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Pfizer (NYSE:PFE)

Q1 2011 Earnings Call

May 03, 2011 10:00 am ET

Executives

Ian Read - Chief Executive Officer, President, Director, Chairman of Executive Committee, Member of Executive Compliance Committee and Group President of Biopharmaceutical Businesses

Charles Triano - Senior Vice President of Investor Relations

Frank D'Amelio - Chief Financial Officer, Executive Vice President of Business Operations and Member of Executive Compliance Committee

Geno Germano - President of Pfizer Specialty Care & Oncology and General Manager of Pfizer Specialty Care & Oncology

David Simmons - President of Emerging Markets & Established Products units and General Manager of Emerging Markets & Established Products units

Analysts

David Risinger - Morgan Stanley

David Maris - Credit Agricole Securities (NYSE:USA) Inc.

John Boris - Citigroup Inc

Catherine Arnold - Crédit Suisse AG

Tim Anderson - Sanford C. Bernstein & Co., Inc.

Jami Rubin - Goldman Sachs Group Inc.

Steve Scala - Cowen and Company, LLC

Seamus Fernandez - Leerink Swann LLC

Christopher Schott - JP Morgan Chase & Co

Gregory Gilbert - BofA Merrill Lynch

Marc Goodman - UBS Investment Bank

Charles Butler - Barclays Capital

Operator

Good day, everyone. And welcome to Pfizer's First Quarter 2011 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 Triano

Thank you, operator. Good morning. And thank you for joining us today to review Pfizer's first quarter 2011 performance. I'm here with our CEO, Ian Read; Frank D'Amelio, our CFO; Olivier Brandicourt, President and General Manager of Primary Care; 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 Nutritionals; and David Simmons, President and General Manager of Emerging Markets and Established Products. The slides that will be presented on this call can be viewed on our home page, pfizer.com, by clicking on the link for Pfizer Quarterly Corporate Performance First Quarter 2011, which is located in the Investor Presentation section in the lower right-hand corner of this page.

Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause the actual results to differ are discussed in Pfizer's 2010 annual report on Form 10-K and in our reports on Forms 10-Q and 8-K.

Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. 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, May 3, 2011. These reports are also available on our website at pfizer.com in the Investors SEC Filings section.

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

Ian Read

Thank you, Chuck. Good morning, everyone. During my remarks this morning I will briefly recap the highlights from the quarter, speak to the perimeters we are making in executing on our R&D strategy, provide updates regarding our late-stage product portfolio and capital allocation initiatives. And I will close with an update on the business portfolio review work we have underway.

Our year is off to a good start, our results were favorably impacted by revenue growth from several key products, growth in Emerging Markets, the addition of legacy King products and the benefits from cost reduction initiatives, among other things. At the same time, revenues were also negatively impacted by the loss of exclusivity of several products in the U.S. and other geographies.

Frank will take you through the details of the quarter but here are a few of the noteworthy highlights. We saw strong growth in the Prevnar franchise, Enbrel, Zyvox, notably in the U.S. and Japan. We saw growth from several other products including Lyrica, Spiriva and Celebrex in key international markets. We had 8% operational growth in the Biopharmaceutical Emerging Markets business, including 10% operational growth in the BRIC-MT countries. This was highlighted by a strong growth in China, India and Turkey. Sales were impacted by a large vaccine sales in the first quarter of 2010. Our overall global innovative core of patent-protected Biopharmaceutical products had operational growth in the mid-single digits.

Within our Established Products business, if we exclude revenue additions to the business unit from off-patent Wyeth and King products as well as LOE transfers from the other business units since beginning of 2009, we saw 7% growth. This performance was driven by both the legacy Pfizer Established Products from the unit as of 2009 and those products added to the portfolio expansion strategy. This is a good measure of the progress we've made since creating this business unit in 2008. With the goal of transforming what was a shrinking revenue base to a growth opportunity.

We continue to remain focused on efforts to reduce costs with a more disciplined and deeply-rooted cost management effort. Operating savings were realized during the quarter due to the Wyeth integration, workforce reductions, actions taken with the R&D portfolio as well as savings from our smaller physical footprint.

So far this year through April 30, we've returned approximately $3.8 billion to our shareholders through dividends and share repurchases. And in early April we announced an agreement to sell Capsugel business for $2.375 billion in cash to KKR. Looking ahead through the rest of the year, I believe our performance during the first quarter firmly positions us for executing our 2011 plan in achieving our financial guidance.

Now I'll turn to an update on the progress we're making with our R&D strategy. I will begin by reiterating that improving the performance of our innovative core remains my top priority.

