Pfizer Inc. (NYSE: PFE) has reported financial results for second-quarter 2010. Since the acquisition of Wyeth was completed on October 15, 2009, legacy Wyeth products and operations are reflected in the first two quarters of 2010, but not reflected in the first two quarters of 2009. Second-quarter 2010 revenues were $17.3 billion, an increase of 58% compared with $11.0 billion in the year-ago quarter. Revenues for second-quarter 2010 compared with the year-ago quarter were favorably impacted by $5.4 billion, or 50%, due to the addition of the legacy Wyeth products, by $315 million, or 3%, due to legacy Pfizer products, and by $584 million, or 5%, due to foreign exchange. For second-quarter 2010, U.S. revenues were $7.4 billion, an increase of 63% compared with the year-ago quarter. International revenues were $9.9 billion, an increase of 54% compared with the prior-year quarter, which reflected 45% operational growth and a 9% favorable impact of foreign exchange. U.S. revenues represented 43% of total revenues in second-quarter 2010 compared with 41% in the year-ago quarter, while international revenues represented 57% of total revenues in second-quarter 2010 compared with 59% in the year-ago quarter.
For first-half 2010, revenues were $34.1 billion, an increase of 56% compared with $21.9 billion in the same period in 2009. Revenues for first-half 2010 compared with the year-ago period were favorably impacted by $10.7 billion, or 49%, due to the addition of the legacy Wyeth products, by $173 million, or 1%, due to legacy Pfizer products, and by $1.3 billion, or 6%, due to foreign exchange. U.S. revenues were $14.7 billion, an increase of 55% compared with first-half 2009. International revenues were $19.4 billion, an increase of 57% compared with the same period last year, which reflected 46% operational growth and an 11% favorable impact of foreign exchange. U.S. revenues represented 43% and international revenues represented 57% of the total in first-half 2010, both comparable with first-half 2009.
Business Revenues
Pfizer operates two distinct commercial organizations: Biopharmaceutical and Diversified. Biopharmaceutical includes the Primary Care, Specialty Care, Established Products, Emerging Markets and Oncology customer-focused units, while Diversified includes Animal Health, Consumer Healthcare, Nutrition and Capsugel.
For second-quarter 2010, revenues from Biopharmaceutical were $15.0 billion, an increase of 49% compared with $10.1 billion in the year-ago quarter. Operationally, revenues increased $4.5 billion, or 44%, which included $4.2 billion, or 41%, attributable to legacy Wyeth products, primarily Premarin in the Primary Care unit, Enbrel and the Prevnar/Prevenar franchise in the Specialty Care unit, Effexor in the Established Products unit as well as Enbrel and Prevenar in the Emerging Markets unit, and $313 million, or 3%, due to legacy Pfizer products. In addition, foreign exchange favorably impacted Biopharmaceutical revenues by 5% or $485 million.
Within the Biopharmaceutical units, legacy Pfizer operational performance was impacted in second-quarter 2010 compared with the year-ago quarter by the loss of exclusivity of certain products and by the resulting reclassification of Camptosar revenues among the units. Legacy Pfizer Oncology unit revenues no longer include Camptosar's European revenues due to its loss of exclusivity in July 2009. Camptosar's European revenues are included in the Established Products unit beginning in first-quarter 2010. This reclassification of revenues negatively impacted the Oncology unit's performance by 20% in second-quarter 2010 compared with the prior-year quarter. Further, legacy Pfizer Established Products unit revenues in second-quarter 2010 were adversely impacted by 5% due to the loss of exclusivity for Norvasc in Canada in July 2009, partially offset by the favorable impact of 1% due to the addition of Camptosar's European revenues.
For second-quarter 2010, revenues from Diversified were $2.2 billion, an increase of 169% compared with $833 million in the year-ago quarter. Operationally, revenues increased $1.3 billion, or 157%, which was primarily attributable to legacy Wyeth products, principally Centrum, Advil and Caltrate in Consumer Healthcare and infant and toddler Nutrition products. Additionally, foreign exchange favorably impacted Diversified revenues by 12% or $102 million.
