Pfizer Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. The interim financial statements are unaudited and were reviewed by the independent auditor. Pfizer is a global biopharmaceutical and consumer healthcare company. It sold its Nutrition business in November 2012 and completed a 19.8% Zoetis IPO in February 2013, while retaining control and continuing to consolidate Zoetis.
Financial performance and position
| Metric | Q1 2013 | Prior comparable period | Change / context |
|---|---|---|---|
| Revenue | $13.50 billion | $14.89 billion | Down 9%; operational decline of 8% and unfavorable foreign exchange of 1%. |
| Income from continuing operations before tax | $3.92 billion | $2.44 billion | Up 61%; margin 29.0%, versus 16.4%. |
| Income from continuing operations | $2.76 billion | $1.72 billion | Up 60%; margin 20.5%, versus 11.6%. |
| Net income attributable to Pfizer | $2.75 billion | $1.79 billion | Up 53%. |
| Diluted EPS | $0.38 | $0.24 | Up 58%; adjusted diluted EPS was $0.54 versus $0.57, down 5%. |
| Operating cash flow | $2.24 billion | $2.77 billion | Down 19%. |
| Cash and cash equivalents | $2.13 billion | $10.39 billion at Dec. 31, 2012 | Declined as short- and long-term investments increased. |
| Total debt | $40.38 billion | $37.46 billion at Dec. 31, 2012 | Includes $3.64 billion of Zoetis debt; short-term borrowings and current maturities were $8.90 billion. |
| Liquidity | $50.74 billion selected financial assets; $10.36 billion net financial assets | $46.86 billion selected financial assets; $9.40 billion net financial assets | Working capital $37.22 billion; current ratio 2.35:1. |
| Dividend per common share | $0.24 paid | $0.22 paid | Up 9%. |
Cost of sales was $2.65 billion, or 19.6% of revenue, compared with 18.4% a year earlier. Selling, informational and administrative expense fell 10% to $3.59 billion; research and development expense fell 13% to $1.80 billion; and intangible amortization fell 13% to $1.23 billion. The effective tax rate was 29.6%, compared with 29.2%.
Cash used in investing activities was $10.93 billion, mainly reflecting net purchases of investments. Financing activities provided $434 million: borrowing proceeds were offset in part by $4.63 billion of share repurchases and $1.74 billion of dividends. Pfizer repurchased approximately 170 million shares; about $7.2 billion remained authorized under its repurchase plans.
Material changes versus the prior period
- Revenue weakness primarily reflected loss of exclusivity and generic competition, particularly Lipitor, as well as Geodon and other products, and the timing of Prevnar 13 government purchases. Lipitor revenue fell 55% to $626 million. The company estimated that loss of exclusivity for Lipitor and other products reduced Q1 2013 revenue by approximately $1.3 billion.
- Revenue by geography declined 10% in the U.S., 14% in developed Europe and 17% in developed rest-of-world markets; Emerging Markets revenue increased 5%.
- Emerging Markets, Oncology, Animal Health and Consumer Healthcare showed growth. Oncology revenue increased 29%; Zoetis revenue rose 5%, and Consumer Healthcare revenue rose 12%, including the benefit of the Alacer acquisition.
- Reported earnings improved substantially, but the comparison was affected by unusual items. Q1 2013 included a $490 million pre-tax gain from transferring product rights to the Hisun Pfizer China equity-method investment and an $80 million insurance recovery related to litigation. Q1 2012 included substantially larger legal charges, including a $450 million Celebrex settlement charge, and higher restructuring and acquisition-related costs.
- Adjusted income declined 10% to $3.91 billion despite higher GAAP net income. The company’s adjusted measure excludes purchase-accounting impacts, acquisition-related costs, discontinued operations and certain significant items; it is non-GAAP and is not a substitute for GAAP results.
- Zoetis issued $3.65 billion of senior notes and Pfizer sold 19.8% of Zoetis in its IPO. Pfizer retained approximately 80.2% ownership and control. The Nutrition business sale was completed in November 2012, so its prior-year operating results appear as discontinued operations.
