Hospira Inc - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-31946

HOSPIRA, INC.

A Delaware corporation		I.R.S. Employer Identification
		No. 20-0504497

275 N. Field Drive
Lake Forest, Illinois 60045

Telephone: (224) 212-2000

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 31, 2007, Registrant had outstanding 157,556,761 shares of common stock, par value $0.01 per share.

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Hospira, Inc.

Quarterly Report on Form 10-Q

Index

	Part I – Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended September 30, 2007 and September 30, 2006	3

	Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2007 and September 30, 2006	4

	Condensed Consolidated Balance Sheets (Unaudited) – September 30, 2007 and December 31, 2006	5

	Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) – Nine Months Ended September 30, 2007	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

Item 4.	Controls and Procedures	25

Part II – Other Information

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	26

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hospira, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(dollars and shares in thousands, except for per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net sales	$	838,019		$	646,640		$	2,490,173		$	1,982,035
Cost of products sold	543,488			427,612			1,654,855			1,293,125
Gross Profit	294,531			219,028			835,318			688,910

Research and development	51,409			36,470			147,478			106,526
Acquired in-process research and development	—			—			84,800			—
Selling, general and administrative	136,495			103,506			414,393			316,373
Income From Operations	106,627			79,052			188,647			266,011

Interest expense	34,675			8,059			102,541			22,999
Other income, net	(6,138		)	(4,099		)	(12,014		)	(12,394		)
Income Before Income Taxes	78,090			75,092			98,120			255,406

Income tax expense	18,711			19,147			37,419			65,128
Net Income	$	59,379		$	55,945		$	60,701		$	190,278

Earnings Per Common Share:
Basic	$	0.38		$	0.36		$	0.39		$	1.21
Diluted	$	0.37		$	0.35		$	0.38		$	1.18
Weighted Average Common Shares Outstanding:
Basic	157,091			156,359			156,628			157,897
Diluted	160,072			158,781			159,528			161,214

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Hospira, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2007			2006
Cash Flow From Operating Activities:

Net income	$	60,701		$	190,278
Adjustments to reconcile net income to net cash from operating activities-
Depreciation	136,191			114,731
Amortization of intangibles	37,081			1,446
Write-off of acquired in-process research and development	84,800			—
Stock-based compensation expense	31,603			27,819
Changes in assets and liabilities-
Trade receivables	(25,650		)	(23,979		)
Inventories	49,701			(101,637		)
Prepaid expenses and other assets	5,676			(13,648		)
Trade accounts payable	(8,115		)	36,090
Other liabilities	(47,392		)	60,728
Other, net	29,889			40,037
Net Cash Provided by Operating Activities	354,485			331,865

Cash Flow From Investing Activities:
Capital expenditures (including instruments placed with or leased to customers)	(128,674		)	(183,632		)
Acquisition of Mayne Pharma, net of cash acquired	(1,961,285		)	—
Settlements of foreign currency contracts	(55,701		)	—
Proceeds from dispositions of product rights	13,771			—
Other, net	(1,263		)	1,845
Net Cash Used in Investing Activities	(2,133,152		)	(181,787		)

Cash Flow From Financing Activities:
Issuance of long-term debt, net of fees paid	3,336,198			—
Repayment of long-term debt	(1,700,124		)	(111		)
Other borrowings, net	(343		)	1,955
Payment to Abbott Laboratories for international assets	—			(124,251		)
Common stock repurchased	—			(299,766		)
Excess tax benefit from stock-based compensation arrangements	865			3,373
Proceeds from stock options exercised	40,464			39,576
Net Cash Provided by (Used in) Financing Activities	1,677,060			(379,224		)

Effect of exchange rate changes on cash and cash equivalents	15,990			2,128

Net change in cash and cash equivalents	(85,617		)	(227,018		)
Cash and cash equivalents at beginning of period	322,045			520,610
Cash and cash equivalents at end of period	$	236,428		$	293,592

Supplemental Cash Flow Information:

Cash paid during the period-
Interest	$	57,663		$	23,434
Income taxes, net	$	57,623		$	21,224

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Hospira, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars and shares in thousands)

	September 30,			December 31,
	2007			2006
Assets
Current Assets:
Cash and cash equivalents	$	236,428		$	322,045
Trade receivables, less allowances of $14,127 in 2007 and $13,688 in 2006	565,988			335,334
Inventories:
Finished products	507,403			405,781
Work in process	139,893			85,849
Materials	173,406			135,304
Total inventories	820,702			626,934
Prepaid expenses, deferred taxes and other receivables	245,721			238,577
Total Current Assets	1,868,839			1,522,890
Property and equipment, at cost	2,541,617			2,273,124
Less: accumulated depreciation	1,296,161			1,233,693
Net Property and Equipment	1,245,456			1,039,431
Intangible assets, net of amortization	544,467			17,103
Goodwill	1,254,005			91,857
Deferred income taxes	68,182			76,367
Investments	29,399			31,341
Other assets	70,063			68,598
Total Assets	$	5,080,411		$	2,847,587
Liabilities and Shareholders’ Equity
Current Liabilities:
Short-term borrowings	$	96,557		$	4,532
Trade accounts payable	188,204			130,968
Salaries, wages and commissions	132,709			102,037
Other accrued liabilities	397,829			368,689
Total Current Liabilities	815,299			606,226
Long-term debt	2,273,944			702,044
Post-retirement obligations, deferred income taxes and other long-term liabilities	374,502			178,228
Commitments and Contingencies
Shareholders’ Equity:
Common stock, par value $0.01 - authorized: 400,000 shares; 165,050 and 163,468 shares issued, and 157,466 and 155,884 shares outstanding at September 30, 2007 and December 31, 2006, respectively	1,651			1,635
Preferred stock, par value $0.01 - authorized: 50,000 shares; issued and outstanding shares: 0 shares	—			—
Treasury stock, at cost - Shares: 2007 and 2006: 7,584	(299,766		)	(299,766		)
Additional paid-in capital	1,113,302			1,033,345
Retained earnings	739,416			676,639
Accumulated other comprehensive income (loss)	62,063			(50,764		)
Total Shareholders’ Equity	1,616,666			1,361,089
Total Liabilities and Shareholders’ Equity	$	5,080,411		$	2,847,587

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Hospira, Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

(dollars and shares in thousands)

	Common Stock			Accumulated Other Comprehensive			Additional Paid-in		Treasury			Retained
	Shares	Amount		Income (Loss)			Capital		Stock			Earnings		Total
Balances at December 31, 2006	155,884	$	1,635	$	(50,764	)	$	1,033,345	$	(299,766	)	$	676,639	$	1,361,089
Net income	—	—		—			—		—			60,701		60,701

Other comprehensive income	—	—		112,827			—		—			—		112,827

Adoption of FASB Interpretation No. 48	—	—		—			—		—			2,076		2,076

Changes in shareholders’ equity related to incentive stock programs	1,582	16		—			79,957		—			—		79,973
Balances at September 30, 2007	157,466	$	1,651	$	62,063		$	1,113,302	$	(299,766	)	$	739,416	$	1,616,666

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Hospira, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

Hospira became a separate public company pursuant to a spin-off from Abbott Laboratories (“Abbott”) on April 30, 2004 (the “spin-off date”). In connection with the spin-off, Hospira and Abbott agreed that the legal transfer of certain operations and assets (net of liabilities) outside the United States would occur, and be completed, within two years after the spin-off. During the transition period, these operations and assets were used in the conduct of Hospira’s international business and Hospira was subject to the risks and entitled to the benefits generated by such operations and assets. Hospira was dependent on Abbott’s international infrastructure until such legal transfers occurred in each international country. These transfers were completed in 2006.

