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Pfizer Inc. (NYSE:PFE)

Q3 2007 Earnings Call

October 18, 2007 12:00 pm ET

Executives

Amal Naj - SVP of IR

Jeff Kindler - Chairman and CEO

David Shedlarz - Vice Chairman

Frank D'Amelio - CFO

Analysts

John Boris - Bear Stearns

Jami Rubin - Morgan Stanley

Steve Scala - Cowen

David Risinger - Merrill Lynch

Roopesh Patel - UBS

George Grofik - Citigroup

Tony Butler - Lehman Brothers

Chris Schott - Banc of America

James Kelly - Goldman Sachs

Operator

Mr. Amal Naj, Senior Vice President of Investor Development, you may begin your conference.

Amal Naj

Good afternoon, and thank you for joining our Third Quarter 2007 Analyst Conference Call. I am here with Jeff Kindler, Chairman and CEO; David Shedlarz, Vice Chairman; Frank D'Amelio, Chief Financial Officer and other members of our senior management team.

We will first review the results of the latest quarter presented in the earnings release issued this morning and available on our website. In a change of practice, we will present financial charts on the call, which can be viewed on our home page at www.pfizer.com. In the investor presentations tab by clicking on the link, quarterly corporate performance third quarter 2007.

We'll take questions after the review of our results. In order to facilitate the maximum number of questions, we would appreciate if you would limit yourself to just one question per person and try submitting, we will come back to you for any follow-up questions you might have.

I would like to remind you, that our discussions during the 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 2006 annual report on Form 10-K and in our reports on Form 10-Q and Form 8-K.

Also, the discussions during this call will include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations 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 October 18, 2007. These reports are available on our website at www.pfizer.com in the Investors, SEC filing section.

Now, I would like to turn the call over to Jeff Kindler. Jeff?

Jeff Kindler

Thanks, Amal and good afternoon, everyone. I would like to welcome Frank to his first earnings call at Pfizer. In just the few weeks that Frank has been here, he's already added tremendous value to the company.

I'd like to comment briefly on our quarterly results, as well as on some of the steps that we are taking to rebuild Pfizer and put the company on the right track for the future.

We are continuing to make the tough decisions and take the right actions that are necessary to address our challenges and seize our opportunities. Between now and 2011, we need to continue to improve all of the foundational elements of our company and we need to continue to optimize our current performance, even as we focused on the critical factors necessary to reset the company strategically and rationally when Lipitor goes off pattern.

There are no quick fixes, but rather a series of actions which break-by-break are putting in place the foundation we need for a successful future. We're moving with the sense of urgency, but at the same time, we must be disciplined in how we allocate our capital in order to maximize the strategic and financial returns to our shareholders.

With that background, let me highlight a few important aspects of this quarter. First, our operational performance, second, our decision to stop selling Exubera, third, our continuing progress in reducing our cost structure, fourth, our commitment to substantially enhance our talent pool by putting strong leaders from inside and outside the company in key positions, and fifth, our establishment of more focused and accountable business units to drive improved performance.

First, operationally, we had a solid third quarter. We're reconfirming our revenue and adjusted diluted earnings per share guidance for 2007 and 2008. Indeed, we're raising the lower end of the ranges we previously provided for revenues and adjusted diluted EPS for 2007.

I think it's worth noting that we're on track this year to achieve roughly the same revenues as last year and better adjusted income in last year, despite the loss of exclusivity on two major drugs, Norvasc and Zoloft, and despite the intense challenges facing our largest product. This is due to the strong performance of most of our products’ substantial progress in our cost reduction efforts and the benefits of favorable foreign exchange.

Our operational performance in my view reflects our insistence on a higher level of focused and accountability within the company. The advantages of our broadly diversified portfolio and the benefits of our continued actions to improve productivity, these attributes are an important part of the solid foundation that we are building for the future.

With the obvious exception of Exubera, our new products performed very well this quarter.

Lyrica grew 37% to $465 million, compared to the same period last year and it has delivered $1.3 billion in revenues year-to-date.

In June, the FDA granted accelerated approval to Lyrica for the treatment of fibromyalgia which more than doubles the potential number of US patients who could benefit from this medicine. We were in the field in record time to take advantage of that opportunity.

Chantix, our treatment to aid smoking cessation, continues its strong performance with $241 million in revenues for the quarter and more than $600 million in revenues year-to-date. Since the August 2006 launch in the US, more than 3.5 million smokers have been prescribed Chantix, and we've just launched a branded advertising campaign to build on this momentum.

When you consider that there are many countries in Europe and Asia where smoking is still very prevalent, the global opportunities for Chantix are significant.

For the year-to-date, Celebrex is up 10% worldwide and 7% in the US market that is basically flat. Geodon is growing at a rate of two times the market for atypical antipsychotics. And during the quarter, we launched the new Viagra advertising campaign that has generated a lot of interest and positive feedback from the field.

We are also continuing to bring strong and creative support to Lipitor, which is facing a commercial assault unprecedented in our industry's history. With new indications in data, advertising, field force support and contracting strategies to optimize Tier 2 access, we are fighting back hard against branded and generic competition, focusing on both new patients and the switch market. In the phase of these challenges, Lipitor revenues in the quarter were $3.2 billion as compared to $3.3 billion in the third quarter last year.

Now, I'd like to address the second key aspect of the quarter, our decision to stop further investment in Exubera. This decision reflects our strict adherence to three fundamental principles which will continue to guide us going forward. We will be realistic, we will listen to our customers, and we will be very disciplined in how we evaluate both internal and external investments, so that we can put our capital to work in support of our best opportunities to create shareholder value.

Pfizer began the development program for Exubera in collaboration with Nektar Therapeutics over a decade ago. We launched it in July 2006 and made a major effort to make it successful. But despite the best efforts of our sales, marketing and manufacturing colleagues, the product has simply not gained the acceptance of patients and physicians. Accordingly, we will over the next three months, support doctors in transitioning their patients to other medicines, and we will cease further investments in the development of a second generation device.

