Earnings Call: Q4 2014

Jan 27, 2015

Summary

2014 guidance was met or exceeded, with Q4 adjusted EPS of $0.54 and operational revenue nearly flat. 2015 guidance reflects substantial LOE and FX headwinds, partly offset by launches, while pipeline investment and shareholder returns remain priorities.

Good day, everyone, and welcome to Pfizer's fourth quarter 2014 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. Thank you, operator. Good morning, and thanks for joining us today to review Pfizer's fourth quarter 2014 performance. Joined today as usual by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, President of Vaccines, Oncology and Consumer; Geno Germano, President of Global Innovative Pharma; John Young, President of Established Pharma; and Doug Lankler, our General Counsel. Slides that will be presented on this call can be viewed on our homepage, pfizer.com, by clicking on the link for Pfizer Quarterly Corporate Performance fourth quarter 2014, which is located in the investor presentation section in the lower right-hand corner of this page. Before we start, I'd like to remind you that our discussion during this call will include forward-looking statements, and that actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer's 2013 annual report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussions during the call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer's current report on Form 8-K, dated today, January 27, 2015. We will now make prepared remarks, and then we will move to the question-and-answer session. With that, I'll now turn the call over to Ian Read. Ian? Thank you, Chuck, and good morning, everyone. We finished 2014 with another quarter of good performance and met or exceeded every element of our financial guidance for the year. Frank will take you through the numbers, but before he does, I want to reemphasize how our four key imperatives have guided the actions we have taken and the decisions we have made and will continue to guide us going forward. These imperatives are about the steps we are taking to create a sustainable high-value pipeline; effectively and in a disciplined way, deploy our capital in ways that create shareholder value; create a culture where colleagues take appropriate risks and accept accountability for their actions; and earn the respect of society. My remarks today will primarily focus on two of these imperatives, the evolution of our pipeline and how we are creating shareholder value. When we started this journey at the start of 2011, we said improving the performance of our innovative core would be a multi-year endeavor. Over this time, we have significantly changed the composition of our pipeline to have a clearer focus on the therapeutic areas that have strong commercial and scientific potential, where we have improved productivity in the pipeline. Since undertaking this effort, we have received 16 approvals as of the end of last year, 10 of which were new molecular entities. Today, we have a total of 86 programs in clinical development with 29 programs in late-stage development or registration. We continue to grow in key areas, most notably in some of our recently launched new products. Eliquis is winning share amongst cardiologists and moving towards the leading position in the new-to-brand share in several markets, including the U.S. and Japan. We grew our Xeljanz market share, so that it now ranks number 3 in new-to-brand prescription share with rheumatologists, and we are seeing good uptake of our Prevnar 13 adult vaccines following the CDC's Advisory Committee on Immunization Practices recommendation. This is good progress, and over the course of the next four years, we expect to have more than 20 phase II and III registration starts and hope to have more than 15 potential approvals, many of them new molecular entities. These numbers do not include study starts and approvals as a result of our Merck KGaA partnership in immune oncology. Many of the new molecular entities have the potential to be first-in-class assets that give us growth platforms. These include the CDK4/6 platform in oncology with Ibrance, or generic name palbociclib, and its potential for indications being studied in the broad spectrum of breast cancer as well as lung, prostate, head and neck, melanoma, ovarian, renal, and brain tumors in young children. We expect to have a competitive immune oncology program. We believe we have a comprehensive program with all the elements to be an industry leader. Through our partnership with Merck KGaA and their anti-PD-L1 avelumab, we are able to accelerate our participation in the immune oncology space, enabling both companies to participate in the first wave of potential single-agent monotherapy treatment regimens of several tumor types, some of which we expect to be first or second to market. Additionally, through this partnership, we are positioned to be a potential leader in the next wave of IO combination therapies. We expect to be amongst the first three companies in certain cancer indications with monotherapy and a leader with combinations of PD-L1 avelumab with targeted agents, for example, Inlyta, Xalkori second-generation ALK or dual IO combinations, for example, 4-1BB, OX40, ADCs, et cetera, and in various cancer indications. This year, we will be collaborating on up to 20 studies with Merck KGaA, with registrational intent on up to six of these studies. In addition, through the collaboration, we expect to have five different IO drugs in the clinic this year and up to 10 by 2016. This strategy includes checkpoint inhibitor mAbs, small molecule immunomodulators, cancer vaccines, bifunctional antibodies, CAR T cell-based therapy, and antibody drug conjugates. Our partner expects to present data from their PD-L1 study at ASCO in June. To the best of our knowledge, it is one of the most comprehensive IO platforms in development in the pharma industry today. We also have leading research on JAK biology with potential new indications for Xeljanz in psoriasis and psoriatic arthritis with our oral product, atopic dermatitis with a topical formulation, new GI indications in ulcerative colitis and Crohn's disease, and ankylosing spondylitis. We have what we believe is a differentiated approach within the PCSK9 area for hyperlipidemia. Our lead asset, bococizumab, has a differentiated clinical trial design, which includes high-risk patients and also assesses primary prevention for patients. In addition to this large molecule approach, we have both a small molecule and a vaccine in development nearing first in human. We have made progress with tanezumab and plan to submit preclinical data to the FDA this quarter in a complete response to potentially lift the clinical hold on that program. In the rare disease area, we are seeing good progress with enrollment in cardiomyopathy phase III programs for tafamidis, and are advancing towards phase III with rivipansel, pending our discussion with the FDA on the final optimization of the formulation. We have just announced a collaboration with OPKO for a long-acting growth hormone product that we believe could also be first in class and further expand that market. We have a broad biosimilars portfolio of complex monoclonals. With the current pipeline of five assets, three are ongoing or enrolling phase III trials and include potential biosimilars to Avastin, Rituxan, and Remicade. We have completed a phase I trial for Avastin and expect to initiate our phase III study later this year, and we have an ongoing phase I proof of concept for Humira. We believe we can become one of the world's preeminent biosimilar companies. There are also several potential acceleration opportunities in the pipeline that include a next-generation ALK/ROS1 inhibitor that holds the potential to significantly extend the lives of patients who will no longer respond to Xalkori. We expect