Pfizer Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; comparisons are with the three months ended March 31, 2013. Amounts are in U.S. dollars unless noted. Interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context and period
Pfizer operates through Global Innovative Pharmaceutical (GIP), Global Vaccines, Oncology and Consumer Healthcare (VOC), and Global Established Pharmaceutical (GEP). The company completed the divestiture of Animal Health business Zoetis in 2013; its prior-period results are presented as discontinued operations. Pfizer introduced its new commercial-segment structure in 2014, and 2013 segment comparisons include allocated costs.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $11.353 billion | $12.410 billion | Down 9% |
| Income from continuing operations | $2.265 billion | $2.616 billion | Down 13% |
| Net income attributable to Pfizer | $2.329 billion | $2.750 billion | Down 15% |
| Diluted EPS | $0.36 | $0.38 | Down 5% |
| Operating cash flow | $2.935 billion | $2.303 billion | Up 27% |
Continuing-operations pretax margin was 25.1% versus 30.0%; continuing-operations income margin was 20.0% versus 21.1%. Cost of sales was 18.0% of revenue, compared with 18.2%. The effective tax rate fell to 20.4% from 29.8%, largely reflecting favorable resolutions of prior-year tax positions and other tax factors.
Adjusted diluted EPS, a non-GAAP measure, was $0.57 versus $0.51; adjusted income was $3.665 billion versus $3.740 billion. Pfizer excludes purchase-accounting adjustments, acquisition-related costs, discontinued operations and selected significant items from adjusted results. Q1 2014 included $1.016 billion of pretax significant items, including $694 million of legal charges and $114 million of asset impairment charges.
Cash and cash equivalents were $2.862 billion at March 30, 2014. Short- and long-term investments totaled $46.841 billion; total debt was $36.968 billion, comprising $9.319 billion of short-term borrowings and current maturities and $27.649 billion of long-term debt. Pfizer reported net financial assets of $12.735 billion, working capital of $33.003 billion and a current ratio of 2.33:1. Operating cash flow exceeded cash dividends paid of $1.662 billion and share repurchases of $1.197 billion. Cash increased $679 million during the quarter.
Dividends paid per common share were $0.26 versus $0.24. Weighted-average diluted shares declined to 6.476 billion from 7.269 billion. The balance sheet showed total assets of $171.808 billion and total equity of $78.068 billion.
Material changes versus the prior period
- Revenue declined 9%: an operational decrease of 6% and an unfavorable foreign-exchange impact of approximately 3% ($364 million). U.S. revenue fell 13%; international revenue fell 6%.
- Major revenue pressures included the end of Enbrel U.S./Canada co-promotion, lower Pfizer share of Spiriva collaboration revenue, generic competition for Lipitor and Viagra, and loss of exclusivity for Detrol LA. Growth in Lyrica, Xalkori, Inlyta, Eliquis and Xeljanz partly offset declines.
- GEP revenue fell 13%, GIP fell 7%, and VOC fell 1%. Pfizer reported growth in oncology launches, while consumer healthcare revenue declined amid milder cold-and-flu conditions and increased competition.
- Other deductions, net, rose to $623 million from $145 million, principally reflecting higher legal charges and the absence of a $490 million Hisun product-rights transfer gain recorded in 2013. Lower impairments, increased Enbrel royalty income and asset-disposal gains partly offset these items.
- Cash from operations increased primarily because of the timing of ordinary-course receipts and payments. Investing cash use was much lower than in 2013, which included substantial net investment purchases.
Outlook, commentary and risks
- Pfizer confirmed its 2014 adjusted guidance: adjusted revenue of $49.2–$51.2 billion; adjusted cost of sales of 19.0%–20.0% of adjusted revenue; adjusted SI&A of $13.5–$14.5 billion; adjusted R&D of $6.4–$6.9 billion; adjusted other income/deductions of approximately $100 million; adjusted tax rate of approximately 27%; and adjusted diluted EPS of $2.20–$2.30. The guidance assumes approximately 6.4 billion diluted weighted-average shares and excludes uncompleted business-development transactions.
- Reported diluted EPS guidance was no longer valid after first-quarter litigation charges; Pfizer said it would provide updated reported guidance as soon as practicable. The adjusted guidance assumes a full-year U.S. Celebrex contribution; the company said it might revise the outlook depending on market exclusivity from May 30 onward.
- Pfizer expects approximately $3.2 billion of restructuring and related program costs during 2014–2016, about one-quarter non-cash, and approximately $2.9 billion in annual cost savings by the end of 2016. Plans include exiting nine manufacturing sites and reorganizing commercial operations.
- Legal matters are a significant uncertainty. Q1 included approximately $620 million of Neurontin-related charges and $50 million for an Effexor matter. Pfizer reached a $325 million agreement-in-principle to settle specified Neurontin payer and individual actions and a separate $190 million settlement agreement for a Neurontin antitrust action; both were subject to court approval. Pfizer said it could not estimate reasonably possible losses in excess of accrued amounts. For an Effexor-related Canadian case, it expected damages of about C$120 million before credit for prior payments, or a net liability of about C$67.5 million; judgment had not yet been issued.
- After quarter-end, Pfizer submitted a revised proposal to combine with AstraZeneca, offering AstraZeneca shareholders 1.845 shares in the combined entity plus 1,598 pence in cash per share. AstraZeneca rejected the proposal; Pfizer was considering its options. Any transaction’s terms, completion and benefits were uncertain.
- Other notable risks include continuing patent expirations and generic competition, pricing and reimbursement pressure, foreign-exchange exposure, product-development and regulatory uncertainty, and delayed government receivables. Pfizer reported about $900 million of gross receivables from governments or agencies in Italy, Spain, Greece, Portugal and Ireland; $100 million was more than one year past invoice date.
- In Venezuela, Pfizer used the official CENCOEX rate of 6.3 bolivars per U.S. dollar for reporting despite multiple official exchange rates. Net monetary assets subject to revaluation were about $360 million, and Q1 revenue from Venezuela was about $150 million.
Important facts for investors to verify
- Whether the revenue decline and pressure from generic competition and expired collaboration rights continue, and whether newer products offset those losses.
- The composition, timing and cash impact of litigation liabilities, especially the Neurontin settlements and the expected Effexor judgment.
- Progress against restructuring costs and the projected $2.9 billion annual savings target.
- Any change to 2014 reported or adjusted guidance, including the impact of Celebrex exclusivity and any AstraZeneca-related developments.
- Recoverability of government receivables and the effects of currency controls, exchange rates and pricing actions in international markets.
- How much of adjusted earnings reflects exclusions versus GAAP results; adjusted measures are non-GAAP and are not directly comparable across companies.