UNITED STATES DISTRICT COURT NORTHERN...

Case: 1:11-cv-08332 Document #: 75 Filed: 06/25/12 of 142 PageID #:1762

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

CITY OF STERLING HEIGHTS GENERAL ) No. 1:11-cv-08332-AJS EMPLOYEES’ RETIREMENT SYSTEM, (Consolidated) Individually and on Behalf of All Others Similarly Situated, CLASS ACTION

Plaintiff,

vs. DEMAND FOR JURY TRIAL

HOSPIRA, INC., et al. ,

Defendants.

AMENDED CONSOLIDATED CLASS ACTION COMPLAINT


TABLE OF CONTENTS

I. SUMMARY OF THE ACTION............................................................................................1

II. JURISDICTION AND VENUE............................................................................................7

III. PARTIES ...............................................................................................................................8

A. Plaintiffs.....................................................................................................................8

B. Defendants .................................................................................................................9

IV. SUBSTANTIVE ALLEGATIONS .......................................................................................13

A. Background of the Company.....................................................................................13

B. Hospira’s Corporate Culture Encouraged “Quantity over Quality” ..........................14

C. Defendants Announced “Project Fuel” as an Initiative to Improve Operations, But in Reality It Was a Cost-Cutting Measure that Gutted Quality ..........................17

D. Project Fuel Exacerbated Existing Manufacturing and Quality Control Deficiencies at Rocky Mount.....................................................................................18

1. Project Fuel Cut Quality Control Personnel, Which Worsened Rather than Improved Hospira’s Quality...................................................................18

2. The Quality Cutbacks and Focus on Quantity Resulted in Production Delays from Rejected Products, Re-Inspection Delays, and Quality ControlBacklogs ...........................................................................................22

3. Tensions Built as Proper Testing, Validation, Documentation, and CleaningSuffered ..........................................................................................26

4. Rocky Mount’s Facilities and Equipment Were in Disrepair........................31

E. Rocky Mount’s Quality Problems Resulted in Production Slowdowns and Increased Back Orders Beginning in 2010, and Ballooning “Open Investigations” in 2011 ..............................................................................................35

F. The FDA Found Increasing Quality Violations Resulting from Hospira’s Cutbacks on Quality and Facility Spending...............................................................38

1. The FDA Found Increasing Quality Issues at Rocky Mount During theClass Period..............................................................................................38

2. FDA Violations Were Not Limited to Rocky Mount....................................42

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G. Despite Increased Regulatory Scrutiny, Defendants Made No Effort Before June 2011 to Meaningfully Address Rocky Mount’s Numerous Deficiencies..........44

H. Defendants Knew of or Recklessly Disregarded Hospira’s Myriad Deficiencies Throughout the Class Period.................................................................46

1. Defendants Held Weekly Meetings and Used Reports to Track RemediationEfforts.......................................................................................46

2. Defendants Were Personally Involved in Addressing the FDA’s Concerns........................................................................................................47

V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS ...........50

A. February to March 2010.............................................................................................50

B. April to June 2010......................................................................................................56

C. July to September 2010..............................................................................................64

D. October 2010 to January 2011 ...................................................................................70

E. February to March 2011.............................................................................................76

F. April to June 2011......................................................................................................84

G. July 2011....................................................................................................................91

VI. THE TRUTH BEGINS TO EMERGE..................................................................................98

A. September 7, 2011 “Investor Day” Event..................................................................98

B. Third-Quarter 2011 Preliminary Earnings Release and Conference Call..................108

VII. POST-CLASS PERIOD REVELATIONS............................................................................113

VIII. LOSS CAUSATION..............................................................................................................115

A. September 7, 2011 Disclosure ...................................................................................116

B. October 18, 2011 Disclosure......................................................................................119

C. Post-Class Period Revelation on November 28, 2011...............................................121

IX. ADDITIONAL SCIENTER ..................................................................................................124

X. PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE..................126

XI. NO SAFE HARBOR .............................................................................................................128

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XII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS..............................................................129

XIII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS.....................................................................................................................131

XIV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS.................................................................135

XV. PRAYER FOR RELIEF ........................................................................................................136

XVI. JURY TRIAL DEMANDED.................................................................................................136

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By and through their undersigned counsel, Lead Plaintiffs the Sheet Metal Workers’ National

Pension Fund (“Sheet Metal Fund”), KBC Asset Management NV (“KBC”), the Heavy & General

Laborers’ Locals 472 & 172 Pension & Annuity Funds (“Laborers Funds”), and the Roofers Local

No. 149 Pension Fund (“Roofers Fund”) (collectively, “Plaintiffs”) allege the following against

Defendants Hospira, Inc. (“Hospira” or the “Company”), Chief Executive Officer F. Michael Ball

(“Ball”), Chief Financial Officer Thomas E. Werner (“Werner”), former Senior Vice President of

Operations James H. Hardy, Jr. (“Hardy”), and former Executive Chairman of the Board Christopher

B. Begley (“Begley”) (collectively, “Defendants”), upon personal knowledge as to those allegations

concerning Plaintiffs and, as to all other matters, upon the investigation of counsel, which included,

without limitation: (a) review and analysis of public filings made by Hospira and other related

parties and non-parties with the U.S. Securities and Exchange Commission (“SEC”); (b) review and

analysis of press releases and other publications disseminated by certain of the Defendants and other

related non-parties; (c) review of news articles and shareholder communications; (d) review of other

publicly available information concerning Hospira, the other Defendants, and related non-parties; (e)

consultation with experts; and (f) interviews with factual sources, including individuals formerly

employed by Hospira and other industry participants.

I. SUMMARY OF THE ACTION

This is a federal securities class action against Hospira and certain of its officers and

directors for violations of the federal securities laws. Plaintiffs bring this action under Sections

10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of

themselves and all persons or entities who purchased or acquired shares of Hospira (the “Class”)

between February 4, 2010, and October 17, 2011, inclusive (the “Class Period”). Plaintiffs allege

that, during the Class Period, Defendants engaged in a fraudulent scheme to artificially inflate the

Company’s stock price by concealing significant deteriorating conditions, manufacturing and quality


control deficiencies at its largest manufacturing facility located in Rocky Mount, North Carolina, and

the costly effects of these deficiencies on production capacity. Defendants also misrepresented the

effectiveness of a self-proclaimed “optimization” initiative which, while touted as “driving”

improvements in their quality and manufacturing operations, was actually nothing more than a cost-

cutting initiative that drastically reduced quality control efforts and delayed and dramatically

increased the cost of necessary remediation at Rocky Mount.

2. Hospira was formed in 2004 when it was spun off from Abbott Laboratories

(“Abbott”). The Company holds itself out as the world’s leading provider of injectable drugs and

infusion technologies. In a heavily regulated industry, the quality of Hospira’s products is critically

important. In March 2009, Hospira launched a major two-year optimization initiative dubbed

“Project Fuel,” which was touted not just as a generic cost-cutting measure but as an initiative that

would cut costs while “increas[ing] shareholder value and improv[ing] operational efficiency.”

Through Project Fuel, Defendants promised shareholders an annual costs savings of more than $100

million by way of a 10% reduction in Hospira’s global workforce, optimization of Hospira’s product

line, evaluation of non-strategic assets, and further streamlining of the Company’s organizational

structure.

3. However, Hospira was also facing increased regulatory scrutiny as a result of an

August 2009 inspection of one of its facilities by the U.S. Food and Drug Administration (“FDA” or

the “Agency”). At the same time Defendants were promising aggressive efforts to remediate the

issues raised by the FDA, they were actually making the problems worse by gutting quality control

efforts through cost cutting aimed at boosting short-term profitability. This created the false

appearance of increased short-term profitability while increasing the eventual remediation costs.

4. Then, in January 2010, an FDA inspection of Rocky Mount revealed significant

problems with Hospira’s quality control and drug validation processes. For the second time in only

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eight months, on April 12, 2010, Hospira was issued a Warning Letter 1 (the “April 2010 Warning

Letter”) identifying numerous violations of the Federal Food, Drug, and Cosmetic Act and its

implementing regulations. The April 2010 Warning Letter further revealed that the FDA’s concerns

had gone unanswered for many months following the issuance of a previous Warning Letter in

August 2009 as a result of an investigation of another of Hospira’s facilities.

Defendants immediately assured investors that: (a) the Company would respond fully

to the FDA’s concerns; (b) they would also undertake a comprehensive evaluation of Hospira’s

entire global manufacturing network to ensure regulatory compliance; and (c) the April 2010

Warning Letter would not affect Hospira’s ongoing operations or its previously announced financial

projections for 2010. Thereafter, quarter in and quarter out, Defendants trumpeted the success that

Project Fuel was achieving in optimizing Hospira’s operations.

6. In reality, Project Fuel’s purported savings from gains in efficiencies were simply

savings from cutting quality and remediation efforts, which resulted in severe operational

deficiencies. Rocky Mount’s facilities shed a number of personnel, including many responsible for

the plant’s quality assurance efforts. With the loss of tenured personnel came the loss of institutional

knowledge. Production staff were asked to pick up the quality control burdens without proper

training. Quality control and testing processes as well as the plant’s written Standard Operating

Procedures were streamlined and ignored. An emphasis on quality had been lost and overrun by an

emphasis on quantity and short-term cost cutting. For example, syringes filled with pharmaceuticals

were being shipped cracked and defective. Production lines were being run at excessive speeds,

1 As described more fully below in Section IV.F, Warning Letters from the FDA are widely considered to be serious regulatory actions and are only issued for violations of regulatory significance. Accordingly, Warning Letters are reserved for Agency investigators’ observations of significant violations of the Federal Food, Drug, and Cosmetic Act and its implementing regulations.


causing frequent glass breakage. Sampling procedures and validation processes were woefully

inadequate and increasingly difficult to remediate, resulting in the production of potentially

dangerous pharmaceutical products. Structurally, the aged facilities and equipment at Rocky Mount

were in disrepair, even facing mold, contamination, and breakdowns. In short, the culture had

changed.

7. Despite Defendants’ repeated assurances during the Class Period that they were

“redoubling [their] commitment to quality” and “holistically addressing the concerns of the FDA,”

no such actions were taking place, and Hospira’s quality and regulatory problems were actually

growing worse. Several former insiders have confirmed that Rocky Mount’s deficiencies identified

in April 2010 were well known and largely ignored until 2011. Beginning in 2010, Rocky Mount’s

myriad problems had taken a significant toll on the facility’s productivity. By 2011, production

levels were far below what management had forecasted, equipment was breaking down, product was

requiring re-inspection, personnel were burdened with increasing FDA inspections, and inventory

reserves would only last for so long before customers’ orders would be delayed or unmet. Follow-up

inspections in June 2011 and August 2011 revealed that the violations at Rocky Mount had not been

remediated, and in fact had gotten worse.

8. Throughout the Class Period, Defendants were well aware of the Company’s

significant and varied operational deficiencies, particularly at Rocky Mount – their largest and most

important facility. They met personally with Hospira’s regulators and held weekly management

meetings to review Rocky Mount’s remediation progress. Defendants similarly held weekly

meetings with all plant-level quality control managers to discuss any ongoing Company-wide issues.

Yet, despite their intimate knowledge of the Company’s operational deficiencies, Defendants

continued to mislead investors with statements such as: (a) “Hospira believes that its facilities and

equipment are in good operating condition and well maintained;” (b) they were “working diligently

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and aggressively” to address the FDA’s concerns; (c) Project Fuel was designed to “drive quality and

operational excellence;” (d) the FDA’s concerns were not “systemic issues to Hospira” nor

“systemic issues to the two plants [Rocky Mount and Clayton];” (e) they had “taken [thei]r learnings

from [thei]r Rocky Mount and Clayton facilities and [we]re applying them to [thei]r manufacturing

operations around the world to ensure that [they] meet the highest standards of quality;” (f) they

made “tremendous progress on the quality front;”(g) “the quality issues we’ve seen and others have

seen in the industry will be largely behind us;” (h) their quality improvements “quite candidly also

set[] a higher benchmark for everyone else” as “[i]t’s not untypical for the market share leader to be

used to set a new quality standard;” (i) stating in advance of the 2011 Rocky Mount inspection that

“we have been preparing diligently for that inspection and feel very confident about the quality

changes that we have made,” their “Head of Quality” had been to Rocky Mount several times and

was “thinking it is looking very well for the FDA inspection;” and (j) “[w]e are not capacity

constrained – period, end of statement, okay?”

9. Ultimately, Defendants could no longer ignore the mounting manufacturing problems

they were facing, especially at Rocky Mount. Beginning September 7, 2011, the truth about

Hospira’s substantial operational deficiencies began to emerge through a pair of partial revelations.

First, at the Company’s “Investor Day” event on September 7th, Defendants decided to “talk today a

little bit more openly,” revealing that Rocky Mount would require significant remediation efforts

over the next two to three years at a cost of $200 million to $250 million. Directly contradicting

their Class Period statements that “Hospira believes that its facilities and equipment are in good

operating condition and are well maintained,” Defendants admitted that their database system was

antiquated and inefficient, their manufacturing facilities needed a “facelift” to be modernized, and

these problems were growing since 2004 when the Company “inherited some aged facilities. We at

Hospira like to affectionately call them ‘experienced.’”


10. Over the next few days, as the market digested this and other news from Hospira’s

day-long event, Hospira’s stock price fell approximately 13%, from a close of $45.61 on September

7, 2011, to a close of $39.51 on September 13, 2011, on unusually heavy trading volume. However,

this stock drop would have been even greater if not for Defendants’ attempt to offset this

announcement with positive news concerning Hospira’s significant growth opportunities and

Defendants’ false reassurances that Hospira’s customer “service levels” were not being affected

because they had sufficient inventory.

11. Just a few weeks later, on October 18, 2011, investors were told the problems were

much greater than originally revealed. They learned that the true costs of necessary remediation

would be even higher than $200 million to $250 million – revealed a week later to be as much as

$375 million. Of even greater significance, the Company revealed on October 18th that customer

service levels were “dramatically reversed,” causing Hospira to disclose disappointing preliminary

third-quarter 2011 financial results, accompanied by the revelation that a production slowdown at

Rocky Mount resulting from the Company’s remediation and quality-improvement initiatives had

caused overall net sales, operating income, and earnings per share to suffer. The market was stunned

by this news, and Hospira’s share price tumbled by 21%, from a close of $37.36 on October 17,

2011, to a close of $29.51 on October 18, 2011, on abnormally heavy trading volume, causing

millions in investor losses.

12. Later, in a post-Class Period revelation on November 28, 2011, additional detail was

revealed about the Company’s manufacturing and operational deficiencies. RBC Capital Markets

published a report detailing how an investigation had showed that “Hospira’s manufacturing issues

are far greater than investors realize and will take a minimum of 2-3 years to resolve. Most damning

is the widespread nature of the violations demonstrating that there may be a more systemic issue that

will have to be rectified long term.” Investors were shocked by this revelation, which stood in stark

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contrast to Defendants’ repeated Class Period assurances, causing Hospira’s stock to fall another 9%,

from a close of $30.98 on November 28, 2011, to a close of $28.17 on November 29, 2011, on

unusually heavy trading volume.

13. While investors suffered, Defendants Begley and Werner cashed in on their fraud.

Beginning in June 2010, with the stock price near its Class Period high due to Defendants’ false and

misleading statements, Defendants Begley and Werner lined their pockets with unusual and

suspicious stock sales as they sold the vast majority of their Hospira stock at artificially inflated

prices for combined proceeds of nearly $27 million .

II. JURISDICTION AND VENUE

14. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC,

17 C.F.R. §240.10b-5. This Court has jurisdiction over the subject matter of this action pursuant to

28 U.S.C. §1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.

15. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. §78aa), and 28 U.S.C. §1391(b). Many of the false and misleading statements were made in

or issued from this District. Hospira’s principal executive offices are located at 275 North Field

Drive, Lake Forest, Illinois 60045, and many of the acts and transactions giving rise to the violations

of law complained of occurred in this District.

16. In connection with the challenged conduct, Defendants, directly or indirectly, used

the means and instrumentalities of interstate commerce, including, but not limited to, the United

States mails, interstate telephone communications, and the facilities of the national securities

markets.

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III. PARTIES

A. Plaintiffs

17. Plaintiff Sheet Metal Fund was appointed to serve as Lead Plaintiff in this action by

Memorandum Opinion and Order of this Court dated April 18, 2012 [Dkt. No. 63]. As shown in its

certification filed with the Court on January 20, 2012 [Dkt. No. 19-2] and herein incorporated,

Plaintiff Sheet Metal Fund purchased Hospira securities at artificially inflated prices during the Class

Period and suffered an economic loss when the true facts about the Company’s business and

financial condition were disclosed and the stock price resultantly declined.

18. Plaintiff KBC was appointed to serve as Lead Plaintiff in this action by Memorandum

Opinion and Order of this Court dated April 18, 2012 [Dkt. No. 63]. As shown in its certification

filed with the Court on January 20, 2012 [Dkt. No. 19-2] and herein incorporated, Plaintiff KBC

purchased Hospira securities at artificially inflated prices during the Class Period and suffered an

economic loss when the true facts about the Company’s business and financial condition were

disclosed and the stock price resultantly declined.

19. Plaintiff Laborers Funds was appointed to serve as Lead Plaintiff in this action by



Plaintiff Laborers Fund purchased Hospira securities at artificially inflated prices during the Class



20. Plaintiff Roofers Fund was appointed to serve as Lead Plaintiff in this action by



Plaintiff Roofers Fund purchased Hospira securities at artificially inflated prices during the Class

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B. Defendants

21. Defendant Hospira is a Delaware corporation with principal executive offices located

in Lake Forest, Illinois. Spun off from Abbott in 2004, the Company is a global provider of

injectable drugs and infusion technologies. Hospira’s portfolio of products includes generic acute-

care and oncology injectable drugs, large volume intravenous solutions and nutritional products, and

medication management products such as electronic drug delivery pumps and the software used to

run those pumps.

22. Defendant Ball is currently Chief Executive Officer (“CEO”) of Hospira and has been

CEO since March 28, 2011. Defendant Ball also has served as a member of Hospira’s Board of

Directors since being appointed in March 2011.

23. Defendant Werner is, and at all relevant times was, Senior Vice President of Finance

and Chief Financial Officer (“CFO”) of Hospira. During the Class Period, while Hospira common

stock was artificially inflated, Defendant Werner sold 85,849 shares of his Hospira common stock at

prices ranging between $55.30 and $59.50 per share for insider trading proceeds of more than $4.9

million.

24. Defendant Hardy was Senior Vice President of Operations from January 2011 until he

left the Company in April 2012. Defendant Hardy’s prior position at Hospira was Corporate Vice

President, Supply Chain, from 2009 through 2010.

25. Defendant Begley was, at all relevant times, the Executive Chairman of the Board of

Directors for Hospira. Defendant Begley also served as the Company’s founding CEO until he was

replaced by Defendant Ball on March 28, 2011. During the Class Period, while Hospira common

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stock was artificially inflated, Defendant Begley sold 386,112 shares of his Hospira common stock

at a price of $57.00 per share for insider trading proceeds of more than $22 million.

26. Defendants Ball, Werner, Hardy, and Begley are collectively referred to herein as the

“Individual Defendants.”

27. During the Class Period, the Individual Defendants, as senior executive officers of

Hospira, were privy to confidential and proprietary information concerning Hospira, its operations,

finances, financial condition, and present and future business prospects. The Individual Defendants

also had access to material adverse non-public information concerning Hospira, as discussed in

detail below. Because of their positions with Hospira, the Individual Defendants had access to non-

public information about Hospira’s business, finances, products, markets, and present and future

business prospects via access to internal corporate documents, conversations, and connections with

other corporate officers and employees, attendance at management and/or board of directors

meetings and committees thereof, and via reports and other information provided to them in

connection therewith. Because of their possession of such information, the Individual Defendants

knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and

were being concealed from, the investing public.

28. The Individual Defendants are liable as direct participants in the wrongs complained

of herein. In addition, the Individual Defendants, by reason of their status as senior executive

officers, were “controlling persons” within the meaning of Section 20(a) of the Exchange Act and

had the power and influence to cause the Company to engage in the unlawful conduct complained of

herein. Because of their positions of control, the Individual Defendants were able to, and did,

directly or indirectly, control the conduct of Hospira’s business.

29. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained of

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herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their executive and managerial positions with Hospira, each of the Individual Defendants had access

to the adverse undisclosed information about Hospira’s business prospects, financial condition, and

performance as particularized herein, and knew, or recklessly disregarded, that these adverse facts

rendered the positive representations made by or about Hospira and its business issued or adopted by

the Company materially false and misleading.

30. The Individual Defendants, because of their positions of control and authority as

officers of the Company, were able to, and did, control the content of the various SEC filings, press

releases, and other public statements pertaining to the Company during the Class Period. Each

Individual Defendant was provided with copies of the documents alleged herein to be misleading

prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their

issuance or cause them to be corrected. Accordingly, the Individual Defendants are responsible for

the accuracy of the public reports and releases detailed herein and are therefore primarily liable for

the representations contained therein.

31. Each of the above officers of Hospira, by virtue of his high-level position with the

Company, directly participated in the management of the Company, was directly involved in the

day-to-day operations of the Company at the highest levels, and was privy to confidential proprietary

information concerning the Company and its business, operations, growth, financial statements, and

financial condition, as alleged herein. These Defendants were involved in drafting, producing,

reviewing, and/or disseminating the false and misleading statements and information alleged herein,

were aware, or recklessly disregarded, that the false and misleading statements were being issued

regarding the Company, and approved or ratified these statements, in violation of the federal

securities laws.

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32. As senior executive officers and as controlling persons of a publicly traded company

whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, and was,

and is, traded on the New York Stock Exchange (“NYSE”) and governed by the federal securities

laws, the Individual Defendants had a duty to promptly disseminate accurate and truthful

information with respect to Hospira’s financial condition and performance, growth, operations,

financial statements, business, products, markets, management, earnings, and present and future

business prospects, and to correct any previously issued statements that had become materially

misleading or untrue so that the market price of Hospira’s securities would be based upon truthful

and accurate information. The Individual Defendants’ misrepresentations and omissions during the

Class Period violated these specific requirements and obligations.

33. The Individual Defendants are liable as participants in a fraudulent scheme and

course of conduct that operated as a fraud or deceit on purchasers of Hospira’s publicly traded

securities by disseminating materially false and misleading statements and/or concealing material

adverse facts. The scheme deceived the investing public regarding Hospira’s business, operations,

management, and the intrinsic value of Hospira common stock and caused Plaintiffs and other

members of the Class to purchase Hospira common stock at artificially inflated prices.

34. Defendants are liable for: (i) making false statements; and/or (ii) failing to disclose

adverse facts known to them about Hospira. Defendants’ fraudulent scheme and course of business

that operated as a fraud or deceit on purchasers of Hospira common stock was a success, as it: (i)

deceived the investing public regarding Hospira’s prospects and business; (ii) artificially inflated the

price of Hospira common stock; and (iii) caused Plaintiffs and other members of the Class to

purchase Hospira common stock at inflated prices.

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IV. SUBSTANTIVE ALLEGATIONS2,3

A. Background of the Company

35. Hospira is a U.S.-based global pharmaceutical and medical device company

headquartered in Lake Forest, Illinois, and describes itself as the world’s leading provider of

injectable drugs and infusion technologies. Employing approximately 15,000 employees worldwide,

the Company achieved sales of $4.1 billion in 2011. 4 The Company’s products are used by

hospitals, clinics, long-term care facilities, and home healthcare providers. Hospira was the hospital

products division of Abbott until it was spun off from Abbott in 2004. Its operations under the

Abbott name dated back to the 1930s. See Form 10-K for fiscal year ended Dec. 31, 2011, filed with

the SEC on Feb. 14, 2012. The Company now conducts business globally in three reportable

segments: (i) the Americas, which includes the U.S., Canada, and Latin America; (ii) Europe, the

Middle East, and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”), which includes Asia, Japan,

Australia, and New Zealand. Id. About 79% of Hospira’s net sales in 2011 originated in the

Americas, while the EMEA and APAC segments contributed 13% and 8%, respectively. Id.

36. In all three segments, Hospira markets a broad offering of products under three

general categories: (i) specialty injectable pharmaceuticals (“SIP”), which include approximately

200 injectable generic drugs that provide customers with lower cost alternatives to name brand

products; (ii) other pharmaceuticals, which include large volume intravenous (“I.V.”) solutions and

nutritional products and solutions for cleaning wounds and surgical sites; and (iii) medication

2 Internal citations and quotations are omitted and emphasis is added unless otherwise stated.

3 Confidential witnesses are referred to in the masculine to protect their identities.

4 See Hospira Corporate Profile Fact Sheet, available at http://www.hospira.com/NewsAndMediaCenter/factsheets.aspx (last visited May 18, 2012).

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management systems (“MMS”), which include electronic pumps to deliver I.V. fluids and

medications to patients and other offerings to support the pumps. Id. In 2011, SIP accounted for

63% of Hospira’s net sales, other pharmaceuticals accounted for 13%, and MMS accounted for the

remaining 24% of net sales. Id.

37. As of the end of 2011, the Company operated 12 manufacturing facilities worldwide

to produce its various pharmaceutical and MMS products. Among Hospira’s largest facilities were

plants located in Rocky Mount, North Carolina, and Austin, Texas, both of which were used

primarily for pharmaceutical manufacturing. Hospira also produced pharmaceuticals at facilities in

Clayton, North Carolina, and McPherson, Kansas, in addition to international plants located in

Australia, Italy, and India. The Company’s MMS devices were manufactured in New York, Ireland,

Costa Rica, and the Dominican Republic. Id.

38. The Rocky Mount facility in particular is crucial to Hospira’s business. It is the

largest and has been referred to by Defendant Hardy as the “crown jewel of Hospira.” This

sprawling facility consists of a manufacturing plant and three laboratories covering about one million

square feet. At full capacity, Rocky Mount employs more than 2,500 people and accounts for 25%

of the Company’s $4 billion in annual revenue. Approximately 100 different injectable

pharmaceuticals – or roughly half of Hospira’s entire SIP portfolio – are produced at Rocky Mount.

B. Hospira’s Corporate Culture Encouraged “Quantity over Quality”

39. Hospira was spun off from Abbott in 2004, and a change in corporate culture

gradually ensued. Hospira and its employees were taking an increasingly lax approach to their

quality assurance duties and turning a blind eye to the deteriorating manufacturing facilities the

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Company had inherited. As described by a former Rocky Mount Technician I, 5 who witnessed this

first-hand, the focus at Rocky Mount changed to “quantity over quality.” He described how the

“older folks [from Abbott] saw how things changed, how the philosophy had changed.” By the time

he left in March 2010, those employees now “had doubts” about the quality of the products being

made at Rocky Mount.

40. A former Rocky Mount Batch Release Specialist 6 confirmed that Rocky Mount’s

problems were the result of a cultural shift to reward quantity over quality. He described the plant’s

long-term employees as “sequestered” – they did not belong to professional organizations, and the

Company never brought in guest speakers or offered any form of continuing education. The

mentality at Rocky Mount was not centered on identifying and remediating the root causes of

problems. The former Rocky Mount Batch Release Specialist described a focus on quantity over

quality because production managers were compensated based on “units produced – not units sold or

distributed.”

41. According to the former Rocky Mount Technician I, before the spin-off from Abbott,

the philosophy was “if you’re not sure about the quality [then] throw it out.” But in the last two

years of his employment, in 2009 and 2010, the philosophy changed to “don’t throw anything out.”

In the Abbott days, and even immediately after the spin-off, the Company allowed an unlimited

5 The former Rocky Mount Technician I started with Abbott in 1999 and remained employed by Hospira after the spin-off, until March 2010. As a Technician I at Rocky Mount, he performed various tasks relating to the Company’s manufacture of injectable pharmaceuticals and aseptic liquid filling.

6 The former Rocky Mount Batch Release Specialist worked for Hospira at the Rocky Mount plant from October 2009 until August 2011. He has been employed in the pharmaceutical industry for more than 20 years. He was initially a temporary employee for the Company, responsible for batch records releases. Within months, his role was expanded to include closing out corrective and preventative action plans (“CAPAs”) and counseling employees on the CAPAs. The CAPA process included determining the sources of errors in production and then identifying whether problems in production were the result of employee error, the production methods used, or issues with equipment.

