Pfizer Q1 2009 Earnings Call Transcript

| About: Pfizer Inc. (PFE)
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Pfizer, Inc. (NYSE:PFE) Q1 2009 Earnings Call April 28, 2009 ET


Chuck Triano - Senior Vice President of Investor Relations

Jeffrey Kindler - Chief Executive Officer and Chairman

Frank D'Amelio - Chief Financial Officer

Ian Read - President, Worldwide Pharmaceutical Operations

Amy Schulman - Senior Vice President and General Counsel


Catherine Arnold - Credit Suisse

Chris Schott - JPMorgan

Tim Anderson - Sanford Bernstein

Jami Rubin - Goldman Sachs

Roopesh Patel - UBS

David Wiesinger - Morgan Stanley

John Boris - Citigroup

Seamus Fernandez - Leerink Swann


Welcome to the Pfizer First Quarter 2009 Earnings Conference Call. I would now turn the call over to your host Mr. Chuck Triano, Senior Vice President of Investor Relations. You may begin, sir.

Chuck Triano

Thank you, operator. And good morning everyone. And thank you for joining us today to review our first quarter 2009 performance. I'm here with Jeff Kindler, Frank D'Amelio, Ian Read, Martin Mackay and Amy Schulman.

The financial charts that will be presented on this call can be viewed on our home page at in the Investor Presentations tab by clicking on the link Quarterly Corporate Performance First Quarter 2009.

We know this is a busy day for many of you with other companies reporting earnings. And our conference call will last one hour, and we will end at 11 o'clock.

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. Factors that could cause actual results to differ are discussed in Pfizer's 2008 annual report on Form 10-Okay, and in our reports on Form 10-Q and Form 8-K.

Also, the discussion during this conference call will include certain financial measures that we're not prepared in accordance with the Generally Accepted Accounting Principles. Reconciliation of these 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 April 28, 2009. These reports are available on our website again at in the Investor's SEC filing section.

With that, I'll now turn the call over to Jeff Kindler. Jeff?

Jeffrey Kindler

Thanks Chuck, and good morning everyone and thanks for joining us today. I'll start this morning with an overview of our first quarter results. Then make some brief comments about the operating environment, provide you with an update on our new business unit model and conclude by reviewing the status of our planning for the pending Wyeth integration.

First, our results. During the first quarter, we continued reshaping our operating model, made substantial progress in planning for the Wyeth integration and continued to face challenging economic and competitive conditions. Yet despite all of that, our colleagues remain intensely focused on meeting our current commitments to our shareholders. As a result, I'm pleased to report that we produced revenues consistent with our expectations and continued to deliver significant cost reductions. And we remain on track to meet our financial goals for the year.

Today, we are reaffirming our 2009 guidance for revenues and adjusted results. As you saw on our release, we posted revenue of $10.9 billion, an 8% decrease, compared to the first quarter of last year. The decline was due primarily to foreign exchange and last year's loss of U.S. exclusivity for Zyrtec and Camptosar. It also reflects lower revenues for Lipitor and the year-over-year decline in Chantix sales following last year's U.S. label changes.

As for the bottom line, we are building on the achievements of the last two years as we continued to streamline our cost base. Our adjusted total costs showed a reduction of roughly $500 million on a constant currency basis due primarily to our cost reduction initiatives and to a lesser extent certain insurance recoveries.

Mike will take you through the numbers in more detail, but I'd like to comment on two particular aspects of the operating environment: the economy, and potentially U.S. healthcare reform. While the recession has clearly had some impact on the business, particularly in the United States, so far that impact has been inline with the expectations that were build into our 2009 guidance, which we are reaffirming today.

I believe this is an environment in which we will see the benefits of our customer focus business units, since they are well positioned to adapt quickly to the changes they each see in their very different therapeutic and geographic markets.

As for potential U.S. healthcare reform, we continued to participate actively in the discussions in Washington, and continued to see a strong effort by policy makers to engage all stakeholders and solutions that improve quality and reduce costs while recognizing the critical importance of maintaining strong incentives through medical innovation.

We firmly believe that there can be tremendous long-term value created for both our customers and our shareholders, and a healthcare system that is more efficient, more performance oriented and more financially sustainable than the one that we have now.

Meanwhile, we continued to make tremendous progress in reshaping Pfizer. Our move to customer focused business units is proceeding very well. Today, we operate in a much more diversified way than in the past, as it is appropriate, given the many different geographic and therapeutic markets in which we compete.

Collectively, the business units in our pharmaceutical business have full P&L responsibility, from proof of concept through the end of the product lifecycle. This approach, unique in our industry, introduces a new level of market discipline. It demands clear focus and accountability, which is leading to faster, smarter, clear decision making.

Here are some examples. In March, our Primary Care business launched a reshaped U.S field organization that is designed to reflect our projected needs after Lipitor loses exclusivity, while also protecting our market position today. This team now operates in five regions, where we are able to adapt the level of resources required. Use sophisticated segmentation analysis to identify customer trends and preferences and deploy this data to micro target customers, focusing on high value opportunities. This approach is enabling us to tailor decisions for our key brands.

We delivered, for example, we are using multi-channel communications to physicians, focusing on undiagnosed patients so that they will ask their doctors for relief from their pain, which may include using Lyrica.

For Celebrex, our DTC programs target key patient segments. And initial results show a significant increase in weekly volume in Celebrex call centers and visit to the Celebrex website.

Earlier this year, the Primary Care business reflecting our commitment to investing our owner's capital wisely discontinued two Phase III projects so they could focus on programs with much greater potential, such as pain and Alzheimer's disease. Two weeks ago, they move forward on our work to address Alzheimer's disease by starting a new Phase III trial of Dimebon with our partner Medivation.

