Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 2003, for Pfizer Inc. The reporting period is significantly impacted by the acquisition of Pharmacia Corporation, completed on April 16, 2003, which was accounted for under the purchase method. Consequently, Pharmacia's results are included for approximately 5.5 months of U.S. operations and 4.5 months of international operations within the nine-month period. The company operates primarily through three segments: Pharmaceutical, Consumer Healthcare, and Animal Health.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sept 28, 2003 |
Nine Months Ended Sept 28, 2003 |
Nine Months Ended Sept 29, 2002 |
|---|---|---|---|
| Revenues | $12,504 | $31,022 | $23,039 |
| Net Income | $2,235 | $3,308 | $6,270 |
| Income from Continuing Ops | $2,239 | $1,025 | $6,473 |
| Diluted EPS (Net Income) | $0.29 | $0.46 | $1.00 |
| Operating Cash Flow | N/A | $7,329 | $6,261 |
| Short-term Borrowings | $9,396 | $9,396 | $8,669 |
| Long-term Debt | $6,439 | $6,439 | $3,140 |
| Cash & Equivalents | $1,610 | $1,610 | $1,878 |
Adjusted Income: Management reports "Adjusted Income" excluding purchase accounting impacts and significant items. For the nine months ended Sept 28, 2003, Adjusted Income was $8.754 billion, compared to GAAP Net Income of $3.308 billion.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 56% in the third quarter and 35% for the nine months compared to the prior year, primarily driven by the inclusion of Pharmacia results and favorable foreign exchange rates.
- Profitability Decline: Net income decreased 47% for the nine months ended Sept 28, 2003, compared to the prior year. This decline is largely attributable to a one-time $5.043 billion charge for in-process research and development (IPR&D) related to the Pharmacia acquisition.
- Cost of Sales: Increased 125% year-over-year for the nine months. This was driven by the fair-value write-up of acquired Pharmacia inventory ($1.712 billion impact) and a change in product mix.
- Balance Sheet Expansion: Total assets grew from $46.4 billion to $120.1 billion, and shareholders' equity increased from $19.9 billion to $68.5 billion, reflecting the acquisition of Pharmacia assets and the issuance of approximately 1.8 billion shares of common stock.
- Discontinued Operations: The company recognized a net gain of $2.285 billion from the sale of discontinued businesses (Adams confectionery, Schick-Wilkinson Sword, and various pharmaceutical products) in the first nine months of 2003.
Guidance, Outlook, and Risks
- 2003 Outlook: Pfizer anticipates total revenues of approximately $45 billion and R&D expenditures of about $7 billion for the full year 2003.
- 2004 Outlook: Targeted revenue for 2004 remains at $54 billion.
- Cost Synergies: The company expects cumulative cost synergies from the Pharmacia acquisition to reach at least $1 billion in 2003, $3 billion in 2004, and $4 billion in 2005. Total merger-related costs to achieve these synergies are estimated between $4.7 billion and $5.2 billion over the next three years.
- Strategic Options: Pfizer is exploring strategic options, including potential sales, for its surgical ophthalmology and diagnostics businesses.
- Risks and Contingencies:
- Legal Proceedings: Significant litigation includes Rezulin product liability suits (approx. 10,300 pending), asbestos claims (approx. 290,000 pending), and investigations into Neurontin marketing practices.
- Patent Challenges: Ongoing disputes regarding patents for Norvasc and PDE5 inhibitors (Viagra) could impact future sales if generic competition is approved.
- Regulatory: Risks associated with the approval of new drug applications (NDAs) and potential changes in healthcare legislation affecting pricing and reimbursement.
Investor Verification Checklist
- Acquisition Accounting: Verify the final valuation of Pharmacia's in-process R&D and intangible assets, as preliminary estimates may be adjusted within one year.
- Inventory Write-down: Monitor the impact of the fair-value inventory write-up on Cost of Sales, which is expected to be fully realized by the end of 2003.
- Legal Exposure: Assess the potential financial impact of the Rezulin and Neurontin litigation, as well as the outcome of the Norvasc patent appeal.
- Divestitures: Track progress on the potential sale of the surgical ophthalmology and diagnostics businesses.
- Adjusted vs. GAAP: Reconcile the significant difference between GAAP Net Income ($3.3B) and Adjusted Income ($8.8B) to understand the core operating performance versus one-time acquisition charges.