We will redeploy those colleagues in sales, marketing, medical and R&D, who have dedicated themselves to this product, to activities that are projected to generate higher returns. Including important late-stage development projects, as well as, stepped up field force support for our inline products.

We will phase-out those manufacturing activities that have been dedicated to Exubera. There are fewer opportunities for redeployment in manufacturing, and we will explore alternatives for sites and employees in consultation with works, councils, and other appropriate bodies. And we will, of course, carefully evaluate what happened here, in order to ensure that we apply all the lessons learned to future product development and marketing. We remain committed to finding and developing new treatments for diabetes, which is an area of enormous unmet medical need.

Our R&D portfolio in this field spends the width of the diabetes disease continue, from genetic susceptibility at birth, to the onset of devastating complications. This is also an important focus for business development.

In addition, we will continue to closely monitor developments in medical practice and technology as they relate to inhalation therapies and other innovative delivery systems, both for insulin and for other medicines.

The third area I'd like to highlight today is the progress we are making on reducing our cost structure. For this year, cost savings in the selling informational and administrative expense component of adjusted income, are ahead of plan. We are now projecting a decrease in these expenses of about $600 million on a constant currency basis. And we are continuing to take the necessary steps to meet our goal of reducing our total adjusted cost by at least $1.5 billion to $2 billion by 2008, compared to 2006 on a constant currency basis.

The process of closing sites like Ann Arbor in R&D and Brooklyn, Groton and Sandwich in manufacturing is on track. As these are company wide plants to reduce overall headcount by 10%. We are making solid progress and putting into place a much more flexible cost base that will more easily adapt to our changing business needs. And as we do this, we are also placing a very strong emphasis on day in, day out productivity improvements across the entire company.

We recently announced that Nat Ricciardi, who has had significant success in this area as the leader of our manufacturing division will lead an intensive enterprise wide focus on continuous improvement.

The fourth area I'd like to highlight today is the steps we continue to take to enhance our leadership talent. We are continuing to put the best possible people from inside and outside the company in critical leadership positions. As you know during this quarter, in addition to bringing Frank D'Amelio to the company, we name Martin Mackay, President of Pfizer Global Research and Development.

After traveling with Martin to our R&D sites around the world last week, I can tell you that he enjoys the highest respect of our scientists. They fully understand and support his commitment, to striking the right balance between stability where that is appropriate and change where that is necessary.

In R&D, as in all our activities, we need increased speed and focus, we need to exercise better discipline in picking the right programs to pursue, and we need to allocate our capital to disease areas with the strongest commercial potential.

Our business development group in close collaboration with R&D will continue to seek opportunities to bring in high potential programs and products from outside of our labs and our research organization will continue to pursue the best possible scientific opportunities for the future both inside and outside the company.

But Martin's single and most important priority is taking the broad array of candidates in our late-stage pipeline and bringing them forward to the market as fast as possible. We have 47 compounds in Phase II in very promising therapeutic areas, the most in our history. We believe that we have the opportunity to have more Phase III starts next year than at any time in our history.

Martin will focus in particular on advancing the most promising Phase II compounds, such as our Jak3 inhibitor for rheumatoid arthritis and IGF-1R, a monoclonal antibody for the potential treatment of common malignancies including non-small cell lung, breast, prostate and liver cancer.

In another important disease area, just this week, our alpha-2-delta compound for the treatment of anxiety moved into Phase 3. Underscoring what we see as our competitive advantage in an area of science that has produced Neurontin and Lyrica.

We've also, as you know, added an important new dimension to our research capacities by establishing a biotherapeutic and bioinnovation center based in California and led by Dr. Corey Goodman, an enormously talented scientist who enjoys the highest respect of the worldwide scientific community. The center will pursue cutting-edge research that we expect will generate an additional Corvert of drug candidates to take into the clinic and from there to the marketplace.

The fifth and final point I'd like make this afternoon is that in this quarter, we have continued to see evidence that the organizational changes that we are making are leading to better execution and better results. For example, by breaking our US business into five distinct and manageable units, led by strong general managers, we've established smaller and more focused originations, where everyone involved has a clear line of site to results so they can effect and be held accountable for.

The new structures have only been in place for six months, but it is already showing what it can do with our new products like Lyrica and Chantix. And our U.S. field force after a major reorganization is leading our industry in call volumes, calls per rep, total details and details per rep.

So to recap, we are working with a sense of urgency and a single-minded focus to improve every aspect of our company. From the way we work, to the way we make decisions, to the speed with which we operate, to the way we allocate our owners capital. These changes and others are establishing the necessary foundation for our future. They will ensure that we continue to improve the way in which we capitalize on top line opportunities, both internal and external, the way we achieved increased productivity and the way that we will continue to improve our performance. All of this will drive the achievement of our ultimate goals. Putting Pfizer on the right track, helping patients and enhancing the returns we delivered to our shareholders.

And now, I would like to turn it over to Frank D'Amelio

Frank D’Amelio

Thanks, Jeff. Good day everyone. Now, to the financial results. The charts that I will be reviewing with you are included in our webcast and will help facilitate the discussions of our third quarter results.

Let me begin with the highlights of our performance. Today, we posted reported revenues for the third quarter 2007 of $12 billion, a 2% decrease from the same quarter of last year. The decline reflects the loss of US exclusivity of Zoloft and Norvasc.

Zoloft lost US exclusivity in June 2006, a generic competition did not enter the marketplace until August of 2006, while Norvasc lost U.S. exclusivity in March of 2007, six months earlier than expected.

In addition, Lipitor revenues declined modestly, as the product continues to experience intense competition from branded and generic products in the statin market. On a positive note, our third quarter revenues were favorably impacted by the strong results of our new products, as well as, foreign exchange, which added approximately $300 million to our top-line.

Also from a comparison perspective, in the third quarter of 2006, we had a one-time reversal of the sales deduction accrual of approximately $170 million. This was due to a favorable development and a pricing dispute in US, which we noted in third quarter last year.

