**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM10-Q**

 
| **(Mark One)**                                                                                                                                                                            | ** ** | ** **                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |       |                                                                                          |
| **x**                                                                                                                                                                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                      |       |                                                                                          |
| **For the  quarterly period ended September 30, 2007**                                                                                                                                    |
|                                                                                                                                                                                      |       |                                                                                          |
| **OR**                                                                                                                                                                                    |
|                                                                                                                                                                                      |       |                                                                                          |
| **o**                                                                                                                                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |       |                                                                                          |
| **For the  transition period from               to             ** |
|                                                                                                                                                                                      |       |                                                                                          |
| **Commission  File No. 1-31946**                                                                                                                                                          |

 

**HOSPIRA, INC.**

 

| **A Delaware corporation** |   | I.R.S. Employer Identification |
|----------------------------|--------|--------------------------------|
|                       |   | No. **20-0504497**             |

 

**275 N. Field DriveLake Forest, Illinois 60045**

 

Telephone:**  (224) 212-2000**

 

Indicate by check mark whetherthe registrant (l) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of l934 during the preceding l2 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.     Yes  x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x    Acceleratedfiler  o                             Non-accelerated filer  o

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).     Yes  oNo  x

 

As of October 31, 2007,Registrant had outstanding 157,556,761 shares of common stock, par value $0.01per share.

 

 

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Table of Contents

 

**Hospira,Inc.**

 

**QuarterlyReport on Form 10-Q**

 

**Index**

 
|                                  | **Part I – Financial Information**                                                                                                |   |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                  |                                                                                                                                   |   |
| Item 1.                               | Financial  Statements                                                                                                                  |   |
|                                  |                                                                                                                                   |   |
|                                  | Condensed  Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended September  30, 2007 and September 30, 2006 | 3      |
|                                  |                                                                                                                                   |   |
|                                  | Condensed  Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September  30, 2007 and September 30, 2006       | 4      |
|                                  |                                                                                                                                   |   |
|                                  | Condensed  Consolidated Balance Sheets (Unaudited) – September 30, 2007 and December 31,  2006                                    | 5      |
|                                  |                                                                                                                                   |   |
|                                  | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) – Nine  Months Ended September 30, 2007     | 6      |
|                                  |                                                                                                                                   |   |
|                                  | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                                      | 7      |
|                                  |                                                                                                                                   |   |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            | 17     |
|                                  |                                                                                                                                   |   |
| Item 3.                               | Quantitative  and Qualitative Disclosures about Market Risk                                                                            | 25     |
|                                  |                                                                                                                                   |   |
| Item 4.                               | Controls and  Procedures                                                                                                               | 25     |
|                                  |                                                                                                                                   |   |
| **Part II – Other  Information** |                                                                                                                                   |
|                                  |                                                                                                                                   |   |
| Item 1.                               | Legal Proceedings                                                                                                                      | 26     |
|                                  |                                                                                                                                   |   |
| Item 1A.                              | Risk  Factors                                                                                                                          | 26     |
|                                  |                                                                                                                                   |   |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                           | 26     |
|                                  |                                                                                                                                   |   |
| Item 6.                               | Exhibits                                                                                                                               | 26     |

 

2

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** **

**PART I. FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**Hospira,Inc.**

 

**Condensed Consolidated Statements of Income**

 

**(Unaudited)**

 

***(dollars and shares in thousands, except for per share amounts)***

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                     |       | $                                                        | 838,019    |                                                    | $          | 646,640 |   | $ | 2,490,173 |   | $ | 1,982,035 |   |
| Cost of products sold                         |       | 543,488                                                  |       | 427,612                                                 |       | 1,654,855 |   | 1,293,125 |   |
| Gross Profit                                  |       | 294,531                                                  |       | 219,028                                                 |       | 835,318 |   | 688,910 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Research and development                      |       | 51,409                                                   |       | 36,470                                                  |       | 147,478 |   | 106,526 |   |
| Acquired in-process research and  development |       | —                                                   |       | —                                                  |       | 84,800 |   | — |   |
| Selling, general and administrative           |       | 136,495                                                  |       | 103,506                                                 |       | 414,393 |   | 316,373 |   |
| Income From Operations                        |       | 106,627                                                  |       | 79,052                                                  |       | 188,647 |   | 266,011 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest expense                              |       | 34,675                                                   |       | 8,059                                                   |       | 102,541 |   | 22,999 |   |
| Other income, net                             |       | (6,138                                                   | )          | (4,099                                                  | )          | (12,014 | ) | (12,394 | ) |
| Income Before Income Taxes                    |       | 78,090                                                   |       | 75,092                                                  |       | 98,120 |   | 255,406 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Income tax expense                            |       | 18,711                                                   |       | 19,147                                                  |       | 37,419 |   | 65,128 |   |
| Net Income                                    |       | $                                                        | 59,379     |                                                    | $          | 55,945 |   | $ | 60,701 |   | $ | 190,278 |   |
|                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings Per Common Share:                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                         |       | $                                                        | 0.38       |                                                    | $          | 0.36 |   | $ | 0.39 |   | $ | 1.21 |   |
| Diluted                                       |       | $                                                        | 0.37       |                                                    | $          | 0.35 |   | $ | 0.38 |   | $ | 1.18 |   |
| Weighted Average Common Shares Outstanding:   |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                         |       | 157,091                                                  |       | 156,359                                                 |       | 156,628 |   | 157,897 |   |
| Diluted                                       |       | 160,072                                                  |       | 158,781                                                 |       | 159,528 |   | 161,214 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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**Hospira,Inc.**

 

**Condensed Consolidated Statements of Cash Flows**

 

**(Unaudited)**

 

***(dollars in thousands)***

** **
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash Flow From Operating Activities:                                             |       |                                                    |       |   |   |
|                                                                             |       |                                                    |       |   |   |
| Net income                                                                       |       | $                                                       | 60,701     |   | $ | 190,278 |   |
| Adjustments to reconcile net income to net  cash from operating activities-      |       |                                                    |       |   |   |
| Depreciation                                                                     |       | 136,191                                                 |       | 114,731 |   |
| Amortization of intangibles                                                      |       | 37,081                                                  |       | 1,446 |   |
| Write-off of acquired in-process research  and development                       |       | 84,800                                                  |       | — |   |
| Stock-based compensation expense                                                 |       | 31,603                                                  |       | 27,819 |   |
| Changes in assets and liabilities-                                               |       |                                                    |       |   |   |
| Trade receivables                                                                |       | (25,650                                                 | )          | (23,979 | ) |
| Inventories                                                                      |       | 49,701                                                  |       | (101,637 | ) |
| Prepaid expenses and other assets                                                |       | 5,676                                                   |       | (13,648 | ) |
| Trade accounts payable                                                           |       | (8,115                                                  | )          | 36,090 |   |
| Other liabilities                                                                |       | (47,392                                                 | )          | 60,728 |   |
| Other, net                                                                       |       | 29,889                                                  |       | 40,037 |   |
| Net Cash Provided by Operating Activities                                        |       | 354,485                                                 |       | 331,865 |   |
|                                                                             |       |                                                    |       |   |   |
| Cash Flow From Investing Activities:                                             |       |                                                    |       |   |   |
| Capital expenditures (including instruments  placed with or leased to customers) |       | (128,674                                                | )          | (183,632 | ) |
| Acquisition of Mayne Pharma, net of cash  acquired                               |       | (1,961,285                                              | )          | — |   |
| Settlements of foreign currency contracts                                        |       | (55,701                                                 | )          | — |   |
| Proceeds from dispositions of product rights                                     |       | 13,771                                                  |       | — |   |
| Other, net                                                                       |       | (1,263                                                  | )          | 1,845 |   |
| Net Cash Used in Investing Activities                                            |       | (2,133,152                                              | )          | (181,787 | ) |
|                                                                             |       |                                                    |       |   |   |
| Cash Flow From Financing Activities:                                             |       |                                                    |       |   |   |
| Issuance of long-term debt, net of fees  paid                                    |       | 3,336,198                                               |       | — |   |
| Repayment of long-term debt                                                      |       | (1,700,124                                              | )          | (111 | ) |
| Other borrowings, net                                                            |       | (343                                                    | )          | 1,955 |   |
| Payment to Abbott Laboratories for  international assets                         |       | —                                                  |       | (124,251 | ) |
| Common stock repurchased                                                         |       | —                                                  |       | (299,766 | ) |
| Excess tax benefit from stock-based  compensation arrangements                   |       | 865                                                     |       | 3,373 |   |
| Proceeds from stock options exercised                                            |       | 40,464                                                  |       | 39,576 |   |
| Net Cash Provided by (Used in) Financing  Activities                             |       | 1,677,060                                               |       | (379,224 | ) |
|                                                                             |       |                                                    |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                    |       | 15,990                                                  |       | 2,128 |   |
|                                                                             |       |                                                    |       |   |   |
| Net change in cash and cash equivalents                                          |       | (85,617                                                 | )          | (227,018 | ) |
| Cash and cash equivalents at beginning of  period                                |       | 322,045                                                 |       | 520,610 |   |
| Cash and cash equivalents at end of period                                       |       | $                                                       | 236,428    |   | $ | 293,592 |   |
|                                                                             |       |                                                    |       |   |   |
| Supplemental Cash Flow Information:                                              |       |                                                    |       |   |   |
|                                                                             |       |                                                    |       |   |   |
| Cash paid during the period-                                                     |       |                                                    |       |   |   |
| Interest                                                                         |       | $                                                       | 57,663     |   | $ | 23,434 |   |
| Income taxes, net                                                                |       | $                                                       | 57,623     |   | $ | 21,224 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**Hospira,Inc.**

 

