01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
Pfizer's 2019 Form 10-K reports revenues of $51.8 billiona, down 4% from $53.6 billion in 2018, with an operational decline of 1% and a 3% foreign exchange headwind.
Reported diluted EPS rose to $2.87b (up 54%) because of an $8.1 billion pre-tax gain on the completion of the GSK Consumer Healthcare joint venture, while Adjusted diluted EPS was $2.95 (up 1%). Operating cash flow fell 20% to $12.6 billion, largely due to upfront payments for Therachon and Akcea and the timing of receipts and payments. The central investor issue is the revenue cliff ahead.
Pfizer expects reduced revenues from patent expirations to be significant in 2020, led by Lyrica (U.S. generics began July 2019, with Lyrica revenues down 33% to $3.3 billionc) and the Chantix U.S. patent expiry in November 2020. Management guides 2020 revenues to $48.5–50.5 billion for total company and $40.7–42.3 billion for "New Pfizer," which is pro forma for the pending Upjohn combination with Mylan into Viatris. It also flagged a $2.4 billion negative revenue impact from generic and biosimilar competition in 2020, and a plan to cut costs by about $1.0 billion net over 2020–2022 against roughly $1.4 billion in restructuring costs.
Portfolio and balance sheet changes were significant. Pfizer acquired Array BioPharma for about $11.2 billiond, took a 32% stake in the GSK Consumer Healthcare JV, and agreed to combine Upjohn with Mylan (Pfizer shareholders to own 57% of Viatris), with closing expected mid-2020. Total debt rose to about $52 billion, and short-term borrowings increased to $16.2 billion, so working capital turned negative at $(4.5) billion.
Pfizer repurchased $8.9 billion of stock and paid $8.0 billion in dividends, and it expects an approximately $600 million repatriation tax installment in April 2020 as part of a roughly $15 billion TCJA liability. Key risks include U.S. and China pricing pressure (including China's VBP tender program), FDA manufacturing compliance issues at the McPherson and Meridian sites, and the Upjohn/Mylan deal's execution.
02—Key points
Key Highlights
- Revenue fell 4% to $51.8 billion in 2019, with Lyrica's U.S. multi-source generic entry in July 2019 a major drag (Lyrica revenues down 33%).
- Reported diluted EPS of $2.87 was inflated by an $8.1 billion pre-tax gain on the GSK Consumer Healthcare JV; Adjusted diluted EPS was $2.95, up 1%.
- 2020 guidance: total company revenue of $48.5–50.5 billion and Adjusted diluted EPS of $2.82–2.92; New Pfizer (pro forma for Upjohn/Mylan) revenue of $40.7–42.3 billion and EPS of $2.25–2.35.
- Operating cash flow fell 20% to $12.6 billion, and the company ended 2019 with negative working capital of $(4.5) billion.
- Major portfolio moves: the $11.2 billion Array BioPharma acquisition, a 32% equity stake in the GSK Consumer Healthcare JV, and the pending all-stock Upjohn–Mylan (Viatris) combination expected to close mid-2020.
- Patent expiries are expected to hit significantly in 2020, including Chantix (November 2020) and continued generic and biosimilar erosion, with an estimated $2.4 billion negative revenue impact in 2020.
- Shareholder returns: $8.9 billion of share repurchases and $8.0 billion of dividends paid in 2019; the quarterly dividend was raised to $0.38, but no buybacks are planned for 2020.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Pfizer Inc kept $0.39.
- Revenue$40.91B100.0%
- Cost of revenue−$8.05B19.7%
- Gross profit$32.85B80.3%
- Operating costs−$22.14B54.1%
- Operating income$10.71B26.2%
- Interest, other & tax$5.32B13.0%
- Net income$16.03B39.2%
Where FY2019 revenue went
$40.91B- SG&A: $12.73B, 31% of revenue
- Operating income: $10.71B, 26% of revenue
- Other operating costs: $9.42B, 23% of revenue
- Cost of revenue: $8.05B, 20% of revenue
Kept 26% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $40.91B$40.83B | +0.2% |
| Cost of Revenue | $8.05B$8.99B | −10.4% |
| Gross Profit | $32.85B$31.84B | +3.2% |
| SG&A Expenses | $12.73B$12.61B | +0.9% |
| Operating Income | $10.71B$3.83B | +179.9% |
| Interest Expense | $1.57B$1.32B | +19.5% |
| Net Income | $16.03B$11.15B | +43.7% |
| EPS (Basic) | $2.88$1.90 | +51.6% |
| EPS (Diluted) | $2.82$1.87 | +50.8% |
| Shares Outstanding (Basic) | 5.57B5.87B | −5.2% |
| Shares Outstanding (Diluted) | 5.67B5.98B | −5.1% |
05—Questions
Frequently Asked Questions
Why did reported EPS jump 54% while adjusted EPS rose only 1%?
Reported 2019 diluted EPS of $2.87 includes an $8.1 billion pre-tax gain from completing the GSK Consumer Healthcare JV, partly offset by $2.8 billion of intangible asset impairments (mainly Eucrisa), restructuring costs, and a $2.7 billion tax charge on the gain. Adjusted EPS of $2.95 excludes these items and the purchase accounting effects of acquisitions, so it better reflects the operating trend.
How severe is the 2020 patent cliff for Pfizer?
Management expects reduced revenues from patent expiries to be significant in 2020, moderating sharply from 2021 through 2025. Lyrica is already in multi-source generic competition, Chantix loses U.S. exclusivity in November 2020, and total generic and biosimilar competition is estimated to reduce 2020 revenues by about $2.4 billion. Key 2019 products face further erosion, including Viagra, Enbrel in Europe, and Norvasc and Lipitor in China.
What happens to Pfizer's structure if the Upjohn–Mylan deal closes?
Upjohn would be combined with Mylan into Viatris, a Reverse Morris Trust transaction in which Pfizer shareholders would own 57% of the new company. Pfizer would retain about $12 billion of net proceeds from Upjohn's debt to repay its own borrowings. Post-closing, Pfizer is a more focused innovative medicines company, with 2020 New Pfizer revenue guidance of $40.7–42.3 billion. Closing is expected mid-2020, subject to Mylan shareholder approval and regulatory clearances.
Is Pfizer's balance sheet and dividend at risk?
Total debt rose to roughly $52 billion, and short-term borrowings grew to $16.2 billion, largely to fund Array, which pushed working capital negative. Pfizer rates AA- (S&P) and A1 (Moody's, under review for downgrade), with a possible further one-notch S&P downgrade on the Mylan close. The dividend is covered by operating cash flow, has been raised to $0.38 per quarter, and management says it can support future annual increases barring unforeseen events. The company also owes about $15 billion in TCJA repatriation tax payable through 2026.
What are the biggest operational and regulatory risks flagged?
Key risks include U.S. pricing and Medicare/Medicaid reform, China's volume-based procurement program and expected unified reimbursement pricing that could lower Upjohn prices, and the ACA's future after the Fifth Circuit ruling on the individual mandate. Manufacturing risk is elevated by FDA OAI status at the Hospira McPherson, Kansas site and the Meridian St. Louis site, along with legacy Hospira product shortages. Litigation exposure includes Zantac, Lipitor, Effexor and EpiPen-related antitrust claims, and a pending $1.065 billion note redemption in March 2020.
06—Continue