Earnings Call: Q2 2014

Jul 29, 2014

Summary

Q2 revenue fell 2% YoY while adjusted EPS rose 4%, with newer brands and emerging markets offsetting LOEs and alliance declines. FY revenue guidance was lowered, while adjusted EPS guidance was reaffirmed.

Good day, everyone, and welcome to Pfizer's second 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 thank you for joining us today to review Pfizer's second quarter 2014 performance. I'm joined today 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. Slides that will be presented on the call can be viewed at pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Second 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 the 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. Discussion 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. We will now make prepared remarks, and then we will move to a question-and-answer session. With that, I'll now turn the call over to Ian Read. Ian? Thank you, Chuck, and thank you all for joining our call this morning. I'll begin with some brief comments on the quarter. Overall, we saw good performance and strong operational growth in a number of areas, including Lyrica in developed markets, Prevnar, primarily in the U.S. and emerging markets, and Celebrex worldwide. Our recently launched brands are making solid gains. Eliquis grew sequentially 15% quarter-on-quarter on a global basis, while Xeljanz posted sequential growth over 30%, primarily in the U.S. With the continuation of this momentum, these products are on a trajectory to become meaningful contributors to our underlying business in the coming quarters. We also saw the continued uptake of Xalkori and Enlyte globally. Revenues in our consumer business increased 15% operationally, primarily due to the recent launch of Nexium 24HR in the U.S. in late May. We also saw strong company-wide performance within the emerging markets. Revenue increased 11% operationally compared to the year-ago quarter, driven by growth in China, Venezuela, Argentina, and Brazil. Despite a somewhat slower start to the year, each of our businesses is performing well in the face of ongoing product LOEs within our innovative businesses and continued pricing pressures and changing market dynamics affecting our established business. I would also point out the negative impact of LOEs and the revenue loss resulting from the expiration of some co-promoted revenues was $1.7 billion for the first six months. This impact masked the company-wide operational revenue growth from all other products during the first half of the year, which was 3% overall. In evaluating our performance now that we've been operating in our new commercial model since the beginning of the year, I believe this structure is providing greater transparency into the operations of each business, and on a daily basis, it enables decision-making that better optimizes the performance and portfolio of each of our segments. Furthermore, we remain encouraged by key developments that demonstrate our pipeline momentum. Of particular note, we expect to complete the submission of the palbociclib new drug application to the FDA in August. The submission is based on the final results of PALOMA-1, a randomized phase II trial comparing the combination of palbociclib plus letrozole versus letrozole alone as the first-line treatment for post-menopausal women with ER-positive, HER2 negative advanced breast cancer. We will publicly communicate once we've completed our submission. Also of note, our phase III palbociclib trials in advanced breast cancer, PALOMA-2 and PALOMA-3, are progressing, and both trials have completed recruitment of new patients. In addition, a number of phase III studies where we are collaborating with leading international breast cancer investigators are open and enrolling patients with both advanced and early breast cancer. We have active exploration underway in multiple phase I and II studies in non-breast indications. Given the outbreaks of meningitis B disease on several U.S. college campuses in 2013, we worked closely with the FDA to submit our biologics license application for accelerated approval of our meningitis B vaccine for the prevention of invasive meningococcal disease in adolescents and young adults. We look forward to the meeting that has just been scheduled to take place on August 13th by the CDC's Advisory Committee on Immunization Practices, ACIP, to discuss and vote on a potential expanded recommendation for Prevnar 13 use in adults. We have a comprehensive Xeljanz program that is progressing with phase III studies underway in UC and psoriatic arthritis, and phase II studies in psoriasis for topical use, Crohn's disease, and ankylosing spondylitis. We continue to enroll patients in phase III trials of bococizumab for cholesterol-lowering in high-risk individuals ertugliflozin for the treatment of diabetes, and later this year, we expect to begin enrolling patients for rivipansel for the treatment of vaso-occlusive crisis in individuals with sickle cell anemia. As we enter the second half of this year, our strategy, focus, and priorities remain unchanged, supported by the steady performance of each of our commercial segments. When it comes to business development, we will continue to evaluate all opportunities regardless of the size, through the lens of value creation for our shareholders and enhancing the competitiveness of our businesses. Our most recent announced acquisitions and collaborations are examples of enablers of our strategy. We expect InnoPharma will meaningfully increase the size of our sterile injectable business through their existing and out-licensed portfolio of sterile injectables, as well as the medium and long term through the potential of their pipeline. If we see promising results as we move forward with the Cellectis collaboration to develop immunotherapies against select targets in oncology, we believe it has the potential for changing the way cancer is treated. In summary, for the remainder of this year, we will be focused on executing our plans and taking the actions that will further strengthen and globally position us to be market leaders in each of our business segments. We remain committed to advancing innovative new therapies on behalf of patients we serve, prudently managing deploying capital to derive the greatest value for our shareholders, and creating a culture within the organization where colleagues think creatively, take prudent risks, and operate with an entrepreneurial mindset. I will now turn it over to Frank to take you through the financial details of the quarter. Thanks, Ian. Good day, everyone. As always, the charts we are reviewing today are included in our webcast. As a reminder, because of the full disposition of Zoetis on June 23, 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 second quarter and first six months of 2013. Now let's move on to the financials. Second quarter 2014 revenues of approximately $12.8 billion decreased 2% year-over-year, reflecting a 1% negative impact from foreign exchange and an operational decline of approximately 1%, driven mainly by the expiration on October 31, 2013 of the co-promotion term for Enbrel in the U.S. and Canada, the ongoing terminations and expirations of the Spiriva collaboration in certain countries, the loss of exclusivity and subsequent multi-source generic competition for Detrol LA in the U.S., and other product losses of exclusivity in various markets. These were partially offset by the strong operational growth in developed markets of Lyrica, Nexium 24HR in the U.S., Prevnar, Eliquis, Xeljanz, Celebrex, Xalkori, and Inlyta, and by strong operational growth of 11% in