Earnings Call: Q3 2014

Oct 28, 2014

Summary

Q3 revenue fell 2% YoY and adjusted EPS was $0.57, as LOEs and lost alliance revenue offset growth in vaccines, oncology, and key products. FY14 adjusted EPS guidance narrowed to $2.23-$2.27; nearly $12B in shareholder returns was planned.

Good day, everyone, and welcome to Pfizer's third 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 third quarter 2014 performance. I am 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, General Counsel. The 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 Third Quarter 2014, which is located in the Investor Presentations section, which is in the lower right-hand corner of this page. Before we start, I would like to remind you that our discussion during this conference call will include forward-looking statements and that actual results could differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ are discussed in Pfizer's 2013 annual report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussions during this 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, October 28, 2014. We will now make prepared remarks, and then we will move to a Q&A session. With that, I will now turn the call over to Ian Read. Ian? Yeah. Thank you, Chuck, and thank you all for joining the call this morning. I will start with a few comments regarding the quarter and then a few words about our strategy, including some remarks about business development. Starting with the quarter, our performance was well in line with our expectations as the business continues to perform well. In our innovative business for Global Innovative Pharmaceuticals, the underlying business grew 9% operationally if you exclude approximately $425 million, or a negative 13 percentage point impact due to LOEs and the loss of Enbrel alliance revenue. Operationally, the vaccine business grew 19%, the oncology business grew 17%, and the consumer healthcare grew 4%. For our established business, GAAP revenues for the quarter were down less than 1% if you exclude the approximately $383 million operational or six percentage points due to the negative impact of recent LOEs and Lipitor in the U.S. and Japan. We had good operational growth in several of our key products, including Lyrica, which grew 16%, and the Prevnar franchise, which grew 18%. Enbrel remains a solid contributor in markets outside the United States and Canada, where we retain marketing exclusivity, and there is good momentum of our newest products, including Eliquis, XELJANZ, Ocaliva, and Inlyta. Specifically for Eliquis, a key leading indicator referred to as new-to-brand share with cardiologists continues to improve nicely. Since launch, based on the most recent data, Eliquis share has increased from zero to 44%, while our main competitor share has declined from the high of seventies to slightly above ours. For XELJANZ, the inclusion of structural data in the XELJANZ label has served as an inflection point with prescribers. We hope to see further steady share gains aided by the growing attractiveness to physicians of using XELJANZ as an effective monotherapy option. Again this quarter, we achieved solid company-wide performance in emerging markets. Revenues increased 9% operationally compared to the year-ago quarter, driven by growth in China and Latin America. Overall performance year-to-date positions us to achieve a strong finish, even after taking into account that we've transitioned to a new commercial model internally while also adapting to ongoing external market forces. Looking ahead, the period of high LOE impact will continue through 2016, making it difficult to generate revenue growth on a net basis. We expect the size of the impact to be substantially reduced starting in 2017. Our strategy has not changed. It is anchored upon the following pillars: making our R&D more productive so we deliver on our pipeline, continuing to make smart and shareholder-friendly decisions around how we allocate our capital, and globally positioning Pfizer to be a market leader for organic and inorganic growth opportunities. Regarding the pipeline, we recently achieved several regulatory milestones in our late-stage vaccines and oncology pipelines. The FDA accepted the biologics license application for our meningitis B vaccine with priority review and set a PDUFA date of February 14, 2015. The new drug application for palbociclib was accepted with priority review with an April 13, 2013 PDUFA date. We also had discussions with the European regulatory health authorities and intend to file palbociclib in the EU next year. The FDA approved abuse-deterrent labeling for EMBEDA extended-release capsules, and our investigational C. difficile vaccine was granted Fast Track designation. The Advisory Committee on Immunization Practices recommended the routine use of Prevnar 13 amongst adults 65 years and above in the United States. In looking at our late-stage pipeline, there are multiple indications for XELJANZ that are progressing. We have completed all phase III studies in psoriasis, have phase III studies underway in psoriatic arthritis and ulcerative colitis, and there are phase II studies in psoriasis for topical use, Crohn's disease, and ankylosing spondylitis. We're exploring the expansion of palbociclib from advanced to recurrent and subsequently early breast cancer. In addition, we are working to advance potentially attractive opportunities that could be commercialized in 2017 and beyond. They include ertugliflozin for the treatment of diabetes, bococizumab for cholesterol lowering in high-risk individuals, vaccines for hospital-acquired infections such as Staph aureus and C. difficile, and several biosimilars in oncology and inflammation. Given the pipeline progress being made, I believe we have good sight to improve R&D productivity. In terms of capital allocation, we have a strong, solid track record of taking expenses out of the business, generating strong operating cash flows, and having a sound balance sheet that is a competitive advantage. We have returned significant capital to shareholders through share repurchases and dividends. During the period 2011 through 2013, we returned approximately $53 billion and expect to return nearly $12 billion in 2014. All of this positions us well to pursue business development opportunities. Recently, there has been a lot of attention paid to deals involving re-domiciling and the proposed regulations announced by the Treasury Department, which make it more complicated and also potentially limits value that could be created by U.S. companies that re-domicile. The fact that Treasury has left open their ability to make further changes without notice is of concern. For Pfizer, enhanced financial flexibility from re-domiciling is certainly still one potential source for creating value. As we said previously, we will look at any business development opportunities based on strategic fit, including operational portfolio and financial synergies. We continue to evaluate a broad set of potential options on a case-by-case basis to accelerate value creation for shareholders. Finally, a few words regarding a potential split of our businesses. We have two primary