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Pfizer, Inc. (NYSE:PFE)

Q1 2013 Earnings Conference Call

April 30, 2013 10:00 am ET

Executives

Charles E. Triano – Senior Vice President of Investor Relations

Ian Read – Chairman and Chief Executive Officer

Frank D’Amelio – Executive Vice President, Business Operations and Chief Financial Officer

Mikael Dolsten – President, Worldwide Research & Development

Geno Germano – President and General Manager of Specialty Care and Oncology

John Young – President and General Manager, Primary Care

Analysts

Chris Schott – JPMorgan

Jami Rubin – Goldman Sachs

Marc Goodman – UBS Securities

Gregg Gilbert – Bank of America-Merrill Lynch

Tim Anderson – Sanford Bernstein

Mark Schoenebaum – ISI Group

Steve Scala – Cowen and Company

Andrew Baum – Citi

David Risinger – Morgan Stanley

Seamus Fernandez – Leerink Swann, LLC

Alex Arfaei – BMO Capital Markets

Anthony Butler – Barclays Capital

Jeffrey Holford – Jefferies

Michael Tong – Wells Fargo Securities

Damien Conover – Morningstar

Operator

Good day, everyone and welcome to Pfizer’s First Quarter 2013 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.

Charles E. Triano

Thank you, operator. Good morning and thank you for joining us today to review Pfizer’s first quarter 2013 performance. I’m joined today by our Chairman and CEO, Ian Read; Frank D’Amelio, our CFO; Olivier Brandicourt, President and General Manager of Emerging Markets and Established Products; Mikael Dolsten, President of Worldwide Research and Development; Geno Germano, President and General Manager of Specialty Care and Oncology; Amy Schulman, General Counsel and Business Unit Lead for our Consumer Business; and John Young, President and General Manager of Primary Care.

The slide that we’ll be presenting can be viewed on our homepage by clicking on the link for Pfizer Quarterly Corporate Performance First Quarter 2013 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 actual results could differ materially. The factors that could cause actual results to differ are discussed in Pfizer’s 2012 Annual Report on Form 10-K, and in our reports on Forms 10-Q and 8-K. Discussions will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles, and the 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.

As we outlined in our earnings release, the IPO of 19.8% interest in Zoetis was completed on February 6 of this year. Thus effective February 7, the earnings attributable to the divested portion of Zoetis are excluded from adjusted and reported net income and diluted EPS, in both our first quarter results and our full year 2013 guidance. We still retain an 80.2% ownership interest, so all Zoetis revenues and expenses continue to be included in first quarter results as well as in the financial guidance for the full year.

With that, I will now turn the call over to Ian Read. Ian?

Ian Read

Thank you, Chuck. I will begin with some comments on the quarter. We started the year continuing to create significant value for our shareholders. Specifically, we completed the successful IPO of a minority interest in Zoetis and related debt offering, and began returning those proceeds as well as the proceeds from the sale of our Nutrition business to our shareholders through share repurchases.

So far this year, we have repurchased approximately 6.3 billion of our shares. In addition, our focus on rebuilding and strengthening our innovative core is yielding results. During the quarter, we launched some significant products; most noteworthy were the launch of Eliquis in the U.S., UK, Germany, Denmark and Japan, and the launch of Xeljanz in the U.S. In addition, we recently approved approval for Xeljanz in Japan and Russia.

Regarding Eliquis, the market introduction since the launch is in line with our expectations. We continue to work with our partner, Bristol-Myers Squibb on securing broader, commercial, medical and hospital reformery access. We expect to gain broader access as the year progresses as we seek to establish Eliquis as the leading novel oral anticoagulant in the market over time. We are very confident in Eliquis’ clinical profile and our ability to translate that into a leading market position, given the new prescriptions we are seeing.

Regarding Xeljanz, we’re encouraged by the early indications or indicators we’re seeing with the U.S. launch. Describing where rheumatologist is tending higher and we are seeing that repeat prescribing is also tending higher, which suggests that once a physician prescribes to Xeljanz they generally increase prescribing. Importantly, we are seeing use in post-methotrexate and post-TNF patients at similar rates.

Our full promotional campaign launched in March and we plan to introduce DTC advertising this summer. In addition, we recently submitted the supplementary NDA for Xeljanz that was accepted for review by the FDA to include support of patient reported outcomes data in the label. Last week, we announced receiving a negative opinion for Xeljanz by the Committee for Medicinal Products for Human Use in the EU.

In the opinion letter to Pfizer, CHMP noted that tofacitinib is a new chemical treatment with a different mechanism of action to products already approved for the treatment of rheumatoid arthritis, and that in their opinion, the safety and efficacy of tofacitinib is not properly or sufficiently demonstrated. We disagree with their opinion and are seeking a reexamination. While history would show that reversal of such an opinion is not common, we feel compelled to further address the risk/benefit issues raised by the rapporteurs through this process. We believe the risk-benefit profile of Xeljanz has been well characterized to date.

We have approximately 5,000 patients across Phase 2 and Phase 3 trials in more than 40 countries resulting in 7,000 patient-years of exposure. The original application submitted to the EU was based on the same pivotal efficacy, the safety data package that was provided to regulatory agencies around the world, and that has resulted in approvals in the U.S., Japan, and Russia. This recent development in the EU does not change the status of Xeljanz as an approved treatment option in these markets. It is also under review in several additional countries and we anticipate decisions this year in a number of those markets.

Turning to our oncology business, we launched Bosulif in EU and saw good and improving performance from both Xalkori and Inlyta across the markets where these products have launched. Within our pipeline, we have shown steady improvement in the quality of compounds and in the right progress in advancing these compounds. Of particular note is the breakthrough therapy designation that the FDA recently granted to palbociclib, our innovative new investigational compound for patients suffering from breast cancer. Yesterday, we announced a worldwide collaboration agreement with Merck, except in Japan, for the development and commercialization of Ertugliflozin, our investigational compound for the treatment of Type 2 diabetes. Phase 3 trials are expected to begin this year, which will examine both its use as monotherapy and in fixed-dose combinations.

We look forward to moving ahead with Merck in this area of significant unmet medical need, and we have a robust vaccines portfolio that includes a vaccine for meningitis B for adolescents and young adults that is currently in Phase 3.

