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Pfizer Reports Fourth-Quarter And Full-Year 2014 Results 27 January 2015

Pfizer Inc. reported financial results for fourth quarter and full-year 2014. At the beginning of fiscal year 2014, the company began managing its commercial operations through a new global commercial structure consisting of two distinct businesses: an Innovative Products business and an Established Products business.

The Innovative Products business is composed of two operating segments: the Global Innovative Pharmaceutical segment (GIP) and the Global Vaccines, Oncology and Consumer Healthcare segment (VOC). The Established Products business consists of the Global Established Pharmaceutical segment (GEP). Financial results for each of these segments are presented in the Operating Segment Information section.

As a result of the full disposition of Zoetis Inc. (Zoetis) on June 24, 2013, the financial results of the Animal Health business are reported as a discontinued operation in the consolidated statements of income for the twelve months ended December 31, 2013.

Ian Read, Chairman and Chief Executive Officer, stated, “During 2014, despite significant continued revenue headwinds from product losses of exclusivity and co-promote expiries, we were able to deliver modest adjusted diluted EPS growth. This was achieved through a combination of incremental revenue generation from key in-line products and recent product launches, responsible expense management as well as supportive capital allocation.”

“We continued to focus on strengthening our innovative core and have made notable progress in this area through both internal advancements and strategic business development. As we look forward to 2015, we expect continued momentum with our pipeline, notably the potential U.S. approval of Ibrance (palbociclib) for advanced breast cancer, as well as anticipated strong growth in emerging markets and from our recent product launches in developed markets, including Eliquis, Xeljanz, Prevnar 13 in adults and Nexium 24HR. We are now in a position to commence over 20 registrational studies during the coming four years with candidates that are based upon strong science and target indications that have significant unmet need.”

Mr. Read continued, “On the commercial front, our innovative and established businesses continue to benefit from a sharp focus on execution in their respective markets and we expect each will demonstrate continued improvement in their competitive positioning.”

“Further, we remain in a strong financial position that will enable us to invest in our business at appropriate levels, continue to pursue attractive business development activities and also continue to return meaningful capital directly to our shareholders,” Mr. Read concluded.

Frank D’Amelio, Chief Financial Officer, stated, “For full-year 2014, I was pleased with our financial performance, the operational execution of our newly-formed businesses and our ability to continue delivering shareholder value through prudent capital allocation. Regarding our financial performance, we achieved or exceeded all elements of our 2014 financial guidance despite an operating environment that remains challenging. In addition, we began operating within our new commercial structure in 2014 and saw significant progress across each of our businesses. Finally, we continued to demonstrate our commitment to delivering significant value to shareholders by returning nearly $12 billion to shareholders through share repurchases and dividends in 2014.”

“We are also providing our 2015 financial guidance, including ranges for reported revenues of $44.5 to $46.5 billion and for adjusted diluted EPS of $2.00 to $2.10. Our guidance for reported revenues reflects the anticipated negative impact of $3.5 billion due to recent and expected product losses of exclusivity as well as $2.8 billion as a result of recent adverse changes in essentially all foreign exchange rates relative to the U.S. dollar compared to foreign exchange rates from last year, partially offset by anticipated revenue growth from certain other products. Our reported and adjusted diluted EPS guidance reflects a $0.17 unfavorable impact as a result of adverse changes in foreign exchange rates from last year. In addition, our reported and adjusted diluted EPS guidance reflects a $0.03 reduction for the planned upfront payment associated with the pending transaction with OPKO Health, Inc. (OPKO)(6). Finally, our guidance for reported and adjusted diluted EPS also reflects anticipated share repurchases totaling approximately $6 billion this year, including $715 million of our shares repurchased to date in 2015. These repurchases and planned repurchases will more than offset the potential dilution related to employee compensation programs,” Mr. D'Amelio concluded.