businesses. I want to say that again because there seems to be some confusion that I may have inadvertently created. We have two primary businesses, an innovative R&D-driven portfolio, which is managed through our Global Innovative Pharma and Vaccines, Oncology and Consumer segments. Secondly, a Global Established Pharmaceutical business. We have 10 months experience operating in our current commercial model with P&L information. This is providing valuable insights into the strength and challenges of each business. In 2015, we will maintain a significant effort towards setting up the groundwork required to operationalize a potential split. What we do will eventually depend upon how our commercial businesses perform in their markets, how our shareholders value these businesses, if the sum of the parts is greater than the whole, and whether there are opportunities to enhance their competitive positioning, which could be achieved outside of Pfizer. It's important to underscore that at this point in time, we have not yet made a decision. In summary, we have an unrelenting focus on successfully executing on our commitments so that we start 2015 financially and operationally strong, and with the flexibility to take the actions that create value in ways that are best for our shareholders, patients, and colleagues. Now I'll turn it over to Frank to take you through the financial details for the quarter. Thanks, Ian. Good day, everyone. As always, the charts we are reviewing are included in our webcast. As a reminder, because 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 first nine months of 2013. Now let's move on to the financials. Third quarter 2014 revenues of approximately $12.4 billion decreased 2% year-over-year, reflecting an operational decline of approximately $270 million or 2%, driven mainly by the expiration on October 31, 2013, of the co-promotion term for Enbrel in the U.S. and Canada, the ongoing termination of the Spiriva collaboration in certain countries, the loss of exclusivity and subsequent multisource generic competition for Detrol LA in the U.S., and other product losses of exclusivity in various markets. In total, LOEs and declining alliance revenues had a negative impact of approximately $750 million in the quarter. These were partially offset by the strong operational growth in developed markets of Lyrica, Prevnar, Eliquis, XELJANZ, Xalkori, and Inlyta, as well as Nexium 24HR, primarily in the U.S., and by 9% operational growth in emerging markets driven by Prevnar as well as Lipitor, primarily in China. Foreign exchange had a negligible impact of $11 million on reported revenues. Adjusted diluted EPS of $0.57 decreased 2% or $0.01, primarily due to lower revenues and a 2% aggregate operational increase in adjusted cost of sales, adjusted SI&A, and adjusted R&D expenses resulting from an unfavorable shift in product mix, upfront payments to Cellectis and MedGenesis Therapeutix associated with recently announced agreements, as well as ongoing phase III programs for bococizumab, ertugliflozin, palbociclib, and certain other new drug candidates. Adjusted SI&A expenses, however, decreased by 1% operationally because of continued benefits from cost reduction and productivity initiatives, partially offset by product launch investments. Adjusted diluted EPS was favorably impacted by fewer diluted weighted average shares outstanding, which declined by 253 million shares versus the year-ago quarter due to ongoing share repurchases and a lower effective tax rate. We recorded reported diluted EPS of $0.42 compared with $0.39 in the year-ago quarter due to the previously mentioned factors and the favorable impact of the non-recurrence of a loss associated with the Teuto option, lower restructuring charges, and lower expenses related to cost reduction initiatives, which were partially offset by the unfavorable impact of a charge to account for an additional year of the non-tax-deductible branded prescription drug fee under the final regulations issued by the IRS during the third quarter 2014. Foreign exchange negatively impacted third-quarter revenues by $11 million and had a net unfavorable impact of $10 million on the aggregate of adjusted cost of sales, SI&A, and R&D. Consequently, the impact of foreign exchange on adjusted diluted EPS was negligible compared with the year-ago quarter. Now moving on to the financial highlights of our business. In the third quarter, global innovative pharmaceutical revenues decreased 4% operationally year-over-year due to the previously mentioned expiration of the co-promotion term for Enbrel in the U.S. and Canada, partially offset by strong operational growth from Lyrica, primarily in the U.S. and Japan, and Eliquis and XELJANZ globally. Income before taxes declined 8% operationally due to the decrease in revenues, a 12% operational increase in cost of sales or a 1.9 percentage point increase as a percentage of revenues, of which 1.5 percentage points was attributable to the loss of Enbrel alliance revenues, a 6% operational increase in SI&A expenses from increased investment in new products such as Eliquis and XELJANZ and in-line brands such as Lyrica and Viagra, as well as a 33% operational increase in R&D expenses due to incremental investment in late-stage pipeline products such as bococizumab, ertugliflozin, and additional XELJANZ indications. In the third quarter, revenues from our Vaccines, Oncology and Consumer Healthcare businesses grew 13% operationally year-over-year due to the strong operational growth of Prevnar, XELJANZ, Inlyta, and Nexium 24HR. Income before taxes increased 19% operationally due to increased revenues, which were partially offset by a 12% operational increase in cost of sales driven by increased sales volume. As a percentage of revenue, cost of sales decreased by 2 percentage points due to a favorable change in product mix. There was a 13% operational increase in SI&A expenses due to Nexium launch cost and Prevnar Adult investment and pre-launch expenses for palbociclib and our meningitis B vaccine candidate. R&D expenses, however, decreased 10% operationally due to lower costs for certain oncology programs, partially offset by increased investment in the palbociclib and Mening B development programs. In the third quarter, Global Established Pharmaceutical revenues decreased 6% operationally year-over-year due to previously mentioned product losses of exclusivity and the loss of alliance revenues and an operational decrease of Lipitor in the U.S. and Japan. Income before taxes declined 4% operationally due to the decrease in revenues, which was partially offset by the decreases in cost of sales, SI&A, and R&D expenses, which included increased spending on biosimilar development programs. Now moving on to our 2014 financial guidance. We are updating certain components of our 2014 financial guidance based on our year-to-date performance, recent changes in foreign exchange rates, and our outlook for the remainder of the year. It is important to note that this guidance does not include an adjustment for the potential devaluation of the Venezuelan bolivar or any other currency. We are narrowing our adjusted revenue range to $48.7 