emerging markets. In addition, reported revenues included $71 million from transitional manufacturing and supply agreements with Zoetis. I want to point out LOEs and declining alliance revenues had a negative impact of approximately $840 million during the quarter. Adjusted diluted EPS of $0.58 increased 4%, primarily due to fewer diluted weighted average shares outstanding due to ongoing share repurchases and the impact of the Zoetis exchange offer, which were partially offset by a 4% aggregate operational increase in adjusted cost of sales, adjusted SI&A, adjusted R&D expenses resulting from an unfavorable shift in product mix, and recently initiated phase III programs for bococizumab, ertugliflozin, palbociclib, and the meningitis B vaccine, and for the studies of Xeljanz and certain other products and potential new indications. However, adjusted SI&A expenses decreased because of continued benefits from cost reduction and productivity initiatives. Reported diluted EPS of $0.45 compared with $1.98 in the year-ago quarter was primarily due to the nonrecurrence in the second quarter 2014 of income from discontinued operations in the year-ago quarter attributable to the animal health business, including the gain associated with its disposition and the income in the year-ago quarter from a litigation settlement for patent infringement damages. To a lesser extent, the LOEs and the expiration of the co-promotion term for certain products. All of which were partially offset by lower acquisition-related costs, purchase accounting adjustments and asset impairment charges, a lower effective tax rate due to the resolution in the second quarter of 2014 of certain prior year tax positions with various foreign tax authorities, a favorable change in jurisdictional mix of earnings, and the nonrecurrence of the unfavorable impact of the tax rate associated with the aforementioned patent litigation settlement income. Finally, fewer shares outstanding. Foreign exchange negatively impacted second quarter revenues by 1% or $87 million and had a net positive impact of $18 million on the aggregate of adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses. Consequently, foreign exchange negatively impacted adjusted diluted EPS by approximately one cent compared with the year-ago quarter. Now moving on to the financial highlights of our businesses. In the second quarter, global innovative pharmaceuticals revenues decreased 5% operationally year-over-year due to the previously mentioned expiration of the co-promotion term for Enbrel in the U.S. and Canada, and the loss of exclusivity for Lyrica in Canada in February of 2013. The expiration of the co-promotion term for Enbrel and the LOEs of certain products resulted in an operational decline of $459 million. However, all other GIP revenues grew 9% operationally, driven by strong growth from Lyrica, primarily in the U.S. and Japan, as well as the performance of recently launched products, including Eliquis globally and Xeljanz primarily in the U.S. Income before taxes declined 12% operationally due to the decrease in revenues, a 5% operational increase in cost of sales, or a 1.2 percentage point increase as a percentage of revenues. I want to point out here that the loss of Enbrel alliance revenues in the second quarter 2014 negatively impacted cost of sales as a percentage of revenues by 1.5 percentage points operationally. 13% operational increase in SI&A expenses from increased investment in new products and in line brands such as Lyrica and Viagra, as well as a 41% operational increase in R&D expenses due to recently initiated phase III programs for tocilizumab, ertugliflozin and additional Xeljanz indications. In the second quarter, revenues from our vaccines, oncology and consumer healthcare business grew 15% operationally year-over-year due to the strong operational growth of Prevnar 13 in the U.S. and in emerging markets, the launch of Nexium 24HR in the U.S. in late May 2014, and the continued strong uptake of Xalkori and Inlyta globally. Income before taxes increased 10% operationally due to increased revenues, which were partially offset by a 23% operational increase in cost of sales, driven by increased sales volumes and an unfavorable change in product mix. An 18% operational increase in SI&A expenses associated with the launch of Nexium 24HR and the pre-launch marketing expenses for the meningitis B vaccine and palbociclib. A 16% increase in R&D expenses supporting the acceleration of the meningitis B vaccine and palbociclib development programs. In the second quarter, global established pharmaceuticals revenues decreased 5% operationally year-over-year due to the loss of exclusivity and subsequent launch of multi-source generic competition for Detrol LA in the U.S. in January of 2014, Viagra in most European markets in June of 2013, and Aricept in Canada in December of 2013. As well as the ongoing termination of the co-promotion agreement for Spiriva in most countries, including the U.S. in April, and the ongoing expiration in certain other countries. These were partially offset by the strong operational performance of Celebrex in most major markets, Lyrica in Europe, and Lipitor primarily in China. The LOEs of certain products, the loss of alliance revenue for Aricept and Spiriva and Lipitor in developed markets negatively impacted GEP revenues by $395 million operationally. However, all other GEP revenues grew 1% operationally. Income before taxes declined 4% operationally due to the decrease in revenues, which partially offset by the aggregate decrease 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've updated several components of our adjusted guidance and reaffirmed our 2014 adjusted diluted EPS guidance range. Because of the anticipated negative impact from the expected multi-source generic competition for Celebrex in the U.S. in December of 2014, we now expect revenues to be in the range of $48.7 billion-$50.7 billion versus $49.2 billion-$51.2 billion. This range absorbs the negative impact of approximately $3.4 billion due to declining alliance revenues and expected product losses of exclusivity. In addition, we are decreasing our adjusted SI&A expense range due to an expected reduction in promotional spending for Celebrex in second half of 2014 and now expect adjusted SI&A to be in the range of $13.3 billion-$14.3 billion, compared with $13.5 billion-$14.5 billion previously. To reflect the planned $80 million upfront payment to Cellectis for our global strategic collaboration and anticipated increased expenses for the acceleration of certain late-stage clinical programs, including palbociclib and tocilizumab, among others, we now expect R&D expenses to be in the range of $6.7 billion-$7.2 billion versus $6.4 billion-$6.9 billion previously. We now expect approximately $200 million of other income versus approximately $100 million of other deducts because of lower expected net interest expense for the remainder of 2014 and gains realized during the first half of 2014, mainly on sales of product rights and investments in equity securities. We expect reported diluted EPS to be in the range of $1.47-$1.62 due to charges related to certain legal matters primarily related to Neurontin incurred during the first quarter 2014. We are reaffirming our 2014 adjusted diluted EPS guidance range of $2.20-$2.30, which absorbs approximately $0.05 per share for anticipated negative impact related to Celebrex and $0.01 related to the planned upfront payment for the Cellectis collaboration. Now moving on to key takeaways. We recorded solid second quarter 2014 results. We reaffirmed our adjusted diluted EPS range, which absorbs an approximately $0.05 