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Executives

Olivier Brandicourt - President of Worldwide Primary Care Business and General Manager of Worldwide Primary Care Business

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

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

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

Mikael Dolsten - Senior Vice President and President of Pfizer Worldwide Research & Development

Charles E. Triano - Senior Vice President of Investor Relations

Unknown Executive -

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

Amy W. Schulman - Executive Vice President, Corporate Secretary, General Counsel, Business Unit Lead of Pfizer Nutrition and Member of Executive Compliance Committee

Analysts

Charles Anthony Butler - Barclays Capital, Research Division

Steve Scala - Cowen and Company, LLC, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

David Risinger - Morgan Stanley, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Barbara A. Ryan - Deutsche Bank AG, Research Division

John T. Boris - Citigroup Inc, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Catherine J. Arnold - Crédit Suisse AG, Research Division

Pfizer (PFE) Q3 2011 Earnings Call November 1, 2011 10:00 AM ET

Operator

Good day, everyone, and welcome to Pfizer's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I would look to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.

Charles E. Triano

Good morning, and thank you for joining us today to review Pfizer's third quarter 2011 performance. I'm joined today by our CEO, Ian Read; Frank D’Amelio, our CFO; Olivier Brandicourt, President and General Manager of Primary Care; Michael Dolsten, President of 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 homepage, pfizer.com, by clicking on the link for Pfizer quarterly corporate performance third quarter 2011 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 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, November 1, 2011. With that, I'll now turn the call over to Ian Read. Ian?

Ian C. Read

Thank you, Chuck. During my remarks this morning, I will briefly recap some highlights from the quarter, provide an update on our capital allocation activities including where we are with the Animal Health and Nutritional strategic reviews, comment on some of the continued progress we're seeing in the productivity of our innovative core and close with a few comments about the external market and political environment we're operating within.

Overall, we delivered a solid financial performance for the quarter despite a challenging global operating environment and the ongoing impact from LOEs. And given our performance year-to-date, we have increased our EPS guidance range for the full year.

In terms of highlights for the quarter, our Emerging Markets business had a strong quarter, delivering operational growth of 12% with solid performance in key countries such as China, Russia, Turkey and India. All we know, these markets will continue to be volatile going forward. Our performance this quarter demonstrates the traction we are getting as a result of the investments we are making.

We saw strong performance this quarter from Lipitor in the U.S. We have worked hard to maximize the value of and best position the brand ahead of the LOE. We are well prepared as the November 30 LOE date in the U.S. approaches.

I am pleased with the continued progress of our Established Products business to penetrate the growing generics market both in developed markets as well as within emerging markets. Close to $1 billion of the $3.2 billion in total revenues for Established Products in both the Emerging Markets and Established Products unit came from Emerging Markets. Overall, the performance of our established product unit was strong, excluding the impact of LOEs experienced this quarter. I would also note our Established Products business has stepped in to help address recent drug shortages within the U.S., particularly in the area of off-patent oncology products.

In Specialty Care, our Prevnar franchise continues to do well. While sales performance in the U.S. reflected the tail end of the catch-up opportunity, we saw continued growth in most international markets. The underlying demand for Prevnar remains robust.

Animal Health, Nutrition and Consumer all turned in strong quarters. Operationally with Animal Health growing 15%, Nutrition growing 24% and Consumer growing 11% over the same quarter last year. And in Japan, our second largest market, we generated 19% operational growth company-wide.

And we continue to see the benefits of our process improvements and cost reduction work this quarter. We are finding new ways of doing business that we believe will further enhance our competitiveness by using fewer resources without compromising our ability to operate. Our recent example as we work underway to globally consolidate certain commercial operations, including such activities as market research, data analytics and training. Frank will take you through the details of the quarter, but I would sum it up as a quarter we performed well despite significant headwinds resulting from LOE that amounted to approximately $950 million and the uncertainties created by the economic trouble experienced most visibly in Europe.

Next, I will turn to the activity we have underway to enhance shareholder value. We started the year sharing with you the steps we would take to allocate our capital in ways that enhance shareholder value. This quarter, we took another significant step in delivering on this goal by repurchasing more than $2 billion of shares. This brings our year-to-date total to $6.5 billion. And today, we've increased our full year share repurchase projection to between $7 billion and $9 billion. Additionally, we began the year with a projection that we would achieve a dividend payout ratio of approximately 40% in about 2 years. We remain committed to that goal.

Regarding the decision to explore strategic alternatives for Nutritional and Animal Health businesses, we are making solid progress in the initial work required to support the form of separation for each that will yield the greatest after-tax return for shareholders.

Our planning and prepared reactions remain on track and we'll be in a position to announce our strategic decision in 2012 for each business with any separations occurring between July of 2012 and July of 2013.

Following the potential separation of these businesses, Pfizer will be a global biopharmaceutical company composed of innovative commercial units that are supported by an efficient R&D organization. We're going to Established Products business that is well-positioned in terms of geography and product portfolio and which generates strong operating cash flow, and a Consumer Healthcare business that brings a deep knowledge of consumers and pharmacists.

Going forward, the innovative core will play a significant role in Pfizer's future, and I believe the steps we are taking to improve our performance here are paying off.

We are seeing good results across each of our biopharmaceutical units in terms of new products that are approved, in registration or close to filing. In oncology, we launched Xalkori in the U.S. and submitted for approval in Europe and Japan. We also submitted axitinib in both the U.S. and Europe.

