Good day, everyone, and welcome to Pfizer's Fourth 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 E. Triano
Good morning, and thank you for joining us today to review Pfizer's fourth quarter 2011 performance. I'm joined today by our Chairman and 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, President and General Manager of Pfizer Nutrition; 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 Pfizer Quarterly Corporate Performance Fourth 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, January 31, 2012.
With that, I'll now turn the call over to Ian Read. Ian?
Ian C. Read
Thank you, Chuck, and good morning, everyone. During my remarks this morning, I will briefly recap some highlights from the fourth quarter and for the year, and I'll talk about what we are focusing on for 2012.
We finished 2011 with a solid fourth quarter and the overall financial performance for the year was strong.
Looking at the quarter, losses of exclusivity continued to impact our business. This quarter, we absorbed nearly $1.3 billion revenue decline due to losses of exclusivity across our Biopharmaceutical commercial units. We saw strong operational growth in key markets such as Japan and China. Revenues in the Emerging Market business overall declined 2% operationally due to pricing pressures and exceptional items that Frank will review in more detail.
As we have said before, the opportunity in Emerging Markets remains attractive, although quarter-to-quarter performance is volatile. I believe the best measure of our business in these markets is the yearly performance, which I will speak to in a moment.
Animal Health, Nutrition and Consumer all turned in strong quarters operationally. Animal Health grew 13%, Nutrition grew 20% and Consumer grew 8% over the same quarter in 2010. And we saw the benefits of our process improvements and cost reduction work this quarter. Adjusted total costs were down 5% operationally.
Turning now to highlights for the year. We met or exceeded every aspect of our financial guidance. We reduced our adjusted R&D spend by nearly $1 billion compared to 2010, but we also took significant actions to strengthen our innovative core, which included: narrowing our therapeutic areas of focus; sharpening our analytical tools to better prioritize investment and stop funding low-potential programs earlier in the R&D cycle; advancing the most promising compounds within our pipeline; and continuing to invest in R&D network and the capability design to drive biomedical innovation.
During the year, the Emerging Markets business was affected by strong headwinds such as: increased pricing pressure in China and Turkey, the loss of exclusivity of Lipitor in Brazil and Mexico in 2010 and devaluation of Venezuela. That being said, revenue in Emerging Markets grew 5% operationally in 2011, comprised of 10% volume growth and a 5% decline in price. Performance was particularly strong in key markets where we increased our investment, such as China, which delivered 18% operational revenue growth, and Turkey, which delivered 17% operational growth for 2011.
We grew revenues from key assets in our branded portfolio including Prevnar 13, Lyrica, Enbrel and Sutent. We absorbed approximately $5 billion in LOE and operationally, only saw a slight decline in our revenues year-over-year.
We moved quickly to complete a strategic review of the businesses, which resulted in the ongoing expiration of strategic alternatives for the Animal Health and Nutrition business.
We saw a steady cadence of progress in our late-stage pipeline and the emergence of a promising mix of early- to mid-stage assets. And we returned over $15 billion to shareholders through dividends and share repurchases.
I would characterize 2011 as a year of committing the company to being a focused, innovative biopharmaceutical company positioned to deliver value for shareholders. We set a course to redefine and strengthen Pfizer. We concentrated on 2 key priorities: improving the performance of our innovative core and making the right capital allocation decisions. And I believe we delivered on both of these goals.
Turning to this year, our focus is unchanged. We remain intent on continuing to take the actions that will create shareholder value. And like we did in 2011, we will continue to do so in 2 primary ways: getting our innovative core more productive and sustainable and keeping our allocation priorities in line with the best interests of shareholders.
The way we will do this is by: maximizing the value of our in-line portfolio, including key in-line assets such as Lyrica, Enbrel, Prevnar and Celebrex; successfully launching Inlyta and Prevnar 13 for adult 50 years and older; advancing the regulatory filings for Eliquis and tofacitinib; and advancing the next wave of compounds in our pipeline, including new molecular entities that are showing promise and that we hope will achieve proof of concepts over the next 2 years. I believe the recent approval of Inlyta as well as the early performances of Xalkori in the U.S. demonstrates how well our Oncology business is evolving.
Regarding Prevnar 13 Adult. The ACIP pneumococcal working group plans to discuss the use of Prevnar 13 in adults with the ACIP Committee at the upcoming meeting in February. Although a vote on recommendation of use is not currently scheduled, we are in discussions with the CDC to obtain guidance about the use of Prevnar 13 and will launch the adult indication in the U.S. in March. The rate of uptake will depend in large part on the ACIP recommendation for use.
Also in 2012, we continue to strengthen our Emerging Markets business and maintain a leadership role as we see growth over time in key markets like China, Brazil, Russia, India, Turkey and Mexico. We will keep examining our cost structure including all aspects of our SI&A, our go-to-market expenses and manufacturing so that we can maintain a lower and flexible cost base that allows us to respond to pricing pressures and additional LOEs over the coming years.
We're on track for determining the strategic alternatives and next steps for the potential separation of our Animal Health and Nutrition business. We still plan to announce our strategic decision for each business in 2012.