Guidance, outlook and management commentary
Pfizer forecast full-year 2013 revenue of $55.3–$57.3 billion, reported diluted EPS of $1.44–$1.59, and adjusted diluted EPS of $2.14–$2.24 (adjusted income of $15.0–$15.7 billion). Guidance includes Zoetis revenues and expenses but excludes earnings attributable to the 19.8% Zoetis interest sold, effective February 7, 2013. It does not assume uncompleted business-development transactions or the potential effects of litigation matters not substantially resolved as of March 31, 2013.
Management highlighted ongoing cost savings and projected approximately $1.0 billion of pre-tax cost reductions in 2013, alongside $500–$800 million of after-tax costs for cost-reduction and productivity initiatives. Adjusted R&D expense was expected to be approximately $6.5–$7.0 billion for 2013. The company said it expected to meet foreseeable liquidity needs through operating cash flow, financial assets, capital-market access and credit facilities.
Strategic priorities include improving R&D productivity, focusing research on five priority therapeutic areas, pursuing collaborations and business development, and evaluating alternatives for Pfizer’s remaining Zoetis stake, potentially including a tax-free distribution. In April 2013, Pfizer announced a Merck collaboration for investigational ertugliflozin; payments received to date totaled $60 million and were deferred for recognition over time.
Risks, contingencies and unusual items
- Patent expirations and competition: Generic entry and loss of exclusivity remain significant revenue risks. Further expected pressures include the 2013 expiration of the U.S. Aricept 23 mg exclusivity and the October 2013 end of Pfizer’s U.S./Canada Enbrel co-promotion agreement. The Rebif agreement’s end date remained subject to a contract dispute.
- Product development and regulation: Clinical, regulatory and launch outcomes are uncertain. The EU regulator recommended against approval of tofacitinib for rheumatoid arthritis in April 2013; Pfizer sought re-examination. The FDA had placed a partial clinical hold on tanezumab. Pfizer also received an FDA warning letter concerning its Catania, Italy manufacturing facility and said it was working to address the issues.
- Legal exposure: Pfizer faces extensive patent, product-liability, antitrust, securities, commercial, environmental and government matters. Management stated it could not estimate the range of reasonably possible losses in excess of amounts accrued; developments could materially affect results or cash flows in a period. The Quigley asbestos reorganization plan remained subject to court approval and contemplated additional cash and non-cash contributions valued at more than $550 million. Approximately 95% of hormone-replacement therapy actions had been settled or were subject to settlement agreements, but further charges could be required.
- Receivables and economic conditions: Gross receivables from governments and agencies in Italy, Greece, Portugal, Spain and Ireland were about $1.3 billion, including $285 million more than one year past invoice date. Pfizer said collection timing and repayment risk were being monitored.
- Foreign exchange and policy: The Venezuelan currency devaluation resulted in an $80 million loss and may continue to adversely affect translated earnings. Pricing and access pressures, healthcare legislation, government spending changes, currency movements and global economic weakness could affect results and guidance.
- Asset impairment and restructuring: Pfizer recorded $395 million of intangible-asset impairment charges in Q1 2013, mainly for acquired developed technology, reflecting updated commercial forecasts. Restructuring and certain acquisition-related costs were $138 million; total costs associated with acquisitions and productivity initiatives were $312 million.
Most important facts for investors to verify
- Whether the $55.3–$57.3 billion revenue and $1.44–$1.59 reported EPS guidance remains achievable, and how much reported results depend on exclusions and one-time items.
- Revenue and profit trends in products facing generic competition, particularly Lipitor, and the ability of newer products and Emerging Markets to offset those declines.
- The status and economic implications of any future separation or distribution of Pfizer’s remaining Zoetis ownership, including debt, cash and noncontrolling-interest effects.
- Progress on the R&D pipeline, regulatory decisions and manufacturing remediation, including the Catania FDA warning letter and key clinical programs.
- Changes in litigation reserves and outcomes, especially Quigley asbestos matters, hormone-replacement therapy cases and other material product or antitrust litigation.
- Collection of overdue government receivables, ongoing cash generation, investment liquidity and the balance of debt, dividends and share repurchases.