In Specialty Care, we are pleased with the results we have seen with tofacitinib in the Phase III Rheumatoid Arthritis program and continue to anticipate accepted filings in the U.S. and Europe and a filing in Japan before the end of this year.

Just last week, we received approval in Europe for Prevnar 13 in adults aged 50 and older for the prevention of Invasive Pneumococcal Disease. And here, in the U.S., we continue to anticipate a decision early next year.

In Primary care, the submission for Eliquis for stroke prevention and atrial fibrillation was validated for review in Europe last week. And our partner, Bristol-Myers Squibb, expects to have an accepted filing in the U.S. for this indication by the end of the year.

While these 6 compounds are the near-term drivers of our innovative global commercial units, I am encouraged by the next wave of compounds and additional indications that is emerging behind these in our pipeline. We have a robust combination of new molecular entities that include biologics, small molecules, large molecules. If successful, they will transition into our commercial units.

In oncology, we have 2 Phase III compounds, dacomitinib for nonsmall cell lung cancer and inotuzumab for progressive non-Hodgkin's lymphoma. We also see potential opportunities to further expand Xalkori within the nonsmall cell cancer segments.

We have recently started registration studies for our meningococcal B vaccine, with a pivotal study expected to commence in the near future pending trial design discussions with the FDA.

In Alzheimer's, we continue to progress our Phase III program for bapineuzumab. In the area of immunology, we are advancing our clinical development program for tofacitinib and plan to initiate Phase III trials in ulcerative colitis and a Phase II trial in Crohn's disease during 2012.

We also have an expanding portfolio of anti-inflammatory drugs in Phase II with novel biological programs in inflammatory bowel disease. And we have a cholesterol reduction compound for hypocholesterolemia that is in Phase II and a combined Phase I/II vaccine for staph aureus.

Regarding the assets we've acquired from King, many of the King product are doing well, such as EpiPen, FLECTOR Patch and Skelaxin. For REMOXY and EMBEDA, we are continuing to make progress in the pharmaceutical sciences and manufacturing characterization of those abusive opioid compounds.

Concerning EMBEDA, we are committed to returning it to the market as soon as the stability issue is resolved. We are actively progressing 3 possible pathways and we have several key decisions pointing -- sorry, several key decisions during 2012 that will determine the necessary corrective action, as well as the timing for reaching out to regulatory authorities.

For REMOXY, there are also several key decision points over the next several months that will determine the timing and nature of our response to the FDA's complete response letter.

Overall, we are making solid progress. I am confident in our ability to further strengthen our mid-stage pipeline. The work our R&D organization is doing to increase its productivity and share risk is gaining traction. We are spending smartly, eliminating nonproductive spending and instilling a great ROI mentality driven by our Chief Scientific Officers.

Finally, I want to acknowledge that there exists uncertainty around macroeconomic issues given the super committee deliberations and continuing issues in European economies.

Regarding the budget goals of the super committee, we believe that the pharmaceutical industry has contributed substantially already and we anticipate this will be recognized. In Europe, pricing pressures remained consistent with what we've experienced last quarter. We are seeing mid-single-digit reductions and are assuming this level of impact going forward.

In terms of balance sheet assets, we have minimal exposure to Portugal, Italy, Greece and Ireland. I believe we are positioned as best as we can be given what we know at this time. We continue to have strong financial flexibility and we will monitor the situation closely.

In summary, I remain optimistic about the opportunities we have and the pace of change I see within our R&D organization. In particular, the entrepreneurial spirit, the collaboration between commercial units and research and the genuine can-do attitude I observe when spending time with our colleagues. There is a more tangible sense of urgency, confidence and commitment that I believe will serve as a foundation to enable Pfizer to deliver meaningful increases in value for our shareholders overtime. Now I will turn it over to Frank for additional details on the quarter

Frank A. D'Amelio

Thanks, Ian. Good day, everyone. As always the charts I'm reviewing today are included in our webcast. Now let's move on to the results.

Revenues of about $17.2 billion increased 7% quarter-over-quarter, which reflects operational growth of $247 million or 1% and the favorable impact of foreign exchange of $951 million or 6%. The 1% operational growth includes the addition of King products, which favorably impacted revenues by $353 million or 2%, which was partially offset by the unfavorable impact of U.S. healthcare reform of $151 million or 1%. In addition, we continue to absorb the impact of the loss of exclusivity of several products in certain geographies, which in the third quarter, negatively impacted revenues by approximately $950 million or 6%.

Reported net income and reported diluted EPS were favorably impacted by the $1.3 billion after-tax gain on the sale of Capsugel in Q3 of '11. The nonrecurrence of $1.5 billion and pretax impairment charges and a $701 million pretax charge for litigation both occurring in Q3 of 2010 and increased revenue compared with Q3 of 2010. And we're unfavorably impacted by the loss of exclusivity of certain products and increased expenses incurred for cost reduction and productivity initiatives.

Third quarter 2011 adjusted cost of sales as a percentage of revenue was 19.3% compared with 17.8% in the year ago quarter due primarily to the negative impact of foreign exchange and a shift in product and business mix. Excluding the impact of foreign exchange on revenue and cost of sales, adjusted cost of sales as a percentage of revenue was 18.7% for the quarter.