Since sharing with you our R&D strategy during the February earnings call, we have moved quickly to set in motion the actions needed to execute on our plans. Over the past 3 months, we have spent time successfully aligning colleagues across the business with our strategy. We are taking important steps forward provide greater budget authority and accountability to our disease area chief scientific officers. Based on my interaction with our R&D team, I remain confident that we have chief scientific officers who will deliver scientific excellence with an ROI mentality.

We have completed a review of our pre-proof-of-concept portfolio. As a result of this review we have elected to terminate 39 projects. We did this to create a greater focus on high potential projects in our areas of go-forward investment, which include neuroscience, cardiovascular/metabolic, oncology, inflammation and vaccines. We believe these and other changes will lead to more effective prioritization of portfolio based on key value and cross criteria.

We said we would establish dedicated unit focused on pain and sensory disorders, to that end, we recently opened a new biotech research unit in Cambridge, U.K., focused in this area. We have also started the preparations for shifting resources to strengthen our key biomedical hubs, including the Cambridge, Massachusetts, and New York City academic hub, and have begun recruiting key talent. Clearly, our work here is not going to be completed in one year. It is a multiyear endeavor and I'm working closely with Mikael Dolsten and the R&D organization to accelerate our efforts.

As this work continues, we are also seeing progress in our late-stage clinical portfolio that we anticipate will lead to new product opportunities. During this year, we expect to present clinical data on assets from each of our innovative Biopharmaceutical businesses: Primary Care, Specialty Care and Oncology. Specifically, during 2011, we expect to report on several important programs in Phase III and some potential regulatory submissions and actions. For Phase III, we now have reported top line results for all 5 of the Tofacitinib Phase III registrational studies, which we believe are forming a very encouraging clinical profile, and expect to present detailed data at medical conferences during this year.

We expect additional clinical data to be presented for axitinib for renal cell carcinoma, Prevnar 13 for the prevention of pneumococcal disease in adults, age 50 and older, and Eliquis which is a new name for apixaban re-data for stroke prevention in patients with atrial fibrillation. And we continue to collect clinical data for crizotinib in non-small cell lung cancer patients and for Tofacitinib in psoriasis.

Regarding regulatory submissions, the crizotinib will remain on track with our rolling U.S. submission, which began in January. We look forward to acceptance of our application in the first half of this year. We continue to anticipate filings in the U.S. and the EU by the end of 2011 for certain other oncology compounds as well as for Tofacitinib and Eliquis.

In terms of anticipated regulatory decisions later this year, the PDUFA date for REMOXY is currently set for June 23, 2011. At this point, we are working to address the specific issue in the manufacturing section of the application as well as to understanding any potential implications for FDA'S recent class-wide REMS, announcement for extended-release opioids. These issues could delay the timing of approval or the launch of REMOXY. We expect to receive actions later this year on our U.S. and EU filings for Prevnar 13 in adults.

In summary, each of these assets or compounds is truly innovative and demonstrate our capabilities.

Next, I'll discuss our ongoing efforts around how we are allocating our capital to directly enhance shareholder value.

Specifically, as of April 30, we repurchased approximately 2.2 billion of Pfizer shares this year. With our recent agreement to sell Capsugel to KKR for approximately $2.4 billion in cash, we now expect to repurchase at least 5 billion and up to 7 billion of shares during 2011.

This compares to our previously announced plan to repurchase approximately 5 billion of shares in 2011. We may also consider using a portion of the proceeds from selling Capsugel to fund other opportunistic business development transactions that are expected to meet or exceed the return on investment to share repurchases.

Regarding business development, we will continue to identify and pursue those bolt-on opportunities that leverage our core capabilities and then build on our portfolio strengths. We will seek and pursue the opportunities that we believe will return the highest value to our shareholders.

On our February earnings call, I shared with you that we are looking at the long-term value creation potential of all of our businesses. As part of the evaluation, we will consider synergies between businesses, the opportunity costs associated with continued or increase investment in each business, as well as the potential returns from pursuing other strategic alternatives.

As I previously shared with you, we're undertaking a rigorous process, which we expect to complete during the second half of 2011. Following the completion of this process, we'll be in a position to make a set of decisions and determine the appropriate next steps based on those decisions.

In summary, with a solid quarter behind us, I believe we're making good progress in executing in our R&D strategy to improve the performance of our innovative core, building a strong pipeline with good scientific and commercial potential, continuing to take steps that will enhance shareholder return in the near-term and we are being diligent in how we make the decisions that we believe will result in long-term value creation that maximizes shareholder return.

Now, I'll turn it over to Frank to take you through the numbers.

