01—Abstract
Summary
Summary of the 10-K filed March 1, 2006. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2005 10-K shows a company under heavy revenue pressure but still highly profitable.
Total revenues fell 2% to $51.3 billiona, while net income dropped 29% to $8.1 billion from $11.4 billion. The decline was driven by loss of U.S. exclusivity on key products (Neurontin, Diflucan, Accupril, and Zithromax), the suspension of Bextra sales, and uncertainty around Celebrex. Those factors cut revenues by about $5.7 billion versus 2004.
Reported earnings were also hit by $1.7 billionb of acquired in-process R&D (mainly Vicuron and Idun), $1.2 billion of Bextra-related impairments and charges, and $1.7 billion of tax on repatriating roughly $37 billion of foreign earnings. Adjusted income, a non-GAAP measure management uses, fell 7% to $15.0 billion. Management is leaning on its cost program and pipeline to offset the revenue loss.
The Adapting to Scale initiative is targeted to deliver about $4 billionc in annual savings by 2008, with roughly $800 million already achieved in 2005. Several launches (Lyrica, Exubera, Sutent, Eraxis) and the Lipitor franchise are expected to drive 2006 revenues, which management expects to be roughly flat with 2005. Guidance calls for reported net income of about $11.4 to $11.7 billion and diluted EPS of $1.52 to $1.56.
That guidance excludes the purchase-accounting effects of a pending business-development deal and any impact from exploring strategic options for Consumer Healthcare, which may be sold or spun off with a decision expected in Q3 2006. The balance sheet remains strong, with $22.7 billiond in cash and short-term investments, $17.9 billion in total debt, and shareholders' equity of $65.6 billion.
Pfizer holds AAA/Aaa ratings, though Moody's has a negative outlook. Key risks include the 2006 patent expiry of Zoloft, the 2007 expiries of Norvasc and Zyrtec, Lipitor generic competition beginning in 2006 (with U.S. patent litigation on appeal), Medicare Part D and Medicaid pricing pressure, and extensive product liability and securities litigation, including Celebrex, Bextra, Neurontin, and Viagra matters.
02—Key points
Key Highlights
- Revenue declined 2% to $51.3 billion as loss of U.S. exclusivity on Neurontin, Diflucan, Accupril and Zithromax, plus the Bextra suspension and Celebrex uncertainty, cut revenues by about $5.7 billion
- Net income fell 29% to $8.1 billion ($1.09 diluted EPS) from $11.4 billion, weighed down by $1.7 billion of acquired IPR&D, $1.2 billion of Bextra charges, and a $1.7 billion repatriation tax charge
- Adjusted income (non-GAAP) declined 7% to $15.0 billion, and management guides 2006 Adjusted diluted EPS to about $2.00 and reported diluted EPS to $1.52-$1.56
- Lipitor remains the world's best-selling drug at over $12 billion in 2005 sales (24% of revenues), but its growth slowed in the second half and generic competition begins in 2006
- Adapting to Scale productivity program targets about $4 billion in annual savings by 2008 (about $800 million achieved in 2005) at a total cost of $4-5 billion
- Strategic review of the Consumer Healthcare segment (possible sale or spin-off), with a decision expected in Q3 2006
- Strong liquidity with $22.7 billion in cash and short-term investments, $65.6 billion in shareholders' equity, and a dividend raised to $0.76 per share in 2005 (39th consecutive annual increase)
03—Questions
Frequently Asked Questions
Why did Pfizer's earnings decline so sharply in 2005?
Net income fell to $8.1 billion from $11.4 billion. The main drivers were lost U.S. exclusivity on several key drugs, the withdrawal of Bextra, and reduced demand for Celebrex. The reported figure also absorbed $1.7 billion of acquired in-process R&D from the Vicuron and Idun acquisitions, $1.2 billion of Bextra-related charges, and a $1.7 billion tax charge on repatriating about $37 billion of foreign earnings. Excluding purchase accounting, merger costs, and certain significant items, Adjusted income fell 7% to $15.0 billion.
What is the outlook for 2006?
Management expects 2006 revenues to be roughly comparable to 2005. It forecasts Adjusted income of about $15 billion and Adjusted diluted EPS of about $2.00, with reported net income of $11.4 to $11.7 billion and reported diluted EPS of $1.52 to $1.56. Growth is expected from Lipitor, Celebrex, and Lyrica. The guidance excludes purchase-accounting effects from a pending business-development transaction and any impact from the Consumer Healthcare strategic review.
Which patent expirations are the biggest risk to Pfizer's revenue?
Zoloft loses U.S. exclusivity in June 2006, and Norvasc and Zyrtec follow in 2007. Lipitor faces generic pravastatin and simvastatin competition starting in April and June 2006. Its U.S. basic patent runs to March 2010, with the enantiomer patent to June 2011, and both are being litigated. Management notes that these seven products represented 33% of Human Health revenues in 2004, and Zithromax, Zoloft, Norvasc and Zyrtec represented 26% of Human Health revenues in 2005.
What is happening with the Consumer Healthcare business?
On February 7, 2006, Pfizer announced it is exploring strategic alternatives for Consumer Healthcare, including a possible sale or spin-off. The segment had 2005 revenues of $3.9 billion, up 10%, driven by Listerine, Zantac, and Purell. Management expects to decide in the third quarter of 2006. The outcome could affect Pfizer's future revenue and earnings base.
04—Continue