Earlier in the pipeline, we are working on prophylactic vaccines to reduce the risk of some of the most difficult hospital acquired infections such as Staphylococcus aureus and C. difficile; our next-generation pneumococcal conjugate vaccine and therapeutic vaccines for smoking cessation and allergic respiratory diseases.

While we are seeing good momentum in our innovative core, our operating environment continues to be challenging and at times volatile due to ongoing pricing and macroeconomic issues. This quarter, our emerging markets revenue grew 6% operationally. But we were negatively impacted by certain events that included the timing of certain government purchases of Enbrel and Prevnar franchise, and the transfer of some of our products to a joint venture in China with Hisun Pharmaceuticals.

Let me note that we do expect the second half of the year will be stronger for our emerging markets business, and on a full-year basis, we continue to expect it will deliver high-single digit operational revenue growth. We also continue to demonstrate good fiscal discipline in managing our cost structure by continuing to align our costs with our revenue base. This quarter, we reduced our total adjusted cost of sales, SI&A expenses, and R&D expenses by approximately 7% compared to a year ago.

Overall, I believe our results demonstrate our continued financial flexibility in adapting to our current operating environment. In a moment, Frank will provide you more details in the quarter and what we expect for the full year. Before he does that, I want to point out that we expect to see data from several important clinical trials during the second half of this year. This includes CAPiTA data of Prevnar 13, which if positive, may result in broader recommendations for adult usage following review by key vaccine technical committees like the ACIP.

We are also expecting data from two Phase 3 programs of dacomitinib towards the end of this year. These programs involve patients with advanced non-small cell lung cancer, whose disease has progressed after prior treatment. Full data presentations are planned for a medical conference next year, and we are expecting data from Phase 3 studies of Xeljanz for the treatment of psoriasis by mid year. If favorable, we expect to file early next year in the U.S. and Japan for the Xeljanz psoriasis indication. Separately, we also anticipate beginning a Phase 3 psoriatic arthritis study for Xeljanz later this year. Thank you, Geno.

As you can see, depending on our clinical outcome, Xeljanz has the potential to become a broad-based product franchise for our specialty care business. Also, later this year or early next, we’ll see the complete Phase 2 data for palbociclib for the treatment of breast cancer and the associated assessment of progression-free survival and overall survival. We believe that palbociclib may represent an important potential treatment for this devastating disease given the encouraging data we’ve already seen. And in February, we began enrolling patients in a Phase 3 study evaluating palbociclib in combination with letrozole for first-line treatment of postmenopausal women with ER+/HER2- advanced breast cancer. This represents 60% of cases amongst post postmenopausal patients with advanced or metastatic breast cancer.

Regarding our options relative to our 80% interest in Zoetis, we have not yet made a final determination. We are actively assessing the best options to maximize value for Pfizer shareholders in a speedy and an efficient manner.

As we shared with you the course of the last year, with the sale of the nutrition business and the successful IPO minority interest in Zoetis, we are building two strong businesses, innovative core and value core, each with the same cost structures and operating drivers. We know it will take the next few years to fully realize the potential of each, and as each of these businesses progress, we will continue to evaluate how best to deliver their value to our shareholders.

In summary throughout this year, we will continue to stay focused on building a substantial innovative core, we will use our capital in ways to deliver the greatest value to our shareholders, we will continue to manage our cost structure, we will press forward on our initiatives to help enhance our reputation with society, and we will focus on creating an ownership culture that helps to drive results.

Now, I’ll turn it over to Frank.

Frank D’Amelio

Thank you Ian, and good day everyone. As always the charts I am reviewing today are included in our webcast. Before I begin, I want to remind everyone that adjusted and reported net income and diluted EPS in both our first quarter 2013 results and our updated 2013 guidance reflect the IPO of 19.8% interest in Zoetis, which we completed on February 6, 2013.

We still retain an 80.2% ownership interest, so all Zoetis revenues and expenses continue to be included in our first quarter results and in financial guidance for the full year. However, effective February 7, 2013 the earnings attributable to the divested portion of Zoetis are excluded from first quarter adjusted and reported net income and diluted EPS in both our first quarter results and our full year 2013 guidance.

Now let’s move on to the financials. First quarter 2013 revenues of approximately $13.5 billion, decreased 9% year-over-year, reflecting a 1% negative impact from foreign exchange and an operational decline of approximately 8% driven mainly by the loss of exclusivity of several key products in certain geographies, notably Lipitor in developed Europe during the second quarter of 2012 and Geodon in the U.S. during the first quarter of 2012, the timing of government purchases of Enbrel and the Prevnar franchise in certain emerging markets and of Prevnar 13 in the U.S., and the transfer of certain product rights to our joint venture in China with Hisun.

Adjusted diluted EPS of $0.54, decreased 5% primarily due to the previously mentioned decrease in revenues, which was partially offset by an aggregate operational decrease of 7% in adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses, primarily resulting from cost reduction and productivity initiatives, a lower effective tax rate, and fewer diluted weighted-average shares outstanding due to our ongoing share repurchase program.

I want to point out that our solid performance during the first quarter was unfavorably impacted by approximately $0.02 per share, due to changes in foreign exchange rates versus the US dollar, including the devaluation of the Venezuelan Bolivar, since we first provided our full year financial guidance in late January.

Reported diluted EPS was $0.38, compared with $0.24 in the year ago quarter and was favorably impacted by lower overall cost and lower certain other items, including non-acquisition related restructuring costs and fewer shares outstanding and unfavorably impacted primarily by the loss of exclusivity of certain products as well as other factors impacting revenues previously mentioned.

During the first quarter, biopharmaceutical volume growth of 10% in the BRIC-MT markets, it’s primarily driven by strong growth in China and partially offset by price reductions of 1% to these markets resulting in operational revenue growth of 9%. If you exclude the product portfolio of products whose rights were transferred to our joint venture in China, with Hisun, our operational revenue growth would have been 8% in our emerging markets business, 14% in BRIC-MT countries and 31% in China. In addition, foreign exchange negatively impacted BRIC-MT revenue by 1% in the first quarter 2013.

Foreign exchange negatively impacted first quarter revenues by 1% or $118 million and had a net positive impact of $24 million in the aggregate on adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses. As a result, foreign exchange negatively impacted first quarter adjusted diluted EPS by approximately $0.01 compared the year-ago quarter.

We’re reducing our 2013 reported revenue guidance range by $900 million solely due, solely to reflect the non-operational negative impact of the changes in foreign exchange rates versus the U.S. dollar since mid-January, while most major currencies have worked against us since mid-January, approximately half of this unfavorable impact is attributable to the weakening of the Japanese Yen versus the U.S. dollar.

