How strong is Pfizer's growth and profitability in 2002?

Revenue grew 12% to $32.4 billion and net income grew 17% to $9.1 billion. Diluted EPS of $1.46 rose 20%, though it absorbed a $410 million non-cash goodwill impairment. Excluding significant items and merger costs, income before the accounting change rose 19% to $9.9 billion.

What is the Pharmacia deal and why does it matter?

Pfizer agreed in July 2002 to acquire Pharmacia in a stock-for-stock deal valued at about $60 billion, issuing roughly 2 billion Pfizer shares. Shareholders and the European Commission approved it, and closing was expected in April 2003 after FTC-required divestitures. It would significantly expand Pfizer's product portfolio and dilute existing shareholders, and management notes integration uncertainty.

What are the biggest risks to Pfizer's revenue?

The main risks are loss of exclusivity: Accupril, Diflucan, Zithromax and Zoloft face patent expiry between 2003 and 2006, and generic competition can cut U.S. sales sharply quickly. Pricing pressure from managed care, Medicare reform and Medicaid rebate expansion also weighs on margins. Pending patent challenges on Lipitor, Norvasc, Neurontin and Celebrex add uncertainty.

Is Pfizer's balance sheet and capital return strong?

Yes. Pfizer holds $12.95 billion in cash and short-term investments, has Aaa/AAA long-term debt ratings, and generated $9.9 billion of operating cash flow. It repurchased about $5 billion of stock in 2002 and paid $3.2 billion in dividends, with a 36th consecutive year of dividend increases. Net financial assets were $6.3 billion.

What litigation should investors monitor?

Key matters include about 8,700 Rezulin product liability suits and a federal grand jury inquiry, a U.S. Attorney investigation and multiple class actions over Neurontin promotion, roughly 128,000 asbestos claims tied to Quigley and about 103,000 tied to American Optical, and Average Wholesale Price litigation. Management says none is expected to have a material adverse effect on financial position, but outcomes are unpredictable.

PFE 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2003. Cited figures are marked; the original filing is the authoritative source.

Pfizer's 2002 Form 10-K shows a company at peak scale: total revenues grew 12% to $32.4 billion^a, net income rose 17% to $9.1 billion, and diluted EPS grew 20% to $1.46.

Growth was driven by the human pharmaceutical franchise (revenues up 12% to $28.3 billion^b), with ten products each exceeding $1 billion in annual sales, including Lipitor, the world's largest-selling prescription drug. Results were also affected by non-cash charges (a $410 million after-tax goodwill impairment on adopting SFAS 142) and Warner-Lambert merger integration and restructuring costs of $331 million after tax. Management forecasts 2003 diluted EPS of about $1.80 excluding significant items and merger costs on a stand-alone basis, and does not forecast reported EPS because of the pending Pharmacia acquisition and divestitures.

The filing is dominated by two pending transactions. The roughly $60 billion^c all-stock Pharmacia acquisition (about 2 billion Pfizer shares to be issued) was cleared by shareholders and the European Commission and was expected to close in April 2003 after an FTC consent decree. Pfizer is also divesting non-core businesses: the Adams confectionery unit ($4.2 billion), Schick-Wilkinson Sword ($930 million), and certain women's health lines ($359 million plus up to $125 million contingent).

These sales are expected to close in the first half of 2003 and would reshape the company's consumer exposure. Key risks for investors include patent expirations and generic competition (Accupril, Diflucan, Zithromax and Zoloft face expiry between 2003 and 2006), pricing pressure from managed care and proposed Medicare/Medicaid reforms, pending patent litigation on Lipitor, Norvasc, Neurontin and Celebrex, a large Rezulin product liability docket (about 8,700 suits), a federal investigation of Neurontin promotion, and roughly 128,000 asbestos claims tied to Quigley and American Optical. Balance sheet strength remains high, with Aaa/AAA long-term debt ratings, $12.95 billion^d in cash and short-term investments, and $5 billion in share buybacks during 2002.

02—Key points

Key Highlights

Revenue grew 12% to $32,373 million in 2002; human pharmaceuticals rose 12% to $28.3 billion, about 87% of total revenue.
Net income rose 17% to $9,126 million; diluted EPS rose 20% to $1.46, after a $410 million after-tax goodwill impairment charge under SFAS 142.
Ten products each exceeded $1 billion in 2002 sales, including Lipitor (about $8.0 billion, the world's largest-selling prescription drug), Zoloft, Neurontin and Viagra.
Pending ~$60 billion stock-for-stock acquisition of Pharmacia (about 2 billion Pfizer shares), expected to close around April 2003 after FTC consent-decree divestitures.
Discontinued operations: Adams confectionery ($4.2 billion), Schick-Wilkinson Sword ($930 million) and women's health lines ($359 million) to be sold in the first half of 2003.
2003 outlook: diluted EPS of about $1.80 excluding significant items and merger costs, on a stand-alone basis; reported EPS is not forecast.
Significant patent exposure: several key drugs face generic entry in 2003–2007, and Lipitor, Norvasc, Neurontin, Diflucan and Zoloft patents are under legal challenge; Rezulin (~8,700 suits) and Neurontin marketing investigations add litigation risk.

03—Questions

Frequently Asked Questions

How strong is Pfizer's growth and profitability in 2002?
Revenue grew 12% to $32.4 billion and net income grew 17% to $9.1 billion. Diluted EPS of $1.46 rose 20%, though it absorbed a $410 million non-cash goodwill impairment. Excluding significant items and merger costs, income before the accounting change rose 19% to $9.9 billion.
What is the Pharmacia deal and why does it matter?
Pfizer agreed in July 2002 to acquire Pharmacia in a stock-for-stock deal valued at about $60 billion, issuing roughly 2 billion Pfizer shares. Shareholders and the European Commission approved it, and closing was expected in April 2003 after FTC-required divestitures. It would significantly expand Pfizer's product portfolio and dilute existing shareholders, and management notes integration uncertainty.
What are the biggest risks to Pfizer's revenue?
The main risks are loss of exclusivity: Accupril, Diflucan, Zithromax and Zoloft face patent expiry between 2003 and 2006, and generic competition can cut U.S. sales sharply quickly. Pricing pressure from managed care, Medicare reform and Medicaid rebate expansion also weighs on margins. Pending patent challenges on Lipitor, Norvasc, Neurontin and Celebrex add uncertainty.
Is Pfizer's balance sheet and capital return strong?
Yes. Pfizer holds $12.95 billion in cash and short-term investments, has Aaa/AAA long-term debt ratings, and generated $9.9 billion of operating cash flow. It repurchased about $5 billion of stock in 2002 and paid $3.2 billion in dividends, with a 36th consecutive year of dividend increases. Net financial assets were $6.3 billion.
What litigation should investors monitor?
Key matters include about 8,700 Rezulin product liability suits and a federal grand jury inquiry, a U.S. Attorney investigation and multiple class actions over Neurontin promotion, roughly 128,000 asbestos claims tied to Quigley and about 103,000 tied to American Optical, and Average Wholesale Price litigation. Management says none is expected to have a material adverse effect on financial position, but outcomes are unpredictable.

04—Continue

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