New CEO Tasked with Getting Hospira Back on Track

by Barry Cohen | September 16, 2011 1:26 pm

New CEO Tasked with Getting Hospira Back on Track

Since being spun off by Abbott Laboratories (NYSE:ABT[1]) in 2004, Hospira (NYSE:HSP[2]) has more than doubled the return to investors of its former parent, 47% to 20%. But the salad days for the world’s leading maker of generic injectable drugs might be coming to an end. Just last week, the company said at an investor meeting at its headquarters in Lake Forest, Ill., that sales will remain sluggish through 2014.

Investors appear to have been expecting bad news. Since trading near $60 less than a year ago, Hospira shares have slid all the way to just under $40. The company issued disappointing guidance in February for 2011, and in late July, it said it expects reduced profit margins because it is spending more money to improve its manufacturing process.

After the investor meeting, Raymond James analyst Jayson Bedford downgraded the stock to “outperform” from “strong buy,” his firm’s top rating. And his comments that accompanied the downgrade sounded like he’s soured on the stock and the people who run the company. “We viewed the (investor day) meeting as a forum to restore investor credibility,” he said in an Associated Press story. “Unfortunately, we do not believe management accomplished this goal.”

The big culprit seems to be the manufacturing tribulations that have plagued company plants in North Carolina. Analysts couldn’t have been too pleased to learn that it will take another 18 to 24 months to fix those problems. Last year, the company received a warning letter from the Food and Drug Administration concerning emulsion products that were used in some drugs that did not meet the FDA’s Good Manufacturing Practices.

Hospira Chief Financial Officer Tom Werner agreed with an analyst who estimated the company will have to cough up about $65 million over three years on remediation. That amount translates to roughly eight to 10 cents in EPS next year alone. Ouch!

Getting Hospira back on the right track is now the responsibility of CEO F. Michael Ball, who was given the job in March after 16 years at Allergan (NYSE:AGN[3]). In addition to getting the company’s manufacturing house back in order, Ball says his other priority is to drive growth.

“I didn’t come here to change the strategy of this company. I came here to take it to the next level,” Ball told Reuters. “If you look at my record, my specialty is growth.”

To realize that growth, Ball said, he is looking at making acquisitions that will give Hospira a presence in emerging markets such as China and Brazil. He also wants to launch biosimilars in the United States beginning in 2013 and become one of the top three providers worldwide of these less costly alternatives to proprietary biopharmaceuticals.

Last week’s announcement indicates biosimilar leadership might be within Hospira’s reach. The company reported positive results from a Phase I U.S. clinical trial of its erythropoietin (EPO), the blockbuster drug that Amgen (NASDAQ:AMGN[4]) sells under the name Epogen. Hospira plans to begin the first Phase III trial of the drug in the United States this year. The company already sells a biosimilar EPO in Europe.

Barry Cohen is long AMGN. 

Endnotes:
  1. ABT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABT
  2. HSP: http://studio-5.financialcontent.com/investplace/quote?Symbol=HSP
  3. AGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGN
  4. AMGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMGN

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