Reported Net Income(1) and Reported Diluted EPS(1)
For second-quarter 2010, Pfizer posted reported net income(1) of $2.5 billion, an increase of 9% compared with $2.3 billion in the prior-year quarter, and reported diluted EPS(1) of $0.31, a decrease of 9% compared with $0.34 in the prior-year quarter. For first-half 2010, Pfizer posted reported net income(1) of $4.5 billion, a decrease of 10% compared with $5.0 billion in first-half 2009, and reported diluted EPS(1) of $0.56, a decline of 24% compared with $0.74 in the prior-year period. Results were favorably impacted by revenues from legacy Wyeth products and foreign exchange, and negatively impacted by the expenses associated with the legacy Wyeth operations as well as purchase accounting adjustments, integration charges and restructuring charges associated with the Wyeth acquisition, higher net interest expense primarily due to the borrowings used to partially fund the Wyeth acquisition and an increase in the effective tax rate.
The effective tax rate on reported results increased to approximately 37% in second-quarter 2010 from approximately 26% in second-quarter 2009, and approximately 37% in first-half 2010 compared with approximately 27% in first-half 2009. These increases were primarily the result of higher charges incurred as a result of the acquisition of Wyeth and the mix of jurisdictions in which those charges were incurred.
Additionally, reported diluted EPS(1) in second-quarter 2010 and first-half 2010 was impacted by the increased number of shares outstanding in comparison with the corresponding periods in 2009 resulting from shares issued to partially fund the Wyeth acquisition.
Adjusted Income(2) and Adjusted Diluted EPS(2)
Second-quarter 2010 adjusted income(2) was $5.0 billion, an increase of 53% compared with $3.2 billion in the year-ago quarter, and adjusted diluted EPS(2) was $0.62, an increase of 29% compared with $0.48 in the year-ago quarter. For first-half 2010, Pfizer posted adjusted income(2) of $9.8 billion, an increase of 42% compared with $6.9 billion in first-half 2009, and adjusted diluted EPS(2) of $1.22, an increase of 18% compared with $1.03 in the prior-year period. Results were favorably impacted by revenues from legacy Wyeth products and foreign exchange, which were partially offset by the expenses associated with the legacy Wyeth operations as well as higher net interest expense primarily due to the borrowings used to partially fund the acquisition of Wyeth and an increase in the effective tax rate.
The effective tax rate on adjusted income(2) increased to approximately 32% in second-quarter 2010 compared with approximately 28% in second-quarter 2009, and approximately 31% in first-half 2010 compared with approximately 29% in first-half 2009. These increases were primarily the result of certain business decisions made in connection with the acquisition of Wyeth and the change in the jurisdictional mix of earnings.
Additionally, adjusted diluted EPS(2) in second-quarter 2010 and first-half 2010 was impacted by the increased number of shares outstanding in comparison with the corresponding periods in 2009 resulting from shares issued to partially fund the Wyeth acquisition.
In second-quarter 2010, adjusted cost of sales(2) as a percentage of revenues was 17.0% compared with 15.4% in second-quarter 2009. This increase primarily reflects the change in the mix of products and businesses as a result of the Wyeth acquisition. Excluding the impact of foreign exchange, adjusted cost of sales(2) as a percentage of revenues was 18.2% in second-quarter 2010.
Adjusted SI&A expenses(2) were $4.7 billion in second-quarter 2010, an increase of 45% compared with $3.3 billion in the prior-year quarter. This increase was attributable primarily to the addition of the legacy Wyeth operations. Foreign exchange increased second-quarter 2010 adjusted SI&A expenses(2) by $126 million compared with the year-ago quarter.
Adjusted R&D expenses(2) were $2.2 billion in second-quarter 2010, an increase of 32% compared with $1.7 billion in the prior-year period. This increase was attributable primarily to the addition of the legacy Wyeth operations and continued investment in the late-stage development portfolio. Foreign exchange increased second-quarter 2010 adjusted R&D expenses(2) by $21 million compared with the year-ago quarter.
Overall, foreign exchange increased adjusted total costs(14) by $48 million, or 1%, in second-quarter 2010 compared with the prior-year period.
Executive Commentary
Jeff Kindler, Chairman and Chief Executive Officer, stated, "During the quarter, Pfizer's more balanced global portfolio, which includes small molecules, biologics and vaccines as well as off-patent pharmaceuticals and diversified products generated strong performance in a period of notable worldwide economic uncertainty. Within our Biopharmaceutical businesses, our recently launched vaccine for the prevention of pneumococcal disease in children, Prevnar/Prevenar 13, was a strong contributor, while many key products in our Primary Care, Specialty Care and Oncology units also performed well on a global basis. The Emerging Markets unit continued to benefit from our on-going investment, with year-over-year operational growth on a legacy Pfizer basis of 11%(13). Within that unit, revenues in our six key markets, led by China, increased a combined 19% on a legacy Pfizer operational basis to approximately $800 million."
