Pfizer Inc. (PFE) Q2 2013 Earnings Conference Call July 30, 2013 10:00 AM ET
Charles E. Triano – Senior Vice President-Investor Relations
Ian C. Read – Chairman and Chief Executive Officer
Frank A. D'Amelio – Executive Vice President-Business Operations and Chief Financial Officer
Geno Germano – President and General Manager-Specialty Care and Oncology
John Young – President and General Manager-Primary Care
Mikael Dolsten – President-Worldwide Research and Development
Chris T. Schott – JPMorgan Securities LLC
Gregg Gilbert – Bank of America-Merrill Lynch
Tim Anderson – Sanford C. Bernstein & Co. LLC
Jami Rubin – Goldman Sachs & Co.
Mark Schoenebaum – ISI Group
Alex Arfaei – BMO Capital Markets
Marc Goodman – UBS Securities LLC
David Risinger – Morgan Stanley & Co. LLC
Tony Butler – Barclays Capital, Inc.
Steve M. Scala – Cowen & Co. LLC
Andrew Baum – Citi
Seamus Fernandez – Leerink Swann, LLC
Damien Conover – Morningstar Research
Good day, everyone and welcome to Pfizer’s Second Quarter 2013 Earnings Conference Call. Today’s call is being recorded.
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 E. Triano
Good morning and thank you for joining us today to review Pfizer’s second quarter 2013 performance. Joined today as usual by our Chairman and CEO, Ian Read; Frank D’Amelio, our CFO; Olivier Brandicourt, President and General Manager of Emerging Markets and Established 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 slide that will be presented on this call can be viewed on our homepage pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Second Quarter 2013 which is located in the Investor Presentations section in the lower right hand corner of this page.
Before we start, I would like to remind you that our discussions during this call will include forward-looking statements and that 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 2012 Annual Report on Form 10-K, and in our reports on Forms 10-Q and 8-K. Discussions during this conference call will also 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, July 30, 2013.
Also as we outlined in our earnings release, as a result of the full dispositions of Zoetis, the financial results of the Animal Health Business are now reported as a discontinued operation for the second quarter and year-to-date for both 2012 and 2013.
With that, I’ll now turn the call over to Ian Read. Ian?
Ian C. Read
Thank you, Chuck. I will begin with some comments on the quarter. We saw solid operational revenue growth at a number of areas. Moving on Innovative business, oncology grew 28% driven by the uptick of new products, mostly Inlyta and Xalkori in several major markets and we saw strong performance from Lyrica in developed markets which grew 14% and Celebrex in U.S., which grew by 13%. The consumer business grew 5% operationally, primarily due to strong global growth from Centrum. And China had strong volume growth, most notably for Lipitor and Prevenar. Overall total China revenues grew 14% operationally or 22% excluding the impact of product transfers in connection with forming a partnership with Hisun.
We continually expect that the second half of this year will be stronger than the first half of emerging markets. Although on a full-year basis, we now expect to see operational revenue growth of mid single-digit rather than high single digits. It is mainly due to a slowdown in growth in Brazil and Russia and the impact of cost containment measures in Columbia, Polland, Thailand and Turkey.
We completed the full separation of Zoetis into a standalone public company. The transactions related to the disposition of Zoetis generated approximately $17.2 billion of after-tax value for Pfizer’s shareholders. And our board of directors authorized a new 10 billion share repurchase program to be utilized overtime. This new program is an addition to the 3.1 billion of authorization remaining under the company’s current repurchase program.
Turning to our products and pipeline assets, the launches of both Eliquis and Xeljanz continued progress in various markets around the world. And we are gaining market approvals to both Xeljanz and Eliquis in additional countries. We are encouraged with the potential for both of these therapies over the time. For Eliquis, we're focused on gaining preferred formulary acceptance, continuing to obtain reimbursement and building physician knowledge and comfort about the drug in this profile.
