Why did reported net income decline in 1999 despite 20% revenue growth?

The 1998 results included about $883 million of significant pre-tax charges, including a $300 million contribution to The Pfizer Foundation, a $240 million Searle co-promotion payment, asset impairments and restructuring. Those items inflated 1998 earnings, including $1.4 billion of discontinued-operations income from the medical device divestitures, so the year-over-year comparison looks weaker than the underlying business. The 1999 results also absorbed a $310 million Trovan inventory write-off. Excluding these items, net income rose about 29%.

What are the key financial terms and expected benefits of the Warner-Lambert merger?

Pfizer will exchange 2.75 of its shares for each Warner-Lambert share, valued at $98.31 per Warner-Lambert share, for an equity value of about $90 billion at Pfizer's February 4, 2000 closing price of $35.75. The deal uses pooling-of-interests accounting and is expected to close in mid-2000. Management projects $1.6 billion in annual cost savings by 2002, 13% compound revenue growth and 25% earnings growth through 2002, with transaction and restructuring charges of $1.7 to $2.2 billion. These projections are management estimates and are not guaranteed.

How concentrated is Pfizer's revenue, and what does that mean for investors?

Revenue is concentrated in a few products. Norvasc alone generated $3,030 million in 1999, and the seven $1 billion-plus products accounted for more than half of revenue. Wholesalers McKesson (14%) and Cardinal Health (12%) are also large customers. This concentration means patent expirations, safety issues or competitive entries could significantly affect results, so investors should monitor the timing of generic challenges to Norvasc, Zoloft, Diflucan and Viagra.

How strong is Pfizer's balance sheet and liquidity after the 1999 buybacks?

Liquidity remains solid. Cash, equivalents and short-term investments totaled $4.7 billion, and the company holds Aaa/AAA long-term ratings and P1/A-1+ short-term ratings. However, total short-term borrowings rose to $5.0 billion, and net financial assets fell to $910 million from $2.6 billion. Shareholders' equity was $8.9 billion, and the current ratio declined to 1.22:1. Management noted that cash is managed by jurisdiction and that short-term borrowings are used when needed.

What are the most significant legal and regulatory risks disclosed?

Key risks include the Procardia XL patent litigation against several generic filers, the Cardura patent expiring in 2000, and the Trovan trademark verdict ($143 million jury award, with use of the mark enjoined from October 2000). Product-liability matters include Trovan liver-injury suits, RID and Plax consumer class actions, and Rimadyl claims. Asbestos claims are extensive, with 26,890 pending against the company. Management says none of these is expected to have a material adverse effect, but the Medicare drug-coverage debate and international price controls pose ongoing pricing risks.

PFE 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2000. Cited figures are marked; the original filing is the authoritative source.

Pfizer's 1999 10-K shows a strong operating year overshadowed by a pending transformational deal.

Total revenues grew 20% to $16.2 billion^a, driven by 19.6% volume growth, with Pharmaceuticals up 22% to $14.9 billion. Growth was led by in-line blockbusters (Norvasc, Zoloft, Zithromax, Viagra, Diflucan) and alliance revenue, which rose to $2.1 billion from $867 million, reflecting Lipitor, Aricept and Celebrex. Reported net income fell 5% to $3.18 billion, but this reflects a $310 million Trovan inventory write-off and the absence of roughly $883 million in 1998 one-time charges; excluding these items, net income rose about 29% and diluted EPS rose 30% to $0.87.

Diluted EPS as reported was $0.82^b. The central investor event is the February 2000 agreement to merge with Warner-Lambert in a pooling-of-interests transaction valued at about $90 billion, expected to close in mid-2000. Management projects 13% revenue CAGR and 25% earnings growth through 2002, $1.6 billion in annual cost savings by 2002, and pro forma diluted EPS of $0.98 in 2000 rising to $1.56 in 2002, before $1.7 to $2.2 billion in restructuring and transaction costs.

Investors should weigh that upside against integration risk and against the dependence of the standalone franchise on a few products. The balance sheet remains solid but has become more leveraged. Short-term borrowings rose to $5.0 billion^c, used largely to fund $2.5 billion of share repurchases, and net financial assets fell to $910 million from $2.6 billion.

Cash and short-term investments of $4.7 billion^d and Aaa/AAA debt ratings provide substantial liquidity. Key risks include generic erosion of Procardia XL (sales down to $521 million from $822 million in 1997), the expiry of the Cardura patent in 2000, Medicare drug-pricing debates, and several pending patent and product-liability suits, including Trovan litigation with a $143 million jury verdict.

