Why did net income rise 51% when continuing operations declined?

The increase is driven by $1.401 billion of discontinued operations income, primarily a $1.366 billion after-tax gain on the sale of the Medical Technology Group businesses (Schneider $2.1 billion, Howmedica $1.65 billion, Valleylab $425 million, AMS $130 million). Income from continuing operations fell 6% to $1.950 billion because of about $1.0 billion of 1998 charges, including a $300 million contribution to The Pfizer Foundation and $240 million in copromotion payments to Searle for Celebrex.

How concentrated is Pfizer's revenue, and what are the patent risks?

Concentration is high: Norvasc ($2.6 billion), Zoloft ($1.8 billion) and Zithromax ($1.0 billion) together account for roughly 40% of 1998 revenues, and 10 major products make up 69%. Basic U.S. patents for several of these expire between 2004 and 2011, while the Cardura patent expires in 2000. Loss of patent protection typically causes a sharp U.S. sales decline due to generic competition, so the timing of these expirations is a key long-term risk.

What is driving growth and what is the outlook for 2000 and beyond?

Growth was driven primarily by volume, with recent launches (Viagra, Trovan, Zyrtec pediatric approval), expanded U.S. sales forces (about 5,400 representatives), and alliance products (Lipitor, Aricept, Celebrex). The 10-K does not provide quantitative guidance, but management expects pricing pressure from managed care and government programs to continue and foreign exchange to affect 1999 results. Pending regulatory items include Tikosyn (advisory committee favorable), Relpax, and Zoloft filings.

How much of the 1998 results were affected by one-time items?

The company disclosed about $1.0 billion of pre-tax significant charges: asset impairments of $213 million (including $103 million for Stafac, banned in the EU), restructuring of $177 million, the $240 million Searle copromotion payment, the $300 million Foundation contribution, and about $126 million of other items, mainly legal settlements. Excluding these, income from continuing operations rose about 26.6%, and diluted EPS was about $2.00 versus $2.55 reported.

What is the legal and regulatory exposure?

Key matters include Procardia XL patent litigation against generic filers (Mylan, Biovail, Lek, Martec), a suit against the FDA over the ANDA process, and an antitrust matter over retail pharmacy pricing with a class settlement and a pending FTC investigation. There are also heart valve (Shiley) claims, asbestos claims against Quigley (about 58,000 pending) and the Company (about 33,000), a Brazilian civil action with a possible payment of about $88 million, and Belgian tax assessments of about $530 million in tax and interest (which the company believes are without merit). Management states that none of these is expected to have a material adverse effect, although the Belgian and Brazilian matters carry the largest potential dollar exposure.

PFE 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.

Pfizer's 1998 results were a step-change year, driven by volume growth in its core pharmaceutical franchise and a large one-time gain from exiting the medical device business.

Total revenues rose 23% to $13.5 billion^a, with pharmaceutical revenues up 26% to $12.2 billion. Volume was the dominant driver (+24.8%), while currency reduced revenues by roughly 3.5%. Growth was led by Viagra (launched 1998, $788 million in sales), Zithromax (+27%), Zoloft (+22%), Norvasc (+16%, now the largest-selling product at $2.6 billion), and Zyrtec (+57%).

Net income rose 51% to $3.35 billion^b, but this figure is inflated by $1.4 billion of discontinued-operations income from the sale of the Medical Technology Group (Schneider, Howmedica, Valleylab, American Medical Systems). Income from continuing operations actually fell 6% to $1.95 billion, reflecting roughly $1.0 billion of 'other deductions,' including a $300 million contribution to The Pfizer Foundation, $240 million in copromotion payments to Searle for Celebrex, $213 million of asset impairments, and $177 million of restructuring charges. Diluted EPS was $2.55 reported, but only about $2.00 excluding significant charges.

The key investor watch items are concentration and patent exposure. Norvasc, Zithromax and Zoloft together account for about 40% of revenue, and several major U.S. patents expire between 2000 and 2011. Procardia XL is in decline ($714 million^c, down 13%) and faces generic challengers, with active litigation over the patent.

Pressure from managed care, Medicaid rebates, and possible Medicare reform is expected to continue. Financially, the balance sheet strengthened: net financial assets rose to $2.6 billion^d from essentially zero, and operating cash flow reached $2.9 billion. The company also committed to a $5 billion buyback program and announced a three-for-one stock split for April 1999, with the dividend raised 16% to $0.22 per quarter.