With this unique profile in atrial fibrillation is the only product with superiority versus Warfarin in stroke prevention, major bleeding and a proven mortality benefit, we're confident we will continue to see steady growth that will build overtime.
For Xeljanz, we're seeing good opportunities with patients who are switching from their current biologic therapy, as well as patients who are initiating Xeljanz's therapy and as a second-line setting. That is following the tricks before a biologic DMARD. In fact, almost half of our recent prescriptions are in the second line setting, with the remainder being patients who have been on one or more, biological DMARDs and not achieving satisfactory results.
In addition, we began our direct consumer campaign in the U.S. early in June and that's seen a subsequent uptick in prescription volume. Last month, we announced that the FDA had accepted for review our supplementary new drug application to include progression of structural damage in Xeljanz label and as of today, Xeljanz will be commercially available in Japan, where it'll be co-promoted by Pfizer and Takeda Pharmaceutical Company Limited.
Overall, we remain encouraged by what we’re seeing what physicians and patients experienced so far. I would describe our progress as measured and steady and we recognize, it will continue to take time for rheumatologists to feel comfortable making a change. The launch is consistent with our expectations for new oral mechanism.
Turning to the status of Xeljanz in Europe, last week we announced The Committee for Medicinal Products for Human Use in the EU confirmed their prior opinions on marketing authorization applications for Xeljanz, although with a much closer vote. Given the novel mechanisms or action to Xeljanz, the CHMP wanted to see more data, particularly around safety to better understand the full profile of Xeljanz relative to other agents used in this patient population.
As a result of the reexamination process we addressed several of the questions and had more clarity on the remaining ones. We plan to work with European Medicines Agency to determine what additional data will be needed in order to resubmit a marketing authorization application and anticipate this will result in several years to lay.
Regarding the Xeljanz Phase III psoriasis program it continues to progress. However given the large size and complexity of this data set the analysis and reporting of the data have been more complicated than we anticipated. That said, there is no issue with the integrity of the data and this delay is purely due to operational issues. As a result, we now expect as the top line results from two of our four psoriasis ongoing studies by the end of the year.
One of the studies expected to read out this year evaluates maintenance of efficacy when patients are withdrawn from and then retreated with Xeljanz therapy. The second study compares the efficacy and safety of Xeljanz to Enbrel and placebo. We anticipate reporting the top line results from the two pivotal studies that will be part of our planned regulatory submission in the second quarter of next year.
For Prevnar sales this quarter were adversely impacted in the U.S. by the variability of CDC purchase patterns and a lower birth cohort in the U.S. as well as the end of a supplementary dose program in Asia. Regarding CAPiTA we continue to accumulate events and based on (indiscernible) spend rates we expect to complete the study this year. Given the size of the study, which is approximately 85,000 patients once the number of events is achieved it will still take several months to complete the necessary database validation and related activities prior to unblinding the results. Given where we are today we expect that we should see top line results in the first half of 2014.
As we announced yesterday, we are moving forward with formally internally separating our commercial and management structure into innovative and value business segments. And we will integrate emerging markets’ fully into each of these segments.
One of the innovative business segments will be led by Geno Germano, who'll become Group President Innovative Products. This business segment will generally include products that have exclusivity beyond 2015 across multiple therapeutic areas consisting of immunology and inflammation including Enbrel, cardiovascular metabolic, neuroscience and pain, rare diseases and women's and men's health. XELJANZ and Eliquis, examples of products in this business.
The other innovative business segment will be led by Amy Schulman who will become Group President of Vaccines Oncology and Consumer Healthcare. Each of these businesses will operate in the separate global business. Each has a different operating model with the same specializations around science, talent and market approach.
The Value Product segment will be led by John Young. They will include the brands that have lost their exclusivity and generally a mature patent protected products are expected to lose exclusivity through 2015 in most markets. Some examples include Celebrex, Zyvox, Viagra outside of the U.S. and Lyrica in the EU.
