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| PFE > SEC Filings for PFE > Form 10-Q on 2-May-2008 | All Recent SEC Filings |
2-May-2008
Quarterly Report
Introduction
Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding Pfizer's results of operations, financial condition and cash flows. The MD&A is organized as follows:
• Overview of Our Performance and Operating Environment. This section, beginning on page 19, provides information about the following: our business; our performance during the first quarter of 2008; our operating environment; our strategic initiatives, such as acquisitions; and our cost-reduction initiatives.
• Revenues. This section, beginning on page 22, provides an analysis of our products and revenues for the first quarters of 2008 and 2007, as well as an overview of important product developments.
• Costs and Expenses. This section, beginning on page 31, provides a discussion about our costs and expenses.
• Provision for Taxes on Income. This section, beginning on page 32, provides a discussion of items impacting our tax provision for the periods presented.
• Adjusted Income. This section, beginning on page 33, provides a discussion of an alternative view of performance used by management.
• Financial Condition, Liquidity and Capital Resources. This section, beginning on page 37, provides an analysis of our balance sheets as of March 30, 2008, and December 31, 2007, and cash flows for the first quarters of 2008 and 2007, as well as a discussion of our outstanding debt and commitments that existed as of March 30, 2008, and December 31, 2007. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.
• Outlook. This section, beginning on page 40, provides a discussion of our expectations for full-year 2008.
• Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 41, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this MD&A relating to our financial results, operations and business plans and prospects. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section is a discussion of Legal Proceedings and Contingencies.
Components of the Condensed Consolidated Statement of Income follow:
First Quarter
(millions of dollars, except per common share Mar. 30, April 1,
data) 2008 2007 % Change
Revenues $ 11,848 $ 12,474 (5)%
Cost of sales 1,986 1,887 5
% of revenues 16.8 % 15.1 %
Selling, informational and administrative expenses 3,492 3,361 4
% of revenues 29.5 % 26.9 %
Research and development expenses 1,791 1,665 8
% of revenues 15.1 % 13.3 %
Amortization of intangible assets 779 815 (4)
% of revenues 6.6 % 6.5 %
Acquisition-related in-process research and
development charges 398 283 40
% of revenues 3.4 % 2.3 %
Restructuring charges and acquisition-related
costs 178 812 (78)
% of revenues 1.5 % 6.5 %
Other (income)/deductions - net (333) (402) (17)
Income from continuing operations before provision
for taxes on income and minority interests 3,557 4,053 (12)
% of revenues 30.0 % 32.5 %
Provision for taxes on income 763 689 11
Effective tax rate 21.5 % 17.0 %
Minority interests 6 3 89
Income from continuing operations 2,788 3,361 (17)
% of revenues 23.5 % 26.9 %
Discontinued operations - net of tax (4) 31 *
Net income $ 2,784 $ 3,392 (18)
% of revenues 23.5 % 27.2 %
Earnings per common share - basic:
Income from continuing operations $ 0.41 $ 0.48 (15)
Discontinued operations - net of tax -- -- *
Net income $ 0.41 $ 0.48 (15)
Earnings per common share - diluted:
Income from continuing operations $ 0.41 $ 0.48 (15)
Discontinued operations - net of tax -- -- *
Net income $ 0.41 $ 0.48 (15)
Cash dividends paid per common share $ 0.32 $ 0.29
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* Calculation not meaningful.
OVERVIEW OF OUR PERFORMANCE AND OPERATING ENVIRONMENT
Our Business
We are a global, research-based company applying innovative science to improve world health. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of safe and effective medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness, and increased access to quality healthcare. Our value proposition is to demonstrate that our medicines can effectively prevent and treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems and their related costs. Our revenues are derived from the sale of our products, as well as through alliance agreements, under which we co-promote products discovered by other companies.
Our First Quarter 2008 Performance
Revenues in the first quarter of 2008 decreased 5% to $11.8 billion, compared to
the same period in 2007. The significant product and alliance revenue impacts on
revenues for the first quarter of 2008, compared to the same period in 2007, are
as follows:
First Quarter
Increase/
(decrease) % Change
(millions of dollars) 08/07 08/07
Norvasc(a) $ (556) (52)
Zyrtec/Zyrtec D(a) (344) (75)
Lipitor(b) (221) (7)
Camptosar(a) (37) (16)
Lyrica 187 47
Chantix/Champix(c) 115 71
Sutent(c) 88 86
Xalatan/Xalacom 45 13
Geodon/Zeldox 25 12
Alliance revenues 90 23
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(a) Norvasc, Zyrtec/Zyrtec D and Camptosar are products that have lost U.S.
exclusivity since 2007.
(b) Lipitor has been impacted by competitive pressures and other factors.
(c) Chantix/Champix and Sutent are major new products that were launched in the
U.S. since 2006.