Our reported net income of $761 million was down 77% from last year. Our reported diluted EPS of $0.11 was down 76% from last year's $0.46. Adjusted income was $4 billion up 1% from the same period last year and adjusted diluted EPS was up 7% to $0.58 from $0.54 last year. The sharp decline in third quarter 2007 reported net income is primarily a result of the items impacting revenue that I just described, as well as, $2.8 billion of pre-tax charges related to the write-off of intangibles, inventory, and fixed assets associated with exiting Exubera, as well as, the accrual of other exit costs, which I will discuss in more detail, shortly.

Also reported net income and reported diluted EPS were negatively impacted by cost we incurred in connection with our cost-reduction initiatives, including restructuring and implementation cost in the creating of more efficient, effective and aligned global organization.

On an adjusted basis, which has reported income and diluted EPS, excluding purchase accounting adjustments, acquisition-related cost, discontinued operations, and certain significant items, our third quarter earnings performance improved despite the revenue decline given our year-over-year decrease in our total cost, higher interest income the favorable impact foreign exchange. Adjusted diluted EPS was also favorably impacted by our share purchase program.

Before moving on, let me point out several significant items that are included in our reported results for the third quarter. More detailed disclosures will be provided in our Form 10-Q filing, to Securities and Exchange Commission.

In the third quarter, we incurred $437 million restructuring charges compared to $245 million last year. These costs are primarily associated with employee termination cost and asset impairments. Additionally, we incurred $373 million in implementation cost compared to $182 million last year. These costs are primarily associated with our sites that will be closing and are recorded in cost of sales, research and development, and SI&A expenses. These are more fully detailed in the supplemental information that accompanies the earnings release.

Specific cost reduction initiatives are varied and stand most divisions, functions, markets and sites across Pfizer, broad categories of activity, our sales force reductions, manufacturing and research site closures and off-shoring and out-sourcing.

We reduced our US sales force by about 20% and are implementing similar reductions in most markets. Sales force restructurings have been completed in a host of other markets as well.

We have announced the closure of nine manufacturing plants this year, most recently, Sandwich, England, and six research sites. To-date, all transactions are proceeding according to plan. Additionally, the vast majority of research programs and development projects have been transferred and stabilized to their new location with minimal disruption. All impacted initiatives will be transferred by yearend.

Further, a wide array of off-shoring and out-sourcing opportunities are in various stages of implementation. Manufacturing, logistics, finance, facilities, medical, legal and IT are among the functions pursuing the financial and operation benefits of this strategy.

Now, on to the $2.8 billion of pre-tax charges associated with the exit of Exubera, our inhaled insulin product.

Our Exubera revenue performance to-date has been disappointing. Our worldwide revenues were $7 billion in the third quarter 2007 and $12 million year-to-date. The performance of Exubera has led us to our decision to exit Exubera, which has resulted in pre-tax charges of $2.8 billion. These charges are comprised to various components, including approximately $1.1 billion of intangible assets, from the acquisition of the rights to Exubera, $661 million of inventory, $454 million of fixed assets and $584 million of other exit costs.

On the income statement, $2.6 billion of this charge is included in cost of sales, while the remainder is included in revenues, SI&A expenses and R&D expenses. The asset-related charges of approximately $2.2 billion, represents non-cash charges, while the other exit costs will result in future cash expenditures.

In the financial schedules, accompanying our earnings release, we have provided our reported financial results, we have also provided for the first time a reconciliation of reported result to our adjusted results on a line-by-line basis.

I'd like to now provide further information on our adjusted results. Adjusted cost of sales as a percent of revenues was 15.1% compared to 15.4% in the same quarter of last year. However, for the full year we expect adjusted cost of sales to rise to approximately 15.5% of revenues compared with our previous estimates of about 15%. The reason for this change is that a greater portion of our revenues and associated costs are being generated in international markets, 52% in the latest quarter versus 45% in the same quarter last year. Also, portfolio was shifting to a mix of products with high cost relative to the prior year.

Adjusted SI&A expenses declined 1% from last year, this reflects our efforts to streamline the organization and improve operational efficiency. The level of decrease is partially offset by the unfavorable impact of foreign exchange. For the full year on a constant currency basis, we now expect an adjusted SI&A reduction of about $600 million relative to the prior year versus our previous guidance of greater than $500 million.

Adjusted R&D expenses for the third quarter declined 5% from last year, also due primarily to our efforts to improve operational efficiency. We continue to project the full year 2007, adjusted R&D expenses to be approximately $7.5 billion. Our effective tax rate on adjusted income for the quarter was approximately 22%, we continue to project 22% for full year 2007.

On a year-to-date basis, many of the changes in the first nine months of 2007 compared to 2006 are consistent with those previously described related to the quarter. Loss of US exclusivity, strong new product growth, the benefits of our efforts to streamline the organization and improve operational efficiency, increase interest income and favorable foreign exchange. Adjusted R&D expenses however increased 5% primarily as a result of our collaboration with Bristol-Myers Squibb to develop and commercialize apixaban.

Adjusted cost of sales increased 6% as a result of changing geographic and product mix. I would also like to highlight the performance of selected products. First Lipitor; Lipitor worldwide revenues for the quarter were down 5% compared to the same period last year. Revenues in the US declined 13% while revenues in international markets increased 9%. In the US, revenues declined as a result of intense competition and payer pressure. Of the 9% increase internationally, 6% is due to the favorable impact to foreign exchange and the remainder to operating growth.

Overall we do expect full year revenues to fall within the range of 3% to 5% decline in 2006. As you can see other key in line products posted positive results in the third quarter compared to the same period last year.

I would also like to emphasize the strong growth being delivered by our key new products. Chantix, our smoking cessation treatment posted revenues of $241 million compared with $33 million a year ago. The revenues of Lyrica, our medicine for the management of neuropathic pain and mostly recently fibromyalgia increased 37% to $465 million and revenues of Sutent our product for advance kidney and cancer of the digestive system were $151 million compared with $63 million last year.

