HSP

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UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D. C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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.

(Exact name of registrant as specified in its charter)

275 North Field Drive
Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(224) 212-2000

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No o

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

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 July 24, 2009, Registrant had outstanding 161,086,797 shares of common stock, par value $0.01 per share.

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Hospira, Inc.

Quarterly Report on Form 10-Q

Index

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PART  I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Hospira, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

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

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 millions)

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 in millions)

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 millions)

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 and Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Events that occurred after June 30, 2009, up until the filing with the SEC which occurred on July 29, 2009 were considered in the preparation of these condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain prior year amounts have been reclassified to conform to the current year presentation. Among other changes, during 2009 Hospira reclassified costs that were previously reported in Cost of products sold and Research and development to Restructuring and impairment, a separate operating costs and expenses line item. See Note 3 for additional details related to Restructuring and impairment. The reclassifications did not affect net income or shareholders’ equity.

Recently Issued and Adoption of New Accounting Standards

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Standards (“SFAS”) No. 168, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”). SFAS No. 168 reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. The adoption of this pronouncement is not expected to have a material effect on Hospira’s consolidated financial statements.

Hospira adopted the provisions of SFAS No. 165, “Subsequent Events” (“SFAS No. 165”) for the interim period ending after June 15, 2009. SFAS No. 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or available to be issued. There was no impact to Hospira’s current condensed consolidated financial position, results of operations, or cash flows upon initial adoption of this statement.

Hospira adopted the provisions of the FASB Staff Position No. FAS 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”) for the interim period ending after March 15, 2009. FSP 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107 to include interim periods. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Hospira adopted the provisions of the FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”) on January 1, 2009. FSP 132(R)-1 requires more detailed disclosures about Hospira’s plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. Additional disclosures are required beginning with the year end 2009 consolidated financial statements. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Hospira adopted the provisions of FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”) on January 1, 2009. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This guidance will be applied prospectively to intangible assets acquired on or after January 1, 2009. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Hospira adopted the provisions of SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”) on January 1, 2009. SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Hospira adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”) on January 1, 2009. EITF 07-1 provides guidance on how to determine whether an arrangement

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constitutes a collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be reported by the participants in a collaborative arrangement, how payments made between participants in a collaborative arrangement should be characterized, and what participants should disclose in the notes to the financial statements about a collaborative arrangement. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Hospira adopted the provisions of SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”) on January 1, 2009. SFAS No. 141R establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations that close in years beginning on or after December 15, 2008. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

The provisions of FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) delayed the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008, for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. There was no impact to Hospira’s current condensed consolidated financial position, results of operations or cash flows upon adoption of this statement.

Note 2 – Investments

In April 2008, Hospira purchased $24.5 million of marketable equity securities and the market value declined by $16.6 million through June 30, 2009. Hospira assessed during the three months ended June 30, 2009 the decline in the market value to be other-than-temporary, primarily due to the duration and severity of the investment’s decline in market value and the near-term prospects for recovery to the original invested value. Accordingly, Hospira recognized a non-cash, impairment charge of $16.6 million in Other expense (income), net during the three and six months ended June 30, 2009. The fair value of the investments may continue to be adversely impacted by the volatility in the global equity markets, length of time the investment’s market value is below the revised invested value, Hospira’s ability and intent to remain invested and the prospects for recovery, among other factors.

Note 3 – Restructuring Actions and Asset Impairments

As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations. The costs related to these actions consist primarily of severance and other employee benefits, accelerated depreciation resulting from the decreased useful lives of the buildings and certain equipment, impairments, other asset charges and exit costs.

Project Fuel

2009 Actions.   In March 2009, Hospira announced details of a multi-stage restructuring and optimization plan (“Project Fuel”) which will occur over the next two years. Project Fuel includes the following activities: optimizing the product portfolio, evaluating non-strategic assets, and streamlining the organizational structure. Hospira expects to incur aggregate restructuring costs and other asset charges, over the next two years, related to these actions in the range of $100 million to $110 million on a pre-tax basis. During the three and six months ended June 30, 2009 Hospira incurred, primarily in the Americas segment, pre-tax Restructuring costs of $4.4 million and $9.1 million, respectively. Inventory charges of $1.7 million related to product portfolio optimization, primarily impacting the Americas segment, are included in Cost of products sold during the three and six months ended June 30, 2009.

