Pfizer Inc. (PFE)

Earnings Call: Q4 2017

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Jan 30, 2018

Summary

FY17 operational revenue was flat despite LOEs and the HIS divestiture, while newer brands and emerging markets grew. FY18 guidance called for $53.5B–$55.5B revenue and $2.90–$3.00 adjusted EPS, with an ~17% adjusted tax rate.

Good day everyone, and welcome to Pfizer's fourth quarter 2017 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. Good morning, and thank you for joining us today to review Pfizer's fourth quarter 2017 performance and 2018 financial guidance. I am joined today by our Chairman and CEO, Ian Read; Albert Bourla, our Chief Operating Officer; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; John Young, Group President of Pfizer Innovative Health; and Doug Lankler, General Counsel. The slides that will be presented on this call can be viewed on our website, pfizer.com/investors. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Additional information regarding these factors is discussed under the Disclosure Notice section in the earnings release we issued this morning, as well as in Pfizer's 2016 annual report on Form 10-K, including in Part One, Item 1A, that is filed with the SEC and available at their website, sec.gov, and on our website at pfizer.com. The 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 U.S. generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer's current report on Form 8-K, dated today, January 30, 2018. You may obtain a copy of the Form 8-K on our website at pfizer.com/investors. Any non-GAAP measures presented are not and should not be viewed as substitutes for financial measures required by U.S. GAAP, have no standardized meaning prescribed by U.S. GAAP, and may not be comparable to the calculations of similar measures at other companies. We will now make prepared remarks, and then we will move to a question-and-answer session. With that, I will now turn the call over to Ian Read. Ian? Thank you, Chuck, and good morning, everyone. During my remarks, I will speak about our performance for the year, the continued advancement of our pipeline, which we believe is more robust and productive than it has been in more than a decade, and the expected impact of U.S. tax reform on Pfizer. Frank will provide details regarding the quarter and our 2018 financial guidance. Pfizer had another solid year in 2017. Despite having just over a $3 billion negative revenue impact due to LOEs and the divestment of Hospira Infusion Systems, we were able to offset this impact and report flat operational revenue as we saw growth in many of our anchor brands. We also saw continued growth in emerging markets, which was up 11% operationally compared with the previous year. I will begin with a few words regarding the performance of each of our businesses, starting with Pfizer Innovative Health. This business had another strong year, growing its top line 8% operationally, thanks to the continued strength of several of our best-selling medicines. Ibrance revenues grew 47% operationally to $3.1 billion for the year. To date, Ibrance has been prescribed to more than 100,000 patients around the world and received regulatory approval in more than 80 countries. However, revenues in certain developed European markets were negatively impacted by a one-time price adjustment to full year 2017 revenues. This adjustment was the result of agreements to establish pricing levels comparable to historical European pricing analogs for oncology products, ensure patient access, and drive expected future growth in these markets. We see this as a positive for the future of the brand. We remain confident in the profile of Ibrance based on a number of factors, including safety and efficacy. We are working to build on Ibrance's initial success with trials in the early breast cancer setting and in the HER2+ metastatic setting and with our novel next generation investigational CDK inhibitor, which may be effective for patients as they become resistant to Ibrance. We expect to have this asset in the clinic this year. Eliquis alliance and direct sales revenue grew 47% operationally to $2.5 billion, and it is the number one new to brand oral anticoagulant prescribed by cardiologists in 21 markets. Xeljanz experienced 45% year-over-year operational growth and achieved its first year of blockbuster status. We expect our inflammation immunology franchises to continue to strengthen with the recent U.S. approval of Xeljanz for psoriatic arthritis. We are hopeful that we will receive U.S. approval for a third indication, ulcerative colitis, this year. Chantix revenue grew 18% operationally to nearly a billion dollars for the year. Lyrica revenues within Pfizer's Innovative Health grew 9% operationally to $4.5 billion for the year. Lyrica continued to be a strong contributor to Innovative Health. We anticipate that Lyrica will maintain its market exclusivity in the United States until the end of 2018 or through June 2019 if the FDA grants approval for the pediatric extension exclusivity. Pfizer's share of Xtandi's U.S. net sales was $590 million for the year. In Q4 2017, Pfizer's share of net sales was $168 million, up 12% from Q3 2017, and 22% from Q4 of 2016. The number of urologists actively prescribing Xtandi continues to grow and reached an all-time high of more than 1,700 in Q4 of 2017, compared with approximately 500 for Zytiga. In terms of potentially expanding Xtandi's benefit to men with non-metastatic prostate cancer, in September, we announced that the phase III PROSPER trial in non-metastatic castration-resistant prostate cancer met its primary endpoint. We look forward to presenting detailed results at the ASCO GU Congress on February 8th. We are also pleased that in partnership with Astellas, we have submitted the PROSPER data to the FDA, seeking to expand the label to the non-metastatic CRPC setting. We are awaiting the FDA's acceptance of the application for review. Finally, we continue to review strategic options for our Consumer Healthcare business. This could include anything from a full or partial separation of the business to ultimately deciding to retain the business. We continue to expect to make a decision during 2018. Turning now to Pfizer Essential Health. While revenues for the year declined, due in large part to expected products LOEs, we once again saw strong operational growth both in emerging markets and our biosimilars portfolio. Emerging markets revenue grew 7% operationally for the year to $7 billion. China led the way, growing 16% operationally. Our biosimilars business grew 66% operationally in 2017 to $531 million. We remain the number one biosimilars company globally. We also advanced six biosimilar pipeline products during the year through various regulatory and data milestones. PEH's growth in emerging markets and biosimilars were offset by product supply shortages in the sterile injectable business. Our sterile injectable shortages are primarily for products from the legacy Hospira portfolio and are largely driven by capacity constraints and technical issues. As we stated previously, we have a robust action plan in place. We believe we will make substantial progress in 2018 towards reducing these shortages. Turning to Inflectra. At the end of December, its share had increased to 5.6% of overall U.S. infliximab volume, up from 4.9% at the end of September. This increase was primarily due to the product's continued strong performance in closed systems, such as the VA, where the insurer and provider are the same entity. Despite J&J's exclusionary contracting with regard to Remicade, we continue to see increased coverage for Inflectra amongst commercial payers. Just last week, the appellate court ruled that a key patent that J&J has asserted to block access to Inflectra is invalid. Last quarter, I talked about the expected decline in the number and revenue impact of LOEs facing our business and the further strengthening of our R&D pipeline. We expect these trends to continue. In terms of LOEs, we expect the full year-over-year impact to be about $2 billion in 2018, which remains significantly lower than our recent past. We expect the impact of LOEs will remain in the $2 billion range through 2020, before improving to $1 billion in 2021, and then $500 million or less from 2022 to 2025. At the same time, our pipeline continues to generate exciting new opportunities for our company and for the patients who benefit from our innovative therapies. In 2017, we received 10 approvals from the FDA. This is significantly more than we achieved in any year in the past decade. Let me touch on some of our most recent advances. In oncology, we recently presented positive results from the phase III EMBRACA trial, which showed that our PARP inhibitor, talazoparib, significantly extended progression-free survival versus standard of care chemotherapy in patients with BRCA-positive metastatic breast cancer. In partnership with Merck KGaA, we look forward to continued progress with Bavencio, our PD-L1 inhibitor. We have upcoming data readouts in second-line non-small cell lung cancer and first-line renal cell carcinoma in combination with Inlyta. In addition, the triplet study exploring the combination of Bavencio, our 4-1BB agent, and our OX40 monoclonal antibody in solid tumors entered the clinic in the first half of 2017. We will continue to evaluate this combination throughout 2018. In 2018, we expect to advance multiple oncology filings in the registration process, including talazoparib in BRCA-positive metastatic breast cancer, Xtandi for non-metastatic castration-resistant prostate cancer, for which we have submitted an sNDA based on the phase III PROSPER data. Lorlatinib, which has shown activity in almost all known clinically acquired ALK mutations in ALK-positive non-small cell lung