Revenues benefited from favorable foreign exchange impacts of about $570 million. The impact of rebates in the first quarter of 2008 decreased overall revenues by approximately $900 million, compared to approximately $670 million in the first quarter of 2007. The increase in rebates was due primarily to:
• the impact of our contracting strategies with both government and non-government entities in the U.S.; and
• a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act), which went into effect in 2006,
partially offset by:
• changes in product mix, among other factors.
(See further discussion in the "Revenues - Pharmaceutical Revenues" section of this MD&A for the first quarter of 2008.)
Income from continuing operationsfor the first quarter of 2008 was $2.8 billion, compared to $3.4 billion in the first quarter of 2007. The decrease was primarily due to:
• the increase in Acquisition-related in-process research and development charges in the first quarter of 2008, compared to the same period in 2007; and
• the decline in certain product revenues discussed above, including the impact of geographic and business mix of revenues on Cost of sales,
partially offset by:
• lower restructuring costs associated with our cost-reduction initiatives in the first quarter of 2008, compared to the same period in 2007;
• the favorable impact of foreign exchange; and
• savings related to our cost-reduction initiatives.
(See further discussion in the "Costs and Expenses" and "Provision for Taxes on Income" sections of this MD&A.)
In the first quarter of 2008, we acquired CovX and Coley Pharmaceutical Group,
Inc. and completed two smaller acquisitions related to Animal Health. In the
first quarter of 2008, we entered into an agreement to acquire Serenex, Inc. and
we completed that acquisition in April 2008. In the first quarter of 2008, we
also began a tender offer to acquire all the outstanding shares of Encysive
Pharmaceuticals Inc., which was completed in April 2008. In the first quarter of
2007, we acquired Embrex, Inc. and BioRexis Pharmaceutical Corp. (See further
discussion in the "Our Strategic Initiatives - Strategy and Recent Transactions:
Acquisitions, Licensing and Collaborations" section of this MD&A.)
We have also made progress with our cost-reduction initiatives, which comprise a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the "Our Cost-Reduction Initiatives" section of this MD&A.)
Our Operating Environment
We and our industry continue to face significant challenges in a profoundly changing business environment, as explained more fully in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2007. Industry-wide factors, including pricing and access, intellectual property rights, product competition, the regulatory environment, pipeline productivity and the changing business environment, can significantly impact our businesses. In order to meet these challenges and capitalize on opportunities in the marketplace, we are taking steps to change the way we run our businesses.
Generic competition and patent expirations significantly impact our business. We lost U.S. exclusivity for Camptosar in February 2008 and Norvasc in March 2007 and, as expected, significant revenue declines followed. Zyrtec/Zyrtec D lost its U.S. exclusivity in January 2008 and we ceased marketing the product in late January 2008. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, in addition to other competitive pressures. The volume of patients who switch from Lipitor to generic simvastatin in the U.S. continues to negatively impact prescribing trends, particularly in the managed-care environment. (For more detailed information about Lipitor, Norvasc, Zyrtec, Camptosar and other significant products, see further discussion in the "Revenues - Pharmaceutical - Selected Product Descriptions" section of this MD&A.)
We will continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate.
(See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent developments with respect to patent litigation.)
These and other industry-wide factors that may affect our businesses should be considered along with the information presented in the "Forward-Looking Information and Factors That May Affect Future Results" section of this MD&A.
Our Strategic Initiatives - Strategy and Recent Transactions
Acquisitions, Licensing and Collaborations
We are committed to capitalizing on new growth opportunities by advancing our new-product pipeline, and maximizing the value of our in-line products, as well as through opportunistic licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, diabetes, Alzheimer's disease, cardiovascular disease, vaccines and other products and services that seek to provide valuable healthcare solutions. Some of our most significant business-development transactions during the first quarters of 2008 and 2007 are described below.
• In January 2008, we acquired CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform that we expect will enhance our biologic portfolio. Also in January 2008, we acquired all the outstanding shares of Coley Pharmaceutical Group, Inc. (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In connection with these and two smaller acquisitions related to Animal Health, we recorded $398 million in Acquisition-related in-process research and development charges.
• In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp. (BioRexis), a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, Inc. (Embrex), an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. In connection with these and other small acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges.
The following transactions were not completed as of March 30, 2008, and are not reflected in our consolidated financial statements as of March 30, 2008:
• In April 2008, we completed the acquisition of Serenex, Inc. (Serenex), a
privately held biotechnology company with SNX-5422, an oral Heat Shock Protein
90 (Hsp90) inhibitor currently in Phase I trials for the potential treatment of
solid tumors and hematological malignancies and an extensive Hsp90 inhibitor
compound library, which has potential uses in treating cancer, inflammatory and
neurodegenerative diseases.