As part of the Project Fuel initiatives, in June 2009, Hospira committed to dispose of certain non-strategic businesses and the underlying assets over the next twelve months, including Hospira’s critical care business. The expected range of proceeds to be received from these divestitures will be less than the historical carrying value. These businesses have not been historically material to the consolidated financial statements. As a result of these commitments, non-cash, pre-tax impairment charges of $48.3 million were recognized in Restructuring and impairment and non-cash, pre-tax inventory charges of $3.1 million were recognized in Cost of products sold during the three months ended June 30, 2009. The impairment charges reduced property and equipment for these businesses by $18.2 million, allocated goodwill by $7.6 million and intangible assets by $22.5 million impacting primarily the Americas segment. The assets held for sale include $26.0 million of long-lived assets and $28.2 million of other net assets, primarily inventory.

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The following summarizes the Project Fuel restructuring and asset impairment activity for 2009:

Facilities Optimization

2008 Actions.   In April 2008, Hospira announced a plan to exit manufacturing operations at its Morgan Hill, California plant over the next two to three years. Hospira expects to incur aggregate restructuring costs through 2011 related to this action in the range of $20 million to $24 million on a pre-tax basis. Hospira is in the process of transferring related operations and production of the primary products to other Hospira facilities, or outsourcing certain product components to third-party suppliers, or ceasing activities entirely. Hospira has incurred $15.0 million, pre-tax, to date for restructuring costs, primarily employee related, associated with this action. During the three months ended June 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $3.2 million and $2.6 million, respectively. During the six months ended June 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $6.2 million and $2.6 million, respectively.

2006 Actions.  In February 2006, Hospira announced plans to close plants in Ashland, Ohio, Montreal, Canada and North Chicago, Illinois and completed these plans in 2007, 2008, and in March 2009, respectively. Hospira incurred $50.7 million, pre-tax, in aggregate for restructuring costs associated with these actions. During the three months ended June 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $0.0 million and $3.7 million, respectively. During the six months ended June 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $1.7 million and $6.7 million, respectively.

The following summarizes the Facilities Optimization (Morgan Hill, California; Ashland, Ohio; Montreal, Canada; North Chicago, Illinois) restructuring activity for 2009:

Note 4 – Fair Value Measures

The following table summarizes the basis used to measure certain assets and liabilities at fair value, under the provisions of SFAS No. 157 “Fair Value Measurements,” in the balance sheet:

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The fair value of the Level 1 assets is based on quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets and liabilities is primarily based on market observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Level 3 inputs, as applicable, are unobservable inputs which reflect assumptions developed by management to measure assets and liabilities at fair value. Specific to the businesses and related assets held for sale, the fair value is based on a combination of projected discounted cash flows and market comparisons including several third-party nonbinding bids reflective of differing assumptions on the future prospects and management of these businesses. These non-financial assets are required to be measured at fair value on a non-recurring basis depending on the occurrence of commitments and triggering events defined under GAAP, among other factors.

Hospira allocated a proportion of the applicable reporting units goodwill based on the relative fair value of the businesses that will be disposed of compared to the relative fair value of the reporting units retained operations. The retained reporting units goodwill was not impaired. Goodwill allocated to the businesses held for sale with a carrying amount of $7.6 million, was measured at fair value, resulting in an impairment charge of $7.6 million to Restructuring and impairment. See Note 3 for more information on the circumstances leading to the impairments.

Note 5 – Financial Instruments and Derivatives

Hospira is exposed to market risk primarily due to changes in currency exchange rates and interest rates. The objective in managing these risks is to reduce volatility on earnings and cash flows. To reduce the risk, Hospira enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. To manage currency exchange rate exposures, Hospira utilizes foreign currency forward exchange contracts not formally designated as cash flow or fair value hedges. To manage interest rate exposures, Hospira utilizes interest rate swap contracts comprised principally of fixed-to-floating rate interest rate swaps, which as designated are subject to fair-value hedge accounting treatment until termination, at which time the related gain or loss is deferred and amortized over the remaining term of the debt. The cash flows from the derivative financial instruments are reflected as operating activities in the condensed consolidated statement of cash flows.

For a more detailed description of Hospira’s financial instruments and derivatives and short-term borrowings and long-term debt, see Note 6 and Note 10, respectively, to Hospira’s consolidated financial statements included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2008.