cancer. Dacomitinib in EGFR mutated non-small cell lung cancer based on the positive ARCHER 1050 findings published in September, and our SMO inhibitor, glasdegib, for acute myeloid leukemia based on phase II results. In inflammation and immunology, we have seven ongoing JAK clinical programs providing us with the strongest immunokinase franchise in the industry. The phase II data for our oral once-daily JAK1 in atopic dermatitis was presented in September, and this asset is the first and only JAK1 to enter phase III in 2017. In vaccines, we began phase III trials with our C. difficile vaccine. The studies have been enrolling well, and a recent competitive decision has positioned us as a potential first-in-class vaccine. Leveraging the success of Prevnar, we also moved into phase II of our next-generation pneumococcal vaccine candidate with the potential to cover 20 serotypes. In addition, we are advancing a phase II tetravalent Staphylococcus aureus vaccine with fast track designation. In 2017, we also continued to take important steps towards becoming an industry leader in gene therapy. We see gene therapy as a field that holds tremendous promise for patients in areas of devastating need, particularly in rare monogenic diseases with loss of function. We finished the year with two assets in the clinic that are potential therapies for hemophilia B and hemophilia A. In 2018, we expect readouts from multiple pivotal studies in rare diseases, including rivipansel for sickle cell disease and Vyndaqel in cardiomyopathy. We also have begun screening patients for our potential gene therapy for Duchenne's muscular dystrophy. We also broke ground on a $100 million commercial gene therapy manufacturing facility in Sanford, North Carolina, and when complete, will have end-to-end capabilities from manufacturing to commercialization. Before closing my remarks today, I would like to spend a few moments discussing the new U.S. tax code and its expected impact on our business. As you know, Pfizer has been advocating for many years for comprehensive tax reform. That is because the system that had been in place put U.S.-based multinational companies at a competitive disadvantage vis-a-vis foreign competitors with regard to the tax rate and international access to capital. The new tax code addresses these issues and helps level the playing field to make U.S. companies more competitive. After evaluating the expected positive net impact the new tax code will have on Pfizer, we have decided to take several actions. Over the next 5 years, we plan to invest approximately $5 billion in capital projects in the U.S., including the strengthening of our manufacturing presence in the U.S. We also expect these reforms to favorably influence future investments. We plan to make a $500 million contribution to our U.S. pension plan in 2018. In the fourth quarter 2017, we made a $200 million charitable contribution to the Pfizer Foundation. This organization provides grants and investment funding to support organizations and social entrepreneurs in an effort to improve healthcare delivery. We have also earmarked approximately $100 million for a special one-time bonus to be paid to all non-executive Pfizer colleagues. Given the more favorable repatriation provision, we are currently reviewing our capital allocation opportunities under the new tax code. We will remain disciplined in our approach with value creation for shareholders remaining our compass. In summary, we continued to deliver our strategy in 2017. As a result, we saw continued growth of newer brands, achieved a record number of product approvals, further advanced our pipeline, which we believe will be a significant competitive advantage and growth driver going forward. We enter 2018 even better positioned to deliver new medicines for patients and increase value for our investors going forward. All of these achievements have been made possible by the strength of our leadership team, which we further strengthened recently with Albert Bourla taking on the role of Chief Operating Officer, John Young leading Pfizer Innovative Health, and Angela Hwang becoming the head of Pfizer Essential Health. These appointments are a testament to the depth and breadth of our leadership talent, which has positioned us very well for continued success. Now I will turn it over to Frank to provide details on the quarter and our outlook for 2018. Thanks, Ian. Good day, everyone. As always, the charts I am reviewing today are included in our webcast. Now moving on to the financials. Fourth quarter 2017 revenues were approximately $13.7 billion, which include the favorable impact of foreign exchange of $114 million, partially offset by a slight operational decline of $39 million. If you exclude both the prior year quarter revenues for our Hospira Infusion Systems, or HIS, and the positive impact of foreign exchange, fourth quarter 2017 revenues increased $240 million or 2%. Our Innovative Health business recorded 5% operational revenue growth in the fourth quarter of 2017, driven primarily by Eliquis globally, Xeljanz in the U.S., Prevnar 13 in emerging markets, and Lyrica, Ibrance, and Chantix in the U.S., all of which were partially offset by lower revenues for Viagra in the U.S. because of generic competition beginning in December of 2017 and Enbrel in most developed Europe markets due to continued biosimilar competition. Revenues for our Essential Health business in the fourth quarter decreased 8% operationally, of which 5% was attributable to the divestiture of the HIS business in February of 2017. The remainder of the decrease was due to an 18% operational decrease from peri-LOE products, including the expected declines of Pristiq in the U.S. and Lyrica in developed Europe markets, as well as a 10% operational decline in the sterile injectables portfolio, primarily due to continued legacy Hospira product shortages in the U.S. All of which were partially offset by operational growth 72% from biosimilars, mainly driven by Inflectra in the U.S. and developed Europe. In emerging markets, Pfizer's overall Essential Health revenues grew 10% operationally in the fourth quarter, primarily due to 10% growth from the legacy established products portfolio and 23% growth from the sterile injectables portfolio. Fourth quarter reported diluted EPS was $2.02 compared with $0.13 in the year-ago quarter, primarily due to a lower effective tax rate due to the enactment of the Tax Cuts and Jobs Act, or the TCJA, in late 2017. As a result, Pfizer's fourth quarter full-year 2017 provision for taxes on reported income was favorably impacted by approximately $10.7 billion, primarily reflecting the remeasurement of U.S. deferred tax liabilities, which includes the repatriation tax on deemed repatriated accumulated earnings of foreign subsidiaries. Our fourth quarter reported diluted EPS was also favorably impacted by lower restructuring and implementation costs and unfavorably impacted by higher losses on debt retirement. Adjusted diluted EPS for the fourth quarter was $0.62 versus $0.47 in the year-ago quarter. The increase was primarily due to a lower effective tax rate, lower adjusted total cost and expenses, and fewer shares outstanding. I want to point out that diluted weighted average shares outstanding declined by 80 million shares versus the year-ago quarter due to our share repurchase program, reflecting the impact of our $5 billion accelerated share repurchase agreement executed in February 2017 and completed in May of 2017. In addition, the full-year 2017 weighted average shares used to calculate EPS was 6,058,000 shares, a reduction of 100 million shares compared versus full-year 2016. As I previously mentioned, foreign exchange positively impacted fourth quarter 2017 revenues by approximately $114 million and negatively impacted adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses in the aggregate by $127 million. As a result, foreign exchange favorably impacted fourth quarter 2017 adjusted diluted EPS by approximately one cent versus the year-ago quarter. As you can see on the chart, we've met or exceeded all components of our 2017 financial guidance. Moving on to full-year 2018 financial guidance. It's important to note that this guidance includes a full-year contribution from Consumer Healthcare and assumes no generic competition for Lyrica in the U.S. during 2018. We currently expect generic competition in June of 2019, contingent upon a six-month patent term extension for pediatric exclusivity, which we are currently pursuing. We expect 2018 revenues to be in the range of $53.5 billion to $55.5 billion. This range incorporates an anticipated $900 million favorable impact of foreign exchange. I want to point out that beginning in the first quarter of 2018 forward, total Viagra worldwide revenues will be reported in Essential Health due to generic competition that began in the U.S. in December of 2017. Previously, revenues for Viagra in the U.S. and Canada had been recorded in our Innovative Health business through December of 2017. We expect the effective tax rate on adjusted income to be approximately 17% in 2018 and sustainable for the foreseeable future, which is significantly lower than the approximately 23% that we previously anticipated for full-year 2017 and reflects the enactment of the TCJA. Because of the significant changes and complexities to the tax law, this financial impact on 2018 guidance is provisional only and therefore subject to further analysis, interpretation, and clarification of the tax reform legislation. I want to point out for modeling purposes that based on 2017 results, a 1% reduction in the effective tax rate on adjusted income results in an approximate $0.03 increase to adjusted diluted EPS. Finally, as a result of the enactment of the recent legislation, we expect to repatriate the majority of our cash held internationally in 2018. As a reminder, as of the third quarter of 2017, Pfizer had approximately $24.2 billion of cash and investments. Finally, we expect adjusted diluted EPS will be in the range of $2.90 to $3, which incorporates $0.06 favorable impact from foreign exchange and $5 billion of anticipated share repurchases in 2018, the impact of which we expect to be offset by about half from dilution related to share-based employee compensation programs. Moving on to key takeaways. We delivered solid financial results in the fourth quarter of 2017. Excluding HIS revenues from the prior year quarter and the impact of foreign exchange, revenues increased 2% operationally year-over-year, driven by the strong growth from Eliquis and Xeljanz. We issued 2018 financial guidance ranges reflecting 4% revenue growth and 11% adjusted diluted EPS growth at their respective midpoints compared with 2017 actual results. We accomplished several key product and pipeline milestones, and we returned $12.7 billion to shareholders in 2017 through dividends and share repurchases, including a $5 billion accelerated share repurchase agreement. Finally, we remain committed to delivering attractive shareholder returns in 2018 and beyond. Now, I'll turn it back to Chuck. And Ian, for the prepared remarks. Operator, can we please poll for Q&A now? Ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypads. Your first question comes from Alex Arfaei from BMO Capital Markets. Oh, great. Thank you. Good morning, and thank you for taking the questions. I guess the first one for Ian. How should we think about the European pricing adjustment longer term? Are these established contracts or should we expect more step downs and could it have implications for U.S. pricing and pricing in general? Then a follow-up for Frank. I appreciate that you are still reviewing your capital allocation opportunities, but your $5 billion share buyback seems conservative given all the options available to you. If we think about the potential divestiture of the consumer business, more efficient access to ex-U.S. cash, how should we think about potential upside there? Finally, Mikael, the Tanezumab phase III pivotal trials are coming up. How should we think about some of the previous safety issues that have delayed this seemingly promising asset? Thank you very much. Thank you, Alex. I am going to let Albert answer your European price question, but I would like to point out ahead of time that these negotiations were not related to competitive pressure. I see the establishment of pricing for Ibrance in Europe as a major positive for the business going forward at prices that are consistent with European oncology analogs. Albert, do you want to add any more context? Yeah. First of all, as you said, Ian, this is something positive. You said it now, and you said it in your remarks. Let me clarify that demand in Europe continues to show very strong growth. We've had 20% this quarter compared to previous quarter, and we've had 29,000 Ibrance patients in Europe this year. To put that in context, in the first year of the U.S. launch, we had 20,000. Now, the negative on this quarter, as Ian said, it is due to a one-time price adjustment to the full-year revenue. These were part of finalizing broader reimbursement negotiations that will establish pricing levels very comparable to historical European pricing analogs. At the same time ensure broad patient access to drive potential future volume and more importantly, revenue growth in these places. I'm very satisfied with these agreements. Overall, they recognize the value that Ibrance brings to patients and at the same time they offer an attractive cost benefit to the payers. In conclusion, in 2018 we expect to see strong volume and revenues growth in Europe and other international markets as a result of these deals. Thank you. Frank, do you want to talk about the capital allocation? Sure. Alex, you mentioned the $5 billion in buybacks. Let me just run the numbers and then I'm going to bump this up to a capital allocation conversation. So we've announced $5 billion in buybacks. We also announced we were increasing our dividend to $0.34 a quarter. The combination of dividends and buybacks for 2018 will return more than $13 billion directly to shareholders. Now let me bump it up to more of a capital allocation conversation. The four priority areas that we've had in the past continue to be our four priority areas. Those are obviously investing in our business, dividends, buybacks, and M&A. So those were the areas, they remain the areas. The nice thing about Pfizer is we have the ability to play in all four areas as we've demonstrated in the past. Now, given tax reform and given that we're exploring strategic options for our Consumer Healthcare business, we will continue to review what our options are. We'll continue to evaluate our options in all these areas on a going forward basis. The answer to Tanezumab please, Mikael. Thank you. Alex, thank you for shedding attention on Tanezumab. We are very excited about the trial of six different studies, 7,000 patients that are starting to read out early fall this year, and then each of the trials further on into 2019. We have a unique position in this space as we gathered tremendous experience and insight in how to manage our NGF antibody and deal with rare events recorded as rapidly progressing OA. We have been able to design the trial to minimize the risk for such to occur. That includes reducing concomitant chronic use of NSAIDs. It includes lowering the dose of Tanezumab, particularly in OA, where some of these rare cases were seen in our trials, while keeping higher doses in chronic lower back pain where this issue was not really reported. We've introduced risk management program and stopping criteria for individual patients. Overall, we think we have really learned uniquely and been able to design a study that should minimize the risk of such events. I also want to take a step back and say the macro environment for the need of new pain medications have really changed. The perspective a number of years ago was that Unmet medical need was rather satisfied. Unfortunately, we have learned that the current pain medications, particularly opioids, have severe issues, not just when it comes to impact on GI respiratory, but also the great addiction crisis that we are battling with. In contrast, of course, a monoclonal antibody like this that can be given conveniently, subcut every 8 weeks, we believe have a very attractive profile, and we look forward very much to the readout of the trials and report those. Thank you. Thanks, Mikael. Next question, please. Your next question comes from Vamil Divan from Credit Suisse. Hi, great. Thanks so much for taking the question. Just, one, there's always been a lot of discussion around these potential new entrants entering drug distribution. We have the news today around Amazon, Berkshire, and JPMorgan. The quotes and the commentary around it obviously talked a lot about healthcare costs and the impact it's having on the economy. You guys generated $26 billion of sales in the U.S. last year. Just if you can comment on how you see this impacting things, maybe near term and also longer term, and how is it not ultimately a bad thing for larger companies such as Pfizer, that generate so much of their sales from the U.S.? Then my second question, just quickly around guidance, totally different topic. With Xtandi, you mentioned some of the positive news you had there, but just if you can talk about how you are thinking about that product. We obviously may see Zytiga generics in the market later this year, and wondering how you think that might impact Zytiga's business. Thanks so much. Vamil, thank you for the question. Vis-a-vis Amazon, I think we have discussed this before. We welcome any entrance to the distribution system that can improve efficiencies and ensure that patients get their medication at the appropriate cost and the appropriate time. Although I would say that the distribution system, not necessarily the way that the rebates and price are handled, but the distribution system is already highly efficient. With regard to the announcement today, I really am surprised at your comments. Do not really know how to react to it. There is very little detail in the announcement. Nevertheless, I would see it as totally positive for our industry. Any attempt to lower healthcare costs are going to have to involve, my belief, in using medicines to ensure adherence, to ensure the appropriate management of diseases. We represent two points, or we represent 10% to 14% of healthcare costs. I would hope that private actors that come into this space would initially see more opportunity throughout the whole distribution chain of costs. And would look at us as a positive way of controlling costs. I think it is encouraging that private actors enter in this, and it is encouraging for the use of modern pharmaceuticals. And Xtandi, would you deal with that, please, Albert? Of course, Ian. First, let me start by saying how pleased we are to see total demand for Xtandi growing 26% compared to the fourth quarter of 2016. Particularly the number of urologists actively prescribing it. Xtandi continues to grow and reached an all-time high of 1,700 in this quarter, which is more than three times the number of urologists that are prescribing Zytiga, for example. Urologists right now represent 41% growth in 2017 compared to 2016. And of course, not to miss mentioning that we had another quarter with sequential sales growth. The sales of this quarter were 12% higher than the sales of the previous quarter. As regards patient assistant program, as a proportion of total demand, it was generally stable compared to the third quarter of this year, which is what we were expecting, knowing that the people