After we posted Michael Price’s long thesis for Hospira a reader pointed out that Broyhill Asset Management has a great presentation on the long case for the stock. Below readers can find the full write up. Michael Price HSP case study is here.
http://www.broyhillasset.com/ Hospira, Inc. (NYSE:HSP)’s investment thesis
Hospira’s Executive Summary
Investment professionals have a knack for transforming simple into complex. It is in our DNA. If we don’t spend countless hours building convoluted models, checking every channel and scrutinizing every data point, how else can we justify the exorbitant fees most managers feel entitled to? Worst still, we tend to take our model’s output and blindly accept it without looking under the hood and asking the obvious question. Does this make sense? Investors would do well to remember that greater complexity often drives greater fees. As Ben Graham warned some time ago:
“Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from. Whenever calculus is brought in, or higher algebra, you could take it as a warning that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.”
Simple thinking is frowned upon in the investment world. For our simple minds, this creates opportunity as Wall Street repeatedly overanalyzes and overestimates the impact of short term noise on long term value. Albert Einstein is credited with the statement, “Everything should be made as simple as possible, but not simpler.” In this report, we will outline our investment thesis for shares of Hospira, Inc. (NYSE:HSP) as simple as possible. In fact, we think the thesis is so simple that it could be sketched on the back of a napkin. We understand that our napkin might not sit well with “sell side” research analysts whose investment banking clients pay big bucks for elaborate models, so we’ve included greater detail throughout the balance of our report, in addition to our napkin below:
Hospira’s business Overview
Hospira, Inc. (NYSE:HSP) operated as the hospital products business of Abbott Laboratories (NYSE:ABT) until it was spun off into a stand-alone entity in 2004. Today, the company manufactures generic specialty injectable drugs, infusion pumps and other medical services, across thirteen manufacturing facilities globally generating $4.1 billion in annual sales. In 2012 the Americas accounted for 79% of net sales while EMEA and APAC generated 13% and 8% of revenues, respectively. By product, specialty injectable pharmaceuticals (SIP) represented 63% of total net sales in 2012. Medication management represented 25% of 2012 sales, including delivery pumps. Other Pharmaceuticals, which houses Hospira’s contract manufacturing services and nutritional products, accounted for the remaining revenues.
Hospira, Inc. (NYSE:HSP) is the global leader of the Generic Injectables industry with 37% market share as of June 2012. The company has gained 14 points of share since 2008, driven primarily by new drug launches and through acquisitions. Our recent discussions with management indicated that the company has managed to broadly hold share, despite near term operational challenges (discussed below). Hospira’s competitive advantage in this business is derived from the company’s highly specialized manufacturing facilities which present a high hurdle for new entrants to gain ground on the incumbent. Additional barriers to entry, in the form of heightened regulatory focus and compliance, create a wide and deep moat around the company’s operations.
In Devices, Hospira, Inc. (NYSE:HSP) commands a 17% market share as the number two player in the industry, behind the market leader, CareFusion Corporation (NYSE:CFN). These systems administer drugs via devices including smart infusion pumps. Over 575,000 installed devices help with drug therapy making the medication process more efficient. Service contracts on their installed devices usually last around three years providing Hospira with a recurring revenue base not only for services, but also for their injectable products.
Hospira’s emerging growth opportunities
Hospira, Inc. (NYSE:HSP) has multiple levers to drive growth in the years ahead. Management has outlined a plan to increase the company’s share of the generic injectable market through both increased sales in markets they currently operate in, as well as new growth in emerging economies, where they have begun laying the groundwork. Currently 79% of sales are in the Americas, with only 13% of revenues generated in EMEA and 8% in APAC, providing Hospira with an opportunity to leverage their expertise and expand their footprint. Management is taking drugs approved on the U.S. market and registering them in other markets requiring little investment from an R&D standpoint. We think this represents $1.8 billion in potential revenue (assuming 37% market share of a $5 billion opportunity set) and see even greater potential in new launches across emerging markets where significant investments are being made. While we are not counting on these sales to drive our intrinsic value estimates, Hospira is well positioned to capitalize on an additional $4 billion in potential in the years ahead.
See full article presentation on Hospira in PDF format here.