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amount of re-work and liberal overtime to ensure quality. But as time progressed, and especially

with the implementation of Project Fuel, there was “less and less” re-work and “no more overtime”

at Rocky Mount, so the quality of the output accordingly suffered.

42. The former Rocky Mount Technician I also described how the robustness of the

plant’s Standard Operating Procedures (“SOPs”) had declined leading up to the start of the Class

Period. Prior to the spin-off, Abbott maintained “three big books” specifying the Rocky Mount

plant’s SOPs. The former Rocky Mount Technician I relayed that these procedures specified

processes for every task imaginable. “If you had questions, you just needed to look at the books.”

Indeed, the SOP books even described “what to do if a fly came into the aseptic room.”

43. But by the time the former Rocky Mount Technician I left in March 2010, there was

“only one book.” All of the detailed SOPs had disappeared, especially with the implementation of

Project Fuel. The former Rocky Mount Technician I relayed that Rocky Mount’s SOPs had been

reduced to “allow management wiggle room” to ensure that more tasks could be accomplished with

fewer resources, a by-product of Project Fuel’s staff and budget cuts.

44. Even before Project Fuel was implemented, according to a former Vice President

Operations Finance, 7 Rocky Mount already had lost an extensive amount of “technical knowledge”

with employees leaving the Company to “go work 50 miles up the road” for one of Hospira’s

competitors. In other words, the Company was losing a number of its long-term employees who had

the requisite aptitude and acumen to be successful in their positions. He had learned this through

7 The former Vice President Operations Finance was employed with Abbott and then Hospira for a total of approximately 25 years. He retired in October 2009 after a disagreement over Project Fuel. Prior to his retirement, he had responsibility over manufacturing finance and openly expressed concerns about the efficacy of Project Fuel before the project was even implemented. In fact, he was forced to retire in October 2009 after it became apparent that he would be an “impediment” to the project’s implementation. Before this, he had met regularly with the consultant Hospira was using to develop and implement Project Fuel; he participated in weekly meetings with representatives from the consultant.

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discussions with Rocky Mount’s Chief Financial Officer. Attrition had started to increase

substantially even before the budget cuts because Hospira was not offering the benefits many of

employees had come to expect. Then, upon implementation, Project Fuel only compounded the

problem.

C. Defendants Announced “Project Fuel” as an Initiative to Improve Operations, But in Reality It Was a Cost-Cutting Measure that Gutted Quality

45. Despite the Company’s already lax quality standards and mounting manufacturing

deficiencies, Defendants undertook an aggressive initiative named “Project Fuel” with the stated

purpose to increase shareholder value through the purported optimization of Hospira’s operations.

Indeed, on March 24, 2009, the Company announced that “Project Fuel will capitalize on the

company’s potential to increase shareholder value and improve operational efficiency by optimizing

its product line, evaluating non-strategic assets and streamlining its organizational structure.” This

three-step initiative would entail a 10% reduction in Hospira’s global workforce and “deliver annual

cost savings of approximately $110 million to $140 million.” With respect to this initiative,

Defendant Begley touted to investors that“[b]y reducing costs and improving efficiencies, we can

free up more dollars to invest for profitable growth and shareholder returns. And with a streamlined,

focused organization, we will reduce complexity, improve performance and be better positioned to

advance our significant opportunities.”

46. Defendants described Project Fuel as a two-year initiative that would “optimize” the

Company’s operations by: (a) identifying and ridding itself not only of duplicative or

underperforming units within its product lines but also of “non-strategic assets” that detracted from

Hospira’s focuses on SIP and MMS; and (b) reducing Hospira’s global workforce by 10% through a

“de-layering” of its management structure, a consolidation of certain functions, and a “heightening”

of the Company’s focus on “process improvement.”

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47. While Project Fuel was touted to investors as a means of increasing shareholder value

and improving operational efficiency, the truth was that reduced operating budgets and slashed

workforces would wreak havoc on Hospira’s already declining quality control efforts, especially at

Rocky Mount – the Company’s largest facility. In fact, the former Vice President Operations

Finance explained that the objectives being established as part of the Project Fuel were

“unachievable,” and thus he openly dissented to the initiative’s implementation. He further

explained that it seemed to him the aim of the initiative was “stoking the stock up.”

48. Thus, despite what Defendants told the market, the operational and financial goals of

Project Fuel were unattainable from the outset without sacrificing the Company’s manufacturing

efficiency and quality assurance efforts, especially at Rocky Mount.

D. Project Fuel Exacerbated Existing Manufacturing and Quality Control Deficiencies at Rocky Mount

49. While Project Fuel was advertized as an initiative to improve quality and operations,

several confidential witnesses confirm that it was nothing more than a cost-cutting campaign. Worse

yet, the cost cutting was actually sacrificing the quality of Hospira’s products. Quality control

personnel were fired due to Project Fuel’s budget cuts. Equipment and facilities were used

improperly and in disrepair, resulting in the production of defective products. Also, the Company’s

mixing, sampling, and validation processes all suffered as a result of insufficient personnel,

inadequate training, and failures in Hospira’s SOPs. Although the cost cutting in quality control may

have boosted short-term profitability, as described below, it also led to increased regulatory scrutiny

and significant production disruptions and delays.

1. Project Fuel Cut Quality Control Personnel, Which Worsened Rather than Improved Hospira’s Quality

50. Project Fuel achieved short-term cost savings at the expense of the quality of

Hospira’s key pharmaceutical products. Former insiders have revealed that Project Fuel’s budget

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cuts reduced plant-level personnel available for quality control, and further caused process shortcuts,

both of which impacted the quality of Hospira’s pharmaceutical products, leading to higher

remediation costs, production slowdowns, and, worst of all, the dissemination of potentially

dangerous pharmaceuticals.

51. As a former Product Quality Safety and Compliance Analyst 8 explained, Project Fuel

was “nothing but a cost-cutting measure.” But, according to a former Austin Production Supervisor 9

and a former Accounting Manager, 10 this initiative had no regard for the long-term ramifications of

its short-term savings. As summarized by the former Austin Production Supervisor, Project Fuel’s

cost-cutting measures “saved money up front,” but subsequent expenses “more than doubled”

whatever money was saved when Hospira was forced to deal with the quality issues that resulted

from the budget cuts and staff layoffs brought on by the initiative. The former Accounting Manager

further described Project Fuel as “self-defeating.” To illustrate this point, he provided an example

8 The former Product Quality Safety and Compliance Analyst worked for Hospira from August 2005 until December 2010. In this role, he received and analyzed customer complaints regarding Hospira’s pain management pumps, which included the LifeCare PCA line of pumps. His customer complaint group was known internally as the “Pain Group” and was one of four different groups of complaint analysts. The former Product Quality Safety and Compliance Analyst left Hospira in December 2010 when the entire complaint handling group, with the exception of the Registered Nurses, was outsourced to the Philippines as part of Project Fuel.

9 The former Austin Production Supervisor worked for Hospira at its Austin, Texas, facility from December 2008 until December 2011. When he first started with Hospira, he led the lines for the sterilization and packaging of LifeCare I.V. bags. Then, for about one year, he led the lines for filling and overwrapping the LifeCare I.V. bags. Finally, before leaving the Company, he led a third-shift production team of approximately 50 employees who worked on production lines for the filling, overwrapping, sterilization, and packaging of the Company’s LifeCare I.V. bags.

10 The former Accounting Manager began working for Abbott in 1998 and remained with the Company after the spin-off until December 2010. Based in Lake Forest, Illinois, the former Accounting Manager’s responsibilities included setting up customers in the SAP information system, ensuring customers were licensed to purchase products from Hospira, coding for sales tax, and accounts receivable cash application. He oversaw a team of personnel who applied payments for all U.S. sales.

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that if “10 people were cut” from a given plant through Project Fuel’s implementation, the Company

then had to “hire 20 people” to remediate quality issues identified by the FDA.

52. At Rocky Mount in particular, a former Rocky Mount Quality Engineer 11 and a

former Rocky Mount Senior Validation Process Engineer 12 explained that Project Fuel was to blame

for many of the plant’s quality control issues. The former Rocky Mount Quality Engineer described

Project Fuel as an “unethical” corporate initiative “because it put money in front of medicine.”

53. By February 2010, staff reductions due to Project Fuel were approximately 75%

complete, and by April 2010, more than 80% complete. As the former Rocky Mount Quality

Engineer described, there were 10% budget cuts “across the board, and Quality was cut.” Indeed,

although Rocky Mount was a one-million-square-foot facility, by the time this former employee left

the Company in October 2010, there were only eight Quality Engineers at the plant. By way of

comparison, the former Rocky Mount Quality Engineer has since been re-contacted to return to

Hospira and, through his conversations with the Company, understands that Hospira now employs

“over 40 investigators” at Rocky Mount in response to the FDA’s increased scrutiny.

54. Even Rocky Mount’s SOPs were altered to reflect the staff’s changing

responsibilities. The former Rocky Mount Technician I confirmed that, in conjunction with Project

Fuel, Hospira “got rid of the quality people,” meaning Rocky Mount’s staff of quality control

11 The former Rocky Mount Quality Engineer was employed by Hospira at Rocky Mount in a variety of positions in the Quality Department from October 2006 until October 2010. He began working as a Batch Record Resident, was then promoted to Quality Supervisor in 2007, and finally was promoted to Quality Engineer in late 2008. His position as Quality Engineer was that of an “investigator,” working to validate failures and recalls at Rocky Mount.

12 The former Rocky Mount Senior Validation Process Engineer worked for Hospira at Rocky Mount for eight years until he left voluntarily in January 2011. Before becoming a Senior Validation Process Engineer, he was an Operation Excellence Industrial Engineer and, in this capacity, assisted with the implementation of Project Fuel. As a Senior Validation Process Engineer, he worked on the remediation of validation issues that had been identified by the FDA.

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personnel was greatly reduced. Quality control responsibilities were thus placed on the “people

running the line – the production folks,” hence the alteration to the SOPs. The one remaining SOP

book at Rocky Mount included changes that specified how production personnel were now

responsible for quality control inspections and doing checks of completed products.

55. However, there was simply “too much extra work” and too few resources to perform

all of the required manufacturing and quality control duties, according to the former Rocky Mount

Technician I. Production personnel already had enough responsibilities without the addition of

quality control tasks, so those employees “couldn’t get it all done.” Thus, even with fewer

governing SOPs, Hospira still was “not following its own rules.” The former Austin Production

Supervisor recalled a similar story. When Project Fuel was implemented at the Austin plant, errors

in production increased exponentially, some of which were the result of staff being tired. After

Project Fuel’s layoffs in Austin in 2010, the remaining staff had mandated overtime, regardless of

their interest in working the overtime, and grew tired through extended shifts.

56. A former Rocky Mount Quality Assurance Validation Engineer 13 also explained that

Hospira had the “wrong people in the wrong positions,” which exacerbated the problems at Rocky

Mount. He recalled that some personnel tasked with responsibility for quality did not have the “right

perspective” in terms of how to analyze and approach problems in quality.

57. The former Accounting Manager further confirmed that, as a result of Project Fuel,

Hospira was “too skinny on the regulatory side.” He learned through discussions with colleagues in

Lake Forest that quality issues identified by the FDA were the result of “not enough regulatory

13 The former Rocky Mount Quality Assurance Validation Engineer worked for Hospira at its Rocky Mount plant from June of 2010 to December 2011. He was responsible for quality engineering, including evaluating and remediating deficiencies in the quality assurance practices at Rocky Mount. The former Rocky Mount Quality Assurance Validation Engineer was tasked with bringing the plant’s validation program “more in line” with “what was seen in the industry” at that time.

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oversight at the plant level,” which had been brought on by Project Fuel’s budget cuts beginning in

2009.

58. A former Manager of Strategic Commercial Contracting 14 further attributed Project

Fuel to Hospira’s quality control deficiencies. According to him, during Project Fuel’s cutbacks,

Hospira laid off long-term quality personnel who “knew the SOPs by heart.” In their absence, when

the FDA audited the Company and asked the remaining quality personnel and temporary employees

for details about the Company’s SOPs, all they could say was, “[w]e don’t know and the people who

did know are no longer here.”

2. The Quality Cutbacks and Focus on Quantity Resulted in Production Delays from Rejected Products, Re-Inspection Delays, and Quality Control Backlogs

59. The consequences of Project Fuel’s cutbacks also began to reveal themselves in

quality and equipment failures, rejected products, production delays, and re-inspection delays. For

example, syringes filled with pharmaceuticals were shipped out cracked and defective. Broken glass

was a frequent problem due to faulty machinery and excessive line speeds. Critical equipment was

forced offline due to validation problems. These issues, in turn, contributed to heightened scrutiny

from the FDA and significant production slowdowns throughout the plant.

14 The former Manager of Strategic Commercial Contracting joined Abbott in 2003 and remained with Hospira after the spin-off, until May 2011. He worked in sales for the first three to three-and-a-half years of his employment. For the last two years of his tenure with Hospira, he was a pricing manager in the contracting group. As a pricing manager, he was responsible for contract negotiations, pricing strategy, bringing products to market, and working with other departments within the Company. Even after contracts were negotiated with customers and Hospira had begun delivering products pursuant to the contracts, the former Manager of Strategic Commercial Contracting remained involved in the “back end” in terms of dealing with “ramifications” of failures to supply products according to the contracts’ terms.

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60. A former Rocky Mount Production Operator 15 spent approximately two months, from

August or September 2011 to October 2011, in the “R2” building “inspecting, re-inspecting, and re-

inspecting” thousands of defective syringes. From August or September 2011 to October 2011, most

of the former Rocky Mount Production Operator’s production colleagues, from both the first and

second shifts, were tasked with the same re-inspection assignment for defective syringes. The

syringes had been returned on more than one occasion because they were cracked, which, an

investigation revealed, was caused by the machine that had packed the syringes in their boxes. The

former Rocky Mount Production Operator recalled that the defective syringes had not been identified

prior to being shipped out based, at least in part, on there being only one quality control employee

assigned to the production line.

61. Manufacture of the syringes entailed four steps. First, the syringes were filled with

pharmaceuticals. Second, the plungers were inserted into the syringes. Third, the syringes were

placed into boxes, which is where the cracks had occurred. Finally, a machine put all the boxes

together and wrapped them in plastic. The one quality control employee assigned to inspect the

syringes performed his or her inspection only after all four processes were complete, by pulling five

boxes as samples and inspecting the syringes for defects. The former Rocky Mount Production

Operator indicated that there should have been at least one other person performing quality control

on the syringes. Significantly, the production staff’s “inspecting, re-inspecting, and re-inspecting” of

the defective syringes held up their other work. As a result, production for other orders “slowed

down.”

15 The former Rocky Mount Production Operator was employed with Hospira on a contract basis from February 2010 until November 2011. He was a second shift Production Operator in the plant’s “R2” building and was responsible for inspecting and boxing manufactured syringes.

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62. Additionally, the former Rocky Mount Quality Engineer recalled that production

quality suffered as a result of plant management running production lines too fast in order to “make

quotas.” He recalled that “line speed was always a problem” because bonuses were paid to

management based on production. The Company “ran a lot of glass” at Rocky Mount for containers

of medicine. “If we had a validation of 500 containers per minute, [management] would still run

faster. When glass runs faster, there is more momentum, and the glass started breaking.” According

to the former Rocky Mount Quality Engineer, the Rocky Mount plant was constantly exceeding

acceptable quality levels for broken glass because management “had to make their numbers.”

63. The former Rocky Mount Technician I described similar problems at Rocky Mount

on Lines 156, 157, and 159. For example, Lines 156 and 157 manufactured products used with

injectable infusion devices for morphine, but the process being used was “flawed” and produced

“high” levels of rejected product. These problems on Lines 156 and 157 included broken glass and

“stoppers going in improperly.”

64. Production on Line 185 suffered as a result of mixing problems, according to a former

Rocky Mount Line Coordinator. 16 He recalled there being many problems with mixing solutions in

2011, which caused the Company to “throw away” product. The problems were only discovered in

testing once the products had been filled on Line 185 and sent to the lab. Typically, a “full batch” of

product was run before being sent to the lab for testing, and a single batch could number 125,000

units. Thus, if problems were found during the testing process, the entire batch of 125,000 units had

to be thrown out, and Hospira had to remake the units. The former Rocky Mount Line Coordinator

16 The former Rocky Mount Line Coordinator began working for Abbott in 1998 and remained with Hospira after the spin-off until leaving the Company in April 2011. He was a first-shift Line Coordinator for Line 185, which produced small vials of various pharmaceuticals, and was responsible for “line clearance,” batch releases, and overseeing a team of 12 Production Operators.

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recalled that the mixing problems were attributable to the mixing team either not having been

properly trained or being understaffed for the mixing portion of the production process, resulting in

inaccurate ingredient combinations such as “too much water or sugar.”

65. A former Rocky Mount Chemical Quality Assurance Analyst III 17 also recalled that

personnel at Rocky Mount were “spread thin” and resources “were short” to deal with current

production and testing demands. This was partly due to Rocky Mount employees being in a “mad

scramble” to prepare the plant to be inspected in early 2011. One particular problem he recalled was

a “back log” of product in March 2011 that was not timely being shipped to customers from the

Rocky Mount plant. This product was “bottlenecked at quality control” because the quality control

personnel were unable to timely “take data and release the product” for shipment to customers. One

contributing factor to the “bottleneck” was the fact that Rocky Mount quality control personnel were

preparing for an FDA inspection and not spending the requisite time to perform quality testing of

completed product. As described below, Rocky Mount’s soaring number of “open investigations”

further contributed to these “bottlenecks” of product.

66. There was also a “contamination issue” in the aseptic portion of the plant, according

to the former Rocky Mount Quality Assurance Validation Engineer. Cleanliness was crucial in that

part of the plant because products there were only sterile if produced in an ultra-clean environment.

Twice a year, in July and December, the aseptic portion of the plant and related equipment were

“taken down” and cleaned. After everything was put back together, a “media fill” was performed to

test for contamination and bacterial growth to ensure that the environment is, indeed, aseptic.

17 The former Rocky Mount Chemical Quality Assurance Analyst III worked for Hospira from August 2010 until March 2011. He worked at the chemistry laboratory in the Rocky Mount facility. There, he performed analyses of pharmaceuticals produced at Rocky Mount. He also was responsible for maintaining stock and providing resources to other laboratory personnel.

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67. The “media fill” is a process in which “media” is run through the aseptic system and

incubated to see if bacteria grows. If only one vial is positive for bacteria growth, the environment

can be considered aseptic. “If there are two positives,” however, meaning two or more vials are

positive for bacteria growth, the media run fails and the source of the contamination has to be

identified and remediated. Rocky Mount experienced this type of contamination issue following the

aseptic portion’s cleaning in July 2011. According to the former Rocky Mount Quality Assurance

Validation Engineer, this issue caused a production disruption for a period of four to six weeks.

3. Tensions Built as Proper Testing, Validation, Documentation, and Cleaning Suffered

68. Former employees have described the tension that built between those responsible for

ensuring quality and those implementing Defendants’ cost cuts. Due to Hospira’s lax corporate

culture and cost cutting, Rocky Mount was deficient in its testing, validation, documentation, and

cleaning processes.

69. Given that the facility produced approximately 100 different injectable

pharmaceuticals, getting each product’s mixture perfectly accurate for each and every batch was key

to Rocky Mount’s production. However, as described below, the Company did not have the right

checks in place. The former Rocky Mount Batch Release Specialist described Rocky Mount’s

validation attempts as “comical.” By way of example, according to this former employee, process

validation should have entailed the production of three batches, with some consistency and

standardization among those batches. Testing needed to be done, and the equipment used needed to

be documented, as did the “tolerances met.” These processes should not have changed, and if they

were to change, validation needed to be redone. But he recalled that processes at Rocky Mount were

“routinely changed on the fly” without proper validation.

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70. In another example, the plant stopped sampling in-process solutions as part of Project

Fuel, which was identified in the FDA’s June 2011 Form 483.18 The former Rocky Mount Quality

Engineer explained that many of the solutions produced at Rocky Mount were mixed in a big tank.

The Standard Operating Procedure had been to take an in-process sample from the big tank prior to

filling containers for sale. This in-process sample was known internally as “1P.” But as a result of

Project Fuel, “they quit doing that.” The former Rocky Mount Quality Engineer recalled that this

saved the Company money by not having to buy the solvents to test the solutions and not paying

employees to do the testing. The quality department “did not agree at all” with these budget cuts,

but when the department raised concerns to plant management, the department was told that the cuts

were directed by Hospira’s Vice President of Global Solutions, one of the Company’s leaders in

implementing Project Fuel.

71. The former Rocky Mount Quality Engineer recalled that in late 2009, the Company

cut quality sampling entirely out of Rocky Mount’s Flex Bag business unit, which was the only

business unit that manufactured its own containers. Before the cuts, the Flex Bag unit ran four

shifts, with three quality technicians per shift to take quality samples of the Flex Bag containers.

Those quality technicians were terminated as part of Project Fuel.

72. The former Rocky Mount Senior Validation Process Engineer further confirmed how

Project Fuel had a negative impact on Rocky Mount’s validation processes in particular. He recalled

that one of the two main issues identified by the FDA was Rocky Mount’s defective validation

program for mixing in the plant’s Formulation and Solutions department. Project Fuel had reduced

18 As described more fully below in Section IV.F, an FDA Form 483 (“Form 483”) is used by the Agency to publish the findings of an inspection that revealed conditions deemed to be objectionable by the FDA’s investigators. The Form 483 is addressed to the company’s executive management, and observed conditions or practices included on a Form 483 indicate that an FDA-regulated product or facility may be in violation of the FDA’s requirements.

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“head counts” that were not being filled. This put pressure on quality because the remaining “head

counts” were insufficient to keep up with the validation processes at Rocky Mount and “to maintain

the plant in a state of compliance.” For example, the former Rocky Mount Senior Validation

Process Engineer indicated that if there were, hypothetically, three employees to validate one tank of

mixing, the implementation of Project Fuel reduced the “head counts” to only one person.

73. He further explained that, each year, the plant had to validate that its processes were

still effective to prevent the production and dissemination of defective products. For example, the

mixing tanks were cleaned after each batch, and the cleaning process had to be validated at least

once annually. This practice of validation was required to ensure that Rocky Mount was in

compliance and “still a clean environment.” Rocky Mount failed to do this.

74. The former Rocky Mount Senior Validation Process Engineer likened validation

processes to the retention of all receipts and documentation supporting one’s tax return. Should the

FDA inspect Rocky Mount, it was likely that the validation processes and documentation would be

requested and reviewed. According to the former Rocky Mount Senior Validation Process Engineer,

the Company was unable to produce sufficient evidence to show that Rocky Mount’s validation

processes were sound and accurate when the FDA inspected the plant prior to issuing its April 2010

Warning Letter.

75. He recalled the Company’s creation of a “five-year plan” in 2010 in an attempt to

address this issue. This plan detailed how the plant intended to carry out validation processes for the

next five years. But, due to Project Fuel, “head counts” had been reduced so dramatically that the

plant was unable to keep up with this plan. He further recalled that because of particulates found in

product manufactured at the Clayton facility, the FDA wanted to ensure that Rocky Mount had

effective validation processes in place to inspect products for particulates. However, the Company

did not carry out the necessary validation processes to appease the FDA or to ensure that the

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particulates issue would not be experienced at Rocky Mount. He attributed this failure to the

inability of Rocky Mount to keep pace with its validation schedule as specified in the “five-year

plan” due to resource cuts from Project Fuel.

76. The former Rocky Mount Quality Assurance Validation Engineer recalled that Rocky

Mount’s two key issues as identified in the April 2010 Warning Letter were its validation processes

for mixing and its inspection for particulates. But, according to him, there was also a host of other

issues at Rocky Mount beyond those identified by the FDA. For example, he recalled how the

validation process for cleaning lacked rigor. But the Company had only one employee dedicated to

remediating that issue because resources were spread so thin.

77. Remediating the validation processes for mixing was a focus of the former Rocky

Mount Quality Assurance Validation Engineer’s job at Hospira. But he encountered difficulties in

accomplishing this because cultural factors undermined his remediation efforts and the remediation

timeline to which the Company had committed was overly aggressive and “unrealistic.” He and the

other Quality Engineers were “screaming, yelling, and pulling their hair out” over the ongoing

quality issues with respect to mixing validation.

78. One such problem was Rocky Mount’s deficient attempt at “bracketing mixing

studies” and using a matrix for validation. Utilizing this approach allowed Hospira to group certain

similar pharmaceuticals together into a “family,” choose one representative family member, and then

conduct testing on that one representative product and apply the test results to the entire family of

products. The science used to support the bracketing has to be “irrefutable.”

79. At Rocky Mount, the science used was not irrefutable. The FDA thus took exception

to Rocky Mount’s approach to bracketing. According to the former Rocky Mount Quality

Assurance Validation Engineer, the science underlying the bracketing of mixing studies at Rocky

Mount was flawed. Hospira was unable to justify why the representative product was chosen, and

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there were “gaps” with respect to variations among the products assigned to the same families. The

Company failed to take into consideration that there were many types and variations of tanks,

including different tank sizes and different mixers used. Hospira did not validate each tank type.

Furthermore, the Company did not consider the fact that there were different batch sizes that affected

how product families could and should be bracketed.

80. Hospira’s efforts to address these problems were ineffective. According to the former

Rocky Mount Quality Assurance Validation Engineer, the Company submitted an unattainable

timeline to the FDA in its formal response to the June 2011 Form 483 in which Hospira “made

promises it could not meet” and “promised too much in too short of time.” 19

81. The timeline put in place by Hospira was simply too aggressive and “unrealistic”

because there were cultural changes required at Rocky Mount. The plant’s quality assurance staff

had to be educated, meaning the former Rocky Mount Quality Assurance Validation Engineer and

other Quality Engineers had to “show them a different perspective and a different approach to

validation and documentation.” Remediation of the plant’s mixing validation deficiencies required

that Rocky Mount’s quality control staff change the way they identified root causes of quality issues

and how they documented problems. Given these necessary changes to the practices to which the

staff had grown accustomed, remediation was not going to happen overnight but was “going to take

time.”

82. Moreover, the sheer size of the plant was daunting. According to the former Rocky

Mount Quality Assurance Validation Engineer, Rocky Mount was responsible for the production of

19 Indeed, the former Rocky Mount Quality Assurance Validation Engineer could see within months of starting in June 2010 that any effort to remediate a number of Rocky Mount’s various issues would take a significant period of time.

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approximately 100 different pharmaceuticals. There were 50 to 60 tanks at Rocky Mount, with a

number of different lot sizes. The mixing studies that the FDA desired had to cover all of these

tanks, mixing variables, and products, and therefore an estimated 75 to 100 mixing studies were

required as part of the remediation.

4. Rocky Mount’s Facilities and Equipment Were in Disrepair

83. In addition to cutting back on personnel, Rocky Mount’s plant and equipment were

“aged” and in need of repair, and necessary maintenance and remediation was not being performed.

This included remediation and modernization of aged facilities, outdated computer systems, and

equipment, which eventually caught up with the Company in the form of production disruptions and

delays, FDA warnings, and resulting expensive remediation costs.

84. The former Rocky Mount Quality Assurance Validation Engineer confirmed that

Hospira failed to make necessary improvements at Rocky Mount because it was unwilling to spend

the money to do so. According to him, the Company should have taken the money generated via the

Project Fuel budget cuts to make upgrades at the plant as a proactive means to improving quality and

remediating ongoing issues with quality. He recalled further problems with Rocky Mount’s SOPs.

He described them as “not very user friendly” and difficult to follow due to their structure and

organization. To make matters worse, they were stored in an archaic, DOS-based computer

information system that was “from the 80s” and made the SOP documentation difficult to manage.

According to the former Rocky Mount Batch Release Specialist, documentation was “horrific” at the

Rocky Mount plant because the DOS-based document management system was “ancient,” so the

document management processes were cumbersome.

85. In addition to the computer system, the facility itself was physically deteriorating,

and structural improvements were required to ensure a clean, compliant environment. According to

the former Rocky Mount Quality Assurance Validation Engineer, new equipment was needed to

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replace old, worn, and outdated equipment used in the manufacturing processes. In general, the

facility was “old” and in dire need of equipment upgrades and construction improvements. This

former employee relayed that Hospira’s lack of investment in Rocky Mount – described by

Defendant Hardy as the “crown jewel” of the Company’s manufacturing empire – fueled the

ongoing quality issues at that plant. Simply, Hospira needed to “invest in the facility.”