The Primary Care business is also conducting Phase III trials with tanezumab, which represents a totally new approach to pain and the treatment of osteoarthritis.

We're seeing similar progress in the other businesses as well. Our Specialty Care team is advancing our host of new ways to meet customers' needs with its 13 medicines. They have reprioritized Geodon in the U.S., backing it with the new field force. There is pursuing business development opportunities, which led to our agreements with Opsolium (ph) and Bausch & Lomb as well as the new HIV company we are creating with GSK.

Specialty Care business is also advancing its light stage development projects, especially our JAK3 inhibitor. This compound is poised to be the first oral disease modifying drug for rheumatoid arthritis in a decade. And we will present additional Phase II data on it in June at the European league against Rheumatism Conference.

In our oncology business, Sutent anchors our portfolio more than 58,000 patients have used it. And extensive oncology development program is underway for 22 new molecular entities and new indications for current medications, including 10 Phase III trials in solid tumors. This work is attracting world-class talents of Pfizer, including Mace Rothenberg, our Clinical Development Leader, who came from Vanderbilt and Elizabeth Barrett, our new U.S. Regional President, who joined us last month from Cephalon and J&J before that.

Meanwhile, our emerging markets business posted 5% operational growth in the first quarter. Asia grew 8% operationally led by 28% operational growth in China, which was partly offset by declines in Korea resulting from losses of exclusivity from both Norvasc and Lipitor. We saw nearly double-digit growth in the Middle-East and African emerging markets. While given the current economic turmoil, we saw a tempering of growth rates in Eastern Europe.

In light of the significant unmet medical needs in the these parts of the world, we believe that over time, revenues in these markets will grow substantially as health systems evolve, infrastructure is created and disposable incomes rise.

In a related area, our Established Products business focuses on a relatively new priority for Pfizer, medicines that have lost exclusivity or are about to do so. This unit was created in 2008, with the goal of recapturing value for these products in developed market geographies, by progressively slowing the erosion of revenue and profit from established products.

Now normally in developed markets we see an immediate and a rapid decline in revenue when branded products lose exclusivity followed by a slower decline over the long-term as more generics become available and prices erode.

So, job one, is to stabilize the decline of current products by reducing the cost of goods, developing product enhancements and increasing promotional efforts. For some products, this translates into changing the growth trajectory from negative to positive.

In one example from its first year of operations, this business took a set of five products that together declined in 2007, and generated positive growth through combined sales of $1 billion in 2008. This month, when a competitive was unable to meet demand for nitroglycerin, our U.S. team quickly committed to supply our product Nitrostat meeting nearly 100% of the U.S. demand for this life saving medicine.

The second step of the journey is to generate growth by expanding our portfolio. And that's why we did the Aurobindo deal which we announced last month. This deal alone gives Pfizer rights to 39 generic solid oral dose products in the U.S and 20 in Europe, as well as 12 sterile injectable products in the U.S and Europe, including penicillins and cephalosporins. All of these points to positive long-term prospects for this business unit.

Finally, our Animal Health business saw a lower global spending on veterinary care this quarter which was reflected in the decline in revenue. But as pet owners around the world and meat and dairy producers adjust to the changing economy, we expect to return to more levels of spending on much needed continued veterinary care.

Overall, our Animal Health business is well diversified with the strong portfolio in more than 60 countries. In this quarter, we opened a new office in Shanghai to better serve the growing China and Asia-Pacific markets. And with new companion animal and livestock products expected to be launched in certain countries this year, we continued to expect to see growth in global animal health revenues for 2009.

That is a progress across all of our businesses confirms that our new business unit model is the right one for Pfizer. And so, we have already begun planning its next phase, which is depicted in this slide and which will take effect when the wire transaction closes.

On the commercial side, the new Pfizer will consist of nine diverse healthcare business units organized into two business groups. Specifically, as this next slide shows, the biopharmaceuticals group will be made up a primary care, specialty care, oncology, emerging markets and established products as well as a vaccines team in specialty care.

The Diversified Businesses group will be made up of animal health, capsugel, consumer health and nutritional health. Make no mistake, our commercial success depends on these businesses. So we will carefully allocate our owners capital based on the best opportunities to create value and we will set profit targets for these businesses to meet.

With those resources and targets set, the business units will then have the authority and the responsibility to deliver what their customers and our shareholders expect.

Let me, while on the research side, we're continuing to keep our commitment to improve productivity. In March of last year, we told you we planned to advance between 10 and 12 new molecular entities and new indications for current medicines into late-stage development by March of this year. We set that goal a year ago, and we have now achieved it.

In the first quarter of this year, we announced the start of Phase III clinical trials for two important molecular entities: our JAK-3 inhibitor and tanezumab. Our R&D pipeline now consists of 100 programs. In total, 21 programs advanced in the pipeline since September of last year, 12 of these are in our high priority investor win areas.

When the Wyeth deal closes, we will continue this momentum by creating two distinct research organizations which you see summarized on the slide. The Pharma Therapeutics Research Group will focus on small molecule discovery and research and the bio-therapeutics research group will focus on large molecules and vaccines.

Within each group small, focused, scientific teams will be led by world-class chief scientific officers who will be the single points of accountability for delivering medical advances. Our research teams will bring together the best of Pfizer's and Wyeth's talent to create a truly premier biopharmaceutical research effort.

Now on that regard, I'm pleased to report that our integration planning is moving thoughtfully and quickly, while at the same time significantly reducing the distraction and disruption caused by the integration.

Teams from both companies are meeting regularly, and our planning is being guided by lessons learned from past integrations. We're confident that when the deal closes, we'll be ready to execute our plans quickly.