anticipated negative impact related to Celebrex and $0.01 related to Cellectis. We achieved several key R&D milestones, including the initiation of a rolling submission in June 2014 of an NDA seeking approval for palbociclib, which we expect to complete this August. In June, we submitted a biologics license application to the FDA for our meningitis B vaccine candidate. We discussed with the ACIP at its June meeting a potential expanded recommendation for Prevnar 13 use with adults. We expect the ACIP's decision on August the 13th. We announced several business development opportunities to further strengthen our position in key strategic areas. We continue to create shareholder value through prudent capital allocation. To date, in 2014 we've repurchased $2.9 billion or approximately 95.1 million shares. We continue to expect to repurchase $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. Finally, we remain committed to delivering attractive shareholder returns in 2015 and beyond. Now I'll turn it back to Chuck. Thank you, Frank. Operator, at this point, can we please poll for questions? Thank you, ladies and gentlemen. If you would like to ask a question, please press star, then the number 1 on your telephone keypads. Your first question comes from Chris Schott from J.P. Morgan. Great. Thanks very much for the question. Just two here. The first one, and I'm sure this is the first time you've been asked this recently, but on business development, just how are you thinking about BD at this point? I guess given the valuation reset and pipeline recovery that's occurred within the space, is it more challenging to find larger deals that both advance the Pfizer story and give your investors the type of returns they're looking for? The second question, for the past year or so up until the Astra approach, there's been a focus on a potential breakup of Pfizer based on your new corporate structure you're creating coupled with your pipeline recovery. Can you just update us on your thoughts on that potential split of Pfizer over time? Has your view of a breakup making potential sense changed at all? I guess, do you still see merits in the idea of splitting the company into maybe two over time? Thanks very much. So thank you for the questions, Chris. On BD is not a strategy. It's an enabler of strategies. We continue to aggressively look at all types of BD, regardless of size, that we believe would add value to shareholders. So that's our stance on BD. On this much-discussed potential breakup, as before, we're managing the business in two segments, broadly speaking, one being innovative and the other being established. In the innovative, we have sub-businesses like oncology and consumer and vaccines that are very distinct from other parts of the innovative business. So we're giving you transparency on those segments, and we're collecting both P&L and balance sheet information to give us optionality. What we do eventually will really depend upon how those businesses perform, how our shareholders value those businesses, and we'll look at that after an appropriate period of time of both collecting the data we need for optionality and the performance in the marketplace. Thank you. Frank, you want to add anything to that? The only thing I would add, Chris, to punctuate what Ian said is, and I think for the time being and for the near future, the most important thing those businesses can do is execute with excellence. It's all about operational performance, and then that'll create all kinds of options and choices for us in the future. And fundamentally, I see BD as adding to what I see as a strong hand we have with our core strategies. Thanks, Ian and Frank. Next question, please. Your next question comes from Vamil Divan from Credit Suisse. Yeah. Thanks for taking the question. So a couple here. Again, I am sure you have gotten some of these before as well, but one around the increased rhetoric in Washington around inversions. Would that impact, or is it impacting any way the way you look at doing an inversion-based deal in the future? And then the second one is on the pipeline around palbo. I think still a lot of questions you said obviously you are going to file next month. A lot of questions around with what the FDA is going to do, and really, so I think why would the FDA approve it on an accelerated basis when we will be getting full phase III data just a few months later. If you can just give us any updated thoughts there around the discussion you had with the FDA and why the need to, again, just maybe take a little bit more of a risk to get this out just a few months ahead of the full data set. Thanks. Thanks for the question, Vamil. In Washington, we remain committed to discussing and advocating for fundamental tax reform. That will play out with the political parties, we suspect, over the next coming years. It is really difficult to comment more than that, other than we do believe the tax system puts American companies at a disadvantage, and we would like to see the tax system reformed. On palbo, I think there is some confusion as to when we get the final phase III data, but I will ask Albert to comment on the palbo submission. Thank you, Ian, and thank you, Vamil, for the question. As you are aware, our submission is based on the final results for our phase II trial, and this has happened after conversations with FDA. I do not want to speculate what FDA will request as we go through the review process, but I can tell you that until now, they have not placed any conditions on us related to the phase III trial results. As Ian alluded, the phase III has completed recruitment, and it is expected to come to final completion at the end, in December of 2015, and the final report will be available in 2016. Thank you, Albert. Thanks, Albert. Next question, please, operator. Your next question comes from Tim Anderson from Sanford Bernstein. Oh, thanks. Just going back to M&A, and I know you'll probably struggle to answer this question, but in your prepared remarks, you said you would continue to evaluate all opportunities regardless of size. My question is whether it's reasonable to expect that Pfizer could find strategically attractive targets that are big enough. Such a tax inversion could be one of the benefits. The operative here for me would be strategically attractive, because I can think of other theoretical inversion targets, but I'm not sure I see the strategic value on those. I'd like to get your opinion on that. Then on palbociclib in Europe, do you expect that PALOMA-1 will be adequate for submission or will regulatory authorities likely require at least interim phase III results before approving, kind of like they did with Xalkori? Albert Bourla, why don't you take the palbo question and I'll come back to the M&A. Yeah. Thanks a lot, Tim. Look, as you can expect, we have begun discussions with European and other regulatory health authorities for palbociclib, and those discussions include discussions on the clinical data. Also, we have presented to them our development program, and we have entered into discussions about the potential regulatory path forward. But it is too early to disclose at this stage our regulatory strategy for these regions. Thank you. Tim, on M&A, we look and continue to look at a very wide spectrum of M&A transactions. We have substantial financial ability and balance sheet, and tax inversion is one part of the value equation. When we were looking at AZ, we looked at both their pipeline, the synergies, and the tax inversion. So we will continue to look very broadly at deploying our capital in a way that makes sense for shareholder return. Excellent. Moving on to the