Pfizer Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended April 1, 2018. Amounts are in U.S. dollars unless noted. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
Pfizer reorganized its commercial operations at the start of 2019 into Biopharma, Upjohn and Consumer Healthcare; Biopharma and Upjohn are its reportable segments. Pfizer agreed to combine Consumer Healthcare with GSK’s business in a joint venture, in which Pfizer expects to hold 32%. The transaction was expected to close in the second half of 2019, subject to conditions and regulatory approvals.
Financial performance
- Revenue: $13.118 billion, up 2% reported and 5% operationally; foreign exchange reduced revenue by $453 million (about 4%). Biopharma revenue increased 3% to $9.185 billion; Upjohn declined 1% to $3.075 billion; Consumer Healthcare declined 5% to $858 million.
- Revenue drivers: Key brands Eliquis, Ibrance, Prevnar 13 and Xeljanz continued to grow. Eliquis revenue rose 32% to $1.011 billion, Ibrance 21% to $1.133 billion, and Xeljanz 30% to $423 million. Lyrica declined 2% to $1.186 billion; Viagra declined 22% to $145 million.
- Profit and margins: Net income attributable to Pfizer was $3.884 billion, up 9%; diluted GAAP EPS was $0.68, up from $0.59. Pretax income was $4.323 billion, up 5%. Cost of sales was 18.5% of revenue versus 19.9%; income from continuing operations was 29.6% of revenue versus 27.7%. The effective tax rate was 10.0%, down from 13.5%.
- Cash flow: Operating cash flow was $1.698 billion, down from $1.983 billion. Investing activities provided $7.550 billion, primarily reflecting investment maturities and sales; financing activities used $8.467 billion. Cash and cash equivalents were $1.937 billion at quarter-end.
- Liquidity and debt: Current assets were $45.290 billion and current liabilities $29.423 billion; working capital was $15.867 billion and the current ratio 1.54. Short- and long-term debt totaled $45.143 billion, versus $41.740 billion at year-end 2018. Selected financial assets totaled $14.478 billion, resulting in selected net financial liabilities of $30.665 billion, compared with $20.140 billion at year-end.
- Capital returns: Pfizer repurchased $8.865 billion of shares and paid $2.045 billion in dividends during the quarter. The board declared a $0.36-per-share dividend in April.
Material changes and unusual items
- Reported revenue growth was partly offset by foreign-exchange headwinds. Emerging Markets revenue rose 8% reported, with operational growth of 17%; U.S. revenue declined 2%.
- Other income/deductions shifted to $92 million of net deductions from $178 million of net income. Q1 2019 included a $138 million loss on early retirement of euro debt, $150 million of asset impairment charges (including $130 million of intangible impairments), and $119 million of business and legal entity alignment costs. Equity-security gains of $111 million partly offset these items.
- Pfizer issued $5.0 billion of senior unsecured notes and repurchased €1.1 billion principal amount of euro debt for €1.3 billion. The debt retirement contributed to the $138 million loss.
- Pfizer adopted the new lease standard, recording $1.4 billion of operating lease assets and liabilities at adoption. At March 31, operating lease liabilities were $1.296 billion.
Outlook, management commentary and risks
- 2019 guidance, updated April 30: Revenue of $52–$54 billion; adjusted diluted EPS of $2.83–$2.93, raised by $0.01 at the midpoint. Adjusted other income/deductions is expected to be approximately $200 million of income. Guidance assumes a $2.6 billion revenue impact from recent and expected generic and biosimilar competition, and an unfavorable foreign-exchange impact of about $1.1 billion on revenue and $0.08 on adjusted EPS. Guidance is non-GAAP; Pfizer did not provide a forward-looking GAAP reconciliation.
- Management cited expected U.S. Lyrica generic competition beginning June 30, 2019, pricing and payer-access pressure, patent expirations, foreign exchange and competition as important business pressures. Pfizer expects higher and more sustained revenue growth post-2020, supported by its pipeline and lower expected revenue impact from patent expirations.
- Manufacturing and supply risks include legacy Hospira sterile-injectable shortages, capacity and technical constraints, and supplier quality issues. Pfizer expected supply issues to improve substantially by year-end 2019. The McPherson facility remained under FDA “Official Action Indicated” status; the FDA issued a warning letter concerning Pfizer’s Chennai-area IKKT facility, which Pfizer planned to exit in 2019.
- A safety signal in a high-risk rheumatoid arthritis study led Pfizer to transition patients taking tofacitinib 10 mg twice daily to 5 mg twice daily; evaluation continued. Pfizer and its partner discontinued a Phase III ovarian cancer trial, citing efficacy and changing treatment considerations, not safety.
- Legal, patent, product-liability, antitrust, environmental and government-investigation matters remain ongoing. Pfizer stated it could not estimate reasonably possible losses beyond amounts accrued. It did not expect the matters to materially affect financial position, but adverse outcomes could affect earnings or cash flows.
- Pfizer reported its disclosure controls were effective and no material change in internal control over financial reporting occurred in the quarter. It reported no material changes to the risk factors in its 2018 Form 10-K.
Most important facts for investors to verify
- Whether 2019 revenue and adjusted EPS guidance assumptions—including foreign exchange and the estimated $2.6 billion generic/biosimilar impact—remain achievable.
- The timing, approvals and final economics of the proposed GSK Consumer Healthcare joint venture and Pfizer’s resulting 32% interest.
- The extent and duration of Lyrica erosion, other loss-of-exclusivity effects, and pricing or access pressure, particularly in China and the U.S.
- Progress in resolving Hospira supply constraints and FDA findings at McPherson and IKKT, including any effect on product availability.
- Developments in the tofacitinib safety evaluation, significant litigation and tax audits, and their potential financial consequences.
- Cash generation, debt growth, repurchases and dividends relative to Pfizer’s investment needs and liquidity objectives.