The following table summarizes Hospira’s fair value of outstanding derivatives not designated as hedging instruments:

The following table summarizes the aggregate unrecognized gains (losses) on terminated interest rate swap contracts:

The impact on earnings from derivatives not designated as hedging instruments, from interest rate swap contracts that qualified as fair-value hedges prior to termination and terminated interest rate swap contracts were as follows:

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The carrying values of certain financial instruments, including primarily cash and cash equivalents, and accounts receivable, accounts payable and short-term borrowings, approximate their estimated fair values due to their short-term nature. The carrying value and estimated aggregate fair value, based primarily on market prices, of the senior unsecured notes are as follows:

Note 6 – Stock-Based Compensation

Hospira’s 2004 Long-Term Incentive Plan (“Plan”), as amended, provides for the grant of shares of stock options, stock appreciation rights, stock awards (restricted stock, restricted stock units, performance shares, performance units), and cash-based awards to employees and non-employee directors. In May 2009, shareholders approved amendments primarily to extend the Plan by ten years to May 14, 2019, and to increase the number of shares that may be granted during the life of the Plan by 13.0 million shares. 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 $9.6 million and $10.1 million was recognized for the three months ended June 30, 2009 and 2008, respectively. The related income tax benefit recognized was $3.3 million and $3.3 million, respectively. Stock-based compensation expense of $22.7 million and $24.5 million was recognized for the six months ended June 30, 2009 and 2008, respectively, primarily resulting from stock option awards. The related income tax benefit recognized was $7.9 million and $8.7 million, respectively.

In March 2009, 3.5 million options were granted to certain employees for the 2009 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 using the Black-Scholes option-pricing model, and the corresponding weighted average assumptions are as follows:

In March 2009, 515,206 performance share awards were granted to key members of management. The performance share awards vest at the end of the three-year performance cycle. The 2009 performance share award is based on a formula that measures performance using relative total shareholder return over the three-year performance cycle compared to an industry peer group. Based on the actual performance, at interim periods, and at the end of the performance cycle, the number of performance share awards earned, which can range between 0% and 200% of the target awards granted, will be satisfied with Hospira common stock.

The weighted average fair value using the Monte Carlo simulation model and the corresponding weighted average assumptions for the March performance share award grants are as follows:

As of June 30, 2009, there was $55.4 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.2 years.

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Note 7 – Post-Retirement Benefits

Retirement plans consist of defined benefit and legislated obligations such as employee severance indemnity plans (“pension plans”), post-retirement medical and dental plans (“medical and dental plans”), and defined contribution plans. Plans cover certain employees both in and outside of the U.S.

Net cost recognized for the pension plans and medical and dental plans for the three and six months ended June 30, is as follows:

Based on current Federal laws, regulations and applicable guidance issued in 2009, Hospira is not required to make any contributions and does not have a current plan to make any discretionary contributions to its pension plans for the remainder of 2009. While Hospira’s funding policy requires contributions to our defined benefit plans equal to the amounts necessary to, at a minimum, satisfy the funding requirements as prescribed by Federal laws and regulations, Hospira does make discretionary contributions when management deems it is prudent to do so.

Certain Hospira employees participate in the Hospira 401(k) Retirement Savings Plan. Hospira’s contributions to this defined contribution plan for the three months ended June 30, 2009 and 2008 were $8.9 million and $9.6 million, respectively. For the six months ended June 30, 2009 and 2008, contributions were $18.3 million and $18.7 million, respectively.

Note 8 – 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. In the three and six months ended June 30, 2009, the effective tax rates were impacted by the establishment of a valuation allowance on certain deferred tax assets associated with the impairment of certain non-strategic assets, impairment of non-deductible goodwill, as well as the impairment of marketable equity securities without the availability of a statutory tax benefit. See Note 2 and Note 3 for more information on the circumstances leading to the impairments.

During the six months ended June 30, 2009, the Internal Revenue Service (“IRS”) audit of Hospira’s 2004 and 2005 tax returns was concluded and the years were effectively settled. The outcome of the audit settlement is a reduction in the gross unrecognized tax benefits for both the audit years settled and resultant impact on tax years 2006 through 2008 in aggregate totaling $100.7 million, of which $91.9 million is recognized in the results for the six months ended June 30, 2009 as a discrete income tax benefit. The remaining amounts represent net changes to current taxes payable and deferred tax accounts. This outcome includes interest and state tax impacts.

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Hospira remains open to tax examination for post-May 1, 2004 periods in all major tax-paying jurisdictions, including Australia, Canada, Ireland, Italy, United Kingdom, and for years 2006 forward for the United States.