that we are enrolling ourselves in these programs, they are enrolled for the full calendar year. We believe that the demand for patient assistant programs as a percentage of total demand will decrease in 2018 as compared with what we saw in 2017. As regards Zytiga generics, there are differences between Xtandi and Zytiga. There are differences in terms of dosing frequency. There are differences in terms of requirements for steroid co-administration, and there are also very different monitoring requirements. As you know, in the future, we hope to have different indications also based on potential approval of the PROSPER study in non-metastatic castrate-resistant prostate cancer and more studies that are coming in the earlier setting. We will continue monitoring the market, but we are not right now concerned about Zytiga generics. Thanks, Albert. Can we move to our next question, please? Your next question comes from David Risinger from Morgan Stanley. Thanks very much, and congrats, Ian and Frank, on all of your efforts to educate Washington having finally paid off. With respect to my questions, I wanted to ask for a little bit more color and perspective on Ibrance in Europe. I think it would just be helpful if you explain which countries agreed, how it all came together so quickly to result in a price reset in a given quarter, since obviously many countries negotiate pricing independently. That is my first question. Second, with respect to Inflectra, has J&J's contract language changed such that Inflectra will have greater commercial access and commercial uptake in 2018? Then my third question is for Frank. How should we think about the tax rate beyond 2018? Should we expect it to decline below 17%? Thanks very much. David, thank you for the congratulations. I do believe that Pfizer was playing a major role in putting a spotlight on the disadvantageous corporate tax situation for U.S. multinationals. So appreciate the comments. Now on to Ibrance. I would like to, number one, we are not getting into discussion of which countries. This is all proprietary information that is important for us that we do not discuss in the public. Two, it was not quick. It was a result of ongoing negotiations over a substantial part of 2017. I think what you need to be focused on, if you do not mind me saying so, is what is this set up for the future of Ibrance? We have managed to establish wide reimbursement and pricing at what we believe for the European market is comparable analogs. We do not see there is any spillover to other markets internationally or within the European context. We see this agreement as setting a strong baseline for patient access in Europe and continued growth of the franchise. So I think this is extremely positive for Ibrance. It comes in an unusual way as the negotiations reflected the full impact in one quarter rather than spread over the whole year or spread over a period of years. So to my point of view, it is very, very positive going forward for Ibrance and for patients in Europe. Would you like to deal with Inflectra, please, John? Thanks for the question, David. I am obviously not aware of any changes that J&J have made to their contracting status. I think we have commented on that previously, and Ian mentioned this in his call. Let me just say that we obviously continue to work towards minimizing the impact in 2018 of their exclusionary contracting practices by growing in closed systems and continuing to seek increased coverage amongst commercial payers. As Ian mentioned in his prepared remarks, in quarter four, approximately half of Inflectra's volume comes from closed systems such as the VA, where the insurer and provider are the same entity. In those closed systems which prioritize healthcare savings over short-term rebating, as of quarter four, we have now reached a 58% share of infliximab. But we are obviously very conscious that those closed systems represent only a small proportion of the market, around about 5%. But we really believe that our performance in those closed systems demonstrates that where payers, providers, and patients have access to Inflectra, that it can offer significant value to the healthcare system, and we'll continue progressing that aggressively. Then on the tax rate question, Dave, we said for this year, approximately 17%, and then in terms of going forward, I would continue to use approximately 17%. We believe that rate is sustainable. If anything were to change, obviously, I will let you and everyone else know. All right. Thank you. Next question, please, operator. Your next question comes from Geoff Meacham from Barclays. Good morning, guys, and thanks for the question. Ian or Frank, just on the topic of repatriation, in the past you guys have talked about tapping into uninvested foreign earnings, not just OUS cash. Should we view the $24 billion you mentioned, Frank, as a ceiling for repatriation, or are you still evaluating? Then more on the pipeline, when you think about Pfizer's IO strategy, moving beyond avelumab and 4-1BB, what's the capacity, or should I say the priority to expand the number of IO combinations? I know you guys are looking at OX40, but obviously room for many more combos. Maybe what's the rate-limiting step for that to happen? Thanks. Jeff, the $24 billion is the ceiling on the repatriation. Of course, it does mean that all future cash flows can come back to the U.S. without restriction, which I think is the really important point rather than the $24 billion we're bringing back. It's unfreeing permanently of our access to our global capital cash flows. And it's up to $24 billion. And it's up to $24 billion. IO strategy. Mikael, please. Yeah, thank you. We look at the IO field development into three buckets as per your question. Initial monotherapy with PD-1, PD-L1s, including our Bavencio. Combinations of those agents with chemo-targeted or IO agents, and three longer term, aiming to turn cold tumors hot. In the first bucket, we are present mainly as a minor player with Bavencio approvals in Merkel cell bladder cancer and planned readout in lung cancer. We didn't really plan to be a leader in this space. However, we really aim to grow impactful leadership with Bavencio in segments of combinations which are near and midterm promising opportunity. We have now five pivotal studies over the next 18 to 24 months with various Bavencio combinations that we think will be really interesting to watch. Ovarian second line and third line with chemo, we are in our first line with Inlyta Bavencio, gastric first line maintenance of Bavencio off the chemo, bladder first line maintenance of Bavencio off the chemo, ovarian, Bavencio combined with various chemo combination. In addition to those pivotal readout in the more near term, we midterm see more than 20 Bavencio combinations, whether radiotherapy, pivotal studies in head and neck, or with our vast number of targeted agent, which is really unique aspect of Pfizer compared to many other players in this space. That includes for lung, dacomitinib, but Xalkori for breast with Ibrance fulvestrant, for leukemias, or Mylotarg with glasdegib. And of course, we are conducting additional IO studies with 4-1BB combined with OX40, where we have encouragement that is made from an immune point of view, be a really interesting combination. Finally, I want to say that we are really one of the few that have both an IO agent, Bavencio, and a PARP inhibitor, Talazoparib. And we do think that will be a very powerful combination. And we're running broad basket studies over many solid tumors and expect opportunities to pick from those data set into pivotal studies in the near term. The longer term bucket was aiming to turn cold tumors hot. And we have invested in numerous platforms there, which combined with PD-1 or avelumab, such as cancer vaccines, oncolytic viruses, antibody drug conjugate, where we have phase I, II studies with PTK7, or nanoparticles loaded with various immuno-targeted agents, and finally, bifunctional antibodies. So yeah. Thanks, Mikael. That's a comprehensive review. And of course, immunology is one stool of our oncology platform because we're in breast, we're in targeted agents, we're in prostate cancer. And so I think we have a very robust overall strategy. I would like to point out that while we are behind in lung, now our expectations are we have two important readouts, one this year and one later on, which is in with a very creative design. And let's see what the results are in lung and how positive it can be. We haven't in any way given up in our attempt to participate in that large market. Thank you very much. All right. Thank you, Ian and Mikael. Next question, please, operator. Your next question comes from Jeff Holford from Jefferies. Oh, thanks very much. My first question is just on the second generation Ibrance product that you have. Are there specific resistance mechanisms that you're identifying within Ibrance patients? I wonder if you can just talk a little bit about those and how this circumvents them. Then the second big picture question, obviously, you guys have looked at a potential separation of the Essential Health business in the past. You did talk about a number of factors that influenced that decision not to do it before. I am just wondering if now we have the tax reform in place, whether that potentially influences that decision going forward and when you might next look at that again. Thank you very much. Thank you, Jeff. I will ask Mikael to discuss the second generation as you have named it for Ibrance agents. Yes. Thank you. We have two current approaches to deal with resistance to CDK and breast cancer. We are starting this quarter as our plans are with a second generation CDK drug, and that's based on unique proprietary science that we have performed to identify resistance mechanism that