86. According to the Rocky Mount Batch Release Specialist, the plant needed new

construction to improve the facilities. He also said the ceiling was leaking throughout the entire time

he was employed with Hospira, but the roof was not fixed and instead they put a “band-aid” on the

problem and paid an employee to repeatedly replace ceiling tiles.

87. A former GMP Compliance Supervisor20 even recalled a problem with mold in Rocky

Mount’s aseptic room in 2010 or 2011. The facility’s mold problem was corroborated by the former

Rocky Mount Chemical Quality Assurance Analyst III, who recalled analysts complaining of poor

air quality and mold in Rocky Mount’s chemistry laboratory.

88. Finally, the equipment also needed updating and repair. The former Rocky Mount

Batch Release Specialist recalled problems with the use of a “dipstick” instead of a scale to measure

mixtures of solutions in large vessels. Common industry practice was to weigh the empty vessels on

a balance on the floor, then use this weight as a starting point to mix solutions by knowing exactly

how much solution to add to the vessel to arrive at a desired and consistent solution weight. But

Rocky Mount used a “dipstick” method instead of weighing the solutions. The dipstick used was

similar to an oil dipstick in a car. The dipstick itself would be etched with various markings, then

20 The former GMP Compliance Supervisor began working for Abbott in 2003 and remained with Hospira following the spin-off, until May 2011. “GMP” stands for Good Manufacturing Practices. Significantly, he “was fired [in May 2011] because [he] told management about a bunch of compliance issues.” He was fired “because [he] wanted to do it by the book.”

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hooked onto the top of the vessel. Employees mixing solutions would add certain ingredients to the

vessel until the solution reached a certain marking etched on the dipstick.

89. The problem, however, was that the dipsticks were “very easily bent.” Investigations

at Rocky Mount revealed that batches of product were no good because the dipstick had been bent,

and the mixture in the solution was therefore incorrect. When this issue was raised to more senior

personnel, the problem was ignored rather than remediated. The former Rocky Mount Batch

Release Specialist recalled that one consultant familiar with this issue was “appalled,” and the

consultant even commented that it was not a matter of “if” but rather “when” Hospira’s products

might harm patients.

90. A former Rocky Mount Senior Production Supervisor 21 described how an isolator

used to fill glass vials in the R2 building failed validation near the end of May 2011. The isolator

was used on Line 103, which produced roughly 115,000 to 120,000 units a day. After failing

validation, the isolator was down for months. In fact, the isolator was still offline when the former

Rocky Mount Senior Production Supervisor left the Company in November 2011.

91. The former Rocky Mount Senior Production Supervisor also recounted a similar

problem around the same time with a depyrogenation tunnel. This machine, which was used to

sterilize glass vials, also failed validation in May or June 2011. The amount of “bioburden” in the

testing of the depyrogenation tunnel was not acceptable. The former Rocky Mount Quality

Assurance Validation Engineer described this tunnel as an “old piece of sh*t equipment” that had

21 The former Rocky Mount Senior Production Supervisor was employed with Abbott beginning in December 1995 and remained employed with Hospira after the spin-off, until November of 2011. For the majority of his time with Hospira, he worked in the flexible container group, where he was responsible for production relating to bulk I.V. solutions, including filling bags, packaging final product, responding to test results, and writing product exception reports. Then, from February 2011 until his departure in November 2011, the former Rocky Mount Senior Production Supervisor worked in the small volume unit in Rocky Mount’s R2 building.

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been “jerry-rigged” by Hospira to keep it working. The former Rocky Mount Senior Production

Supervisor recalled that Rocky Mount even received “help from corporate” to try to remediate the

tunnel, and representatives from the tunnel’s manufacturer also visited the plant. But by the time

these former Rocky Mount employees had departed the Company in November and December 2011,

the tunnel was still offline.

92. Production was further disrupted by the failure of a system used to steam clean an

area of production in the R2 building at Rocky Mount. Production parts were sterilized in a chamber

in the system, and a part of the system that supplied the steam failed at least twice in 2011 – once in

March, and again in July or August. According to the former Rocky Mount Senior Production

Supervisor, each time the system failed, production was interrupted for four or five days.

93. Moreover, the former Rocky Mount Quality Assurance Validation Engineer

corroborated that certain lines at the plant were shut down after the June 2011 Form 483 as

validation for the lines and machines had failed. For example, he recalled that two lines were shut

down for a period of four to six weeks sometime in the summer of 2011, after the June 2011 Form

483. In addition, as described above, one of the lines on which the depyrogenation tunnel was run

was shut down indefinitely. Importantly, the former Rocky Mount Quality Assurance Validation

Engineer blamed these “shut downs” for a disruption in production and an inability to fill orders.

94. At the same time that Rocky Mount’s Quality Engineers were “screaming, yelling,

and pulling their hair out” about ongoing quality issues, Hospira’s Senior Vice President of Quality

at the time was being updated about the plant’s issues. According to the former Rocky Mount

Quality Assurance Validation Engineer, the Senior Vice President of Quality gave a presentation to

Rocky Mount’s Quality Engineers in early 2011 indicating he understood the issues Rocky Mount

was facing. He also told them he planned to “lobby for new equipment” for the Rocky Mount

facility. But necessary investments had not been made by the time the former Rocky Mount Quality

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Assurance Validation Engineer left Hospira in December 2011. His impression was that the Senior

Vice President of Quality may have “been shackled” in terms of his ability to implement the

sweeping changes that were needed at Rocky Mount.

E. Rocky Mount’s Quality Problems Resulted in Production Slowdowns and Increased Back Orders Beginning in 2010, and Ballooning “Open Investigations” in 2011

95. All of the foregoing quality issues resulted in widespread production slowdowns as

early as 2010. For example, the former Manager of Strategic Commercial Contracting recalled that,

beginning in 2010 and continuing through 2011, Hospira was incurring charges of as much as $50 to

$60 million per month for “failure to supply” penalties resulting from the Company’s inability to

maintain adequate production levels as required by contracts with group purchasing organizations

(“GPOs”). 22 Hospira’s two largest GPO customers were Novation and HPG, and the Novation

contract alone accounted for over $400 million in annual sales. Hospira was incurring “failure to

supply” penalties on both contracts as a result of backorders beginning in 2010.

96. The former Manager of Strategic Commercial Contracting recalled the back orders

were the result of manufacturing disruptions and delays. Problems were so severe that a “Monday

morning” meeting was initiated in 2010 to apprise the sales team of products that were on back

order. Back order reports were also created to list all products on back order; indeed, at any given

time in 2010 and into 2011, the back order report was approximately three to four pages in length.

97. Heading into 2011, the former Manager of Strategic Commercial Contracting

confirmed that Hospira’s manufacturing disruptions and delays only increased, resulting in more

22 GPOs bought supplies in bulk on behalf of their member hospitals. The former Manager of Strategic Commercial Contracting explained that there were approximately six or seven GPOs in the industry with which Hospira and its competitors contracted to supply products. If Hospira secured the GPO as a customer, that GPO’s member hospitals would order and purchase their products from Hospira based on the terms of the contract entered into between Hospira and the GPO.

35


“failure to supply” penalties incurred by the Company. Moreover, executive management was kept

abreast of the Company’s “failure to supply” penalties, as they received copies of the “failure to

supply” reconciliation reports, which outlined the details of GPOs’ claims for “failure to supply”

penalties. In 2011, the employee in charge of the “failure to supply” reconciliation reports began

getting “push back” from executive management to recheck everything because “they were freaking

out” about the size of the penalties being incurred. According to the former Manager of Strategic

Commercial Contracting, because these penalties were a direct hit to the Company’s bottom line,

Hospira’s executive team closely monitored the penalties.

98. The fact that Rocky Mount suffered from depressed production levels in 2011 was

further corroborated by the former Rocky Mount Senior Production Supervisor. He relayed that

Hospira’s corporate office had projected, in 2011, Rocky Mount would produce 590 million units of

product. To him, this projection was simply unrealistic, as he knew it left no room for

“breakdowns.” In fact, by April 2011, it was apparent the plant could not possibly produce its

projected 590 million units.

99. According to the former Rocky Mount Senior Production Supervisor, production had

already slowed by April 2011 such that production personnel were coming to work to “clean”

instead of run production. The former Rocky Mount Line Coordinator corroborated that production

became “slower, slower, and slower” beginning in April 2011, and Hospira was “sending people

home” as a result. Given this drop in production, any unanticipated disruptions negatively impacted

the Rocky Mount plant even more so than they normally would have. This is what happened when

key pieces of equipment such as the isolator and depyrogenation tunnel (described above) were

forced offline due to validation problems. The former Rocky Mount Senior Production Supervisor

recalled that the Rocky Mount “small volume” unit – which accounted for “90 percent of the

business” at Rocky Mount in terms of sales – was not in a position to be able to handle breakdowns

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and was unable to “maintain high throughput” when these production disruptions occurred beginning

in May 2011.

100. Meanwhile, according to the former Manager of Strategic Commercial Contracting,

Hospira was successful in masking its manufacturing problems throughout 2010 and into 2011 by

virtue of its launch of two new drugs – oxaliplatin and docetaxel – with higher than usual profit

margins. Fortunately for the Company, it was one of the few manufacturers of these two generic

oncology drugs and thus enjoyed high profit margins as a result. The price erosion normally seen

with the launch of a generic drug did not materialize as quickly as was typically the case. According

to this former employee, the high margins earned on sales of these drugs allowed Hospira to hide the

extent to which quality issues and resulting disruptions in manufacturing were negatively impacting

the Company’s operations. But as the margins on sales of these drugs began to erode in 2011,

eventually Hospira was forced to “expose the underbelly” of all the problems that were occurring

because of the Company’s ongoing quality issues.

101. Further, while production was slowing into 2011, the number of internal “open

investigations” at Rocky Mount began to explode. The former Rocky Mount Senior Production

Supervisor explained that whenever there were problems reported with particular products,

investigations were opened inside the plant to determine the causes and extent of the problems, and

ultimately to remediate them.

102. When he joined the plant’s “small volume” unit in February 2011, there were

between eight and ten “open investigations” per month. By the time he left Hospira in November

2011, the number of “open investigations” per month had ballooned to 45 or 50.

103. The former Rocky Mount Senior Production Supervisor attributed this increase to

Hospira’s reaction to intense FDA scrutiny. “Every issue was being turned into an investigation” at

Rocky Mount. Significantly, according to plant policy, any products produced that were under an

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“open investigation” could not be finalized and shipped out to customers. As a result, those products

were stored in a warehouse until final approval and could not be shipped until after the “open

investigation” was resolved.

F. The FDA Found Increasing Quality Violations Resulting from Hospira’s Cutbacks on Quality and Facility Spending

104. While regulated facilities are typically inspected by the Agency once every three

years as a matter of course, inspections may be more frequent if the FDA has cause for concern.

When an inspection reveals conditions deemed to be objectionable, the inspectors’ concerns are

published on a Form 483 addressed to the company’s executive management. Observed conditions

or practices included on a Form 483 indicate that an FDA-regulated product or facility may be in

violation of the FDA’s requirements.

105. Warning Letters are one of the FDA’s principal means of achieving prompt voluntary

compliance with the Federal Food, Drug, and Cosmetic Act (the “Act”) and its implementing

regulations. The issuance of a Warning Letter is widely considered to be a more serious regulatory

action than the issuance of a Form 483. According to the FDA, Warning Letters should only be

issued for violations of regulatory significance, i.e. , those that may actually lead to an enforcement

action if the documented violations are not promptly and adequately corrected. Warning Letters are

thus reserved for more significant violations of the Act and its accompanying regulations.

Importantly, Warning Letters typically will not be issued if the Agency finds that adequate

corrective actions have been implemented following the initial notification of observed

noncompliance, usually by way of Form 483.

1. The FDA Found Increasing Quality Issues at Rocky Mount During the Class Period

106. From August of 2009 until the end of the Class Period, FDA inspectors visited the

Company’s Rocky Mount plant no fewer than five times. Public records show that Rocky Mount

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was inspected in August of 2009, January of 2010, June of 2010, May/June of 2011, and July/August

of 2011. The FDA’s inspection database confirms that the investigations at Rocky Mount in August

of 2009, January of 2010, and May/June of 2011 all concerned device compliance issues and drug

quality assurance.

107. The FDA’s inspection of Rocky Mount in January of 2010 resulted in the issuance of

a Warning Letter on April 12, 2010, to Defendant Begley. The April 2010 Warning Letter outlined a

host of “significant violations of Current Good Manufacturing Practice (CGMP) regulations”

observed not only at Rocky Mount but also at Hospira’s Clayton, North Carolina, facility, and noted

that the “violations cause your drug products to be adulterated.”

108. Specific to Rocky Mount, the April 2010 Warning Letter observed that Hospira: (1)

did not have adequate written procedures for production and process controls designed to assure that

the drug products it manufactured had the identity, strength, quality, and purity they were purported

to have; (2) had failed to adequately validate the mixing processes for certain products; and (3) had

failed to submit adverse events reports to the Agency.

109. The FDA also noted in the Warning Letter:

In addition, we are concerned about the length of time your firm has needed to develop and implement its Validation Prioritization Plan at the Rocky Mount facility. You have been aware of our concerns regarding process validations since 2005. While your response states that you conduct finished product release testing to ensure safety and efficacy, the quality of your drug products cannot be ensured by testing alone. Please provide an interim plan to ensure the quality of the drug products that you continue to manufacture and distribute, prior to the completion of your validation activities.

110. Significantly, the April 2010 Warning Letter concluded by highlighting

that the CGMP violations listed in this letter include a similar violation (failure to identify actions needed to correct and prevent the recurrence of defective product) to the violation cited in the August 12, 2009 Warning Letter to Hospira’s Morgan Hill, California facility. It is apparent that Hospira’s attempts to implement global corrective actions after past regulatory actions by the FDA have been inadequate. Be advised that corporate management has the responsibility to ensure the quality,

39


safety, and integrity of its drug products and devices. FDA expects that your corporate management will immediately undertake a comprehensive evaluation of global manufacturing operations to ensure compliance with CGMP and [Quality System] regulations where applicable.

111. This stern warning from the FDA clearly indicated to Defendants that the deficiencies

observed at Rocky Mount were not to be taken lightly. Yet, as described more fully below,

Defendants did just that. Former Company employees have confirmed that Defendants failed to

undertake any meaningful evaluation of the Company’s quality assurance efforts, let alone a

“comprehensive evaluation.” Nor did the Company implement any global change.

112. Moreover, despite the FDA’s direct warning that Hospira’s corrective actions had

been “inadequate,” the Agency found substantially more violations when it returned to Rocky Mount

a year later. On June 17, 2011, as a result of its May/June 2011 inspection of Rocky Mount, the

FDA issued a Form 483 addressed to Hector E. Jimenez, Director of Quality at Rocky Mount, with

18 separate observations. These observations identified manufacturing and quality control

deficiencies at nearly every level of the Rocky Mount plant – from the lack of proper testing and

control procedures, to the poor design of the buildings and manufacturing equipment, the inadequate

training of plant employees, and the lack of sufficient oversight by executive management.

113. The FDA’s observations in the June 2011 Form 483 identified quality control failures

that, at least in part, appear to be the result of Project Fuel-related cuts and Defendants’ inattention to

their “aged” facilities. The FDA’s observations included, among others:

• “There is no written testing program designed to assess the stability characteristics of drug products;”

• “The responsibilities and procedures applicable to the quality control unit are not fully followed;”

• “There is a failure to thoroughly review any unexplained discrepancy and the failure of a batch or any of its components to meet any of its specifications whether or not the batch has been already distributed;”

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• “Deviations from written sampling plans and test procedures are not justified;”

“Control procedures are not established which validate the performance of those manufacturing processes that may be responsible for causing variability in the characteristics of in-process material and the drug product;”

“Equipment used in the manufacture, processing, packing or holding of drug products is not of appropriate design and suitably located to facilitate operations for its intended use and cleaning and maintenance. Specifically, a number of design and/or structural defects related to equipment or the location of equipment in the facility were noted through the course of this inspection;”

• “Buildings used in the manufacture, processing, packing or holding of a drug product do not have the suitable construction to facilitate cleaning, maintenance, and proper operations;”

• “The separate or defined areas and control systems necessary to prevent contamination or mix-ups are deficient;”

“Written procedures are not followed for the cleaning and maintenance of equipment, including utensils, used in the manufacture, processing, packing or holding of a drug product;”

• “Employees are not given training in the particular operations they perform as part of their function;”

• “Management with executive responsibility has not reviewed the suitability and effectiveness of the quality system with sufficient frequency;” and

• “Procedures for quality audits have not been adequately established.”

114. On August 4, 2011, just two months later, Hospira received a second Form 483

following a subsequent Rocky Mount inspection in July/August 2011. This Form 483 was addressed

to Jonathan Waldron, Rocky Mount’s Vice President of Operations, and contained three

observations criticizing: (1) Hospira’s failure to thoroughly review the failure of a batch or any of its

components; (2) the Company’s laboratory controls not including the establishment of scientifically

sound and appropriate test procedures designed to assure that drug products conform to appropriate

standards; and (3) the quality control unit’s failure to fully follow applicable responsibilities and

•

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procedures, which had resulted in numerous product lots being released for distribution despite

having failing in-process and/or finished product results.

115. Thus, it became clear that cost cutting through Project Fuel had left Hospira

understaffed and unable to perform necessary quality control to ensure the safety of its products,

plant, and equipment (which corroborates the information conveyed by various witnesses detailed in

Section D above).

2. FDA Violations Were Not Limited to Rocky Mount

116. The problems at Hospira’s largest facility, Rocky Mount, also existed at the

Company’s other facilities. This led to frequent inspections and criticisms leading up to and during

the Class Period. On August 12, 2009, the FDA issued a Warning Letter to Hospira related to the

Company’s Morgan Hill, California, facility. Immediately following its April/May 2009 inspection

of Morgan Hill, the FDA had issued a Form 483 to Hospira identifying observed violations. But,

unsatisfied with the Company’s response, the FDA issued its August 2009 Warning Letter to

reiterate the Agency’s concern about Hospira’s inadequate efforts to that point to rectify the

observed problems. Tellingly, the FDA concluded its August 2009 Warning Letter with the

following rebuke:

The specific violation noted in this letter and in the Inspectional Observations, Form FDA 483, issued at the closeout of the inspection may be symptomatic of serious problems in your firm’s manufacturing and quality assurance systems. You should investigate and determine the causes of the violations, and take prompt actions to correct the violations and to bring your products into compliance.

117. However, in light of Rocky Mount’s ongoing problems and the Agency’s April 2010

Warning Letter, Defendants clearly refused to fully investigate Hospira’s manufacturing and quality

assurance systems. In fact, the Company’s manufacturing facility at Clayton, North Carolina, also

was the subject of numerous FDA investigations around the same time. For example, the same April

2010 Warning Letter that addressed deficiencies at Rocky Mount also highlighted similar problems

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at Clayton. The April 2010 Warning Letter identified five separate violations of Current Good

Manufacturing Practice regulations at Clayton, four of which were repeat violations from a prior

inspection in April 2009. The Agency’s records further confirm that the April 2009 inspection had

centered on Hospira’s drug quality assurance.

118. In addition to the foregoing inspections, Clayton was also inspected by the FDA in

June 2008, October 2010, and again in January 2011. The January 2011 inspection yielded

regulatory concerns over device compliance issues and deficiencies in drug quality assurance at the

Clayton facility. Thus, leading up to and during the Class Period, Hospira’s Clayton plant was

inspected by the FDA no fewer than five times.

119. The Company’s facility in Austin, Texas, was inspected three times from 2008 until

the close of the Class Period: once in August of 2008, again in December 2009, and then again in

April 2011. According to the FDA’s records, the latter two inspections resulted in concerns over

Hospira’s drug quality assurance in Austin. The Agency issued a Form 483 with 11 observations

following its four-week inspection in April 2011. That Form 483 was addressed to Arthur J. Flacco,

Jr., Corporate Vice President of Pharmaceutical Operations, and identified manufacturing

deficiencies and failures in quality control, employee training, and equipment design that were

strikingly similar to, or even duplicative of, the violations previously observed in early 2010 at the

Company’s Rocky Mount and Clayton facilities.

120. Defendants were explicitly warned in the FDA’s August 2009 Warning Letter that

violations addressed therein “may be symptomatic of serious problems in your firm’s manufacturing

and quality assurance systems. You should investigate and determine the causes of the violations,

and take prompt actions to correct the violations and to bring your products into compliance.”

Defendants were again cautioned in the April 2010 Warning Letter that, in light of the Company’s

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ongoing deficiencies, it was “apparent that Hospira’s attempts to implement global corrective actions

after past regulatory actions by the FDA have been inadequate.”

G. Despite Increased Regulatory Scrutiny, Defendants Made No Effort Before June 2011 to Meaningfully Address Rocky Mount’s Numerous Deficiencies

121. As described above, Hospira’s Rocky Mount facility was plagued with deficiencies

that were well known within Hospira in 2010 and had only increased heading into 2011. But despite

the increased scrutiny from the FDA beginning in early 2010, the Company largely ignored its

quality control deficiencies at Rocky Mount for well over a year. Indeed, the former Rocky Mount

Quality Assurance Validation Engineer confirmed that Hospira had not made any concerted effort to

remediate the issues identified in the April 2010 Warning Letter until after it received the June 2011

Form 483 identifying 18 more problems at Rocky Mount.

122. The former Rocky Mount Batch Release Specialist described a presentation put

together by one particular consultant in early 2011, sometime between January and March. This

consultant was “well respected in the industry” and was routinely invited to speak about good

manufacturing practices at industry conferences. The consultant came to Hospira with a “published

book” with “scripted questions” and interviewed Company personnel. The consultant then compiled

his findings in a three-ring binder with an accompanying PowerPoint presentation. The presentation

was sent to corporate personnel in Lake Forest, Illinois, including Defendant Begley, and to staff at

Rocky Mount. As the former Rocky Mount Batch Release Specialist recalled, the first slide of the

presentation said something to the effect of “10 Things in the Lab that Will Shut the Plant Down.”

The consultant thought the problems needed to be exposed so they could be remediated. Rocky

Mount’s management had “harsh words” with the consultant as a result, and the consultant departed

Hospira once he realized his efforts were largely ignored, and he was not going to be able to make

progress resolving Rocky Mount’s quality problems.

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123. According to the former Rocky Mount Quality Assurance Validation Engineer, it was

not until after the FDA had issued the Form 483 in June 2011 that “you heard a lot of talk about

timelines” and a concerted effort was made to work toward remediating the issues at Rocky Mount.

Only then was there a noticeable effort by the Company to “throw money” at the quality issues at

Rocky Mount and bolster resources in a manner and amount necessary to remediate the plant’s

problems. He also recalled corporate vice presidents being sent to Rocky Mount after the June 2011

Form 483 to assist in dealing with the plant’s quality issues.

124. The former Rocky Mount Quality Assurance Validation Engineer was actually hired

by Hospira shortly after the April 2010 Warning Letter as part of a commitment the Company had

made to the FDA to remediate Rocky Mount’s observed deficiencies. A few other Quality

Engineers and a Quality Engineering Manager were brought in around the same time. But,

according to the former Rocky Mount Quality Assurance Validation Engineer, the Company only

began to “dabble” in remediation efforts following the April 2010 Warning Letter. There was “not a

sense of urgency” in resolving the issues the FDA had identified.

125. He recalled that the Company finally began to “ramp up” and “throw money” at

remediation efforts much more noticeably after the FDA’s follow-up inspections at Rocky Mount in

mid-2011. At that point, the quality issues “came to a head” internally. After the June 2011 Form

483, much more attention was paid to the quality issues at Rocky Mount.

126. Yet, even by the end of 2011, the former Rocky Mount Quality Assurance Validation

Engineer had grown frustrated with the Company’s lack of remediation progress at Rocky Mount.

He departed Hospira in December 2011 on his own accord because the Company was “still

struggling to correct regulatory issues” at Rocky Mount and had fallen considerably behind schedule

on its remediation plans. By that time, Hospira already was at least six months behind in its efforts

to remediate the issues the FDA had identified.

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H. Defendants Knew of or Recklessly Disregarded Hospira’s Myriad Deficiencies Throughout the Class Period

127. Defendants were well aware of the regulatory issues facing Hospira leading up to and

during the Class Period. Indeed, the April 2010 Warning Letter was specifically addressed to

Defendant Begley at Hospira’s corporate headquarters in Lake Forest, Illinois. Moreover, as

described above, the April 2010 Warning Letter even referred to an earlier Warning Letter issued to

Hospira on August 12, 2009 in which Defendants were advised that certain identified issues “may be

symptomatic of serious problems in your firm’s manufacturing and quality assurance systems. You

should investigate and determine the causes of the violations, and take prompt actions to correct the

violations and to bring your products into compliance.” Thus, as of August of 2009, Defendants

clearly were on notice of “serious problems” in Hospira’s manufacturing and quality control

processes, as well as the FDA’s concerns over those problems.

1. Defendants Held Weekly Meetings and Used Reports to Track Remediation Efforts

128. Defendant Begley called weekly management meetings to review Hospira’s progress

in its Company-wide remediation efforts. During the Company’s second-quarter 2010 earnings call

on July 28, 2010, he described those meetings as follows:

I literally have a weekly meeting with management here reviewing the progress on the plan, not only for Clayton and Rocky Mount, but the status of our initiatives across all of our manufacturing plants. In addition to that, then I have a larger monthly meeting. And so the ball is in our court clearly now to execute that plan. We will be giving every other month a update to the FDA on the status of that and so we have made some tremendous progress that the organization should be proud of achieving.

129. Further, Defendants held weekly management meetings every Thursday morning that

included all plant-level quality control managers. On the Company’s fourth-quarter and full-year

2010 earnings call on February 2, 2011, Defendant Begley described how Hospira’s “senior

leadership team” met every Thursday morning at seven o’clock to discuss inventory and related

46


issues with “every plant manager and plant quality control manager from around world . . . .”

Defendant Begley further indicated he regularly joined that meeting as well.

130. Defendants also held “Town Hall” meetings in which the Company’s top executives

discussed, among other things, ongoing issues with the FDA. The former Product Quality Safety

and Compliance Analyst recalled that both Defendants Begley and Werner participated in the Town

Hall meetings.

131. Hospira’s executive management also personally followed any regulatory actions by

the FDA and the Company’s responses. During Hospira’s “Investor Day” event on September 7,

2011, Defendant Hardy told investors that Defendants had been “tracking” their “robust action

plans” with respect to Rocky Mount and Clayton ever since receiving the FDA’s April 2010

Warning Letter. Defendant Hardy relayed, “The robust action plans that were developed in Rocky

and Clayton were tracked, as [Defendant] Mike [Ball] likes to say, here at the Ivory Tower, we were

measuring and reporting and had green, yellow and red graphs.” Defendants thus closely monitored

from their “Ivory Tower” in Illinois the Company’s progress at Rocky Mount in remediating

whatever violations the FDA had identified.

132. Moreover, as Defendant Hardy admitted at the end of the Class Period, Defendants

knew from the beginning that Hospira had inherited “aged” facilities that were in need of a “facelift”

and further modernization. That Rocky Mount, Hospira’s most important manufacturing facility,

needed significant remediation certainly was no secret to Defendants throughout the Class Period.

2. Defendants Were Personally Involved in Addressing the FDA’s Concerns

133. With respect to Hospira’s regulatory troubles, Defendant Begley declared from the

outset, during the Company’s first-quarter 2010 earnings call on April 27, 2010, that he was

“personally engaged in the process and committed to driving a positive resolution to this issue.”

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134. Defendant Begley met personally with the Agency as part of the Company’s response

to the April 2010 Warning Letter. On July 28, 2010, during the second-quarter 2010 earnings call,

Defendant Begley described a meeting he had had with Hospira’s regulators in Atlanta:

I personally flew down with the team to the Atlanta District and we presented our plan to the District and also to the Center. And the reason why I made the comments I did is in listening to their feedback and their reaction, I believe that they think the plan is on the right course.

135. The former Rocky Mount Line Coordinator recalled Defendant Begley visiting the

Rocky Mount plant in February of 2011 for two or three days to observe some of the processes in

use there. Defendant Begley watched “hands on” demonstrations of production processes. The

former Rocky Mount Line Coordinator was one of the staff who personally met with and presented

to Defendant Begley during this trip.

