Pfizer Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended July 1, 2012; comparisons are to the quarter ended July 3, 2011. Six-month figures compare the periods ended on those dates. Amounts are in U.S. dollars unless stated otherwise. Pfizer reports four operating segments and presents Nutrition as a discontinued operation following its agreement to sell the business.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $15.057 billion | $16.485 billion | $29.942 billion | $32.509 billion |
| Income from continuing operations | $3.194 billion | $2.521 billion | $4.918 billion | $4.657 billion |
| Net income attributable to Pfizer | $3.253 billion | $2.610 billion | $5.047 billion | $4.832 billion |
| Diluted EPS, continuing operations | $0.42 | $0.32 | $0.65 | $0.58 |
| Diluted EPS, total | $0.43 | $0.33 | $0.67 | $0.61 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $6.795 billion | $10.540 billion |
- Revenue declined 9% in Q2 and 8% in the first six months. Management attributed the decline mainly to loss of exclusivity for Lipitor and other products, plus unfavorable foreign exchange. Lipitor’s worldwide revenue fell 53% in Q2 and 47% year to date.
- Q2 continuing-operations income rose 27%; first-half income rose 6%. Lower acquisition-accounting and integration costs and lower operating expenses helped, while higher legal charges weighed on results. Reported continuing-operations income as a share of revenue was 21.2% in Q2 versus 15.3%, and 16.4% for the first half versus 14.3%.
- Q2 cost of sales was 18.3% of revenue versus 21.7%; selling, informational and administrative expense was 26.4% versus 29.1%; R&D was 11.3% versus 13.5%. The filing attributes lower expenses to cost reductions, lower promotion and restructuring-related factors; these ratios are not adjusted measures.
- First-half operating cash flow fell 36%, primarily reflecting lower sales and associated cash generation, taxes and legal payments, inventory build ahead of plant rationalizations, and payment timing. Investing activities used $436 million; financing activities used $6.475 billion. Cash and cash equivalents decreased $151 million to $3.031 billion.
Balance sheet, debt and liquidity
- At July 1, 2012, total assets were $182.842 billion, total liabilities $102.881 billion and total equity $79.961 billion.
- Cash and cash equivalents were $3.031 billion; short-term investments were $21.275 billion and long-term investments $10.548 billion. Total debt was $38.571 billion, comprising $7.703 billion short-term borrowings and current debt and $30.868 billion long-term debt. Pfizer reported net financial liabilities of $3.717 billion, compared with $2.676 billion at year-end 2011.
- Working capital was $27.967 billion and the current-assets-to-current-liabilities ratio was 1.91:1, versus 2.10:1 at December 31, 2011. Working capital includes $5.3 billion of assets held for sale.
- Pfizer said it had $8.3 billion of unused credit lines, including $7.1 billion of committed borrowing capacity, and maintained high-quality debt ratings. Management stated that operating cash flows, financial assets and access to capital markets and credit support liquidity needs for the foreseeable future.
- First-half cash returned to shareholders included $3.283 billion of dividends and $2.999 billion of share repurchases. The dividend paid per share was $0.22 in Q2; the Board declared a further $0.22 dividend payable September 5, 2012.
Material changes and business developments
- Lipitor’s U.S. loss of exclusivity and generic competition drove the sharpest revenue pressure. Primary Care segment revenue declined 32% in Q2; Established Products and Emerging Markets revenue rose 12%, reflecting product transfers after exclusivity losses, generic sales and emerging-market growth.
- Emerging Markets revenue grew 8% in Q2, while U.S. revenue fell 15% and Developed Europe fell 17%. Among growth products, Lyrica revenue rose 14% in Q2, Prevnar 13/Prevenar 13 rose 12%, and Celebrex rose 6%.
- Pfizer agreed to sell Nutrition to Nestlé for $11.85 billion cash; closing was expected by the first half of 2013, subject to regulatory clearances and other conditions. Nutrition revenue was $581 million in Q2 and $1.101 billion for the first half, reported in discontinued operations.
- Pfizer was preparing a potential IPO of up to 20% of Animal Health business Zoetis, targeted for the first half of 2013. The business remained a continuing operation at the reporting date. Pfizer also completed the Alacer acquisition in February 2012 and had completed the Ferrosan consumer-health acquisition in December 2011.
- Q2 R&D expense declined 24% to $1.699 billion; first-half R&D expense declined 13% to $3.753 billion. Management said the R&D productivity initiative was on track, targeting adjusted 2012 R&D expense of approximately $6.5–$7.0 billion.
Outlook, commentary and risks
- Pfizer forecast 2012 revenue of $58.0–$60.0 billion, reported diluted EPS of $1.23–$1.38 and adjusted diluted EPS of $2.14–$2.24. Adjusted EPS is a non-GAAP measure; management’s reconciliation excludes purchase accounting, acquisition-related costs, discontinued operations and certain significant items. Guidance excludes the gain on the pending Nutrition sale and assumes no uncompleted business-development transactions or unresolved litigation outcomes.
- Management highlighted continued pressure from patent expirations, generics, pricing and payer restrictions, foreign exchange, challenging economic conditions and government healthcare policies. Additional near-term exclusivity events included U.S. losses for Revatio tablets and Detrol IR in September 2012; the company also cited future contract-right expirations for products including Enbrel, Aricept and Spiriva.
- Legal and impairment items were significant: other deductions, net, included legal charges of $474 million in Q2 and $1.287 billion for the first half. First-half legal charges included a $450 million settlement of Brigham Young University’s Celebrex lawsuit and increased hormone-replacement-therapy litigation charges. First-half intangible-asset impairments were $449 million, including a $305 million write-off of in-process R&D; additional asset and investment impairments were also recorded.
- Pfizer reported approximately 10,000 hormone-replacement-therapy actions and had accrued $532 million for expected resolution of remaining actions, excluding class actions; it said it could not estimate reasonably possible losses above accrued amounts. Quigley asbestos proceedings, patent challenges, product liability, antitrust and government investigations remain material areas of uncertainty. Management did not believe pending matters would materially adversely affect financial position, but acknowledged possible material effects on results or cash flows.
- After quarter-end, the filing disclosed August 7 resolutions of foreign-bribery matters: a Pfizer subsidiary agreed to a $15 million DOJ fine, Pfizer agreed to $16 million disgorgement plus $10.3 million interest to the SEC, and Wyeth agreed to $17.2 million disgorgement plus $1.66 million interest. The filing also reported unsuccessful Phase 3 bapineuzumab results and discontinuation of the IV studies; these were post-period developments.
- Other disclosed uncertainties include delayed European government receivables: $1.7 billion gross receivables from Spain, Italy, Greece, Portugal and Ireland, of which $619 million was more than one year past invoice date. Management said it was monitoring collection risk and the allowance for doubtful accounts.
Most important facts to verify
- Whether Lipitor and other product erosion, foreign exchange and pricing pressure track with the assumptions embedded in the $58–$60 billion 2012 revenue guidance.
- Whether the Nutrition sale closes on the expected timetable and at the announced terms, and whether the planned Zoetis IPO proceeds or separation strategy change.
- Cash-flow sustainability and liquidity after first-half operating cash flow declined 36%, including the effects of litigation payments, inventory build, dividends and planned share repurchases.
- The adequacy of legal accruals and the outcomes of hormone-replacement-therapy, Quigley asbestos, patent, product-liability and government matters.
- Regulatory and clinical developments affecting pipeline value, particularly apixaban, tofacitinib, tafamidis and the discontinuation of bapineuzumab IV studies.
- The extent to which adjusted results and guidance exclusions reconcile to GAAP performance; adjusted measures are company-defined and not standardized.