And we will continue to return capital to shareholders through dividends and share repurchases. We remain committed to meeting a target dividend payout of approximately 40% by the end of 2013. Further, our board recently approved a new $10 billion share repurchase program and we've stated our intent to purchase approximately $5 billion during this year. This amount does not include any repurchases that could result from actions taken related to our Nutrition and Animal Health business.
To sum up, in 2012, we will stay the course. We will work to maintain the momentum we created in 2011. Longer term, after we potentially complete the separation of Animal Health and Nutritional, Pfizer will be a company that has 2 primary businesses with distinct cost structures and operating approaches. The first will be a growth business of pharmaceuticals that we expect to generate profitable revenue growth with strong cash flow and that has a sustainable innovation engine that will be evident through advances in our pipeline. The second will look more like a value business that is also expected to generate strong cash flow and will be represented by established or post-LOE products. We can see -- we see Consumer Products fitting nicely into either of these businesses. I see these businesses generating consistent and steady growth in earnings per share over time.
Now I will turn it over to Frank for additional details on the quarter and our 2012 financial guidance.
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.
Fourth quarter 2011 revenues of $16.7 billion decreased 4% year-over-year reflecting the continued impact of LOEs of approximately $1.3 billion or 7% and the unfavorable impact of U.S. healthcare reform of $106 million or 1%, which were partially offset by the positive impact of foreign exchange of $157 million or approximately 1%, the addition of King products, which favorably impacted revenues by $340 million or 3%, and growth in certain in-line products.
Reported net income of $1.4 billion and reported diluted EPS of $0.19 were negatively impacted by the impact of LOEs, the nonrecurrence of a onetime tax benefit recorded in 2010 and higher charges associated with our cost reduction and productivity initiatives, which were partially offset by lower acquisition-related cost and the nonrecurrence of current -- of certain litigation charges recorded in 2010.
Fourth quarter 2011 adjusted cost of sales as a percentage of revenue was 20.1% versus 21.1% in the year-ago quarter due primarily to the positive impact of foreign exchange and our cost reduction and productivity initiatives, which were partially offset by the addition of legacy King operations, the Puerto Rico excise tax and a shift in geographic and business mix.
Adjusted total cost decreased 9%, reflecting the positive impact of foreign exchange. Excluding foreign exchange, adjusted total cost decreased 5% operationally, which also reflects the positive impact of our ongoing cost reduction and productivity initiatives, particularly in the R&D organization, and the negative impact of the addition of costs from legacy King operations, the U.S. healthcare reform fee and the Puerto Rico excise tax.
Adjusted income of $3.9 billion increased 3% year-over-year, driven by lower adjusted total cost and foreign exchange, which were partially offset by the impact of LOEs and a higher effective tax rate in the fourth quarter.
Adjusted diluted EPS of $0.50 increased 6%, which included a $0.02 benefit from share repurchases as well as the positive items I just mentioned. Foreign exchange positively impacted fourth quarter revenues by $157 million or 1% and lowered adjusted total cost by $481 million or 4%. As a result, foreign exchange favorably impacted fourth quarter adjusted diluted EPS by approximately $0.06.
As I mentioned earlier, this quarter we continued to absorb revenue declines as a result of the loss of exclusivity of certain products in several geographies. The fourth quarter negative impact of LOEs was approximately $1.3 billion. The full year negative impact was approximately $5 billion. This quarter, the impact of LOEs was partially offset by the addition of King products, growth in our Animal Health, Nutrition and Consumer Healthcare businesses, the positive impact of foreign exchange and growth of certain in-line pharmaceutical products including Lyrica, Enbrel, Celebrex and Sutent, Prevnar 7 in Japan and Prevnar 13, Norvasc and Viagra in Emerging Markets with overall double-digit growth in China.
Fourth quarter revenues generated from both our Biopharmaceutical and our other businesses in Emerging Markets increased to $3.3 billion. In the fourth quarter, Biopharmaceutical revenues in Emerging Markets declined 2% operationally. Although that business experienced volume growth of 3%, this was more than offset by the negative impact of foreign exchange, 2%, increased pricing pressures, changes in institutional purchase patterns in Turkey and Brazil, currency devaluation in Venezuela and Lipitor's loss of exclusivity in Brazil and Mexico, 2010.
It's important to note that for the full year 2011, Biopharmaceutical revenues in all emerging markets grew 5% operationally, which reflects operational growth of 10% and price reductions of 5%. Biopharmaceutical revenues increased 6% operationally to about $4.2 billion in the BRIC-MT markets in 2011.
As you can see, in 2011 we again met or exceeded all elements of our full year financial guidance, including achieving our cost-reduction target associated with the Wyeth acquisition 1 year ahead of plan, generating more than $4 billion of cost reductions on an operational basis compared with the 2008 combined cost of Pfizer and Wyeth.