Adjusted total cost increased 3%. However, excluding the negative impact to foreign exchange, cost related to legacy King operations, healthcare reform and the Puerto Rico excise tax, adjusted total cost decreased by approximately 5%, primarily due to our ongoing cost-reduction and productivity initiatives.

Adjusted income increased 11% year-over-year due to increased revenues, which reflects the favorable impact of foreign exchange, which was partially offset by a loss of exclusivity of certain products and increased cost of sales due to a shift in products -- in product and business mix.

Adjusted diluted EPS increased 15%, which included a $0.02 benefit from the decline in the number of shares outstanding. As I previously stated, foreign exchange positively impacted third quarter revenues by $951 million or 6% and negatively impacted adjusted total cost by $541 million or 6%. As a result, foreign exchange favorably impacted adjusted diluted EPS by approximately $0.04.

As I mentioned previously, in the third quarter, we experienced total operational growth of 1% driven by: growth in the Emerging Markets, Consumer Healthcare, Animal Health care and the Nutrition businesses, growth for certain key products, the addition of King products and foreign exchange. And again, I want to point out that in the third quarter, we continued to absorb revenue declines as a result of the loss of exclusivity of certain products in several geographies. The impact this quarter was approximately $950 million.

Third quarter revenues generated from both biopharmaceutical and other businesses in Emerging Markets increased 21% year-over-year and biopharmaceutical revenues grew 12% operationally in those markets. It's important to note that over the same period, Brazil, Russia, India, China, Mexico and Turkey contributed a combined 53% of the overall growth in Emerging Markets. And revenues from the Biopharmaceutical businesses in the BRIC-MT markets grew 13% operationally to approximately $1.1 billion.

In addition, year-to-date, biopharmaceutical revenues in BRIC-MT markets increased 9% operationally to $3.2 billion. Finally, enterprise-wide revenues generated by sales in Emerging Markets totaled approximately $3.4 billion in the third quarter.

Based on year-to-date performance and outlook for the remainder of 2011, we are increasing our adjusted diluted EPS guidance range to $2.24 to $2.29 from $2.16 to $2.26. In addition, we are narrowing the range of the components of our 2011 financial guidance, including raising the lower end of our revenue guidance.

As expected, our cost of sales in the fourth quarter will reflect the impact of the seasonal uptick we typically experienced during the quarter and Lipitor's loss of U.S. exclusivity on November 30.

In addition, our expected SI&A expenses for the remainder of the year will include the impact of increased spending in connection with the launch of Xalkori, prelaunch expenses for anticipated new products, seasonal spending patterns and the continued spending to support the Lipitor brand pre and post its loss of exclusivity to maximize its value.

Given our continued confidence in our future business performance, we are reaffirming all elements of our 2012 financial targets. I want to point out that we continue to expect our 2012 target range for adjusted operating margin to be in the high 30s to low 40s percentages. And we expect the negative impact on our cost of sales due to shifts and product and business mix to be mitigated by the continuing benefits of our productivity and cost reduction initiatives.

Finally, moving on to key takeaways. We delivered solid quarterly financial performance despite the continuing -- the continued challenging global operating environment and the continued impact from the loss of exclusivity of several key products.

Based on our year-to-date performance and outlook for the rest of 2011, we are updating the components of our 2011 financial guidance, including increasing our adjusted diluted EPS guidance. We're continuing to improve the performance of our innovative core, making significant advances in our mid- to late-stage pipeline, and we now anticipate repurchasing $7 billion to $9 billion of our shares in 2011.

In fact, during the third quarter, we repurchased $2.1 billion or 112.9 million shares. And to date, we have repurchased approximately $6.5 billion or 331.6 million shares. We have remaining authorization to repurchase up to $2.5 billion more of our shares under the current Board approved repurchase program, and we're positioning the business to continue to deliver shareholder value overtime. With that, I'll turn it back to Chuck.

Charles E. Triano

Thank you, Frank. And, operator, at this point, if we 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., Research Division

A couple of questions. First, on Lipitor. Frank or Ian, if you could provide a little bit more color on how you see the 180-day exclusivity period play out for you. Specifically, what your intelligence is telling you on Ranbaxy, if Ranbaxy indeed will be on the market on time. And number two, Watson just told us that they expect that you would retain about 40% market share and just wondering if you could provide a little bit of color around that. And is most of that being driven by the mail-order business, or is that part retail, is it a mixture of both? That would be my first question. And my second question relates to capital allocation, $7 billion to $9 billion in share repurchase is a huge number, and congratulations. Just was wondering, though, if that is the sort of rate of repurchases that we should now come to expect given your very strong cash flow going forward.

Ian C. Read

So thank you, Jami. On Lipitor, I'm going to ask Frank to answer most of the questions. But I'd like to point out that we have addressed the Lipitor LOE very seriously. We've put in a lot of, I believe, very good programs to continue to support it, to drive brand loyalty, negotiating with payers in the distribution channel, and we're trying to build a strong pre and post plan. So I'd ask Frank to add some comments and perhaps Olivier.

Frank A. D'Amelio

Right. So on the first part of the Lipitor question, Jami, we're assuming that Watson will enter the market upon LOE. We're also assuming that Ranbaxy will enter the market upon LOE. The LOE obviously being November 30 of this year. And we assume that 180 days from when Ranbaxy enters the market, there will be multiple players that enter the market as well. So that's the assumption on what we're assuming relative to the 180-day window. Olivier?

