Earnings Call: Q4 2013

Jan 28, 2014

Summary

Q4 revenue was $13.6B, down 2% YoY, while adjusted EPS rose 22% to $0.56; 2013 guidance was met or exceeded. 2014 guidance incorporates LOE, alliance-revenue, and FX headwinds, alongside continued investment and ~$5B in planned buybacks.

Good day everyone, and welcome to Pfizer's fourth quarter 2013 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir. Thank you, operator. Good morning, and thanks for joining us today to review Pfizer's fourth quarter 2013 performance. I am joined today by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Albert Bourla, President of Vaccines, Oncology and Consumer; Mikael Dolsten, President of Worldwide Research and Development; 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 Fourth Quarter 2013, which is located in the Investor Presentations section in the lower right-hand corner of this page. Before we start, I would like to remind you that our discussion during this call will include forward-looking statements, and that actual results could differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ are discussed in Pfizer's 2012 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, January 28, 2014. With that, I will now turn the call over to Ian Read. Ian? Thank you, Chuck, and good morning, everyone. We finished 2013 with a solid fourth quarter and the overall financial performance for the year was strong. Looking at the quarter, we delivered good operational performance. Revenues in emerging markets grew 9%. Established products revenues grew 6%, oncology revenues grew 29%, and consumer health care grew 2%. We also had strong quarterly revenue performance operationally from key inline products such as Lyrica, which grew 14%, Celebrex, which grew 9%, and Enbrel outside of North America, which grew 8%. We continue to see positive progress with our recently launched products, Eliquis and Xeljanz. For Eliquis, in the last two quarters of 2013, we saw definitive momentum across key metrics resulting from the actions that we implemented together with our partners BMS. While we are starting from a small base, the trend we are seeing on sales growth for Pfizer is significant. Specifically, we saw a 124% increase in sales globally in the fourth quarter of 2013 compared to the third quarter, and TRx volume in the U.S. for Eliquis increased 68% from the third to the fourth quarter of 2013. For Xeljanz, we continue to see a steady increase in U.S. scripts with a 28% growth in TRx volume in the fourth quarter compared to the third quarter of 2013. Physician feedback continues to be positive. To date, nearly 3,500 HCPs have prescribed Xeljanz and nearly 80% are repeat prescribers. Turning to highlights for the year. We met or exceeded every element of our financial guidance. We drove operational growth in key products including Lyrica, Celebrex, and Enbrel outside of North America. Looking at how our business performed operationally, emerging markets reported solid single-digit growth of 6%, oncology grew 29%, and consumer health business grew 5%. We saw advancement in our pipeline across the portfolio. We achieved approval in the U.S. for Duavee for the treatment of moderate to severe vasomotor symptoms associated with menopause and prevention of post-menopausal osteoporosis. We expect to launch next month, and the FDA approved a prior approval supplement for Embeda extended release capsules. We initiated a phase III program which includes pivotal and outcome studies for bococizumab, the proposed generic name for our PCSK9 monoclonal antibody to lower LDL cholesterol. We initiated two phase III studies of palbociclib in advanced breast cancer and began enrolling patients in a third phase III study with the German Breast Group in patients with early breast cancer at a high risk of recurrence. We initiated a phase III program with our partner, Merck, for ertugliflozin, our SGLT2 inhibitor for the treatment of type 2 diabetes. We concluded a phase II study for our Staph Aureus vaccine, which showed encouraging signals that our vaccine elicits positive immune response. We expect to present this data at a medical conference this year. We completed a phase II-A proof of concept study with a novel PDE5 inhibitor in diabetic nephropathy, which showed an encouraging clinical profile warranting further expiration in phase II-B. We conducted phase I proof of concepts on biosimilars of rituximab and infliximab, which concluded with positive outcomes on the relevant study endpoints. For Xeljanz in Europe, where we received a negative opinion last year for our rheumatoid arthritis indication, we are continuing to pursue registration and are actively engaged in discussions with regulators and the development of additional data to support a refiling, although we continue to expect this will result in a several-year delay. We reduced our total adjusted cost of sales, SI&A, and R&D expenses on an operational basis by approximately 3%, which is about an $850 million reduction versus 2012 levels. We completed the separation of Zoetis and generated approximately $17.3 billion in after-tax value. We returned nearly $23 billion to shareholders in dividends and share repurchases. We put in place and are operating in our new commercial structure. Each business has strong leadership in place, and we believe that by having a sharper focus, we can better maximize the performance of all our businesses. In terms of financial transparency, we will provide a management view of profit and loss for each business, starting with the first quarter results this year. To sum up the year, we strengthened our innovative core by advancing key R&D programs, created significant value for our shareholders through disciplined capital allocation, and our commercial businesses performed well during a time of transition and difficult market dynamics. Three years ago, we laid out the priorities and strategies for how we would create value for each of our businesses and address R&D productivity challenges. Over the course of the last three years, our priorities and our strategies have not changed, and I believe are showing strong results. In 2014, you can expect us to remain intensely focused on maximizing the opportunities within each of our commercial businesses, continue to advance science, innovation, and our pipeline, and prudently deploying our capital. We see distinct opportunities for each of our commercial businesses this year. The global innovative pharma business will focus on accelerating the uptake trajectory of newly launched products Xeljanz and Eliquis, and driving growth from major inline brands like Lyrica, Enbrel outside of North America, Viagra in the U.S., and Chantix. The vaccines, oncology, consumer healthcare business, respectively, will capitalize on the Prevnar 13 franchise, concentrate on the recently launched oncology products, Xalkori, Inlyta, and Bosulif, and launch over-the-counter Nexium in Europe and in the U.S., provided it receives FDA approval. The global established pharma business will