Pfizer's Management Presents at Morgan Stanley Global Healthcare Conference (Transcript)

| About: Pfizer Inc. (PFE)

Pfizer Inc. (NYSE:PFE)

Morgan Stanley Global Healthcare Conference Call

September 10, 2013; 04:05 p.m. ET


Frank D’Amelio - Chief Financial Officer


Dave Friedman - Morgan Stanley

[No presentation session for this event.]

Question-and-Answer Session

Dave Friedman - Morgan Stanley

So welcome everyone to the Pfizer session. I just need to mention disclaimers. We just need to refer you to disclaimers at and it’s my pleasure to welcome Frank D’Amelio, the CFO of Pfizer.

Frank originally joined the company in September 2007 from Lucent, where he was CFO and was responsible for driving the turnaround of Lucent in the integration of the Alcatel-Lucent merger and prior to the Alcatel merger he was Chief Operating Officer of Lucent.

At Pfizer he’s overseen Pfizer’s delivery of the Wyeth merger efficiencies, solid financial results and rising returns to shareholders. So we are fortunate to have him here with us today and thanks for joining us Frank.

Frank D’Amelio

Thank you David and pleasure to be here with everyone today. I was here same time, same place last year, so we’re making this an annual occurrence; a pleasure to be here with everybody.

Dave Friedman - Morgan Stanley

So thank you again and I guess just to kick it off, Pfizer’s obviously executed very well against your objectives and you wouldn’t accept anything less from a financial standpoint, but can you maybe take us from here, rather than looking backward, look forward and talk about your vision from here, where you want to take the company going forward and financial prospects from 2013.

Frank D’Amelio

Sure. And what I’m going to do is, if it's okay, let me just start with a little bit of how we got here and then I’ll talk about how we got here and where we go from here.

So if you look at kind of how we’ve gotten to where we are and the value we’ve created to-date, we’ve really done that in several ways. So if you say, okay Frank, what are those ways? Clearly productivity improvements and cost reduction; financial engineering, in terms of what we’ve done with Capsugel, Nutri, the Zoetis split off.

Capital allocation, whether that be our dividend policy since the Wyeth acquisition or the share buybacks. Being [inaudible] bolt on acquisitions and quite frankly we did a big acquisition a few years ago called Wyeth, which really placed us very nicely in kind of the biologic space and vaccines and then advancing the pipeline.

Last year we had five products approved, two potential blockbusters, right, eliquis and Xeljanz and I’m sure we’ll get to talk about those at some point during our conversation. So if you think about what have we been doing to get to where we are, those are the things that we’ve been doing.

So you say, okay now where do we go from here to continue to create shareholder value, because when all is said and done, that’s what we do right, create shareholder value. I think we do all the things we’ve been doing. One of the new entries now is we have some new products that have been approved, we have to successfully launch those products. Once again, we can talk about that in a little while.

And then we’ve also put a new organizational structure in place fairly recently with our two innovative core businesses and our one value core business. We need to really leverage and get the benefit of that on a going forward basis, because I think that very much talks about – it kind of organizes the company very much around kind of where the industry is moving to and gives us an ability to really maximize the operating performance of those different businesses, but kind of that’s where we are, what we’ve done.

Going forward it's to do all those things, do them as well or better and then supplement that with - start cranking sales on the new products, start leveraging the new organizational structure and continuing to use our balance sheet and use capital allocations as an enabler of value.

Dave Friedman - Morgan Stanley

Right. And since you mentioned the new business segments, could you frame for investors that aren’t familiar, those three segments, the rough contribution to the company and the timeline going forward for driving value out of those organizations.

Frank D’Amelio

Sure. So let me run the numbers real quick and I’m going to run the numbers using 2013, because that’s where we published and then coming 2014 we’ll start reporting in the new structure and I’ll give you all a summary of what the new structure is.

If you look at established products last quarter, just as a proxy, total established product sales were almost $2.5 billion. I think it was exactly $2.4 billion. Then if you look at our emerging market sales, which currently are separate from the statutory product sales, they were about $2.6 billion last quarter.