can occur related to the cell cycle. We look forward very much to study that in breast, and it has also application outside of breast as a resistance mechanism. The second resistance we have noted is related to a targeted pathway, PI3K, and we have a phase I-B study with a unique inhibitor, gedatolisib, and have seen so far encouraging data and are expanding those studies. Thank you. Why don't we go to Frank for the discussion of the separation? Yeah. So Jeff, on optionality, if you all recall, we had laid out four questions. Was the business performing well inside the company? Will it continue to perform well on a standalone basis? Was there trapped value? Can we unlock that trapped value in a tax-efficient way? Let's focus on questions three and four. With tax reform, now question four is yes. To the extent that there's trapped value, we believe we would be able to unlock that trapped value in a tax-efficient way. But let's really zoom in on question three, which is: is there trapped value? When we announced we were looking at optionality, specialty pharma valuations had price earnings multiples that were 20-ish. If you look today, they've been cut roughly in half. We really don't see Any trapped value. Our current view is for the foreseeable future, the key for our Essential Health business is execution. To really get that business humming. To deal with our sterile injectables, continue to grow biosimilars, to continue to grow in emerging markets and continue to manage our peri-LOE products as effectively as possible. That's our view for the foreseeable future. Great. Thank you, Frank. Next question please, operator. Your next question comes from Jason Gerberry from Bank of America. Hi, good morning, and thanks for taking my questions. First, just wanted to get your guys' perspective on 2018 M&A valuations that are getting paid. I think investors and even company management teams have been vocal that the valuations have been pretty lofty. Just curious to get your perspective on the valuation. It certainly seems like a seller's market. Secondly, on Xtandi, just can you comment a little bit year to date 2018, the dynamic between the PAP and the copay foundations. I realize you have no line of sight into the copay foundation, but potentially you have a line of sight into the PAP. Just wondering if the patients are being funneled in a way that will improve revenue recognition or revenue generation with Xtandi patients in 2018. Thanks. Well, vis-a-vis the valuations, every deal is a deal by deal. So it's very difficult for us to assess the value transactions on deals, because it's not clear what the opportunities that with the specific assets and research and capabilities companies have when they pay for these assets. They would appear to be, in terms of P and multiples, lofty prices. But once again, everybody does their own deals, and every deal is specific. So, we will continue to look for value in the BD space. And when we find it, we have the capability and the capacity to operate on it. With that, I'd ask Albert to discuss the issues around- Dynamics dynamics. Yes. Jayson, look, I have no visibility in what is going on in terms of copay foundations. I know because we have made publicly available that we are contributing, but I am not aware of the amounts that we are giving by quarter, by month, because we have established very strong, let me call it Chinese wall between our commercial operations and the groups that they are contributing to these foundations. What I know, it is only how many people are enrolling in the commercial free goods, which is the patient assistant program. This is what I said before, that in the fourth quarter it was the same more or less amount percentage-wise as we had in the third quarter. From the first indications that I can see how many are enrolling in 2018, I expect this number to be lower in 2018 than 2017. Great. Thanks, Albert. Next question please. Your next question comes from John Boris from SunTrust. Thanks for taking the questions and congratulations on the solid results. Ian, just going back to the question on M&A going forward. I think you previously mentioned that you essentially wanted to take a pause on large scale type of M&A until tax reform was in the rearview mirror and how things shook out on repatriation. I think you have also provided some commentary that there were some significant binary events that would have to occur going forward to also for consideration on larger scale M&A. Just wondering how the tax outlook shapes that view going forward. Second question on tax. Tax rate goes down by 500 basis points. Can you just walk us through the pushes and pulls of what is gone on with the international subsidiaries that caused that 500 basis point contraction? And then why the tax rate wouldn't continue to go down as you do, and certainly how does that influence your tax planning going forward? Last question, just on tafamidis. Cardiomyopathy and the trial potential readout, what do you potentially expect out of that? Is there a potentially mortality outcome out of that? Can you contrast the drug with Alnylam and Ionis' drugs that are being studied in that area? Thanks. Okay. So on M&A, I think we've been reasonably consistent over the years when we discuss M&A to say that we had the capacity before tax reform to do M&A. In fact, we attempted to do two large ones, which were thwarted by government interventions. The tax reform was really more important from the point of view of M&A, from the point of view of how you would finance a deal or what the relative values of companies would be. I expect to see some changes in that as some premiums for previously established tax advantages for certain companies disappear. But it doesn't really change our underlying focus of how we look at M&A and how we look at the disposition of our capital that Frank talked about earlier. So we'll continue to look at M&A from the point of view of value for our shareholders. We'll be directed by the science and the opportunities. We'll also look at opportunities across the other spectrums, which is the dividends and the buybacks and investment in the business. So I think it's really the continuation of a very thoughtful I believe from the point of view of Pfizer, of deployment of capital. Frank, do you want to answer the tax rate for me? Sure. John, let me run the numbers just to ground everybody. We had guided this year to approximately 23%. Now, obviously, we are giving guidance for next year of 17%, so approximately a 600 basis point decrease in the tax rate year-over-year. In terms of the going forward rate, I had answered earlier that for modeling purposes, we should assume that that 17%, approximately 17%, was sustainable. You asked me about kind of the international impact with our subsidiaries. At a macro level, the way to think about this is we do business in over 150 countries. Every country obviously has their own tax structure, their own tax rates. A slug of our business is outside the U.S. A major part of our business is inside the U.S. The new corporate tax rate going forward is 21% on overseas earnings. We have now a territorial system, but with a minimum tax of 10.5%. When you do all the work and all the tax planning, and we work through everything, the blended rate gets us to that approximately 17% that I alluded to. So going forward, you all should expect us to sustain, give or take, a 17% tax rate. Mikael, do you want to take on the Tafamidis question, please? Sure. We have a Tafamidis study for cardiomyopathy. As you know, the drug is registered in Europe to deal with what is called TTR amyloid for neuropathy. This study in cardiac condition is 400 subjects and the first and largest study in this important segment, including both patients with mutation and a large population with excessive amyloid but no mutation. We expect readout the first half of this year, and pending the data, we will then consider further potential regulatory action. It is, of course, the first of its kind in this rare disease, so there is high risk, but also very high upside given that this is a much larger population than neuropathy and a very few treatment. This is an oral drug and differed from injectables such as oligonucleotides that you referred to. We look really forward to the readout and to review it. Thanks, Michael. Next question, please. Your next question comes from Gregg Gilbert from Deutsche Bank. Thank you. First, on the innovative side, for your new JAK, can you talk in some more detail about how you'll develop it and differentiate it versus Xeljanz over the longer term, and versus other JAKs in the space? Then shifting over to the essential side, just questioning whether your manufacturing and supply chain network is where it needs to be there. It sounds like you've described that as more of fixing legacy problems versus investing new capital. Can you shed some more light on the strategy there? Is it a set of expensive band-aids, or is it a fundamentally new approach to have success on the essential side? Lastly, what do you plan to do with your own biosimilar version of Remicade, which would presumably be more profitable than the Celltrion version? Thanks. Hey, Greg, thank you for the questions. It's good to see lots of questions on our pipeline as it comes into focus. Mikael, would you like to talk about the JAK1 and the JAKs? Yeah. Thank you. We have six next-generation immunokinases, including five oral, and they have been uniquely designed to go into areas where we think the first generation of JAKs, such as Xeljanz, is less optimal. While we are very excited about Xeljanz's strong performance in RA and the possible further expansion into ulcerative colitis, we have a JAK1, as you noted, went into phase III for atopic dermatitis and have a unique profile for that. We have a TYK2/JAK1 that