Now as to Zoloft and Norvasc, you can see the short drop in revenues in the third quarter, a 73% drop to Zoloft and a 47% drop in Norvasc, following the loss of US exclusivity. Excluding Zoloft and Norvasc, worldwide pharmaceutical revenues would have increased 5%. As you can see in our earnings release, we have made some changes in our 2007 financial guidance. I've already discussed our 2007 guidance related to Lipitor revenues, adjusted cost of sales as percentage of revenues, SI&A expenses and R&D expenses.

We previously projected revenues of $47 billion to $48 billion for 2007, we are now improving the range to $47.5 billion to $48 billion as we move closer to year end. On reported diluted EPS for the full year, we previously said $1.30 to $1.41, given the charges associated with exiting Exubera, we have now lower the range to $1.01 to $1.10.

On adjusted diluted EPS for the full year, we previously said $2.08 to $2.15. We are now improving the range to $2.10 to $2.15. Guidance remains unchanged for other items, effective tax rate on adjusted income and cash flows from operation. Lastly, in the area of our stock buyback program, we previously said that we will repurchase up to $10 billion of our stock in 2007 and that remains our expectation. To-date, we have purchased $7.5 billion of our stock in 2007, for a total of approximately 291 million shares.

Now on to 2008 guidance, our previously issued guidance remains unchanged, except for our target to reduce our adjusted total cost. We previously projected that we would achieve an absolute cost reduction of at least $1.5 billion to $2 billion compared to 2006. We now expect to achieve this target but at constant exchange rates. This is reflective of the extent to which our expenses have been adversely impacted by foreign exchange. The strengthening of the euro and of the currencies related to the dollars partially offsetting saving from our cost reduction initiatives.

So to summarize the key takeaways for the quarter. We are on track to achieve our 2007 revenue and adjusted diluted EPS guidance. We have raised the lower end of the range and our guidance for both 2007 revenues and adjusted diluted EPS.

Additionally, we have reaffirmed our 2008 guidance, but have now stated that our 2008 total cost reduction of at least $1.5 billion to $2 billion as compared to 2006, as a constant exchange rates. We recorded $2.8 billion of pre-tax charges associated with the exit of Exubera. These charges relate to the write-off of certain assets as well as the accrual of other exit cost, which resulted in at $0.31 reduction and reported diluted EPS for the third quarter.

Our new products particularly Chantix, Lyrica and Sutent are performing extremely well and our largest product Lipitor continues to do well considering the intense competition and payer pressure.

Lastly, on our cost reduction initiatives, we continue to make progress to reduce our overall cost base and improve our operational efficiency. We recognize we have made significant progress to-date and that there is more to do in order to achieve our overall objectives.

With that, I would like to turn it back to Jeff.

Jeff Kindler

Thank you very much, Frank. And we are now ready to take your questions.

Question-and-Answer Session

Operator

Anderson with Sanford Bernstein.

Tim Anderson - Sanford Bernstein

Thank you, I have a couple of questions. The first actually it just goes back to your earlier announcement of the biotherapeutic center that you are going to establish on the West Coast. And I am wondering if this is going to be a bricks-and-mortar facility. And if you actually go so far as make it a research or designate a separate pool of funds with things like acquisition.

And then the second question, sorry, if this has too blown, but any comments about Biogenetic being for sale and whether this is something that Pfizer would potentially consider?

Jeff Kindler

Okay Tim, thank you. First with regards to biotherapeutics, we’re starting with the facility that we already have in San Francisco called Rinat, which as you may know it was the neuroscience spin-off from Genentech and has really done quite well and we’re very excited about some of the opportunities that we have there and Dr. Goodman is going to initially start with that base. And we’re in the process developing the future business plans, but I think you can look forward to creating hopefully a network of organizations without a significant investment in bricks-and-mortar, because I don't think that will be necessary, and it will be a very integrated approach to business development that involves both what Corey Goodman is leading, as well as what Martin Mackay, at [Oregon] our business development group is leading.

So, stay tune, I'll be talking about further plans as we go forward, but that's how we are starting. And with regard to biogenetic, obviously we don't comment on that kind of speculation, so I won't surprise you in that regard. But, I just have to say, we will always keep eyes and ears open at any means to build our business through alliances, licensing or acquisitions and when the right opportunities present themselves, we will act appropriately. But, we really want to be disciplined in how we allocate our capital and we want to be thoughtful about that and so, we look at all these opportunities from that perspective.

We are going to focus first on product potential, especially with our gaps in our therapeutic areas. We will focus secondly on expanding our platform potential, such as new ways to deliver therapies and as I said the most important consideration here is to ensure that we deploy our capital in the best possible ways to create opportunities for creating shareholder value.

Tim Anderson - Sanford Bernstein

Thank you.

Jeff Kindler

Thank you, Tim.

Operator

Your next question comes from John Boris of Bear Stearns.

John Boris - Bear Stearns

Yes, good afternoon. Thanks for taking my questions. To your point Jeff on capital allocation, it appears that with 7.5 billion of shares repurchased and are you completing the 10 billion share repurchase, also with the dividend increases that we've seen over the last couple of years, I think two years ago, is it 27% increase, 21% increase last year?

And then on business development, can you just take us through how you are thinking about those three elements going forward? And then, I just have a follow-up on some operational questions on Lipitor and Exubera.

Jeff Kindler

Okay, John. Why don’t I let Frank start that and we will see if that addresses your question.

Frank D'Amelio

Sure, on the dividend, let me start by saying as a company, we've been committed to total shareholder value. Going forward, we will continue to be committed to total shareholder value.

In terms of the numbers, John, let me just run the numbers for you. Two years ago, the dividend was $0.76, this year it $1.16, so it's increased 53% over the last two years. It's 32% in '06, 21% in '07. Going forward, for the '08 dividend, we will announce that dividend in December of this year for the upcoming year, as it has been our practice from the past.

John Boris - Bear Stearns

Buybacks?