Looking ahead to 2012. We're updating some elements of our full year financial guidance and providing a guidance range for adjusted cost of sales for the first time. Specifically, we have reduced the guidance ranges for reported revenues and adjusted diluted EPS primarily to reflect the strengthening of the U.S. dollar against major currencies from mid-October of 2011 to mid-January 2012. We now expect 2012 reported revenues to be in the range of $60.5 billion to $62.5 billion, and we expect adjusted diluted EPS to be in the range of $2.20 to $2.30. In addition, we expect reported diluted EPS to be in the range of $1.37 to $1.52. We've lowered the guidance range for adjusted SI&A to $17 billion to $18 billion, and we expect adjusted cost of sales as a percentage of revenues to be in the range of 20.5% to 21.5%.
So finally, moving on to key takeaways. I'm very pleased that this year, we again met or exceeded all components of our financial guidance including achieving the cost-reduction target associated with the Wyeth acquisition ahead of schedule. We've updated certain components of our 2012 guidance primarily to reflect the significant unfavorable changes in currency rates from mid-October of 2011 to mid-January of 2012. We remain on track to finalize strategic decisions for our Animal Health and Nutrition businesses in 2012 and continue to expect that any separation of these businesses from Pfizer will occur between July of 2012 and July of 2013.
In 2011, we returned $15.2 billion to shareholders through $6.2 billion in dividends and $9 billion in share repurchases, and we remain committed to allocating our capital in order to deliver attractive shareholder returns in 2012 and beyond.
Now I'll turn it back to Chuck.
Charles E. Triano
Thanks, Frank. And at this point, operator, can we please poll for questions?
[Operator Instructions] Your first question comes from Catherine Arnold from Crédit Suisse.
Catherine J. Arnold - Crédit Suisse AG, Research Division
I don't have to tell you guys that getting your share count down is going to make a big difference in the way people look at your pipeline, your product story and fueling growth. I know you know that. But obviously, there can be big swings in what people expect from you in the longer-term EPS based on what you do there. And I guess I -- there's a lot of questions about the various scenarios of how you use the proceeds from Nutrition and Animal Health towards buying back shares. And I guess I'm wondering, are you thinking about giving us any new guidance on share repurchase once you announce these transactions? Or is this something that we're going to have to monitor? And are you thinking about the proceeds from these transactions as earmarked in any different way than the way you're sort of giving us your strategy from the year-to-year cash flow that you generate?
Ian C. Read
Thank you, Catherine. Let me start, and then Frank can add to it. There's been no change in our strategy from 2011 to 2012. We've said that the use of our cash post dividends, post investment of the business will be -- stock buybacks is the first test. And we remain aligned with that. So once we complete -- if we complete the separation of Nutritional and Animal Health, then the funds from that will be tested against the best investment with stock buyback being the baseline. Frank, do you want to add to that?
Frank A. D'Amelio
I'd just punctuate what Ian said, Catherine, which is the proceeds from those businesses, assuming we do a separation, the case to beat is buybacks. That's what we've said, that's what we continue to say and that's what we will do relative to anything with those businesses. And let me just run a couple of numbers, which is if you look last year, Ian and I mentioned we returned $15 billion to shareholders. Of that, $9 billion were buybacks. We bought back 459 million shares with that $9 billion. And we've said this year, approximately $5 billion in buybacks plus another $6-plus billion in dividends, $11-plus billion for the year. In the last 2 years, we have returned $26 billion, what we were estimating this year plus what we did last year in capital directly to shareholders.
Your next question comes from Jami Rubin from Goldman Sachs.
Jami Rubin - Goldman Sachs Group Inc., Research Division
Ian, I've got a couple of questions. The first is, is that I appreciate your providing us your vision for what Pfizer might look like post-2012 in terms of 2 different companies, an innovative core and a cash generator and the commitment to grow the company on a consistent basis. Can you provide a little bit more color behind that in terms of how we should think about the revenue outlook? I mean, obviously post Lipitor, there's still other patent expirations, obviously divesting about $6.5 billion to $7 billion worth of companies. And then on the bottom line, what that could look like. So if you could be just a little bit more specific on your top and bottom line growth aspirations post 2012. And my second question is more to do with just your view of the reshaping of Pfizer's portfolio. A lot of the discussion last year focused on what that portfolio might look like. And your goal was to achieve a smaller, more focused company. And when I step back, I'm still looking at a $60 billion company, which is huge. And I'm wondering if you have discovered through the process of being CEO, other options that might now be on the table that weren't earlier in the year that could lead to a further reshaping of the portfolio.
Ian C. Read
Thank you, Jami, for those 2 questions. So I think, if you -- I tried to lay it out by saying I look at the company in 2 parts. So clearly, with the post Lipitor, we've got through the bulk of the LOEs, but still continue to have sequential LOEs through 2015. So I tend to look on the top line in 2 companies. One, where if we take it as the innovative core and we see the growth coming from that, that in my mind is a growth company that's sustainable with a research engine that's sized and will be predictable. And then I look at a value company that will have to absorb the post-LOE impact of the transfers. And then from that base, we'll be stable or grow, given it'll have Emerging Market growth, et cetera, et cetera. So top line growth will be the impact of those 2 factors. And I'm more focused on our ability to produce predictable and consistent EPS growth over time as we manage those 2 businesses. Now to your second question, I feel that while we are a $60-plus billion business, that's prior to any decisions on the separation of Nutritionals and Animal Health. And then laying out this clear vision of 2 businesses, I think leads to increased visibility, 2 business models, different cost structures, different priorities. And I think it'll allow the Street to clearly see the value of those 2 businesses inside of Pfizer.