"We continue to make solid progress on the Wyeth integration while we remain focused on delivering strong business performance. We expect to receive phase three clinical data for tasocitinib in rheumatoid arthritis, Sutent in lung cancer, Prevnar 13 for the prevention of pneumococcal disease in adults, axitinib in renal cell carcinoma and bosutinib in chronic myelogenous leukemia during the balance of this year. Within the Established Products unit, we anticipate continued new product launches, and within the Emerging Markets unit, we plan to continue our expansion in China and other key markets. Within our Diversified businesses, we plan to continue launching new innovations in markets around the world to grow and strengthen our product offerings, such as in our vitamin and infant formula product lines. We believe that these actions, in addition to a modest level of business development, will continue to support consistent, solid financial results," continued Mr. Kindler.
Frank D'Amelio, Chief Financial Officer, stated, "Based on our year-to-date performance, continued confidence in the business, progress on both our cost-reduction initiatives and the Wyeth integration as well as our future outlook, we are reaffirming our 2010 financial guidance and our 2012 financial targets. At this point, we anticipate that 2010 adjusted diluted EPS(2) will be at the upper-end of our guidance range, with expenses at the lower-end of our ranges. Given the continued strength of our balance sheet and significant operating cash flow, we remain confident that we have the financial wherewithal to successfully execute our strategies and continue to meet our financial objectives. Additionally, during the second quarter, we repurchased approximately $500 million, or 31 million shares, of our common stock."
2010 Financial Guidance(16)
For full-year 2010, Pfizer's financial guidance, at current exchange rates(15), is summarized below.
Reported Revenues - $67.0 to $69.0 billion
Adjusted Cost of Sales(2) as a Percentage of Revenues - 19.0% to 20.0%
Adjusted SI&A Expenses(2) - $19.0 to $20.0 billion
Adjusted R&D Expenses(2) - $9.1 to $9.6 billion
Adjusted Other (Income)/Deductions(2) - $1.2 to $1.4 billion
Effective Tax Rate on Adjusted Income(2) - Approximately 30%
Reported Diluted EPS(1) - $0.95 to $1.10
Adjusted Diluted EPS(2) - $2.10 to $2.20
2012 Financial Targets
The Company is reaffirming all elements of its 2012 financial targets. As previously stated, given the longer-term nature of these targets, they are subject to greater variability and less certainty as a result of potential material impacts related to foreign exchange fluctuations, macroeconomic activity including inflation, and industry-specific challenges including changes to government healthcare policy, among others.
For 2012, at current exchange rates(15), Pfizer is targeting reported revenues between $65.2 and $67.7 billion, reported diluted EPS(1) between $1.58 and $1.73, adjusted diluted EPS(2) between $2.25 and $2.35, adjusted R&D expenses(2) between $8.0 and $8.5 billion, adjusted operating margin(2) in a range of the high 30%s to low 40%s and adjusted other (income)/deductions(2) between $1.0 and $1.2 billion in deductions. The effective tax rate on adjusted income(2) is targeted at approximately 30%, while operating cash flow is expected to be at least $19.0 billion.
Additionally, the Company remains on-track to achieve the cost-reduction target of approximately $4 to $5 billion, by the end of 2012, at 2008 average foreign exchange rates, in comparison with the 2008 pro-forma adjusted total costs(14) of Pfizer and the legacy Wyeth operations.
For additional details, please see the attached financial schedules, product revenue tables, supplemental information and disclosure notice.
1. "Reported Net Income" is defined as net income attributable to Pfizer Inc. in accordance with U.S. generally accepted accounting principles. "Reported Diluted EPS" is defined as reported diluted EPS attributable to Pfizer Inc. common shareholders in accordance with U.S. generally accepted accounting principles.
2. "Adjusted Income" and its components and "Adjusted Diluted Earnings Per Share (EPS)" are defined as reported net income(1) and its components and reported diluted EPS(1) excluding purchase accounting adjustments, acquisition-related costs, discontinued operations and certain significant items. Adjusted Cost of Sales, Adjusted SI&A expenses, Adjusted R&D expenses and Adjusted Other (Income)/Deductions are income statement line items prepared on the same basis, and therefore, components of the overall adjusted income measure. As described under Adjusted Income in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of Pfizer's Form 10-Q for the fiscal quarter ended April 4, 2010, management uses adjusted income, among other factors, to set performance goals and to measure the performance of the overall company. We believe that investors' understanding of our performance is enhanced by disclosing this measure. Reconciliations of second-quarter 2010 and 2009 and first-half 2010 and 2009 adjusted income and its components and adjusted diluted EPS to reported net income(1) and its components and reported diluted EPS(1), as well as reconciliations of full-year 2010 guidance and 2012 targets for adjusted income and adjusted diluted EPS to full-year 2010 guidance and 2012 targets for reported net income(1) and reported diluted EPS(1), are provided in the materials accompanying this report. The adjusted income and its components and adjusted diluted EPS measures are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS.