On the financing front, things are progressing smoothly. Early last month, the banks financing the initial bridge loan completed its syndication, marking a significant milestone in our pending acquisition. A total of 34 banks have committed to the financing, which includes the five initial bridge lenders. The completion of the debt offering has reduced the bank commitment such that no one bank holds more than $600 million of the bridge loan, down from $4.5 billion.

Later last month, we successfully completed our $13.5 billion offering of senior unsecured notes. We were able to issue this debt earlier than originally expected and at favorable interest rates that were lower than we expect. This debt offering allows us to reduce the bridge loan commitments received earlier, which will reduce our fees substantially.

We were pleased with the level of interest in the offering and subject to market conditions we may consider additional financing opportunities to further reduce the bridge facility.

Finally, things are progressing on the regulatory front as well. We continued to engage in a constructive dialogue with the appropriate regulatory agencies around the world, including the FTC, the European Commission and the Chinese authorities. As we anticipated and previously announced, we received the second request from the FTC. We have had productive discussions with the agency regarding the possible divestiture of some animal health products. These and other discussions are progressing as expected.

We continued to progress with filings in other jurisdictions as well and we have filed our S4 registration statement with the SEC. All-in-all our integration planning is moving smoothly. We remain on track to close the transaction around the end of the third quarter or in the fourth.

So, let me conclude where I began. We faced challenging economic and competitive conditions as well as the losses of exclusivity that are inherent in our business. At the same time, we are transforming our business model, advancing our pipeline, reducing our costs and planning the integration of Wyeth. Yet with all of that, Pfizer colleagues remain intensely focused on delivering current results and meeting our commitments to our shareholders, and we will continue to do so.

With that, I'll ask Frank to give you more detail on the first quarter.

Frank D'Amelio

Thanks Jeff. Good morning, everyone. The charts I am reviewing today are included in our webcast and will help facilitate the discussion of our first quarter 2009 results.

Now, can we get onto our financials? Reported revenues for the first quarter of 2009 were 10.9 billion, a decrease of 8% compared with the year ago quarter, reflecting the negative impact of foreign exchange which decreased reported revenues by approximately 640 million or 5%. The decline in Lipitor revenues due to continued intense competition, the loss of U.S exclusivity with Zyrtec in January of 2008 and Camptosar in February of 2008 and the decline in Chantix revenues mainly due to label changes.

First quarter 2009 reported net income was 2.7 billion, a decrease of 2% compared with the year ago quarter and reported diluted EPS was $0.40, compared with $0.41 in the prior year quarter, which were primarily driven by a decrease in total revenues and other income, the decrease in the effective tax rate... the increase from the effective tax rate due to the increased tax cost associated with financing of the pending wide acquisition and other costs associated with the pending acquisition. These items were partially offset by savings from cost reduction initiatives and the elimination of IP R&D charges compared with 398 million of IP R&D charges in the prior year quarter.

Included in our reported results, our cost related to our pending acquisition of Wyeth, such as transaction cost, interest income expense related to the 13.5 billion debt offering completed in March and other reintegration costs.

Adjusted income of $3.7 billion and adjusted diluted EPS of $0.54 so decreased 11% year-over-year. As expected these results reflect the decrease in total revenues and the increase in the effective tax rate to 30% from 22% in year ago quarter, which will partially offset by savings from cost reduction initiatives.

Several significant items impacted our reported pre-tax result this quarter by approximately $473 million, including charges of 157 million for restructuring related to our cost reduction initiatives, 174 million implementation costs primarily related to sites we exited or even in the process of exiting, and 132 million certain legal matters.

Now, I'd like to provide more details regarding our first quarter adjusted income components. Adjusted revenues of 10.8 billion, which exclude a minimum amount of transition services associated with the sale of the consumer healthcare business, declined 8% year-over-year.

Adjusted cost of sales as a percentage of revenue was 12.1% versus 15.3% in the prior year quarter, driven by the benefits of our ongoing cost reduction initiatives and the favorable impact of foreign exchange. Excluding the impact of foreign exchange in the first quarter, adjusted cost of sales as a percentage of revenues 14.4%.

Adjusted SI&A expenses decreased 17% year-over-year due to the benefits of our ongoing cost reduction initiatives, and to a lesser extent certain insurance recoveries as well as foreign exchange, which decreased expenses by about 140 million versus the prior year quarter.

Adjusted R&D expenses increased 2% year-over-year due to the 150 million milestone payment to Bristol-Myers Squibb during the quarter associated with the collaboration on a fixed event, which was partially offset by the benefit of our ongoing cost reduction initiatives. And the positive impact of foreign exchange which decreased R&D expenses by about 60 million, versus the year ago quarter.

Adjusted income and adjusted diluted EPS were unfavorably affected by lower revenue, the higher effective tax rate, which were partially offset by benefits of course reduction initiatives.

In the first quarter on an adjusted results basis, foreign exchange decreased revenues by approximately 627 million or 5%. In the prior year quarter, foreign exchange increased revenues by approximately 570 million or 5%.

Our cost reduction initiatives continued to have a positive impact on our adjusted total cost this quarter. In addition, foreign exchange reduced lease cost by approximately 536 million or 8%, compared with the prior year quarter. Excluding the impact of foreign exchange, adjusted total cost decreased operationally by 497 million or 7% year-over-year. That said in the first quarter, the net effect of foreign exchange on adjusted diluted EPS was a negative $0.02, versus a positive $0.03 in the year ago quarter. While foreign exchange benefited our cost and expenses during the first quarter of 2009, it had a large unfavorable impact on our revenues as I previously mentioned.

As you know on January 1, 2009, we expanded our new business unit operating structure. As a result, beginning this quarter, in addition to providing revenues for our pharmaceutical and animal health businesses, we're also providing revenue to the five units within our pharmaceutical business to help you better understand their respective performance. We believe this additional information provides greater transparency into our operating structure as well as the impact these business have on our overall results.

