Pfizer Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 27, 2020; year-to-date figures cover the first nine months of 2020. The filing was reviewed by KPMG, which reported no material modifications needed for conformity with U.S. GAAP. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12,131 | $12,680 | $35,961 | $39,062 |
| Income before tax | $2,176 | $10,727 | $10,014 | $19,190 |
| Net income attributable to Pfizer | $2,194 | $7,680 | $9,022 | $16,609 |
| Diluted GAAP EPS | $0.39 | $1.36 | $1.60 | $2.92 |
| Adjusted diluted EPS (non-GAAP) | $0.72 | $0.75 | $2.31 | $2.39 |
- Revenue and segments: Q3 revenue fell 4% year over year; first-nine-month revenue fell 8%. Biopharma revenue rose 3% in Q3 and 6% year to date, while Upjohn revenue declined 18% and 30%, respectively. The year-over-year comparisons are affected by Pfizer’s July 2019 contribution of Consumer Healthcare to the GSK joint venture; 2019 revenue included that business for part of the year.
- Drivers: Biopharma growth included Ibrance, Eliquis, Vyndaqel/Vyndamax and biosimilars. Upjohn declines chiefly reflected U.S. generic competition for Lyrica and China’s volume-based procurement impact on Lipitor and Norvasc. Pfizer estimated COVID-19 reduced revenue by about $500 million in Q3 and $800 million in the first nine months.
- Profit and margins: Q3 GAAP results included a $900 million impairment of Array-acquired IPR&D assets. Q3 2019 included an $8.1 billion pre-tax gain on the GSK Consumer Healthcare transaction, making the headline profit comparison unusually large. GAAP cost of sales was 20.8% of revenue in Q3 and 20.0% year to date, versus 20.5% and 19.5% a year earlier. The filing reports adjusted diluted EPS, but the excerpt does not provide a directly comparable GAAP operating-margin measure.
- Cash flow: Nine-month operating cash flow was $8,778, versus $8,819 in 2019. Investing used $12,601 (versus $1,112), largely reflecting investment purchases and restricted funds from Upjohn debt proceeds; financing provided $4,138 (versus $6,045 used). Cash and restricted cash ended at $1,627, compared with $2,846 a year earlier.
- Liquidity and debt: At September 27, cash was $1,587; short-term investments were $8,912 and restricted short-term investments $11,413. Short-term borrowings, including current long-term debt, were $13,363; long-term debt was $49,785. Total debt was $63,148, up from $52,150 at year-end 2019. Working capital was $13,585 and the current ratio 1.40, versus negative working capital of $4,501 and a 0.88 ratio at year-end. Pfizer reported $11.6 billion of unused credit lines.
- Capital returns and other balance-sheet items: Nine-month dividends paid were $6,328; the quarterly dividend was $0.38 per share. Pfizer made no open-market share repurchases in the first nine months. A voluntary $1.25 billion U.S. qualified pension contribution was made in September.
Material changes and unusual items
- Q3 other deductions included the $900 million IPR&D impairment, partly offset by GSK joint-venture equity income. Year-to-date results also reflected investment gains, restructuring costs, pension settlement losses and other items.
- The effective tax rate was negative 1.2% in Q3 and 9.7% for the first nine months, versus 28.4% and 13.4% in 2019. Comparisons reflect, among other items, the non-recurrence of 2019’s tax expense on the GSK transaction gain and the non-recurrence of a 2019 tax benefit from an IRS audit settlement.
- Pfizer issued $4.0 billion of notes in May and Upjohn issued $7.45 billion of dollar notes and €3.60 billion of euro notes in June in connection with the planned Mylan combination. The $11.4 billion of Upjohn proceeds was classified as restricted short-term investments pending the transaction.
- Pfizer reported $621 million of costs associated with acquisitions and cost-reduction/productivity initiatives in the first nine months. Its multi-year “Transforming to a More Focused Company” program is expected to incur about $1.2 billion of corporate enabling-function costs and about $500 million of manufacturing-network optimization costs through 2022.
Outlook, management commentary and risks
- 2020 Total Company guidance, updated October 27: revenue $48.8–$49.5 billion; adjusted diluted EPS $2.88–$2.93; adjusted cost of sales 20.2%–20.7% of revenue; adjusted R&D expense $8.8–$9.1 billion; and adjusted SI&A expense $11.5–$12.0 billion. Guidance assumed no COVID-19 vaccine revenue and an approximately $2.4 billion revenue impact from recent and expected generic and biosimilar competition. These are non-GAAP measures where indicated; Pfizer did not provide forward-looking GAAP reconciliations.
- COVID-19 program: As of November 2, Pfizer and BioNTech reported more than 43,000 participants enrolled in the Phase 3 BNT162b2 vaccine trial. They said they might seek U.S. Emergency Use Authorization as early as late November, subject to positive results and sufficient safety and manufacturing data. Supply targets and regulatory timing were conditional, not assured.
- Upjohn/Mylan transaction: All required antitrust clearances had been obtained by October 2020; closing was expected November 16, 2020, subject to customary conditions. Pfizer expected a $12 billion cash distribution from Upjohn before the spin-off. Failure to close by February 1, 2021 could require redemption of Upjohn transaction notes at 101% of principal, plus accrued interest.
- Key risks: COVID-19’s duration and severity, weaker demand or disrupted clinical trials and supply chains; vaccine efficacy, authorization, cold-chain distribution and manufacturing scale-up; patent expirations and generic/biosimilar competition; pricing and reimbursement pressure, including China’s procurement program; regulatory and manufacturing compliance; and litigation, tax audits and government investigations. Pfizer said it could not estimate reasonably possible legal losses in excess of amounts accrued. It did not believe pending matters would materially affect financial position, but outcomes could materially affect results or cash flows.
- Other pipeline developments included stopping the Phase 3 intensive-treatment cohort of Daurismo in October after an interim analysis indicated it was unlikely to meet its primary endpoint, and reporting that the Ibrance PENELOPE-B trial did not meet its primary endpoint.
Most important facts for investors to verify
- Whether the Upjohn/Mylan combination closed as expected, and the resulting debt, cash distribution and post-separation financial profile.
- Subsequent BNT162b2 trial, authorization, manufacturing and supply outcomes; 2020 guidance explicitly excluded vaccine revenue.
- Underlying Biopharma growth versus continuing erosion in Upjohn, including Lyrica generics, China procurement effects and COVID-related demand changes.
- The assumptions and exclusions behind adjusted EPS guidance and reported adjusted results, especially the $900 million impairment and other unusual items.
- Debt and liquidity after the planned separation, and whether cash generation supports dividends, pension funding and restructuring commitments.
- Developments in significant litigation, tax disputes, product-safety matters and government investigations, for which potential losses may be uncertain.