billion-$49.7 billion, from $48.7 billion-$50.7 billion. We are narrowing and lowering our adjusted cost of sales as a percentage of adjusted revenues range from 18.5%-19%, from 19%-20%. We are narrowing our adjusted SI&A expenses range to $13.5 billion-$14 billion, from $13.3 billion-$14.3 billion. We are narrowing our adjusted R&D expense range to $6.9 billion-$7.2 billion, from $6.7 billion-$7.2 billion. We now expect other income to be approximately $400 million, versus our previous expectation of about $200 million. We continue to expect our adjusted effective tax rate to be approximately 27%, which does not assume the renewal of the U.S. R&D tax credit. If renewed, the effect would not be material, and we would not anticipate any impact on our 2014 adjusted effective tax rate guidance. We are narrowing our reported diluted EPS range to $1.50-$1.59 from $1.47-$1.62. We are narrowing our adjusted diluted EPS range to $2.23-$2.27 versus $2.20-$2.30. Now moving on to key takeaways. We narrowed our guidance ranges for adjusted revenues and adjusted diluted EPS. We recently achieved several key R&D milestones related to palbociclib, our meningitis B vaccine candidate, Prevnar 13, and our investigational C. difficile vaccine. We continue to create shareholder value through prudent capital allocation. To date, in 2014, we've returned approximately $5 billion in dividends to shareholders and repurchased $4.2 billion or approximately 140.4 million shares, and we continue to expect to repurchase approximately $5 billion of our common stock this year. These repurchases and planned repurchases for the remainder of the year are expected to reduce total shares outstanding year-over-year by a total of approximately 100 million shares by the end of 2014, after considering actual and projected dilution related to employee compensation programs. In total, we expect to return nearly $12 billion via share repurchases and dividends to shareholders this year. In addition, last week, the board of directors authorized a new $11 billion share repurchase program to be used over time. Finally, we remain committed to delivering attractive shareholder returns in 2014 and beyond. With that, I'll turn it back to Chuck. Thank you, Frank and Ian, for your comments. At this point, operator, can we please poll for questions? Ladies and gentlemen, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Your first question comes from Chris Schott from JPMorgan. Great. Thanks very much for the questions. Just a few here on Biz Dev. First, I just want to make sure I am clear on your comments. Do you still see meaningful value to Pfizer from inversion? Or should we be thinking about larger deals having to be much more driven by operating synergies and pipeline opportunities, I guess, relative to, let's say, 6 or 12 months ago? The second question is just how does potential for future Treasury action factor into that analysis in terms of, do you really know what Treasury ultimately does, and does that affect how you are thinking about this? The final one is just a broader one, which is relative to a year ago, it seems like Pfizer is much more focused on business development. I guess just a question first, what has changed over the last year that it seems like you are just seeing that this is a big value-creating event for shareholders that did not exist maybe one or two years ago? Thanks very much. Thanks, Chris. I appreciate the questions on BD. I just want to make the point that BD is not a strategy. It is an enabler of the strategy. I do not want to get us sort of totally focused on BD and not on the strength of underlying business, the development of our pipeline, and I think both our prepared remarks have gone through that, so I will not repeat it here, but I do want to stress that we feel the strategies we put in place on improving our innovative core and getting capital allocation right are working and working well. The proposed rule changes on inversions have not stopped inversions. If you are between the 80% and the 60%, I think it is fair to say they have made it more difficult and perhaps changed the timing on realization of the value. But we still believe on a case-by-case basis, there is meaningful value to be had from inversions, and probably the most significant is the liberation of a substantial proportion of your future cash flows out of sight of the U.S. tax system into a territorial system. The next question I believe was- Future Treasury Future Treasury actions. I can't predict what they're going to do, and no one can. It's worrying that U.S. businesses are put in this uncertain situation and that U.S. companies are put at such a competitive disadvantage vis-a-vis foreign competitors, both on the tax rate and also the uncertainty of the rules. That's where we are today, and that's what we have to live with. I think what it means is that as you look at an inversion, you need to thoroughly understand case by case what the inversion target is, what your capabilities are, and how you intend to realize the values, and there should be multiple ways of realizing such value because you can't anticipate the rule changes that Treasury may put in place. So all of that would be factored in, I think, by anybody who intends to do an inversion deal. I think from your question about why more focus from Pfizer now on BD, I think you've got to look at that in the context of when this team took over the company back in late 2010, we were really focused on fixing our innovative core, working with Mikael Dolsten to make sure that our science organization was best in class, advancing our pipeline, getting our capital allocation right, getting our expense base right, getting our culture the way we want it to be. I think through 2011, 2012, and parts of 2013, we got where we wanted to be, and we felt very confident about our ability to take on a BD over a bolt-on or a large size and ensure we maximize the value of any such BD. So I think that explains the timing. Thank you for the question. Thanks, Ian. Operator, next question, please. Your next question comes from Gregg Gilbert from Deutsche Bank. Thanks. Ian, what have been the key learnings since the decision to separate your businesses internally? I realize it's only 10 months, but I'm sure you've learned some goods and bads. Part B of that question is a hypothetical. If someone were to offer you a price for the EP business and could run it in a more cost and tax-efficient manner, and that Pfizer shareholders could benefit from that, would it even be possible at this point or soon from an operational standpoint? In other words, has enough separation work occurred to enable that type of hypothetical to be a reality? Thanks. Okay. I'll deal with the learnings and then ask Frank to talk about the hypothetical of this more immediate separation. I think the learnings are basically what we expected is the power of focus, is the power of having a leader and a team focused on established products with John Young leading that, with crafting strategies that address the specific issues of the GEP business, of driving that business in those countries without losing focus on what the strategies are for