Now let's move to the results of these businesses. Within pharmaceuticals, primary care revenues include those of human pharmaceutical products, mainly prescribed by primary care physicians and generally fall within the following therapeutic disease areas among many others Alzheimer's disease, cardiovascular, and pain. Examples of products of these areas include Lipitor, Lyrica, Celebrex, Viagra and Chantix among others.

Primary Care revenues were 5.3 billion, a decrease of 8% year-over-year, driven by negative impact of foreign exchange, declines in Lipitor, Chantix revenues, and the loss of exclusivity of Zyrtec in January 2008.

Specialty Care revenues include those from human pharmaceutical products that are mainly prescribed by specialist physicians and spend the following therapeutic and disease areas among many others antivirals, inflammation, multiple sclerosis and pulmonary hypertension. Examples of products in these areas include Xalatan, Zyvox, Revatio, Vfend, Geodon, and Genotropin among others.

Specialty Care revenues of 1.46 billion increased 7% versus the prior year quarter, driven by solid operational performance of Revatio, Zyvox, Vfend, and Xalatan, which were partially offset by the negative impact of foreign exchange, which decreased Specialty Care revenues by approximately 3%.

Oncology revenues include those from human oncology and oncology related products. Examples of products on oncology include but are not limited to Sutent, Aromasin, and Camptosar in Europe. Oncology revenues of $350 million decreased by approximately by 17% year-over-year primarily driven by the loss of the U.S. exclusivity of Camptosar in February of 2008, and the unfavorable impact of foreign exchange, which were partially offset by the strong and financial performance of Sutent.

Established products revenues generally include those from human pharmaceutical products that have lost marketing exclusively. However, there are certain situations in which products may transferred to established products prior to their loss of exclusivity to maximize their value.

It's important to note established products revenues include only those from established products, sold and developed market geographies, and exclude revenues from these products generated in emerging markets. Examples of products in this business include Norvasc, Camptosar, Zoloft, Ropax, Medrol, and Cordura among others.

Revenues for the Established Products business were 1.6 billion, a decrease of 12% versus the prior year, primarily resulting from declining sales of Norvasc and Camptosar and to a lesser extent a favorable impact of foreign exchange.

Emerging market revenues include those from all human pharmaceutical products sold in emerging markets, including but not limited to Asia excluding Japan, Latin America, Middle-East, Africa, Central and Eastern Europe, Russia, and Turkey.

Revenues generated in emerging markets were 1.35 billion, a decrease of 9% year-over-year, driven by operational growth of 5% primarily due to expansion in China. That was more than offset by the negative impact of foreign exchange, which decreased revenues by 215 million or 14%.

Animal Health revenues include those from products that treat livestock and companion animals. Animal Health revenues of 537 million decreased 13% versus the prior year quarter due to decreased spending on veterinary care resulting from the challenging global economy, a planned change in U.S. distributor terms resulting in an anticipated reduction in distributor inventories, and the negative impact of foreign exchange.

Now, I would like to provide some select product results. Lyrica, Zyvox and Sutent recorded strong performance in both the U.S. and in international markets. In addition, Viagra and Xalatan returned to its strong performance in the U.S.

As I mentioned earlier, Lipitor revenues declined as a result of the continued intense competition and Chantix revenues declined due to prior year label changes.

During the first quarter, we continued to make progress on our ongoing cost reduction initiatives, achieving 330 million in cost reductions versus 208 on a constant currency basis, which excludes insurance recoveries of 165 million. These cost reduction initiatives continued to spend essentially all divisions, functions, markets and sites across Pfizer.

Broad categories of activity include manufacturing and research side exits and targeted workforce reductions. In addition, we have a wider rate of outsourcing opportunities in various stages of implementation. Manufacturing, logistics, finance, facilities, legal and IT are among the functions contributing the financial and operational benefits of this strategy.

For example, outsource manufacturing is now about 24%, versus 17% in 2008. We're also continuing to size our work force level with current market dynamics. Our work force level at the end of the first quarter was 80,250, a net decrease of 1,650, compared to year-end 2008.

In the beginning of 2008, we decreased our total work force by approximately 6,350 physicians. These reductions are net of new colleagues hired during the first quarter in certain expanding areas primarily emerging markets.

We're on track to achieve our 2009 objectives and I'll reaffirm our 2009 financial guidance with revenues and all adjusted results. We're also reducing the range for reported diluted EPS to $1.20 to $1.35 to include certain costs that have been and that we expect to be incurred as a result of the pending acquisition of Wyeth.

To-date, we have achieved many milestones related to our pending acquisition of Wyeth. These include syndicating the bridge loan 34 banks resulting in no banks holding more than $600 million of the facility, following for Hart-Scott-Rodino notification, following the preliminary S4 for SEC review, completing our 13.5 billion debt offering and announcing the company's post-close organizational designer leadership team for our combined commercial and R&D organizations.

We also have many items that need to be include completed including seeded (ph) our '09 financial objectives, working with the appropriate agencies to obtain the necessary regulatory clearances.

The SEC declaring the S-4 effective, Wyeth obtaining shareholder approval, continuing to identify opportunities to further reduce the bridge facility, developing details, synergy plans and ultimately closing the transaction.

We're committed to wrapping in successful integration with minimal disruptions to our operations so we can hit the ground running on day one.

So, to summarize the key takeaways, first quarter results were consistent with our expectations. We reduced our cost by approximately 330 million this quarter on a constant currency basis due to operational improvements. And we reaffirmed our '09 guidance for revenues and all adjusted results.

We've also updated our guidance range for reported results to include certain acquisition related costs. Finally, our integration planning efforts remain on track.

And now, I'll turn it back to Chuck.

Chuck Triano

Thanks Frank. Thanks for the review. Operator, at this point, if you could please call for questions we can get started. Thank you.

