Pfizer’s Profit Plunges 38% on Acquisition-related Charges

Pharma major’s adjusted R&D expenses rose 9% to $1.9 billion during Q3 FY16

p1Drug behemoth Pfizer Inc. (NYSE: PFE) announced its Q3 FY16 financial results on November 1st, 2016.

The New York-based company discovers, develops, and manufactures healthcare products. The Company’s portfolio includes medicines, vaccines, medical devices, and consumer healthcare products. The Company carries out its contract manufacturing and bulk pharmaceutical chemical sales operations through Pfizer CentreOne, part of the Essential Health segment.

Pfizer has two operating segments: Innovative Health (IH) and Essential Health (EH). Innovative Health consists of two segments: the Global Innovative Pharmaceutical segment (GIP) and the Global Vaccines, Oncology, and Consumer Healthcare segment (VOC). Essential Health consists of the Global Established Pharmaceutical segment (GEP). Its research focuses on six areas: immunology and inflammation, cardiovascular and metabolic diseases, oncology, vaccines, neuroscience and pain, and rare diseases. Hospira Inc., which Pfizer acquired in September 2015, operates as its subsidiary. Read more about Pfizer’s financial results below.

Q3 FY16 financial highlights

p2During Q3 FY16, Pfizer’s revenue grew 8% to $13.0 billion, an increase of $957 million compared to the prior year’s quarter, reflecting operational growth of $1.2 billion, or 10%, partially offset by the unfavorable foreign exchange impact of $224 million, or 2%. Excluding the contributions from legacy Hospira operations and foreign exchange, Pfizer’s standalone revenues grew 3%, or $381 million, on an operational basis during Q3 FY16.

Revenue growth was driven by inclusion of Hospira sales ($1.13 billion) and the strong performance of key products like Ibrance (breast cancer), Lyrica (neuropathic pain) and Xeljanz (rheumatoid arthritis), all primarily in the U.S., as well as Eliquis, which offset lower sales of the Prevnar/Prevenar 13 vaccines franchise. International revenues were flat at $6.5 billion, while U.S. revenues grew 17% to $6.5 billion during the reporting quarter.

Pfizer has plans to launch Inflectra, a biosimilar version of Johnson & Johnson’s (NYSE: JNJ) blockbuster drug Remicade, in the U.S. in late November 2016. Inflectra is the first and only biosimilar monoclonal antibody therapy and the second biosimilar to be approved in the U.S.

Adjusted selling, informational, and administrative expenses grew 8% to $3.53 billion during the quarter, while adjusted R&D expenses rose 9% to $1.9 billion. In all, Pfizer posted a 38% plunge in reported net income to $1.32 billion, or $0.21 per share, from $2.13 billion, or $0.34 per share, a year ago. Excluding $2.4 billion worth of charges for acquisitions and restructuring, adjusted EPS came in higher at $0.61 during the reporting quarter.

Segmental highlights

p3Pfizer’s Innovative Health Q3 FY16 revenues grew 9% to $7.33 billion, and was up 10% operationally, driven by continued growth from key brands including Ibrance, primarily in the U.S., Eliquis globally as well as Xeljanz, Lyrica and Chantix/Champix, all primarily in the U.S. Revenue grew despite the loss of Rebif alliance revenue compared to the prior year’s quarter due to the year-end 2015 expiry of the collaboration agreement to co-promote Rebif in the U.S. as well as lower revenues for Enbrel in most developed Europe markets, primarily due to biosimilar competition.

Global Prevnar/Prevenar 13 revenues were down 2% operationally. In the U.S., Prevnar 13 revenues fell 3% driven by an expected decline in revenues for the Adult indication. Internationally, Prevenar 13 revenues grew 1% operationally driven by a modest increase in uptake for the Adult indication.

p4Pfizer’s Essential Health Q3 FY16 revenues grew 7% to $5.71 billion and increased 10% operationally, primarily due to the inclusion of legacy Hospira operations, and to a lesser extent, the performance of the EH Standalone Sterile Injectables portfolio, partially offset by the loss of exclusivity and associated generic competition for certain Peri-LOE products, primarily Lyrica and Zyvox.

