Pfizer, Inc. (PFE)

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Pfizer Inc. (PFE)

Q4 2012 Earnings Conference Call

January 29, 2013, 10:00 AM ET


Ian Read - Chairman and CEO

Frank D’Amelio - EVP and CFO

Olivier Brandicourt - President and General Manager, Emerging Markets and Establish Products

Mikael Dolsten - President, Worldwide Research and Development

Geno Germano - President and General Manager, Specialty Care and Oncology

Amy Schulman - General Counsel and Business Unit Lead, Consumer Business

John Young - President and General Manager, Primary Care

Chuck Triano - SVP, Investor Relations


Tim Anderson - Sanford Bernstein

Chris Schott - JP Morgan

Jay Olson - Goldman Sachs

Mark Schoenbaum - ISI Group

Andrew Baum – Citigroup

Gregg Gilbert - Bank of America Merrill Lynch

Alex Arphe - BMO Capital Markets

Mark Goodman – UBS

Tony Butler - Barclays Capital

Seamus Fernandez - Leerink Swann & Company

David Risinger – Morgan Stanley

Catherine Arnold - Credit Suisse

Stephen Scala - Cowen & Company

Michael Tong - Wells Fargo Securities

Kim Vukhac - CLSA



Good day everyone, and welcome to Pfizer’s Fourth Quarter 2012 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, Sir.

Chuck Triano

Thank you, operator. Good morning and thank you for joining us today to review Pfizer’s fourth quarter and full-year 2012 performance.

I’m joined today by our Chairman and CEO, Ian Read; Frank D’Amelio, our CFO; Olivier Brandicourt, President and General Manager of Emerging Markets and Establish Products; Mikael Dolsten, President of Worldwide Research and Development; Geno Germano, President and General Manager of Specialty Care and Oncology; Amy Schulman, General Counsel and Business Unit Lead for our Consumer Business; and John Young, President and General Manager of Primary Care.

The slides that will be presented on this call can be viewed at our home page at by clicking on the link for Pfizer quarterly corporate performance, fourth quarter 2012 located in the Investor Presentations Section in the lower right-hand corner of this page.

Before we start, I’d like to remind you that our discussions during this conference call will include forward-looking statements and that actual results could differ materially from those projected in forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer’s 2011 annual report on Form 10-K and in our reports on Forms 10-Q and 8K.

The discussions during this call will include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer’s current report on Form 8-K dated today, January 29, 2013.

In addition, we will offer some brief comments regarding the potential IPO of a minority stake in our Animal Health business, Zoetis. As I’m sure you’ll understand we’re not going to be able to respond to questions on that subject in light of the quiet period imposed by the securities laws.

With that, I’ll now turn the call over to Ian Read.

Ian Read

Thank you, Chuck and good morning, everyone. During my remarks this morning I will briefly recap the progress we made in 2012 improving the performance of our innovative core and in creating value for our shareholders. I’d also discuss our focus 2013.

2012 was a year of very strong operational financial performance especially given our LOE challenges. We drove operational growth in many of our key products in the patent protected portfolio including Lyrica, Enbrel, Prevnar 13, Celebrex and Sutent. Operationally Emerging Markets grew 12%, animal health grew 6% and the consumer business grew 8%.

Also during 2012 we executed on our plans allocating capital in ways that it enhance shareholder value. We reduced our total adjusted cost of sales SI&A and R&D expenses on an operational basis by approximately 10%, which is nearly a $4 billion reduction versus 2011 levels.

We realized significant value for our shareholders through the sale of our Nutrition business to Nestlé for $11.85 billion, and we’re on track subject to market conditions to unlock value from our Animal Health business by completing our IPO Zoetis in the near future, and we returned nearly $15 billion to shareholders through dividends and share repurchases.

Our focus on creating and productive and sustainable innovative course is yielding results. Our fourth quarter was highlighted by two important product approvals, Xeljanz in the U.S. and Eliquis in the U.S, Canada the EU and Japan. Along with our time at Bristol-Myers Squibb we’re looking forward to launching Eliquis in the U.S. shortly, and believe its strong clinical profile can establish this medication as an important new treatment option in the high need area of stroke prevention for patients with nonvalvular atrial fibrillation.

Our Specialty Care business is in the initial phase of launching Xeljanz in the U.S., a first-in-class compound with a compelling clinical profile and oral dosing. We believe these factors will position us competitively within the moderate to severe rheumatoid arthritis market.

We are prepared to invest in both of these products at competitive levels to support their launches. In addition to Xeljanz and Eliquis, during 2012 we received approval for three additional new medicines in light of advanced renal cell carcinoma in the U.S., the EU and Japan, Bosulif for CML in the U.S. and Eleyso for Gaucher disease in the U.S.

During the year, we also advanced our early and mid-stage pipeline most notably in oncology and vaccine areas. We move forward in Phase 3 studies with dacomitinib for non-small cell lung cancer and inotuzumab for aggressive non-Hodgkin's lymphoma.