**Condensed Consolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars and shares in thousands)***

 
| ** **                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **Assets**                                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                              |       | $                      | 236,428    |                  | $          | 322,045 |   |
| Trade receivables, less allowances of  $14,127 in 2007 and $13,688 in 2006                                                                                                                             |       | 565,988                |       | 335,334               |       |
| Inventories:                                                                                                                                                                                           |       |                   |       |                  |       |
| Finished products                                                                                                                                                                                      |       | 507,403                |       | 405,781               |       |
| Work in process                                                                                                                                                                                        |       | 139,893                |       | 85,849                |       |
| Materials                                                                                                                                                                                              |       | 173,406                |       | 135,304               |       |
| Total inventories                                                                                                                                                                                      |       | 820,702                |       | 626,934               |       |
| Prepaid expenses, deferred taxes and other  receivables                                                                                                                                                |       | 245,721                |       | 238,577               |       |
| Total Current Assets                                                                                                                                                                                   |       | 1,868,839              |       | 1,522,890             |       |
| Property and equipment, at cost                                                                                                                                                                        |       | 2,541,617              |       | 2,273,124             |       |
| Less: accumulated depreciation                                                                                                                                                                         |       | 1,296,161              |       | 1,233,693             |       |
| Net Property and Equipment                                                                                                                                                                             |       | 1,245,456              |       | 1,039,431             |       |
| Intangible assets, net of amortization                                                                                                                                                                 |       | 544,467                |       | 17,103                |       |
| Goodwill                                                                                                                                                                                               |       | 1,254,005              |       | 91,857                |       |
| Deferred income taxes                                                                                                                                                                                  |       | 68,182                 |       | 76,367                |       |
| Investments                                                                                                                                                                                            |       | 29,399                 |       | 31,341                |       |
| Other assets                                                                                                                                                                                           |       | 70,063                 |       | 68,598                |       |
| Total Assets                                                                                                                                                                                           |       | $                      | 5,080,411  |                  | $          | 2,847,587 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                         |       |                   |       |                  |       |
| Current Liabilities:                                                                                                                                                                                   |       |                   |       |                  |       |
| Short-term borrowings                                                                                                                                                                                  |       | $                      | 96,557     |                  | $          | 4,532 |   |
| Trade accounts payable                                                                                                                                                                                 |       | 188,204                |       | 130,968               |       |
| Salaries, wages and commissions                                                                                                                                                                        |       | 132,709                |       | 102,037               |       |
| Other accrued liabilities                                                                                                                                                                              |       | 397,829                |       | 368,689               |       |
| Total Current Liabilities                                                                                                                                                                              |       | 815,299                |       | 606,226               |       |
| Long-term debt                                                                                                                                                                                         |       | 2,273,944              |       | 702,044               |       |
| Post-retirement obligations, deferred  income taxes and other long-term liabilities                                                                                                                    |       | 374,502                |       | 178,228               |       |
| Commitments and Contingencies                                                                                                                                                                          |       |                   |       |                  |       |
| Shareholders’ Equity:                                                                                                                                                                             |       |                   |       |                  |       |
| Common stock, par value $0.01 - authorized:  400,000 shares; 165,050 and 163,468 shares issued, and 157,466 and 155,884  shares outstanding at September 30, 2007 and  December 31, 2006, respectively |       | 1,651                  |       | 1,635                 |       |
| Preferred stock, par value $0.01 -  authorized: 50,000 shares;  issued and outstanding shares: 0 shares                                                                                                |       | —                 |       | —                |       |
| Treasury stock, at cost - Shares: 2007 and  2006: 7,584                                                                                                                                                |       | (299,766               | )          | (299,766              | )          |
| Additional paid-in capital                                                                                                                                                                             |       | 1,113,302              |       | 1,033,345             |       |
| Retained earnings                                                                                                                                                                                      |       | 739,416                |       | 676,639               |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                                         |       | 62,063                 |       | (50,764               | )          |
| Total Shareholders’ Equity                                                                                                                                                                        |       | 1,616,666              |       | 1,361,089             |       |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                        |       | $                      | 5,080,411  |                  | $          | 2,847,587 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**Hospira,Inc.**

 

**Condensed Consolidated Statement of Changes in Shareholders’Equity**

 

**(Unaudited)**

 

***(dollars and shares in thousands)***

** **
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**                            | ** ** | **Income (Loss)**  | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Balances at December 31, 2006**                                         |       | 155,884               |       | $                                     | 1,635      |                    | $          | (50,764      | )          | $            | 1,033,345  |         | $          | (299,766 | ) | $ | 676,639 |   | $ | 1,361,089 |   |
| Net income                                                                |       | —                |       | —                                |       | —                  |       | —       |       | —       |       | 60,701       |       | 60,701 |   |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Other comprehensive income                                                |       | —                |       | —                                |       | 112,827                 |       | —       |       | —       |       | —       |       | 112,827 |   |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Adoption of FASB Interpretation No. 48                                    |       | —                |       | —                                |       | —                  |       | —       |       | —       |       | 2,076        |       | 2,076 |   |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Changes in shareholders’ equity related to  incentive stock programs |       | 1,582                 |       | 16                                    |       | —                  |       | 79,957       |       | —       |       | —       |       | 79,973 |   |
| **Balances at September 30, 2007**                                        |       | 157,466               |       | $                                     | 1,651      |                    | $          | 62,063       |       | $            | 1,113,302  |         | $          | (299,766 | ) | $ | 739,416 |   | $ | 1,616,666 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**Hospira,Inc.**

 

**Notes to Condensed Consolidated Financial Statements**

 

**(Unaudited)**

 

**Note 1 – Basis ofPresentation**

 

These condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) and, therefore,do not include all information and footnote disclosures normally included inaudited financial statements. However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2006. The results of operations for anyinterim period are not necessarily indicative of the results of operations tobe expected for the full year.

 

Hospira became a separate public company pursuant to aspin-off from Abbott Laboratories (“Abbott”) on April 30, 2004 (the “spin-offdate”). In connection with the spin-off, Hospira and Abbott agreed that thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States would occur, and be completed, within two years after thespin-off. During the transition period, these operations and assets were usedin the conduct of Hospira’s international business and Hospira was subject tothe risks and entitled to the benefits generated by such operations and assets.Hospira was dependent on Abbott’s international infrastructure until such legaltransfers occurred in each international country. These transfers werecompleted in 2006.

 

On February 2, 2007, Hospira acquired all the outstanding ordinary sharesof Mayne Pharma Limited (“Mayne Pharma”), an Australian public company listedon the Australian Stock Exchange. The results of operations of Mayne Pharma areincluded in Hospira’s results for periods on and after that date, which hasaffected comparability of the financial statements for the periods presented inthis report and will affect comparability in future periods.

 

For comparative purposes, Net sales to Abbott Laboratories have beenreclassified to Net sales on the Condensed Consolidated Statement of Income forthe three and nine months ended September 30, 2006. The reclassification didnot affect net income or shareholders’ equity.

 

**Note 2 – Recently Issued AccountingStandards**

 

In June2007, the Financial Accounting Standards Board (“FASB”)ratified EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Paymentsfor Goods or Services Received for Use in Future Research and DevelopmentActivities” (“EITF 07-03”). EITF 07-03 states that nonrefundable advancepayments for goods or services that will be used or rendered for futureresearch and development activities should be deferred and capitalized. Suchamounts should be recognized as an expense as the related goods are deliveredor the related services performed. If it is not expected that the goods will bedelivered or services will be rendered, the capitalized advance payment shouldbe charged to expense in the period in which such determination is made. EITF07-03 is effective for new contracts entered into in fiscal years beginningafter December 15, 2007. Hospira is currently evaluating the potential impactof EITF 07-03 on its financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 provides a company with the option to measure selectedfinancial instruments and certain other items at fair value at specifiedelection dates. The election may be applied on an item by item basis, withdisclosure regarding reasons for partial election and additional information aboutitems selected for fair value option. SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.Hospira is currently evaluating the potential impact of SFAS No. 159 on itsfinancial statements.

 

In September2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFASNo. 157”). SFAS No. 157 clarifies the principle that fair value should be basedon the assumptions market participants would use when pricing an asset orliability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. Under the standard, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy. SFAS No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007. Hospira is currently evaluatingthe potential impact of SFAS No. 157 on its financial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of

 

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the end of the fiscal year. This provision of SFAS No. 158 is effective forfiscal years ending after December 15, 2008. Hospira does not anticipate that the impact from the adoption of thisprovision of SFAS No. 158 will be significant to its financial statements.

 

**Note 3 – Mayne Pharma Acquisition**

 

On February 2, 2007, Hospira acquired all theoutstanding ordinary shares of Mayne Pharma (including those shares issuablepursuant to stock options) for $2,055.0 million. The $2,055.0 million purchaseprice includes the cash purchase price and direct acquisition costs. MaynePharma manufactures and sells primarily specialty injectable pharmaceuticals.The results of operations of Mayne Pharma are included in Hospira’s results forperiods on and after February 2, 2007.

 

During the second quarter 2007,Hospira completed the valuation for both intangible assets and property andequipment. The following allocation of the purchase price is subject tofurther revision, as additional information may become available to modifyHospira’s initial estimates for certain assets and liabilities. Theallocation is as follows:

 
| **(dollars in thousands)**                                                | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|
| Current assets                                                                      |       | $          | 477,229    |   |
| Property and equipment                                                              |       | 194,352    |       |
| Intangible assets                                                                   |       | 602,959    |       |
| Goodwill                                                                            |       | 1,093,982  |       |
| Other assets                                                                        |       | 6,623      |       |
| Current liabilities                                                                 |       | (257,655   | )          |
| Long-term debt                                                                      |       | (4,536     | )          |
| Post-retirement obligations, deferred income  taxes and other long-term liabilities |       | (57,921    | )          |
| Total estimated allocation of purchase  price                                       |       | $          | 2,055,033  |   |
|                                                                                     |            |            |            |  |  |

 

Of the estimate of $603.0million of acquired intangible assets, $84.8 million relates to acquiredin-process research and development that was expensed at the date ofacquisition. Of the remaining $518.2 million, $486.6 million relates todeveloped product rights that will be amortized over their estimated usefullives (9 to 12 years, average 11 years), including $13.8 million of productrights disposed of as a result of the acquisition, and $31.6 million relates tocustomer relationships that will be amortized over their estimated useful lives(4 to 12 years, average 10 years). Of the estimate of $1,094.0 million ofgoodwill, approximately $422.6 million was assigned to the U.S. segment andapproximately $671.4 million was assigned to the International segment.Goodwill is not expected to be deductible for tax purposes.

 

Hospira has progressed with itsplans for the integration of Mayne Pharma into its operations. As Hospira takescertain actions in connection with the integration that give rise torestructuring charges, such as termination of employees and exiting certainactivities and facilities, certain of those charges are recorded as goodwill aspart of the purchase price allocation. As of September 30, 2007, the impact togoodwill associated with restructuring charges for these activities is $14.5million, net of taxes, and is included in current liabilities. Additionalrestructuring charges that impact goodwill may continue to be incurred during2007 and early 2008, consistent with the initial integration plan.

 

The total purchase price of$2,055.0 million is comprised of $2,042.3 million of cash purchase price and$12.7 million of direct acquisition costs. On February 1, 2007, Hospiraincurred $1,925.0 million of bank debt to finance the Mayne Pharma acquisition.The remainder of the purchase price was funded with cash on hand. Thebank facilities included a $500.0 million, three-year term loan facilityand a $1,425.0 million one-year bridge loan facility. The bridge loanfacility was completely refinanced on March 23, 2007 through the issuance oflong-term debt securities. See Note 11 for more details. In connection with theacquisition, Hospira entered into certain foreign currency forward exchangecontracts to limit its exposure from currency movements of the Australiandollar. Forward contract gains and losses of this exposure substantially offsetthe remeasurement of the related asset and both are included in other income.During the nine months ended September 30, 2007, Hospira paid $55.7 millionupon the settlements relating to these contracts.