Question-and-Answer Session


Thank you. (Operator Instructions). And our first question comes from Catherine Arnold of Credit Suisse. Please proceed.

Catherine Arnold - Credit Suisse

Thanks very much. Good morning.

Jeffrey Kindler

Good morning.

Catherine Arnold - Credit Suisse

Good Morning. I wanted to ask you two things. One, could you talk about the obligations that you have from your bridge financing and your merger agreement related to what you can do on dividend policy? And how we should think about that?

And then secondly, Aurobindo wasn't a large financial deal, but it does penetrative strategy seeking a broader generic portfolio. Is that fare and should we expect more of these types of arrangements as you shape the company and with that, could give us an update on your interest in generic biologics?

Jeffrey Kindler

Sure. Catherine, I'll ask Frank to address the first question, then Ian the second, and then I'll add some further towards on the second question. Frank?

Frank D'Amelio

Yeah. On the first question Catherine, given the terms of the merger agreement, we can not increase the dividend, obviously up to and through the closings of the acquisition. So there is obviously other terms and conditions in both the merger agreement and the bridge facility relative to other items, where capital could to be outlaid. But you asked be about the dividend and the answer is one the dividend not until the deal is closed.

Jeffrey Kindler

Thanks Frank. Ian?

Ian Read

Yes. So, Aurobindo is part of our overall strategy as we look at the emerging markets and establish pros in general, we've clearly have to expand our portfolio. One way we're doing that is by partnering with the appropriate companies and the appropriate geographies to get the benefits of both their scale and their expertise.

I think you're going to continue to see a look for selected partnerships expanding our ability in both brand and generics. And hence regards generic biologics will review that strategy I think post to Wyeth acquisition and then we can get into fundamentally understand our capabilities.

Jeffrey Kindler

Right. I was just going to add on that latter point that clearly one of the benefits of the Wyeth transaction are the biologic manufacturing pharmaceutical science capabilities that we are very excited about. That certainly creates the potential for opportunities in that area and we're also supportive of establishing a regulatory pathway for biological followance. So, that is very much insight. Next question please?


Thank you, sir. Our next question comes from Chris Schott of JPMorgan. Please proceed.

Chris Schott - JPMorgan

Great, thanks. Just a question on SG&A. As following the first quarter results, it appears... you need to see basically slight year-over-year SG&A organizing growth over the next three quarters to get to that 13.5 to $14 billion target. I guess with year-over-year FX benefit next two quarters, can you just help us understand what's driving that level of SG&A spend I guess in light of what it appears to pretty significant year-over-year declines we've seen in SG&A over the last several quarters.

And I mean just the second question on Lyrica. On a sequential basis it assumes as though we are seeing some slowing volume growth here. Let's take a little bit more about your plans to reaccelerate this franchise. Thanks.

Jeffrey Kindler

Okay. Chris thanks. I'll let Frank take the first and Ian take the second question.

Frank D'Amelio

Yeah. So Chris, to your point the guidance for SI&A for the year is 13.5 to 14 billion, which is what you reference. Let me just run the numbers and I'll answer your question. So if you look at the Q1 results to your point, they are down about for 3.4 billion to 2.8 billion, so down significantly. A significant portion of that is SI&A as a foreign exchange. So about a 140 million or so that is foreign exchange. And then we also had insurance recoveries this quarter which reduce the SI&A line by 165 million, and then operationally obviously is the difference between those two numbers, roughly half of the reduction.

In terms of the guidance, not only for SI&A but for all of our elements of costs and expenses, we clearly factored that into guidance that we reaffirmed again today. And couple of points to make on this.

First, our results have some significant trending. If you look at our earnings, for example, last year, if you look at Q1 earnings they were higher than Q2, which was different in Q3 and in Q4 typically has really big spending quarter and has the best from an earnings perspective. But the seasonality, so that you just can't take a quarter and then straight line that and assume that that's the number for the year. We had the benefit from the insurance recovery this quarter of $165 million, which lowered SI&A overall.

And then third, I think the other key points to make is our results this quarter were consistent with our internal expectations, and part of the overall guidance that we provided for the year.

Jeffrey Kindler

Thanks Frank. Ian on Lyrics, please.

Ian Read

Yeah. So, Chris you're right on Lyrica. I'd just like to point out first of all that we did see 33% operational growth international and that will become more important for that franchise as we are forward. And being said in the U.S., what we're really seeing is continued penetration and growth in fibromyalgia where we grew quarter-on-quarter a year ago some 28% that we are losing share and scripts in DPN, PHN, has been driven probably by two major forces, one, now, I do think we've being effective by the worsening economy and the co-pays are impacting people's willingness. And secondly, the Managed Care does have a failed generic first strategy in this clause.

So, to deal with this, we really have three strategies here. One, market development. In DPN, there is about 3 million sufferers in the U.S, about 1.6 million are diagnosed, and only 0.8 million are actually treated. So, one is market development, helping patients clearly articulate their pain and get the right medication.

Two, exit strategy, where to continue the works, especially on the Medicaid side to get Lyrica out of Tier III and into Tier II. And three, co-pay system cost to patients to help them deal with the co-pays and the economic difficulties as we go through this period. So that's the overall review of our strategy.

Jeffrey Kindler

Thanks Ian. Next question, please.


Thank you. And our next question comes from Tim Anderson of Sanford Bernstein. Please proceed.

Tim Anderson - Sanford Bernstein

Thank you. A couple of questions. In your Established Products group, if I understood the description right, it sounds like we should generally expect to see year-on-year declines in the aggregate when you report your quarterly results or should it at some point turn positive. I'm just trying to figure out how investor should think about monitoring your performance in this division going into the future.

