Pfizer Inc. — Form 10-Q Summary
Business context and reporting period. Pfizer reported its third quarter and first nine months of 2017, with the quarter ended October 1, 2017. The company operates through Innovative Health (IH) and Essential Health (EH). Results are affected by acquisitions and divestitures, including the February 2017 sale of Hospira Infusion Systems (HIS); the filing notes that international subsidiaries report on a period ended August 27, 2017.
Financial performance
Amounts are U.S. dollars; financial statement figures are in millions unless indicated.
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Revenue | $13,168 | $13,045 | $38,843 | $39,196 |
| Income attributable to Pfizer | $2,840 | $1,355 | $9,034 | $6,440 |
| Diluted GAAP EPS | $0.47 | $0.22 | $1.49 | $1.04 |
| Adjusted diluted EPS (non-GAAP) | $0.67 | $0.61 | $2.03 | $1.92 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $9,728 | $10,151 |
- Margins and costs: Cost of sales was 21.6% of revenue in Q3 versus 23.6% a year earlier, and 20.5% for the first nine months versus 23.2%. GAAP income from continuing operations was 21.7% of revenue in Q3 versus 10.4%, and 23.3% year to date versus 16.5%.
- Segment revenue: IH revenue rose 11% in Q3 and 8% year to date; EH revenue declined 12% in both periods. Q3 growth included Ibrance, Eliquis and Xeljanz. EH faced HIS divestiture effects, product losses of exclusivity and sterile-injectable supply constraints.
- Balance sheet and liquidity: Cash and cash equivalents were $2.779 billion and short- and long-term investments totaled $21.457 billion at October 1. Total debt was $43.951 billion, up from $42.085 billion at year-end 2016; reported selected net financial liabilities were $19.714 billion, compared with $17.118 billion. Working capital was $12.074 billion and the current ratio was 1.43, versus $7.834 billion and 1.25 at year-end.
- Capital returns: Cash dividends paid were $5.750 billion in the first nine months; dividends paid per share were $0.32 in Q3 versus $0.30. Pfizer repurchased $5 billion of shares through an accelerated share repurchase completed in May; $6.4 billion of authorization remained at October 1.
Material changes versus the prior comparable periods
- Revenue was up 1% in Q3 but down 1% for the first nine months. Management attributed the year-to-date decline mainly to the HIS sale and unfavorable foreign exchange, offset by growth in key IH brands and biosimilars.
- GAAP earnings rose substantially, but the comparison benefited from the nonrecurrence of a $1.4 billion HIS write-down recorded in 2016. Other year-over-year drivers included lower cost of sales and restructuring charges, partly offset by higher intangible amortization and lower royalty-related income. Adjusted diluted EPS increased to $0.67 from $0.61 in Q3 and to $2.03 from $1.92 year to date.
- Operating cash flow fell about 4% year to date, which Pfizer attributed primarily to timing of customer receipts and vendor payments and higher benefit-plan contributions. Investing cash flow was nearly breakeven, compared with $4.7 billion used in the prior-year period, largely because prior-year acquisition spending was substantially higher.
- Revenue deductions increased 16% in Q3 and 13% year to date, primarily reflecting higher rebates, chargebacks and sales allowances.
Outlook, management commentary, risks and unusual items
- 2017 guidance, updated October 31: Revenue of $52.4–$53.1 billion; adjusted diluted EPS of $2.58–$2.62, with the midpoint implying 8% growth versus 2016. Guidance assumes a $2.3 billion revenue impact from recent and expected generic and biosimilar competition and a $0.1 billion revenue and $0.01 EPS foreign-exchange headwind. Pfizer does not provide forward GAAP guidance or a reconciliation to adjusted measures.
- Strategic review: Pfizer announced a review of strategic alternatives for Consumer Healthcare, including possible full or partial separation by spin-off, sale or another transaction; it may also retain the business. A decision was expected during 2018.
- Manufacturing and hurricane exposure: Puerto Rico manufacturing sites were disrupted by hurricanes. Pfizer recorded $55 million of Q3 costs and expected facilities to reach full capacity in early 2018; potential product shortages were noted, though management expected future revenue impact to be insignificant due to alternate sourcing and inventory. FDA warning letters concerning cGMP or quality issues at Hospira’s McPherson, Kansas facility and Meridian’s St. Louis sites create potential approval, export and supply risks.
- Restructuring: New 2017–2019 cost initiatives are expected to cost about $1.0 billion and target approximately $1.3 billion in savings by 2020. Pfizer reported $601 million of costs associated with acquisitions and productivity initiatives in the first nine months of 2017. Hospira integration savings were reported at approximately $700 million to date, against a target of $1 billion in annual savings by 2018.
- Legal and other unusual items: Q3 included a $94 million agreement-in-principle to resolve a Celebrex direct-purchaser class action, subject to final terms and court approval, and a $79 million charge for damages awarded by a jury in a patent matter. Pfizer stated that it cannot estimate the range of reasonably possible legal losses beyond amounts accrued. Other notable items included a $127 million intangible-asset impairment and a $12 million Q3 benefit from HIS sale-related adjustments.
- Other risks and contingencies: Key exposures include loss of exclusivity and generic/biosimilar competition, pricing and payer pressure, regulatory and clinical outcomes, foreign-exchange movements, tax audits, litigation, product safety and manufacturing quality. Management said it believed liquidity would meet foreseeable needs and that it did not expect the disclosed legal matters to materially affect financial position, while acknowledging possible material effects on results or cash flows in periods of settlement or payment.
Most important facts for investors to verify
- Whether 2017 revenue and adjusted EPS guidance were achieved, and how actual GAAP results compare with adjusted performance.
- Whether growth in IH brands can offset EH declines, upcoming patent expirations, biosimilar competition and increasing revenue deductions.
- Progress in resolving Hospira and Meridian manufacturing issues, restoring Puerto Rico capacity and avoiding product shortages.
- Actual savings, charges and timing under the 2017–2019 productivity program and Hospira integration.
- Developments in the Consumer Healthcare strategic review, significant litigation and related cash or earnings impacts.
- Debt, investment balances and cash generation, including the effect of dividends, repurchases and future business-development spending.
The interim financial statements were reviewed by KPMG, not audited; the accountant reported that it was not aware of material modifications needed for GAAP conformity.