focus on maximizing key peri-LOE brands, namely Celebrex, Lyrica in the E.U., and Zyvox. It will also support continued growth for important legacy off-patented brands such as Lipitor and Norvasc in emerging markets, build on local partnerships like those with Mylan, Takeda, and Eisai, and advance growth opportunities within the sterile injectables and biosimilars portfolio. Building on the pipeline advances achieved in 2013, there are several potential milestones in 2014. We expect to report in the near future the top-line results for phase II study of palbociclib in patients with post-menopausal ER-positive advanced breast cancer. The results of the CAPITA trial for Prevnar 13 in adults aged 65 and older are expected to read out during this quarter, and if supportive, we expect to discuss the data with the Advisory Committee on Immunization Practices, ACIP, in the U.S. and other regulatory authorities. Along with our partner, Bristol-Myers Squibb, we are seeking approval for Eliquis VTE prevention in orthopedic patients in the U.S. and VTE treatment in the U.S. and Europe. We have two pivotal trials in the Xeljanz phase III oral psoriasis program that are anticipated to read out in the second quarter. For the Staph Aureus and Meningitis B vaccines, we anticipate sharing results from phase II studies at medical congresses this year while advancing the late-stage development of both assets. Last week, we announced the top-line phase III results for ALO-02, an investigational agent of oxycodone hydrochloride and naltrexone. It met the primary efficacy endpoints in patients with moderate to severe chronic low back pain, demonstrating a statistical significance compared to placebo. Yesterday, we announced top-line results for two phase III studies, BR.26 and ARCHER-1009, that evaluated dacomitinib in two different populations of previously treated patients with advanced non-small cell lung cancer. While we are disappointed that neither study met its primary endpoint, we will continue to evaluate the full data set from both trials to understand if molecularly defined subgroups of patients may derive benefit from dacomitinib. In order to continually develop a robust pipeline of highly differentiated molecules and vaccines that have the potential to be either first or best in class, such as the therapies I just noted, requires ongoing R&D investment. In 2014, we will continue to be prudent stewards for how we allocate capital and will balance the need for incremental R&D investment with the need for delivering overall shareholder return. As we've done in the past, we will continue to use business development opportunities as an enabler of strategies to create value for our shareholders. In summary, we start 2014 with a sound strategy and a strong business. We will build on our performance in 2013 by continuing to create a sustainable high-value pipeline and establishing strong commercial businesses. By executing on our new product launches, growing key inline products, delivering on the potential at all phases of the pipeline, and effectively deploying our capital, we will further strengthen all of our businesses. Our top priority and commitment is to develop and to bring to patients innovative medicines that meet their needs and that together with our actions, will generate and enhance shareholder value. Now I'll turn it over to Frank to take you through the details of the quarter and our financial guidance for 2014. Thanks, Ian. Good day, everyone. As always, the charts I'm reviewing today are included in our webcast. I want to remind everybody that as a result of the full disposition of Zoetis on June 24, 2013, the financial results of the Animal Health business are reported as a discontinued operation in the consolidated statements of income for full year 2013 and fourth quarter and full year 2012. Now, let's move on to the financials. Fourth quarter 2013 reported revenues were approximately $13.6 billion, which decreased 2% year-over-year and reflect operational growth of approximately 1%, driven mainly by the strong performance of Lyrica, Celebrex, Inlyta, and Xalkori globally, Enbrel outside of North America, and Xeljanz and Eliquis primarily in the U.S. These were more than offset by the unfavorable impact of foreign exchange of approximately $397 million or 3%, the expiration on October 31, 2013 of the collaboration agreement for Enbrel in North America, continued erosion for branded Lipitor in developed Europe and certain other developed markets, the ongoing expiration of the Spiriva collaboration in certain countries, other product losses of exclusivity in certain markets, and decreased government purchases of Prevnar in certain emerging markets, among other items. Adjusted diluted EPS of $0.56 increased 22%, primarily due to the operational decrease of adjusted SI&A and R&D expenses, an increase in other income due primarily to the sale of a portion of our in-licensed generic sterile injectables portfolio to Mylan, a lower effective tax rate on adjusted income, and substantially fewer weighted average shares outstanding due to our continued share repurchases and the impact of the Zoetis exchange offer. Reported diluted EPS was $0.39 compared with $0.85 in the year-ago quarter, driven by the significant negative impact of the non-recurrence of income from discontinued operations attributable to the animal health and nutrition businesses, including the gain on the sale of the nutrition business in the year-ago quarter. In addition to the previously mentioned factors, reported diluted EPS was favorably impacted by a lower effective tax rate, primarily due to favorable audit settlements, lower charges related to asset impairments and legal matters, and lower acquisition-related expenses. During the fourth quarter, biopharmaceutical revenues in the BRIC-MT markets increased 6% operationally, driven primarily by strong volume growth in China, especially for Lipitor. In these BRIC-MT markets, volume growth of 6% was partially offset by foreign exchange of 3% versus the year-ago quarter. Revenue from all emerging markets increased 9% operationally in the fourth quarter, with China growing approximately 19% operationally. If you exclude the portfolio of products whose rights were transferred to our joint venture in China with Hisun in the fourth quarter, we would have had operational revenue growth of 10% in our overall emerging markets business, 9% in the BRIC-MT markets, and 27% in China compared with the year-ago quarter. Foreign exchange negatively impacted fourth-quarter revenues by $397 million or 3% and positively impacted adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses in the aggregate by $251 million or 3%. As a result, foreign exchange negatively impacted fourth-quarter adjusted diluted EPS by approximately one cent. As you can see, in 2013, we met or exceeded all components of our financial guidance, including exceeding our adjusted diluted EPS guidance. Now I'd like to comment specifically on a few of the elements of our 2014 guidance. First, we