On February 2, 2007, Hospira acquired all the outstanding ordinary shares of Mayne Pharma Limited (“Mayne Pharma”), an Australian public company listed on the Australian Stock Exchange. The results of operations of Mayne Pharma are included in Hospira’s results for periods on and after that date, which has affected comparability of the financial statements for the periods presented in this report and will affect comparability in future periods.

For comparative purposes, Net sales to Abbott Laboratories have been reclassified to Net sales on the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2006. The reclassification did not affect net income or shareholders’ equity.

Note 2 – Recently Issued Accounting Standards

In June 2007, the Financial Accounting Standards Board (“FASB”) ratified EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-03”). EITF 07-03 states that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services performed. If it is not expected that the goods will be delivered or services will be rendered, the capitalized advance payment should be charged to expense in the period in which such determination is made. EITF 07-03 is effective for new contracts entered into in fiscal years beginning after December 15, 2007. Hospira is currently evaluating the potential impact of EITF 07-03 on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides a company with the option to measure selected financial instruments and certain other items at fair value at specified election dates. The election may be applied on an item by item basis, with disclosure regarding reasons for partial election and additional information about items selected for fair value option. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Hospira is currently evaluating the potential impact of SFAS No. 159 on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Hospira is currently evaluating the potential impact of SFAS No. 157 on its financial statements.

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the end of the fiscal year. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008. Hospira does not anticipate that the impact from the adoption of this provision of SFAS No. 158 will be significant to its financial statements.

Note 3 – Mayne Pharma Acquisition

On February 2, 2007, Hospira acquired all the outstanding ordinary shares of Mayne Pharma (including those shares issuable pursuant to stock options) for $2,055.0 million. The $2,055.0 million purchase price includes the cash purchase price and direct acquisition costs. Mayne Pharma manufactures and sells primarily specialty injectable pharmaceuticals. The results of operations of Mayne Pharma are included in Hospira’s results for periods on and after February 2, 2007.

During the second quarter 2007, Hospira completed the valuation for both intangible assets and property and equipment. The following allocation of the purchase price is subject to further revision, as additional information may become available to modify Hospira’s initial estimates for certain assets and liabilities . The allocation is as follows:

(dollars in thousands)
Current assets	$	477,229
Property and equipment	194,352
Intangible assets	602,959
Goodwill	1,093,982
Other assets	6,623
Current liabilities	(257,655		)
Long-term debt	(4,536		)
Post-retirement obligations, deferred income taxes and other long-term liabilities	(57,921		)
Total estimated allocation of purchase price	$	2,055,033

Of the estimate of $603.0 million of acquired intangible assets, $84.8 million relates to acquired in-process research and development that was expensed at the date of acquisition. Of the remaining $518.2 million, $486.6 million relates to developed product rights that will be amortized over their estimated useful lives (9 to 12 years, average 11 years), including $13.8 million of product rights disposed of as a result of the acquisition, and $31.6 million relates to customer relationships that will be amortized over their estimated useful lives (4 to 12 years, average 10 years). Of the estimate of $1,094.0 million of goodwill, approximately $422.6 million was assigned to the U.S. segment and approximately $671.4 million was assigned to the International segment. Goodwill is not expected to be deductible for tax purposes.

Hospira has progressed with its plans for the integration of Mayne Pharma into its operations. As Hospira takes certain actions in connection with the integration that give rise to restructuring charges, such as termination of employees and exiting certain activities and facilities, certain of those charges are recorded as goodwill as part of the purchase price allocation. As of September 30, 2007, the impact to goodwill associated with restructuring charges for these activities is $14.5 million, net of taxes, and is included in current liabilities. Additional restructuring charges that impact goodwill may continue to be incurred during 2007 and early 2008, consistent with the initial integration plan.

The total purchase price of $2,055.0 million is comprised of $2,042.3 million of cash purchase price and $12.7 million of direct acquisition costs. On February 1, 2007, Hospira incurred $1,925.0 million of bank debt to finance the Mayne Pharma acquisition. The remainder of the purchase price was funded with cash on hand. The bank facilities included a $500.0 million, three-year term loan facility and a $1,425.0 million one-year bridge loan facility. The bridge loan facility was completely refinanced on March 23, 2007 through the issuance of long-term debt securities. See Note 11 for more details. In connection with the acquisition, Hospira entered into certain foreign currency forward exchange contracts to limit its exposure from currency movements of the Australian dollar. Forward contract gains and losses of this exposure substantially offset the remeasurement of the related asset and both are included in other income. During the nine months ended September 30, 2007, Hospira paid $55.7 million upon the settlements relating to these contracts.

Supplemental information on an unaudited pro forma basis for the nine months ended September 30, 2007, and the three and nine months ended September 30, 2006, as if the Mayne Pharma acquisition had taken place on January 1, 2007 and 2006, is as follows:

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	Three Months Ended		Nine Months Ended September 30,
(dollars in thousands)	September 30, 2006		2007		2006
Net sales	$	800,114	$	2,541,458	$	2,440,039
Net income	$	36,371	$	51,213	$	8,858
Diluted earnings per share	$	0.23	$	0.32	$	0.05

Unaudited pro forma supplemental information is based on accounting estimates and judgments, which Hospira believes are reasonable. The unaudited pro forma supplemental information also includes purchase accounting adjustments (including inventory step-up charges, adjustments to depreciation on acquired property and equipment, and a charge for in-process research and development), amortization charges from acquired intangible assets, adjustments to interest expense, and related tax effects. The unaudited pro forma supplemental information is not necessarily indicative of the results of operations in future periods or the results that actually would have been realized had Hospira and Mayne Pharma been combined at the beginning of each period presented.

Note 4 – Restructuring Costs

In August 2005, Hospira announced plans to close its manufacturing plant in Donegal, Ireland. In February 2006, Hospira further announced plans to close manufacturing plants in Ashland, Ohio and Montreal, Canada, and also provided the planned timeline for phasing out production at a leased facility in Abbott Laboratories’ North Chicago, Illinois campus. Hospira expects to incur aggregate restructuring charges related to these actions in the range of $75 million to $95 million on a pre-tax basis. The restructuring costs are expected to be incurred through 2009 and consist primarily of costs related to severance and certain other employee benefit costs, additional depreciation resulting from the decreased useful lives of the buildings and certain equipment, and other exit costs.

Hospira recorded pre-tax restructuring charges in Cost of products sold in the following segments:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2007		2006		2007		2006
U.S.	$	1,119	$	3,091	$	7,724	$	11,199
International	3,058		8,216		8,321		24,408
Total pre-tax restructuring charges	$	4,177	$	11,307	$	16,045	$	35,607

Hospira has incurred $68.2 million to date for restructuring charges related to these actions. Product transfers from the Donegal, Ireland plant were completed in 2006. Hospira expects to complete all product transfers relating to the Montreal, Canada manufacturing plant and exit the facility at the end of 2007. Hospira ceased production at the Ashland, Ohio facility during the three months ended September 30, 2007. Hospira is currently evaluating the potential disposition of its Ashland, Ohio manufacturing plant and is planning to take the steps necessary to prepare for such disposition, including environmental studies. At September 30, 2007, Hospira had $0.6 million recorded for environmental clean-up costs related to these studies and actions.

The following summarizes the restructuring activity for the nine months ended September 30, 2007:

	Balance at		Costs					Non cash			Balance at
(dollars in thousands)	January 1, 2007		Incurred		Payments			Items			September 30, 2007
Employee-related benefit costs ⁽¹⁾	$	16,473	$	8,764	$	(8,838	)	$	856		$	17,255
Accelerated depreciation	—		5,062		—			(5,062		)	—
Other	1,309		2,219		(2,945		)	(52		)	531
	$	17,782	$	16,045	$	(11,783	)	$	(4,258	)	$	17,786

⁽¹⁾ Includes postretirement medical and dental plan curtailment gain of $0.9 million related to the Ashland, Ohio plant shutdown.

