Business context and reporting period
Pfizer Inc. filed this unaudited Form 10-Q for the three months ended April 2, 2017. Pfizer manages commercial operations through Innovative Health (IH) and Essential Health (EH). International subsidiaries’ results are reported through February 26, 2017, versus February 28, 2016. The interim statements were reviewed by KPMG, not audited.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $12.779 billion | $13.005 billion |
| Income before tax | $3.951 billion | $3.561 billion |
| Net income attributable to Pfizer | $3.121 billion | $3.038 billion |
| Diluted GAAP EPS | $0.51 | $0.49 |
| Diluted adjusted EPS (non-GAAP) | $0.69 | $0.67 |
| Operating cash flow | $1.589 billion | $1.808 billion |
| Capital expenditures | $358 million | $301 million |
Revenue fell 2% (1% operationally and 1% from foreign exchange); income before tax rose 11%, and Pfizer-attributable net income rose 3%. GAAP net margin was 24.4%, compared with 23.4%; cost of sales declined to 19.3% of revenue from 21.9%. Operating cash flow was lower year over year, reflecting net income after noncash adjustments and timing of receipts and payments. Cash flow less capital expenditures was approximately $1.231 billion.
IH revenue increased 5% to $7.415 billion; EH revenue declined 10% to $5.364 billion, including the effect of selling Hospira Infusion Systems (HIS). Growth included Ibrance, Eliquis, Lyrica IH and Xeljanz; declines included Peri-LOE and legacy established products, Prevnar 13 and Enbrel outside the U.S. and Canada. Revenue deductions rose 9% to $4.367 billion, principally reflecting higher contract rebates, sales allowances and chargebacks.
At April 2, 2017, cash and cash equivalents were $4.057 billion and short-term investments were $10.503 billion. Total debt was $44.010 billion ($7.680 billion short-term and $36.330 billion long-term), up from $42.085 billion at year-end 2016. Selected net financial liabilities were $22.103 billion, versus $17.118 billion. Working capital was $11.014 billion and the current ratio was 1.44:1. Pfizer reported $7.7 billion of unused credit lines, including $7.1 billion of committed lines.
Material changes and notable items
- IH growth was more than offset by EH declines and the HIS disposition; Q1 revenue also faced an estimated $300 million headwind from fewer selling days.
- Pretax income benefited from lower cost of sales and fewer legal charges and impairments than in Q1 2016. Amortization of intangible assets increased 18% to $1.186 billion, mainly due to acquired Medivation and Anacor assets. The effective tax rate increased to 20.8% from 14.4%, largely because certain prior-year tax benefits did not recur.
- Pfizer completed the HIS sale to ICU Medical on February 3, receiving approximately $200 million net cash, ICU Medical shares valued at $428 million, and a $75 million note; up to $225 million of additional contingent cash may be payable based on performance targets. Pfizer recorded a $37 million loss on the sale.
- Pfizer paid $5 billion under an accelerated share repurchase agreement, initially receiving about 126 million shares. Approximately $6.4 billion remained authorized for repurchases at quarter-end. Cash dividends paid were $0.32 per share, versus $0.30 a year earlier.
- Pfizer issued $5.3 billion of long-term debt during the quarter. It also made a voluntary $1.0 billion contribution to its U.S. qualified pension plan.
Guidance, outlook and risks
On May 2, 2017, Pfizer reaffirmed 2017 guidance: revenue of $52–$54 billion; adjusted diluted EPS of $2.50–$2.60; adjusted cost of sales of 20%–21% of revenue; adjusted SI&A of $13.7–$14.7 billion; adjusted R&D of $7.5–$8.0 billion; and an adjusted effective tax rate of approximately 23%. Guidance assumes a $2.4 billion revenue impact from recent and expected generic and biosimilar competition and a $0.5 billion revenue and $0.03 adjusted EPS headwind from foreign exchange. It excludes uncompleted business-development transactions. These are non-GAAP measures; Pfizer did not provide a forward GAAP reconciliation.
Management cited ongoing pricing and access pressure, patent expirations and generic/biosimilar competition, foreign-exchange volatility, regulatory and clinical-development uncertainty, and integration and execution risks. Pfizer expected to incur about $900 million in costs over 2017–2019 for new productivity initiatives, targeting approximately $1.2 billion in savings by 2020; about one-quarter of the costs were expected to be noncash. The company also anticipated $1 billion in annual Hospira-related savings by 2018 and reported approximately $660 million achieved through April 2, 2017.
Contingencies include extensive patent, product-liability, antitrust, environmental and government matters. Pfizer said it could not estimate reasonably possible legal losses above amounts accrued, and did not believe pending matters would materially affect financial position, while acknowledging a material effect on results or cash flows could arise in a period of resolution or payment. Notable matters include a DOJ investigation and private litigation concerning intravenous-solution sales, a U.K. competition authority fine of £84.2 million that Pfizer appealed, and other product and patent disputes. Management also highlighted uncertainty around healthcare policy and pricing, Brexit, and operating conditions and asset recoverability in Venezuela.
Key facts for investors to verify
- Whether IH growth and launches can offset EH erosion, upcoming loss of exclusivity, and further rebate and pricing pressure.
- How the HIS sale’s contingent consideration, final adjustments and remaining local-market transfers develop.
- Progress toward the stated cost savings, and the cash and earnings effects of restructuring and integration costs.
- Debt and liquidity trends after the quarter’s borrowing, share repurchases, dividends and pension contribution.
- Developments in significant litigation, investigations and tax audits, for which the filing provides no clear estimate of potential losses beyond recorded accruals.
- Whether Pfizer achieves its 2017 guidance assumptions, especially generic competition, foreign exchange, regulatory milestones and product demand.