Pfizer Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 29, 2014. Amounts are in U.S. dollars; financial statement figures are generally in millions. Interim statements are unaudited and were reviewed, not audited, by KPMG.
Business context and performance
Pfizer operates through three commercial segments: Global Innovative Pharmaceutical (GIP), Global Vaccines, Oncology and Consumer Healthcare (VOC), and Global Established Pharmaceutical (GEP). Comparisons with 2013 are affected by the June 2013 disposal of Zoetis, including a $10.4 billion after-tax gain reported in discontinued operations in the prior-year period. Pfizer announced May 26, 2014 that it would not make an offer for AstraZeneca.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $12.773bn | $12.973bn | $24.126bn | $25.383bn |
| Continuing-operations income | $2.921bn | $3.575bn | $5.186bn | $6.191bn |
| Pfizer net income | $2.912bn | $14.095bn | $5.241bn | $16.845bn |
| Diluted EPS, continuing operations | $0.45 | $0.50 | $0.80 | $0.86 |
| Cash from operations | — | — | $7.022bn | $6.060bn |
Revenue fell 2% in Q2 and 5% in the first half. Continuing-operations income declined 18% and 16%, respectively. Continuing-operations income was 22.9% of revenue in Q2 and 21.5% in the first half, versus 27.6% and 24.4% in 2013. Cost of sales was 19.3% of revenue in Q2 and 18.7% in the first half, versus 17.3% and 17.7% a year earlier. GAAP net income and EPS comparisons are especially distorted by the prior-year Zoetis disposal gain.
Segment revenue was GIP $3.547bn, VOC $2.579bn and GEP $6.513bn in Q2; first-half revenue was $6.623bn, $4.753bn and $12.503bn, respectively. VOC grew, led by vaccines, oncology and consumer healthcare; GIP and GEP declined. In Q2, Prevnar family revenue rose 13%, Lyrica 16%, Xalkori 61% and Inlyta 42%; alliance revenue fell 69%, reflecting the expiration or wind-down of Enbrel and Spiriva arrangements.
Cash, debt and liquidity
- First-half operating cash flow was $7.022bn; investing activities used $1.605bn and financing activities used $4.173bn. Cash and cash equivalents increased $1.223bn to $3.406bn.
- At June 29, cash and cash equivalents were $3.406bn, short-term investments $30.648bn and long-term investments $17.168bn. Total debt was $37.828bn, comprising $5.561bn short-term and $32.267bn long-term; reported net financial assets were $13.394bn.
- Working capital was $36.349bn and the current ratio was 2.66:1. Pfizer issued $4.5bn of senior unsecured notes in May. It reported $8.3bn of unused credit lines, of which $7.1bn was committed.
- Pfizer repurchased $2.520bn of shares and paid $3.320bn in dividends in the first half. The quarterly dividend declared was $0.26 per share.
Material changes, outlook and risks
- Revenue pressures: Pfizer cited loss of exclusivity and generic competition, the expiration of Enbrel co-promotion rights in the U.S. and Canada, the end of the U.S. Spiriva alliance, product mix and foreign-exchange headwinds. First-half foreign exchange reduced revenue by about $452m.
- Costs and investment: R&D expense increased 15% in Q2 and 4% in the first half, partly reflecting late-stage programs including palbociclib and the meningitis B vaccine. Pfizer expects approximately $3.2bn in restructuring, integration and related costs during 2014–2016, about one-quarter non-cash, and estimates annual ongoing savings of approximately $2.9bn by end-2016.
- 2014 guidance, updated July 29: adjusted revenue $48.7–$50.7bn; adjusted diluted EPS $2.20–$2.30; reported diluted EPS $1.47–$1.62; adjusted effective tax rate approximately 27%. The update included expected U.S. generic competition for Celebrex beginning in December and associated wholesaler and retailer destocking of approximately $500m in Q4. Guidance excludes potential effects of unresolved litigation and most uncompleted business-development transactions, subject to stated exceptions.
- Legal and tax exposures: First-half other deductions included approximately $620m for Neurontin-related matters and $55m for an Effexor matter. Pfizer stated it could not estimate reasonably possible losses in excess of amounts accrued. A Canadian court judgment in an Effexor matter awarded approximately CAD125m; after prior payments, Pfizer estimated net liability at about CAD67m and said it would appeal. Tax audits and uncertain tax positions could also affect results.
- Other risks and developments: The filing highlights drug-development and regulatory uncertainty, pricing and reimbursement pressure, patent challenges, generic and biosimilar competition, manufacturing and foreign-exchange risks, and uncertain European government receivables. Gross receivables from governments in Italy, Spain, Greece, Portugal and Ireland were about $927m, including $83m over one year. Pfizer continued to use Venezuela’s preferential 6.3 exchange rate, while noting possible devaluation, recoverability and operating risks.
- Pipeline and transactions: Pfizer reported positive Phase 2 results for palbociclib and began a rolling U.S. NDA submission. It entered a CAR-T oncology collaboration with Cellectis, with an $80m upfront payment and potential milestones and royalties. Subsequent to quarter-end, it agreed to acquire Baxter’s marketed vaccines portfolio for $635m and InnoPharma for $225m upfront plus potential milestones.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, including the impact of the 2013 Zoetis gain, acquired-intangible amortization, restructuring and legal items.
- Assess the durability of revenue growth in VOC and newer products against generic erosion, alliance expirations and the expected Celebrex launch impact.
- Track delivery, timing and cash costs of the restructuring program against the stated $2.9bn annual savings target.
- Monitor litigation outcomes and accruals, particularly Neurontin, Effexor and patent-related cases; management cannot estimate the range of possible losses above accruals.
- Check 2014 guidance performance and assumptions, including foreign exchange, tax benefits, product launches and litigation exclusions.
- Review collectability of European government receivables and the continued use of Venezuela’s 6.3 exchange rate.