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Note 5 – Stock-Based Compensation

Costs resulting from share-based payment transactions are recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant. Stock-based compensation expense of $8.1 million and $8.2 million was recognized for the three months ended September 30, 2007 and 2006, respectively, primarily resulting from stock option awards. The related income tax benefit recognized was $2.9 million and $2.9 million, respectively. Stock-based compensation expense of $31.6 million and $27.8 million was recognized for the nine months ended September 30, 2007 and 2006, respectively, primarily resulting from stock option awards. The related income tax benefit recognized was $11.7 million and $9.7 million, respectively.

In May 2007, 2.7 million options were granted to certain employees for the 2007 annual stock option grant. These options were awarded at the fair market value at the time of grant, generally vest over three years and have a seven-year term.

The weighted average fair value for the Hospira options granted in the three and nine months ended September 30, 2007 was $11.93 and $14.00, respectively. The weighted average fair value for the Hospira options granted in the three and nine months ended September 30, 2006 was $15.76 and $15.96, respectively. The fair value was estimated using the Black-Scholes option-pricing model, based on the average market price at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on a combination of historical volatility of Hospira’s stock and historical volatility of peer companies. Expected life assumptions for the periods presented are based on the “simplified” method as described in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. The weighted average assumptions utilized for option grants during the periods presented are as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Hospira Stock Options Black-Scholes assumptions (weighted average):
Volatility	34.0%	31.0%	33.8%	31.0%
Expected life (years)	3.5	5.5	4.4	5.7
Risk-free interest rate	4.3%	5.0%	4.6%	5.0%
Dividend yield	0.0%	0.0%	0.0%	0.0%

For a more detailed description of Hospira’s stock-based compensation plan, see Note 14 to Hospira’s consolidated financial statements included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006.

Note 6 – Income Taxes

Taxes on income reflect the estimated annual effective rates, excluding the effect of significant unusual items. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in several non-U.S. taxing jurisdictions.

Hospira adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, Hospira recognized a $2.1 million decrease in the liability for unrecognized tax benefits. This decrease in the liability resulted in an increase in the January 1, 2007 balance of retained earnings of $2.1 million. The gross amount of unrecognized tax benefits at January 1, 2007 is $113.1 million. The amount, if recognized, that would affect the effective tax rate is $104.2 million.

Hospira recognizes interest and penalties accrued in relation to unrecognized tax benefits in income tax expense, which is consistent with the reporting in prior periods. As of January 1, 2007, Hospira recorded liabilities of $1.9 million for the payment of interest and penalties.

Hospira began operations as a new taxpayer on May 1, 2004, and the U.S. federal tax returns for 2004 and 2005 are currently under examination by the Internal Revenue Service (“IRS”). Hospira expects the audit fieldwork and the issuance of the initial IRS audit report to be completed within the next 12 months. However, the ultimate resolution of the 2004 – 2005 IRS audit is dependent on a number of factors and procedures that can not be predicted at this time. In addition, certain tax statutes are also expected to close within the 12 month timeframe. Accordingly, it is reasonably possible that a change in unrecognized tax benefits will occur within the next 12 months; however, quantification of a range cannot be made at this time.

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Note 7 - Earnings per Share

Basic earnings per share are computed by dividing net income by the number of weighted average common shares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The following table shows the effect of stock options on the weighted average number of shares outstanding used in calculating diluted earnings per share:

	Three Months Ended September 30,		Nine Months Ended September 30,
(shares in thousands)	2007	2006	2007	2006
Weighted average basic common shares outstanding	157,091	156,359	156,628	157,897
Assumed exercise of stock options	2,981	2,422	2,900	3,317
Weighted average dilutive common shares outstanding	160,072	158,781	159,528	161,214

The number of outstanding options to purchase Hospira stock for which the exercise price of the options exceeded the average stock price was 5.2 million and 2.6 million for the three and nine months ended September 30, 2007, respectively, and 2.7 million for both the three and nine months ended September 30, 2006. Accordingly, these options are excluded from the diluted earnings per share calculation for these periods.

Note 8 – Litigation

Hospira, Abbott, or in some instances both, are involved in various claims and legal proceedings, including product liability claims and proceedings related to Hospira’s business.

Various state and federal agencies, including the U.S. Department of Justice and various state attorneys general, are investigating a number of pharmaceutical companies, including Abbott, for allegedly engaging in improper marketing and pricing practices with respect to certain Medicare and Medicaid reimbursable products, including practices relating to average wholesale price (“AWP”). These are civil investigations that are seeking to identify the practices and determine whether those practices violated any laws, including federal and state false claims acts, or constituted fraud in connection with the Medicare and/or Medicaid reimbursement paid to third parties. In addition, Abbott is a defendant in a number of purported class actions on behalf of individuals or entities, including healthcare insurers and other third-party payors, that allege generally that Abbott and numerous other pharmaceutical companies reported false or misleading pricing information in connection with federal, state and private reimbursement for certain drugs. Many of the products involved in these investigations and lawsuits are Hospira products. Hospira is cooperating with the authorities in these investigations. There may be additional investigations or lawsuits, or additional claims in the existing investigations or lawsuits, initiated with respect to these matters in the future. Hospira cannot be certain that it will not be named as a subject or defendant in these investigations or lawsuits. Hospira is a named defendant in two such lawsuits: The State of Texas ex rel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc., Abbott Laboratories and Hospira, Inc, Case No. GV-04-001286, pending in the District Court of Travis County, Texas and State of Hawaii v. Abbott Laboratories, Inc., et al. , Case No. 06-1-0720-04, pending in the Circuit Court of the First Circuit, Hawaii. Hospira denies all material allegations asserted against it in these two lawsuits. Hospira has been dismissed as a defendant in the case, United States of America ex rel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories, Inc., et al Case No. 95-1354, pending in the United States District Court for the Southern District of Florida. Abbott will indemnify Hospira for liabilities associated with pending or future AWP investigations and lawsuits only to the extent that they are of the same nature as the lawsuits and investigations that existed against Abbott as of the spin-off date and relate to the sale of Hospira products prior to the spin-off. Hospira will assume any other losses that may result from these investigations and lawsuits related to Hospira’s products, including any losses associated with post-spin-off activities. These investigations and lawsuits could result in changes to Hospira’s business practices or pricing policies, civil or criminal monetary damages, penalties or fines, imprisonment and/or exclusion of Hospira products from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans’ Administration health programs, any of which could have a material adverse effect on its business, profitability and financial condition.

Hospira has been named as a defendant in a lawsuit alleging generally that the spin-off of Hospira from Abbott Laboratories interfered with employee benefits in violation of the Employee Retirement Security Act of 1974 (“ERISA”). The lawsuit was filed on November 8, 2004 in the United States District Court for the Northern District of Illinois, and is captioned: Myla Nauman, Jane Roller and Michael Loughery v. Abbott Laboratories and Hospira, Inc. On November 18, 2005, the complaint was amended to assert an additional claim against Abbott and Hospira for breach of fiduciary duty under ERISA. Hospira has been dismissed as a defendant with respect to the new fiduciary duty claim. By Order dated December 30, 2005, the Court granted class action status to the lawsuit. As to the sole claim against Hospira in the original complaint, the court certified a class defined as: “all employees of Abbott who were participants in the Abbott Benefit Plans and whose employment with Abbott was terminated between August 22, 2003 and April 30, 2004, as a result of the spin-off of the HPD/creation of Hospira announced by Abbott on August 22, 2003, and who were eligible for retirement under the Abbott Benefit Plans on the date of their terminations.” Hospira denies all material allegations asserted against it in the complaint.

