Pfizer Inc.
Q1 2010 Earnings Call Transcript

Published: 5 May 2010

[Operator:]

Good day, everyone, and welcome to Pfizer's First Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.

[Charles Triano:]

Thank you. Good morning, everyone. Thanks for joining us today to review our first quarter 2010 performance, 2010 financial guidance and 2012 long-range targets. I'm here with Jeff Kindler; Frank D'Amelio; Ian Read; and other members of our leadership team. The financial charts that will be presented on this call can be viewed on our home page at pfizer.com in the Investor Presentations tab by clicking on the link Quarterly Corporate Performance First Quarter 2010. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer's 2009 Annual Report on Form 10-K and in our reports on Form 10-Q and Form 8-K. Also, The discussions during this conference 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. These reports are available at our website at pfizer.com in the Investors SEC Filings section. With that, I'll now turn the call over to Jeff Kindler. Jeff?

[Jeffrey Kindler:]

Thanks, Chuck. Good morning, everyone. Today's report covers our first full quarter since closing the Wyeth acquisition. Just seven months after putting these two companies together, we are creating value for shareholders in four ways

[Frank D'Amelio:]

Thanks, Jeff. Good morning, everyone. As always, the charts I'm reviewing today are included in our webcast. Now let's move on to the first quarter financial results. The 54% year-over-year increase in first quarter 2010 revenues was primarily attributable to the addition of Wyeth products, mainly, the Prevnar franchise, Premarin, Enbrel, Zosyn/Tazocin and Effexor. Also, foreign exchange favorably impacted the quarter's revenues by $733 million or 7%. These favorable impacts were slightly offset by $137 million or 1% decrease in revenues from legacy Pfizer products. First quarter 2010 revenues reflect a reduction of $56 million due to the recently enacted U.S. healthcare legislation. Adjusted income and adjusted diluted EPS increased, primarily due to increased revenues resulting from the addition of legacy Wyeth products, which were partially offset by expenses associated with Wyeth operations and higher net interest expense. Also, it's important to remember that reported and adjusted diluted EPS were affected by the increased number of shares outstanding compared with the year-ago quarter as a result of shared issues to partially fund the Wyeth acquisition. First quarter adjusted total cost were negatively impacted, primarily by the addition of Wyeth operations and foreign exchange. The negative impact to foreign exchange increased adjusted total cost to [ph] (36

[Charles Triano:]

Thanks, Frank. Operator, please poll for questions now. Thank you.

[Operator:]

[Operator Instructions] Our first question comes from Chris Schott, JPMorgan.

[Christopher Schott:]

Can you talk a little bit about the size of potential transactions you had looked at at this point? I know a lot's been focused on financial resources, you got to allocate the deals [ph] (43

[Jeffrey Kindler:]

Let me give you my perspective on that. First -- and it sounds like you're asking about managerial capacity as opposed to financial capacity. But I'll let Frank address the second in case that's also part of your question. I think it's important to recognize the different parts of our business or the different stages of the integration, and some of them are quite far along. So you take our Established Products business, for example, under Dave Simmons' leadership, they're very far along in terms of the integration of their business, and I think have a great deal of capacity to bolt on or integrate additional activities. Other parts of the business, possibly less so. We're certainly mindful of the distraction and disruption that large deals can cause. I think you could say, in many ways, we're quite expert in that from a historical basis. And I think we've learned a lot over the years on how to deal with that. I think one of the benefits of our business unit model is, that different businesses have the capability at different points in their planning and execution to take on different levels of integration of different-sized businesses. So I wouldn't want to give a generalized answer to that. It depends on the business and where they are. And I can assure you, though, that as we look at different business development opportunities, that's one of the most important considerations we take into effect. Sometimes we even look at opportunities that might involve a reverse integration because sometimes there's an opportunity to take on skills and capabilities that the target might provide to us that would be beneficial. So I think we're very careful to take that sort of thing into account, and it's very relevant to our consideration. To the extent that you're asking about financial capacity, maybe I'll let Frank address that.

