Costs mount quickly when manufacturing issues are bad enough to attract the FDA's attention. There are lost sales if a line or plant is closed for remediation, plus the costs of the upgrades themselves. Value can even be hit substantially if investors get freaked out by the moves, and sometimes that can lead to litigation that makes the proposition even more expensive. That is what happened to Hospira ($HSP), which has agreed to pay $60 million to settle an investor lawsuit.
The litigation was filed in 2011 by investors who claimed they were kept in the dark by the Lake Forest, IL-based drugmaker about the depth of quality problems at its manufacturing operations that led to FDA warning letters. Hospira said in an emailed statement Friday that it still doesn't think it did anything wrong, but that it will be good for business to put the matter behind it.
"While we strongly believe that the company did not violate federal securities laws, we agreed to settle the lawsuit in order to avoid further risk and disruption to our business, allowing us to focus our efforts on addressing the needs of our customers worldwide and driving profitable growth and value for our shareholders," it said.
The suit was filed on behalf of investors who bought Hospira shares between Feb. 4, 2010, and Oct. 17, 2011, according to Reuters. The settlement still needs to be approved by a federal judge in Chicago. Hospira has previously indicated it had reached a deal to settle the litigation and that it expects insurance to cover its costs. The litigation ties the company's problems back to its cost-cutting "Project Fuel" plan launched in 2009 with the idea that it would boost shareholder value, Reuters reported. Instead, the lawsuit claimed, it hurt quality and eventually cost investors. Hospira's shares fell 21% following a third-quarter 2011 announcement that it was cutting its earnings projections in the face of FDA actions, the suit said.
The FDA first publicly noted problems at Hospira's massive Rocky Mount, NC, plant in a warning letter in 2010. In response, the company launched a major overhaul of its U.S. manufacturing network including plants in Austin, TX, Clayton, NC, and Boulder, CO, in addition to the Rocky Mount facility. It has spent more than $375 million on upgrades. For all of that, it has yet to overcome all of its problems. Last year, Hospira received a warning letter for a plant in India, and some of its medical device operations have also run into issues with the FDA.
But strides are being made that CEO F. Michael Ball says will help revenues as more product is shipped. During Hospira's February earnings call, he said the FDA had given the company verbal notice that its plants at Rocky Mount and Austin have achieved the status of voluntary action indicated, a step down from the official action indicated designation they have been operating under. Ball said that is an indication of the progress being made. He said Hospira expects the FDA will return for reinspections around midyear.
- read the Reuters story