is targeted to the mechanism in psoriasis and Crohn's, ulcerative colitis. We have JAK3 selective into RA. In derm, we look at interesting conditions such as alopecia with two of these JAKs, again, uniquely targeted. The whole story is to go into other areas where Xeljanz may not be fully optimized. While we think we can grow Xeljanz in rheumatology and select segment of GI, now we target broader diseases within derm, GI, beyond Xeljanz. We hope to expand the opportunity for JAK and obviously also plan for life cycle management on Xeljanz. Thank you, Mikael. In reality, we believe from the science of the JAKs we have been investing in for over 10 years, we can bring significant relief to specific patient segments with the specificity of the JAKs that we have developed, and this will be the backbone of our strategy and our competitive advantage. That is very good. Now we are going to ask- Biosimilar the biosimilars and also- And manufacturing. Okay. Please go ahead. Thanks for the questions, Greg. Look, as Ian mentioned in his comments, in the Essential Health portfolio, we have obviously been experiencing some supply shortages with some products. The shortages are primarily for products from the legacy Hospira portfolio. As Ian said, they are largely driven by capacity constraints and technical issues. Let me just make a comment and say that obviously, as we have said before, during the Hospira acquisition, we were aware that there were manufacturing issues that were confirmed during the due diligence process. But we have a robust action plan in place, and we believe that we will make progress during 2018 towards reducing sterile injectable shortages. That will include investing capital in those specific plants. Turning now to our own infliximab biosimilar, Ixifi. As you know, Inflectra's existing marketed infliximab biosimilar is currently available in the U.S., and it will continue to be available to patients and physicians. Although we are very pleased with the U.S. FDA approval of Ixifi as the first Pfizer-developed biosimilar in the U.S., Pfizer does not currently plan on launching Ixifi in the U.S., and we are evaluating our strategic options for this product. Thank you, John. Next question, please. Your next question comes from Jami Rubin from Goldman Sachs. Thank you. Ian, I think in the past you have, as an industry leader, spoken about the inevitability about industry consolidation. Today's news about the Amazon partnership, consistent pricing pressure, the Hillary tweet, I think that's when you started talking about it. We really haven't seen it, and the last wave of large-scale deals was back in 2009. Today on the call you're saying that there's less reason to do a tax deal, obviously because of tax reform. The spin is probably off the table now because you don't see trapped value. I'm just wondering if you still see value in industry consolidation from synergies and scale. That is something you really haven't touched upon. Do you see Pfizer as a consolidator as you've been in the past, or do you think you will continue down the path of smaller scale BD activity? Thanks very much. Well, thank you, Jami. I do believe that given the pressures that are being applied by the consolidation and the payer network, and the pressure there exists on governments to find ways of curtailing overall healthcare costs. Although I am optimistic that actually drugs will play a bigger part in that as being very cost-effective. I do believe there will be a need to further consolidation to deal with the size of our customers and the size of the opportunities. I think these things come in waves. I think everybody is looking at potential combinations and consolidations. I cannot tell you when it will start, but I believe there will be moments when there is a key detonator to initiation of further consolidation. I would say we have a core competency in consolidation of large companies into Pfizer. If there is an opportunity for shareholder additional value consolidation, I expect that Pfizer would be at the forefront of it. At the same time, we would also be looking at deals of a different size. We never say never to big deals, but we also say we think we have the capacity to do both the small deals and the big deal when the moment arises. We also, by the way, I am just getting some flags here from Frank. I think that we do not feel any pressure to immediately do any type of deal in the sense that we have just had a very good year in 2017. We are going to have a good year in 2018. We have very good franchises. We have focused on developing our own pipeline. That being said, we are opportunistic in looking for intellectual property that we can buy and do better than the present owners. We continue to look at that. I am very optimistic about our hand and all the arrows that we have to fire in our arsenal. Thanks, Ian. Thank you, Jamie. Next question, please. Your next question comes from Andrew Baum from Citi. Thank you. A couple of questions, please. Both for Ian and Albert. Despite the rhetoric, this U.S. administration is about as good as it could have been for the industry, given lashing on 340B hospitals, the proposals for PBMs to pass on rebates and make the right action on drug pricing. The president, together with the new head of HHS, reiterated his comments, and I am just interested how you quantify the risk or whether you think it is more noise. Does it impact how you look at M&A valuations and such that you believe there is risk? Are you more concerned of drugs under pharmacy versus medical benefits? So that is the first question. The second question is whether you could comment on the market pricing dynamic for small molecule oncology, given the density in those areas for PARPs or CDK4/6s. Whether you think net pricing is going to come under much more pressure than maybe we should be thinking about. Then finally from Mikael, could you talk to Pfizer's biomarker adoption beyond PD-L1, particularly tumor mutational burden, and how you are implementing that within your oncology program? You might like to comment on your Foundation Medicine relationship. Thank you. Andrew, thank you for those three questions. All very powerful and all very extensive. I think on the question of the pricing risk, this industry has for decades had a pricing risk present in its commercial business. In fact, we highlight that on our 10Qs and things like that. I do not see that the pricing risk has dramatically changed from where it was 10 years ago or 5 years ago. I believe that we need to be in a constant dialogue with society and with payers and the government over the value of pharmaceuticals. I think that dialogue is ongoing with both the administration and Congress. I think the dialogue is being informed by facts. We are looking for ways, as you mentioned, to lower the out-of-pocket cost of patients. The fundamental problem is not, I believe, the pricing of products. To be able to fund and run a modern, innovative pharmaceutical company, there is a certain level of resources necessary. Unless we see a breakthrough in innovation and a breakthrough in the process, this is the cost of bringing products to market. The question is, does society want to continue to support that innovation? I think the answer is absolutely yes. The next question is, how will society ensure access to those products? This is really about how you ensure people. Do rebates get to the point of sale where we think they ought to be? How do you make drugs affordable? Right now, the system is set up perversely to transfer the costs of lowering premiums for healthy people onto sick people. I do not think that is a good policy, and we are in discussions with the government to change that. I think this pricing risk is with us. I think it remains with us, and it is a constant issue that the industry needs to deal with given the nature of the marketplace. On your question about the density of small molecules, to a certain extent, I would apply that to the density of PD-L1s. I do not think it is specific to small molecules. I think the pricing always rests on the value the products bring to society. We will continue to develop innovative products that have differences with competitors, and we will expect to earn a reasonable return on those products. There was one other question on the PD-L1. Mikael, do you want to talk to that? Yeah, I'll be brief. We started with PD-L1 as what was the initial most frequent used, and for some tumors, like lung, useful biomarker. We are now assessing tumor mutational burden. Clearly, you have good insight into this field. I envision that we will see in the future studies to start maybe even a combination of PD-L1 and TMB. Exploratory markers include immune cell subset, T cell repertoire sequencing, and then combination drug-specific choices. Thanks, Mikael. Next question, please. Your next question comes from Tony Butler from Guggenheim Partners. Yes, thanks very much. Two questions, please. One, Mikael, in first-line renal cell carcinoma, you've got a very interesting trial with Inlyta. Obviously, there will be an IO/IO combination, I suspect, in the market by the time your trial reads out. I'm most interested in whether or not you think that Inlyta or tyrosine kinase inhibitor actually improves the synergy with Bavencio. Then second, still within oncology, if I might ask, clearly a little bit of euphoria around the CAR T space, and I recognize you all have an interest in an off-the-shelf version with Cellectis. I'm just curious if you might comment yet again on whether you're ramping up some efforts there. Then finally, Frank, once again on taxes, if I may. LOEs are diminishing. You've clearly stated that your U.S. business is doing extremely well, disproportionately, I might add. The U.S. percentage of your total business increases. Again, I have to ask, given