We maintain an Underperform rating on Hospira, Inc. (HSP) with a target of $29.00 following appraisal of third quarter results.
Hospira’s third quarter 2011 adjusted earnings of 66 cents per share fell short of the year-ago adjusted earnings by 8 cents. Earnings were hurt by the slowdown in production at the company’s facility in Rocky Mountain, North Carolina.
The company came up with revenues of $976.7 million in the reported quarter, missing the Zacks Consensus Estimate by $19.3 million. Revenues were however 2.9% higher than the year-ago figure of $949.3 million. The year-over-year improvement was driven by a strong performance of the SIP segment despite production slowdown at the Rocky Mountain facility.
In mid-October 2011, Hospira trimmed its outlook for 2011. Slowdown in production at the company’s facility in Rocky Mountain, North Carolina due to remediation efforts undertaken in response to the US Food & Drug Administration (FDA) warning letter received in April last year led to a shortfall in sales. 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 normalized levels and is expected to function at the same pace throughout the remainder of 2011. Though the company is aggressively working to address the areas of concern, timeliness of remediation is unclear. Accordingly, management cut its 2011 adjusted earnings guidance to $2.95-$3.05 from $3.90-$4.00 to reflect lower sales and higher costs. Following the management action, we also trimmed our revenue and earnings estimates significantly.
Hospira has put shipments of its Symbiq general infusion pump to new customers on hold due to reports of alarm failures in certain conditions. Hospira is also facing an issue with its Plum A+ pump regarding an alarm failure. The company continues selling the Plum pump though sales are moderating.
Moreover, customers are delaying purchase of the pump until the corrected pumps are available. The remediation of Plum A+ pump began by the end of the third quarter of 2011 and is expected to complete in 2012 due to a large number of installed Plum pumps, all of which need remediation. Though the company is ramping up the field remediation of the Plum devices in use by existing customers and has begun shipping Plum orders to customers, we believe sales will continue to be light until the remediation is fully complete.
As the timing of resolution of the matters related to the Symbiq/Plum pumps or the FDA Warning Letter remain clouded, we have an underperform rating on Hospira.