expect adjusted revenues to be in the range of $49.2 billion-$51.2 billion. I want to point out that this range reflects an anticipated $3 billion negative impact due to declining alliance revenues specific to 2014, notably the Enbrel collaboration in North America and the ongoing expiration of the Spiriva collaboration in the U.S. and other developed markets, and the loss of exclusivity of certain products in several geographies, including Viagra in the EU, Japan, and Australia, Detrol in the U.S., and Aricept in major developed markets. I also want to point out that our 2014 adjusted revenue guidance also reflects an additional $1.4 billion negative impact due to the year-over-year difference in actual foreign exchange rates in mid-January of 2013 compared with mid-January of 2014, mainly driven by the movement of the yen against the US dollar. Had we applied the rates from mid-January of 2013 to our 2014 guidance, the adjusted revenue range would have been $1.4 billion higher. We expect cost of sales as a percentage of revenue to be in the range of 19%-20%, an increase from the 18% we recorded in 2013, driven by the significant decrease in alliance revenues. It's important to remember that these alliance revenues were recorded at 100% gross margin because there is no associated cost of sales. Consequently, the significant decrease in these revenues will also negatively impact our cost of sales as a percentage of revenue in 2014. We expect adjusted SI&A expenses to be in the range of $13.5 billion-$14.5 billion, which reflects spending in support of key product launches as well as the benefit of our continued cost reduction and productivity initiatives. We expect adjusted R&D expenses to be in the range of $6.4 billion-$6.9 billion to support phase III studies initiated in late 2013 and early 2014. We also expect adjusted other deductions to be approximately $100 million. I want to remind everyone that the recognition of profits from the Enbrel collaboration in North America has shifted from alliance revenue to other income as we have moved to a royalty structure. We expect our tax rate on adjusted income to be approximately 27%. Finally, we expect adjusted diluted EPS to be in the range of $2.20-$2.30. This range includes anticipated share repurchases of approximately $5 billion this year, which will more than offset some expected dilution related to employee compensation programs. It is important to note that our 2014 adjusted diluted EPS guidance absorbs an $0.08 negative impact resulting from the previously mentioned difference in actual foreign exchange rates for mid-January 2013 compared with mid-January 2014. As always, we will continue to monitor foreign exchange fluctuations, and we will update the potential impact, if any, on our 2014 expectations. Moving on to key takeaways. We achieved or exceeded all elements of our full year 2013 financial guidance in a continuing challenging environment. In 2013, we completed the separation of our Animal Health business and created a new commercial structure that we successfully implemented at the beginning of this year. We provided full year 2014 financial guidance, which reflects the negative impact of $3 billion due to declining alliance revenues and expected product losses of exclusivity. In addition, our guidance for adjusted R&D expenses reflects our investment in several phase III studies initiated in late 2013 and early 2014. We will continue to mitigate the impact of product losses of exclusivity and declining alliance revenue with growth from certain other products, as well as expense discipline and share repurchases. We continued to create shareholder value through prudent capital allocation. In 2013, we repurchased $16.3 billion or 563 million shares. Overall, in 2013, we returned almost $23 billion to shareholders through dividends and share repurchases. Over the past three years, we have returned almost $53 billion to shareholders through dividends and share repurchases. In 2014, we expect to repurchase approximately $5 billion of our common stock. Finally, we remain committed to delivering attractive shareholder returns in 2014 and beyond. With that, I will turn it back to Chuck. Thanks, Frank and Ian as well. With that, operator, if we could please hold for questions. Ladies and gentlemen, to ask a question, please press star, then the number 1 on your telephone keypad. Your first question comes from Tim Anderson from Sanford Bernstein. Thank you. A couple of questions, please. You've no doubt seen various analyst reports predicting what the financials for the three divisions will look like, and I know you're planning on providing those details on your Q1 call, but can you give us your preliminary thoughts on what you've seen thus far from the street? Do you think we'll end up being surprised by how the numbers fall out between the different divisions, or do you think the analyses you've seen look reasonable? On palbociclib, any updated perspective on the likelihood of being able to file on the final phase II results? I know that day is approaching. I would imagine you've already had some discussions with the agency or at least at a minimum, have some thoughts on the matter. Okay. Thank you, Tim. I'll ask Frank to answer the question that you posed on the financial divisions and when you'll see the results. Then I would ask Albert Bourla to comment on palbo. Tim, clearly we've looked at several models that have been put together relative to what the new businesses will look like. I think the rhythm of those numbers is directionally correct, is how I would describe it. Obviously, we'll come out with our own numbers for our first quarter 2014 results. I think directionally correct is how I would describe it, and I don't expect what we will publish will create any big surprises. Thank you, Frank. Tim, on palbo, as you alluded, our discussions with FDA are productive, and they are ongoing. This is particularly true given the breakthrough therapy designation we have received from them. Now, these discussions will continue after the phase II analysis becomes available. Therefore, the exact regulatory path forward has not yet been determined. Now, having said that, we can envision a scenario where, depending upon the strength of the final phase II data, there may be a pathway to file with the FDA based upon these phase II results. However, as you know, the acceptance of any filing is ultimately an FDA decision. Thank you, Albert. Thanks, Albert. Next question please, operator. The next question comes from Greg Gilbert from Bank of America. Thanks. Just sticking with the palbo theme. Could you comment on the competitive landscape in light of Novartis and Lilly's progress and what differentiation you could speak to at this early stage? For Frank, can you put a little more meat on the bones on the gross margin commentary? What are the drivers for lower gross margin in 2014, and whether those items are trends or blips? Thank you. Albert, palbo again. Yes. As you are aware, there is very limited information