136. In addition, according to the former Rocky Mount Batch Release Specialist, sometime

between January and March 2011, Defendant Begley received a presentation from a well-respected

consultant that addressed the Company’s quality problems. As the former Rocky Mount Batch

Release Specialist recalled, the presentation was a compilation of findings after the consultant

interviewed Company personnel, and its first slide said something to the effect of “10 Things in the

Lab that Will Shut the Plant Down.” The consultant thought the CEO needed to know about the

problems, and that they should be exposed so that they could be remediated.

137. Defendant Ball, at the September 7, 2011 “Investor Day” event, responded to an

analyst’s question admitting that he knew coming into the Company (in early 2011) about Rocky

Mount’s troubles and the April 2010 Warning Letter. Furthermore, according to the former Rocky

Mount Senior Production Supervisor, Defendant Ball visited Rocky Mount sometime in the summer

of 2011, after July, and spent two or three days meeting with plant personnel.

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138. The former Rocky Mount Quality Assurance Validation Engineer also recalled that

Defendant Ball informed Rocky Mount employees via video conference sometime in the third

quarter of 2011, after the June 2011 Form 483 was issued, that Hospira was in “constant, daily

contact” with the FDA to provide updates.

139. Further, during the Company’s October 18, 2011 conference call, Defendant Ball told

the market that he was fully invested in Hospira’s remediation efforts:

And as we dug into this and I personally dug into it , I think we now can say that our monitoring systems are not just lagging indicators of what’s going on, but we’re looking at forward indicators as to what is actually going on in the plant. So I think there is new transparency into the plant that probably just was not there before. And in digging through it with the consultants, I have one-on-ones where it’s just me and the consultants every week where I personally talk to the individual who heads up IHL to get a thorough review of exactly what’s going on in the plant, and an unvarnished view.

And this is also a commitment I made to the FDA that I would personally be involved in terms of ensuring that we had the right metrics in place and that we had the right controls in place for me to personally be assured that we were getting the right information. So as it pertains to the situation now, I think I have full transparency into the operation.

140. In sum, from the time they were first disclosed, the FDA’s April 2010 Warning Letter

and the Company’s ongoing responses were a topic of conversation during each and every quarterly

earnings call, as well as during many interim conference calls at various healthcare industry

conferences. At one point or another during the Class Period, each and every one of the Individual

Defendants led some sort of discussion with the market about Hospira’s responses to the April 2010

Warning Letter. See, e.g. , ¶¶159, 168, 175, 185, 193, 204, 209 (Defendant Begley); ¶¶178, 180, 190,

198, 205, 210, 216, 232 (Defendant Werner); ¶¶215, 216, 226 (Defendant Ball); ¶¶221, 222, 227,

228 (Defendant Hardy).

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V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS

141. The Class Period begins on February 4, 2010, when Defendants announced Hospira’s

fourth-quarter and full-year 2009 financial results, boasted of the ongoing successes of Project Fuel,

and further assured the market of Hospira’s commitment to quality control and its “very good

relationship with the FDA,” while, at the same time, the FDA was raising concerns over significant

manufacturing and quality control deficiencies revealed during its inspections of the Company’s

Rocky Mount and Clayton, North Carolina, facilities only days earlier.

A. February to March 2010

142. On February 4, 2010, the Company issued a press release announcing fourth-quarter

and full-year 2009 financial results, which was also filed with the SEC on Form 8-K that same day.

Hospira’s fourth-quarter and full-year 2009 earnings release announced “improvements resulting

from the company’s Project Fuel optimization initiatives.” Hospira’s press release further quoted

Defendant Begley:

“Driven by double-digit revenue and adjusted earnings growth, the fourth quarter concluded a year of transformation for Hospira. In addition to our strong financial performance, we made significant progress on many fronts, including . . . advancing Project Fuel, our corporate-wide optimization initiative ,” said Christopher B. Begley, chairman and chief executive officer. “Looking forward, we expect 2010 to be another good year of growth for Hospira. Backed by our commitment to strong execution and focus on sustained operational improvement, we continue to position Hospira for sustainable, long-term growth and increased shareholder value.”

143. Defendants hosted a conference call with analysts that same day, on February 4,

2010, to discuss the Company’s financial results. In his opening remarks, Defendant Begley offered

the following praise for Project Fuel:

• We kicked off Project Fuel, a corporate wide optimization initiative to drive long-term profitable growth and increased shareholder value , and we met the commitments we set forth for 2009.

50


• We have met our Project Fuel commitments in 2009, aggressively driving transformation throughout the organization and building momentum going into 2010.

• Efforts such as these will optimize our productivity and allow us to free up additional funds for investment in our business, driving even better execution of our longer-term financial targets and business goals.

Our strong performance in the fourth quarter brought to a close a very good year for Hospira, a year of significant transformation for the company. The far-reaching changes we’ve made with Project Fuel have not only improved our operations, they have significantly changed the profitability profile. . . . In short, we’ve change[d] Hospira, for the better. The [significant] (technical difficulty) momentum we generated in 2009 paves the way for continued progress in 2010. We [expect to] (technical difficulty) [drive] increased efficiencies this year through Project Fuel as we continue to position Hospira for long-term, sustainable growth.

144. During the question-and-answer session that followed, one analyst asked, “So to what

extent does FDA policy keep you up at night, given all the regulatory submissions you’ve got

pending? And what’s the risk?” Defendant Begley responded by boasting of Hospira’s “very good

relationship with the FDA” and assured investors that FDA policy was “not something that keeps

[him] up at night”:

First of all, we’ve got a very good relationship with the FDA, and we’ll continue to work very closely with the FDA . . . . And so -- and I think we are on top of it. And so I don’t mean to put it aside, but it’s not something that keeps me up at night. The organization here is very well aware of the importance of working with the FDA and changing as their requirements change.

145. In addition, Hospira’s 2009 Form 10-K, which was filed with the SEC on February

18, 2010, and included a comprehensive overview of Defendants’ progress in implementing Project

Fuel, contained the following statements regarding the Company’s operations, remediation, and

commitment to quality control:

Hospira is actively involved in setting quality policies and managing internal and external quality performance. Its quality assurance department provides quality leadership and supervises its quality systems. An active audit program, utilizing both internal and external

51


auditors, monitors compliance with applicable regulations, standards and internal policies.

Hospira has received notices from regulatory authorities alleging violations of applicable regulations and standards, and Hospira has developed definitive action plans, implemented remedial programs and modified its practices to address these issues. During 2009, Hospira received a warning letter from the FDA related to Hospira’s corrective action plans with respect to the failure of certain AC power cords manufactured by a third party. The affected power cords are used on certain infusion pumps and related products. Hospira initiated a voluntary recall of the affected power cords in August 2009. Hospira has responded to the warning letter and is working closely with the FDA to conclude this matter.

• Hospira believes that its facilities and equipment are in good operating condition and are well maintained .

In addition, higher production volume and cost reductions associated with Project Fuel and Facilities Optimization initiatives contributed to manufacturing efficiency gains .

146. Moreover, Defendants Begley and Werner signed certifications stating they reviewed

the Form 10-K and that it “does not contain any untrue statement of a material fact or omit to state a

material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report,” and that

they

have disclosed, based on [thei]r most recent evaluation of internal control over financial reporting, to Hospira’s auditors and the audit committee of Hospira’s board of directors:

* * *

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Hospira’s internal control over financial reporting.

147. Further, Defendants Begley and Werner each signed certifications pursuant to the

Sarbanes-Oxley Act of 2002 (“SOX”) that the Form 10-K “fully complies with the requirements of

section 13(a) or 15(d) of the Securities Exchange Act of 1934,” and that “[t]he information contained

52


in the [Form 10-K] fairly presents, in all material respects, the financial condition and results of

operations of the Company.”

148. Analysts reacted favorably to Defendants’ statements regarding the Company’s

fourth-quarter and full-year 2009 financial results and its success with Project Fuel. For example,

Morgan Stanley published an analyst report on February 4, 2010, entitled “Hospira: Project Fuel

Upside Offsets Revenue Headwinds in 2010.” This report concluded that “overall positive themes

are intact with Fuel driven margin expansion and underlying growth in SIP still strong . . . .”

149. On March 9, 2010, Defendant Werner participated in the Raymond James

Institutional Investors Conference and described as one of Hospira’s “core strengths” how “very well

respected” Defendants were “for our quality, reliability and manufacturing capabilities as well.” He

went on to brag about the Company’s progress in its Project Fuel initiative, which was “ adopted to

drive operational excellence and then drive and generate top quarter financial performance. We

believe it is really serving to transform the company.” According to Defendant Werner, Project Fuel

would “support further long-term growth and hopefully support top quartile, consistent,

sustainable shareholder value performance .” The initiative would also result in “ increased

efficiencies” and improved “productivity per employee.”

150. In a response to a question from the audience, Defendant Werner further extolled the

benefits of Project Fuel:

I think the most exciting thing about it is the more we look, the more we find. We’ve been able to exceed just about every goal we’ve laid out.

* * *

So, it really is touching about every part of the organization. There is very much a focus on simplifying decision-making. As you might imagine, being part of a large company like Abbott we need to move a lot more quickly than we were able to move before. The list of accomplishments we have going on, you can see there is many things going out at the same time.

53


So, it continues to be a project where sort of the more we look, the more we find. We’ve had -- I really can’t think of any significant negative surprises.

151. Then, on March 10, 2010, Defendant Werner took part in the Cowen and Company

Healthcare Conference, during which he again boasted of Hospira “continu[ing] to be highly

respected for our quality, reliability and manufacturing capabilities .” He similarly described the

Company’s transformation from Project Fuel’s focus “on operational excellence.”

152. Defendant Werner provided further detail on the success of Project Fuel when

responding to a question from the audience: “And the focus of Project Fuel I think on the internal

operations -- oxaliplatin was just sort of icing on an otherwise nice year. So Project Fuel continues

to have us very focused on the base business and its health .” He continued, “. . . and I think Project

Fuel is what gives us the confidence that the base business will continue to fire on all cylinders.”

153. For the reasons stated above in the Substantive Allegations section, and as further

detailed herein, the foregoing statements made in or during the February 4, 2010 earnings release

and conference call, 2009 Form 10-K, March 9, 2010 Raymond James Institutional Investors

Conference, and March 10, 2010 Cowen and Company Healthcare Conference, which touted, among

other things, the success of Project Fuel, the soundness of Hospira’s operations, the respectability of

Hospira’s quality and manufacturing, and the Company’s commitment to quality control and

ensuring regulatory compliance, were materially false and misleading when made or omitted

material facts to make such statements not false and misleading, because:

(a) Defendants knew or recklessly disregarded and omitted to disclose that Rocky

Mount’s manufacturing operations were nowhere near “operational excellence” but in fact suffered

from serious issues with regard to quality control and the deterioration of its facilities and

equipment. By early 2010, for example, necessary quality control staff had been cut through Project

Fuel, the plant’s Standard Operating Procedures had been diminished and ignored, in-process quality

54


sampling was eliminated, and pharmaceutical mixing processes were relying on unsound science and

could not be validated. These problems were not being fixed but were actually worsening as a result

of cost cutting pursuant to Project Fuel ( see, e.g., ¶¶49-94);

(b) the Company’s facilities and equipment were not in “good operating

condition” and “well maintained” because, as Defendant Hardy would later admit, Hospira had

inherited “aged” facilities that were in need of a “facelift” and modernization that would cost

millions of dollars, and they were further plagued with mold, equipment failures, antiquated and

unusable DOS-based documentation systems, and other operational deficiencies ( see, e.g., ¶¶83-94,

132);

(c) the deficiencies at Rocky Mount and beyond were so substantial that,

beginning in 2010, they resulted in widespread manufacturing disruptions and delays that caused

many of the Company’s products to be on back order, which ultimately cost Hospira not only lost

sales and revenues, but also tens of millions of dollars in hard costs each month as a result of “failure

to supply” penalties (see, e.g., ¶¶95-99);

(d) in contrast to enjoying a “very good relationship” with the FDA and

Defendants not having to lose any sleep at night, Hospira was, in fact, facing heightened scrutiny

from the Agency as a result of its myriad production and quality control deficiencies, which scrutiny

included an inspection of Rocky Mount in January 2010 that revealed problems so severe as to

warrant the April 2010 Warning Letter ( see, e.g., ¶¶104-120);

(e) rather than “working closely with the FDA” and adapting to any regulatory

changes following the August 2009 Warning Letter, up to this point and for well over a year in total

after receiving the subsequent April 2010 Warning Letter, the Company made no concerted effort

nor any meaningful commitment in dollars or resources to address the FDA’s concerns, particularly

55


at Rocky Mount, as revealed by the issuance of the June 2011 and August 2011 Form 483s

identifying even more problems at the plant ( see, e.g., ¶¶121-126);

(f) the Company was not “actively involved in setting quality policies” but

actually had encouraged a shift in corporate culture to reward “quantity over quality,” which would

take significant time and effort to reverse ( see, e.g., ¶¶39-44);

(g) Defendants hid from the market the devastating effects of Project Fuel on

Hospira’s manufacturing and quality assurance efforts, particularly at Rocky Mount. Instead of

driving “sustainable,” “long-term” profitability, in reality, Project Fuel’s short-term savings would

be eclipsed by the long-term costs of the sacrifices in quality resulting from the initiative, which

costs would include a remediation bill topping $300 million, the need to hire additional quality

control personnel to ensure the safety of Hospira’s products, and the eventual impacts to the

Company’s revenues as quality-related production slowdowns resulted in decreased sales ( see, e.g.,

¶¶49-58); and

(h) the Company’s 2009 Form 10-K was materially false and misleading because

it failed to disclose (in violation of Item 303 of regulation S-K) these materially adverse conditions

to the market.

B. April to June 2010

154. Hospira filed with the SEC on April 16, 2010, a Form 8-K disclosing that the

Company had received a warning letter, dated April 12, 2010, from the FDA in connection with the

FDA’s inspection of the Company’s manufacturing facilities in Rocky Mount, North Carolina and

Clayton, North Carolina. The Company revealed that the FDA had cited Current Good

Manufacturing Practice deficiencies and other inadequacies at those facilities, some of which were

repeat observations. The Company stated that it “ takes this matter seriously and intends to respond

56


fully, and in a timely manner,” and that it planned “ a comprehensive review of its manufacturing

operations to ensure compliance with applicable regulations.”

155. On the Company’s reassurances that its 2010 financials should not be negatively

impacted by the FDA’s April 2010 Warning Letter, the market had minimal reaction to disclosure of

the letter. Morgan Stanley published an analyst report on April 18, 2010, with the heading “Quick

Comment: Warning Letter Looks Manageable.” The report continued:

The impact of the FDA warning letter looks manageable given 1) lack of a FDA imposed ship-hold or recall and 2) the problem relates in part to propofol, which has been a frequent focus for the FDA (Hospira, Teva and Bedford have experienced problems in the past) suggesting the issues are not novel. Expected timelines to resolution may be relatively brief (weeks) for the two voluntarily suspended products as one of the products, propofol, is already on the FDA’s drug shortage list, the company is awaiting FDA approval of manufacturing changes (additional filtration steps) to prevent the problem, and a facility re-inspection is unlikely to be required.

156. On April 27, 2010, the Company issued a press release announcing first-quarter 2010

financial results, which was also filed with the SEC on Form 8-K the same day. Hospira’s first-

quarter 2010 earnings release announced an increase in full-year guidance and higher net sales due in

part to “improved manufacturing efficiency from the company’s Project Fuel optimization

initiatives.” The earnings release quoted Defendant Begley as follows:

“Hospira started out the year with very strong sales and profitability. Our positive performance was driven by continued momentum in our Specialty Injectable Pharmaceuticals business, as well as by additional progress on our Project Fuel optimization initiatives . . . . We remain dedicated to delivering on our commitments to our customers and patients through focused execution and improving shareholder value through sustainable top- and bottom-line growth .”

157. In addition, Hospira’s first-quarter 2010 Form 10-Q, which was filed with the SEC on

April 27, 2010, and included a comprehensive overview of Defendants’ progress in implementing

Project Fuel, contained the following statements regarding the Company’s operations, remediation

efforts, and regulatory compliance:

57


As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations .

Hospira has initiated and completed a substantial portion of the field corrections and other remediation activities with respect to the recalled products for which the related costs had been reserved for during 2009.

Hospira will be undertaking a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations.

158. The Company’s first-quarter 2010 Form 10-Q also contained certifications by

Defendants Begley and Werner that were materially similar to those identified above in ¶¶146-147.

159. Defendants hosted a conference call with analysts the same day, on April 27, 2010, to

discuss Hospira’s first-quarter 2010 financial results. In opening the call, Defendants Begley and

Werner addressed the warning letter Hospira received from the FDA, stating in pertinent part:

• Defendant Begley: “ We take these actions very seriously. We are committed to following the FDA’s regulations and Company operating procedures.”

• Defendant Begley: “We are confident we can demonstrate to the agency our ability and commitment to not only implement these corrective actions, but also to ensure the global application of all improvements .”

• Defendant Begley: We at Hospira are “ raising our bar internally ” and working to “meet the highest level of compliance with both our pharmaceutical and device products.”

• Defendant Werner characterized Hospira’s actions in response to the FDA warning letter as “voluntary actions we’ve decided to take” in order to “bring the issues identified to a positive resolution,” and further noted that Hospira was “in the process of implementing corrective actions .”

• Defendant Begley: “We are redoubling our commitment to quality , proactively addressing certain product issues to ensure they meet our high standards. We are working diligently and aggressively to resolve those issues, and are holistically addressing the concerns of the FDA . We are confident in our ability to address these challenges and emerge an even stronger Company. We are committed to delivering our increased full-year guidance for sales and adjusted EPS, and we are on track for another positive year.”

58


160. Defendants Begley and Werner downplayed the FDA’s concerns by continuing to

tout the impact Project Fuel was having on driving improvements in process and quality. Defendant

Begley noted “strong progress and gains from Project Fuel” and stated, “We remain on track with

our optimization program, which is designed to simplify our business and drive quality and

operational excellence to obtain top-tier financial performance.” Defendant Werner attributed

adjusted gross margin gains to “ improvements to manufacturing productivity, mainly as a result of

Project Fuel efforts .”

161. In the question-and-answer session that followed, Defendants Werner and Begley

provided additional assurances of the strength of Hospira’s operations, with Defendant Werner

stating that “margins will begin to rebound in the back part of the year aided by better manufacturing

performance, as well as increased savings from Project Fuel.” Defendant Begley added, “ It’s part of

the fabric of our culture, and we will do whatever it takes from a technology quality improvement

standpoint to make sure that we are able to deliver the best product out there .”

162. Analysts reacted favorably to Defendants’ statements regarding the Company’s first-

quarter 2010 financial results, its responses to the FDA following the April 2010 Warning Letter,

and its success with Project Fuel. For example, JPMorgan published a report on April 27, 2010,

raising its 2010 earnings per share target for Hospira. “[W]e view this quarter’s beat and raise

positively, especially in the context of a healthcare sector under pressure from the impact of

healthcare reform.” A report from Morgan Stanley the same day noted the FDA’s Warning Letter,

but then continued, “That said, [Project] Fuel’s solid underlying profitability gains remain intact, and

regardless, near term stock performance is more tied to the Taxotere litigation, which remains the

key catalyst for the stock and for positive revisions given HSP’s multiple premium to hospital

supplies and generics.”

59


163. On May 4, 2010, Defendant Begley participated in the Deutsche Bank Securities

Health Care Conference and boasted of Hospira’s “70-year track record and a reputation of quality

and innovation.” Defendant Begley characterized Project Fuel as “an aggressive enterprisewide

optimization initiative we adopted to drive operational excellence and generate top financial

performance,” and noted “the significant progress we are making with Project Fuel, which is

transforming Hospira into an optimal performer.” Defendant Begley further touted “ increased

efficiencies” and “operational excellence” driven by Project Fuel, which was “freeing up additional

funds to invest in the business.”

164. Defendant Begley also fielded questions following his opening remarks. With respect

to the Rocky Mount issues, Defendant Begley promised that “ everything that we will do will end up

being quicker and a little bit more as it relates to validation to meet the new guidelines that have

been issued by the FDA.”

165. Defendant Werner participated in the Bank of America Merrill Lynch Health Care

Conference about a week later, on May 12, 2010, where he boasted that Hospira was “ [vJery well-

respected for quality, reliability and manufacturing .” He also told the market that Hospira was

“very pleased with our [Project Fuel] progress to date,” that Project Fuel was “very much on track,”

and that Project Fuel had “ transformed our organization . . . driving operational excellence and

freeing up capital to invest in areas for growth.”

166. Defendant Werner then participated in the Citi Global Healthcare Conference on May

27, 2010. His remarks highlighted the Company’s operations (“Very well respected for our quality,

reliability and manufacturing”) and successes in implementing Project Fuel (“We’re doing very well

on Project Fuel; we’re on track, very pleased with our progress.”). Defendant Werner concluded,

“We have as a tailwind here, if you will, Project Fuel that allows us to really drive margin expansion

60


as well as cash flow improvement . . . . So we think that, particularly with Project Fuel, that we’ve

positioned the Company for sustained growth .”

167. Defendant Begley took part in the Sanford C. Bernstein Strategic Decisions

Conference on June 2, 2010. Defendant Begley called Hospira “ highly respected for our quality,

reliability, and manufacturing capabilities ” and touted the Company’s focus on “ improving the

safety and quality of medication administration .” Defendant Begley also promoted the success of

Project Fuel in driving operational excellence, increasing efficiencies, “freeing up additional funds to

invest in the business,” and “ transforming Hospira into an optimal performer .”

168. Defendant Begley then responded to two questions regarding Project Fuel’s cost

savings and the Company’s regulatory troubles at Rocky Mount. With respect to Project Fuel,

Defendant Begley stated that process improvements were “making it easier to make decisions,”

“taking frustration out of the organization ,” and increasing productivity.

169. On the topic of the FDA, Defendant Begley assured the market that Hospira’s

regulatory issues were limited to Clayton and Rocky Mount, and of the Company’s ability to

remediate the problems: “[N]either of those are systemic issues to Hospira, and neither of those

are systemic issues to the two plants either .” With respect to the Rocky Mount issues, Defendant

Begley placed the blame on “validation and a new guidance document that the FDA has put out for

public comment.”

170. Two weeks later, Defendant Werner participated in the Goldman Sachs Global

Healthcare Conference on June 17, 2010. He took this opportunity to further sell the market on the

success of Project Fuel:

So we’re tracking very well with Project Fuel and I went back four or five quarters and it just continues to notch up . . . . So we’re executing very well on Project Fuel, you tally those numbers up, it’s almost end of state gross savings that we’ve committed to.

61



detailed herein, the foregoing statements made in or during the April 16, 2010 Form 8-K, April 27,

2010 earnings release and conference call, first-quarter 2010 Form 10-Q, May 4, 2010 Deutsche

Bank Securities Health Care Conference, May 12, 2010 Bank of America Merrill Lynch Health Care

Conference, May 27, 2010 Citi Global Healthcare Conference, June 2, 2010 Sanford C. Bernstein

Strategic Decisions Conference, and June 17, 2010 Goldman Sachs Global Healthcare Conference,

which touted, among other things, the Company’s intent to evaluate its facilities and remedy the

FDA’s concerns, the success of Project Fuel, Hospira’s respectable quality and manufacturing, and

the Company’s continued efforts to remediate Rocky Mount, were materially false and misleading

when made or omitted material facts to make such statements not false and misleading because:




equipment. For example, by early 2010, Project Fuel’s staff cuts were more than 80% complete and

quality control personnel had been sacrificed, those employees who remained were generally

“secluded” and “sequestered” and therefore out of touch with evolving industry practice, the plant’s

Standard Operating Procedures had been diminished and ignored, in-process quality sampling was

eliminated, and pharmaceutical mixing processes were relying on unsound science and could not be

validated. These problems were not being fixed but were actually worsening as a result of cost

cutting pursuant to Project Fuel (see, e.g., ¶¶49-94);

(b) Defendants knew or recklessly disregarded that they were not “redoubling”

their commitment to quality but were ignoring required improvements to their weakened quality

control team, deteriorated manufacturing facilities, and antiquated DOS-based documentation

system. Quality was suffering as a result of Defendants’ failure to update the Company’s systems

62


and maintain Hospira’s facilities, and their cutting of quality control costs through Project Fuel ( see,

e.g., ¶¶49-94);






(d) the Company was not “raising the bar” internally but actually had encouraged

a shift in corporate culture to reward “quantity over quality,” which would take significant time and

effort to reverse (see, e.g., ¶¶39-44);

(e) contrary to Defendants’ assurances, the problems identified by the FDA were

in fact “systemic issues” to Rocky Mount, and even to the Company as a whole, because Project

Fuel’s budget cuts meant “across the board” sacrifices throughout Rocky Mount and Hospira’s other

manufacturing facilities (see, e.g., ¶¶49-94);

(f) as opposed to being proactive and “aggressively” and “holistically” addressing

the FDA’s concerns, for well over a year in total after receiving the April 2010 Warning Letter,

Defendants undertook no “comprehensive evaluation” of Hospira’s global operations or made any

concerted effort or meaningful commitment in dollars or resources to address the FDA’s concerns at

Rocky Mount, as revealed by the issuance of the June 2011 and August 2011 Form 483s identifying

even more problems at the plant (see, e.g., ¶¶121-126);

(g) Defendants hid from the market the devastating effects of Project Fuel on


“position[ing] the Company for sustained growth,” in reality, Project Fuel’s short-term savings

would be eclipsed by the long-term costs of the sacrifices in quality resulting from the initiative,

63


which costs would include a remediation bill topping $300 million, the need to hire additional

quality control personnel to ensure the safety of Hospira’s products, and the eventual impacts to the

Company’s revenues as quality-related production slowdowns resulted in decreased sales ( see, e.g.,

¶¶49-58); and

(h) the Company’s first-quarter 2010 Form 10-Q was materially false and

misleading because it failed to disclose (in violation of Item 303 of regulation S-K) these materially

adverse conditions to the market.

C. July to September 2010

172. On July 28, 2010, the Company issued a press release announcing second-quarter

2010 financial results, which was also filed with the SEC on Form 8-K that same day. Hospira’s

second-quarter 2010 earnings release stated in pertinent part:

“Hospira delivered another solid quarter, driven by strong performance in our Specialty Injectable Pharmaceuticals business and by continued momentum ofour Project Fuel optimization initiatives ,” said Christopher B. Begley, chairman and chief executive officer. “. . . We are highly focused on executing our strategy of investing for growth and improving margins and cash flow, as well as on driving quality improvements across our global manufacturing organization . We remain on track to achieve our full-year earnings projections.”

*

Adjusted* income from operations increased 20.6 percent to $213 million in the second quarter of 2010, compared to $177 million in the second quarter of 2009. Driving the majority of the increase were more favorable product mix and improved manufacturing efficiency from the company’s Project Fuel optimization initiatives , offset by charges associated with certain quality and product-related matters.

173. In addition, Hospira’s second-quarter 2010 Form 10-Q, which was filed with the SEC

on July 28, 2010, and included a comprehensive overview of Defendants’ progress in implementing

Project Fuel, contained the following statements regarding the Company’s operations, remediation

efforts, and regulatory compliance:

64



Hospira has responded to the August 2009 Warning Letter and is working closely with the FDA to conclude this matter .

The [April 2010] Warning Letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at the facilities while implementing the corrective actions and validation activities. Hospira has begun to undertake a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations.

Hospira has responded to the April 2010 Warning Letter and is working closely with the FDA to conclude these matters. As part of Hospira’s response, Hospira took immediate actions to address the FDA’s concerns , including recalling the propofol and liposyn products manufactured at the Clayton facility and the fosphenytoin sodium injection products manufactured at the Rocky Mount facility.

• The FDA’s Warning Letters are publicly available on the FDA’s website. Hospira takes all of these matters seriously and intends to respond fully, and in a timely manner, to the FDA’s Warning Letters.

174. The Company’s second-quarter 2010 Form 10-Q contained certifications by

Defendants Begley and Werner that were materially similar to those identified above in ¶¶146-147.