 

Supplemental information on an unaudited pro forma basis for the ninemonths ended September 30, 2007, and the three and nine months ended September30, 2006, as if the Mayne Pharma acquisition had taken place on January 1, 2007and 2006, is as follows:

 

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| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **September 30, 2006** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Net sales                            |       | $                                | 800,114    |                                                    | $          | 2,541,458 |   | $ | 2,440,039 |   |
| Net income                           |       | $                                | 36,371     |                                                    | $          | 51,213 |   | $ | 8,858 |   |
| Diluted earnings per share           |       | $                                | 0.23       |                                                    | $          | 0.32 |   | $ | 0.05 |   |
|                                      |            |                                  |            |                                                         |            |  |  |  |  |  |  |  |

 

Unaudited pro forma supplemental information is based on accountingestimates and judgments, which Hospira believes are reasonable. The unauditedpro forma supplemental information also includes purchase accounting adjustments(including inventory step-up charges, adjustments to depreciation on acquiredproperty and equipment, and a charge for in-process research and development),amortization charges from acquired intangible assets, adjustments to interestexpense, and related tax effects. The unaudited pro forma supplementalinformation is not necessarily indicative of the results of operations infuture periods or the results that actually would have been realized hadHospira and Mayne Pharma been combined at the beginning of each periodpresented.

 

**Note 4 – Restructuring Costs**

 

In August 2005, Hospiraannounced plans to close its manufacturing plant in Donegal, Ireland. InFebruary 2006, Hospira further announced plans to close manufacturing plants inAshland, Ohio and Montreal, Canada, and also provided the planned timeline forphasing out production at a leased facility in Abbott Laboratories’ NorthChicago, Illinois campus. Hospira expects to incur aggregate restructuringcharges related to these actions in the range of $75 million to $95 million ona pre-tax basis. The restructuring costs are expected to be incurred through2009 and consist primarily of costs related to severance and certain otheremployee benefit costs, additional depreciation resulting from the decreaseduseful lives of the buildings and certain equipment, and other exit costs.

 

Hospira recorded pre-taxrestructuring charges in Cost of products sold in the following segments:

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S.                                 |       | $                                                        | 1,119      |                                                    | $          | 3,091 |   | $ | 7,724 |   | $ | 11,199 |   |
| International                        |       | 3,058                                                    |       | 8,216                                                   |       | 8,321 |   | 24,408 |   |
| Total pre-tax restructuring charges  |       | $                                                        | 4,177      |                                                    | $          | 11,307 |   | $ | 16,045 |   | $ | 35,607 |   |
|                                      |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |

 

Hospira has incurred $68.2million to date for restructuring charges related to these actions. Producttransfers from the Donegal, Ireland plant were completed in 2006. Hospiraexpects to complete all product transfers relating to the Montreal, Canadamanufacturing plant and exit the facility at the end of 2007. Hospira ceasedproduction at the Ashland, Ohio facility during the three months endedSeptember 30, 2007. Hospira is currently evaluating the potential dispositionof its Ashland, Ohio manufacturing plant and is planning to take the stepsnecessary to prepare for such disposition, including environmental studies. AtSeptember 30, 2007, Hospira had $0.6 million recorded for environmentalclean-up costs related to these studies and actions.

 

The following summarizes therestructuring activity for the nine months ended September 30, 2007:

 
| ** **                           | ** ** | **Balance at**           | ** ** | **Costs**    | ** ** | ** **   | ** ** | **Non cash** | ** ** | **Balance at**              | ** ** |
|--------------------------------------|------------|-------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|----------------------------------|------------|
| **(dollars in thousands)** | ** ** | **January 1, 2007** | ** ** | **Incurred** | ** ** | **Payments** | ** ** | **Items**         | ** ** | **September 30, 2007** | ** ** |
| Employee-related benefit costs (1)   |       | $                             | 16,473     |         | $          | 8,764        |       | $                 | (8,838     | )                                | $          | 856 |   | $ | 17,255 |   |
| Accelerated depreciation             |       | —                        |       | 5,062        |       | —       |       | (5,062            | )          | —                           |       |
| Other                                |       | 1,309                         |       | 2,219        |       | (2,945       | )          | (52               | )          | 531                              |       |
|                                 |       | $                             | 17,782     |         | $          | 16,045       |       | $                 | (11,783    | )                                | $          | (4,258 | ) | $ | 17,786 |   |
|                                      |            |                               |            |              |            |              |            |                   |            |                                  |            |  |  |  |  |  |  |

 

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(1) Includespostretirement medical and dental plan curtailment gain of $0.9 million relatedto the Ashland, Ohio plant shutdown.

 

 

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**Note 5 – Stock-Based Compensation**

 

Costs resulting from share-based payment transactions are recognized ascompensation cost over the vesting period based on the fair value of theinstrument on the date of grant. Stock-based compensation expense of $8.1million and $8.2 million was recognized for the three months ended September30, 2007 and 2006, respectively, primarily resulting from stock option awards.The related income tax benefit recognized was $2.9 million and $2.9 million,respectively. Stock-based compensation expense of $31.6 million and $27.8million was recognized for the nine months ended September 30, 2007 and 2006,respectively, primarily resulting from stock option awards. The related incometax benefit recognized was $11.7 million and $9.7 million, respectively.

 

In May 2007, 2.7 million options were granted to certain employees forthe 2007 annual stock option grant. These options were awarded at the fairmarket value at the time of grant, generally vest over three years and have aseven-year term.

 

The weighted average fair value for the Hospira options granted in thethree and nine months ended September 30, 2007 was $11.93 and $14.00,respectively. The weighted average fair value for the Hospira options grantedin the three and nine months ended September 30, 2006 was $15.76 and $15.96,respectively. The fair value was estimated using the Black-Scholes option-pricingmodel, based on the average market price at the grant date and the weightedaverage assumptions specific to the underlying options. Expected volatilityassumptions are based on a combination of historical volatility of Hospira’sstock and historical volatility of peer companies. Expected life assumptionsfor the periods presented are based on the “simplified” method as described inSEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” which is the midpointbetween the vesting date and the end of the contractual term. The risk-freeinterest rate was selected based upon yields of U.S. Treasury issues with aterm equal to the expected life of the option being valued. The weightedaverage assumptions utilized for option grants during the periods presented areas follows:

 
| ** **                                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Hospira Stock Options Black-Scholes  assumptions  (weighted average): |       |                                                     |       |                                                    |       |   |   |   |   |
| Volatility                                                            |       | 34.0%                                                    |       | 31.0%                                                   |       | 33.8% |   | 31.0% |   |
| Expected life (years)                                                 |       | 3.5                                            |       | 5.5                                           |       | 4.4   |   | 5.7   |   |
| Risk-free interest rate                                               |       |  4.3%                                               |       |  5.0%                                              |       |  4.6% |   |  5.0% |   |
| Dividend yield                                                        |       |  0.0%                                               |       |  0.0%                                              |       |  0.0% |   |  0.0% |   |

 

For a more detailed description of Hospira’s stock-based compensationplan, see Note 14 to Hospira’s consolidated financial statements included inHospira’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

**Note 6 – Income Taxes**

 

Taxes on income reflect the estimated annual effectiverates, excluding the effect of significant unusual items. The effective taxrates are less than the statutory U.S. federal income tax rate principally dueto the benefit of tax exemptions, of varying durations, in several non-U.S.taxing jurisdictions.

 

Hospira adopted the provisionsof FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. As aresult of the implementation of FIN 48, Hospira recognized a $2.1 milliondecrease in the liability for unrecognized tax benefits. This decrease in theliability resulted in an increase in the January 1, 2007 balance of retainedearnings of $2.1 million. The gross amount of unrecognized tax benefits atJanuary 1, 2007 is $113.1 million. The amount, if recognized, that would affectthe effective tax rate is $104.2 million.

 

Hospira recognizes interest andpenalties accrued in relation to unrecognized tax benefits in income taxexpense, which is consistent with the reporting in prior periods. As of January1, 2007, Hospira recorded liabilities of $1.9 million for the payment ofinterest and penalties.

 

Hospira began operations as anew taxpayer on May 1, 2004, and the U.S. federal tax returns for 2004 and 2005are currently under examination by the Internal Revenue Service (“IRS”). Hospiraexpects the audit fieldwork and the issuance of the initial IRS audit report tobe completed within the next 12 months. However, the ultimate resolutionof the 2004 – 2005 IRS audit is dependent on a number of factors and proceduresthat can not be predicted at this time.  In addition, certain tax statutes are also expected toclose within the 12 month timeframe. Accordingly, it is reasonably possiblethat a change in unrecognized tax benefits will occur within the next 12months; however, quantification of a range cannot be made at this time.

 

 

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**Note 7 - Earnings per Share**

 

Basic earnings per share are computed by dividing netincome by the number of weighted average common shares outstanding during thereporting period. Diluted earnings per share are calculated to give effect toall potentially dilutive common shares that were outstanding during the reportingperiod. The following table shows the effect of stock options on the weightedaverage number of shares outstanding used in calculating diluted earnings pershare:

* *
| ** **                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(shares in thousands)**                  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average basic common shares  outstanding    |       | 157,091                                                  |       | 156,359                                                 |       | 156,628 |   | 157,897 |   |
| Assumed exercise of stock options                    |       | 2,981                                                    |       | 2,422                                                   |       | 2,900 |   | 3,317 |   |
| Weighted average dilutive common shares  outstanding |       | 160,072                                                  |       | 158,781                                                 |       | 159,528 |   | 161,214 |   |
|                                                      |            |                                                          |            |                                                         |            |  |  |  |  |  |

 

Thenumber of outstanding options to purchase Hospira stock for which the exerciseprice of the options exceeded the average stock price was 5.2 million and 2.6million for the three and nine months ended September 30, 2007, respectively,and 2.7 million for both the three and nine months ended September 30, 2006. Accordingly,these options are excluded from the diluted earnings per share calculation forthese periods.

 

**Note**** 8****– Litigation**

 

Hospira, Abbott, or in some instances both, areinvolved in various claims and legal proceedings, including product liabilityclaims and proceedings related to Hospira’s business.

 

Various state and federal agencies, including the U.S.Department of Justice and various state attorneys general, are investigating anumber of pharmaceutical companies, including Abbott, for allegedly engaging inimproper marketing and pricing practices with respect to certain Medicare andMedicaid reimbursable products, including practices relating to average wholesaleprice (“AWP”).  These are civil investigations that are seeking toidentify the practices and determine whether those practices violated any laws,including federal and state false claims acts, or constituted fraud inconnection with the Medicare and/or Medicaid reimbursement paid to thirdparties.  In addition, Abbott is a defendant in a number of purportedclass actions on behalf of individuals or entities, including healthcareinsurers and other third-party payors, that allege generally that Abbott andnumerous other pharmaceutical companies reported false or misleading pricinginformation in connection with federal, state and private reimbursement forcertain drugs.  Many of the products involved in these investigations andlawsuits are Hospira products.  Hospira is cooperating with theauthorities in these investigations. There may be additional investigations orlawsuits, or additional claims in the existing investigations or lawsuits,initiated with respect to these matters in the future.  Hospira cannot becertain that it will not be named as a subject or defendant in theseinvestigations or lawsuits. Hospira is a named defendant in two such lawsuits: *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Abbott Laboratories and Hospira, Inc,*CaseNo. GV-04-001286, pending in the District Court of Travis County, Texas and *State of Hawaii v. Abbott Laboratories, Inc., et al.*,Case No. 06-1-0720-04, pending in the Circuit Court of the First Circuit,Hawaii. Hospira denies all material allegations asserted against it in thesetwo lawsuits. Hospira has been dismissed as a defendant in the case, *United States of America ex rel. Ven-A-Care of theFlorida Keys, Inc. v. Abbott Laboratories, Inc.,* et al Case No.95-1354, pending in the United States District Court for the Southern Districtof Florida. Abbott will indemnify Hospira for liabilities associated withpending or future AWP investigations and lawsuits only to the extent that theyare of the same nature as the lawsuits and investigations that existed againstAbbott as of the spin-off date and relate to the sale of Hospira products priorto the spin-off.  Hospira will assume any other losses that may resultfrom these investigations and lawsuits related to Hospira’s products, includingany losses associated with post-spin-off activities. These investigations andlawsuits could result in changes to Hospira’s business practices or pricingpolicies, civil or criminal monetary damages, penalties or fines, imprisonment and/orexclusion of Hospira products from participation in federal and statehealthcare programs, including Medicare, Medicaid and Veterans’ Administrationhealth programs, any of which could have a material adverse effect on itsbusiness, profitability and financial condition.

