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Pfizer Reports Third-Quarter 2012 Results

Reported cost of sales as a percentage of revenues decreased 1.4 percentage points to 19.1% in the third quarter of 2012, compared to the same period in 2011, reflecting the aforementioned factors.

2. Change in Reported Selling, Informational & Administrative (SI&A) Expenses and Reported Research & Development (R&D) Expenses

Reported SI&A expenses decreased 14% in the third quarter of 2012 and 13% in the first nine months of 2012, compared to the same periods in 2011. The decreases were primarily due to savings generated from a reduction in the field force and a decrease in promotional spending, both partially in response to product losses of exclusivity, more streamlined corporate support functions, and the impact of lower revenues, as well as the favorable impact of foreign exchange of 4% for the third quarter of 2012 and 2% for the first nine months of 2012, partially offset by costs associated with the potential separation of Animal Health employees, net assets and activities from Pfizer.

Reported R&D expenses decreased 9% in the third quarter of 2012 and 12% in the first nine months of 2012, compared to the same periods in 2011, primarily due to savings generated by the discontinuation of certain therapeutic areas and R&D programs in connection with our previously announced cost-reduction and productivity initiatives, which were partially offset by a $250 million payment to AstraZeneca to obtain the exclusive global over-the-counter rights to Nexium. In addition, charges related to those initiatives were lower in the third quarter of 2012 and in the first nine months of 2012 than in the same periods in 2011.

3. Other Deductions – Net

   
             
($ in millions) Third Quarter

Nine Months

2012     2011 2012     2011

Interest income (a)

$ (108 )   $ (109 ) $ (275 )   $ (331 )
Interest expense (a) 382       423   1,151       1,285  
Net interest expense 274 314 876 954
Royalty-related income (132 ) (136 ) (353 ) (447 )
Net gain on asset disposals (19 ) (21 ) (45 ) (47 )
Certain legal matters, net (b) 726 132 2,014 619
Certain asset impairment charges (c) 49 145 561 625
Costs associated with the potential separation of the Animal Health business (d) 32 -- 93 --
Other, net 32       113   137       98  
Other deductions ––net   $ 962     $ 547     $ 3,283     $ 1,802  
(a)   Interest income decreased slightly in the third quarter of 2012 due to lower cash balances mostly offset by higher interest rates earned on investments. Interest income decreased in the first nine months of 2012 due to lower interest rates earned on investments. Interest expense decreased in both periods in 2012 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.
(b)

In the third quarter of 2012, primarily includes a $491 million charge resulting from an agreement-in-principle with the U.S. Department of Justice to resolve an investigation into Wyeth’s historical promotional practices in connection with Rapamune. In the first nine months of 2012, primarily includes the aforementioned $491 million charge related to Rapamune, a $450 million settlement of a lawsuit by Brigham Young University related to Celebrex, and charges for hormone-replacement therapy litigation. In 2011, primarily includes charges for hormone-replacement therapy litigation.

(c) In the first nine months of 2012, primarily includes certain intangible assets acquired in connection with our acquisitions of Wyeth and King, including in-process research and development (IPR&D) intangible assets. In the third quarter and first nine months of 2011, primarily includes certain intangible assets acquired in connection with our acquisition of Wyeth, including IPR&D intangible assets.
(d)

Costs incurred in connection with the potential initial public offering of a minority stake in our Animal Health business, Zoetis, Inc. Includes expenditures for banking, legal, accounting and similar services related to the potential transaction.

 

4. Effective Tax Rate

ReportedThe effective tax rate on reported results was (4.0)% in the third quarter of 2012 compared with 34.3% in the third quarter of 2011, and 19.0% in the first nine months of 2012 compared with 31.2% in the first nine months of 2011. The effective tax rates on reported results for the third quarter and first nine months of 2012 were favorably impacted by a settlement with the U.S. Internal Revenue Service related to audits for multiple tax years. The settlement resulted in a favorable impact on net income for both periods of $1.1 billion representing tax and interest. The tax rates in both periods in 2012 compared to the same periods in 2011 were also favorably impacted by the resolution of foreign audits pertaining to multiple tax years and the change in the jurisdictional mix of earnings, partially offset by the unfavorable impact of the non-deductibility of a $491 million charge resulting from an agreement-in-principle with the U.S. Department of Justice to resolve an investigation into Wyeth’s historical promotional practices in connection with Rapamune, as well as the expiration of the U.S. research and development tax credit.

