Highlights From PFE's Q4 Conference Call: Wyeth Integration Going Well; Issues Guidance Through 2012

February 3, 2010 1:11 PM EST

Pfizer (NYSE: PFE) reports Q4 EPS of $0.49, versus the analyst estimate of $0.50. Revenue for the quarter was $16.54 billion, which compares to the estimate of $15.97 billion. Shares are down 2.41% today.

Highlights From PFE's Q4 Conference Call:

• Sees FY10 EPS of $2.10 - $2.20, versus $2.27 consensus.
  
• (CEO) Today, thanks to the changes that we have made, the Wyeth acquisition and the hard work of thousands of people, our targets for 2012 project adjusted earnings per share that are higher than both our 2009 actual results and our 2010 guidance.
  
• Who would have thought that Pfizer would join forces with GSK (NYSE: GSK) to create ViiV Healthcare, a separate company that brings together the industry's best assets in combating HIV Aids. Today, we are working hard to unleash creative thinking and fast disciplined execution throughout the company. The watch words of our culture are speed, focus, accountability, execution, results.
  
• In emerging markets, for the first time, we saw double-digit revenue growth led by China, India, Brazil and Russia. The Established Products business consisting of products that historically simply decline actually grew 1% on an operational basis for the first time.
  
• Across all of these businesses, we will continue to focus on reducing costs, making our cost structure more flexible and improving productivity. And we will also make focused, disciplined investments where there is opportunity for profitable growth.
  
• We now have 133 compounds in development including 27 biologics and six vaccines, bringing our ratio of small molecules to biologics from three to one to 1.3 to one.
  
• We are especially enthusiastic about our late phase portfolio. We now have 34 compounds in Phase III development across various indications. Among the most noteworthy of these are Dimebon for Alzheimer's Disease, Taszocitamib [ph], Jak inhibitor for rheumatoid arthritis, apixaban for cardiovascular indications; tanezumab for pain, sunitinib for renal cell carcinoma, additional indications for our Sutent and studies of the Prevnar 13 vaccine in adults.
  
• (CFO) Fourth quarter 2009 reported revenues were 16.5 billion, a year-over-year increase of 34% or 4.2 billion due to 3.3 billion or 27% from the addition of legacy Wyeth products, 419 million, or 3% operational growth from legacy Pfizer products and 469 million, or4% from foreign exchange.
  
• Fourth quarter 2009 reported net income increased 188% to 767 million and reported diluted EPS increased from 150% to $0.10 year-over-year due to higher revenues, the non-recurrence of the pre-tax and after tax charge of 2.3 billion in the prior year quarter related to the resolution of certain investigations concerning Bextra and various other products, which were largely offset by higher acquisition-related cost, which include transaction and integration cost, and restructuring charges associated with the Wyeth acquisition and significant purchase accounting adjustments.
  
• Fourth quarter 2009 adjusted income of 3.8 billion and adjusted diluted EPS of $0.49 decreased year-over-year by 13% and 25%, respectively.
  
• Fourth quarter 2009 adjusted cost of sales was 2.9 billion, or 17.5%, as a percentage of revenues versus 11.7%, or 1.4 billion, in the year ago quarter, driven by, first, the overall change in mix of products and businesses due to the Wyeth acquisition.
  
• Fourth quarter 2009 adjusted SI&A expenses increased 52% to 5.3 billion year-over-year, resulting from the addition of legacy Wyeth operation, increased investments in high growth and in-line product opportunities and the negative impact of foreign exchange. Fourth quarter adjusted R&D expenses increased year-over-year to 2.8 billion, or 27%, due to addition of legacy Wyeth operations, continued investment in the late-stage development portfolio, cost associated with Established Products business development transactions and the negative impact of foreign exchange.
  
• Consequently, '09 reported diluted EPS of $1.23 was lower than our previous guidance range of $1.45 to $1.50. On an adjusted results basis, FX increased fourth quarter revenues by approximately 469 million or 4% year-over-year.
  
• On the other hand, foreign exchange negatively impacted total adjusted cost in the fourth quarter by 720 million, or 10%, which resulted in a $0.02 net decrease in adjusted diluted EPS. Most notably, foreign exchange had a 568 million, or 39%, negative impact on cost of sales. Excluding the impact of foreign exchange, adjusted total cost increased operationally by 44% due to the inclusion of legacy Wyeth operations and the continued investment in high growth areas.
  
