Pfizer Inc. Q4 Profit Brings Plan to Reshape R&D Budget Back on Track
Published: Jan 29, 2013
Pfizer Inc. (NYSE: PFE) today reported financial results for fourth-quarter and full-year 2012. Fourth-quarter 2012 revenues were $15.1 billion, a decrease of 7% compared with $16.1 billion in the year-ago quarter, which reflects an operational decline of $802 million, or 5%, and the unfavorable impact of foreign exchange of $271 million, or 2%.
For fourth-quarter 2012, U.S. revenues were $5.8 billion, a decrease of 9% compared with the year-ago quarter. This decrease was primarily the result of the loss of exclusivity of Lipitor in November 2011 and Geodon in March 2012. International revenues were $9.3 billion, a decrease of 5% compared with the prior-year quarter, mainly due to the losses of exclusivity of Lipitor in developed Europe during second-quarter 2012 and the unfavorable impact of foreign exchange. U.S. revenues represented 38% of total revenues in fourth-quarter 2012 compared with 39% in the year-ago quarter, while international revenues represented 62% of total revenues in fourth-quarter 2012 compared with 61% in the year-ago quarter.
Full-year 2012 revenues were $59.0 billion, a decrease of 10% compared with $65.3 billion in full-year 2011, which reflects an operational decline of $4.8 billion, or 8%, and the unfavorable impact of foreign exchange of $1.5 billion, or 2%.
For full-year 2012, U.S. revenues were $23.1 billion, a decrease of 14% compared with full-year 2011. This decrease was primarily the result of the aforementioned loss of exclusivity of Lipitor. International revenues were $35.9 billion, a decrease of 6% compared with the prior year, mainly due to the previously mentioned losses of exclusivity of Lipitor and the unfavorable impact of foreign exchange. U.S. revenues represented 39% of total revenues in full-year 2012 compared with 41% in the previous year, while international revenues represented 61% of total revenues in full-year 2012 compared with 59% in full-year 2011.
Primary Care unit revenues decreased 28% operationally in comparison with fourth-quarter 2011, primarily due to the losses of exclusivity of Lipitor in most major markets, as well as the resulting shift in the reporting of U.S. and Japan Lipitor revenues to the Established Products unit beginning January 1, 2012. This decline in revenues for Lipitor and for certain other Primary Care unit products that lost exclusivity in various markets in 2012 and 2011 reduced Primary Care unit revenues by approximately $1.8 billion, or 33%. The impact of this decline was slightly offset by the continued strong operational growth of Lyrica in developed markets as well as Celebrex and Viagra in the U.S.
Specialty Care unit revenues declined 2% operationally in comparison with fourth-quarter 2011. Revenues were positively impacted by growth of the Prevnar/Prevenar franchise, primarily due to the timing of U.S. government purchases, as well as growth of Enbrel and Rebif, mostly in the U.S., in addition to Benefix, ReFacto/Xyntha and Zyvox. This increase was more than offset by approximately $360 million, or 9%, due to product losses of exclusivity.
Emerging Markets unit revenues grew 20% operationally in comparison with fourth-quarter 2011. This growth was primarily driven by strong volume growth in China as a result of more targeted promotional efforts for key innovative and established products, including Lipitor, Norvasc and Sulperazon, and overall market growth, as well as the timing of government purchases of Enbrel in Brazil and Prevenar 13 in Turkey in comparison with the year-ago period.
Established Products unit revenues increased 5% operationally in comparison with the prior-year period, primarily reflecting the inclusion of $200 million of U.S. and Japan branded Lipitor revenues in fourth-quarter 2012. This increase was partially offset by the decline of revenues of certain products that recently lost exclusivity and the impact of ongoing pricing pressures, primarily in developed Europe and South Korea. Total revenues from established products in both the Established Products and Emerging Markets units were $3.5 billion, with $1.1 billion generated in emerging markets.
Oncology unit revenues increased 11% operationally in comparison with fourth-quarter 2011. Revenues were positively impacted by the launches of Inlyta and Xalkori in the U.S. and certain other developed markets. Revenues were negatively impacted by approximately $44 million, or 13%, due to the shift in the reporting of international Aromasin revenues to the Established Products unit beginning January 1, 2012.
Consumer Healthcare unit revenues increased 17% operationally in comparison with fourth-quarter 2011, primarily due to the addition of products from the acquisitions of Ferrosan Consumer Health in December 2011 and Alacer Corp. in February 2012 as well as strong growth of Advil and Centrum in the U.S.