that business. It's about having John working on growth opportunities, his team looking for growth opportunities. I think it's back to the whole theory of give a team an objective, make it clear, make it focused, and let them go at it. If you've got good people, they'll come up with extraordinary results. I think that's the learning on that, and we continue to be pleased with the way John's approaching his, the way Albert's doing it with VOC, and the way Geno's doing it with GIP. These growth rates in Eliquis, XELJANZ, and Lyrica are a result of a great management team working, and Albert also with the growth in the vaccines oncology. I'm very pleased with the focus we're achieving. With that, I'll hand over to you. Yeah. Greg, in terms of on the timing, the way I'll answer the question relative to, for example, our established products business. The way to think about this is it a public transaction or a private transaction? If it's a public transaction, by the way, I know your example was a private one. I'll get to it. If it's a public transaction, so a reverse Morris trust, a partial spin, a complete spin, a partial IPO, a partial IBO, followed by a spin or a split, three years of audited financials are required. That would be three years of prospective audited financials, so think about that as 2017. If it's a private transaction, by the way, your example was a private transaction, so we sell the entire segment to someone, or we're going to sell a partial element of a segment or a joint venture with a minority interest or a joint venture with a majority interest, and it's subject to what's called a significance test. Then there's three tests within the significance test. There's an asset test, an income test, and an investment test. The asset test is the target's assets as a percentage of the acquirer's assets. The income test is the acquirer's income as a percentage of the acquirer's income. Then the investment test is the acquirer's investment in the target as a percentage of the acquirer's assets. If all three tests are below 20%, no audited financials are required. If any one test is between 20% and 40%, one year of audited financials is required. If any one test is between 40% and 50%, two years of audited financials are required. If any one test is greater than 50%, two years of balance sheet, three years of income statement, cash flow, comprehensive income, and shareholders' equity are required. Given the size of our established products business, it's very likely one of the tests, if not all, would be greater than 50%. Greg, you can see that we've given this some considerable thought and continue to be working on this and leaving no stone unturned in ways of trying to achieve our objective here. Thank you. Great. Thank you, Frank and Ian. Next question please, operator. The next question comes from Mark Schoenebaum from ISI Group. Hi. Thank you for taking my question. Actually, Vlad Nikolenko sitting for Mark. Again, congratulations with a great quarter. I have a couple of questions about the R&D update. I am wondering if you can provide more color on the level of confidence for the ongoing palbociclib filing, which is our understanding is based on phase II data and the plans how to use the phase III data. Also want to know if you can give more highlights about the ongoing PCSK9 program. Finally, just to give more sense about the state of the pipeline, because currently published pipeline has more than 80 programs at different stages of development. Some of them are label extensions. Just what investors have to focus on besides palbociclib and PCSK9 and vaccines that you already mentioned. Thank you. Well, thank you very much. Good questions, which we welcome the answering. I will ask Albert to deal with the palbo issue, Geno with the vocasimer, and then we will ask Mikael to give you a succinct description of the portfolio and what we are excited about. Thank you, Vlad. For palbociclib, as you are aware, we have submitted our filing, and FDA has accepted the NDA and has gave us priority review, and we have a PDUFA date, which is on April 13. This filing was based on phase II data. To date, FDA has not placed any conditions related to submission of phase III data results during the NDA review. In fact, we do not expect to have any phase III data before the PDUFA date. There is an interim review built into the protocol, which is event-driven, so I cannot speculate when it will happen. This interim review will not happen before the PDUFA date. We are looking forward to continue working with the FDA so we can bring this product to patients as soon as possible. Thank you. Gino, palbociclib. The bococizumab, the PCSK9 program, is progressing. We are in phase III. We have been enrolling for about a year now. We have a fairly extensive phase III program with five LDL trials and two cardiovascular outcomes trials. This I think differentiates our program from others in the category. I believe we are the only one with a cardiovascular outcomes trial in high-risk patients who are unable to get their LDL levels below 100 on maximum doses of statins. This is a patient population, where we are likely to show a benefit. In the event that reductions in LDL levels to very low levels do not show the linearity that we are looking for, we think this patient population will still show the benefit. We have a second cardiovascular outcomes trial in a broader patient population testing whether reducing LDL levels below the current recommended levels will confer an additional morbidity and mortality benefit. It is a robust program. We are moving quickly to enroll patients, and we are on track. Mikael, some comments on the other products outside of those near term. Absolutely. The way to look upon the pipeline is, as you said, we have more than 80 projects across phase I to registration. When you look at the late stage, I would encourage you to see it as four potential blockbuster franchises supporting GIP work and GEP. You are aware of Palbo for work for GIP, bococizumab and XELJANZ lifecycle management. As you have heard, XELJANZ is really picking up pace in RA, and there are multiple indications that are following psoriasis, oral ulcerative colitis, psoriatic arthritis, and a QD for RA. Then finally for GEP, the biosimilars, which are moving to four soon in phase III and one additional in a UC study. There is also an upside that we have not discussed a lot, and that is progress that we are making on tanezumab in preclinical safety in a dialogue with the agency. We look forward to concluding this data with a potential opportunity to get back on a dialogue to restart that program, pending, of course, good data and thorough agency dialogues. You already mentioned vaccines, and I expect that we will see mid of next year that we will have six different programs. In addition to Staph C. difficile, we also have therapeutic vaccines now coming that includes IgE, nicotine, and cancer vaccine. I encourage you to see that as a whole technology platform that we have built. In immunology inflammation, in addition to the tofacitinib oral program, there are now additional opportunity in psoriasis. We have recently seen