At any quarter 40% to 45% of that is driven by established products. So if you want to do the math on kind of the established product space now, the 40% to 45% of the emerging markets business, plus the established products business from last quarters numbers and then we’ll give you all more detail when we get to the first quarter at 2014.

Now in terms of the new organizational structure, here’s the way to think about it. We organized the company really in two ways; we call one kind of the innovative part of the company; the second one, the value, the non-branded part of the company. And the way we’ve done that is, we call the non-branded value core and any products that will loose exclusivity up till 12/31/15 with one or two exceptions will be in the value core business, beginning 01/01/14. So we are kind of finally getting ahead of that a little bit. So that will be the value core business.

In terms of the innovation portion of the company, there’ll be two businesses. So there we call it innovation core one for now, innovation core two, very complicated. In innovation core one, we’ve primarily our primary care and specialty businesses and innovation core two will be our vaccines, oncology and then our consumer business.

And if you say, well Frank, consumer with vaccines and oncology, how did you all get there? Really the way to think about that is consumer was being run previously by Amy Schulman. Amy is going to be in charge of the vaccines oncology business, given she was already in charge of the consumer business. We thought it was just a natural to tuck that in with Amy on the vaccines and oncology.

And if you get into some of the rational for what we did, why on the innovative side, go to two units instead of maybe combining them all into one. The big rational there was all about making sure vaccines and oncology had laser focus and was not getting lost in the kind of bigger, primary care specialty business. Was that the table of the executive leadership team of the company and it was just getting kind of you know – giving all the right intellectual capital and then with the needs within the company.

And if you look at this, the new organizational structure, in my mind is very much a natural evolution of our commercial structure, right. I mean few years ago, you got back six, seven years and I’ve been with Pfizer six years today. If you go back kind of to when I first got here, we were very much a functionally organized company. We had a global manufacturing organization; we had a global R&D organization. Every dollar of R&D in the company was spent in that global R&D organization and then we had our commercial units.

A couple of years ago we moved from a pure functional organization to division and structure. We created the business unit structure that we have kind of till today, primary care, specialty, oncology, emerging markets, established products, consumer products. So we kind of went to somewhat of a matrix model.

We took R&D, everything that’s up till the part, because in the R&D organization or in WRD, Mikael Dolsten. Everything post park we put into the business unit, so I could spend all kinds of time on what we did then. I won’t just for the sake of time.

And then if you look at the current model, the developed market, sort of very much organized along the lines that we move too for 114. It was really the emerging markets that we needed to really kind of drive back into the units to create global units.

Everything we had as of today or what we saw, with the exception of emerging markets, which is where we saw. What we concluded is creating these global units was the prudent thing to do; their own cultures, their own focus, their own different business models and we thought this kind of laser focus was the right way to go. So you’ll see us do that at the beginning of the next.

Dave Friedman - Morgan Stanley

Got it. And with respect to the financials, I think its pretty clear that you said, starting with the first quarter ‘14, you’ll break out the financials in terms of profitability and then you would need, three years of audited financial, so ‘14, ‘15 and ‘16 to contemplate any potential tax free exits if that’s the way you go. Is that a simple way to think about it, such that we shouldn’t expect any major transaction activity over the next three years or am I missing something?

Frank D’Amelio

So I want to kind of just – I want to do that question in pieces, there was a lot to that question.

So first, let me tell you what to expect for beginning of ’14, then I’ll get to the three years. So first, we’ll provide I’ll call it kind of contribution P&L. So revenue for each of those businesses, direct cogs, direct expenses, then that will be quantitated.

In addition we’ll provide qualitative direction on the things we aren’t allocating, so that people can get a feel for what the operating margins of those businesses are; you follow David? So there will be some contribution P&L’s, then we’ll give some qualitative statements, so people can get a feel for how to allocate the corporate centers and those kinds of things, point one; that will be 114. 115 will be the same thing on the balance sheet in terms of doing some contribution balance sheets.