On August 12, 2005, Retractable Technologies, Inc. (“RTI”) filed a lawsuit against Abbott Laboratories, Inc. alleging breach of contract and fraud in connection with a National Marketing and Distribution Agreement (“Agreement”) between Abbott and RTI signed in May 2000. Retractable Technologies, Inc. v. Abbott Laboratories, Inc. , Case No. 505CV157, pending in U.S. District

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Court for the Eastern District of Texas. RTI purported to terminate the contract for breach in 2003. The lawsuit alleges that Abbott misled RTI and breached the Agreement in connection with Abbott’s marketing efforts. RTI seeks unspecified monetary damages as well as punitive damages. Hospira has conditionally agreed to defend and indemnify Abbott in connection with this lawsuit, which involves a contract carried out by Abbott’s former Hospital Products Division. Abbott denies all material allegations in the complaint. Abbott intends to pursue claims against RTI for breach of the Agreement in arbitration or in federal court. Hospira is entitled, pursuant to its agreements with Abbott, to any amounts recovered due to RTI’s breach of the Agreement. On February 9, 2007, the court ruled that RTI could not be compelled to arbitrate its claims, but granted Abbott leave to appeal the ruling. Abbott has appealed the ruling that RTI is not required to arbitrate its claims.

Hospira’s product liability claim exposures are evaluated each reporting period. Hospira’s reserves, which are not significant at September 30, 2007 and 2006, are the best estimate of loss, as defined by SFAS No. 5, “Accounting for Contingencies.” Based upon information that is currently available, management believes that the likelihood of a material loss in excess of recorded amounts is remote.

Additional legal proceedings may occur that may result in a change in the estimated reserves recorded by Hospira. It is not feasible to predict the outcome of such proceedings with certainty and there can be no assurance that their ultimate disposition will not have a material adverse effect on Hospira’s financial position, cash flows, or results of operations.

Note 9 - Post-Retirement Benefits

Retirement plans consist of defined benefit (“pension”), defined contribution, and post-retirement medical and dental plans. The pension and post-retirement medical and dental plans cover certain employees both in and outside of the United States.

Net cost (benefit) recognized for the three and nine months ended September 30, 2007 and 2006 for the major pension plans and post-retirement medical and dental benefit plans, is as follows:

	Pension Plans
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2007			2006			2007			2006
Service cost for benefits earned during the year	$	374		$	677		$	1,143		$	1,971
Interest cost on projected benefit obligations	6,144			6,117			18,444			18,257
Expected return on plans’ assets	(7,088		)	(7,538		)	(21,266		)	(22,261		)
Net amortization	1,166			708			3,486			2,430
Curtailment of benefits ⁽¹⁾	—			—			—			1,518
Net cost (benefit)	$	596		$	(36	)	$	1,807		$	1,915

⁽¹⁾ Relates to the shutdown of the Ashland, Ohio plant.

	Medical and Dental Plans
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2007			2006		2007			2006
Service cost for benefits earned during the year	$	—		$	526	$	—		$	1,577
Interest cost on projected benefit obligations	713			842		2,139			2,528
Net amortization	216			437		646			1,310
Curtailment of benefits ⁽¹⁾	(856		)	—		(856		)	—
Net cost	$	73		$	1,805	$	1,929		$	5,415

⁽¹⁾ Relates to the shutdown of the Ashland, Ohio plant.

Hospira’s employees participate in the Hospira 401(k) Retirement Savings Plan. Hospira’s contributions to this defined contribution plan for the three months ended September 30, 2007 and 2006 were $10.0 million and $8.3 million, respectively. For the nine months ended September 30, 2007 and 2006 contributions were $26.8 million and $25.8 million, respectively.

Based on Federal laws and regulations, Hospira is not required to make any contributions, and does not expect to make any discretionary contributions to its U.S. pension plans in 2007.

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Note 10 – Goodwill and Intangible Assets

Goodwill as of September 30, 2007 totaled $1,254.0 million compared to $91.9 million as of December 31, 2006. The increase of $1,162.1 million, including the effect of exchange rate changes of $68.3 million, is related to the acquisition of Mayne Pharma. See Note 3 for more details.

Intangible assets, primarily product rights, customer relationships and technology, are as follows:

(dollars in thousands)	September 30, 2007			December 31, 2006
Cost	$	611,399		$	44,873
Less: accumulated amortization	(66,932		)	(27,770		)
Intangible assets, net	$	544,467		$	17,103

The increase of $527.4 million in 2007, including the effect of exchange rate changes of $60.7 million, is primarily related to the acquisition of Mayne Pharma. See Note 3 for more details.

Intangible assets have definite lives and are amortized on a straight-line basis over their estimated useful lives (3 to 12 years, weighted average 10 years). Intangible asset amortization for each of the five succeeding fiscal years is estimated at $14.1 million for the remainder of 2007, approximately $58.0 million for 2008, 2009, and 2010, and $55.5 million for 2011.

Note 11 - Short-term Borrowings and Long-term Debt

Hospira’s debt consists of the following at September 30, 2007 and December 31, 2006:

(dollars in thousands)	September 30, 2007			December 31, 2006
Long-term debt:
4.95% Notes due 2009	$	300,000		$	300,000
Term loan due 2010 (weighted-average floating interest rate of 5.95% at September 30, 2007)	145,600			—
Floating rate notes due 2010 (weighted-average
floating interest rate of 5.83% at September 30, 2007)	375,000			—
5.55% Notes due 2012	500,000			—
5.90% Notes due 2014	400,000			400,000
6.05% Notes due 2017	550,000			—
International borrowings due 2008	—			4,914
Other unsecured loans due 2009	2,640			—
Securitized mortgage note due 2015	5,020			4,871
Economic development promissory notes due 2015	1,694			1,320
Fair value of interest rate swap instruments	(3,573		)	(8,181		)
Total long-term debt	2,276,381			702,924
Unamortized debt discount	(2,437		)	(880		)
Long-term debt	2,273,944			702,044
Short-term borrowings	96,557			4,532
Total debt	$	2,370,501		$	706,576

On February 1, 2007, Hospira incurred $1,925.0 million of bank debt to finance the Mayne Pharma acquisition. The remainder of the purchase price was funded with cash on hand. The bank facilities included a $500.0 million, three-year term loan facility and a $1,425.0 million one-year bridge loan facility. The bridge loan facility was completely refinanced on March 23, 2007 through the issuance of long-term debt securities described below.

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months ended September 30, 2007, Hospira prepaid $240.8 million in principal amount of the term loan, in addition to the rescheduled $34.2 million in principal. The $34.2 million of payments in principal reflect a reduction in original mandatory payments due to prepayments made in 2007. As a result of the prepayments made in 2007, the amount due within one year is $79.0 million, and is recorded as short-term borrowings. Borrowings under the term loan facility and bridge loan facility bear interest at LIBOR plus a margin that is determined based on Hospira’s senior unsecured debt ratings from Standard & Poor’s and Moody’s. The margin is currently 0.60%.

On March 23, 2007, Hospira issued $375.0 million principal amount of Floating Rate Notes due 2010, $500.0 million principal amount of 5.55% Notes due 2012 and $550.0 million principal amount of 6.05% Notes due 2017 in a registered public offering. The Floating Rate Notes due 2010 bear interest at three-month LIBOR plus 48 basis points. All series of notes are due on March 30 of the year of maturity. The net proceeds of the notes (after deducting approximately $10.0 million of underwriters’ discounts and offering expenses of $5.6 million), together with approximately $21.5 million of cash on hand, were used to repay the bridge loan facility and related interest in full.