in the public domain on these compounds from this company, so it is really difficult to differentiate palbo at this point until we see some more clinical efficacy and safety data from them. On palbo, on the contrary, we have seen data, and we are encouraged by the magnitude of the clinical activity we have seen in our patient population. We are really looking forward to our final phase II results. Thank you. Frank? Yeah. Greg, on the gross margin, let me walk through this, and I am going to bridge this because I think it will be helpful. Let me run the numbers first. We printed 18% for the full year 2013. We are providing guidance for next year of 19%-20%. Now let me build a bridge. If we remove foreign exchange, the positive impact foreign exchange had last year on cost of sales, because it lowered cost of sales, that 18% becomes 18.5%. So 18% to 18.5%. Then, if you did the accounting for Enbrel in 2013, the way we are going to do the accounting for it in 2014, which is don't show it as alliance revenues, but show it as royalties, that 18.5% would become 19%. Now 18% became 19%, and that 19%-20% in 2014 is really a result of the other alliance revenue declines, primarily Spiriva, and some of the product LOEs. One key point to make here is the big decline here in alliance revenues is in 2014. That is the way to think about the rhythm of the numbers. Thanks, Frank. Next question please, operator. The next question comes from Mark Schoenebaum from ISI Group. Hey, guys. Thanks. Love taking the question. Also, congratulations on great P&L management in 2014. I know a lot of people- Thank you. were nervous about the alliance revenue lines and everything, so well done. I just wanted to ask a question that you probably get a lot, but I thought I'd ask it on the call. And that is there a scenario that you can envision, Frank or Ian, where you might sell your established products unit or at least your generics unit in some kind of tax-advantaged way prior to 2017? The only other question I had, if I might, is if my calculations are correct, R&D plus SG&A are crept up a little bit as a percentage of revenue at the midpoint versus 2013. I was just wondering, I know you're not going to give guidance beyond 2014, but in general, are you comfortable with where our analyst models are or should we expect that trend to continue, or is that a 2014 blip? Thanks a lot. Thank you. I think on the R&D, our R&D spend has been responsive to late phase III assets that we have high confidence in and want to invest in. That's basically where the flex is. You would expect us to fund the phase III assets to the extent we see great opportunity for them, and we will continue to do that, but we will continue to manage our overall P&L as we do that. On the potential sale of our established products business, we are managing all three businesses to create value for the company. I think the immediate focus of this is to get these businesses, with very strong management teams, which they have, to focus on the different ways of delivering value and to drive value for Pfizer shareholders. There are also several data requirements which restrict our ability to enter into any transaction, even assume if we wanted to at this stage, and I'll ask Frank to talk about that. Yes. Mark, it's a lengthy answer, but let me try to rip through this, which is, it depends on the type of transaction. If it's a public transaction, so what's a public transaction? A partial spin, a complete spin, a reverse Morris trust, a partial IPO, a partial IPO followed by a spin or a split, 3 years of audited financials are required. That's a requirement. If it's a private transaction, a partial sale of the business, a complete sale of the business, the formation of a joint venture where we have a minority interest or where we have a majority interest, no audited financials are required. However, a significance test is required, the results of which may require audited financials. Let me rip through the significance test. There's 3 tests that make up the significance test. There's an asset test, an income test, and an investment test. And basically, it's the target's results for each of those tests as a percentage of the acquirers results. So think about income would be the target's income as a percentage of the acquirers income. The way the results work or the test work is if all 3 tests are less than 20%, no audited financials are required. If any one test is greater than 20% and lower than 40%, between 20% and 40%, one year of audited financials is required. Between 40% and 50%, any one test, 2 years of audited financials. And any one test greater than 50%, 2 years of audited balance sheets, 3 years of audited P&Ls, cash flows, other comprehensive income, and shareholders' equity statements. So that's basically what's required and why it's required. That's the summary. Thank you, Frank. As you can see, Mark, we have thought a lot about this issue, and I would say that we want to create optionality, and the best way to create optionality is having strong results and transparency on these results over the next few years, and that's what we're focused on. Thank you. Thanks, Ian. Thanks, Frank, for the detail there. Next question, operator. Your next question comes from Jami Rubin from Goldman Sachs. Thank you. Just to follow up on that. Ian, if you could talk about the value business, which is what I think we're all focused on here, the emerging markets and established products business. That is a huge part of the overall Pfizer story. While we appreciate that you are going to focus on driving value of each of these businesses, maybe you could talk about how you think about the margin and growth potential of this business. What are the true durable earnings performance that you see from this business? From what we see, the growth of established is really just coming from shifting products that go generic into that business. The emerging markets piece is obviously very difficult to predict. Maybe if you can sort of provide your view on how you see this business as a standalone performing over the next three years or so. Just as a follow-up to the breakup scenario, Frank, you said three years of financial audit and information is required. If we are first starting to get the data in the first quarter of this year, does that then mean that the earliest you could contemplate a full breakup would be end of 2016? Thanks. Thank you, Jami. Well, obviously, as I said the Established Products business is not a homogeneous business. It's a heterogeneous business with many different opportunities. We have very strong management teams in all our businesses. So I am going to ask John Young to answer your good questions over how we will manage the established business for growth. On the last point, I think, yes, we are indicating that we would have three years of financials by the end of 2016. Okay. So thanks for the question, Jami. Maybe just to say a little bit about what this business is. I think, certainly we believe that this is not only a