01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2009 10-K, filed February 26, 2010, is dominated by the October 15, 2009 acquisition of Wyeth, valued at about $68 billiona and funded with roughly $24 billion of senior unsecured notes plus about 1.3 billion treasury shares issued to Wyeth holders.
Reported 2009 revenue rose 4% to $50.0 billionb, but only about $3.3 billion came from legacy Wyeth products, which were consolidated for under three months. Net income attributable to Pfizer was $8.6 billion, or $1.23 per diluted share, up 7%. Adjusted income, a non-GAAP measure management emphasizes, fell 13% to $14.2 billion, and Adjusted diluted EPS fell to $2.02 from $2.42, reflecting higher share count and interest expense.
The balance sheet changed sharply. Total assets rose to $213 billionc from $111 billion, with goodwill of $42 billion and intangibles of $68 billion. Net financial position swung from +$18.8 billion of net financial assets to -$8.4 billion of net financial liabilities, and total debt rose to $48.7 billion.
Moody's cut Pfizer to A1 and S&P to AA, both still investment grade. Management guides to 2010 revenue of $67d–69 billion and Reported EPS of $0.95–$1.10, with Adjusted EPS of $2.10–$2.20, and targets 2012 revenue of $66–68.5 billion. It also plans about $4–5 billion of net cost reductions by 2012.
The key risks for investors are the scheduled loss of exclusivity on major products and pending U.S. healthcare reform. Lipitor, which generated $11.4 billion in 2009 (about 25% of Biopharmaceutical revenue), faces generic competition starting in 2010, and Effexor XR generics can launch from July 2010. Pending legislation could mandate Medicare rebates or direct government price negotiation.
The filing also discloses substantial legal exposure, including off-label promotion investigations, hormone-replacement therapy suits, and Quigley asbestos matters. Management says these are not expected to be material, but the filing does not quantify a maximum exposure.
02—Key points
Key Highlights
- Completed the $68 billion acquisition of Wyeth on October 15, 2009, with about $24 billion of senior unsecured notes issued in 2009 and roughly 1.3 billion treasury shares issued to former Wyeth holders.
- 2009 revenues were $50.0 billion (+4%), but only $3.3 billion came from legacy Wyeth products because they were consolidated only from the acquisition date.
- Reported net income attributable to Pfizer was $8.6 billion ($1.23 diluted EPS), up 7%, while non-GAAP Adjusted income fell 13% to $14.2 billion (Adjusted EPS $2.02 vs. $2.42).
- Total debt rose to $48.7 billion from $17.3 billion, and net financial position moved from +$18.8 billion to -$8.4 billion; credit ratings were lowered to A1 (Moody's) and AA (S&P).
- 2010 guidance: revenue of $67–69 billion, Reported EPS of $0.95–$1.10, Adjusted EPS of $2.10–$2.20; 2012 targets: revenue of $66–68.5 billion and Reported EPS of $1.58–$1.73.
- Lipitor (2009 revenue $11.4 billion, about 25% of Biopharmaceutical revenue) faces U.S. basic patent expiry in March 2010 and generic competition, and Effexor XR generics can launch from July 2010.
- Cost programs target about $7 billion gross and $4–5 billion net cost reductions by end-2012, with cumulative restructuring and acquisition costs estimated at $11.5–13.5 billion through 2012.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Pfizer Inc kept $0.18.
- Revenue$49.27B100.0%
- Cost of revenue−$8.46B17.2%
- Gross profit$40.81B82.8%
- Operating costs−$32.29B65.5%
- Operating income$8.52B17.3%
- Interest, other & tax$114.0M0.2%
- Net income$8.63B17.5%
Where FY2009 revenue went
$49.27B- Other operating costs: $17.54B, 36% of revenue
- SG&A: $14.75B, 30% of revenue
- Operating income: $8.52B, 17% of revenue
- Cost of revenue: $8.46B, 17% of revenue
Kept 17% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $49.27B$48.30B | +2.0% |
| Cost of Revenue | $8.46B$8.11B | +4.3% |
| Gross Profit | $40.81B$40.18B | +1.6% |
| SG&A Expenses | $14.75B$14.54B | +1.5% |
| Operating Income | $8.52B$8.03B | +6.2% |
| Interest Expense | $1.23B$516.00M | +138.8% |
| Net Income | $8.63B$8.10B | +6.6% |
| EPS (Basic) | $1.23$1.20 | +2.5% |
| EPS (Diluted) | $1.23$1.20 | +2.5% |
| Shares Outstanding (Basic) | 7.01B6.73B | +4.2% |
| Shares Outstanding (Diluted) | 7.04B6.75B | +4.4% |
05—Questions
Frequently Asked Questions
How much did the Wyeth acquisition cost and how was it financed?
The acquisition was valued at about $68 billion, or $50.40 per Wyeth share: $33.00 in cash plus 0.985 Pfizer shares per Wyeth share, valued at $17.40. Pfizer financed the cash portion mainly through about $13.5 billion of senior notes issued in March 2009 and about $10.5 billion issued in June 2009, and used treasury shares for the stock component.
Why did adjusted EPS decline even though reported revenue grew?
Adjusted diluted EPS fell to $2.02 from $2.42. Share count rose after the stock issuance for Wyeth, and interest expense on the new debt increased by about $717 million. Adjusted income also shows a higher tax rate of 29.5%, up from 22.0%, due to tax costs tied to financing the deal. Revenue growth was largely offset by foreign exchange losses of about $1.8 billion.
What is the biggest near-term revenue risk for investors?
Loss of exclusivity on major products is the main near-term risk. Lipitor, the largest product, faces generic competition after its U.S. basic patent expires in March 2010, and Effexor XR generics can launch from July 2010. Lyrica, Celebrex, and Zyvox also face rising generic pressure. The filing says patents on several best-selling drugs are being challenged, so the timing of erosion is uncertain.
What does the filing say about U.S. healthcare reform?
Congress had passed bills in both chambers that had not been reconciled, so the final form and timing were uncertain. Pfizer noted that the pharmaceutical industry pledged $80 billion over ten years, including higher Medicaid rebates, Medicare coverage-gap discounts, and an excise tax. Pfizer said it could not quantify the impact but warned that direct government price negotiation or mandated Medicare rebates could significantly restrict access and reimbursement.
Are there significant legal or regulatory exposures disclosed?
Yes. Pfizer discloses ongoing DOJ and state investigations into Protonix and Rapamune promotion and Protonix pricing for Medicaid rebates, plus civil and criminal investigations into payments outside the U.S. It also faces many product-liability suits, including hormone-replacement therapy, Viagra, Neurontin, Chantix, and thimerosal cases, and asbestos claims tied to Quigley. Management believes none will have a material adverse effect, but it does not quantify a maximum exposure.
06—Continue