Pfizer Inc. — 2018 Q3 Form 10-Q
Business context and reporting period
Pfizer reported unaudited results for the three and nine months ended September 30, 2018, compared with the three and nine months ended October 1, 2017. The company operated through Innovative Health (IH) and Essential Health (EH); it announced a reorganization into three businesses effective in fiscal 2019. International subsidiaries report on a quarter ending August 26, 2018, while U.S. subsidiaries report through September 30.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $13.30B | $13.17B | $39.67B | $38.84B |
| Income from continuing operations | $4.11B | $2.86B | $11.56B | $9.06B |
| Net income attributable to Pfizer | $4.11B | $2.84B | $11.55B | $9.03B |
| Diluted EPS | $0.69 | $0.47 | $1.92 | $1.49 |
| Income before tax | $4.18B | $3.59B | $12.83B | $11.35B |
| Effective tax rate | 1.6% | 20.3% | 9.9% | 20.1% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $11.09B | $9.71B |
Revenue rose 1% in Q3 and 2% for the nine-month period. IH revenue increased 4% in Q3 and 6% year to date; EH decreased 4% in both periods. Q3 pretax margin was 31.4% versus 27.2%; nine-month pretax margin was 32.3% versus 29.2%. Gross margin, calculated as revenue less cost of sales divided by revenue, was 79.7% versus 78.4% in Q3 and 79.4% versus 79.5% year to date.
As of September 30, cash and cash equivalents were $3.56B, short-term investments $13.68B, and long-term investments $6.44B. Total debt was $41.04B, comprising $7.39B short-term borrowings and $33.65B long-term debt. Pfizer reported working capital of $12.57B and a current ratio of 1.43:1; selected net financial liabilities were $17.35B. Cash and equivalents plus investments totaled $23.68B. The balance sheet showed total assets of $167.84B and total liabilities of $96.17B.
For the first nine months, investing activities provided $5.29B, reflecting investment sales; financing activities used $14.03B, including $7.17B of share repurchases and $6.02B of dividends. Cash dividends were $0.34 per share in Q3 and $1.02 per share year to date.
Material changes versus prior comparable periods
- Higher earnings reflected lower income tax expense and favorable changes in other income/deductions, including investment gains, collaboration and licensing income, pension items, and fewer legal charges. The unusually low 2018 effective tax rate was influenced by the Tax Cuts and Jobs Act (TCJA) and favorable tax adjustments.
- Growth in Eliquis, Ibrance, Xeljanz, Prevnar 13 and biosimilars was partly offset by generic and biosimilar competition, legacy established-product declines, Viagra’s U.S. loss of exclusivity, Enbrel competition in Europe, and sterile-injectable shortages.
- U.S. revenue declined 3% for the nine months, while international revenue increased 8%, including a favorable foreign-exchange impact. Emerging-market revenue increased 14%.
- Nine-month R&D expense increased 3% to $5.55B; SI&A increased 2% to $10.45B. Q3 cost of sales decreased 5%, but rose 3% for the nine-month period.
Outlook, commentary, risks and unusual items
Updated 2018 guidance, issued October 30, narrowed revenue expectations to $53.0–$53.7B from $53.0–$55.0B, primarily due to lower-than-expected EH revenue from legacy Hospira injectable shortages and unfavorable currency movements. Adjusted diluted EPS guidance was $2.98–$3.02; adjusted cost of sales was 20.8%–21.3% of revenue; adjusted SI&A $14.0–$14.5B; adjusted R&D $7.7–$8.1B; adjusted other income approximately $1.3B; and adjusted tax rate approximately 16%. Guidance assumes no uncompleted business-development transactions and excludes forecasting unrealized equity gains or losses. It anticipates $1.8B of revenue impact from generic and biosimilar competition and assumes no U.S. generic Lyrica competition until June 2019, contingent on a pediatric patent extension. The company did not provide forward-looking GAAP guidance or reconciliation to adjusted measures.
Management said remediation of legacy Hospira manufacturing facilities is progressing, with supply issues expected to improve significantly by the end of 2019; shortages could continue to pressure SIP sales. The company expects about $1.2B of costs for 2017–2019 productivity programs and targets approximately $1.4B of savings by 2020. It expects higher R&D investment as its pipeline advances. A decision on strategic alternatives for Consumer Healthcare was expected in Q4 2018; no acceptable sale offer had been received at filing time.
Notable nonrecurring or volatile items included a $343M noncash gain on the Cerevel neuroscience-asset transaction, a $50M gain on the Allogene CAR T contribution, and a $119M one-time employee bonus. Nine-month equity investment gains recognized in income were $460M. The TCJA tax accounting remained provisional, with Pfizer expecting to finalize its analysis in Q4 2018; it reported a $15.2B repatriation tax liability, payable in installments through 2026. Adoption of accounting standards also changed recognition and presentation, including recording net equity-security fair-value changes in earnings.
Risks include patent challenges and loss of exclusivity, pricing and reimbursement pressure, manufacturing and supplier constraints, foreign-exchange movements, regulatory and clinical outcomes, and extensive litigation and government investigations. Pfizer said it could not estimate reasonably possible legal losses in excess of accrued amounts. It did not believe the matters would materially affect financial position, but adverse developments could materially affect results or cash flows. The filing also describes ongoing tax audits, product and antitrust litigation, and government inquiries.
Investor facts to verify
- Whether legacy Hospira supply constraints improve as management expects, and the resulting impact on EH and 2018 guidance.
- Whether the TCJA estimates are finalized as expected and whether tax adjustments materially change reported earnings.
- The timing and commercial impact of generic competition, particularly for Lyrica, and other patent expirations and biosimilar launches.
- How much of reported earnings growth reflects recurring operations versus tax benefits, investment marks, licensing income, and transaction gains.
- Developments in material litigation, government investigations, and the Consumer Healthcare strategic review.
- Debt, liquidity and capital returns: confirm subsequent borrowing, repurchases, dividends, and the remaining share-repurchase authorization.