Your next question comes from Tim Anderson from Bernstein.
Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division
On your 2012 guidance, you said it was lower -- revenues and earnings were lower primarily due to FX. Were there any other contributing factors? And then second, Lilly's Q4 call was dominated by questions about solanezumab. And your product, bapineuzumab is going to have important data in the current year as well, yet you never seem to talk about it too much. I'm hoping I can kind of ask you a few questions on this. The first is what will be the timing and venue for seeing the results of the 2 U.S. trials? The second is can you confirm that you'll likely present the results of both trials at the same time like Lilly will do? And then the third point, have there been futility analyses done with the bapi Phase III trials?
Ian C. Read
So Frank, perhaps you can address the first question, and then I would ask Olivier to answer the question on bapineuzumab.
Frank A. D'Amelio
Yes, so 2012 guidance. If you look at -- we'll start with the bottom line. If you look at what the previous bottom line was and now with the current one is for adjusted diluted EPS, it went from $2.25 to $2.35, to $2.20 to $2.30. That $0.05 is entirely due to foreign exchange. If you look at revenue, revenue went from $62.2 billion to $64.7 billion to $60.5 billion to $62.5 billion. So on average, if you look at the bottom of the range and the top of the range, we lowered the 2012 revenue number by about $2 billion. Roughly 2/3 of that, approximately 2/3 of, that was due to foreign exchange. The other 1/3 was really due to, I'll call it, 3 areas. One was a more challenging environment in the EU. Second one was more generic product offerings by ourselves in certain emerging markets. And the third was lower-than-expected volume growth in Emerging Markets due to accelerated price cuts. That said, we still see robust growth opportunities in those markets and the volume is less than we expected.
Ian C. Read
Thank you, Frank. Yes, re-emphasizing that, it's just -- we -- as price cuts occur in Emerging Markets, we expect volume to respond. In '11, we saw the response slightly slower than had we expected in our original projections and we corrected for that in '12. Olivier?
All right. In term of timing, it's the same timing that we talked about in the previous calls. And the studies are going to be read out by mid-year, and we will report the results as soon as possible afterwards in a scientific meeting. There was no futility analysis done on those studies. And I would like to actually mention that the 2 products or the 2 compounds are targeting a different epitope on the beta and amyloid peptides. And that may trigger 2 very different mechanism of actions. And therefore, the results of one may not be transferable to the results of the other one. However, I must say that based on what we heard this morning, we heard the alliance views the decision to continue on solanezumab with interest. And we're maintaining confidence in the amyloid pathway for our AD program.
Your next question comes from Gregg Gilbert from BoA Merrill Lynch.
Gregory B. Gilbert - BofA Merrill Lynch, Research Division
First, for Ian and Frank, given that we're actually getting closer to seeing proceeds, I want to better understand the buyback being the case to beat comment you've been making. So buyback offers immediate accretion, while good acquisitions often take a few years to generate a return. So how are you truly comparing the 2? Is it an accretion in an out-year or something like that? And then for Dave Simmons, what have been the key positives and negatives learned from your Lipitor strategy and how that might shape future strategy for generic launches?
Ian C. Read
Okay. On the buybacks, I mean, I -- I think it's clear that we look at the value of the share in the market today. And we have models to look at the value of the share on a discounted cash flow basis, so we look on that return on a buyback along with the impact of dividend payments being lowered by the buyback. That gives us a certain financial return. And we compare that to the opportunities we have of acquiring businesses and the net present value of those businesses. So it really is an economic view of what is the best use of the shareholders' for -- of the funds of Pfizer shareholders. Lipitor, Olivier? Sorry, David.
David S. Simmons
Gregg, yes, the question on learnings from Lipitor, I'd probably break these into 2 pieces. The first is we've done a lot of market research and learned, one, that in-depth, the incentives that are occurring from different stakeholders in the healthcare environment during the LOE period, both from day 1 to day 180 and then also post 180. And this cuts across payers, pharmacists and the patients themselves. And through those learnings and research, we've also been able to discover a significant percentage of patients who want to remain on the brand. They don't feel that they understand how they can do that. And we've been developing strategies of how to tap into that desire without increasing cost to the healthcare system. So the learnings are on that front. The second thing that I would add in is that the response to the strategies that we've put in have been very strong. We're pleased with where we are in the Lipitor progress. Our share of branded Lipitor is tracking some 40-plus percent higher than historic analogs, so the strategies appear to be working. And as we go into upcoming LOEs, assuming we get the same type of market research reads, we will be applying the learnings from Lipitor, tweaking them and trying to continue with our core goal, which is to make sure we maximize revenue, profit and patient value from our brands.
Ian C. Read
Thank you, David. That being said, the Lipitor opportunity is unique in its size. And the 180-day period, I'm not sure how many molecules going forward will have that same dynamic, as I believe the law has been changed to allow same-day filing. So you won't have one company with 180-day exclusivity. You'll have multiple companies. So I think that will change the dynamic of post-LOE marketplace.
Your next question comes from John Boris from Citi.