[Frank D'Amelio:]

The way I think about that is, it's one of our priorities from a capital allocation perspective. We said business development is one of those priorities, it continues to be one of those priorities. And we have the capability, we have the capacity, continue to have that, to do bolt-on transactions.

[Operator:]

Jami Rubin, Goldman Sachs.

[Jami Rubin:]

So Jeff, if I heard you right, are you prepared to back your 2012 earnings guidance of $2.25 to $2.35 even if we see further operational revenue misses? I think that we appreciate your bringing down the numbers a bit, but I think that the Street's expectations for top line growth in 2012 are still several billion at least below your guidance. So I'm wondering if you could, give you an opportunity to draw a line on the sand on that. And secondly, are you also prepared to commit to a specific dividend payout over time?

[Jeffrey Kindler:]

What I said, Jami, was that we have flexibility in our balance sheet, our spending and in our investments. In fact, I think that the fact that we have reaffirmed our 2010 guidance in the face of absorbing the healthcare reform costs and the foreign exchange headwind that we're facing is a reflection of that. The fact that we have reconfirmed our 2012 EPS targets in the face of lowering the revenue guidance for that year is a further reflection of that. And so what I said was, that should revenues in 2012 fall short of our target range, we believe that we do have the ability, within reason, to achieve the 2012 EPS targets that we have reaffirmed today, and we intend to achieve them. With respect to your second question, we're not providing specific guidance about the amount of any dividend increase. But we have said, and we did say when we made the last dividend increase, that it is our intention to increase the dividend annually barring significant unforeseen events, and that continues to be our intention.

[Operator:]

Next, Catherine Arnold, Crédit Suisse.

[Catherine Arnold:]

I wanted to ask you in terms of the -- if I step back and I think about last quarter's 2010 guidance and expectations on net synergies, were below what folks thought, and now 2012 was reaffirmed despite the revenue drop. Should we be looking at that as it's as simple as net synergies are back-end loaded or is there any indication here that the more you know about the integration, the more you can count on dropping those synergies to the bottom line in later years? And then my second question is related to the Protonix court decision. I was wondering if you've seen any change in the generic inventory in the channel and when you expect to hear back from the judge on this decision. And if you could just comment on if generics remove inventory, what you might do if you're authorized generic before the July patent expiry?

[Jeffrey Kindler:]

I'll let Frank talk about the cost question that you first asked. I'll ask Amy to give you a status report on the timing of the Protonix decision. And if Ian has any comments on the inventory part of the Protonix question, I'll ask him to address that.

[Frank D'Amelio:]

So on the first part of the question, on the synergies, we're still at the $4 billion to $5 billion in total synergies on the spread that I talked about in my comments

[Amy Schulman:]

So as you know, on April 23, the jury returned the favorable finding that you referenced. We really can't comment on the expected timetable for the judge's ruling, but we look forward to it. And we'll update you as soon as we have further information from the court.

[Ian Read:]

And we've seen no material changes in distributor inventories.

[Operator:]

Tim Anderson, Sanford Bernstein.

[Tim Anderson:]

On the Emerging Market, both figures you gave for a handful of the Pfizer products, I was surprised that the underlying growth rates were as modest as they were even when you corrected [ph] (50

[Jeffrey Kindler:]

I'll let Ian address the first question, and I'll address the second. Ian?

[Ian Read:]

The products in Emerging Markets like a Brazil or an India or even a Turkey are not mature in any way. We're seeing very, very accelerated growth in markets like China. So I think when you look at the Emerging Markets for the quarter from one to six because of the reclassification, it's clearly not where we project to be, which is in double-digit growth. We saw very strong growth in China, strong double digit. We saw the same in Brazil, the same in India, and we had a poorer performance in Turkey this quarter due to the price reforms they put in. And we expect to see some sort of volatility in Emerging Markets market by market. And Mexico was slower than we expected given the phasing and timing of government purchases.