Frank D'Amelio

On buybacks, we announced this year a repurchases of up to $10 billion. At the end of the quarter, we have repurchased $7.5 billion worth of our shares, 291 million shares. We are clearly on a path to achieve up to 10 billion in our repurchases. One again, in terms what we’ll do going forward, in January, we’ll announce our 2008 buyback program as it has been customary.

Jeff Kindler

Okay John, your second question?

John Boris - Bear Stearns

Yeah, just on operations on Exubera. Can you just comment on the sales reps or the detailed effort that you have behind the brand? And how are you going to be reallocating that important resource going forward?

And then, I think I recall that there was a manufacturing facility in Germany that went along with your acquisition of the full rights on Exubera. What are you going to be doing with that? And then on Lipitor, just on the trends on Lipitor, seems like the four week average trends on TRX, the growth is minus 15% if you look at it by dosage form, the 10 mg is declining 19%, 20 mg down 14%, 40 mg is down 7% and 80 mg is up 1%. You’re aggressively doing a lot of direct-to-consumer advertising but it doesn’t seem to be addressing the growth issue that you have within the US. Can you just talk about when you might be anticipating seeing stabilization of those trends in the United States?

Jeff Kindler

Okay, let me start with the first part of your question and then I'll ask, Ian, to address the Lipitor. We are going to redeploy the vast majority of the effected colleagues in commercial medical and R&D functions, and there will be no reductions in the US field force. We're going to redeploy people in those groups, I mentioned to support projects and products that have, we hope greater commercial potential.

Now, in manufacturing opportunities for redeployment are frankly pure and they depend on the ultimate role for the impacted sites, including the one you mentioned. So, we'll be exploring alternatives for those sites and their employees and consultation with works councils and other appropriate bodies.

Ian, do you want to address the questions about Lipitor?

Ian Read

We have been shutting that facility.

Jeff Kindler

As I said we have to look at that in consultation with works councils.

Ian Read

Okay. So, I'll give more color on the Frank's comments on Lipitor, so we were down about 13% in the U.S. On scripts, the pricing and rebates were basically a watch given the fact that we had a favorable settlement in the third quarter of '06, which basically offset our favorable pricing of impact for quarter.

If you're looking at Lipitor, I think you got to just look back and discuss how we look at the market, how we see what's happening and on the switch loss, we appear to stabilize that at about 50% below the peak, post the advent of multi-generic simvastatin, in fact, we are now at the pre-multi-simvastatin level. New patient population is fluctuating or new patient volume is fluctuating around to a 20% share. I like to indicate I feel we are very competitive, against the brand of statins in this marketplace. And our access remained strong, our access remains in the range of 65 to 70 at Tier 2 across commercial and medicare lives. And we see the market while slowing up from 12 to plus growth to about high single-digits coming out of this year and I see that being maintained in '08.

So, our strategy is to continue using our commercial resources to folks on the switch, the new patients and maintaining access. And as you noted, those strategies are being applied against on the professional platform to differentiate Lipitor on the efficacy across the dosage range, it's safety and outcomes, a very strong DTC program using print and using the (inaudible) ad, which is one of our best ads for Lipitor. We are also looking at using those resources and targeting those sites where we see the most activity on generic switching. And we are also using related things like value cards to deal with co-pays. And that's the environment we see going forward for Lipitor.

Jeff Kindler

Thanks Ian. Next question, please.

Operator

Your next question comes from Jami Rubin of Morgan Stanley.

Jami Rubin - Morgan Stanley

Thank you. I've got a few questions. Frank, this might be unfair since you are still new. But based on the guidance next year, which doesn't appear to have meaningfully changed at all. The expectation for cost reduction of $1.5 billion to $2 billion hasn't changed and you've given a pretty wide range of EPS and a relatively wide range in terms of the top line. But if I assume sort of a middle of the range on revenues, I've got to assume a significant decline in both SG&A and R&D just to get to the bottom end of the range next year.

I appreciate you can't give a lot of detail yet on 2008, but you have offered this guidance. Am I thinking directionally in the right way that we haven't seen yet big year-over-year declines in those expense areas? And again just to get to the lower end of the range, I've got to assume big year-over-year declines. That's my first my question.

Second question is, just interested in the Exubera announcement today. You are also disbanding your research on second generation Exubera, which I thought was interesting. And I am wondering if you could comment on, why are you stopping development in the second generation insulin device? And it seems to me that one of the biggest issues was the device itself. The second generation device was a nifty little thing that should be an easier sell. And I am just wondering if you could comment on why you've chosen to scrap the whole development plan. If you think it's more than just a device, if it has to do with just the overall acceptances of pulmonary insulin.

And my third question relates to an update on the Lipitor 993 patent. If you could tell us where that fits now at the Patent and Trade Office. Thanks.

Jeff Kindler

Okay. Thanks Jami. We are doing great on our one question per --

Jami Rubin - Morgan Stanley

Sorry.

Jeff Kindler

Here, but they are all good questions. So, I'll let Frank take the first, Ian take the second and Allen Waxman will take the third.

Frank D'Amelio

Let me address the first question. I know you are focusing on the level of cost reduction for '08. Let me start with '07, and then what I'll do is, after I start with '07, gives some statistics, I'll bridge to '08 and then I'll try to frame that into the overall '08 guidance.

We are making good progress on our cost reduction initiatives. In fact, in SI&A in 2007, we increased the guidance from $500 million to $600 million. That was the SI&A element of overall cost only.

If you think about some of the things we are doing, just operationally to demonstrate progress, you can bucket most of our cost reduction initiatives into five categories. Field force reductions, manufacturing site closures, research site closures, outsourcing and offshoring. Let me just give you one statistic on each and then I will move on to 2008.

In the field force, as I mentioned before, we’ve implemented 20% reductions in the US and similar reductions in many markets outside of the US. In manufacturing of sites alone, we’ve announced nine exits this year. In R&D, we’ve announced six exits. In terms of outsourcing, we have outsourced some of our IT operations. In terms of outsourcing and offshoring, we’ve outsourced and offshored some of our financial back office operations. It's a macro statistic. At the end of last year, we had 98,000 employees. We had announced the 10,000 employee reduction at the end of this past quarter we had about 87,000. So, I frame that just to give you a feel for we are making a lot of progress relative to the area of cost reduction.