Olivier Brandicourt

Yes, thanks. I can add that we are continuing to promote Lipitor in order to maximize the vital opportunities, as Ian said, on both pre and post-LOE. You probably have seen in the third quarter, we have reported Lipitor U.S. brought at about 13% and primarily as a result of the promotion, which is based on higher risk patient targeted DTC Lipitor $4 Co-Pay Card which we have launched in December last year. And a new program we launched recently in September called the Lipitor For You program, which includes normally assisted Co-Pay, but also a very targeted program in support of the patient. So we also have partnered, to your point, with some customer, so their patients can remain or even begin taking branded Lipitor. And we are continuing to explore opportunities to partner with the others. So we definitely supporting the brand again and maximizing the brand pre and post-LOE.

Frank A. D'Amelio

And then on the capital allocation question on the $7 million to $9 billion, let me run some numbers, Jami, and then I'll answer your question. So year-to-date now, we repurchased $6.5 billion worth of our shares, almost 332 million shares. This past quarter, $2.1 billion worth of our shares, 112.9 million shares. We increased our target in terms of repurchases from what was $5 billion to $7 billion from $7 billion to $9 billion. So that's all the numbers for this year and then what you're really asking about was what about going forward? And the way I'll answer that question is buybacks have been and will continue to be one of our priorities to capital allocation, but we have other priorities. The dividend is another priority. Bolt-on acquisitions is another priority. Investing in the business is another priority. And how we handle our debt and then finally, how much cash we repatriate. So I don't want to forecast what we're going to do or not do specific to buybacks going forward because I don't view that as an or, it's an and, relative to everything else that we do on our capital allocation.

Ian C. Read

So that being said, I think we have a track record, especially this year, of showing that we acutely focused on shareholder value and we'll take those decisions as the situation evolve to make those decisions in the best interest of shareholders.

Operator

The next question comes from Catherine Arnold from Credit Suisse.

Catherine J. Arnold - Crédit Suisse AG, Research Division

I was wondering just if you can give some more color on the Lipitor expectations in terms of share retention and contracting. Did you have those expectations whenever you originally gave us the 2012 guidance? And then I wondered if you could give us a little bit more color on the tax rate and if there was repatriation activity that might have also been an explanation for the higher tax rate and how we should extrapolate that in the longer term?

Ian C. Read

Can you do that, Frank?

Frank A. D'Amelio

Yes. So in terms of the tax rate, let's say, maybe the way I'll answer that, Catherine, is the adjusted rate for the quarter was 30.9%. Last year, it was 30.2%. So what caused the increase was really a change in the jurisdictional mix of our earnings, which was partially offset by the extension of the R&D tax credit. So that's kind of what happened on a quarter-over-quarter basis. In terms of going forward, we forecasted for this year, we reaffirmed our approximately 29% and we did that for next year as well. So at least for the remainder of this year and for next year, assume the tax rate continues to be approximately 25%. Beyond 2012, I think it's just -- it's pretty premature to try to say given the kind of the various financial challenges that are in numerous places in the world today and then the economical challenges that go along with that. So I think 29% for next year. Beyond that, I think too soon to tell. And then you mentioned repatriation. So let me comment on that not in terms of anything extraordinary that we did this quarter. It was really mix of earnings this quarter. But in terms of just repatriation, I want to bump it up a level and really describe it as -- we think tax reform debate, the debates will continue. We have been and will continue to be proactive in those debates, and Pfizer supports any comprehensive tax reform that will make U.S. multinationals more competitive internationally. So that's how I did the questions, Ian?

Ian C. Read

Thank you. And Lipitor, in the forecast?.

Frank A. D'Amelio

Yes. In terms of the forecast. That was all incorporated, factored into our existing 2012 targets.

Operator

The next question comes from Chris Schott from JPMorgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

First question with -- sort of regards to crizotinib. Can you just talk about your expected uptake of ALK testing and what's the launch trajectory you're thinking about for that product? And the second question, not to focus too much on Lipitor, I know we've had a bunch of questions on the U.S., can you still discuss the erosion that you're anticipating when we think about your presubstantial developed Europe and developed rest-of-world businesses for Lipitor as we look out to 2012?

Geno J. Germano

Yes, Chris. This is Geno. I'll speak to Xalkori. [indiscernible] we just launched in August. We're off to a good start. While it's early in the process, we're excited by the feedback we're getting from clinicians, and we're seeing patients administer the drug on a pretty broad-base across cancer centers around the United States. There's significant traffic on our website, et cetera. So the early indicators seem to be positive. In terms of the testing, NCCN guidelines were updated within 2 weeks of the launch of crizotinib, recommending routine testing for ALK. There's about 140 centers, testing centers around the country that have the capability to do ALK testing and they're being converted to the now FDA-approved test methodology. So we see the progress moving according to expectations and it's early. We'll see how things go from here.

Ian C. Read

Olivier, do you want to comment -- thank you, Geno. Do you want to comment on Lipitor x U.S.?

Olivier Brandicourt

Yes. Sure. So we achieved about almost $600 million in developed Europe in revenues but we're down about 16% operationally. And the main driver of the European revenue decline is in fact the LOE in Spain, which represented around $53 million, which was driven by a combination of mandatory price reduction and also, to your point, a generic volume erosion. So the sales erosion in Spain has been much more rapid than previous LOEs in Europe given the payer pressures in many regions of Spain. So we have been able to increase the volume in some countries. However, the revenue decline is also being impacted by other countries in Europe due to mandatory price reductions this year. And I'm thinking about Italy, where we have faced a 20% price reduction in January, and Ireland, which you may know, we faced an average price reduction of 35% also in January. So again, we are growing in some country by volume. Italy, despite what I just said, actually grew volume but 8%. France and Belgium by 3% and 4%. And other smaller countries. So that's the summary of this situation.

