Pfizer Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the periods ended July 1, 2012. Financial statements are unaudited and were reviewed by the independent accountant, not audited.
Business context and reporting period
Pfizer reported four continuing operating segments: Primary Care; Specialty Care and Oncology; Established Products and Emerging Markets; and Consumer Healthcare. Results reflect the June 24, 2013 full divestiture of Animal Health (Zoetis), whose operating results are presented as discontinued operations. The 2012 Nutrition business sale is also presented as discontinued operations in comparative periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $12.973B | $13.968B | $25.383B | $27.813B |
| Income from continuing operations | $3.575B | $3.000B | $6.191B | $4.554B |
| Net income attributable to Pfizer | $14.095B | $3.253B | $16.845B | $5.047B |
| Reported diluted EPS | $1.98 | $0.43 | $2.34 | $0.67 |
| Adjusted income (non-GAAP) | $4.003B | $4.449B | $7.743B | $8.604B |
| Adjusted diluted EPS (non-GAAP) | $0.56 | $0.59 | $1.08 | $1.14 |
- Revenue declined 7% in Q2 and 9% in the first half. Reported net income and EPS rose sharply because of the Zoetis disposal gain; adjusted income and adjusted EPS each fell 10% year over year in both periods.
- Q2 gross margin was approximately 82.7% versus 83.0%; first-half gross margin was approximately 82.3% versus 82.9%. Continuing-operations net margin was 27.6% versus 21.5% in Q2 and 24.4% versus 16.4% for the first half; these figures include significant unusual items.
- Operating cash flow was $6.071B for the first half, down from $6.795B. Capital spending was $511M, implying operating cash flow less capital spending of approximately $5.560B, versus approximately $6.247B a year earlier.
- At June 30, cash and cash equivalents were $2.436B; short- and long-term investments totaled $47.382B; total debt was $36.746B. Pfizer reported net financial assets of $13.072B, working capital of $37.985B and a current ratio of 2.62:1.
- Cash dividends paid were $0.24 per share in Q2 and $0.48 per share in the first half. The company repurchased approximately $7.9B of shares in the first half.
Material changes versus prior comparable periods
- Loss of exclusivity and generic competition—especially Lipitor—were the principal revenue headwinds. Lipitor revenue fell 55% in both Q2 and the first half; Pfizer cited approximately $1.1B and $2.4B, respectively, of revenue impact from Lipitor and other product losses of exclusivity.
- Other pressures included foreign exchange, lower Spiriva alliance revenue, Aricept rights returning to Eisai in Japan, Prevnar/Prevenar purchasing timing and generic competition for other established products. Emerging Markets revenue grew 1% in Q2 and 3% in the first half; Consumer Healthcare revenue rose 4% and 8%, respectively. Oncology revenue rose 24% and 26%.
- Continuing-operations income benefited from lower legal charges versus 2012, the Protonix settlement, a $459M pre-tax gain on product-rights transfers to the China equity-method investment, lower amortization and cost reductions. The effective tax rate increased to 33.3% for Q2 and 31.8% for the first half, from 28.2% and 28.4%.
- Cash and cash equivalents fell from $10.081B at year-end to $2.436B, while investments increased. Pfizer attributed the cash decline in part to net investment purchases, dividends, and share repurchases; proceeds and noncash consideration from Zoetis transactions also affected liquidity and equity.
Outlook, management commentary and risks
- 2013 guidance: revenue of $50.8B–$52.8B; adjusted diluted EPS of $2.10–$2.20; reported diluted EPS of $3.07–$3.22; adjusted effective tax rate of approximately 28%. Guidance was updated for Zoetis and the Protonix settlement. Adjusted figures exclude, among other items, purchase-accounting impacts, acquisition-related costs, discontinued operations and certain significant items.
- Management cited continuing patent expirations, generic and biosimilar competition, pricing and reimbursement pressure, foreign-exchange exposure, regulatory and clinical-development uncertainty, and economic conditions as important risks. The U.S. and international regulatory environment and government purchasing patterns may affect product access and sales.
- Pfizer announced a new global commercial structure planned for 2014, grouping operations into Innovative Products, Vaccines/Oncology/Consumer Healthcare, and Value Products. Management expects cost-reduction initiatives to yield approximately $1.0B of pre-tax savings in 2013; estimated 2013 initiative costs were $500M–$800M after tax.
- The Protonix patent-litigation settlement with Teva and Sun was recorded as $1.351B of income. The settlement provides for payments to Pfizer and Takeda; collection timing extends into 2014.
- Pfizer expects to contribute approximately $964.5M of cash and noncash items to the Quigley asbestos trust when its reorganization plan becomes effective, subject to appeal. The company said it could not estimate reasonably possible losses above amounts accrued for its legal contingencies.
- The FDA issued a warning letter concerning the Catania, Italy facility; it accepted Pfizer’s proposed corrective actions subject to future reinspection. Pfizer also reported that the EMA maintained its negative recommendation on Xeljanz for rheumatoid arthritis, potentially delaying EU resubmission by several years.
Most important facts for investors to verify
- Separate recurring operating performance from reported results: the $10.418B after-tax Zoetis disposal gain drove much of the reported net-income increase, while adjusted income declined.
- Track revenue trends and exposure to patent expirations, particularly Lipitor and upcoming changes to Enbrel and Spiriva collaboration economics.
- Confirm collection and timing of Protonix settlement proceeds, and monitor legal, asbestos and tax contingencies for changes in accruals or cash requirements.
- Assess whether 2013 guidance and expected cost savings remain achievable given pricing, competition, currency, regulatory and pipeline risks.
- Monitor cash generation, investment balances, debt maturities, repurchases and dividends; also note that $47.382B of reported investments, rather than cash alone, comprises most of the company’s liquid financial assets.