Frank D'Amelio

Thanks, Ian. Good day, everyone. As always the charts I'm reviewing today are included in our webcast. It's important to note that because of our decision to sell the Capsugel business, all revenues and expenses related to Capsugel for both the first quarter 2010 and the first quarter of 2011 are included in a single line item, discontinued operations, net of tax in our consolidated income statement for the first quarter of 2011 and the first quarter of 2010. In addition, as a result of the completion of the King acquisition, legacy King operations are included in the first quarter 2011 results beginning January 31, 2011, but are not included in the results for the first quarter of 2010.

Now let's move on to the results. First quarter 2011 reported revenues were $16.5 billion, essentially flat year-over-year and favorably impacted by $224 million or 1% due to the addition of legacy King products, $97 million or 1% due to foreign exchange. First quarter 2011 revenues were decreased by $166 million or 1% due to U.S. healthcare reform.

The 12% year-over-year increase in reported diluted EPS was driven by growth for certain products, lower purchase accounting adjustments and acquisition-related costs associated with the Wyeth acquisition, lower first quarter effective tax rate on reported income, primarily reflecting the extension of the U.S. R&D tax credit, the change in the jurisdictional mix of earnings during the quarter and the tax impact of charges related to certain legal matters, these were partially offset by the lowest of exclusivity of certain products, legal charges and cost incurred to improve overall R&D productivity.

First quarter 2011 adjusted cost of sales increased 9% or $261 million versus the prior year quarter. It's important to note that adjusted cost of sales was negatively impacted by $64 million due to foreign exchange; $30 million due to the Puerto Rico excise tax, as well as healthcare reform which resulted in decreased revenues, but did not correspondingly decrease cost of sales, and a shift in product and business mix. Consequently, adjusted cost of sales as a percentage of revenue increased year-over-year from 17.1% to 18.7%. However, excluding the negative impact of foreign exchange to Puerto Rico excise tax and healthcare reform, adjusted cost of sales as a percentage of revenue was 18.1%.

Adjusted total cost increased 3% to $9.6 billion, driven by a shift in product and business mix, the addition of legacy King operations, which had an impact of $160 million, the unfavorable impact of foreign exchange of $101 million, the quarterly component of the annual fee required under U.S. healthcare reform legislation, which had a negative impact of $69 million and the previously mentioned impact of the Puerto Rico excise tax. These were partially offset by savings from our cost reduction initiatives. Excluding the impact of foreign exchange, adjusted total cost increased only 2% year-over-year.

Finally, adjusted diluted EPS was $0.60 per share, flat year-over-year and driven primarily by growth in certain products, a lower effective tax rate on adjusted income and lower R&D expenses, offset by a shift in product and business mix, the loss of exclusivity of certain products and the impact of U.S. healthcare reform.

In the first quarter 2011, foreign exchange positively impacted revenues by $97 million and negatively impacted adjusted total cost by $101 million. Remember, our Q1 international results include the months of December, January and February and over this timeframe, the euro to the dollar actually worked against us on a year-over-year basis. All in, foreign exchange had essentially no impact on first quarter adjusted diluted EPS.

Primary Care unit revenues of $5.4 billion decreased 7% year-over-year, driven by growth in Lyrica, Spiriva, Pristiq and Celebrex and certain other patent-protected products in key international markets, as well as the addition of legacy King products. These were more than offset by the loss of exclusivity of Lipitor in Spain and Canada and Aricept in the U.S., all in 2010, which decreased Primary Care revenues by $590 million or 10% this quarter.

The 12% increase in Specialty Care unit revenues was driven by the strong growth in the Prevnar franchise, Enbrel and Zyvox, notably in the U.S. and Japan.

Established Products unit revenues of $2.4 billion decreased year-over-year by 16% operationally, primarily due to the loss of exclusivity of Effexor, Protonix and Zosyn/Tazocin and the resulting increased competition facing these brands, which was partially offset by the addition of legacy King products. The 8% operational growth in Biopharmaceutical Emerging Markets revenue was due to both innovative products including Enbrel, Lyrica, Sutent and Vfend, as well as Established Products.

Oncology unit revenues decreased 13% operationally, primarily due to the transfer of Aromasin U.S. business to Established Products in 2011 as a result of its loss of exclusivity in April 2011.

Animal Health grew 15% operationally, of which 6% or $50 million was due to legacy King products and the remainder due to strong global performance.

And Consumer Healthcare grew 11% operationally, driven primarily by higher sales of Robitussin and Advil Cough and Sinus (sic) [Advil Cold and Sinus] because of a more severe cold and flu season, particularly in the U.S. market.

First quarter 2011 revenues generated from both Biopharmaceutical and other businesses in Emerging Markets increased 11% year-over-year and Biopharmaceutical revenues grew 8% operationally. It's important to note that over the same period, Brazil, Russia, India, China, Mexico and Turkey contributed a combined 58% to the overall growth in Emerging Markets.