Ian C. Read

So overall, what I think Olivier is describing is in fact, we're taking some hits on Lipitor ahead of the LOE in '11. Overall, we expect the -- we do have patent -- or pediatric patent extension in the major countries in Europe. So we're not expecting to see the LOE of Lipitor until mid-'12 in the major countries. Japan has in fact -- the patent has expired, I believe, on Lipitor, although there's been no generic entries. We would expect a generic entry at the back end of '11 in Japan. And would expect the performance in Japan on Lipitor to be similar to what we experienced with our other products in Japan when they, like Norvasc, when they go LOE, which is certainly a decline a lot more limited than Europe or any other of the developed markets.

Operator

The next question comes from Tim Anderson from Sanford Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

A couple of questions. The $1.5 billion in SG&A that you're guiding for the reduction end and going from '11 to '12, can you kind of rank order the biggest buckets of savings, or is this the sort of thing where there's no big discrete buckets but instead it's just a smaller contraction across a very broad base of business functions? And then second question is when can we expect Pfizer to give guidance that extends beyond 2012?

Ian C. Read

Please, Frank.

Frank A. D'Amelio

All right. So on the first question, the way I'd answer it, Tim, is there's no one big silver bullet on the SI&A. It's really just, I'm going to call it a series of numerous items, lots of blocking and tackling that cover multiple areas. Ian mentioned some in his opening remarks relative to things we're doing to streamline the organization, which will improve our cost structure. We're looking at how we spend advertising dollars and promotion dollars. We're looking at our spend on consultants, travel and living, our systems environment and the various opportunities that we've been generating and that we will continue to generate on a going-forward basis. So there is no one single item, it's a host of items. The other thing I should just mention in terms of our cost structure is headcount. If you look at our headcount this past quarter, our headcount was 106,500. At the beginning of the year, we were at 110,600. At the end of 2009, which was the year after we closed Wyeth, we were at 116,500. So if you go from the end of '09 to where we ended up the quarter, we were down over 10,000 people. If you look at when we announced Wyeth in January of 2009, the combined companies had 130,000 people. We said we -- well, we could reduce the workforce by 15% in about 3 years. At the end of this past quarter, we're at 18% in less than 2 years, just -- it will give you a feel for the rhythm of the numbers and how that drives through our core structure. So that's how I'd answer that. In terms of when you can expect guidance beyond 2012, obviously our next earnings call will be early February. We'll provide an update on 2012. Beyond 2012, quite frankly, our objective is to generate consistent, steady, sustainable earnings growth over time, which we believe will create shareholder value consistently over time and that's what we're all about doing.

Ian C. Read

Thanks, Frank. I would just add to this expense issue that we have taken steps in the U.S. with the upcoming LOE of Lipitor to readjust our sales force. And we are also moving to readjust our infrastructure in Europe at a fast pace as we look at Europe Primary Care scenario over the next few years. But more to the point, we are creating inside Pfizer a real ownership culture of the expense base. And this is -- this decision to move our expenses and get them in line with our revenue is one that the whole ELT has taken on. And I feel very confident we'll be able to manage our expenses appropriately.

Operator

Your next question comes from Greg Gilbert from Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

First, another Lipitor-U.S. question. Maximizing a brand past LOE to the extent suggested by Watson and I think supported by your comments today is somewhat unprecedented. So my question is, is this a bridge to an OTC strategy or other strategy for which brand -- the brand equity matters? Or are you simply trying to maximize profits over a 6-month period? And secondly, for Frank, wondering why the factors that allow you to overachieve 2011 earnings per share don't flow through to a higher outlook for 2012 or should we not read too much into your simply reaffirming 2012 yet?

Ian C. Read

Thanks for the question, Greg. On the Lipitor, most of the focus is on ensuring the brand has a robust performance in the rest of '11 and the first 180 days of its loss of exclusivity. Clearly, there is an intent at some point to try and have an OTC version of Lipitor on the marketplace. I think the brand Lipitor is strong. And these actions we're taking, they are not specifically directed towards strengthening any potential OTC brand in the future.

Frank A. D'Amelio

And then, Greg, in terms of the '11 to '12 EPS number, so let me run the numbers and I'll answer the question. So we raised the EPS guidance this quarter for the year from $2.16 to $2.26 to $2.24 to $2.29. Next year, the EPS number is $2.25 to $2.35. So that's earnings growth despite the fact that we have the Lipitor LOE in the U.S. on November 30 of this year. We get the full year effect of that next year. So to grow earnings despite that, there's lots that we're going to be doing next year. It's growth of some of our in-line products, growth of new products, growth in Emerging Markets, growth in our diversified business, significantly lower SI&A and R&D expenses, continuing to leverage our balance sheet as appropriate. So no, I don't think you all should read anything negative into the 2012 numbers quite frankly. I think those 2012 numbers are quite balanced given what we're -- given the LOEs that we will continue to have to address on a going-forward basis.

Ian C. Read

Thank you, Frank.