We reported encouraging Phase 2 data from our CDK 46 inhibitor for advanced breast cancer. This asset formally known as PD-332991 is now palbociclib. We commenced a Phase 3 study for inotuzumab for acute lymphoblastic leukemia and we began a Phase 3 study for meningitis B vaccine for individuals aged 11 to 25. I believe we are entering 2013 with one of the most robust pipelines in the company's recent history.

The actions we set in motion early in 2011 to improve R&D productivity are starting to bear results and we look forward to additional progress June 2013. We have a pipeline that I believe includes high-value assets at all stages of the development continuum across our key therapeutic areas.

As of late last year, our pipeline contained a total of 78 programs including 59 new molecular entities. There were 17 programs in Phase 3 clinical testing and eight in registration. Throughout 2012, we concentrated on advancing our pipeline, reducing our cost structure and returning value to our shareholders. I believe that through the dedication and focus of Pfizer colleagues, we have delivered on each of these goals.

Turning to 2013, as I've discussed with you on previous calls, we have two distinct operating models within the developed markets. One model supports our innovative driven business; primary care, specialty care and oncology. The second model supports our value-driven business that comprises the off patent products within our Established Products unit.

In terms of the Emerging Markets, our operational model has a geographic focus that supports both, the innovative driven and the value driven business. This is working well in these high growth geographies. That said, as these markets evolve, we will evaluate if our Emerging Markets operating model should more closely mirror the two distinct approaches we have for developed markets.

The Consumer Healthcare business continues to be important as we pursue Rx to OTC Switch opportunities. We believe these are the right models for achieving the best performance for Pfizer over the next several years. During this time, we will be able to focus on the market success of our new products, advance our early and mid-stage pipeline, drive continued growth in Emerging Markets in both our innovative and all patent portfolio.

Additionally, we'll have put behind us our most significant LOEs. We will also continue to use business development opportunities to supplement both our research and internal product efforts. Our primary focus remains both on acquisitions that are projected to meet or exceed the return on investment of share repurchases.

More specifically in 2013, you will see us focused on continuing to maximize the value of our in-line portfolio including key in-line assets such as Lyrica, Celebrex, Enbrel, Viagra and Prevnar 13; maximizing the performance of the products approved in the last two years; continuing to advance the mid-to-late stage pipeline in vaccines, oncology, cardiovascular information; focusing on the high-growth, high-margin off-patent opportunities; focusing opportunities in key growth markets such as China, Brazil, Russia, India, Turkey and Mexico; continuing to work on managing our expenses and driving ongoing efficiencies within our manufacturing network so we have a lower and flexible cost base that allows us to respond to pricing pressures and our upcoming LOEs; and continuing to return capital to shareholders through dividends and share repurchases.

In summary, our results in 2012 demonstrated that we’re focused on the right areas and are making visible progress towards sustained value creation. In 2013 we must maintain our momentum by continuing to execute by delivering on the potential within our pipeline and by demonstrating fiscal responsibility in how we use our capital. We are committed to helping patients by delivering innovative medicines and creating value for our shareholders.

Now, I’ll turn it over to Frank, for additional details on the quarter and our 2013 financial guidance.

Frank D'Amelio

Thanks, Read, and good day everyone. As always, the charts I’m reviewing today are included in our webcast. I want to again remind you that the Nutrition business is presented as a discontinued operation in consolidated statements of income for all periods presented. As you know, discontinued operations are excluded from adjusted financial results consequently throughout 2012 until its sale on November 30th. The results of the Nutrition business have been excluded from adjusted results.

Now let’s move on to the financials. Fourth quarter 2012 revenues of approximately $15.1 billion decreased 7% year-over-year reflecting a 2% negative impact from foreign exchange an operational decline of approximately 5% driven mainly by the loss of exclusivity of several key products in certain geographies notably Lipitor in all major markets.

Adjusted diluted EPS of $0.47 decreased 4% primarily due to the previously mentioned decrease in revenues, which was partially offset by an aggregate operational decrease of 9% and adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses primarily resulting from cost reduction and productivity initiatives, and fewer weighted average shares outstanding due to our continued share repurchases.

Reported diluted EPS was $0.85 compared with $0.19 in the year-ago quarter, in additional to the factors previously mentioned. Reported diluted EPS was favorably impacted by the gain on the sale of the Nutrition business to Nestlé and lower overall cost, which were partially offset by the negative impact due to loss of exclusivity of certain products and several geographies and higher restructuring charges.

Foreign exchange negatively impacted fourth quarter revenues by 2% or $271 million and unfavorably impacted adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses by $161 million or 1%. As a result, foreign exchange negatively impacted fourth quarter adjusted diluted EPS by approximately $0.05.

