01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2007 Form 10-K shows a company whose revenue was flat at $48.4 billiona, but whose profitability fell sharply.
Reported net income dropped 58% to $8.1 billionb from $19.3 billion in 2006, which was inflated by the one-time $7.9 billion after-tax gain on the Consumer Healthcare sale. Diluted EPS was $1.17 versus $2.66. Management's Adjusted income, which excludes purchase accounting, acquisition costs, discontinued operations and certain significant items, rose about 1% to $15.1 billion (Adjusted diluted EPS $2.18).
The main drags were a $2.8 billionc pre-tax charge to exit the inhaled insulin product Exubera and roughly $3.9 billion of cost-reduction spending, which is part of a plan to eliminate about 10,000 positions by the end of 2008. Revenue quality is under pressure. Pharmaceutical sales fell 1% to $44.4 billion as loss of U.S. exclusivity hit Norvasc (down 38%) and Zoloft (down 75%).
Lipitor, the largest product at $12.7 billiond, declined 2% and is facing generic statin competition, a 2010-2011 U.S. patent cliff, and a patent reexamination. Newer launches such as Lyrica, Chantix and Sutent offset some of the decline. Management's 2008 guidance calls for revenue of $47.0-49.0 billion, reported diluted EPS of $1.78-1.93 and Adjusted diluted EPS of $2.35-2.45, implying a further year of pressure.
Moody's has moved Pfizer's Aa1 outlook to negative. The balance sheet remains strong, with $26.1 billion in cash and short-term investments and a current ratio of 2.15:1. Total debt rose to $13.1 billion, and the company returned $10.0 billion through buybacks and $8.0 billion in dividends.
The dividend was raised to $1.16 per share, the 41st consecutive annual increase. Investors should weigh that capital return against the patent-expiry risk and the large restructuring program still in progress.
02—Key points
Key Highlights
- Revenue was flat at $48.4 billion, but reported net income fell 58% to $8.1 billion because 2006 included the roughly $7.9 billion after-tax gain on the Consumer Healthcare sale to J&J.
- Adjusted income rose about 1% to $15.1 billion, and Adjusted diluted EPS was $2.18, a non-GAAP view that excludes purchase accounting, restructuring and certain significant items.
- The Exubera exit cost $2.8 billion pre-tax in 2007. Cost-reduction spending reached $3.9 billion, with about 10,000 positions planned for elimination by end-2008.
- Pharmaceutical revenue fell 1% to $44.4 billion, with Norvasc down 38% and Zoloft down 75% after loss of U.S. exclusivity. Lipitor fell 2% to $12.7 billion, and Animal Health grew 14% to $2.6 billion.
- 2008 guidance: revenue of $47.0-49.0 billion, reported diluted EPS of $1.78-1.93 and Adjusted diluted EPS of $2.35-2.45. Zyrtec and Camptosar patent losses are expected to weigh on results.
- Lipitor faces U.S. basic patent expiry in March 2010 and enantiomer patent expiry in June 2011, and the basic patent is under USPTO reexamination after an initial rejection. Moody's revised its outlook to negative.
- Strong liquidity: $26.1 billion in cash and short-term investments, $13.1 billion total debt, and a $5 billion buyback authorization announced in January 2008. Dividends were raised to $1.16 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $48.42B |
| Cost of Revenue | $11.24B |
| Gross Profit | $37.18B |
| SG&A Expenses | $15.63B |
| Net Income | $8.14B |
| EPS (Basic) | $1.18 |
| EPS (Diluted) | $1.17 |
| Shares Outstanding (Basic) | 6.92B |
| Shares Outstanding (Diluted) | 6.94B |
05—Questions
Frequently Asked Questions
Why did reported net income fall so sharply in 2007?
Net income fell to $8.1 billion from $19.3 billion mainly because 2006 included the roughly $7.9 billion after-tax gain on the sale of the Consumer Healthcare business. 2007 also absorbed a $2.8 billion pre-tax Exubera exit charge and $3.9 billion of cost-reduction costs, while the effective tax rate fell to 11.0%.
What is Adjusted income, and why does it matter?
Adjusted income is a non-GAAP measure management uses to assess performance. It excludes purchase accounting impacts, acquisition-related costs, discontinued operations and certain significant items. It reached $15.1 billion in 2007, up 1%. Pfizer ties executive bonuses partly to it, but it is not comparable to other companies' figures, so investors should review the GAAP reconciliation.
How exposed is Pfizer to patent expirations?
Substantially. Norvasc and Zyrtec lost U.S. exclusivity in 2007 and early 2008, and Camptosar's U.S. patent expired in February 2008. The four products cited in the filing represented 12% of 2007 revenue and 20% of 2006 revenue. Lipitor, about 28% of Pharmaceutical revenue, faces U.S. basic patent expiry in March 2010 and enantiomer patent expiry in June 2011, and both are under legal and reexamination challenge.
What are the main risks to 2008 results?
The main risks are continued generic erosion of key products, pricing pressure from Medicare Part D plans, Medicaid rebate increases, and international price controls. Other risks include R&D productivity and the cost of cost-reduction actions. Management guides to 2008 reported diluted EPS of $1.78-1.93, which is below 2007's $1.17 only in the sense that 2007 contained large one-time charges, so the comparison is not straightforward.
How is Pfizer returning capital to shareholders?
In 2007 Pfizer repurchased about $10.0 billion of stock and paid $8.2 billion in dividends declared, with the annual dividend raised to $1.16 per share from $0.96. A new $5 billion buyback was authorized in January 2008. Management says dividends are funded from operating cash flow and the financial asset portfolio, and are not restricted by debt covenants.
06—Continue