I want to remind everyone that Japan is our second largest market and represented 10% of our total revenues in 2012. In addition, the evaluation of Venezuela and Bolivar accounts for approximately 20% of the unfavorable impact of foreign exchange since mid-January.

Now, moving onto our 2013 financial guidance, I want to emphasize again that our guidance for this year reflects the completion of the IP over 19.8% interest to Zoetis and resulting non-controlling interest. Also add us full-year revenues and expenses are included in our guidance, but the earnings attributable to the 19.8% divested portion are excluded from both adjusted and reported diluted EPS guidance beginning on February 7, 2013.

As I just mentioned, we’ve lower the upper and lower ends of our reported revenue guidance range by $900 million or approximately 1.6% due to foreign exchange movements, since in the January. We’ve lowered our adjusted diluted EPS range from $2.20 to $2.30 to $2.14 to $2.24, to reflect the aforementioned changes in foreign exchange rates and the completion of the Zoetis IPO. And we’ve lowered our reported diluted EPS range from $1.50 to $1.65 to $1.44 to $1.59, to reflect the same factors as well as some other offset factors.

Approximately $0.04 of this EPS decrease in adjusted and reported diluted EPS guidance ranges is due to the non-operational unfavorable impact of changes in foreign exchange rates from mid January to mid April on our full year guidance, which includes the weakening of the Japanese yen and our [basket] of the currencies versus US dollar, but excludes the $0.02 negative impact from the devaluation of the Venezuelan Bolivar, which we are absorbing.

Approximately $0.02 of the decrease in the adjusted and diluted EPS guidance ranges is due to the elimination of the noncontrolling interest of Zoetis. To be clear, excluding in this $0.02 non-operational impact related to the noncontrolling interest of Zoetis, and foreign exchange rates remain constant, we would be reaffirming our initial full year 2013 revenue and reported and adjusted diluted EPS guidance.

Moving on to key takeaways, first quarter results were unfavorably impacted by the loss of exclusivity of several products and various geographies and the expected volatility in emerging markets. As we previously stated, because of this volatility, we anticipate our performance in that business to fluctuate from quarter-to-quarter. That said, we continue to expect high single-digit operational revenue growth in emerging markets in 2013 with the majority of this growth occurring in second half of the year.

We continue to mitigate the earnings impact of product LOEs with both expense discipline and share repurchases. We received approximately $6 billion of proceeds from the successful completion of the IPO of 19.8% interest in Zoetis and a related debt offering. We’ve updated our 2013 financial guidance to reflect the negative impact of foreign exchange rate changes since next January and the completion of the Zoetis IPO among other non-operational factors.

During the first quarter, we launched Xeljanz and Eliquis in the U.S., and Eliquis in several developed markets in the EU as well as in Japan. We remain excited about the potential of our mid-to-late stage pipeline and we continue to create shareholder value through prudent capital allocation. To date, in 2013, we have repurchased approximately $6.3 billion or 227 million shares and we have approximately 5.5 billion of authorization remaining under the current repurchase program. I want to point out that since 2010; we have repurchased nearly 1.1 billion shares of our common stock. Finally, we remain committed as we’re delivering attractive shareholder returns in 2013 and beyond.

With that, I will turn it back to Chuck.

Charles E. Triano

Great. Thanks for your review Frank. With that, operator, can we please call for questions?

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions) Your first question comes from Chris Schott of JPMorgan. Please go ahead.

Charles E. Triano

Good morning, Chris.

Chris Schott – JPMorgan

Good morning everybody. Just two for you guys. First, Ian, you mentioned it’s going to take several years for you to fully develop your innovative and value cores. As you consider how to best realize value from these divisions for your shareholders, should we think about the decision on that as something that could occur in the near term or do we really have to wait a couple of years to see how these businesses evolve before you have a better sense of the profiles of each.

My second question was on palbociclib, just thoughts on what breakthrough designation means here, the potential of file off of Phase 2 data, and can you talk a little about the early breast cancer opportunity, when we should expect to hear more about that? Thank you very much.

Ian Read

Okay. Thanks, Chris. I will deal with the two core businesses and then ask Geno to deal with the palbo question. I think what we’re saying is that we believe there are two core businesses, we’re going to – we look at this year as a year as the decision year on, how to structure those, how to indicate to you to give you further visibility and then simply the work involved in order to have those businesses as entities with enough financial information to make decisions when we are ready to make them would take two years to three years because of the complexity of separating out the businesses.

So, what we would like to do at some point in time and we’ll take that decision this year is to start to operate more independently those businesses, give you more visibility as shareholders and then assess what are the advantages and disadvantages of having these two core businesses housed in the same entity or not, and at that point, as we see that happen and frankly as we see the innovative core’s pipeline mature and as we take steps to continue to strengthen value core’s ability to have product growth inside certain segments of its product offering, that will inform our decision.

Geno Germano

Okay, so Chris just a couple of comments on palbociclib. I think you are probably familiar with the breakthrough designation now as this is a new device that the FDA has to increase or intensify their focus on programs where early clinical signals are compelling for conditions that are serious and life threatening, and certainly palbociclib falls into that category and it was encouraging to see FDA give the designation to palbociclib recently. So we look forward to continued engagement with the FDA on the program. As you know, the Phase 2 trial is still ongoing. We are anticipating completion around the end of this year or sometime in the second half. It is an event driven trial, so in a way, the longer that it takes, it’s possible that patients are actually surviving longer and without progression in the palbociclib arm, which could be a very good thing.

So we are just going to have to wait until we achieve the required number of events and we’ll report out as soon as we have results ready for disclosure. With regard to the early-stage trial, we are actually working on two additional Phase 3 trials now, one for earlier stage high risk patients as well as for advanced recurrent patients, and our expectation is that we’ll initiate those trials in the second half of this year as well. So, we’ll provide more color once we reach that point.

Charles E. Triano

Thanks Geno. Operator next question please.

Operator

Your next question comes from Jami Rubin of Goldman Sachs.

Jami Rubin – Goldman Sachs

Thank you Frank, I have a question for you. I guess I’m still very confused about something related to Zoetis IPO. Can you walk us through the dynamics of your 20% stake that you sold to the IPO and how the $6 billion in proceeds from that which were being allocated to share repurchases would not have allowed you to report accretion from your sale of Zoetis, instead you’re reporting $0.02 of dilution, so I’m just confused about that, I would just think with the IPO proceeds and given your market cap or rather your P/E multiple that this would have been pretty meaningfully accretive.