Operator

The next question comes from David Risinger from Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

My questions are for Mikael Dolsten. First, Mikael, if you could please discuss the meningococcal B vaccine Phase III program? Specifically, there is a 7,500-patient trial in 11- to 25-year-olds that has safety as the primary endpoint. Could you discuss the safety issues you're scrutinizing? And also what your target age population is for commercialization? And then my next question is a little bit broader, just hoping to get your perspective on the key clinical trial results to focus on in 2012 for Pfizer and what you're most optimistic about seeing?

Ian C. Read

Mikael, you could take those questions.

Mikael Dolsten

Yes. So thank you for your interest in the meningococcal B vaccine. And we previously have reported that we have a vaccine based on 2 unique structures that we have isolated. And we showed in the Phase II studies a very good tolerability in the adolescent population, and I've previously stated that it looks like it's performing very well when it comes to immunonicity (sic) [immunogenicity] and tolerability versus competitors start using infant using mening B as a target vaccine. We have, as Ian commented in his introduction, start on studies of the registration package while growing the final phase of discussing with the FDA concerning the surrogate endpoint and trial design for the larger pivotal Phase III studies. We remain encouraged about the importance of a mening B vaccine to provide effective prevention for a fatal disease and we think we have a strong data package so far and good trends moving forward.

David Risinger - Morgan Stanley, Research Division

The second part of the question, Mikael, is 2012, things we're looking forward to?

Mikael Dolsten

Yes. Speaking about the pipeline and I think Ian shared with you our enthusiast for the late registration pipeline drugs there and the 6 kind of particular drugs moving forward in -- towards registration or to the market. In all of our 5 core areas, we have a very robust portfolio. And I'll just give you a couple of highlights. Oncology beyond axitinib or Xalkori, we have first-in-class inotuzumab for non-Hodgkin's lymphoma. We have an opportunity to expand in traditional B cell malignancies. Dacomitinib has been reported previously for proof of concept is now in Phase III. And we have also some very intriguing best-in-class mTORPl3k (sic) [Pl3k/mTOR] rights, an area which has shown a very interesting efficacy in select breast cancer segments. In the immuno-inflammation, you've heard that we extend tofacitinib into ulcerous colitis due to encouraging data so far, into Phase III studies we're moving now. And also we'll assess optimal use of tofacitinib in Crohn's in Phase II. We have also first-in-class MAdCAM antibody and best-in-class IL-6 antibodies for IBD and several other programs, which will also open into new areas of immuno-information such as Lupus. [indiscernible] beyond Eliquis and our excitement for A-fib and stroke, we have encouraging clinical data for PCSK9 and removing that antibody forward in Phase II. We have received also good clinical signs for unique glucokinase activators and novel PV5 inhibitors for diabetic nephropathy. In the vaccine area, you are aware of that beyond mening B, we have a staph aureus program that we think is industry leading in its profile and we have a combined Phase I and II study ongoing. And neuroscience pain, inotuzumab with our partners is moving forward. We have additional novel entries in the pipeline for [indiscernible] inhibitor for cognitive impairment and also base program. And in the pain area, we are moving a nice compound effort in the NaV 1.7 space, which is a high-profile target for the industry. So these are our 5 core areas but it's a broad pipeline. We have exciting assets also in niche areas, including wet and dry AMD. And I hope this gave you a kind of a perspective of a balanced robust, pipeline coming behind the major programs that Ian introduced you to.

Ian C. Read

Thank you, Mikael. I believe on mening B, our main focus on the adolescence, which are the carriers in that population. So that's extremely important and that's a differentiation with [indiscernible] which is more in pediatric.

Operator

Your next question comes from Steve Scala from Cowen.

Steve Scala - Cowen and Company, LLC, Research Division

I have 3 questions all related to Alliance revenue. First, can you please tell us the months when the Spiriva co-promote ends in key EU markets during 2012 and 2013? And at what markets in 2014 -- or what months in 2014 does it does it expire in the U.S. and Japan? Secondly, what is the origin of the dispute with Merck Serono over whether Rebif co-promote terminates in 2013 or 2015? Is it simply vague language in the contract or is it something else? And then the third question is, is there any chance to extend the co-promotes for either Spiriva or Enbrel or should we assume there is no chance of that?

Ian C. Read

Oliver, would you like to take the first question?

Olivier Brandicourt

Yes. I'll answer the Spiriva question. We have 10 years contract with BI. And the termination date in fact differs country by country because it is calculated from the launch date in each country. So what you are going to see is a graduated decline in revenue during the year 10 of the contract for all countries with no additional revenue being in year '11. So in Europe, we will begin contract exits in 2012 and 2013. And You mentioned U.S. and Japan and the contract exit there is actually planned for 2014. And the last countries, we exit the contract in 2016. And to answer the second part of your question on Spiriva, I think you have to assume that there is no continuation of the contract beyond 2016.

Ian C. Read

Thank you, Olivier. Amy, would you like to answer the question.

Amy W. Schulman

With respect to Rebif, as you know, Serono filed a lawsuit in Philadelphia contesting the terms of the contract. We were very pleased that the court agreed with our interpretation. And other than that, given the pendency of the litigation, I don't think we should comment on the contract terms.

Ian C. Read

Thank you. I think that was the...

Steve Scala - Cowen and Company, LLC, Research Division

The Embrel question.

Ian C. Read

Yes. Geno?

Geno J. Germano

Yes. I mean, the Enbrel partnership would end. It's been a very, very successful partnership, and the term expires in October 2013. We have no current plans to extend that partnership.