very large business, to your point about its contribution to Pfizer overall, but actually a very attractive, a very diverse, and a very profitable business with actually some unique opportunities across different portfolios and geographies. So let me just walk you through a little bit what this business really comprises. Broadly, we think of it as in four buckets. There is a peri-LOE business in developed markets that include some of the major brands that currently are pre-LOE, such as Celebrex, Zyvox, Lyrica in the EU. Certainly, we are going to be very focused in that segment on maximizing the profitability of those brands, both sides of the LOE spectrum, and leveraging some of the capability from EP that we think has really done a pretty good job with some of the recent LOEs, such as Lipitor, compared to market proxies. The second segment of the business is really a legacy EP business that comprises mature off-patent products in developed markets. That business is declining, but we are very focused on maximizing profitability through targeted investments in certain brands in that portfolio that present opportunities for growth. The third piece of the business is really what comprises probably a little more than 70% of the emerging market business today, and that business is growing pretty strongly. You have seen our results from the fourth quarter for the emerging market business overall. We believe that portfolio, and actually the fit of the mature products in the global established pharma portfolio, is a great fit actually for a lot of the healthcare needs that we see in some of the key emerging markets, such as China and Brazil and Mexico. That is growing today, and we envisage that that will continue to grow in the future. The last component of this business really is what we think of as growth opportunities. Now, some of those growth opportunities will be medium-term growth opportunities, such as the biosimilar portfolio. We think we have one of the leading biosimilar portfolios in the industry with five assets in different stages of development. But we actually have a number of other opportunities, too, through areas of growth, such as some of the partnerships that you are already aware of with Teuto, Hisun, Mylan, all of which we are very pleased with and performing well. And we are going to be very active in looking for additional partnerships in targeted markets where we think there is an opportunity to add shareholder value. Opportunities for continued growth with sterile injectables, and some targeted opportunities in certain markets for some reformulated branded generic products as well. I think probably the last point to make is this is really not a commodity generic business. In fact, less than 10% of our revenues would come from what you traditionally think of as being a generic business. So there is no doubt that we will see some pressure on revenues over the next few years, driven by some of the LOEs that everyone is well aware of from some of those big peri-LOE brands. But actually, this is a business where we believe in the medium term that it will plateau, and we believe that we can then have a number of significant opportunities for growth with this business in the medium to longer term. Thank you, John. Frank, you want to make a comment? Just real quickly, I just want to punctuate what Ian said, which is three years prospective financials, as I have said previously. So that would be 2014, 2015, and 2016 financials. And then obviously the 2016 10-K wouldn't be done till the end of February of 2017. So optionality, if we decided to do so, would be sometime in 2017. Thanks, Frank. Operator, next question, please. Your next question comes from Chris Schott from JPMorgan. Great. Thanks very much. Just staying on the Established Products side. I recognize the near-term focus in that business unit is kind of working on the performance. But when you consider the long-term options for that business, I guess first of all, would you agree with the statement that this is the division where a larger merger could make the most sense for Pfizer? Following on to that, can you walk through the pros and cons of a larger merger for that division as you consider options relative to either running the business on your own or looking at tuck-in deals? My second question is, just as we're thinking about capital deployment, is there any changes in the way you're thinking about share repo versus higher dividend payout or other opportunities in light of the new business structure? Does that change at all of just that you want to have either more cash available as these business units look at their various options as you consider new structures, et cetera? Just anything we should be thinking of there. Thanks very much. Chris, I think on the established products business, our focus is the creation of value. We do have a quite impressive portfolio and a geographic presence across the emerging markets. Your question is, will further scale be useful? I think it depends very much on the opportunities that arrive, and we would have to be opportunistic about that. Clearly, if we can add broader portfolio and specific scale in specific countries, we would be interested in it, which is why we have been doing our JVs on a country-by-country basis. We would be open to other alternatives, as we always are, that will create shareholder value. But priori, we are going to focus right now on running that business, producing the value, and open to various BD alternatives to contribute to create more value. On the second question, on the capital structure, I think, as we have seen in the last three years, our capital structure and the way we manage our capital has been focused on ensuring we produce the best return for our shareholders. We continue to manage that mix, and I would ask Frank to make some more specific comments. Chris, I think the short answer is our priorities have not changed. Maybe I will embellish a little bit. Clearly, dividends, buybacks, continue to remain important parts of our capital allocation. Investing in the business, you see that in 2014 with our capital deployment for R&D, for launch cost and support of our new products. Obviously, business development remains a priority. The priorities have not changed. You look at what we did with our dividend in December, we increased the dividend from $0.96 to $1.04, an 8.3% increase. We just announced another $5 billion in repurchases of our shares. The priorities have not changed. They remain the same. I would just add to Frank's comment there, is I think, we see ourselves in a position of well-balanced with optionality and in many directions given our capital structure. Thank you, Frank. Thanks, Ian. Operator, next question, please. Your next question comes from Steve Scala from Cowen. Thank you. Two questions. First, I believe there is a pending court decision. Does your 2014 guidance bracket a scenario where generics to Celebrex launch in May of this year? Or do the guidance elements not consider the scenario? The