In terms of three years reporting the financials, I just want to step back and say, if we, we’re not the side of anything. But if we were to ever decide to do something in terms of a transaction with any of those businesses, it would need three years of order of the financials and what I said on the last earnings call was three years order to financials and we should assume with the prospect, simply because these businesses doesn’t exist retrospectively. So prospective three years order to the financials.

But the one other thing I wanted to comment on is, you said we’d wait for years. This conversation aside, we have and we are always looking at is a prudent business development we should do, and please know, we are not going to be waiting to do business development. If we see good things we should be doing, we’ll go off and do them. If we don’t think they are prudent we won’t do them, but we’ll always look.

So as we are looking through our internal structure, we are always looking externally at things to improve the hand that we have to play and I think the last thing I’ll say on the new structure, is what’s most important about the new structure, is getting each of those businesses to hum (ph). The best thing to do operationally is get each of those business units to perform to maximum efficiency, maximum productivity and that’s what we’re all about doing.

If we get the operations tab, operate with excellence, the financials will take care of them self, so that’s what we’re all about doing with those new businesses. Get those businesses to really execute with excellence, and I will say operational cause equals financial effect. If we make the operations hum (ph), the financial will come.

Dave Friedman - Morgan Stanley

Right, yes. And with respect to the revenue outlook, are these relative to our expectations a year ago. Celgen’s and eliquis have ramped slower than expected and I’m just curious if Pfizer has the financial flexibility to deliver EPS growth – I don’t want to say, almost no matter what, but irrespective of some of the launch challenges, you have the financial flexibility with respect to future cost cutting as the alliance revenue winds down, share repurchase, etcetera, such that we can still count on EPS growth annually in future years.

Frank D’Amelio

So let me look at this into three different answers. I’ll talk a little bit about eliquis and Celgens; then I’ll talk about just revenue in general and then I’ll talk about earnings, is that okay. So let me kind of slice and dice this in those three ways.

So if you think about Celgens and eliquis, the term I’d like to use for what we were expecting was measured in steady growth and we are getting measured and steady growth. By the way, its never good enough, but its measured and steady and we expect it to be measured in steady, because the space that we’re in has encumbrance. There’s embedded standards of care that have been there for a long time, there’s competitors, but we assume that would be measurement steady and its been measured and steady.

Recently we started our DTC with eliquis, we started printing as of a few weeks ago; the response to that’s been good. We start television advertising a couple of weeks from now, so once again we’re optimistic and that will start to put a little more oomph into the measurement study. But directionally it’s behaving the way we thought it would, but it’s never good enough; I’ll just make sure I say that.

If you look at our revenue and you look at the rhythm of our revenues, in terms of what our revenues are doing, over the last few years our revenues have been declining. Take out the divestments that we’ve been doing. If you normalize, our revenues have been declining. They’ve been declining because of patent expirations.

Last year we had almost $8 billion, almost $8 billion of patent expirations really being driven by lipitor in the U.S. and Europe. This year almost $4 billion and in the next couple of years through the $4 billion a year, so that we’ve got that headwind probably now for the next couple of years, so that’s a negative.

But if you look at some of the positive factors in our revenue, there’s several. So long as we have in-line products, some in particular that are performing very well; products likely are continuing to perform well. If you look at our emerging markets, our emerging markets continue to grow. Some of our markets like China are growing very nicely. In the last quarter, 15%, 16%, and that’s after adjusting for price, so a little up, 15%, 16%.

And then the other thing now is new products and as we work our way though this process, its not just the new products we have, but advancing the pipeline, creating more revenue from more new products and then bolting, supplementing the business developed.

So when you think about the rhythm of the revenues we’ve got headwind, we are going to have that for the next couple of years, but we’ve got some positive factors within that that I think are helping the business. I didn’t mention consumer, I could have mentioned some other ones, but those are the big-ticket items.