02—Key points

Key Highlights

Total revenues rose 20% to $16,204 million in 1999, with volume contributing 19.6 percentage points of growth and alliance revenue more than doubling to $2,071 million.
Reported net income fell 5% to $3,179 million and diluted EPS was $0.82, but excluding the $310 million Trovan inventory charge and 1998 one-time items, net income rose 29% and diluted EPS rose 30% to $0.87.
Pending Warner-Lambert merger (about $90 billion equity value, 2.75 Pfizer shares per Warner-Lambert share) targets $1.6 billion in annual cost savings by 2002 and pro forma diluted EPS of $0.98 (2000), $1.27 (2001) and $1.56 (2002), before $1.7 to $2.2 billion in transaction and restructuring costs.
Seven products exceeded $1 billion in third-party sales, with the in-line group (Norvasc, Cardura, Zithromax, Diflucan, Zoloft, Viagra, Zyrtec) making up 60% of revenues; Viagra has been prescribed for over 6 million US patients.
Share repurchases of $2.5 billion in 1999 were funded with short-term borrowings, pushing short-term debt to $5,001 million and cutting net financial assets to $910 million from $2,579 million in 1998.
Procardia XL sales fell to $521 million in 1999 from $822 million in 1997 amid generic competition, and Cardura's US patent expires in 2000; generic erosion is a recurring risk across the portfolio.
Litigation exposure includes a $143 million Trovan trademark jury award (judgment entered February 2000, with use of the mark enjoined from October 2000) and Shiley heart-valve and asbestos claims that management considers not materially adverse.

03—Questions

Frequently Asked Questions

Why did reported net income decline in 1999 despite 20% revenue growth?
The 1998 results included about $883 million of significant pre-tax charges, including a $300 million contribution to The Pfizer Foundation, a $240 million Searle co-promotion payment, asset impairments and restructuring. Those items inflated 1998 earnings, including $1.4 billion of discontinued-operations income from the medical device divestitures, so the year-over-year comparison looks weaker than the underlying business. The 1999 results also absorbed a $310 million Trovan inventory write-off. Excluding these items, net income rose about 29%.
What are the key financial terms and expected benefits of the Warner-Lambert merger?
Pfizer will exchange 2.75 of its shares for each Warner-Lambert share, valued at $98.31 per Warner-Lambert share, for an equity value of about $90 billion at Pfizer's February 4, 2000 closing price of $35.75. The deal uses pooling-of-interests accounting and is expected to close in mid-2000. Management projects $1.6 billion in annual cost savings by 2002, 13% compound revenue growth and 25% earnings growth through 2002, with transaction and restructuring charges of $1.7 to $2.2 billion. These projections are management estimates and are not guaranteed.
How concentrated is Pfizer's revenue, and what does that mean for investors?
Revenue is concentrated in a few products. Norvasc alone generated $3,030 million in 1999, and the seven $1 billion-plus products accounted for more than half of revenue. Wholesalers McKesson (14%) and Cardinal Health (12%) are also large customers. This concentration means patent expirations, safety issues or competitive entries could significantly affect results, so investors should monitor the timing of generic challenges to Norvasc, Zoloft, Diflucan and Viagra.
How strong is Pfizer's balance sheet and liquidity after the 1999 buybacks?
Liquidity remains solid. Cash, equivalents and short-term investments totaled $4.7 billion, and the company holds Aaa/AAA long-term ratings and P1/A-1+ short-term ratings. However, total short-term borrowings rose to $5.0 billion, and net financial assets fell to $910 million from $2.6 billion. Shareholders' equity was $8.9 billion, and the current ratio declined to 1.22:1. Management noted that cash is managed by jurisdiction and that short-term borrowings are used when needed.
What are the most significant legal and regulatory risks disclosed?
Key risks include the Procardia XL patent litigation against several generic filers, the Cardura patent expiring in 2000, and the Trovan trademark verdict ($143 million jury award, with use of the mark enjoined from October 2000). Product-liability matters include Trovan liver-injury suits, RID and Plax consumer class actions, and Rimadyl claims. Asbestos claims are extensive, with 26,890 pending against the company. Management says none of these is expected to have a material adverse effect, but the Medicare drug-coverage debate and international price controls pose ongoing pricing risks.

04—Continue

← View all 10-K filings