Hospira cuts costs by expanding drug and API production outside of the U.S.

Generic drugmakers have been expanding production in low-cost countries to drive down costs in a highly competive market. Hospira ($HSP) has been slow to do that. Its focus in recent years has been plant remediation in the U.S. because key facilities were not meeting FDA standards. But CEO F. Michael Ball says that will change.

Three of Hospira's U.S. plants became the subject of an FDA warning letters several years ago, and the company has spent more than $300 million making improvements. But with most of the remediation behind it, it can look to manufacturing efficiencies and lowering plant production costs, and that includes manufacturing in low-cost countries, Ball said during an investor meeting last week. Hospira, by 2018, expects to be manufacturing 40% to 50% of its units outside of the U.S. That would be a huge increase since Hospira currently is manufacturing only about 10% of its units in other countries. "(I)t's about manufacturing in low-cost-to-produce places," Ball said, according to a transcript from Seeking Alpha.

The need to do that is why Hospira is expanding in India, Ball told analysts, building a 1.1 million square-foot manufacturing plant in Vizag, India, and expanding at its other plants there. The Vizag operation will add about 500 million additional units per year. "This should have a profound effect on our cost profile," Ball said.  

The cost strategy also applies to Hospira's active pharmaceutical ingredient (API) manufacturing, an expensive piece of the cost-of-goods equation, especially for oncolytics, Ball explained. Hospira currently produces less than 10% of its APIs. But the $200 million acquisition of an API manufacturing facility from Orchid Chemicals & Pharmaceuticals will change that. Hospira last year agreed to buy the half-million square foot, FDA-approved facility in Aurangabad, India, and take on the R&D operations and 640 workers tied to the API-making business. With the Orchid plant, Hospira should be making about 30% of its own APIs by 2015. With a couple of "inorganic" moves, that could reach as much as 50% by 2018. Those moves will help the company improve its profits, lifting its gross margins to the mid-40% range from the 30% to 37% it now produces.

- read the Seeking Alpha transcript