next question, please, operator. Your next question is from Jami Rubin from Goldman Sachs. Thank you. I know we're all kind of dancing around the same issue, Ian, but just on the assumption that AstraZeneca does not materialize, is there actually a plan B in place? What we've seen since then is a small acquisition in InnoPharma, and is that the kind of deals that we should anticipate going forward or is there still a plan in place to achieve a lower tax rate to enhance the pipeline? I don't know if Mikael Dolsten is on the call, but just a question on business development in-licensing, out-licensing activity. We've seen recently a couple of high-profile out-licensing deals, tremelimumab to AstraZeneca, neratinib to Puma, and regrettably those look like very unfortunate decisions. Ian, are you looking internally and are you pleased with the team that you have in place who are charged with making these critical decisions? Thanks very much. Thank you. On the BD, we looked at both of those assets you mentioned early on in their life cycle, and we looked at the opportunities inside our portfolio and took the decision given that they were, we believe, lower value assets of what we knew about those assets at the time to out-license them. In the case of the Puma asset that they acquired, neratinib, we out-licensed this, or we looked at almost 10 companies, most of them major pharmaceutical companies, and the only company that was interested in its development was Puma. As such, we were pleased with the out-licensing agreement we struck with them and the royalty rate. I have not seen the data, nor has Pfizer seen the data that may or may not indicate that the product has value. And we will be in discussions with Puma to see our legal rights as to that data and the consequences of that data. On the tremelimumab, it was a decision to out-license to AZ, and I am not aware of any data that would make me believe that we made a mistake given the fact that we had other products that we were developing of higher productivity value. Now, as regards your plan B, my comment would be our plan A is our plan to continue to develop our innovative pipeline, to restore the vigor in our pipeline. We are making progress with mid and late stage pipelines, including Prevnar Adult, palbociclib, bococizumab, ertugliflozin, Mening B, and Xeljanz follow indications. We are continuing to grow our newly launched brands such as Eliquis, Xeljanz, Xalkori, Lyrica, and Enbrel, and we are focusing on the emerging markets. So plan A is to continue with the strategy that we have always articulated, which is to reinvigorate our innovative core, make our R&D productive, and make smart and shareholder-friendly capital allocation decisions. Any BD that we do will be looked at through the view of accelerating those strategies and improving returns to shareholders. And the deals that you, InnoPharma and Cellectis, are deals that are opportunistic and add on and we think build and help the underlying BUs, but certainly are not representative of the total firepower or corporate strategy of Pfizer. Frank, do you want to add anything on that? No. Okay. Thank you. No, I mean. Next question, please. Your next question is from John Boris from SunTrust Robinson Humphrey. Thanks for taking the questions. First question for Frank. In 2013 and for the front half of 2014, you returned a significant amount of cash through share repurchases and through dividends in both of those years. Can you just remind us what the total amount that you returned and how much cash did you have to bring back offshore to be able to fund your share repurchase and your dividend from offshore? Second question for Ian, on large scale versus tuck-in type acquisitions. If you look at your U.S. operation, which is traditionally the most profitable operation of a major pharma, it seems with ongoing losses of exclusivity and losses of alliance revenue, that operation seems to be under a fair amount of pressure. You do have some pipeline assets that you're successfully launching through there, but is the scale of what you're launching large enough to be able to offset some of those pressures that you have from continued losses of exclusivity, losses of alliance revenue? On your established products business, traditionally you've had a lot of success bringing in injectable assets into that business. But on a global basis, is it of scale where you have the regulatory capabilities needed to be able to successfully launch other types of assets on a global basis through that strategically? Thanks. Thank you, John. Frank, do you want to take the first question? Sure. John, just in terms of running the numbers, last year we returned $23 billion to our shareholders between share buybacks and dividends. The buyback piece of that was $16.3 billion. This year, the buyback piece year-to-date is $2.9 billion. If you look at our dividend on an annual basis, we've got on average, call it 6.4, 6.5 billion shares at above four dividend. Call that $6.5 billion to $7 billion. If you look, by the way, just in terms of numbers, if you look over the last three years, 2011, 2012, and 2013, we returned about $53 billion to our shareholders in terms of buybacks and dividends. In terms of a major way we have funded that, has been through some of our unlocking value activities. The sale of Capsugel, the sale of nutrition, and the exchange for Zoetis. Those are three of the ways we've done that, and obviously through very effective and efficient tax planning. Thank you, Frank. On your question about scale of the innovative business, obviously your question goes to the strategic issue we've been dealing with as we try and take care of the LOEs while trying to minimize revenue decreases while growing our EPS. I think we've been doing a good job of doing that while we manage the sort of onslaught of LOEs with EPS growth. It comes down to the question of the growth of Lyrica, the growth of Eliquis, the growth of Xeljanz, the adult vaccine, the Mening B, the Xeljanz follow-ons. What is the extent of growth we can get from that while we continue, and of course, the palbociclib and when it launches, that compared to the LOEs, plus the growth we can get out of emerging markets. It's a very good question. We feel that our strategy is the right one. We will continue to be challenged on revenue growth, but we see that we can manage through this cycle through those products I just mentioned. Behind that, we see a wave of very exciting products coming as we get through these LOEs. On GEP, I would ask John to comment. Okay, so thanks for the question, John, about sterile injectables. I think maybe the first point to make is that we actually have a very strong sterile injectable business globally, not only in the U.S. One of the features of the market overall is actually it is pretty concentrated, and there are about five markets globally that probably represent about 80% of the total profit pool in sterile injectables. The U.S. is obviously one of those markets, but the other markets would include China, Japan, France, and Italy. It is actually more concentrated than you would think. I think the answer to your question is we actually feel very confident about the underlying capabilities that we have, particularly in regulatory affairs, to be able to bring to market products in that portfolio, either products that we are developing organically or hopefully in the future, pending completion of the acquisition of InnoPharma, products that will come out of the pipeline of that company. Yeah, I would add, John, our established products or our international presence is probably the strongest of any American company, and