Pfizer Inc. 10-Q Summary
Reporting period: Third quarter ended October 3, 2010, and nine months ended October 3, 2010. Dollar amounts are in U.S. dollars. Interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context
Pfizer operates Biopharmaceutical and Diversified businesses. Comparisons with 2009 are substantially affected by the October 15, 2009 Wyeth acquisition: 2010 includes Wyeth results, while the comparable 2009 periods do not. Accordingly, headline revenue growth is not directly comparable to organic growth.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $16.171 billion | $11.621 billion | $50.248 billion | $33.472 billion |
| Income from continuing operations | $876 million | $2.879 billion | $5.395 billion | $7.871 billion |
| Net income attributable to Pfizer | $866 million | $2.878 billion | $5.367 billion | $7.868 billion |
| Diluted EPS | $0.11 | $0.43 | $0.66 | $1.16 |
| Adjusted income (non-GAAP) | $4.372 billion | $3.461 billion | $14.213 billion | $10.377 billion |
| Adjusted diluted EPS (non-GAAP) | $0.54 | $0.51 | $1.76 | $1.54 |
- Revenue rose 39% in Q3 and 50% year to date. Wyeth contributed $5.2 billion in Q3 and $15.9 billion year to date; legacy Pfizer revenue declined $458 million and $285 million, respectively. Foreign exchange reduced Q3 revenue by about $160 million but increased nine-month revenue by about $1.2 billion.
- Reported net income and diluted EPS fell sharply despite higher sales. Management cited Wyeth operating costs and purchase-accounting charges, acquired-intangible impairments, restructuring and acquisition costs, the asbestos charge, higher interest expense, and a higher tax rate.
- Q3 cost of sales was 24.1% of revenue versus 15.4% a year earlier; pretax margin was 8.9% versus 34.2%, and net margin was 5.4% versus 24.8%. The Q3 effective tax rate was 39.2%, compared with 27.5%; nine-month rates were 37.2% and 27.3%.
- Adjusted income increased 26% in Q3 and 37% year to date; adjusted diluted EPS rose 6% and 14%, respectively. These are non-GAAP measures that exclude purchase-accounting impacts, acquisition-related costs and certain significant items; they are not substitutes for GAAP results.
- Biopharmaceutical revenue was $13.945 billion in Q3, with segment profit of $7.005 billion. Diversified revenue was $2.150 billion, with segment profit of $530 million. Corporate/Other reported a $6.095 billion loss, including significant acquisition-related and other charges.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $5.196 billion, down from $11.762 billion. The period included approximately $11.5 billion of income-tax payments, primarily related to financing decisions for the Wyeth acquisition.
- Investing activities provided $5.153 billion, versus $26.905 billion used in 2009; financing activities used $10.095 billion, versus $17.215 billion provided. Financing included $4.6 billion of net borrowing repayments, $1.0 billion of share purchases and $4.544 billion of dividends paid.
- At October 3, cash and cash equivalents were $2.176 billion; short-term investments were $20.288 billion. Total debt was $44.168 billion, comprising $5.158 billion short-term and $39.010 billion long-term debt, down from $48.662 billion at year-end 2009.
- Pfizer reported financial assets of $33.582 billion and net financial liabilities of $10.586 billion, compared with $8.376 billion at year-end 2009. Working capital was $29.917 billion and the current ratio was 2.24:1. The company said its cash flows, assets, capital-market access and credit facilities should meet foreseeable liquidity needs.
Material changes, outlook and risks
- Unusual charges: Q3 included a $701 million pretax charge for Quigley asbestos litigation, approximately $1.5 billion of acquired-intangible impairment charges, and a $212 million Wyeth-related inventory write-off. Nine-month asset impairments were $1.710 billion; restructuring and certain acquisition-related costs were $2.091 billion.
- Integration: Pfizer targeted $4–$5 billion of cost reductions, net of business investment, by the end of 2012. It estimated total cost-reduction and acquisition-related costs of $11.5–$13.5 billion through 2012. The company said it remained on track, planned to exit 12 manufacturing sites over four years, and expected to exceed its original 15% workforce-reduction target.
- 2010 guidance: Revenue of $67–$68 billion; reported diluted EPS of $0.84–$0.94; adjusted diluted EPS of $2.17–$2.22. Guidance excludes certain potential litigation resolutions and, generally, business-development transactions not completed by October 3.
- 2012 targets: Revenue of $65.2–$67.7 billion; reported diluted EPS of $1.58–$1.73; adjusted diluted EPS of $2.25–$2.35. Pfizer reduced its 2012 revenue target range by $800 million in May, citing U.S. healthcare legislation, while reaffirming other targets.
- Market and regulatory risks: The filing identifies generic competition, pricing and reimbursement pressure, weak economic conditions, foreign-exchange movements, regulatory uncertainty and R&D outcomes as risks. Lipitor U.S. exclusivity was expected to end in November 2011; Effexor XR lost U.S. exclusivity in July 2010. Pfizer also disclosed FDA warning letters, complete-response letters for several filings, and discontinued or unsuccessful Sutent trials.
- Healthcare legislation: Pfizer estimated adverse revenue effects of about $300 million for 2010, $900 million for 2011 and $800 million for 2012 from enacted U.S. provisions, including increased Medicaid rebates and future Part D discounts and industry fees.
- Transactions after quarter-end: Pfizer agreed to acquire King Pharmaceuticals for $3.6 billion, subject to tender, regulatory and other conditions, and targeted closing in late 2010 or early 2011. It also completed a 40% investment in Brazil’s Teuto for approximately $230 million and announced other development and licensing arrangements.
- Legal and product matters: Quigley’s bankruptcy court declined to confirm a reorganization plan; Pfizer appealed and was developing a revised plan. Pfizer disclosed patent challenges to Chantix, Lyrica and Viagra, and litigation seeking to block the King transaction. Management said it did not believe the disclosed proceedings would materially adversely affect financial position, but noted outcomes remain uncertain.
Most important facts for investors to verify
- How much of reported revenue growth and future performance reflects Wyeth, versus the trajectory of legacy Pfizer products and comparable organic growth.
- The assumptions and exclusions behind adjusted earnings, 2010 guidance and 2012 targets, including the effect of purchase accounting and restructuring charges.
- Whether integration savings are achieved on schedule and whether further restructuring, impairment or inventory costs arise.
- The outcome and potential financial exposure of the Quigley asbestos matter, patent disputes, tax audits and other litigation.
- The pace and commercial impact of generic competition, particularly for Lipitor, and the effect of healthcare reform, pricing pressure and regulatory decisions.
- Completion and financing of the King acquisition and other post-quarter transactions, and the resulting effects on debt, liquidity and earnings.