those, unless there is something which we totally missed, why does not, again, tax change certainly out in the future beyond 2017? Sorry for that, but thanks. I will ask Mikael to address your first question. We do think that combining Inlyta with Bavencio is really unique combination for renal cell carcinoma, and the data as reported were really impressive. At least to me, I believe it stands out among the absolutely best seen thus far. Inlyta targets the microenvironment as a VEGF inhibitor, so I think it has unique position, and we view it currently as really promising and a preference for us than adding more immuno-oncology agent as we see very high responsive. We look really forward to the readout that will come within the next 12 months or so from this study. Thank you. On the question of CAR T, we have seen the explosion of interest. We do have an off-the-shelf version, as you say it, which we are developing with Cellectis. We are currently looking at our strategy of how to ensure that that product can get to patients in the most rapid and effective way. We will be looking at our strategy around CAR Ts. Then the last question. Yeah, on the tax rate. Tony, in terms of the overall business, if you look last year, 2016, roughly 50% of our revenues are in the U.S., 50% of our revenues are outside of the U.S. If you look at 2017, about 49% of our revenues were in the U.S., about 51% were outside the U.S. Not a lot of change, but a little bit more pointed towards the international part of the business. When we put all of that together and we look at where the mix of our business is, when we look at the countries we do business in, where we manufacture our products, where we ship from, I am currently comfortable with the 17% and my statement about sustaining that 17% beyond 2018. Great. Thank you, Frank, for covering that. Next question, please. Your next question comes from Chris Schott from J.P. Morgan. Great. Thanks very much. Just two questions here. Maybe coming back to business development. I know the returns need to be there. You have highlighted you are agnostic to size. But given where the business and the pipeline stand today, I guess ideally, what are you trying to achieve as you think about BD? Is it focused on enhancing near-term growth? Is it more about long-term growth? Do you want to stay in the existing verticals? Do you want to add verticals? Trying to understand a little bit more what the strategic priorities are as you consider deals before we think about the financial terms associated with them. My second question was switched on the Prevnar outlook for 2018. Are we still expecting the U.S. adult business to be under pressure? Can growth elsewhere in the franchise start to offset that erosion as we think about the 2018 outlook? Thanks very much. Thank you, Chris. On BD, we look at across a spectrum of BD from near term to long term. Clearly, if assets were available at appropriate valuations, we would have a preference for short-term acceleration in our revenue growth and our EPS growth. On the other hand, if there is availability of a different deal, which also produces value, although it may take longer, i.e., through consolidation and things like that, we would also be interested in that and continue to look across that spectrum. I think we are well-positioned. We can be considerate in the options we look at, and we do have a certain sense of urgency to find deals that would accelerate our revenue and EPS growth. With that- Okay We will go to Prevnar. Albert. Yes. Chris, you are right. We do expect that there will be a pressure in the adult sales in the U.S., which will be less as the product is coming more to a stable state. This will be offset by higher pediatric sales globally. We do not provide guidance on specific products because this is already incorporated in the guidance that Frank gave. I can tell you in general terms that the Prevnar will be roughly flat in 2018 compared to 2017. Okay. Thanks, Albert. Next question, please, operator. Your next question comes from Tim Anderson from Bernstein. Thank you. A couple of questions. Can you talk about how you see your international sales of Enbrel evolving from here as we move into 2018 relative to what we saw in 2017, further levels of price erosion, volume loss, and that sort of thing? In 2017, sales were down about 15% versus the prior year. Is that the sort of contraction that you expect we will see in 2018 as well as future years beyond that, so maybe 15% per year? I am trying to understand what your long-term modeling shows in the setting of a biosimilar. Second question, there is continued, or I should maybe say renewed interest recently on the topic of whether PD-1s and PD-L1s are the same, with the argument being the P1s might offer better efficacy because of mechanistic differences. Wondering what Pfizer's current view of this debate is. Okay, Tim, on Enbrel, thank you for the question. As you know, we do not give product-specific forecasts, but I think the ranges you described in your opening commentary is aligned with our internal thinking about the way that franchise will be managed over the future. PD-1, PD-L1, Mikael? Yeah, I would start to say that we have a unique situation that we actually have one PD-L1, Bavencio, and one PD-1. The PD-1 is right now in studies with our cancer vaccines, very well behaving. That has potential for substitute monthly administration. On the other hand, we are very pleased with our PD-L1 that is more advanced. We monitor carefully what you said, whether there are any new data that would indicate under certain specialized setting that one would be better than the other. But in the big picture, I think they look pretty similar overall within these two classes. Thanks, Mikael. Next question, please. Your next question comes from Marc Goodman from UBS. Yes, morning. A couple questions. First, Albert, in the past, we've talked about as the new competition have come in with CDK4/6s, whether you've had to take any price. I was curious whether you've had to take any price now that there are three in order to maintain the dominant share you have. Second question is Consumer, if you could just refer to the U.S. business, it seemed a little weak in the quarter. Then third question, Tanezumab, you talked about six phase III studies. Can you tell us how many you're expecting to actually report out this year? Thanks. Okay. Albert, if you want to take the Ibrance and the Consumer. Yes. Mark, so far, despite the pressure that any incumbent product faces when multiple competitors enter the market, we have not seen any material impact on Ibrance performance. We believe the positive results from the other CDK inhibitor demonstrate the significance of CDK inhibition and will benefit the class overall. It's important to remember that almost 60% of newly diagnosed patients are receiving a CDK, but only 50% of the total population. So that demonstrates the potential to grow the class. Within this class, we remain very confident in Ibrance leadership based on the strength of the data, efficacy, safety profile, and then that can go on and on. Importantly, you know that there is no clinical relevant QT prolongation with Ibrance that was observed across the PALOMA trials. There is no requirement for ECG or hepatotoxicity monitoring in the current prescribing information. There is no requirement for monitoring of the signs and symptoms of thrombotic events or precautions. We feel that three years in the market with this, as you said, very large market share, 11,000 prescribers, more than 100,000 patients, we feel we are very strong with that. I believe on the value we are receiving, it remains consistent with our previous years' experience and have not seen any undue pressure due to the competition on our pricing, given the profile that Albert just described for Ibrance. Consumer's performance. Yeah, Consumer, Frank spoke about it. We had a 2% growth, and this was affected mainly by the U.S. The U.S. was declining 2%. Excuse me. In the fourth quarter, we were declining 2%, and then the U.S. that drove this decline was minus 8%. The reasons are first, the negative impact of Hurricane Maria in Puerto Rico, but also the U.S. were impacted by Nexium OTC LOE that happened in this quarter. As Frank emphasized, this business is performing at 5% every year, but it was in the last three years, and we are hoping to see it coming back to this level of performance this year. Okay, Mikael? Yeah. We'll have the first short 16-week efficacy trial reading out this fall, followed by the slightly longer 24, 56-week in safety trials in OA and chronic low back pain for the U.S. and EU markets reading out the first few months of 2019. That will really constitute the data package for potential filing consideration pending data for the major markets. Then we have other smaller studies for Japan and cancer pain later on. Great. Thank you. Next question, please. Your next question comes from Steve Scala from Cowen. Thank you. I have a few questions. On Ibrance's EU price, could you give us examples of the pricing analogs to which you're referring? Secondly, Pfizer had been saying that Essential Health would return to growth in a couple of years. Now that Viagra U.S. is in Essential Health, and presumably Lyrica U.S. will be moving over in the future, how does this affect Essential Health's return to growth timing? Then lastly, Inflectra U.S. increased $10 million quarter-over-quarter or a bit less than 1% of market share increase. Is that the trajectory we should be expecting going forward, or should we anticipate some sort of inflection? Thank you. Thank you, Steve. I do not really, for proprietary reasons on pricing, I do not want to get into analogs. I would say that we are satisfied in the European context of the reimbursement price we got. It was very