The Value business will also include our biosimilars portfolio and current and future collaborations for broadening our off patent portfolio, such as our existing partnerships with Mylan in Japan, Hisun in China and Teuto in Brazil. While we have decided to integrate emerging markets into the innovative value businesses, these markets will continue to play an important role in Pfizer's long-term success.
We see the fastest-growing emerging markets becoming more aligned with the profile of developed markets. With these changing dynamics we believe this is the right strategic to move for us at this time. I've asked Olivier Brandicourt to lead the transition from the current emerging markets business into each of the three business segments.
And with Amy becoming the Group President of Vaccines, Oncology and Consumer Healthcare, we're appointing Doug Lankler currently our Chief Compliance and Risk Officer to be Pfizer's General Counsel. And additionally, Ray Johnson, Senior Vice President and Associate General Counsel will become the new Chief Compliance and Risk Officer.
All of the leadership changes are effective January 1, 2014. We will be moving towards operating in the new commercial structure at the start of 2014 while we continue to manage our business and report our financial results and the existing structure for the balance of 2013. All the current leaders will continue in their roles for the remainder of this year.
Starting with a release of our financial results for the first quarter of 2014, we will provide greater transparency into the financial profile of each of the three new business segments. Our plan is to provide 2014 baseline management view of profit and loss to each segment. We anticipate providing additional financial detail as we move forward within a new structure effective January 1, 2015.
In summary, I believe this new commercial structure will put us in a better position to assess the capabilities, progress and opportunities, our innovative core and provide our value business dedicated resources required to fully strengthen and grow and position it to be a market leader.
Now, I’ll turn it over to Frank to take you through the details for the quarter.
Frank A. D'Amelio
Thanks Ian, good day everyone. As always, the charts I’m reviewing today are included in our webcast. Before I begin, I want to point out that as a result of the full disposition of Zoetis on June 24, 2013; the financial results of the Animal Health business are now reported as a discontinued operation, and the condensed consolidated statements of income for the second quarter and year-to-date for both 2012 and 2013.
Now let’s move on to the financials. Second quarter 2013 revenues of approximately $13 billion, decreased 7% year-over-year reflecting a 3% negative impact from foreign exchange and an operational decline of approximately 4% driven mainly by the loss of exclusivity of several key products in certain geographies, most notably Lipitor and developed Europe for the second quarter of 2012, and multi-source generic competition for Lipitor in U.S. beginning in late May 2012.
The decline in Pfizer’s share of revenues for the terms of the co-promotion agreements for Spiriva, which are in the final year in the U.S., Australia, Canada and certain European countries. The timing of government purchases of Prevenar in various markets and the transfer of certain product rights to our joint venture in China with Hisun in first quarter.
Adjusted Diluted EPS of $0.56 decreased 5%, primarily due to the previously mentioned decrease in revenues and the impact of foreign exchange, which were partially offset by a lower effective tax rate, and fewer diluted weighted average shares outstanding, primarily due to our ongoing share repurchase program.
Reported diluted EPS was $1.98 compared with $0.43 in the year-ago quarter. So, it’s mainly driven by the pre-tax gain of $10.5 billion associated with the full disposition of Zoetis and to a much lesser extent by the Protonix patent litigation settlement and lower legal charges, which were partially offset by the previously mentioned decrease in revenues and a 5.1 percentage point increase in the effective tax rate on reported income from continuing operations mainly attributable to the tax liability associated with the previously mentioned Protonix patent litigation settlement.
During the second quarter, biopharmaceutical revenues in the BRIC-MT markets declined 2% operationally, primarily due to the timing of government purchases of Enbrel in Brazil and Prevenar in Turkey and the transfer of certain product rights to the Pfizer-Hisun joint venture in the first quarter. These were partially offset by strong volume growth in China, especially for Lipitor and Prevnar.