to start a pivotal study this year. As you know, our Staph Aureus vaccine is currently in phase II clinical trials and was granted Fast Track designation by the U.S. Food and Drug Administration in February 2014. A phase IIB study that could be registrational is scheduled to start around the middle of this year. I am pleased with the progress we've made in a relatively short period of time in terms of the quality of the assets in our pipeline and the potential for delivering breakthrough products starting in late 2017 and 2018. Turning next to how the prudent deployment of capital has yielded significant returns to our shareholders. Over the last four years, we've maintained our operating margins and have taken approximately $5.5 billion out of our operating expenses. During a period where we lost significant revenue to LOEs and co-promote expiries from several high-margin products like Lipitor, Enbrel in Canada and the U.S., and the loss of Spiriva. This year, and for the next couple of years, ongoing expense reductions will result from continuous improvement efforts. However, given that the largest opportunities have already been realized, the amount of potential reductions is more limited. Also, there are certain areas where we will continue to invest in, such as R&D and new product launches. Further, we have returned just over $64 billion to shareholders through share repurchases and dividends over the last four years. As we have worked to transform Pfizer, business development has been an important enabler of our strategy. We have entered into a series of partnerships in license agreements and made some acquisitions that have bolstered our vaccines portfolio, enhanced our established products portfolio, strengthened our oncology pipeline, expanded our consumer portfolio, and fortified the set of assets we have across our key therapeutic areas. Given the strength of our late and mid-stage pipeline, we will evaluate business development opportunities biased towards deals with the potential for creating value in the near term. Beyond business development, here is what you can expect to see from us in terms of additional actions we plan to take in 2015 to create shareholder value. We will continue to invest in the launch of new products. We are excited about the potential revenue and continued growth prospects, primarily for Eliquis, Xeljanz, Prevnar 13 adult, Trumenba, Xalkori, and Nexium 24HR. We expect these products, along with a few others, Endocrel, Bosulif, Duavive, and vaccines acquired from Baxter, including Fibriance's pending approval, will generate nearly $2 billion in incremental operational revenue growth this year compared to last. While we expect product launch costs will increase approximately 25% year over year, we are seeing good leverage from the investment we are making in these products. In addition to new launch products, the innovative business will be focused on growing market share in our major inline brands like Lyrica, Enbrel outside the U.S., Viagra within the U.S., Chantix, and the Prevnar franchise. Our consumer business will be focused on growing its core brands, Advil and Centrum. Growing Nexium OTC market share and continuing to pursue Rx-to-OTC switch opportunities. For our established business, we will build on our success in 2014 in providing high value, high quality, low cost treatments in emerging markets. We expect to see operational revenue growth of mid to high single digits in emerging markets this year by focusing on opportunities in key growth markets such as China, Brazil, India, Russia and Turkey. In 2015, we will continue our efforts to finish the groundwork required to be in a position to operationalize a potential split of the company, and we have made good progress on this work. For 2015, we anticipate the effort that will be required for this work will result in approximately $400 million of one-time costs on a pre-tax basis. Let me remind you, at this point in time, we have not yet made a decision to split the company. We have said the final decision will depend upon how our businesses perform in their markets, having a high degree of confidence that the businesses will be successful as standalone entities, and how our shareholders value these businesses if the sum of the parts is greater than the whole. In 2015, we will again be in a position to reduce our adjusted effective tax rate. We expect it will decrease from 26.5% in 2014 to approximately 25% this year. We will continue to manage our tax line as we do any other expense line and look to be as efficient as possible. I would note that foreign exchange is one of those items that can either work for us or against us. Most importantly, it is not indicative of how the business is performing in a fundamental manner. As always, all of our decisions will be rooted in how best to strike the right balance in terms of capital deployment, dividends, buybacks, and business development. One of the reasons I am confident that we can accomplish all of this is because we have an employee body that is motivated and engaged in the successful execution of the initiatives we have undertaken to drive results. Over the past four years, we have created a culture ingrained in a strong ownership environment. In summary, we will build on our performance over the past four years to create a sustainable high-value pipeline, to have market-leading strong commercial businesses, to manage our cost structure, and continue to be disciplined in how we deploy our capital. Collectively, these elements of our strategy that will allow us to generate results and continue to create shareholder value, and that will enable us to bring patients innovative medicines that best meet their needs. Now I will turn it over to Frank for additional details on the quarter, the year, and our financial guidance for 2015. Thank you. Thanks, Ian. Good day, everyone. As always, the charts I am reviewing today are included in our webcast. I want to remind everybody that as a result of the full disposition of Zoetis on June 24, 2013, the financial results of the Animal Health business and the gain associated with its full disposition are reported as a discontinued operation in the consolidated statements of income for the 12 months ended December 31, 2013. Fourth quarter 2014 reported revenues of approximately $13.1 billion, which reflects a slight operational increase of $9 million year-over-year, was mainly driven by the strong performance of Lyrica, Prevnar, and Eliquis in developed markets, and Xeljanz, which grew primarily in the U.S., and 7% operational growth in emerging markets driven by Lipitor, mainly in China, as well as Prevnar and Enbrel, which were offset mainly by the unfavorable impact of foreign exchange of approximately $449 million or 3%, the loss of exclusivity for Celebrex in the U.S., the expiration of the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada, the termination of the Spiriva collaboration in certain countries, and other product losses of exclusivity in certain markets. Adjusted diluted EPS was $0.54 versus $0.56 in the year ago quarter. The decrease was primarily due to a $0.01 negative impact due to foreign exchange, a 4% aggregate operational increase of adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses, driven by an unfavorable change in product mix and increased R&D expenses due to incremental expenses for the ongoing phase III programs for bococizumab, palbociclib, ertugliflozin, and certain other new drug candidates, as well as potential new indications for previously approved products, especially for Xeljanz. Adjusted SI&A expenses, however, decreased by 2% operationally because of continued benefits from cost reduction and productivity initiatives, partially offset by investment to support several recent product launches and other in-line brands. Adjusted diluted EPS was