• Now, let's move to the results of our commercial organizations. As you can see from the chart, biopharmaceutical revenues increased year-over-year, which included a 419 million, or 4%, favorable impact from foreign exchange.
  
• Operationally, biopharmaceutical revenues increased 2.9 billion, or 26%, year-over-year due to 2.5 billion, or 22%, from the addition of Wyeth products, and about 400 million, or 4%, from legacy Pfizer products.
  
• Primary care revenues increased 10% year-over-year including a 4% favorable impact of foreign exchange. Operational growth of 6% was due to the addition of Premarin, a legacy Wyeth product and operational improvements in Lyrica and Alliance [ph] revenues.
  
• Specialty care revenues increased 84% year-over-year, including a 5% favorable impact of foreign exchange. Operational growth of 79% was due to the addition of Wyeth's Specialty Care portfolio, particularly Enbrel and Prevnar and operational growth in Xalatan and Zyvox among others.
  
• Established product revenues increased by 57% year-over-year, which included a 6% favorable impact of foreign exchange. Operational growth of 51% was due to the addition of legacy Wyeth products, primarily driven by Effexor, the launch of six products in the U.S., bringing the number of solid oral dose license products launched in the U.S. to 26, the launch of five in license products in the newly created U.S. sterile injectibles unit, higher antibiotic sales, and the stabilization of the rate decline of some LOE products.
  
• And we're pleased that in fourth quarter '09, legacy Pfizer contributed plus 1% of operational growth year-over-year to establish products growth, positive growth for the first time.
  
• Emerging markets revenues increased 25% year-over-year, including a 1% favorable impact of foreign exchange. Operational growth of 24% was due to the addition of Enbrel and Prevnar, legacy Wyeth products and double-digit growth in priority markets such as Brazil, Russia, India and China. In fourth quarter '09, legacy Pfizer contributed 10% of operational growth to emerging market results.
  
• Oncology revenues increased 11% year-over-year, including a 5% favorable impact of foreign exchange. Operational growth of 6% was due to the addition of Wyeth's Oncology portfolio, the continued solid performance of despite Sutent, despite increasing market challenges which were partially offset by the continued negative impact of Camptosar's LOE in most European markets in July, 2009.
  
• Fourth quarter '09 diversified revenues increased 83% year-over-year, which included a favorable impact of 45 million, or 5%, from foreign exchange. Operational growth of 78% was due to an 11% operational increase in animal health revenues due to the addition of Wyeth's Fort Dodge products and an increase in legacy Pfizer's animal health revenues and the addition of Wyeth consumer health care, which includes sent Centrum, Advil and Robitussin, among other products, and Wyeth's nutrition products.
  
• In January of '09, Pfizer implemented a new cost reduction program expected to achieve gross reductions of approximately three billion at '08 average exchange rates, compared with '08 adjusted total costs. As we previously said, we anticipate a two billion net decrease in adjusted total costs as we expect to reinvest about one billion of those reductions in the business.
  
• Net of these investments, we reduced Pfizer's stand alone costs by 200 million on a constant currency basis for full year '09 versus '08. We believe we can achieve our cost reduction targets as we begin to realize the benefits of some of the synergy decisions we've made, including determining headquarters locations, rationalizing our R&D portfolio and reducing our R&D real estate footprint by about 35%.
  
• In 2010, we currently expect, for the combined company, reported revenues in the range of 67 to 69 billion, cost of sales as a percentage of revenues of 19 to 20%, adjusted FINA in the range of 19 to 20 billion, adjusted R&D expenses in the range of 9.1 to 9.6 billion, adjusted other deductions in the range of 1.2 to 1.4 billion, effective tax rate on adjusted income of about 30%, reported diluted EPS in the range of $0.95 to $1.10 and adjusted diluted EPS in the range of 210 to 220.
  
• Pfizer's U.S. biopharmaceutical organization is evolving its U.S. distribution model to a fee for service approach in the U.S. Plans for this change were in place prior to the Wyeth acquisition, and Wyeth already has a fee for service arrangement in the U.S. This change should not have a significant impact on 2010 results.
  
• It should, however, have a slight one time impact on seasonal sales patterns in the first and second quarter 2010. We expect first quarter sales of legacy Pfizer products to moderately decrease year-over-year, which we then expect will be offset by a moderate year-over-year increase in second quarter sales. We're updating and expanding our 2012 financial targets.
  
