Pfizer Inc. 2014 Q3 Form 10-Q Summary
Reporting period: Three and nine months ended September 28, 2014; comparisons are to periods ended September 29, 2013. Amounts are in U.S. dollars. The interim statements are unaudited and were reviewed by KPMG, not audited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $12.36B | $12.64B | $36.49B | $38.03B |
| Income from continuing operations | $2.68B | $2.59B | $7.86B | $8.78B |
| Net income attributable to Pfizer | $2.67B | $2.59B | $7.91B | $19.44B |
| Diluted EPS, continuing operations | $0.42 | $0.39 | $1.22 | $1.25 |
| Diluted EPS, total | $0.42 | $0.39 | $1.23 | $2.77 |
- Revenue declined 2% in Q3 and 4% for the first nine months. Continuing-operations income rose 3% in Q3 but fell 10% year to date.
- Prior-year nine-month net income and EPS included the approximately $10.4B after-tax gain on the Zoetis divestiture. Total net income comparisons therefore are not representative of underlying continuing performance.
- Pre-tax continuing-operations margin was 29.0% in Q3 versus 28.3%; year to date it was 28.6% versus 33.3%. Continuing-operations net margin was 21.6% versus 20.5% in Q3 and 21.5% versus 23.1% year to date.
- Q3 cost of sales was 19.2% of revenue versus 18.1%; R&D was 14.6% versus 12.9%. Higher R&D reflected, among other items, collaboration payments and investment in late-stage programs.
- Management’s non-GAAP adjusted diluted EPS was $0.57 in Q3 and $1.72 for nine months, versus $0.58 and $1.65, respectively. Adjusted measures exclude specified items, including purchase-accounting impacts and certain significant items, and are not substitutes for GAAP results.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $11.49B, down from $11.96B. Investing activities used $4.14B versus $10.69B, largely reflecting lower net investment purchases; financing activities used $7.06B versus $9.23B.
- Cash and cash equivalents were $2.44B at September 28, 2014. Short- and long-term investments totaled $49.46B; together with cash, selected financial assets were $51.90B.
- Total debt was $37.06B, up from $36.49B at year-end 2013. Pfizer reported net financial assets of $14.84B, working capital of $37.07B and a current ratio of 2.86, compared with 2.41 at year-end.
- Pfizer issued $4.5B of senior unsecured notes in May 2014. There were no commercial-paper borrowings at quarter-end. Available credit lines were $8.5B, of which $8.2B were unused; $7.1B of unused lines were committed.
- Nine-month cash dividends were $4.97B; common-stock purchases were $3.80B. The board authorized an additional $11B share-purchase plan on October 23, after quarter-end. The October 2014 dividend was declared at $0.26 per share.
Material changes and business drivers
- Loss of exclusivity, generic competition and expiring collaboration rights weighed on sales, especially Enbrel U.S./Canada co-promotion revenue, Spiriva and older established products. Enbrel U.S./Canada royalties continued but were recorded in other income rather than revenue and were materially below prior co-promotion economics.
- Growth in Lyrica, the Prevnar family, Eliquis, Xeljanz, Xalkori and Inlyta partly offset declines. Emerging-market revenue increased 7% in Q3 and 3% year to date; U.S. revenue fell 7% and 8%, respectively.
- By segment, Q3 revenue was $3.49B for Global Innovative Pharmaceuticals (down 4%), $2.51B for Vaccines, Oncology and Consumer Healthcare (up 13%), and $6.24B for Global Established Pharmaceuticals (down 7%). For nine months, the respective changes were down 5%, up 9% and down 8%.
- Foreign exchange reduced nine-month revenue by approximately $405M. Q3 foreign-exchange impact on total revenue was small.
- Q3 other income/deductions included $243M of certain asset impairments. For nine months, other legal matters were a net $720M deduction, primarily related to Neurontin matters (about $610M) and an Effexor matter (about $55M). Nine-month R&D expense increased 7%; restructuring and acquisition-related costs were $531M, down from $926M.
Outlook, risks and contingencies
- Updated full-year 2014 guidance, announced October 28, was adjusted revenue of $48.7B–$49.7B; reported diluted EPS of $1.50–$1.59; and adjusted diluted EPS of $2.23–$2.27. Guidance also included adjusted cost of sales of 18.5%–19.0% of adjusted revenue, adjusted R&D of $6.9B–$7.2B and an adjusted effective tax rate of approximately 27%.
- Guidance assumes about 6.4B diluted weighted-average shares and specified exchange rates; it excludes potential effects of unresolved litigation and business-development transactions not completed by quarter-end. It includes expected U.S. generic competition for Celebrex beginning in December 2014.
- Management expected approximately $3.0B of costs during 2014–2016 for restructuring and productivity programs, about one quarter non-cash, and approximately $2.6B of annual cost savings by the end of 2016. Eight manufacturing sites were expected to exit over several years.
- Key risks include continued generic erosion and patent challenges, pricing and payer pressure, regulatory and clinical-development uncertainty, manufacturing and supply issues, foreign exchange and potential currency devaluations, tax uncertainty, and litigation. Management said it could not estimate the reasonably possible loss range above accrued legal amounts; it did not expect the disclosed matters to materially affect financial position, though results or cash flows could be materially affected in a period.
- Specific items to monitor include the Neurontin settlement process, the appealed Canadian Effexor judgment (net exposure described as approximately C$67M before appeal outcome), Celebrex generic-entry timing, and regulatory outcomes for key pipeline products. Pfizer also noted uncertainty over Venezuelan exchange rates and European government receivables.
Investor verification priorities
- Reconcile reported GAAP results with adjusted EPS and the exclusions used in management’s non-GAAP measures.
- Track revenue trends and remaining exposure to product losses of exclusivity, particularly Celebrex, Lipitor and the expired Enbrel and Spiriva collaborations.
- Assess whether the 2014 guidance assumptions, including currency, generic competition and unresolved litigation exclusions, remain achievable.
- Review legal accruals and developments in Neurontin, Effexor, patent and product-liability matters; the filing provides no clear aggregate potential-loss range above accruals.
- Monitor the execution, cash costs and delivery of expected savings from the restructuring program, alongside dividends, repurchases and debt levels.