175. Defendants also hosted a conference call on July 28, 2010, to discuss the Company’s

second-quarter 2010 financial results. Among Defendants Begley’s and Werner’s opening remarks:

Defendant Begley: “We submitted our response to the FDA in May and have subsequently met with the agency to discuss our plans and objectives. We believe the FDA has [accepted] the remediation plan we laid out. We are now dedicated to fulfilling the planned commitments, the bulk of which we expect to complete by year-end . As part of our commitment to transparency and proactive communication, we are providing bi-monthly updates to the FDA and are pleased with the progress so far .”

Defendant Begley: “ These issues have a silver lining. We have taken our learnings from our Rocky Mount and Clayton facilities and are applying them to our manufacturing operations around the world to ensure that we meet the highest standards of quality going forward. By taking this holistic approach, we are raising our bar internally.

65


Furthermore, we are at the forefront of implementing the FDA’s new device guidelines and will be one of the first companies to make a submission under the new 510K guidelines. By doing this we are ensuring that we meet the highest level of compliance with all of our products and as always putting the safety of our patients first .”

• Defendant Begley: “We remain on track with Project Fuel and we are pleased with our progress on this organization wide optimization program. As many of you know, Project Fuel is designed to simplify our business and drive continuous improvement and operational excellence in order to obtain top tier financial performance.”

• Defendant Werner: “Moving to Project Fuel. We made significant progress in the first half of the year and are on track to meet our estimate of $70 million to $80 million in net savings this year and $110 million to $140 million in net savings in 2011.”

• Defendant Begley: “As I mentioned at the onset, Hospira delivered another solid quarter, driven by strong performance in Specialty Injectable pharmaceutical business and continued contributions from Project Fuel . . . . At the same time we remain highly focused on our quality improvement efforts, working diligently to raise the standards of quality across the Company and address the concerns of the FDA .”

• Defendant Begley: “Despite several unanticipated challenges, we remain on track to achieve our sales and earnings projections for 2010. I attribute much of this to Project Fuel, which is not only driving improved operational performance, but is also transforming the way we think and act. and respond to difficulties that may arise .”

176. The Company’s remediation plan in addressing the FDA’s concerns was a topic of

conversation in the question-and-answer session that followed. Defendant Werner assured the

market that the costs of this plan – characterized as “onetime” rather than ongoing – “ should really

start to taper off as you progress through the fourth quarter [of2010] .” Defendant Begley noted

the “tremendous” progress of the plan and emphasized his personal involvement with the Hospira

management team responsible for implementing the plan, as well as with the FDA. Defendant

Begley claimed that the FDA was “ very pleased with some of the things that we are doing around

creating some centralized functions here in Chicago from a quality standpoint .”

66


177. Analysts reacted positively to Defendants’ statements regarding the Company’s

second-quarter 2010 financial results, its success with Project Fuel, and its “tremendous progress” in

responding to the FDA. For example, on July 29, 2010, The Buckingham Research Group issued a

report maintaining its “Buy” rating and declaring, “Hospira believes that the FDA has accepted its

plan to remediate two key plants although there is a short-term hit with back-orders and expenses.

We view as a potential positive Hospira’s moves to remedy warning letters received.” Capstone

Investments also rated Hospira’s stock a “Buy” on July 29, 2010, and cited “several positive reasons

to own Hospira’s shares.” Among those reasons: “While the company has received a warning letter

from the FDA for its manufacturing practices in two facilities, it is diligently working with the

agency to resolve the problems and believes it has proposed changes that will be acceptable to the

agency.”

178. On August 12, 2010, Hospira took part in the Bank of America Merrill Lynch

Specialty Pharmaceuticals Conference. During that conference, Defendant Werner touted Hospira’s

“very strong track record for quality and reliability ” and the success of Project Fuel (“ it really was

about driving operational excellence , improving margins, driving additional cash flow . . . . We’re

on track, we’re ahead of all of our goals”). Defendant Werner also claimed that Hospira was

completely aligned with the FDA, “ working across our operations to make sure that we meet the

highest level of compliance and quality for both pharmaceutical and device products .”

179. About a week later, on August 20, 2010, Defendants hosted a conference call with

analysts regarding Hospira’s CEO succession plan. On that call, Defendant Begley was asked to

address the impact of his impending departure on Hospira’s Project Fuel initiative. Defendant

Begley took this opportunity to reiterate the Company’s focus on quality, stating that “ there is

nothing more important for Hospira other than Project Fuel and all of our quality initiatives ,” and

further emphasizing Hospira’s “ tremendous progress on the quality front .”

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180. Then, on September 13, 2010, Hospira participated in the Morgan Stanley Global

Healthcare Conference. During that conference, Defendant Werner told the market to expect a

“calmer” regulatory environment for the Company heading into 2011 and expressed hope that “the

quality issues we’ve seen and others have seen in the industry will be largely behind us .”


detailed herein, the foregoing statements made in or during the July 28, 2010 earnings release and

conference call, second-quarter 2010 Form 10-Q, August 12, 2010 Bank of America Merrill Lynch

Specialty Pharmaceuticals Conference, August 20, 2010 conference call, and September 13, 2010

Morgan Stanley Global Healthcare Conference, which touted, among other things, the success of

Project Fuel, the quality improvements being made, and the Company’s progress in addressing the

FDA’s concerns, were materially false and misleading when made or omitted material facts to make

such statements not false and misleading because:




equipment. By mid-2010, for example, Project Fuel’s staff cuts were more than 85% complete and

necessary quality control personnel had been sacrificed, the plant’s Standard Operating Procedures

had been diminished and ignored, pharmaceutical mixing processes were relying on unsound science

and could not be validated, and equipment was being run improperly simply so management could

make their production quotas. These problems were not being fixed but were actually worsening as

a result of cost cutting pursuant to Project Fuel ( see, e.g., ¶¶49-94);

(b) Defendants were not “working across [thei]r operations to make sure that

[they] me[t] the highest level of compliance and quality,” nor was Hospira applying its “learnings”

from Rocky Mount to “driv[e] quality improvements across” its global organization, but rather

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Defendants actually were allowing the Company’s quality assurance to deteriorate even further, as

quality control personnel were laid off and in-process quality sampling was eliminated via Project

Fuel (see, e.g., ¶¶49-94);






(d) on the regulatory front, Defendants had not made “tremendous progress” in

putting Hospira’s quality issues “largely behind” them, and they therefore could not expect a “calmer

quality and regulatory environment” ahead, because, up to this point and for well over a year in total

after receiving the April 2010 Warning Letter, they had not undertaken any “comprehensive review”

of Hospira’s global operations or made any concerted effort or meaningful commitment in dollars or

resources to address the FDA’s concerns at Rocky Mount, as revealed by the issuance of the June

2011 and August 2011 Form 483s identifying even more problems at the plant ( see, e.g., ¶¶121-

126);

(e) Defendants were not “raising the standards of quality across the Company,”

but actually had encouraged a shift in corporate culture to reward “quantity over quality,” which

would take significant time and effort to reverse ( see, e.g., ¶¶39-44);

(f) Defendants hid from the market the devastating effects of Project Fuel on


increasing shareholder value, in reality, Project Fuel’s short-term savings would be eclipsed by the

long-term costs of the sacrifices in quality resulting from the initiative, which costs would include a

remediation bill topping $300 million, the need to hire additional quality control personnel to ensure

69


the safety of Hospira’s products, and the eventual impacts to the Company’s revenues as quality-

related production slowdowns resulted in decreased sales ( see, e.g., ¶¶49-58); and

(g) the Company’s second-quarter 2010 Form 10-Q was materially false and



D. October 2010 to January 2011

182. On October 26, 2010, the Company issued a press release announcing its third-quarter

2010 financial results, which was also filed with the SEC on Form 8-K the same day. Hospira’s

third-quarter 2010 earnings release stated in pertinent part:

“Hospira delivered a solid third quarter, despite difficult year-over-year comparisons from the temporary discontinuation of U.S. oxaliplatin sales and the impact of several divestitures,” said Christopher B. Begley, chairman and chief executive officer. “During the quarter . . . we saw continued contributions from Project Fuel, our companywide optimization initiative; and we made good progress on our quality-improvement efforts. We believe the efforts and advancements we are making this year position Hospira for another good year and continued growth going forward .”

* * *

Adjusted* income from operations decreased 8.6 percent to $189 million in the third quarter of 2010, compared to $207 million in the third quarter of 2009. Improved manufacturing efficiency from the company’s Project Fuel optimization initiatives was more than offset by lower sales volume and associated margins primarily due to the temporary exit from the U.S. oxaliplatin market, charges associated with certain quality and product-related matters, and higher research and development expenses related to new product development programs, including clinical trials.

183. In addition, Hospira’s third-quarter 2010 Form 10-Q, which was filed with the SEC

on October 26, 2010, and included a comprehensive overview of Defendants’ progress in

implementing Project Fuel, contained the following statements regarding the Company’s operations,

remediation efforts, and regulatory compliance:

70



Hospira has responded to the August 2009 Warning Letter and is working closely with the FDA to conclude this matter .

The [April 2010] Warning Letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at the facilities while implementing the corrective actions and validation activities. Hospira has made significant progress on completing a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations .

Hospira has responded to the April 2010 Warning Letter and is working closely with the FDA to conclude these matters . As part of Hospira’s response, Hospira took immediate actions to address the FDA’s concerns , including recalling the propofol and liposyn products manufactured at the Clayton facility and the fosphenytoin sodium injection products manufactured at the Rocky Mount facility.

• The FDA’s Warning Letters are publicly available on the FDA’s website. Hospira takes all of these matters seriously and intends to respond fully, and in a timely manner, to the FDA’s Warning Letters .

184. The Company’s third-quarter 2010 Form 10-Q contained certifications by Defendants

Begley and Werner that were materially similar to those identified above in ¶¶146-147.

185. Also on October 26, 2010, Defendants hosted a conference call with analysts to

discuss the Company’s third-quarter 2010 financial results. Defendants Begley and Werner led off

the call with the following reassurances on Rocky Mount and Project Fuel:

Defendant Begley: “Regarding the warning letter we received from the US FDA, related to the inspections of our manufacturing facility in Clayton and Rocky Mount, North Carolina, we continue to make good progress during the quarter. We are on track to fulfill our plans commitment most of which we expect to complete by year-end . ”

• Defendant Werner: “Adjusted gross margin in the quarter was 42.8%, up 130 basis points, compared to 41.5% in the third quarter of 2009. Contributing to the improvement was favorable product mix, driven by Precedex, as well of cost reductions associated with project fuel efforts .”

71


• Defendant Werner: “ We continue to make significant progress year-to-date on project fuel and are on track to meet our estimate of $70 million to $80 million in cumulative savings this year and $110 million to $140 million in cumulative savings in 2011.”

• Defendant Begley: “With solid results for the third quarter, Hospira is on track to deliver another great year. Bolstered by strong performance in our specialty injectable pharmaceutical business and continued contributions from project fuel .”

Defendant Begley: “We also made progress on our quality improvement initiatives working diligently to ensure we are delivering the highest quality products to our customers and patients. We believe the efforts and advancements we are making this your position us for continued growth going forward as well .”

186. Analysts reacted favorably to Defendants’ statements regarding the Company’s third-

quarter 2010 financial results, its improved manufacturing efficiencies, and the progress of Project

Fuel. For example, on October 26, 2010, JPMorgan published a report entitled, “Hospira, Inc.:

Positioned for Significant 2011 Growth,” which rated Hospira stock “Overweight” and forecasted an

11% year-over-year growth in annual revenues for 2011. With respect to Rocky Mount, JPMorgan

concluded as follows (emphasis in original):

Manufacturing update: quality improvements on track. Hospira reported good progress on the measures it is taking to improve manufacturing quality at its facilities in Clayton and Rocky Mount, North Carolina which were the subject of an FDA warning letter earlier this year. The company remains on track to complete most of the improvements by year-end.

187. Also on October 26, 2010, The Buckingham Research Group maintained its “Buy”

rating and noted that “Hospira should benefit from additional Project Fuel savings offset by quality

improvement costs,” and how “efforts to improve manufacturing quality are progressing . . . .” The

next day, Capstone Investments rated Hospira’s stock a “Buy.”

188. On November 30, 2010, Defendant Werner participated in the Piper Jaffray

Healthcare Conference. At this conference, he continued to tout Project Fuel and its manufacturing

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optimization initiative, which he attributed to “ advancing operational excellence and sustainable

shareholder value ” and expected annual savings of $110 million to $140 million in 2011.

189. Later, on January 11, 2011, at the JP Morgan Healthcare Conference, Defendant

Werner continued to tout not just savings but process and quality improvements from Project Fuel:

• Fuel has not only transformed our profitability profile, but it’s optimized our operations and refined our culture further honing our focus on driving shareholder value .

Results have been very impressive. The efforts have translated into impressive results on all fronts . We’ve significantly improved our financial performance in many metrics, including sales, operating margins and EPS growth. And we’ve continued to drive performance improvement in 2010, as shown by our results for the first nine months of the year.

Now, while Project Fuel is technically winding down this year, its benefits and effects will continue for a long time to come . We plan on leveraging and building on these benefits going forward. Benefits such as the drive for continued improvement, such as our re-engineered culture and re-energized employee population and our focus on lean manufacturing . We expect Fuel’s legacy to have a very lasting impact going forward.

190. Moreover, Defendant Werner went on to reassure the market that all the remediation

required at Rocky Mount had been done:

We think we have essentially completed all of the activities in the Clayton and Rocky Mount facilities that we outlined in our response to the warning letter from FDA . At some point they’ll be back in the facilities. There’s not an official lifting of the warning letter as of -- per se, but we fulfilled all of the things that we need to do essentially .

• And more importantly or as important, we’re beginning to roll those changes out globally to all of our facilities so that when FDA shows up wherever and whenever, they should expect to see a very consistent approach to things across all Hospira facilities in the US and globally.

So, it’s been a difficult situation really trying to sort through the level of back orders that we’ve experienced and understanding what really is an order and what is not. There have been situations where customers have over-ordered in the hopes of getting what they really and truly needed, and our planners are having to sort through all that, but we think we’re

73


on a good path to bring things back to a more normal stage here in the first part of the year .


detailed herein, the foregoing statements made in or during the October 26, 2010 earnings release

and conference call, third-quarter 2010 Form 10-Q, November 30, 2010 Piper Jaffray Healthcare

Conference, and January 11, 2011 JP Morgan Healthcare Conference, which touted, among other

things, the success of Project Fuel, the soundness of Hospira’s operations, and the Company’s

dedication to ensuring regulatory compliance and remediation efforts at Rocky Mount and around

the globe, were materially false and misleading when made or omitted material facts to make such

statements not false and misleading because:




equipment. By late 2010, for example, Project Fuel’s staff cuts were all but complete and necessary

quality control personnel had been sacrificed, the plant’s Standard Operating Procedures had been

diminished and ignored, in-process quality sampling had been eliminated, pharmaceutical mixing

processes were relying on unsound science and could not be validated, and resources were spread so

thin that employees could not effectuate the Company’s “five-year plan” to correct Rocky Mount’s

validation issues. These problems were not being fixed but were actually worsening as a result of

cost cutting pursuant to Project Fuel (see, e.g ., ¶¶49-94);

(b) as opposed to “rolling” changes out globally in response to the FDA’s

concerns and taking “all of these matters seriously,” up to this point and for well over a year in total

after receiving the April 2010 Warning Letter, Defendants failed to undertake any “comprehensive

review” of Hospira’s manufacturing operations and made no concerted effort or any meaningful

74


commitment in dollars or resources to address the FDA’s concerns at Rocky Mount, as revealed by

the issuance of the June 2011 and August 2011 Form 483s identifying even more problems at the

plant (see, e.g., ¶¶121-126);

(c) Hospira was not making “good progress” on its quality improvement efforts,

nor “delivering the highest quality products,” but actually had encouraged a shift in corporate culture

to reward “quantity over quality,” which would take significant time and effort to reverse ( see, e.g .,

¶¶39-44);

(d) the deficiencies at Rocky Mount and beyond were so substantial that,





(e) Defendants hid from the market the devastating effects of Project Fuel on


promoting “sustainable shareholder value,” in reality, Project Fuel’s short-term savings would be

eclipsed by the long-term costs of the sacrifices in quality resulting from the initiative, which costs

would include a remediation bill topping $300 million, the need to hire additional quality control

personnel to ensure the safety of Hospira’s products, and the eventual impacts to the Company’s

revenues as quality-related production slowdowns resulted in decreased sales ( see, e.g., ¶¶49-58);

and

(f) the Company’s third-quarter 2010 Form 10-Q was materially false and



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E. February to March 2011

192. On February 2, 2011, the Company issued a press release announcing fourth-quarter

and full-year 2010 financial results, which was also filed with the SEC on Form 8-K that same day.

Defendants continued to highlight that Project Fuel was having no impact on their focus on quality

by representing that Hospira’s financial results and Project Fuel’s gains were moderated by quality-

related expenditures. Hospira’s fourth-quarter and full-year 2010 earnings release quoted Defendant

Begley as stating:

“2010 marked a year of progress for Hospira . . . we made substantial progress with our quality initiatives; and we met our commitments with Project Fuel, our corporate-wide optimization initiative . Looking forward, we expect a year of good growth in 2011, as we remain committed to transforming challenges into opportunities and driving continuous improvement across the organization.”

*

Adjusted* income from operations decreased 30.7 percent to $142 million in the fourth quarter of 2010, compared to $204 million in the fourth quarter of 2009. Improved manufacturing efficiency from the company’s Project Fuel optimization initiatives was more than offset by lower net sales; the impact of charges associated with certain quality and product related matters; and higher research and development expenses related to new product development programs, including clinical trials.

*

Adjusted* income from operations increased 6.2 percent to $784 million for the full year of 2010, compared to $738 million for the full year of 2009. Higher net sales volume and cost savings from Project Fuel contributed to the full-year operating income performance . However, these positive factors were partially offset by the impact of charges associated with certain quality and product related matters . . . .

193. Defendants hosted a conference call for analysts that same day, on February 2, 2011,

to discuss the Company’s fourth-quarter and full-year 2010 financial results. Defendants Begley and

Werner kicked off the call with their usual praise for Project Fuel and the Company’s quality

initiatives across all of their global facilities in response to the April 2010 Warning Letter:

• Defendant Begley: “In the second quarter we received a warning letter regarding two of our facilities, both located in North Carolina. This was

76


a sizable pothole in the road that could have deterred us. But we resolved to meet the FDA’s expectations and raised our bar internally to drive even higher levels of quality and consistency across our global facilities . During the second half of 2010, we made substantial progress addressing the issues in the warning letter. We fulfilled our planned commitment outlined to the FDA, most of which were completed by year end , and resumed delivery of propofol under the new manufacturing process.”

• Defendant Begley: “I am pleased to announce that just last week the FDA completed their inspection of our Clayton facility with no observations. The next step is the FDA inspection of our Rocky Mount facility which we anticipate will occur within the coming months.”

Defendant Begley: “And finally, to meet our internally driven challenge of improving margins and driving towards top quartile financial performance, we not only met our commitments for Project Fuel, our corporate-wide optimization initiative, but we over achieved many of our goals, allowing us to invest in key drivers of our business . In terms of our Project Fuel initiatives, we simplified our product line, disposed of non-strategic assets, and aggressively drove transformation throughout the organization. In doing so, we are optimizing our productivity and driving towards better execution of our longer term financial targets and business goals .”

• Defendant Werner: “Moving down the rest of the income statement, adjusted gross margin in the quarter was 39.1% compared to 40.5% in the fourth quarter of 2009, with the decline . . . partially offset by improved manufacturing efficiency associated with Project Fuel .”

Defendant Begley: “ The optimized efficiencies we’ve achieved through Project Fuel and the focus it has instilled in the Company is driving us towards continual improvement and has enhanced our commitment to operational excellence . We look forward to resolving our remaining challenges in 2011 as well as continuing to build on Hospira’s leadership position, driving sustainable growth and returning value to our shareholders .”

194. During the question-and-answer session that followed, Defendant Begley downplayed

manufacturing problems such as backorders and defective products and went so far as to suggest that

they were the result of Hospira having raised its quality standards to new levels in the industry,

which would increase production in the future since those problems were fully resolved, stating:

77


• Yes, as we’ve talked about, the backorders are being caused by a variety of different situations . . . . We’ve also had some situations where our new quality system and the sensitivity to the triggers that we have in the new quality system which will pay dividends long term as it elevates our overall quality in the marketplace and quite candidly also sets a higher benchmark for everyone else . It’s not untypical for the market share leader to be used to set a new quality standard and then everyone else ends up having to match that. And I really believe that we’ve taken our SIP quality to a new level here .

• If you think about it, medium term and long term, what it does, is by driving the root cause, the problem doesn’t pop up again . And so that has slowed down our ability to get product out the door, and you’re seeing that somewhat reflected in our inventory levels, as well. And we’re beginning, again, to see the light at the end of the tunnel on that but need another quarter or so to get through that.

• We’re all over those issues. In fact, every Thursday morning at 7 o’clock, there is a management meeting we have, and every plant manager and plant quality manager from around the world is on that phone call, along with our senior leadership team, and I attend that meeting on a regular basis, as well. And we go through each issue that we have as it relates to backorders and what we’re doing to fix those. I believe that from a recovery standpoint, we’ll have no problem whatsoever in recovering from the backorder situation, and regaining any lost momentum that we may have in the base business .

• I made this comment earlier and I’ll reinforce it. When we improved our overall quality systems approximately a year ago, one of the key things that we did and it’s the expectation from the FDA for all companies going forward and quite candidly I don’t think you’ve seen most of the companies begin to do this. In fact, I know they haven’t other than the larger companies. And that is to increase the sensitivity on their triggers from a complaint standpoint .

• Of what is a very, very low-level complaint, we now do a thorough root cause analysis on and come up with a fix for it. Then the expectation is to incorporate that fix across the whole product line . So you’ve seen a couple spikes like that, that have had a recent impact, but I don’t see that occurring long term through the business and creating situations like we just had in Q4. And on the SIP overall, it’s driven to the difficulty of us getting product out the door as efficiently as we used to, but as I talked about, we are beginning to see the light at the end of the tunnel there . And the key metric that we look at is our internal investigations and the number of open investigations we have and the aging of that. We review all of that data literally at my level weekly at the Thursday meeting, and there’s people looking at the data on a daily basis, and all of those trends

78


are downwards in each of our manufacturing plants, so that’s a real positive sign . What it says is you are not opening up new investigations at all and the fact that the age is less says you’re driving root cause more quickly and implementing those changes. I really believe a good piece of this is behind us as we move forward .

195. In addition, Hospira’s 2010 Form 10-K, which was filed with the SEC on February

16, 2011, and included a comprehensive overview of Defendants’ progress in implementing Project

Fuel, contained the following statements regarding the Company’s operations, quality assurance,

remediation efforts, and regulatory compliance:

Hospira is actively involved in setting quality policies and managing internal and external quality performance . Its quality assurance department provides quality leadership and supervises its quality systems . An active audit program, utilizing both internal and external auditors, monitors compliance with applicable regulations, standards and internal policies . In addition, Hospira’s facilities are subject to periodic inspection by the FDA and other regulatory authorities. Hospira has received notices from regulatory authorities alleging violations of applicable regulations and standards, and Hospira has developed definitive action plans, implemented remedial programs and modified its practices to address these issues .

The [April 2010] warning letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at the facilities while implementing the corrective actions and validation activities. Hospira has made significant progress on completing a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations .

• The FDA’s warning letters are publicly available on the FDA’s Web site. Hospira has responded to the 2010 warning letter and is working closely with the FDA to conclude this matter .

• Hospira believes that its facilities and equipment are in good operating condition and are well maintained . Hospira believes that it has adequate capacity to meet its current business needs.

• As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations .

• The [April 2010] Warning Letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at

79


the facilities while implementing the corrective actions and validation activities. Hospira has made significant progress on completing a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations .

Hospira has responded to the April 2010 Warning Letter and is working closely with the FDA to conclude these matters . As part of Hospira’s response, Hospira took immediate actions to address the FDA’s concerns , including recalling the propofol and liposyn products manufactured at the Clayton facility and the fosphenytoin sodium injection products manufactured at the Rocky Mount facility.

• Hospira has implemented certain interim controls, including third party oversight, to ensure products manufactured at both facilities meet their specifications prior to release .

• The FDA’s Warning Letters are publicly available on the FDA’s website. Hospira takes all of these matters seriously and responds fully, and in a timely manner, to the FDA’s Warning Letters .

196. The Company’s 2010 Form 10-K contained certifications by Defendants Begley and

Werner that were materially similar to those identified above in ¶¶146-147.

197. Despite reporting weaker-than-expected financials, analysts still reacted positively to

Defendants’ statements regarding the Company’s fourth-quarter and full-year 2010 financial results,

its responses to the FDA following the April 2010 Warning Letter, and its success with Project Fuel.

For example, in a report published February 3, 2011, The Buckingham Research Group rated

Hospira a “Buy” and further saw “the Company benefitting from two FDA approvals during 2011,

more normal manufacturing for its Specialty Injectable Pharmaceuticals (SIP) business and a

rebound in its Medication Management Systems (MMS) business by 2012 particularly after a

software fix for Symbiq is approved.”

198. On March 8, 2011, Hospira took part in the Raymond James Institutional Investors

Conference. During this conference, Defendant Werner further touted Project Fuel as a driver of

“much improved financial performance,” as well as the Company’s “ significant progress ” in

addressing the FDA’s concerns. Defendant Werner characterized the FDA warning letter as “an

80


opportunity to raise our bar to match the FDA’s new standards ” and promised to apply “the

learnings and changes to our facilities around the world .” Defendant Werner concluded by

boasting of Hospira’s heavy focus on execution “ as we get the quality issues behind us and continue

to build on our market leading positions and capitalizing on the lessons that we have learned.”

199. Little more than a week later, on March 16, 2011, Defendant Begley participated in

the Barclays Capital Global Healthcare Conference, during which he praised the Company’s success

in “optimiz[ing] our operations and financial performance” through Project Fuel, touted the

Company’s focus on crisp execution, and further highlighted Hospira’s “ significant progress ” in

remediating Rocky Mount’s issues. Defendant Begley spun Hospira’s remediation issues in a

similarly positive manner, calling them “an opportunity to match the FDA’s heightened focus on

quality . . . . We believe being a front runner in this respect should position us from a competitive

standpoint moving forward .”


detailed herein, the foregoing statements made in or during the February 2, 2011 earnings release

and conference call, 2010 Form 10-K, March 8, 2011 Raymond James Institutional Investors

Conference, and March 16, 2011 Barclays Capital Global Healthcare Conference, which touted,

among other things, the success of Project Fuel, the impact of Hospira’s quality initiatives, the

Company’s reputation for manufacturing capability, and Hospira’s “significant progress” in

addressing the FDA’s concerns, were materially false and misleading when made or omitted material

facts to make such statements not false and misleading because:




equipment. By early 2011, for example, Project Fuel’s cutbacks were complete and necessary

81


quality control staff had been sacrificed, the remaining personnel were spread so thin that product

was being “bottlenecked” at quality control and could not be released for shipment, in-process

quality sampling had been eliminated, the plant’s Standard Operating Procedures had been

diminished and ignored, “open investigations” at Rocky Mount were beginning to explode in

number and cause further production delays, and pharmaceutical mixing processes were relying on

unsound science and could not be validated. These problems were not being fixed but were actually

worsening as a result of cost cutting pursuant to Project Fuel ( see, e.g., ¶¶49-94);

(b) the Company’s facilities and equipment were not in “good operating

condition” and “well maintained” because, as Defendant Hardy would later admit, Hospira had

inherited “aged” facilities that were in need of a “facelift” and modernization that would cost

millions of dollars, and they were further plagued with mold, operational deficiencies, antiquated

documentation systems, and old, “jerry-rigged” equipment that often broke down and failed

validation (see, e.g., ¶¶83-94, 132);

(c) the widespread manufacturing disruptions and delays that had resulted in tens

of millions of dollars in monthly “failure to supply” penalties only increased in 2011, causing even

greater hits to the Company’s bottom line as its “failure to supply” penalty charges continued to

climb during the year (see, e.g., ¶¶95-99);

(d) even assuming Hospira’s total number of “open investigations” were in fact

trending “downwards” during this time, Defendants knew or recklessly disregarded and omitted to

the tell the market that “open investigations” at Rocky Mount, Hospira’s largest facility, were

actually ballooning throughout 2011 ( see, e.g., ¶¶101-103);

(e) the Company was not making “substantial progress” with its quality

initiatives, nor improving manufacturing efficiency, but actually was allowing quality to further

deteriorate (see, e.g., ¶¶49-94);

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“driving sustainable growth and returning value to [Hospira’s] shareholders,” in reality, Project

Fuel’s short-term savings would be eclipsed by the long-term costs of the sacrifices in quality

resulting from the initiative, which costs would include a remediation bill topping $300 million, the

need to hire additional quality control personnel to ensure the safety of Hospira’s products, and the

eventual impacts to the Company’s revenues as quality-related production slowdowns resulted in

decreased sales (see, e.g., ¶¶49-58);

(g) as opposed to having made “substantial progress addressing the issues in the

warning letter,” up to this point and for well over a year in total after receiving the April 2010

Warning Letter, the Company failed to undertake any “comprehensive review” of Hospira’s

manufacturing operations and made no concerted effort or any meaningful commitment in dollars or

resources to address the FDA’s concerns at Rocky Mount, as revealed by the issuance of the June

2011 and August 2011 Form 483s identifying even more problems at the plant ( see, e.g., ¶¶121-

126);

(h) Defendants were not “actively involved in setting quality policies and

managing internal and external quality performance” but actually had encouraged a shift in corporate

culture to reward “quantity over quality,” which would take significant time and effort to reverse

(see, e.g., ¶¶39-44); and

(i) the Company’s 2010 Form 10-K was materially false and misleading because

it failed to disclose (in violation of Item 303 of regulation S-K) these materially adverse conditions

to the market.

