01—Abstract
Summary
Summary of the 10-K filed February 28, 2013. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2012 Form 10-K (filed February 28, 2013) shows a company in transition: revenues fell 10% to $59.0 billiona, driven by the loss of exclusivity of Lipitor (which fell 59% to $3.9 billion) and other products, plus $1.5 billion of unfavorable currency effects.
Reported net income attributable to Pfizer rose 46% to $14.6 billionb, but that was flattered by the $11.85 billion Nutrition sale to Nestlé, which generated a roughly $4.8 billion after-tax gain and $5.1 billion of total discontinued-operations income. Continuing-operations income was $9.5 billion, and Non-GAAP Adjusted income fell 8% to $16.5 billion (Adjusted diluted EPS $2.19 versus $2.27), the measure management uses for compensation. Investors should therefore focus on the underlying erosion of the core business rather than the headline GAAP increase.
Management is responding with cost cuts, a smaller R&D budget (R&D fell 13% to $7.9 billion, with 2013 adjusted R&D guided to $6.5c–7.0 billion), a reduced workforce (down 12,200 to 91,500), and a 2013 guidance range of $56.2–58.2 billion in revenue and $2.20–2.30 in Adjusted diluted EPS. Capital returns remain significant: $8.2 billion of buybacks in 2012, a new $10 billion authorization, and a dividend increased to $0.24 per quarter. The February 2013 IPO of 19.8% of Zoetis, the animal health unit, brought in about $6.1 billion of cash in total, of which about $2.5 billion is restricted to debt repayment, dividends, or buybacks through mid-2014.
Pfizer also faces significant legal exposure, including settled and pending hormone-replacement therapy, Chantix, Quigley asbestos, and off-label promotion matters, and it expects continued pricing pressure in Europe, Japan, and emerging markets, as well as the Affordable Care Act. The balance sheet remains strong, with total assets of $185.8 billiond, net financial assets of $9.4 billion (up from a net liability of $2.7 billion), and investment-grade ratings (A1/AA as of 2009).
Operating cash flow fell to $17.1 billion from $20.2 billion. The outlook depends on the pipeline and on the 2013–2014 patent expirations for Celebrex, Zyvox, Lyrica, Eliquis, and others, along with Enbrel's U.S. co-promotion expiring in October 2013.
02—Key points
Key Highlights
- Revenues fell 10% to $59.0 billion, with an operational decline of $4.8 billion (8%) largely from Lipitor's loss of exclusivity, plus a $1.5 billion foreign exchange headwind.
- GAAP net income attributable to Pfizer rose 46% to $14.6 billion, but this included about $5.1 billion of discontinued operations, mainly the $4.8 billion after-tax gain on the Nutrition sale to Nestlé for $11.85 billion.
- Non-GAAP Adjusted income declined 8% to $16.5 billion, and Adjusted diluted EPS fell to $2.19 from $2.27, indicating weaker underlying earnings power.
- Cost discipline is in progress: SI&A fell 12%, R&D fell 13% to $7.9 billion, and headcount dropped by 12,200 to 91,500, with 2013 adjusted R&D guided to $6.5–7.0 billion.
- 2013 guidance calls for revenue of $56.2–58.2 billion, reported diluted EPS of $1.50–1.65, and Adjusted diluted EPS of $2.20–2.30, before the Zoetis IPO impact is updated.
- Capital returns are substantial: $8.2 billion of 2012 buybacks, a new $10 billion repurchase plan, a $0.24 quarterly dividend (up from $0.22), and about $6.5 billion of dividends paid.
- Upcoming patent expirations and the Enbrel co-promotion expiry (October 2013) present ongoing revenue risk, while the Zoetis IPO brought in about $6.1 billion of cash, of which about $2.5 billion is restricted to debt repayment, dividends, or buybacks through mid-2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Pfizer Inc kept $0.27.