Revenues from the Biopharmaceutical businesses grew 10% operationally in these BRIC-MT markets to approximately $1 billion. Revenues from Established Products and Emerging Markets increased 6% operationally to approximately $900 million. And Established Products revenues in the BRIC-MT markets increased 13% to $450 million.

Finally, worldwide revenues generated by sales in Established Products, which include revenues from the Established Products business unit and revenues from Established Products generated in Emerging Markets totaled $3.3 billion in the first quarter.

We are reaffirming all elements of our 2011 financial guidance. As a reminder, on April 4, we updated our previous 2011 reported revenue guidance to $65.2 billion to $67.2 billion from $66 billion to $68 billion to reflect the pending sale of Capsugel. We're also reaffirming our 2012 financial targets given our continued confidence in the business. Again, we updated our previous 2012 reported revenue target range to $62.2 billion to $64.7 billion from $63 billion to $65.5 billion due to the pending sale of Capsugel.

So moving on to key takeaways. We continue to deliver strong operational performance. We're reaffirming all elements of our 2011 financial guidance and 2012 financial targets. We expect to complete our business portfolio review during the second half of 2011. We anticipate presenting data and submitting regulatory submissions for several of our late-stage pipeline compounds during 2011. And we continue to expect to repurchase $5 billion to $7 billion of common stock during 2011. And we anticipate using approximately $2 billion of the after-tax proceeds from the pending sale of Capsugel for these repurchases and/or for business development.

To date, in 2011, we repurchased approximately $2.2 billion or 110.5 million shares of our common stock, including repurchases made in the second quarter.

Now, I'll turn it back to Chuck.

Charles Triano

Thanks, Frank. And at this point operator, if you could please poll for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jami Rubin from Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc.

Ian, a couple of questions for you. Specifically, if you could outline for us what you're -- how you're thinking about strategic alternative for Emerging Markets and Established Products. And secondly, if you could also share with us, if you have narrowed your options regarding strategic alternatives for your diversified businesses? And then thirdly, just so that you could clarify what your plans will be if assuming you do spend or sell some of these businesses, what you will do with the cash proceeds?

Ian Read

So let's take perhaps in reverse order. I think we've said that proceeds, if we do spend proceeds, the case to be would be share repurchase. So I think that's -- we've firmly drawn the line in the sand there. You ask then for the look at the -- how I see or looking at the EP in the Emerging Markets, strategic alternatives. The EP business is made up of mature markets in the United States and in Europe, and then the Emerging Markets. In a mature markets, it's really a low-cost and to a certain extent, a price game. And in the Emerging Markets, it continues to be promotion and field force and traditional marketing. So I think if we look at the strategic intersections, the most interesting question is in the Emerging Markets and to the extent that the Established Products are part of the core, are they linked to the infrastructure, are they linked to overall presence in the marketplace and how would those businesses be operated separately or do they require different capabilities? So those are the first strategic questions we are looking at as we look at those 2 options. And then you go ask me if I've narrowed my alternatives. We are still reviewing all of our alternatives on the businesses outside of the core. And we intend to take the first, second half to go through that in a thorough way, and as I say in my opening remarks, we expect to start making some announcements during the second half. I don't think see it as a big bang. I don't foresee at some point second half suddenly coming out with a detailed master plan, but certainly, we'll lay out decisions we've taken and decisions we haven't and the wise and analysis and give a clearer path forward.

Operator

Your next question is from Catherine Arnold from Credit Suisse.

Catherine Arnold - Crédit Suisse AG

I wanted to ask Ian a big picture question and then I have a question on Nutritionals business. If you step back, Ian, and I know that you've talked a lot about how you're evaluating each particular business on its own and what to do with it, but clearly, in the bigger picture, I wonder if you can directionally just address what type of growth profile that you're trying to create for the Pfizer business ultimately? And thinking about the strategic exercise that you're going through, are we talking about a company that's going to be growing mid-single digits, mid to high single digits? Anything you can directionally say, kind of as to your aspirations longer term would be helpful. And then on the Nutritionals business, it seems like the growth was a little weaker this quarter. I wondered if you could give us some color on that.

