Pfizer Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 27, 2015; comparisons are with the periods ended September 28, 2014. Amounts are U.S. dollars unless stated otherwise. The interim financial statements were reviewed by KPMG, not audited.
Business context
Pfizer operates Innovative Products, comprising Global Innovative Pharmaceutical (GIP) and Global Vaccines, Oncology and Consumer Healthcare (VOC), and Established Products (GEP). On September 3, 2015, Pfizer acquired Hospira for approximately $16.0 billion in cash ($15.6 billion net of cash acquired). Reported results include one month of Hospira U.S. operations, but no Hospira international results. Purchase accounting amounts remain provisional.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $12.087B | $12.361B | $34.804B | $36.487B |
| Income from continuing operations | $2.130B | $2.676B | $7.141B | $7.862B |
| Net income attributable to Pfizer | $2.130B | $2.666B | $7.132B | $7.907B |
| Diluted GAAP EPS | $0.34 | $0.42 | $1.14 | $1.23 |
| Continuing-operations margin | 17.6% | 21.6% | 20.5% | 21.5% |
| Cost of sales as % of revenue | 18.4% | 19.2% | 17.9% | 18.8% |
| Research and development | $1.722B | $1.802B | $5.342B | $5.184B |
Revenue declined 2% in Q3 and 5% year to date. Operational growth was 6% in Q3 and 3% year to date, more than offset by foreign exchange headwinds of 9% and 8%, respectively. Q3 segment revenue was GIP $3.521B, VOC $3.231B and GEP $5.219B. Growth in Prevnar 13, Ibrance, Eliquis and other newer products was offset by generic competition, particularly for Celebrex and Zyvox. Q3 revenue changes included Prevnar family +38%, Ibrance $230M, Celebrex -72% and Zyvox -51%.
Management’s non-GAAP adjusted diluted EPS was $0.60 for Q3 versus $0.57, and $1.67 for the first nine months versus $1.72. These measures exclude specified acquisition, purchase-accounting and unusual items and are not directly comparable to GAAP EPS.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $9.799B, down from $11.485B. The decline reflected lower operating earnings, a $1.0B pension contribution and payment timing, including legal liabilities.
- Investing cash flow was a $756M outflow; it included $15.6B net cash paid for Hospira and $679M net for Baxter’s vaccine portfolio, offset in part by net investment redemptions.
- Financing cash flow was a $9.124B outflow, including $6.160B of share repurchases and $5.211B of dividends. Cash and equivalents ended at $3.099B.
- At September 27, cash, short- and long-term investments totaled $36.891B; short- and long-term debt totaled $38.897B, leaving net financial liabilities of $2.007B. Current ratio was 1.62, and working capital was $17.156B.
- Debt included $9.818B of short-term borrowings and $29.079B of long-term debt. Commercial paper outstanding was $4.9B. Pfizer reported $7.9B of unused credit lines, including $7.1B committed at the company’s request.
Material changes and unusual items
- Q3 continuing income fell 20%; nine-month continuing income fell 9%. In Q3, higher restructuring charges and asset impairments were significant pressures. Nine-month results also reflected higher R&D and other charges, partly offset by lower cost of sales, legal charges, amortization and net interest expense.
- Other deductions included a $470M impairment of Pfizer’s Hisun Pfizer equity investment, attributed to weaker performance, competition, China’s economic slowdown and regulatory changes. Q3 also included $163M of intangible-asset impairments.
- Q3 restructuring and acquisition-related charges were $581M; nine-month charges were $727M. Pfizer reported $933M of total costs associated with acquisition and productivity initiatives for the first nine months.
- Hospira contributed $330M revenue and a $265M net loss attributable to Pfizer common shareholders in the reported period, including purchase-accounting and restructuring/integration effects. Pfizer expects $800M of annual Hospira synergies by 2018, with approximately $1B of one-time costs over up to three years.
- Currency translation contributed to a $2.170B foreign-currency translation loss in other comprehensive income for the first nine months. Pfizer also recorded a $507M reduction in its U.S. postretirement obligation following a plan amendment.
Outlook, management commentary and risks
On October 27, 2015, Pfizer updated its 2015 guidance: reported revenue of $47.5B–$48.5B; reported diluted EPS of $1.37–$1.43; and adjusted diluted EPS of $2.16–$2.20. Guidance assumes approximately 6.25B diluted weighted-average shares. Management cited generic competition and unfavorable currency as headwinds; the guidance estimated a $3.3B revenue impact from recent or expected generic competition and a $3.1B impact from foreign exchange on Pfizer-standalone revenue. Adjusted EPS guidance is a non-GAAP measure.
Pfizer said it believes cash flows, financial assets, capital-market access and credit facilities are sufficient to meet foreseeable liquidity needs. Key risks include generic and biosimilar competition, pricing and access pressure, foreign exchange, regulatory and clinical outcomes, manufacturing quality and continuity, and the integration and expected benefits of Hospira. Pfizer disclosed preliminary friendly discussions with Allergan announced October 29, 2015; no agreement had been reached and completion was uncertain.
Contingencies include patent, product-liability, antitrust, environmental and government matters. Management stated it could not estimate the range of reasonably possible losses above amounts accrued. In India, Hospira’s Aurangabad facility faced a contested closure order that had been stayed pending a further hearing. In Venezuela, Pfizer used the official exchange rate of 6.3 bolivars per U.S. dollar; it warned of uncertainty over that rate and potential asset recoverability, and expected a $36M Q4 restructuring charge.
Most important facts for investors to verify
- Whether Hospira integration delivers the projected $800M annual synergies by 2018, and the ultimate integration and purchase-accounting costs.
- How much reported revenue and earnings are exposed to currency movements and continued generic erosion, especially for established products.
- Whether growth in Prevnar 13, Ibrance, Eliquis and other newer products can offset losses of exclusivity and payer pressure.
- The assumptions underlying 2015 reported and adjusted guidance, including the exclusions in adjusted EPS and the expected fourth-quarter contribution from Hospira.
- Recoverability of the Hisun investment and exposure to legal, tax, environmental, manufacturing-quality and Venezuela-related contingencies.
- Whether the preliminary Allergan discussions proceed, and any resulting transaction terms, financing needs or regulatory conditions.