 

Hospirahas been named as a defendant in a lawsuit alleging generally that the spin-offof Hospira from Abbott Laboratories interfered with employee benefits inviolation of the Employee Retirement Security Act of 1974 (“ERISA”).  Thelawsuit was filed on November 8, 2004 in the United States District Court forthe Northern District of Illinois, and is captioned:  *Myla Nauman, Jane Roller and Michael Loughery v.Abbott Laboratories and Hospira, Inc.*  On November 18, 2005,the complaint was amended to assert an additional claim against Abbott andHospira for breach of fiduciary duty under ERISA.  Hospira has beendismissed as a defendant with respect to the new fiduciary duty claim.  ByOrder dated December 30, 2005, the Court granted class action status to thelawsuit. As to the sole claim against Hospira in the original complaint,the court certified a class defined as:  “all employees of Abbott who wereparticipants in the Abbott Benefit Plans and whose employment with Abbott wasterminated between August 22, 2003 and April 30, 2004, as a result of thespin-off of the HPD/creation of Hospira announced by Abbott on August 22, 2003,and who were eligible for retirement under the Abbott Benefit Plans on the dateof their terminations.” Hospira denies all material allegations assertedagainst it in the complaint.

 

On August 12, 2005, Retractable Technologies, Inc. (“RTI”)filed a lawsuit against Abbott Laboratories, Inc. alleging breach of contractand fraud in connection with a National Marketing and Distribution Agreement (“Agreement”)between Abbott and RTI signed in May 2000. *RetractableTechnologies, Inc. v. Abbott Laboratories, Inc.*, Case No. 505CV157,pending in U.S. District

 

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Court for the Eastern Districtof Texas. RTI purported to terminate the contract for breach in 2003. Thelawsuit alleges that Abbott misled RTI and breached the Agreement in connectionwith Abbott’s marketing efforts. RTI seeks unspecified monetary damages as wellas punitive damages. Hospira has conditionally agreed to defend and indemnifyAbbott in connection with this lawsuit, which involves a contract carried outby Abbott’s former Hospital Products Division. Abbott denies all materialallegations in the complaint. Abbott intends to pursue claims against RTI forbreach of the Agreement in arbitration or in federal court. Hospira isentitled, pursuant to its agreements with Abbott, to any amounts recovered dueto RTI’s breach of the Agreement. On February 9, 2007, the court ruled that RTIcould not be compelled to arbitrate its claims, but granted Abbott leave toappeal the ruling. Abbott has appealed the ruling that RTI is not required toarbitrate its claims.

 

Hospira’s product liability claim exposures areevaluated each reporting period. Hospira’s reserves, which are not significantat September 30, 2007 and 2006, are the best estimate of loss, as defined bySFAS No. 5, “Accounting for Contingencies.” Based upon information that iscurrently available, management believes that the likelihood of a material lossin excess of recorded amounts is remote.

 

Additional legal proceedings may occur that may resultin a change in the estimated reserves recorded by Hospira. It is not feasibleto predict the outcome of such proceedings with certainty and there can be noassurance that their ultimate disposition will not have a material adverseeffect on Hospira’s financial position, cash flows, or results of operations.

 

**Note 9 - Post-RetirementBenefits**

 

Retirement plans consist of defined benefit (“pension”),defined contribution, and post-retirement medical and dental plans. The pensionand post-retirement medical and dental plans cover certain employees both inand outside of the United States.

 

Net cost (benefit) recognized for the three and ninemonths ended September 30, 2007 and 2006 for the major pension plans andpost-retirement medical and dental benefit plans, is as follows:

 
| ** **                                        | ** ** | **Pension Plans**           | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                        | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** |
| **(dollars in thousands)**              | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost for benefits earned during the  year |       | $                                | 374        |   | $ | 677 |   | $ | 1,143 |   | $ | 1,971 |   |
| Interest cost on projected benefit  obligations   |       | 6,144                            |       | 6,117 |   | 18,444 |   | 18,257 |   |
| Expected return on plans’ assets             |       | (7,088                           | )          | (7,538 | ) | (21,266 | ) | (22,261 | ) |
| Net amortization                                  |       | 1,166                            |       | 708 |   | 3,486 |   | 2,430 |   |
| Curtailment of benefits(1)                        |       | —                           |       | — |   | — |   | 1,518 |   |
| Net cost (benefit)                                |       | $                                | 596        |   | $ | (36 | ) | $ | 1,807 |   | $ | 1,915 |   |
|                                                   |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Relatesto the shutdown of the Ashland, Ohio plant.

 
| ** **                                        | ** ** | **Medical and Dental Plans** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
| ** **                                        | ** ** | **September 30,**                      | ** ** | **September 30,** | ** ** |
| **(dollars in thousands)**              | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost for benefits earned during the  year |       | $                                           | —     |   | $ | 526 |   | $ | — |   | $ | 1,577 |   |
| Interest cost on projected benefit  obligations   |       | 713                                         |       | 842 |   | 2,139 |   | 2,528 |   |
| Net amortization                                  |       | 216                                         |       | 437 |   | 646 |   | 1,310 |   |
| Curtailment of benefits(1)                        |       | (856                                        | )          | — |   | (856 | ) | — |   |
| Net cost                                          |       | $                                           | 73         |   | $ | 1,805 |   | $ | 1,929 |   | $ | 5,415 |   |
|                                                   |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Relatesto the shutdown of the Ashland, Ohio plant.

 

Hospira’s employees participate in the Hospira 401(k)Retirement Savings Plan. Hospira’s contributions to this defined contributionplan for the three months ended September 30, 2007 and 2006 were $10.0 millionand $8.3 million, respectively. For the nine months ended September 30, 2007and 2006 contributions were $26.8 million and $25.8 million, respectively.

 

Based on Federal laws and regulations, Hospira is notrequired to make any contributions, and does not expect to make anydiscretionary contributions to its U.S. pension plans in 2007.

 

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**Note 10 – Goodwill and IntangibleAssets**

 

Goodwill as of September 30, 2007 totaled $1,254.0 million compared to$91.9 million as of December 31, 2006. The increase of $1,162.1 million,including the effect of exchange rate changes of $68.3 million, is related tothe acquisition of Mayne Pharma. See Note 3 for more details.

 

Intangible assets, primarily product rights, customer relationships andtechnology, are as follows:

 
| **(dollars in thousands)** | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Cost                                 |       | $                                | 611,399    |                            | $          | 44,873 |   |
| Less: accumulated amortization       |       | (66,932                          | )          | (27,770                         | )          |
| Intangible assets, net               |       | $                                | 544,467    |                            | $          | 17,103 |   |
|                                      |            |                                  |            |                                 |            |  |  |  |

 

The increase of $527.4 million in 2007, including the effect ofexchange rate changes of $60.7 million, is primarily related to the acquisitionof Mayne Pharma. See Note 3 for more details.

 

Intangible assets have definite lives and are amortized on astraight-line basis over their estimated useful lives (3 to 12 years, weightedaverage 10 years). Intangible asset amortization for each of the fivesucceeding fiscal years is estimated at $14.1 million for the remainder of2007, approximately $58.0 million for 2008, 2009, and 2010, and $55.5 millionfor 2011.

 

**Note 11 - Short-term Borrowingsand Long-term Debt**

 

Hospira’s debt consists of the following at September 30, 2007 andDecember 31, 2006:

 
| **(dollars in thousands)**                                                         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Long-term debt:                                                                              |       |                             |       |                            |       |
| 4.95% Notes due 2009                                                                         |       | $                                | 300,000    |                            | $          | 300,000 |   |
| Term loan due 2010 (weighted-average  floating interest rate of 5.95% at September 30, 2007) |       | 145,600                          |       | —                          |       |
| Floating rate notes due 2010  (weighted-average                                              |       |                             |       |                            |       |
| floating interest rate of 5.83% at  September 30, 2007)                                      |       | 375,000                          |       | —                          |       |
| 5.55% Notes due 2012                                                                         |       | 500,000                          |       | —                          |       |
| 5.90% Notes due 2014                                                                         |       | 400,000                          |       | 400,000                         |       |
| 6.05% Notes due 2017                                                                         |       | 550,000                          |       | —                          |       |
| International borrowings due 2008                                                            |       | —                           |       | 4,914                           |       |
| Other unsecured loans due 2009                                                               |       | 2,640                            |       | —                          |       |
| Securitized mortgage note due 2015                                                           |       | 5,020                            |       | 4,871                           |       |
| Economic development promissory notes due  2015                                              |       | 1,694                            |       | 1,320                           |       |
| Fair value of interest rate swap  instruments                                                |       | (3,573                           | )          | (8,181                          | )          |
| Total long-term debt                                                                         |       | 2,276,381                        |       | 702,924                         |       |
| Unamortized debt discount                                                                    |       | (2,437                           | )          | (880                            | )          |
| Long-term debt                                                                               |       | 2,273,944                        |       | 702,044                         |       |
| Short-term borrowings                                                                        |       | 96,557                           |       | 4,532                           |       |
| Total debt                                                                                   |       | $                                | 2,370,501  |                            | $          | 706,576 |   |
|                                                                                              |            |                                  |            |                                 |            |  |  |  |

 

On February 1, 2007, Hospiraincurred $1,925.0 million of bank debt to finance the Mayne Pharma acquisition.The remainder of the purchase price was funded with cash on hand. The bankfacilities included a $500.0 million, three-year term loan facility and a$1,425.0 million one-year bridge loan facility. The bridge loan facilitywas completely refinanced on March 23, 2007 through the issuance of long-termdebt securities described below.

 

Under the three-year term loan facility,before giving effect to any prepayments (which reduce the repayment amounts ona pro rata basis), Hospira must repay $12.5 million in principal at the end ofeach quarter in 2007, $50.0 million at the end of each quarter in 2008 and$62.5 million at the end of each quarter in 2009 (with the final payment to bemade on the maturity date of January 15, 2010). Hospira is permitted to prepayamounts borrowed under the term loan from time to time without penalty. Duringthe nine

 

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months ended September 30, 2007, Hospiraprepaid $240.8 million in principal amount of the term loan, in addition to therescheduled $34.2 million in principal. The $34.2 million of payments inprincipal reflect a reduction in original mandatory payments due to prepaymentsmade in 2007. As a result of the prepayments made in 2007, the amount duewithin one year is $79.0 million, and is recorded as short-term borrowings.Borrowings under the term loan facility and bridge loan facility bear interestat LIBOR plus a margin that is determined based on Hospira’s senior unsecureddebt ratings from Standard & Poor’s and Moody’s. The margin is currently0.60%.