Ian Read

Okay, I'll address the first question and then ask perhaps Frank and Amy to add something on the second. So when we look at post-'12, we'll continue to see a series of LOEs that will affect our growth rate, yet we will be launching some really innovative products into that marketplace post-'12. So I conceptualize the company, if you put to one side the diversified businesses just in the way you described what's happening, as a Pharmaceutical business it has an exciting inner core of launching new innovative products and then a set of more established assets that would -- some of those will be suffering LOEs. I think the key question for the investors is, how exciting is the innovative core, how exciting once the penetration of those newly launched products and what will we do with the cash flows from those more mature products and to what extent can those cash flows be used to produce earnings growth? And without getting into any decisions about how we see the final shape of the company or how we see it being structured or managed, I think those are the 2 big strategic themes in the company going forward. Frank, do you want to take the Nutrionals?

Frank D'Amelio

Yes. So Catherine, let me just run the numbers and then I'll answer what took place. Nutri sales for the quarter are about $470 million. On a reported basis, they were up low-single digits, on an operational basis, they were flat, when you remove foreign exchange. What's happening is, last quarter's results, so Q1 2010 actually had some favorable items, onetime items that impacted revenue that did not take place this year. So that's kind of major point 1. Major point 2 is we'll add new products for the Nutri business this year and that weren't available yet in Q1, so we didn't get the benefit of those new products. So when you look at kind of the numbers and then what happened, those 2 reasons are really the driver of the Q1 revenue being essentially flat on an operational basis year-over-year.

Operator

The next question comes from Tony Butler from Barclays.

Charles Butler - Barclays Capital

Two questions. First is 2 parts, it's on Prevnar. Prevnar 13 sequential growth remains extraordinarily strong in the U.S. Can you comment as to the number of previously vaccinated Prevnar 7 and since we're coming back for a 13 boost relative to the overall de novo vaccines that has instance that did not have a vaccination and then therefore getting 13. And part B of that question is, can you comment internationally on maybe new tenders that you want in the quarter or those that may be coming up? And then the second question involves manufacturing. As the LOE for Lipitor, the Lipitor or Torisel looms in the near future, question is, do you continue to operate the manufacturing process at full capacity given you will be supplying Cobalt or Watson product for volume sale? Or do you actually ratch that back? Any color you would provide will be very helpful.

Ian Read

Geno, do you want to take the Prevnar question?

Geno Germano

Yes, sure. Let me talk about first the catch up for Prevnar 13 in the U.S. The catch-up program has been a strong contributor to our growth both in 2010 and continuing into 2011. In the first quarter, about $90 million of our revenues were associated with catch-up sales. As time goes by, the additional revenues from catch-up will diminish as we continue to complete that program, but it should be a continued strong contributor for the remainder of this year. And then in terms of new tenders, we're in a pretty solid position with most of our major developed markets right now. We're seeing strong growth of actually the 7-valent in Japan with now new funding, government funding available there, and that's driving some significant growth in that country. We signed a 2-year contract in Mexico recently and a number of other smaller markets in the Emerging Markets.

Frank D'Amelio

And then on the manufacturing question, I think I'll start by saying, clearly, once Lipitor loses LOE in the U.S., we will be competing vigorously for those volumes not only in the U.S. but globally as it loses LOE in different countries. And from a manufacturing perspective, we clearly made assumptions around demand forecast and factor those into the manufacturing load. So that's the way we think about it.

Operator

Your next question comes from Tim Anderson from Sanford Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., Inc.

A couple of questions. A year and a half into the merger with Wyeth, SG&A isn't exactly going down, I know you've talked about a couple things keeping trends higher, but in 2011, it looks like it's probably going to be flat. If I look at the midpoint of your 2012 SG&A guidance versus the midpoint of the 2011 guidance, you're saying SG&A would be about $1.5 billion lower next year. And I'm wondering if you can categorize where that $1.5 billion in cost savings is going to come from exactly? And then second question is, if you decide that Established Products is not really part of the core or the future for Pfizer going forward, can that business really be carved out from the parent? I'm just trying to figure out what that would look like and how it would work. Is there a potential buyer for that business? Is it capable of standing on its own as a separate publicly traded company or what exactly?

Frank D'Amelio

Tim, it's Frank. I'll hit the SI&A question. Let me just start with the numbers for the quarter. So SI&A for the quarter was, give or take about $4.5 billion, up about 4% year-over-year from $43.50 or so in the year-ago quarter. Three things really driving that. So you've got the addition of King, you've got foreign exchange and then you've got healthcare reform. So that's the annual fee. The RX fee on the annual sales, which is a charge to SG&A. All those 3 items all in, are give or take about $170 million, which more than basically offset what the increase was. The slight difference is really from cost savings. Now, to run the numbers for the year, our guidance for the year on SG&A is about $19 billion to $20.2 billion is the range and then the 2012 target is $17.5 billion to $18 billion, and then to your point, if you take the midpoints, you're seeing a number that's coming down, give or take about $1.5 billion from '11 to onto '12 . The major categories there, and let me frame this, there is no one big ticket item. Let me just start this, it's not like some one big ticket item. It's really multiple areas of opportunity. And one of the things we'll have is we'll have some products that are going to be losing exclusivity. There'll be some marketing and sales and savings as a result of some this products that are losing exclusivity. Then there's lots of opportunities in the discretionary spend areas, whether it'd be things like consulting, non-employees, how we travel, so there's different buckets for each of those. We continue to generate savings from our integration efforts that will be generating part of those savings. So it's no one big ticket item. It's a bunch of different opportunity areas, all of which are being worked very aggressively inside the company.