encouraging data for our topical version of tofacitinib in both dermatitis and psoriasis, and we are designing a new generation of JAK inhibitors for psoriasis as well as for IBD. In cardiovascular metabolic, we have generated encouraging data on a novel PDE5 inhibitor for diabetic nephropathy, and we have another drug, CCR2/5, that is reading out in the next one or two months. In oncology, there is a very nice mid-stage pipeline with a GSI drug for genetical altered triple negative breast, a broad program around SMO in hematology, and we have recently seen encouraging phase I data for our ALK for LON drug 3922. As you are aware, we are building an increasingly robust immuno-oncology second wave program, and we are now, for example, dosing 4-1BB on top of PD-1 in a partnership with Merck. Recently we moved our fifth antibody drug conjugate into the clinic and addressing multiple solid tumors. These were just a couple of things that I think will deliver a lot of momentum over the next two years. Thank you, Mikael. Thanks, Mikael. Next question please, operator. Your next question comes from Mark Goodman from UBS. Yes. I am not sure if Gino is on the line, but if he can talk about the oncology business and maybe specifically some of the products in Inlyta, Xalkori. Some of these products have looked like they are slowing down a little bit, so I was curious what is happening there. I believe we got into the oncology just at the end there about how you are positioning yourself for the future. But I am curious how you are thinking about immuno-oncology and the products that you are working on. On biosimilars, could you just tell us the four phase IIIs, has anything moved forward? When should we be expecting the phase IIIs to finish? Okay. I will ask Albert Bourla, who has responsibility for the oncology business, to make some comments on Sutent and Inlyta. Xalkori as well. Xalkori. Well, basically our inline products. Then on the positioning, perhaps, of the immuno-oncology, I would ask Mikael Dolsten to make a comment on that. Then on biosimilars, John Young could make a comment. Thank you. Yes. Thanks. Thanks a lot, Mark. For the Inlyta, we had for the quarter a 23% growth operationally. U.S. was 9%. In U.S., we have a strong uptake in the academic setting. What we are working now is to make sure that we have a strong uptake also in the community setting, and to have numerous programs that are in place to achieve that. In EU, Inlyta was quite impressive, 32% growth for the quarter. Over there, the results are driven basically by positive ESMO guidelines that now are endorsing Inlyta as a standard second-line treatment option. Also we saw this year improvement in our reimbursement status. Right now, we have basically all 16 EU countries reimbursing Inlyta. If I go to Xalkori. In Xalkori, we were very pleased with the performance. We have 55% growth operationally for the quarter. U.S., 33%. It's driven by clearly an increased testing for the ALK gene mutation. Right now, we are at 74% testing. To remind you, we started the launch at 11%, and a year ago it was 16%, so it's a significant improvement. In the EU, the growth was even more impressive, 74% for the quarter. Over there, again, it's driven by ESMO treatment guidance. Also, we had positive data from the PROFILE 1014 study that we released, and that is driving a lot of these results in Europe. Finally, in Japan, Xalkori had 43% growth, and is driven by, again, the new data of PROFILE 1014 that has compared Xalkori to the standard chemotherapy. Thank you very much. If we go to the positioning on immuno-oncology. Yes. We are enthusiastic about immuno-oncology rising as a new modality in oncology. As you know, that's been durable. Many are partial responses, and we see the next level of immuno-oncology to go to deeper and more complete responses, and that's where we really are focusing our current efforts strongly to be a leader. I mentioned briefly that our 4-1BB is now dosing on top of PD-1 in a partnership with Merck. We have a partnership to study 4-1BB on top of CCR4 with KHK. We're moving additional checkpoint modulators into human studies, OX40 early next year or later next year on PD-1. In addition to the checkpoint drugs, I think you will see not only IO plus IO combos, but IO plus targeted agents. We are working in a partnership with Merck studying PD-1 plus ENLIFTA and planning to study PD-1 plus Xalkori together. A second modality beyond the IO checkpoints are cancer vaccines, where we are planning during next year to start our first out of a series of cancer vaccine clinical studies. We also have our own platform of bifunctional antibodies that will start delivering human agents in 2016. As you know, we did with Cellectis, a partnership around CAR T-cells. So we are playing very broadly with the leading technologies and assets, and our goal is to move one to two immuno-oncology agents in the classes as I described every year for the coming period into human studies, mainly focusing on combination, which we think will deliver the utmost value of deep, more durable responses. Thank you, Mikael. John? Okay. Thanks for the question, Mark. Just as a reminder, in our first wave, we have five monoclonals in our biosimilar portfolio, primarily in oncology and inflammation indications. The three biosimilars that are already in phase III studies that are ongoing or enrolling are biosimilar for rituximab, biosimilar for trastuzumab, and a biosimilar for infliximab. Those phase III studies are ongoing already. As Mikael mentioned earlier on, bevacizumab, biosimilar bevacizumab, has just recently successfully completed phase I study, and the next milestone for that in development would be the initiation of phase III. And we have an adalimumab biosimilar, which is currently in phase I. Those studies are progressing well, and we anticipate bringing this portfolio to the market in the 2017-2018 timeframe. Great. Thanks, John. Moving to the next question please, operator. Your next question comes from Steve Scala from Cowen. Thank you. A few questions. You stated, I think, that you would file palbociclib in the E.U. in 2015. Is that based on the same phase II data that you submitted to the FDA, so the filing could be early in 2015? Or is it based on some look at phase III as well, which would probably push the filing to later in the year? Two questions for Ian, and I apologize in advance for both. Why the very deliberate comment on two businesses rather than three when the company is giving financials on three businesses and has been talking about three businesses for several years? I know you've been talking about two companies or two businesses in recent calls, but why the need to emphasize it now? Secondly, I'm not clear on the benefit to Pfizer of saying an inversion is still possible. Is it, for instance, to prompt further Treasury Department clarification or for some other reason? Thank you. I'll ask. Well, I was answering a question about whether we still thought that inversion was a viable strategic component of any deal. We still believe it is. I was answering a question. I think that explains why I answered it that way. There was no ulterior motive