certainly on the par with any of the Europeans. We have great strength, broadly speaking, in emerging markets. We are the number one multinational in China. I am very confident we have the talent, the distribution, and the know-how to fully leverage our products globally. Thank you for the question. Thanks, Ian. Next question please, operator. Your next question is from David Risinger from Morgan Stanley. Yes, thanks very much. I have two strategic questions and then one cost question. On the first two, number one, I was just wondering if you could provide feedback that you received on the final offer of £55 for AstraZeneca that you received from major investors. Second, are you considering other major tax re-domiciling transactions? Then with respect to net costs, obviously Pfizer continues to cut costs but also needs to reinvest. So beyond 2014, Frank, should we think about Pfizer being able to reduce net costs in terms of selling and general administrative and R&D, or at the end of this year, will you be at the point of essentially looking at flattish costs or rising costs going forward? Thank you. On AZ, you understand I can't make any forward-looking statements on AZ. I would like to put in context of, I believe information's already been reported. We were faced with the AZ management with an indication that they would not engage with us in a meaningful way unless we had an opening offer of approximately £59. Faced with that, we made what we thought was a full and final offer of £55 that fully valued the company and gave appropriate sharing of synergies to the appropriate shareholders. We have in general received good feedback from our shareholders that we demonstrated appropriate capital discipline. Are we looking at additional or other BD deals? Absolutely. Would a tax inversion be part of that value? Just as it was with AZ, it will be part of the value that we look at, but we also look for strengthening parts of our businesses as well as we do that. Fundamentally, what we look for is, will any BD create long-term value for our shareholders? That is the lens we look at it through, not necessarily through financial or strategic, but overall, is it value-creating against our cost of capital. Frank, on our net cost. Sure. Dave, just in terms of timing, when we close out the year, our end of January, early February call of 2015, we will close out Q4, and then I will give specific guidance by line item for 2015. You will get the specific numbers then. But I will answer your question now. In maybe macro context, what I have said this year, last few quarters is I think we have entered the late innings on cost reduction. We have got some pressure on R&D, as we have initiated some late-stage development programs that we have alluded to on the call. We have had some pressure on SI&A, due to launch costs for new products, which is a good problem to have. That said, in terms of managing our cost and expense structure, our expectation is that we will continuously improve as we go forward, and there are still opportunities to improve our cost structure, and we will capitalize on those opportunities, and we will drop as much of that to the bottom line as we can. It will be a balance between cost-benefit analysis and how we deploy our capital. Thanks, Frank. Next question, please. Your next question is from Colin Bristow from Bank of America. Thanks. A few product questions, if I may. On Xeljanz, can you just give us a little more color on the performance in the quarter. Looking forward, where are you in terms of getting the 10-milligram dose approved in RA. Given you intend to file the 5 and 10-milligram doses in psoriasis, what gives you confidence the FDA will feel comfortable with the 10-milligram dose in this setting. On the once-daily formulation, what are the timelines associated with this. Finally, on ertugliflozin, how do you see yourself competing, given it looks like you will be fourth to market, and historically, third or fourth entrants in these types of commoditized markets have struggled to gain meaningful share. Thanks. Geno, would you like to answer those questions, please. Sure. Let me start out with Xeljanz. We had a good quarter with Xeljanz. We grew by over 30% from the first quarter of this year. We think we have really hit an inflection point with the launch of the structured data that came out during the first quarter this year. We have some momentum, and we are feeling good about the performance in the U.S. With regard to the 10 milligram in RA, we think that that is going to take a while. It is going to take accumulation of additional safety data to satisfy the FDA, although we have 10-milligram registrations in other countries. We will just see how that plays out. With regard to psoriasis, we have a fairly large comprehensive database, over 3,600 patients in four significant trials in psoriasis. The results that we saw across the 5 and 10-milligram doses were consistent in those trials. It is obviously a different patient population with a different safety and efficacy profile overall. So, we're in the process now of assembling our dossier, and we'll file a dossier and have discussions with the agency on the appropriate benefit risk and the appropriate dosages for that indication. With regard to the once-a-day, we're continuing to make really good progress with the once-a-day program. As you may know, we're not needing to do any additional clinical work. We're doing some pharmacology and PK work. So we expect to be filing in the first half of 2015. With regard to ertugliflozin, we have, again, a comprehensive program in partnership with Merck, developing ertugliflozin as a single entity, a molecule or product, and also in combination with Januvia and metformin. We will have an overall strategy that involves both the single entity and combination products to make our way into that marketplace. Thank you, Geno. Of course, as you say, fourth in, but it depends upon the quality of the clinical trial and the results we get, and we believe that it is potentially a best-in-class molecule. Thank you. Thank you. Next question, please, operator. Your next question is from Marc Goodman from UBS. Geno, I was wondering if you could also give us an update on Xalkori and Inlyta, how those products are doing and the trends, and how much more you think we can get from those. Second question is an update on tanezumab, and third, China. Maybe you could talk about some of the trends in China. Are we still gaining market share over there? Are we adding sales reps? Are we moving into new cities? And how the Hisun JV has worked out. Thanks. Thank you, Mark. Great questions. Albert, in fact, has oncology under his responsibility, so he will answer the Xalkori and Inlyta questions, and then we'll go to Mikael for tanezumab, and then perhaps in general, perhaps John could answer the China question. Mark, in Inlyta, overall, very pleased with the performance of Inlyta. That was driven by very strong uptake in key new regions. In the quarter, we had $101 million of sales. That was up 44% operationally from last year. Very similar sentiments for Xalkori. We reported revenues of $108 million for the quarter. That was up 59%. Overall, the growth is driven as a result of we have increased testing for the ALK gene mutation. We reached 78%. Remind you that when we launched the product, it was 7%, so quite a strong uptake. And second reason it is because we have extended duration of therapy. So more patients are treated, and they are treated for longer. So very strong performance for both, and to expect to see this growth continue. Geno? No, Mikael on tanezumab. Yes. On tanezumab, thank you for the interest