Pfizer Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended July 3, 2011, compared with periods ended July 4, 2010. Pfizer operates a diversified global pharmaceutical, animal-health, consumer-healthcare and nutrition business. The results include King Pharmaceuticals from January 31, 2011; the first-half comparison therefore includes about five months of King U.S. operations and four months of its international operations. KPMG reviewed the interim financial statements and reported no material modifications needed for U.S. GAAP conformity; this was not an audit.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $16.984B | $17.132B | $33.486B | $33.708B |
| Income from continuing operations | $2.588B | $2.454B | $4.812B | $4.468B |
| Net income attributable to Pfizer | $2.610B | $2.475B | $4.832B | $4.501B |
| Diluted EPS | $0.33 | $0.31 | $0.61 | $0.56 |
| Adjusted income, non-GAAP | $4.726B | $4.927B | $9.534B | $9.789B |
| Adjusted diluted EPS, non-GAAP | $0.60 | $0.61 | $1.19 | $1.21 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $10.540B | $(1.487)B |
Margins and taxes. Continuing-operations pretax margin was 21.7% in Q2 versus 22.9%; first-half margin was 20.3% versus 21.0%. Continuing-operations net margin was 15.2% versus 14.3% in Q2 and 14.4% versus 13.3% in the first half. Effective tax rates declined to 29.7% from 37.5% in Q2 and to 29.2% from 36.9% year to date, primarily reflecting the U.S. R&D credit extension and jurisdictional earnings mix.
Balance sheet and liquidity (July 3, 2011). Cash and cash equivalents were $3.096B; short-term investments, $22.388B; and total current assets, $60.484B. Current liabilities were $30.471B, working capital was $30.013B, and the current ratio was 1.98:1. Short-term borrowings including current maturities were $5.988B and long-term debt was $35.723B, or $41.711B total debt. Financial assets totaled $36.153B, leaving net financial liabilities of $5.558B. Total assets were $195.899B and shareholders’ equity was $88.963B.
Cash flow and capital returns. First-half investing cash flow was $1.086B and financing cash flow was $(10.322)B; cash increased $1.361B to $3.096B. The $12.027B year-over-year improvement in operating cash flow mainly reflects the prior-year $11.3B tax payment related to financing the Wyeth acquisition and timing of working-capital receipts and payments. Pfizer paid $3.159B in dividends and repurchased $3.679B of common stock during the first half. Quarterly dividend per share was $0.20, up from $0.18.
Material changes versus comparable periods
- Revenue declined 1% in both Q2 and the first half. Product exclusivity losses and U.S. healthcare reform deductions were offset substantially by growth in Prevnar/Prevenar 13, Lyrica and Enbrel, favorable foreign exchange, and King revenue.
- U.S. revenue fell 9% in Q2 and 6% in the first half; emerging-market revenue rose 10% in both periods. Biopharmaceutical revenue declined 3% in Q2 and 2% in the first half.
- Patent-expiry pressure was pronounced: Q2 worldwide Effexor XR revenue fell 73%, Protonix 75%, Xalatan/Xalacom 35%, and Lipitor 8%. In the first half, Lipitor declined 11% and Effexor XR 72%. Prevnar/Prevenar 13 grew 44% in Q2 and 113% in the first half.
- Reported Pfizer net income increased 5% in Q2 and 7% in the first half, while adjusted income fell 4% and 3%, respectively. Reported results benefited from lower purchase-accounting and acquisition-related costs and lower tax rates; higher non-acquisition restructuring and legal charges partly offset those factors.
- Total debt declined from $44.013B at year-end 2010 to $41.711B, while cash and cash equivalents increased from $1.735B to $3.096B. Cash, short-term investments and loans together declined from $28.479B to $25.946B, principally to fund King.
Outlook, management commentary and risks
- 2011 guidance: Revenue of $65.2B–$67.2B; reported diluted EPS of $1.09–$1.24; adjusted diluted EPS of $2.16–$2.26. Guidance excludes potential effects of litigation not substantially resolved as of July 3 and the gain on the subsequent Capsugel sale.
- 2012 targets: Revenue of $62.2B–$64.7B; reported diluted EPS of $1.58–$1.73; adjusted diluted EPS of $2.25–$2.35. Management cautioned that these longer-range targets have greater uncertainty, including from foreign exchange, economic conditions and healthcare policy.
- Management expected U.S. Lipitor exclusivity to end in November 2011, with a substantial subsequent loss of U.S. Lipitor revenue. Pfizer had granted Watson the exclusive right to sell its authorized generic for five years, beginning around that time.
- Pfizer acquired King for approximately $3.6B cash ($3.2B net of acquired cash). King contributed $581M of revenue through the first half; its provisional purchase-price allocation and goodwill assignment remained subject to change.
- Pfizer announced a sale of Capsugel for $2.375B; the transaction closed August 1, 2011. It also announced plans to explore strategic alternatives, potentially including sale or separation, for Animal Health and Nutrition; any resulting transactions were expected in 12–24 months.
- Cost and R&D restructuring remained significant. Pfizer reported $1.998B of first-half costs associated with cost-reduction initiatives and acquisition activity. It expected $4B–$5B of net cost reductions from ongoing programs by end-2012, and estimated $1.7B–$2.4B of charges for the new R&D productivity initiative. Adjusted R&D expense targets were $8.0B–$8.5B for 2011 and $6.5B–$7.0B for 2012.
- Material risks include Lipitor and other product patent expirations, generic competition, pricing and reimbursement pressure, regulatory and clinical-trial uncertainty, foreign-exchange exposure, and product-liability and patent litigation. First-half hormone-replacement litigation charges were $525M; the filing says maximum potential exposure beyond accrued amounts cannot reasonably be estimated. Other notable matters include ongoing government investigations, Quigley asbestos proceedings, and a DOJ/EPA matter concerning King’s Bristol facility.
- Pfizer voluntarily recalled Embeda in March 2011 after a stability issue; it said it aimed to return the product to market once resolved. Tanezumab remained on clinical hold. The filing also reported Chantix label updates concerning cardiovascular safety.
Most important facts for investors to verify
- Whether Lipitor’s anticipated U.S. November 2011 loss of exclusivity and the authorized-generic arrangement produced the expected revenue and earnings impact.
- Whether revenue and adjusted earnings guidance were achieved, particularly given product expirations, U.S. healthcare reform, currency movements and the difference between GAAP and adjusted results.
- Whether Pfizer realized projected cost savings while executing R&D restructuring, and how those actions affected pipeline productivity and future launches.
- Final King acquisition accounting, integration outcomes and any changes to provisional acquired-asset values or goodwill.
- Developments in hormone-replacement, patent, product-liability and government-investigation matters, including any material charges, settlements or adverse rulings.
- Cash generation, debt reduction, planned $5B–$7B 2011 share repurchases, dividend commitments, and use of Capsugel proceeds.