beyond that of reassuring investors that while the rules have changed, we still believe in the appropriate circumstances that inversions can be part of the value mix of a deal. Although we can do deals and we do see value in deals without inversions, it still remains part of our overall mix. I hope explains that, Steve. On the two businesses, I've been talking to investors, and I believe there is a confusion out there. We have two businesses. We report one of the businesses in two segments. We have our innovative business, which relies on our core research and our core capabilities, and which I see as an integral business. It's made up of oncology and vaccines and consumer and what I would call traditional innovative. That is, as I see it, one business, and the fact that we report it separately is really an artifact of the SEC rules on segment reporting and depending on your management construct and who reports to the CEO. I think that's led to some confusion in the investment community that we see the company as made up of more than two business segments. I see two business segments, one that's innovative, using those resources innovative, and one that is established, and those are the ones that John runs. I just wanted to make that clear. Most of the work we are doing on optionality is around those two businesses, not around more than those two businesses. Palbo in the EU. Yes, thanks a lot, Steve. We have had discussions with European regulatory health authorities on the clinical data, and it is our intention to file in the EU, and that filing will happen in 2015. I do not want to be more specific if it is going to be beginning of the end of 2015, it is going to be in 2015. Now, the anticipated filing package will likely look similar to what was submitted in U.S. to the FDA. Okay. Thanks, Albert. Next question, please. Your next question comes from Colin Bristow from Bank of America, Merrill Lynch. Morning, and thanks for taking the questions. Just on BD, the immuno-oncology pie seems to continue to grow as potential indications continue to grow, making it arguably more attractive for those who are not first to market. How are you thinking about this space with regards to your business development priorities? Then just on XELJANZ, there is obviously a couple of competitor JAKs on the horizon. How do you view the competitive threat in XELJANZ's positioning? Are you still on track for a filing in the first half of 2015 for your once-daily formulation? Thanks. All right. So if Gino could talk about the XELJANZ situation, then I will come back on the BD. Yeah. So I think, we are very pleased with the progress that we are making with XELJANZ. We see continued adoption by the rheumatology community. We have about a 10% now share of new-to-brand patients from rheumatology, which is a nice leading indicator of where that business is going. Obviously, the rheumatology community is getting more and more comfortable with XELJANZ. A majority of the use of XELJANZ is used in what I call methotrexate-free regimens, where patients who have difficulty with methotrexate are finding adequate therapy with XELJANZ, which is great. So, it is becoming entrenched, it is becoming established, and we think that is going to speak well for its competitive position in the future. We are still on track for a first-half filing for the once-a-day. On our immuno-oncology BD activity, I agree with you that I think the value is in combinations. You have all seen the results of the PD-1s. There are some durable responses in monotherapy, but our belief is that the true power of the immuno-oncology will be from combinations, perhaps from two or three combinations. We are focused on developing our second-wave immuno-oncology and our vaccines and the CAR technology and are clearly open to any type of business development which would give us access earlier to a PD-1 type portfolio that we could more easily integrate and combine with our second wave. Thanks, Ian. Next question, please, operator. Your next question comes from David Risinger from Morgan Stanley. Thanks very much. I have two questions. First, regarding the net cost outlook, Frank, could you just talk about how investors should think about cost trends going forward? Maybe you could weave in some comments about the potential for some increased costs, if you are building up two business segments from the one that currently exists globally. Then, with respect to Palbo, I am just curious, what should investors focus on, in terms of timing of next key Palbo readouts in case the FDA does not approve Palbo on the first cycle review next spring? Thank you. Okay, Frank, do you want to go into that? Sure. net cost and then Yeah, sure. Palbo can look at the Yes. So Dave, the way I think about cost trends going forward is kind of by starting with where are we. And I think where we are now, and I've said this before, is we're in the late innings, I think, on cost reduction. There's always more opportunity to be more efficient in everything that we do, but I think the big-ticket items are behind us. We've basically gotten those identified, we've gotten those implemented, we've gotten those executed, and they're obviously in our results. I think, going forward, there'll be some opportunities, but the big-ticket opportunities from my perspective are behind us. The one thing I always say, though, about just managing cost is I'm making every statement based on the hand we currently have. To the extent that we expand that hand through whatever, collaborations, partnerships, business development, that gives us opportunities once again to be more efficient on a going forward basis. I think late innings, we've taken a bunch out. Still some more we can take out, but the big-ticket item's primarily behind us. In terms of, Frank, increased costs going forward, I think the way I'll answer that is if you look at this year to last year, so 2014 to 2013, the one area where you see a fairly sizable increase is in our R&D spend. If you look at our guidance for the year now, we just tightened it to $6.9 billion to $7.2 billion. If you take the midpoint of that range just for analytical purposes, compare it to last year, our R&D spend year-over-year is up $0.5 billion. It's the late-stage assets that we talked about plus the business transactions we did, Cellectis and MedGenesis. So you see some pressure on the R&D spend, at least in 2014 versus 2013. Beyond 2014 going into 2015, we'll obviously give that guidance on every line item when we get on our next earnings call where we close out 2014 and provide guidance for 2015. To ask, Frank, I think you want to comment on the— I think the comment was, is there any ongoing expenses of setting up the two businesses? Oh, yeah. Thanks, Ian. In terms of optionality, the short answer is there are. They haven't been material on a year-to-date basis, but we're clearly incurring expenses, give or take, about $50 million this quarter, roughly twice that year to date. That will ramp up as we go into 2015, and obviously, I'll call that out on a going forward basis. Yeah, and there are two types of expenses, of course. One is just the ongoing, which I think are very modest