Why did reported net income more than double in 2001?

Most of the increase reflects the absence of the large 2000 merger-related charges ($3.3 billion, including $1.8 billion for the terminated Warner-Lambert/American Home Products merger) and lower 2000 tax rates effects. Merger costs fell to $839 million in 2001, and the effective tax rate dropped to 24.8% from 35.4%. Investors should focus on the underlying 28% growth in EPS excluding significant items and merger costs.

How dependent is Pfizer on its top-selling drugs?

Highly dependent. The eight $1 billion-plus products accounted for more than half of 2001 revenues. Lipitor alone generated $6.4 billion, about 20% of total revenues. Loss of patent protection, a competitive entrant, or a regulatory problem with any of these drugs could significantly affect results, and the company explicitly noted the patent challenges facing Neurontin, Diflucan and Zoloft.

What are the biggest legal and regulatory risks disclosed?

The most notable are generic patent challenges to several key drugs, the Rezulin product liability litigation (more than 2,000 suits, with a federal grand jury inquiry), a government investigation into Neurontin promotion that could lead to criminal charges, a DOJ civil probe of Lipitor pricing and rebates, and antitrust suits challenging Neurontin and Procardia XL patent enforcement. Management believes these will not have a material adverse effect, but outcomes are inherently uncertain.

What is the outlook for Pfizer's growth and earnings?

Management guided to double-digit annual revenue growth through 2004 at current exchange rates and projected 2002 diluted EPS of $1.56 to $1.60 excluding significant items. It targets average annual EPS growth of 15% or better in 2003 and 2004. Investors should note that pricing pressure from U.S. Medicare reform debates, managed care cost containment, and generic competition are identified as headwinds, and quarterly EPS growth in 2002 is expected to be weighted toward the first half.

PFE 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2002. Cited figures are marked; the original filing is the authoritative source.

Pfizer's 2001 10-K (filed March 2002) shows a company whose reported results were driven by the Warner-Lambert merger's aftermath and a strong core pharmaceutical franchise.

Total revenues grew 10% to $32.3 billion^a, with human pharmaceuticals up 13% to $25.5 billion and eight products each exceeding $1 billion in sales (Lipitor, Norvasc, Zoloft, Neurontin, Viagra, Zithromax, Celebrex and Diflucan). Net income more than doubled (up 109%) to $7.8 billion, and diluted EPS rose 107% to $1.22. Investors should note that these headline gains are flattered by merger-related dynamics: the prior year carried $3.3 billion of merger costs, and 2001 includes a one-time $175 million Medicaid accrual harmonization benefit.

Excluding certain significant items and merger-related costs, diluted EPS grew 28% to $1.31^b, which is the more representative measure of operating momentum. The filing highlights several risks. Foreign exchange was a significant headwind, reducing revenues by $861 million.

Lipitor and Norvasc face looming patent and pricing pressures in the U.S., and the company disclosed that patents on Neurontin, Diflucan and Zoloft are under legal challenge from generic manufacturers. Management also flagged U.S. pricing pressure from Medicare reform debates, managed care consolidation, and growing generic competition. Litigation exposure is substantial, including over 2,000 Rezulin suits, about 168,000 asbestos claims, and government investigations into Neurontin and Lipitor marketing and pricing practices.

Management maintains that these matters should not have a material adverse effect on financial condition. Looking forward, management guided to double-digit annual revenue growth through 2004 at current exchange rates, 2002 diluted EPS of $1.56 to $1.60^c excluding significant items, and average annual EPS growth of 15% or better for 2003 and 2004.

R&D spending was projected to rise about 10% to $5.3 billion^d, and merger-related cost savings were expected to reach $1.7 billion by the end of 2002. The balance sheet remained strong, with AAA/Aaa credit ratings, $8.9 billion in cash and short-term investments, and a dividend that marked its 35th consecutive year of increases.

02—Key points

Key Highlights

Revenue grew 10% to $32.3 billion in 2001, with human pharmaceuticals up 13% to $25.5 billion and 79% of revenues from human pharma.
Net income rose 109% to $7.8 billion and diluted EPS rose 107% to $1.22; excluding significant items and merger-related costs, diluted EPS grew 28% to $1.31.
Eight products each exceeded $1 billion in 2001 sales and together represented 76% of human pharmaceutical revenue, growing 17% combined; Lipitor (+28%) was the largest and fastest-growing.
Foreign exchange reduced revenues by $861 million (about 3%), and 38% of revenues came from outside the U.S.
Key patent and litigation risks include pending generic challenges to Neurontin, Diflucan, Zoloft and Celebrex, plus Rezulin product liability suits (over 2,000 suits) and roughly 168,000 asbestos claims.
2002 guidance called for diluted EPS of $1.56 to $1.60 excluding significant items, R&D of about $5.3 billion, and $1.7 billion in merger-related cost savings; the company targets double-digit revenue growth through 2004 and 15%+ EPS growth in 2003-2004.
Financial position remained strong with AAA/Aaa credit ratings, $8.9 billion in cash and short-term investments, and $2.4 billion budgeted for capital expenditures in 2002.

03—Questions

Frequently Asked Questions

Why did reported net income more than double in 2001?
Most of the increase reflects the absence of the large 2000 merger-related charges ($3.3 billion, including $1.8 billion for the terminated Warner-Lambert/American Home Products merger) and lower 2000 tax rates effects. Merger costs fell to $839 million in 2001, and the effective tax rate dropped to 24.8% from 35.4%. Investors should focus on the underlying 28% growth in EPS excluding significant items and merger costs.
How dependent is Pfizer on its top-selling drugs?
Highly dependent. The eight $1 billion-plus products accounted for more than half of 2001 revenues. Lipitor alone generated $6.4 billion, about 20% of total revenues. Loss of patent protection, a competitive entrant, or a regulatory problem with any of these drugs could significantly affect results, and the company explicitly noted the patent challenges facing Neurontin, Diflucan and Zoloft.
What are the biggest legal and regulatory risks disclosed?
The most notable are generic patent challenges to several key drugs, the Rezulin product liability litigation (more than 2,000 suits, with a federal grand jury inquiry), a government investigation into Neurontin promotion that could lead to criminal charges, a DOJ civil probe of Lipitor pricing and rebates, and antitrust suits challenging Neurontin and Procardia XL patent enforcement. Management believes these will not have a material adverse effect, but outcomes are inherently uncertain.
What is the outlook for Pfizer's growth and earnings?
Management guided to double-digit annual revenue growth through 2004 at current exchange rates and projected 2002 diluted EPS of $1.56 to $1.60 excluding significant items. It targets average annual EPS growth of 15% or better in 2003 and 2004. Investors should note that pricing pressure from U.S. Medicare reform debates, managed care cost containment, and generic competition are identified as headwinds, and quarterly EPS growth in 2002 is expected to be weighted toward the first half.

04—Continue

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