John T. Boris - Citigroup Inc, Research Division
First one for Ian. Appreciate the color, Ian, on the 2 separate businesses post divestitures of Nutritional, Animal Health. Can you maybe go a little bit more in detail on the description of how you return the pharma portion of that business to growth relative to the value portion and then how you resource those 2 parts of the business? And is there additional room for improvements in the efficiency of R&D and what you're spending in SI&A as you think about those going forward? Second question on the ACIP panel. Just help us understand what kind of recommendation you're expecting out of that panel and how that is potentially going to facilitate the uptake of Prevnar 13 in adults.
Ian C. Read
Okay. I'll take the first one, and I'll ask Geno to talk to the second one. So thank you for the question, John. I think, fundamentally, this sort of separation on my mind, or in fact in the way we run the businesses, will allow a sort of a focus on an innovative core and a clear understanding of the capital being deployed and the growth expectations from innovative products. So it'll allow the marketplace and ourselves to have a lot clearer view on are we returning cost of capital on our innovative endeavors and will allow a better valuation of that business and allow management to be held to better performance standards. And on the other side -- and your SI&A spend as well, which will be more tailored towards positions and investment in innovative products. Whereas you move to the value business, that becomes a business that sort of absorbs the impact of LOEs and then continues to grow post that and adds strong brands from Emerging Markets, and is a sort of value cash engine with a completely different cost structure. So in my mind, it does allow a clear valuation by the marketplace or by management of 2 businesses with 2 distinct models. So with that, I would hand it over to Geno to talk to the ACIP recommendation.
Geno J. Germano
Yes. On the ACIP question, John, the -- it's typical for ACIP to provide recommendations to the healthcare system after the approval of a new vaccine. And you know that Prevnar 13 was approved in December by FDA under their accelerated approval provision, recognizing the significant unmet need for a serious medical condition, in this case, pneumococcal pneumonia. So the ACIP needs to deliberate and discuss how this vaccine should be used or recommended to be used in light of the availability of a polysaccharide vaccine for the over 65 population. So we're not privy to exactly how they're going to vote or how they're going to guide on the use of Prevnar 13, but we know that Prevnar 13 is certainly a different vaccine with a conjugate technology. And the ultimate recommendations will influence the uptake of the vaccine in the U.S.
Ian C. Read
Yes. And additional to that, post their recommendation, we will have the CAPITA trials that we expect by the end of '12 or early '13.
Your next question comes from Marc Goodman from UBS.
Marc Goodman - UBS Investment Bank, Research Division
Just had a couple of questions. One, can you give us a little more color on Prevnar in the quarter? It just seems a little lighter than what we would've expected. And then second, can you give us an update on the uptake of crizotinib, kind of what's going on behind the scenes there, and also an update on REMOXY and what's happening there?
Ian C. Read
Okay, thank you, Marc. So Geno, can do the Prevnar and the Xalkori, and then I'll ask Olivier to talk about REMOXY.
Geno J. Germano
Okay, so for Prevnar 13. Prevnar 13's humming along. Overall worldwide sales were $3.7 billion in 2011, up 50% from 2010. So the vaccine is doing extremely well on a global basis. As you mentioned, sales in the fourth quarter in the U.S. atypically were soft compared to the fourth quarter of 2010. And it's simply because the catch-up opportunity was strong in the fourth quarter 2010. So comparing one quarter to the other, we see a change in the growth rate. So the fourth quarter of '11, we had much less catch-up and there was some adjustment of inventories in doctors' offices and in the supply chain as a result of that re-established demand level for Prevnar 13. In terms of Xalkori or crizotinib, this was approved last summer, a new personalized medicine with a companion diagnostic. We're happy with the progress so far. The diagnostic is widely available now, essentially in all major clinical sites and academic medical centers. Usage is accelerating pretty dramatically. There's been a doubling of the use of the diagnostic so far, and we expect yet another doubling of the use of diagnostic in this coming year. Growth for Xalkori or crizotinib is going to come from the accumulation of new patients and the sustained duration of therapy. And we know from our Phase II trials that patients were sustained for a much longer period of time than on previous therapy. So we see the development of the drug occurring over time. And then, of course, we're continuing to explore utilization of crizotinib in other subtypes of patients with different mutations and in combinations with other pipeline therapies.
All right. Marc, on REMOXY, we spent the last few months trying to understand the issue. We have now a much better understanding of the formulation, the manufacturing controls and what we need as analytical test in term of methods. So in addition to that, we will have to conduct 2 bioavailability study that we'll run during the second quarter this year. And when we will have all this data, we think that it will constitute the basis for our engagement with the FDA. And we anticipate meeting with the FDA during the third quarter this year to discuss next step.
Your next question is from Barbara Ryan from Deutsche Bank.
Barbara A. Ryan - Deutsche Bank AG, Research Division
I guess the question is for you, Ian. You talked about the 2 different businesses, the innovative core and the more mature established products and the different P&Ls. And the focus on that from investors, I'm just wondering, when and if you would provide more transparency into the difference of the P&Ls of those 2 companies so we could in fact value them and model them differently.