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F. April to June 2011

201. On April 26, 2011, the Company issued a press release announcing first-quarter 2011

financial results, which was also filed with the SEC on Form 8-K the same day. Hospira’s first-

quarter 2011 earnings release stated in pertinent part:

“Hospira started out the year with a stronger-than-expected first quarter . . . ,” said Christopher B. Begley, executive chairman and former chief executive officer (CEO). “During the quarter, we gained momentum on several of our existing and newly launched specialty pharmaceuticals and made good progress in decreasing our level of backorders to better serve our customers. We remain focused on driving quality enhancements throughout the organization and on improving shareholder value through strong execution and sustainable growth .”

*

Improved manufacturing efficiency from the company’s Project Fuel optimization initiatives and margin contribution from U.S. sales of docetaxel in the first quarter of 2011 were tempered by the joint-venture arrangement related to the production of docetaxel, as well as by higher research and development expenses associated with new product development programs.

202. In addition, Hospira’s first-quarter 2011 Form 10-Q, which was filed with the SEC on

April 26, 2011, and included a comprehensive overview of Defendants’ implementation of Project

Fuel, contained the following statements regarding the Company’s operations, remediation efforts,

and regulatory compliance:

• Hospira aims to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness and substantially improve its cost base . As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations .

The [April 2010] Warning Letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at the facilities while implementing the corrective actions and validation activities. Hospira has responded to the April 2010 Warning Letter and is working closely with the FDA to conclude these matters . As part of Hospira’s response, Hospira took immediate actions to address the FDA’s concerns , including recalling certain products manufactured at the Clayton and Rocky Mount facility. Hospira is also working with

84


several third party experts to assist with the ongoing activities at both facilities.

• Hospira has made significant progress on completing a comprehensive review of all its manufacturing operations to ensure compliance with applicable regulations .

• The FDA’s Warning Letter is publicly available on the FDA’s website. Hospira takes all of these matters seriously and responds fully, and in a timely manner, to the FDA’s Warning Letter .

203. The Company’s first-quarter 2011 Form 10-Q contained certifications by Defendants

Ball and Werner that were materially similar to the certifications identified above in ¶¶146-147.

204. Defendants also hosted a conference call with analysts on April 26, 2011, to discuss

the Company’s first-quarter 2011 financial results. Defendants Begley and Werner opened the call

with highlights of Hospira’s quality improvement efforts and the manufacturing efficiencies

associated with Project Fuel:

Defendant Begley: “Regarding the 2010 warning letter we received from the FDA related to our two facilities in North Carolina, we mentioned on our last quarter call that the FDA completed the inspection of our Clayton facility with no observations. The next major milestone is the inspection of our Rocky Mount facility , which we anticipate will occur during the second quarter. We have been diligently preparing for that inspection and look forward to the FDA’s response .”

Defendant Werner: “Moving down the income statement, although we are very pleased with the quarter’s performance . . . adjusted gross margin in the quarter was 42.3%, down 280 basis points from 45.1% in the first quarter of last year. The decline was . . . partially offset this year by docetaxel and better manufacturing efficiencies associated with Project Fuel .”

• Defendant Werner: “Moving to Project Fuel, we have very successfully concluded this two-year optimization initiative and not only consistently met our initial commitments but overachieved them , allowing us to reinvest the excess savings back into the business. We are on track to meet our estimate of $110 million to $140 million in net cumulative savings in 2011.”

Defendant Begley: “ We also continue to make progress on our quality improvement and supply recovery initiatives . We are working diligently

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to ensure we are delivering the highest quality products to our customers and patients at the service levels they expect , and we signed on a great new CEO.”

205. During the question-and-answer session that followed, Defendants Werner and

Begley spoke extensively on the Company’s quality improvement efforts, the remediation at Rocky

Mount, and manufacturing efficiencies that were expected to have an impact toward the end of the

year:

Defendant Begley: “ Concerning the Rocky Mount upcoming inspection, we have been preparing diligently for that inspection and feel very confident about the quality changes that we have made in response to the initial warning letter . We have had numerous consultants on board helping us out. Our new Head of Quality has been down to the Rocky Mount facility a couple of times already. He is thinking it is looking very well for the FDA inspection . So we are looking forward to the inspection and believe it will occur in the second quarter.”

Defendant Begley: “The other part of your question is around the fact that what we have done is we have taken our learnings from both the Clayton facility and the Rocky Mount facility and have made those holistic changes that we are making across all of our manufacturing facilities . And that is tracking very well, and it is raising the bar internally for us , which we are very pleased and believe it is appropriate to do. And, quite candidly, we believe it’s going to be a competitive advantage as we move forward here.”

Defendant Werner: “The other thing I would add there is that FDA is in our facilities -- I will not say at all times, but in any given time, they could be in there, they have been over to the Orchid Pan Am facility. We have received a clean bill of health there, and they have also been to our factory in Croatia, and we received a clean bill of health there as well. So we are encouraged with the inspections that have taken place at other facilities, and we are looking forward to getting through the Rocky Mount inspection as well .”

Defendant Begley: “And so, at any point in time in any week, we can have, believe it or not, as many as 10 inspections going on around the world from different agencies around the world. And so it is a way of life, okay. It is something that to be successful in this market you need to know how to deal with and always be shooting ahead of the duck, which is why we’re making all of our changes from the recent warning letter holistically around the world .”

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• Defendant Begley: “In addition to that, as we look at the next several quarters, our manufacturing efficiencies continue to improve, and . . . you see some manufacturing efficiencies kicking in the back half ofthe year, and all of that on top of it is you see the back orders reducing , which then enables us to be more aggressive from a share gain standpoint.”

206. Analysts reacted positively to Defendants’ statements regarding the Company’s first-

quarter 2011 financial results, its responses to the FDA following the April 2010 Warning Letter,

and its success with Project Fuel. For example, on April 26, 2011, Capstone Investments reiterated

its “Buy” recommendation. Morgan Stanley published a report that same day with the following

opening: “Operating performance was strong in 1Q with progress on the SIP and MMS quality

issues that with solid underlying performance in the core US injectables franchise.”

207. The next day, on April 27, 2011, JPMorgan issued a report entitled, “Hospira, Inc.:

Solid Start To 2011; Updating Estimates Following 1Q Results,” and which opened as follows:

Hospira kicked off its 2011 with a strong 1Q ($0.93, +$0.10 vs. JPMe) on better-than-expected performance in both its specialty injectable and device businesses. We view these results as particularly encouraging in light of last quarter’s choppy results and see several of the overhangs that have kept the stock range bound as largely resolved by mid-2011.

JPMorgan further anticipated “a significant recovery in 2H/11 gross margins driven by better

capacity utilization, reduced expenses associated with manufacturing improvements and more

favorable product mix.”

208. On May 11, 2011, Hospira took part in the Bank of America Merrill Lynch

Healthcare Conference, and Defendant Werner once again touted Project Fuel (“our ongoing

optimization efforts”) and the Company moving past its problems with the FDA. Defendant Werner

assured the market that Hospira was strongly focused on crisp execution and well-positioned to drive

long-term sustainable growth. He asserted that Hospira was “ moving through the quality issues

with the FDA ” and “starting to see light at the end of the tunnel here, the back orders will also

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improve and we’ve got to get our inventory levels down.” He acknowledged that such issues “have

always been topics of conversation” of the Company’s Board of Directors.

209. Then, on June 6, 2011, Defendant Begley participated in the Sanford C. Bernstein

Strategic Decisions Conference, during which he touted Project Fuel, assured the market of quality

improvement changes worldwide, and indicated that Hospira was decidedly not capacity-

constrained:

Let’s first start with our ongoing optimization efforts. As I mentioned, we launched Project Fuel in 2009 to optimize our operations and drive improved financial performance primarily through three key areas -- simplifying our product lines, addressing non-strategic assets and streamlining our organizational structure and processes. This year we expect to see annual savings of at least $110 million to $140 million from the project. In the past two years, we exceeded our savings goals and used the additional savings to invest in growth opportunities that we would not have been able to pursue otherwise .

And while Project Fuel has technically ended, its benefits and effects will continue on . We plan on leveraging and building on these benefits going forward that will drive continued improvement, benefits such as re-energizing our culture and our focus on lean manufacturing . We expect Fuel’s legacy to have a lasting impact.

I would now like to briefly highlight our quality improvement initiatives and our progress to date . We have established an initiative in part as a response to a warning letter that we had received from the FDA in April of last year related to two of our manufacturing facilities in the US. We elected to view the situation as an opportunity, an opportunity to raise our bar internally to match the FDA’s heightened focus on quality. By applying the changes and learnings from our response to the FDA’s comments to all of our facilities worldwide, we believe being a front-runner in this respect should position us from a competitive standpoint moving forward. And we have made significant progress .

The FDA completed the inspection of one of two facilities in the first quarter with no observation, a fact that we are very proud of. The FDA is now in the process of inspecting our second plant, which is the largest of the two facilities. We prepared diligently for both inspections and look forward to the FDA’s response to the second inspection as well .

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One is the inventory buildup that we have had. And the inventory buildup is the direct cause of the new quality system that we put in place, which increased our cycle times which has resulted in work in process and raw materials beginning to build up as it takes us longer to release product underneath those new quality standards. That will improve as we lean out the quality system , and that is what we are in the process of doing as we speak.

We are not capacity constrained -- period, end of statement, okay ? We are building India for the longer term, for the horizon from four to five years on out so we can continue to grow and assure that we are the low-cost provider in this marketplace because low cost and scale around the globe is so important. But we are not capacity constrained from our -- and it is not going to prevent us from being able to grow whatsoever. Okay?

210. Days later, on June 8, 2011, Defendant Werner attended the Goldman Sachs Global

Healthcare Conference and further touted “ the focus we’ve been putting on the quality initiatives

and working with the FDA and getting the back orders down .” Defendant Werner continued to

spin the Company’s FDA scrutiny as resulting not from quality deficiencies but from the FDA

raising quality standards to new levels, stating: “The standards have definitely been raised by the

FDA. We think that, as we move through implementing our new processes, that we are the leader .

We are the marketshare leader globally. We’re the marketshare leader in the US. And we will act

like the leader and use the quality improvements, hopefully, as a strength and a differentiator .”


detailed herein, the foregoing statements made in or during the April 26, 2011 earnings release and

conference call, first-quarter 2011 Form 10-Q, May 11, 2011 Bank of America Merrill Lynch

Healthcare Conference, June 6, 2011 Sanford C. Bernstein Strategic Decisions Conference, and June

8, 2011 Goldman Sachs Global Healthcare Conference, which touted, among other things, the

success of Project Fuel, the Company’s efficient manufacturing processes and ongoing quality

improvement initiatives, and Hospira’s progress in addressing the FDA’s concerns, were materially

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false and misleading when made or omitted material facts to make such statements not false and

misleading because:


Mount’s manufacturing efficiencies were not improving but in fact the plant suffered from serious

issues with regard to quality control and the deterioration of its facilities and equipment. By mid-

2011, for example, necessary quality control staff had been cut through Project Fuel, the plant’s


eliminated, pharmaceutical mixing processes were relying on unsound science and could not be

validated, key pieces of equipment like one of the plant’s bulk isolators and a depyrogenation tunnel

had failed validation around May 2011 and caused significant production disruptions through the end

of the year, and the Company’s attempt at a “five-year plan” to fix Rocky Mount’s validation issues

had already been derailed as a result of reduced “head counts.” These problems were not being fixed

but were actually worsening as a result of cost cutting pursuant to Project Fuel ( see, e.g., ¶¶49-94);

(b) the widespread manufacturing disruptions and delays that had resulted in tens




(c) contrary to achieving a “culture of continuous improvement,” Defendants



(d) Defendants hid from the market the devastating effects of Project Fuel on


driving long-term sustainable growth, in reality, Project Fuel’s short-term savings would be eclipsed

by the long-term costs of the sacrifices in quality resulting from the initiative, which costs would

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include a remediation bill topping $300 million, the need to hire additional quality control personnel

to ensure the safety of Hospira’s products, and the eventual impacts to the Company’s revenues as

quality-related production slowdowns resulted in decreased sales ( see, e.g., ¶¶49-58);

(e) Defendants could not have seen any “light at the end of the tunnel” with

respect to Rocky Mount, nor have made “significant progress” in addressing the FDA’s concerns,

because up to that point and for well over a year in total after receiving the April 2010 Warning

Letter, the Company failed to undertake any comprehensive review of its manufacturing operations

and made no concerted effort nor any meaningful commitment in dollars or resources to address the

FDA’s concerns at Rocky Mount, as revealed by the issuance of the June 2011 and August 2011

Form 483s identifying even more problems at the plant ( see, e.g., ¶¶121-126); and

(f) the Company’s first-quarter 2011 Form 10-Q was materially false and



G. July 2011

212. On July 27, 2011, the Company issued a press release announcing second-quarter

2011 financial results, which was also filed with the SEC on Form 8-K the same day. Hospira’s

second-quarter 2011 earnings release stated in pertinent part:

“Hospira delivered strong second-quarter performance . . . ,” said F. Michael Ball, chief executive officer. “ We continued to advance the business and make progress on our quality and product supply improvement initiatives . In part due to the quarter’s results, we are increasing our sales projections for the year, and remain focused on driving value for our customers, patients and shareholders .”

213. In addition, Hospira’s second-quarter 2011 Form 10-Q, which was filed with the SEC

on July 27, 2011 and included a comprehensive overview of Defendants’ implementation of Project

Fuel, contained the following statements regarding the Company’s operations, manufacturing

efficiency, remediation efforts, and regulatory compliance:

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• Hospira aims to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness and substantially improve its cost base . As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations .

The [April 2010] Warning Letter also questioned whether Hospira’s interim plans ensured the quality of products that were manufactured at the facilities while implementing the corrective actions and validation activities. Hospira has responded to the April 2010 Warning Letter and is working closely with the FDA to conclude these matters . As part of Hospira’s response, Hospira took immediate actions to address the FDA’s concerns , including recalling certain products manufactured at the Clayton and Rocky Mount facilities. Hospira has worked with several third party experts to assist with the activities at both facilities. Hospira had implemented certain interim controls, including third party oversight, to ensure products manufactured at both facilities meet their specifications prior to release. Hospira has completed a comprehensive review of its manufacturing operations to ensure compliance with applicable regulations, and continues to ensure compliance with new regulations.

• Hospira takes all of these matters seriously and responds fully, and in a timely manner, to the FDA.

Further, cost reductions associated with Project Fuel initiatives contributed to net manufacturing efficiency gains . A portion of the increase was due to the reduction of costs for activities directly associated with the FDA’s Warning Letter received in April 2010.

214. The Company’s second-quarter 2011 Form 10-Q contained certifications by

Defendants Ball and Werner that were materially similar to the certifications identified above in

¶¶146-147.

215. Also, Defendants hosted a conference call with analysts on July 27, 2011, to discuss

Hospira’s second-quarter 2011 financial results and the FDA’s inspection of Rocky Mount.

Defendants Ball and Werner continued to downplay the FDA concerns and tout their focus on

process and quality, stating:

Defendant Ball: “And so, to be able to provide our customers with the highest quality and best selections of products when and where they need them, I’ve directed the organization to sharpen their focus to ensure

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that first and foremost we have the right processes in place across our global operations to produce the highest quality products for our customers and to complete the remediation of our infusion devices.”

Defendant Ball: “ We also made progress with regards to our quality and product supply improvement initiatives .”

Defendant Ball: “Regarding the 2010 warning letter we received from the USFDA related to our two facilities in North Carolina, we mentioned on our last quarter call that the FDA completed an inspection of our Clayton facility with no observations, and that they were expected to be in our Rocky Mount facility in the second quarter. During the second quarter, the FDA completed an inspection of Rocky Mount, as expected. While we received verbal feedback acknowledging that we had made progress with respect to our validation processes, the agency was not fully satisfied. We received observations and are aggressively working to address their areas of concern . We have submitted a full response with corrective and preventative actions. We continue to interact and work with the agency to resolve our warning letter and fully comply with their expectations .”

Defendant Werner: “In addition, as Mike mentioned in his opening remarks, our focus on driving higher-quality manufacturing processes and products has impacted the timing of certain of our cost improvement and lean optimization efforts in manufacturing . These items . . . resulted in near-term negative impact to margins.”

Defendant Ball: “Where we fell short is in our operational performance. We are not happy with where our margins are today, nor where they will be at the end of the year. As I mentioned at the outset of my comments, our primary focus is providing our customers with the highest quality and best selection of products when and where they need them, even if this creates some short-term challenges . We see this as a temporary obstacle and believe we can convert our current actions into a long-term advantage for Hospira .”

Defendant Ball: “The organization made a commitment to you in February to grow our earnings per share to $3.90 to $4. The path forward will be different and more challenging than what we initially envisioned, but we remain focused on achieving our previously-projected range given this commitment and our expected strong sales performance, subject to product approvals and progress on our remediation and service level efforts. We believe we are on track .”

216. In the question-and-answer session that followed, Defendants Ball and Werner fielded

numerous questions about Hospira’s progress at Rocky Mount and getting the Company’s margins

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back up to historical levels. Their responses further reassured the market that they had a full handle

on the issues at Rocky Mount, and that the costs of remediation were contained and largely in the

rear-view mirror:

Defendant Werner: “Unfortunately, as we explained with the focus on quality and improving service levels and building back supply , we’ve just gotten off to a much slower start this year on cost improvement programs than we had originally anticipated.”

Defendant Werner: “ We’re not spending any additional dollars on the quality initiatives beyond what we initially expected . It’s simply the situation with the bandwidth of the plant management teams, they’re only able to do so much, and our focus now is on product quality and getting our supply levels built back up , and unfortunately it’s caused the cost improvement programs to shift . . . it’s just a matter of getting the quality and product supply issues in the rear view mirror and then being able to focus fully on lean and cost of improvement.”

Defendant Ball: “ We need to ensure that we are making the highest quality products, the highest quality processes, we have to get things remediated. That really in my mind is job number one at this point .”

Defendant Werner: “The FDA was back in the facility. We did receive a 483 with some observations really, again, relating to quality practices and processes and more specifically related to how investigations of exceptions are conducted. We did respond to the 483 a couple of weeks ago. There’s no set timeframe for the FDA to get back to us on that. We’re not expecting there to be a substantial amount of additional cost, it’s just heavy lifting and working through it . It’s just a little too early to predict the timing and the cost of it. We did receive some verbal acknowledgment that we had made some good progress, but unfortunately, it was not to the full satisfaction of the agency, and we’re working very cooperatively with them to move forward .”

Defendant Ball: “ We’re taking all necessary steps in order to support Rocky Mount . We have sent down a team from Lake Forest -- what I described as the A team -- of quality specialists, lean specialists, process specialists in order to give them all the help they need. We have deployed consultants at the actual floor level, as well as higher-level consultants. We have increased the number of quality people in Rocky Mount by some 20 folks going to 30 more people. So we are doing everything that can be done to ensure that we ramp things up as quickly as possible to get to the quality levels that both we want and the FDA wants , and I think at the end of the day when we get through this thing we’ll have a vary high-quality plant making extremely high-quality products.”

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• Defendant Ball: “. . . in meeting with the senior leadership team of this Company and looking them all in the eye in terms of this $3.90 to $4, everybody is standing behind it , and I think we owe it to the investors to go for this particular number.”

Defendant Ball: “Kind of on the disconnect downside, I’ve obviously not been very happy with the backorder situation, the service level, so I think that has been a major issue that we need to get resolved, as I said in my opening remarks. So that’s been the major disconnect. Certainly from a quality and issues around our plants with the FDA, the warning first alert Clayton and Rocky Mount, that obviously has been a bit of a disappointment. But I think the good news here is that these are internal issues and something we can do about .”

217. Analysts reacted favorably to Defendants’ statements regarding the Company’s

second-quarter 2011 financial results and its progress in addressing the FDA’s concerns and

returning Rocky Mount to normalcy. For example, The Buckingham Research Group published a

report on July 27, 2011, maintaining its “Buy” rating and stating that “the expected return to high-

90% service levels (from about 94% in 2Q11) should help drive improved gross margin and sales

going forward.” This report also noted, “We believe that HSP shares could benefit as Hospira

continues to ‘fix’ issues with its Specialty Injectable Pharmaceuticals or SIP business following the

successful FDA inspection for the Clayton, North Carolina manufacturing plant (with no

observations) and ongoing dialogue with the Agency regarding its Rocky Mount facility.”

218. That same day, JPMorgan reiterated its “Overweight” rating and added: “Hospira also

disclosed on its 2Q call that it has not fully resolved the FDA Warning Letter at its Rocky Mount

facility, though the remaining issues at the plant appear very manageable, in our view.” Capstone

Investments issued a report on July 28, 2011, with a “Buy” recommendation and noting:

HSP continues to make progress in resolving the warning letters it received in 2010 from the FDA for its North Carolina facilities. The agency completed its inspection of the Clayton facilities with no observations and has inspected the Rocky Mountain facilities with verbal comments which have not yet satisfied the agency. HSP has increased its efforts to resolve the deficiencies.

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detailed herein, the statements contained in the Company’s July 27, 2011 earnings release, the

second-quarter 2011 Form 10-Q, and the July 27, 2011 earnings conference call, which touted,

among other things, the success of Project Fuel and Defendants’ progress in remediating Rocky

Mount, were materially false and misleading when made or omitted material facts to make such

statements not false and misleading because:


Mount had not experienced “net manufacturing efficiency gains” but in fact suffered from serious

issues with regard to quality control and the deterioration of its facilities and equipment. By July

2011, for example, necessary quality control staff had been cut as a result of Project Fuel, the plant’s


eliminated, Rocky Mount’s aseptic area had been found contaminated and caused production

disruptions for upwards of six weeks, key pieces of equipment like one of the plant’s bulk isolators

and a depyrogenation tunnel had failed validation and remained offline since May, causing

significant production disruptions through the end of the year, and the Company’s attempt at a “five-

year plan” to fix Rocky Mount’s validation issues had already been derailed as a result of reduced

“head counts.” These problems were not being fixed but were actually worsening as a result of cost

cutting pursuant to Project Fuel (see, e.g., ¶¶49-94);

(b) the widespread manufacturing disruptions and delays that had resulted in tens




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(c) contrary to achieving a “culture of continuous improvement,” Defendants



(d) as opposed to taking “all of these matters seriously” with respect to the FDA’s

concerns, for well over a year after receiving the April 2010 Warning Letter, the Company did not

make any concerted effort or any meaningful commitment in dollars or resources to address the

FDA’s concerns at Rocky Mount, as revealed by the issuance of the June 2011 and August 2011

Form 483s identifying even more problems at the plant ( see, e.g., ¶¶121-126);

(e) Defendants could not have known that there would not be “a substantial

amount of additional cost” in addressing the FDA’s concerns because they had not even begun to

undertake any “comprehensive review” of Hospira’s global manufacturing operations until that June,

at the earliest, after the issuance of the Form 483, and further inspections would later reveal that

problems persisted at Rocky Mount ( see, e.g., ¶¶114, 121-126);



promoting shareholder value, in reality, Project Fuel’s short-term savings would be eclipsed by the

long-term costs of the sacrifices in quality resulting from the initiative, which costs would include a

remediation bill topping $300 million, the need to hire additional quality control personnel to ensure

the safety of Hospira’s products, and the eventual impacts to the Company’s revenues as quality-

related production slowdowns resulted in decreased sales ( see, e.g., ¶¶49-58); and

(g) the Company’s second-quarter 2011 Form 10-Q was materially false and



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VI. THE TRUTH BEGINS TO EMERGE

220. Beginning on September 7, 2011, through a pair of partial revelations, the market

began to learn over the course of six weeks the truth about (i) how Project Fuel’s cost cutting had

exacerbated existing problems and further impeded remediation of quality issues identified by the

FDA, and (ii) the scope of the significant manufacturing and quality control deficiencies and

deteriorated facilities plaguing Hospira’s operations at Rocky Mount. As detailed above, rather than

reveal the full truth about Rocky Mount’s operational woes, the substantial remediation costs they

would require, and the generally devastating effects of Project Fuel on Hospira’s quality assurance,

Defendants continued to assure investors that they were working diligently to satisfy whatever

concerns the FDA had, that Hospira was on track to quickly and adequately address its regulatory

issues, and that the Company’s operations and manufacturing efficiencies were, in fact, stronger than

ever due to the success of Project Fuel. Through their misrepresentations and wrongdoing,

Defendants endeavored to keep the truth hidden from the market and buoy Hospira’s share price,

allowing Defendants Begley and Werner to line their pockets during the Class Period with nearly

$27 million in combined proceeds from unusual and suspicious insider stock sales.

A. September 7, 2011 “Investor Day” Event

221. On September 7, 2011, Hospira held its annual “Investor Day” event in Lake Forest,

Illinois, to present updates on every facet of Hospira’s business. The news was generally positive

throughout the day until the conversation turned to Hospira’s “Operational Excellence.” Defendant

Hardy opened that discussion with the following revelations about the Company’s significant quality

problems:

Mike [Ball] did an admiral job deflecting, defending, deferring and the moment is here. Let’s talk about operation, let’s talk about quality. I’ve been in my role as leader of operations here at Hospira for about eight months. And over that eight month period of time, the mission of operations has become extremely clear to me. The first mission we have is to deliver the highest possible quality products and

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services at an optimal cost to the patients and customers that are counting on Hospira to be there for them. We understand that that is number one on our mission and we’re committed to making it happen.

The second thing that is part of our mission statement is to develop a flexible manufacturing base that is ready to support my commercial colleagues as they get ready to turbo charge growth. We’ll talk a little bit about the asset base we inherited as we spun from Abbot and some of the changes we’ve made through strategic acquisitions and then obviously where are we going as we go forward.

* * *

The third area is around consistent customer service. It’s a must have, it’s a pillar, it’s a corner stone of what operations is all about. And we have got to deliver 98- plus-percent consistent customer service if we’re going to be the customer centric organization Mike described this morning.

* * *

So getting customer service right and fixing it for the long term is an absolute must do on our mission. And lastly, it’s to develop a team of people that understand what it takes to be successful in this industry. We’ve got to be good stewards of the company’s cash. We have got to be the owners of how we manage and spend that cash wisely and how we make strategic investments that are right for our patients, customers and shareholders.

To be quite frank, we aren’t delivering against that mission right now. Let’s just be real with each other, we understand we have issues to fix here at Hospira and part of the reason I’m’ in this role is to help bring those solutions to bear. part of the reason we’re building the team that we’re building is to be successful in that journey to world-class excellent and I’ll talk to you a little bit about how we’re going to get there. But let’s don’t start off on a false pretense, we aren’t delivering today.

There are still a lot of good things going on in Hospira operations, but we’re going to talk today a little bit more openly about some of the issues we’re facing and how we plan to address them. But let’s begin our talk today like we begin many talks in Hospira let’s start by talking about quality. We believe that quality and best-in-class-quality is an enabler for one of our strategic imperatives called turbo charged growth. Well, how do we get from quality to turbo-charged growth? We believe that the focus we’re going to bring to quality delivers three components of helping us turbo charge growth at Hospira.