And then secondly, can you talk about your current plans for the 80% Zoetis stake, I understand as Ian said that you haven’t yet decided when or how, but if you could talk about maybe how you’re thinking about allocating those proceeds as well? Thanks.

Frank D’Amelio

Okay. So on the first question, let me walk through this in a couple of steps, Jami. So, first on the last earnings call, I mentioned that our current year guidance, the 2013 guidance assumed mid teens in the billions share buybacks, so that was already factored into the guidance. That mid teens billions in buybacks made assumptions about the Nutri cash proceeds as well as the Animal Health IPO and debt offering proceeds, point one.

Point two; remember when we’re buying back shares, we don’t get the full year benefit of those shares from the EPS calculation in the year, it’s a weighted--average calculation. So, the full year benefit of those buybacks will actually take place in 2014.

Point three, if we were to do something with the second step on Zoetis, and you assume that there was a share reduction from that, it would clearly be when you net it all out accretive, the reason you’re seeing that $0.02 decrease in earnings today is simply a timing issue, it is the way that I think about it.

So hopefully that explains the steps relative to why you saw the $0.02, it’s really timing, not getting the full year benefit of the shares, we repurchased this year and the fact that we had already planned for mid-teen billions in buybacks that -- which have taken into account Nutri in the first step on Animal Health.

In terms of current plans for Zoetis and our remaining 80.2%, couple of comments. First, we haven’t made any decisions to date. Second, we have several alternatives available to us per the IRS ruling and we continue to monitor our market conditions. Third, there are no operational barriers that would prevent us from proceeding with a potential second step. And then lastly, our goal remains the same which is to maximize after-tax return to our shareholders.

Charles E. Triano

Thanks Mike. Operator, next question please.

Operator

Your next question comes from Marc Goodman of UBS. Please go ahead.

Marc Goodman – UBS Securities

Yes, I was hoping you could talk about Xeljanz a little bit more and what’s going on behind the scenes in the U.S. and the launch there and how its progressing and talk about the reimbursement that you have now and how that’s going to change? And then second of all, on the oncology products that you have launched, Xalkori and Inlyta, if you could give us a little bit of an update there Geno on just how those are progressing and what kind of patients have been already penetrated and how much is left there? And then third, when is the staph vaccine trial is going to readout? Thanks.

Ian Read

Okay. I will ask as you say, as you requested Geno to answer the Xeljanz and any oncology questions and Mikael can give you some update on the staph readout.

Geno Germano

So I guess for Xeljanz in the U.S. we’re pretty pleased with the way things are going right now. We’re seeing a continued adoption of the drug, fairly broadly now across rheumatology community. We have somewhere around 1,200, 1,300 physicians who have initiated patient trials and about two thirds of them are repeat prescribers, and we see this nice trend week after week after week increase in number of physicians with experience.

We know from our Phase 3 trials, with the patient reported outcomes and the efficacy that patients are likely to be very satisfied. We are already hearing from some rheumatologists that they’re hearing back from their patients that their early experience has been very favorable, so I think it is a so far, so good situation as Ian mentioned in his opening comments, we really just kind of got off the tracks on our full launch in March with speaker programs, with sales representatives, with promotional materials in their hands, with additional medical support in the field; and in the middle of the summer, beginning of summer, we expect to launch our DTC.

So, we’re right where we need to be, we see the trajectory of our launch comparing favorably to other recent launches. We’re a little ahead of most of the other products that have launched in this category. So, again we like what we see.

With regard to reimbursement, initially we had, probably broader reimbursement support than we anticipated. Everyone just seem to agree to pass through reimbursement over the last couple of months, we’ve seen more managed care players doing their full assessments and making decisions on formula replacement, we’re getting the formula replacement, we would expect.

There will be prior authorization required for this medicine, just like there is for all of the medicines in the RA category and so, I think we have now formal reimbursement decisions made for lives, totaling about $60 million and continue there will be a continuation of evaluation by plants as we go into the summer.

So, again that’s looking okay, and then finally, just to reiterate another point that Ian made in his comments, what we’re seeing in terms of patients is we’re seeing about an even split in patients that are post-methotrexate and patients who are post-TNF. So we’re getting both second line and third line patients in the early experience so far. So that’s that Xeljanz with regard to Xalkori and Inlyta, again we’re continuing to make progress there. Inlyta in the first quarter, we did $63 million in the quarter. We’re seeing real good uptake in second line, which is the indicated physician for that product for about 26% share in the second line.

In Europe, where we launched later last year, we know about half of the physicians now who treat patients with renal cell carcinoma have had experience with Inlyta, so the uptake there is on track. And in Japan, we’ve had very robust uptake, it’s actually the number one product to renal cell in Japan. So Inlyta is off to a good start, good feedback on patient tolerability, which is what we expected the benefit to be, so again so far so good there with Xalkori. We had a $53 million first quarter, up about 20% from the last quarter, which is again good progress.

Health testing continues to improve in the first quarter of this year; new guidelines were published for health testing. We think it will helpful in setting standards for who to test and how to get through the diagnostic in an expeditious manner. So we think that can have a benefit. And we’re actually seeing now that we are getting healthier patients on Xalkori of good duration of therapy. So all the indicators are on track with Xalkori as well and make out handed over to Mikael to comment on (inaudible).

Mikael Dolsten

Marc, thank you for interest in our step always you like seeing. We are expecting data readout from our proof-of-concept study meter this year. It’s really our first-in-class vaccine, which contains four components carefully select that to one hand, two of them and allow immune-mediated clearance of bacteria while the two others are selected to inhibit the growth of the bacteria including proprietary antigens that we have identified. The vaccine is designed to act on antibiotic resistant and antibiotic sensitive stuff hours and we are quite enthusiastic about this potential new approach to deal with the threat of a difficult to treat stuff hours.

Marc Goodman – UBS Securities

Thank you, Mikael

Ian Read

And Mark I’ll just that Xeljanz sales in the quarter were $11 million. Then with that operator, we’ll go to the next question.

Operator

Yes your next question is from Gregg Gilbert of Bank of America. Please go ahead.