Ian C. Read
Thanks for the question. Yes, I sort of see that developing approach to that as we go through '12. We need to, first of all, complete the potential separation of Nutri and Animal Health. And then as we do that and we look at our P&Ls and we enter into late '12 or '13, I expect us to have a more clearer way of describing those 2 businesses to the shareholders. And I think it also -- going back to a question from Jami, we see our research being focused on neuroscience and CVMED, oncology, inflammation, vaccines and pain. And so that's a very focused portfolio, where we are looking to really focus on personalized medicine and bringing forward products that have a differentiation, both in clinically and from a genetic standpoint. So I think that's the transformation we're talking about in our science.
Your next question comes from Steve Scala from Cowen.
Steve Scala - Cowen and Company, LLC, Research Division
I have 3 questions. First, historically, Pfizer has treated businesses to be divested as discontinued. So what does not considering Animal and Nutrition discontinued tell us about the status of the actions on those businesses? Secondly, on tofacitinib, did Pfizer request a priority review and it was turned down by FDA? And then thirdly, should we assume that a good portion of the Lipitor sales force at peak, so at the peak marketing force, will be marketing Eliquis? And I'm also wondering if you'd help us craft an expectation for the rollout. So should we think of the rollout as PRADAXA- or Xarelto-like? Or would you like us to think about it as being appreciably better driven by the data?
Ian C. Read
Thank you, Steve. Frank, if you could take the first question?
Frank A. D'Amelio
Sure. So in terms of not having discontinued ops treatment, as of today, Steve, that's because no decision's been made. Just to -- we've said all along, we're on track to finalize our strategic decisions regarding the Animal Health and Nutri business. We said we would do that this year. We're pleased with the progress we've made to date. In terms of our objective, nothing's changed. Our objective is to generate, to create the greatest after-tax value for our shareholders, and we will be providing updates on this as we move through the year. But the reason why it's not being accounted for as disc ops is simply because we haven't made a final decision.
Ian C. Read
Geno J. Germano
Yes. On the tofacitinib question, we did not request a priority review. We are seeking a broad label with usage in patients in second-line as well as third-line therapy. So we didn't go for a priority review for an unmet need in the post-TNF indication.
Ian C. Read
Okay. And then on the Lipitor, stroke, Eliquis question, I'll make a couple of comments, and then Olivier can add to it. I think from a point of view of your modeling, our resources have been dimensioned for both post Lipitor and an Eliquis launch as of the end of the fourth quarter of this year. And as regard to Eliquis, I see that marketplace -- number one, I see the advent of having 3 products in that segment as positive in the sense of it's a new class. It needs medical education. It needs continued promotion. And having 3 products in that class will be positive for the overall expansion of the class. And we would expect, given the fact that the strength of our data, for us to be -- to take a leadership role in that class. Olivier, do you want to give any...
Nothing much to add to that, frankly. With BMS, we think we have optimized the launch and we are putting the right amount of resources to make sure that we are very competitive with cardiologists and primary care physician. And as you said, it's going to be competitive. But we think we have one of the best-in-class profile. And again, we have the right resources behind it.
Your next question comes from David Risinger from Morgan Stanley.
David Risinger - Morgan Stanley, Research Division
I had a couple questions on the growth outlooks. With respect to Emerging Markets, the revenue growth x currency was 5% in 2011. Can you please provide a little bit of color on what the growth outlook is in 2012? And then basically, similar questions with respect to Nutritional and Animal Health. Nutritional grew 11% last year, constant currency. I'm hoping that you might be able to provide some color on the outlook for '12. And Animal grew 14% last year. Wondering if you could provide perspectives on the growth outlook for that segment.
Ian C. Read
Okay. I'll make a couple of comments on Emerging Markets, and I'll ask David to expand upon it, and I think ask Frank to handle the questions on Nutritional and Animal Health. So Emerging Markets growth in '11 was volume, 10%, and the price reductions of 5% were beyond our expectations of sustainable price reductions in Emerging Markets. So we continue to expect volume at double digits, and we expect to continue to see pricing pressures, but not of the level we saw in 2011. And David, do you want to add any more color to that?
David S. Simmons
Yes, just to call out a couple items. And when we look at Emerging Markets as a backdrop, we see 2 fundamentally strong trends that aren't going away over time. One is the increase in population masses overall, and the second is increase in the wealth of these population masses. So that's the backdrop that keeps us very optimistic about opportunities in Emerging Markets. Now as Ian mentioned, the price erosion we saw in 2011 was a little stronger than what we had anticipated, and we've factored that into our views going forward. We do expect to improve our growth rate moving forward. We would expect to increase this up to high single digits. And our strategies to do that are focused around maximizing the opportunity space of our in-line innovative portfolio, having very, very targeted approaches to the generic market, more targeted than we've ever had, and also being able to adapt to unique local market opportunities. Those are the 3 fundamental strategic pillars that we think will cause an uplift in the inflection of growth rate.
Ian C. Read
Thank you, David. Frank?
Frank A. D'Amelio
And then on Animal Health and on Nutri, let me just add the absolute numbers to that. So Animal Health this past year, we did $4.2 billion in sales, and in the Nutri business, we did $1.2 billion in sales. And both had strong growth rates, to your point, 14% and 10%, respectively. $2.1 billion in Nutri, $4.2 billion in Animal Health.