QUARTERLY FINANCIAL HIGHLIGHTS (Fourth-Quarter 2014 vs. Fourth-Quarter 2013)

Reported revenues decreased $440 million, or 3%, which reflects slight operational growth of $9 million, and the unfavorable impact of foreign exchange of $449 million, or 3%. Operational growth in developed markets was driven by the performance of certain key products, including Lyrica, Prevnar and Eliquis, as well as Xeljanz primarily in the U.S. Additionally, revenues in emerging markets increased 7% operationally, including strong operational growth from Lipitor, primarily in China, as well as Prevenar and Enbrel. This operational growth was offset primarily by the loss of exclusivity and subsequent multi-source generic competition for Celebrex in the U.S., the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada, the termination of the Spiriva collaboration in certain countries as well as by other product losses of exclusivity in certain markets.

Established Products Business Highlights

GEP revenues decreased 7% operationally, primarily due to declining revenues from Lipitor in developed markets resulting from continued generic competition as well as the loss of exclusivity and subsequent launch of multi-source generic competition for Celebrex in the U.S. in December 2014, Detrol LA in the U.S. in January 2014 as well as Aricept in Canada in December 2013. Additionally, the co-promotion collaboration for Spiriva has terminated in most countries, including the U.S. in April 2014, or has entered its final year in other markets, which, per the terms of the collaboration agreement, has resulted in a decline in Pfizer’s share of Spiriva revenues. These declines were partially offset by strong performance in emerging markets, where revenues increased 7% operationally, as well as by Lyrica in Europe.

Innovative Products Business Highlights

GIP revenues increased 6% operationally, primarily due to strong operational 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. This growth was partially offset primarily by the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada on October 31, 2013; for a 36-month period thereafter, Pfizer is entitled to royalty payments that have been and are expected to continue to be significantly less than the share of Enbrel profits prior to the expiration of the co-promotion term, and those royalty payments are and will be included in Other (income)/deductions–net rather than in Revenues.

VOC revenues increased 14% operationally, reflecting the following:

Global Vaccines revenues grew 22% operationally. Prevnar 13 revenue in the U.S. increased 33%, primarily driven by increased uptake among adults following the positive recommendation from the U.S. Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices for use in adults aged 65 and over in third-quarter 2014, partially offset by lower revenues generated by the pediatric indication due to the timing of government purchases compared to the year-ago quarter. International sales of Prevenar 13 were up 11% operationally, primarily reflecting the favorable impact of Prevenar's inclusion in additional national immunization programs in certain emerging markets compared with the year-ago quarter.

Consumer Healthcare revenues increased 4% operationally, primarily due to the launch of Nexium 24HR in the U.S. in late-May 2014.

Global Oncology revenues increased 14% operationally, primarily driven by the continued strong underlying demand for Xalkori globally, Inlyta in most markets as well as operational growth from Sutent, primarily in the U.S. and emerging markets.

Income Statement Highlights

Adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses in the aggregate increased $336 million operationally, or 4%, reflecting the following operational factors: ◦ higher adjusted cost of sales, primarily reflecting an unfavorable change in product mix;

lower adjusted SI&A expense, primarily as a result of continued benefits from cost-reduction and productivity initiatives, partially offset by investments to support several recent product launches and other in-line brands; and

higher adjusted R&D expense, primarily due to incremental expenses associated with the ongoing Phase 3 programs for bococizumab, palbociclib, ertugliflozin and certain other new drug candidates, as well as potential new indications for previously approved products, especially for Xeljanz.

The effective tax rate on adjusted income declined 1.5 percentage points to 26.2% from 27.7%. This decline was primarily due to a favorable change in the jurisdictional mix of earnings and the extension of the U.S. research and development (R&D) tax credit, which was signed into law in December 2014, partially offset by a decrease in the favorable impact of the resolution of certain tax positions, pertaining to prior years, with various foreign tax authorities.

The diluted weighted-average shares outstanding declined by 159 million shares compared to the prior-year quarter, due to the company’s ongoing share repurchase program.

In addition to the aforementioned factors, fourth-quarter 2014 reported earnings were primarily impacted by the following:

Unfavorable impacts:

a charge associated with a collaborative arrangement with Merck KGaA, announced in November 2014, to jointly develop and commercialize an investigational anti-PD-L1 antibody currently in development as a potential treatment for multiple types of cancer.

