HSP

We recently upgraded our rating on Hospira, Inc. (HSP) from Underperform to Neutral with a target price of $33.00.

Hospira is facing continued manufacturing problems at its Rocky Mountain facility, which accounts for approximately 25% of the overall net sales. Slowdown in production at the Rocky Mountain facility due to remediation efforts undertaken in response to the FDA's warning letter received in April 2010, led to a shortfall in sales in the third quarter of 2011. The manufacturing remediation resulted in additional costs for quality control, lost sales, inventory loss and lower service levels.

Rocky Mountain is currently operating at 60%–70% of the normal level. Though the company is aggressively working to address the problem areas, the timeliness of remediation is unclear.  Moreover, the Symbiq and Plum pump issues remain matters of concern. The timing of resolution of the matters related to the Symbiq/Plum pumps or the FDA warning Letter remain unclear. However, we believe that the negatives associated with the quality control issues have been priced into the stock.

We believe the company’s top and bottom-lines will rebound once the ongoing manufacturing issues get resolved. We like the long-term prospects of Hospira as a leader in the attractive generic injectables space.

The Specialty Injectable Pharmaceuticals (SIP) segment is the biggest contributor to the company’s top-line. Growth prospects appear promising due to increased demand for core generic injectable drugs. The segment was bolstered by new drug launches, particularly the generic versions of oncology drugs like Sanofi Aventis’ (SNY) Taxotere and Eli Lilly’s (LLY) Gemzar.

Moreover, Hospira is fast working on expanding its biosimilar portfolio. It already markets two biosimilars- Nivestim, a biosimilar of Amgen’s (AMGN) Neupogen and Retacrit, a biosimilar of Johnson and Johnson’s (JNJ) Eprex.

Biosimilars are expected to be significant growth drivers for the generics industry in 2015 and beyond. We believe the biosimilars market represents a huge commercial opportunity with more than $60 billion of biologic sales slated to lose patent protection through 2017.

Further, Hospira also has a strong pipeline, which could boost its top-line growth in the long term. As of September 30, 2011, Hospira's generic pharmaceutical pipeline consisted of 73 products, most of which are related to oncology and anti-infectives with the remainder targeting cardiovascular, anesthesia and other areas. Moreover, Hospira boasts of a strong biosimilars pipeline with 11 compounds in different stages of development.

These positive factors have caused us to upgrade the stock to Neutral.

 
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