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Edited Transcript of PFE earnings conference call or presentation 1-Nov-16 2:00pm GMT

NEW YORK Nov 2, 2016 (Thomson StreetEvents) -- Edited Transcript of Pfizer Inc earnings conference call or presentation Tuesday, November 1, 2016 at 2:00:00pm GMT

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Corporate Participants

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Pfizer Inc. - SVP of IR

* Ian Reed

Pfizer Inc. - Chairman & CEO

Pfizer Inc. - CFO

* John Young

* Albert Bourla

Pfizer Inc. - President of Worldwide Research & Development

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* David Maris

* Jami Rubin

Piper Jaffray & Co. - Analyst

JPMorgan - Analyst

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Operator [1]

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Good day, everyone, and welcome to Pfizer's third-quarter 2016 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.

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Chuck Triano, Pfizer Inc. - SVP of IR [2]

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Thank you, operator. Good morning and thanks for joining us today to review Pfizer's third-quarter 2016 performance. As usual I'm joined today by our Chairman and CEO, Ian Reed; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, Group President of Pfizer Innovative Health; John Young, Group President of Pfizer Essential Health; and Doug Lankler, our General Counsel.

Slides that will be presented on the call can be viewed at our home page, Pfizer.com, by clicking on the link for Pfizer quarterly corporate performance, third-quarter 2016. And this is located in the For Investors section in the lower right hand corner of the page.

Before we start, I'd like to remind you that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Additional information regarding these factors is discussed under the disclosure notice section in the earnings press release we issued this morning, as well as in Pfizer's 2015 annual report on Form 10-K, notably including Part 1, Item 1a, Risk Factors. And this is filed with the Securities and Exchange Commission and available at their website, as well as the Pfizer website. Forward-looking statements during this conference call speak only as of the original date of this call and we undertake no obligation to update or revise any of these statements.

Discussions during the call will also include certain financial measures that were not prepared in accordance with US 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 today, November 1, 2016. You may also obtain a copy of the form 8-K at our website Pfizer.com/investors.

Also, any non-GAAP measures presented are not, and should not, be viewed as substitutes for financial measures required by US GAAP and have no standardized meaning prescribed by US GAAP and may not be comparable to the calculations of similar measures at other companies. We will now make prepared remarks and then we'll move to a question-and-answer session. With that, I'll now turn the call over to Ian Reed. Ian?

Ian Reed, Pfizer Inc. - Chairman & CEO [3]

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Thank you, Chuck, and thank you for joining our call this morning. During my remarks this morning I will briefly recap the highlights from the quarter and provide some comments on the strength and depth of our pipeline.

Starting with the quarter, we reported another quarter of solid operational revenue growth, marking our eighth consecutive quarter of operational growth. Excluding the impact of foreign exchange and the legacy Hospira operations, Pfizer's standalone revenues grew by 3% operationally.

Looking at each of our businesses. Pfizer's Innovative Health achieved another quarter of strong revenue growth due to the performance of key brands including Eliquis globally, Xeljanz, Lyrica, Chantix, and Ibrance primarily in the US. We continue to be very pleased with the performance of Ibrance. Since our US launch in February 2015 it remains the market leader for treatment of first-line HR positive HER2 negative metastatic breast cancer. As expected, we are starting to see a tempering in new market share growth. However, our total scripts continue to grow and we are focused on reaching additional metastatic patients currently receiving chemotherapy or hormone replacement therapy. Sorry, hormone therapy alone.

We also anticipate the publication of our Phase 3 PALOMA-2 study will occur by year-end and expect that the ability of our dedicated breast cancer field force to then detail on the strength of this data. It should allow us to achieve greater penetration into the later-adopting physicians, many of whom are potentially high prescribers for Ibrance.

A key milestone to grow the Ibrance franchise will be to secure approval in the EU, where we have filed and received a positive opinion from the CHMP in September. We expect the decision from the Commission later this year.