Ian Read

So Tim, on your question on Established Products. All good questions, all really good strategic questions that we're in fact dealing with and thinking through as we go through this year. Certainly, we have the critical mass and the size of our Established Products in the Emerging Markets for the business to be a stand-alone if we want it to be or if we wanted to try and look at some sort of way of improving the capabilities of that organization to be more effective. I mean our thinking on this is clearly, how do we create more value for shareholders, what are the core capabilities needed to drive that business. If you actually look at our performance in Emerging Markets, we do very well on our legacy variance. We do very well on our Specialty. I would say that area that perhaps we struggle to compete against local companies is in the pure established brand products. In there, we're trying to step back and say, "We have a strategy that's based on multi-sourcing, from partners throughout the Emerging Markets." Is that strategy scalable? What is the best way of running that business? And so all the questions you asked are the questions we're trying to answer in the second half of the year.

Operator

Your next question comes from John Boris from Citi.

John Boris - Citigroup Inc

I just have a couple of questions. Ian, I think you'd indicated on the last conference call that you're going to be spending a fair amount of time with the R&D organization. What have you learned over the last quarter as you spent time with R&D? And as you look at R&D spend going forward, is there any additional room for firming of the R&D budget? Second question on Oncology, I think you're about to file certain Oncology assets. Can you maybe articulate whether axitinib and bosutinib are part of the those filings? And then the third question, especially in light, Ian, of your comments on bolt-on opportunities with the highest return for shareholders, can you help us understand whether you have the right business development process in place, especially in light of the some of the things that we see with the King transaction, most notably, the withdrawal of EMBEDA, REMOXY filing, et cetera to ensure that these things can be hired out before a transaction is actually hit on.

Ian Read

On the R&D organization I am very optimistic and enthusiastic about the organization. I think under Mikael's leadership we're getting an entrepreneurial sense into the organization with empowered, committed scientists that are focused on what I would call, making unstoppable products, shots in goal not shots on goal, very acutely aware of the resources being used and the payback necessary to continue getting those resources. On the spend, I think we did this R&D review that we did is part and parcel of the total strategic what we're doing of the other businesses. It's not different in any sense. So we arrived at an amount about funds we thought was appropriate to generate a return on investment of that innovative core. So I think the spend is right and we'll see as the performance comes through what the appropriate spend level is. Geno, do you want to answer the Oncology? And I'll come back to the bolt-on thing.

Geno Germano

Sure. Yes. It's an exciting time with the Oncology portfolio now. We're continuing to proceed with the rolling, filing for crizotinib in the U.S. And we have plans to file axitinib in the U.S. as well and are discussing bosutinib filings in both Europe and the United States.

Ian Read

And John, on bolt-on acquisitions, I think we have a rigorous process that goes through, identifies opportunities and we have been very selective in where we chose to play and we have stepped back when necessary and we've been very disciplined in the use of our funds. So I am pleased with the King acquisition. We were pleased when we acquired it. We remain pleased. It provides significant immediate value creation. It's accretive. It adds to our scale of both PC business, Primary Care business in the epiphan, reflector patch and when EMBEDA and REMOXY are launched it will add to those capabilities, it adds to our Animal Health business and to our E&P business. So I feel that we looked at the opportunities out there, this was a prudent acquisition, it was good value for money. We saw the risks in our due diligence on EMBEDA and potentially on REMOXY. And we took the decision based on the value we are acquiring at. So I feel that we have a very solid process.

Operator

Your next question comes from Greg Gilbert from Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

A follow-up on the King assets. Can you give us some color on when or whether EMBEDA will come back? And what's the manufacturing issue on REMOXY that you mentioned, and perhaps you could share your enthusiasm for that product and term of market. My second question, Ian, is bigger picture, do you think having a large portfolio of brands and generics including some very mature ones can help your new innovative product launches from a contracting point of view? Or do you not really subscribe to the product breadth and contracting muscle sort of playbook.

