Pfizer Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of 2019, ended September 29, 2019; comparisons are with the periods ended September 30, 2018. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $12.680B | $13.298B | $39.062B | $39.670B |
| Net income attributable to Pfizer | $7.680B | $4.114B | $16.609B | $11.546B |
| Diluted GAAP EPS | $1.36 | $0.69 | $2.92 | $1.92 |
| Diluted adjusted EPS (non-GAAP) | $0.75 | $0.77 | $2.39 | $2.29 |
| Operating cash flow | Not separately stated | Not separately stated | $8.819B | $11.089B |
- Q3 revenue fell 5% year over year: a 3% operational decline and 2% unfavorable foreign-exchange impact. Nine-month revenue declined 2%; operational growth of 1% was more than offset by foreign exchange.
- Reported earnings included an $8.087B pre-tax gain from the GSK Consumer Healthcare joint venture. The gain materially elevated GAAP income and EPS; nine-month adjusted diluted EPS, which excludes specified items, was $2.39.
- Cost of sales was 20.5% of revenue in Q3 versus 20.3%; for the first nine months it was 19.5% versus 20.6%. Selling, informational and administrative expense was 25.7% of Q3 revenue and 25.9% year to date. R&D expense was $2.283B in Q3 and $5.827B year to date.
- Biopharma revenue rose 7% in Q3 to $10.108B; Upjohn revenue fell 28% to $2.195B. Key growth products included Ibrance, Eliquis and Xeljanz; Lyrica’s U.S. generic competition sharply reduced Upjohn sales.
- Cash and cash equivalents were $2.785B and short-term investments $6.302B at quarter-end. Total debt was approximately $52.662B, up from $41.740B at year-end 2018; selected net financial liabilities increased to $41.595B from $21.084B. Working capital was negative $3.515B and the current ratio was 0.90:1.
- Investing cash flow was a $1.112B outflow, including $10.861B net cash paid for Array. Financing cash flow was a $6.045B outflow, including $8.865B of share repurchases and $6.051B of dividends paid.
Material changes and unusual items
- Pfizer completed the contribution of its Consumer Healthcare business to the GSK joint venture on July 31, receiving a 32% equity stake valued at approximately $15.7B. The gain was $8.1B pre-tax and $5.4B after tax; Pfizer will record its share of JV earnings on a one-quarter lag.
- Pfizer acquired Array BioPharma on July 30 for approximately $11.2B, or $10.9B net of cash acquired, primarily financed with debt. The acquisition added oncology products and pipeline assets.
- Pfizer agreed to combine Upjohn with Mylan in an all-stock transaction, expected to close in mid-2020 subject to approvals and other conditions. Pfizer shareholders were expected to own 57% of the combined company. Upjohn was to incur $12B of debt and distribute the proceeds to Pfizer before separation.
- The Phase 3 rivipansel study did not meet its primary or key secondary endpoints. Pfizer recorded a $127M charge, primarily for inventory, and $15M of anticipated close-out costs.
- The favorable settlement of U.S. tax issues for 2009–2010 generated a $1.4B tax-and-interest benefit in Q2. Q3’s effective tax rate was 28.4%, principally reflecting tax on the Consumer Healthcare JV gain.
Guidance, outlook and risks
- On October 29, Pfizer raised 2019 revenue guidance to $51.2B–$52.2B and adjusted diluted EPS guidance to $2.94–$3.00. Guidance also included adjusted cost of sales of 19.3%–19.8% of revenue and an approximately 16% adjusted effective tax rate. These are non-GAAP measures; Pfizer did not provide a forward-looking GAAP reconciliation.
- Management cited growth in key innovative brands and a strong pipeline, while expecting a negative $2.1B revenue impact from recent and anticipated generic and biosimilar competition. Foreign exchange was expected to reduce revenue by about $1.4B and adjusted EPS by about $0.10 versus 2018 rates.
- Important risks include patent expirations (notably Lyrica’s U.S. loss of exclusivity), pricing and reimbursement pressure, biosimilar and generic competition, foreign-exchange movements, and manufacturing constraints in legacy Hospira sterile-injectable facilities. Pfizer expected supply issues to improve substantially by year-end 2019; the McPherson, Kansas facility remained under an FDA Official Action Indicated classification.
- Other uncertainties include the proposed Upjohn–Mylan transaction and its financing and credit-rating effects, pipeline and regulatory outcomes, and legal proceedings and government investigations. Pfizer said it could not estimate reasonably possible legal losses above accrued amounts. It reported no material change in risk factors from its 2018 Form 10-K.
Investor verification priorities
- Separate recurring operating performance from the one-time JV gain and related tax effects; compare GAAP results with Pfizer’s adjusted non-GAAP measures.
- Track Lyrica’s generic erosion, performance of Ibrance, Eliquis and Xeljanz, and the effects of pricing and volume-based procurement in China.
- Confirm progress and closing conditions for the Upjohn–Mylan combination, including planned debt, distribution and credit-rating implications.
- Monitor Array integration, acquired-product growth and pipeline milestones, as well as the implications of the unsuccessful rivipansel study.
- Assess cash generation, debt and short-term borrowing levels, liquidity, and the company’s ability to sustain dividends and investment while executing transactions.
- Review developments in manufacturing remediation, product supply, significant litigation and government investigations.