Generic-drug maker and hospital-supply company Hospira Inc. (HSP) boosted its financial guidance for 2009 on Thursday. Investors are cheering the news with a $0.99 or 2.35% rise in the stock price. Is the optimism warranted?
Guidance revision
The company said in an 8-K filing with the Securities and Exchange Commission that it now sees global sales rising by 5% to 7% this year, excluding the impact of foreign currency. The company on July 29 had reiterated prior guidance for a 4% to 6% climb in sales this year. Adjusted per-share earnings, which excludes charges linked to a big company restructuring plan, among other items, are now seen at $2.80 to $2.85 this year. Both ends of the new forecast are up 10 cents from prior guidance, which was increased by three cents on July 29. Analysts surveyed by Thomson Reuters had, on average, expected earnings for the year of $2.77 a share.
Hospira also boosted the upper end of its gross margin forecast, which is now 39.5% to 40.5%, guided to an operating margin of 18% to 19%, and boosted its forecast for 2009 cash flow from operations to a range of $610 million to $660 million.
Problems ahead
Battle with Sanofi-Aventis
In June 2009, a US District Court in New Jersey ruled in favor of Hospira and announced that the generic drug did not infringe the patent held by Sanofi-Aventis, the latter has appealed the decision. As a result, both Hospira and Teva had to stop the shipment of the drug.
Debt burden
Hospira's balance sheet is loaded with debt burden. At the end of the second quarter, it had a huge debt of roughly $1,706 million and a cash balance of about $609 million. Its massive debt load requires Hospira to dedicate a substantial portion of its cash flow from operations to servicing its creit obligations, thereby reducing the availability of cash to fund development of new drugs, capital expenditures, pursue other acquisitions and investments in new technologies.
Outlook
The stock outlook may improve if
1) the company meets its full year 2009 guidance,
2) refinance debt on favorable terms, and
3) raise new debt for acquisitions and investments in new technologies.
