Hospira‘s (NYSE:HSP) beleaguered Rocky Mount, North Carolina manufacturing facility has been a drag on the company’s production and its 2011 financial results, and by the looks of the company’s 2012 guidance, the site will operate below capacity for the foreseeable future as Hospira works to regain regulatory compliance.
Given the extent of the problems at Hospira’s largest site, Bank of America analyst Greg Gilbert asked what many in the industry have speculated about: Could the FDA impose a consent decree on Hospira?
Hospira CEO Michael Ball probably expected that question would come up during the conference call to discuss 2011 financial results. And analysts probably expected his answer. Ball said he didn’t think it would be wise or even possible to comment on speculation of a consent decree. He reiterated that the company will meet with the FDA in the coming weeks to discuss the remediation plans. Ball said he has personally been involved with the FDA discussions and he believes regulators see the steps the company is taking. But he stopped short of definitively saying a consent decree is not coming for the Lake Forest, Illinois company.
“You never know what the agency is going to do, but at this juncture, we’ve had no indication from them or any discussion of a consent decree,” he said.
A consent decree is a big deal. Beyond a court-enforced order to make changes, a company could also be subject to heavy fines. Hospira has been working to fix problems that the FDA brought to light after a 2010 FDA warning letter concerning the Rocky Mount plant. Across all of its facilities, Hospira is spending between $300 million and $375 million, split between devices and pharmaceuticals, to address manufacturing concerns at multiple sites. But as Hospira’s largest facility, Rocky Mount is particularly critical to the company’s operations. The Rocky Mount site makes generic injectable drugs, large volumes of solution and is also part of Hospira’s contract manufacturing business. At full capacity, the facility accounts for 25 percent of Hospira’s roughly $4 billion in annual revenue.
The compliance issues have the Rocky Mount site at about 60 to 70 percent of its operating capacity. Hospira shut the plant down in December but Ball emphasized that the action was planned for maintenance issues. Operations resumed in mid-January and production levels are returning to the 60 to 70 percent capacity levels. The reduced capacity and the associated costs hurt Hospira. Last year Hospira recognized charges of $36.8 million for third party oversight and consulting and costs related to reduced production levels at Rocky Mount. The company also recorded a $28.5 million charge for inventory losses.
By the end of 2012, Hospira expects to have incurred the majority of the remediation costs for Rocky Mount. And there’s light at the end of this tunnel. When Ball explained to analysts the extent of Rocky Mount’s problems last fall, he said that he could not put a timetable for resolving the FDA’s concerns. But Ball now says that the company expects to continue addressing the issues through 2013 with remediation completed by 2014. But even that time line is hazy. Ball said that the FDA “needs to be on board with the remediation plan.” Hospira won’t know that until it meets with the agency. Perhaps by then, Ball will know whether a consent decree is coming.