Gregg Gilbert – Bank of America-Merrill Lynch

Just thank a few, quickly on the Merck deal, should we view this as a step in the direction of Pfizer wanting to have a full fledged IBDs effort covering several classes of drugs or just weight of share cost and risk for one product area.

Secondly on capital deployment, your dividend yield is at the low-end of the major pharma average at this point certainly due to strong stock performance, but your payout ratio was also somewhat lower than average, I was curious if you add any updated thoughts on the balance between dividends, buybacks and business development or if not when can we expect an update?

And lastly in the pain area in light of the recent FDA actions on abuse-deterrent opioids, I was hoping you could update us on your current thinking on Remoxy in the ALO product in the oxycodone space as well as Embeda in the Morphine space. It seems like there is quite an opportunity there to cannibalize generics and generate a lot of revenue, if you can Embeda back on track, thanks.

Ian Read

Thanks, some of your questions are lot on you agenda. On the Merck deal, we have a large effort in CVMED; we continue to do research in diabetes and in areas around those conditions. I think this was a great opportunity for us to play there the product could not be as a backbone of monotherapy and we continue to remain focused on seeing some of the opportunities. John, do you want to add a little bit more on what you see at this partnership?

John Young

Yeah. Thanks for the question, Greg. And I think first thing to say is, we’re really very excited about the opportunity of this collaboration with Merck to develop and commercialize ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and JANUVIA.

It’s a proprietary, innovative SGLT2 inhibitor for the treatment of Type 2 diabetes, which as you know is a huge unmet clinical need and one that is growing. We expect to begin Phase 3 trials later in 2013 and we think that the clinical prolife in differentiating action has the potential to really complement the market leading therapeutic profile of JANUVIA brought to the collaboration by Merck.

So overall, we think as Ian said this is a very positive opportunity and one that really get the degree into point for the ongoing research efforts that we have in cardiovascular metabolic.

Maybe just to pick up on your question on pain and opioids as well, clearly it has been an interesting last few months with some of the decisions that the FDA have made which I think is really a recognition for some of the challenges that we have here in the United States with the abuse of opioids.

I think the decision along with the guidelines the agency issued in January really help to inform our development strategies. Specifically with Embeda as we said last quarter, the required stability programs are already underway.

We are working towards the submission of a prior approval supplement for Embeda in 2013 and we believe that Embeda subject to successful completion of those stability programs will be commercially available in the first half of 2014. For Remoxi, we had a predictive meeting with the FDA in March and the guidance that we’ve got out about meeting, it certainly helping to inform the next steps and addressing the issues that the FDA had raised previously in their Complete Response Letter. We believe we have a path forward and we will publicly communicate further details overcoming quarters.

Ian Read

Thank you, John. Frank you want to take the total shareholder return…

Frank D’Amelio

Yeah, sure. So, Gregg let me run the numbers first and then I’ll give you a little more color commentary. So the payout ratio for the quarter was 44%, right $0.24 on the dividend overnight over $0.54 or 44% payout ratio for Pfizer. If you look at what we’ve done with the dividend since the acquisition of Wyeth, when we announce Wyeth, we cut the dividend from $1.28 to $0.64 since then we’ve rated from $0.64 to $0.72, $0.72 to $80, $0.80 to $0.88 and $0.88 to $0.96 or 12.5%, 11%, 10% and 9% increases respectively, just in terms of running the numbers.

In terms of what we’ll do going forward to dividend is on every year-end December, Ian and I make a recommendation to the Board of Directors and then once we get approval from the Board of Directors, we obviously announced that to on the investment community literally that day or the next day. So, that’s the game plan for the dividend on a going forward basis.

In terms of just capital priorities, capital deployment priorities, from my prospective, they remain the same. So, first and foremost in terms of total shareholder return, we understand the importance of dividends and buybacks so that clearly remains the priority, investing in the business, whether that would be R&D programs, capital expenditures, launch cost associated with our new products, continued investment in the business, business development will be an area that we continue to look at, the amount of cash that we’re paying to oversees.

So all the things that I’ve talked about previously and I think what’s important is, because of the amount of cash that we generate from operations, we have the ability to do all these things, which is really that’s a nice structure to have so, that’s all I answered the question.

Gregg Gilbert – Bank of America-Merrill Lynch

Thank you, Frank.

Charles E. Triano

Next question please.

Operator

Your next question is from Tim Anderson of Sanford Bernstein. Please go ahead.

Tim Anderson – Sanford Bernstein

Well, thank you, couple of questions. You talked about Prevnar being week in Q1 due to timing that would imply. We should see a rebound in Q2 through Q4 such that on a full year basis will still see growth across the franchise, is that correctly of looking at it?

And then the second question relates to the mechanics of potentially splitting up the company further, you mentioned recently the one of the things that would be needed to do this is three years of audited financials. My question is whether that three year clock has started yet and if not is that mean that the earlier same thing it happened in terms of actually accomplishing the split would be 2016 or can you look back or satisfy some of the three year period versus it being forward-looking?

Ian Read

Tim, thank you. Well, so I just want to emphasize firstly that I believe we do have two operating models two core business in the company. The first order of business is define a model where we can separate them and give the management ability to run those businesses of this much authority and independence is necessary and to judge if those businesses inside Pfizer can fulfill what we believe is that full potential and where the shareholders see the potential as businesses and value them fully inside that combination.

If we decided or can be conclusion if they were further benefits from a split of those businesses, my decision has not been taken. I believe the earliest we could do that would be in 2016. And as I say, this year we’re studying how best to report and how the results and how complicated it will be for us to start generating different P&Ls and even potentially balance sheets. So that is the situation where we are, and we will give you more color on when and how later on this year. With that I would turn it over to Geno for his comments.

Geno Germano

Yeah, Tim. Just on Prevnar, I think you actually – you have it right, I think our first quarter was impacted by some inventory differences compared to the first quarter last year primarily with the CDC purchases, some stockpile purchased last year in the first quarter, and even in the private market we saw slightly lower inventories in the first quarter this year compared to the first quarter last year, that will probably even out as we go through the year. Those decreases relative to last year offs that a little bit by some price increase that we had for this year in the U.S. in the first quarter, and a little bit of adult business that started to creep in.

So all-in-all, I think the business is stable in Europe; we were actually up about 3% for the first quarter reflecting a better pricing situation in the UK. And for emerging markets, rest of world, we’re off again slightly in the first quarter of this year related to purchase timing primarily. The fundamentals of the business are very sound, the only NIP that we don’t have this year that we had before is Morocco, it’s about $9 million impact. So we’re on pretty solid ground with Prevnar, I expect we will see strength as we go through the rest of the year.