Also of note, both Eliquis and Xeljanz continue to generate attractive growth on a quarter-over-quarter basis. And Chantix in the US is benefiting from the publication earlier this year of the [EU] study. Prevnar 13, sequentially we saw an increase this quarter in adult indication as flu season approaches and overall, the Prevnar family continues to perform in line with our expectations.

Turning to Pfizer Essential Health business. It achieved operational revenue growth, primarily due to the inclusion of legacy Hospira operations, and to a lesser extent from the Essential Health standalone sterile injectables portfolio. Excluding legacy Hospira, we experienced a slight operational revenue decline on a year-to-date basis; however we remain confident that the Essential Health portfolio has the potential to pivot to achieve more sustainable growth.

We expect this shift to be driven by a combination of anticipated growth across the portfolio, including sterile injectables, anti-infectives, biosimilars, and emerging markets. Collectively they may proved an offset to our peri-LOE and legacy products portfolio, which by their nature are robust contributors to cash flow generation, given they are multi-scorced [generally decline] in developing markets. As part of the Essential Health growth strategy, we anticipate continuing to refine the portfolio with business development activities such as the pending acquisition of AstraZeneca's late stage small molecule anti-infectives business and our recent agreement to sell the infusion systems unit to ICU Medical.

All in all, the PIH and PH business are performing well and have been further strengthened by approximately $40 billion of acquisitions we've done over the past year. This has enhanced our near-term growth potential by expanding our footprint in the highest-growth therapeutic areas including biosimilars, [sterile] injectables, Hospira, medical rheumatology, and Anacor oncology, Medivation, as well as several smaller deals. These additions to our portfolio are bolstering near-term revenue-generation opportunities as our pipeline continues to mature and advance.

Turning to our pipeline, we remain confident that we have built a solid pipeline, targeting areas that have potentially meaningful clinical value for patients and will provide the largest return on investment for shareholders. Of particular note is our oncology pipeline. For Ibrance we have more than 60 research programs in breast and non-breast cancers, including squamous cell and neck cancer, metastatic pancreatic cancer and mantle cell lymphoma.

For Xtandi, the FDA approved the label update on October 20, to include important data from the first comparative trial that demonstrated safety and efficacy of Xtandi compared to bicalutamide. We believe these data will help physicians better understand the difference between Xtandi and bicalutamide for their patients living with metastatic CRPT, that's castration resistant prostate cancer. Similar to Ibrance, we hope to generate new data to drive increased utilization or new treatment paradigms for prostate cancer.

For immuno-oncology we continue to execute our planned bio strategy of 10 programs in the clinic and 30 programs ongoing. Given [who our clime] and Merck KGA, we are on track to file Avelumab for treatment of metastatic Merkel cell carcinoma by the end of this year in the US. And we just announced the European medicine agency validated for review our market authorization application in the EU.

Over 3,000 patients have now been enrolled in ongoing Svelumab studies. There are studies of Avelumab as monotherapy and are completing recruitment in second-line non-small lung cancer and other small tumor types. However, we believe that doublet and triplets, that is the combination of Avelumab and other bio drugs or chemotherapy are the areas of greatest potential for patients. And we are making targeted investments in support of developing clinical data to potentially advance these combinations.

We've initiated Avelumab combination studies with chemotherapy and targeted therapies and expect to see updated data next year on a later class of Avelumab in first-line renal cell carcinoma. And rituximab plus 4-1BB in follicular lymphoma. We also anticipate data on Avelumab plus 4-1BB next year.

In addition to Avelumab, the remainder of the year we have a study underway with other agents in our portfolio, including OX30 as a single agent in combination with 4-1BB and Avelumab in various tumor types. PTK7 and ADC is showing encouraging activity in ovarian cancer in Phase 1B and combination studies with Avelumab will commence in 2017.

Our IDO1 inhibitor is also in Phase 1 and we expect combination studies to start in 2017. Our clinical allogeneic CAR T-cell program was selected from several years on track for recruitment in the UK ongoing.