Now let's take that and move into 2008. We have, I'll call it, a relatively wide range out there for 2008. But in terms of where we fall in the range, there is a lot of moving parts still relative to 2008. We are still very much in our planning process. We are comfortable enough at a macro level to reaffirm the guidance we’ve provided on the various elements. We updated or slightly modified the $1.5 billion to $2 billion at constant currency, given some of the things that are going on with the dollar relative to other currencies. But I think we’ve reaffirmed the range. We’ve reaffirmed the guidance. We’ve got some ranges out there and we’ll be back in January to update the guidance.

Jeff Kindler

Thanks Frank. Ian do you want to talk about the second generation, please.

Ian Read

Well, Jami, I think to your question, when we look at the marketplace, there are two barriers I think we clearly underestimated. The barrier to moving patients with the physician community earlier to Exubera. And I think this is one of the major issues that we underestimated. The resistance from physicians and patients to going on to insulin in any form earlier than they have been to-date. So, that is one major barrier. The second one is per se, the burden that the Exubera technology represented to the practice, which went from the lung function testing, the training on the device, and while the size of device may be a component of that, I think you have to look at the totality of it. And that's what led us to a decision to exit.

Jeff Kindler

Okay. Thank you, Ian. Allen do you want to talk about the patent?

Allen Waxman

Thanks, Jeff. Jami, you referred to the 993, I assume you completing the 995 and 893, actually both are before the Patent office as we speak. I think you may know in August, we received comments from the Patent office on 995 enantiomer patent that was in the form of an initial rejection which is typically the way these things come out. We have filed a respond to those comments and that will continue to work its way through the Patent office over the next year, 18 months. It can be a lengthy process.

The 893 is the subject of a reexamination request by a law firm associated with Ranbaxy. That request has been granted as the norm and we will wait to hear from the Patent office. And again, typically a response can be in the form of an initial rejection of some of the claims. We will have an opportunity to respond to that and that will too work its way through the Patent office and what can be a lengthy process.

Jeff Kindler

Thanks Allen. Next question please.

Operator

Your next question comes from Steve Scala of Cowen.

Steve Scala - Cowen

Thank you. How would you characterize generics Simvastatin relative to its ultimate market share? Do you feel that's nearly full penetrated, 50% penetrated, or some other estimate? And within your overall 2008 P&L guidance, what are the expectation for Lipitor's trend and then lastly giving the apparent success of your competitors in developing a CETP inhibitor without hypertension, are you reconsidering starting your efforts on your follow-ons towards atropine? Thank you.

Jeff Kindler

I will ask Ian to answer the first two questions and Mart Mackay will answer the third.

Ian Read

So, I will take the second part first which is Lipitor inside the overall business. When we look at the guidance we gave on the revenue, we looked at a lot of our major products and we talked about the opportunities and challenges of those products to get to the macro-levels. So, I think we expressed our judgment, we reflect that through the balance of all of the portfolio.

On Simvastatin either we have got a year and a half, we are coming up to the year review. I am seeing a sort of at least on the access side, a stabilization of our access, I think we got to look at how Lipitor continuous to be competitive against Crestor and Vytorin and we'll see how it goes forward, may be as Simvastatin will continue to make some further marginal gains, but it's going to be via some market pressure and not major contracting changes.

Jeff Kindler

Thank you, Ian. Martin, CETP Inhibitors

Martin Mackay

Just a briefly, Steve, good afternoon. We are still currently reviewing the prospect of daytime going through that, carefully we will present, some of this work at the American Heart Association, in November and layout the studies that we have done in that regard. We have no plans at this stage to begin our -- restart our CETP Inhibitor program, until we have thoroughly reviewed all those results and obviously I can't comment on the [med] programs.

Jeff Kindler

Thanks Martin, next question please.

Operator

Your next question comes from David Risinger of Merill Lynch.

David Risinger - Merrill Lynch

Thanks very much.

Jeff Kindler

Is that same person as David Risinger.

David Risinger - Merrill Lynch

Yeah, thank you. So, I'll just keep it to two questions. First in terms of the losses on Exebura, obviously dropping Exubera will be accretive. Is there anyway Frank that you can frame for us, how accretive it will be for you to drop Exubera? And second, I was hoping that you could talk about your biotech and vaccine transaction agenda. This is something that Pfizer has talked about for a long time, there have been relatively few transactions to date and I believe that Pfizer's commitment is still there but in the mean time acquisition target prices are rising and so it had be helpful for you, Jeff to maybe address that.

Jeff Kindler

Okay, thanks. Frank, go ahead.

Frank D'Amelio

On the first part of that question I think the simplest way to think about this is Exubera sales for the year were very, very modest. As I mentioned, $7 million in the quarter, $12 million year-to-date, so really no impact on our margins.

Jeff Kindler

Okay. Dave, with regard to biotherapeutics clearly you're right, the deal environment is challenging, there is a relatively finite number of assets, especially in the later stages and the prices are clearly quite high. We feel that there is still a lot of opportunities out there if we take a thought on disciplined approach to it and possibly through creative deal structures in the like. Obviously, I’m not going to comment on any particular transactions we might be considering, but there has been activity in that area and there will continue to be and we have to strike the balance between our desire and need to supplement our internal portfolio, which we've clearly recognized. But at the same time exercise discipline to ensure that we make smart investments that will payoff for the shareholders that's not an easy thing to do in this environment, but we are going to keep at it.

David Risinger - Merrill Lynch

And just a follow-up Frank, obviously in dropping Exubera you're dropping a lot of costs in manufacturing and promotions, so won't that be accretive?

Frank D'Amelio

Yeah. So in terms of '07, it's almost November already, right? So I mean there isn't a whole lot of the fiscal year left and clearly, decisions and implications were factored into the updated guidance we gave. In terms of 2008, once again, there are many factors that impact the guidance, which is part of why we have the range, we have all of that clearly factored into the update we provided today on 2008.