in that asset. As you may remember, tanezumab delivered some very strong efficacy signal in the previous studies, and represent potentially one of the few classes of new mechanisms that are recently proving substantial clinical benefit. We have been working with FDA in some very good constructive dialogues on what needs to be demonstrated in preclinical toxicology in order to submit a new package that could open up the potential for reinitiating large studies. This has been focused on preclinical studies on the peripheral nervous system. We have done some in-depth studies that continue to accumulate data. But so far, I am encouraged about what we have learned about the drug and the mechanism. We have stated that we will plan potentially to resubmit the data if all continue to come together in a positive way, no later than first part of 2015. Thank you. John, China. Overall, perhaps Frank has also got some numbers. We will see if we do a tag team there. All right. Thanks for the question, Mark. I think we're obviously very pleased with the performance of China this quarter. Overall, the total biopharmaceutical business in China showed operational growth of 27%. The GEP business within that grew at 37% in the quarter. You can see the product performances when you go to the schedules and the earnings release. Pretty much across the board, what we've seen is strong volume growth, driven by good operational performance in the marketplace. I think maybe just a comment on overall the strategy in China for our business, which clearly is very important to us. Overall, our strategy has a number of areas of focus. We're very focused on driving the legacy brands in China. Lipitor is probably a standout product for us, and we see a great fit with the priorities of the Chinese government to really better treat and manage patients with cardiovascular disease. A portfolio of Lipitor and Norvasc is a great fit in that regard. You mentioned Hisun, and certainly, we've had a strategy in China for a number of years now to really find ways of participating in the profitable segments of the fast-growing generic market. Our partnership with Hisun is really a great example of that. Overall, generic products account for around about 70% of the domestic market in China. Really, our partnership with Hisun places us extremely well to be able to maximize our contribution there with products that are a great fit with, again, the needs of the healthcare system. Thirdly, clearly, we are looking to bring innovative products to market, and the GIP and VOC businesses in China are looking to maximize the performance of innovative products in the market, as well as bring new products to market. Overarching all of that, the last thing I would just say is that we're clearly looking to find ways of collaborating very constructively with the Chinese government and with their goals for the development of the pharmaceutical industry capability in China. We've had a domestic manufacturing capacity in China for many years. We're also very engaged with working with the Ministry of Health to partner with them to better screen patients for cardiovascular disease in China as well. All of those things together really give you, hopefully, a flavor of what is driving the performance in China this quarter. Thank you, John. And then, Mark, I'll just run a few other numbers, and then I'll answer your question about reps. John mentioned 27% operational growth for the biopharmaceutical business. Total company for the quarter grew 24% operationally. Then John mentioned Lipitor and Norvasc. Lipitor in China grew 55% operationally quarter-over-quarter. Norvasc grew 30% quarter-over-quarter. Just some really, really strong performance. We have added a significant amount of reps in China in the first half of the year. Thank you. Next question, please, operator. Your next question is from Seamus Fernandez from Leerink. Well, thanks very much. I have three questions. The first one on palbociclib. Can you just update us on the timing of the potential interim look in PALOMA-2? The second question is really for Frank. Frank, maybe you can just confirm for us, as we look at the year-over-year comparisons, we do see the 2013 numbers broken out. But can you just confirm that this is not fully audited information that would include the balance sheet? Basically, my question is, historically, you've said that there won't be a look back at 2013 that would basically facilitate a split occurring sooner. But as I look at that data, if it were fully audited, it would seem like that might be a possibility. Then my last question for Ian. Would you ever consider a sale of the innovative businesses, should you be approached by another company? Basically, a willingness if it made sense for shareholders in terms of the value that might be provided to Pfizer in an eventual split. Thanks so much. Thank you, Seamus. Palbo interim. Yes. There is an interim review built into the design of our phase III trial, the PALOMA-2. The timing of that review is event-driven. So we cannot speculate when that review will exactly take place. As I said before, the primary completion of the study is expected at the end of 2015, so the final report is expected in 2016. Again, it is event-driven, so the actual date may vary a bit. Thank you. Frank. Yeah. Seamus, the way I think about this is no change from what I've said previously, which is if it's a public transaction, if we were to decide to do something from a separation perspective in the future, it would be three years of audited financials, and with year one being 2014. It would be prospectively three years of audited financials. So no change from what I've said previously. On your last question, Seamus, I see myself and the management team, and I'm sure the board sees themselves as custodians of shareholder value. And so we would have to evaluate any proposal under its merit and whether we believed it produces long-term superior returns to shareholders. Thanks, Ian. Next question please, operator. Your next question is from Geoff Holford, first from Jefferies. Hi. Thanks for taking my question. I have three for you. First off on Prevnar 13, would you just like to frame the opportunity for us again if you were to receive a positive recommendation from the ACIP in August, and is that contained within your guidance for this year? Secondly, could you just comment around your strategic thoughts on your consumer business? Given some of the recent consolidation within that industry, does this asset still make most sense within the Pfizer structure? Lastly, I wonder if you could just give us an up-to-date overview of your biosimilar programs and the potential timelines for any key assets. Thank you. Okay. On the consumer business, we see it a great store of value. We have an active both with acquired assets in that business. We have just launched Nexium 24HR. We have an active Rx to OTC switch strategy. We see it as a business that we want to be in. On Prevnar 13 adult, I will ask Albert to give you some idea of the opportunity. The early approval is included in this year's overall guidance. No material change. No major change. Right. Albert? Yes. I will tell you. This is a great opportunity, of course, globally, not only in U.S., because there is a very large adult target population, and there is a significant unmet need over there. There are 300 million adults of greater than 65 years of age in the world, and half of that is in U.S., EU, and Japan. 