The information immunology to our Anacor acquisition we have added Crisaborole to our pipeline for the treatment of mild-to-moderate dermatitis. It is currently under review by the FDA with a January 2017 PDUFA date. If approved, Crisaborole has the potential to be an important first-line treatment for the 18 million patients in the US who suffer from this significant unmet medical need. We are also exploring filing Crisaborole outside of the US.

We continue to see strong potential to expand the label for our Anacor asset [Zorganz] in diseases beyond our [line], such as you see in psoriatic arthritis. We are excited about our next generation of selective JAK inhibitors currently in development. In CV met in September we recorded positive Phase 3 data that Ertugliflozin in partnership with Merck we're on track with some New Drug Applications so the FDA Ertugliflozin and [pick first] combinations. Ertugliflozin plus Januvia and Ertugliflozin plus metformin by the end of 2016.

As you saw today, we announced the discontinuation of the clinical program for Bococizumab. While these decisions are always difficult, we make these assessments in the best interests of our patients and our shareholders and in the context of the both the data defining the potential profile of the drug, as well as our view of the treatment and market landscape for the drug.

The discontinuation decision was made based on the totality of information available to us across two key areas. The first is the emerging clinical profile from our six completed Phase 3 lipid-lowering studies. Specifically, the longer-term efficacy data now in hand, including from two recently-completed 52-week studies in which top-line results were announced today, we had seen an unanticipated attenuation of popliteal cholesterol-lowering over time. Additionally, we have observed an unanticipated higher level of immunogenicity and injection site reactions of Bococizumab as compared to other agents in the class.

The second is the evolving treatment and market landscape lipid-lowering agents in the PCSK9 class. In this market, the treatment's ability to impacts CV outcomes is a significant value driver which requires long-term efficacy and durability of the cholesterol lowerer. And we have also recently seen players establish access restrictions to the class which has meaningfully dampened our initial expectations for the market potential.

Taken together, the totality of the emerging clinical profile and the treatment and market landscape led us to the conclusion that Bococizumab is no longer likely to provide value to patients or physicians or shareholders. And as a result, we determined the appropriate decision was to discontinue the development program.

In rare diseases, the acquisition of Bamboo Therapeutics complements our rare disease portfolio and enhances our leadership position in gene therapy. And with our partner, SPARK, we have seen data from the first seven patients being treated in our ongoing Phase 1 SPK 2 trial which is promising so far and has the potential to be a long-time therapy for the treatment of hemophilia B.

In vaccines we continue to advance [stapholorous] and Clostridium difficile programs which are both currently in Phase 2. We anticipate a [C. difficile] Phase 2 read out before the year-end. And assuming that it achieves its primary endpoint, we anticipate a potential Phase 3 start in the first half of 2007.

And in biosimilars we remain confident that we'll be well positioned in emerging biosimilars market by our broad pipeline. We recently announced that we would begin shipment of Inflectra to wholesalers in the US in late November. As you can see, we expect to have several key pipeline milestones between now and the end of 2017 across several therapeutic areas.

To summarize, the remainder of this year we anticipate potential EU decisions for Ibrance. Avelumab filing in the US for Merkel cell carcinoma which has a [frozen] filing in the US and CUP proof of concept read out. In 2017, we anticipate potential US decision for Avelumab Merkel cell carcinoma, potential lorlatinib submission in non-small cell lung cancer, potential EU decision for Xeljanz in RA, potential US filing with first half of 2017 for label extension for Xeljanz in UC and psoriatic arthritis, and potential for crisaborole decision in the US.

In addition, between now and the end of 2017, we expect up to 12 pivotal studies with top-line read outs. We have seven from oncology, including the first IO combination data read outs of Avelumab, one from rare disease and four from biosimilars.