hard negotiations, but in the end, patient access was important, as was the reimbursement price. We think we arrived at a fair compromise on that, and we think we have a basis for vibrant growth and at an appropriate price for Ibrance in Europe. I think that is the most important thing to look at there. John, would you take the other questions? Yeah. Thanks for the question, Steve. We have consistently said over the last two to three years that we expect the Essential Health business to return to growth in the medium term. That actually remains our view, that actually as the headwinds from major LOEs in the portfolio that currently sits within PEH begin to lessen, and we are seeing, for example, in 2017, the impact of LOEs was something like $1.4 billion in this business. We expect that that will shrink to around about $900 million in 2018 given the portfolio. Combined with the continued growth of emerging markets, combined with the continued growth of biosimilars. When you put all of those things together, we continue to expect that actually in the near term, that actually Essential Health is poised to deliver modest single-digit growth. We still feel that that is a sustainable pattern of growth for this business. In relation to Inflectra in the U.S., let me just say, first of all, that Inflectra globally had revenues of $135 million in the quarter. That was a 110% increase or $70 or $68 million growth. That actually, a $41 million increase in the U.S. Whilst we have commented in the answers to some other questions about some of the challenges in terms of access due to J&J's exclusionary contracting, we expect to continue to make progress in the U.S. with Inflectra in the course of 2018. Great. Thank you, John. Next question, please. Your next question comes from Umer Raffat from Evercore. Hi, guys. This is John Miller on for Omer. A couple questions. At JPMorgan, you showed an interesting slide titled "The step change in Pfizer R&D productivity". The number one thing on that was IO/IO combination. How do you think your internal IO/IO portfolio measures up against external, and have your thoughts changed based on the early results from JAVELIN Medley? Secondly, Frank, the 17% rate tax going forward, is your expectation the non-GAAP tax rate is going to be consistent with the cash tax rate? Last, I noticed you guys have an oral GLP-1 in phase I. Are you looking at that more in diabetes or in NASH? Okay. We'll ask Mikael to answer the question Yeah on research, and then Frank will answer the tax question. Thank you for noting our up to 15 and five subject to attrition that is typical in development blockbuster projections for the next five years. As you noted, it contained actually five opportunities in oncology. The first one included Bavencio mono in combos or IO/IO. We clearly continue to be positive about Bavencio as a quality PD-1. Ian alluded to certain trials coming up soon. We follow with significant interest the triple combo with OX40 4-1BB. We also, as I spoke earlier, have numerous pivotal study readouts with combinations of chemo and targeted agents, and actually more than 20 of such combinations overall in the portfolio. I think there is ample opportunity for us to make very valuable contribution in this field through IO/IO targeted and chemo combinations. That is a very important part of our strategy. Darren, on the GAAP tax rate versus the 17%. The 17% obviously is an adjusted results tax rate. The GAAP rate versus the adjusted, we will see fluctuations quarter to quarter based on the accounting that we are doing for various items. Every quarter, we typically have significant items, some positive, some negative. For example, this quarter we had a hugely positive significant item, which was a reversal of $10.7 billion in primarily U.S. deferred tax liabilities, which caused an incredibly negative tax rate. So there will be volatility, there will be fluctuations quarter to quarter with differences between GAAP and adjusted results as there has been in the past. Michael, just on the GLP-1. Yeah. Thank you for noting that. We are really excited about this oral GLP-1 small molecule. We think maybe the first real small molecule nature to be in human studies. We look upon initial opportunity in NASH and adjunct risk factors such as obesity. But certainly, we look at this profile also for treating diabetes, where this drug class has been so successful as injectable and of course an oral drug with a unique profile seems very attractive across the entire metabolic spectrum. Thank you, Michael. We will take our last question now please. Your final question comes from Seamus Fernandez from Leerink. Thanks very much for squeezing me in here. Just a couple quick ones. Ian, can you just give us your big picture thoughts on Eliquis and its overall opportunity growth continues to be pretty spectacular given where this product is in its life cycle. Just wondering if you think given where we are in the developed world, in terms of global markets overall, if this could possibly exceed Lipitor sales at peak. The second question, as we think about your pricing analogs in the discussion around international pricing of Ibrance, is it wrong to think that this may in fact anticipate success in the adjuvant setting so that there wouldn't be another step down in pricing as that patient population grows substantially? The last question is on the PARPs, as we think about the opportunity for talazoparib, what is Pfizer doing in prostate cancer given some early data there for a combination of talazoparib with Xtandi. Thanks so much for the questions. Thank you. I'm going to let Albert in his capacity as Chief Operating Officer to answer the Eliquis questions and the pricing on Ibrance, and then Mikael can answer talazoparib questions. Thank you. So let's start with Eliquis. Yes, we are very optimistic for Eliquis. We expect the growth will continue. The next leg of growth will be driven by increased NOAC penetration of the OAC market and increased Eliquis share gain of the class, of NOAC class. This share gain is expected to be achieved by increasing focus on the following strategic initiatives. We are going to accelerate market share gain in VTE market, in those markets who have achieved a leadership position in risk reduction already of stroke systemic embolism. We are going to generate and utilize local real-world data to seek preferential access for Eliquis, and we have a very good demonstration of these values so far with the first studies that we have performed, that they are getting the attention of payers. And of course, we are going to increase diagnosis of the NVAF patients in those markets who have achieved already a leadership position in risk reduction of stroke. So the news are very, very positive. Yeah. Concerning talazoparib. We are very excited about that drug profile. You noted our report on the EMBRACA trial in breast cancer where we had a nice superiority to chemotherapy and a very favorable profile. So we are looking forward to additional readouts for talazoparib and investment in the drug. And we have two prostate cancer studies, one that was recently initiated in combination with enzalutamide or Xtandi in a select subset of prostate cancer. And we also have a more advanced prostate cancer, an open single arm trial that could be of potential pivotal character. And then we have invested significantly in combination with Bavencio for what we think will be a number of different tumor types. So I look forward to continue the dialogue as we advance what I think is a potential best-in-class PARP inhibitor. All right. Thanks, Mikael. We'll just go back to Albert for another comment. Yes, because I forgot to answer your question about Ibrance. First of all, I cannot say it will be bigger than Lipitor. What I can say it is that it's going to be than Eliquis. But what I want to say, excuse me, than Eliquis, but what I want to say is that this is an extremely appealing opportunity for us, and big part of the opportunities, as you alluded, comes from advancement of Ibrance into the early settings of treatments. We have three studies that are related with early. Two are phase III studies, and is PENELOPE-B, but it is in high-risk early breast cancer, and that will become available towards the end of 2020. The other one, it is the PALLAS, but it is with intermediate risk early breast cancer, and that will come a little bit earlier in the third quarter of 2020. Of course, also we have Palette. In its totality, the early breast cancer represents very big opportunity because virtually the number of patients is more than double, and also the economic, the financial opportunity is larger because you have much longer duration of treatments. I don't think that it's early to speak about pricing, as you alluded, because those are coming in the 2021 timeframe for negotiations with payer. Thank you, Albert. The pricing analog of your question of whether the overall survival data that come matures in Ibrance will influence the pricing in Europe is a good question, but one that really is relatively remote. It's going to take three years to get that data. Assuming the data is positive, I would expect us to relook at the value of Ibrance. If it was negative, which it's very difficult in this type of long disease progression to get any really accurate information. I would expect that the use of Ibrance will be very well entrenched in the patterns of treatment by physicians by that time. Thank you. All right. Thanks, and thanks everybody for your attention today. Thanks, everybody. Thanks for your time. Ladies and gentlemen, this does conclude Pfizer's fourth quarter 2017 earnings conference call. Thank you for your participation. You may now disconnect.

Data Source: Quartr Last updated: Jan 30, 2018

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