In these BRIC-MT markets, volume growth of 1% was more than offset by price reductions of 3% versus the year-ago quarter. In addition, foreign exchange negatively impacted BRIC-MT revenue by 1% in the second quarter of 2013. Revenue from all emerging markets increased 4% operationally in the second quarter. If you exclude the portfolio of products whose rights would transfer to our joint venture in China with Hisun, we would have had operational revenue growth of 5% in our emerging markets business and 22% in China, and BRIC-MT operational revenue would have been flat compared with the year-ago quarter.
Operational, biopharmaceutical revenue growth from all emerging markets business is expected to accelerate in the second half of the year to a high single-digit percentage. However, we now expect full year operational revenue growth and our emerging markets business to be in the mid single digit percentage due continued slowing growth in some markets as pricing pressures continue to build and governments take additional steps to contain rising healthcare expenditures.
As we previously stated, because of the continued volatility in emerging markets, we anticipate our performance in that business to fluctuate from quarter-to-quarter.
Foreign exchange negatively impacted second quarter revenues by 3% or $392 million, and had a net positive impact of 3% or $228 million on the aggregate of adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses. As a result, foreign exchange negatively impacted second quarter adjusted diluted EPS by approximately $0.02 compared with the year-ago quarter.
Now, moving on to our 2013 financial guidance, we are reaffirming all components of our full year 2013 adjusted financial guidance that we updated on June 24 to solely reflect the impact of the Zoetis exchange offer. I want to remind everyone that the weighted average shares outstanding used in the calculation of adjusted and reported diluted EPS reflects the net reduction of 405.1 million shares of Pfizer's outstanding common stock as a result of the exchange offer. Because the exchange offer was completed on June 24, we will recognize only a partial year benefit to our full year 2013 adjusted and reported diluted EPS.
As an additional reminder, when we completed the full disposition of Zoetis in June we announced that the expected impact of the removal of the full year 2013 financial contribution of Zoetis and the impact of the partial year benefit from the net reduction in shares of our outstanding common stock due to the exchange offer would result in a $0.04 decrease to the upper and lower ends of our projected range for 2013, adjusted diluted EPS.
Today, we’ve also updated our 2013 reported diluted EPS guidance range of $3.07 to $3.22 to reflect the gain associated with the full disposition of Zoetis, and income from the previously mentioned litigation settlement.
Now moving on to key takeaways. Second quarter results reflect the loss of exclusivity of certain products in various geographies as well as the continued volatility in emerging markets.
As I previously mentioned, we expect high single-digit operational revenue growth in emerging markets during the second half of 2013, and now expect mid single-digit growth for the full year.
We continue to mitigate the earnings impact of product LOEs with both expense discipline and share repurchases. We completed the full disposition of Zoletis during the second quarter, and we accepted 405.1 million shares of Pfizer common stock in exchange for our remaining interest in Zoetis.
We continue to expect the transaction to be accretive to reported and adjusted diluted EPS on a full year basis in 2014. We are reaffirming all components of our 2013 adjusted financial guidance, we remain excited about the potential of our new product launches in mid-to-late stage pipeline. We’ve announced our intention to implement the new commercial structure beginning in fiscal 2014, which we except will better position Pfizer in long term success, and we continue to create shareholder value through prudent capital allocation.
In the second quarter, we repurchased approximately $3.3 billion of our common stock. To date in 2013, we have repurchased approximately 8.7 billion or approximately 309 million shares and have $13.1 billion remaining under our current authorization. And we continue to expect the repurchase in the mid teens of billions of dollars of our common stock this year, despite the blackout period for share repurchases during and for 10 business days after the Zoetis exchange offer period. Finally, we remain committed to delivering attractive shareholder returns in 2013 and beyond.
Now, I’ll turn it back to Chuck.
Charles E. Triano
Thanks Frank and Ian for the update. Operator, can we please now pull for questions.
Earnings Call Part 2:
- Health Care Industry
- Pfizer Inc