• We now expect 2012 reported [ph] revenues to be in the range of 66 to 68.5 billion, which reflects the divestiture of animal health assets required by the regulatory authorities, a revenue shift to the newly formed HIV company, ViiV Healthcare resulting from our joint venture with GSK, and Wyeth's return of its Rilstarite at a licensed store.
  
• All combined, these items decreased the previous target by about 1.5 billion. We also expect, in 2012, adjusted R&D expenses to be in the range of eight to 8.5 billion, adjusted other deductions to be in the range of 1 to 1.2 billion, adjusted operating margins to be in the previously expected range of high 30s to low 40s%, the effective tax rate on adjusted income to be about 30%, reported diluted EPS to be in the range of $1.58 to $1.73, adjusted diluted EPS to be in the range of 225 to 235 which is based on approximately 8.1 billion shares currently outstanding, and an operating cash flow of 19 billion or more.
  
• Both our 2010 guidance and 2012 targets reflect our confidence in the business and balance the achievements of the expected cost reductions with the anticipated increased investment to drive longer term, top and bottom line performance. In addition, 2012 our targets assume a modest level of planned business development activities. I want to emphasize that these longer term targets are subject to greater variability uncertainty due to macroeconomic factors.
  
• (Q&A)Good morning. I wanted to ask you a couple of questions. First of all, on the 2010 guidance, we obviously like to trust that the reinvestment that you're making in the products is prudent and official in the long-term strategic outlook for the company, but I think we need a little more color so that we can have that confidence. So can you talk why is SI&A expenses are presumably much higher than the Street expected. And obviously you're not inside of our models, but you have some priorities that perhaps you could elucidate for us? And then if you could comment on the 2012 revenue difference and where that primarily came from. And my last question is that with all if back and forth about the ratio farm acquisition, I wonder if you could remind us what you see as the pros and cons of buying a generic business of that sort of store.(A)Thank you for the questions. Let me make a general statement about your first question which is investments in 2010. And then I'm going to ask Frank and Ian to elaborate. We've had the benefit now since
  the closing of the Wyeth transaction to really dig deep into the opportunities that the two companies provide and to really consider where there's opportunities to invest in growth. We have now with our business model a very I think very rigorous process, and as we have talked about in the past, we really apply very different hurdle rates to different businesses based on the various risks that they presen, which vary, and it's a pretty disciplined process. And we have looked at where there are opportunities in these different businesses based on their growth opportunities, based on what they see in their different markets. And we also, as I mentioned in my comments and Frank and Ian can elaborate on this, want to do that in a flexible way so that we can adjust our cost and investments as needed. And so what we're talking about for 2010 reflects a very thorough review of where those investments can be made in both the short and the long-term to grow the business. So that's the approach we took. I'll let Frank and Ian give you more specifics, but I just wanted to give you that overview of how we thought about it. And I think actually that we're very excited about a lot of those opportunities, but I want to emphasize that it's a balance between continuing to reduce costs both on an absolute basis but also create a flexible cost structure so that we can flex it as needed and as the business requirements demand, but also kind of a real bottoms up business leader focus, market by market customer set by customer set opportunities for growth that we approach in a pretty disciplined way, and that's how we come about these investment opportunities. So let me ask Fran and Ian to take your questions both about the 2010 issue and the 2012 revenues, and then I'll ask Ian - obviously, we're not going to comment on any particular potential transactions, but Ian can elaborate generally about our thinking on established business opportunities. So Frank?(A)Yes, so let me hit 2012 revenue number first and I'll go to the 2010 reinvestment. On 2012 revenue, let me bridge it this way. Back in January of last year, we gave a target of approximately 70 billion which was the sum of the two companies revenue numbers in 2008, to add a stand alone Pfizer and a stand alone Wyeth. So a couple of things have happened. One, the first bridge is from 70 to 68.5 which is the top end of our new target range, three things: the planned animal health divestitures; the second item is the MD HIV joint venture and ViiV Healthcare; and then the third item is basically the return of re-lister rights to the licensor. Those three items were not in the approximately $70 billion target that we had issued, so that takes you from roughly 70 billion to 68.5. Then in terms of the new range, the 66 to 68.5, we've had a year now since we issued that target back in January. We have had a year with the new business unit model in place, and getting the benefits of that model. We have integrated Wyeth. We've four months or so now post integration with Wyeth. And when we factor in all the data, all the bottoms up work that we've done, we're now updating the target to 66 to 68.5 billion, and we have confidence in our ability to achieve that number. So that's the 2012 revenue item. On 