Ian Read

Thank you, Geno.

Charles E. Triano

Thanks, Geno. Our next question please?

Operator

Your next question is from Mark Schoenebaum of ISI Group. Please go ahead.

Mark Schoenebaum – ISI Group

Hi guys, thanks a lot for taking the question. On [drugs] if the appeal doesn’t work out at the end of re-filing, what new data would you have that would allow a re-filing, and the second question is on PD-991, given the mechanism of action, I guess there is a reasonable, it’s reasonable it may work across different tumor types, I’m wondering if you’ve seen strong signals often, Michael outside of breast, and then just finally on the EM, you mentioned EM you thought growth would pick up in the second half and I was looking for little bit of color on that, why you think that’s going to happen. Thank a lot.

Ian Read

Geno, if you could deal with the Xeljanz and then I’ll Michael talk about Palbo and …

Geno Germano

Yes

Ian Read

To talk about EM.

Geno Germano

So, Mark Xeljanz in Europe as we’ve indicated we are going to go through a reexamination process, we hope to build to clarify some of the issues that were raised by CHMP and either eliminate the majority of them or some of them, so we can focus our follow up activities on the areas that our of most interest or concern to the CHMP. We would probably spend more effort analyzing and reanalyzing data that we have to complete a new filing.

We would have some additional data from our 1069 study, the two year data, which would be new and we could have updated safety tables from ongoing long term extension trails, as primarily the data that we will put into the filing, but I think it has more to do with going deeper into some of the areas that the CHMP has been asked about and I think we can do some of that with just stronger analysis of some of the databases that we’ve already discussed.

Ian Read

Thank you, Geno. So, on Palbociclib and Mark we appreciate your interest in how this drug could be fully developed. Yes, certainly we are exploring opportunities in a number of different tumor segments and we have pre-clinical and some early clinical signs that this mechanism can have an important outcome also in other tumors. We are starting now or thinking on starting of course the number of segment from melanoma to squamous cell carcinoma in a variety of different locations, which can include head-to-head neckline esophageal tumors.

I would like to underline that given the strengths of palbociclib in ER positive breast cancer, and amount of understanding we have got on the importance of this drag in breast cancer, as Geno outlined this year, we are starting three different breast cancer trials, advance ER positive breast early breast cancer that are ER positive and recoverant, but in addition to that there are more segments in the ER positives that we are considering as opportunities which can include medium to low risk ER positive breast. And also within the – our two segments, substantial proportion also carry the ER positive signature.

So Mark even the very strong signal in breast its compelling to consider that the breast cancer ER positive is segment alone, obviously have potential to make this one of the most impact full drugs. In addition to exploring other tumors as you asked for.

Okay Mark coming to emerging markets, you’ve heard Ian and Frank talking about the one-time event of government purchase of Enbrel in Brazil and Prevnar in Mexico and some countries in Africa and Middle East. Those had significant impact on the growth for the quarter and taking those events out underlying growth is more like 10% for OEM and some seeing around 14% for BRIC-MT countries. So the reason why we are expecting a better second half in term of growth rate is due to the fact that we still expecting to get the full year purchase order of those medicine and I’m talking NIP Prevnar and Enbrel but the timing would be pushed for the second half of the year.

Mark Schoenebaum – ISI Group

Thank you, Olivier.

Charles E. Triano

Thanks. Next question please.

Operator

The next question is from Steve Scala of Cowen. Please go ahead.

Steve Scala – Cowen and Company

Okay. I have a few questions. What was the rationale for designing CAPiTA without a comparison arm with Pneumovax? And without such comparison, do you believe you can still get an ACIP approval? Secondly does the ongoing Phase 3 Palbo trial have an interim look built in and if so when would we get that data? And then thirdly on Xeljanz, I appreciate it is early days but of the 11 million in Q1, how much of that was pipeline stocking? Thank you.

Ian Read

Okay. Geno, would you like to take all three, I mean the CAPiTA trial design, the Palbo and those?

Geno Germano

Yeah. So I mean the CAPiTA trial design was obviously discussed with regulators. This is a post marketing commitment for the accelerated review in the United States, so this is a trial design that has been thoroughly discussed and agreed upon with the FDA and the decision to not include Pneumovax – as competitor I think was related to the fact that there is lack of evidence that there is a Pneumovax effect on Community Acquired Pneumonia, but essentially it was an agreed upon protocol with the regulators.

We do believe that with positive data that we will be able to demonstrate reach agreement on a favorable recommendation from ACIP. So with the Palbociclib Phase 3 trial, there is a provision for an interim look, I don’t know what the timing on that is, so I can’t give you a date, we’ll have to follow-up with you, Steve on that.

And with Xeljanz of the $11 million almost none of it is pipeline stocking, we put very small amount of product in the marketplace at the end of last year, because of the class and the specialty pharmacy management of a drug like this there are not large inventories out there.

Steve Scala – Cowen and Company

Thank you, Geno.

Charles E. Triano

Next question please?

Operator

Your next question is from Andrew Baum of Citi. Please go ahead.

Andrew Baum – Citi

Good morning. Three questions please. Firstly on Palbociclib, you mentioned there were current breast cancer trial you are running to understand the trial design, you’re looking at adding the drug on top of AFINITOR or looking at in head-to-head design? Second, are you looking at the development of Palbociclib, we have combination chemotherapy in select rheumatoid using the drug of chemo protections, which an idea has been suggested by some? And then finally on Xeljanz, just outline the [repeater and co-repeater] and whether the possibility exists that became individual up and central approval if you do in fact receive the rejection from your ongoing appeal?

Ian Read

Thank you, Andrew. I’ll ask Mikael to answer the Palbo questions and in fact Geno could talk a bit about the Xeljanz and the European Union.

Mikael Dolsten

Yes, so concerning Palbo our Phase 2 study was on top of letrozole and [aromatizing] EBITDA. We do think that the unique opportunity with Palbociclib is to a large extent to delay the need or replace the need for chemotherapy with all its burden on patients. So our treatment designs for the advanced and recurrent involves the use of additional full moon blockade beyond letrozole, and particular for the recurrent, we are keen on the opportunity to add a drag on top of fulvestrant, which you may know has been used and demonstrated to be an agent that can have some intrinsic activity even off the human receptor blockade is diminished by receptor antagonist by having additional receptor degradation of the insulin pathway. But we haven’t excluded opportunity for a certain chemo-combinations, but we are even more enthusiastic about the ability to give profound treatment effect without the serious side-effect of chemo treatment.