02—Key points

Key Highlights

Total revenues grew 23% to $13.544 billion; volume contributed 24.8 percentage points of growth, while currency reduced growth by 3.5 points.
Net income rose 51% to $3.351 billion, but this includes $1.401 billion of discontinued operations from the MTG divestitures; income from continuing operations fell 6% to $1.950 billion.
Diluted EPS was $2.55 reported (+50%), or roughly $2.00 excluding significant charges (+25.8%), which totaled about $1.0 billion pre-tax across impairments, restructuring, the Searle copromotion payment, and the Foundation contribution.
Viagra launched in 1998 with $788 million in sales; Zithromax ($1.04 billion), Zoloft ($1.84 billion), and Norvasc ($2.58 billion) each grew strongly, and together with Norvasc, Zithromax and Zoloft represent roughly 40% of revenues.
Procardia XL sales declined to $714 million (down from $1,005 million in 1996) amid competition from generic filers, with multiple ANDA challenges and patent litigation pending.
Balance sheet strengthened: net financial assets reached $2.6 billion (vs. $58 million in 1997), operating cash flow was $2.9 billion, and the company repurchased $1.9 billion of stock during the year, with a new $5 billion buyback program authorized.
Shareholder actions: quarterly dividend raised 16% to $0.22 (32nd consecutive year of increases), and a three-for-one stock split is planned for April 22, 1999, subject to shareholder approval of more authorized shares.

03—Questions

Frequently Asked Questions

Why did net income rise 51% when continuing operations declined?
The increase is driven by $1.401 billion of discontinued operations income, primarily a $1.366 billion after-tax gain on the sale of the Medical Technology Group businesses (Schneider $2.1 billion, Howmedica $1.65 billion, Valleylab $425 million, AMS $130 million). Income from continuing operations fell 6% to $1.950 billion because of about $1.0 billion of 1998 charges, including a $300 million contribution to The Pfizer Foundation and $240 million in copromotion payments to Searle for Celebrex.
How concentrated is Pfizer's revenue, and what are the patent risks?
Concentration is high: Norvasc ($2.6 billion), Zoloft ($1.8 billion) and Zithromax ($1.0 billion) together account for roughly 40% of 1998 revenues, and 10 major products make up 69%. Basic U.S. patents for several of these expire between 2004 and 2011, while the Cardura patent expires in 2000. Loss of patent protection typically causes a sharp U.S. sales decline due to generic competition, so the timing of these expirations is a key long-term risk.
What is driving growth and what is the outlook for 2000 and beyond?
Growth was driven primarily by volume, with recent launches (Viagra, Trovan, Zyrtec pediatric approval), expanded U.S. sales forces (about 5,400 representatives), and alliance products (Lipitor, Aricept, Celebrex). The 10-K does not provide quantitative guidance, but management expects pricing pressure from managed care and government programs to continue and foreign exchange to affect 1999 results. Pending regulatory items include Tikosyn (advisory committee favorable), Relpax, and Zoloft filings.
How much of the 1998 results were affected by one-time items?
The company disclosed about $1.0 billion of pre-tax significant charges: asset impairments of $213 million (including $103 million for Stafac, banned in the EU), restructuring of $177 million, the $240 million Searle copromotion payment, the $300 million Foundation contribution, and about $126 million of other items, mainly legal settlements. Excluding these, income from continuing operations rose about 26.6%, and diluted EPS was about $2.00 versus $2.55 reported.
What is the legal and regulatory exposure?
Key matters include Procardia XL patent litigation against generic filers (Mylan, Biovail, Lek, Martec), a suit against the FDA over the ANDA process, and an antitrust matter over retail pharmacy pricing with a class settlement and a pending FTC investigation. There are also heart valve (Shiley) claims, asbestos claims against Quigley (about 58,000 pending) and the Company (about 33,000), a Brazilian civil action with a possible payment of about $88 million, and Belgian tax assessments of about $530 million in tax and interest (which the company believes are without merit). Management states that none of these is expected to have a material adverse effect, although the Belgian and Brazilian matters carry the largest potential dollar exposure.

04—Continue

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