Business context and reporting period
Pfizer Inc.’s unaudited Form 10-Q covers the quarter ended September 30, 2012, and the first nine months of 2012. Comparatives are the three and nine months ended October 2, 2011. Pfizer operates across biopharmaceuticals, Animal Health and Consumer Healthcare. Nutrition is presented as discontinued operations following the announced sale to Nestlé; results for prior periods were reclassified. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $14.0B | $16.6B | $43.9B | $49.1B |
| Income from continuing operations | $3.1B | $2.3B | $8.0B | $7.0B |
| Net income attributable to Pfizer | $3.2B | $3.7B | $8.3B | $8.6B |
| Diluted EPS, continuing operations | $0.41 | $0.30 | $1.06 | $0.88 |
| Diluted EPS, total | $0.43 | $0.48 | $1.09 | $1.08 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $11.8B | $15.0B |
Q3 revenue declined 16% and nine-month revenue declined 11%. Management attributed the decline chiefly to loss of Lipitor exclusivity and unfavorable foreign exchange. Lipitor revenue fell 71% in Q3 to $749M and 56% for the nine months to $3.4B. Q3 U.S. revenue fell 18%; developed Europe fell 26%. Emerging-markets revenue was down 2% in Q3 but up 4% year to date.
Continuing-operations pre-tax margin was 21.4% in Q3 versus 21.3% and 22.6% for the nine months versus 20.7%. Cost of sales was 19.1% of revenue in Q3 versus 20.5%, and 18.6% year to date versus 21.3%. These ratios reflect reported results, including the effects of revenue and expense mix.
Net income attributable to Pfizer fell 14% in Q3 and 4% year to date, despite higher continuing-operations income. Prior-year total net income included after-tax gains on the Capsugel sale of $1.3B in Q3 and $1.3B for the nine months. Conversely, 2012 continuing-operations income benefited from a roughly $1.1B tax benefit related to settlement of IRS audits for 2006–2008. Non-GAAP adjusted income declined 16% in Q3 to $3.9B and 8% year to date to $13.0B; adjusted diluted EPS was $0.53 and $1.72, respectively.
Operating cash flow was $11.8B for the nine months, down 21%; capital expenditures were $833M. Cash and cash equivalents were $4.5B at September 30. Short- and long-term investments totaled $31.9B; total debt was $38.9B, leaving net financial liabilities of $2.5B. Working capital was $28.0B and the current ratio 1.96, compared with $31.9B and 2.10 at year-end 2011. Pfizer paid $4.9B in dividends and repurchased $4.8B of shares during the nine months; dividends paid per share were $0.22 in Q3 and $0.66 year to date.
Material changes versus the prior comparable period
- Lipitor’s U.S. and international exclusivity losses drove the largest revenue decline; other patent expirations also weighed on Geodon, Xalatan, Caduet, Effexor and other products.
- Established Products and Emerging Markets segment revenue rose 2% in Q3 and 9% year to date, while Primary Care revenue fell 39% and 32%, respectively. Emerging-markets growth was partly offset by currency effects.
- Q3 and nine-month 2012 results included lower restructuring and acquisition-related costs than in 2011, but higher legal charges. Other deductions, net, increased to $962M in Q3 from $547M and to $3.3B year to date from $1.8B.
- Operating cash flow declined, with management citing lower sales and related cash generation, legal payments, higher inventory, taxes and timing of receipts and payments.
Outlook, management commentary, risks and unusual items
Pfizer forecast full-year 2012 revenue of $58–59B, reported diluted EPS of $1.30–$1.38 and adjusted diluted EPS of $2.14–$2.17. Guidance includes Nutrition operating results but excludes any gain on its pending sale and certain potential business-development or unresolved litigation effects. Management said it expected adjusted R&D expense of approximately $7.0–$7.25B for 2012 and was on track to meet its cost-reduction goal.
The planned $11.85B cash sale of Nutrition to Nestlé remained subject to regulatory clearances and other closing conditions. Pfizer was targeting an IPO of up to 20% of Zoetis in the first half of 2013 and said a full separation remained an option. A new $10B share-repurchase authorization announced November 1 would take effect only upon closing the Nutrition sale. Pfizer also announced its intention to acquire NextWave for $255M upfront plus up to $425M in sales milestones, subject to closing conditions.
Unusual legal items included a $491M charge for the Rapamune matter; Pfizer disclosed an agreement-in-principle involving approximately $257M of civil payments and $234M of criminal payments, with Wyeth to plead guilty to misdemeanor misbranding. Nine-month legal charges also included a $450M Celebrex-related settlement and hormone-replacement-therapy litigation charges. Final agreements or court approvals remained outstanding for certain matters. Management said it could not estimate the range of reasonably possible losses in excess of recorded legal accruals.
Key operating risks include further generic competition and patent or collaboration expirations, pricing and reimbursement pressure, foreign-exchange movements, clinical and regulatory outcomes, product safety, and litigation and government investigations. Pfizer reported approximately $1.3B of gross receivables from governments or agencies in Italy, Greece, Portugal, Spain and Ireland; $315M was more than one year past invoice date. Management considered its allowance appropriate but said it would continue monitoring collection risk. Pfizer stated it had liquidity for the foreseeable future, while noting that a further economic downturn could affect financing access.
Product and regulatory uncertainties included the FDA’s rejection of pediatric Revatio, a complete-response letter for tafamidis, and the resubmission of apixaban with an FDA goal date of March 17, 2013. Pfizer also reported that its U.S. defined-benefit plans would be frozen effective January 1, 2018, with a transition to an enhanced defined-contribution plan.
Most important facts for investors to verify
- Whether Pfizer achieved 2012 revenue and reported and adjusted EPS guidance, and how much results depended on the IRS tax benefit and excluded items.
- The pace and scale of generic erosion in Lipitor and other products, and growth in replacement products, established brands and emerging markets.
- Completion and proceeds of the Nutrition sale, and the timing and terms of any Zoetis IPO or separation and related share repurchases.
- Final costs, timing and outcomes of the Rapamune, Protonix and other legal matters, including hormone-replacement and asbestos litigation.
- Cash-flow conversion, European government receivable collections, debt and liquidity levels, and the effect of foreign exchange and pricing pressures.
- Regulatory decisions and clinical progress for key pipeline and product programs, including apixaban, tafamidis and Prevnar 13 adult use.