Revenues excluding the contribution from legacy Hospira fell 5% operationally, reflecting a 15% operational decline from the Peri-LOE Products portfolio and a 4% operational decline from the EH Standalone Legacy Established Products portfolio, partially offset by 7% operational growth from the EH Standalone Sterile Injectable Pharmaceuticals portfolio.

Other highlights

Acquisition of Medivation: Pfizer announced on August 22nd, 2016, that it has entered into a definitive merger agreement with Medivation Inc. (NASDAQ: MDVN), a biopharmaceutical company that develops and commercializes small molecules for oncology, for $81.50 a share in cash for about $14 billion. The Boards of Directors of both companies have approved the merger, which is expected to be immediately accretive to Pfizer’s adjusted diluted EPS upon closing, approximately $0.05 accretive in the first full year after close with additional accretion and growth anticipated thereafter. Pfizer does not expect the transaction to impact its current FY16 guidance. The drugmaker expects to complete the acquisition in Q3 FY16 or Q4 FY16. If the acquisition is not completed, Medivation would have to pay Pfizer a $510 million termination fee.

p5Pfizer’s drugs portfolio includes the breast cancer treatment Ibrance and several other promising immune-oncology (IO) products. Medivation, founded in 2004, has in its portfolio prostate cancer drug Xtandi, a leading novel hormone therapy already approved for sale in the U.S., and which generated about $2.2 billion in worldwide net sales over the past four quarters. Moreover, Xtandi is also being further developed in Phase 2 studies for the treatment of advanced breast cancer and hepatocellular carcinoma. Xtandi is forecasted to generate $5.7 billion in sales by 2020.

In addition, Medivation has a promising, late-stage oncology pipeline, which includes two development-stage oncology assets, talazoparib and pidilizumab, which has the potential to be clubbed with IO therapies in Pfizer’s portfolio. For Medivation, Pfizer is the ideal partner to extend the reach of its blockbuster Xtandi franchise and take its late-stage assets to their next stages of development and commercialization, giving Pfizer leadership in two hormone-driven cancers. Xtandi competes with Johnson & Johnson’s prostate-cancer treatment Zytiga. Xtandi would also face potential competition in the future from Johnson & Johnson’s new prostate-cancer drug, which is still in its development phase.

p6Pfizer sells infusion business to ICU Medical: On October 6th, 2016, Pfizer announced the sale of its global infusion systems business to ICU Medical Inc. (NASDAQ: ICUI) for $1 billion in cash and stock in order to better focus on its core pharmaceuticals business. Pfizer had acquired the hospital infusion system business, which has annual sales of about $1.2 billion, through its $15-billion purchase of Hospira in September 2015. With the current deal, Pfizer will receive $600 million in cash and nearly $400 million in newly issued shares of ICU Medical, translating into a shareholding of about 16.6% in the company. The deal is expected to close in Q1 FY17.

Pfizer decides to remain a single entity: On September 26th, 2016, Pfizer announced that it had decided not to split into two entities. Pfizer was earlier planning to split into two entities, with one business focused on patent-protected drugs and another on cash-rich older products. Instead, the Company will retain its low-growth generics business because splitting it from Pfizer’s patent-protected products would not boost cash flow or better position the businesses in an intensely competitive market. Pfizer had so far spent at least $600 million preparing for a potential split as a means to reduce its complexity, while rewarding shareholders with rich dividends from a split into two stocks. Toward that goal, Pfizer let go of its animal-health business and created two internal organizations.

Pfizer to lay off hundreds of workers at Rocky Mount: Pfizer has been facing headwinds in the form of patent expiry for its best-selling drugs and the associated generic competition from biosimilars. Hence, Pfizer announced on October 3rd, 2016, that it is laying off about 400 workers at its manufacturing plant in Rocky Mount, North Carolina, which it acquired from Hospira in 2015. The layoffs, to be implemented in H2 FY16, come in the wake of recent changes in market demand for certain products as well as the associated reduction in manufacturing volume and staffing levels at Rocky Mount.