And second question is on comments you made on emerging markets and the level of investment. Can you try to qualify that? Give us, for example, the year-on-year increase and full-time employees and what that might look like a year from now. Are we going to see continue to see heavy investments there going forward?

Jeffrey Kindler


Frank D'Amelio

So, I think the way to think about this Tim for Established Products is, of course, the rhythm of the business or at least how we think about it is. If there was no interventions, then clearly that business would be a declining on a year-to -year basis just given the nature of what goes into that business unit. And so, from... by establishing an individual business unit, creating acute focus on that area of the business, what we want to do is I'll call it kind of almost a three step. And the way I think about it is, step one is decelerate the decline for you don't kind of quit the rate of decline. So that's if its declining at X, that's better than what they would have been. It would have declined more if we didn't have the intervention relative to the business unit and the acute focus and the various actions that we're taking. So step one, I'll call it decelerate the decline.

Step two, and this is over a period of time, would be to stabilize the business, which is one of the things that Jeff alluded to. So we've clearly want to go from decelerated the decline to stabilizing the business. And clearly actions like Aurobindo transaction that we alluded to where we know we have 39 solid oral dose products and 12 sterile injectable products into our portfolio, our action was only to take to do that.

And then ultimately, as you get out, we'd like to try to grow that business. But that's it I call it an ultimate. So think about the rhythm of that is accelerate the decline, stabilize, and then ultimately try to grow that business through organic actions and then call it non-organic actions. So that's the way I think about established products. Ian, do you want to add anything?

Ian Read

No, I think you explained it perfectly Frank.

Frank D'Amelio


Jeffrey Kindler

If I could before you go to the next part of Tim's question, Frank, just to add one thing. I just want to emphasize for clarity that when we're talking of the Established Products business and everything Frank just said, we're talking about Establish Products in the developed markets. And that's where as you know Tim we've historically seen and the industry has really rapid decline. So, Frank's comments about deceleration, stabilization and ultimate growth are applicable there.

Established Products in the emerging markets is part of our Emerging Markets business, where we expected to continued to contribute to genuine growth.

Tim Anderson - Sanford Bernstein


Frank D'Amelio

Yeah. That's a good clarification. Then, let me just answer the question Tim on Emerging Markets, which is just first I want to run the numbers. Revenues this quarter were about 1.4 billion, even though they were down on a reported basis, they were up operationally by 5% in what is a very difficult kind of macroeconomic environment, globally including the Emerging Market. So we continued to have good traction.

I mentioned in my comments a lot of that growth is primarily driven in China. I wanted to come back to that because one of the areas where we're deploying capital, for example, and getting to senior return is in China. We've been expanding the field force there. We've been expanding the countries that we have presence on there, a lot more feet on the street, and we're clearly getting a return there.

We will continue to use that kind of rigorous approach to how we deploy capital across the business, including Emerging Markets in all the businesses have to compete for our capital, and quite frankly generate economic profit which means returns that exceed our overall cost to capital. That's what we've been doing, that's what we'll continue to do.

Jeffrey Kindler

Thank you, Frank. Next question please.

Chuck Triano

Operator, next question please. Operator?

Jeffrey Kindler

I'll take questions from management.

Chuck Triano

I think we have a connection problem.

Jeffrey Kindler

So we should skip and go to the next call?


Jami Rubin of Goldman Sachs. Please go ahead.

Jami Rubin - Goldman Sachs

Thank you. Can you all hear me?

Chuck Triano

Yes, Jami we apologize.

Jeffrey Kindler

Sorry everyone.

Jami Rubin - Goldman Sachs

That's okay. So I have two questions. One is a follow-up from an earlier question. If you refinance your bridge loans by doing a Euro bond offering, will that allow you then or will the restrictions that apply to the bridge loan then go away and allow you to then raise the dividend?

And the other questions that I have relates to going back to the emerging market's question. I think this is the first time you've actually isolated your emerging market sales of 1.3 billion, up 5% operationally. I'm wondering Jeff if you can provide a little bit more detail? When you gave your revenue guidance of 70 billion by 2012, I think that many of us sort of struggled to get there. And one of the opportunities to get there was in the emerging markets area to the tune on several billion dollars, which is a long way from in additional to where you are right now there.

So, if you could talk about a bit more about that opportunity and is this opportunity an organically driven opportunity or one that will require acquisitions? Thanks.

Frank D'Amelio

Okay. Thanks Jami. So I'll let Frank start on both questions and Ian can comment on the second part. And then I'll add some at the end of that. Go ahead, Frank.

Frank D'Amelio

Okay, sure. So, on the bridge facility Jami, to the extent that we take actions to further reduce the bridge. And obviously we're exploring any little opportunities to do that to the extent that we work to reduce the bridge and ultimately eliminate the bridge so that we do an average bridge facility anymore.

Then any constraints that we had that were specific to the bridge facility would go away. We still have the merger agreement constraints that would be open that would just still be in place until we close the transactions. So, there is really two different agreements and each of those agreements has different terms and conditions relative to deployment of capital. That's the way to think about it. So, we eliminate the bridge if we would to take actions to do that then those constraints would go away.

Relative to and by the way, I think U.S. need lot of dividends specifically. I think the other point I should make is please recognize we get how important the dividend is to our shareholders. So obviously, we understand on point a dividend to our shareholders.

In terms of emerging markets, let me just run some numbers and how we think about this. This is always in the context of the approximately $70 billion target that we put out there in 2012. Clearly, that 70 billion in sales comparable for what the two companies generated in 2008. We were about $48 billion in change, Wyeth was about 22 billion. So despite some of the LOE items that we're going to have between now and 2012, we put a target out there for 2012 that was comparable to our 2008 combined sales kind of 0.1.

