01—Abstract
Summary
Summary of the 10-K filed February 28, 2005. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2004 Form 10-K (filed February 28, 2005) describes a year dominated by the Pharmacia acquisition, which lifted revenues 17% to $52.5 billion and net income to $11.4 billiona from $3.9 billion in 2003.
The 2003 comparison is distorted by roughly $5.1 billionb of in-process R&D charges and $2.7 billion of inventory step-up charges, so reported earnings growth overstates underlying momentum. Adjusted Income, a non-GAAP measure management uses internally, rose 31% to $16.1 billion. Human Health generated 88% of revenue, and ten products each exceeded $1 billion, with Lipitor becoming the industry's first $10 billion product.
The filing is equally clear about risks. Celebrex and Bextra face regulatory reviews by the FDA and EMEA over cardiovascular safety following Merck's Vioxx withdrawal, and management warns that a significant loss of sales of either would materially hurt results. Several major franchises face generic erosion: Neurontin and Diflucan were hit in late 2004, Zithromax retains U.S. patent protection only until November 2005, and Zoloft and Norvasc lose U.S. exclusivity in 2006 and 2007.
Pfizer also disclosed a $369 millionc asbestos charge tied to Quigley, a $691 million Depo-Provera impairment, and numerous pending product liability and securities suits. Capital returns remain a central part of the story. Pfizer repurchased $6.7 billion of stock in 2004, paid $5.1 billion in dividends, and raised the annual dividend to $0.68 from $0.60, and it launched a new $5 billion buyback expected to be completed by the end of 2005.
Management expects Pharmacia cost synergies of about $4.2 billiond in 2005 and says the company may repatriate up to $29 billion under the American Jobs Creation Act, though the tax effect cannot yet be estimated. Investors will want to watch whether synergy gains and new launches can offset the patent cliff ahead.
02—Key points
Key Highlights
- Revenue grew 17% to $52.5 billion in 2004, with Human Health at $46.1 billion (88% of total), boosted by a full year of Pharmacia results and a weaker dollar.
- Net income rose to $11.4 billion from $3.9 billion, but 2003 was depressed by about $5.1 billion of acquired IPR&D and $2.7 billion of inventory step-up charges; Adjusted Income grew 31% to $16.1 billion.
- Lipitor became the pharmaceutical industry's first $10 billion product, with $10.9 billion in 2004 sales; ten products each exceeded $1 billion in revenue.
- Pharmacia cost synergies reached $3.6 billion in 2004 and are expected to reach about $4.2 billion in 2005.
- Celebrex and Bextra face FDA and EMEA cardiovascular safety reviews, and a significant sales loss from either would have a material adverse impact on results.
- Patent expirations loom: Zithromax (U.S. until November 2005), Zoloft (2006), and Norvasc and Zyrtec (2007), with Neurontin and Diflucan already facing generic competition.
- Shareholder returns were substantial: $6.7 billion in buybacks and $5.1 billion in dividends in 2004, a dividend increase to $0.68 per share, and a new $5 billion buyback program.
03—Questions
Frequently Asked Questions
How much of Pfizer's 2004 earnings growth reflects the Pharmacia acquisition versus underlying performance?
A large share. The 2003 base included about $5.1 billion of acquired IPR&D and $2.7 billion of inventory fair-value charges, so reported net income rose from $3.9 billion to $11.4 billion. Management's non-GAAP Adjusted Income, which excludes purchase accounting and merger costs, grew a more modest 31% to $16.1 billion, and even that figure includes Pharmacia's full-year contribution.
What is the biggest near-term risk to Pfizer's revenue?
The FDA and EMEA reviews of Celebrex and Bextra are the most immediate threat, since sales had already declined from December 2004 and a significant loss would materially affect results. Over the next few years, patent expirations for Zithromax, Zoloft, Norvasc and Zyrtec, plus generic challenges to Lipitor, Xalatan and Detrol, create further exposure to sharp revenue drops.
How is Pfizer returning capital to shareholders?
In 2004 Pfizer bought back $6.7 billion of stock and paid $5.1 billion in dividends. The annual dividend rose to $0.68 per share from $0.60, marking 38 consecutive years of increases. A new $5 billion repurchase program was authorized in October 2004 and is expected to be completed by the end of 2005.
Does Pfizer face material litigation exposure?
Yes, several matters are significant. These include a $369 million asbestos charge tied to Quigley and a related Chapter 11 reorganization, about 144,400 American Optical asbestos claims, Neurontin marketing class actions, Celebrex and Bextra securities and product liability suits, and Average Wholesale Price litigation. Management states that none is expected to have a material adverse effect on financial position, but acknowledges that verdicts or settlements could materially affect results in a given period.
Could Pfizer repatriate significant overseas cash under the American Jobs Creation Act?
Potentially. Pfizer is studying repatriating up to $29 billion in extraordinary dividends, possibly $8.6 billion more, at the 5.25% statutory rate. The company had not yet decided on the amount and said the total tax effect could not be reasonably estimated until further Treasury guidance and legislation were issued, with a decision expected in the first quarter of 2005.
04—Continue