• In April 2008, we completed a tender offer and acquired approximately 85% of the outstanding shares of Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company with a product (Thelin) for the treatment of pulmonary arterial hypertension, which is commercially available in much of the E.U., is approved in certain other markets, and is under review by the Food and Drug Administration (FDA), as well as other pipeline candidates. We will acquire all of the remaining shares of Encysive by means of a merger. The cost of acquiring Encysive, through the tender offer and planned merger, will be approximately $200 million, including transaction costs. Upon completion of the tender offer, we also assumed Encysive's change of control repurchase obligations under its $130 million 2.5% convertible notes.
• In April 2008, we also entered into an agreement with a subsidiary of Avant Immunotherapeutics Inc. (Avant) for an exclusive worldwide license to CDX-110, an experimental therapeutic vaccine in Phase II development for the treatment of glioblastoma multiforme, and exclusive rights to the use of EGFRvIII vaccines in other potential indications. Under the license and development agreement, an up-front payment of $40 million and a $10 million equity investment are expected to be recorded in the second quarter of 2008. Additional payments exceeding $390 million could potentially be made to Avant based on the successful development and commercialization of CDX-110 and additional EGFRvIII vaccine products. The agreement is subject to antitrust approval.
• In April 2008, we announced an agreement to acquire a number of animal health product lines from Schering-Plough Corporation for sale in the European Economic Area in the following categories: swine e.coli vaccines; equine influenza and tetanus vaccines; ruminant neonatal and clostridia vaccines; rabies vaccines; companion animal veterinary specialty products; and parasiticides and anti-inflammatories. The acquisition is subject to certain closing conditions, including anti-trust approval.
Our Cost-Reduction Initiatives
We have made significant progress with our multi-year productivity initiatives, which are designed to increase efficiency and streamline decision-making across the company.
We are generating cost savings through site rationalization in R&D and manufacturing, reductions in our global sales force, streamlined organizational structures, staff function reductions, and increased outsourcing and procurement savings. Projects in various stages of completion include:
• Reorganization of our Field Force - Globally, we have reduced our field force by 23%. Additional savings are being generated from de-layering, eliminating duplicative work and strategically realigning various functions.
• Strategic Outsourcing - We are consolidating 11 third-party providers associated with information technology, thereby reducing labor costs. We expect to generate considerable annual savings and improve service quality related to information technology.
• Plant Network Optimization - We are transforming our global manufacturing network to improve efficiency and reduce overall cost. We have reduced our network of plants from 93 four years ago to 57 today. The latter also reflects the acquisition of seven plants and the sites sold in 2006 as part of our Consumer Healthcare business. By the end of 2009, we plan to reduce our network of manufacturing plants around the world to 44. The result will be a more focused, streamlined and competitive manufacturing operation, with less than 50% of our plants and a reduction of more than 35% of our manufacturing employees compared to 2003. Further, we currently outsource the manufacture of approximately 17% of our products on a cost basis and plan to increase this substantially by 2010 and beyond.
• Enhanced R&D Productivity - To increase efficiency and effectiveness in bringing new therapies to patients-in-need, in January 2007, Pfizer Global Research and Development (PGRD) announced a number of actions to transform the research division. Of six sites that were identified for exit by PGRD, two (Mumbai, India, and Plymouth Township, Michigan) have been closed. Operations have been scaled back significantly in the other four sites (Ann Arbor and Kalamazoo, Michigan; Nagoya, Japan; and Amboise, France). The timing of the end of PGRD's activities at these sites is subject to business needs and, in the case of Nagoya and Amboise, to consultation with works councils and local labor law. The reorganization has resulted in smaller, more agile research units designed to drive the growth of our bigger pipeline, while maintaining costs, and generating more products.
By the end of 2008, on a constant currency basis (the actual foreign exchange rates in effect during 2006), we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion, compared to 2006. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)
REVENUES
Worldwide revenues by segment and geographic area for the first quarters of 2008
and 2007 follow:
First Quarter % Change in Revenues
Worldwide U.S. International World- Inter-
Mar. 30, April 1, Mar. 30, April 1, Mar. 30, April 1, wide U.S. national
(millions of 2008 2007 2008 2007 2008 2007 08/07 08/07 08/07
dollars)
Pharmaceutical $ 10,904 $ 11,581 $ 5,141 $ 6,468 $ 5,763 $ 5,113 (6) (21) 13
Animal Health 619 586 240 264 379 322 6 (9) 18
Other 325 307 130 118 195 189 6 10 3
Total Revenues $ 11,848 $ 12,474 $ 5,511 $ 6,850 $ 6,337 (a) $ 5,624 (a) (5) (20) 13
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(a) Includes revenues from Japan of $765 million (6.5% of total revenues) for the first quarter of 2008 and $752 million (6.0% of total revenues) for the first quarter of 2007.