Hospira has a five-year $375.0 million unsecured revolving credit facility (the “Revolver”), which it entered into on December 16, 2005 and amended on January 15, 2007. The revolver was amended to permit the Mayne Pharma acquisition and to temporarily increase the maximum leverage ratio and lower the minimum interest coverage ratio. This Revolver is available for working capital and other requirements. The Revolver allows Hospira to borrow funds at variable interest rates as short-term cash needs dictate. The amount of available borrowings under the Revolver may be increased to a maximum of $500 million, and the term may be increased for up to two additional years, under certain circumstances. As of September 30, 2007, Hospira had no amounts outstanding under the Revolver.

Hospira’s debt instruments contain covenants that limit Hospira’s ability to, among other things, sell assets, incur secured indebtedness and liens, incur indebtedness at the subsidiary level and merge or consolidate with other companies. Hospira’s debt instruments also include customary events of default, which would permit amounts borrowed to be accelerated and would permit the lenders under the revolving credit agreement to terminate their lending commitments. A description of certain covenants is set forth below.

Change of Control. The notes issued on March 23, 2007 include covenants that require Hospira to offer to repurchase those notes at 101% of their principal amount if: (1) there is a change of control of Hospira and (2) Hospira is rated below investment grade by both Moody’s and Standard & Poor’s at or within a specified time after the time of announcement of the change of control transaction. A change of control, as described above, would constitute an event of cross default under the term loan agreement and Hospira’s revolving credit agreement.

Financial Covenants. Hospira’s term loan facility and revolving credit facility include requirements to maintain a maximum leverage ratio and a minimum interest coverage ratio. The leverage ratio is calculated by dividing Hospira’s debt by its earnings before interest, taxes, depreciation and amortization (excluding certain purchase accounting charges relating to the Mayne Pharma acquisition, expenses relating to the integration of Mayne Pharma into Hospira, expenses relating to Hospira’s transition from Abbott, expenses relating to Hospira’s manufacturing optimization activities and certain non-cash gains, expenses and losses, subject in certain cases to agreed-upon maximums) for the twelve months ending on the last day of each quarter. The coverage ratio is calculated by dividing Hospira’s earnings before interest, taxes, depreciation and amortization (excluding the items described above) by its consolidated financing expense (interest expense and net capitalized interest), in each case for the twelve months ended on the last day of each quarter. As of the end of each calendar quarter during 2007, the ratios will be calculated on a pro forma basis assuming the acquisition of Mayne Pharma and the related financing transactions had occurred on the first day of the period.

The maximum leverage ratio is 3.50 as of September 30, 2007 and 3.25 as of the end of all quarters thereafter. The minimum coverage ratio is 4.75 as of September 30, 2007 and 5.00 as of the end of all quarters thereafter.

As of September 30, 2007, Hospira was in compliance with all applicable covenants.

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Note 12 - Comprehensive Income, net of tax, and Accumulated Other Comprehensive Income (Loss)

Comprehensive income, net of taxes consisted of the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2007			2006			2007			2006
Foreign currency translation	$	63,882		$	(1,643	)	$	116,072		$	6,594
Pension liability adjustments	847			—			2,386			12,895
Unrealized (losses) gains on marketable equity securities	(3,446		)	626			(3,869		)	751
Unrealized losses on cash flow hedges	(586		)	—			(1,762		)	—
Total other comprehensive income (loss)	60,697			(1,017		)	112,827			20,240
Net Income	59,379			55,945			60,701			190,278
Total Comprehensive Income	$	120,076		$	54,928		$	173,528		$	210,518

Accumulated other comprehensive income (loss), net of taxes consisted of the following:

(dollars in thousands)	September 30, 2007			December 31, 2006
Cumulative foreign currency translation	$	128,982		$	12,910
Cumulative retirement plans unrealized losses, net of tax	(66,454		)	(68,840		)
Cumulative unrealized gains on marketable equity securities, net of tax	1,297			5,166
Cumulative unrealized losses on cash flow hedges, net of tax	(1,762		)	—
Accumulated Other Comprehensive Income (Loss)	$	62,063		$	(50,764	)

Note 13 - Segment Information

Hospira’s principal business is the development, manufacture and sale of a broad line of hospital products, including specialty injectable pharmaceuticals and medication delivery systems, and the provision of injectable pharmaceutical contract manufacturing services. Hospira has two reportable segments: U.S. and International.

Hospira’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. For internal management reporting, intersegment transfers of inventory are recorded at standard cost and are not a measure of segment income from operations. The costs of certain corporate functions that benefit the entire organization are not allocated. The following segment information has been prepared in accordance with the internal accounting policies of Hospira, as described above.

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	Three Months Ended September 30,										Nine Months Ended September 30,
	Net Sales				Income from Operations						Net Sales				Income from Operations
(dollars in thousands)	2007		2006		2007			2006			2007		2006		2007			2006

U.S.	$	574,167	$	533,025	$	104,384		$	80,623		$	1,736,124	$	1,639,901	$	211,600		$	277,738

International	263,852		113,615		22,127			10,831			754,049		342,134		34,378			29,445

Total reportable segments	$	838,019	$	646,640	126,511			91,454			$	2,490,173	$	1,982,035	245,978			307,183
Corporate functions					(19,884		)	(12,402		)					(57,331		)	(41,172		)
Income from operations					106,627			79,052							188,647			266,011
Other, net					(28,537		)	(3,960		)					(90,527		)	(10,605		)
Income before income taxes					$	78,090		$	75,092						$	98,120		$	255,406

	Total Assets
	September 30,		December 31,
(dollars in thousands)	2007		2006

U.S.	$	1,926,286	$	2,036,486

International	1,355,653		702,141

Total reportable segments	3,281,939		2,738,627
Goodwill and net intangible assets	1,798,472		108,960
Total	$	5,080,411	$	2,847,587

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Hospira intends that these forward-looking statements be covered by the safe harbor provisions for forward-looking words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “intend,” “could,” or similar expressions. In particular, statements regarding Hospira’s plans, strategies, prospects and expectations regarding its business and industry are forward-looking statements. Investors should be aware that these statements and any other forward-looking statements in this document only reflect Hospira’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Many of these risks, uncertainties and assumptions are beyond Hospira’s control, and may cause actual results and performance to differ materially from expectations. Important factors that could cause Hospira’s actual results to be materially different from its expectations include (i) the risks and uncertainties described in “Item 1A. Risk Factors” in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”), as may be updated by Part II. Item 1A. of this report and (ii) the factors described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2006 Form 10-K and the Reports on Form 10-Q for the three month periods ended on March 31, 2007 and June 30, 2007, as may be updated by this Item 2. Accordingly, you should not place undue reliance on the forward-looking statements contained in this report. These forward-looking statements speak only as of the date on which the statements were made. Hospira undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Hospira is a global specialty pharmaceutical and medication delivery company that develops, manufactures and markets products that help improve the productivity, safety and efficacy of patient care. In February 2007, Hospira acquired Mayne Pharma Limited (“Mayne Pharma”) to increase its presence in specialty generic injectable pharmaceuticals. Hospira’s portfolio includes one of the industry’s broadest lines of generic acute-care and oncology injectables, which help address the high cost of proprietary pharmaceuticals; and integrated solutions for medication management and infusion therapy. Hospira’s broad portfolio of products is used by hospitals and alternate site providers, such as clinics, home healthcare providers and long-term care facilities.

Please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2006 Form 10-K. The information in this Item 2 is intended to supplement, and should be read in conjunction with, the information included in Item 7 of the 2006 Form 10-K. The 2006 Form 10-K was filed with the Securities and Exchange Commission on February 28, 2007.

