01—Abstract
Summary
Summary of the 10-K filed March 10, 2004. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2003 10-K reflects a transformational year, dominated by the April 2003 acquisition of Pharmacia in a roughly $56 billiona stock-for-stock deal that made Pfizer the world's largest pharmaceutical company.
Revenues rose 40% to $45.2 billionb, with Pharmaceutical sales up 40% to $39.6 billion (88% of the total), Consumer Healthcare up 20% to $3.0 billion, and Animal Health up 43% to $1.6 billion. Much of the top-line growth reflects the inclusion of legacy Pharmacia products, a weaker U.S. dollar, and strong performances from Lipitor, Norvasc, Zoloft, Neurontin and Zithromax, each of which exceeded $2 billion or $1 billion in sales. Reported profitability fell sharply.
Net income dropped 57% to $3.9 billionc (EPS of $0.54 diluted) from $9.1 billion in 2002, driven by non-cash purchase accounting charges of roughly $10.2 billion pre-tax, including a $5.1 billion in-process R&D write-off and a $2.8 billion inventory step-up, along with a $1.4 billion legal provision tied to Rezulin and Neurontin matters and a 49.7% effective tax rate. Management's adjusted income, which excludes these items, rose 28% to $12.7 billion. The company also divested Adams confectionery, Schick-Wilkinson Sword and women's health lines for a combined gain of roughly $2.3 billion after tax, and guided to 2004 revenue of about $54 billion and adjusted diluted EPS of $2.13.
Investors should weigh the strong franchise and synergy outlook (about $3.4 billiond of cumulative Pharmacia cost synergies expected in 2004) against heavy exposure to patent expirations and generic competition, including Diflucan's U.S. basic patent expiry in January 2004, with Lipitor, Norvasc, Neurontin and Celebrex all facing legal challenges. Balance sheet strength remains intact with AAA/Aaa long-term ratings, though total debt rose to $14.6 billion and goodwill and intangibles now total about $58 billion, creating future impairment and amortization risk (roughly $3.4 billion of annual amortization expected in 2004).
02—Key points
Key Highlights
- Revenue up 40% to $45.2 billion, driven mainly by the April 2003 Pharmacia acquisition, with Pharmaceutical at 88% of sales
- Reported net income fell 57% to $3.9 billion ($0.54 diluted EPS) due to a $5.1 billion IPR&D charge, $2.8 billion inventory step-up, and $1.4 billion litigation provisions
- Adjusted income rose 28% to $12.7 billion, excluding purchase accounting and significant items per management's non-GAAP reconciliation
- Nine pharmaceutical products exceeded $1 billion in 2003 sales, representing 70% of Pharmaceutical revenues; Lipitor reached $9.2 billion
- Pharmacia cost synergies of $1.3 billion achieved in 2003, with about $3.4 billion expected in 2004 and $4 billion in 2005
- Net financial assets fell to $3.9 billion from $6.3 billion, with total debt rising to $14.6 billion; credit ratings remain Aaa/AAA and P1/A-1+
- 2004 guidance of about $54 billion revenue and $2.13 adjusted diluted EPS, with reported EPS of $1.68 after amortization and merger costs
03—Questions
Frequently Asked Questions
Why did Pfizer's reported net income drop so sharply in 2003?
Net income fell 57% to $3.9 billion because of non-cash purchase accounting charges from the Pharmacia acquisition, including a $5.1 billion in-process R&D write-off and a $2.8 billion inventory fair-value charge, plus a $1.4 billion provision for Rezulin and Neurontin legal matters. The effective tax rate also rose to 49.7%. Management's adjusted income, which excludes these items, grew 28%.
How significant is the Pharmacia acquisition to Pfizer's future?
The roughly $56 billion stock deal created the world's largest pharmaceutical company and added products such as Celebrex, Xalatan, Genotropin and Zyvox. It also brought about $1.3 billion of 2003 cost synergies, with targets of about $3.4 billion in 2004 and $4 billion in 2005, and it created about $36 billion of identifiable intangibles and $22 billion of goodwill that will drive ongoing amortization of roughly $3.4 billion a year.
What are the biggest risks to Pfizer's revenue?
Patent expirations and generic competition are the main risks. Diflucan lost its U.S. basic patent in January 2004, with pediatric exclusivity under legal challenge through July 2004. Patents on Lipitor, Norvasc, Neurontin, Celebrex, Xalatan and Detrol are being challenged by generic filers. Pricing pressure from managed care, Medicaid and Medicare reform, and foreign price controls also limit growth.
Is Pfizer's balance sheet still strong after the acquisition?
Yes, though leverage increased. Pfizer maintained Aaa/AAA long-term ratings and P1/A-1+ short-term ratings, with $12.3 billion of cash and short-term investments. Total debt rose to $14.6 billion from $11.8 billion, and net financial assets fell to $3.9 billion from $6.3 billion. The company also repurchased $13 billion of stock in 2003 and has a new $5 billion buyback program, and it raised its dividend 15% in 2003 with a 37th consecutive annual increase announced for 2004.
What drove the 2003 divestitures and what is left to sell?
Pfizer sold the Adams confectionery business for $4.2 billion, Schick-Wilkinson Sword for $930 million, and several women's health products, recording combined after-tax gains of about $2.3 billion. Pending or exploring sales include the in-vitro allergy diagnostics business for $575 million, around 60 non-core European consumer brands, and the surgical ophthalmology business. These divestitures were excluded from adjusted income.
04—Continue