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PFE > SEC Filings for PFE > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for PFIZER INC

Form 10-Q for PFIZER INC


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

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, Operating Environment, Strategy and Outlook. This section, beginning on page 42, provides information about the following: our business; our performance during the second quarter and first six months of 2014 and 2013; our operating environment; our strategy; our business development initiatives, such as acquisitions, dispositions, licensing and collaborations; and our financial guidance for 2014.

Analysis of the Condensed Consolidated Statements of Income. This section begins on page 53, and consists of the following sub-sections:

Revenues and Product Developments. This sub-section, beginning on page 53, provides an analysis of our revenues and products for the second quarter and first six months of 2014 and 2013, including an overview of important biopharmaceutical product developments.

Costs and Expenses. This sub-section, beginning on page 65, provides a discussion about our costs and expenses.

Provision for Taxes on Income. This sub-section, on page 69, provides a discussion of items impacting our tax provisions.

Discontinued Operations. This sub-section, on page 70, provides an analysis of the financial statement impact of our discontinued operations.

Adjusted Income. This sub-section, beginning on page 70, provides a discussion of an alternative view of performance used by management.

Analysis of Operating Segment Information. This sub-section, beginning on page 77, provides a discussion of the performance of each of our operating segments.

Analysis of the Condensed Consolidated Statements of Comprehensive Income. This section, beginning on page 83, provides a discussion of changes in certain components of other comprehensive income.

Analysis of the Condensed Consolidated Balance Sheets. This section, on page 84, provides a discussion of changes in certain balance sheet accounts.

Analysis of the Condensed Consolidated Statements of Cash Flows. This section, beginning on page 85, provides an analysis of our cash flows for the first six months of 2014 and 2013.

Analysis of Financial Condition, Liquidity and Capital Resources. This section, beginning on page 86, provides an analysis of selected measures of our liquidity and of our capital resources as of June 29, 2014 and December 31, 2013, as well as a discussion of our outstanding debt and other commitments that existed as of June 29, 2014 and December 31, 2013. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.

New Accounting Standards. This section, beginning on page 89, discusses accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.

Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 90, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this MD&A relating to, among other things, our anticipated operating and financial performance, business plans and prospects, in-line products and product candidates, strategic reviews, capital allocation, plans relating to share repurchases and dividends and business-development plans. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.


The following table provides the components of the condensed consolidated statements of income:

                                          Three Months Ended                      Six Months Ended
(MILLIONS OF DOLLARS, EXCEPT      June 29,      June 30,          %      June 29,      June 30,          %
PER COMMON SHARE DATA)                2014          2013     Change          2014          2013     Change
Revenues                         $  12,773     $  12,973         (2 )   $  24,126     $  25,383         (5 )

Cost of sales                        2,462         2,242         10         4,507         4,505          -
% of revenues                         19.3 %        17.3 %                   18.7 %        17.7 %

Selling, informational and
administrative expenses              3,520         3,591         (2 )       6,560         6,808         (4 )
% of revenues                         27.6 %        27.7 %                   27.2 %        26.8 %

Research and development
expenses                             1,759         1,530         15         3,382         3,240          4
% of revenues                         13.8 %        11.8 %                   14.0 %        12.8 %

Amortization of intangible
assets                               1,001         1,140        (12 )       2,118         2,359        (10 )
% of revenues                          7.8 %         8.8 %                    8.8 %         9.3 %

Restructuring charges and
certain acquisition-related
costs                                   81           183        (56 )         139           314        (56 )
% of revenues                          0.6 %         1.4 %                    0.6 %         1.2 %

Other (income)/deductions--net         (53 )      (1,070 )      (95 )         570          (925 )        *
Income from continuing
operations before provision
for taxes on income                  4,003         5,357        (25 )       6,850         9,082        (25 )
% of revenues                         31.3 %        41.3 %                   28.4 %        35.8 %

Provision for taxes on income        1,082         1,782        (39 )       1,664         2,891        (42 )
Effective tax rate                    27.0 %        33.3 %                   24.3 %        31.8 %

Income from continuing
operations                           2,921         3,575        (18 )       5,186         6,191        (16 )
% of revenues                         22.9 %        27.6 %                   21.5 %        24.4 %

Discontinued operations--net
of tax                                   -        10,559       (100 )          73        10,708        (99 )

Net income before allocation
to noncontrolling interests          2,921        14,134        (79 )       5,259        16,899        (69 )
% of revenues                         22.9 %       108.9 %                   21.8 %        66.6 %

Less: Net income attributable
to noncontrolling interests              9            39        (77 )          18            54        (67 )
Net income attributable to
Pfizer Inc.                      $   2,912     $  14,095        (79 )   $   5,241     $  16,845        (69 )
% of revenues                         22.8 %       108.6 %                   21.7 %        66.4 %

