Shares of Hospira (UNKNOWN:HSP.DL) jumped nearly 7% on Nov. 6 after the maker of injectable drugs and infusion technologies reported impressive third-quarter earnings.

Source: Wikimedia Commons.

Hospira's revenue climbed 2% year over year to $1.2 billion, while its net income rose to $158.6 million, or $0.92 per share, up from $0.01 per share at the same time last year. That gain was mainly attributed to its sale of its clinical surveillance software business, Theradoc, for $106.3 million. On an adjusted basis, the company earned $0.74 per share, easily topping the Thomson Reuters consensus estimate of $0.53. Looking ahead, Hospira raised the lower end of its full-year adjusted earnings forecast from $2.30 to $2.40 per share. The top range remained unchanged at $2.50.

Let's take a moment and dig deeper into the three key takeaways from the earnings report.

Don't worry about Precedex
Many Hospira investors have been worried about Precedex, an injectable sedative which started facing generic competition during the third quarter. The drug accounted for 11% of Hospira's global sales of $4.1 billion last year.

Global sales of specialty injectable pharmaceuticals, or SIP, which account for 68% of Hospira's top line, rose 13.9% year over year despite the availability of generic versions of Precedex. The company attributed that growth to favorable pricing and strong sales volume in the U.S., which accounted for 81% of its SIP revenue. Hospira also sells a premix formulation of Precedex, approved last March, which generic competitors do not currently offer. Looking ahead, Hospira assured investors that it would meet its full-year guidance despite the genericization of Precedex.

In my opinion, investors should focus more on Hospira's growing pipeline of biosimilars, which are also included in the SIP business. That pipeline includes generic versions of Johnson & Johnson and Merck's blockbuster arthritis drug Remicade, Amgen's neutropenia treatment Neupogen, and J&J's anemia treatment Procrit/Eprex.

These biosimilars could substantially boost SIP revenue, since 10 blockbuster biologic drugs with combined sales of $60 billion will lose patent protection in the U.S. and Europe over the next four years. Allied Market Research estimates that the biosimilars market will grow from $1.3 billion in 2013 to $35 billion in 2020 as a result. Hospira intends to launch Inflectra (the Remicade biosimilar) in Western Europe and Canada next year.

Medication management business is stuck in neutral
Revenue at Hospira's medication management business, which mainly sells infusion pumps, slipped 1% to $207.5 million.

That wasn't surprising, considering the problems the business has faced over the past year. Last February, federal regulators placed an embargo on pumps made by Hospira's Costa Rica plant due to quality control issues. Hospira quickly signed a deal with Q Core Medical to launch the latter's Sapphire pump to replace the affected GemStar line. CEO F. Michael Ball noted during the conference call that the company was still waiting on the FDA to inspect the Costa Rica plant.

On the bright side, if the FDA lifts the embargo, Hospira's medication management business should perk up. The business posted 3% sales growth from 2011 to 2012, before the ban caused sales to plunge 24% in 2013. Therefore, investors should note that Hospira's medication management business might still be stuck in neutral, but at least it's not declining any further.

The possibility of a tax inversion
Investors should also keep an eye on Hospira's plans to acquire Danone's medical nutrition unit for around $5 billion. That deal, if it goes through, could reduce Hospira's tax rate if it relocates its headquarters from Illinois to France, where Danone is based. However, political pressure and the recent passage of anti-inversion laws have apparently stalled the deal, which was first reported in September. Danone's medical nutrition unit generated 1.3 billion euros ($1.7 billion) in sales last year.

While the acquisition would allow Hospira to diversify its top line and reduce its adjusted tax rate, which came in a 26.5% in the third quarter as opposed to 17.5% a year ago, it might not be an ideal strategic fit. Hospira was originally spun off from Abbott Laboratories, which retained its own medical nutrition business after the split, so it seems a bit odd for Hospira to acquire its own medical nutrition business. Moreover, Danone's unit makes feeding tubes and food products for people with special nutritional needs, which doesn't quite gel with Hospira's core SIP and pumps businesses.

The road ahead
Hospira stock has rallied 37% since the beginning of the year, which has caused its trailing P/E to heat up. Although the stock is certainly trading at a premium, I think that valuation is justified by the growth potential of its biosimilars pipeline and the possible resumption of its Costa Rica operations. The company's management has also been nimble with handling past crises, like the Costa Rica ban and the genericization of Precedex, with limited impact to its top- and bottom-line growth.