Adjusted cost of sales(2), adjusted SI&A expenses(2) and adjusted R&D expenses(2) in the aggregate were $9.8 billion in fourth-quarter 2012, a decrease of 8% compared with $10.6 billion in fourth-quarter 2011. Excluding the unfavorable impact of foreign exchange of $161 million, or 1%, these costs decreased 9%, primarily reflecting the benefits of cost-reduction and productivity initiatives.
Savings in adjusted R&D expenses(2) were generated in fourth-quarter 2012 primarily by the discontinuation of certain therapeutic areas and R&D programs in connection with our previously announced initiatives. Lower adjusted SI&A expenses(2) compared with the year-ago period primarily reflect a reduction in the field force and a decrease in promotional spending, both partially in response to product losses of exclusivity, and more streamlined corporate support functions. Adjusted cost of sales(2) and adjusted cost of sales(2) as a percent of revenues were favorably impacted by the benefits generated from the ongoing cost-reduction and productivity initiatives to streamline the manufacturing network, while unfavorably impacted by the decline in revenues contributing to a shift in geographic, business and product mix as well as by foreign exchange. Additionally, adjusted cost of sales(2) compared with the same period last year reflects reduced manufacturing volumes given the aforementioned products that lost exclusivity in various markets.
In full-year 2012, adjusted cost of sales(2), adjusted SI&A expenses(2) and adjusted R&D expenses(2) in the aggregate were $34.6 billion, a decrease of 12% compared with $39.2 billion in full-year 2011. Excluding the favorable impact of foreign exchange of $840 million, or 2%, these costs decreased 10%, primarily reflecting the aforementioned items.
The fourth-quarter 2012 effective tax rate on adjusted income(2) was 31.0%, compared with 29.8% in fourth-quarter 2011. The 2012 full-year effective tax rate on adjusted income(2) was 29.3%, compared with 29.6% for the full-year 2011. The rates for 2012 compared with the prior-year rates reflect the impact of the change in the jurisdictional mix of earnings and the expiration of the U.S. research and development tax credit. The full-year 2012 effective tax rate compared to the prior-year rate also reflects the favorable impact of the resolution of foreign audits pertaining to multiple tax years, recorded in third-quarter 2012.
The diluted weighted-average shares outstanding for fourth-quarter and full-year 2012 were 7.4 billion and 7.5 billion shares, respectively, a reduction of approximately 292 million and 362 million shares, respectively, compared with the same periods in 2011. These declines were primarily due to the Company’s ongoing share-repurchase program.
As a result of the aforementioned factors, fourth-quarter 2012 adjusted income(2) was $3.5 billion, a decrease of 7% compared with $3.8 billion in the year-ago quarter, and adjusted diluted EPS(2) was $0.47, a decrease of 4% compared with $0.49 in fourth-quarter 2011. Full-year 2012 adjusted income(2) was $16.5 billion, a decrease of 8% compared with $17.8 billion in full-year 2011, and adjusted diluted EPS(2) was $2.19, a decrease of 4% compared with $2.27 in full-year 2011.
Reported Net Income(3) and Reported Diluted EPS(3) Highlights
In addition to the aforementioned factors, fourth-quarter and full-year 2012 reported earnings in comparison with the same periods in 2011 were favorably impacted by the gain on the sale of the Nutrition(1) business, lower purchase accounting adjustments, lower acquisition-related costs and lower costs related to cost-reduction and productivity initiatives, while unfavorably impacted by higher costs associated with the potential separation of Zoetis(4). Full-year 2012 reported earnings in comparison with full-year 2011 were also unfavorably impacted by certain legal charges, primarily associated with hormone-replacement therapy, Rapamune, Celebrex and Chantix, and the non-recurrence of the gain on the sale of Capsugel(5) recorded in third-quarter 2011.
The fourth-quarter 2012 effective tax rate on reported results was 31.3%, compared with 34.4% in fourth-quarter 2011. The full-year 2012 effective tax rate on reported results was 21.2%, compared with 31.8% for full-year 2011. The lower rates for 2012 compared with the prior-year rates reflect the impact of the change in the jurisdictional mix of earnings and the expiration of the U.S. research and development tax credit. The full-year 2012 effective tax rate was also favorably impacted by a settlement with the U.S. Internal Revenue Service related to audits for multiple tax years and the aforementioned resolution of foreign audits, partially offset by the unfavorable impact of the non-deductibility of the aforementioned legal charge related to Rapamune, all recorded in third-quarter 2012.
