NEW YORK, March 27 (Reuters) - Hospira Inc has agreed to pay $60 million to resolve a class action lawsuit accusing the drug maker of misleading investors about quality control problems that undermined an initiative to improve the company’s margins and operations.
The settlement, disclosed in court papers filed on Thursday in federal district court in Chicago, would bring to an end a lawsuit that had dogged the company since November 2011.
The company had previously indicated it had reached a deal to resolve the case, though financial terms had not previously been disclosed. Hospira has said it anticipates insurance will cover the cost of the accord.
“We believe this is an excellent result for the class and provides a substantial recovery for investor losses,” James Barz, a lawyer for the plaintiffs, said in an emailed message.
A spokesman for Hospira could not immediately be reached for comment.
The lawsuit, which also named executives including Chief Executive Officer Michael Ball as defendants, was filed following problems at a production facility in Rocky Mount, North Carolina.
As Hospira was promising to address issues raised by the U.S. Food and Drug Administration following inspections, the plaintiffs said the company was “making the problems worse by gutting quality control efforts through cost cutting aimed at boosting short-term profitability.”
The lawsuit said those cost-cutting moves stemmed from a March 2009 initiative called “Project Fuel” intended to increase shareholder value by eliminating underperforming and duplicative units and reducing its global workforce.
Plaintiffs contended the cuts in the budget and workforce hurt Hospira’s quality control efforts, particularly at Rocky Mount, the company’s largest facility.
An FDA inspection in January 2010 of the Rocky Mount facility found a number of problems with the company’s quality control and drug validation processes, the lawsuit said, and the agency issued a warning letter that April.
Further inspections by the FDA in 2011 found other deficiencies at the facility, which accounted for about a quarter of the company’s sales, the lawsuit said.
In October 2011, Hospira reported disappointing preliminary third quarter financial results and cut its full-year guidance, citing quality actions taken in response to the FDA’s warnings about the Rocky Mount facility.
In the wake of that announcement, Hospira’s stock price fell 21 percent to close at $29.51, the plaintiffs said.
The lawsuit was led by plaintiffs Sheet Metal Workers’ National Pension Fund, KBC Asset Management NV, the Heavy & General Laborers’ Locals 472 & 172 Pension & Annuity Funds, and the Roofers Local No. 149 Pension Fund.
The lawsuit sought to cover all investors who purchased Hospira stock from February 4, 2010 through October 17, 2011. The settlement must be approved by U.S. District Judge Amy St. Eve. A motion to certify the class was pending at the time of the settlement after St. Eve largely denied a motion to dismiss.
The case is City of Sterling Heights General Employees’ Retirement System v. Hospira, Inc. et al, U.S. District Court, Northern District of Illinois, No. 11-08332. (Reporting By Nate Raymond; additional reporting by Dena Aubin; Editing by Cynthia Osterman)