Mayne Pharma Acquisition

On February 2, 2007, Hospira completed its acquisition of Mayne Pharma for $2,055.0 million. The results of operations of Mayne Pharma are included in Hospira’s results for periods on and after that date, which has affected comparability of the financial statements for the periods presented in this report and will affect comparability in future periods. Hospira financed the acquisition and related expenses through borrowing approximately $1,925.0 million and the remainder was funded with cash on hand. The financing arrangements are described below under “Liquidity and Capital Resources.” For the 2007 periods, sales of Mayne Pharma products, which are principally specialty injectable pharmaceutical products, are reported as a separate product line within each of Hospira’s reportable segments.

In connection with the acquisition, Hospira recorded $137.9 million of charges relating to purchase accounting during the nine months ended September 30, 2007, including $84.8 million of acquired in-process research and development, all of which was recorded in the first quarter, and $53.1 million of inventory step-up charges, of which $21.4 million was expensed in the first quarter and $31.7 million was expensed in the second quarter. Hospira also recorded $518.2 million of intangible assets in connection with the acquisition, which will be amortized over their useful lives (which have a weighted average life of 10 years).

In connection with the integration of Mayne Pharma into its operations, Hospira expects to incur approximately $95 million to $110 million of cash expenditures for the two-year period after the closing, of which $60 million to $75 million will be recorded as expense and the remainder relates to purchase accounting items and capital projects. These expenses relate to the closure of facilities, termination of lease agreements and employee-related benefit arrangements during the two-year period after the closing. Approximately $7.9 million and $31.6 million of integration expenses were recorded during the three and nine months ended September 30, 2007, respectively. In addition to integration expenses, Hospira recorded other acquisition-related expenses of $7.9 million in the first quarter 2007. For further information regarding the acquisition and its financial impact, please see Note 3 to the condensed consolidated financial statements included in this report.

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Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of Hospira’s significant accounting policies is included in Note 1 to the company’s consolidated financial statements, which are included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain of Hospira’s accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2006 Form 10-K.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). One provision of SFAS No. 158 requires the measurement of Hospira’s defined benefit plan’s assets and its obligations to determine the funded status be made as of the end of the fiscal year. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008. Hospira does not anticipate that the impact from the adoption of this provision of SFAS No. 158 will be significant to its financial statements.

Results of operations for the three months ended September 30, 2007 compared to September 30, 2006

Net Sales

Net sales increased 29.6% in the three months ended September 30, 2007 compared to the three months ended September 30, 2006. Of this increase, 25.6% is related to the addition of Mayne Pharma. The remaining 4.0% increase in overall sales is primarily driven by volume/mix of 2.1%, the impact of exchange of 0.9%, and increased price of 0.9% in the United States.

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Hospira, Inc.

Net Sales by Product Line

(Unaudited)

(dollars in thousands)

A comparison of product line sales is as follows:

	Three Months Ended September 30,
					Percent
					Change
					vs. Prior
	2007		2006		Year
U.S.—
Specialty Injectable Pharmaceuticals	$	208,363	$	198,362	5.0%
Medication Delivery Systems	216,245		199,029		8.6%
Injectable Pharmaceutical Contract Manufacturing	33,518		38,090		(12.0)%
Sales to Abbott Laboratories	18,604		25,038		(25.7)%
Mayne Pharma	26,262		—		nm
Other	71,175		72,506		(1.8)%

Total U.S.	574,167		533,025		7.7%

International—
Sales to Third Parties	112,637		97,277		15.8%
Sales to Abbott Laboratories	11,972		16,338		(26.7)%
Mayne Pharma	139,243		—		nm

Total International	263,852		113,615		132.2%

Net Sales	$	838,019	$	646,640	29.6%

Net Sales in Specialty Injectable Pharmaceuticals increased, driven by favorable pricing and higher sales in the base product portfolio, as well as contributions from new product launches in 2007 and 2006, including ampicillin sulbactam and ondansetron.

Net Sales in Medication Delivery Systems increased, driven by growth in both infusion therapy and medication management systems sales. Growth in infusion therapy products sales was largely due to higher sales of administration sets and increased volume from new customer contracts. Medication management systems sales increased due to higher placements of devices and increased revenue from related services.

Net Sales in Injectable Pharmaceutical Contract Manufacturing were down due to expected lower demand from existing customers for certain products, including several products that now have generic competition.

The decrease in U.S. Net Sales to Abbott Laboratories (“Abbott”) was primarily due to expected decreased volume to Abbott for several of its products, partially offset by increased price.

The Other product line includes sales of Hospira’s products to alternate site providers such as clinics, home healthcare providers and long-term care facilities, as well as sales of critical care devices and brain function monitoring systems. The growth in sales to alternate site healthcare customers was more than offset by a decline in sales of critical care devices, and the planned exit of certain products manufactured in Ashland, Ohio and other adjustments. Sales to alternate site healthcare customers increased due to higher overall sales of specialty injectable pharmaceuticals and medication delivery systems.

International Net Sales to Third Parties were higher in all regions primarily related to increased sales of specialty injectable pharmaceuticals and medication management systems, favorable exchange, and increased contract manufacturing sales.

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Gross Profit

Gross profit increased $75.5 million, or 34.5%, for the three months ended September 30, 2007, compared with the same period in 2006. Of this increase, $63.2 million, or 28.9%, is related to the addition of Mayne Pharma.

Gross profit margin increased by 1.2% to 35.1% for the three months ended September 30, 2007, from 33.9% for the three months ended September 30, 2006. Of this increase, 0.7% is related to the addition of Mayne Pharma, which includes amortization of acquired intangible assets of (2.0)%. The remaining increase of 0.5% not related to the addition of Mayne Pharma is primarily the result of volume/product mix improvement of 0.3%, favorable price in the U.S. of 0.6% and lower costs associated with the planned manufacturing plant closures of 1.6% offset by inflation and other manufacturing costs of (1.5)% and higher project expense of (0.5)%.

Research and Development

Research and development (“R&D”) expenses increased $14.9 million, or 41.0%, for the three months ended September 30, 2007, compared with the same period in 2006. Of this increase, 36.9% is related to the addition of Mayne Pharma. The remainder of the increase was primarily related to higher spending on new product development related to new compounds in Hospira’s generic injectable drug pipeline and clinical trials on Hospira’s branded sedative, Precedex®, partially offset by lower spending in 2007 on medication delivery infusion systems projects as a result of new product launches in 2006. R&D expenses increased to 6.1% of net sales for the three months ended September 30, 2007, compared with 5.6% of net sales for the same period in 2006.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses increased $33.0 million, or 31.9%, for the three months ended September 30, 2007, compared with the same period in 2006. Of this increase, 24.1% is related to the addition of Mayne Pharma. The remainder of the increase was primarily due to additional costs related to the integration of Mayne Pharma partially offset by reduced costs due to the completion in 2006 of the implementation of Hospira’s new independent infrastructure as a result of the spin-off. SG&A expenses increased to 16.3% of net sales for the three months ended September 30, 2007, compared with 16.0% of net sales for the same period in 2006.

Interest Expense and Other (Income), Net

Interest expense was $34.7 million for the three months ended September 30, 2007, compared to $8.1 million in the same period in 2006. The increase was primarily due to the issuance of additional debt and related costs due to the Mayne Pharma acquisition. Other (income), net was $(6.1) million for the three months ended September 30, 2007 compared to $(4.1) million for the three months ended September 30, 2006. The change was primarily related to net gains on investments of $2.9 million.