Earnings per common
share--basic(a):
Income from continuing
operations attributable to
Pfizer Inc. common
shareholders                     $    0.46     $    0.51        (10 )   $    0.81     $    0.87         (7 )
Discontinued operations--net
of tax                                   -          1.50       (100 )        0.01          1.50        (99 )
Net income attributable to
Pfizer Inc. common
shareholders                     $    0.46     $    2.00        (77 )   $    0.82     $    2.37        (65 )

Earnings per common
share--diluted(a):
Income from continuing
operations attributable to
Pfizer Inc. common
shareholders                     $    0.45     $    0.50        (10 )   $    0.80     $    0.86         (7 )
Discontinued operations--net
of tax                                   -          1.48       (100 )        0.01          1.49        (99 )
Net income attributable to
Pfizer Inc. common
shareholders                     $    0.45     $    1.98        (77 )   $    0.81     $    2.34        (65 )

Cash dividends paid per common
share                            $    0.26     $    0.24          8     $    0.52     $    0.48          8

* Calculation not meaningful.
(a) EPS amounts may not add due to rounding.

Certain amounts and percentages may reflect rounding adjustments.


OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Our Business

We apply science and our global resources to bring therapies to people that extend and significantly improve their lives through the discovery, development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world's best-known consumer healthcare products. We work across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases of our time. We collaborate with healthcare providers, governments and local communities to support and expand access to reliable, affordable healthcare around the world. Our revenues are derived from the sale of our products and, to a much lesser extent, from alliance agreements, under which we co-promote products discovered by other companies (Alliance revenues).

On June 24, 2013, we completed the full disposition of our Animal Health business, Zoetis Inc. (Zoetis), and recognized a gain of approximately $10.4 billion, net of tax, in Gain on disposal of discontinued operations--net of tax in our condensed consolidated statements of income for the three and six months ended June 30, 2013. The operating results of this business are reported as Income from discontinued operations--net of tax in our condensed consolidated statements of income for the three and six months ended June 30, 2013. For additional information, see Notes to Condensed Consolidated Financial Statements--Note 2B. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments: Divestiture and see the "Our Business Development Initiatives" and "Discontinued Operations" sections of this MD&A.

We manage our commercial operations through a global commercial structure consisting of three operating segments, each of which is led by a single manager--the Global Innovative Pharmaceutical segment (GIP); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC); and the Global Established Pharmaceutical segment (GEP). Each operating segment has responsibility for its commercial activities and for certain in-process research and development (IPR&D) projects for new investigational products and additional indications for in-line products that generally have achieved proof of concept. For additional information, see Notes to Condensed Consolidated Financial Statements--Note 13. Segment, Geographic and Other Revenue Information and the "Our Strategy" section of this MD&A below.

The financial information included in our condensed consolidated financial statements for our subsidiaries operating outside the United States (U.S.) is as of and for the three and six months ended May 25, 2014 and May 26, 2013.

Previously Proposed Combination with AstraZeneca PLC (AstraZeneca)

During April and May 2014, Pfizer issued a number of announcements pursuant to Rule 2.4 of the U.K. City Code on Takeovers and Mergers (the Code) regarding its consideration of a possible offer for AstraZeneca PLC (AstraZeneca) and proposals made to the board of AstraZeneca in connection therewith. Pfizer announced on May 26, 2014 that it did not intend to make an offer for AstraZeneca. The announcement was made in accordance with Rule 2.8 of the Code. As a result of this announcement, Pfizer, together with any party acting in concert with Pfizer, is bound by the restrictions contained in Rule 2.8 of the Code.

Our 2014 Performance

Revenues--Second Quarter 2014

Revenues in the second quarter of 2014 were $12.8 billion, a decrease of 2% compared to the same period in 2013, which reflects an operational decrease of $113 million, or 1%. The operational decrease was primarily the result of:
the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada (approximately $428 million);

the loss of exclusivity and subsequent multi-source generic competition for Detrol LA in the U.S., Viagra in most major European markets, Lyrica in Canada and Aricept in Canada (aggregate decline of approximately $208 million);

the ongoing termination of the Spiriva collaboration in certain countries (approximately $127 million);

the operational decline of certain products, including Metaxalone, Effexor, Norvasc and Caduet (approximately $129 million); and

the loss of exclusivity for certain other products (approximately $78 million),

partially offset by:


the operational growth of certain products in certain developed markets, including Lyrica, Nexium 24HR in the U.S. as a result of its recent launch, Prevnar, Eliquis, Xeljanz, Celebrex, Xalkori and Inlyta, among others (approximately $569 million);

an 11% operational increase in revenues in emerging markets, including strong operational growth from Lipitor, primarily in China, and Prevenar (approximately $271 million); and

revenues from the transitional manufacturing and supply agreements with Zoetis (approximately $71 million).