3.6, 3.7 million or so only U.S. adults are turning 65 each year. Also depending upon ACIP recommendation, we do believe that there could be even an additional catch-up opportunity for adults greater than 65 that have already received the old generation vaccine. We expect Prevnar 13 to be the leading adult vaccination given the strength of our data. Thank you. Biosimilars, John. Okay. Thanks again for the question, Geoff. Essentially we have five monoclonals in development. All of those products we expect to come to market in the 2017, 2018 timeframe, after the loss of exclusivity of the basic patents of those molecules. Just to give you a rundown of the five. We have trastuzumab, which is a biosimilar for Herceptin. That is already in phase III. Phase III was initiated earlier on this year. We have a biosimilar rituximab. That achieved our proof of concept in the first half of this year, and we expect to initiate phase III in the second half of 2014. We have a biosimilar infliximab. Phase I was completed, or we expect to complete at the end of this year. The next milestone there would again be the initiation of phase III in the second half of this year. We have biosimilar adalimumab. Phase I has been initiated and the next milestone would be a proof of concept readout from those phase I studies in mid this year. Then we have biosimilar bevacizumab. That is in preclinical and the next milestone for that program would be the initiation of phase I studies again this year. Thank you, John. Next question, please. Your next question is from Alex Arfaei from BMO Capital Markets. Good morning. Thank you for taking the questions. On palbo, when can we expect updated survival data from PALOMA-1? A higher-level R&D question, is there an opportunity for additional cost savings in your R&D structure? We've seen some of your peers simplify their structure and achieve significant savings without seemingly compromising productivity. Is that an option for Pfizer? Thank you. Would you like to do palbo please, Albert? Yes. On the overall survival data, we had an initial assessment, but it was done when we had only 37% of the total events. Now, there is a follow-up analysis, but it is scheduled following the accrual of additional events. But the time can take really long because the median overall survival of this population, it is approximately four years. So I really think that the final analysis likely will take long. Just a reminder, though, here, that the primary endpoint of the study was the progression-free survival. The overall survival was one of the secondary endpoints. Also, historically, agents on the market for ER-positive metastatic breast cancer have been approved all with PFS data as the primary endpoint. Thank you, Albert. On the R&D question, we feel that post the acquisition of Wyeth, we were very prudent in the way we dimensioned our R&D spend. I believe taking the combined spend of some 11- 11 billion total 11 billion down to $6.5 billion, $6.7 billion. I really can't comment on what other competitors have been doing, but certainly for a few years now, we have accelerated the refining of how much we spend in research, where we spend it. We have really good tools internally to look at the productivity by asset, and we invest behind strong signals with lots of quality gates. And we have separated out the decision between proof of concept and a decision to move forward into phase III between the research and the commercial business. So we've got strong internal drivers for return on capital. Will we continue to look at the best ways to invest in research? Of course. We've got a CTI initiative where we have major relationships with some 20 universities in the U.S. and I believe outside of the U.S., at least one, where we attempt to look to be efficient in the way we discover mechanisms of action. And of course, this is a major expense which we're constantly monitoring to make sure it's efficient. When you have great products like we do, and we're bringing them forward in the development of phase III, clearly there is pressure on the development costs for large trials such as we're doing with bococizumab or with palbociclib or with Mening B or with the Staph aureus vaccine. So clearly, there are pressures on our phase III spend, but we will continue to manage our overall R&D spend within our overall guidance and overall drive to continue to grow EPS. Thank you. Thanks, Ian. Next question, please. Your next question is from Andrew Baum from Citi. Hi, a couple of questions, please. First, we have obviously seen increased pressure by PBMs, together with lesser price discipline from the pharma industry, translating into negative pricing dynamics in respiratory and diabetes spaces. I would be interested in your view on the evolution of that into the specialty pharma segment. Then leading on from it, and I appreciate it is a different situation, but GSK recently announced the pricing for their GLP-1 at a 65% discount to the first in class. To what extent do you think aggressive pricing strategies like that may work for products where it is late to market? I guess I am thinking partly of Xeljanz, maybe not now, but at one point, does a pricing lever become a potential option for you? Secondly, building an oncology company around one drug is not easy, particularly if you have never had a strong legacy oncology business, as I think is the case with Pfizer. To what extent do you think you can build an oncology company without the acquisition of external talent and additional products through an M&A structure? Thank you. Well, undoubtedly, the PBMs are doing what they are constructed to do, which is to try and aggregate volume and achieve price discounts. This has been going on in the U.S. market for many years now, and I think will continue to occur. It really depends on the value that you bring to the marketplace. We are focused on that, and I think specialty products certainly, normally, if you define them as having close to or cures or having dramatic impact on the outcome of disease or with disease-modifying, have huge value. I believe that we will continue to see attention in there, but value is rewarded, innovation is rewarded. I really cannot comment on GSK pricing, and on how we price Xeljanz. We think it reflects both the composition of the value to the patient, the value in the marketplace. The most important thing in that market is, I think, is the efficacy and safety, and adoption is normally slow and driven by clinical data rather than pure pricing decisions. I would see pricing as being more for acute conditions or it is highly genericized, and it is not so much a sort of long-term serious disease. Gino, do you want to comment anything more on that? No, all that I would say is that, as I'm sure you're aware, Andrew, the pricing reimbursement process, particularly in the U.S., is very complex, very fragmented, and we're dealing with not only prices but discounting, rebating, step edits, tiering of formulary status. It's not as simple as saying the price should be higher or lower. It's really a strategic approach to the marketplace where you first and foremost have to build value for your product and then operate within the system that exists out there for maximum benefit. It's a day in and day out process. We think very strategically about how to price our products, how to discount our products, how to position our products on formularies, and I think we're going to continue to need to do that. Thank you, Geno. On oncology, I don't quite understand your comment about building it around one product. We have Xalkori in the market. We have Bosulif in the marketplace. We have Sutent in the marketplace. We see palbo as another product coming to market, and we have a very in-depth phase II oncology portfolio. Perhaps, Mikael, you want to just mention a little bit about how you see