[Jeffrey Kindler:]

Tim, let me address your second question. I'm not sure specifically what you're referring to in terms of a prior review of the question, but let me say my view of this as I've expressed it before. We are about a year and half, two years into the business unit model that we have and seven months into the Wyeth closing. That has provided us with a portfolio of nine business units which, as I said, we're seven months into now. Our obligation for our shareholders is to maximize the value of these business units, whether inside of Pfizer or if their value can be maximized in some other way, so be it. We are allocating capital across the portfolio as we believe most appropriate to maximize their value, both within each business unit and to the extent that they can create value with each other and create more value by being inside of Pfizer. That needs to be demonstrated. We look all the time at opportunities to do that. We believe there are opportunities to do that. But I also have told everybody here, and they know that, that we need to justify to ourselves and to our shoulders that, that's the best way to create value. It is early in the game here in terms of having this portfolio. I personally believe there are lots of opportunities for the combination of these assets and businesses to create greater value together, and we are exploring that. Over time, we'll continue to look for that, and we need to demonstrate that to ourselves and to our shareholders. As we sit here today, we are very excited about the opportunities and promise that these businesses have. But it is our obligation to continue to look at that question, and we'll continue to do so.

[Operator:]

Next, David Risinger, Morgan Stanley.

[David Risinger:]

I have three questions. I guess I'll start with the two short ones first, and then I'll add the third. So could you just provide some color, Frank, on the sequential outlook for revenue and earnings following the strong first quarter? Just any color you can provide, even though you don't provide guidance. And then second, with respect to the lung cancer data at ASCO and the plenary session, can you just remind us what percentage of lung cancer patients the ALK inhibitor will target? And then finally, and I guess this is really a high-level question, but given Novartis' historical challenges rolling up the generics market, investors are concerned about Pfizer's generic strategy, and that's despite the fact that generics can't possibly be a meaningful contributor to the bottom line EPS, it wouldn't seem. But can you just discuss your generics vision and acquisition plan, and could you separate your commentary? I think it's pretty clear what you're doing in Emerging Markets, but if you could separate your commentary and discuss the U.S. market, that would be helpful.

[Jeffrey Kindler:]

Just for clarification, Dave, that last part, the U.S. market as it pertains to generics? Frank, why don't you start, and then we'll go to Ian.

[Frank D'Amelio:]

So to your point, Dave, we don't provide quarterly guidance. So I think the way I'll answer this is, the numbers will move around from quarter to quarter. And maybe the best way to demonstrate that is, if you think about last year, our earnings for the year were $2.02; and by quarter, and I'll go Q1 Q2, Q3, Q4, was $0.54, $0.48, $0.51 and $0.49, to add that all up, $2.02. So it just kind of makes my point about, as we go through the year, as we move through each quarter, the numbers will move quarter to quarter. So in terms of what's going to happen for the rest of the year, think about there'll be some movement from quarter to quarter. But most importantly, all of that has been factored into and assumed in our 2010 guidance with a revenue range of $67 billion $69 billion and the adjusted EPS range of $2.10 to $2.20. Ian?

[Ian Read:]

So to talk about your, David, the generics business, our Generics business, we actually don't call it the Generics business, we call it Established Products business because we, in the main, attempt to sell, certainly in the international arena, branded generics. Then we sell them based over on of the history of our brands, or we sell them on the quality of Pfizer's name as a branded product. And we sell them on a [ph] (57

[Jeffrey Kindler:]

I would just like to add a couple of things to this because there are a couple of things, Dave, you said that I don't necessarily agree with. First of all, the branded generic business is among the most, fastest-growing segment in the biopharmaceutical industry. There is an overlap here in terms of Emerging Markets, and branded generics can be profitable. As I said in my opening comments, while the prices are lower, the cost structure is lower, the risk can be different. And in many marketplaces, branded generics, because physicians and patients are making the decisions, do command brand loyalty and price opportunities. And without commenting on other companies' strategies, I believe that Pfizer's scale, its go-to-market strategy, its experience in building brands, its relationships with key opinion leaders and the ability to bring a portfolio to the marketplace in many countries outside of the United States and outside of markets that have been commoditized, actually creates a very strong profitable growth opportunities for that business. And so I actually respectfully disagree with some of the premises of the question and think that is a very strong opportunity for us.