*

So, let’s talk bout where we are in our journey to operational excellence and we started as a spinoff from Abbott, it’s a pretty well-known story. It happened about seven years ago and you can talk about what did we get from Abbott as we spun.

99


One thing that we got was some disparate systems, some disparate databases. It’s a little harder at Hospira for you spend to get the data out of our plants, to get the data put into a common format, to draw logical conclusions and to make good robust business decisions than perhaps some of our competitors. We’ve worked through that, we’ve become pretty good at getting it done but we’re not as effective and as efficient as we should be and we’ll talk about some of the solutions we have in place for that.

The second thing you see here is that we inherited some aged facilities. We at Hospira like to affectionately call them “experienced.” We know that we’ve got some facilities that probably need to have some facelifts. We need to make some investments in modernization but the fact of the matter is that spin those are the assets that we inherited and I think we’ve done a good job of managing those assets over the next seven years but today I want to talk to you about what we’re going to do to take that asset base to another level of performance.

222. Defendant Hardy’s presentation next turned to Hospira’s remediation efforts and, in

particular, those efforts at Rocky Mount following the FDA’s April 2010 Warning Letter:

Another area that we’re facing and I know many of you have probably read ahead and have anxiously awaited the next three slides, is our remediation efforts. And fixing the foundations is absolutely mission critical for Hospira. I don’t think I’ve ever heard Mike hit a podium before but I think I heard him hitting the podium as he talked about fixing the foundation and that he personally commits that it’s going to happen. And I can promise you, his personal commitment translates to me, because if it don’t I won’t be here presenting at the next Investor Day, and rightfully so.

Fixing the foundation is mission critical. Well, if there’s two areas of fixing the foundation that are mission critical times two, it’s the next two remediation areas that I’m going to talk to you about. The first is our Rocky Mount facility. And let me talk to you a little bit about Rocky Mount. Rocky Mount is a gem of a plant. It has been the crown jewel of Hospira and hospital product division for many years.

* * *

So what we don’t -- what we have in Rocky Mount isn’t a problem with how to do this business. But I believe that we got a little lazy. I believe that the bar was changing, the puck was moving, you pick the analogy, but we were kind of skating behind the puck and it was time for us to get caught up and it was time for us to take on a new mentality and a different approach.

Well, what happened in our past I think is pretty well known as we received a Warning Letter for our Rocky Clayton facilities, it happened in 2010. And when that Warning Letter was received we developed a very robust action plan. We kicked off a quality transformation effort across both Rocky Clayton and the rest of our

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pharmaceutical businesses as well as our MMS platforms. And that quality transformation plan was rolled throughout operations.

The robust action plans that were developed in Rocky and Clayton were tracked, as Mike likes to say, here at the Ivory Tower, we were measuring and reporting and had green, yellow and red graphs. But the proof’s going to be in the pudding when you come to transformation. And what we saw was a mixed bag of results.

We’re pleased with our Clayton facility's progress and that was verified by the FDA in their most recent audit. And the FDA was pleased as well, with the progress they’ve seen in Clayton. However, when we got to the Rocky Mount reinspection, we were not only disappointed, we were somewhat surprised., The same kind of rigor had not stuck in Rocky.

We’re fighting a different animal. It’s a very complex plant. We’re trying to drive remediation at the same time we’re trying to drive very robust cost-savings programs. And we found those things competing with each other. There was a lack of clear focus in Rocky Mount. And the FDA thought, and we subsequently received, additional Form 483 observations in our most recent audit.

* * *

This is part of what we committed to the FDA. We keep them routinely updated and we believe we’re on track to deliver it. However, it does have a price. And we see this as being a two to three-year process between our pharma remediation at Rocky Mount, as well as our MMS remediation, we think this will take us two to three years and be in the neighborhood of $200 million to $250 million.

223. Further detail about the necessary remediation at Rocky Mount was disclosed in the

question-and-answer session that followed Defendant Hardy’s presentation. For example, when

asked how long the remediation effort would take, an unidentified Company representative

responded, “I personally believe that in the next six months we can make significant progress. But

the total remediation of Rocky is going to be somewhere between 18 months and 36 months , for

total remediation.” On this same topic, an unidentified Hospira representative later revealed that

Defendants internally had always known Rocky Mount’s remediation was a long-term project: “So

we have been at this for about a year and even when we started on this journey, we – it was always a

multi-year journey .”

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224. Defendant Ball was specifically asked about his knowledge of the Rocky Mount

situation when coming onboard earlier in the year:

Unidentified Audience Member

Just the -- you also said this morning that you haven’t been surprised by many of the surprises, or I can’t remember the words, but I think -- was it clear to you, the amount -- or the length of time to remediate and get sort of Rocky Mount back on - - online?

So I mean, you’ve known -- this wasn’t something that just kind of popped up. I mean, you’ve known about this throughout your analysis?

Mike Ball - Hospira - CEO

So I certainly knew about it coming into the company, about the warning letter. What I said was one of the negative surprises, one of the few ones, was around Rocky Mount. Just the extent of the issues there. And I certainly was pleased to see that Clayton got a clean bill of health. So honestly, I was surprised about the Rocky Mount situation. But again, it’s an internal issue, one that we can get fixed ourselves.

I’d much rather have that than, as I said earlier, some impending doomsday genericization that every proprietary company fears and you can’t do a thing about. So this is within our control. I believe we have a great team in place. So all these objectives that were outlined here were put in place with the knowledge that we would have to do things in remediation, both on MMS and on Rocky Mount. So absolutely clarity in that.

225. These disclosures, which brought to light: (a) the seriousness of Hospira’s quality

control and facility deficiencies at Rocky Mount; (b) the scope and cost of remediation efforts

necessary to fix the problems; and (c) the fact that Project Fuel was not improving quality but was

working against it, caused the Company’s stock price to fall approximately 13%, from a close of

$45.61 on September 7, 2011, to a close of $39.51 on September 13, 2011, as the market digested all

the news that was relayed at Hospira’s day-long event. However, this stock drop would have been

even greater had Defendants not simultaneously flooded the market with overly positive news

throughout the rest of the day painting a rosy picture of Hospira’s long-term prospects due to strong

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new products in its pipeline, its significant growth opportunities abroad, and its new management

team put in place to execute upon these growth strategies.

226. Moreover, the stock drop would have been greater had Defendants not downplayed

the total cost of remediation, as revealed later, and not falsely assured the market of Hospira being

“on track” to remediate Rocky Mount’s problems. In addition, Defendant Ball claimed quality

would now take priority over Project Fuel’s cost cutting:

• I will say I was very deliberate in our Q2 call about getting the [quality] situation fixed. And, I was very deliberate in terms of my statements and my presentation about getting it fixed.

• So, if the FDA is unhappy, I’m unhappier about the situation, and we will get it fixed. The theme around this place right now is, basically, fix the foundation in turbo charge growth. That’s the rallying cry right now at Hospira.

• Job one is getting this thing fixed. And, I’m determined to do what it takes to get this thing situated in the right place and have the highest quality manufacturing, highest quality processes, and highest quality products. It’s unacceptable to be in any other situation.

• On project fuel, again, I think it was an important exercise to go through. I think that it is important as the CEO now to put a stake in the ground and say, what are our key priorities? I definitely want to expand gross margins. But, we need high quality products, high quality manufacturing, FDA happiness, for lack of a better word. So, that is job one. And, that’s what I was alluding to on the call, and that’s what I’m saying to this organization. That is job one. If fuel gets in the way of job one, fuel loses. So, I am very clear here what the priorities are for this organization because we can’t grow with what I think is a tremendous vision and opportunity without a firm foundation. And so, if there’s any question in anybody’s mind in this entire organization, I don’t know where they’ve been hiding because we have been pounding the table that this will get fixed. And, I personally went down to (inaudible) to give them that exact message. This thing has to be fixed, no if ands and buts about it. I don’t want to hear about fuel interfering with fix to the foundation. We will get it fixed. That is job one. That is what we’re going to do.

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227. Defendant Hardy also acknowledged that Project Fuel was hurting quality and tried to

downplay the tension that had built within Hospira during the Class Period between Defendants’

emphasis on quantity and cost cutting and the need for adequate quality control:

Let’s talk about operation, let’s talk about quality. I’ve been in my role as leader of operations here at Hospira for about eight months. And over that eight month period of time, the mission of operations has become extremely clear to me. The first mission we have is to deliver the highest possible quality products and services at an optimal cost to the patients and customers that are counting on Hospira to be there for them. We understand that that is number one on our mission and we’re committed to making it happen.

• First-pass quality, we’ve got to drive predictive quality into our DNA. We are very good, at Hospira, of managing risk. We’re very good at Hospira of remediating a fire. We are good firefighters.

There’s no disparity between quality and operations at Hospira, we’re on the same page. We have the same vision. We’re going to drive our organization to be fixing the same problems . . . corporate quality will make the final call, no bones about it. But in terms of being on the same page of driving a common approach, of getting the synergies between our two organizations, attacking the fundamental problems we’re facing rest assured we’re one team with one dream.

We’re fighting a different animal [with Rocky Mount]. It’s a very complex plant. We’re trying to drive remediation at the same time we’re trying to drive very robust cost-savings programs. And we found those things competing with each other. There was a lack of clear focus in Rocky Mount. And the FDA thought, and we subsequently received, additional Form 483 observations in our most recent audit. We’ve responded to those observations. We’ve put together another action plan with the FDA and we’re working very collaboratively with the FDA at this time. We believe we have the right team in place, we’ve made some leadership changes in our Rocky Mount facility. We believe we have the right focus. And we believe the FDA is seeing that focus and seeing that commitment to change.

So, yes, remediation is in front of us. We believe it’s going to take investments in the plant. We believe we’re invested in third-parties. We’ll invest in some external resources. There’s going to be a cost associated with getting Rocky right. We absolutely know it’s worth it and we’re absolutely committed to doing it right and doing it right this time.

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This is part of what we committed to the FDA. We keep them routinely updated and we believe we’re on track to deliver it. However, it does have a price. And we see this as being a two to three-year process between our pharma remediation at Rocky Mount, as well as our MMS remediation, we think this will take us two to three years and be in the neighborhood of $200 million to $250 million. We do believe that 70% to 75% of these costs will be classified as one time. So, fixing the foundation is important. And we are absolutely sure that we are going to get it done. We’re committed to doing it right.

228. Then, in the question-and-answer session that followed Defendant Hardy’s operations

presentation, he and at least one unidentified Company representative made the following reassuring

remarks regarding the Rocky Mount remediation process:

Unidentified Company Representative: “So we are in the process, right now, of working with the FDA on what our plans are going to be. Also, listening to them, of what their expectations are. We’re going to mutually agree to a plan, going forward, which we see as a very positive sign. I personally believe that in the next six months we can make significant progress. But the total remediation of Rocky is going to be somewhere between 18 months and 36 months, for total remediation. We’re going to be looking at things from visual inspection right down to every SOP in the plant. And this is a very big and complicated plant. So it’s still -- it’ll be a two to three-year remediation, but significant progress in the next six months.”

Unidentified Company Representative: “We think Rocky Mount’s future is very, very bright. We are going to streamline Rocky Mount into be -- becoming what it was in the past, a world-class sterilized -- terminally sterilized and aseptic manufacturing facility. It is absolutely essential to the cornerstone of our global strategy, as well as our US strategy. In terms of mix, we don’t think that Rocky’s going to see a huge change in the near term and perhaps even over the long term. As we turbo charge growth, what we plan to do is to leverage Vizag for that flexible, low-cost manufacturing base with very high-quality products, both as a hot backup to Rocky Mount, as we’re going to have to take a time out and do the streamlining and modernization at Rocky. That’s got to be part of this two to three-year plan. And we’re going to have to be able to take the luxury of taking the time to do that. But long term, I see Rocky as a very substantial part of our portfolio going forward.”

• Defendant Hardy: “We don’t have a good forecast for when the warning letter is going to be lifted. I think what our goal is, to operate under this environment and still can take out the obstacles we have in terms of that cycle time, getting it down from the 50-plus days down more into the

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neighborhood of 30 days in the Rocky Mount facility, et cetera. So as we march towards remediation, what we think we’re going to see is whether the warning letter is lifted or not, we’re going to see the performance coming out of Rocky Mount get better and better and better. We’re going to focus less time on trying to predict the warning letter going away as we are how fast we’re going to be able to, in the next six months, demonstrate to the FDA our ability to manage that business, manage that plant, and take out some of the complexity that’s caused some of the issues that we face there.”

Unidentified Company Representative: “So I’ll take on the Rocky Mount continued questions and maybe Sumant can talk to some of the new products. I think that there are a plethora of possibilities as we go forward here. I could paint a worst case picture that could be pretty dim and grim. We, honestly, don’t think that is where we’re headed. We are very optimistic that we have a plan that the FDA is going to see. We’re preparing for conversations, further conversations, with the FDA over the following two weeks. And we expect that those conversations are going to go quite well. So we’re going to use the word of collaborative plans. A plan with synergies around what it’s going to take to turn the corner at Rocky Mount. So that’s what we’re anticipating and that’s what we’re going to be planning for and driving towards as an operations team.”

Unidentified Company Representative: “How often the FDA might come back and take a look? I think those topics will be discussed over the next two weeks. I don’t think that they’re going to be back on a routine basis. I’ve got a feeling they’re going to say, hey, take six months or so and then let’s come back in and see how you’ve done, but we could see something different. What I do believe is that we’re going to put a plan in front of the FDA that they’re going to find very positive. I think we’re going to put a plan in front of them, they find very executable. And I think we’ll start a progress of continuous improvement from this moment, going forward, with Rocky Mount. We’ve made some pretty significant leadership changes in that plant. I believe that the Rocky Mount culture is awake, alive, well and ready to drive progress. So we’re pretty optimistic on Rocky Mount. But we realize how big an issue it is for our company and I’m not going to underplay it.”

229. Lastly, and perhaps most importantly, Defendants were asked about the “ongoing

commercial impact” of Rocky Mount’s remediation, and an unidentified Company representative

stated that customer service levels were not affected:

And this delay in cycle time, this increase in cycle time, has driven that tranche of inventory up pretty significantly. And at a big plant like Rocky Mount, that’s impacting our performance. The good news is, though, it’s not impacting service

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levels today. Because of the decision to raise finished goods inventory levels, we’ve been able to absorb that and still continue to serve the market.

230. Analysts took note of the significant costs to remediate Rocky Mount but otherwise

remained generally positive about Hospira’s near- and long-term prospects. For example, Capstone

Investments published a report on September 8, 2011, that concluded: “Despite some near-term

expense, which puts our estimates under review, we view these initiatives as especially positive

because they identify much larger markets for HSP core strength of producing injectable generics

and hopefully removes the regulatory overhang . We continue to rate the shares a BUY.”

231. On Hospira’s quality remediation efforts, Morgan Stanley wrote on September 8,

2011, “Overall, despite a significant amount of focus on this issue, we continue to see the actual

revenue impact of quality issues in SIP as relatively limited. Admittedly, the spending in 2012 and

2013 to address these issues will impact EPS materially but this does not appear to be a significant

revenue issue” (emphasis in original). The report concluded:

Net, net, we continue to view the quality and supply issues as manageable with time as Hospira adjusts to a new regulatory and competitive regime which stresses execution and an upgrade in quality systems. Similar processes have played out in other healthcare subsectors and we expect Hospira to adjustment to this new normal. However, the process is painful for investors and estimates in the near term.

232. Only days later, Defendant Werner continued to mislead the market at the Morgan

Stanley Global Healthcare Conference on September 14, 2011, by stating that the remediation issues

were just “blocking and tackling” issues.


detailed herein, the foregoing reassuring statements made during the Company’s September 7, 2011

“Investor Day” event and the September 14, 2011 Morgan Stanley Global Healthcare Conference,

which led the market to believe that Hospira’s Rocky Mount remediation was on track and would

have no effect on its customer service levels, were materially false and misleading when made or

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omitted material facts to make such statements not false and misleading. In addition, they were false

and misleading because:

(a) Defendants had encouraged a shift in corporate culture to reward “quantity

over quality,” which would take significant time and effort to reverse ( see, e.g., ¶¶39-44);

(b) not until after the issuance of the June 2011 Form 483 did the Company make

any concerted effort or meaningful commitment in dollars or resources to address the FDA’s

concerns in the April 2010 Warning Letter ( see, e.g., ¶¶121-126); and

(c) the devastating effects of Project Fuel on Hospira’s manufacturing and quality

assurance efforts had taken a significant toll on Rocky Mount’s production levels, as further

illustrated by the tens of millions of dollars in monthly “failure to supply” penalties that Hospira was

forced to pay, which had only increased throughout the year ( see, e.g., ¶¶49-99).

B. Third-Quarter 2011 Preliminary Earnings Release and Conference Call

234. Then, on October 18, 2011, the Company issued a press release announcing

disappointing preliminary financial results for the third quarter of 2011 and revealing for the first

time, and contrary to prior statements, that Rocky Mount’s operational woes were inhibiting service

as inventory was not sufficient to make up for decreased production capacity. Hospira’s net sales,

adjusted income from operations, and adjusted earnings per share were all “lower than anticipated

primarily due to certain quality actions taken in response to a U.S. Food and Drug Administration

(FDA) 2010 warning letter and subsequent observations related to the company’s manufacturing

facility in Rocky Mount, North Carolina, and device quality and supply-related issues.” The press

release continued:

“While recently launched product sales continue to drive top-line growth, we were extremely disappointed in the third quarter by developments related to our quality-improvement initiatives that resulted in a significant slowdown of production and an associated impact on our operating performance,” said F. Michael Ball, chief

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executive officer. “As I indicated at our Investor Day in early September, addressing these issues is Hospira’s top priority, and our organization is committed to full resolution. I remain confident that Hospira will emerge from this process a stronger, more competitive global company that is optimally positioned to serve the needs of our customers and patients, and deliver strong value to our shareholders.”

235. Defendants held a conference call with analysts that same morning. In his opening

remarks, Defendant Ball relayed the following:

While as those of you who know me are aware, I am not accustomed to missing numbers, which is why this is a particularly difficult call for me to have to make, I first want to articulate to you the sequence of events over the past months to put this morning’s press release into context. And then we’ll open up the call for your questions.

* * *

If I can take you back several months to our second quarter call, many of our metrics were headed in the right direction. Our backorders were declining; our customer service levels were improving; we were increasing our market share in many of our core products and newly launched products; and we felt confident that the strong top line in the first half of the year should be reflected in the annual guidance. We also announced that we had received observations regarding our Rocky Mount facility and that the FDA was not satisfied with our progress.

As we discussed at Investor Day after the second quarter call, we received a second 483 with additional observations from the agency. Receiving two 483s so close together was a clear signal that we were not making satisfactory progress to fully comply with the FDA’s concerns and that we had to ramp up our remediation efforts.

Accordingly, we initiated several additional actions at the Rocky Mount facility -- we made changes to the senior operations and quality leadership; we installed third-party assistance and oversights; and we are making further improvements to our processes and procedures. These actions resulted in a number of consequences, which due to the sheer size and magnitude of Rocky Mount, had implications that were greater than anticipated -- production and batch releases slowed significantly; and material charges were incurred related to inventory losses due to batch write-offs. As a result, late in the quarter and into October, promising trends in backorders and customer service levels were dramatically reversed as customer service levels went from the mid-90% we discussed on the second quarter call, to the high 80%. This resulted in lost sales which, combined with inventory charges, ultimately accounted for most of our miss in the quarter.

The remaining significant item that contributed to the miss was related to device quality and supply-related issues which was primarily associated with delays in Plum remediation. All of this added up to a disappointing preliminary third quarter performance which was significantly below our expectations and your projections.

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At Investor Day, our operating forecast did not anticipate the degree to which the production slowdown and resulting charges would impact performance through the rest of September, nor did we have visibility into the magnitude of the reversal in customer service levels. Furthermore, because traditionally September has been a very strong month for sales, we believed at that point that the sales would materialize. However, our customer service levels declined sharply and sales were impacted.

* * *

As a result of the slowdown, we have revised our 2011 full-year adjusted earnings per share guidance to a range of $2.95 to $3.05. This reflects the fact that we will remain at reduced production capacity at Rocky Mount at least through the end of the year.

236. Then, in the question-and-answer session that followed, the very first question was a

request for more detail on what exactly had gone wrong after all indications from Investor Day were

that everything was “on track”:

David Roman - Goldman Sachs - Analyst

Good morning everyone. I was hoping you could dive into a little bit more detail to provide some clarity on the path forward here. I understand that, that, obviously, some of the issues came up late in the quarter as it relates to Rocky Mount but certainly at the time of the Analyst Meeting, the commentary from James Hardy was that things were pretty much on track , on a – towards sustained improvement. So from here, can you just maybe walk us through what happens next, what specifically you’re doing from a remediation perspective and what the timelines are around that?

Mike Ball - Hospira Inc - CEO

So the situation at the Investor Meeting when James Hardy was making the comments, he was looking at a set of customer service levels that were on the upswing. What happened, as I mentioned in these prepared remarks, was that as we brought in the oversight group, this slowed down our batch releases and production. As we look at it now, those releases will continue to be slow as we go through this fourth quarter. We are bringing in more resources in order to address the batch releases. We’re also training up our people on new processes. And as they get more comfortable with the processes, and as the training takes hold, and as we get more bandwidth to go through our batch release processes, we believe that things will start to pick up. However, I believe that through the fourth quarter, we will continue to see these low releases from the Rocky Mount facility, and it’s too early to say exactly how far into 2012 that could possibly extend.

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237. Defendant Ball further revealed that production levels could very well stay deflated

for quite some time and that Defendants needed to implement a “culture change” ( e.g. , focusing

again on quality instead of simply cost-cutting and quantity):

Rick Wise - Leerink Swann & Company - Analyst

Good morning, Mike. Maybe you can help us -- just even a however roughly frame time to resolution. I appreciate there are a lot of moving pieces – you’re hiring new people, you’re hiring consultants, but it -- and you indicated that the FDA was, if I understood you correctly, FDA is not going to come back until sometime in 2012. Could this take through the whole year? Again, if you could just give us any framing for six months to 12 months, or it could take three years or – we’d appreciate it. Thank you.


Rick, so I think a couple of things. Number one is, in terms of doing a full remediation plan, culture change, et cetera, those things definitely take some time. With respect to increasing our production so that production comes back up to what I would call near normal levels, this is what we’re working on right now. So we just do not have, and I am not comfortable at this point saying that there’s a timeline at which we get out from underneath these, let’s call it reduced manufacturing levels. I feel like we are doing the right things to bring those things back up, but sitting here today, I just have not seen evidence of that, and until we do, and until we understand all the root issues, et cetera, I would be very reluctant to put any type of time frame on it.

238. It was also disclosed on this call that remediation efforts would be even more costly

than the $200 million to $250 million initially forecasted. Defendant Warner stated:

Okay, the remediation costs that we referenced at Investor Day, as we’ve now dug deeper into the Rocky Mount situation, it is our expectation that we’re going to see some costs in addition to what we referenced at Investor Day. We’ll give you a much clearer idea on that next week when we have the regular full earnings call.

During the full earnings call on the morning of October 26, 2011, the market learned that Hospira’s

remediation efforts would actually cost $300 million to $375 million. Hospira’s share price dipped

accordingly from a close of $30.32 on October 25, 2011, to a close of $29.97 on October 26, 2011.

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239. Finally, Defendant Ball ended the October 18, 2011 conference call admitting,

contrary to prior statements, that Defendants had not taken aggressive steps to resolve the FDA’s

concerns:

Junaid Husain - Ticonderoga Securities - Analyst

Mike, big picture question for you. You’ve been on the job at Hospira now for, call it, six months, a tough six months, to say the least. I know hindsight isn’t 20/20, but if you could do it all over again, what would you do differently, what are the lessons learned, and then how, as a manager, do you change your behavior moving forward?


Well, I think that’s a good question. I think we’ve done a lot of the right things. I think as I look back at it, the fact that the plants were under a warning letter and we ended up getting a 483 in sometime in the June time frame. Perhaps we could have acted in terms of getting some more consultants, et cetera, on the case sooner than we did. So I would say that would be one of the major things. However, I don’t think it would have changed history at all. So I think we have what we have.

In terms of moving forward, I had said from the outset to the organization, that the number one priority was fix the foundation, and by that, I meant, obviously, as I said at Investor Day was get after the issues in our plants because I believe in this industry, one has to have the top quality products. That’s always been a belief of mine. So in terms of fixing the foundation, ifthere’s another thing we could have done, maybe it was pursue that earlier , but our sense at the time was that things were going along okay.

240. The market reacted swiftly to these disclosures, punishing Hospira’s stock. The share

price plummeted a whopping 21%, falling from a close of $37.36 on October 17, 2011, to a close of

$29.51 on October 18, 2011, on abnormally heavy trading volume. In fact, on these revelations,

Hospira’s shares traded at a volume more than 26 times greater than the previous day’s volume.

241. Analysts responded sharply, immediately lowering their estimates for the Company’s

financial performance and reducing their price targets for Hospira stock. Among the reports

published that same day, on October 18, 2011:

• RBC Capital Markets would not recommend buying Hospira stock for the following reasons, among others: (i) management was unable to give a timeline for resolution of the Company’s manufacturing issues; (ii) it was

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not convinced that customers would stand by the Company given its customer service level reduction; and (iii) management’s credibility may now begin to be questioned;

• Morgan Stanley felt “[r]apid intensification of manufacturing issues on the heels of a more positive analyst day will only augment concerns about 2012+ earnings risk and the extent to which management transition can improve domestic execution and reaccelerate international growth. Lowering estimates for 2012+;” and

• The Buckingham Research Group downgraded Hospira’s stock and noted how “[d]ue to remediation, the Company has slower releases of batches and customer service levels reversed trend according to the Company from its early September investor meeting.” It was “cautious” as a result of “the new lower earnings level” and expected Hospira’s shares “to maintain a discounted multiple so we would not be lulled into being aggressive on the 19%-20% pull-back.”

242. The following day, on October 19, 2011, Capstone Investments published a report

entitled, “HSP: Too Late to Sell, Too Early to Buy – Downgrading to Hold.” Noting “very

disappointing results,” the report explained, “This negative turn of events really revolves around

manufacturing problems the company is experiencing at its Rocky Mount facility in NC as the result

of FDA audits that have identified some manufacturing processes and procedures that do not meet

the agency’s standards.” It further added that the problems were “extending the time to manufacture,

increasing drug batches that do not meet Q&A resulting in inventory write-off and lowering

customer service levels which can have a negative impact on market share. All of this has

contributed to lower than expected revenues and gross margin deterioration.”

VII. POST-CLASS PERIOD REVELATIONS

243. Later, on November 28, 2011, further detail of Hospira’s manufacturing and

regulatory troubles was revealed to the market. RBC Capital Markets published a follow-up report

to a prior publication after having “conducted more detailed interviews with FDA manufacturing and

quality control consultants and with senior executives from generic injectables manufacturers.”

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According to this analyst, “The feedback [wa]s consistent.” Its investigation into the Company’s

situation at Rocky Mount and beyond led RBC Capital Markets to conclude that

Hospira’s manufacturing issues are far greater than investors realize and will take a minimum of 2-3 years to resolve. Most damning is the widespread nature of the violations demonstrating that there may be a more systemic issue that will have to be rectified long term. While our [previous] downgrade assumed no consent decree given the active role management is taking (recently) to resolve the manufacturing issues, our more recent conversations with experts make us inclined to believe a consent decree is more likely than not, which could have significant commercial implications for Hospira. We reiterate our Underperform rating on HSP.

244. The report continued by highlighting (emphasis in original):

A consent decree may be more likely than we previously believed. Specifically, Hospira’s violations meet FDA criteria for entering a consent decree. 1) The nature of violations show numerous ‘very serious problems’ 2) Hospira is guilty of repeat violations specifically in its largest facility in Rocky Mount, NC for which a 483 was issued after the company failed to resolve observations from the previous warning letter, 3) Hospira is guilty of similar violations across multiple facilities; perhaps even globally.

Impact of consent decree is meaningful, even without plant shutdowns. The FDA is given authority to shut down plants as appropriate. Hospira would have to hire a third party (e.g. Lachman or LEK consulting) to sign off on all issues; Hospira may have to pay disgorgement fines or monetary penalties for further violations.