The charge includes an $850 million upfront cash payment as well as an additional amount of approximately $300 million reflecting the fair value for certain co-promotion rights for Xalkori granted to Merck KGaA;

higher charges for certain legal matters, primarily reflecting a $400 million charge for an agreement in principle to resolve a securities class action pending against the company in New York federal court, which is subject to court approval; and

a higher effective tax rate, primarily due to the non-recurrence of tax benefits recorded in fourth-quarter 2013 related to certain audit settlements in multiple jurisdictions covering various periods.

Favorable impacts:

lower restructuring charges, expenses associated with cost-reduction initiatives and purchase accounting adjustments in fourth-quarter 2014 compared to the prior-year quarter.

FULL-YEAR FINANCIAL HIGHLIGHTS (Full-Year 2014 vs. Full-Year 2013)

Reported revenues decreased $2.0 billion, or 4%, which reflects an operational decline of $1.1 billion, or 2%, and the unfavorable impact of foreign exchange of $912 million, or 2%. The operational decline was primarily due to the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada, the ongoing termination of the Spiriva collaboration in certain countries as well as the loss of exclusivity and subsequent multi-source generic competition for Detrol LA in the U.S. as well as other product losses of exclusivity in certain markets. Revenues in developed markets were favorably impacted by the growth of certain key products, including Lyrica, Prevnar, Eliquis, Xeljanz, Xalkori, Inlyta as well as Nexium 24HR. Additionally, revenues in emerging markets increased 7% operationally, including strong operational growth from Prevenar as well as from Lipitor, primarily in China, and from Enbrel, primarily in Latin America.

Adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses(2) in the aggregate increased $563 million operationally, or 2%, reflecting the following operational factors: ◦ higher adjusted cost of sales(2), primarily reflecting an unfavorable change in product mix;

lower adjusted SI&A expense, primarily as a result of continued benefits from cost-reduction and productivity initiatives, partially offset by investments to support several recent product launches and other in-line brands; and

higher adjusted R&D expense, primarily due to incremental expenses associated with the ongoing Phase 3 programs for bococizumab, palbociclib, ertugliflozin and certain other new drug candidates, as well as potential new indications for previously approved products, especially for Xeljanz.

The effective tax rate on adjusted income declined 1.0 percentage point to 26.5% from 27.5%. This decline was primarily due to a favorable change in the jurisdictional mix of earnings, partially offset by a decrease in the favorable impact of the resolution of certain tax positions, pertaining to prior years, with various foreign tax authorities as well as a decrease in the favorable impact of the U.S. R&D tax credit compared to last year.

The diluted weighted-average shares outstanding declined by 471 million shares compared to last year, due to the company’s ongoing share repurchase program and the impact of the Zoetis exchange offer, which was completed on June 24, 2013.

In addition to the aforementioned full-year 2014 factors and the factors impacting fourth-quarter 2014 reported earnings, full-year 2014 reported earnings were also impacted primarily by the following:

Unfavorable impacts:

the non-recurrence in 2014 of income from the gain associated with the transfer of certain product rights to Pfizer’s joint venture with Zhejiang Hisun Pharmaceuticals Co., Ltd. (Hisun) in China in first-quarter 2013;

higher charges for certain legal matters, primarily driven by Neurontin-related matters in first-quarter 2014;140

the non-recurrence in 2014 of income from discontinued operations attributable to the company’s Animal Health business in first-half 2013 through June 24, 2013, including the gain associated with the full disposition of Zoetis in second-quarter 2013;

the non-recurrence in 2014 of income from a litigation settlement with Teva Pharmaceuticals Industries Ltd. and Sun Pharmaceutical Industries Ltd. in second-quarter 2013 for patent-infringement damages resulting from their “at-risk” launches of generic Protonix in the U.S.; and

a non-tax deductible charge in third-quarter 2014 to account for an additional year of the Branded Prescription Drug Fee in accordance with final regulations issued by the U.S. Internal Revenue Service.

Favorable impacts:

lower restructuring charges, acquisition-related costs, purchase accounting adjustments and asset impairment charges compared to the prior-year;

the non-recurrence in 2014 of a loss in third-quarter 2013 related to an option to acquire the remaining interest in a 40%-owned generics company in Brazil, and the income recorded in third-quarter 2014 as a result of a decline in the loss from the option; and
a lower effective tax rate.