Hospira, Inc. Earnings Call Nuggets: FDA, Manufacturing

On Tuesday, Hospira, Inc. (NYSE:HSP) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

FDA

Gregg Gilbert – Bank of America-Merrill Lynch: I have an FDA question, surprise, surprise. What happened with the FDA meeting that was going to happen a few weeks after the last call, but that was cancelled and not rescheduled, and then what is the actual trigger to make the product levels go from 60% to 70% to something much higher, is that an inspection – a re-inspection you would expect, or could that occur without a re-inspection, can you just put some color around what drives materially higher production levels, after the plant shutdowns? Thanks.

A Closer Look: Hospira Earnings Cheat Sheet>>

F. Michael Ball – CEO: Okay. Gregg, I’ll take the FDA question first. With respect to the timing around the meeting with them, we have been discussing with them for number of months a meeting. It’s simply been a scheduling issue. We feel that we’ll in this quarter or certainly before the next call, we feel we’ll have an opportunity to get a face-to-face meeting with them, and obviously then we can give you an update as to what occurs then, so it’s simply been a scheduling issue with respect to the FDA. Turning to your second question on what then gets our ramp from 60% to 70% up to something higher. Essentially I believe it’s uncovering these issues, getting our plants up in terms of first pass quality, getting the tough exception reports that we need to get through more labs behind us, and getting to more of a free flow of product. So, as we continue to go through a remediation, we are uncovering issues. This causes then a slowdown in our manufacturing or a backup behind our lab as we seek to ensure that the products are safe and effective. Once we get through this particular period I believe that the plants will or at least Rocky Mount will get better than at the release process, we will have less issues as we’ve taken care of the issues and then we should start to see a ramp-up in terms of supply. I should also say that product supply is somewhat dependent upon the amount of remediation that we have to do. As we find things, a lot of times we have to divert resources away from the product supply area into looking at detailed remediation on a specific issue and this causes a slowdown in this system. So, again, as we get these remediation efforts behind us, I believe we will see a ramp-up then from the 60% to 70% level.

Gregg Gilbert – Bank of America-Merrill Lynch: So, no re-inspection required to achieve that?

F. Michael Ball – CEO: My opinion is, there will not be a re-inspection required in order to get these volumes moving forward.

Manufacturing

Christopher Schott – JPMorgan: Just one quick one and a follow-up. Relative to your last update with us in February, are you feeling better, the same, or worse about the state of your manufacturing as you’ve learned more what we have to do as you’re working through some of these issues? How are you overall feeling this process is going? Then the second question is a longer-term question. When all this work is done how much higher is your cost of manufacturing going to be relative to prior – when this process started? Seems like you’re hiring people, you’re going to have more manufacturing oversight, you’re upgrading suites. It seems like it points to higher marginal cost of production going forward. Is there anything you can do just to talk to us on that front of how much of an impact this is? Can you quantify it at all just as thinking about our longer-term models here?

F. Michael Ball – CEO: So, I’ll take the first question, Chris, and Tom will handle the second. So, how is the process going, is it in line with our expectations? I would say, yes, it is. We are making progress on the remediation front. As I said before, we’re uncovering a number of things. We have I think great expertise now resident into the plant both from a consultant standpoint, but also from the new hires we’ve made and we’ve been essentially moving through issues and knocking them out one by one, but there are a lot of issues. It’s a big plant. So, even as I think we’ve been very good at progressing, there is still a lots work to do, and as I mentioned before, we’re still uncovering things as we move forward. So, this is in line with our expectations. As I indicated to you before, I didn’t think this was going to be an easy process, but it’s absolutely a necessary process, and again I just want to express my determination that I want to get all this stuff behind us. So, we are just driving the root cause, getting the solution then done right now and moving forward, so that as we move through 2012, we can say we did a great job at reinforcing the foundation.

Thomas E. Werner – SVP, Finance and CFO: Chris, the cost structure kind of explained a couple of different ways. Coming into this year and going back as far as almost to the end of 2010, we’ve added at least 300 basis points of costs to our cost structure, and depending on how you look at it, it could be more than that and we had been running I think if you normalized our margins for oxaliplatin as well as some of the early quality issues we began to have in 2010, near as I could tell, we were running normally around 41%, 42%. So, we’ve seen at least a 300 basis point drop off. I think it’s slightly more than that depending on how you look at it. Whatever it is, we are not intending to stop there and have a permanent impact to the cost structure. As Mike said, the key here is getting our first pass quality up so that we’re not writing. We call them exception reports or basically production deviation reports, where something isn’t right with the production, or something is not right with the documentation. I’ve been through quality training before and the cost of quality when you can get the first pass quality it’s a – I won’t say it’s exponential, but it’s a magnitude in cost savings of what you think you’re actually spending. So, we’ve had to add these costs in. Some of them are people. The consultants will go away towards the end of the year, early next year, as Mike said. We’re going to get more efficient with the existing people we have. We’re adding automation. We will begin to modernize, particularly Rocky Mount, potentially some of these other factories to help gain more efficiencies. But the key is getting to first pass quality and that’s where we intend to drive to get our costs back in line, because we can’t stand still with the cost structure we have right now, plus it’s going to take some time.

F. Michael Ball – CEO: The other thing I would mention is we have to continue to look at pricing as well, because the industry – across the industry all of our competitors have been plagued with these issues to some extent as well. We have to really take a hard look at pricing.