We have maintained a Neutral recommendation on Hospira Inc. (HSP) with a target price of $55.00 following the announcement of the second quarter results.
Hospira’s second quarter earnings of 94 cents per share were well above the Zacks Consensus Estimate of 77 cents. Earnings also surpassed the year-ago adjusted figure of 86 cents.
Earnings in the second quarter of 2011 benefited from an increase in revenue, which was boosted by strong performance of the Specialty Injectable Pharmaceuticals (SIP) business. Margins were however weak in the quarter, resulting from the loss of higher-margined generic Eloxatin and the substitution of the lower-margined generic Taxotere.
Overall, we are encouraged by Hospira’s leading position in the SIP business and its consistent top-line performance. The SIP segment was bolstered by the US launch of generic versions of oncology drugs like Eli Lilly’s (LLY) Gemzar in November 2010 and Sanofi Aventis’ (SNY) Taxotere in March 2011.
These products, particularly Taxotere, drove solid top-line performance at the SIP segment in the first half of 2011. The drug has captured peak market share levels of over 50% and is being sold at a price of 40-45% off the price of the branded product.
Other products, like the generic version of Merrem experienced robust sales in the second quarter, benefiting from strong pricing with just one competitor in the market. The company has launched generic Merrem in most European countries in the first half of 2011 and is the largest generic provider of the drug in Europe.
Generic versions of Gemzar also did well in the quarter. Moreover, increased backorders at the SIP segment resulted in supply shortages, which affected the fourth quarter 2010 results. The backorders are now steadily decreasing in tandem with improving customer service levels.
To top favorable trends, Hospira boasts of a strong pipeline. As of June 30, 2011, Hospira's generic pharmaceutical pipeline consisted of 45 compounds with the majority related to oncology and anti-infectives and the remainder focused on cardiovascular, anesthesia and other areas.
Hospira hopes to launch a solution presentation of its generic version of Gemzar in early September. Hospira also has a robust biosimilars pipeline with 11 compounds. The healthy pipeline should boost Hospira’s top-line growth in the long term.
In the long term, Hospira aims to meet customer needs by providing them with valuable solutions. It aspires to maintain a high standard for its products and satisfactorily complete the remediation of its infusion devices. It also aims to improve supply, to meet customer demand, and increase capacity to accommodate future growth needs of customers.
On the other side of the coin, these long-term objectives are sure to create some near-term hiccups such as temporary increases to inventory levels and a delay in implementing certain manufacturing improvement initiatives. These are expected to affect the company’s margins. Even though margins will remain suppressed in the near term, there are potential drivers for earnings growth in the upcoming months like new product launches and manufacturing improvements, to mitigate falling margins.
However, the Symbiq pump issues, Plum remediation delays and the pending resolution of the FDA warning letter are concerns which keep us on the sidelines. Hospira has put shipments of its Symbiq general infusion pump to new customers on hold due to reports of alarm failures in certain conditions.
The timing of the US Food and Drug Administration’s (FDA) approval is uncertain and the issue is not expected to be resolved anytime in 2011. Hospira is also facing an issue with its Plum A+ pump regarding an alarm failure. The remediation of Plum A+ pump has been delayed and is expected to begin by the end of the third quarter.
The correction is expected to continue through the remainder of 2011 and into the first half of 2012. Hospira has also been unable to fully resolve the FDA Warning Letter at its Rocky Mount and Clayton facilities received in April 2010. These issues could negatively affect revenues, if not resolved promptly.
HOSPIRA INC (HSP): Free Stock Analysis Report
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SANOFI-AVENTIS (SNY): Free Stock Analysis Report
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