Pfizer Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended October 2, 2011; comparisons are with periods ended October 3, 2010. Amounts are U.S. dollars. Interim statements are unaudited; KPMG conducted a review, not an audit, and reported no material modifications needed for GAAP conformity.
Business context and performance
Pfizer operates across human biopharmaceuticals, animal health, consumer healthcare and nutrition. Results include King from its January 31, 2011 acquisition, but only approximately eight months of King’s U.S. operations and seven months of its international operations for the nine-month period. Pfizer sold Capsugel on August 1, 2011 and reported it as discontinued operations.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $17.2bn | $16.0bn | $50.7bn | $49.7bn |
| Income from continuing operations | $2.4bn | $856m | $7.2bn | $5.3bn |
| Net income attributable to Pfizer | $3.7bn | $866m | $8.6bn | $5.4bn |
| Diluted EPS, continuing operations | $0.31 | $0.11 | $0.91 | $0.66 |
| Diluted EPS, total | $0.48 | $0.11 | $1.08 | $0.66 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $15.0bn | $5.2bn |
Q3 reported net income included a $1.3bn after-tax gain on the Capsugel sale; nine-month discontinued operations contributed $1.4bn after tax. Thus, total net income and EPS substantially reflect the sale gain. Management’s non-GAAP adjusted income was $4.8bn for Q3, up 11%, and $14.4bn for nine months, up 2%; adjusted diluted EPS was $0.62 and $1.81, respectively.
Q3 cost of sales was 21.4% of revenue (23.7% in 2010); continuing-operations pre-tax margin was 21.3% (8.8%), and continuing-operations net margin was 14.2% (5.4%). For nine months, cost of sales was 22.1% of revenue (23.5%); pre-tax margin was 20.7% (17.1%), and continuing-operations net margin was 14.3% (10.7%).
Cash, debt and liquidity at October 2, 2011: Cash and equivalents were $3.7bn and short-term investments $25.3bn. Total debt was $41.0bn, down from $44.0bn at year-end 2010; long-term debt was $35.4bn. Financial assets totaled $38.6bn, leaving net financial liabilities of $2.4bn. Working capital was $34.9bn and the current ratio 2.25:1. Cash dividends paid were $4.7bn in the first nine months; purchases of common stock were $5.8bn.
Material changes versus prior comparable periods
- Revenue increased 7% in Q3 and 2% year to date. Q3 growth reflected favorable foreign exchange of about $951m, King revenue of $357m, and growth in selected products and non-pharmaceutical businesses. Year-to-date revenue included about $1.8bn from foreign exchange and $938m from King.
- These gains were offset by product exclusivity losses: about $950m of Q3 revenue and $3.8bn year to date, according to management. U.S. healthcare legislation reduced revenue by $151m in Q3 and $357m year to date.
- Key growth products included Prevnar/Prevenar 13, Lyrica and Enbrel. Lipitor revenue fell 6% year to date; Effexor XR fell 64%, Protonix 69%, and Xalatan/Xalacom 25%.
- Operating cash flow rose sharply, largely because 2010 included approximately $11.5bn of income-tax payments related to financing the Wyeth acquisition. It should not be read as a comparable underlying cash-flow increase.
- Income from continuing operations improved substantially year over year, partly because 2010 had larger Wyeth-related intangible impairments and a $701m pre-tax Quigley asbestos charge. Lower effective tax rates also contributed.
Outlook, management commentary and risks
- 2011 guidance: Revenue $66.2bn–$67.2bn; reported diluted EPS $1.20–$1.30; adjusted diluted EPS $2.24–$2.29.
- 2012 targets: Revenue $62.2bn–$64.7bn; reported diluted EPS $1.58–$1.73; adjusted diluted EPS $2.25–$2.35. These are management targets, not guarantees, and reflect anticipated exclusivity losses.
- Management cited expected U.S. Lipitor and Caduet loss of exclusivity on November 30, 2011, alongside other upcoming patent expirations, pricing pressure, competition, foreign exchange and healthcare-policy changes.
- Cost-reduction programs are expected to generate $4bn–$5bn in savings by the end of 2012 versus 2008 pro forma adjusted costs. Pfizer estimated total costs of $11.5bn–$13.5bn through 2012 for ongoing programs, and separately expected $1.7bn–$2.4bn of pre-tax charges for its 2011 R&D productivity initiative. Adjusted R&D expense targets were $8.1bn–$8.4bn for 2011 and $6.5bn–$7.0bn for 2012.
- Pfizer was exploring strategic alternatives, potentially including a sale or separation, for Animal Health and Nutrition; it expected any resulting transactions within 12–24 months of its July 2011 announcement. It also completed King and Capsugel transactions and acquired Icagen in September, buying the remaining shares in October.
- Material legal and regulatory exposures include hormone-replacement therapy litigation, asbestos-related Quigley claims, patent disputes, product claims and government investigations. Pfizer recorded $280m of charges in the first nine months for HRT actions and a further $260m for minimum expected costs of remaining actions; it could not estimate reasonably possible losses above accrued amounts. The Quigley reorganization plan remained subject to court approval.
- Pfizer said it had reached agreements-in-principle with U.S. authorities concerning potentially improper foreign payments and expected final agreements in Q4. DOJ investigations concerning Protonix and Rapamune promotional or pricing practices also remained ongoing.
- Embeda distribution was stopped and a voluntary recall initiated in March after a product stability issue; timing of a return to market was not specified. Pfizer also warned that future regulatory decisions, clinical results, patent challenges, manufacturing issues and potential Medicare/Medicaid spending changes could affect results.
Important facts for investors to verify
- Whether full-year 2011 revenue and reported/adjusted EPS meet the stated guidance, and how much reported earnings depend on one-time items.
- The realized revenue and earnings impact of U.S. Lipitor and Caduet generic competition beginning November 30, 2011, and other patent expirations.
- Whether projected restructuring savings materialize and how much additional restructuring, integration and acquisition-related spending remains.
- Developments in HRT, Quigley and other litigation, including whether future losses exceed recorded accruals, which Pfizer said it could not estimate.
- Regulatory and clinical milestones, especially the adult Prevnar 13 launch, pipeline outcomes, and resolution of the Embeda stability issue.
- Progress and terms of any Animal Health or Nutrition strategic transactions, as well as final King purchase-accounting allocations and potential goodwill or intangible-asset impairments.