Pfizer Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended July 4, 2010. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and comparability
Pfizer completed its approximately $68 billion acquisition of Wyeth on October 15, 2009. 2010 results include Wyeth, while 2009 comparative results do not, so reported growth is not directly comparable. Pfizer reported two segments: Biopharmaceutical and Diversified.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $17.327bn | $10.984bn | $34.077bn | $21.851bn |
| Income from continuing operations | $2.486bn | $2.263bn | $4.519bn | $4.992bn |
| Net income attributable to Pfizer | $2.475bn | $2.261bn | $4.501bn | $4.990bn |
| Diluted EPS | $0.31 | $0.34 | $0.56 | $0.74 |
| Operating margin before tax | 22.9% | 27.8% | 21.0% | 31.4% |
| Effective tax rate | 37.4% | 25.8% | 36.8% | 27.1% |
Revenue rose 58% in Q2 and 56% in the first half, primarily because of Wyeth, which contributed $5.4bn and $10.7bn, respectively; favorable foreign exchange and modest legacy Pfizer growth also contributed. First-half net income fell 10% and diluted EPS fell 24%, despite higher revenue, reflecting Wyeth operating costs, purchase-accounting charges, restructuring and acquisition costs, higher interest expense, and a higher tax rate. Q2 EPS was also lower year over year.
Management’s non-GAAP adjusted income was $4.959bn in Q2 (+53%) and $9.841bn in the first half (+42%); adjusted diluted EPS was $0.62 and $1.22, respectively. These measures exclude purchase-accounting impacts, acquisition-related costs and other specified items and are not substitutes for GAAP results.
Cash flow, balance sheet and capital allocation
- Cash flow: First-half operating cash flow was negative $1.487bn, versus positive $7.661bn in 2009. Pfizer attributed the change principally to approximately $11.3bn of tax payments associated with financing the Wyeth acquisition and payment timing. Investing activities provided $9.033bn; financing activities used $7.572bn.
- Liquidity: At July 4, cash and cash equivalents were $1.877bn and short-term investments were $17.391bn. Working capital was $26.420bn and the current ratio was 2.07:1. Pfizer reported $8.4bn of unused credit lines, including $7.1bn committed by lenders.
- Debt: Total debt was $43.274bn ($5.509bn short-term and $37.765bn long-term), down from $48.662bn at year-end 2009. Financial assets were $30.307bn; net financial liabilities were $12.967bn, compared with $8.376bn at year-end.
- Other capital items: First-half dividends paid were $2.995bn; the quarterly dividend was $0.18 per share. Pfizer repurchased about 31 million shares for $500m. It expects 2010 pension and postretirement contributions totaling approximately $1.834bn.
Material changes, outlook and risks
- Integration and costs: First-half restructuring and acquisition-related costs were $1.592bn; total cost-reduction and acquisition-related costs were $1.900bn. Pfizer expects $4bn–$5bn of net cost reductions by year-end 2012 and estimates program costs of $11.5bn–$13.5bn through 2012. It announced plans to exit 12 manufacturing sites over four years.
- Guidance: Pfizer reaffirmed 2010 revenue guidance of $67bn–$69bn, reported diluted EPS of $0.95–$1.10 and adjusted diluted EPS of $2.10–$2.20. For 2012, targets are revenue of $65.2bn–$67.7bn, reported diluted EPS of $1.58–$1.73 and adjusted diluted EPS of $2.25–$2.35. The 2012 revenue range was reduced by $800m because of U.S. healthcare legislation; other targets were reaffirmed.
- Policy and market pressures: Pfizer estimated healthcare legislation would reduce 2010 revenue by about $300m and revenue by about $900m in 2011 and $800m in 2012. Risks include Medicaid rebates, Medicare discounts and a federal industry fee. Weak economic conditions, payer pressure, foreign-exchange movements and generic competition also affect results.
- Product and regulatory risks: Pfizer expected U.S. Lipitor loss of exclusivity in November 2011 and reported that generic Effexor XR shipments began July 1, 2010, with significant expected revenue impact. FDA warning letters concerned a Geodon clinical trial and adverse-event reporting. The FDA requested suspension of certain tanezumab studies; some other late-stage trials were discontinued after failing endpoints or for safety concerns.
- Unusual and contingent items: A $200m impairment was recorded for acquired in-process research and development assets. Pfizer provided a guarantee of up to $1.5bn for certain Wyeth diet-drug settlement payments. Goodwill, acquired intangible assets, inventory, tax balances and legal contingencies from the Wyeth purchase allocation remained provisional. Management said pending litigation and claims were not believed to have a material adverse effect on financial position, while acknowledging outcomes could materially affect results in a particular period.
- Management’s liquidity view: Pfizer stated that operating cash flows, financial assets, capital-market access and credit facilities should meet liquidity needs for the foreseeable future. It was monitoring government receivables in several European markets.
Investor verification priorities
- Separate Wyeth’s contribution, foreign exchange and one-time distribution-model effects from underlying legacy Pfizer growth; reported revenue growth is not like-for-like.
- Track the conversion of revenue into GAAP earnings and cash, including purchase-accounting charges, restructuring costs, tax payments and the elevated effective tax rate.
- Verify progress against 2010 guidance and 2012 targets, including the assumptions for healthcare reform, foreign exchange and cost savings.
- Assess the commercial impact of generic launches and patent expirations, particularly Effexor XR and Lipitor, alongside the pipeline’s clinical and regulatory setbacks.
- Monitor debt reduction, liquidity and cash returns, as well as the final Wyeth purchase-price allocation, the diet-drug guarantee and material litigation or tax developments.