01—Abstract
Summary
Summary of the 10-K filed February 27, 2015. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2014 Form 10-K (filed February 27, 2015) shows a year of declining revenue and earnings driven by patent expirations and lost collaboration rights.
Revenues fell 4% to $49.6 billiona, with an operational decline of 2% and a 2% unfavorable foreign exchange impact. Reported net income attributable to Pfizer was $9.1 billion, down 58% from 2013, which benefited from a $10.3 billion Zoetis gain that year. Diluted EPS was $1.42 on a reported basis versus $2.26 on the company's non-GAAP Adjusted basis, a figure that excludes purchase accounting, acquisition costs and certain significant items.
Key pressures included the Enbrel co-promotion expiration in the U.S. and Canada (about $1.4 billionb), generic erosion of Lipitor, Celebrex and Lyrica in Europe, and the loss of Spiriva in the U.S. R&D spending rose 26% to $8.4 billion, including a $1.2 billion charge tied to the Merck KGaA collaboration. Management's 2015 guidance calls for reported revenues of $44.5 to $46.5 billion and adjusted diluted EPS of $2.00 to $2.10, while reported EPS is guided to $1.37 to $1.52. The guidance reflects roughly $3.5 billion of revenue loss from product exclusivity losses and $2.8 billion from adverse currency moves.
The company also announced a $17 billionc cash-and-debt acquisition of Hospira (expected to close in the second half of 2015) and a $5 billion accelerated share repurchase. Pfizer ended the year with $53.6 billion in cash and investments against $36.7 billion in debt, and it increased the quarterly dividend to $0.28. For investors, the central questions are whether the pipeline (including Ibrance, Xeljanz and Eliquis) and the Hospira deal can offset a sizable multi-year loss of exclusivity, and whether the approximately $2.5 billion of expected annual cost savings by 2016 can protect margins.
The filing also flags meaningful risks: U.S. pricing and healthcare reform, Medicare SGR legislation, the pending King v. Burwell Supreme Court case, a $400 milliond securities settlement, Venezuela currency exposure and continuing litigation over Effexor, Lipitor and Neurontin.
02—Key points
Key Highlights
- Revenue declined 4% to $49.6 billion in 2014 (operational -2%, FX -2%), with the U.S. at 38% of sales and Japan at about 9%.
- Reported net income attributable to Pfizer fell 58% to $9.1 billion, versus $22.0 billion in 2013 which included a $10.3 billion Zoetis disposal gain; reported diluted EPS was $1.42 versus Non-GAAP Adjusted diluted EPS of $2.26.
- R&D expense rose 26% to $8.4 billion, including a $1.2 billion charge for the Merck KGaA anti-PD-L1 collaboration (the $850 million upfront payment plus $309 million for Xalkori co-promotion rights).
- 2015 guidance: reported revenues of $44.5–46.5 billion, adjusted diluted EPS of $2.00–2.10, and reported diluted EPS of $1.37–1.52, reflecting about $3.5 billion of product exclusivity losses and $2.8 billion of FX headwinds.
- Agreed to acquire Hospira for $90 per share in cash (about $17 billion enterprise value), expected to close in 2H 2015 and financed about two-thirds from cash and one-third from debt.
- Returned capital through $5.0 billion of 2014 buybacks, an $11 billion authorization announced October 2014, a $5 billion accelerated share repurchase in February 2015, and $6.6 billion of dividends; the quarterly dividend was raised to $0.28.
- Balance sheet remained strong, with $53.6 billion of cash and investments against $36.7 billion of debt (net financial assets of $17.0 billion) and high-quality credit ratings (A1/AA).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Pfizer Inc kept $0.18.
