Pfizer Inc. — First-Quarter 2011 Form 10-Q
Reporting period: Three months ended April 3, 2011; comparable period ended April 4, 2010. Financial statements are unaudited and were reviewed by the independent accountant. Pfizer completed its acquisition of King Pharmaceuticals in the quarter; reported results include about two months of King’s U.S. operations and one month of its international operations.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $16.502 billion | $16.576 billion | Down $74 million; essentially flat |
| Income from continuing operations | $2.224 billion | $2.014 billion | Up 10% |
| Net income attributable to Pfizer | $2.222 billion | $2.026 billion | Up 10% |
| Diluted GAAP EPS | $0.28 | $0.25 | Up 12% |
| Adjusted income | $4.808 billion | $4.862 billion | Down 1% |
| Adjusted diluted EPS | $0.60 | $0.60 | Flat |
| Operating cash flow | $4.642 billion | $(6.360) billion | Improved $11.002 billion |
Cost of sales was 22.4% of revenue versus 25.3%; research and development expense declined 6% to $2.091 billion, while selling, informational and administrative expense rose 2% to $4.503 billion. Pretax continuing-operations income was $3.118 billion, or 18.9% of revenue, versus $3.149 billion, or 19.0%. The effective tax rate fell to 28.7% from 36.0%, supporting higher GAAP earnings despite flat sales. Adjusted measures are non-GAAP and exclude specified acquisition, purchase-accounting, discontinued-operation and significant items.
Revenue headwinds included loss of exclusivity and generic competition, lower legacy-product sales, and a $166 million reduction from U.S. healthcare reform. Favorable foreign exchange added about $97 million, and King contributed $224 million. Prevnar/Prevenar 13 revenue rose to $996 million from $286 million; Lipitor declined 13% to $2.385 billion, Effexor XR declined 72% to $204 million, and Prevnar/Prevenar 7-valent declined 71% to $153 million. Emerging Markets revenue increased 10%; U.S. revenue declined 3%.
Cash, debt and liquidity
- Cash and cash equivalents were $730 million at April 3, down from $1.735 billion at December 31, 2010. Short-term investments were $23.279 billion; total financial assets were $34.226 billion.
- Total debt was $41.401 billion, down from $44.013 billion; net financial liabilities (debt less financial assets) were $7.175 billion, versus $5.787 billion. Long-term debt was $35.308 billion.
- Current assets were $58.244 billion and current liabilities $29.171 billion; working capital was $29.073 billion and the current ratio 2.00:1.
- Investing cash flow was $725 million, including $3.169 billion paid for King, net of acquired cash. Financing cash outflow was $6.404 billion, including $3.878 billion of long-term debt repayments, $1.430 billion of share purchases and $1.591 billion of dividends.
- Management cited operating cash flow, financial assets, capital-market access and credit facilities as supporting liquidity for the foreseeable future. At quarter-end, $8.2 billion of $9.4 billion in credit lines was unused; $7.1 billion was committed lending capacity.
Material changes, outlook and key risks
- King acquisition: Acquired for approximately $3.6 billion cash ($3.2 billion net of cash acquired). King contributed $224 million revenue and a $69 million loss attributable to Pfizer common shareholders in the included period. Purchase-price allocations remain provisional, including acquired asset values, contingencies and goodwill allocation.
- Guidance: After announcing the Capsugel sale, Pfizer revised 2011 revenue guidance to $65.2–$67.2 billion; it maintained reported diluted EPS guidance of $1.09–$1.24 and adjusted diluted EPS guidance of $2.16–$2.26. For 2012, revenue targets were revised to $62.2–$64.7 billion; reported diluted EPS targets remain $1.58–$1.73 and adjusted diluted EPS $2.25–$2.35. Guidance excludes potential effects of unresolved litigation and assumes no uncompleted business-development transactions.
- Portfolio and restructuring: Pfizer agreed to sell Capsugel for $2.375 billion cash, expected to close in Q3 2011 subject to conditions and regulatory approvals. A strategic review of businesses and assets was underway, with completion expected in the second half of 2011. The R&D productivity initiative is expected to incur $1.7–$2.4 billion in pretax charges; adjusted R&D expense is forecast at $8.0–$8.5 billion in 2011 and $6.5–$7.0 billion in 2012. Pfizer also expected $4–$5 billion in net cost reductions by end-2012 from initiatives begun since late 2008.
- Patent and product exposure: Pfizer expected U.S. Lipitor and Caduet to lose exclusivity in November 2011 and anticipated a substantial near-term loss of U.S. Lipitor revenue. Lipitor generated about $5.3 billion of U.S. revenue in 2010. Other recent or expected exclusivity losses include Effexor XR, Xalatan, Protonix and additional products.
- Legal and unusual items: Other deductions included $501 million of legal charges, primarily a $472 million hormone-replacement-therapy charge; Pfizer said further charges may be needed and could not estimate maximum exposure or the range of possible additional loss. A separate $157 million impairment related to a Wyeth-acquired in-process R&D compound. The Quigley asbestos reorganization plan was subject to court and claimant approval; proposed contributions include cash and non-cash assets valued above $550 million, in addition to settlement terms. A Neurontin antitrust class was certified, with damages potentially subject to trebling.
- Clinical, regulatory and operating risks: Embeda distribution was stopped and a voluntary recall initiated after a product specification issue. FDA responses or delays affected several applications, including tafamidis, taliglucerase alfa and Genotropin. Pfizer identified patent expiration, generic competition, pricing and access pressures, regulatory outcomes, R&D productivity, litigation, foreign exchange and macroeconomic conditions as risks. The Japan earthquake and tsunami occurred after quarter-end; management did not expect a material financial impact and had not changed guidance, but said it would continue evaluating effects.
- Capital allocation: Pfizer planned $5–$7 billion of 2011 share repurchases and paid a $0.20-per-share dividend in the quarter. The board declared another $0.20-per-share dividend payable June 7, 2011.
Important facts for investors to verify
- Whether Pfizer achieves revenue and EPS guidance as Lipitor’s U.S. exclusivity expires and other products face generic competition.
- King integration results, realization of expected synergies, and final acquisition accounting and contingency valuations.
- Capsugel sale closing, proceeds and any changes to portfolio strategy following the strategic review.
- Actual R&D restructuring charges, savings, and the pace and productivity of the development pipeline.
- Developments in hormone-replacement, asbestos, Neurontin and other litigation, including changes to accrued amounts.
- Operating cash generation, debt reduction, repurchases and dividend funding alongside acquisition and pension obligations.