In addition, Revenues were unfavorably impacted by foreign exchange by approximately $87 million, or 1%, in the second quarter of 2014 compared to the same period in 2013.

Revenues--First Six Months 2014

Revenues in the first six months of 2014 were $24.1 billion, a decrease of 5% compared to the same period in 2013, which reflects an operational decrease of $805 million, or 3%. The operational decrease was primarily the result of:
the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada (approximately $804 million);

the continued erosion of branded Lipitor in the U.S. and most other developed markets due to generic competition and the operational decline of certain products, including, Metaxalone, Effexor, Norvasc and Caduet (approximately $361 million);

the loss of exclusivity and subsequent multi-source generic competition for Detrol LA in the U.S., Viagra in most major European markets, Lyrica in Canada and Aricept in Canada (aggregate decline of approximately $421 million);

the ongoing termination of the Spiriva collaboration in certain countries (approximately $303 million); and

the loss of exclusivity for certain other products (approximately $137 million),

partially offset by:
the operational growth of certain products in certain developed markets, including Lyrica, Nexium 24HR in the U.S. as a result of its recent launch, Prevnar, Eliquis, Xeljanz, Celebrex, Xalkori and Inlyta, as well as the contribution from the collaboration with Mylan Inc. to market generic drugs in Japan (approximately $871 million);

a 6% operational increase in revenues in emerging markets (approximately $334 million); and

revenues from the transitional manufacturing and supply agreements with Zoetis (approximately $128 million).

In addition, revenues were unfavorably impacted by foreign exchange by approximately $452 million, or 2%, in the first six months of 2014 compared to the same period in 2013.

Income from Continuing Operations--Second Quarter 2014

Income from continuing operations for the second quarter of 2014 was $2.9 billion, compared to $3.6 billion in the second quarter of 2013, primarily reflecting, among other items, in addition to the lower revenues described above:
the non-recurrence in the second quarter of 2014 of patent litigation settlement income of $1.4 billion in the second quarter of 2013 (see also the "Costs and Expenses--Other (Income)/Deductions-Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net);

higher cost of sales (up $220 million) (see also the "Costs and Expenses--Cost of Sales" section of this MD&A); and

higher research and development expenses (up $229 million) (see also the "Costs and Expenses--Research and Development (R&D) Expenses" section of this MD&A),

partially offset by:
a lower effective tax rate (down 6.3 percentage points to 27.0%) (see also the "Provision for Taxes on Income" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 5. Tax Matters);

lower asset impairments and related charges (down $126 million) (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net);


higher royalty-related income (up $119 million) primarily due to royalties earned on sales of Enbrel in the U.S. and Canada after October 31, 2013. On that date, the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada expired, and Pfizer became entitled to royalties for a 36-month period (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net); and

lower purchase accounting adjustments (down $115 million).

Income from Continuing Operations--First Six Months 2014

Income from continuing operations for the first six months of 2014 was $5.2 billion, compared to $6.2 billion in the first six months of 2013, primarily reflecting, among other items, in addition to the lower revenues described above:
the non-recurrence in the first six months of 2014 of the patent litigation settlement income of $1.4 billion in the first six months of 2013 (see also the "Costs and Expenses--Other (Income)/Deductions-Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net);

higher legal charges (up $787 million), primarily due to Neurontin- and Effexor-related matters (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net); and

the non-recurrence in the first six months of 2014 of the gain associated with the transfer of certain product rights to our joint venture with Zhejiang Hisun Pharmaceuticals Co., Ltd. (Hisun) in China in the first six months of 2013 ($459 million) (see also the "Our Business Development Initiatives " and "Costs and Expenses--Other (Income)/Deductions--Net" sections of this MD&A and Notes to Condensed Consolidated Financial Statement--Note 2D. Acquisition, Divestiture, Collaborative Arrangement and Equity-Method Investments:
Equity-Method Investments, and Note 4. Other (Income)/Deductions--Net),

partially offset by:
a lower effective tax rate (down 7.5 percentage points to 24.3%) (see also the "Provision for Taxes on Income" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 5. Tax Matters);

lower asset impairment and related charges (down $506 million) (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives and Note 4. Other (Income)/Deductions--Net);

lower operational expenses due to the benefits of cost-reduction and productivity initiatives;

higher royalty-related income (up $304 million) primarily due to royalties earned on sales of Enbrel in the U.S. and Canada after October 31, 2013. On that date, the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada expired, and Pfizer became entitled to royalties for a 36-month period (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net); and

higher net gains on asset disposals (up $160 million), primarily due to gains on sales of product rights and gains on sales of investments in equity securities (see also the "Costs and Expenses--Other (Income)/Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other (Income)/Deductions--Net).

See also the "Discontinued Operations" section of this MD&A.