Ian C. Read
Frank A. D'Amelio
We expect strong performance going forward and all of that performance has been factored into our 2012 guidance.
Your next question comes from Chris Schott from JPMorgan.
Christopher Schott - JP Morgan Chase & Co, Research Division
Just a few questions here. First, can you talk about your Established Product growth here? I guess it's tough for us to get a clean read on this, given some of the recent off-patent assets securing growth like Effexor. Can you just talk about the growth or decline you're seeing in that business, let's say, for the, I don't know, pre-2010 products in this portfolio to help us understanding the kind of underlying trends that you're seeing in that business? Second, on gross margins. Can you just confirm what your expectations for gross margins are for this year and what type of quarterly progression we should be thinking about, given the Lipitor decline throughout the year? I guess what I'm trying to get out here is what your gross margins look like exiting this year. And then the final question is on the tax rate. It's roughly 500 basis points above your competitors. Why are we seeing this? And when or if should we start thinking about those rates starting to come down?
Ian C. Read
Thank you, Chris. So if David could comment on Established Products, and Frank could handle gross margin and the tax rate.
David S. Simmons
Sure. Chris, you're asking the question the right way. You've got to separate out the products that are going through LOE events last year and into this year because you've got an abnormal comp. So if you remove out Zosyn, Protonix and Effexor, that was the major cause of the decline in Established Products. So when you go back to that original base of legacy Pfizer brands going back to 2009, plus the addition of growth initiatives like some of the generic work we've been doing, what you see is that business that was decreasing 3 years ago at about minus 18% to minus 20%, that business has been stabilized. So if you look on that basis this year, the growth on that business segment plus those select growth initiatives got to flat. So we stopped the deterioration on that business. And those strategies'll continue going forward. Whether we can hold that line or not, we'll have to see. It's a very dynamic market in this off-patent market.
Frank A. D'Amelio
On gross margin. So in 2011 -- I think I'll answer this by doing cost of sales. And then the gross margin is just a reciprocal. So in 2011, our cost of sales was 19.3% for the year. Our guidance for 2012 is 20.5% to 21.5% on cost of sales guidance. And what's happening there clearly is that's increasing, which means there's downward pressure on the gross margin. And that's based on the change or shift in the company's business and geographic mix, including things like the Lipitor LOE. That said, we continue to believe we can achieve operating margins in the high 30s to low 40s because some of the primary care revenues is being replaced by revenues like in places like Emerging Markets, where we don't need as much of an expense base to generate those revenues. So there's clearly some pressure on gross margins, but we continue to believe we can generate operating margins that are in the high 30s to low 40s. In terms of quarter-to-quarter, there'll be volatility quarter-to-quarter based on how the mix of the business changes from quarter-to-quarter, which is why we provide the guidance on an annual basis. In terms of the tax rate, let me just give a little history on this, and then I'll answer the question. Pre-Wyeth, our tax rate was in the low 20s. When we announced the Wyeth acquisition, we increased the tax rate to approximately 30%, and part of the reason for that had to do with the amount of cash that we planned on repatriating. That repatriation of cash continues, which is why we gave guidance for 2012 of approximately 29%, which is pretty much what we predicted in 2011. We predicted 29.5%. One other point on the 29.5%, it was down year-over-year from 29.7% in 2010 to 29.5% in 2011. I think in '12, we should assume that 25% and beyond '12 with all of the winds blowing fiscally globally today, it's hard to predict tax rates. But I think we should assume for the time being a rate that's approximately 29%.
Ian C. Read
Thank you, Frank. I mean, the only thing that would change that would be fundamental tax reform in United States, which we would hope would move the United States more in line with the rest of the developed world on its corporate tax rate and even to a territorial system, which potentially as you pointed out, would have a differential impact on Pfizer vis-à-vis our competitors.
Your next question comes from Jeff Holford from Jefferies.
Jeffrey Holford - Jefferies & Company, Inc., Research Division
It's Jeff Holford here. Three questions for you, if you can. Firstly, what important readouts could we see from tofacitinib this year in ongoing clinical studies and if you can give us any indication of potential timelines you think could happen there? Secondly, when you talk about fixing the innovative core, as you put it in your release, is that deemed to be an internal organic process? Or does that rely on to some or a large extent on acquisition or licensing going forwards? And then just lastly, on the disposal process, news wires indicate that there's a number of buyers out there for the Nutrition business, but it's less clear on the Animal Health side. Can you give us any update if you are seeing a number of potential interested buyers for that business?
Ian C. Read
All right. Geno, if you could do the tofacitinib, I'd like to have Mikael to give a comment on the innovative core, which we see as both internally being better and also reaching outside of our borders, seeking the best science. And the third question was on Animal Health, which Frank can deal with.
Geno J. Germano
So for tofacitinib, we read out our 5 pivotal trials over the course of the year in 2011. In 2012, there'll be additional analyses from those databases that'll be presented at EULAR and ACR later in the year. And I really can't comment on the specific sub-analyses that will be presented at this point.