Even without a consent decree, Hospira faces an uphill battle and resolution will take at least 2-3 years. Per our consultants, the company will need to invest to inspect ALL of its facilities even those not cited in a 483. This would likely lead to reduced production and therefore decreased service levels. We also note the commercial impact of lost market share will pressure earnings and the company could also be liable for inabilities payments to customers, which can be significant.

245. These revelations informed investors that Hospira’s manufacturing deficiencies – and

their resulting regulatory scrutiny – were far more troublesome than the Company would have the

market believe. Indeed, the “widespread,” “systemic” nature of Hospira’s operational woes would

require investments by Hospira to inspect “ALL” of the Company’s facilities, which “would likely

lead to reduced production and therefore decreased service levels.” It was now clear that Hospira

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had not been making improvements across all of its global facilities as previously represented, and

that Hospira’s serious operational troubles were not limited to Rocky Mount.

246. On this news, Hospira’s stock tumbled approximately 9%, from a close of $30.98 on

November 28, 2011, to a close of $28.17 on November 29, 2011, on unusually heavy trading

volume, as word of RBC Capital Markets’ investigation spread through the analyst community and

into the market.

247. One analyst, The Buckingham Research Group, stated in a report published

November 30, 2011:

We do not recommend purchase of Neutral-rated Hospira shares because we see risk that our 2012 Cash EPS forecast of $2.65 per share (near consensus at $2.71) could be materially high on manufacturing remediation costs. Yesterday saw the media pick up analyst commentary on a potential Consent Decree and shares fell 9%.

VIII. LOSS CAUSATION

248. As detailed throughout and further herein, Defendants’ fraudulent scheme artificially

inflated Hospira’s stock price by failing to disclose: (a) the true scope of the Company’s

manufacturing and quality control deficiencies at its Rocky Mount, North Carolina plant, which

accounted for 25% of Hospira’s overall net sales; (b) the actual investment in time and money

needed to remediate those deficiencies; and (c) the resulting impact of the remediation on Hospira’s

ongoing manufacturing operations. These false and misleading statements, individually and

collectively, concealed Hospira’s pervasive manufacturing deficiencies and true financial

circumstances and future business prospects, resulting in the stock being artificially inflated until, as

indicated herein, the relevant truth about Hospira was revealed. While each of these

misrepresentations was independently fraudulent, they were all motivated by Defendants’ desire to

artificially inflate Hospira’s stock price and the image of its future business prospects to give the

market the false notion that Hospira’s manufacturing operations were strong and sufficiently

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compliant with FDA mandates. These false and misleading statements and omissions, among others,

had the intended effect of preventing the market from learning the full truth and keeping the

Company’s stock price artificially inflated throughout the Class Period. Indeed, Defendants’ false

and misleading statements had the intended effect and caused, or were a substantial contributing

cause of, Hospira’s stock trading at artificially inflated levels, reaching as high as $60.49 during the

Class Period.

249. A truer picture of Hospira’s operational and financial circumstances was revealed: (a)

on September 7, 2011, when Defendants revealed at its Investor Day conference that manufacturing

and quality control deficiencies would require two to three years of remediation at a cost of $200

million to $250 million; (b) on October 18, 2011, when the Company announced disappointing net

sales, operating income, and earnings per share for the third quarter of 2011 due in substantial part to

remediation efforts at Rocky Mount; and (c) after the Class Period, on November 28, 2011, when

RBC Capital Markets published the results of its investigation revealing how Hospira’s

“widespread,” “systemic” manufacturing deficiencies extended beyond Rocky Mount and thus were

“far greater” than investors had realized. When Hospira and RBC Capital Markets provided the

market with these revelations on September 7, October 18, and November 28, 2011, it was an

indication to the market that Defendants’ prior Class Period statements were false and misleading.

A. September 7, 2011 Disclosure

250. The truth about Hospira’s business and operations began to emerge on September 7,

2011, when the Company hosted investors and analysts at its annual “Investor Day” event to discuss,

among other things, the state of Hospira’s operations. Defendants revealed that the Company’s

“aged” facilities were in need of a “facelift” and extensive remediation, particularly at Rocky Mount,

to bring the Company’s operations up to FDA standards, and, as a result, that they would be

spending $200 million to $250 million to improve operational efficiencies. Defendants attempted to

116


offset this news by offering the market false assurances that they had “the right team in place” to fix

the Company’s operational issues, and that “Quality and operations” were on the same page “to

accelerate our progress to fixing the foundation.” In addition, Defendants further tempered the

revelation by touting generally positive news throughout the rest of the day, including updates on

Hospira’s products in development and an overview of the Company’s great potential for business

development overseas.

251. As a result of the information revealed to the market on September 7, 2011, the

market cast doubt on the veracity of Defendants’ prior statements, causing Hospira’s stock to drop

$6.10 a share, or approximately 13%, from a close of $45.61 on September 7, 2011, to close at

$39.51 on September 13, 2011, on abnormally high trading volume, as the market digested news

from the Company’s day-long Investor Day event of Hospira’s operational woes. The drop would

have been more dramatic had Defendants not falsely assured that the problems would soon be

adequately addressed. The market’s negative reaction to Hospira’s September 7, 2011 revelation is

demonstrated in the following stock chart:

3000000

2500000

2000000

1500000

1000000

500000

0

46

45

44

43

0 42

41

40

39

0/ / Date

117


252. The decline in Hospira’s stock price by approximately 13% from September 7, 2011,

through September 13, 2011, was the direct result of the nature and extent of the revelations made to

investors and the market regarding the Company’s extensive manufacturing deficiencies that had

been concealed or misrepresented by Defendants’ scheme and misstatements. This decline would

have been even more significant had Defendants disclosed the full truth of the remediation’s impact

on the Company’s ongoing operations, and had Defendants not tried to offset the remediation news

with a full day of other presentations boasting of the Company’s strong pipeline of new products and

lucrative international opportunities.

253. The timing and magnitude of Hospira’s September 7-13, 2011 stock price decline

negates any inference that the losses suffered by Plaintiffs were caused by changed market

conditions, macroeconomic or industry factors, or Company-specific facts unrelated to Defendants’

fraudulent conduct. This point is evidenced by the chart below, which demonstrates the clear

divergence of Hospira’s stock price from its peer index 23 as the revelation of the truth became known

to the market:

Hospira vs. S&P Health Care Index

105 0

100

95 0 c..J N: 90

85 a)

E a) a- G) 80

Co

75

9/7/2011 9/8/2011 9/9/2011 9/10/2011 9/11/2011 9/12/2011 9/13/2011

- - HSP S&P Health Care Index

23 The Company compares itself to the S&P Health Care Index in its own public filings. See Form 10-K for fiscal year ended Dec. 31, 2011, filed with the SEC on Feb. 14, 2012.

118


B. October 18, 2011 Disclosure

254. Weeks later, on October 18, 2011, Defendants revealed the true impact that the

Company’s operational problems were having on its financial results when they stunned the market

with their announcement of disappointing preliminary financial results for the third quarter of 2011.

Hospira’s net sales, income from operations, and earnings per share for the quarter were all “lower

than anticipated primarily due to certain quality actions taken in response to a U.S. Food and Drug

Administration (FDA) 2010 warning letter and subsequent observations related to the company’s

manufacturing facility in Rocky Mount, North Carolina, and device quality and supply-related

issues.” Moreover, Defendants continued to reveal further details of Hospira’s manufacturing

deficiencies at Rocky Mount and other quality control problems Company-wide. Remediation costs

were now expected to exceed the $200 million to $250 million range disclosed on September 7,

2011, at Investor Day. However, Defendants omitted to tell investors the true scope of these

problems and that they were more systemic than investors had been led to believe.

255. As a result of Defendants’ October 18, 2011 announcement of disappointing third-

quarter 2011 financial results and a bleaker outlook due to production issues attributable to

remediation efforts at Rocky Mount and other quality control problems, Hospira’s stock price

plummeted by 21%, falling from $37.36 per share on October 17, 2011, to close at $29.51 on

October 18, 2011. Significantly, trading volume for Hospira’s stock on October 18, 2011, was more

than 26 times the volume traded the previous day. The market’s negative reaction to Hospira’s

October 18, 2011 revelation is demonstrated in the following stock chart:

119


25000000

20000000

15000000

Is

I-

2 10000000 to

5000000

0

39

37

35

33 In Volume

Price 31

29

27

25

10/17/2011 10/18/2011

Date

256

The decline in Hospira’s stock price by a whopping 21% in one day, from October

17, 2011, to October 18, 2011, was the direct result of the nature and extent of the revelations made

to investors and the market regarding the true scope of the Company’s manufacturing deficiencies

and other quality control issues that had a negative impact on Hospira’s third-quarter 2011 financial

performance and had been concealed or misrepresented by Defendants’ scheme and misstatements.

This decline would have been even more significant had Defendants disclosed how widespread its

manufacturing deficiencies truly were.

257. The timing and magnitude of Hospira’s stock price decline on October 18, 2011,




divergence of Hospira’s stock price from its peer index as the revelation of the truth became known

to the market:

120



0 0

0 c'.J

0

0 0 0

120

100

80

60

40

20

0 I I p p

' NN ' ' ' ' ' ' ' ' '

,,, ,,,,,,,,

HSP S&P Health

C. Post-Class Period Revelation on November 28, 2011

258. Later, on November 28, 2011, RBC Capital Markets published a report revealing the

full extent of Hospira’s regulatory troubles. The RBC Capital Markets analyst had conducted

“interviews with FDA manufacturing and quality control consultants and with senior executives

from generic injectables manufacturers” to conclude that “manufacturing issues [at Hospira] are far

greater than investors realize and will take a minimum 2-3 years to resolve. Most damning is the

widespread nature of the violations demonstrating that there may be a more systemic issue that will

have to be rectified long term.” The report further indicated that, based on discussions with

regulatory and industry experts, a consent decree was more likely than not, “which could have

significant commercial implications for Hospira.” With this report, the market learned further detail

on the Company’s manufacturing and quality control deficiencies.

259. As a result of this publication of Hospira’s “widespread,” “systemic” manufacturing

deficiencies, the Company’s share price fell approximately 9%, from a close of $30.98 on November

28, 2011, to close at $28.17 on November 29, 2011, on unusually heavy trading volume, as news of

121


the investigation made its way into the market. The market’s negative reaction to the November 28,

2011 revelation is demonstrated in the following stock chart:

8000000

7000000

6000000

5000000

4000000

3000000

2000000

1000000

0

32

31

30

Volume

• Price

29

28

27 11/28/2011 11/29/2011

Date

260. The decline in Hospira’s stock price by approximately 9% from November 28, 2011,

to November 29, 2011, was the direct result of the nature and extent of the revelations made to

investors and the market regarding the “widespread” and “systemic” scope of Hospira’s

manufacturing deficiencies that had been concealed or misrepresented by Defendants’ scheme and

misstatements.

261. The timing and magnitude of Hospira’s stock price decline on November 29, 2011,




divergence of Hospira’s stock price from its peer index as the revelation of the truth became known

to the market:

122



CD 110 0

105

CD 100

95

90 E 85

z 80

- -.

' ' ' ' \c9

, ,,, , <\ <\

- HSP S&P Health

262. In sum, the rapid declines in Hospira’s stock price following the Company’s

September 7 and October 18, 2011 disclosures, as well as RBC Capital Markets’ post-Class Period

revelation on November 28, 2011, were a direct and foreseeable consequence of the revelation of the

falsity of Defendants’ Class Period misrepresentations and omissions to the market. Thus, the

revelations of truth at the close of the Class Period and thereafter, as well as the resulting clear

market reactions, support a reasonable inference that the market understood that Hospira’s prior

statements were false and misleading. In short, as the truth about Defendants’ prior

misrepresentations and concealments was revealed, the Company’s stock price quickly sank, the

artificial inflation came out of the stock, and Plaintiffs were damaged, suffering true economic

losses.

263. Accordingly, the economic losses, i.e. , damages, suffered by Plaintiffs on September

7-13, 2011, October 18, 2011, and November 29, 2011, were a direct and proximate result of

Defendants’ scheme and misrepresentations and omissions that artificially inflated Hospira’s stock

price and the subsequent significant decline in the value of Hospira’s stock when the truth

concerning Defendants’ prior misrepresentations and fraudulent conduct entered the marketplace.

123


IX. ADDITIONAL SCIENTER

264. The Individual Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading, and knowingly or recklessly substantially

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violators of the federal securities laws.

265. The Individual Defendants, by virtue of their receipt of information reflecting the true

facts regarding Hospira, its operations, and its business practices, their control over and/or receipt of

Hospira’s materially misleading misstatements and/or their associations with the Company that made

them privy to confidential proprietary information concerning Hospira, were active and culpable

participants in the fraudulent scheme alleged herein. The Individual Defendants knew and/or

recklessly disregarded the falsity and misleading nature of the information, which they caused to be

disseminated to the investing public. The ongoing fraud as described herein could not have been

perpetrated over a substantial period of time, as occurred, without the knowledge and/or recklessness

and complicity of personnel at the highest level of the Company, including the Individual

Defendants.

266. As set forth above, Defendants have acknowledged that, throughout the Class Period,

they were aware of the nature and extent of Hospira’s quality and facility deficiencies through their

close monitoring of Hospira’s efforts to respond to the FDA’s concerns, which efforts were tracked

with weekly update meetings, “Town Hall” meetings, and “green, yellow, and red” progress reports

(see, e.g. , ¶¶127-132). Defendants also have acknowledged their intimate, personal dealings with

the FDA, consultants, and plant personnel in working to address the Agency’s concerns ( see, e.g. ,

¶¶133-140).

124


267. In addition, as further detailed above in ¶¶35-38, the manufacture of pharmaceuticals,

particularly at Rocky Mount, was one of Hospira’s core operations during the Class Period. Indeed,

the Company holds itself out as the world’s leading provider of injectable drugs and infusion

technologies. Plus, Rocky Mount was Hospira’s largest facility and the “crown jewel” of its empire,

with roughly half of the Company’s injectable drugs produced there. Moreover, the Individual

Defendants were high-ranking officers ( i.e. , CEO, CFO, and Senior Vice President of Operations)

who were heavily involved with, and had day-to-day responsibilities concerning, the Company’s

core business of pharmaceuticals manufacturing. Accordingly, through the receipt of internal reports

and involvement with daily operations, the Individual Defendants were intimately aware of

Hospira’s true operational condition and continued problems at Rocky Mount during the Class

Period.

268. Defendants also undertook the affirmative obligation to obtain knowledge in order to

ensure the Company’s disclosures to the market were truthful by executing SOX certifications ( see,

e.g. , ¶147).

269. Further, Defendants were motivated to artificially inflate Hospira’s stock price during

the Class Period in order to line their own pockets with the proceeds of insider stock sales. Indeed,

in June 2010, with the share price near its Class Period high, Defendant Begley sold over 386,000

shares, or roughly 64% of his share holdings, for proceeds exceeding $22 million , as detailed in the

chart below:

Transaction Shares Date Sold Price Proceeds

21-Jun-2010 26,200 $57.00 $1,493,400 22-Jun-2010 359,912 $57.00 $20,514,984

386,112 $22,008,384

125


270. Likewise, beginning in June 2010 and continuing through early 2011, Defendant

Werner sold nearly 86,000 shares – over 86% of his stock holdings – for proceeds of nearly $5

million , as detailed in the chart below:

Transaction Date

16-Jun-2010 16-Jun-2010 15-Sep-2010 02-Nov-2010 08-Mar-2011

Shares Sold

14,853 6,431 9,384

40,000 15,181 85,849

Price $55.79 $55.75 $55.30 $59.50 $53.71

Proceeds

$828,649 $358,528 $518,935

$2,380,000 $815,372

$4,901,484

271

Significantly, neither Defendant Begley nor Defendant Werner sold any Hospira

stock in the five years prior to the start of the Class Period. Defendants’ insider sales were thus

unusual and suspicious in both timing and amount.

272. In addition, Defendants were also motivated to hide the true scope of the Company’s

operational troubles and thereby keep Hospira’s market value artificially inflated so that they could

successfully raise $500 million in a September 2010 debt offering. This issuance allowed Hospira to

essentially replace $500 million in debt nearing maturity with new, long-term notes at the same

interest expense.

X. PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

273. The market for Hospira’s publicly traded securities was open, well-developed, and

efficient at all times. As a result of these materially false and misleading statements and failures to

disclose, Hospira’s publicly traded securities traded at artificially inflated prices during the Class

Period. Plaintiffs and other members of the Class purchased or otherwise acquired Hospira’s

publicly traded securities relying upon the integrity of the market price of those securities and the

market information relating to Hospira, and have been damaged thereby.

126


274. At all relevant times, the market for Hospira’s securities was an efficient market for

the following reasons, among others:

(a) Hospira’s stock met the requirements for listing and was listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, Hospira regularly made public filings, including its

Forms 10-K, Forms 10-Q, and related press releases with the SEC and the NYSE;

(c) Hospira regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press, and other similar reporting services; and

(d) Hospira was followed by several securities analysts employed by major

brokerage firms, such as RBC Capital Markets, Capstone Investments, Morgan Stanley, and the

Buckingham Research Group, among others, who wrote research reports that were distributed to the

brokerage firms’ sales force and the public at large. Each of these reports was publicly available and

entered the public marketplace.

275. As a result of the foregoing, the market for Hospira’s securities promptly digested

current information regarding Hospira from all publicly available sources and reflected such

information in the prices of Hospira’s securities.

276. Under these circumstances, all purchasers of Hospira’s securities during the Class

Period suffered similar injury through their purchase of Hospira’s securities at artificially inflated

prices and a presumption of reliance applies.

277. At the times they purchased or otherwise acquired Hospira’s securities, Plaintiffs and

other members of the Class were without knowledge of the facts concerning the wrongful conduct

alleged herein and could not reasonably have discovered those facts. As a result, the presumption of

127


reliance applies. Plaintiffs will also rely, in part, upon the presumption of reliance established by a

material omission.

278. In sum, Plaintiffs will rely, in part, upon the presumption of reliance established by

the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations or failed to disclose facts during

the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s securities traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s securities; and

(e) Plaintiffs and the other members of the Class purchased the Company’s

securities between the time Defendants misrepresented or failed to disclose material facts and the

time the true facts were disclosed, without knowledge of the misrepresented or omitted facts.

XI. NO SAFE HARBOR

279. The federal statutory safe harbor providing for forward-looking statements under

certain circumstances does not apply to any of the allegedly false and misleading statements pleaded

in this complaint. Many of the specific statements pleaded herein were not identified as “forward-

looking statements” when made. To the extent there were any forward-looking statements, there

were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements. Alternatively,

to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, Defendants are liable for those false and misleading forward-looking statements because, at

the time each of those forward-looking statements were made, the particular speaker knew that the

particular forward-looking statement was false or misleading and/or the forward-looking statement

128


was authorized and/or approved by an executive officer of Hospira who knew that those statements

were false or misleading when made. Moreover, to the extent that Defendants issued any disclosures

designed to “warn” or “caution” investors of certain “risks,” those disclosures were also false and

misleading since they did not disclose that Defendants were actually engaging in the very actions

about which they purportedly warned and/or had actual knowledge of material adverse facts

undermining such disclosures.

XII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS

280. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased or otherwise

acquired the publicly traded common stock of Hospira between February 4, 2010, and October 17,

2011, inclusive, and who were damaged thereby. Excluded from the Class are Defendants, the

officers and directors of the Company, at all relevant times, members of their immediate families and

their legal representatives, heirs, successors, or assigns, and any entity in which Defendants have or

had a controlling interest.

281. Because Hospira has millions of shares of stock outstanding and because the

Company’s shares were actively traded on the NYSE, members of the Class are so numerous that

joinder of all members is impracticable. According to Hospira’s SEC filings, as of shortly before the

close of the Class Period, Hospira had approximately 164.7 million shares outstanding. While the

exact number of Class members can only be determined by appropriate discovery, Plaintiffs believe

that Class members number at least in the thousands and that they are geographically dispersed.

282. Plaintiffs’ claims are typical of the claims of the members of the Class because

Plaintiffs and all of the Class members sustained damages arising out of Defendants’ wrongful

conduct complained of herein.

129


283. Plaintiffs will fairly and adequately protect the interests of the Class members and

have retained counsel experienced and competent in class actions and securities litigation. Plaintiffs

have no interests that are contrary to, or in conflict with, the members of the Class they seek to

represent.

284. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual members of the Class may be relatively small, the expense and

burden of individual litigation make it impossible for the members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

285. Questions of law and fact common to the members of the Class predominate over any

questions that may affect only individual members in that Defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the Class

are:

(a) whether Defendants violated the federal securities laws as alleged herein;

(b) whether Defendants’ publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) whether Defendants failed to convey material facts or to correct material facts

previously disseminated;

(d) whether Defendants participated in and pursued the fraudulent scheme or

course of business complained of herein;

(e) whether Defendants acted willfully, with knowledge or severe recklessness, in

omitting and/or misrepresenting material facts;

130


(f) whether the market prices of Hospira’s securities during the Class Period were

artificially inflated due to the material nondisclosures and/or misrepresentations complained of

herein; and

(g) whether the members of the Class have sustained damages as a result of the

decline in value of Hospira’s stock when the truth was revealed and the artificial inflation came out,

and, if so, what is the appropriate measure of damages.

XIII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS

286. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth

herein. This claim is asserted against all Defendants.

287. During the Class Period, Hospira and the Individual Defendants, and each of them,

carried out a plan, scheme and course of conduct which was intended to and, throughout the Class

Period, did: (i) deceive the investing public, Plaintiffs, and other Class members, as alleged herein;

(ii) artificially inflate and maintain the market price of Hospira’s publicly traded securities; and (iii)

cause Plaintiffs and other members of the Class to purchase Hospira’s publicly traded securities at

artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct,

Hospira and the Individual Defendants, and each of them, took the actions set forth herein.

288. These Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Hospira’s securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the wrongful

131


and illegal conduct charged herein. The Individual Defendants are also sued as controlling persons

of Hospira, as alleged below.

289. In addition to the duties of full disclosure imposed on Defendants as a result of their

making affirmative statements and reports, or participating in the making of affirmative statements

and reports to the investing public, they each had a duty to promptly disseminate truthful information

that would be material to investors in compliance with the integrated disclosure provisions of the

SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17 C.F.R. §229.10,

et seq .) and other SEC regulations, including accurate and truthful information with respect to the

Company’s operations, sales, product marketing and promotion, financial condition, and operational

performance so that the market prices of the Company’s publicly traded securities would be based on

truthful, complete, and accurate information.

290. Hospira and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means, or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material information

about the business, business practices, sales performance, product marketing and promotion,

operations, and future prospects of Hospira as specified herein.

291. These Defendants each employed devices, schemes, and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course of

conduct as alleged herein in an effort to assure investors of Hospira’s value and performance and

continued substantial sales, financial, and operational growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material facts

necessary in order to make the statements made about Hospira and its business operations and future

prospects in light of the circumstances under which they were made, not misleading, as set forth

132


more particularly herein, and engaged in transactions, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of Hospira’s securities during the Class Period.

292. The Individual Defendants’ primary liability and controlling person liability arise

from the following facts, among others: (i) the Individual Defendants were high-level executives at

the Company during the Class Period; (ii) the Individual Defendants, by virtue of their

responsibilities and activities as senior executive officers, were privy to, and participated in, the

creation, development, and reporting of the Company’s internal sales and marketing plans,

projections, and/or reports; (iii) the Individual Defendants enjoyed significant personal contact and

familiarity with, were advised of, and had access to other members of the Company’s management

team, internal reports, and other data and information about the Company’s financial condition and

performance at all relevant times; and (iv) the Individual Defendants were aware of the Company’s

dissemination of information to the investing public which they knew or recklessly disregarded was

materially false and misleading.

293. Each of the Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with severely reckless disregard for the truth, in

that each failed to ascertain and disclose such facts, even though such facts were available to each of

them. Such Defendants’ material misrepresentations and/or omissions were done knowingly or with

deliberate recklessness and for the purpose and effect of concealing Hospira’s operating condition,

sales, product marketing and promotional practices, and future business prospects from the investing

public and supporting the artificially inflated price of its securities. As demonstrated by the

Individual Defendants’ overstatements, misstatements, and omissions of the Company’s financial

condition and performance throughout the Class Period, the Individual Defendants, if they did not

have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to

133


obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

294. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of Hospira’s securities

were artificially inflated during the Class Period. In ignorance of the fact that market prices of

Hospira’s publicly traded securities were artificially inflated, and relying directly or indirectly on the

false and misleading statements made by Defendants, or upon the integrity of the market in which

the securities trade, and/or on the absence of material adverse information that was known to, or

disregarded with deliberate recklessness by, Defendants but not disclosed in public statements by

Defendants during the Class Period, Plaintiff and the other members of the Class acquired Hospira’s

securities during the Class Period at artificially high prices and were damaged thereby, as evidenced

by, among others, the stock price declines above.

295. At the time of said misrepresentations and omissions, Plaintiffs and other members of

the Class were ignorant of their falsity and believed them to be true. Had Plaintiffs and the other

members of the Class and the marketplace known of the true performance, sales, marketing,

promotion, and other fraudulent business practices, future prospects, and intrinsic value of Hospira,

which were not disclosed by Defendants, Plaintiffs and other members of the Class would not have

purchased or otherwise acquired their Hospira publicly traded securities during the Class Period; or,

if they had acquired such securities during the Class Period, they would not have done so at the

artificially inflated prices which they paid.

296. By virtue of the foregoing, Hospira and the Individual Defendants have each violated

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

297. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and the

other members of the Class suffered damages in connection with their respective purchases and sales

134


of the Company’s securities during the Class Period, as evidenced by, among others, the stock price

declines discussed above, when the artificial inflation was released from Hospira’s stock.

XIV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS

298. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth

herein. This claim is asserted against the Individual Defendants.

299. The Individual Defendants acted as controlling persons of Hospira within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions with the Company, participation in, and/or awareness of, the Company’s operations, and/or

intimate knowledge of the Company’s fraudulent marketing practices and actual performance, the

Individual Defendants had the power to influence and control, and did influence and control, directly

or indirectly, the decision making of the Company, including the content and dissemination of the

various statements which Plaintiffs contend are false and misleading. The Individual Defendants

were provided with, or had unlimited access to, copies of the Company’s reports, press releases,

public filings, and other statements alleged by Plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or cause

the statements to be corrected.

300. In addition, the Individual Defendants had direct involvement in the day-to-day

operations of the Company and, therefore, are presumed to have had the power to control or

influence the particular transactions giving rise to the securities violations as alleged herein and

exercised the same.

301. As set forth above, Hospira and the Individual Defendants each violated Section 10(b)

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange

135


Act. As a direct and proximate result of the Individual Defendants’ wrongful conduct, Plaintiffs and

other members of the Class suffered damages in connection with their purchases of the Company’s

securities during the Class Period, as evidenced by, among others, the stock price declines discussed

above, when the artificial inflation was released from Hospira’s stock.

XV. PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for relief and

judgment, as follows:

(a) Declaring that this action is a proper class action and certifying Plaintiffs as

class representatives pursuant to Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs’

counsel as Class Counsel for the proposed Class;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including attorneys’ fees and expert fees; and

(d) Such other and further relief as the Court deems appropriate.

XVI. JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: June 25, 2012 ROBBINS GELLER RUDMAN & DOWD LLP

PAUL J. GELLER JACK REISE (pro hac vice)

/s/ JACK REISE JACK REISE

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120 E. Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected]

ROBBINS GELLER RUDMAN & DOWD LLP

JAMES E. BARZ (IL Bar # 6255605) 200 South Wacker Drive, 31 st Floor Chicago, IL 60606 Telephone: 312/674-4674 312/674-4676 (fax) [email protected]

MOTLEY RICE LLC JOSEPH F. RICE JAMES M. HUGHES VINCENT I. PARRETT BADGE HUMPHRIES DAVID P. ABEL 28 Bridgeside Blvd. Mount Pleasant, SC 29464 Telephone: 843/216-9000 843/216-9450 (fax) [email protected] [email protected] [email protected] [email protected] [email protected]

Co-Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

I, Jack Reise, one of Plaintiffs’ attorneys, hereby certify that on June 25, 2012, I

electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will

send notification of such filing to the parties listed on the electronic service list.

/s/ JACK REISE JACK REISE

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UNITED STATES DISTRICT COURT NORTHERN...

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