Highlights From PFE's Q3 Conference Call: Comments on Merger with Wyeth, Guides Higher for FY Revenues

October 20, 2009 3:50 PM EDT

Pfizer Inc. (NYSE: PFE) reports Q3 adjusted EPS of $0.51, versus the consensus of $0.48. Revenues fell 3% $11.6 billion, versus the consensus of $11.42 billion. Share are down less than 1% today.

Highlights From PFE's Q3 Conference Call:

• Pfizer sees 2009 revenues of $49-$50 billion, versus prior guidance of $45-$46 billion and the consensus of $45.3 billion. Pfizer sees FY EPS of $2.00-$2.05, versus prior guidance of $$1.90-$2.00 and the consensus of $1.98.
  
• (CEO) (because of Wyeth merger) Pfizer is now a significantly more diversified company with an expanded inline portfolio offering treatments and preventive medicines for every stage of life.
  
• The combined company also has a robust pipeline of biopharmaceutical projects including significant late stage opportunities in Alzheimer's disease, oncology, pain, inflammation and other important therapeutic areas.
  
• Our leadership teams below the executive level are now in place across most of the company.
  
• We intend to announce decisions about R&D sites in the next 30 to 60 days and about manufacturing sites three to six months from now.
  
• On a constant currency basis, each of our pharmaceutical units as well as our animal health business grew revenues this quarter compared to a year ago except for primary care which was flat and established products which was down in the face of LOEs as expected.
  
• Global revenues for two of our most important products grew operationally this quarter. Lyrica posted 35% operational growth outside the United States while Sutent grew by 21% operationally outside the U.S.
  
• Overall, revenues outside the United States grew 5% operationally while U.S. revenues declined 2% compared to a year ago. And revenue from many alliances with other companies grew 21% worldwide.
  
• We reduced our adjusted total cost by 5% compared to the year ago quarter. 3% of this was due to operational improvements. During Q4, we expect investments and high growth opportunities to offset a
  portion of the 2009 cost reductions.
  
• (CFO) Reported revenues for Q3 of 2009 were 11.6 billion, a decrease of 3% year-over-year. This is driven by foreign exchange, which had an unfavorable impact on reported revenues of approximately 610 million, or 5% which was partially offset by the non-recurrence of the $217 million charge or 2% resulting from a one-time adjustment in the year ago quarter for prior years liabilities product returns.
  Net of these items reported revenues were essentially flat.
  
• Adjusted income of 3.5 billion and adjusted diluted EPS of $0.51 decreased year-over-year by 17% and 18% respectively.
  
• Adjusted cost of sales as a percentage of revenue was 15.4%, versus 14.5% in the prior year quarter primarily driven by a negative impact of foreign exchange, which is partially offset by savings and cost reduction initiatives. Excluding foreign exchange, adjusted cost of sales as a percentage of revenue was 14.3% in Q3 2009.
  
• Adjusted SI&A expenses decreased 6% or 204 million, year-over-year and adjusted R&D expenses decreased 8% or 150 million year-over-year.
  
• On an adjusted results basis foreign exchange decreased Q3 revenues by approximately 606 million or 5% year-over-year. In the year ago quarter foreign exchange increased revenues by approximately 620 million or 5% versus Q3 of 2007.
  
• In total, business revenues increased 2% excluding the impact of foreign exchange and the prior year returns adjustment.
  
• During Q3, we continue to make progress on our ongoing cost reduction initiatives achieving approximately 210 million in net cost reductions versus the year ago quarter on a constant currency basis.
  
• For the nine months of 2009, we realized a decrease of about 950 million and adjusted total cost versus 2008 at constant currency.
  
• We remain on track to achieve our 2 billion net cost reduction target on a constant currency basis by 2011, which is in addition to approximately 4 billion in deal synergies related to the acquisition of Wyeth that we expect to realize by 2012.
  
• We've updated our '09 guidance to reflect the completion of the acquisition of Wyeth. We currently expect the '09 reported revenues for the combined company to be 49 to 50 billion.
  