favorably impacted by a lower effective tax rate and fewer diluted weighted average shares outstanding, which declined by 159 million shares versus the year ago quarter due to ongoing share repurchases. Reported diluted EPS was $0.19 compared with $0.39 in the year ago quarter due to the previously mentioned factors and the unfavorable impact of the charge for the $850 million upfront payment associated with the global strategic alliance formed with Merck KGaA in November of 2014, and an additional amount of approximately $300 million reflecting the fair value of certain co-promotion rights for Xalkori granted to Merck KGaA. Higher charges related to certain legal matters, as well as a higher effective tax rate, all of which were partially offset by lower restructuring charges and purchase accounting adjustments in the fourth quarter of 2014 versus the prior year quarter. Foreign exchange negatively impacted fourth quarter adjusted revenues by $453 million or 3%, and positively impacted adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses in the aggregate by $351 million or 4%. As a result, foreign exchange negatively impacted fourth quarter adjusted diluted EPS by approximately $0.01 compared with the year-ago quarter. Now moving on to the financial highlights of our business segments. In the fourth quarter, global innovative pharmaceutical revenues increased 6% operationally year-over-year due to the strong operational growth from Lyrica, primarily in the U.S. and Japan, and the performance from recently launched products including Eliquis globally and Xeljanz primarily in the U.S. All of which was somewhat offset by the previously mentioned expiration of the co-promotion term for Enbrel in the U.S. and Canada. Income before taxes declined 5% operationally due to a 5% operational increase in cost of sales, a 25% operational increase in SI&A expenses due to increased investment in new products such as Eliquis and Xeljanz and certain in-line brands, and a 25% operational increase in R&D expenses due to incremental investment in late-stage pipeline products, mainly bococizumab, avelumab, and additional Xeljanz indications. Fourth quarter VOC revenues increased 14% operationally due primarily to strong performance of Prevnar 13 adult in the U.S. and Xalkori globally, and Lyrica in most markets, and Sutent in emerging markets, as well as Nexium 24HR in the U.S. Income before taxes increased 13% operationally, mainly due to increased revenues, which were partially offset by a 12% operational increase in cost of sales, driven by increased sales volumes. As a percentage of revenue, cost of sales decreased by 30 basis points due to a favorable change in product mix. A 13% operational increase in SI&A expenses due to investment in Prevnar Adult, as well as launch and pre-launch expenses for Trumenba and Ibrance, and a 17% operational increase in R&D expenses due to increased investment in the Ibrance and Trumenba development programs and the global alliance with Merck KGaA. In the fourth quarter, global established pharmaceutical revenues decreased 7% operationally year-over-year due to the loss of exclusivity of Celebrex in the U.S., Detrol LA in the U.S. and Aricept in Canada, as well as the termination of the co-promotion agreement for Spiriva in most countries, including the U.S. All of these were partially offset by 7% operational growth in emerging markets and the strong performance of Lyrica in Europe. Income before taxes declined operationally 9% due to the decrease in revenues, a 5% operational increase or a 2.3 percentage point increase as a percentage of revenues in cost of sales due to LOEs and unfavorable changes in product mix, and a 5% operational increase in R&D expenses, primarily due to our biosimilars development program, partially offset by lower clinical trial expenses. All of which were partially offset by a 17% operational decrease in SI&A expenses driven by cost reduction and productivity initiatives. As you can see, in 2014, we met or exceeded all components of our annual financial guidance. Now I'd like to walk you through the 2015 guidance ranges for reported revenues, reported diluted EPS, and adjusted diluted EPS relative to our 2014 actual results. First, it's important to note that the 2015 reported revenues incorporate an anticipated $3.5 billion negative impact due to continuing product losses of exclusivity and declining alliance revenues, which will be partially offset by expected operational growth in certain other products. In addition, we expect foreign exchange to have an additional $2.8 billion negative impact on reported revenues. Consequently, we expect 2015 reported revenues to be in the range of $44.5 billion-$46.5 billion. Before moving on, I want to point out that the actual mid-January 2015 rates used to determine our 2015 guidance do not include the impact of a potential devaluation of the Venezuelan bolívar or any other currency. Reported diluted EPS and adjusted diluted EPS also include the negative impact from product losses of exclusivity, a $0.17 negative impact from foreign exchange rates, and a negative $0.03 impact from the pending transaction with OPKO. As a result, we expect reported diluted EPS to be in the range of $1.37-$1.52, and adjusted diluted EPS to be in the range of $2-$2.10. In addition, I want to remind everyone that guidance ranges for both reported and adjusted diluted EPS incorporate $6 billion of anticipated share repurchases in 2015, including $715 million of our shares repurchased to date. These repurchases will more than offset the potential dilution related to employee compensation programs. In summary, if you exclude the anticipated FX impact and the impact of the pending OPKO transaction, our fiscal year 2015 adjusted diluted EPS guidance midpoint is in line with full-year 2014 actual results, despite the $3.5 billion negative impact from expected product LOEs and declining alliance revenues. Now I'll review the remaining elements of our 2015 financial guidance. We expect cost of sales as a percentage of revenue to be in the range of 18.5%-19.5%. We expect adjusted SI&A expenses to be in the range of $12.8 billion-$13.8 billion. We expect adjusted R&D expenses to be in the range of $6.9 billion-$7.4 billion, which includes a planned upfront payment of $295 million to OPKO expected in the first quarter of 2015 upon completion of the transaction announced in December of 2014. We also expect adjusted other income to be approximately $500 million, and we expect our tax rate on adjusted income to be approximately 25%. Moving on to key takeaways. We achieved or exceeded all elements of our full-year 2014 financial guidance in an environment that continues to be challenging. We advanced our strategy through pipeline advancement and business development. The FDA approved Trumenba, our meningitis B vaccine, and we announced that we are in labeling discussions with the FDA for Ibrance, and we entered into a collaboration with Merck KGaA, which positions us well to potentially compete in the first wave of immuno-oncology therapies and be a leader in the second wave of combination therapies. Our full-year 2015 reported revenue guidance range includes the anticipated negative impact of $3.5 billion due to product losses of exclusivity and $2.8 billion due to adverse changes in foreign exchange, partially offset by nearly $2 billion of anticipated operational revenue growth from certain products. The adjusted diluted EPS guidance range includes a $0.17 negative impact from foreign exchange and a $0.03 negative impact from the plans on front payment to OPKO. We continue to create shareholder value through prudent capital allocation. Overall, in 2014, we returned nearly $12 billion to shareholders through dividends and share repurchases. From 2011 through 2014, we returned more than $64 billion to shareholders through