As a result of all these factors, fourth-quarter 2012 reported net income(3) was $6.3 billion, compared with $1.4 billion in the prior-year quarter, and reported diluted EPS(3) was $0.85, compared with $0.19 in fourth-quarter 2011. Full-year 2012 reported net income(3) was $14.6 billion, an increase of 46% compared with $10.0 billion in full-year 2011, and reported diluted EPS(3) was $1.94, an increase of 53% compared with $1.27 in full-year 2011.
Ian Read, Chairman and Chief Executive Officer, stated, “In 2012, we generated attractive returns for our shareholders and made meaningful progress in positioning Pfizer for anticipated sustained value creation. Notable achievements during 2012 included approvals of five important new products in key markets, realizing significant value through the sale of our Nutrition(1) business, preparation for our potential initial public offering of up to a 19.8% stake in Zoetis(4) in order to further unlock value, as well as returning almost $15 billion to our shareholders through dividends and share repurchases. In addition, many of our key innovative products reported solid operational growth, and our Emerging Markets business generated strong growth. We continued to make important advances in our mid-to-late stage pipeline, notably in the oncology and vaccines areas, effectively managed our cost structure and progressed key initiatives that I believe will drive future growth. These achievements reflect the continued hard work and commitment of our colleagues in support of Pfizer’s ability to realize long-term success.”
“During 2013, we will continue to foster our two distinct operating models in order to best support our innovative and value-driven businesses and position them to generate peak performance. We also look forward to successful launches for Xeljanz for the treatment of moderate-to-severe rheumatoid arthritis and, together with our partner Bristol-Myers Squibb, Eliquis for the prevention of stroke and systemic embolism in patients with nonvalvular atrial fibrillation. These opportunities represent important new therapies in high-need markets. In addition, our mid-to-late stage pipeline continues to strengthen with key potential opportunities, including palbociclib (PD-332991) for advanced breast cancer, RN316 (PCSK9) for lowering LDL cholesterol, dacomitinib for advanced non-small cell lung cancer, inotuzumab for aggressive non-Hodgkin's lymphoma and acute lymphoblastic leukemia, Xeljanz for psoriasis, and the rLP2086 vaccine for meningococcal B in adolescents and young adults. In addition, I expect that ‘bolt-on’ business development will continue to play an important role in supplementing our internal efforts.”
“In summary, we remain intently focused on continued value creation for our shareholders, driving meaningful innovation and pursuing the most attractive opportunities for deployment of our shareholders’ capital,” concluded Mr. Read.
Frank D’Amelio, Chief Financial Officer, stated, “Overall, I am pleased with our 2012 financial performance, our recent product approvals and our expense reductions, as evidenced by the $4.5 billion decline in adjusted cost of sales, SI&A expenses and R&D expenses(2) in the aggregate compared with 2011. Additionally, we completed an important strategic initiative through the sale of our Nutrition(1) business to Nestlé, and are ready to execute on another important strategic initiative with the potential initial public offering of up to a 19.8% stake in Zoetis(4), after having recently completed a related $3.65 billion debt offering. We continue to expect to allocate the proceeds from these transactions to share repurchases while also considering other value-creating opportunities, with the return on share repurchases remaining the case to beat.”
“We are also providing our initial 2013 financial guidance, including a range for revenues of $56.2 to $58.2 billion and for adjusted diluted EPS(2) of $2.20 to $2.30. Our guidance reflects the benefit of a full-year contribution from Zoetis(4), partially offset by an unfavorable $0.02 adjusted(2) and reported(3) diluted EPS impact for Zoetis(4)-related interest expense associated with the $3.65 billion debt offering and certain duplicative and other costs given the potential separation of Zoetis(4). Additionally, our revenue guidance reflects the anticipated negative impact of approximately $4 billion due to product losses of exclusivity and the near-term expiration of certain co-promotion agreements. We expect adjusted SI&A expenses(2) to be between $15.6 billion and $16.6 billion, with the mid-point below the 2012 level. Notably, we expect SI&A expenses will include substantial expenses associated with the launches of various key medicines, including Eliquis, Xeljanz and Prevnar/Prevenar 13 for adults, but plan to essentially offset those incremental expenses through our cost-reduction initiatives. Lastly, we expect to continue to deploy significant capital to share repurchases during the year,” concluded Mr. D’Amelio.
he exchange rates assumed in connection with the 2013 financial guidance are as of mid-January 2013.
