Pfizer Inc. — 2013 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 29, 2013, compared with the periods ended September 30, 2012. Amounts are in U.S. dollars. The interim financial statements were reviewed, not audited.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $12.643B | $12.953B | $38.026B | $40.766B |
| Continuing-operations income | $2.588B | $2.989B | $8.779B | $7.543B |
| Net income attributable to Pfizer | $2.590B | $3.208B | $19.435B | $8.255B |
| Diluted EPS, continuing operations | $0.39 | $0.40 | $1.25 | $1.00 |
| Diluted EPS, total | $0.39 | $0.43 | $2.77 | $1.09 |
| Operating cash flow | — | $11.979B | $11.798B |
- Q3 revenue declined 2%; nine-month revenue declined 7%. Foreign exchange reduced revenue by about 2% in both comparisons.
- Continuing-operations pretax margin was 28.3% in Q3 versus 21.7% a year earlier, and 33.3% for nine months versus 22.5%. Continuing-operations net margin was 20.5% versus 23.1% for Q3 and 23.1% versus 18.5% for nine months.
- Q3 cost of sales was 18.1% of revenue versus 17.8%; R&D was 12.9% versus 14.6%. Nine-month R&D fell 11% to $4.867B.
- At September 29, cash and cash equivalents were $2.052B, short-term investments $31.627B, and long-term investments $15.731B. Total debt was $36.550B, down from $37.460B at year-end 2012; net financial assets were $12.860B. Working capital was $39.127B and the current ratio was 2.92:1.
- Nine-month investing cash use was $10.705B, largely reflecting net investment purchases; financing cash use was $9.231B, including $11.643B of share repurchases and $5.026B of dividends. Cash declined $8.029B from year-end.
- Management’s non-GAAP adjusted income was $3.859B for Q3, up 3%, and $11.602B for nine months, down 6%. Adjusted diluted EPS was $0.58 for Q3 and $1.65 for nine months. These measures exclude specified items and are not GAAP results.
Material changes and unusual items
- Pfizer completed the full divestiture of Zoetis on June 24, 2013. The exchange offer generated a $10.393B after-tax disposal gain; Zoetis results and the gain are reported in discontinued operations. This drove much of the nine-month increase in total net income and EPS. Pfizer received approximately $6.1B in cash and $11.4B in Pfizer shares through the transactions.
- Revenue pressure reflected generic erosion of Lipitor and other products, loss of exclusivity, and expiration of the Spiriva collaboration in some markets. Lipitor revenue fell 29% in Q3 and 49% for nine months. Growth in Lyrica, Celebrex, Inlyta, Xalkori and emerging markets partly offset declines.
- Nine-month continuing income benefited from approximately $1.3B of Protonix patent-settlement income and a $459M pretax gain on transferring product rights to the China equity-method venture Hisun Pfizer. Asset impairments and related charges were $968M for nine months, including $674M of intangible-asset impairments.
- The Q3 continuing-operations effective tax rate was 27.6%, compared with a 6.5% benefit rate in Q3 2012. The nine-month rate was 30.6% versus 17.7%, in part because 2012 included favorable tax audit settlements, including about $1.1B of tax and interest benefit.
Guidance, management commentary and risks
- For full-year 2013, Pfizer guided to adjusted revenue of $50.8B–$51.8B, reported diluted EPS of $3.05–$3.15, and adjusted diluted EPS of $2.15–$2.20. Adjusted cost of sales was guided at 18.0%–18.5% of adjusted revenue; adjusted R&D at $6.3B–$6.6B; and the adjusted effective tax rate at about 28%. Reported EPS includes Zoetis discontinued-operation results and its disposal gain; adjusted measures exclude discontinued operations and other specified items.
- Management said operating cash flows, financial assets, capital-market access and available credit facilities should meet liquidity needs for the foreseeable future. Pfizer had $8.5B of unused credit lines, including $7.1B of committed lending capacity.
- Management highlighted continuing exposure to generic competition and patent expirations, pricing and access pressures, foreign-exchange movements, pipeline and regulatory uncertainty, and economic and government-payment risks. Revenue also faces the loss of Pfizer’s U.S./Canada Enbrel co-promotion economics after October 2013; royalties thereafter are expected to be significantly lower.
- Legal contingencies include extensive product, patent, antitrust, securities, asbestos and government matters. Pfizer said it could not estimate the reasonably possible loss range beyond accrued amounts. After quarter-end, the Quigley asbestos plan became effective: Pfizer paid approximately $724M to Reorganized Quigley and the trust, and about $176M to plaintiffs’ counsel for claimants.
- Pfizer planned a new three-business commercial structure beginning in 2014. The ertugliflozin collaboration with Merck was ongoing; the FDA had placed tanezumab on partial clinical hold pending additional nonclinical data, expected to be submitted in the first half of 2014.
Important facts for investors to verify
- How much of reported earnings and EPS is attributable to the Zoetis gain and other nonrecurring items, versus continuing operating performance and adjusted results.
- Whether revenue declines from Lipitor, other exclusivity losses and expiring collaborations are offset by growth in newer products and emerging markets.
- The timing and cash collection of the Protonix settlement; $600M remained receivable at September 29, 2013.
- The cash-flow and balance-sheet effects of share repurchases, dividends, investment activity and the Quigley payments.
- Developments in material litigation, tax audits, product approvals and clinical programs, as well as progress against 2013 guidance.