Income Tax Expense

The effective tax rate was 24.0% for the three months ended September 30, 2007, compared to 25.5% for the same period in 2006. The decrease in the effective tax rate for the three months ended September 30, 2007 compared to 2006, was due primarily to increased expenses in higher tax rate jurisdictions in connection with the Mayne Pharma acquisition, including intangible amortization expense, purchase accounting charges, and interest expense. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in certain jurisdictions outside the United States.

Results of operations for the nine months ended September 30, 2007 compared to September 30, 2006

Net Sales

Net sales increased 25.6% in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Of this increase, 23.0% is related to the addition of Mayne Pharma. The remaining 2.6% increase in overall sales is primarily driven by volume/mix of 1.3%, the impact of exchange of 0.6%, and increased price of 0.5% in the United States.

A comparison of product line sales is as follows:

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Hospira, Inc.

Net Sales by Product Line

(Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
					Percent
					Change
					vs. Prior
	2007		2006		Year
U.S.—
Specialty Injectable Pharmaceuticals	$	619,761	$	590,915	4.9	%
Medication Delivery Systems	660,049		626,498		5.4	%
Injectable Pharmaceutical Contract Manufacturing	111,632		139,879		(20.2	)%
Sales to Abbott Laboratories	55,791		70,860		(21.3	)%
Mayne Pharma	75,862		—		nm
Other	213,029		211,749		0.6	%

Total U.S.	1,736,124		1,639,901		5.9	%

International—
Sales to Third Parties	334,470		290,232		15.2	%
Sales to Abbott Laboratories	37,882		51,902		(27.0	)%
Mayne Pharma	381,697		—		nm

Total International	754,049		342,134		120.4	%

Net Sales	$	2,490,173	$	1,982,035	25.6	%

Net Sales in Medication Delivery Systems increased, driven by growth in both infusion therapy and medication management systems sales. Growth in infusion therapy products sales was largely due to increased volume from new and existing customer contracts. Medication management systems sales increased due to higher placements of devices and increased revenue from related services.

The decrease in U.S. Net Sales to Abbott was primarily due to expected decreased volume to Abbott for several of its products, partially offset by increased price.

The Other product line includes sales of Hospira’s products to alternate site providers such as clinics, home healthcare providers and long-term care facilities, as well as sales of critical care devices and brain function monitoring systems. The growth in sales to alternate site healthcare customers more than offset a decline in sales of critical care devices, and the planned exit of certain products manufactured in Ashland, Ohio and other adjustments. Sales to alternate site healthcare customers increased due to higher overall sales of specialty injectable pharmaceuticals and medication delivery systems, partially offset by decreased sales of deferoxamine.

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Gross Profit

Gross profit increased $146.4 million, or 21.3%, for the nine months ended September 30, 2007, compared with the same period in 2006. Of this increase, $124.4 million, or 18.1%, is related to the addition of Mayne Pharma.

Gross profit margin decreased by (1.3)% to 33.5% for the nine months ended September 30, 2007, from 34.8% for the nine months ended September 30, 2006. Of this decrease, (1.5)% is related to the addition of Mayne Pharma, which includes the inventory step-up charge resulting from purchase accounting of (2.4)% and amortization of the acquired intangible assets of (1.5)%. The remaining change of 0.2% not related to the addition of Mayne Pharma is primarily the result of volume/product mix improvement of 0.7%, lower costs associated with the planned manufacturing plant closures of 0.4% and favorable price in the U.S. of 0.3% partially offset by inflation and other manufacturing costs of (1.1)% and incremental freight and distribution costs of (0.1)%.

Research and Development

R&D expenses increased $41.0 million, or 38.4%, for the nine months ended September 30, 2007, compared with the same period in 2006. Of this increase, 30.2% is related to the addition of Mayne Pharma. The remainder of the increase was primarily related to higher spending on new product development related to new compounds in Hospira’s generic injectable drug pipeline and clinical trials on Hospira’s branded sedative, Precedex®, partially offset by lower spending in 2007 on medication delivery infusion systems projects as a result of new product launches in 2006. R&D expenses increased to 5.9% of net sales for the nine months ended September 30, 2007, compared with 5.4% of net sales for the same period in 2006.

Acquired In-Process Research and Development

On February 2, 2007, Hospira completed its acquisition of Mayne Pharma. As part of the purchase price allocation, Hospira allocated and expensed $84.8 million to acquired in-process research and development related to Mayne Pharma’s pipeline products.

Selling, General and Administrative

SG&A expenses increased $98.0 million, or 31.0%, for the nine months ended September 30, 2007, compared with the same period in 2006. Of this increase, 24.0% is related to the addition of Mayne Pharma. The remainder of the increase was primarily due to additional costs related to the integration of Mayne Pharma and partially offset by reduced costs due to the completion in 2006 of the implementation of Hospira’s new independent infrastructure as a result of the spin-off. SG&A expenses increased to 16.6% of net sales for the nine months ended September 30, 2007, compared with 16.0% of net sales for the same period in 2006.

Interest Expense and Other (Income), Net

Interest expense was $102.5 million for the nine months ended September 30, 2007, compared to $23.0 million in the same period in 2006. The increase was primarily due to the issuance of additional debt and related costs due to the Mayne Pharma acquisition. Other (income), net was $(12.0) million for the nine months ended September 30, 2007 compared to $(12.4) million for the nine months ended September 30, 2006. The change was primarily related to $5.7 million of foreign exchange losses realized in 2007 due to the Mayne Pharma acquisition and $1.0 million of lower interest income, partially offset by $3.7 million of foreign exchange gains realized in 2007 and net gains on investments of $2.9 million.

Income Tax Expense

The effective tax rate was 38.1% for the nine months ended September 30, 2007, compared to 25.5% for the same period in 2006. The effective tax rate for the nine months ended September 30, 2007 included the impact of a significant unusual item, the expensing of non-deductible acquired in-process research and development. Excluding the effect of this item, the 2007 effective tax rate was 20.5%. The decrease in the effective tax rate in 2007 compared to 2006, excluding the significant unusual item, was due primarily to increased expenses in higher tax rate jurisdictions in connection with the Mayne Pharma acquisition, including intangible amortization expense, purchase accounting charges, and interest expense. The effective tax rates, excluding the impact of significant unusual items, are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in certain jurisdictions outside the United States.

Liquidity and Capital Resources at September 30, 2007 compared with December 31, 2006

Net Cash provided by Operating Activities continues to be Hospira’s primary source of funds to finance operating needs and capital expenditures. Other capital resources include cash on hand, borrowing availability under Hospira’s $375.0 million revolving credit facility and access to capital markets. Beginning on February 2, 2007, Hospira’s operating cash flows include operating cash

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flows generated by Mayne Pharma. During the two-year period after the closing, Hospira expects to incur approximately $95 million to $110 million of cash expenditures relating to the integration of Mayne Pharma, which will reduce operating cash flows. In addition, as a result of the debt incurred during the first quarter of 2007 to finance the Mayne Pharma acquisition, Hospira must dedicate substantially greater cash to service debt obligations (including interest expense and mandatory principal payments on the term loan described below) on an ongoing basis compared to past periods. Hospira believes that its current capital resources, including cash and cash equivalents, cash generated from operations, funds available from its revolving credit facility and access to the capital markets will be sufficient to finance its operations, including debt service obligations, capital expenditures, product development and Mayne Pharma integration expenditures for the foreseeable future.

Summary of Cash Flows

Operating activities provided net cash of $354.5 million driven by net income of $60.7 million. Non-cash depreciation, non-cash amortization charges, the write-off of acquired in-process research and development, and non-cash stock-based compensation expense totaled $289.7 million. Changes in operating assets and liabilities and Other, net of $4.1 million consist primarily of lower inventory as a result of the impact of the step-up value of acquired Mayne Pharma inventory subsequently sold, partially offset by payments made on acquired Mayne Pharma current liabilities, including merger advisory fees, and higher trade receivables due to increased sales, including Mayne Pharma.

