Hospira sees dim light at end of plant troubles

Executives see the light at the end of the tunnel where Hospira's ($HSP) manufacturing stumbles are concerned, but that light appears to be from a 60-watt bulb where a 100-watt is needed.

Mike Ball, CEO of the generic injectables maker, told analysts Tuesday that production resumed in January at its troubled Rocky Mount, NC, plant and that the plant is running at 60% to 70%. He pointed out that the company closed the plant in December for its regularly scheduled maintenance, not because the FDA said it must, then extended the shutdown to work on issues. The company has a new executive team overseeing quality and new management at two of its plants. The news impressed investors, who ran the company's stock up 6.08% Tuesday to close at $36.30, up more than $2 a share. It gained another 9 cents a share Wednesday.

Hospira has been dealing with product recalls and FDA-observed issues since 2009. Observations at Rocky Mount run the gamut, from lack of testing to insure sterility, to underfilled vials, to a lack of complete follow-up when particulates were found in a Lidocaine mixer.

Throughout the call, Ball and others explained that while a consent decree is not expected, the FDA has yet to give the company a clean bill of health at Rocky Mount or its plants in McPherson, KS, and Austin, TX. A consultant for the Austin facility has concluded that all action plan commitments have been addressed. Production at Rocky Mount, which before being closed for remediation accounted for a quarter of Hospira's sales, will generally remain in the 60% to 70% range through this year, ramping up some at the end of the year. However, Ball acknowledged something anyone who has managed through these situations knows: Sometimes as one problem is addressed, others pop up.

Remediation at Hospira's various plants is estimated to run $300 million to $375 million, of which $111 million was taken in the second half of 2011. Of that, $76 million primarily went "to third-party oversight and consulting." While some of that amount is for one-time costs, the CEO said Hospira may continue to use consultants to make sure FDA commitments are met and that plants are prepared for future FDA visits.

But the fallout from quality lapses will live with Hospira for some time. It expects to book 60% to 70% of the remaining $190 million to $265 million this year and the rest in 2013. Fixing problems at Rocky Mount and other facilities, as well as efforts to expand capacity, will shave 66 cents a share off 2012 earnings. Bloomberg points out that problems at Rocky Mount sparked a class-action lawsuit from investors who said the company failed to disclose those issues.

Seeing a silver lining in the troubles, Ball says that while the plant improvements may increase operational costs, that increases barriers to entry. "And from my standpoint, what I'm excited about is I believe that we have a great opportunity here, to meet the absolute highest quality standards. Obviously, it's painful right now, but I think we can meet those high quality standards, and perhaps many others won't be able to, or if it's less critical mass, it won't be worth it to them to do it. So from our standpoint, I ultimately see that this will be a great competitive advantage for us moving forward."

- find the analyst call transcript here
- read Bloomberg's story

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