01—Abstract
Summary
Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2006 Form 10-K shows a company in transition.
Revenues rose 2% to $48.4 billiona, but the growth was driven by a broad portfolio of patent-protected drugs and new launches, offset by loss of U.S. exclusivity on Zithromax (November 2005) and Zoloft (June 2006), which together fell about $2.5 billion. Reported net income surged to $19.3 billion from $8.1 billion, but that jump is mainly the $7.9 billion after-tax gain on the December 2006 sale of the Consumer Healthcare business to Johnson & Johnson for $16.6 billion, plus a lower effective tax rate of 15.3% (versus 29.4% in 2005, which carried a $1.7 billion repatriation charge). Income from continuing operations rose to $11.0 billion, and the company's Adjusted income, a non-GAAP measure management uses internally, was roughly flat at $15.0 billion versus $14.5 billion.
The forward outlook is more cautious. Management expects 2007 and 2008 revenues to be broadly comparable to 2006, with patent expirations on Norvasc and Zyrtec (2007) and Camptosar (2008) offsetting new product growth. Pfizer announced a plan to eliminate about 10,000 positions (roughly 10% of the workforce) by end-2008 and to cut pre-tax expenses by $1.5 to $2.0 billionb versus 2006 under its expanded Adapting to Scale program, and it plans to repurchase up to $10 billion of stock in 2007.
Lipitor, at about $12.9 billionc (28.6% of Pharmaceutical revenue), remains a major concentration risk as generic statins launched in 2006 and the primary U.S. patent expires in 2010. Balance sheet and risk items to note: net financial assets rose to $24.1 billion from $7.3 billion after the divestiture, and total debt fell to $8.0 billion from $17.9 billion.
Moody's cut Pfizer's long-term rating to Aa1 in December 2006 after the torcetrapib program was discontinued, and S&P moved its outlook to negative. The company also faces extensive product liability, patent, and government investigation matters, including Celebrex/Bextra litigation, Neurontin and Lipitor marketing suits, and a securities class action tied to torcetrapib.
02—Key points
Key Highlights
- Revenue grew 2% to $48.4B, led by patent-protected products and 2004-2006 launches, partly offset by a roughly $2.5B decline from Zithromax and Zoloft.
- Reported net income of $19.3B (up 139%) was inflated by the $7.9B after-tax gain on the $16.6B Consumer Healthcare sale to J&J; continuing-operations income was $11.0B.
- Adjusted income (non-GAAP) was about $15.0B, up 4% from $14.5B, and management uses it for compensation and budgeting.
- Lipitor generated $12.9B (28.6% of Pharmaceutical revenue), and nine products each exceeded $1B in sales, representing 64% of Pharmaceutical revenue.
- Guidance calls for 2007 and 2008 revenue roughly flat versus 2006, with a $1.5-$2.0B pre-tax cost reduction target by 2008 and up to $10B of 2007 share buybacks.
- Upcoming U.S. patent expirations on Norvasc and Zyrtec (2007), Camptosar (2008), and Lipitor (2010) pose significant revenue risk, with generic challenges pending on several key drugs.
- Credit profile weakened: Moody's downgraded long-term debt to Aa1 and S&P moved its outlook to negative, though S&P still rates the debt AAA.
03—Questions
Frequently Asked Questions
Why did reported net income more than double in 2006?
Most of the increase came from the one-time $7.9 billion after-tax gain on the December 2006 sale of the Consumer Healthcare business. Income from continuing operations rose more modestly, to $11.0B from $7.6B, helped by lower acquisition IPR&D charges ($835M vs. $1.7B), smaller impairments, and a 15.3% effective tax rate versus 29.4% in 2005.
How exposed is Pfizer to patent expirations?
Significantly. Zithromax and Zoloft lost U.S. exclusivity in 2005 and 2006, and Norvasc and Zyrtec lose it in 2007, with Camptosar following in 2008. The five products Pfizer cited represented 26% of 2005 revenue and 21% of 2006 revenue. Lipitor's basic U.S. patent expires in 2010, and several key patents face generic challenges in court.
What is Pfizer's plan to control costs?
Under the expanded Adapting to Scale program, Pfizer plans to eliminate about 10,000 positions (around 10% of its workforce) by end-2008, cut the U.S. sales force by 20% (completed December 2006), reduce the European sales force by more than 20%, and close or sell multiple plants and research sites. Targets are a $500M pre-tax SI&A reduction by end-2007 and a $1.5-$2.0B absolute pre-tax expense reduction by end-2008 versus 2006. Pfizer realized about $2.6B in savings in 2006.
Is Pfizer's balance sheet and credit position still strong?
Yes, with some pressure. Net financial assets rose to $24.1B from $7.3B and total debt fell to $8.0B from $17.9B. Pfizer had $3.6B of credit lines, of which $3.4B were unused. However, Moody's downgraded long-term debt to Aa1 in December 2006, citing the weaker patent-to-pipeline balance, and S&P moved to a negative outlook while keeping AAA. Pfizer said a substantial downgrade would affect its access to favorable financing rates.
What are the biggest legal risks disclosed?
The filing describes numerous exposures, including product liability suits over Celebrex and Bextra, consolidated Neurontin and Lipitor marketing class actions, average wholesale price litigation, Rezulin and asbestos-related claims (including the Quigley bankruptcy plan), and securities litigation over torcetrapib filed in December 2006. Pfizer says it does not believe any matter will have a material adverse effect on its financial position, but it acknowledges that an adverse judgment or settlement could affect results in a given period.
04—Continue