Now to EPS, which is – so if you say, well Frank, what about EPS? So what have we been doing over the last couple of years? Really its been all about litigating as much of the impact of revenue of the LOE’s, the pattern expirations of revenue to a number of things; cost reductions, productivity improvements and share buybacks.

Right, if we think about what we’ve been doing in share buybacks, this year I said we will do the mid-teens billions in buybacks. If you take that plus the dividend we are going to payout this year, we’ll return directly to our shareholders over $20 billion in cash this year, just in terms of some of the things that we have been doing.

The intent going forward is to continue to do those kinds of things to mitigate, as much as the impact of revenue on the bottom line as we can. And I think our track record has been good. And going forward our intent is to continue to do those things to mitigate as much of it as we can.

Dave Friedman - Morgan Stanley

Great, and one area of the revenue line that’s particularly opaque is alliance revenue. In terms of the timing of royalties stepping down. Could you just talk about how steep of the decline we should be thinking about and any inflections in terms of losses of revenues contribution over the next year. So we have a better sense for how to model that.

Frank D’Amelio

So let me run the numbers and then I’ll answer the question. So once again when we look at Q2 of last year, Q2 of the prior year and Q2 of the prior year, so ‘13, ‘12, ’11.

If you look at the revenue number for the Alliance revenues, I’m going to round the numbers, but they are all roughly right. This past quarter $750 million, the year before quarter $850 million, the year before quarter $950 million. So there is a trend, which has just been declined.

If you look at the alliance revenues today, the bulk of those revenues come from Enbrel in the U.S. and Canada and SPIRIVA. So lets talk about each one of those individually. So Enbrel in the U.S. and Canada and beginning on November 1, so a couple of months from now we enter to the 36 month sunset period in the collaboration agreement, where that converts to a royalty instead of alliance revenue. So we won’t record anymore alliance revenue from Enbrel. We’ll record a royalty and that royalty will be a credit to other incomes.

So not only does it decline Dave, but it will change line items of an income statement. It will come off of alliance revenue and go in other income. And then SPIRIVA has been winding down. We’ll continue to wind down this year and then we’ll continue to wind down right thought the end of next year. So that by the time we get to the end of 2014, the majority of our alliance revenues will be rediff and Eliquis.

So the alliance revenues are going to step down fairly significantly by the time we get to the end of 2014 and then what I’ll do obviously is on our fourth quarter earnings call, which we typically have at the end of January, first or second day in February. We’ll close out 2013, provide guidance for 2014. Part of what provide in that guidance will be a revenue number, which will factor into it what the alliance revenues are going to be come 2014.

But the trending has been down and it’s going to get steeper, given what’s going relative to Enbrel . You got kind of the declines coming, in fact the declines coming with the ramp still. So that’s the way to think about it.

Dave Friedman - Morgan Stanley

So the way that you describe it is that as of November, is that the end of November that Enbrel – September 1 Enbrel goes to zero in the alliance revenue and it transactions to other income

Frank D’Amelio

As a royalty payment.

Dave Friedman - Morgan Stanley

Okay got it .

Frank D’Amelio

So that’s a 36 months sunset period and then actually, there is a step down in the royalty over the period.

Dave Friedman - Morgan Stanley

And of the 750 that you booked in the second quarter, any way to…

Frank D’Amelio

We don’t provide details, but what I said is the majority of that number is a combination of Enbrel is for real.

Dave Friedman - Morgan Stanley

And SPIRIVA is winding down through the end of ‘14.

Frank D’Amelio

Through the end of ‘14.

Dave Friedman - Morgan Stanley

And then SPIRIVA is zero and then…

Frank D’Amelio

Its not quite zero, but its more close to it. It think its very low.

Dave Friedman - Morgan Stanley

Okay. All right, that’s helpful. And then cost cutting ahead to help offset these alliance revenues and other revenue declines.

Frank D’Amelio

So I think, I said previously I may have even said this last year at the meeting, but I think on a cost cutting perspective, if you look at the hand we’re currently playing, we’ve entered the latest.