3. The Primary Care unit includes revenues from human pharmaceutical products primarily prescribed by primary-care physicians, and may include, but are not limited to, products in the following therapeutic and disease areas: Alzheimer's disease, anxiety, cardiovascular (excluding pulmonary arterial hypertension), diabetes, pain, genitourinary, obesity, osteoporosis and respiratory. Examples of products in this unit include, but are not limited to, Celebrex, Lipitor, Lyrica, Premarin, Pristiq and Viagra. All revenues for such products are allocated to the Primary Care unit, except those generated in emerging markets(6) and those that are managed by the Established Products(5) unit.
4. The Specialty Care unit includes revenues from human pharmaceutical products primarily prescribed by physicians who are specialists, and may include, but are not limited to, products in the following therapeutic and disease areas: antibacterials, antifungals, antivirals, bone, inflammation, gastrointestinal, growth hormones, multiple sclerosis, ophthalmology, pulmonary arterial hypertension and psychosis. Examples of products in this unit include, but are not limited to, Enbrel, Genotropin, Geodon, the Prevnar/Prevenar franchise, Xalatan and Zyvox. All revenues for such products are allocated to the Specialty Care unit, except those generated in emerging markets(6) and those that are managed by the Established Products(5) unit.
5. The Established Products unit generally includes revenues from human prescription pharmaceutical products that have lost patent protection or marketing exclusivity in certain countries and/or regions. In certain situations, products may be transferred to this unit before losing patent protection or marketing exclusivity in order to maximize their value. This unit also excludes revenues generated in emerging markets(6). Examples of products in this unit include, but are not limited to, Arthrotec, Effexor, Medrol, Norvasc and Relpax.
6. The Emerging Markets unit includes revenues from all human prescription pharmaceutical products sold in emerging markets, including, but not limited to, Asia (excluding Japan and South Korea), Latin America, Middle East, Africa, Central and Eastern Europe, Russia and Turkey.
7. The Oncology unit includes revenues from human oncology and oncology-related products. Examples of products in this unit include, but are not limited to, Aromasin, Sutent and Torisel. All revenues for such products are allocated to the Oncology unit, except those generated in emerging markets(6) and those that are managed by the Established Products(5) unit.
8. Animal Health includes worldwide revenues from products to prevent and treat disease in livestock and companion animals, including vaccines, paraciticides and anti-infectives.
9. Consumer Healthcare generally includes worldwide revenues from non-prescription medicines and vitamins and may include, but are not limited to, products in the following therapeutic categories: pain management, nutritionals, respiratory and GI-topicals. Examples of products in Consumer Healthcare include, but are not limited to, Advil, Centrum, Caltrate, ChapStick and Robitussin.
10. Nutrition generally includes revenues from a full line of infant and toddler nutritional products sold outside of North America. Examples of products in Nutrition include, but are not limited to, the S-26 and SMA product lines as well as formula for infants with special nutritional needs.
11. Capsugel generally includes worldwide revenues from capsule products and services for the pharmaceutical and associated healthcare industries.
12. Includes revenues generated primarily from Pfizer Centersource.
13. In Biopharmaceutical, revenues from South Korea in 2009 have been reclassified from the Emerging Markets unit to the appropriate developed market units to conform to the current-year presentation, which reflects the fact that the commercial operations of South Korea, effective January 1, 2010, are managed within the appropriate developed market units.
14. Represents the total of Adjusted Cost of Sales(2), Adjusted SI&A expenses(2) and Adjusted R&D expenses(2).
15. The current exchange rates assumed in connection with the 2010 financial guidance are a blend of the average of the actual exchange rates in effect during first-half 2010 and the mid-July 2010 exchange rates for the remainder of the year. The current exchanges rates assumed in connection with the 2012 financial targets are the mid-July 2010 exchange rates.
16. This guidance does not assume the completion of any business-development transactions not completed as of July 4, 2010. This guidance also excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of July 4, 2010.