Over the past five years, we have worked to shape the quality of the assets in our pipeline. I believe we have a mix of competitive assets that are positioned to deliver new therapy breakthroughs to patients over the next few years.

Similarly, over the past three years, each of our businesses have gained a sharper focus, increased accountability and a greater ability to capture the opportunities within their unique markets. Today they have the independence and resources of standalone increments in Pfizer to effectively compete in their markets while having the benefit of the operational strength and financial flexibility associated with being part of Pfizer.

For example, we are now managing our Innovative Health business as five therapeutic-focused integrated businesses plus consumer health. We think of them as five small biotech companies, each concentrated on targeted areas of science and relevant patient groups. And that being a clear focus on delivering value to patients and in turn to shareholders.

In conclusion, our business is performing well. We are taking steps to position Innovative Health and Essential Health for long-term success through competitive portfolios, pipeline investments in key growth areas that address the unmet needs of patients, and thirdly, the financial strength to continue to invest in the growth drivers that will enable both business key leaders in their markets. Now I'll turn it over to Frank who will go into greater detail and results for the quarter.

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Frank D'Amelio, Pfizer Inc. - CFO [4]

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Thanks, Ian. Good day, everyone. As always, the charts I'm reviewing today are included in our webcast. As a reminder, because we completed the acquisition of Hospira on September 3, 2015, Pfizer's financial results for the third quarter and first nine months of 2016 include Hospira Global Operations while the comparable prior-year periods include only one month of legacy Hospira US and do not include financial results from legacy Hospira international operations.

In addition, Pfizer completed the acquisition of Anacor Pharmaceuticals on June 24, 2016. Consequently, our financial results for the third quarter and the first nine months of 2016 include three months of legacy Anacor operations which were immaterial. Finally, Pfizer completed it's acquisition of Medivation on September 28, 2016, so financial results for the third quarter and first nine months of 2016 reflect three business days of legacy Medivation operations which were also immaterial.

Now, moving on to the financials. Third-quarter revenues were approximately $13 billion and reflect year-over-year operational growth of $1.2 billion or 10%, which was partially offset by the unfavorable impact of foreign exchange of $224 million or 2%. Legacy Hospira operations contributed $1.1 billion to Pfizer's third-quarter revenues in our Essential Health business. If you'll exclude foreign exchange and the contribution from legacy Hospira operations, Pfizer's standalone revenues grew operationally by $381 million or 3%.

Innovative Health operational revenue growth was 10%, driven by the strong performance of Ibrance in the US, Eliquis globally, and Xeljanz, Lyrica and Chantix, all primarily in the US, which were partially offset by the loss of Rebif alliance revenue versus the year-ago quarter, due to the expiration at year-end 2015 of the agreement to co-promote Rebif from the US, lower Enbrel revenues in most developed Europe markets due to biosimilar competition, and expected lower revenues from Prevnar 13 adult in the US, due to the high initial capture rate after its launch in the fourth quarter of 2014, resulting in a smaller catch-up opportunity versus the year-ago quarter.

Essential Health operational revenue growth was also 10% driven by the inclusion of legacy Hospira operations and to a lesser extent, from Pfizer standalone sterile injectables. Both of which were partially offset by the loss of exclusivity and the associated generic competition, primarily for Lyrica and Zyvox in most developed Europe markets.

Pfizer's standalone revenue in the Essential Health business, which excludes contribution of legacy Hospira operations, declined 5% operationally as a result of the 7% operational increase in the standalone sterile injectables portfolio which was more than offset by a 15% operational decrease in the peri-LOE products portfolio and the 4% operational decline in the Essential Health standalone legacy established products portfolio. It's important to note that in emerging markets Pfizer's overall Essential Health revenues grew 9% operationally, due primarily to the in inclusion of legacy Hospira operations and Pfizer's standalone sterile injectables portfolio and standalone legacy established products portfolio.