Ian C. Read
Okay, Mikael, if you could just have a comment on the innovative core?
Yes. So I'm very excited about the flow of the pipeline. And you have seen strong discipline in the late-stage pipeline as exemplified by comments from Geno and Olivier. And we have a pipeline out with lots of opportunities of differentiated drugs from early, mid to late stage. And just to give you highlight on some of the stages that you not have been able to follow as closely. So in immuno inflammation, we have a number of Phase II assets such as MAdCAM, IL-6 and dissociated steroids for indications from Crohn, RA and to lupus. In oncology, we have a number of exciting signal transduction inhibitors in both solid and hematological tumors. In vaccine, we have not only mening B, but we have staph aureus in the Phase II studies. And we're bringing in towards the clinic vaccine for nicotine and later on to Plastene [ph] and [indiscernible]. In cardiometabolic, you heard Olivier to speak about Eliquis. We have a very encouraging data on our PCSK9 antibody for cholesterol lowering. We have multiple diabetes read-outs in Phase II, and we also have a very interesting drug, PDE5, a very selective inhibitor for diabetic nephropathy. Similarly, neuro pain, where we had a discussion around bapi, we are adding a new generation of drugs in the pain portfolio with precision medicine focus, as Ian spoke to and a couple of more earlier CNS drugs. So as you can see, there is a lot of exciting drugs where we are highly differentiated and either best- or first-in-class in our aspiration.
Ian C. Read
Thank you, Mikael. I'd like to reinforce that. I think that we feel we've made good progress on the innovative core. But in a way, we feel at Pfizer, it's just the beginning as we continue to accelerate what we're doing by focusing in the therapeutic areas where we're in and merging together the biology and the chemistry that I think -- the biology from Wyeth and the chemistry from Pfizer to a best-in-class scientific organization.
Frank A. D'Amelio
And then on Animal Health. We've not yet decided on what the potential method of monetization is. However, we continue to explore all options and once again, with the goal being to maximize after-tax value to our shareholders. And on Animal Health, we are proceeding according to our internal plans. We remain on track, and we are pleased with the progress that we've made to date.
Your next question comes from Tony Butler from Barclays Capital.
Charles Anthony Butler - Barclays Capital, Research Division
Just one brief question around Enbrel. The reps that you have today that are marketing to rheumatologists, if we make an assumption that tofacitinib is approved, do you actually continue to market Enbrel, given that you will -- your contract expires with Amgen in '13, I believe? And moreover, is this a product actually that will also be part of the bag of a rep who also is a -- who also is actually visiting primary care physicians?
Ian C. Read
I'll ask Geno to answer that question.
Geno J. Germano
So for Enbrel in the U.S., we currently copromote with Amgen, and that arrangement will expire at the end of 2013. So we are in dialogue with Amgen on how we'll make that transition. But ultimately, we will be promoting tofacitinib within Pfizer alone in the United States. Outside of the United States, we'll continue to have a role with Enbrel, and we'll manage Enbrel and tofacitinib in countries outside of the United States.
And your final question comes from Seamus Fernandez from Leerink Swann.
Seamus Fernandez - Leerink Swann LLC, Research Division
So just a couple of questions here. Ian, maybe you could just discuss for us what we're seeing in Europe with these developed market value determinations with the evolution of the German market, IQWiG, GBA and really what that might mean for the business and new products near term. And then also if you can just give us your sort of 30,000-foot view in terms of the expectations for these types of developments broadening and how you're approaching those types of things strategically. And then sorry for the long question there. But then lastly, can you also comment on what would prevent, if anything, a timely separation of either the Nutritionals business or the Animal Health business?
Ian C. Read
Okay. A pretty expansive question there on Europe. I'll ask Frank to talk about the timeliness of the Animal Health business for a second, and then come back to you on your first question.
Frank A. D'Amelio
So relative to Animal Health and Nutri, I mentioned for both that progress is proceeding. We're pleased with the progress. Things are moving according to plan. In terms of what would hinder the progress at this point, I don't see anything at this point hindering our progress. I think we're going down a good path and pleased with the progress and I think we'll continue to move down a good path.
Ian C. Read
All right. So regarding Europe. Europe has had HTA or healthcare technology assessments for a long period of time. And frankly, in Europe, as you pointed out, they tend to be used in conjunction with medical evidence also as a rationing tool. So as our portfolio changes, as Lipitor goes LOE, as some of our primary care products go LOE and we become a more specialty business, the medical differentiation and the value add is a lot more visible to those authorities than perhaps a primary care product would be. So I think while my view is that this practice will continue to expand outside of Europe and it's appropriate that payers and the government expect value from their medication, I think in the U.S., we'll see a broader view of what value is, including wider stakeholders than in Europe including the caregivers and the patients, a less narrow definition, a more -- of value to society. And I feel once again, our portfolio is evolving. And certainly, our research is focused in a way that we'll have the data and the differentiation to be successful in that environment where there is health technology assessments.
Charles E. Triano
Thanks, Ian, and thank you, everybody, for your attention this morning.
Ladies and gentlemen, this does conclude the Pfizer Fourth Quarter 2011 Earnings Conference Call. Thank you for participating. You may now disconnect.
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