• We also expect 2009 reported diluted EPS for the combined company of $1.45 to $1.50. $2.00 to $2.05 adjusted diluted EPS guidance is based on estimated full year weighted average shares oustanding of approximately 7 billion shares.
  
• (Q&A) I guess, I have two questions, the first is for Jeff and the second is for Frank and both of these are kind of high level. Jeff can you please frame your vision or what you think the investment community will come the better appreciate about Pfizer over the next year. And Frank can you discuss cash repatriation requirement in the near-term? Thank you. (A) Well, I think Dave that the real power of the changes that we made over the last two years that is already starting to reflect itself in our result - to do so is the benefit of our business unit structure and I just highlight two particular aspects of that. First of all, by having leaders of these business units that are really keenly focused on their particular marketplaces and their particular customer needs. We're insuring that we are identifying the opportunities for both growth and appropriate cost structure for those businesses. We're allocating capital to those businesses based on the risks and returns that are appropriate to them which vary depending on the businesses and we're really encouraging them to see opportunities for growth as well structuring their cost accordingly. And I think you're going to find and we already are seeing that's creating a lot of opportunities that would have got kind of lost in the larger company under the earlier
  structure. Secondly, by having those business unit leaders have developed responsibility for late stage development in close collaboration with research. But nevertheless they are ones that ultimately make the decisions whether to make those very expensive decisions in late stage development. I think they will be a greater discipline and customer focus and commercial evaluation of those decisions that I think will improve our R&D productivity when it comes to the real intense investment decisions that are made. So I think the visibility that we've given to these business units now we are in nine of them, thanks to the diversification that Wyeth has presented, we're going to see and I hope the investors will continue to see the benefit of being in nine different businesses, they're in different cycles, they're in different markets, different opportunities I think that really will be of tremendous benefit to the shareholders going forward and I think we're already seeing the benefit of that and we'll continue to see it over the next couple of year's. (A)And then Dave, relative to the second question on cash repatriation I think the best way to answer that is just in terms of the tax rate and because we will continue to have repatriation needs. Earlier in the year we gave guidance for 2009 that said the adjusted tax rate would be approximately 30%, its still approximately 30% I think going forward at least for the near-term we should expect our rate to remain at approximately 30%. So that factors in incorporates our repatriation needs.
  
• Couple of questions on emerging markets, May be first can you just help us quantify little bit what growth rates Pfizer is anticipating for its emerging market segment next few year's I know you sited emerging markets just one of the core components where you kind of defer little bit from where may be street consensus 2012 sales are potential for share gains in these market. Is the growth you're expecting for Pfizer something meaningfully higher than I guess the 9% organic growth we've seen these past two quarters. And then second, margin contribution from these emerging market business how should we think about that relative to Pfizer's overall operating margins. And may just very quick final question Animal Health, can you just quantify the annual sales from the products that were divested from the Wyeth transaction. Thank you. (A)Let's do this in three pieces I'm going to ask to Ian to talk about emerging markets relative to overall market growth. Then I'll ask Frank to talk about margins for these business units in general and then on the Animal Health divestitures. (A)So Chris, we're growing in emerging markets overall that 9% in our BRIC countries plus I think Mexico and Korea or Turkey we're growing at closer to 12%. The overall emerging market is growing about 13% and this
  is in spite, the economic turbulence we've had. So overall, I would expect emerging markets to at least continue to grow as a marketplace in that 13 to 15% and our aim is to accelerate our growth although to be truthful 12% is pretty robust in those BRIC countries. (A)And Chris in terms of the second and third questions, on margins for emerging markets I think the way to think about that is clearly the gross margins there are somewhat lower than call it our traditional pharma business whether it would be Primary Care or the other places there. But remember what we've said, that it also has lower expenses so that all in our operating margins should still continue to be in the high 30s to low 40s and that's no
  change from what we've said previously. On Animal Health divestment, I had ballpark this earlier in the year I'll call it at approximately 10% of what the overall sales of the combined business was, and my guess is we'll come in at or slightly higher than that, but in that range. So not a whole lot of variability from that roughly 10% is - my guess is it could be a little bit higher than that, but we'll be in the zone.

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