Pfizer Inc. — Q1 2015 Form 10-Q
Business context and period. Pfizer reported results for the three months ended March 29, 2015; the comparable period ended March 30, 2014. The company operates through Global Innovative Pharmaceutical (GIP), Global Vaccines, Oncology and Consumer Healthcare (VOC), and Global Established Pharmaceutical (GEP). The interim statements are unaudited and were reviewed by KPMG, which reported no material modifications it believed were needed.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $10.864B | $11.353B | -4% |
| Income from continuing operations | $2.376B | $2.265B | +5% |
| Net income attributable to Pfizer | $2.376B | $2.329B | +2% |
| Diluted GAAP EPS | $0.38 | $0.36 | +6% |
| Adjusted net income (non-GAAP) | $3.196B | $3.665B | -13% |
| Adjusted diluted EPS (non-GAAP) | $0.51 | $0.57 | -11% |
| Operating cash flow | $685M | $2.935B | -77% |
- Margins and expenses: Cost of sales was 16.9% of revenue versus 18.0%; continuing-operations pretax margin was 28.4% versus 25.1%, and net margin attributable to Pfizer was 21.9% versus 20.5%. R&D rose 16% to $1.885B (17.4% of revenue); SI&A rose 2% to $3.104B. The effective tax rate increased to 22.9% from 20.4%.
- Cash flow and capital allocation: Operating cash flow was reduced in part by a $1.0B voluntary pension contribution and timing of receipts and payments, including legal payments. Pfizer repurchased $6.0B of shares and paid $1.758B in dividends during the quarter; dividends paid per share were $0.28 versus $0.26.
- Liquidity and debt at March 29: Cash and cash equivalents were $3.563B; short- and long-term investments totaled $42.434B. Total debt was $35.925B, yielding reported net financial assets of $10.073B. Working capital was $29.221B and the current ratio was 2.45:1. Short-term borrowings included $3.6B of commercial paper.
- Segment revenue: GIP was $3.075B, essentially flat; VOC was $2.664B, up 23%; and GEP was $5.014B, down 16%. GIP and VOC segment earnings increased, while GEP earnings declined; these segment earnings are pretax and are not directly comparable to consolidated net income.
Material changes versus prior period
- Reported revenue declined $489M: operational growth of 2% was more than offset by a $739M, or 7%, unfavorable foreign-exchange impact. U.S. revenue rose 4%; international revenue fell 9% reported, while increasing 1% operationally.
- Prevnar family revenue increased 41% to $1.306B, supported by U.S. adult uptake and international market expansion. Ibrance launched in the U.S. in February and generated $38M in quarter revenue.
- Celebrex revenue fell 67% to $205M following loss of exclusivity and generic entry; the filing identifies this as a major contributor to GEP’s decline. Other product pressures included generic competition for Zyvox IV and loss of collaboration revenue for Spiriva.
- GAAP continuing income rose despite lower sales, in part because Q1 2014 included $694M in certain legal charges and $115M in asset impairments that did not recur. Lower cost of sales and amortization also helped; higher R&D and taxes partly offset these benefits. Adjusted income and adjusted EPS declined.
- Other comprehensive loss was $1.257B, primarily reflecting foreign-currency translation losses. Total assets fell to $160.640B from $169.274B, including a decline in short-term investments; shareholders’ equity also decreased.
Outlook, management commentary, risks and unusual items
- 2015 guidance, updated April 28 for foreign exchange: Reported revenue of $44.0B–$46.0B; reported diluted EPS of $1.32–$1.47; adjusted diluted EPS of $1.95–$2.05; adjusted cost of sales of 18.5%–19.5% of revenue; adjusted R&D of $6.9B–$7.4B; and an adjusted effective tax rate of approximately 25%. The update lowered revenue and EPS ranges from prior guidance, primarily due to currency movements, including a weaker euro.
- Guidance anticipates a $3.5B revenue headwind from recent and expected generic competition and a $3.3B headwind from foreign exchange versus 2014 rates. It excludes the proposed Hospira acquisition and certain unresolved litigation outcomes.
- Pfizer agreed to acquire Hospira for $90 per share in cash, with enterprise value of approximately $17B. The company expected to finance about two-thirds with existing cash and one-third with new debt; closing was anticipated in the second half of 2015, subject to regulatory and shareholder approvals.
- Pfizer expects approximately $2.5B of annual cost savings from current restructuring and productivity programs by the end of 2016. It estimates about $2.9B of related costs during 2014–2016, roughly one-quarter non-cash.
- Key risks include further foreign-exchange volatility, price and access pressure, patent expirations and generic competition, product safety or regulatory outcomes, pipeline and trial uncertainty, manufacturing issues, and legal, tax and government-investigation exposures. Pfizer said it could not estimate reasonably possible legal losses above accrued amounts. A $400M settlement of a securities class action concerning alleged off-label promotion had been reached in principle and received preliminary court approval in March 2015.
- Other notable items: Pfizer received a $200M Lilly payment related to resuming tanezumab development, recorded as deferred revenue and to be recognized over multiple years; it paid OPKO $295M upfront for a growth-hormone collaboration, recorded in R&D. Management stated it believed liquidity was sufficient for foreseeable needs. No material changes to previously disclosed risk factors were reported.
Investor facts to verify
- Whether operational growth in key products, particularly Prevnar, Eliquis, Xeljanz and Ibrance, can offset generic erosion and foreign-exchange pressure.
- Whether the updated 2015 revenue and EPS guidance is achieved, including its currency and generic-competition assumptions.
- Hospira transaction approvals, timing, final financing mix and the resulting debt and integration effects.
- Cash generation after the unusually large pension contribution, and the balance between dividends, buybacks, investment needs and acquisition funding.
- Developments in material litigation and tax audits, and any changes to related accruals or cash requirements.