Now on its own, the old Abbott unit is becoming a leader in generic drugs and injection gear
When Abbott Laboratories (ABT) jettisoned its generic drug and hospital product division in 2004, investors cheered Abbott but had only low expectations for the spinoff. The $2.6 billion unit's product line was moldering—it had just four medications in development—and revenue and profit were flat-lining. Further, Abbott had weighed it down with $700 million in debt. The dray horse could barely pull its load.
Today, the four-year-old company is starting to look downright frisky. Hospira (HSP), as it's now known, has 43 drugs in its pipeline. It leads in generic cancer therapies and, thanks to a $2 billion takeover, is the world's top seller of generic injectable drugs. It also sells infusion pumps, needles, and tubes to administer hospital meds. It has become, in short, a one-stop shop for hospital purchasing managers. As a result, Hospira's sales, operating earnings, and cash flow are turning higher.
But the Lake Forest (Ill.) company is also in hock more than ever. Even after repaying $1.8 billion of long-term debt last year, Hospira entered 2008 owing $2.18 billion, mostly to finance its purchase of Mayne Pharma. The borrowing prompted Moody's Investors Service (MCO) to lower its outlook for Hospira to negative early last year. "We didn't feel they had a lot of financial flexibility with that amount of debt," says Moody's analyst Diana Lee.
Chief Executive Christopher Begley, 55, an 18-year Abbott veteran, credits the rejuvenation to freeing up cash, which he has used to bump up research-and-development spending and to leverage acquisitions. The cash came from such mundane efforts as making customers pay bills more quickly, along with closing factories, cranking out more from those it kept, and reducing the stacks of stuff in its storerooms. "If you are able to provide a 99% customer-service level with $30 million less inventory," Begley notes, "you have $30 million more cash to invest in the business."
The Abbott operations that became Hospira generated a fair amount of money before the spinoff in April, 2004. But Abbott siphoned much of the cash into its faster-growth, higher-margin pharmaceutical division for such products as arthritis drug Humira, a blockbuster that topped $3 billion in sales last year. R&D in its hospital division added up to a mere $110 million, or 4.2% of revenue, in 2003. Product introductions slowed, which in turn brought sales and income growth to a standstill. Abbott's overall gross profit margin in 2003 was 51.9%. The hospital division's was 26.7%
Many of Hospira's numbers look healthier now. Revenue climbed 28% last year, to $3.44 billion, while net income dropped 42.5%, to $136.8 million. But the decline was due to one-time, takeover-related charges. The fresh cash bought $201.2 million in R&D, or 5.9% of sales. Gross margins hit 38.6%. Hospira says profits will bounce back in 2008, at least to $329 million, with revenue increasing 6% or better, to a record $3.65 billion, and margins reaching 39.5%.
Hospira's mainstay products are generic injectable pharmaceuticals and medication delivery systems, mainly infusion pumps. It is not a business of megahits: The company's biggest seller, an antibiotic called vancomycin, sold $140 million last year, JPMorgan Chase (JPM) estimates. But it has a lot of products—Hospira offers more than 190 generic injectable products alone, in more than 900 dosages and formulations. It needs that many to raise its financial numbers and win over hospital purchasing agents who don't want to shop all over for supplies.
Packaging is important, too. Many hospital drugs have to be prepared by a caregiver at bedside. Vancomycin, for example, comes in powdered form because it is unstable as a liquid. A nurse has to mix the drug in the proper amount, get it into a needle, and infuse it into a patient at a specific rate, creating plenty of opportunities for error, injury, and waste. Hospira has developed a proprietary system, called ADD-Vantage, for mixing the drug in IV bags. The medicine may be a generic, offered by rival suppliers as well, but only Hospira has this nurse-friendly administration system.
Still, those products generally represent the company Begley inherited. What sets Hospira apart in 2008 are the addition of Mayne Pharma and its advance into generic versions of bio-engineered drugs. Both are turning the 13,000-employee company into an up-and-comer in cancer treatment.
Begley, a native of south suburban Lansing, Ill., and, true to his South Side roots, a lifelong Chicago White Sox fan, is counting on Mayne to take his company beyond the U.S. The Australian drugmaker had strong sales networks throughout Asia, the Middle East, and Europe. Moreover, it had well-developed relationships with regulatory agencies in these regions. Mayne's addition has raised Hospira's overseas sales to 31% of total revenue, from 17%.
Mayne also brought an array of chemotherapy drugs. Cancer treatment is, unfortunately, a growth industry around the world. The World Health Organization estimates that new cancer diagnoses will rise nearly 50% between 2002 and 2020, to 16 million a year, with many of them occurring in Southeast Asia, the Middle East, North Africa, and Latin America. "We think we can put together a strong product portfolio for the oncologist," Begley says. "Some of our infusion pumps are perfect for oncologists and chemo patients."
Hospira may enter cancer-treatment centers a second way. Cancer patients often become anemic during chemotherapy, prompting doctors to prescribe injections of erythropoietin (EPO), a hard-to-manufacture and expensive synthetic protein that promotes red blood cell formation. In the U.S., it is genetically engineered only by Amgen (AMGN) and Johnson & Johnson (JNJ). In December, Hospira won approval by European Union regulators to introduce a generic version of EPO, which it calls Retacrit. It's the first U.S. company to launch a biogeneric in Europe. "They've got the trifecta going in oncology services," says Junaid Husain, a medical-technology analyst at Soleil Securities in Boston. "Hospira is the only company that has oncology drugs, infusion pumps, and their own EPO."
One thing Hospira doesn't yet have, however, is permission to sell generic biopharmaceuticals in the U.S. Congress is not expected to allow the Food & Drug Administration to begin reviewing biogenerics until 2009, at the earliest.
Overall, investors like the storyline. Hospira shares are near their 52-week high of $44.64 set in December. Cash flow from operations, the company says, should be around $600 million, up 8.9% from $551 million in 2007, allowing it to pay down another $475 million in Mayne-related debt. Even with its load, this horse has sturdy legs.