- Revenue$49.60B100.0%
- Cost of revenue−$9.58B19.3%
- Gross profit$40.03B80.7%
- Operating costs−$30.94B62.4%
- Operating income$9.09B18.3%
- Interest, other & tax$48.0M0.1%
- Net income$9.13B18.4%
Where FY2014 revenue went
$49.60B- Other operating costs: $16.84B, 34% of revenue
- SG&A: $14.10B, 28% of revenue
- Cost of revenue: $9.58B, 19% of revenue
- Operating income: $9.09B, 18% of revenue
Kept 18% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 27, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $49.60B$51.58B | −3.8% |
| Cost of Revenue | $9.58B$9.59B | −0.1% |
| Gross Profit | $40.03B$42.00B | −4.7% |
| SG&A Expenses | $14.10B$14.36B | −1.8% |
| Operating Income | $9.09B$11.38B | −20.1% |
| Interest Expense | $1.36B$1.41B | −3.8% |
| Net Income | $9.13B$22.00B | −58.5% |
| EPS (Basic) | $1.44$3.23 | −55.4% |
| EPS (Diluted) | $1.42$3.19 | −55.5% |
| Shares Outstanding (Basic) | 6.35B6.81B | −6.9% |
| Shares Outstanding (Diluted) | 6.42B6.89B | −6.8% |
05—Questions
Frequently Asked Questions
How much revenue is Pfizer losing to patent expirations and lost collaboration rights?
The filing lists major losses including the Enbrel U.S./Canada co-promotion expiration (about $1.4 billion in 2014 revenue decline), Celebrex and Detrol LA generic entry in the U.S., Lipitor's continued erosion (down 11% to $2.1 billion), and Spiriva's termination in the U.S. Management expects $3.5 billion of revenue impact from product exclusivity losses in 2015, plus Zyvox U.S. generic entry in 2015 and Enbrel's European and Japanese exclusivity loss in 2015.
Why does reported EPS differ so much from Adjusted EPS?
Adjusted income excludes purchase accounting amortization and depreciation from past acquisitions (Wyeth, Pharmacia, King), acquisition-related costs, discontinued operations and certain significant items such as restructuring, legal charges and business development upfront payments. In 2014 those adjustments totaled about $5.4 billion net of tax. Management uses Adjusted income for compensation and budgeting, but it is a non-GAAP measure and not directly comparable with peers. Investors should weigh reported EPS of $1.42 alongside the $2.26 Adjusted figure.
What is the financial impact and rationale of the Hospira acquisition?
Pfizer agreed to buy Hospira for $90 per share in cash, a total enterprise value of about $17 billion. Hospira is a leading injectables and infusion company and a biosimilars player. Pfizer plans to fund about two-thirds from existing cash and one-third from new debt. The deal is expected to close in 2H 2015 subject to shareholder and antitrust approvals, and 2015 guidance excludes its effects. Risks include integration, possible divestitures above $450 million in revenue, and purchase accounting charges that could be substantial.
What regulatory and pricing risks could hurt Pfizer's U.S. revenue?
Key risks include the Medicare SGR physician payment reform (estimated at $144 billion over 10 years, with possible funding from pharma taxes or rebates), the ACA's growing rebate and fee burden (about $631 million of 2014 revenue reductions and a $362 million fee), the pending Supreme Court case King v. Burwell on Health Insurance Exchange subsidies (management expects a negligible revenue impact), and growing PBM and MCO pressure on branded drugs. The company also faces the prospect of biosimilar competition after the 12-year exclusivity period, which applies to its biologics such as Enbrel outside the U.S.
What are the main legal exposures disclosed in the filing?
Pfizer discloses many contingencies, including a $400 million agreement in principle to settle a securities class action over off-label promotion, roughly $610 million of 2014 charges for Neurontin-related matters, and ongoing Effexor birth-defect and antitrust suits, Lipitor antitrust and personal injury suits, Zoloft and Chantix/Champix product claims, asbestos claims (about 61,000 pending), and a Canadian judgment of about C$125 million to Teva Canada over Effexor XR. Management believes these matters will not have a material adverse effect on financial position, but it cannot estimate losses above amounts accrued, so future charges could be significant.
06—Continue