second question is, I know FDA was aware of CAPITA's design very early on. But what discussions have you had with ACIP on the design of CAPITA, and are they comfortable that it did not compare Prevnar to Pneumovax? Thank you very much. Doug, do you want to comment on the Celebrex situation? Sure. Obviously, we have our reissue patent on Celebrex that takes us through December 2, 2015, and our trial to defend that patent is scheduled to commence on March 19 of this year. Frank, do you want to add anything to that? Yeah. That our guidance assumes we have a full year of Celebrex. Thank you. Albert, on discussions with ACIP. Yes. As you can imagine, once we have the results, we will determine the best approach to present the data to ACIP and request a recommendation. We have been in discussions with the CDC and members of ACIP to ensure their understanding of the protocol and the potential outcomes. So when they have the data, they can move quickly. The ACIP meets three times per year. I cannot speculate in which meeting they will make a vote. As regards your question for how would they compare it with Pneumovax, again, I cannot speculate on that. But if you look at current practice in immunocompromised adults, 18 to 19 years and older, there is a recommendation. ACIP has recommended routine use of Prevnar 13 administered in addition to Pneumovax. Thank you, Albert. Excellent. Next question from the operator. The next question comes from Alex Arfaei from BMO Capital Markets. Good morning. Thank you for taking the questions, and congratulations on the performance. I was wondering if you could provide us more color on the powering assumptions for CAPITA. Do you believe there is still enough residual disease among U.S. adults, given that Prevnar 13 has been available for four years and there's probably a significant herd effect? Finally, on palbo, is the phase II sufficiently powered to detect a statistically significant survival difference between the two arms? Thank you. Thank you for that question. I believe the CAPITA design was powered for three endpoints and would've been designed well aware of the herd effect. I'd ask Albert just to talk through the three endpoints of CAPITA. Really, the response of ACIP will depend on those endpoints, and that's why we have to wait for the trial to read out. But I believe it was a very well-designed trial, powered to achieve or to show the results if the product performs as we expect. On the phase II, Albert, could you discuss the powering vis-a-vis overall survival? Yes. As we said, CAPITA is a large, complex trial. We have 85,000 healthy volunteers, and the three endpoints are a primary endpoint to demonstrate the efficacy of the product in prevention of first episode of pneumococcal CAP, community-acquired pneumonia, of course, for vaccine type. The secondary endpoint, it is to demonstrate the same efficacy in the first episode on non-bacteremic, non-invasive CAP, and in invasive pneumococcal disease. As you said, the study is very well designed, taking into consideration everything. That study was a post-approval obligation with the FDA, so we have consulted with them for the protocol. Thank you. On the phase II, do you want to talk to that, Mikael, perhaps? I thought I'll just add one comment on the herd effect that Alex Arfaei asked about. Actually, in 2013, there's been some very useful publication from U.K. and U.S. that have studied the epidemiology of various pneumococcal strains. They have clearly shown that in the adult, and particularly the older adult population that is highly vulnerable to pneumococcal, there is a number of Prevnar 13 strains still occurring linked to disease. And actually, even Prevnar 7 strains are occurring. So it suggests that the older population is more prone to pick up those strains. Interestingly, some strains that are not causing disease in younger population can cause substantial disease in the older population, where we also see a substantially increased morbidity and also fatal outcomes. So we do believe that the recent data will favor the view of an existing unmet need in this population. As Albert Bourla alluded to, pending the readout of CAPITA, this would be the only available study of this size that would show an effect in this population. Thank you, Mikael. It's good questions and good to speculate. We'll know by the end of the quarter, and then we can discuss it in more detail. Albert, on the overall survival. Albert Bourla. Yes. Data for overall survival is event-driven, so therefore, it's difficult to predict when the final overall survival data will be complete. The study is well powered to catch any differences. We do anticipate preliminary overall survival data that could be presented at the medical conference in the first half of 2014, together with the other data. Thank you, Albert. Thanks, Albert. Next question please, operator. Your next question comes from John Boris from SunTrust. Thanks for taking the questions. I just have two. On Prevnar 13, you indicated that there are three times the ACIP meets. What is the earliest meeting, and have you asked the ACIP yet to be a part of the agenda of any one of those three meetings yet? Secondly, on palbociclib. If you look at your binding affinity for CDK4 and CDK6, most notably on cyclin D1, D2, for CDK4 it is 11 and 9, and cyclin D6 IC50 is 15, which suggests high degree of affinity, hence strongly correlated to efficacy. Is there any way you might be able to contrast that to the activity of the Novartis and Lilly compounds? The second part of that question on palbo is, there are some off-target effects that occur on greater than 30 other kinases. Has the FDA asked you to try and characterize any of those off-target effects on palbo? Thanks. Thank you, John. Prevnar 13 ACIP, I think there are three meetings, one in February, one in June, and one in October. I would find it doubtful we would make the February date. When we have the results, we will immediately engage with ACIP to see if they can review the results at the earliest point possible. One would expect their willingness to do that will depend on the results in many ways. Mikael, there was a comment on John's very scientific question there on palbo. Yeah, John. I am impressed with your detailed understanding of this kinase inhibitor. As you very well articulated, we have designed an inhibitor that would have potent activity against both kinases, which I do think is somewhat unique for palbociclib. All kinases have some off-target activities, but we do believe that the therapeutic window for palbociclib favors the on-target profile. If you look at the efficacy and tolerability we have seen so far, the main adverse events related to neutropenia that has been well manageable is very much compatible with on-target effect for these type of drugs. We do not really have enough detail on the competitor products to make any comparisons. Is that correct? Yeah. We tend not to comment on other products, and that is why I use the term that our inhibitors are well balanced and