 

On March 23, 2007, Hospira issued $375.0million principal amount of Floating Rate Notes due 2010, $500.0 millionprincipal amount of 5.55% Notes due 2012 and $550.0 million principal amount of6.05% Notes due 2017 in a registered public offering. The Floating Rate Notesdue 2010 bear interest at three-month LIBOR plus 48 basis points. All series ofnotes are due on March 30 of the year of maturity. The net proceeds of thenotes (after deducting approximately $10.0 million of underwriters’ discountsand offering expenses of $5.6 million), together with approximately $21.5million of cash on hand, were used to repay the bridge loan facility andrelated interest in full.

 

Hospira has a five-year $375.0 million unsecuredrevolving credit facility (the “Revolver”), which it entered into on December16, 2005 and amended on January 15, 2007. The revolver was amended to permitthe Mayne Pharma acquisition and to temporarily increase the maximum leverageratio and lower the minimum interest coverage ratio. This Revolver is availablefor working capital and other requirements. The Revolver allows Hospira toborrow funds at variable interest rates as short-term cash needs dictate. Theamount of available borrowings under the Revolver may be increased to a maximumof $500 million, and the term may be increased for up to two additional years,under certain circumstances. As of September 30, 2007, Hospira had no amountsoutstanding under the Revolver.

 

Hospira’sdebt instruments contain covenants that limit Hospira’s ability to, among otherthings, sell assets, incur secured indebtedness and liens, incur indebtednessat the subsidiary level and merge or consolidate with other companies. Hospira’s debtinstruments also include customary events of default, which would permitamounts borrowed to be accelerated and would permit the lenders under therevolving credit agreement to terminate their lending commitments. Adescription of certain covenants is set forth below.

 

*Change of Control.* The notes issued on March23, 2007 include covenants that require Hospira to offer to repurchase thosenotes at 101% of their principal amount if: (1) there is a change of control ofHospira and (2) Hospira is rated below investment grade by both Moody’s andStandard & Poor’s at or within a specified time after the time ofannouncement of the change of control transaction. A change of control, asdescribed above, would constitute an event of cross default under the term loanagreement and Hospira’s revolving credit agreement.

 

*Financial Covenants.* Hospira’s term loanfacility and revolving credit facility include requirements to maintain amaximum leverage ratio and a minimum interest coverage ratio. The leverageratio is calculated by dividing Hospira’s debt by its earnings before interest,taxes, depreciation and amortization (excluding certain purchase accountingcharges relating to the Mayne Pharma acquisition, expenses relating to theintegration of Mayne Pharma into Hospira, expenses relating to Hospira’stransition from Abbott, expenses relating to Hospira’s manufacturingoptimization activities and certain non-cash gains, expenses and losses,subject in certain cases to agreed-upon maximums) for the twelve months endingon the last day of each quarter. The coverage ratio is calculated by dividingHospira’s earnings before interest, taxes, depreciation and amortization(excluding the items described above) by its consolidated financing expense(interest expense and net capitalized interest), in each case for the twelvemonths ended on the last day of each quarter. As of the end of each calendarquarter during 2007, the ratios will be calculated on a pro forma basisassuming the acquisition of Mayne Pharma and the related financing transactionshad occurred on the first day of the period.

 

The maximum leverage ratio is 3.50 as of September30, 2007 and 3.25 as of the end of all quarters thereafter. The minimumcoverage ratio is 4.75 as of September 30, 2007 and 5.00 as of the end of allquarters thereafter.

 

As ofSeptember 30, 2007, Hospira was in compliance with all applicable covenants.

 

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**Note 12 - Comprehensive Income, netof tax, and Accumulated Other Comprehensive Income (Loss)**

 

Comprehensive income, net of taxes consisted of thefollowing:

 
| ** **                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(dollars in thousands)**                       | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Foreign currency translation                               |       | $                                                        | 63,882     |                                                    | $          | (1,643 | ) | $ | 116,072 |   | $ | 6,594 |   |
| Pension liability adjustments                              |       | 847                                                      |       | —                                                  |       | 2,386 |   | 12,895 |   |
| Unrealized (losses) gains on marketable  equity securities |       | (3,446                                                   | )          | 626                                                     |       | (3,869 | ) | 751 |   |
| Unrealized losses on cash flow hedges                      |       | (586                                                     | )          | —                                                  |       | (1,762 | ) | — |   |
| Total other comprehensive income (loss)                    |       | 60,697                                                   |       | (1,017                                                  | )          | 112,827 |   | 20,240 |   |
| Net Income                                                 |       | 59,379                                                   |       | 55,945                                                  |       | 60,701 |   | 190,278 |   |
| Total Comprehensive Income                                 |       | $                                                        | 120,076    |                                                    | $          | 54,928 |   | $ | 173,528 |   | $ | 210,518 |   |
|                                                            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |

 

Accumulated other comprehensive income (loss), net oftaxes consisted of the following:

 
| **(dollars in thousands)**                                     | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Cumulative foreign currency translation                                  |       | $                                | 128,982    |                            | $          | 12,910 |   |
| Cumulative retirement plans unrealized  losses, net of tax               |       | (66,454                          | )          | (68,840                         | )          |
| Cumulative unrealized gains on marketable  equity securities, net of tax |       | 1,297                            |       | 5,166                           |       |
| Cumulative unrealized losses on cash flow  hedges, net of tax            |       | (1,762                           | )          | —                          |       |
| Accumulated Other Comprehensive Income  (Loss)                           |       | $                                | 62,063     |                            | $          | (50,764 | ) |
|                                                                          |            |                                  |            |                                 |            |  |  |  |

 

**Note 13 - Segment Information**

 

Hospira’s principal business is the development,manufacture and sale of a broad line of hospital products, including specialtyinjectable pharmaceuticals and medication delivery systems, and the provisionof injectable pharmaceutical contract manufacturing services. Hospira has tworeportable segments: U.S. and International.

 

Hospira’s underlying accounting records are maintainedon a legal entity basis for government and public reporting requirements.Segment disclosures are on a performance basis consistent with internalmanagement reporting. For internal management reporting, intersegment transfersof inventory are recorded at standard cost and are not a measure of segmentincome from operations. The costs of certain corporate functions that benefitthe entire organization are not allocated. The following segment informationhas been prepared in accordance with the internal accounting policies ofHospira, as described above.

 

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| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **Net Sales**                                       | ** ** | **Income from Operations**                    | ** ** | **Net Sales** | ** ** | **Income from Operations** | ** ** |
| **(dollars in thousands)** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                                 |       | $                                                        | 574,167    |                                                    | $          | 533,025 |   | $ | 104,384 |   | $ |  80,623 |   | $ | 1,736,124 |   | $ | 1,639,901 |   | $ | 211,600 |   | $ | 277,738 |   |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| International                        |       | 263,852                                                  |       | 113,615                                                 |       | 22,127 |   | 10,831 |   | 754,049 |   | 342,134 |   | 34,378 |   | 29,445 |   |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total reportable  segments           |       | $                                                        | 838,019    |                                                    | $          | 646,640 |   | 126,511 |   | 91,454 |   | $ | 2,490,173 |   | $ |  1,982,035 |   | 245,978 |   | 307,183 |   |
| Corporate  functions                 |       |                                                     |       |                                                    |       | (19,884 | ) | (12,402 | ) |   |   |   |   | (57,331 | ) | (41,172 | ) |
| Income from  operations              |       |                                                     |       |                                                    |       | 106,627 |   | 79,052 |   |   |   |   |   | 188,647 |   | 266,011 |   |
| Other, net                           |       |                                                     |       |                                                    |       | (28,537 | ) | (3,960 | ) |   |   |   |   | (90,527 | ) | (10,605 | ) |
| Income before  income taxes          |       |                                                     |       |                                                    |       | $ | 78,090 |   | $ | 75,092 |   |   |   |   |   | $ | 98,120 |   | $ | 255,406 |   |
|                                      |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Total Assets**  | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **(dollars in thousands)** | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                 |       |                   |       |   |   |
| U.S.                                 |       | $                      | 1,926,286  |   | $ | 2,036,486 |   |
|                                 |       |                   |       |   |   |
| International                        |       | 1,355,653              |       | 702,141 |   |
|                                 |       |                   |       |   |   |
| Total reportable segments            |       | 3,281,939              |       | 2,738,627 |   |
| Goodwill and net intangible assets   |       | 1,798,472              |       | 108,960 |   |
| Total                                |       | $                      | 5,080,411  |   | $ | 2,847,587 |   |
|                                      |            |                        |            |  |  |  |  |  |

 

 

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

This report contains forward-looking statements withinthe meaning of the federal securities laws. Hospira intends that theseforward-looking statements be covered by the safe harbor provisions forforward-looking words such as “may,” “will,” “should,” “anticipate,” “estimate,”“expect,” “plan,” “believe,” “predict,” “potential,” “project,” “intend,” “could,”or similar expressions. In particular, statements regarding Hospira’s plans,strategies, prospects and expectations regarding its business and industry areforward-looking statements. Investors should be aware that these statements andany other forward-looking statements in this document only reflect Hospira’sexpectations and are not guarantees of performance. These statements involverisks, uncertainties and assumptions. Many of these risks, uncertainties andassumptions are beyond Hospira’s control, and may cause actual results andperformance to differ materially from expectations. Important factors thatcould cause Hospira’s actual results to be materially different from itsexpectations include (i) the risks and uncertainties described in “Item 1A.Risk Factors” in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (the “2006 Form 10-K”), as may be updated by Part II. Item1A. of this report and (ii) the factors described in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe 2006 Form 10-K and the Reports on Form 10-Q for the three month periodsended on March 31, 2007 and June 30, 2007, as may be updated by this Item 2.Accordingly, you should not place undue reliance on the forward-lookingstatements contained in this report. These forward-looking statements speakonly as of the date on which the statements were made. Hospira undertakes noobligation to update or revise publicly any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

**Overview**

 

Hospira is a global specialty pharmaceutical and medicationdelivery company that develops, manufactures and markets products that helpimprove the productivity, safety and efficacy of patient care. In February2007, Hospira acquired Mayne Pharma Limited (“Mayne Pharma”) to increase itspresence in specialty generic injectable pharmaceuticals. Hospira’s portfolioincludes one of the industry’s broadest lines of generic acute-care andoncology injectables, which help address the high cost of proprietarypharmaceuticals; and integrated solutions for medication management andinfusion therapy. Hospira’s broad portfolio of products is used by hospitalsand alternate site providers, such as clinics, home healthcare providers andlong-term care facilities.