David Risinger - Merrill Lynch

Thank you.

Frank D'Amelio

Thank you.

Jeff Kindler

You are welcome. The next question, please.

Operator

Your next question comes from Roopesh Patel of UBS.

Roopesh Patel - UBS

Well, thanks. I have a couple of questions on the Celebrex, I'm actually curious about the company's strategy on Celebrex here for the US market in the context of the two price increases taken over the six-month period, totaling 12%. I know that this was highlighted as one product area where you wanted to resume market share growth, are you satisfied with how things have turned out? And then separately if you could also help us claim the opportunity for Celebrex in Japan that would be very helpful?

Jeff Kindler

Okay. Roopesh I will turn both those questions over to Ian.

Ian Read

So, I think you step back and look at it, Celebrex clearly offers value to patients and that's reflected in the way we are commercializing the product this year. The market growth is anemic and we are still focused on reestablishing market growth and script growth for Celebrex.

To get to that we need to deal first of all with the CV issue and put it in perspective and we are leading with that in our discussions with physicians, both with the field force and with medical-to-medical and through DTC. When we ran the DTC over this issue in the second quarter, we did see a response in market share. We will be back into the fourth quarter and the first quarter heavily on this area in DTC to sort of reestablish to growth trend on scripts for Celebrex. So the strategy still is focused on reestablishing growth in scripts for Celebrex. Specifically Japan, we're working through indications and registrations in Japan and when that's complete, I think we also have to work through pricing and depending upon that, we can get to the opportunity in Japan.

Jeff Kindler

Thanks, Ian next question please.

Operator

Your next question comes from George Grofik of Citigroup.

George Grofik - Citigroup

Thanks for taking my question. Looking to 2008, can you give us a sense for the Part D pricing environment, and to what degree you may have seen more pressure on that business relative 2007? And secondly, in past several weeks, across the market growth is low to mid single-digit, and can you provide some color on what you believe is causing that slowdown and what you anticipate will reinvigorate growth in the market to your expectation of high single-digit? Thank you.

Jeff Kindler

Thanks, George. I'll let Ian take both of those.

Ian Read

So, George, remind me the first question again. I am sorry.

George Grofik - Citigroup

Part D next year.

Ian Read

Part D, well, I think we have discussed this on previous calls. Clearly, the land grab was made early on and Part D is becoming more competitive and the negotiations to be more competitive. So there is more pressure vis-à-vis the net access and rebase and I expect that to be reflected in '08.

And secondly, the question of the soft market, I don't have any specific data anecdotally from distributors and from people we speak to. There maybe an issue of the [Donut Hall] and some resistance as seniors get close to that, may be causing a slow up. So, we would -- my belief is that, we can expect high single-digits for the statin market in '08.

Jeff Kindler

Thank you. George, next question please.

Operator

Your next question comes from Tony Butler of Lehman Brothers.

Tony Butler - Lehman Brothers

Thanks very much. Jeff, just a little bit of a macro question and that is having been in the seat now for roughly 13 months, you have been very rapid for some change. In your management team you've been very rapid to execute some costs reduction and in my opinion we used to refocus the culture at Pfizer over that span of time. What's the next 12 months holding for you and what are your true objectives over this very finite period of time, if you could? Thanks.

Jeff Kindler

Well, thanks Tony. I think that's a great question. I am glad that you asked it. I think, well I'd start by saying is that when I started in this job and our current team start in this job, it was very clear to us that this business needed to be fixed in a lot of ways.

We needed to get down to the foundation of this company and rebuild some basic elements of it brick-by-brick. I would say, just to use as examples, four big areas that we've been addressing, with a great deal of intensity, are pursuable, focus and accountability that required both changes in the culture but also organizational changes that I've talked a lot about.

Second, improving our leadership cadre which I have talked about.

Third, a disciplined approach to capital allocation and prioritizing our investments. Starting to get into the habit of understanding that we can't do all things to all people, we can't do everything we'd like to do and we have to focus our investments where they provide the greatest opportunities, that's a bit of a change for us quite frankly.

And fourth, improving our cost base, making it more flexible and instilling the culture productivity, all of this is foundational. I think, we've made a lot of progress but I will say I don't think we're by any means done and we have a lot more to do in this regard.

And in order to establish ourselves for the future, we have to have the foundation right. This is tough work and there are no quick fixes. I think we're making a lot of progress as I have said but we need to keep going. We all know very well that we face in 2011 loss of exclusivity on the largest product in the history of pharmaceutical industry and that we have to be, while we are fixing the foundation of this business, while we are improving our operational performance, we have to be thinking about, not just thinking about, but taking actions to prepare ourselves for that time.

To reset the company strategically to really push our late stage pipeline, to provide real focus on the value that's in that pipeline, to continue with focus on aggressive business development. To see whether we can get more out of our mature products, which I think is an opportunity to focus on parts of the world like Asia, where there are tremendous opportunities, we need to continue to do, to looking for complementary products and technologies that can enhance the value of our offerings, and we are going to focus on all of these on multiple fronts.

So, over the next year and in the next month, so I think you will see continued activity across all those areas that I have listed. There isn't a magic bullet here. There isn't a single solution that one day we are going to open the curtain and unveil, and I am sorry people find that disappointing. We are very focused on building a foundation for success, optimizing our current performance, and doing everything we need to do to prepare the company for the Lipitor to elevate.

Tony Butler - Lehman Brothers

Thanks Jeff.

Jeff Kindler

Next question please.

Operator

Your next question comes from Chris Schott of Banc of America.

Chris Schott - Banc of America

Great. Thanks. Just two quick questions. May be first with regards to the Lipitor franchise. Without a natural follow on the cholesterol business with 10 mg under pressure, it is 2008 or 2009, too early to start thinking about pulling back resources from that product or just still from your perspective a good investment even with the decline given that we kind of our heading towards that, I think I just mentioned that 2011 involve.