the oncology portfolio developing? Yeah. Thank you, Ian. On one hand, there is significant activities on expanding palbociclib into a variety of additional indications, and we have a handful of phase I, phase II studies exploring various segments of lung cancer, including genomic defined with collaborators, melanoma, and we're also looking into other novel indications. We have a very exciting smoothened inhibitor that we're broadly expanding into a variety of blood cancer in ongoing phase II studies, including AML and myelodysplastic diseases. Our gamma secretase inhibitor shows a very interesting clinical profile distinct from what we have seen previously reported, and we're moving that into triple negative breast cancers. In immuno-oncology, as you know, we are collaborating with Merck on combining 4-1BB with their PD-1, and that study will soon start. Early next year, we plan to bring into clinical studies an OX40 antibody followed by a PD-1. During the later part of 2015, we'll have a significant onco-immunology portfolio. Then, of course, we have a phase I ongoing with a follow on to Xalkori that shows really interesting profile. This was just a brief overview of some of the more interesting compounds. Building on what Ian said, we had breadth and depth in talents and pipeline here. Thank you for the question, Andrew. Next question, please. Your next question comes from Mark Schoenebaum from ISI Group. Hi. Thanks for fitting me in. Maybe just go back to some questions at the first half of the Q&A, if you would tolerate that. Number one, maybe for Ian. Ian, just speaking again about BD, could you perhaps, if possible, kind of prioritize therapeutic areas for us that you're interested in? I remember as recently as last summer, you had mentioned a few therapeutic areas you're most interested in. I was just understanding what your priorities are now. And then within that commentary, perhaps you could comment on strategically whether it would make sense to add a significant generics component to your current business. And then two more questions for Mikael, if I may. Mikael, could you update us on conversations you may have had with the regulators in the last several months around the PCSK9 class? I know Pfizer had spoken before about how you thought perhaps outcome trials might be necessary prior to registration. I was just wondering what your current thoughts are. Also just summarize your CAR T-cell program that you recently in-licensed and how it differs from the programs that are a little bit ahead. Thanks. Thank you, Mark. Well, on BD, clearly you want to do BD where you have a potential for not only organic growth but synergy. You'd like to look at BD where you already are strong in therapeutic areas, whether it's pain or oncology or vaccines, just to mention a few. Anything that would utilize a primary care field force would also be of interest to us. Adding a significant generic component, we would look at, as you say, we look at all alternatives. If it fits, if it makes sense, if we think we can leverage it in the emerging markets, if we see that there is organic growth we could produce from it, we would certainly consider it. We're open to a wide range of business development activities that we believe that we can acquire at a good value for our shareholders. Mikael, on the question of PCSK9, and then I think the CAR technologies. Mark, thank you for the interest in R&D programs. First on PCSK9, we have a very large clinical program that, of course, includes LDL lowering and a significant CV outcome study involving both patients with less than 100 and patients above 100 in cholesterol and includes primary and secondary prevention. We think actually it's the broadest program available, which could, of course, bring a real insight to patients, physicians, and to regulators. We think it's difficult to speculate if regulators will approve with LDL alone or wait for outcome studies. I think it depends how other studies that are reading out will deliver on the correlation between LDL lowering in a variety of CV patient groups to outcome. But I would underline that it's our view that what will really matter for the uptake in the marketplace, my dialogues with Geno, is very much that payers will look for outcome studies. We think we have a premier outcome program, and we think it will deliver timely to competitors. Concerning Cellectis, it's another Pfizer entry into the different modality of oncoimmunology. I'm pleased to share with you that Cellectis is the company that uses allogeneic CARs, which has the upside that it's not a complex procedure, but you could actually, in a more industrialized process, provide defined cellular treatment for thousands of patients. Cellectis has a unique TALEN technology that allows them to modify and optimize those cells with a precision that made it very attractive for us to make a deal. It's a significant collaboration, including more than 15 targets by Pfizer. Also, we are supporting some targets that Cellectis will develop, and we have first rights to refusal for those few Cellectis targets. It includes a number of technologies, such as giving the cells the best specificity, such as introducing signals that allow you to eliminate the cells, making the cells resistant to certain standard of care that the patient may be receiving, as well as enhancing the cores by possibly knocking out molecules such as the PD-1, creating super CARs. So I just gave you a flavor of what I think we and Cellectis will uniquely do in the industry, and it really combines our in-depth ability in engineering of biological with Cellectis genome editing. Thank you, Mikael. Operator, if we could please take our last question now. Your final question comes from Steve Scala from Cowen. Thank you very much. I have three questions. What is your level of confidence around the August 13 ACIP vote on Prevnar 13 in adults? Would you say, for instance, that you're highly confident in the vote? Secondly, regarding the Niraparib comment earlier in the call, were you suggesting that you believe you have some legal right to gain greater participation than just the 13% royalty? Then thirdly, I would think you have kept a close eye on developments at AstraZeneca, maybe involving evolution of the pipeline, and I'm wondering if you would share any observations. Thank you. AstraZeneca, I really don't want to make any comments. It's a very complicated legal situation with the UK Takeover Panel. I think it's best to remain silent. Sorry for that, Steve, but I'm sure you'll understand why. Perhaps, Doug, you could comment on Niraparib. Sure. As we indicated before, we did not see the data and believe we should have been able to see that data, and we're in the process of reviewing our contractual rights. I think what we're basically talking about is that we were in negotiations with them, and we believe we have contractual rights to see data that we didn't see. So we're reviewing our options. And ACIP. Albert. Yeah. I do not want to speculate what the ACIP decisions will be, but I am very optimistic. I think that the policy options that they proposed were both favorable, actually commercially neutral for us, because either it will be the only or it will be the first vaccine that will be administered. We think that will be a vote in this meeting, and we hope to be positive. Thank you. When you all have a chance to meet Albert, he is a very optimistic personality, so we appreciate that optimism. Thanks, Albert. Thanks, everybody, for your attention. Thanks for your time, everyone. Thank you. Ladies and gentlemen, this does conclude Pfizer's second quarter 2014 earnings conference call. Thank you for-