Note 9 – 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-based awards on the weighted average number of shares outstanding used in calculating diluted earnings per share:

The number of outstanding options to purchase Hospira stock for which the exercise price of the options exceeded the average stock price was 6.8 million and 9.7 million for the three and six months ended June, 2009, respectively, and 5.4 million and 5.5 million for the three and six months ended June 30, 2008, respectively. Accordingly, these options are excluded from the diluted earnings per share calculation for these periods.

Note 10 – Supplemental Financial Information

Inventories consist of the following:

Property and equipment, net consists of the following:

Other long-term liabilities consist of the following:

(1)           Reflects conclusion and effective settlement of the IRS audit of Hospira’s 2004 and 2005 tax returns during the six months ended June 30, 2009.

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Note 11 – Goodwill and Intangible Assets, Net

The following summarizes goodwill and intangible assets, net activity:

See Note 3 for more information on the circumstances leading to the impairments, and Note 4 for fair value considerations.

Intangible assets have definite lives and are amortized on a straight-line basis over their estimated useful lives (2 to 11 years, weighted average 10 years). Intangible asset amortization expense was $16.0 million and $17.5 million for the three months ended June 30, 2009 and 2008, respectively. Intangible asset amortization expense was $30.7 million and $34.4 million for the six months ended June 30, 2009 and 2008, respectively. Intangible asset amortization for each of the five succeeding fiscal years is estimated at $27 million for the remainder of 2009, $54 million for 2010, $52 million for 2011, $41 million for 2012, and $39 million for 2013.

Additionally, intangible assets, net consist of the following:

Note 12 – Short-term Borrowings and Long-term Debt

For a more detailed description of Hospira’s short-term borrowings and long-term debt, see Note 10 to Hospira’s consolidated financial statements included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2008.

In January 2009, the remaining $5.0 million in principal outstanding as of December 31, 2008, under the $500.0 million three-year term loan facility due March 2010, was paid. Beginning in March 2009, the $375.0 million principal amount of floating rate notes are classified as short-term borrowings as they mature in March 2010. In May 2009, Hospira issued $250.0 million aggregate principal amount of 6.40% notes which are due May 15, 2015, with interest due semi-annually, for general corporate purposes. This issuance contains covenants consistent with current borrowings. In June 2009, Hospira repaid in full the $300.0 million aggregate principal amount of 4.95% notes upon maturity.

Hospira has a five-year $375.0 million unsecured revolving credit facility (the “Revolver”) expiring in December 2010 . The Revolver is available for working capital and other requirements. As of June 30 , 2009, Hospira had no amounts outstanding under the Revolver.

Certain borrowing agreements contain covenants that require compliance with, among other restrictions, a maximum leverage ratio and a minimum interest coverage ratio. As of June 30, 2009, Hospira was in compliance with all applicable covenants.

Note  13 – Litigation

Hospira is involved in various claims and legal proceedings, as well as product liability claims and proceedings related to Hospira’s business, including in some instances when Hospira operated as part of Abbott Laboratories (“Abbott”).

Various state and federal agencies, including the U.S. Department of Justice and various state attorneys general, are investigating or have lawsuits pending against 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

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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 lawsuits 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. Some of the products involved in these investigations and lawsuits are Hospira products.  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. Abbott will indemnify Hospira for liabilities associated with AWP investigations and lawsuits, if any, 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 resulted in a mass termination of employees so as to interfere with the future attainment of benefits in violation of the Employee Retirement Income 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.   Plaintiffs generally seek reinstatement in Abbott benefit plans, disgorgement of profits and attorneys fees. 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 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 [Hospital Products Division]/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.” In July 2008, the court denied defendants’ motions for summary judgment. Hospira denies all material allegations asserted against it in the complaint. Trial of this matter has begun and is ongoing. In the third quarter of 2008, Hospira received notice from Abbott requesting that Hospira indemnify Abbott for all liabilities that Abbott may incur in connection with this litigation. Hospira denies any obligation to indemnify Abbott for the claims asserted against Abbott in this litigation.

On August 12, 2005, Retractable Technologies, Inc. (“RTI”) filed a lawsuit against Abbott 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 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 has brought counterclaims against RTI for breach of the Agreement, including failure to pay marketing fees owed to Abbott. 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. On June 2, 2008, the Fifth Circuit Court of Appeals upheld that decision in a 2-1 ruling.  The case will now proceed in the U.S. District Court for the Eastern District of Texas.

Hospira’s litigation exposures, including product liability claims, are evaluated each reporting period. Hospira’s reserves, which are not significant at June 30, 2009 and December 31, 2008, 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.

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Note 14 – Shareholders’ Equity

Common Stock