And then, secondly question, maybe to Martin Mackay with regards to the R&D, just the scopes of R&D efforts right now. Are you comfortable with the breadth of investment? Or what are your thoughts on just may be Pfizer focusing on pure therapeutic categories may be the target investment you are making on Oncology as an example, putting more resources towards may be in more selected portfolio products? Thanks.

Jeff Kindler

Okay. Chris, I’m going to let Ian take the first question and I just mentioned and you’ll get to know him a lot better. It’s Mackay not Mackey. So, Ian do you want to talk about the further investments in Lipitor?

Ian Read

Chris, as you imagine, the statin market is extremely competitive. I mean not only on the generic side but on the branded side with large investments by behind Crestor and Vytorin. And we analyzed this very carefully and have its models and look at response rates and I’ve got no doubts that we need to continue to maintain the support behind this brand through the periods that you discussed, there is no question about it in my mind.

Jeff Kindler

Martin?

Martin Mackay

Thank you for the question, Chris. Jeff alluded to the fact that we visited all the major R&D sites last week, and during that visit we took along new PGRD leadership team, plus Corey Goodman and gained tremendous amount of excitement amongst the colleagues for some of the changes that we’ve made. At those meetings, we laid out a very distinct five point plan to all the colleagues in R&D. And although I won't go through all of the points in the interest of time, I will mention two or three of them which really addresses the point that you make.

Clearly and again as Jeff alluded to, over the short term, we must make sure that we deliver on our Phase 3 portfolio. I know that portfolio isn’t as rich as like it to be in Phase 3, but nevertheless there is a lot of value there around our Oncology platform with Axitinib, CTLA-4, et cetera and another indications for Sutent. We also have some other exciting compounds in that area, and we must deliver to gain the value for the company.

Secondly, we need to make sure that this rich Phase 2 portfolio that we have which again has already been eluded to, as we actually translate into Phase 3. And we do have a real potential to create and more Phase 3 starts next year and in '09 and '10 than we have ever have before as an organization. So, to really accelerate, the hottest compounds through that pipeline. Now, it's the real piece that you'll ask about to do this and this was the second part of the plan, we're going to have to focus resources on the highest priority compound and the highest priority disease areas. So immediately, I have launched a team to look at all the compounds that we currently have in development and will be going through those in a rigorous analysis one by one over the next two to three weeks to make sure that we are backing that very finest compound.

Then next on our list is to look at the disease areas that we work on and again, we’ve been doing quite a piece of work over the summer already to really get to that heart of what are therapeutic areas that we are going to be really crucial over the next period. You mentioned one of them Oncology, of course, we have other very hot areas, diabetes will continue. It's a very important area for us. Alzheimer's disease for example and a number of other areas that over a very short period of time, we are going to focus our resources on to the hottest compounds and the hottest areas.

Jeff Kindler

Thank you, Martin. We have time for one more question.

Operator

Next question will be from James Kelly of Goldman Sachs.

James Kelly - Goldman Sachs

Thank you and good afternoon. I want to just ask a quick two part question on this. One, to follow-up on David's question and really ask about the fixed cost component, on the Exubera exit. If you are looking at about $1.1 billion of intangibles and $500 million or just under that worth of fixed assets, what should we think about these fixed cost charge per annum that will not be in the number going forward.

And then secondly, as we take a look at some of the pipeline products that Pfizer has recently discontinued or even Exubera, definitely seen that some of the products that were in-licensed in a very competitive process and had fairly high royalty rates. And for whatever reason we are not meeting the right economic hurdles or we are not looking like we are going meet the right profile. Are you thinking differently now about how you bring products in and what sort of variable cost component could come in on products that you are looking at from a business prospective? Thank you.

Jeff Kindler

Okay. I well let Frank take the first part.

Frank D'Amelio

Yeah, I think in terms of the first part of the question on fixed cost clearly to your point there will be some cost that will not be incurred which is the point that you all were asking about when we get into 2008. But as I made on the same point before that's part of an array of various items we are working our way through relative to the 2008 plan and to the guidance that we reaffirmed today on 2008. We're still working through the details of the '08 plan, we are comfortable with the general parameters we provided today and come January, we'll provide another update on our 2008 guidance.

Jeff Kindler

Jim, could you just restate your second question again? Please.

James Kelly - Goldman Sachs

As you take a look at the opportunity thanks to in-license or the business development in general, are you thinking differently about what kind of economics you want to bring in house. Because some of those products that you've recently exited, whether its Exubera or others in the pipeline had much higher variable cost burdens or royalty burdens is that part of the calculus here at all?

Jeff Kindler

I let David respond to that.

David Shedlarz

Good Jim, there's a number of different ways that we're addressing business development not only from an economic point of view but from an organizational point of view and also in terms of the types of transactions we are likely to enter into. And so, let me highlight first that, we are exercising greater discipline in terms of that, the way that we are approaching overall business development, understanding as you highlight, not only the initial cost in terms of entering into a transaction of the ongoing burden to the company at the same time. In some respects, you have to take a look at business development the same way, you take a look at in total activity, and you are just acquiring whatever you are acquiring at whatever stage on that basis and you have take into consideration of that which is only going to able to accommodate a certain level of activity at the same time.

Also understand, you are not going to see your father's approach to business development going forward. You will see classical ways of entering for licenses and acquisitions, but you are also going to see more alliances being established along the lines of what we put in place for a fix-a-band. And let me tell you what that ends up doing strategically. One spreading the risk, two make in showing to your advantage the best capabilities are people in the business. And three, this is probably the more elegant way of dealing what is an over capacity in the pharmaceutical industry by pulling together activities. So, hopefully that answers your question. There is going to be a lot of changes in the approach, not only from economic point of view, but a risk of point of view, and a capabilities point of view at the same time.

Jeff Kindler

Thank you, David. That's all the time we have today, I appreciate all of you listening in and have a good afternoon.

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Source: Pfizer Q3 2007 Earnings Call Transcript
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