Pfizer Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012; comparable period ended April 3, 2011. Amounts are U.S. dollars. Interim financial statements were reviewed by KPMG, not audited.
Business context and performance
Pfizer operates across biopharmaceuticals, animal health, consumer healthcare and nutrition. The quarter’s results were affected by multiple product exclusivity losses, especially U.S. Lipitor, alongside cost reductions and acquisitions. Pfizer reported that worldwide revenue fell 7% to $15.405 billion, including a 6% operational decline and a small unfavorable foreign-exchange effect.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $15.405 billion | $16.502 billion | Down 7% |
| Income from continuing operations | $1.803 billion | $2.224 billion | Down 19% |
| Net income attributable to Pfizer | $1.794 billion | $2.222 billion | Down 19% |
| Diluted EPS | $0.24 | $0.28 | Down 14% |
| Adjusted income (non-GAAP) | $4.432 billion | $4.808 billion | Down 8% |
| Adjusted diluted EPS (non-GAAP) | $0.58 | $0.60 | Down 3% |
| Operating cash flow | $2.774 billion | $4.642 billion | Down $1.868 billion |
Cost of sales was $2.974 billion, or 19.3% of revenue, versus $3.693 billion, or 22.4%, a year earlier. Continuing-operations pre-tax margin was 16.6%, versus 18.9%; continuing-operations net margin was 11.7%, versus 13.5%. The effective tax rate increased to 29.4% from 28.7%.
Cash and cash equivalents were $2.934 billion, short-term investments $21.038 billion, and long-term investments $10.632 billion. Total debt was $39.069 billion ($5.526 billion short-term and $33.543 billion long-term), leaving net financial liabilities of approximately $4.5 billion. Working capital was $27.769 billion and the current ratio was 2.02:1. Total assets were $185.683 billion and shareholders’ equity was $83.677 billion.
Cash used in financing was $3.507 billion, including $1.659 billion of share repurchases and $1.650 billion of dividends. Capital expenditures were $254 million. Cash declined by $248 million during the quarter.
Material changes versus the prior period
- U.S. Lipitor lost exclusivity in November 2011; worldwide Lipitor revenue fell 42% to $1.395 billion. Pfizer attributed a $922 million year-over-year revenue reduction to the U.S. loss of exclusivity.
- Revenue declines also reflected exclusivity losses for products including Xalatan, Caduet, Effexor, Geodon and Aromasin. Emerging Markets revenue rose 6%, while U.S. revenue fell 15% and Developed Europe revenue fell 8%.
- Established Products and Emerging Markets segment revenue increased 12% to $5.1 billion, partly reflecting products transferred after loss of exclusivity. Primary Care revenue declined 25% to $4.097 billion.
- Other deductions—net rose to $1.657 billion from $827 million, driven primarily by higher legal charges and asset impairments. Pfizer recorded a $450 million charge related to an agreement-in-principle to settle Brigham Young University’s Celebrex-related lawsuit, and approximately $395 million of intangible-asset impairments.
- Operating cash flow declined, primarily due to $451 million of tax payments versus $134 million of net tax refunds in the prior-year quarter, timing of receipts and payments, and the impact of Lipitor’s U.S. exclusivity loss.
Outlook, commentary and risks
- 2012 guidance: Revenue of $58–$60 billion; reported diluted EPS of $1.23–$1.38; adjusted diluted EPS of $2.14–$2.24. Guidance reflects the Nutrition divestiture decision and additional legal and impairment costs. The filing excludes any gain on the pending Nutrition sale and certain unresolved litigation outcomes.
- Nutrition sale: On April 23, 2012, Pfizer agreed to sell its Nutrition business to Nestlé for $11.85 billion in cash, subject to regulatory approvals and other closing conditions. Closing was expected by the first half of 2013. Pfizer expected a strategic decision on Animal Health during 2012 and any separation by July 2013.
- Cost program: Pfizer said it had achieved its $4–$5 billion cost-reduction target a year early. It expected 2012 adjusted R&D expense of approximately $6.5–$7.0 billion and said it was on track with its R&D productivity initiative.
- Commercial and pipeline risks: Management cited continuing generic competition and upcoming exclusivity or alliance-right expirations, including U.S. Revatio tablets and Detrol IR in September 2012, and the return of Aricept Japan rights to Eisai in December 2012. Prevnar 13 adult uptake could be affected by the advisory committee’s decision to defer a routine-use recommendation pending trial data.
- Legal and regulatory exposure: Pfizer faces extensive patent, product-liability, antitrust, securities, environmental and government-investigation matters. Management said it could not estimate the reasonably possible loss above accrued amounts for its contingencies; outcomes could materially affect results or cash flows in a period.
- Liquidity and market risks: Pfizer said it expected sufficient liquidity for the foreseeable future, citing operating cash flow, investments, capital-market access and credit facilities. It also identified foreign-exchange exposure, pricing pressure, delayed government receivables in parts of Europe, and uncertainty around healthcare policy and economic conditions.
Important facts for investors to verify
- Track Lipitor and other post-exclusivity products’ sales, generic entry and the resulting revenue and margin trajectory.
- Assess the assumptions underlying 2012 reported and adjusted guidance, including the treatment of legal, impairment, restructuring and Nutrition-related items.
- Monitor closing conditions, timing and proceeds allocation for the Nutrition sale, and Pfizer’s decision on Animal Health.
- Review material litigation developments, particularly the BYU settlement’s definitive agreement and remaining hormone-replacement, asbestos and government matters.
- Compare operating cash flow, debt, investment balances, pension contributions, buybacks and dividends with Pfizer’s capital-allocation plans.
- Evaluate pipeline and regulatory milestones, including Prevnar 13 adult evidence, tofacitinib review and other late-stage filings.