Pfizer Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020, compared with the three months ended March 31, 2019. Amounts are in U.S. dollars; financial statements are unaudited. Pfizer reported two segments: Biopharma and Upjohn. Its Consumer Healthcare business had been contributed to the GSK joint venture in July 2019 and was no longer consolidated.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $12.028 billion | $13.118 billion | Down 8% |
| Income before tax | $3.885 billion | $4.323 billion | Down 10% |
| Net income attributable to Pfizer | $3.401 billion | $3.884 billion | Down 12% |
| Diluted GAAP EPS | $0.61 | $0.68 | Down 10% |
| Adjusted diluted EPS (non-GAAP) | $0.80 | $0.85 | Down 6% |
| Operating cash flow | $3.133 billion | $1.698 billion | Up 84% |
GAAP net margin was approximately 28.3%, versus 29.6% a year earlier; pretax margin was 32.3%, versus 33.0%. Cost of sales was 19.8% of revenue, compared with 18.5%; selling, informational and administrative expense was 23.9%, compared with 25.5%; R&D expense was 14.3%, compared with 13.0%. The tax rate rose to 12.2% from 10.0%, principally because a prior-year tax benefit did not recur.
Operating cash flow improved largely due to timing of customer receipts and vendor payments. Investing activities used $71 million, compared with $7.550 billion provided in Q1 2019, when investment sales generated significant cash. Financing activities used $2.200 billion, versus $8.467 billion, reflecting the absence of the prior-year $8.865 billion share repurchase.
Balance sheet and liquidity
- At March 29, 2020, cash and cash equivalents were $2.151 billion and short-term investments were $8.199 billion. Current assets were $34.738 billion and current liabilities $33.890 billion; working capital was $848 million and the current ratio 1.03:1.
- Total debt, including short-term borrowings and current long-term debt, was $52.288 billion, versus $52.150 billion at December 31, 2019. Pfizer reported selected net financial liabilities of $39.998 billion.
- Total assets were $166.336 billion and total equity $65.338 billion. Pfizer cited operating cash flows, financial assets, capital-market access and $15.6 billion of unused credit lines as supporting liquidity.
- Pfizer issued $1.25 billion of 2.625% senior notes due 2030 and repurchased $1.065 billion of notes due 2047. The board declared a Q2 dividend of $0.38 per share.
Changes versus the prior period
- Revenue fell $1.090 billion, including the absence of $858 million of Consumer Healthcare revenue consolidated in Q1 2019. Excluding Consumer Healthcare, revenue declined 1% operationally, according to management.
- Biopharma revenue increased 11% to $10.007 billion, with 12% operational growth. Eliquis, Ibrance, Hospital products and newer rare-disease products were among the contributors.
- Upjohn revenue declined 37% to $2.022 billion. U.S. Lyrica sales fell sharply after generic competition began in July 2019; Lipitor and Norvasc also declined amid China’s volume-based procurement program.
- GAAP earnings were pressured by lower revenue and $255 million of net losses on equity securities, versus $111 million of gains in Q1 2019. Lower SI&A and amortization partly offset these effects.
- Revenue declined 8% in each of the U.S. and international markets. Foreign exchange reduced revenue by $134 million.
Guidance, outlook and management commentary
On April 28, 2020, Pfizer reaffirmed full-company 2020 revenue guidance of $48.5–$50.5 billion and adjusted diluted EPS guidance of $2.82–$2.92. It forecast adjusted cost of sales at 19.5%–20.5% of revenue, adjusted SI&A of $11.5–$12.5 billion, adjusted R&D of $8.6–$9.0 billion, approximately $800 million of adjusted other income/deductions, and an adjusted tax rate of approximately 15%. These are non-GAAP measures; the filing does not provide forward-looking GAAP reconciliations.
For a pro forma “New Pfizer” assuming the planned Upjohn–Mylan combination had closed at the start of 2020, guidance was revenue of $40.7–$42.3 billion, adjusted diluted EPS of $2.25–$2.35, adjusted pretax margin of approximately 37%, and operating cash flow of $10–$11 billion, reduced from the prior $11–$12 billion range. Upjohn’s separate 2020 guidance was revenue of $8.0–$8.5 billion and adjusted EBITDA of $3.8–$4.2 billion. The planned transaction was anticipated to close in the second half of 2020, subject to approvals and other conditions.
Guidance assumed patient visits, vaccinations, elective procedures, access to prescribers and clinical-trial enrollment would rebound in the second half of 2020; manufacturing and supply would not be materially disrupted; and COVID-19 research investment would continue. Management expected the pandemic’s primary financial impact in Q2, but stated its duration and effects were highly uncertain. Q1 revenue included an estimated net favorable COVID-19 impact of about $150 million, from demand for some Hospital products and Eliquis wholesaler buying, partly offset by reduced patient visits and elective procedures.
- Pfizer signed a BioNTech agreement in April 2020 to co-develop COVID-19 vaccine candidates, with an initial $72 million payment and $113 million equity investment; these were post-quarter events. It also announced a Lyme-vaccine collaboration with Valneva on April 30.
- The company expected approximately $1.2 billion of pre-tax costs through 2022 for its “Transforming to a More Focused Company” program, with approximately $900 million of net savings over 2020–2022.
- Key risks include COVID-related demand, trial and supply disruption; generic and biosimilar competition; pricing and reimbursement pressure; regulatory and manufacturing matters; foreign exchange; and litigation and government investigations. Pfizer said it could not estimate the range of reasonably possible legal losses above amounts accrued.
- The filing identified ongoing litigation and investigations, including product, patent, antitrust and manufacturing matters. Pfizer stated it did not believe the matters would materially adversely affect its financial position, while noting outcomes could materially affect results or cash flows in a particular period.
Important facts for investors to verify
- Whether the expected second-half 2020 Upjohn–Mylan transaction closed on the anticipated terms, including the planned $12 billion Upjohn debt and distribution to Pfizer.
- How COVID-19 affected subsequent-quarter sales, patient starts, vaccinations, clinical development and manufacturing relative to guidance assumptions.
- Whether Biopharma growth and product launches could offset Lyrica-related erosion, China procurement pressure and other patent expirations.
- Performance against full-company and New Pfizer guidance, including the distinct bases and non-GAAP definitions used for each.
- Developments in material legal, regulatory and manufacturing proceedings, and any effect on accruals, cash flows or product supply.
- Execution costs and realized savings from the restructuring program, and the sustainability of operating cash flow, liquidity and the dividend.