Pfizer Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended July 1, 2018; international subsidiaries report through May 27, 2018. Financial statements are unaudited. Comparisons are with the periods ended July 2, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First six months 2018 | First six months 2017 |
|---|---|---|---|---|
| Revenue | $13.466B | $12.896B | $26.373B | $25.675B |
| Income from continuing operations | $3.879B | $3.077B | $7.450B | $6.207B |
| Net income attributable to Pfizer | $3.872B | $3.073B | $7.432B | $6.194B |
| Diluted EPS | $0.65 | $0.51 | $1.24 | $1.02 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.830B | $4.824B |
Q2 reported revenue rose 4% (2% operationally, with a 3% favorable foreign-exchange impact); six-month revenue rose 3% despite a $109M operational decline, as favorable foreign exchange added $806M. GAAP diluted EPS increased 28% in both comparisons. Q2 gross margin was approximately 78.3%, versus 79.4%; six-month gross margin was 79.2%, versus 80.0%. Net margin was approximately 28.8% in Q2 versus 23.8%.
Growth was led by Innovative Health (IH): Q2 revenue increased 8% to $8.273B; six-month revenue rose 7% to $16.102B. Essential Health (EH) Q2 revenue declined 1% to $5.193B and six-month revenue declined 3% to $10.271B. Eliquis, Ibrance and Xeljanz were notable growth drivers. Offsetting factors included generic competition for Viagra, declines in legacy and peri-LOE products, biosimilar pressure on Enbrel, and continuing sterile-injectable shortages.
Cash, debt and liquidity
- At July 1, cash and cash equivalents were $2.704B; short- and long-term investments totaled $17.322B. Working capital was $5.146B and the current ratio was 1.16:1, down from 1.35:1 at year-end 2017.
- Total short- and long-term debt was $40.518B, down from $43.491B at December 31, 2017. Selected net financial liabilities were $20.493B, compared with $16.484B at year-end, primarily reflecting reduced short-term investments.
- Six-month investing cash flow was a $8.193B source, largely reflecting investment redemptions; financing cash flow was a $12.628B use, including $6.063B of share repurchases and $4.021B of dividends. Cash and restricted cash ended the period at $2.811B.
- Pfizer reported $7.6B of unused credit lines, including $7.0B available under a revolving facility expiring in 2022, and said it expects to meet liquidity needs for the foreseeable future.
Material changes, outlook and unusual items
- Management updated 2018 guidance on July 31: revenue of $53.0B–$55.0B; adjusted diluted EPS of $2.95–$3.05; adjusted R&D expense of $7.7B–$8.1B; and an adjusted-income tax rate of approximately 16%. Revenue and EPS ranges were reduced from $53.5B–$55.5B and $2.90–$3.00, respectively. Adjusted other income/deductions guidance increased to approximately $1.0B of income, mainly reflecting first-half gains and collaboration and licensing income. Guidance assumes no U.S. Lyrica generic competition until June 2019, contingent on a six-month pediatric exclusivity extension Pfizer is pursuing.
- Management attributed stronger GAAP earnings partly to a lower effective tax rate (14.3% Q2; 13.9% for six months, versus 19.4% and 20.1%), reflecting the Tax Cuts and Jobs Act, earnings mix and tax-position resolutions. Tax accounting under the law remained provisional; Pfizer expected to complete its analysis during 2018. The company recorded a $15.2B repatriation-tax liability, with payment planned over eight years through 2026.
- Other income included $337M of six-month unrealized equity-security gains, $316M of collaboration, out-licensing and product-rights income, and a $107M net benefit from certain legal matters. These items, along with tax effects and purchase-accounting adjustments, make reported earnings less directly comparable; six-month adjusted diluted EPS was $1.58 versus $1.36.
- Pfizer contributed its allogeneic CAR T program assets to Allogene and received a 25% ownership interest, recording a $50M noncash gain. It also received $75M upfront for a compound-rights sale to Biogen, with up to $515M in potential milestones plus royalties.
- Management planned to reorganize into Innovative Medicines, Established Medicines and Consumer Healthcare businesses effective in fiscal 2019. Strategic alternatives for Consumer Healthcare remained under review, with a decision expected in 2018; no acceptable sale offer had been received.
- Pfizer reported that July 10 price increases effective July 1 were deferred and prices returned to pre-July 1 levels; price declines already implemented remained in effect. Management cited continuing payer and government pricing pressure.
- Legacy Hospira sterile-injectable supply constraints continued to weigh on EH results. Pfizer said remediation and facility upgrades were ongoing, with additional capacity expected from 2019 onward. Puerto Rico facilities had resumed operations after hurricane disruption, though remediation and possible product shortages remained risks.
- Other notable exposures include patent and product litigation, government investigations, and tax audits. Management said it did not expect pending legal matters to materially affect financial position, but could not estimate reasonably possible losses above accrued amounts. A pneumococcal-vaccine patent ruling invalidated some claims and was appealed; other challenges remained pending.
Important facts for investors to verify
- Whether growth in key IH brands can offset patent expirations, generic and biosimilar competition, and EH product declines.
- Progress in sterile-injectable remediation, product availability and the expected timing of added capacity.
- Delivery against updated 2018 guidance, particularly R&D spending, foreign-exchange assumptions, tax-rate estimates and the conditional Lyrica exclusivity assumption.
- Final TCJA accounting and cash-tax implications, including the repatriation-tax payment schedule.
- Outcomes of Consumer Healthcare strategic review, patent disputes, litigation and government investigations.
- Effect of equity-market movements on reported earnings: the new accounting standard records certain equity investment fair-value changes in net income.