The 2013 financial guidance does not assume the completion of any business development transactions not completed as of December 31, 2012, including any one-time upfront payments associated with such transactions, and excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of December 31, 2012.
The 2013 financial guidance reflects the benefit of a full-year contribution from Zoetis(4). Adjusted(2) and Reported(3) Diluted EPS guidance includes a $0.02 unfavorable impact for Zoetis(4)-related interest expense and certain duplicative and other costs given its potential separation. Reported Diluted EPS(3) guidance includes an additional $0.02 unfavorable impact for costs related to the establishment of Zoetis’(4) corporate and manufacturing support functions, and certain other costs related to the potential separation of Zoetis(4) from Pfizer, including new branding, creation of a standalone infrastructure, site separation and certain legal registration and patent assignment costs.
For additional details, please see the attached financial schedules, product revenue tables, supplemental information and disclosure notice.
(1) On November 30, 2012, Pfizer completed the sale of the Nutrition business to Nestlé. The operating results of the Nutrition business are reported as Discontinued Operations – net of tax in the consolidated statements of income for all periods presented. The gain on the sale of the Nutrition business is reported as Discontinued Operations – net of tax in the consolidated statements of income for fourth-quarter and full-year 2012.
(2) "Adjusted Income" and its components and "Adjusted Diluted Earnings Per Share (EPS)" are defined as reported U.S. generally accepted accounting principles (GAAP) net income(3) and its components and reported diluted EPS(3) excluding purchase accounting adjustments, acquisition-related costs, discontinued operations and certain significant items. Adjusted Cost of Sales, Adjusted Selling, Informational and Administrative (SI&A) expenses, Adjusted Research and Development (R&D) expenses and Adjusted Other (Income)/Deductions are income statement line items prepared on the same basis, and, therefore, components of the overall adjusted income measure. As described under Adjusted Income in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Pfizer's Form 10-Q for the fiscal quarter ended September 30, 2012, management uses adjusted income, among other factors, to set performance goals and to measure the performance of the overall company. We believe that investors' understanding of our performance is enhanced by disclosing this measure. Reconciliations of certain GAAP reported to non-GAAP adjusted information for the fourth-quarter and full-year 2012 and 2011, as well as reconciliations of full-year 2013 guidance for adjusted income and adjusted diluted EPS to full-year 2013 guidance for reported net income(3) and reported diluted EPS(3), are provided in the materials accompanying this report. The adjusted income and its components and adjusted diluted EPS measures are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS.
(3) “Reported Net Income” is defined as net income attributable to Pfizer Inc. in accordance with U.S. GAAP. “Reported Diluted EPS” is defined as reported diluted EPS attributable to Pfizer Inc. common shareholders in accordance with U.S. GAAP.
(4) Pfizer previously announced its intention to initiate a potential initial public offering of up to a 19.8% stake in Zoetis Inc. (Zoetis), a subsidiary of Pfizer, and Zoetis has filed a registration statement with the Securities and Exchange Commission. Upon completion of the potential initial public offering, Pfizer will have transferred substantially all of its animal health business assets and liabilities to Zoetis. The financial results of Zoetis differ from the financial results of the Animal Health business unit as the components of this unit differ from Zoetis and, therefore, the financial results of the Animal Health business unit should not be relied upon as indicative of the performance of Zoetis.
(5) On August 1, 2011, Pfizer completed the sale of Capsugel to an affiliate of Kohlberg Kravis Roberts & Co. L.P. The operating results and the gain on the sale of Capsugel are reported as Discontinued operations – net of tax in the consolidated statements of income for full-year 2011. Additionally, due to the acquisition of King Pharmaceuticals, Inc. (King), legacy King operations are reflected in the results beginning January 31, 2011. Therefore, in accordance with Pfizer’s domestic and international reporting periods, in full-year 2011 the operating results reflect approximately eleven months of King’s U.S. operations and approximately ten months of King’s international operations.
(6) For a description of each business unit, see Note 13A to Pfizer’s condensed consolidated financial statements included in Pfizer’s Form 10-Q for the fiscal quarter ended September 30, 2012.
(7) Other includes revenues generated primarily from Pfizer CentreSource, Pfizer’s contract manufacturing and bulk pharmaceutical chemical sales organization.