Hospira (UNKNOWN:HSP.DL), a maker of specialty injectable pharmaceuticals and medical devices, has had a great run over the past year, handily outperforming the market with a 39% rally during the past 12 months.

HSP Chart

Source: Ycharts

After that big rally, investors are probably wondering if the stock still has room to run. On one hand, Hospira's growing portfolio of biosimilars (generic versions of biologic drugs) will become increasingly valuable as 10 blockbuster biologic drugs with combined sales of $60 billion lose patent exclusivity over the next four years. On the other hand, Hospira faces tough questions about its valuation, manufacturing issues, and generic competition.

Let's take a look at the key factors investors should consider when deciding whether or not to invest in this stock.

A premium valuation
Thanks to its year-long rally, Hospira is trading at a premium to industry rivals like Baxter International (NYSE:BAX) and Teva Pharmaceutical (NYSE:TEVA). Baxter's medical products division sells similar products as Hospira, while Teva sells a similar combination of generic and specialty injectable pharmaceuticals.



Baxter International



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PEG ratio (five-year)





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Source: Yahoo Finance, Sept. 8

Based on its P/E ratio, Hospira definitely isn't a value stock at current prices. Yet we have to consider two other facts -- that it is still much smaller than Baxter and Teva, and its PEG ratio suggests stronger earnings growth than either competitor. However, Hospira's premium valuation indicates that it could fall much faster than Baxter or Teva once market volatility rises. Moreover, Hospira doesn't pay a dividend, while both Baxter and Teva do.

Two unresolved issues
To understand if Hospira's valuations are justified, we have to consider two unresolved issues -- questions about manufacturing plant standards and generic competition for Precedex.

In July, Hospira announced that the FDA had finally cleared its Rocky Mount, N.C., plant with no observations, after being hit by over 20 observations during its initial inspection. Hospira had spent $487.5 million over the past three years on product and quality charges, mostly on upgrading the plant.

While that was a positive development, Hospira's overseas plants are still in trouble. Last February, the FDA put an embargo on infusion pumps made at its Costa Rica plant due to quality control issues. Hospira signed a deal with Q Core Medical to distribute new pumps to offset those losses, but revenue at Hospira's medical management business (which accounts for 19% of its top line) only edged up 0.7% year over year last quarter. Hospira also faces two ongoing problems in India -- its plant near Chennai was hit by an FDA warning letter last May, while another plant at Vizag remains under close scrutiny. Both plants produce specialty injectable pharmaceuticals.

Meanwhile, Precedex, a liquid sedative which accounted for 11% of Hospira's revenue last year, is about to face generic competition. Novartis' (NYSE:NVS) Sandoz will launch a generic version in December, and Akorn also intends to launch one later. This means that revenue at Hospira's specialty injectables business could slump by fiscal 2015.

The stalled deal with Danone
Meanwhile, Hospira's proposed acquisition of France-based Danone's medical nutrition unit for $5 billion recently stalled out. If the deal had gone through, Hospira would likely have reduced its corporate tax rate with an overseas inversion.

In addition to reducing taxes, the acquisition would have given Hospira's portfolio some much-needed diversification. Danone's medical nutrition unit generated 1.3 billion euro ($1.7 billion) in revenue last year, compared to Hospira's 2013 revenue of $4 billion.

Therefore, the lack of a deal with Danone is disappointing, since it could have partially offset the company's flat device sales, costs for upgrading plants, and looming generic competition for Precedex.

The Foolish final verdict
In conclusion, I like Hospira's growing footprint in biosimilars, but its stock currently faces a triple threat of a high valuation, a market trading near all-time highs, and unresolved fundamental issues. These factors indicate that the stock could fall before it starts climbing again.

If Hospira resolves its ongoing plant issues, gets its pump business moving again, and strikes an overseas inversion deal, I'd be more bullish on the stock. But for now, I think it's wiser to stay away from Hospira and see how things play out.


Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Baxter International and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.