Frank A. D'Amelio

And we have 13 months immediately thereafter where we receive our royalty, although it's obviously less than [indiscernible]

Ian C. Read

36 months. Right.

Operator

Your next question comes from Tony Butler from Barclays Capital.

Charles Anthony Butler - Barclays Capital, Research Division

The questions are 2 and they're around Prevnar and Animal Health. The first is on an international basis, strong quarter-to-quarter growth, could you comment on tenders, which may have been won? And then second, as we think about and try to frame the adult indication next year without the results of the CAPITA trial, how should we think about that adult indication rolling out? Will it be initially slow? And moreover, when CAPITA reads out even before label change, would you not assume that the uptake would become very -- relatively quick because that information would clearly be unique, extraordinarily unique to a pneumococcal vaccine? And then my second question on Animal Health is if you take out the King assets, the U.S. growth would actually be down. Is there something fundamentally in the U.S. with respect to Animal Health given the very strong demand x U.S.?

Ian C. Read

Geno, could you to the Prevnar, please?

Geno J. Germano

Sure. On the quarter, strong international results actually were up 21% for the quarter and international is up even more. Most of the gain has come from continued penetration of the Japanese market with Prevnar 7. The Turkey NIP that began this year and we've initiated distribution in the GAVI countries. We won back 2 key provinces in Canada. We have the South African NIP. And then about 3 or 4 other important NIPs, but it's broadly spread across really around -- across the world. And then I think the question on Prevnar 13, adult uptake with the approval in Europe. First step is to secure pricing and to rollout the introduction of the adult indication throughout Europe. We were particularly pleased to see the regulators in Europe recognize the preferable positioning of the 13 valent conjugate vaccine ahead of the use of polysaccharide vaccine. We think that will be an important part of the labeling and the positioning of the product in European countries. And once the CAPITA trial data are available, assuming they're positive, we think that they will be well-recognized in the infectious disease community and we will work quickly with regulators to incorporate that information into the labels across Europe.

Ian C. Read

And with regard to Animal Health, Animal Health was up I think as you said 15% operationally. 10% was due to King and 5% was due to legacy Pfizer. And I believe, in fact, the U.S. was not down but very slightly up when you extract King. So overall, there's no particular reason for any concerns about the business in the U.S. It continues to be strong and progressing along the lines we expect.

Operator

Your next question comes from Seamus Fernandez from Leerink Swann.

Seamus Fernandez - Leerink Swann LLC, Research Division

So just 3 quick questions. First, maybe if you guys can comment on the very strong performance of the Nutritionals business, anything specific to the strong third quarter versus the slower first half? Second, maybe for Ian and can you just give us how we should think about the restructuring of Animal Health and Nutri? The use of proceeds as you kind of think about it historically, you commented on that as the stock in sort of the right of first passage, as well as the influence of tax on the strategic decisions there. And then lastly, for Mikael, on bapineuzumab, can you just update us on when we should expect to actually see the first data reported out from the venture with Johnson & Johnson in the [indiscernible]? And if there is any chance that subgroups such as prodromal patients or early AD patients could be used to allow approval?

Ian C. Read

Okay. So the first question was on the...

Amy W. Schulman

Strong Nutri performance.

Ian C. Read

Strong Nutri performance. If you'd like to answer that please.

Amy W. Schulman

Sure. So thank you and this quarter's performance is indeed a demonstration of the focus and the commitment that our Nutritional colleagues have shown around the world. And I think a few things contribute to the very strong operational growth we had. The first is strong performance in some of our key geographies including Africa, Middle East and China, a greater demand in the market for some of our premium and superpremium products. We launched ILLUMA in China and the reformulated premium Gold line. And then throughout the Pfizer Nutrition key markets, we had a number of other product launches. So I think those 3 factors really contributed along with the focus of our workforce on the strong quarter we had.

Ian C. Read

Thank you, Amy. And certainly the management of that BU and the focus of the BU has brought to bear, has been instrumental in these very good results. Regarding the disposal and the restructuring, we look at the monetization of both the Nutritional and Animal Health on an after-tax basis. We need to maximize the after-tax value of that. And the proceeds that we get from that as you've said and as I've said before, the case to beat is share repurchase. Clearly, we would like to do and we look -- we continually look for bolt-on acquisitions of high-quality assets that would accelerate top line growth. But those acquisitions have to beat the base case of a buyback of shares and the impact that has on the company.

Operator

Your next question comes from John Boris from Citi.

Ian C. Read

Before we go to that actually we'll answer the question about bapineuzumab. I apologize, John. Give us a sec.

Olivier Brandicourt

Yes. On bapi, there is actually no new news of program and [indiscernible] that is continuing. You may remember as of last year, J&J announced that the 2 [indiscernible] North American study will be completed by mid-2012 and there is no change to that schedule. And the 2 international studies, which Pfizer is responsible for is the study 3,000 and 3,001 continue unroll and we'll be reporting in 2014. Now regarding specifically the per normal aspect, we are discussing that within the alliance but there is nothing to report at this point.

Ian C. Read

Thank you, Olivier. Let's go back to John. Sorry for making you wait, John.

