Pfizer Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter ended July 2, 2017; comparisons are with the quarter ended July 3, 2016. Cash-flow figures cover the six months ended July 2, 2017. Amounts are U.S. dollars unless stated otherwise. Interim financial statements are unaudited; KPMG performed a review, not an audit.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $12.896B | $13.147B | $25.675B | $26.152B |
| Income from continuing operations | $3.077B | $2.062B | $6.207B | $5.110B |
| Net income attributable to Pfizer | $3.073B | $2.047B | $6.194B | $5.085B |
| Diluted EPS | $0.51 | $0.33 | $1.02 | $0.82 |
| Cost of sales / revenue | 20.7% | 24.1% | 20.0% | 23.0% |
| Effective tax rate | 19.4% | 14.4% | 20.1% | 14.4% |
Q2 pretax income was $3.815B (29.6% of revenue), versus $2.410B (18.3%) a year earlier. Pfizer’s reported earnings growth was substantially affected by unusually high prior-year charges: Q2 2016 included $816M of asset impairments and $261M of legal charges; first-half 2016 included $947M and $534M, respectively. Lower cost of sales and lower restructuring and legal charges also benefited 2017 results, while higher intangible amortization and lower royalty income were offsets. Adjusted diluted EPS, a non-GAAP measure, was $0.67 for Q2 and $1.36 for the first half; the filing cautions that it is not a substitute for GAAP results.
Revenue and segments: Q2 revenue declined 2% year over year, including a $202M unfavorable foreign-exchange effect. Innovative Health (IH) revenue rose 8% to $7.671B; Essential Health (EH) fell 14% to $5.226B. IH growth reflected Ibrance, Eliquis, Xeljanz and Lyrica, partly offset by Prevnar 13 and Enbrel declines. EH weakness reflected the February sale of Hospira Infusion Systems (HIS), product losses of exclusivity and declines in established products; biosimilars provided some growth. First-half revenue also declined 2%. Geographic revenue was flat in the U.S., down 12% in developed Europe and up 6% in emerging markets in Q2.
Cash flow and balance sheet: First-half operating cash flow was $4.841B, down from $5.414B. Investing activities provided $3.034B, compared with $323M used in the prior-year period, largely reflecting lower acquisition spending and investment cash flows. Financing activities used $7.922B, including $5.0B of share repurchases and $3.855B of dividends. Cash ended at $2.585B. At July 2, 2017, total debt was $43.705B, cash and investments totaled $21.340B, and selected net financial liabilities were $22.364B. Working capital was $9.203B and the current ratio was 1.34:1. Long-term debt was $34.191B; short-term borrowings, including current debt, were $9.514B. Pfizer reported $7.7B of unused credit lines, of which $7.0B was committed.
Q2 dividends paid were $0.32 per share. Pfizer completed a $5B accelerated share repurchase in May and had approximately $6.4B of remaining repurchase authorization at quarter-end.
Material changes and notable items
- Pfizer completed the sale of HIS to ICU Medical on February 3, 2017. Consideration included approximately $200M net cash, ICU Medical shares valued at $428M, a $75M promissory note and potential contingent cash of up to $225M. Pfizer recorded $64M of first-half incremental loss charges; some local transfers remained pending, with completion expected by Q1 2018.
- EH revenue comparisons are affected by the HIS divestiture: Q2 2017 includes no HIS global operations, while Q2 2016 includes a full quarter.
- Pfizer recorded a net loss of approximately $30M related to its agreement to exit its 40% investment in Brazil’s Teuto; the transaction was expected to close in Q3 2017.
- Pfizer initiated enterprise-wide cost-reduction programs expected to run through 2019, with approximately $900M of costs and targeted annual savings of approximately $1.2B by 2020. The company also reported approximately $700M of Hospira-related savings achieved through July 2, 2017.
- The EU approved Besponsa in June. Pfizer recorded a $118M intangible asset and related payment obligations; additional fixed payments could arise if the product is approved in the U.S.
Outlook, commentary and risks
On August 1, 2017, Pfizer raised its 2017 adjusted diluted EPS guidance to $2.54–$2.60 from $2.50–$2.60. It forecast revenue of $52B–$54B, adjusted cost of sales of 20%–21% of revenue, adjusted R&D expense of $7.5B–$8.0B, adjusted SG&A of $13.7B–$14.7B, and approximately $200M of adjusted other income. Guidance assumes a $2.4B revenue headwind from recent and expected generic and biosimilar competition and a $0.2B revenue/$0.01 adjusted EPS adverse foreign-exchange impact. It excludes uncompleted business-development transactions and is subject to stated uncertainties.
Management cited pricing and payer-access pressure, patent expirations, generic and biosimilar competition, pipeline and regulatory outcomes, manufacturing issues, foreign exchange, and changing healthcare laws as significant risks. Expected exclusivity losses include U.S. Viagra in December 2017 and U.S. Lyrica in December 2018. The filing notes that the FDA issued a complete response letter for Retacrit in June 2017, citing matters related to a manufacturing-facility warning letter. Pfizer also disclosed ongoing litigation and government investigations, including intravenous-solutions antitrust litigation and a related DOJ investigation. Management said it did not believe pending matters would materially affect financial position, but could not estimate reasonably possible losses in excess of accrued amounts.
Other exposures include uncertain tax audits and positions, delayed government receivables in certain European markets, Venezuela currency and operating risks, and uncertainty over the business implications of Brexit. Management stated that liquidity was adequate for foreseeable needs. No material changes to the risk factors in the 2016 Form 10-K were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects the unusually large 2016 impairment and legal charges, versus underlying operating performance; compare GAAP and adjusted results.
- Whether growth in IH brands, particularly Ibrance, Eliquis and Xeljanz, can offset EH declines, HIS divestiture effects and upcoming patent expirations.
- Actual realization, timing and cash costs of the 2017–2019 productivity program and the expected $1.2B annual savings target.
- Debt, investment balances, operating cash flow and capital returns, including the effects of repurchases and dividends on financial flexibility.
- Progress on Retacrit and other pipeline/regulatory milestones, and the outcomes and potential financial exposure of significant litigation, investigations and tax matters.