dividends and share repurchases. In addition, in 2015, we anticipate returning approximately $13 billion to shareholders through dividends and share repurchases. Finally, we remain committed to delivering attractive shareholder returns in 2015 and beyond. Now I'll turn it back to Sean. Thank you, Frank. Operator, can we please call for questions, please? Thank you, ladies and gentlemen. If you would like to ask a question, please press star then the number 1 on your telephone keypad. To withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jami Rubin from Goldman Sachs. Thank you very much. Ian, just a question for you, sort of high level. Based on all the press reports that we are all reading every day, it sounds like you are intensely focused on landing a large target, and these articles are all saying most companies are rebuffing you. I think this is a great opportunity for you to sort of remind us, what are your strategic objectives? Do you have to make a large transaction? If so, it would seem to me that it is the GEP business that would need the biggest growth drivers, or is it the other areas of the business? If you could just sort of prioritize for us which of the areas of the business make most sense for you for a large transaction, if indeed that is what you believe you need. Then just a second question, maybe this is for Frank. On the GEP business, is it permissible for you guys to buy a foreign company and use it as a new address when you potentially go to spin out, if you decide to do so, your GEP business? Is that actually an option? Thanks very much. Thank you, Jami, for the question. Rumors are rumors. We do not comment on rumors or speculation or what they write in the press. I would go back to my comment that BD is an enabler of strategies. Our strategy is to deploy our capital in a way that is shareholder-friendly. We have been doing that through dividends and buybacks, and we have been doing BD. I would look at BD as a potential always to accelerate incremental value to shareholders. That is the purpose of deploying that capital, strengthening our businesses. We look at all opportunities to do that, but we do that in a disciplined manner. We did not push beyond what we thought was reasonable to do the AZ deal. I do not feel that we need to do a large deal. I do believe, though, that we can deploy capital in a way that it can improve return to shareholders. Then Jami, on the second question, where you were specific to the GEP business, and I think the question was buying a foreign company and potentially changing the address. My answer is, it is kind of one of those things that is almost impossible to speculate upon. It is very situational, depends on lots of things, valuations, markets, and the like. Tax reform is an ongoing area where I think that it is still subject to change. So I do not want to speculate on, one, what may or may not happen as a result of some hypothetical acquisition. Thanks, Frank. Operator, can we move to the next question, please? Your next question comes from Chris Schott from J.P. Morgan. Great. Thanks very much. Just a couple of questions here. First for Ian. I believe you mentioned that your business development is now focused on creating value in the near term, given the late-stage pipeline. I guess just firstly, is that a shift from prior focus or what we're thinking about in 2014? Then second question on business development, when you look at valuations resetting across the biopharma space, is that reducing the opportunity set as you look at these targets given the valuation discipline you've highlighted for Pfizer? Well, I think if we'd have been concerned about the state of our research and if we hadn't strengthened our research, which we did with the deal with Merck on the immuno-oncology asset, then we may have felt we needed to do more business development in acquiring assets in our research. But I feel our research pipeline middle stage, late stage is strong, and I would rather take our capital right now and direct it to opportunities to accelerate EPS growth, as I think we've got the right balance of capital allocation in the medium to long term on the innovative side. It's just really a balance of where you're deploying your capital and where you think you have areas you want to strengthen. That being said, if there was a piece of intellectual property that added huge value and we thought we could develop it, we would not be shy in acquiring that intellectual property. I do think that the values are high at the moment in many sectors. We are disciplined, but when we find an appropriate deal that will meet our strategies of strengthening our businesses and accelerating shareholder value, we feel very comfortable that we have the ability to do those deals. Thanks, Ian. Operator, next question, please. Your next question comes from Mark Schoenebaum from Evercore ISI. Thank you very much for taking the question. First of all, congrats to Frank. Great P&L management this quarter, and also for the guidance. If I may ask some R&D questions. On the PCSK9 program, could you just update us, if you would be willing to do so, on the timelines and the enrollment status for the outcomes trials on the PCSK9 program? Number two, I was intrigued by your comments during the prepared remarks, Ian, on immuno-oncology, where I think you mentioned that you thought you'd be among the first three companies to launch in several or a few tumor types. I'd be wondering if you'd be willing to tell us what tumor types you think that could be. And then finally on Palbo, and I suppose this is more of a commercial question, but just as we all contemplate a near-term launch as a clear possibility, can you help us frame the initial market opportunity? Do you expect this to be a very rapid cancer launch or something that is a little bit more tempered since these women have a standard of care today? Thank you. Thank you, Mark. Good questions. Perhaps Geno can address the PCSK9 status, and then I will ask that we will then move to answer your questions on Palbo and which products we think we could be first or second in from Albert. Geno. Sure. Thanks, Mark. Regarding the PCSK9 program outcomes trials, we are in the process of ramping up site initiation and enrollment. This is something we monitor, frankly, on a daily and weekly basis. So we are making good progress there. We expect to be competitive with the other programs from Amgen and Sanofi in terms of timing for completion of those outcomes trials which we currently see occurring in the late 2017, early 2018 timeframe. Thank you, Geno. Albert. Yes. On the question of the initial Ibrance launch update, we are very excited about this initial launch for two main reasons. First, we have not seen an approval of a new therapy in first-line advanced cancer in more than 10 years. So there is a great unmet need. Secondly, Ibrance has demonstrated not only a statistical significant improvement, but more importantly, a clinically meaningful benefit to patients. It has doubled PFS and added 10 months to the standard of care. As a result, we expect the uptake to be robust. Having said that, as with all launches, there will be some oncologists that will be early adopters, while others will wait for additional data or more experience in the field. For this group, we already have four phase III trials ongoing, two of which are expected to complete this year. Let me say that we are working to build a broad franchise around breast cancer. We are starting with first-line metastatic breast cancer, but then we are moving fast to recurrent breast cancer and then to early breast cancer. Let's remind everyone that we are currently running phase III pivotal registration-enabling studies for all of these indications. Now, to your question on immuno-oncology. As Ian said, this deal is transformational for our immuno-oncology