Pfizer Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Pfizer reported the three months ended April 1, 2018, compared with the three months ended April 2, 2017. International subsidiaries’ results generally cover periods ended February 25, 2018 and February 26, 2017. Pfizer operates through Innovative Health (IH) and Essential Health (EH). Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $12,906 | $12,779 | +1% |
| Income from continuing operations before tax | $4,127 | $3,951 | +4% |
| Net income attributable to Pfizer | $3,561 | $3,121 | +14% |
| Diluted EPS | $0.59 | $0.51 | +15% |
| Operating cash flow | $1,983 | $1,584 | +25% |
- Margins and expenses: GAAP continuing-operations net margin was 27.7%, versus 24.5%; pretax margin was 32.0%, versus 30.9%. Cost of sales was 19.9% of revenue versus 19.3%; selling, informational and administrative expenses were 26.4% versus 25.9%; R&D was 13.5% versus 13.4%. Intangible amortization was $1,196, approximately unchanged.
- Cash flows: Investing activities provided $9,667, largely reflecting proceeds from investment sales; financing activities used $10,720, including $6,063 of share repurchases and $2,032 of dividends. Capital expenditures were $386. Cash and cash equivalents were $2,302 at quarter-end.
- Debt and liquidity: Short-term borrowings, including current maturities, were $9,010; long-term debt was $31,831, for total debt of $40,841, down from $43,491 at year-end 2017. Cash and short- and long-term investments totaled $18,365, down from $27,007. Reported net financial liabilities increased to $22,476 from $16,484. Working capital was $7,470 versus $10,714, and the current ratio was 1.27:1 versus 1.35:1. Pfizer reported $7.7 billion of unused credit lines.
- Dividends and repurchases: Cash dividends paid were $0.34 per share, compared with $0.32. Pfizer repurchased approximately $6.1 billion of shares in the quarter, including a $4.0 billion accelerated repurchase agreement; about $10.3 billion of authorization remained at quarter-end.
Material changes versus the prior period
- Revenue rose only 1%: favorable foreign exchange contributed $430 million, partly offset by a $302 million operational decline. IH revenue increased 6% to $7,829; EH revenue fell 5% to $5,077.
- Growth in Ibrance, Eliquis and Xeljanz, plus biosimilars, was offset by generic or biosimilar competition, sterile injectable shortages, lower Prevnar 13 U.S. sales, and the absence of HIS sales following its 2017 sale. Emerging-market revenue grew 20%; U.S. revenue declined 5%.
- Higher income reflected a lower effective tax rate (13.5% versus 20.8%), improved pension-related credits, equity-security gains, collaboration and licensing income, and lower restructuring/acquisition costs. These benefits were partly offset by higher selling, cost-of-sales and R&D expenses and contingent-consideration charges.
- Revenue deductions rose 13% to $4,939. Accrued rebates and other revenue-related deductions totaled $5,392 at quarter-end, versus $4,923 at year-end.
Outlook, management commentary, risks and unusual items
- 2018 guidance reaffirmed May 1: revenue of $53.5–$55.5 billion; adjusted diluted EPS of $2.90–$3.00; adjusted cost of sales of 20.5%–21.5% of revenue; adjusted SI&A of $14.0–$15.0 billion; adjusted R&D of $7.4–$7.9 billion; adjusted other income of approximately $400 million; and an adjusted effective tax rate of approximately 17%. Guidance assumes a full-year Consumer Healthcare contribution and approximately $6.1 billion of share repurchases. It includes a projected $2.0 billion revenue impact from generic and biosimilar competition, and assumes no U.S. generic Lyrica competition until June 2019, contingent on pediatric exclusivity. Pfizer estimated favorable currency effects of $1.3 billion on revenue and $0.09 on adjusted EPS.
- Pfizer continued to assess strategic alternatives for Consumer Healthcare, with a decision expected during 2018; management said it had not received an acceptable sale offer. The guidance does not assume an uncompleted business-development transaction.
- Management cited legacy Hospira sterile-injectable supply constraints and remediation work; additional capacity was expected from 2019 onward. Puerto Rico manufacturing sites had resumed operations after hurricane damage, but remediation continued and potential product shortages remained possible.
- Pfizer expected approximately $1.4 billion of savings by 2020 from its 2017–2019 productivity program, with approximately $1.1 billion of associated costs. It reported approximately $900 million of Hospira-related savings through April 1, 2018 and targeted $1 billion of annual savings by the end of 2018. It also announced planned U.S. capital investment of approximately $5 billion over five years and paid a $108 million one-time employee bonus in Q1.
- Pipeline and regulatory risks: the Phase 3 Bavencio second-line NSCLC trial missed its primary endpoint; an Inlyta adjuvant RCC trial was stopped for futility. The FDA issued a complete response letter for the proposed trastuzumab biosimilar, citing technical information needs rather than safety or clinical data. Product approvals, trial outcomes, manufacturing execution and patent outcomes remain uncertain.
- Tax and accounting: Pfizer’s $15.2 billion TCJA repatriation-tax liability was planned for payment over eight years, beginning in April 2019. The company’s TCJA accounting estimates remained provisional, with final analysis expected during 2018. New accounting standards adopted in Q1 included revenue recognition and fair-value accounting for certain equity investments; the latter produced $111 million of unrealized gains in Q1 and may increase earnings volatility. Adoption adjustments included a $450 million after-tax increase to opening retained earnings for revenue recognition and a $419 million increase for financial-asset accounting, partly offset by other adoption adjustments.
- Contingencies: Pfizer disclosed patent, product-liability, antitrust, commercial, environmental and government-investigation matters. Management did not expect the matters to materially affect financial position, but said outcomes could materially affect results or cash flows; it could not estimate reasonably possible losses beyond accruals. A $94 million Celebrex direct-purchaser settlement was approved in April 2018. Tax audits and disputed tax positions also create uncertainty.
- The filing identifies pricing and access pressure, loss of exclusivity, competition, foreign-exchange movements, product-supply disruption, clinical and regulatory outcomes, and litigation as material risks. It also notes that the 2018 increase in the Medicare Part D coverage-gap discount is expected to modestly reduce future revenues.
Most important facts for investors to verify
- Whether growth from Ibrance, Eliquis, Xeljanz and biosimilars can offset losses from exclusivity, sterile-injectable shortages and other portfolio declines.
- Whether revenue, adjusted EPS and tax-rate guidance remain achievable, particularly given the assumed Lyrica timing, competition and foreign-exchange effects.
- Progress in Hospira manufacturing remediation, product availability and the expected timing of added capacity.
- Final TCJA accounting and cash-tax payments, as well as earnings volatility from equity-security fair-value changes.
- Developments in major patent, product, antitrust and government-investigation matters, including the amount and timing of any additional liabilities or settlements.
- Execution of share repurchases, dividends, productivity targets and the Consumer Healthcare strategic review, alongside the company’s reduced investment balances and higher net financial liabilities.