[Ian Read:]

David, I forgot you asked about [indiscernible] (59

[Operator:]

John Boris, Citi.

[John Boris:]

Can you possibly provide us with a bit of an overview, aside from Prevnar Adult, what your regulatory filings might be in 2010? In addition to that, I think you removed some language out of your K that indicated you were planning on filing 15 to 20 targeted regulatory filings in 2010 to 2012. Any update as to when that we might get some visibility on that and/or when you might host the business briefing? And then a second one for Jeff and Frank, on cash that you have offshore, I really appreciated the discussion on capital allocation that you provided, but can you provide any -- some of your peers provide what percent of their cash is offshore. Can you help us understand what percent of it is offshore and how that helps to shape the amount that you might have to allocate towards dividend and share repurchase going forward?

[Frank D'Amelio:]

John, as I've said before, if you look at the construct of the company, more of our operating cash flow is generated offshore than is generated in the U.S. But in terms of our ability to allocate capital, which is the premise, kind of the underlying part of the question, remember, our tax rate now is 30%. It is a lot easier to move cash around given that higher tax rate's become much more fungible. Given the tax rate, it gives me, it gives the company lots of flexibility relative to moving cash and capital where we need to, where opportunities are to deploy that capital. But more of it's overseas than in the U.S., and that's what I've said previously. Ian?

[Ian Read:]

John, we can confirm the Prevnar Adult we will submit this year, and there are some others that we will file this year as well. I'd just like to go back to your sort of broader question that the goals we outlined in 2008, we are on track with those goals. So we met our target to deliver 10 to 12 Phase III starts by March 2009. In fact, we did leave at [ph] (1

[Operator:]

Eric Lo, Bank of America Merrill Lynch.

[Eric Lo:]

You mentioned continued goals to diversify revenue streams. And for business development, you talked about Established Products, Emerging Markets and starting to keep franchises as focus areas. I was wondering how important the Nutrition and Consumer business units are to your business strategy, and would you consider divesting those units at any time? And second question, to expand on something that was previously asked, in terms of your commitment to 2012 EPS guidance even if revenue targets were not achieved, I was wondering what additional R&D cuts have you considered or will your cost flexibility come up primarily from SG&A and manufacturing.

[Jeffrey Kindler:]

Eric, I'll take both questions. First of all, we feel that the Diversified businesses, several of which, as you know, came to us through the Wyeth acquisition, Nutritional and Consumer business, and in the case of Animal Health, the Wyeth acquisition strengthened our leading Animal Health business, are very exciting businesses. They're very strong businesses, and we think they're good businesses that we want to see continue to get strength in. We also believe there may be opportunities for those businesses working with each other and with our other businesses to create additional value for shareholders. It's early days. As I said earlier, it's our job to create shareholder value through those businesses, both in and of themselves, and across the Pfizer enterprise in terms of diversifying risk and creating new opportunities. And that's what we're focused on doing and will continue to do. With regard to the 2012 targets, I want to re-emphasize what I said in response to Jami. These targets and other targets and commitments that we make to our shareholders, they're very important to us. And I've said many times before that this management team takes these things very seriously, and we like to believe that we've had a very strong track record in that regard, and we take it very seriously and will continue to take it very seriously. And when we make those commitments and put out those targets, we will continue to take them seriously. We have a significant amount of flexibility in our balance sheet and in our income statement, and that is why we reaffirmed those targets for 2012. I'm not going to comment on exactly how or in the ways in which we might achieve those earnings target should the revenues fall short of our expectations. But again, as I said in response to Jami, it's our intention to achieve those earnings targets, and we'll go about doing that.