John T. Boris - Citigroup Inc, Research Division

Ian, when you first had taken over, you'd indicated you're going to be spending a lot of time with Mikael Dolsten on R&D productivity. We've seen quite a few press releases come across on that front. Can you maybe just help us understand the progress that you've made to date? What additional things you have to do incrementally to improve productivity and what metrics are you using to grade yourself on whether you're improving that productivity? And then I have a follow-up question for Olivier.

Ian C. Read

Okay. Do you want to give us the Olivier question now, John?

John T. Boris - Citigroup Inc, Research Division

Sure. Olivier, you articulated that pricing in some of the markets like Italy, Ireland down 20, down 35. In France, in particular there's certainly been some rumblings about price cuts also in the French market. Just any thoughts on what the impact on pricing could be out of that market?

Olivier Brandicourt

I can answer that question quickly. Given the macro economy condition and to your point, Europe has been experiencing increased pricing pressures in several countries, including the one I just mentioned. In the past, we have extremes about 2% to 3% of the price decline in Europe. And we are now experiencing mid-single-digit price decline which we believe will continue throughout this year and certainly for the foreseeable future. So we continue to monitor the situation very closely and I think that's it.

Frank A. D'Amelio

And if can just add to that. That's the assumption that we've made not only for the remainder of 2011 in our guidance but also through 2012 financial targets, which is mid-single digit pricing pressure continues in developed Europe.

Ian C. Read

So I'm going -- John, thanks for the question on research. It's one of the, I believe, most important things we have to focus on in the next 2 to 3, 4 years. Very happy working with Mikael Dolsten in a partnership on this. I'm going to ask him to make some specific comments. But, yes, we do have a series of metrics that are important, that we're measuring with [indiscernible] team, we're measuring them with the Board. I'm excited about our ability to move some of our research into biomedical hubs like Boston, Massachusetts and Cambridge in La Jolla. I'm excited about the cultural change I see in research as we appropriately balance both the pursuit of science and the need to make unstoppable products, not shots on goal, but products we can consider unstoppable in the development process. And the culture is one of ownership and we've in fact moved recently and this was part of what I was trying to do, we've moved the compensation for the research community away from totally Pfizer Inc. and half of their long-term compensation will now be tied to specific performance metrics inside that organization. So I think it really brings about our focus inside the resource organization. It ties their long-term compensation to their productivity in a very specific way. Mikael, do want to comment on some of the progress we've been making?

Mikael Dolsten

Yes. So let me add -- shed further light on this. And I think Ian's engagement to spend some of his time with me at the sites and discuss the intersection of business and product development and science I think has been of instrumental importance in building this new ownership culture and really move Pfizer into kind of an industry-leading position in addressing the challenges of this industry to drive productivity to a new return of investment level. So let me just give 3 samples of progress. Increased pipeline focus. We decided to really put 80% or more of our resources on the 5 core areas that -- where we have experienced the strength and where we see good balance between commercial and scientific opportunities. And you heard previously, I mentioned some significant advances in our pipeline here. Differentiated approach is a second part here. We have been moving our biomedical key expertise into leading hubs. We are now established with real exciting pain unit in Cambridge, U.K. We acquired Icagen, a leading iron channel group in North Carolina and we are bringing that together with the Cambridge, U.K. group to one really strong group as we move forward during an integration phase. In Massachusetts, Cambridge, U.S. we have now moved our CVMed group, and they are -- they're growing the pipeline, building the right type of new partnership and I think that's been a very fast pace of change. Increased externalization. We have announced relationship with Icon and Parexel to create a more flexible way of doing R&D. And we also have crossed the business units and R&D expanded our pipeline reach, with numerous biotech collaborations to grow the pre [indiscernible] and post [indiscernible] opportunities. The metrics we're using are obviously some example of increasing value in pipeline, the number of new [indiscernible] studies. Stage 3 is submission and approval. But we put also a lot of emphasis on the quality, not only on the numbers. When it comes to the clinical differentiation, how it translates to a strong label and how it fulfills customer needs on the market and I think this new mix of science and business has really moved forward.

Operator

And you next question comes from Barbara Ryan from Deutsche Bank.

Barbara A. Ryan - Deutsche Bank AG, Research Division

I have 2. I know you did run through some detail on the Emerging Markets and I'm just wondering if you could tell us what your operational and reported growth in China was in the size of the business and I have a second on Lipitor if you don't mind.

Ian C. Read

Okay, David?

David S. Simmons

For China, for the quarter, our reported growth was 31% operational growth, 26% on a year-to-date basis. Reported 23% for China growth in the third, quarter 20% year-to-date. Also adding in on China and we maintained the #1 rank in the market in China of all multinationals and local Chinese companies. And our growth rate is outpacing the underlying growth. So China is a big anchor point for us in emerging markets and we're doing very well there.

Ian C. Read

And those growths where actually were overpriced cuts, I believe.

David S. Simmons

Yes. we do experience a dynamic environment in Emerging Markets quarter-on-quarter as you can see our numbers this year, we have experienced price decreases, pretty significant price decreases in China, Turkey and some other markets. But as we see it -- consistent in these markets, we see volume expansion often when these occur. That certainly was the case in both China and Turkey.

Ian C. Read

Okay, Barbara, your last question on Lipitor? Did we lose her?

Unknown Executive

We may have lost her. Okay. We can follow-up with you offline, Barbara. That will conclude the call, everybody. Thanks for your time and attention this quarter.

Operator

Ladies and gentlemen, thank you for participating in Pfizer's Third Quarter 2011 Earnings Conference Call. You may now disconnect.

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