program for two reasons. The first it is that enable us to quickly move into the first wave of potential monotherapy treatments. You ask for some examples of that. Examples could be ovarian or gastric, for example. This is where we are going to put our emphasis, rather than on indications that are more crowded, as melanoma, for example. But don't forget the second also benefit, which enable us to accelerate our combinations program by more than 2.5 years. This acceleration, in conjunction with our broad range of combination assets, Zaltorapane, Inlyta, Ibrance, ALK cross-inhibitor, OX40, 4-1BB, will enable us to be a leading player in the second wave, where we see also a much greater potential value. Thank you, Albert. Thanks, Albert. Operator, next question, please. Your next question comes from Greg Gilbert from Deutsche Bank. Thanks. Good morning. A couple unrelated questions. First, Ian, to slice the M&A question a different way, it is clear you have a sense of urgency to find deals that could be, if they are shareholder enhancing. Can you care to comment on the sense of urgency to supplement the innovative versus the established products? You have made it clear that you would rather have near-term accretion or value accretion versus long term, but I want to make sure we understand that you are still committed to both, or is one taking precedent? Secondly, can you comment on Lyrica CR, obviously a large product that gets almost no focus. Are you planning to attempt a filing there to protect at least some of that franchise longer term? Lastly, Albert, can you comment on Prevnar adult versus pediatric and progress there, and maybe share some color around the split between those two important buckets? Thank you. Okay, Geno, do you want to talk about Lyrica first? Then Albert can talk about the vaccine, and I'll come back on the On our BD preferences or priorities. Yeah. So Greg, on the Lyrica program, we continue to advance the CR program for Lyrica. We have completed several trials and seen positive outcomes. We're continuing to move towards a registration, and we expect to see a registration potentially ahead of the expiration of the exclusivity in the U.S. Yes, Greg, on the adult, although early, we are very pleased with the launch, and we believe this is potentially a very large and durable opportunity given current demographics and aging trends. The adult sales in the U.S. were around $250 million, which was driven by higher penetration during the high flu season, and of course also some inventory stocking with new customers. Our market share jumped almost four times to 45% from 12% originally. Growth moving forward in 2015, we expect to be strong throughout the year. Of course, keep in mind that this quarter was influenced by seasonality and some inventory build, and that can vary quarter by quarter. On the pediatric, what you asked, pediatric, in fact, was down this quarter due to the timing of the CDC purchase, that last year occurred in fourth quarter and this year in third. Thank you. On the urgency to do business development, let me stress, the urgency I have is to create shareholder value. If business development can do that, then we will move on business development with urgency. I do not really have a preference between strengthening either of the businesses. I think we can use business development to improve and strengthen both of them. We will look at deals, and if the deals make sense, we will attempt to execute them. Thank you for the question. Thank you. Operator, next question, please. The next question comes from Tim Anderson from Bernstein. Hi, I am sorry. It is the same line of questioning, but on inversion. Is that, in your view, pretty much off the table at this point for Pfizer, or is that still something that you think you can pursue? Also on inversion, any visibility on when or whether Treasury might come out with second round of regulations? On the pipeline, apart from Palbo, if you had to pick two compounds that excite you the most, what would those be? Okay. So on the inversion, Tim, inversions have not been stopped. What the potential rules of the government have done is delayed the value or potentially delayed the value realization of the inversion. So, inversions, I think, are being tempered by the ability to pay the target's price, given the slower realization of the inversion values. I think it's an area that will remain fertile while there's no change in the U.S. tax laws. I think we're in a very uncompetitive situation with our tax code, and inversions will continue to be important as an instrument of increasing shareholder value, just depending on the price you need to pay to affect the inversion. And the exact conditions of the inversion, which are very technical, depending on how you can manage your subsequent cash flows. It's not an easy general answer to what type of inversion you would want to do. Apart from Palbo, I think we have a lot of exciting products. I would probably talk about the ability to bring the Staph Aureus vaccine to market as quickly as possible. I think MAdCAM clearly has a huge potential. I think we're well-placed with the clinical trial design. Ertugliflozin is well-positioned. Trumenba, which we've just launched, has a huge potential. So I find it difficult to really pick just two assets. I think we have a lot of assets that we can create value from, and especially the total life cycle of Palbociclib. On new Treasury regulations, I don't know. I'm not in Washington. I can't comment. They have published a rule. They haven't finalized the rule. And clearly, there's an intent to do that. There's an intent to make it somewhat more problematical for people to plan inversions, and we'll just have to work around that. Thank you. Thanks, Ian. Operator, moving on, please. Your next question comes from Vamil Divan from Credit Suisse. Yeah, thanks for taking my question. So I have two. One, I guess the first one's for Ian. Obviously, a lot of discussion around M&A and what you guys are looking to do. I guess just strategically, some comments earlier about valuations and people you're approaching maybe not wanting to go ahead with a deal. Something strategically is going to be tougher for you to consummate a deal when you've been so public Talking about the need to do something and the near-term focus that you're mentioning now, doesn't that make it tougher to get a deal done? Doesn't it just raise the prices higher? Then the second one's more on the pipeline. If you can talk about IO, appreciate the comments you gave earlier and thanks for all that. Can you talk a little bit about on the biomarker side, if there's anything you can share about how you're planning to incorporate biomarkers, at least into this first wave of studies that you've outlined here for this year? Thanks. Yeah. Vamil, I'm sort of intrigued by your comments. I don't think I've ever said we have to do a deal. I think you're reading the press rather than what I've been saying. If I felt there was a pressure to do a deal, we would have done the deal we were trying to do last year. We are very disciplined. We don't feel we need to do a big deal. I do feel we have the ability, and we have the balance sheet that we can use if business development can further our basic strategies, which is to strengthen either one of our businesses or to acquire in an area like immuno-oncology, which we did to strengthen where we see we can create synergy and value. So, I'm a little mystified about your comment that Pfizer needs to do a deal. I think there's a lot of rumors running around. We, as like any management team, look at opportunities. We have the capital and the wherewithal to do the deal, should we so decide. I think it's a matter of is there value, and if there's value, we can get the deal done. I hope that puts in perspective for all of you where we sit on business