Pfizer Inc. — Q2 2009 Form 10-Q
Business context and period: Global pharmaceutical and animal-health company; quarter ended June 28, 2009. Financial statements are unaudited and were reviewed, not audited. Comparisons are with the quarter ended June 29, 2008; cash flows cover the first six months.
Financial results and key metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $10.984B | $12.129B | $21.851B | $23.977B |
| Income from continuing operations | $2.263B | $2.765B | $4.992B | $5.559B |
| Net income attributable to Pfizer | $2.261B | $2.776B | $4.990B | $5.560B |
| Diluted EPS | $0.34 | $0.41 | $0.74 | $0.82 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $7.661B | $8.313B |
- Revenue fell 9% in both the quarter and first half. Pharmaceutical revenue declined 9% in Q2 and 8% in the first half; Animal Health declined 9% and 11%, respectively.
- Q2 cost of sales was 16.0% of revenue (18.9% prior year); selling, informational and administrative expense was 30.5% (31.8%); R&D was 15.4% (16.2%). Continuing-operations income was 20.6% of revenue versus 22.8%.
- Management attributed earnings pressure to foreign exchange, a higher effective tax rate, lower net interest income/higher interest expense, and Wyeth transaction costs. Cost savings and lower restructuring implementation and in-process R&D charges partly offset these effects. Q2 effective tax rate was 25.8%, versus 0.9%; first-half rate was 27.1%, versus 12.4%. Prior-year rates benefited from tax settlements and a business sale.
- Q2 GAAP net income fell 19%; first-half net income fell 10%. Adjusted income, a non-GAAP measure, was $3.249B in Q2, down 12%, and $6.916B for six months, down 11%. Adjusted diluted EPS was not stated for the periods in the provided income statement.
- Q2 revenue declines were broad: Lipitor fell 10%, Norvasc 17%, Camptosar 38%, and Chantix/Champix 7%. Lyrica rose 2%, Revatio 30%, and alliance revenues 6%. Foreign exchange reduced total revenue by about $1.1B in Q2 and $1.7B in the first half; higher U.S. rebates also weighed on sales.
- First-half investing cash outflow was $26.607B, chiefly reflecting net investment purchases; financing cash inflow was $19.043B, largely debt issuance. Cash and equivalents ended at $2.244B, versus $2.122B at year-end 2008.
- At June 28, total debt was $39.509B ($7.645B short-term and $31.864B long-term), versus $17.283B at year-end. Pfizer issued about $24B of senior notes principally to finance the pending Wyeth acquisition. Net financial assets were $23.649B. Current assets were $71.550B, current liabilities $26.109B, and the current ratio 2.74:1.
Changes, outlook and material items
- Wyeth transaction: Pending cash-and-stock acquisition valued at approximately $68B when announced. Wyeth shareholders and the European Commission approved it in July 2009; other approvals and closing conditions remained. Pfizer expected closing late Q3 or in Q4 2009. The EU approval required divestiture of certain animal-health assets. Pfizer had incurred $682M of acquisition-related costs in the first half.
- Guidance updated July 22, 2009: Revenue $45B–$46B; adjusted diluted EPS $1.90–$2.00; reported diluted EPS $1.30–$1.45. These ranges exclude uncompleted business-development transactions and certain unforecast litigation effects. Management cited lower expected 2009 cost-reduction charges for the reported EPS increase.
- Pfizer projected approximately $4B of annual Wyeth-related cost savings by end-2012, with estimated $6B–$8B of acquisition restructuring and integration costs. Separately, a new cost program targets about $3B gross savings by end-2011, with about $1B reinvested and a planned 10% workforce reduction.
- The quarterly dividend was reduced to $0.16 per share beginning in Q2, from $0.32 in the prior-year quarter; the merger agreement capped the dividend at $0.16 absent Wyeth consent.
- Major business risks include generic competition and patent expirations (including Lipitor’s basic U.S. patent expiry expected in 2010), pricing and rebate pressure, foreign exchange, recession-related demand effects, regulatory and safety decisions, and healthcare or tax reform. The filing also notes pipeline uncertainty and possible acquisition-closing delays.
- Unusual legal matter: Pfizer agreed in July 2009 to fund up to $35M for participants in the 1996 Trovan study, $30M for Kano State healthcare initiatives, and $10M in legal costs; Pfizer denied wrongdoing. Other litigation and tax audits remained, and the company said loss exposure beyond accrued amounts could not be reasonably estimated for many matters.
- Product and pipeline developments included July 2009 boxed-warning and label changes for Chantix; several Phase 3 trials of Sutent in cancer were discontinued for futility. Management expected 15 new molecular entities or indications to enter Phase 3 during 2008–2009, 24–28 programs in Phase 3 by year-end 2009, and 15–20 regulatory submissions in 2010–2012.
Most important facts for investors to verify
- Whether and when the Wyeth acquisition closed, its final financing and purchase accounting, required divestitures, and realized savings versus the projected $4B.
- Whether revenue and EPS guidance was achieved, particularly given foreign-exchange exposure, rebates, patent expirations, and generic competition.
- How much of reported earnings and future performance depends on restructuring, acquisition costs, purchase-accounting adjustments, and management’s non-GAAP adjusted-income measure.
- Debt, interest expense, credit ratings, and liquidity after the acquisition; the filing anticipated possible long-term rating reductions.
- Material outcomes in patent, product-liability, and tax matters, including Lipitor and Norvasc challenges and the remaining Trovan proceedings.