Pfizer Inc. — Form 10-Q Summary
Business context and reporting period
Reports the three and nine months ended September 27, 2009, compared with periods ended September 28, 2008. Pfizer is a global pharmaceutical and animal-health company. The results exclude Wyeth: Pfizer completed its approximately $68.2 billion acquisition on October 15, 2009, after the reporting period.
Financial highlights
| Metric | Third quarter 2009 | Nine months 2009 |
|---|---|---|
| Revenue | $11.621 billion, down 3% | $33.472 billion, down 7% |
| Income from continuing operations | $2.879 billion, up 27% | $7.871 billion, up 1% |
| Net income attributable to Pfizer | $2.878 billion, versus $2.278 billion | $7.868 billion, versus $7.838 billion |
| Diluted EPS | $0.43, versus $0.34 | $1.16, versus $1.16 |
| Adjusted income (non-GAAP) | $3.461 billion, down 17% | $10.377 billion, down 13% |
| Operating cash flow | Not stated for quarter | $11.762 billion, versus $12.265 billion |
Cost of sales was 15.4% of revenue for the quarter and 14.8% for the nine months, compared with 17.7% and 17.8%, respectively. Selling, informational and administrative expense was 28.2% and 28.4% of revenue; research and development expense was 14.0% and 15.0%.
At September 27, cash and cash equivalents were $4.234 billion and short-term investments were $48.239 billion. Total debt was $39.356 billion, comprising $6.954 billion short-term and $32.402 billion long-term. Pfizer reported net financial assets of $26.074 billion and working capital of $49.792 billion. These figures precede the Wyeth acquisition and its funding.
For the nine months, investing cash outflow was $26.905 billion, largely reflecting investment of proceeds from debt issuance; financing cash inflow was $17.215 billion. Pfizer issued approximately $24 billion of senior notes, paid $4.268 billion in dividends, and reported $4.234 billion cash at period-end. Quarterly dividends were reduced to $0.16 per share in 2009 from $0.32 in the comparable quarter.
Material changes versus the prior comparable period
- Revenue fell amid foreign-exchange headwinds, generic competition, patent expirations, pricing pressure and higher rebates. Foreign exchange reduced revenue by approximately $610 million in the quarter and $2.3 billion year to date.
- Major product declines included Lipitor (down 9% in the quarter and 11% year to date), Norvasc (down 13% in both periods), and Camptosar (down 33% and 39%). Lyrica, Sutent and alliance revenues grew.
- GAAP income improved despite lower sales, supported by lower cost-reduction implementation costs and the absence of approximately $900 million in prior-year NSAID litigation charges. Year-to-date income also benefited from lower acquisition-related in-process R&D charges.
- The effective tax rate increased to 27.5% for the quarter and 27.3% year to date, from 17.0% and 13.8%. Pfizer cited tax costs connected with Wyeth financing and the absence of prior-year tax benefits; a $174 million tax benefit partly offset the increase.
- Cash and investments rose substantially as debt proceeds were held ahead of the acquisition. Long-term debt increased from $7.963 billion at year-end 2008 to $32.402 billion at quarter-end.
Outlook, management commentary, risks and unusual items
Revised 2009 guidance, issued October 20, includes a limited period of Wyeth operations: revenue of $49–$50 billion, adjusted diluted EPS of $2.00–$2.05, and reported diluted EPS of $1.45–$1.50. Management cited patent expirations and other factors as near-term pressures, while expressing confidence in the combined company’s longer-term prospects.
Pfizer targeted approximately $6 billion in annual cost savings by the end of 2012, including $2 billion in Pfizer cost reductions and $4 billion in expected Wyeth synergies. Estimated related costs are $11.5–$13.5 billion through 2012; $2.3 billion had been incurred through September 27. These targets and estimates are forward-looking.
The Wyeth purchase price included approximately $44.2 billion cash for Wyeth shares and $23.3 billion in Pfizer shares, plus cash for awards. Pfizer funded the approximately $44.9 billion cash portion with available cash, cash equivalents and short-term investments. The purchase accounting and pro forma combined results were not yet available in this filing. Pfizer also guaranteed $10.3 billion of certain Wyeth debt after quarter-end. Credit agencies downgraded Pfizer’s long-term ratings in October, while retaining their highest commercial-paper ratings.
Key risks include patent challenges and generic entry, especially for Lipitor; regulatory and safety issues affecting products and pipeline candidates; healthcare pricing and access reforms; foreign exchange; litigation and tax uncertainty; and execution of Wyeth integration and planned savings. The filing reports a settlement of certain Nigeria Trovan proceedings and a $33 million state settlement related to Geodon promotion. Pfizer stated that it could not reasonably estimate maximum exposure or the range of possible loss beyond accrued amounts for certain contingencies.
Important facts for investors to verify
- Actual post-acquisition debt, cash usage, purchase-price allocation, pro forma results and integration costs when subsequently reported.
- Progress toward the $6 billion savings target, alongside restructuring and integration costs.
- Developments in Lipitor patent challenges and the timing and commercial impact of generic competition.
- Whether 2009 guidance was achieved, including the assumptions for exchange rates, taxes, Wyeth contribution and purchase accounting.
- Material updates to litigation, regulatory matters, product safety and unresolved tax positions.