structural expenses of running and collecting information for two businesses, and the other, which is more one-off. And one-time. and one-time as you set up your structures and your tax planning, et cetera. Thanks. Okay. Albert? Albert on the. Oh, yeah, Albert on. On the cycle. Yeah. David, right now we are focused on getting in U.S. registration based on our phase II submission. FDA has accepted this submission, has given us priority review. We have a PDUFA date of April 13. We are looking forward to bring the product to U.S. based on this submission to the U.S. patients as soon as possible. In Europe, as we just said, we also plan to submit in 2015 with a similar packet. I can tell you that there are several studies that are moving on. We have PALOMA-2, which is a phase III study, but it is expected to come to completion at the end of 2016, so the report sometime in March 2016. This is a replica of our phase II study. We have two additional studies that will give us additional registration indications, which are in recurrent, and one of them is expected to come to completion again next year. We have one registration study, one phase III study, which is in recurrent advanced in early stage with high risk of recurrence, and this is expected to come into completion sometime in the 2019 timeframe. As I said, our focus right now it is to bring the first indication, which is first-line advanced metastatic in U.S. based on our submission that happened this August and has a PDUFA date of April 13. I suppose, David, to your question that while we are working with the FDA to get approval in the April timeframe of palbo, if they decide not to approve on that, then we have the replica, which we will report out towards the end of the year with an interim look at some point in the year if they hit the number of events. But I think the more important thing is that we have already started the trials to expand beyond advanced breast cancer in intermediate and early, and that lead is not a lead that will be eroded by the decision on when we get approval for advanced breast cancer. Because the fact that we have started those trials now, and our competitors are not in a position to start those trials because they do not have the data. If you look at it from a competitive point of view, there is competition for advanced breast cancer, which may become more intense if our approval is delayed until the end of our phase III trial. But I do not see that having any implications on the competitive position on the intermediate or early breast cancer, which is a far larger percentage of the market longer term. I hope that explains how we see the dynamics of that market. Next question, please. Your next question comes from Jami Rubin from Goldman Sachs. Thank you. Ian, I just want to go back to capital allocation. I think the market is saying that you need to do something bold. I am just wondering if you agree with that, and if so, what would you define as bold, and what is your timeline? We have been talking about capital allocation and doing something bold now for several quarters. How are you thinking in terms of timing? Thirdly, I think that the AstraZeneca deal was sort of thought of as a potential carve-out opportunity. Would you consider I think the GEP business is a business that really has limited longer term growth visibility, whereas the innovative business, we see pipeline assets that would drive future growth. Can you describe your options available to you in the GEP business? I think you have described incremental options, but is there something you could do in that business that is on the bolder side? Thanks very much. Thanks, Jami. Well, your characterization of something bold. Going back to the issue, we have a great sense of urgency inside Pfizer to continue to accelerate returns to shareholders. To the extent that BD will allow us to do that, then I am willing to take bold actions. I believe that the initial approach to AZ was a bold action, one that we couldn't get to the right value equation, so the deal didn't progress. Certainly, I feel a sense of urgency on utilizing our balance sheet and our capital to do deals that are incremental, add incremental value, and certainly add revenue growth in the innovative space. We are looking at all alternatives, and we are aggressively looking at all alternatives. Now, in the GEP space, I think we have said that I think the GEP business is somewhat difficult to analyze. I understand that, but it is made up of what is really a great emerging markets business, which today represents about 30%-35% of the total GEP business and is growing. That business is based on brands and quality and out of pocket. I would model it more like I would model a consumer business, frankly. The rest of it is around peri LOEs, which are highly profitable and managing a pipeline that is mature in the developed markets. So we are looking at ways to add additional growth levers to that business, such as biosimilars, which we are investing in. We are also looking at other types of acquisitions where we can use offshore cash, so it is highly efficient. Or even where we would do acquisitions that are in specific areas, such as sterile injectables. But I believe there are lots of opportunities to do BD in that area so as to add growth. So, I thank you for your encouragement to be bold. We are looking at bold ideas. We are looking aggressively at using BD, and we have a sense of urgency. Thank you for the question. Thank you. Next question please, operator. Your next question comes from Alex Arfaei from BMO Capital Markets. Good morning, and thank you for taking the questions. Just to follow up on the biosimilar comments earlier, just at a higher level, could you comment more specifically at the commercial opportunity? I think it is fair to say that expectations for biosimilars have come down recently. How should we think about the commercial prospects for your meningitis B vaccine? Thank you. All right. I will ask John to talk about biosimilars, and then Albert can talk about the Mening B. Thank you. Thanks for the question, Alex. First thing to say is, obviously, the biosimilars market is really one that is still evolving. We are still seeing regulators around the world put into place their guidance around biosimilarity and the development pathway for biosimilars. That is the first comment to make is that marketplace is still an evolution. That said, it is estimated by independent analysts as being a market that is around about $100 billion globally. The biotherapeutics marketplace overall, that biotherapeutics marketplace is going to grow to about $250 billion by 2020. The market for biosimilars in that context potentially could grow as a market opportunity from around about $1 billion today to about $18 billion by 2020. Those are the sort of general ranges that you actually see from independent analysts about the potential for this marketplace. I think beyond saying that we see it as being a significant opportunity and saying that we believe we are well-placed with our first wave of biosimilar assets, which as I commented already, we are progressing as expeditiously as we can, and we believe we will