development deals. Good to do if they create shareholder value. Disciplined if they don't. We're not doing them. Yeah, biomarkers. Yeah. That's a great question on how you bring immuno-oncology to the next level. First, as you know, we have considerable experience in selecting and developing biomarkers from Xalkori, where we've obviously linked that to the drug's efficacy, and we have also learned how to drive uptake of that diagnostic to very high rates in the marketplace, specifically for immuno-oncology. In our partnership on avelumab, we certainly are looking at PD-L1 high versus low tumors, and the data we see really correlates as expected with high response in the PD-L1 high, but we also see responses in the PD-L1 low. We have a second wave, as you heard from Albert, on 4-1BB and OX40 for combination. We think that the 4-1BB is unique in amplifying cytotoxic cells, CD8 cells. We certainly will look for expression of those cells in the tumor. Similarly, for OX40, we think it's more on the CD4 side. That would be another marker to monitor. But we also have programs coming on board for T regulatory cells that may limit the overall immuno-oncology response and tumor-suppressive macrophages. We have assets coming within the next year or so on each of those particular subset of immuno-oncology. Of course, our ADC portfolio is very much supported by diagnostic. We have now two ADC in phase I that show interesting responses, and we start to enrich by diagnostic for those. I hope you get the sense that we go from standard diagnostic to more next-generation diagnostic, and we'll also do the kind of future diagnostic, looking at circulating tumor cells to make it even more easy to integrate in medical practice. We really see us being a driver of this change and a pioneer in this area. Thank you. Thanks for the background, Martin. Next question, please. Your next question comes from John Boris from SunTrust. Thanks for taking the questions. First question, just going back to business development as an enabling strategy. Ian, I think you had indicated that one of the primary reasons for the AstraZeneca transaction was the tax considerations, obviously, around the inversion and being able to unleash the value of the cash that you have trapped offshore. If you go back and look at the last transaction, your tax rate around that time was around 22%. You have gone as high as 27%, not enabling you to bring that cash back. How much consideration is there that when you do a transaction, how much impact on the tax rate are you willing to absorb if it is a U.S. asset that you are looking to acquire? Second question for Frank. You have disclosed what the impact of foreign exchange is. Can you articulate or quantify what the impact is on volume and price on growth in 2014? And then last question on R&D and Xeljanz in EU. Any update on your ability to file Xeljanz in Europe? And then the implications for the Enbrel sales force over there, especially in light of Samsung filing the Remicade for and anticipating to be commercializing it, at least Biogen Idec commercializing Enbrel in the back half. And how are you going to be adjusting for that resource if you do not have Xeljanz there? Thanks. John, thank you. As always, good questions. Why don't you, Geno, deal with the whole issue of Xeljanz in Europe? Yeah. Frank can look at the volume question, and I'll come back to your rather complicated question on inversions and tax rates, and perhaps Frank will also help me out there a bit. Yeah. So John, regarding Xeljanz and the Enbrel inflammation business in Europe, we remain committed to resubmitting for approval of RA for Xeljanz in Europe. We have had recent interactions with regulators there in a discussion on our plans for resubmission. We were encouraged by those discussions. We continue to collect additional clinical data to support that resubmission, and our expectations are that we will resubmit by the end of 2015. Regarding Enbrel and potential competition, we see the introduction of biosimilars into the marketplace in Europe as something that's more evolutionary than transitionary, and we expect to continue to support Enbrel through the near term and realize continued support from that franchise. So I don't see a disruption at this point with the timing that we're anticipating and the impact that we see projected for biosimilars. Of course, that market in Europe is very under-penetrated given their reluctance. So, there's a lot of volume there that can be accessed via biosimilars as well as the original. Frank. John, for the quarter, and this is company-wide, price was +1%, volume was -1%, foreign exchange was -3%, FX drove the -3% for the quarter. As I mentioned on my comments, we are actually up operationally by $9 million, excluding foreign exchange for the quarter. For the full year, price was +2%, volume was -4%, FX was -2%. You put that together, you get the -4% that we reported for the year. Thank you. On the BD, I think my comments on AZ have always been that we looked at three components of value. One was their pipeline, two was the amount of operational synergies that could be achieved, and third was the financial synergies. We were disciplined in our approach because the financial synergies were the most risky part of the equation, and in fact, were made eventually more difficult to achieve by the proposed rules. I think the net answer to your question about tax rates is it all goes into the value. What is the value of the acquisition we are trying to achieve? What is the value we create for shareholders? The tax rate, just like the synergies, just like expenses, just like everything else, is part of that value equation. If it works, the value works, we will do the deal. If the value does not work, we will not do the deal. Of course, undeniably, the foreign companies, as you have seen for most of the acquisitions that have occurred in the last year, foreign companies do have an advantage given their tax rate. This is something that should be of concern to the U.S. economy. I think the only thing I would add in is, John, in your question, you mentioned before we announced Wyeth, it was 22%, and we took it up to 27%. We actually took it up to 30%. When we announced Wyeth, we took the tax rate from 22% to 30%, and we have been, I think, in an effective way, being able to step it down through a combination of changes in jurisdictional mix and tax planning. We have gone from 30% to 29% to 28%. This past year, we had said approximately 27%. We printed 26.5% on adjusted results, and now we have got it for 2015 to approximately 25%. Thank you. Thank you, all. Next question please, operator. Your next question comes from David Risinger from Morgan Stanley. Yes, thanks very much. I have two questions. Frank, in the context of a potential split up in the future, you have obviously set up the financials, but could you please discuss the dyssynergies and the risk of pro forma total cost being higher due to step-up costs if a separation were pursued in the future? Then second, for Mikael, could you please discuss the top three or four pipeline readouts to watch in 2015? Specifically, what clinical trial readouts are most important to focus on? Thank you. Please, Frank. Dave, the way I think about the split question you asked me is, in my mind, there will be basically three key determinants to obviously whether or not we would separate the company. One is the performance of the businesses. The second one would be our confidence level in those businesses continuing to perform successfully on a standalone basis. Then three would be how the market values those businesses and quite frankly, is there an opportunity to create in a tax-efficient way incremental value? So sum of the parts greater than the whole, their inability to unlock that value. That value part of the answer, in my mind, would factor