Andrew Baum – Citi

Great. Thank you very much, Geno?

Geno Germano

Okay. Andrew, I think your question was related to the opportunity or the potential to go forward with individual country registrations versus the central approach in the event that we’re not successful with the reevaluation. I mean suddenly, there is an opportunity to explore that option, but we’re not at a point yet, we’re prepared to make that decision.

Andrew Baum – Citi

Thank you, Geno.

Charles E. Triano

Thanks, Geno. Next question, please operator?

Operator

The next question is from David Risinger of Morgan Stanley. Please go ahead.

David Risinger – Morgan Stanley

Yes, thank you. I have a couple of questions, please. First, with respect to separating established products, could you just explain to us some of the operational changes that you’re making for example, I think you’ve mentioned in the past that you’re moving some lines of manufacturing to different parts of facilities. But if you could go into some more detail on operationally what action is being taken that would be helpful?

And second with respect to the possibility of exiting the business, I’m just curious about whether you need the three years of financials to be able to do a tax free spin off and that is why you are looking at a three year timeline or whether you could exit the business sooner through a simple sale of the business or would that just be too difficult from a tax standpoint to exit the segment through a sale prior to having three years of audited financials? Thank you.

Ian Read

Thank you. Well, on separating the business, we already have separated the management in U.S. and developed markets. The key question that we are looking at is in our BRIC-MT and our emerging markets that are very successful in growing aggressively, what would we need to do to separate out and what will be the dynamics of that of separating out and what portfolio we separate out so as to create an innovative core and a value core and how would we allocate capabilities and access within that, this is not a tribune undertaking in an organization that’s already performing so well.

And the second part would be clearly on the manufacturing side, we would want to try and identify plants that are purely of a value or established product type plants and there have to be independencies and you look at that and then you also have to look at the tax issues as you do that. So this is we believe worth doing, I believe it is worth creating that separation internally because I think it brings focus and management focus and will improve the performance of those two businesses.

But it’s something that we’re doing carefully given the – it’s sort of reorganization of our potential reorganization of emerging markets that is being so successful as is. But certainly that’s some of the consideration as we go to look at this separation now. I’ll ask Frank to talk about the timing and the mechanics of that, but I would just add that under your hypothetic scenario of a buyer, I’m sure the buyer would want to see P&Ls and balance sheets.

Unidentified Company Representative

And Dave I think what I’ll add to what Ian said is, when we talk about the three years, it’s really, I’ll call it a path that’s similar to what we did – if we would do it, a path that’s similar like the (inaudible) path, where basically it’s a path that we are doing it ourselves and we set ourselves up in a position to be able to do whatever kind of optionality we want on a standalone basis. But that’s what we think about when we talk about the three years.

Ian Read

So the underlying thesis of this is that we have an innovative call, which is focused on science and focused on selling and delivering education in a certain way and would have an exciting pipeline that would drive substantial growth and certain shareholders would have an appeal for that type of investment. And then we would have a value company, which has a substantial and cash flows, large dividend capacity, big brands in emerging markets more of a sort of traditional selling model, also with brand generics. But also we want to take time as we go through the next couple of years to see how we strengthen both of those segments. We are strengthening [cumulative] call with the pipeline. We also want to look on how do we strengthen the value business at the same time. Thank you.

Charles E. Triano

Next question please.

Operator

Your next question is from Seamus Fernandez of Leerink. Please go ahead.

Seamus Fernandez – Leerink Swann, LLC

All right, thanks very much. So just wanted to check on BD, historically you’ve discussed primarily tuck-in acquisitions, Frank. May be you can just give us, reiterate the thresholds or give us the thresholds that you are thinking about on that regard. Also historically, you’ve talked about interest in the sterile injectable space as a potential area of interest. Can you just update us on that as well? And then lastly on psoriasis and the indication for potential indication for Xeljanz, can you just give us a sense of the dose used in the oral studies as well as the percept of the topical formulation. And I’m more asking that in the context of safety questions that have been raised at least by the CHMP. Thanks very much.

Ian Read

Geno, could you answer the psoriasis question?

Geno Germano

Yeah. So for the psoriasis program, our Phase 2 trial, we used five milligram to 15 milligram dose and I think those results have been disclosed. In the Phase 3, we have the 5 milligram and 10 milligram doses both administered BID. And again you’ll be seeing readouts in the middle of this year on those trials. We are now working on a topical formulation and intent to initiate a Phase 2 trial with the topical formulation this year.

Ian Read

Okay on BD, I just like to preface a few comments and make some comments and pass over to Frank. Our view on BD has always been that it’s not a strategy, it’s an enabler and we will do BD if we see a clear path of increasing shareholder value. So we’ve always said never say never to big deals and we’ve said we’re looking at bolt-on deals or frankly any deal where we felt that there was a convincing argument that we would add value to our shareholders. So Frank do you want to make some more color on there.

Frank D’Amelio

Yeah. I think what I would say is just to punctuate Ian’s comments is from my perspective as of we never say never, the strategy remains bolt-on acquisitions and we say the thresholds and my mind target areas are our priority therapeutic areas, so inflammation and immunology, pain oncology, CVMED, neuroscience, emerging markets you seen us do take actions in the emerging markets more on a local basis, when you see what we’ve done there and then established products which by the way comprises a major part of our emerging markets business and that includes things like reformulations for example which was Quillivant transaction with NextWave. So those have been the strategies, those continue to be the strategies and always with the focus being how we create shareholder value. Next question please.

Operator

The next question is from Alex Arfaei of BMO Capital Markets. Please go ahead.

Alex Arfaei – BMO Capital Markets

Good morning. Thank you for taking my questions. First the question for Frank in cost cutting, I think last year you characterize as being in the middle and I was wondering if you could update us on let us know which anywhere now and then a follow-up on for Geno, could you talk about your sampling strategy and would you characterize it as aggressive and could that perhaps time consuming little bit and when you expect those patients to come back to the physicians to perhaps get prescription, thank you.

Ian Read

Frank?