has a unique profile in that sense. I think at this stage of clinical development, as Albert very well alluded to, we need to understand more from the competitor products as they advance in development. Thank you. Thanks, Mikael. Our next question, please, operator. Your next question is from Vamil Divan from Credit Suisse. Yeah. Thanks for taking the questions. I have two on the pipeline for palbo. You started quite a few studies now outside of breast cancer, where I think most of the focus has been. Can you just talk at this point where you see palbo having the most potential outside of the lead breast cancer indication? Second on the PCSK9, just any comments there. You're going into phase III. Obviously, it's a large study, a lot of investment needed there. Given some of the changing guidelines, maybe less of an emphasis on LDL and HDL target levels, how do you see the value of a PCSK9 program, and would you consider maybe partnering that with someone, just given the amount that you would need to invest there? Thanks. Good questions. Palbo, Albert, outside of breast cancer, you may want to discuss a little bit about what we're doing there, and then Gino will do the PCSK9 reply. Yes. Vamil, expanding palbo beyond breast cancer is a top priority for us. Given the potential of this franchise, we are very focused on progressing in other tumor types, as melanoma, for example. There is an ongoing phase I-II study of palbo with Zelboraf, and this is conducted by the National Cancer Institute of France, and this is for BRAF mutations. Also, in addition, I'm sure you have seen a recent announcement. We are working with GSK to evaluate palbo with their MEK inhibitor in metastatic melanoma, this time without BRAF mutations. This trial should begin in the first half of the year of 2014. Now, if we look beyond melanoma, we are working with academic centers, including the Dana-Farber Cancer Institute, to evaluate palbo in non-small cell lung cancer. And we have numerous other collaborations and programs in other tumor types, including squamous non-small cell lung cancer and head and neck cancer. Thank you, Albert. Gino, PCSK9. Yeah, on the PCSK9, we've initiated our phase III program. It's a broad program, as you can imagine, with multiple lipid-lowering studies. And we've decided to go into two fairly large outcome studies as well, with the intent to provide the broadest base of data of any of the PCSK9 programs in the patient populations that we believe can benefit from this therapy. We believe that outcomes trials and the results of the outcome trials are going to determine the place for these agents in management of patients with cardiovascular risk factors and high cholesterol levels. And our programs are designed to read out in a similar timeframe of the competitive programs as well. So, we're excited about the program. We're off and running with our phase III program, and we're, at this point, going it alone. Thank you, Gino. Next question please, operator. Your next question comes from Andrew Baum from Citi. Morning. First on palbo, should I assume that in the absence of any significant OS benefit from the phase II, you would not file under accelerated approval? In addition, you made some comment about the manageability of the neutropenia. Should I assume that is still the case, i.e., the profile has not changed from the early patient experience? Finally, you retained the rights to both tremelimumab and your anti-CD40 together with use with vaccines. Do you have any vaccines close to entering clinical development in combination with either of these two assets? Thank you. Thank you, Andrew. Look, on palbo, I do not think we can assume anything on the path forward until we see the results, and then we will be in conversations with the FDA. As you say, overall survival is event driven and may take a longer time, but we will just have to wait for the results and have in-depth discussions with the FDA. Mikael, do you want to talk about the profile vis-à-vis neutropenia and also then discuss the tremelimumab and the CD40? Yeah. The type of profile we have reported, which is very well compatible with what you will see with this type of drug, has been very well manageable in the clinic, and seems to be much more tolerable than previous experience with the drugs used in solid tumors when it relates to hematological suppression. We feel very comfortable with the profile and look forward, as Ian alluded to see the final results. And clearly at this stage of development, it's progression-free survival that will be the dominant endpoint to look for. In the vaccines area, you're right, we retained use for tremelimumab. Particularly, I would like to underline that that antibody is part of the platform we are exploring together with unique prostate vaccine antigens and a very comprehensive delivery method of the vaccine to boost immune response. Our initial focus is on prostate cancer, and we aspire to be in human studies by 2015. And at that time point, you will actually see a number of Pfizer cancer immunotherapy approaches move forward based on a panel of different monoclonal antibodies. Thank you, Mikael. Thanks, Mikael. Next question, please, operator. Your next question comes from Tony Butler from Barclays. Thanks very much. Good morning. Just a brief question. As you late last year made references to splitting out the units into three different business units, you focused on oncology and vaccines, claiming that there was the need for laser-like focus on these areas because they clearly are growing substantially above the corporate rate. That's clearly understandable. You included consumer at the time, and as I seem to recall, it was either Frank or Ewien made the reference that it was because the manager of the consumer business would then be the manager of both. Now that Albert is head of that, does it not now make sense that consumer be split apart again because of this laser-like focus on vaccines and oncology? Thanks very much. Thanks, Tony. I think the structure is important, but not overriding. What's overriding is having really good leaders running the oncology and the vaccine business, having transparency on their results, having somebody good running consumer, and then having an overall president who has done tremendously good work in the established products and the value business and somebody who's a seasoned leader. I do not really think it's important vis-a-vis my small tweaks in the structure because of changes of leaders. But thank you for the question. Thank you. Next question please, operator. Your next question comes from Seamus Fernandez from Leerink. Thanks a lot. Thanks for the questions. Frank, thank you for the incredible detail on the P&L structures. That was great. Separately, you mentioned the Staph Aureus showing some preliminary evidence of efficacy. Can you just give us maybe a little bit of color as to what you were looking for in terms of the quality of the immune response? Should we anticipate some threshold of real evidence of opsonizing