Source: Seeking Alpha
Pfizer Inc. (NYSE:PFE)
Q2 2014 Earnings Conference Call
July 29, 2014 10:00 AM ET
Chuck Triano – SVP of IR
Ian Read – Chairman and CEO
Frank D’Amelio – CFO
Mikael Dolsten – President of Worldwide Research and Development
Albert Bourla – President of Vaccines, Oncology and Consumer
Geno Germano – President of Global Innovative Pharma
John Young – President of Established Pharma
Doug Lankler – General Counsel
Chris Schott – JPMorgan
Vamil Divan – Credit Suisse
Tim Anderson – Sanford Bernstein
Jami Rubin – Goldman Sachs
John Boris – SunTrust Robinson
David Risinger – Morgan Stanley
Colin Bristow – Bank of America
Marc Goodman – UBS
Seamus Fernandez – Leerink
Jeff Holford – Jefferies
Alex Arfaei – BMO Capital Markets
Andrew Baum – Citi
Mark Schoenebaum – ISI Group
Steve Scala – Cowen
Good day, everyone and welcome to Pfizer’s Second Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning and thank you for joining us today to review Pfizer’s second quarter 2014 performance. I am joined today in by our Chairman and CEO, Ian Read; Frank D’Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, President of Vaccines, Oncology and Consumer; Geno Germano, President of Global Innovative Pharma; John Young, President of Established Pharma and Doug Lankler, General Counsel.
The slides that will be presented on the call can be viewed at pfizer.com, by clicking on the link for Pfizer Quarterly Corporate Performance Second Quarter 2014, which located in the Investor Presentations section in the lower right hand corner of this page.
Before we start, I would like to remind you that our discussions during the call will include forward-looking statements and that actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer’s 2013 Annual Report on Form 10-K and in our reports on Forms 10-Q and 8-K.
Discussion during the call will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer’s current report on Form 8-K dated today.
We will now make prepared remarks and then we will move to a question and answer session. With that, I will now turn the call over to Ian Read. Ian?
Thank you Chuck and thank you all for joining our call this morning. I will begin with some brief comments from the quarter. Overall we saw good performance and strong operational growth in a number of areas including Lyrica in developed markets, Prevnar primarily in the U.S. and in emerging markets and Celebrex worldwide.
Our recently launched brands are making solid gains. Eliquis grew sequentially 50% quarter-on-quarter on a global basis while Xeljanz posted sequential growth quarter roughly 30% primarily in the U.S. With the continuation of this momentum these products are on a trajectory to become meaningful contributors to our underlying business in the coming quarters. We also are looking continued uptake with Xalkori and Inlyta globally.
Revenues in our consumer business increased 15% operationally primarily due to the recent launch of Nexium 24HR in the U.S. in late May. We also saw strong companywide performance within the emerging markets, revenue increased 11% operationally compared to the year ago quarter driven by growth in China, Venezuela, Argentina and Brazil.
Despite to somewhat slower start to the year, each of our businesses is performing well in the face of ongoing product losses of exclusivity for innovative businesses and continued pricing pressures and changing market dynamics effecting our established business.
I would also point out the negative impact of LOEs and the revenue loss resulting from the exploration of some co-promoted revenues was 1.7 billion for the first six months. This impact mass the companywide operational revenue growth from all other products during the first half of the year which was 3% overall.
In evaluating our performance now that we have been operating in our new commercial model since the beginning of the year, I believe this structure is providing greater transparency into the operations of each business and on a daily basis it enables decision making that better optimizes the performance and portfolio of each of our segments.
Furthermore we remain encouraged by key developments that demonstrate our pipeline momentum. Of particular note, we expect to complete the submission of the palbociclib new drug application to the FDA in August. This submission is based on the final result of PALOMA-1, a randomized, Phase 2 trial comparing the combination of palbociclib plus letrozole versus letrozole alone as the first line treatment of postmenopausal women with estrogen positive HER2 negative advanced breast cancer. We will publically communicate once we’ve completed our submission. Also of note, our Phase III palbociclib trials in advanced breast cancer PALOMA-II and PALOMA-III are progressing and both trials have completed recruitment of new patients.
In addition, the number of Phase III studies where we are collaborating with leading international breast cancer investigators are open and enrolling patients with both advanced and early breast cancer and we have active exploration underway of multiple Phase I and II studies in non-breast indications.
Given the outbreaks of meningitis B disease on several US college campuses in 2013, we work closely with the FDA to submit our biologics license application for accelerated approval of our meningitis B vaccine for the prevention of meningococcal disease and in adolescent to young adults.
We look forward to the meeting that adjusted the scheduled to take place on August 13th by the CDC Advisory committee on immunization practices ACIP to discuss and vote on a potentially expanded recommendation for Prevnar 13 use in adults.