 

Please refer to “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in the 2006 Form10-K. The information in this Item 2 is intended to supplement, and should beread in conjunction with, the information included in Item 7 of the 2006 Form10-K. The 2006 Form 10-K was filed with the Securities and Exchange Commissionon February 28, 2007.

 

**Mayne Pharma Acquisition**

 

On February 2, 2007, Hospira completed its acquisitionof Mayne Pharma for $2,055.0 million. The results of operations of Mayne Pharmaare included in Hospira’s results for periods on and after that date, which hasaffected comparability of the financial statements for the periods presented inthis report and will affect comparability in future periods. Hospira financedthe acquisition and related expenses through borrowing approximately $1,925.0million and the remainder was funded with cash on hand. The financingarrangements are described below under “Liquidity and Capital Resources.” Forthe 2007 periods, sales of Mayne Pharma products, which are principallyspecialty injectable pharmaceutical products, are reported as a separateproduct line within each of Hospira’s reportable segments.

 

In connection with the acquisition, Hospira recorded$137.9 million of charges relating to purchase accounting during the ninemonths ended September 30, 2007, including $84.8 million of acquired in-processresearch and development, all of which was recorded in the first quarter, and$53.1 million of inventory step-up charges, of which $21.4 million was expensedin the first quarter and $31.7 million was expensed in the second quarter.Hospira also recorded $518.2 million of intangible assets in connection withthe acquisition, which will be amortized over their useful lives (which have aweighted average life of 10 years).

 

In connection with the integration of Mayne Pharmainto its operations, Hospira expects to incur approximately $95 million to $110million of cash expenditures for the two-year period after the closing, ofwhich $60 million to $75 million will be recorded as expense and the remainderrelates to purchase accounting items and capital projects. These expensesrelate to the closure of facilities, termination of leaseagreements and employee-related benefit arrangements during the two-year periodafter the closing. Approximately $7.9 million and $31.6 million ofintegration expenses were recorded during the three and nine months endedSeptember 30, 2007, respectively. In addition to integration expenses, Hospira recordedother acquisition-related expenses of $7.9 million in the first quarter 2007. Forfurther information regarding the acquisition and its financial impact, pleasesee Note 3 to the condensed consolidated financial statements included in thisreport.

 

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**Critical Accounting Policies**

 

The preparation of financial statements in accordancewith generally accepted accounting principles in the United States (GAAP)requires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses. A summary of Hospira’ssignificant accounting policies is included in Note 1 to the company’sconsolidated financial statements, which are included in Hospira’s AnnualReport on Form 10-K for the year ended December 31, 2006. Certain of Hospira’saccounting policies are considered critical, as these policies requiresignificant, difficult or complex judgments by management, often employing theuse of estimates about the effects of matters that are inherently uncertain.Such policies are summarized in “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” in the 2006 Form 10-K.

 

**Recently Issued Accounting Standards**

 

In June2007, the Financial Accounting Standards Board (“FASB”)ratified EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Paymentsfor Goods or Services Received for Use in Future Research and DevelopmentActivities” (“EITF 07-03”). EITF 07-03 states that nonrefundable advancepayments for goods or services that will be used or rendered for futureresearch and development activities should be deferred and capitalized. Suchamounts should be recognized as an expense as the related goods are deliveredor the related services performed. If it is not expected that the goods will bedelivered or services will be rendered, the capitalized advance payment shouldbe charged to expense in the period in which such determination is made. EITF 07-03is effective for new contracts entered into in fiscal years beginning afterDecember 15, 2007. Hospira is currently evaluating the potential impact of EITF07-03 on its financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 provides a company with the option to measure selectedfinancial instruments and certain other items at fair value at specifiedelection dates. The election may be applied on an item by item basis, withdisclosure regarding reasons for partial election and additional informationabout items selected for fair value option. SFAS No. 159 is effective forfinancial statements issued for fiscal years beginning after November 15,2007. Hospira is currently evaluating the potential impact of SFAS No. 159 onits financial statements.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFASNo. 157”). SFAS No. 157 clarifies the principle that fair value should be basedon the assumptions market participants would use when pricing an asset orliability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. Under the standard, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy. SFAS No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007. Hospira is currently evaluatingthe potential impact of SFAS No. 157 on its financial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of the end of the fiscal year. This provision of SFAS No. 158 is effective forfiscal years ending after December 15, 2008. Hospira does not anticipate that the impact from the adoption of thisprovision of SFAS No. 158 will be significant to its financial statements.

 

**Results of operations for the threemonths ended September 30, 2007 compared to September 30, 2006**

 

*Net Sales*

 

Net sales increased 29.6% in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. Ofthis increase, 25.6% is related to the addition of Mayne Pharma. The remaining4.0% increase in overall sales is primarily driven by volume/mix of 2.1%, theimpact of exchange of 0.9%, and increased price of 0.9% in the United States.

 

 

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**Hospira, Inc.**

**Net Sales by Product Line**

**(Unaudited)**

**(dollars in thousands)**

 

Acomparison of product line sales is as follows:

 
| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** | **vs. Prior** | ** ** |
| ** **                                       | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **Year** | ** ** |
| U.S.—                                       |       |                                                     |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals             |       | $                                                        | 208,363    |   | $ | 198,362 |   | 5.0% |   |
| Medication Delivery Systems                      |       | 216,245                                                  |       | 199,029 |   | 8.6% |   |
| Injectable Pharmaceutical Contract Manufacturing |       | 33,518                                                   |       | 38,090 |   | (12.0)% |   |
| Sales to Abbott Laboratories                     |       | 18,604                                                   |       | 25,038 |   | (25.7)% |   |
| Mayne Pharma                                     |       | 26,262                                                   |       | — |   | nm |   |
| Other                                            |       | 71,175                                                   |       | 72,506 |   | (1.8)% |   |
|                                             |       |                                                     |       |   |   |   |   |
| Total U.S.                                       |       | 574,167                                                  |       | 533,025 |   | 7.7% |   |
|                                             |       |                                                     |       |   |   |   |   |
| International—                              |       |                                                     |       |   |   |   |   |
| Sales to Third Parties                           |       | 112,637                                                  |       | 97,277 |   | 15.8% |   |
| Sales to Abbott Laboratories                     |       | 11,972                                                   |       | 16,338 |   | (26.7)% |   |
| Mayne Pharma                                     |       | 139,243                                                  |       | — |   | nm |   |
|                                             |       |                                                     |       |   |   |   |   |
| Total International                              |       | 263,852                                                  |       | 113,615 |   | 132.2% |   |
|                                             |       |                                                     |       |   |   |   |   |
| Net Sales                                        |       | $                                                        | 838,019    |   | $ | 646,640 |   | 29.6% |   |

 

Net Sales in SpecialtyInjectable Pharmaceuticals increased, driven by favorable pricing and highersales in the base product portfolio, as well as contributions from new productlaunches in 2007 and 2006, including ampicillin sulbactam and ondansetron.

 

Net Sales in MedicationDelivery Systems increased, driven by growth in both infusion therapy andmedication management systems sales. Growth in infusion therapy products saleswas largely due to higher sales of administration sets and increased volume fromnew customer contracts. Medication management systems sales increased due tohigher placements of devices and increased revenue from related services.

 

Net Sales in InjectablePharmaceutical Contract Manufacturing were down due to expected lower demandfrom existing customers for certain products, including several products thatnow have generic competition.

 

The decrease in U.S. NetSales to Abbott Laboratories (“Abbott”) was primarily due to expected decreasedvolume to Abbott for several of its products, partially offset by increasedprice.

 

The Other product lineincludes sales of Hospira’s products to alternate site providers such asclinics, home healthcare providers and long-term care facilities, as well assales of critical care devices and brain function monitoring systems. Thegrowth in sales to alternate site healthcare customers was more than offset bya decline in sales of critical care devices, and the planned exit of certainproducts manufactured in Ashland, Ohio and other adjustments. Sales toalternate site healthcare customers increased due to higher overall sales ofspecialty injectable pharmaceuticals and medication delivery systems.

 

International Net Sales toThird Parties were higher in all regions primarily related to increased salesof specialty injectable pharmaceuticals and medication management systems,favorable exchange, and increased contract manufacturing sales.

 

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*Gross Profit*

 

Gross profit increased $75.5 million, or 34.5%, forthe three months ended September 30, 2007, compared with the same period in2006. Of this increase, $63.2 million, or 28.9%, is related to the addition ofMayne Pharma.

 

Gross profit margin increased by 1.2% to 35.1% for thethree months ended September 30, 2007, from 33.9% for the three months endedSeptember 30, 2006. Of this increase, 0.7% is related to the addition of MaynePharma, which includes amortization of acquired intangible assets of (2.0)%.The remaining increase of 0.5% not related to the addition of Mayne Pharma isprimarily the result of volume/product mix improvement of 0.3%, favorable pricein the U.S. of 0.6% and lower costs associated with the planned manufacturingplant closures of 1.6% offset by inflation and other manufacturing costs of(1.5)% and higher project expense of (0.5)%.

 

*Research and Development*

 

Research and development (“R&D”) expensesincreased $14.9 million, or 41.0%, for the three months ended September 30,2007, compared with the same period in 2006. Of this increase, 36.9% is relatedto the addition of Mayne Pharma. The remainder of the increase was primarilyrelated to higher spending on new product development related to new compoundsin Hospira’s generic injectable drug pipeline and clinical trials on Hospira’sbranded sedative, Precedex®, partially offset by lower spending in 2007 onmedication delivery infusion systems projects as a result of new productlaunches in 2006. R&D expenses increased to 6.1% of net sales for the threemonths ended September 30, 2007, compared with 5.6% of net sales for the sameperiod in 2006.

 

*Selling, General and Administrative*

 

Selling, general and administrative (“SG&A”)expenses increased $33.0 million, or 31.9%, for the three months endedSeptember 30, 2007, compared with the same period in 2006. Of this increase,24.1% is related to the addition of Mayne Pharma. The remainder of the increasewas primarily due to additional costs related to the integration of MaynePharma partially offset by reduced costs due to the completion in 2006 of theimplementation of Hospira’s new independent infrastructure as a result of thespin-off. SG&A expenses increased to 16.3% of net sales for the threemonths ended September 30, 2007, compared with 16.0% of net sales for the sameperiod in 2006.

 

*Interest Expense and Other (Income), Net*

 

Interest expense was $34.7 million for the threemonths ended September 30, 2007, compared to $8.1 million in the same period in2006. The increase was primarily due to the issuance of additional debt andrelated costs due to the Mayne Pharma acquisition. Other (income), net was$(6.1) million for the three months ended September 30, 2007 compared to $(4.1)million for the three months ended September 30, 2006. The change was primarilyrelated to net gains on investments of $2.9 million.

 

*Income Tax Expense*

 

The effective tax rate was 24.0% for the three monthsended September 30, 2007, compared to 25.5% for the same period in 2006. Thedecrease in the effective tax rate for the three months ended September 30,2007 compared to 2006, was due primarily to increased expenses in higher taxrate jurisdictions in connection with the Mayne Pharma acquisition, includingintangible amortization expense, purchase accounting charges, and interestexpense. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in certain jurisdictions outside the United States.