in the items you raised, like dyssynergies. That is all part of the value equation that we would have to factor in to get to a net positive along with performance and standalone performance. Yeah, let me just mention a couple of readouts. So obviously from palbociclib or Ibrance, we are excited to also get the readouts from our recurrent study combining with palbociclib that Albert spoke about. avelumab, our partnership with Merck Serono around ASCO will be the first time we start to share updated data set. I think there will be opportunity also later to hear about how combinations are progressing, and possibly late in the year that we will also share some data on 4-1BB, our own trial that we are running in lymphoma. We also have readouts in ulcerative colitis. Mid of the year or so, we have top-line results from induction study with Xeljanz. Please remember, in phase II, Xeljanz had very strong induction data, among the best that has been really presented in this field. At the JPMorgan, I also shared very robust and really interesting data from our MAdCAM antibody in UC, so you could really look upon UC as a space where we have multiple interesting data sets. More near-term, you also have an opportunity to look at inotuzumab in ALL, which will have an analysis for complete respond or for complete response with incomplete hematological recovery. Thank you. Thanks, Mikael. Next question please, operator. Your next question comes from Seamus Fernandez from Leerink. Thanks very much for the questions. First off, maybe Frank, can you just walk us through, we have an increased spending coming in. Well, maybe not increased spending, but good cost controls overall. But is there more to achieve or be taken out of the business from here, where you can be opportunistic as we head towards the potential loss of Lyrica and some incremental pressures, or are we off an overall growth trajectory on the business, including the expense base as we think about 2015 plus? Separately, as we think about the PCSK9 opportunity, I think there's been a real emphasis on the outcomes from Pfizer. But Pfizer's also demonstrated an ability to succeed in the statin space without outcomes. Just wondering, despite being third to market, how you would anticipate competing before perhaps outcomes are available. And could you be, as a third to market product, how would you expect to compete without outcomes versus other competitors who likely won't have outcomes data either? Thanks. Frank, on spending. On spending, Seamus, I've said this before, clearly we're in the late innings in terms of cost reduction. There's still opportunities. I think there's always opportunities. I think there continues to be opportunities in G&A, for example. Continues to be opportunities with our portfolio as the portfolio ebbs and flows. So there's clearly opportunities related to the portfolio. That said, it's hard. Ian mentioned in his comments that we've taken out $5.5 billion in expenses and operating expenses over the last four years. There's not another $5.5 billion, for example, to take. So it's getting harder. Then if you look at our results for 2014, I'll give you the full year numbers operationally. COGS was up 2%, SI&A was down 2%, R&D was up 9%. Clearly, that upward pressure in R&D, we printed $7.2 billion in 2014 as an actual number. We got it to $6.9 billion to $7.4 billion for 2015. That includes the $300 million upfront for OPKO. But I think R&D, OPKO aside, is going to be in the low sevens going forward. So that's good upward pressure in my mind in terms of the late-stage portfolio progressing in a good way. So I think I'm probably more than you need, but I think the short answer is there's always opportunities, but we don't have the same opportunities we had several years ago because we've basically done a much better job, I think, in managing the base. I'd just add to Frank's comments that what we're looking at is a sort of a transition from dealing with some $26 billion of LOEs from 2010 through 2015, and the need to rationalize our cost base to one of investing in the future growth, which I think is basically the most desirable state to be in to have top-line growth. We're investing in our phase III pipeline and our innovative products. This management team is very good at managing our P&L and our investment and where we invest and are prepared to do what's necessary if business circumstances change on our expense base. With that, the other question was for Geno on PCSK9. Yeah, PCSK9. Seamus, just to respond, clearly Pfizer has a long history and heritage in the cardiovascular space, and I think that we can leverage that knowledge and obviously the data from our clinical trials to determine the best approach to the marketplace. Frankly, we really expect the PCSK9 market to emerge as a large and attractive market with the occurrence of the outcomes data, and we're kind of most focused on that. We've obviously put our best thinking forward in our protocol designs, and should we have stronger data than the other companies in the cholesterol management arm, then we'll leverage that. At this point, we'll have to wait and see how the data turns out. Again, our focus is mainly on the outcomes on trials. Thanks, Gino. Next question, please. Your next question comes from Steve Scala from Cowen. Thank you. I have two questions. First for Frank, is the $400 million in spend for potential company split in non-GAAP guidance, and what happens to this number in 2016? Is it the same, is it higher, or is it lower? The second question is on palbociclib. Has the FDA taken a look or do you expect it to take a look prior to April 13th at the phase III trial, which is underway. Thank you. Frank, do you want to talk about our- Sure. Yeah. On the $400 million, Steve, it's in GAAP. It's not an adjusted. We actually called that out in the release. It's in the bridge we give you all. That bridge is from adjusted EPS to GAAP EPS. I think the bridge shows, starts at the top, it shows $2 to $2.10, and then we have three takeaways from that. There's purchase accounting adjustments for $0.41. There's restructuring and implementation cost that has a range of $0.13 to $0.18. Then there's a business and legal entity alignment cost, which is the $400 million you allude to, which is $0.04. So that's the bridge from $2.10 to $2.20 to $1.37 to $1.52. So in GAAP, not an adjustment. We give you a bridge that breaks out how we get from point A to point B. In terms of 2016, quite frankly, as we get towards the end of the year, early next year, we'll call that number out to you because a lot of that depends on how we progress through the year, how the businesses perform. So that's something that we'll call out obviously later in this year or early in 2016. Albert, on palbociclib. Yeah. Ibrance? Yes. For Ibrance, I don't want to speculate what the FDA would like to do, but from a timing perspective, we don't expect to have the results of even the interim review of phase III before the PDUFA date. As you know, we are already in late-stage discussions for the label. Thank you. Thanks, Albert. Next question please, operator. Your next question comes from Jeff Holford from Jefferies. Hi. Thanks very much for taking my question. The first one is for Ian, which is just really, what do you think about business development where you use OUS cash on OUS targets as non-inversion, just straight M&A type deals as a potential pragmatic way to deal with the tax situation on those overseas cash assets? Do you see potential opportunities to do that? Then just a few financial questions. As you want to be able to allow investors to see the value in the two separate pieces, what do you think about giving midterm guidance on the two potential separate pieces for investors to help them reach that decision and how you reach that decision? Do you think it is reasonable to assume