Our Operating Environment

Industry-Specific Challenges

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. As explained more fully in our 2013 Annual Report on Form 10-K, the biopharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. These factors include, among others: the loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights, healthcare legislation, pipeline productivity and the regulatory environment, pricing and access pressures and competition among branded products.


Intellectual Property Rights and Collaboration/Licensing Rights

The loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights can have a significant adverse effect on our revenues.

We have lost exclusivity for a number of our products in certain markets and we have lost collaboration rights with respect to a number of our alliance products in certain markets, and certain of our products and alliance products are expected to face significantly increased generic competition over the next few years.

Our collaboration with Boehringer Ingelheim for Spiriva expires on a country-by-country basis between 2012 and 2016. On April 29, 2014, the 10-year alliance between Boehringer Ingelheim and Pfizer for the promotion and marketing of Spiriva in the U.S. came to an end. Boehringer Ingelheim now exclusively markets and supplies Spiriva in the U.S. We expect to experience a graduated decline in revenues from Spiriva through 2016 as agreements for other markets enter their final year and subsequently expire.

See the "Intellectual Property Rights and Collaboration/Licensing Rights" section of our 2013 Financial Report, which was filed as Exhibit 13 to our 2013 Annual Report on Form 10-K, for information about (i) recent losses of product exclusivity impacting product revenues, (ii) recent and expected losses of collaboration rights impacting alliance revenues and (iii) losses and expected losses of product exclusivity in 2014.

In addition, we expect to lose exclusivity for various other products in various markets over the next few years. For additional information, see the "Patents and Other Intellectual Property Rights" section in Part I, Item 1, "Business", of our 2013 Annual Report on Form 10-K.

Our 2014 financial guidance reflects the projected impact of the loss of exclusivity of various products and the expiration of certain alliance product contract rights discussed above. On July 29, 2014, we updated our 2014 financial guidance to reflect, among other things, the expected negative impact from anticipated multi-source generic competition for Celebrex in the U.S. beginning in December 2014. For additional information about our 2014 financial guidance, including additional factors for which our guidance was updated on July 29, 2014, see the "Our Financial Guidance for 2014" section of this MD&A.

We will continue to aggressively defend our patent rights whenever we deem appropriate. For more detailed information about our significant products, see the discussion in the "Revenues--Major Biopharmaceutical Products" and "Revenues--Selected Product Descriptions" sections of this MD&A. See Notes to Condensed Consolidated Financial Statements--Note 12A1. Commitments and Contingencies: Legal Proceedings--Patent Litigation for a discussion of certain recent developments with respect to patent litigation.

Regulatory Environment/Pricing and Access--U.S. Healthcare Legislation

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (together, the U.S. Healthcare Legislation, and also known as the Affordable Care Act or ACA), was enacted in the U.S. As explained more fully in our 2013 Annual Report on Form 10-K, this legislation has resulted in both current and longer-term impacts on us.

We recorded the following amounts as a result of the U.S. Healthcare Legislation:
$30 million in the second quarter of 2014 and $103 million in the second quarter of 2013, and $205 million in the first six months of 2014 and $231 million in the first six months of 2013, recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare "coverage gap" discount provision; and

$54 million in the second quarter of 2014 and $75 million in the second quarter of 2013, and $25 million in the first six months of 2014 and $131 million in the first six months of 2013, recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government (which is not deductible for U.S. income tax purposes) based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. The decrease in the first six months of 2014 was driven by a true-up associated with the final 2013 invoice received from the federal government, which reflected a lower share than that of the initial 2013 invoice.


Regulatory Environment/Pricing and Access--U.S. Government and Other Payer Group Pressures

Budget Control Act of 2011-In August 2011, the federal Budget Control Act of 2011 (the Budget Control Act) was enacted in the U.S. In December 2013, Congress enacted minor amendments to the Budget Control Act, providing for greater discretionary spending in 2014 and 2015 than originally budgeted. The amendments also provide for U.S. Food and Drug Administration (FDA) user fee sequester relief for two years, allowing the FDA to continue to review new products. The new legislation continues to prohibit reductions in payments to Medicare providers from exceeding a 2% reduction of the originally budgeted amount, and extends this prohibition for two years (until 2023). The implications to Pfizer of these changes are expected to be nominal. However, any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented, and/or any significant additional taxes or fees that may be imposed on us, as part of any broader deficit-reduction effort or legislative replacement for the Budget Control Act, could have an adverse impact on our results of operations.

Sustainable Growth Rate Replacement-The Medicare physician payment formula known as the Sustainable Growth Rate (SGR) is routinely overridden by Congressional action because it would lead to dramatic decreases in physician payment. On April 1, 2014, the President signed into law another extension that will maintain physician payment through March 2015. Prior to expiration . . .

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