In the fourth quarter of 2012 Emerging Markets biopharmaceutical revenues were approximately $2.7 billion which reflects operational growth of 20% and the negative impact of foreign exchange of 3%. The revenue growth in Emerging Markets this quarter was driven primarily by strong volume growth in China, overall Emerging Market growth as well as the timing of government purchases of Enbrel in Brazil and Prevnar 13 in Turkey compared with the year-ago quarter.

Volume growth of 22% in Emerging Markets was partially offset by price reductions of 2% resulting in the 20% operational growth. Of the fourth quarter Emerging Markets biopharmaceutical revenues approximately 42% which generated by Established Products, 34% by specialty and oncology products and 24% by primary care products.

Fourth quarter biopharmaceutical revenues in the BRIC-MT markets were approximately $1.2 billion which reflects operational growth of 26% and the unfavorable impact of foreign exchange of 4%. Of the fourth quarter BRIC-MT biopharmaceutical revenues, approximately 46% was generated by Established Products, 29% by specialty and oncology products and 25% by primary care products.

During the fourth quarter, biopharmaceutical volume growth of 30% in the BRIC-MT markets was partially offset by price reductions of 4% resulting in operational revenue growth of 26%. Full-year operational growth in the BRIC-MT markets was 60% versus the year-ago period, reflecting volume growth of 20% partially offset by price reductions of 4%.

As you can see in 2012 we met or exceeded most components of our financial guidance including achieving the top-end of our full-year 2012 revenue guidance and exceeding our just diluted EPS guidance. Our 2012 adjusted R&D expenses of $7.3 billion reflect opportunities to accelerate investments and promising late stage pipeline assets including palbociclib and advanced breast cancer.

However, I want to point out that we expect full-year 2013 adjusted R&D expenses to be in the range of $6.5 billion to $7 billion. And as I previously mentioned, reported diluted EPS was primarily favorably impacted by the gain on the sale of the nutrition business.

Now moving on to our 2013 financial guidance, which incorporates the full-year contribution from Zoetis, I'd like to comment specifically on a few elements of the guidance. First, we expect reported revenues to be in the range of 56.2 billion to 58.2 billion. I want to point out that this range includes the absorption of an anticipated $4 billion negative impact due to the loss of exclusivity of certain products in several geographies and to the near-term expiration of certain co-promotion agreements.

In addition, it's important to note that approximately 200 million of 2012 revenues associated with products that Pfizer is contributing to the Pfizer-Hisun joint venture in China announced in 2012 will not be recorded as Pfizer revenues in 2013. The results of the joint venture will be recorded in other income.

We expect 2013 SI&A to be in the range of 15.6 billion to 16.6 billion, the midpoint of which is less than the 2012 actual spending level. This range includes spending and support of key product launch opportunities such as Eliquis, Xeljanz and Prevnar 13 Adult.

These are significant product opportunities and we intend to appropriately fund and support these launches to be competitive. In addition, we plan to essentially offset those incremental expenses through our cost reduction initiatives.

We also expect our 2013 tax rate on adjusted income to be approximately 28%, which among other items includes the federal R&D tax credit renewed by Congress under the American Taxpayer Relief Act for both 2012 and 2013.

Finally, we expect adjusted diluted EPS to be in the range of $2.20 to $2.30. This range includes a $0.02 unfavorable impact for certain ongoing costs associated with the potential separation of Zoetis, including the interest expense on Zoetis debt, certain duplicative costs for corporate support and manufacturing functions and other costs, as well as a $0.02 negative impact reflecting the difference in actual foreign exchange rates in 2012 compared with the mid-January 2013 exchange rates. As always, we will continue to monitor foreign exchange fluctuations and will update the potential impact if any on our 2013 expectations.

I want to point out that with all other things being equal, the inclusion of the $0.02 of cost related to the separation in Zoetis and the $0.02 impact of recent foreign exchange movements has negatively impacted our 2013 adjusted diluted EPS guidance range by $0.04. Excluding these items, our adjusted diluted EPS guidance range would have been $2.24 to $2.34.

Now moving on to key takeaways, we achieved the top end of our full year 2012 revenue guidance and exceeded our adjusted diluted EPS guidance. Our initial 2013 financial guidance includes the full-year contribution from Zoetis.

We recently completed a 3.65 billion offering of Zoetis senior unsecured notes and remain on track to complete a potential initial public offering of up to a 19.8% ownership stake in Zoetis in the near future.

In November, we completed the sale of our Nutrition business to Nestlé for $11.85 billion. During the fourth quarter, we received U.S. regulatory approvals for Xeljanz and Eliquis. We continue to create shareholder value through prudent capital allocation.

In 2012, we repurchased 8.2 billion or 349 million shares. As of December 31, 2012, we had 11.8 billion of authorization remaining under our current repurchase programs. Overall, we returned almost 15 billion to our shareholders in 2012 through dividends and share repurchases.

Finally, we remain committed to delivering attractive shareholder returns in 2013 and beyond.

With that, I'll turn it back to Chuck.

Chuck Triano

Great. Thanks for the commentary, Frank, and operator at this point if we could please poll for questions.

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