We had a comprehensive Xeljanz program that is progressing with Phase III studies underway and you see in psoriatic arthritis and Phase II studies in psoriasis for top reviews, Crohn’s disease and ankylosing spondylitis. We continue to enroll patients in Phase III trials of bococizumab for cholesterol lowering and high risk individuals, the total flows into the treatment of diabetes and later this year we expect to begin enrolling patients for the Rapunzel for the treatment of vaso-occlusive crises individuals of sickle cell anemia.
As we ended the second half of this year, our strategy, focus and priorities remain unchanged, supported by the steady performance of each of our commercial segments. When it comes to business development, we will continue to evaluate all opportunities regardless of the size through the lens of value creation for our shareholders and enhancing the competitors of our businesses.
Our most recent announced acquisitions and collaborations are example to enablers of our strategy. We expect far more meaningfully increase the size of our sterile injectable business through their existing and out licensed portfolios sterile injectables as well as the medium and long-term through the potential of their pipeline. And if we see promising result as we move forward with the selector’s collaboration to develop immune therapies against select [indiscernible] oncology, we believe it has the potential for changing the way cancer is treated.
In summary, for the remainder of this year, we will be focused on executing our plans and taking the actions that will further strengthen and globally position us as the market leader in each of our business segments.
We remain committed to advancing innovative therapies on behalf of patients we serve, prudently managing deploying capital, to drive the greatest value for our shareholders and creating a culture within the organization where [indiscernible] creatively take prudent risk in operating with an entrepreneurial mindset.
I will now turn it over to Frank to take you through the financial details of the quarter.
Thanks Ian and good day everyone. As always the charts we are reviewing today are included in our webcast. As a reminder, because of the focused position of Zoetis on June 23, 2013, the financial results of the animal health business and the gain associated with its fully disposition are reported as a discontinued operation in the consolidated statements of income for the second quarter and first six months of 2013.
Now let’s move on to the financials.
Second quarter 2014 revenues of approximately 12.8 billion decreased 2% year-over-year, reflecting a 1% negative impact from foreign exchange to an operational decline of approximately 1% driven mainly by the expiration on October the 31, 2013 of the co-promotion terms for Enbrel in U.S. and Canada, the ongoing terminations and expirations of the Spiriva collaboration in certain countries, the loss of exclusivity is subsequent to multi-sourced generic competition for Detrol LA in the U.S. and other product losses of exclusivity in various markets.
These were partially offset by the strong operational growth in developed markets of Lyrica, Nexium 24HR in the U.S., Prevnar, Eliquis, Xeljanz, Celebrex, Xalkori and Inlyta and by strong operational growth of 11% in emerging markets. In addition reported revenues included 71 million transitional manufacturing and supply agreements with Zoetis.
I want to point out LOEs in declining alliance revenues had a negative impact of approximately $840 million, during the quarter. Adjusted diluted EPS of $0.68 increased 4% primarily due to fewer diluted weighted average shares outstanding due to ongoing share repurchases and the impact of the Zoetis exchange offer which were partially offset by a 4% aggregate operational increase and adjusted cost of sales, adjusted SI&A, adjusted R&D expenses resulting from an unfavorable shift in product mix and recently initiated Phase III programs for bococizumab, ertugliflozin, palbociclib and the meningitis B vaccine and for the studies of Xeljanz and certain other products and potential new indications.
However, adjusted SI&A expenses decreased because of continued benefits from cost reduction productivity initiatives. Reported diluted EPS of $0.45 compared with the $1.98 in the year ago quarter was primarily due to the non-recurrence in the second quarter 2014 of income from discontinued operations in the year ago quarter attributable to the animal health business including the gain associated with its disposition and the income in the year ago quarter from a litigation settlement for patent-infringement damages. And to a lesser extent the LOE from the exploration of the co-promotion term of certain products, all of which were partially offset by lower acquisition related cost, purchase accounting adjustments, and asset impairment charges.
A lower effective tax rate due to the resolution in the second quarter of 2014 of certain prior year tax positions with various foreign tax authorities, a favorable change in the jurisdictional mix of earnings and the non-recurrence of the unfavorable impact of the tax rate associated with the aforementioned patent litigation settlement income and finally fewer shares outstanding.
Foreign exchange negatively impacted second quarter revenues by 1% or 87 million that had a net positive impact of 18 million on the aggregate of adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses. Consequently, foreign exchange negatively impacted adjusted diluted EPS by approximately $0.01 compared with a year ago quarter.
Now moving onto the financial highlights of our businesses, in second quarter Global Innovative Pharmaceuticals revenues decreased 5% operationally year-over-year due to the previously mentioned exploration of the co-promotion term for Enbrel in the U.S. and Canada and the loss of exclusivity for Lyrica in Canada in February of 2013. And the exploration of the co-promotion term for Enbrel and LOEs of certain products resulted in an operational decline of $459 million; however, all other GEP revenues grew 9% operationally driven by strong growth from Lyrica primarily in the U.S. and Japan as well as the performance of recently launched products including Eliquis globally and Xeljanz primarily in the U.S.