If you think about a baseball game, nine innings, I think we clearly answered the way it ends, but I want to be clear, there’s still lots of opportunity. So let me just kind of run through some numbers, run through some examples and then also just churn us a little bit, what else we can do to continue to extent the game, the extra innings.

So if you look at manufacturing, after we acquired Wyeth, after we bought King and after we did some smaller acquisitions, things like Alacer and Ferrosan. We had almost a 196 manufacturing facilities. To date we have 40 exits of those 96. We have six more that are targeted for exits.

So one thing we’ve been obviously is really making more efficient, the overall manufacturing network. I think about it almost as a telecom network and how many notes do we need to really maximize the efficiently of the network.

Then what we do is, for those remaining factories we work to optimize, the performance of each individual factory that remains in the plant network. We also leverage our purchasing. We are a big company, we leverage our scale, our size our scope from a purchasing perspective.

And then the other thing in manufacturing is we’re fanatic along what I call the center cost. So manufacturing resources that aren’t located in the factories themselves that are headquarters type resources, we are all over that, but its really making that as efficiently as it can possibly be. So there is and will continue to be opportunities in that manufacturing space, and the purchasing piece doesn’t only apply to manufacturing. Although we buy a lot of materials, it applies to the whole company.

If you look at SI&A, I think there continues to be opportunities in SI&A, whether it be things like continuing to leverage our centers of excellent, continuing to leverage some of our systems work; we’ve done some really neat stuff in the systems environment this past year, our real-estate footprint. We’ve taken our real-estate footprint down by tens or thousands of square feet. This is all non-manufacturing and there’s still more we can give.

So I think lots of opportunity remains for the SI&A, SG&A area, and then if you look at R&D, quite frankly R&D, I think we are roughly right sized right now. If you look at what we’ve done with R&D and once again, let me just run some numbers, when we bought Wyeth, we announced that deal in January of 2009. The pro forma combined spend with the two company’s R&D in 2008 was $11 billion; Pfizer was $7.6 billion, Wyeth was $3.4 billion.

We’ve taken that $11 billion down to a guidance time of this year, of the latest guidance $6.1 billion to $6.6 billion. That number is a billion and change, a $1.5 billion half lower and with Pfizer stand along.

Now we reduced it somewhere because that will help nurturing Capsugel, but none of those were big ticket R&D items. So those numbers I give you all, they are all roughly one. But if you look at where we are now with R&D, if you look at our pipeline, and kind of a lot of ‘08, the Phase III stuff that we’re looking at, that we thought we want to fund. I think that number is roughly right at this point in time, so that’s how I think about it.

And then the last point to make is, and then as always business development, right. Every time we do a deal, there’s always an opportunity to be more efficient, right, that’s called synergies and in particular cost synergies.

So as we change the cause that are into our hands, we had cost in the hand we are playing, that always creates more opportunities for cost synergies for more efficiencies that always extends the game. I mean I look at that as that’s something we are perpetually doing. So that’s kind of how I think about where we are.

Dave Friedman - Morgan Stanley

Let me pause and see if there are any questions from the audience. Well, I wanted to follow up. You had mentioned BD; I wanted to ask a little bit about the environment and what you are up against. Obviously biotech valuation have sky rocketed in the past year and your quite disciplined when it comes to financial assessments. So are there opportunities for near term M&A or are you pausing a bit given risking valuations in the market place?

Frank D’Amelio

So some assets have gotten, I call it really pricey, and ideally I don’t like buying assets when they are priced for perfection. I’d rather buy them when they are not priced for perfection, but there’s always opportunities.

If you say what are our priority areas relative to business development, it’s the several therapeutic areas that we always talk about that are priorities for the company, right; pain, inflammations, immunology, oncology, CV (ph), neuroscience, those things haven’t changed.

And things like vaccine, orphan drugs, things that we can pickup in the consumer product space, we did some pickups over the last couple of years that report emergency with Alacer and Ferrosan, which was a geographic complimentarity play, plus official assets that we got from that acquisition.

