Pfizer Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 28, 2015, compared with the periods ended June 29, 2014. Pfizer operates through Global Innovative Pharmaceutical (GIP), Global Vaccines, Oncology and Consumer Healthcare (VOC), and Global Established Pharmaceutical (GEP). KPMG performed an interim review; it did not express an audit opinion.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $11.853B | $12.773B | $22.717B | $24.126B |
| Income from continuing operations | $2.635B | $2.921B | $5.011B | $5.186B |
| Net income attributable to Pfizer | $2.626B | $2.912B | $5.002B | $5.241B |
| Diluted EPS, continuing operations | $0.42 | $0.45 | $0.80 | $0.80 |
| Operating cash flow | Not separately provided | Not separately provided | $4.775B | $7.022B |
Q2 reported revenue fell 7%; the six-month decline was 6%. Operating income before tax was $3.539B for Q2 and $6.621B for the half-year. Gross margin, calculated as revenue less cost of sales, was approximately 81.6% in Q2 and 82.3% for the first six months; pretax margin was 29.9% and 29.1%, respectively. Net margin attributable to Pfizer was approximately 22.2% and 22.0%.
At June 28, 2015, cash and cash equivalents were $3.670B, short-term investments $26.586B and long-term investments $17.650B. Total debt was $35.123B ($8.394B short-term, including current maturities, and $26.729B long-term); reported net financial assets were $12.783B. Working capital was $27.572B and the current ratio 2.14:1, down from 2.67:1 at year-end 2014. Total assets were $160.878B and total equity $67.180B.
Six-month investing activities provided $4.487B, largely reflecting net investment redemptions; financing activities used $8.857B, including $6.0B of share repurchases and $3.483B of dividends. Cash increased $327M to $3.670B. Dividends paid per share were $0.28 in Q2 and $0.56 for the half-year.
Changes versus comparable periods
- Foreign exchange was a major headwind: it reduced Q2 revenue by about $1.0B and first-half revenue by about $1.8B. Operational revenue increased 1% in Q2 and 2% in the first half, but those gains were more than offset by currency.
- GEP revenue declined 22% in Q2 and 19% in the first half, principally due to generic competition and loss of exclusivity, particularly for Celebrex and Zyvox, plus lower Spiriva collaboration revenue. Celebrex revenue fell 71% in Q2 and 69% for the half-year.
- VOC revenue increased 21% in Q2 and 22% in the first half, led by Prevnar 13 and the U.S. launch of Ibrance. GIP revenue declined 1% in both periods as operational growth was offset by foreign exchange and product-specific competition.
- Prevnar family revenue rose 37% in Q2 and 39% for the half-year; Xeljanz revenue rose 87% and 86%, respectively. Ibrance generated $140M in Q2 and $178M for the first half.
- GAAP net income attributable to Pfizer fell 10% in Q2 and 5% in the first half. First-half operating cash flow fell 32%, reflecting lower operating earnings, a $1.0B voluntary pension contribution and timing of receipts and payments, including legal-claim payments.
Outlook, management commentary and notable items
- On July 28, 2015, Pfizer raised its full-year 2015 guidance: reported revenue $45.0B–$46.0B; reported diluted EPS $1.38–$1.47; and adjusted diluted EPS $2.01–$2.07. Adjusted EPS is a non-GAAP measure and excludes specified items, including purchase-accounting impacts. Guidance excludes any impact from the pending Hospira acquisition and assumes about $3.3B of adverse foreign-exchange impact and $3.4B of adverse generic-competition impact on revenue.
- Pfizer agreed to acquire Hospira for $90 per share in cash, with an enterprise value of approximately $17B. The deal was expected to close in the second half of 2015, subject to conditions and approvals; Pfizer planned to fund it about two-thirds with existing cash and one-third with new debt. Management forecast $800M in annual synergies by 2018 and approximately $1B of one-time costs. Subsequent to quarter-end, the European Commission approved the transaction subject to divestitures of certain EU assets.
- Management estimated approximately $2.5B of annual savings from current cost-reduction programs by end-2016. Expected 2014–2016 program costs totaled approximately $2.8B, about one-quarter expected to be non-cash.
- Six-month R&D expense increased 7% to $3.620B, including a $295M upfront payment to OPKO and increased investment in late-stage and biosimilar programs. Pfizer and Lilly resumed preparations for Phase 3 tanezumab trials after the FDA lifted a partial clinical hold; Pfizer received a $200M upfront payment, recorded as deferred income.
- Legal and regulatory exposures include patent, product-liability, antitrust, commercial, environmental and government-investigation matters. Pfizer said it could not estimate reasonably possible losses beyond amounts accrued, and noted outcomes could materially affect results or cash flows in a period. It also reported a UK competition authority Statement of Objections issued in August 2015 concerning phenytoin sodium capsule supply.
- Credit and operating risks include generic erosion, payer pricing and access pressure, currency volatility, R&D and regulatory uncertainty, and collection risk in certain European markets. Pfizer reported limited Greek government collections in 2015 and $46M of net Greek receivables. It continued to use Venezuela’s official 6.3 exchange rate, while noting uncertainty about future currency conversion and potential impairment or reduced sales.
Most important facts for investors to verify
- Whether revenue and earnings growth from Prevnar 13, Ibrance, Eliquis and other newer products can offset generic erosion and currency headwinds.
- Progress, final costs, financing and realized synergies from the Hospira acquisition, including the required EU asset divestitures.
- Cash generation and liquidity after dividends, share repurchases, pension funding and any Hospira-related borrowing; first-half operating cash flow was materially lower year over year.
- Assumptions and exclusions in 2015 guidance, particularly foreign exchange, generic competition, non-GAAP adjustments and the omission of Hospira.
- Potential financial effects and developments in significant litigation, tax audits, government investigations, Greek receivables and Venezuela operations; the filing does not provide a clear estimate of possible legal losses above accruals.