Frank D’Amelio

So last year, I did say earnings if you look at what we saved operational last year in terms of our total cost and expense base, it was almost $4 billion in operational savings, I think the exact number is about $3.8 billion and I think it was clearly entered via the late innings, entering the seventh inning right now. Still opportunities to further reduce cost; I think you saw that again this quarter. Adjusted costs and expenses were down operationally $545 million, 7%. But I think when you look at kind of the continuum, the rhythm, I think we’ve entered, just started entering the late innings.

Geno Germano

Yeah. So, Alex the program that we’ve put out there for Xeljanz, there were two sampling programs, one of the 14 day sample, it’s primarily managed through our patients support program to help patients get started on therapy right away while they’re going through the prior authorization process. So, that’s a 14 day relatively short-term program. And then we gave select physicians a series of 28 day patient starters, so again they could get some early experience. It’s very difficult for us to track the utilization of those samples so it’s difficult for me to say whether or not, I think that’s influencing the uptake. And I’m not sure, I’ll call it aggressive, I think we were somewhat pointed in a way that we distributed those samples and so, we’ll see how things play-out.

Charles E. Triano

Thanks Geno. Next question, please.

Operator

Your next question is from Anthony Butler of Barclays Capital. Please go ahead.

Anthony Butler – Barclays Capital

Thanks very much. Just briefly one question on our two parts to Eliquis and one is around overall spend there is, do you feel or otherwise it’s an early launch that the overall spend so far has been as you predicted sufficient for the initial launch and the second issue is assuming the six month mTOR on DTC is over do you anticipate a direct-to-consumer campaign much like occurs with rivaroxaban thank you very much.

Geno Germano

Thank you, Anthony. John?

John Young

Okay. Thanks for the question Anthony. So I think the first point to make is that you along with our partners, BMS we’ve been very thoughtful by making sure of you. We are very focused on our investment, but we are also mindful of the very competitive nature of this market and resourcing, what we remain convinced is actually a really significant opportunity to improve the outcomes for patients with the indications that we’ve researched thus far. So, we’ve deployed our resources, have made sure that we are competitive and in addition to just this year spend; I think the other thing that both companies bring is obviously a strong heritage in cardiovascular medicine between Pfizer and BMS, which we believe is a real positive advantage for us in the marketplace.

And our expectations for Eliquis are broadly in line with launches in, mentioned in his opening comments. We always have known this was going to be an opportunity that was going to require us to displace a competitor in warfarin that’s been in the marketplace for 50 years. But we are very positive about the progress that we’ve made thus far and certainly what we have seen is a trend in the marketplace that has Eliquis pretty much on track to actually the second (inaudible).

In terms of DTC specifically, you are absolutely right, we currently are still in that six month moratorium period, which certainly is an alliance we would – once we have come out of that moratorium period, subject purposely see clearance by OPBP and the FDA, we would certainly have plans to initiate a DTC campaign in the U.S. to enable us to communicate the benefit risk of Eliquis to the patients and we are very positive about that as being a further opportunity that will kick in the second half of the year.

Anthony Butler – Barclays Capital

Thank you.

Charles E. Triano

Thanks John. Next question please

Operator

You next question is from Jeff Holford of Jefferies. Please go ahead.

Jeffrey Holford – Jefferies

Joe, my questions have been answered. Thank you.

Charles E. Triano

Next question operator.

Operator

Your next question is from Michael Tong of Wells Fargo. Please go ahead.

Michael Tong – Wells Fargo Securities

Thanks. Just one quick question, on the R&D side, if I look at Inlyta and Xalkori, nice to see the ramp coming up but in the overall scheme of things still a relatively modest contributor to the top line. So maybe for Frank or Mike, as you think about capital allocation within the R&D segment where you’re allocating your R&D dollars maybe perhaps give us an idea of how you splitting between primary care and specialty care at the moment and where you think it might be in two or three years time?

Frank D’Amelio

Thanks for question. We have TAs we’ve broadly stated that we are spending on which is oncology and vaccines, and inflammation and immunology, CVMed oncology pain and that’s where we are dividing our spend and we’re dividing it as we see opportunities that occur in the science. I personally I am excited about what we see coming at our oncology portfolio. And I think they have the potential to be a large driver on our revenue go forward, as does the vaccine segment where we are investing in which we really basically we start investing from a standing star after acquiring Wyeth. They had one large and good vaccine, but since then we’re really building up a portfolio of vaccines. So in fact Mikael may just want to comment briefly on the more interesting oncology projects.

Mikael Dolsten

Yeah, so overall oncology is our largest investment in R&D slightly above 20% of the R&D investment followed by immunology inflammation just slightly below that. And then number of the other core areas are somewhere between 10% to 20% and we try to do capital allocation by looking at what’s in the pipeline, what is looking most promising, and where we’ll see a return of investment going forward.

So it’s certainly not carving stone, but as we do across the business in R&D allocation to maximize output. Particularly in oncology, we have opted a successful launch of three products in recent one to two years. We now have a second wave that we’re very excited about.

On one end, Dacomitinib, that with the end rate data within the next period of this year, early next year in Rituximab for blood cancer, and of course Palbociclib, that we spoke a lot about it today. But behind that we have other interesting oncology drugs, such as (inaudible) for multiple blood cancers, and PI3K/mTOR that will have a readout over the next couple of years in several solid tumors. So it’s quite a rich portfolio in oncology, immunology, vaccines and across the biotherapeutic areas.

Michael Tong – Wells Fargo Securities

Thank you, Mikael.

Charles Triano

Thanks, Mikael. If we could take our last question please, operator?

Operator

Yes, your final question comes from Damien Conover of Morningstar. Please go ahead.

Damien Conover – Morningstar

Thanks for taking the question. Just one question on the strategic deployment of capital to research and development. And the pipeline has shown a lot of strength and productivity over the years, a lot of that strength is coming from the R&D spend, where the spend was much higher. As you look forward, are you comfortable with around 12% of sales going to R&D and keeping this high productivity going – to keep it going over the long-term? Thank you.

Geno Germano

Thank you for the question. Yeah we are very confident about capital allocation. We feel we have the right balance allocated to research right now. And it obviously depends upon opportunities to come in the pipeline; if large opportunities come that look very promising and requires substantially more resources and we would not shrink from putting those resources there, assuming we believe in the opportunities. Thank you.

Charles E. Triano

Thank you. And thanks everyone for your attention this morning.

Operator

This does concludes the conference, you may all disconnect.

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