Pfizer Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 3, 2016; comparative period ended March 29, 2015. The filing is unaudited. Pfizer’s non-U.S. subsidiaries report on periods ending February 28, 2016 and February 22, 2015, respectively.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $13.005 billion | $10.864 billion | Up 20% reported; up 26% operationally, with a $729 million unfavorable foreign-exchange impact |
| Income from continuing operations before tax | $3.561 billion | $3.082 billion | Up 16%; 27.4% versus 28.4% of revenue |
| Net income attributable to Pfizer | $3.016 billion | $2.376 billion | Up 27% |
| Diluted GAAP EPS | $0.49 | $0.38 | Up 29% |
| Adjusted diluted EPS (non-GAAP) | $0.67 | $0.51 | Adjusted net income was $4.155 billion versus $3.196 billion |
| Effective tax rate | 15.0% | 22.9% | Lower rate reflected tax benefits, including Protonix-related tax-position benefits, Venezuela operations, prior-year tax resolutions and the U.S. R&D credit |
| Operating cash flow | $1.651 billion | $680 million | Increase reflected higher operating earnings, partly offset by working-capital timing and employee bonus payments |
| Capital expenditures | $301 million | $239 million | Operating cash flow less capital expenditures was approximately $1.350 billion in Q1 2016 |
Costs and margins: Cost of sales was $2.851 billion, or 21.9% of revenue, versus $1.838 billion, or 16.9%. Pfizer attributed the higher ratio mainly to Hospira acquisition-related inventory and product mix, including products facing loss of exclusivity. Selling, informational and administrative expenses rose 9% to $3.385 billion but declined to 26.0% of revenue from 28.6%. R&D fell 8% to $1.731 billion, primarily because the prior-year quarter included a $295 million OPKO upfront payment; current-quarter late-stage oncology and other development spending increased. Intangible amortization rose 7% to $1.006 billion.
Balance sheet and liquidity: At April 3, 2016, cash and cash equivalents were $2.561 billion, short-term investments $16.882 billion and long-term investments $14.146 billion. Total debt was $39.370 billion ($11.546 billion short-term, including current maturities, and $27.824 billion long-term); Pfizer’s selected net financial liabilities were $5.780 billion, compared with net financial assets of $391 million at year-end 2015. Working capital was $12.563 billion and the current ratio was 1.44:1, versus $14.405 billion and 1.49:1 at year-end. Cash and cash equivalents declined $1.080 billion during the quarter. Financing used $7.014 billion, including $5.000 billion of share repurchases and $1.854 billion of dividends. Pfizer reported $8.0 billion of unused credit lines, including $7.3 billion committed by lenders.
Material changes and business drivers
- Q1 2016 revenue included $1.2 billion from Hospira, acquired in September 2015, so year-over-year comparisons are not fully like-for-like. Pfizer also estimated that additional selling days boosted the quarter’s revenue by about $900 million; the company expected the calendar-day benefit to reverse in Q4.
- Innovative Products revenue increased 23% to $7.033 billion: GIP rose 18% to $3.640 billion and VOC rose 27% to $3.394 billion. Growth included Ibrance, Prevnar/Prevenar 13, Eliquis, Lyrica and Xeljanz. Ibrance revenue was $429 million, versus $38 million a year earlier.
- Established Products revenue rose 17% to $5.972 billion, primarily reflecting Hospira. Pfizer said GEP revenue excluding Hospira increased only 1% operationally; generic competition and loss of exclusivity reduced revenue for products including Zyvox and Lyrica in affected markets.
- Reported revenue increased 49% in the U.S. and decreased 1% internationally; international revenue was down 11% from foreign exchange, partly offset by operational growth.
- Net cash from investing activities was $4.355 billion, mostly reflecting investment redemptions and sales; it was below the $6.592 billion in the prior-year quarter. Net cash used in financing was broadly similar year over year.
Outlook, commentary, risks and unusual items
- 2016 guidance, updated May 3: Reported revenue of $51–$53 billion (previously $49–$51 billion); reported diluted EPS of $1.72–$1.85 (previously $1.54–$1.67); and adjusted diluted EPS of $2.38–$2.48 (previously $2.20–$2.30). Management cited stronger operating performance and more favorable exchange rates. Guidance assumes no uncompleted business-development transactions and excludes potential resolution of litigation matters not substantially resolved by April 3.
- Guidance included estimated revenue headwinds of $2.3 billion from recent and expected generic competition and $1.3 billion from foreign exchange versus 2015, including an estimated $0.8 billion Venezuela currency impact. The filing states these estimates and guidance are subject to significant risks and assumptions.
- Pfizer and Allergan terminated their merger agreement by mutual agreement on April 6, after the U.S. Treasury’s April 4 actions. Pfizer paid Allergan $150 million for expenses on April 8, a subsequent-quarter item. The filing reported $24 million of Q1 transaction costs, most related to the terminated transaction.
- Q1 other deductions included $274 million for certain legal matters and $131 million of asset impairments, including $81 million for the Hisun Pfizer investment and $50 million for the Teuto investment. A $116 million gain from resolution of a contract disagreement partly offset other deductions. Pfizer recorded $286 million of certain legal charges in its adjusted-income reconciliation.
- The Protonix matter was resolved in principle for $784.6 million; the amount had been recorded in 2015 and was paid April 29, 2016. The agreement was finalized in April and remained subject to court approval. Pfizer said it could not estimate reasonably possible legal losses in excess of accruals; litigation outcomes may materially affect results or cash flows in a period.
- Pfizer expected approximately $1 billion of Hospira integration costs over up to three years and targeted $1 billion in annual Hospira cost savings by 2018. It also estimated approximately $2.4 billion of annual savings by the end of 2016 from other specified cost-reduction programs.
- Principal risks highlighted include patent expirations and generic or biosimilar competition, pricing and reimbursement pressure, foreign exchange and Venezuela uncertainty, clinical and regulatory outcomes, manufacturing and integration risks, customer credit exposure, and litigation and tax contingencies. Pfizer reported $722 million of gross receivables from governments or agencies in Italy, Spain, Greece and Portugal; $83 million was more than a year past invoice date. Greece net receivables were $56 million.
- Pfizer was considering a possible separation of its Innovative and Established Products businesses, but had made no decision and expected to decide by the end of 2016. It also described a new unified late-stage development group.
Most important facts for investors to verify
- How much of reported growth reflects Hospira, extra selling days and product demand, and whether comparable operational growth persists after those effects.
- Whether the updated 2016 revenue and EPS guidance is achieved, including the assumed currency, Venezuela and generic-competition impacts; review reported and adjusted measures separately.
- Hospira integration progress, the timing and realization of the $1 billion annual savings target, and the effect of acquired-product mix on margins and cash flow.
- Developments in patent challenges, legal accruals and the Protonix court approval, alongside the risks attached to the Hisun and Teuto impairments and other estimates.
- Accounts-receivable collectability, particularly government receivables and the distributor issue that increased the doubtful-account allowance, and the effect of continued repurchases and dividends on liquidity and net debt.
- Whether pipeline candidates and regulatory filings—including Ibrance, biosimilars and late-stage development programs—deliver approvals and commercial results consistent with management’s outlook.