk you through our traditional quarterly review.

For those of you who may not have been on last week's call, let me briefly highlight the chain of events that resulted in heightened remediation activities at Rocky Mount, one of our manufacturing facilities in North Carolina. Rocky is a large facility that accounts for approximately 25% of our overall net sales. It produces generic injectables, large-volume solutions and also is one of the facilities that supports our contracting manufacturing business.

As most of you know, Rocky Mount is under a Warning Letter from the FDA, which we received in April of 2010, related primarily to processing compliance issues. An FDA inspection completed in June 2011 resulted in observations from the FDA known as a 483. The FDA completed another inspection in August 2011, after which we received a second 483 with additional observations.

Receiving 2 483s so close together was a clear signal that we were not making satisfactory progress to fully comply with the FDA's concerns, and that we needed to ramp up our remediation efforts. That is why we escalated the remediation activities at the facility, which resulted in a significant slowdown at the plant, hampering our ability to meet customer demand for product in a timely fashion. It also resulted in inventory write-offs associated with the remediation activities. This development, coupled with device quality-related issues, led to significantly lower third quarter results than we had expected.

I want you to know, first and foremost, that I have heard and appreciate your feedback following our pre-release call. I understand your desire for greater clarity regarding the scope and timelines of remediation, projected costs and overall financial projections.

The situation at Rocky Mount is one we are committed to fix. I can assure you that we are engaging the appropriate internal and external resources needed to address this issue. While I would like nothing more than to lay out clearly defined timelines for remediation, we are not in a position to do that today. When we pre-released last week, we shared the same information regarding our progress that we shared with the FDA in early October, implementing new site leadership, bring in third-party assistance and oversight with Quintiles and IHL, which are regulatory consultants, and reemphasizing that quality is everyone's top priority at the facility.

As part of their oversight, Quintiles and IHL are reviewing several process and compliance aspects of the manufacturing process at the facility. This entails documentation and records review, shop floor oversight, inspection of the test record data and associated issues, such as deviations, lab investigations and manufacturing investigations.

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