 

**Results of operations for the ninemonths ended September 30, 2007 compared to September 30, 2006**

 

*Net Sales*

 

Net sales increased 25.6% in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Ofthis increase, 23.0% is related to the addition of Mayne Pharma. The remaining2.6% increase in overall sales is primarily driven by volume/mix of 1.3%, theimpact of exchange of 0.6%, and increased price of 0.5% in the United States.

 

Acomparison of product line sales is as follows:

 

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**Hospira, Inc.**

**Net Sales by Product Line**

**(Unaudited)**

**(dollars in thousands)**

 
| ** **                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                              | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                       | ** ** | ** **                                              | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                                       | ** ** | ** **                                              | ** ** | ** ** | ** ** | **vs. Prior** | ** ** |
| ** **                                       | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **Year** | ** ** |
| U.S.—                                       |       |                                                    |       |   |   |   |   |
| Specialty Injectable Pharmaceuticals             |       | $                                                       | 619,761    |   | $ | 590,915 |   | 4.9 | %  |
| Medication Delivery Systems                      |       | 660,049                                                 |       | 626,498 |   | 5.4 | %  |
| Injectable Pharmaceutical Contract Manufacturing |       | 111,632                                                 |       | 139,879 |   | (20.2 | )% |
| Sales to Abbott Laboratories                     |       | 55,791                                                  |       | 70,860 |   | (21.3 | )% |
| Mayne Pharma                                     |       | 75,862                                                  |       | — |   | nm |   |
| Other                                            |       | 213,029                                                 |       | 211,749 |   | 0.6 | %  |
|                                             |       |                                                    |       |   |   |   |   |
| Total U.S.                                       |       | 1,736,124                                               |       | 1,639,901 |   | 5.9 | %  |
|                                             |       |                                                    |       |   |   |   |   |
| International—                              |       |                                                    |       |   |   |   |   |
| Sales to Third Parties                           |       | 334,470                                                 |       | 290,232 |   | 15.2 | %  |
| Sales to Abbott Laboratories                     |       | 37,882                                                  |       | 51,902 |   | (27.0 | )% |
| Mayne Pharma                                     |       | 381,697                                                 |       | — |   | nm |   |
|                                             |       |                                                    |       |   |   |   |   |
| Total International                              |       | 754,049                                                 |       | 342,134 |   | 120.4 | %  |
|                                             |       |                                                    |       |   |   |   |   |
| Net Sales                                        |       | $                                                       | 2,490,173  |   | $ | 1,982,035 |   | 25.6 | %  |

 

Net Sales in SpecialtyInjectable Pharmaceuticals increased, driven by favorable pricing and highersales in the base product portfolio, as well as contributions from new productlaunches in 2007 and 2006, including ampicillin sulbactam, ondansetron andpropofol.

 

Net Sales in MedicationDelivery Systems increased, driven by growth in both infusion therapy andmedication management systems sales. Growth in infusion therapy products saleswas largely due to increased volume from new and existing customer contracts.Medication management systems sales increased due to higher placements ofdevices and increased revenue from related services.

 

Net Sales in InjectablePharmaceutical Contract Manufacturing were down due to expected lower demand fromexisting customers for certain products, including several products that nowhave generic competition.

 

The decrease in U.S. NetSales to Abbott was primarily due to expected decreased volume to Abbott forseveral of its products, partially offset by increased price.

 

The Other product lineincludes sales of Hospira’s products to alternate site providers such asclinics, home healthcare providers and long-term care facilities, as well assales of critical care devices and brain function monitoring systems. Thegrowth in sales to alternate site healthcare customers more than offset adecline in sales of critical care devices, and the planned exit of certainproducts manufactured in Ashland, Ohio and other adjustments. Sales toalternate site healthcare customers increased due to higher overall sales ofspecialty injectable pharmaceuticals and medication delivery systems, partiallyoffset by decreased sales of deferoxamine.

 

International Net Sales toThird Parties were higher in all regions primarily related to increased salesof specialty injectable pharmaceuticals and medication management systems,favorable exchange, and increased contract manufacturing sales.

 

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*Gross Profit*

 

Gross profit increased $146.4 million, or 21.3%, forthe nine months ended September 30, 2007, compared with the same period in2006. Of this increase, $124.4 million, or 18.1%, is related to the addition ofMayne Pharma.

 

Gross profit margin decreased by (1.3)% to 33.5% forthe nine months ended September 30, 2007, from 34.8% for the nine months endedSeptember 30, 2006. Of this decrease, (1.5)% is related to the addition ofMayne Pharma, which includes the inventory step-up charge resulting frompurchase accounting of (2.4)% and amortization of the acquired intangibleassets of (1.5)%. The remaining change of 0.2% not related to the addition ofMayne Pharma is primarily the result of volume/product mix improvement of 0.7%,lower costs associated with the planned manufacturing plant closures of 0.4%and favorable price in the U.S. of 0.3% partially offset by inflation and othermanufacturing costs of (1.1)% and incremental freight and distribution costs of(0.1)%.

 

*Research and Development*

 

R&D expenses increased $41.0 million, or 38.4%,for the nine months ended September 30, 2007, compared with the same period in2006. Of this increase, 30.2% is related to the addition of Mayne Pharma. Theremainder of the increase was primarily related to higher spending on newproduct development related to new compounds in Hospira’s generic injectabledrug pipeline and clinical trials on Hospira’s branded sedative, Precedex®,partially offset by lower spending in 2007 on medication delivery infusionsystems projects as a result of new product launches in 2006. R&D expensesincreased to 5.9% of net sales for the nine months ended September 30, 2007,compared with 5.4% of net sales for the same period in 2006.

 

*Acquired In-Process Research and Development*

 

OnFebruary 2, 2007, Hospira completed its acquisition of Mayne Pharma. As part ofthe purchase price allocation, Hospira allocated and expensed $84.8 million toacquired in-process research and development related to Mayne Pharma’s pipelineproducts.

 

*Selling, General and Administrative*

 

SG&A expenses increased $98.0 million, or 31.0%,for the nine months ended September 30, 2007, compared with the same period in2006. Of this increase, 24.0% is related to the addition of Mayne Pharma. Theremainder of the increase was primarily due to additional costs related to theintegration of Mayne Pharma and partially offset by reduced costs due to thecompletion in 2006 of the implementation of Hospira’s new independentinfrastructure as a result of the spin-off. SG&A expenses increased to16.6% of net sales for the nine months ended September 30, 2007, compared with16.0% of net sales for the same period in 2006.

 

*Interest Expense and Other (Income), Net*

 

Interest expense was $102.5 million for the ninemonths ended September 30, 2007, compared to $23.0 million in the same periodin 2006. The increase was primarily due to the issuance of additional debt andrelated costs due to the Mayne Pharma acquisition. Other (income), net was $(12.0)million for the nine months ended September 30, 2007 compared to $(12.4)million for the nine months ended September 30, 2006. The change was primarilyrelated to $5.7 million of foreign exchange losses realized in 2007 due to theMayne Pharma acquisition and $1.0 million of lower interest income, partiallyoffset by $3.7 million of foreign exchange gains realized in 2007 and net gainson investments of $2.9 million.

 

*Income Tax Expense*

 

The effective tax rate was 38.1% for the nine monthsended September 30, 2007, compared to 25.5% for the same period in 2006. Theeffective tax rate for the nine months ended September 30, 2007 included theimpact of a significant unusual item, the expensing of non-deductible acquiredin-process research and development. Excluding the effect of this item, the2007 effective tax rate was 20.5%. The decrease in the effective tax rate in2007 compared to 2006, excluding the significant unusual item, was dueprimarily to increased expenses in higher tax rate jurisdictions in connectionwith the Mayne Pharma acquisition, including intangible amortization expense,purchase accounting charges, and interest expense. The effective tax rates,excluding the impact of significant unusual items, are less than the statutoryU.S. federal income tax rate principally due to the benefit of tax exemptions,of varying durations, in certain jurisdictions outside the United States.

 

**Liquidity and Capital Resources atSeptember 30, 2007 compared with December 31, 2006**

 

Net Cash provided by Operating Activities continues tobe Hospira’s primary source of funds to finance operating needs and capitalexpenditures. Other capital resources include cash on hand, borrowingavailability under Hospira’s $375.0 million revolving credit facility and accessto capital markets. Beginning on February 2, 2007, Hospira’s operating cashflows include operating cash

 

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flows generated by Mayne Pharma. During the two-yearperiod after the closing, Hospira expects to incur approximately $95 million to$110 million of cash expenditures relating to the integration of Mayne Pharma,which will reduce operating cash flows. In addition, as a result of the debtincurred during the first quarter of 2007 to finance the Mayne Pharmaacquisition, Hospira must dedicate substantially greater cash to service debtobligations (including interest expense and mandatory principal payments on theterm loan described below) on an ongoing basis compared to past periods.Hospira believes that its current capital resources, including cash and cashequivalents, cash generated from operations, funds available from its revolvingcredit facility and access to the capital markets will be sufficient to financeits operations, including debt service obligations, capital expenditures,product development and Mayne Pharma integration expenditures for theforeseeable future.

 

*Summary of Cash Flows*

 

Operating activities provided net cash of $354.5million driven by net income of $60.7 million. Non-cash depreciation, non-cashamortization charges, the write-off of acquired in-process research anddevelopment, and non-cash stock-based compensation expense totaled $289.7 million.Changes in operating assets and liabilities and Other, net of $4.1 millionconsist primarily of lower inventory as a result of the impact of the step-upvalue of acquired Mayne Pharma inventory subsequently sold, partially offset bypayments made on acquired Mayne Pharma current liabilities, including mergeradvisory fees, and higher trade receivables due to increased sales, includingMayne Pharma.

 

Net Cash Used in InvestingActivities of $2,133.2 million includes the acquisition of Mayne Pharma for$1,961.3 million, net of cash acquired and capital expenditures of $128.7million. In connection with the acquisition of Mayne Pharma, Hospiraentered into certain foreign currency forward exchange contracts to limit itsexposure from currency movements of the Australian dollar. During the ninemonths ended September 30, 2007, Hospira paid $55.7 million for the settlementsrelating to these contracts. These decreases were partially offset byproceeds from dispositions of certain product rights for $13.8 million.

 

Net Cash From Financing Activities of $1,677.1 millionconsists primarily of Hospira incurring $1,925.0 million of bank debt tofinance the Mayne Pharma acquisition. The bank facilities included a $500.0million, three-year term loan facility and a $1,425.0 million one-year bridgeloan facility. The bridge loan facility was completely refinanced on March 23,2007 through the issuance of long-term debt securities. During the nine monthsended September 30, 2007, Hospira prepaid $240.8 million in principal amount ofthe term loan, in addition to the scheduled $34.2 million in principal. Inaddition, financing activities includes proceeds from employee stock optionexercises and related tax benefits of $41.3 million.

 

*Debt andCapital*

 

On February 1, 2007, Hospiraincurred $1,925.0 million of bank debt to finance the Mayne Pharma acquisition.The remainder of the purchase price was funded with cash on hand. Thebank facilities included a $500.0 million, three-year term loan facilityand a $1,425.0 million one-year bridge loan facility. The bridge loanfacility was completely refinanced on March 23, 2007 through the issuance oflong-term debt securities described below.

