Updated from 10:11 a.m.


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CEO Henry McKinnell said Tuesday that although 2005 will be a transition year, he expects the drug giant to return to double-digit earnings growth starting in 2006.

"We have reinvented ourselves many times, and it's clearly time to do it again," McKinnell said during a meeting with analysts and investors.

The company offered guidance for 2005 that was lower than analysts had expected. Pfizer said it expects to earn $2.00 a share, excluding items, down from $2.12 a year ago. On a GAAP basis, the drug giant expects net income of about $8.6 billion and EPS of about $1.16.

Analysts expect earnings per share of $2.13 and revenue of $51.81 billion for the year, according to the consensus among analysts polled by Thomson First Call.

For the first quarter, Pfizer forecast adjusted EPS of about 53 cents -- or 13 cents on a GAAP basis. The First Call consensus is EPS of 52 cents and revenue of $12.44 billion, although Pfizer won't issue first-quarter results for another three weeks or so.

Despite the problems, McKinnell added: "We expect our performance to rebound quickly in 2006 and accelerate in 2007."

Part of Pfizer's future progress will be based on cutting costs. The company is targeting $4 billion in total annualized cost savings by 2008, which represents about 12% of Pfizer's current cost base. Those cost savings exclude the savings the company continues to wring out from its 2003 acquisition of Pharmacia.

Pfizer declined to quantify how many employees might lose their jobs during its corporate streamlining, adding that there would be "some modest reduction" in total employment. Pfizer has 115,000 employees worldwide. The company added that any cuts in its 38,000-member sales staff would be achieved through attrition.

McKinnell said 2005 would be a "transition year" due to the expiration of patents on certain products and "a number of uncertainties," which include the company's arthritis drugs, "continued pricing pressures, and market acceptance of new products."

Investors liked what they heard on Tuesday. Shares of Pfizer rose 77 cents, or 3%, to $26.70. After just two hours of trading, more than 22.5 million shares had been traded. The average daily volume for the last three months is 28.4 million shares.

The Cox-2 Dilemma

One uncertainty is how Bextra and Celebrex will fare once the Food and Drug Administration acts on recommendations made by two advisory committees in mid-February to place restrictions on all arthritis drugs known as Cox-2 inhibitors. Bextra and Celebrex belong to this class, as does Vioxx, which


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withdrew from the market on Sept. 30 due to tests showing a higher risk of cardiovascular problems. The advisory committees, by a narrow vote, said the

benefits outweighed the risks for Vioxx and Bextra. The committees gave Celebrex overwhelming support.

McKinnell said Celebrex and Bextra are "very important options" to millions of patients, adding that he expects "renewed growth" from currently depressed sales levels of the Cox-2 drugs if the FDA gives the company a relatively broad label for these drugs.

Karen Katen, a vice chairman and president of Pfizer's human health operations, said Pfizer is looking forward to "finalizing changes to its U.S. labeling" with the FDA over the drugs as well as to conducting more clinical studies to examine the benefits and risks of the Cox-2 medications vs. older pain relievers.

Future Financial Issues

"Pfizer has the financial strength to meet the challenges of the 2005-2007 period," said Vice Chairman David Shedlarz. "Pfizer's strong cash flow will provide us with flexibility in leveraging the company's financial strength. For example, we will intensify our efforts to acquire new products and technologies to further strengthen our new product pipeline."

As an indication that Pfizer isn't cutting its lifeblood R&D, the company said it expects to invest about $8 billion in research and development in 2005 vs. $7.7 billion in 2004.

The impact of corporate streamlining will be "modest" this year, "but it is expected to yield significant benefits in 2006 and 2007," the company said.

Next year, Pfizer expects "the operational and financial benefits of this productivity initiative to drive a return to double-digit growth in adjusted earnings." In the following year, Pfizer predicts revenue growth from new products and major existing products "will drive accelerating double-digit adjusted earnings growth

while productivity initiatives will also contribute to growth in 2007."

Corporate changes include a restructuring of Pfizer's sales operations. For example, U.S. sales will be reorganized "around states to better align with our increasingly important Medicare and Medicaid customers," Katen said.

"We intend that the field force will remain at a scale that is consistent with meeting current customer needs, and with the capacity required to support the launches of the 20 products that we have filed and expect to file," she said. Pfizer will reduce the number of representatives calling on physicians in recognition of a changing market that includes "our physician customers' time demands."

Shedlarz said financial results for 2005 also will be affected by the adoption of new accounting regulations relating to the expensing of stock options. These regulations are expected to result in an after-tax expense of $200 million, or 3 cents a share.

He added that Pfizer will repatriate more than $28 billion in foreign cash in 2005 thanks to a law signed last year by President Bush. The law allows companies to repatriate the profits of foreign subsidiaries for domestic use at a significantly reduced tax rate.

"This will strengthen Pfizer's ability to pursue strategic opportunities while enhancing the company's flexibility to invest in our R&D pipeline and new product potential in the U.S.," the company said. Pfizer will record a tax charge of $2.2 billion in the first quarter in connection with the repatriation. This charge may be reduced by roughly $850 million pending anticipated technical corrections of the law, the company said.

Shedlarz said Pfizer expects to accelerate the completion of a $5 billion share repurchase program launched in October 2004. Pfizer expects to complete the repurchase by midyear, following the planned buyback of roughly $2.3 billion of Pfizer stock in the second quarter of 2005.

Early in the second half of 2005, Shedlarz added, Pfizer will consider another buyback. Now trading in the mid-$20s range, Pfizer's stock is much closer to its 52-week low of $21.99, than its 52-week high of $37.90.