Income before taxes declined 12% operationally due to the decrease in revenues, a 5% operational increase in cost of sales or a 1.2 percentage point increase as a percentage of revenues. I want to point out here that the loss of Enbrel alliance revenues in the second quarter 2014 negatively impacted cost of sales as a percentage of revenues by 1.5 percentage points operationally, 13% operational increase in SI&A expenses from an increased investment in new products and in line brands such as Lyrica and Viagra as well as a 41% operational increase in R&D expenses due to recently initiated Phase 3 programs for bococizumab, ertugliflozin, and additional Xeljanz indications.
In the second quarter, revenues from our vaccines, oncology and consumer healthcare business grew 15% operationally year-over-year due to the strong operational growth of Prevnar 13 in the U.S. and emerging markets, the launch of Nexium 24HR in the U.S. in late May 2014 and the continued strong uptake of Xalkori and Inlyta globally. Income before taxes increased 10% operationally due to increased revenues, which were partially offset by a 23% operational increase in cost of sales driven by increased sales volumes in unfavorable change in product mix, an 18% operational increase in SI&A expenses associated with the launch of Nexium 24HR and the prelaunch marketing expenses to the meningitis B vaccine palbociclib. And the 16% increase in R&D expenses supporting the acceleration of the meningitis B vaccine at palbociclib development programs.
The second quarter Global Established Pharmaceuticals revenues decreased 5% operationally year-over-year due to the loss of exclusivity and subsequent launch of multi-source generic competition for Detrol LA in the U.S. January 2014, Viagra in most European markets in June of 2013, and Aricept in Canada in December of 2013 as well as the ongoing termination of the co-promotion agreement for Spiriva in most countries including the U.S. in April and the ongoing exploration in certain other countries. These were partially offset by the strong operational performance of Celebrex in most major markets, Lyrica in Europe and Lipitor primarily in China.
The LOEs of certain products, the loss of alliance revenue for Aricept and Spiriva and Lipitor in developed markets negatively impacted GEP revenues by 395 million operationally; however, all other GEP revenues grew 1% operationally. Income before taxes declined 4% operationally due to the decrease in revenues was partially offset by the aggregate decrease, cost of sales, SI&A and R&D expenses which included increased spending on biosimilar development programs.
Now moving onto our 2014 financial guidance, we’ve updated several components of our adjusted guidance and reaffirmed our 2014 adjusted diluted EPS guidance range. Because of the anticipated negative impact from the expected multi-source generic competition for Celebrex in the U.S. in December 2014 we now expect revenues to be in the range of 48.7 billion to 50.7 billion versus 49.2 billion to 51.2 billion. This range absorbs the negative impact of approximately 3.4 billion due to declining alliance revenues and expected product losses of exclusivity. In addition, we are decreasing our adjusted SI&A expense range due to an expected reduction in promotional spending for Celebrex in second half of 2014 and now expect adjusted SI&A to be in the range of 13.3 billion to 14.3 billion compared with 13.5 billion to 14.5 billion previously.
To reflect the planned 80 million upfront payment to Cellectis for our global strategic collaboration and anticipated increased expenses for the acceleration of certain late-stage clinical programs including palbociclib and bococizumab among others, we now expect R&D expenses to be in the range of 6.7 to 7.2 billion versus 6.4 to 6.9 billion previously. We now expect approximately 200 million of other income versus approximately 100 million of other deducts because of lower expecting net interest expense for the remainder of 2014 and gains realized during the first half of 2014 mainly on sales of product rights and investments in equity securities.
We expected reported diluted EPS to be in the range of $1.47 to a $1.62 due to charges related to certain legal matters primarily related to Neurontin incurred during the first quarter 2014. And we are reaffirming our 2014 adjusted diluted EPS guidance range of $2.20 to $2.30 which absorbs approximately $0.05 per share for anticipated negative impact related to Celebrex and $0.01 related to the planned upfront payment to the Cellectis collaboration.
Now moving on to key takeaways, we recorded solid second quarter 2014 results. We reaffirmed our adjusted diluted EPS range which absorbs an approximately $0.05 anticipated negative impact related to Celebrex and $0.01 related to Cellectis. We achieved several key R&D milestones including the initiation for rolling submission in June 2014 of an NDA seeking approval for palbociclib which is expected to complete this August.
In June we submitted a Biologics License Application to the FDA for our meningitis B vaccine candidate and we discussed with the ACIP at its June meeting a potential expanded recommendation for Prevnar 13 used with adults. We expect the ACIP’s decision on August 13. We announced several business development opportunities to further strengthen our position in key strategic areas and we continue to create shareholder value through prudent capital allocation.
To date 2014, we repurchased 2.9 billion or approximately 95.1 million shares and we continue to expect to repurchase 5 billion of our common stock this year. These repurchases and planned repurchases for the remainder of the year are expected to reduce total shares outstanding year-over-year by a total of approximately 100 million shares by the end of 2014 after considering actual and projected dilution related to employee compensation programs.
Finally, we remain committed to delivering attractive shareholder returns in 2014 and beyond. Now, I will turn it back to Chuck.
Thank you, Frank. Operator, at this point can we call for questions.
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