One of the way that we clearly believe, we will get to that number to achieve that number is through growth in emerging markets. And let me just run some numbers and then Ian and Jeff will add to this. If you look at Asia-Pacific excluding Japan, New Zealand and Australia, that market at the end of last year was about $50 billion. We had about give or take about 4% of that market. So, we run those numbers 4% on 50 billion is about 2 billion.

We expect that market to grow to 75 to 80 billion over the next couple of years, by 2012. If we would have just keep our share, 4 billion on 70 billion 4% on 70 billion is 2.8, if we can grow our share to 6%, now, we are at 4.8 billion. That is enough itself in that one region is almost $3 billion of incremental revenue.

So clearly, we think the opportunities are there, and when it's going to blow down to is execution. And given all relationships in these places, how long we've been there, the investments we've made there, we think we clearly have the ability to execute successfully in these emerging markets. Ian?

Ian Read

Yeah, I'll just add. For the full year, so if you just take first quarter, so we're assuming around a 5 billion for the full year, we grew 5% in the first quarter, I think that's below our long-term expectations in the emerging markets.

The brick markets in this quarter, in fact, it grow 16% operationally for us. We're investing heavily, we're looking for opportunities, we have great capabilities. We're bringing in the Wyeth portfolio post acquisition which has great potential in emerging markets.

So, I think we're very focused on generating maximum growth and gaining share. And you add to that the type of work we've done with Aurobindo to supplement our portfolio. And I think we're one of the few companies that are really focused in driving the strategy.

Jeffrey Kindler

Yeah, Jami I'll just add to what Ian and Frank said. You asked about organic versus business development, and certainly we have been and we will continue to look for opportunities for smaller or midsized opportunities to engage in business development. Aurobindo was a recent example. And as I said earlier, a significant part of the growth in emerging markets stuff well established products and we'll continue to look for those kinds of opportunities as well. Okay. Next question please?


Next question comes from Roopesh Patel, UBS.

Roopesh Patel - UBS

Thanks. Just a couple of quick questions. First on inventories. Frank if you could just clarify how many weeks of inventory you ended the quarter with here in the U.S.? And then separately on Chantix, if you could just elaborate on the trends that you're seeing here in the U.S. and overseas? Thank you.

Frank D'Amelio

Yeah. So Roopesh, in terms of inventory levels, the inventory levels at the end of this quarter were literally the same as they were at the end of our Q1 '08. So no change in overall inventory levels Q1 '09 to Q1 '08 from a weeks-on-hand perspective.

Now obviously some changes by individual product as you'd expect. But when you put all... you net all the puts and takes, weeks on hand for over to the next on year-over-year basis remained the same.

Jeffrey Kindler

So, on overall for Chantix, I mean the good new is that we'd now had 10 million patients globally who've used Chantix. And we continue to focus our strategies on rebuilding this brand. I mean we saw in the first quarter versus fourth quarter sequential growth in scripts, which is heartening and does indicate that the product does respond two types of strategies we're implementing. And basically they cover engaging physicians in what we call a safety first dialogue to ensure physicians understand the risks associated with any type of smoking sensation. We're continuing to develop our consumer platforms that activate consumers.

Now, when consumers ask for a smoking sensation product in the physician's office, aid to the time, they get Chantix. So clearly the message is to get through the physicians to patients when they hear our message. And we continue to work on the insurance coverage and we're doing well in the U.S. I think the international business development... international development Chantix does depend on getting the right policies in countries like Japan and China. They are like smoking policies and in coverage.

Frank D'Amelio

And I'm sorry Roopesh, I didn't give you the number in terms of weeks on hand and inventory, it was 3.7 weeks on hand, which is what it was in Q1 of '08.

Jeffrey Kindler

Thank you. Next question, please?


Thank you. Our next question David Wiesinger, Morgan Stanley.

David Wiesinger - Morgan Stanley

Thanks very much. I appreciate it. I have a couple of questions. First, with respect to the established products category, Frank if you could just detail when a product ships in your segment reporting from primary Tier II established product.

So for example, let's say a drug goes to generic in the United States in February in a given year; when would that shift in terms of segment reporting? Second, if you could maybe talk at a higher level about your goals ultimately stabilize revenue and profit from established products, just wondering if you see that it is possible on a commodity business with ever lower price competition emanating from Asia?

And then my final question relates to dividend. Frank maybe you could talk about your visions for cash flow longer term at the company and talk about the dividend from a longer term perspective post the Wyeth transaction? Thank you.

Frank D'Amelio

Okay. So, I'll handle the one and three. I think Ian you'll to second part of this question. So, first Dave, in terms of when there is a product shifted to established products, I mean at that macro level, I think about it very simply. And the term I like use is operational cause equal financial effect.

So, what that translates to as when we operationally move a product from one of the business units to established products, that's when the financials will then move from that business unit to the established products business units. So, just the principal is operational cost equals financial effect, and that's how we are and we will continue to do that on a going forward basis. We think that's clearly... I think that's clearly the best way to do this.

Ian you want to hit on the established products?

Ian Read

So, David, there are two components to that. So, let me just talk about first of all the established products that we sell in emerging markets. These are, we believe somewhat more protected from a top of price competition you were talking about in the developed markets. And now benefit from an overall strategy that the established products business units progressing such as reformulations, enhancements in the product and driving down our efficient production or genesis in production. So in the emerging markets, we see substantial growth from those established products.

Now in the developed markets to your point, we are seeing increased price competition certainly in Europe. And the way to deal with that is for expanding our offerings to getting a more solid overdoses, looking for differentiated dosage forms and trying to avoid direct price competition. That being said, with a very focused manufacturing strategy, we will also participate in that segment where we believe we can be profitable. So it's a balance I agree with you all, we're losing on the price side and gaining it back in both volumes on the base and new volumes from new launches and new partnerships.