2010 on investments, I'll touch on this - Ian, I'll make you make some comments and we may even want some product comments on this not just limiting it to SI&A although Katherine talked about SI&A kind of at a high level, at a general ledger lever. And I'll let Ian get into some of the detail. It's the opportunity growth areas that we've been talking about where we continue to see opportunities. So it's emerging markets where we continue to invest, I'll call it additional marketing, investment make additional marketing investment in the focus countries, adding field force, promotional tools, sales tools. We saw some of the benefits of that this past quarter with double digit growth and legacy Pfizer in emerging markets, and very strong double digit growth in our priority countries, in many of our priority countries, continuing to invest in established markets. Once again, sales, feet on the street, on SI&A, and also continuing to just work through other growth opportunity areas that we see. Ian?(A) Thanks, Frank. The first thing I'd like to make the point is that in the business structure, we are structured for a post 2012 world, so a lot of our incremental investment will be in flexible spending and directed [audio gap] behind products. So certainly in emerging markets we're adding field force as fast as we can with quality field force in China and Brazil and some of the other markets and established products. We're adding dossiers and adding opportunities and really focusing on market by market which requires targeted promotional spend. In the U.S., Prevnar effort in adult where we need to ramp up for that. It will probably require a primary care field force to really fully explore its opportunity. Similarly in Europe and western Europe, the same nature investment, a lot of premarketing investments to prepare the market. And then inside the U.S., we're putting variable spend behind some of the major products that we need to grow through this period such as Lyrica where we have seen in the fourth quarter with that increase, DTC spend, good improvements in market share for DPN and PHN and fibromyalgia. Chantix, which I'd like to point out that, in the three years Chantix being on the market prior to third quarter, it only had had 18 weeks of DTC in those three years. So we are putting substantial effort behind that both in the December and in 2010. We the look at other areas of spend, Lipitor. We're continuing to defend Lipitor where it makes sense to maximize the revenues of Lipitor through its LOE, and even smaller products such as Toviaz where we now have new data with head to head superiority against Detrol in two clinical trials. So we see a lot of opportunity in that segment, and we intend to invest behind this new product. So that gives you a scope. And if we take it to 2012, clearly we need to do a lot of market preparation and development for our Alzheimer franchise, which with Dimebon would be healthy the first one into the marketplace. We have our JAK-3 inhibitor, we have Oncology portfolio where we expect Xalatan to be entering or the Cemanalk [ph] inhibitor. We have apixaban, we have tanezumab, We have Pristik [ph] both it's depression indication and it's phase of motor indication, and potentially Aprella [ph]. So we have a rich powerful late stage portfolio which we need to invest in to produce the growth from 12 and onwards. And actually I'd like to ask Martin and Michael if they want to add some color to those really exciting products?(A) Thanks Ian. Thanks for the question, Katherine. I'll keep this very brief because Ian has touched on many of the high points. You will remember in March the 5th 2008, we made some commitments of our late stage pipeline in terms of those entities entering phase III and the numbers we'd have in phase III by the end of 2009, and we've met all of those commitments. The fourth commitment, you will remember, were the submissions we make over 2010 to 2012, and we're very much on target to do that. Now, take it up to the close of the deal and add in really wonderful products from Wyeth in that late stage where we now have 34 entities, and Ian has mentioned the tanezumab, the Tazilsystamab [ph], Xysistamab [ph], Azimabon [ph] not to talk of Prevnar and Bapineuzumab. So I couldn't be more excited about our pipeline and of course that these investment to bring it home. But, Michael?(A)I'm very pleased to hear excitement from all of you about the investment to really make this product reach all the patients that we want to and be able to transform some of the diseases. For example, the Prevnar both for infant and adults to come I think is a vaccine that can really provide an expanded coverage, and in adult area it will be the first powerful [indiscernible] vaccine that could allow sustained protection from pneumococcal diseases. Tanezumab I think offers the first new biological, where we have pioneered the science, and to bring it into the pain setting and the primary care over time as well as working with specialized pain physicians. I think really advanced pain relief in a new setting, and of course, having spent a lot of effort in rheumatology with Enverline [ph], I'm very excited to see a new powerful drug that can also provide increased convenience.
  (A) Yes, Katherine, I can't really comment on any particular company or possible acquisition, but clearly Established Products, as it becomes a major player in this field, needs to expand its portfolio globally in reality to maximize the infrastructure we have created: both the targeted field force, the commercial infrastructure. So we will continue to look at business development opportunities to add to the strength of that portfolio.

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