Pfizer Inc. — Form 10-Q Summary
Reporting period: Three months ended April 4, 2010; comparative period ended March 29, 2009. Financial statements are unaudited and were reviewed by the independent registered public accounting firm. Pfizer acquired Wyeth on October 15, 2009, so 2010 includes Wyeth operations while 2009 does not; reported year-over-year growth is therefore not directly comparable.
Financial performance and position
| Metric | Q1 2010 | Comparable period |
|---|---|---|
| Revenue | $16.750 billion | $10.867 billion |
| Income from continuing operations | $2.033 billion | $2.729 billion |
| Net income attributable to Pfizer | $2.026 billion | $2.729 billion |
| Diluted EPS | $0.25 | $0.40 |
| Adjusted income and adjusted diluted EPS (non-GAAP) | $4.882 billion; $0.60 | $3.667 billion; $0.54 |
| Operating cash flow | $(6.360) billion | $3.147 billion |
| Cash and cash equivalents | $1.759 billion | $1.978 billion at Dec. 31, 2009 |
| Total debt | $46.050 billion | $48.662 billion at Dec. 31, 2009 |
- Revenue rose 54%, primarily from $5.3 billion of Wyeth sales and a $733 million favorable foreign-exchange impact; legacy Pfizer product revenue declined $137 million. Management reported a $56 million Q1 revenue impact from U.S. healthcare legislation.
- GAAP continuing-operations margin was 12.1% of revenue versus 25.1%; pretax margin was 19.0% versus 35.0%. Cost of sales rose to 25.7% of revenue from 13.0%, reflecting acquisition-related inventory fair-value charges and business mix.
- GAAP net income fell 26% and diluted EPS fell 38%, with Wyeth-related purchase accounting, operating costs, restructuring and acquisition expenses, higher net interest expense, and a higher effective tax rate weighing on results. Adjusted income increased 33%; this is a company-defined non-GAAP measure and excludes significant items.
- Operating cash outflow chiefly reflected approximately $10.5 billion of tax payments tied to transactions used to finance the Wyeth acquisition, along with timing of ordinary receipts and payments. Investing activities provided $9.394 billion, mainly from net investment redemptions; financing activities used $3.211 billion.
- At April 4, cash, short-term investments and loans totaled $18.181 billion; working capital was $23.992 billion and the current ratio was 1.93. Financial assets were $30.262 billion against $46.050 billion of debt, leaving net financial liabilities of $15.788 billion, compared with $8.376 billion at year-end 2009.
- Cash dividends paid were $0.18 per share, versus $0.32 in the prior-year quarter. The board declared a further $0.18 per-share dividend payable June 1, 2010.
Material changes, outlook and management commentary
- The Wyeth acquisition expanded Pfizer’s portfolio and drove most of the reported revenue increase. Provisional acquisition accounting remains subject to change, including valuations of intangibles and inventory, legal contingencies, tax balances and goodwill allocation.
- Pfizer reaffirmed 2010 guidance at April 2010 exchange rates: revenue of $67.0–$69.0 billion, reported diluted EPS of $0.95–$1.10 and adjusted diluted EPS of $2.10–$2.20.
- For 2012, Pfizer reduced its revenue target range by $800 million following U.S. healthcare reform, to $65.2–$67.7 billion; it reaffirmed reported diluted EPS targets of $1.58–$1.73 and adjusted diluted EPS targets of $2.25–$2.35.
- Management estimated cost reductions, net of business investment, of $4–$5 billion by year-end 2012, and total cost-reduction and acquisition-related costs of approximately $11.5–$13.5 billion through 2012. Approximately $6.3 billion had been incurred through April 4, 2010, excluding transaction costs.
- Healthcare reform was expected to reduce revenue by approximately $300 million in 2010, $900 million in 2011 and $800 million in 2012. The legislation also prompted a $270 million deferred-tax-asset write-off in Q1. A $410 million tax benefit from resolutions of prior-year foreign tax positions partly offset the higher tax burden; the effective tax rate was 36.0%, versus 28.2%.
- Key commercial risks include generic and branded competition, pricing and reimbursement pressure, foreign-exchange movements, and patent expirations. Pfizer expected U.S. Lipitor exclusivity to end in November 2011 and anticipated U.S. Effexor XR and Aricept exclusivity losses later in 2010.
- Product-development and safety uncertainties include an FDA request to revise Sutent labeling to address hepatotoxicity, including a likely boxed warning; two Phase 3 Sutent breast-cancer trials that missed primary endpoints; and discontinuation of a Sutent liver-cancer trial. Several other applications remained under FDA review or required additional information.
- Pfizer said it believed it could meet foreseeable liquidity needs, citing operating cash flows, financial assets, capital-market access and credit facilities. It had $8.3 billion of unused credit lines, including $7.1 billion committed by lenders.
Risks, contingencies and unusual items
- Pfizer and subsidiaries face patent, product-liability, securities, commercial, environmental and tax matters. The company said it did not believe outstanding proceedings would materially adversely affect its financial position, but noted litigation outcomes and potential losses are uncertain and could materially affect results in a particular period.
- In April 2010 Pfizer agreed, subject to court approval, to guarantee up to $1.5 billion of certain Wyeth obligations under the diet-drug settlement agreement.
- The company recorded $706 million of restructuring and certain acquisition-related costs in Q1; total costs associated with restructuring and the Wyeth acquisition were $799 million when additional depreciation is included. Wyeth integration and cost-reduction execution remain significant.
- U.S. and foreign tax audits and uncertain tax positions remain open; management stated that timing and potential adjustments are difficult to estimate.
- Other risks identified include R&D and regulatory outcomes, manufacturing disruption, healthcare-policy changes, foreign-exchange and interest-rate fluctuations, weak economic conditions, and the ability to realize Wyeth synergies.
Important facts for investors to verify
- Separate acquisition-driven revenue growth from underlying legacy Pfizer performance, and assess product-level trends against patent and competitive pressures.
- Review the reconciliation and exclusions in adjusted income and adjusted EPS; these non-GAAP measures are not substitutes for reported results.
- Confirm whether the large Q1 operating cash outflow was primarily a one-time tax-payment effect and monitor cash generation and debt reduction in subsequent periods.
- Track actual healthcare-reform impacts against management’s revenue estimates and the revised 2012 target range.
- Monitor delivery of the $4–$5 billion cost-reduction target, integration costs, and finalization of provisional Wyeth purchase accounting.
- Follow Lipitor, Effexor XR and Aricept exclusivity developments, Sutent safety and labeling actions, and the outcomes of material patent, product-liability and tax matters.