AdjustedIn third-quarter 2012, the effective tax rate on adjusted income (1) was 28.3% compared with 31.2% in third-quarter 2011, and 28.8% in the first nine months of 2012 compared with 29.5% in the first nine months of 2011. The tax rates in both periods in 2012 compared to the same periods in 2011 reflect the favorable impact of the change in the jurisdictional mix of earnings, as well as the resolution of the aforementioned foreign audits, partially offset by the unfavorable impact of the expiration of the U.S. research and development tax credit.

5. Reconciliation of 2012 Adjusted Income (1) and Adjusted Diluted EPS (1) Guidance to 2012 Reported Net Income Attributable to Pfizer Inc. and Reported Diluted EPS Attributable to Pfizer Inc. Common Shareholders Guidance (a)

     
  Full-Year 2012 Guidance

(Billions of dollars, except per share amounts)

Net Income (b)   Diluted EPS (b)

Income/(Expense)

 
Adjusted Income/Diluted EPS (1) Guidance ~$16.1 - $16.4 ~$2.14 - $2.17
Purchase Accounting Impacts of Transactions Completed as of

9/30/12

(3.6) (0.48)
Acquisition-Related Costs (0.5 - 0.7) (0.07 - 0.09)
Non-Acquisition-Related Restructuring Costs (c) (1.4 - 1.6) (0.18 - 0.21)
Other Certain Significant Items incurred as of 9/30/12

Income from Discontinued Operations (d)

  (0.9)

0.4

  (0.12)

0.06

Reported Net Income Attributable to Pfizer Inc./Diluted EPS Guidance

  ~$9.7 - $10.4   ~$1.30 - $1.38
(a)  

The current exchange rates assumed in connection with the 2012 financial guidance are a blend of the actual exchange rates in effect during the first nine months of 2012 and the mid-October 2012 exchange rates for the remainder of the year.

(b)

Includes revenues and expenses related to the Nutrition business, which is reflected as a discontinued operation, but does not include the gain on the pending sale of the Nutrition business. Does not assume the completion of any business-development transactions not completed as of September 30, 2012, including any one-time upfront payments associated with such transactions. Also excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of September 30, 2012, except for charges for such matters that have been recorded during the first nine months of 2012.

(c) Includes amounts related to our initiatives to reduce R&D spending, including our realigned R&D footprint, and amounts related to other cost-reduction and productivity initiatives. These amounts are included in Certain Significant Items.
(d) Income attributable to Pfizer’s Nutrition business.

_______________

 

(1)

“Adjusted income” and “adjusted diluted earnings per share (EPS)” are defined as reported U.S. generally accepted accounting principles (GAAP) net income attributable to Pfizer Inc. and reported diluted EPS attributable to Pfizer Inc. common shareholders excluding purchase accounting adjustments, acquisition-related costs, discontinued operations and certain significant items. As described under Adjusted Income in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Pfizer’s Form 10-Q for the fiscal quarter ended July 1, 2012, management uses Adjusted income, among other factors, to set performance goals and to measure the performance of the overall company. We believe that investors’ understanding of our performance is enhanced by disclosing this measure. The Adjusted income and Adjusted diluted EPS measures are not, and should not be viewed as, substitutes for U.S. GAAP net income and diluted EPS.

DISCLOSURE NOTICE: The information contained in this earnings release and the attachments is as of November 1, 2012. We assume no obligation to update forward-looking statements contained in this earnings release and the attachments as a result of new information or future events or developments.

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