- Revenue$54.66B100.0%
- Cost of revenue−$9.82B18.0%
- Gross profit$44.84B82.0%
- Operating costs−$35.84B65.6%
- Operating income$8.99B16.5%
- Interest, other & tax$5.58B10.2%
- Net income$14.57B26.7%
Where FY2012 revenue went
$54.66B- Other operating costs: $20.67B, 38% of revenue
- SG&A: $15.17B, 28% of revenue
- Cost of revenue: $9.82B, 18% of revenue
- Operating income: $8.99B, 16% of revenue
Kept 16% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 28, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $54.66B$61.03B | −10.4% |
| Cost of Revenue | $9.82B$12.50B | −21.4% |
| Gross Profit | $44.84B$48.53B | −7.6% |
| SG&A Expenses | $15.17B$17.58B | −13.7% |
| Operating Income | $8.99B$7.82B | +15.0% |
| Interest Expense | $1.52B$1.68B | −9.5% |
| Net Income | $14.57B$10.01B | +45.6% |
| EPS (Basic) | $1.96$1.28 | +53.1% |
| EPS (Diluted) | $1.94$1.27 | +52.8% |
| Shares Outstanding (Basic) | 7.44B7.82B | −4.8% |
| Shares Outstanding (Diluted) | 7.51B7.87B | −4.6% |
05—Questions
Frequently Asked Questions
Why did reported net income rise 46% if revenues fell 10%?
The increase is mainly due to discontinued operations, which contributed $5.08 billion, including the roughly $4.8 billion after-tax gain from selling the Nutrition business to Nestlé on November 30, 2012. Continuing-operations income was $9.5 billion, up from $8.4 billion, helped by lower acquisition-related costs, lower purchase accounting charges, and a tax benefit of about $1.1 billion from an IRS settlement. Those gains were partly offset by a $1.4 billion increase in legal charges and the Lipitor revenue decline. Management's Adjusted income, which excludes these items, fell 8%.
How exposed is Pfizer to the loss of exclusivity on its key products?
Exposure is significant. Lipitor revenue fell 59% to $3.9 billion in 2012 after losing exclusivity in the U.S. and most of developed Europe. Ten biopharmaceutical products each exceeded $1 billion in 2012 and represented 49% of biopharmaceutical revenue. The 10-K lists upcoming U.S. basic patent expirations for Celebrex (2014), Zyvox (2015), Lyrica (2018), Eliquis (2023), and others. Management also expects Enbrel's U.S./Canada co-promotion to end in October 2013, followed by a royalty period at much lower economics.
What happened with the Zoetis IPO, and how is the cash restricted?
On February 6, 2013, Pfizer completed the IPO of about 19.8% of Zoetis, selling 99.015 million shares in exchange for retiring about $2.5 billion of Pfizer commercial paper. Pfizer continues to consolidate Zoetis and may pursue a future tax-free distribution of its remaining stake. In total, Pfizer received about $6.1 billion of cash, of which about $2.5 billion is restricted to debt repayment, dividends, or share buybacks to be completed by mid-2014.
What are the main legal and regulatory risks disclosed?
The 10-K discloses a broad set of contingencies. Hormone-replacement therapy litigation is about 95% settled, with aggregate charges of about $1.6 billion and an additional approximately $100 million accrued. Chantix litigation has about 80% of known U.S. claims settled, with $288 million in 2012 charges. Quigley asbestos matters remain subject to bankruptcy plan approval, with more than $550 million expected to be contributed. There are also off-label promotion and antitrust actions (Neurontin, Lipitor, Effexor), a DPA in the FCPA matter, and a Corporate Integrity Agreement through 2014. The company also faces pricing pressure in Europe, Japan, and emerging markets, as well as ACA-related rebate and fee costs.
Is the balance sheet and capital allocation strong enough to support the dividend and buybacks?
Yes, per management. Operating cash flow was $17.1 billion in 2012, and the company held $46.9 billion in cash and investments against $37.5 billion of total debt, giving net financial assets of $9.4 billion, up from a net liability of $2.7 billion a year earlier. Long-term debt is investment grade at both S&P and Moody's. Management stated that it believes it can support future annual dividend increases barring significant unforeseen events, and its covenants do not restrict dividends.
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