Pharmaceutical Revenues
Worldwide pharmaceutical revenues for the first quarter of 2008 were $10.9 billion, a decrease of 6%, compared to the same period in 2007, due primarily to:
• a decrease in revenues for Norvasc of $556 million in the first quarter of 2008, primarily due to the loss of U.S. exclusivity in March 2007;
• a decrease in revenues for Zyrtec/Zyrtec D of $344 million in the first quarter of 2008, primarily due to the loss of U.S. exclusivity and cessation of marketing in January 2008;
• an increase in rebates in the first quarter of 2008, primarily due to a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act, and the impact of our contracting strategies with both our government and non-government entities in the U.S.;
• a decrease in revenues for Lipitor in the U.S. of $221 million in the first quarter of 2008, primarily resulting from competitive pressures from generics, among other factors; and
• a decrease in revenues for Camptosar of $37 million in the first quarter of 2008, primarily due to the loss of U.S. exclusivity in February 2008,
partially offset by:
• an aggregate increase in revenues from products launched in the U.S. since 2006, particularly Sutent and Chantix, of $212 million and from many in-line products in the first quarter of 2008, including Lyrica, which increased 47%; and
• the weakening of the U.S. dollar relative to many foreign currencies, especially the euro and U.K. pound, which increased Pharmaceutical revenues by approximately $520 million, or 4%, in the first quarter of 2008.
Geographically:
• in the U.S., Pharmaceutical revenues decreased 21% in the first quarter of 2008, compared to the same period in 2007, primarily due to the effect of the loss of exclusivity of Norvasc, Zyrtec/Zyrtec D and Camptosar, and higher rebates in the first quarter of 2008, compared to the same period in 2007, partially offset by the aggregate increase in revenues from products launched since 2006 and from many in-line products; and
• in our international markets, Pharmaceutical revenues increased 13% in the first quarter of 2008, compared to the same period in 2007, primarily due to the favorable impact of foreign exchange on international revenues of approximately $520 million (4%), revenues from our products launched since 2006, as well as growth of certain in-line products.
During the first quarter of 2008, international Pharmaceutical revenues grew to represent 52.9% of total Pharmaceutical revenues, compared to 44.1% in the first quarter of 2007. This increase has been fueled by higher volumes and the favorable impact of foreign exchange, despite pricing pressures in international markets.
Effective May 2, 2008, January 1, 2008, July 13, 2007 and January 1, 2007, we increased the published prices for certain U.S. pharmaceutical products. These price increases had no material effect on wholesaler inventory levels in comparison to the prior year.
As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations, with respect to our pharmaceutical products. These deductions represent estimates of the related obligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual results have not been material to our overall business. On a quarterly basis, our adjustments to actual results generally have been less than 1% of Pharmaceutical net sales and can result in either a net increase or a net decrease in income. Product-specific rebate charges, however, can have a significant impact on year-over-year individual product growth trends.
Rebates under Medicaid and related state programs reduced revenues by $178 million in the first quarter of 2008, compared to $165 million in the first quarter of 2007. The increase in rebates under Medicaid and related state programs in the first quarter of 2008 was due primarily to the impact of a price increase in January 2008, partially offset by lower sales of Norvasc and Zyrtec/Zyrtec D, both of which lost exclusivity in the U.S.
Rebates under Medicare reduced revenues by $221 million in the first quarter of 2008, compared to $48 million in the first quarter of 2007. The increase in Medicare rebates was due primarily to the impact of our contracting strategies and a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act.
Performance-based contract rebates reduced overall revenues by $506 million in the first quarter of 2008, compared to $458 million in the first quarter of 2007. The increase in performance-based contract rebates was primarily due the impact of our contracting strategies, primarily related to Lipitor, and the non-recurrence of a credit received in the first quarter of 2007, partially offset by lower sales of Lipitor, Norvasc and Zyrtec. These contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.
Chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties) reduced revenues by $507 million in the first quarter of 2008, compared to $373 million in the first quarter of 2007. Chargebacks were impacted by the launch of certain generic products, including amlodipine besylate after Norvasc lost U.S. exclusivity in March 2007.
Our accruals for Medicaid rebates, Medicare rebates, contract rebates and chargebacks totaled $1.6 billion as of March 30, 2008, an increase from $1.2 billion as of December 31, 2007, due primarily to the impact of our contracting strategies and increased pricing pressures.
Pharmaceutical--Selected Product Revenues
Revenue information for several of our major Pharmaceutical products follows:
First Quarter
%
Change
(millions of dollars) Mar. 30, from
Product Primary Indications 2008 2007
Cardiovascular and
metabolic diseases:
Lipitor Reduction of LDL cholesterol $3,137 (7)%
Norvasc Hypertension 513 (52)
. . .
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