So I think there’s certain areas you mentioned; one, prices have gotten hot, but that doesn’t mean that there’s still not opportunities out there. But the way you framed it is the way I like to think about it, which is we have been, we are and we will continue to be disciplined in how we do bus-dev.

But when we think there is an opportunity, we’ll go look, and my guess is if you named 50 companies, my guess is we are looking every one of them. The question becomes, what’s going to create value for our shareholders. Now that’s going to create value to our target shareholders and that’s how we think about it, right.

At a macro level business development is simple, because one plus one equal more than two. We bought Wyeth, because we think one plus one equals more than two. We though it equaled dramatically more than two and there was a $68 billion bill. We though the value creation from that was really very good for our shareholders, and in retrospect we believe it was very good for our shareholders.

So here my action is the compass on bus-dev is the same as the compass on everything we do. Its how do we create value for our shareholders. If we think there’s transactions out there that can, we’ll go after them. If we think they are too pricey and the value creation is going to be for the target shareholders, we won’t. But all that said and done, there’s opportunities out there, there always are.

Dave Friedman - Morgan Stanley

Great. And then pivoting to the pipeline, obviously in your role you have a lot more things to worry about and your looking at the pipeline from a higher level. But what would be the three or four pipeline assets that you would focus people on to watch over the next year, year and a half.

Frank D’Amelio

Sure, and I may even – I’ll try to even beyond three and four. So I think if you kind of rip through them, I think the Prevnar 13 adult indication, which is based on the results of the CAPiTA trial. We’ve now reached the number of required events and we expect to read out on that trail in early 2014, so I’d say that would clearly be one.

The meningitis b vaccine, we have three Phase III studies going on in that area. Dacomitinib, which is a lung cancer program will be another one to watch and the SGLT2 collaboration with Merck in the diabetes area, where we expect that to move into Phase III by the end of the year.

There is the STAFF (ph) vaccine, that’s in Phase IIa, so a little bit earlier than what you asked me, but we expect that to read out by the end of this year, early next year. There is celgen psoriasis, we have a bunch of work going on. And then finally there is PCSK9 in the cholesterol market and tanezumab in the pay market, which are all going to call potentially moving closer to Phase III as we assesses those.

So if you were to say to me, Frank in terms of the pipeline of the company, what are the assets that I’m spending some time with the team on? Those are the assets that are getting time, and those are the ones that I would say that we as a community should be watching.

Dave Friedman - Morgan Stanley

And palbociclib?

Frank D’Amelio

So palbociclib, I guess I should have mentioned that one, thanks for helping me Dave. So palbociclib, we are seeing encouraging data so far in Phase II, that’s the way I kind of – if I had to give a headline, encouraging data so far, Phase II. Let me embellish a little bit and provide some more detail.

So the Phase II study is event driven. So because its event driven its hard to predict the exact time, but that said, we currently expect the final Phase II study results to be available sometime in the first part of 2014. Obviously when those final results are available, we’ll have discussion with the FDA in determining what our potential filing strategies will be.

Now in addition, in February of this year we sorted a Phase III trail with the same trial design as the Phase II study, but with more patients. And then in addition we expect to start two more Phase III trails in breast cancer by the end of the year. So if you think about what I just said, clearly palbo is a big priory program for the company. So palbociclib is obviously on that radar screens as well.

Dave Friedman - Morgan Stanley

And the break through therapy designation obviously allows for that dialog to potentially file next year if the data is highly compelling and if the FDA allows it?

Frank D’Amelio

Yes. So I never like to speak for the FDA, but what I would say is as soon as we get the final Phase II study results, we will obviously get into conversation with the FDA and then determine what is the appropriate filing strategy.

Dave Friedman - Morgan Stanley

Great. Well, we are out of time. Thanks everybody for joining and Frank, thanks again for taking the time.

Frank D’Amelio

My pleasure. Thanks everybody, much appreciated.

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