Frank D'Amelio - Chief Financial Officer

And then let me just hit the third part of your question, which was on the dividend and then just I think the way you described, it was our longer term thinking. So, let me just run the numbers first. And then I'll answer the question.

So, our dividend up until this year was $1.28, so $0.32 a quarter. When we announced the Wyeth acquisition we reduced the dividend in half, so we cut that from above 28 to $0.64 or $0.32 a quarter to $0.16 a quarter with that really being effective in Q2. So, actually for this year, the dividend will pay $0.80 and then $0.16 a quarter really starting in Q2. So that kind of point one.

Point two is, we said that one other targets we put out for the new company in 2012 was to be generating operating cash flow that was $20 plus billion a year. And as we're on a path to doing that, as we're executing on the deal on the acquisition as we're continuing to improve in the financials, as we integrate on the implementation and the integration of deal, we'll begin to see that obviously before 2012.

As we start to generate that significant operating cash flow, we will have lots of financial flexibility. And I think about that in terms of giving us lots of choices and options specifically in the following areas. One is the level of the dividend we pay, another is the amount of shares that we repurchase, another is the amount of business development that we do, another one is the amount of cash that we repatriate, we could actually choose to repatriate less cash which will reduce the tax rate, increase our earnings and then finally is the amount of debt that we paid out.

So as we execute, as we implement, as we start to generate that operating cash flow that we expect to generate as a result of the acquisition, we'll have a lot of financial flexibility, a lot of choices and we'll obviously evaluate those as we go forward.

Jeffrey Kindler

Thank you, Frank. Next question please?


Next question, John Boris, Citigroup.

John Boris - Citigroup

Thanks for taking the questions. My first question is for Jeff and that you are actively engaged in the healthcare reform debate in DC. On price and comparative effectiveness, can you potentially maybe address where you believe pricing and how much more input comparative effectiveness will be and how you might be prepared to deal with that on the new product opportunities that you are developing and also on deferral of tax?

And can you also may be just address where the silver lining maybe for the industry, now most notably in the 47 million patients that don't have healthcare coverage. Is there any kind of volume gain or assessment that you've done on volume gain that you might be able to get from 47 million being added in?

One question for Frank on Aurobindo. Can you just give the annual run rate on the Aurobindo products just for modeling purposes? Thanks.

Jeffrey Kindler

Okay. Let me say a couple of things. You referenced a number of things that are being discussed in March. And let me if I could sort of make a broad statement and go into some of the specifics.

I think it's too early to predict exactly the shape that reform may take. But I will tell you that we continued to see a very serious effort by all the key figures, both in the White House and in Congress to work with all of the state coalition to seek common ground. And we've been gratified that engagement by our industry has been welcomed.

And I will tell you also that we continued to see a recognition that support for innovation and biomedical research has to be an important element of reform. So specific to some of the points you made. For example, independent of comparative effectiveness, it's certainly incumbent upon us to continue to develop products that have demonstrable value to our patients and to payers. And we, I think have gotten much better earlier in our process of clinical development to involve and consult with the payers and key opinion leaders and patient groups to ensure that we do that, and we'll continue to do that, independent of any legislative changes.

In terms of the overall potential benefits, I did say in my opening remarks that I think there can be tremendous potential value for both our customers and our shareholders, and a health care system that's more efficient, more performance oriented, more financially sustainable, provides more coverage for more people, a greater focus on prevention and wellness on inherence, on primary care, disease management. And all of those kinds of considerations are very much top of mind among policy makers right now. And as I said, we're gratified to be having an opportunity to participate constructively in that regard.

You also mentioned a deferral. The administration hasn't yet clarified exactly how it's thinking about tax deferral. And obviously we're monitoring that closely and will continue to do so. And maybe Frank you might have one or two other things to say about that.

Frank D'Amelio

Sure. On deferral, maybe just a couple of statements on that. One, obviously conversations continue around the tax reform, and then particular around deferral.

Two; that reform could take a shape that could negatively impact the industry and our results. And I think third, the key point there is to the extent that it did, it would have much less than expect... of an impact on us than it would have previously, because of that fact that we increased our effective tax rate this year to about 30%.

So, I think that's kind of just a net out on tax reform. And relative to Aurobindo, I think the way I'll answer that John is, initially we don't expect that to have any kind of material impact and then over time we obviously expect that business to build. And that's part of the opportunities in emerging markets and established products and obviously part of the $70 billion that we put out there as a target for 2012.

Jeffrey Kindler

Okay. I think we have time for one more question.


Thank you. And our final question comes from Seamus Fernandez, Leerink Swann LLC. Please proceed.

Seamus Fernandez - Leerink Swann

Thanks very much. So, my question is just around the process at the FTC as well as some of the international markets. Basically the question being what’s left that has to be run through with the U.S. FTC, what data point should we be looking for with regard to the European Union’s review of the merger?

And then lastly, are there any emerging markets particularly China, which posted I believe some new rules with regard to regulatory combinations in August of 2008, are there any issues associated with that or have you already passed the regulatory hurdles in China? Thanks very much.

Jeffrey Kindler

I'll ask Amy Schulman, our General Counsel to respond to those questions Seamus.

Amy Schulman

Thanks for those questions, Seamus. So, I think it's important for everybody to recognize that we are working cooperatively and in an ongoing fashion with the regulatory agencies in the EU, with China as you mentioned does have a new regulatory process with which we are actively engaged.

And as expected, we got a second requests from the FTC. It was anticipated and we are in the process of working cooperatively with the FTC. So the bottom line on the regulatory issues is that they are progressing as we anticipated.

Chuck Triano

Thanks Amy. And thanks everyone for joining us today. That's all for time we have. We wish you all a very good day.


This concludes our conference call for today. Thank you everyone for joining. You may now disconnect.

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