be well-placed in that marketplace. I think the general comment would be that clearly there is much water to flow under that bridge, but we are continuing to be very actively engaged in both monitoring and also engaging with regulators in this space. Thank you. Albert. Yes. On meningitis B vaccine. Look, meningitis B disease is devastating. It is characterized by rapid onset, has very high rates of fatality. Up to 20% of the people that get meningitis B die from it, usually within 24 hours. Many that survive will have permanent long-term sequelae. So this introduction, it is an important product for the patients to start with and addresses a high unmet medical need. On the commercial front, we believe that will give us a modest contribution to our revenue line given the magnitude of our vaccines business. Thanks, Albert. The next question, please. Your next question comes from Jeff Holford from Jefferies. Hi. Thanks for taking my question. Just going back to capital allocation and timing of business development, I guess for Ian, really. Just still wondering what your thoughts are about the potential for tax reform now that this has become such a focus for everybody. Do you potentially get paid to wait on doing business development? It depends what your view is around the likelihood of that happening into next year. So I wonder if you can just talk about some of that. Thank you. Yeah, Jeff, I think it's an interesting question. Clearly, there is a dynamic going on about what you're willing to pay for inversions, vis-a-vis what you believe is the opportunity for fundamental reform in the U.S. I think we'll know a little bit more after the midterm elections. But historically, you don't get tax reform unless the president of the United States puts a lot of his credibility and weight behind it. There are just too many factions and too many ways of dividing the cake, and you really need the White House to take a lead in that. So, if you're a betting man, you would suspect that fundamental tax reform would not occur until post the 2016 presidential elections. But, in politics, you never know. It's day to day, so we'll look at that after November 4th and continue to factor in the elements you comment in what we think the value an inversion is worth. Thank you for the question. Thanks, Ian. Next question, please. Your next question comes from Vamil Divan from Credit Suisse. Yeah, thanks for taking the question. My first question, just again on the BD side, you touched on a couple of things like sterile injectables and maybe a little on immune oncology. Are there any other areas that you would highlight in terms of where you are looking to do more investing in? Do you really have a preference between investing on the innovative side of your business as opposed to the more established side? Then my second question, just following up on your comments around XELJANZ earlier. You mentioned that it is being used more now in methotrexate-free regimens, I believe. Have these patients actually tried TNFs or is it before TNFs? Anything you can update on your latest timelines around resubmitting into EU. Thanks. Okay. On the business development, I think in the GEP business, there is a wide range of opportunities that stem from local investments using offshore cash to larger type of investments to have capabilities in how to make generics. We just did a smaller acquisition in that area. InnoPharma. InnoPharma. So there are a multitude of opportunities, and that is what John is looking at and going through and trying to isolate what the best opportunities would be. From a point of view of do we have a preference between GEP or innovative, everything is driven by value and portfolio balance. You would expect a larger scale acquisition to potentially cover both businesses. It may not do. So those are all the things we factor in. Then there was a question on. Xeljanz Xeljanz. Yeah. So on XELJANZ, about half the patients on XELJANZ have gone from methotrexate to XELJANZ, and about half of them have been on a biologic, one or more biologics. So it's a mix. Then in terms of resubmitting in Europe, we intend to resubmit late in 2015 to the Europeans. Thank you, Geno. Thanks, Gino. Then in the interest of everybody's time, operator, if we can take one more question, please. Your final question comes from Seamus Fernandez from Leerink. Oh, thanks for the question. Just wondering if Mikael could talk to us a little bit about the differences in the bococizumab clinical trial design versus competitors and your views on how that is differentiated from competitors and why you think bococizumab is going to be a competitive offering in that space. Okay. Seamus, Gino tried to do it, so I'll give Mikael a chance to make it clearer this time around. Gino should feel free to add anything if he thinks Mikael hasn't covered it. I'll build on Gino's excellent description why we think that the way we're developing bococizumab, and importantly, the learnings we did in phase II-B that was very extensive, that allowed us to design what we think is a very comprehensive, broad phase III program. So a couple of key takeaway messages. One, our phase III program includes population for both primary and secondary prevention. We think there will be a growing opportunity for patients that are at high risk in primary prevention, such as diabetics with a high risk equivalent for cardiovascular disease. To the best of our knowledge, we are the only CV outcome trial program that includes primary prevention. Number two, we structured it in two different trials, one addressing individuals that cannot get down to 100 or below. That allow us to show most likely a substantial risk reduction in cardiovascular disease, since this is the segment where we expect a strong correlation between lowering cholesterol and lowering risk for CV events. The second trial really focusing on bringing patients in the 70 to 100 segment with high risk, both primary and secondary prevention patients, down really low in cholesterol, and we think that will allow us to open up unmet need in that area further by generating data. I should say that the dose regimen that we developed in phase II-B is really crucial for this study design, and we developed a dosing regimen that allow us to start with a high dose and get immediately down patients to low levels, and only if necessary, do a dose titration with lower dose of bococizumab. We do think bococizumab is one of the most potent antibodies that showed really pronounced lowering of cholesterol. It performs well in every 2 weeks, and we have said earlier that through a partnership with Halozyme, we have in our longer lifecycle management plan, exploration of once a month, after first ensuring generating good data in the current regimen. Yeah, that Halozyme is unique to us. I think we have exclusivity on that technology. Correct. Thank you, Ian. Thank you, Mikael. Good answer. Thank you. Thank you everybody this morning for your time. Thanks for your time, everybody. Bye-bye. Ladies and gentlemen, thank you for participating in today's Pfizer's Third Quarter 2014 Earnings Conference Call. This does conclude the call. You may now disconnect.