 

Under the three-year term loan facility,before giving effect to any prepayments (which reduce the repayment amounts ona pro rata basis), Hospira must repay $12.5 million in principal at the end ofeach quarter in 2007, $50.0 million at the end of each quarter in 2008 and$62.5 million at the end of each quarter in 2009 (with the final payment to bemade on the maturity date of January 15, 2010). Hospira is permitted to prepayamounts borrowed under the term loan from time to time without penalty. Duringthe nine months ended September 30, 2007, Hospira prepaid $240.8 million inprincipal amount of the term loan, in addition to the rescheduled $34.2 millionin principal. The $34.2 million of payments in principal reflect a reduction inoriginal mandatory payments due to prepayments made in 2007. As a result of theprepayments made in 2007, the amount due within one year is $79.0 million, andis recorded as short-term borrowings. Borrowings under the term loanfacility and bridge loan facility bear interest at LIBOR plus a margin that isdetermined based on Hospira’s senior unsecured debt ratings from Standard &Poor’s and Moody’s. Based on Hospira’s ratings of BBB (stable outlook) fromStandard & Poor’s and Baa3 (negative outlook) from Moody’s, the margin iscurrently 0.60%. Ratings are not recommendations to buy, sell or holdsecurities and are subject to revision or withdrawal at any time by the ratingagencies. Each rating should be evaluated independently of any other rating.

 

On March 23, 2007, Hospira issued $375.0million principal amount of Floating Rate Notes due 2010, $500.0 million principalamount of 5.55% Notes due 2012 and $550.0 million principal amount of 6.05%Notes due 2017 in a registered public offering. The Floating Rate Notes due2010 bear interest at three-month LIBOR plus 48 basis points. All series ofnotes are due on March 30 of the year of maturity. The net proceeds of thenotes (after deducting approximately $10.0 million of underwriters’ discountsand offering expenses of $5.6 million), together with approximately $21.5million of cash on hand, were used to repay the bridge loan facility andrelated interest in full.

 

Hospira has a five-year $375.0 millionunsecured revolving credit facility (the “Revolver”), which it entered into onDecember 16, 2005, and amended on January 15, 2007. The Revolver was amended topermit the Mayne Pharma acquisition and to temporarily increase the maximumleverage ratio and lower the minimum interest coverage ratio. This Revolver isavailable for working capital and other requirements. The Revolver allowsHospira to borrow funds at variable interest rates as short-term cash needsdictate. The

 

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amount of available borrowings under theRevolver may be increased to a maximum of $500 million, and the term may beincreased for up to two additional years, under certain circumstances. As ofSeptember 30, 2007, Hospira had no amounts outstanding under the Revolver.

 

Hospira’s debt instruments contain covenants thatlimit Hospira’s ability to, among other things, sell assets, incur securedindebtedness and liens, incur indebtedness at the subsidiary level and merge orconsolidate with other companies. Hospira’s debt instruments also includecustomary events of default, which would permit amounts borrowed to beaccelerated and would permit the lenders under the revolving credit agreementto terminate their lending commitments. A description of certain covenants isset forth below.

 

*Change of Control.* The notes issued on March 23,2007 include covenants that require Hospira to offer to repurchase those notesat 101% of their principal amount if: (1) there is a change of control ofHospira and (2) Hospira is rated below investment grade by both Moody’s andStandard & Poor’s at or within a specified time after the time ofannouncement of the change of control transaction. A change of control, asdescribed above, would constitute an event of cross default under the term loanagreement and Hospira’s revolving credit agreement.

 

*Financial Covenants.* Hospira’s term loanfacility and revolving credit facility include requirements to maintain amaximum leverage ratio and a minimum interest coverage ratio. The leverageratio is calculated by dividing Hospira’s debt by its earnings before interest,taxes, depreciation and amortization (excluding certain purchase accountingcharges relating to the Mayne Pharma acquisition, expenses relating to theintegration of Mayne Pharma into Hospira, expenses relating to Hospira’stransition from Abbott, expenses relating to Hospira’s manufacturingoptimization activities and certain non-cash gains, expenses and losses,subject in certain cases to agreed-upon maximums) for the twelve months endingon the last day of each quarter. The coverage ratio is calculated by dividingHospira’s earnings before interest, taxes, depreciation and amortization(excluding the items described above) by its consolidated financing expense(interest expense and net capitalized interest), in each case for the twelvemonths ended on the last day of each quarter. As of the end of each calendarquarter during 2007, the ratios will be calculated on a pro forma basisassuming the acquisition of Mayne Pharma and the related financing transactionshad occurred on the first day of the period.

 

The maximum leverage ratio is 3.50 as of September30, 2007 and 3.25 as of the end of all quarters thereafter. The minimumcoverage ratio is 4.75 as of September 30, 2007 and 5.00 as of the end of allquarters thereafter.

 

As of September 30, 2007, Hospira was in compliancewith all applicable covenants.

 

**ContractualObligations and Off-Balance Sheet Arrangements**

 

The followingtable summarizes Hospira’s estimated contractual obligations as of September30, 2007:

 

*(dollars in millions)*

* *
| ** **                                                                   | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **Total**                                | ** ** | **2007** | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **2012 and  Thereafter** | ** ** |
| Long-term debt and interest payments                                         |       | $                                        | 3,088.8    |   | $ | 47.2 |   | $ | 775.5 |   | $ | 556.4 |   | $ | 1,709.7 |   |
| Lease obligations                                                            |       | 162.7                                    |       | 7.4 |   | 48.5 |   | 43.5 |   | 63.3 |   |
| Purchase commitments (1)                                                     |       | 484.8                                    |       | 401.3 |   | 82.3 |   | 0.8 |   | 0.4 |   |
| Other long-term liabilities reflected on  the consolidated balance sheet (2) |       | 221.9                                    |       | — |   | 164.6 |   | 57.3 |   | — |   |
| Total                                                                        |       | $                                        | 3,958.2    |   | $ | 455.9 |   | $ | 1,070.9 |   | $ | 658.0 |   | $ | 1,773.4 |   |

 

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(1)        Purchase commitments consist primarily of inventory purchases madein the normal course of business to meet operational requirements. Contractualcapital commitments are also included here, but these commitments representonly a portion of expected capital spending. Hospira has committed to makepotential future “milestone” payments to third-parties as part of in-licensingand development agreements. Payments under these agreements are contingent uponachievement of certain developmental, regulatory and/or commercial milestonesand are not included in the table above.

(2)        Includes liability of $123.9 million relating to unrecognized taxbenefits, penalties and interest: excludes $152.6 million of other long-termliabilities related primarily to post-retirement benefit obligations.

 

Hospira has nomaterial exposures to off-balance sheet arrangements, no special purposeentities, and no activities that include non-exchange-traded contractsaccounted for at fair value.

 

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**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

 

On March 23, 2007, Hospira issued $375.0 millionprincipal amount of Floating Rate Notes due 2010 that bear interest at athree-month LIBOR plus 48 basis points. A hypothetical one percentage pointincrease/(decrease) in interest rates would increase/(decrease) interestexpense by $3.8 million. On February 1, 2007, Hospira incurred a$500.0 million, three-year term loan facility bearing interest at LIBORplus a margin that is determined based on Hospira’s senior unsecured debtratings from Standard & Poor’s and Moody’s. As of September 30, 2007 theoutstanding balance on the term loan was $224.6 million. A hypothetical onepercentage point increase/(decrease) in interest rates wouldincrease/(decrease) interest expense by $2.3 million. Refer to the Liquidityand Capital Resources section above, as well as Note 11 to the condensedconsolidated financial statements included in this quarterly report on Form10-Q, for further information.

 

There have been no other material changes to theinformation provided in Item 7A. to Hospira’s Annual Report on Form 10-K forthe year ended December 31, 2006.

 

**Item 4.******** Controls and Procedures**

 

*Evaluationof disclosure controls and procedures.*The Chairman and Chief Executive Officer, ChristopherB. Begley, and Senior Vice President, Finance and Chief Financial Officer,Thomas E. Werner, evaluated the effectiveness of Hospira’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities and Exchange Act of 1934) as of the end of the period covered bythis report, and concluded that Hospira’s disclosure controls and procedureswere effective.

 

*Changesin internal controls.* There was no change in Hospira’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, Hospira’s internal control over financial reporting. Hospira iscontinuing to evaluate the internal controls of Mayne Pharma.

 

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**PART II. OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

The disclosure contained in Note 8 to the condensedconsolidated financial statements included in Part I. Item 1 hereof isincorporated herein by reference.

 

**Item 1A.Risk Factors**

 

Pleaserefer to Item 1A. in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2006 for a discussion of risks to which Hospira’s business,financial condition, results of operations and cash flows are subject.

 

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds**

 

(c) Issuer Purchases of Equity Securities

 

The table below givesinformation on a monthly basis regarding purchases made by Hospira of itscommon stock.

 
| **Period**                     | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet be Purchased  Under the Plans or  Programs (2)** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1-July 31, 2007           |       | 6,720                                                     |       | $                                                | 40.06      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| August 1-August 31, 2007       |       | 26,608                                                    |       | $                                                | 37.93      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| September 1-September 30, 2007 |       | 31,070                                                    |       | $                                                | 39.07      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| Total                          |       | 64,398                                                    |       | $                                                | 38.70      |                                                                                                                 | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |

 

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(1)          Theseshares represent the shares deemed surrendered to Hospira to pay the exerciseprice and satisfy minimum statutory tax withholding obligations in connectionwith the exercise of employee stock options.

 

(2)          InFebruary 2006, Hospira’s board of directors authorized the repurchase of up to$400.0 million of Hospira’s common stock in accordance with Rule 10b-18 underthe Securities Exchange Act of 1934. The repurchase of shares commenced inearly March 2006. As of September 30, 2007, Hospira had purchased 7,584,400shares for $299.8 million in the aggregate under the 2006 board authority, allof which were purchased during 2006.

 

**Item 6. Exhibits**

 

A list of exhibits filed herewith orincorporated by reference herein immediately precedes such exhibits and isincorporated herein by reference.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|   | HOSPIRA, INC. |
|--------|--------------------|
|   | By                 | /s/  THOMAS E. WERNER |
|   |               | Thomas  E. Werner,Senior Vice President, Finance  and Chief Financial Officer |
|   |               | Date:  November 8, 2007 |

 

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** **

EXHIBIT INDEX

 

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                       |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Hospira Corporate Officer Severance Plan.                                                                                                         |
|                 |       |                                                                                                                                              |
| 10.2                 |       | Hospira, Inc. Non-Employee Directors’ Fee Plan.                                                                                              |
|                 |       |                                                                                                                                              |
| 12.1                 |       | Statement regarding Computation of Ratios.                                                                                                        |
|                 |       |                                                                                                                                              |
| 31.1                 |       | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                |
|                 |       |                                                                                                                                              |
| 31.2                 |       | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                |
|                 |       |                                                                                                                                              |
| 32.1                 |       | Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                              |
| 32.2                 |       | Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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