that this is now the floor, 2015 is now the floor in Pfizer revenues and EPS going forwards? Then lastly, are you happy that we just extrapolate this year's tax rate going forwards, or are there any other factors that we should consider? Thank you. Okay. I will let Frank answer your modeling questions. On the BD and using offshore cash for offshore deals, once again, it comes down to value. It comes down to the offshore deals often price in the fact that there is offshore cash. So you have to look at the price tag on the deals and see if they make sense. But certainly, conceptually, you have a point, but it just comes down to the quality of the asset and the deals you are trying to do. Frank, on the other question. Let me hit, Geoff, let me hit the extrapolation of the tax rate first. I think the way I will answer your question is, we stepped it down this year to approximately 25%. That is down from a 26.5% to 2014. So a nice decrease. And please know that when we reduce the rate, like we are doing for 2015, our intent is that rate is sustainable for the foreseeable future. So that is how I would answer your question. In terms of trying to provide guidance beyond 2015 for tax rates, given all the uncertainty in the tax environment, I think that just would not be a prudent thing to do. In terms of your question on BUs and providing midterm type of guidance, I think we are getting more and more transparent, I think, relative to our business units. This year, we started providing very detailed income statement information. Come 2015, we are going to start to provide some balancing information. So we are providing more and more information that I think enables a lot of good extrapolation work. In terms of taking our guidance and peeling it down to another level, I think it is hard enough to provide annual guidance to the whole company. To then start to taking it and slicing it by sub-ledger detail, I think, just creates a level of complexity that I do not think we are inclined to do. Thank you, Frank. Next question please, operator. Next question comes from Marc Goodman from UBS. Yes, morning. First of all, can you give us an update on China? How did it perform in the quarter, and how you're expecting it to perform in 2015? Give us some trends there. Second, just update on us on Palbo overseas and what the timing is there. Then on the MAdCAM, you did provide some data, and I was curious if you could comment on the dose response and on why it will take so long to move into phase III. I think you said you're going to move into phase III in 2016. I think the phase IIs were done, so I was curious about that. Lastly, just on Lipitor over the counter, I know there was one study that remains before you can go back and talk to FDA. I was curious where we stand on that and when you think you'll be talking to FDA again. Thanks. Okay, let's try and put it together. If Albert can answer the Palbo and the Lipitor question. Yes. We have had discussions with European regulatory health authorities on the clinical data, and it is our intention to file in the E.U. this year. The anticipated filing package will build off of what was submitted to the FDA, but it's too early to provide more details on that. Coming to Lipitor, you're right. The actual use trial was completed in December of 2014, and the results are expected in second quarter. Once we see the results, then we will define our next steps in our efforts to bring another version of Lipitor. Okay. John, China. Thanks for the question, Mark. We continue to perform strongly in China. I'll comment on the GEP segment, which is the largest segment of our business in China. Overall, for the quarter, we had growth of 13%. Overall, for the year, we saw a growth of around about 18%. We continue to see, as we always do in emerging markets, quarter-to-quarter fluctuation, but we continue to be very satisfied by our performance in China. The segments that are strong for us are particularly our cardiovascular franchise, with Lipitor and Norvasc performing strongly, and also very strong performance from our anti-infective business. Thank you. Next, Mads Krogsdahl. Yeah. So, thank you for noticing. They're very interesting, those response that we shared with you. We do think it represent possibly through human biology that at the mid doses, 22 to 75 milligram, in that range, we possibly inhibit the autoimmune cells causing disease, while at the higher doses, you may also start to interfere with regulatory T cells that have a protective effect. So it is very important to have done a very thorough dose-response that can allow you to select the optimal dose. And we think this may distinguish our opportunity in MAdCAM versus other integrin antibodies that may not have been able to do such a thorough dose-response and pick the sweet spot. And actually, if you look at our remission data, they really perform well versus other published comparison, although it's historical comparison. Concerning the timelines, we'll certainly see if we can accelerate it, but that relates to production of clinical trial manufacturing for potential registration study. Also to really understand how to design a study where you could test, develop a drug that has this really unique solubility profile, both for induction and maintenance therapy, and how it could play as an anchor drug across many IBD-like conditions. So that's why we gave a little bit of an extended time period, and we may be able to shorten that as we go forward. Thank you, Mikael. Operator, if we could take our last question, please. Your final question comes from Alex Arfaei from BMO Capital. Good morning, and I apologize if I ask redundant questions. I got disconnected briefly. Ian, from your perspective, could you comment on the M&A landscape in general? Based on your conversations with management teams, are you finding willing sellers out there, and is it just a matter of price? To follow up for Frank, and just following up on your earlier comments, how should we think about your margins for the next couple of years? You're losing some high-margin products. You've said most of the cost-cutting is done, and you're investing in launches. So is it fair to expect somewhat stable or perhaps slightly declining margins going forward? Thank you. Alex, on the price, willing sellers. Price always determines whether you have a willing seller or not, normally. It is just a matter of what value you want to transfer. What I would say is I think the starting point of the prices are somewhat buoyant, shall we say, given where the marketplace is. That does give you some concern when you look at paying the type of prices or premiums you need of what we see as high valuations to begin with. We are being disciplined in how we look at that. Would you like to answer the margin question? Yeah. Alex, I think very good question in terms of, I will call it the rhythm of the margins. There is some, I will call it some downward pressure on our operating margins. We have got $3.5 billion LOEs next year on some high-margin products, clearly putting some downward pressure on the operating margins. We have given guidance where you can obviously go through the line items and compute the numbers. That said, all of that is factored into our EPS guidance. I want to reiterate what I said before. If you exclude foreign exchange in the Outco transaction, the midpoint of our guidance for next year is roughly what we printed in 2014, despite that $3.5 billion LOE. We will continue to manage our cost structure. Obviously, the opportunities aren't what they used to be. But there is some slight downward pressure on our operating margins. That is what it is. Thank you, Frank, and thank you everybody for your attention this morning on the call. Ladies and gentlemen, thank you for participating in today's fourth quarter 2014 earnings conference call. This concludes