Breaking News on Global Pharmaceutical Technology & Manufacturing

Hospira's contract biz set for slump

By Kirsty Barnes, 14-Mar-2007

Related topics: Processing

Hospira's US injectables contract manufacturing unit reported a sales jump of 32 per cent to $43.4m (€33m), however, this stellar performance is not indicative of the strength of the unit or the performance expected to follow this year.

The timing of shipments of contract manufactured products predominantly meant that the fourth quarter sales were flattered - sales in the segment for the year only rose by 3 per cent and this is a more accurate reflection of how the unit is faring growthwise, company spokesperson Stacey Eisen told Outsourcing-Pharma.com.

 

 

 

This is partly because the company has decided to exit some of the lower margin contracts it was involved in and focus on fewer but more lucrative contracts that will increase segment margins overall, said Eisen.

 

 

 

But mainly this is because the company has forecast a sales drop in 2007, as several of its customers have predicted decline in the volume of product they will outsource due to the contracts being for drugs going off patent, which will significantly affect demand.

 

 

 

Hospira has been attempting to replace this volume with other contract manufacturing volumes in 2007, however, did not generate enough incremental business to compensate for the declines.

 

 

 

The majority (80 per cent) of this impact is expected to be reflected in the US side of the business. "As a result, we anticipate sales in our US One 2 One operation to decline approximately 20 to 25 percent in 2007," said the firm.

 

 

 

About 20 per cent of Hospira's contract manufacturing operations are outside the US and this part of the business also fared well in the fourth quarter, according to the company - although no specific figures were released - but as is the case in the US, its future isn't so bright.

 

 

 

Eisen said this "strength" was primarily due to the unit's efforts in helping its former parent company Abbott to build up inventories so that it has enough product to fall back on as it transitions away from using Hospira to make its products and begins in-house manufacturing.

 

 

 

As a result, contract manufacturing sales outside the US will also drop in 2007 by 35-40 per cent.

 

 

 

Overall Hospira said it expects to take a $50m hit on contract manufacturing sales in 2007 compared to 2006.

 

 

 

The reduced level of both US and international contract manufacturing sales, coupled with reduced efficiencies due to the lower volumes running through the plants, will not only affect future profitability the segment, but will impact the business as a whole.

 

 

 

"The anticipated decline in revenue in contract manufacturing will negatively affect our annual growth rate by more than 2 percentage points," said Tom Werner, senior vice president, Financial, and chief financial officer of Hospira, in a recent webcast.

 

 

 

Looking forward, Hospira said it has "signed several new contracts over the last three months, but in some instances they are for products that are still in clinical trials, so it will be a couple of years before they generate meaningful revenue."

 

 

 

Commenting on its plans for the segment, the company said: "Contract manufacturing is a very good business for us, but it will continue to be viewed as opportunistic for Hospira. Our goal going forward is to have a sustainable high-margin business growing in the mid-single digits."

 

 

Meanwhile, quarterly sales in the company's much larger medication delivery system business rose 16 per cent to $229m, while total sales for the company rose 9.3 per cent to $706m.

 

 

 

Interestingly, the firm managed this sales increase while at the same time reducing its direct costs and selling general and administrative costs - both by 1 per cent. When asked, the firm did not provide an adequate explanation as to how it achieved these cost cuts.

 

 

 

Another point of interest is Hospira's drop in cash flow by 26 per cent down to $424m. This extra cash was used to pay for the higher inventory levels that the firm has built up as safety stocks as it closes two of its plants - in Ashland, Ohio, and Montreal, Canada - and phases out production at a plant in Chicago that it is currently leasing from Abbott, said Eisen.

 

 

 

Manufacturing operations at the impacted plants will be transferred to other Hospira facilities in the US and the company will outsource certain product components to third-party suppliers. During a previous interview the company refused to comment on what components this would involve and where they would be outsourced.

 

 

 

This is all part of a "manufacturing optimisation initiative" that Hospira has been undertaking, said Eisen. For 2007 the firm said it expects cash flow to be in the $500m-to- $550m range.

 

 

 

Overall, profitability shot up 142 per cent during the quarter to $69.3m and profit margin grew 6 percentage points to 10 per cent.

 

 

 

"This was achieved through an improved product mix, favourable pricing, higher volumes running through our manufacturing plants, and other manufacturing efficiencies," said Werner - meaning that Hospira has a greater mixture of higher- versus lower-margin contracts, increased its prices and has been able to produce products more cheaply through higher processing volumes.

 

 

 

Analysts have predicted that its recent acquisition of Australia's injectable generic manufacturer, Mayne Pharma, will help smooth out some of the quarterly volatility that Hospira has been experiencing.

Copyright - Unless otherwise stated all contents of this web site are © 2012 - William Reed Business Media SAS - All Rights Reserved - For permission to reproduce any contents of this web site, please email our Syndication department copyright@wrbm.com - Full details for the use of materials on this site can be found in the Terms & Conditions

© 2012 - William Reed Business Media SAS - All rights reserved.