Hospira (NYSE:HSP) completed a two-year “restructuring and optimization plan” this year that the company expressly stated would increase shareholder value by generating annualized savings between $110 million and $140 million. But now the company faces a phalanx of angry shareholders claiming the company did not disclose the extent of problems at a North Carolina plant that could cost even more to fix.
After Hospira disclosed details of the millions it will spend to bring the company’s Rocky Mount, North Carolina site back into compliance with the U.S. Food and Drug Administration, Hospira’s stock price plummeted.
Hospira now faces at least two class action lawsuits filed in U.S. District Court for the Northern District of Illinois. One has been filed by Los Angeles firm Glancy Binkow & Goldberg. Another was filed by New York firm Harwood Feffer. Both suits claim Hospira did not properly disclose the quality-control issues at Rocky Mount, Hospira’s largest site. The suits also claim that any savings from the efficiency and cost-cutting program called Project Fuel have been undermined by the problems at Rocky Mount. The suits cover shareholders who bought stock between March 24, 2009, the day Hospira launched the Project Fuel initiative, and Oct. 18, 2011, the day that Hospira announced preliminary third-quarter results. Those results included the disclosure that the company’s financial performance was hurt by problems at Rocky Mount. Shareholders who purchased Hospira stock at any time may also have a claim.
A message left with Hospira was not immediately returned.
Hospira’s Rocky Mount plant makes generic injectable drugs, large volumes of solution and also supports Hospira’s contract manufacturing business. At full capacity, the facility employs more than 2,500 and accounts for 25 percent of Hospira’s nearly $4 billion in annual revenue. But in April 2010, Hospira received an FDA warning letter that cited quality assurance and compliance concerns at the Rocky Mount plant. The FDA continues to find problems at the site. Subsequent FDA inspections this year have yielded two Form 483s, reports that list findings inconsistent with current good manufacturing practices.
On Oct. 18, Hospira CEO Michael Ball said that remediation efforts for the Rocky Mount plant have slowed production and added costs that contributed to the lower-than-expected financial results in the third quarter. When the company disclosed the company’s full third-quarter financial results a week later, Ball said that the company would need to spend between $300 million and $375 million on remediation costs. The higher estimate tops earlier projections that remediation would cost between $200 million and $250 million.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
That total cost will be split evenly between devices and pharmaceuticals. The bulk of the pharmaceutical half — as much as 80 percent — will be devoted to Rocky Mount. Ball has given no time line for resolving the problems at Rocky Mount. In October, he told analysts he would address it further when the company discusses its fourth-quarter results.
Hospira has scheduled a Feb. 14 conference call to discuss fourth-quarter results, full-year 2011 results and projections for 2012.