Net Cash Used in Investing Activities of $2,133.2 million includes the acquisition of Mayne Pharma for $1,961.3 million, net of cash acquired and capital expenditures of $128.7 million. In connection with the acquisition of Mayne Pharma, Hospira entered into certain foreign currency forward exchange contracts to limit its exposure from currency movements of the Australian dollar. During the nine months ended September 30, 2007, Hospira paid $55.7 million for the settlements relating to these contracts. These decreases were partially offset by proceeds from dispositions of certain product rights for $13.8 million.

Net Cash From Financing Activities of $1,677.1 million consists primarily of Hospira incurring $1,925.0 million of bank debt to finance the Mayne Pharma acquisition. The bank facilities included a $500.0 million, three-year term loan facility and a $1,425.0 million one-year bridge loan facility. The bridge loan facility was completely refinanced on March 23, 2007 through the issuance of long-term debt securities. During the nine months ended September 30, 2007, Hospira prepaid $240.8 million in principal amount of the term loan, in addition to the scheduled $34.2 million in principal. In addition, financing activities includes proceeds from employee stock option exercises and related tax benefits of $41.3 million.

Debt and Capital

Under the three-year term loan facility, before giving effect to any prepayments (which reduce the repayment amounts on a pro rata basis), Hospira must repay $12.5 million in principal at the end of each quarter in 2007, $50.0 million at the end of each quarter in 2008 and $62.5 million at the end of each quarter in 2009 (with the final payment to be made on the maturity date of January 15, 2010). Hospira is permitted to prepay amounts borrowed under the term loan from time to time without penalty. During the nine months ended September 30, 2007, Hospira prepaid $240.8 million in principal amount of the term loan, in addition to the rescheduled $34.2 million in principal. The $34.2 million of payments in principal reflect a reduction in original mandatory payments due to prepayments made in 2007. As a result of the prepayments made in 2007, the amount due within one year is $79.0 million, and is recorded as short-term borrowings. Borrowings under the term loan facility and bridge loan facility bear interest at LIBOR plus a margin that is determined based on Hospira’s senior unsecured debt ratings from Standard & Poor’s and Moody’s. Based on Hospira’s ratings of BBB (stable outlook) from Standard & Poor’s and Baa3 (negative outlook) from Moody’s, the margin is currently 0.60%. Ratings are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by the rating agencies. Each rating should be evaluated independently of any other rating.

Hospira has a five-year $375.0 million unsecured revolving credit facility (the “Revolver”), which it entered into on December 16, 2005, and amended on January 15, 2007. The Revolver was amended to permit the Mayne Pharma acquisition and to temporarily increase the maximum leverage ratio and lower the minimum interest coverage ratio. This Revolver is available for working capital and other requirements. The Revolver allows Hospira to borrow funds at variable interest rates as short-term cash needs dictate. The

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amount of available borrowings under the Revolver may be increased to a maximum of $500 million, and the term may be increased for up to two additional years, under certain circumstances. As of September 30, 2007, Hospira had no amounts outstanding under the Revolver.

As of September 30, 2007, Hospira was in compliance with all applicable covenants.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes Hospira’s estimated contractual obligations as of September 30, 2007:

(dollars in millions)

	Payment Due by Period
	Total		2007		2008-2009		2010-2011		2012 and Thereafter
Long-term debt and interest payments	$	3,088.8	$	47.2	$	775.5	$	556.4	$	1,709.7
Lease obligations	162.7		7.4		48.5		43.5		63.3
Purchase commitments ⁽¹⁾	484.8		401.3		82.3		0.8		0.4
Other long-term liabilities reflected on the consolidated balance sheet ⁽²⁾	221.9		—		164.6		57.3		—
Total	$	3,958.2	$	455.9	$	1,070.9	$	658.0	$	1,773.4

⁽¹⁾ Purchase commitments consist primarily of inventory purchases made in the normal course of business to meet operational requirements. Contractual capital commitments are also included here, but these commitments represent only a portion of expected capital spending. Hospira has committed to make potential future “milestone” payments to third-parties as part of in-licensing and development agreements. Payments under these agreements are contingent upon achievement of certain developmental, regulatory and/or commercial milestones and are not included in the table above.

⁽²⁾ Includes liability of $123.9 million relating to unrecognized tax benefits, penalties and interest: excludes $152.6 million of other long-term liabilities related primarily to post-retirement benefit obligations.

Hospira has no material exposures to off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

On March 23, 2007, Hospira issued $375.0 million principal amount of Floating Rate Notes due 2010 that bear interest at a three-month LIBOR plus 48 basis points. A hypothetical one percentage point increase/(decrease) in interest rates would increase/(decrease) interest expense by $3.8 million. On February 1, 2007, Hospira incurred a $500.0 million, three-year term loan facility bearing interest at LIBOR plus a margin that is determined based on Hospira’s senior unsecured debt ratings from Standard & Poor’s and Moody’s. As of September 30, 2007 the outstanding balance on the term loan was $224.6 million. A hypothetical one percentage point increase/(decrease) in interest rates would increase/(decrease) interest expense by $2.3 million. Refer to the Liquidity and Capital Resources section above, as well as Note 11 to the condensed consolidated financial statements included in this quarterly report on Form 10-Q, for further information.

There have been no other material changes to the information provided in Item 7A. to Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. The Chairman and Chief Executive Officer, Christopher B. Begley, and Senior Vice President, Finance and Chief Financial Officer, Thomas E. Werner, evaluated the effectiveness of Hospira’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of the end of the period covered by this report, and concluded that Hospira’s disclosure controls and procedures were effective.

Changes in internal controls. There was no change in Hospira’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Hospira’s internal control over financial reporting. Hospira is continuing to evaluate the internal controls of Mayne Pharma.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The disclosure contained in Note 8 to the condensed consolidated financial statements included in Part I. Item 1 hereof is incorporated herein by reference.

Item 1A. Risk Factors

Please refer to Item 1A. in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of risks to which Hospira’s business, financial condition, results of operations and cash flows are subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below gives information on a monthly basis regarding purchases made by Hospira of its common stock.

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (2)
July 1-July 31, 2007	6,720	$	40.06	—	$	100,233,606
August 1-August 31, 2007	26,608	$	37.93	—	$	100,233,606
September 1-September 30, 2007	31,070	$	39.07	—	$	100,233,606
Total	64,398	$	38.70	—	$	100,233,606

(1) These shares represent the shares deemed surrendered to Hospira to pay the exercise price and satisfy minimum statutory tax withholding obligations in connection with the exercise of employee stock options.

(2) In February 2006, Hospira’s board of directors authorized the repurchase of up to $400.0 million of Hospira’s common stock in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The repurchase of shares commenced in early March 2006. As of September 30, 2007, Hospira had purchased 7,584,400 shares for $299.8 million in the aggregate under the 2006 board authority, all of which were purchased during 2006.

Item 6. Exhibits

A list of exhibits filed herewith or incorporated by reference herein immediately precedes such exhibits and is incorporated herein by reference.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOSPIRA, INC.
	By	/s/ THOMAS E. WERNER
		Thomas E. Werner, Senior Vice President, Finance and Chief Financial Officer
		Date: November 8, 2007

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EXHIBIT INDEX

Exhibit No.		Exhibit
10.1		Hospira Corporate Officer Severance Plan.

10.2		Hospira, Inc. Non-Employee Directors’ Fee Plan.

12.1		Statement regarding Computation of Ratios.

31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1		Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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