Ian Read

So on EMBEDA, I can't give you an exact date. We're still working through the manufacturing issues on that and on REMOXY and that cause in general I'm very encouraged by the opportunities given the REMS that just come out in the government's recognition of this, how important this area as in abuse deterrent and safety. So I think as a strategic play it's very important for us and medium to long-term will work out very well. And in regards the broad back portfolio, I'm a lot more inclined to look at it asset by asset and look at the clinical value that the asset delivers to the society, to the payer, to governments around the world. And I am really subscribed in today's marketplace to a breadth of portfolios being argument to get listings.

Operator

Your next question comes from David Risinger from Morgan Stanley.

David Risinger - Morgan Stanley

I have 2 questions for you, Ian. The first is if you could provide some more color on your comment about no big bang in terms of your strategic review outcome, do you mean to say that you're going to be making decisions one by one on the non-core assets and so that's why you said no big bang, or are you backing off at all from your recent discussions that you're interested in significantly downsizing Pfizer? And then separately, with respect to the innovative core, I'm hoping that you could provide a little bit more color on how you plan to boost Pfizer's productivity in the face of a variety of headwinds including size working against innovation. I know that you're doing some small partnerships with academic institutions, but that seems to be a small fraction of the spending and time of your R&D organization. It doesn't seems to be that there is a large effort on individual academic partnerships. And then one follow-up on that is just maybe you could comment on improving your culture and being able to do so in the face of stepping down the R&D spending.

Ian Read

Okay, David. So read the big bang. We remain committed to looking at all our businesses and I think we used the expression, no safety cows and we remain intent upon that. What I was trying to convey there is that, I don't expect in the second half to come forward with a fully mapped out announcement of dispositions and models that will direct the company for the next 5 to 10 years. That is the intent to get to that, and I think we will expect that over the rest of this year and some part of the beginning of '12, but certainly we will take decisions in the second half of '11 as regard to how we want to freight additional value for shareholders, vis-à-vis what we do and how we treat the non-core businesses. And we will get back to you in the second half on that. But you should not interpret my comments in any way as being a reluctance to take the decisions necessary to drive the innovative core. Vis-à-vis, the culture and how we're going to return productivity in R&D, I think it comes down to a lot of work we've discussed on creating the chief scientific officers for disease areas, empowering them, giving them the right incentive structure, giving them control over their budgets, it comes down to the quality of leadership that Mikael Dolsten will exercise over research. The quality of the leaders that we will hire and also utilize the leaders we already have inside the organization. We intend to look at a very strong incentive to the system to motivate entrepreneurial behavior in R&D. And we're focusing on key disease areas where we believe we have capabilities and the depth of science to be successful. So fundamentally, we think we've sized our research, sized the effort, sized the resources and focused it so it will be productive. And we will continue to work on that. And while I think the model we have is going to be successful, we will continue to review it and until we have metrics internally that will measure that on a sort of 6 monthly, yearly basis. And we're very, very focused on getting this model right and getting productivity.

Operator

Your next question comes from Chris Schott from JP Morgan.

Christopher Schott - JP Morgan Chase & Co

My first question is on the strategic review. It seems like several of the actions you could potentially consider if you were to break up pieces of your Pharma division could be associated with incremental near-term cost or dis-synergies. At the same time, it can lock a lot of shareholder value. I guess how do you think of the trade-offs as you consider opportunities to reshape the company? The second question on business development, obviously during your strategic review, are your various business units free to pursue transactions, particularly the larger bolt-on deals, the multi-billion dollar type of acquisitions? Or should we think about Pfizer pursuing a lower amount of activity as we go through this year?

Ian Read

Chris, so yes, I mean your characterization of the way we are looking at the innovative business and the diversified businesses are that we will look to see where there are natural synergies. Are there reasons why this work well together and improve our market presence or are they really stand-alone where there are no dis-synergies. We look at what we need to invest to maintain or improve market position. I'm trying to assess what is the competitive set against where we're competing and what is the probabilities of continued success in those businesses. All that comes down to our view of what is the net present value of the cash flows of those businesses. And what is their value inside Pfizer and what is their value outside Pfizer, and that will drive our decision-making on that. As regard to business development, each business unit is working in partnership with central business development resources to identify opportunities and bring them forward. A key component is I want to have accountability, I want to have BU leaders feeling responsible accountable for the deals that they propose. They will then take on those deals and manage them much in the way that the King deal is a good deal and the business units, that proposed it are responsible for the results of that acquisition.

Operator

The next question comes from Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank

First question is on Tofa [Tofacitinib], can you just make sure we understand, has there been any more deaths in any of the other studies that you just reported out on. I think we're all pretty clear based on the press release you put out on the prior study but there was 2 additional studies that were put out. So if you can comment on that and maybe just overall how you view the response out there and what's happening with Tofa? Second question is, just specifically, can you talk about Russia, did it bounce back this quarter, I know it was a tough quarter last quarter. And then in China, how are things looking specifically there, what kind of growth did you see in the quarter? And are you still actively investing as fast as you can there?

