Pfizer Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are to the corresponding 2018 periods. Dollar amounts are in U.S. dollars. The interim financial statements were reviewed by KPMG, not audited.
Business context and reporting period
Pfizer reorganized its commercial operations at the start of 2019 into Biopharma, Upjohn and Consumer Healthcare; Biopharma and Upjohn are the reportable segments. Consumer Healthcare was classified as held for sale at quarter-end and was combined with GSK’s business on July 31, 2019, in a joint venture in which Pfizer holds 32%.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $13.264B | $13.466B | $26.382B | $26.373B |
| Income before tax | $4.141B | $4.527B | $8.463B | $8.654B |
| Net income attributable to Pfizer | $5.046B | $3.872B | $8.929B | $7.432B |
| Diluted GAAP EPS | $0.89 | $0.65 | $1.56 | $1.24 |
| Diluted adjusted EPS (non-GAAP) | $0.80 | $0.77 | $1.65 | $1.52 |
- Q2 revenue fell 2% reported, while operational revenue grew 2%; foreign exchange reduced revenue by $527 million. First-half revenue was essentially flat, with $989 million operational growth offset by a $980 million FX headwind.
- Q2 pretax margin was 31.2%, versus 33.6% a year earlier; first-half pretax margin was 32.1%, versus 32.8%. GAAP net income rose 30% in Q2 and 20% in the first half, principally reflecting tax benefits rather than higher pretax income.
- The Q2 effective tax rate was negative 22.1% (benefit), versus 14.3% in 2018; the first-half rate was negative 5.7%, versus 13.9%. A favorable IRS settlement for 2009–2010 contributed approximately $1.4 billion of tax and interest benefit in Q2. Additional Treasury guidance under the TCJA also benefited taxes.
- Cost of sales was $2.576B in Q2 and $5.009B in the first half, down 12% and 9%, respectively. As a share of revenue, it declined to 19.4% in Q2 from 21.7%, and to 19.0% for the first half from 20.8%. R&D was $1.842B in Q2 and $3.544B in the first half; SI&A was $3.511B and $6.850B, respectively.
- Six-month operating cash flow was $4.309B, down from $5.830B. Capital expenditures were $939M; operating cash flow less capital expenditures was approximately $3.370B, compared with $5.020B in 2018. Investing activities provided $5.648B and financing activities used $9.318B. Cash and cash equivalents were $1.784B at June 30.
- At June 30, total debt was $46.675B, comprising $10.507B short-term borrowings and $36.168B long-term debt. Cash and investments totaled $15.817B; selected net financial liabilities were $30.857B, up from $20.140B at year-end 2018. Working capital was $15.043B and the current ratio was 1.47:1, versus 1.57:1. Pfizer reported $7.5B of unused credit lines.
- Pfizer paid $4.047B in dividends and repurchased $8.865B of common stock during the first half. The declared quarterly dividend was $0.36 per share.
Material changes versus the prior comparable period
- Biopharma revenue increased 2% in Q2 to $9.595B and 3% in the first half to $18.779B. Upjohn revenue fell 11% in Q2 to $2.807B and 6% in the first half to $5.882B. Consumer Healthcare revenue was $862M in Q2 and $1.721B in the first half.
- Growth in Ibrance, Eliquis and Xeljanz supported results. Q2 worldwide sales included Ibrance $1.261B (+23%), Eliquis $1.085B (+22%) and Xeljanz $613M (+32%). Weakness included Viagra, Lyrica, Enbrel outside the U.S. and Canada, and Hospital products affected by generic competition and supply constraints.
- Q2 results also reflected lower cost of sales and restructuring credits. Other income/deductions shifted to a $126M expense from $551M of income in Q2 2018, including lower investment gains and collaboration income, higher interest expense, and organizational-alignment costs.
Guidance, outlook, risks and unusual items
- On July 29, 2019, Pfizer updated full-year 2019 guidance: revenue of $50.5B–$52.5B; adjusted diluted EPS of $2.76–$2.86; adjusted cost of sales of 20.1%–21.1% of revenue; adjusted SI&A of $13.0B–$14.0B; adjusted R&D of $7.9B–$8.3B; and an approximately 16% adjusted tax rate. Revenue and EPS ranges were lowered from $52.0B–$54.0B and $2.83–$2.93. Guidance includes the Consumer Healthcare transaction, Array and Therachon, and assumes a $2.4B revenue impact from recent or expected generic and biosimilar competition and approximately $1.2B revenue and $0.08 adjusted EPS FX headwinds.
- After the proposed Upjohn–Mylan combination, Pfizer preliminarily projected 2020 revenue of approximately $40B, adjusted pretax margin in the mid-30% range and operating cash flow of $11B–$12B. These are preliminary, non-GAAP-oriented expectations and depend on closing the transaction.
- Subsequent events: Pfizer acquired Array on July 30 for an enterprise value of approximately $11.4B, financed mostly with debt; acquired Therachon on July 1 for $340M upfront plus up to $470M in contingent milestones; and agreed on July 29 to combine Upjohn with Mylan. The proposed transaction was expected to close in mid-2020, subject to approvals and other conditions. Upjohn was expected to incur $12B of debt and distribute $12B cash to Pfizer before separation.
- Management expected legacy Hospira sterile-injectable supply issues to improve substantially by year-end 2019, but cited continuing capacity, technical and supplier-quality challenges. The McPherson site remained under FDA Official Action Indicated status; the IKKT facility in India was closed following an FDA warning letter.
- Risks include patent expirations and generic/biosimilar competition (including U.S. Lyrica exclusivity loss in June 2019), pricing and reimbursement pressure, foreign exchange, manufacturing and supply interruptions, regulatory and clinical outcomes, and legal, tax and transaction contingencies. The filing notes the FDA added boxed warnings and changed Xeljanz labeling in July 2019; Pfizer expected a negative revenue effect. A revised ACIP recommendation for Prevnar 13 in adults 65 and older was also expected to weigh on 2019 revenue.
- Notable unusual items include the approximately $1.4B IRS settlement benefit, $138M first-half loss on early debt retirement, $140M of first-half asset impairments, and $256M of first-half business and legal-entity alignment costs. Pfizer said it could not estimate reasonably possible legal losses above amounts accrued; it did not believe pending matters would materially affect financial position, though results or cash flows in a period could be materially affected.
Most important facts for investors to verify
- How much of GAAP earnings growth came from the one-time IRS settlement and other tax benefits, versus operating performance; compare GAAP with adjusted EPS.
- Whether Biopharma growth can offset Upjohn declines, the $2.4B expected LOE-related revenue impact, and the additional effects of Xeljanz and Prevnar 13 developments.
- Whether Hospital manufacturing remediation delivers the expected supply improvement by year-end 2019 and whether FDA actions constrain products or approvals.
- Whether updated guidance assumptions for currency, competition and the post-quarter transactions are achieved.
- Completion terms, financing, credit-rating effects and expected benefits of the Array acquisition, Consumer Healthcare joint venture and proposed Upjohn–Mylan combination; monitor litigation, tax audits and other contingencies.