On the other hand, Pfizer’s previously announced investments in a new state-of-the-art sterile injectable manufacturing facility and new quality laboratory at the same site will continue as planned. The Rocky Mount site remains an important facility in Pfizer’s sterile injectable supply network, employing about 2,000 people at the complex.

p7Pfizer to sell New York headquarters: Pfizer plans to sell its buildings in Midtown at East 42nd Street and Second Avenue by the end of 2017 and expects to move into more modern facilities in Manhattan no sooner than H1 FY19. The company plans to lease rather than buy a new headquarters. The company moved to its headquarters at 235 E. 42nd St. in 1961 and later also occupied the adjacent building at 219 E. 42nd St. These buildings that Pfizer own have indoor access between them and a million square feet of space. A newer complex would have more work space and room for collaboration.

License agreement with OncoImmune: In September 2016, Pfizer entered into an exclusive option and license agreement with OncoImmune Inc. for ONC-392, a novel, potentially differentiated preclinical anti-CTLA4 monoclonal antibody in a deal worth up to $250 million in upfront and potential milestone payments. Under the agreement, Pfizer plans to evaluate ONC-392 up until a certain agreed-upon time to determine whether it will exercise its option to exclusively license ONC-392 as well as any other OncoImmune anti-CTLA4 antibodies. If Pfizer exercises its option under the agreement, Pfizer would be responsible for all development and potential commercialization of the program, and OncoImmune would be eligible to receive potential developmental and commercial milestone payments as well as royalties on sales of any potential resulting products.

p8Agreement with AstraZeneca: In August 2016, AstraZeneca PLC (NYSE: AZN) has agreed to sell its small molecule antibiotics business to Pfizer in a deal that could be valued at more than $1.5 billion. For Pfizer, the antibiotics gain from AstraZeneca would enhance its portfolio of more than 60 anti-infective and anti-fungal medicines, and bolster its stable of older products, some of which have lost patent protection in recent years and are facing associated competition from cheaper generics in the U.S. and global markets.

The medicines included under the potential deal are approved antibiotics Merrem, Zinforo, and Zavicefta, as well as ATM-AVI and CXL, which are in clinical development, giving Pfizer the right to sell those drugs in most markets outside the U.S. and Canada. Under the terms of the deal, Pfizer will pay $550 million upon completion and a further $175 million in January 2019. Thereafter, depending on the progress and commercial success of Zavicefta and ATM-AVI in certain markets, Pfizer will pay a further $850 million in sales-related payments and royalties. The transaction is expected to close in the fourth quarter of 2016, subject to customary closing conditions, including antitrust clearance in certain jurisdictions.

p9Share repurchases: At the end of Q3 FY16, Pfizer returned $10.5 billion to shareholders through dividends and share repurchases, including the completion of a $5 billion accelerated share repurchase agreement in June 2016.

Discontinuation of bococizumab development: On November 1st, 2016, Pfizer announced its decision to discontinue development of bococizumab. Bococizumab was being evaluated for the treatment of hyperlipidemia and prevention of cardiovascular events, and was in a phase III program for LDL-C (bad cholesterol) reduction. Bococizumab is in a new class of cholesterol medicine, PCSK-9 inhibitors, costing about $14,000 per year. The discontinuation of the development of this drug comes as insurers are aggressively limiting patient access in favor of generic cholesterol pills.

Guidance for full year FY16

Pfizer has revised downwards its guidance for full year FY16 with earnings of $2.38 per share to $2.43 per share, down from its prior forecast of $2.38 per share to $2.48 per share. It forecasts revenue of $52 billion to $53 billion from its prior forecast of $51 billion to $53 billion, while adjusted R&D expenses are predicted at $7.4 billion to $7.8 billion, during the year.

The company raised its R&D expense guidance to account for discontinuation of the bococizumab program. The bococizumab discontinuation is expected to hurt adjusted earnings per share by 4 cents. R&D expenses are now expected in the range of $7.8 billion to $8.1 billion compared to $7.4 billion to $7.8 billion previously.

Stock Performance

p10Pfizer’s stock finished the day at $32.12, jumping 7.07%, at the close on Wednesday, November 9th, 2016, having vacillated between an intraday high of $33.37 and a low of $31.50 during the session. The stock’s trading volume was at 118,700,974 for the day. The Company’s market cap was at $199.65 billion as of Wednesday’s close.

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