Third quarter reported diluted EPS was $0.21 compared with $0.34 in the year-ago quarter due to a charge related to the pending sale of Hospira Infusion Systems, decreased operating expenses, product losses of exclusivity and foreign exchange impacts, including the Venezuelan bolivar. All of which were partially offset by revenue growth in certain new, in line and acquired products, and lower asset impairment charges, and lower acquisition-related costs.

Adjusted diluted EPS for the third quarter was $0.61 versus $0.60 in year-ago quarter. The increase was primarily due to increased revenues, lower effective tax rate and fewer diluted weighted-average shares outstanding which declined by 105 million shares versus the year-ago quarter due to our share repurchase program. All of which were partially offset by an aggregate operational increase and adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses of approximately $1.1 billion, or 16%, which includes the addition of Hospira operations in 2016, a $0.04 negative impact due to foreign exchange and continuing product losses of exclusivity.

I want to point out that third-quarter adjusted cost of sales as a percentage of revenues increased year over year from 17.4% to 22.7%, primarily due to foreign exchange and the addition of legacy Hospira operations. Also, because foreign exchange increased cost of sales while decreasing revenues at the same time, which is atypical, there was an exaggerated increase of our adjusted cost of sales as a percentage of revenues in the third quarter.

If you'll exclude the foreign exchange impact, third-quarter adjusted cost of sales as a percentage of revenue would have been 20.9%. Although we have experienced this for two consecutive quarters, we continue to view this as an anomaly rather than a trend, and we've narrowed our adjusted 2016 adjusted cost of sales as a percentage of revenue guidance within its original range.

Foreign exchange negatively impacted third-quarter revenues by approximately $224 million, or 2%, of which approximately $175 million was attributable to Venezuela. While FX favorably impacted adjusted SI&A and R&D expenses, the previously mentioned significant negative impact on adjusted cost of sales drove the overall FX impact of $115 million, or 2% of our total adjusted cost. As a result, foreign exchange negatively impacted third-quarter adjusted diluted EPS by approximately $0.04 compared with the year-ago quarter but approximately $0.015 related to Venezuela.

As you can see on the chart, we've narrowed the ranges to certain components of 2016 financial guidance. We increased the low end of our revenue guidance range and we now expect 2016 revenues to be in the range of $52 billion to $53 billion. I want to point out that this range continues to absorb an anticipated $1.8 billion negative impact from product losses of exclusivity and an anticipated $1.4 billion negative impact from foreign exchange versus 2015, of which almost $850 million is attributable to Venezuela.

I also want to remind everyone that as we previously communicated, there are seven fewer selling days in the fourth quarter of 2016 versus the fourth quarter of 2015. This will impact only the quarterly year-over-year comparisons, given that there are essentially the same number of selling days in 2016 as there were in 2015.

Because of our decision to discontinue the global clinical development program for Boco, we now expect adjusted R&D expenses to be in the range of $7.8 billion to $8.1 billion and adjusted diluted EPS to be in the range of $2.38 to $2.43 which is still within our original range of $2.38 to $2.48. It important to note the mid point of our adjusted diluted EPS guidance range was negatively impacted solely to reflect this decision. Excluding this Boco decision, the midpoint of the range would have increased by $0.02.

Moving on to key take-aways. We achieved our eighth consecutive quarter of operational revenue growth. In the third quarter of 2016 growth was driven by the inclusion of legacy Hospira operations, new products that are early in their life cycles such as Ibrance, Eliquis, and Xeljanz, as well as the solid performance from Lyrica and Chantix. We narrowed the ranges for certain components of our 2016 financial guidance.

We announced and completed the acquisition of Medivation and accomplished several key product and pipeline milestones. And we returned $10.5 billion to shareholders through the first nine months of 2016 through dividends and share repurchases, including a $5 billion accelerated share repurchase program. Finally, we remain committed to delivering attractive shareholder returns in 2016 and beyond. Now, I'll turn it back to Chuck.

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Chuck Triano, Pfizer Inc. - SVP of IR...


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