Ian Read

So Geno, would you want to take the Tofa?

Geno Germano

Yes, let me just talk about...

Ian Read

Then I'll ask between Frank and David to answer it.

Geno Germano

Sure. Yes. On Tofa, let me start by saying that the mortality rates that we've seen for Tofa across all trials are within expected range, the expected range for therapies, biologic therapies used in this patient population. So these are very large trials with patients with severe moderate to severe disease and mortality does occur in these trials. So we'll be reporting full results of all the trials at upcoming meetings, but you won't find anything that's unusual with regard to the mortality rates.

Ian Read

David?

David Simmons

Regarding the question for Brazil -- for Russia and China. For Russia, we did have a bounce-back this quarter from what we had last year and then the fourth quarter in particular. And it was underlying demand, was very good, specifically in China, things are going very, very well in China. we're currently the #1 ranked pharmaceutical company in the Chinese market and our evolution index is greater than 100. We continue to have targeted investments in this area. And we're very, very pleased with our progress and optimistic for future growth in China.

Operator

Your next question comes from David Maris from CLSA, Credit Agricole.

David Maris - Credit Agricole Securities (USA) Inc.

I'd like to ask what an evolution index is, but I'm not going to waste my valuable questions...

Ian Read

We'll answer it anyhow, right?

David Maris - Credit Agricole Securities (USA) Inc.

Okay. So separately, Ian and Frank, your discussions, maybe you could tell us, with your discussions with teams and payers, what are their biggest challenges right now that have implications on Pfizer, in other words, what are your customers telling you? And then separately, legislatively, is there anything in recent months that you're concerned about or less concerned about the pricing environment in the U.S.? And what do you think of the implications are for the legislation to de-fund the state health insurance exchanges. Are there any implications for the drug industry or for Pfizer?

Ian Read

So evolution index, that is a measure of, are you growing faster or slower than the market, so 100 would mean you're growing at the market rate, 500 is you're growing faster than the market, below 100, you're growing less than the market. So David's comment about China that we have a positive evolution index means we're growing faster than the market rate to date. The next question was on...

David Maris - Credit Agricole Securities (USA) Inc.

What the customers are telling us?

Ian Read

Our customers remain focused in sort of broad terms. They remain focused on ensuring that they have a competitive offering to their customers in regards to the quality of their healthcare and the cost of price of their healthcare. So to the extent that we participate in doing that where we add value to their offerings then we're going to be successful. And on the environment, really, I think it's very much in flux. We're working along the assumptions of the law that we have in place today. And we'll see how it develops as it develops.

Operator

Your next question comes from Steve Scala from Cowen.

Steve Scala - Cowen and Company, LLC

The recent EULAR Tofa abstract said it's 4 opportunistic infections. I'm wondering if you could tell us what the causative organisms were? And secondly, regarding Pfizer's relationship with Codexis for Lipitor intermediates, do you have an exclusive supply of ATS-5 from Codexis? And can you explain or would you explain, the difference between the 2 intermediates, ATS 5 and ATS-8 given the latter is not exclusive to Pfizer?

Ian Read

Okay, so on the Lipitor supply, I have to confess I do not have those details, Steve. We would try if we can get back to you on a separate information on those details around the Lipitor and the Codexis relationship, I really don't have any information on that. And the first question was ...

Geno Germano

Yes. Related to the 4 opportunistic infections, I cannot quote the pathogens, we'll be presenting that data at EULAR in a very short term so.

Ian Read

To reiterate, we've seen nothing.

Geno Germano

Yes, we didn't see anything unusual, but I can't name the pathogens.

Operator

Our final question comes from Seamus Fernandez from Leerink Swann.

Seamus Fernandez - Leerink Swann LLC

I'm just wondering, can you -- on the strategic review, Ian, when we kind of think about the difficulties of sort of breaking up the company and the way that the debt was structured. Is there anything that we should think about with regard to covenants for the debt and the ability to kind of restructure the debt associated with some of the potential movements going forward.

Ian Read

I'll ask Frank to answer that.

Frank D'Amelio

Yes. So I think Seamus, the short answer is no. Given how the debt is structured, we don't see that handcuffing our ability to make the right operational and shareholder value decisions relative to the business portfolio.

Charles Triano

Thank you, everybody, for your time this morning. I appreciate it. Goodbye.

Ian Read

Goodbye.

Operator

Ladies and gentlemen, this concludes the Pfizer's first quarter 2011 earnings conference call. You may now disconnect.

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