[Operator:]

Next, Marc Goodman, UBS.

[Marc Goodman:]

First one is, can you comment on Enbrel's performance overseas? Just give us a little flavor for the market growth, market share changes, just some dynamics there for that key product. And then second question is, inventory changes in the U.S., were there any significant in the quarter? And then third, can you just talk about Lyrica? Obviously, we see it on the television quite a bit, but it still doesn't feel like it's really responding to the DTC advertising, and what you're thinking about there.

[Frank D'Amelio:]

Weeks on hand, in terms of inventory for the quarter, it was, call it 2.7 weeks on hand. That was down about a full week from last year's Q1. And that was really driven by the distributor model change in the U.S. that we talked about on our last earnings call. Ian?

[Ian Read:]

In Europe, Enbrel continues to perform well. We saw growth in the international of 17% and 16% in the developed [ph] (1

[Operator:]

Manoj Garg, Soleil Securities.

[Manoj Garg:]

First off, within Emerging Markets, given that China's of a particular focus there, can you either qualitatively or quantitatively shed some light on the impact of China to that line item, the growth there relative to the other BRIC countries and how leveragable the lessons learned there are?

[Ian Read:]

China is one of the leading countries in Emerging Markets for growth. It's producing strong double-digit growth. And clearly, we see it as a place where we can take our learnings from China and take them to India and other emerging markets.

[Operator:]

Tony Butler, Barclays Capital.

[Charles Butler:]

You correctly predicted the Pfizer legacy products would be down due to the inventory change. You made the statement last quarter. But you also stated last quarter that, that should reverse itself in Q2. Am I correct with that statement and would you make the assumption that it should be positive by Q2?

[Frank D'Amelio:]

Tony, it's Frank. The short answer is yes. In fact, that's exactly what I said last quarter. What I said was, the impact that, that would have in Q1, which would be some downward pressure on revenue, would be offset, I'm going to call it, essentially in full, in the second quarter, so that by the first half of the year, that would have mitigated itself. So that's exactly right in terms of the rhythm of the numbers and the impact of that distributor model change.

[Operator:]

Last question, David Maris, LSA (sic) [CLSA].

[David Maris:]

In the Emerging Markets, just to get maybe a little bit more clarity if you can provide it, but as you can see, it's a big interest. In that All Other category where you had really good dollar growth, can you talk a little bit about whether that's unit growth or are you expanding -- is that just more a result of expanding to the broader product offering? So how much of that's unit demand growth, and where, if we took out China, how much of that $600 million is China? And then separately, on R&D spending, broadly speaking, thinking about external R&D collaborations, what percentage of R&D spending do you think or management focus are you spending on external collaborations or new collaborations that way?

[Jeffrey Kindler:]

David, let me comment on the second question, and we're not breaking out those numbers, obviously. But I would say we spend a lot of time focused on external collaborations. We've got a lot underway, as you know, and we continue to focus on that. You look historically and a lot of products come in that we at various stages, whether early stages or late stages. And the boundaries there have actually blurred in a lot of ways. For example, we now have world-class external advisory, committees that review our pipeline. We have academic collaborations. We're doing more and more things, not just with biotechs, but with even Big Pharma on a lot of things. So I think it's a lot more of a collaborative environment than it was, and we're going to continue aggressively to pursue that. That's very much a big part of our future. So I'll turn to the first part of your question to Frank.

[Frank D'Amelio:]

On the Emerging Markets part of the question, the way we think about that is, with the combination now, with the legacy Wyeth products and the legacy Pfizer products, we now have a bigger basket that we are able to put through our channels in those emerging markets. And we believe over time, we've said this, we expect to be able to grow that business in the double digits, and that's what we're all about executing and getting done as we go forward in that area of our business.

[Jeffrey Kindler:]

With that, I thank you all. I know you have a busy day, and we appreciate your time and your interest. Thank you very much.