Business context and reporting period
Pfizer Inc. filed this unaudited Form 10-Q for the quarter ended July 3, 2016. Results are compared with the quarter and six months ended June 28, 2015; international subsidiaries report on periods ending May 29, 2016 and May 24, 2015. Pfizer operated through Innovative Health (IH) and Essential Health (EH); segment reporting was reorganized in Q2, with prior periods revised. The comparison includes Hospira only in 2016, following its acquisition in September 2015.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $13.147bn | $11.853bn | $26.152bn | $22.717bn |
| Income from continuing operations | $2.035bn | $2.635bn | $5.060bn | $5.011bn |
| Net income attributable to Pfizer | $2.019bn | $2.626bn | $5.036bn | $5.002bn |
| Diluted GAAP EPS | $0.33 | $0.42 | $0.82 | $0.80 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $5.230bn | $4.770bn |
| Cost of sales as % of revenue | 24.1% | 18.4% | 23.0% | 17.7% |
Revenue grew 11% in Q2 and 15% in the first half; on an operational basis, growth was 13% and 20%, respectively, before unfavorable foreign-exchange effects of $302 million and $1.0 billion. First-half reported growth also benefited by about $800 million from four additional selling days, expected to be offset in Q4. Hospira contributed $1.1 billion of Q2 revenue and $2.3 billion for the first half. Without Hospira, Pfizer reported standalone operational revenue growth of $0.5 billion in Q2 and $2.1 billion in the first half.
Q2 IH revenue was $7.105 billion, up 7%; EH revenue was $6.042 billion, up 16%, substantially reflecting Hospira. Growth products included Ibrance ($514 million Q2 revenue; $942 million first-half), while Prevnar/Prevenar 13, Zyvox, Lyrica in certain European markets, and the expired U.S. Rebif co-promotion weighed on results. First-half revenues in the U.S. rose 37%; emerging-market revenues fell 7%.
Q2 GAAP income from continuing operations fell 23%, despite higher revenue, mainly reflecting higher cost of sales, impairments, legal charges, restructuring and acquisition-related costs, and amortization. First-half GAAP income from continuing operations was up 1%. Management’s non-GAAP adjusted diluted EPS was $0.64 in Q2 versus $0.56, and $1.30 for the first half versus $1.07; adjusted measures exclude specified purchase-accounting, acquisition and significant items and are not GAAP measures.
At July 3, 2016, cash and cash equivalents were $3.411 billion, short-term investments $17.531 billion and long-term investments $13.124 billion. Total debt was $44.181 billion, versus $38.899 billion at December 31, 2015; selected net financial liabilities were $10.114 billion, versus net financial assets of $391 million. Working capital was $11.746 billion and the current ratio 1.37, compared with $14.405 billion and 1.49 at year-end. Short-term borrowings included $8.0 billion of commercial paper. Pfizer reported $7.9 billion of unused credit lines, including $7.1 billion committed by lenders, and said it expects liquidity to meet foreseeable needs.
Pfizer paid $3.675 billion in dividends and repurchased $5.0 billion of stock in the first half. Q2 dividend paid per share was $0.30, versus $0.28. A $5.0 billion accelerated repurchase was completed in June; remaining authorization was approximately $11.4 billion.
Material changes, outlook, risks and unusual items
- 2016 guidance reaffirmed August 2: revenue of $51.0-$53.0 billion; adjusted diluted EPS of $2.38-$2.48; adjusted cost of sales of 21%-22% of revenue; adjusted SI&A of $13.7-$14.7 billion; adjusted R&D of $7.4-$7.8 billion; adjusted other income of approximately $500 million; and an adjusted tax rate of approximately 24%. Guidance assumes about 6.2 billion diluted weighted-average shares and excludes uncompleted business-development transactions. Pfizer does not provide forward GAAP guidance or a reconciliation of these non-GAAP measures.
- Guidance incorporates an estimated $2.3 billion revenue headwind from recent and expected generic competition and a $1.4 billion foreign-exchange headwind versus 2015 rates, including $800 million attributed to Venezuela. The estimated adverse adjusted EPS effect of currency is about $0.10, including $0.07 from Venezuela.
- Q2 and first-half other deductions included $816 million and $947 million, respectively, of asset impairments. These included $641 million of Hospira-related intangible impairments; the filing cites scientific, regulatory, pricing and competitive developments. Pfizer also recorded a $486 million charge for an agreement in principle to settle Celebrex/Bextra securities litigation, subject to a final agreement and court approval. Other material items included $150 million paid to Allergan after termination of the proposed merger and impairment charges on equity-method investments, including Hisun Pfizer and Teuto.
- Pfizer acquired Anacor on June 24 for approximately $4.9 billion cash, net of acquired cash of $4.5 billion, and assumed $698 million of debt. The purchase-price allocation remained provisional; Anacor’s operating results included in this quarter were immaterial. The proposed Allergan merger was terminated by mutual agreement in April after announced U.S. Treasury actions.
- Management expects $1.0 billion of annual Hospira cost savings by 2018, with approximately $1.0 billion of one-time integration costs over up to three years. Separate 2014-2016 cost-reduction programs were expected to generate about $2.4 billion in annual savings by end-2016. Management was evaluating a potential separation of IH and EH, with a decision expected by year-end 2016; no decision had been made.
- Key risks include product patent expirations and generic or biosimilar competition, pricing and payer-access pressure, clinical and regulatory uncertainty, manufacturing and integration execution, foreign exchange and economic conditions. Expected near-term exclusivity losses included Pristiq in the U.S. in March 2017 and Viagra in the U.S. in late 2017. The U.K. vote to leave the EU created longer-term operational uncertainty; Pfizer said the immediate business impact was limited mainly to currency. Venezuela’s exchange-rate and government-policy uncertainty could affect asset recoverability and operations.
- Legal contingencies include patent, product-liability, antitrust, environmental and government matters. Pfizer stated it could not estimate reasonably possible losses in excess of amounts accrued. It also disclosed $752 million gross receivables from governments or agencies in Italy, Spain, Greece and Portugal, including $97 million outstanding more than a year; net Greek government receivables were $55 million.
Important facts for investors to verify
- How much of revenue growth and guidance depends on Hospira, extra selling days, acquisitions, product mix and price, versus durable Pfizer standalone demand.
- Whether the $1.0 billion Hospira annual savings target and the broader cost-savings plans are achieved, and the total integration and restructuring costs required.
- Progress on Ibrance, Eliquis, Xeljanz and other growth products, against declining or exposed products including Prevnar, Zyvox, Lyrica in certain markets, and upcoming patent expirations.
- Final settlement terms and court approval for the $486 million Celebrex/Bextra matter, plus developments in other significant litigation and tax disputes.
- Final Anacor acquisition accounting and the commercial and regulatory prospects for its pipeline, including crisaborole.
- Cash conversion, working-capital trends, credit exposure to government customers, debt levels and financing costs; also monitor the impacts of foreign exchange and Venezuela developments on the reaffirmed guidance.
- Any decision on a potential IH/EH separation and the resulting effects on capital allocation, costs and reported segment performance.