antibodies actually showing, since it's my understanding that that's what's necessary to really eradicate or fight the disease? Separately, as we think about some of the products in earlier stages of development, would you mind just maybe giving us a little bit of color as to the products in phase II outside of the products that were mentioned on the call today that might be particularly exciting, particularly as we think about the prospect for combinations in your cancer portfolio. Thanks a lot. Okay. Thank you. Really good questions. Michael, you're a popular man today. Thank you very much for your interest in Staph aureus vaccine. That is based on some very thorough science that we invested in over the last couple of years. We identified four different antigens, both polysaccharide and proteins that we have shown elicit a high level of antibodies in the age-relevant individuals. As you discussed, these induced antibodies will both induce what you call opsonization, clearance of the antibody by the immune system, but also they will interfere with the bacterial function, which is based on some unique science that we have done for this particular vaccine. We saw very nice levels of induced antibodies, rapid onset with really the profile you would like to see before you vaccinate individuals to go into a surgical environment where they may be threatened with difficult infection. I would like to underline that the antibodies cross-react with a large majority of Staph aureus strains, including the multi-resistant strains that can cause devastating outcome of hospitalization. We are very encouraged by the data. We have shared it with both European and U.S. regulators. We are now in dialogues around a phase II-B study that we will invest in to show event reduction of infection in a pre-surgical population. Concerning your interest in our phase II pipeline, I would like to underline that we have a rich pipeline with a lot of momentum behind the kind of near-term excitement around palbociclib and adult vaccine. Just a few highlights. We have started multiple phase II for our smoothened inhibitor in blood cancers and related blood disorders, an area that we are very excited about. We are also moving a gamma secretase inhibitor into triple-negative breast cancer, where we have seen some very interesting and favorable profiles so far. In the Xalkori space, we are now dosing patients with a follow-on drug that is targeting all known mutations. We think can have a very exciting profile. We have already moved one antibody drug conjugate into the clinic. We have several more that will move into the clinic this year. In inflammation immunology, we have readouts in this year of our best-in-class IL-6 antibody across numerous immune conditions, similar for our MAdCAM antibody and also for our small molecule dissociated glucocorticoid receptor. In vaccine, we also have noticed favorable phase I-B data with Clostridium difficile. We are moving forward with one of our formulations towards phase II initiation this year. Ian alluded briefly in his introductory remark to some extended work we are doing into renal diseases, where we have seen a positive phase II-A data of our novel PDE5 inhibitor. We also have moved a second drug, a CCR2/5 dual inhibitor, into diabetic nephropathy and diabetic macular edema, underlining the important opportunity, medical and commercial, we see in this disease. You may also noted some other highlights, including a dual-acting inhibitor of uric acid for gout therapy that we recently acquired through a licensing agreement with Kissei. I think you will continue to see great momentum through internal and external partnership in this area. Thank you for your interest. Thank you. On top of that, we do have the phase III tofacitinib and the Xeljanz data coming out and Meningitis B. I think it's a strong pipeline across all phases. Thank you, Mikael. Next question please, operator. Your next question comes from David Risinger from Morgan Stanley. Thanks very much. Frank, I appreciated all the detail that you provided. I just wanted to follow up, though. Some potential acquirers of the established products business have implied or suggested that Pfizer can indeed retroactively audit going backwards. Could you just sort of settle the debate? Could you talk about why Pfizer cannot retroactively audit going backwards? Just explain whether there's any gray area there. That would be great. Thanks so much. Sure. So, Dave, I mentioned before that three years audited financials, and I used the word prospective. The reason I used the word prospective was, if not prospective, then it would have to be some portion of retrospective. Remember, if you're doing something retrospectively, it's not just an income statement. It's also a balance sheet. It's a cash flow statement. These are businesses that in their new construct, didn't exist previously to 2014. It's the complexity involved in their not existing and the full suite of financial statements required, which is why I said prospectively. Thanks, Frank. Our last question please, operator. Your final question comes from Damian Conover from Morningstar. Great. Thanks for taking the questions. Just two quick questions. First on Eliquis. The Lancet in December published a meta-analysis that looked at the different anticoagulants and really showed little differentiation among them, obviously better than warfarin. But wanted to get your sense of the marketing effort and if you're finding ways to market Eliquis and get a better response over Xarelto and Pradaxa. Secondly, just a question on the potential breakup of the company. If you look forward to patent losses beyond the breakup, just try to get an understanding of how assets might stay within companies or shift companies. For example, with Lyrica, I think the patent loss is 2019. How would something like that, would that stay with the branded company or would it shift to the established company? Just trying to get a sense of how that strategy might play out. Thanks. Thank you. I'll take that second question first and then ask Gino Germano to comment on the differentiation and the confidence one can have in meta-analysis and compared to randomized prospective trials. Look, I think the way you see we've set up our divisions now and the sort of transfer of assets is probably similar to what we would do if there was a separation, but it would depend upon what type of separation it was. Clearly you'd have to operate to maximize the value initially to Pfizer's shareholders at that time. Then there would be commercial considerations on how you ensure that continuing LOEs get well managed by an organization that is capable to maximize it. I think your question is a little hypothetical at this time without knowing exactly how we would, if we do any type of breakup or separation. Whether it would be selling to another company or a spin, that would clearly change the nature of the transactions, et cetera. In all cases, we'd be focused on doing what was right for our shareholders and ensuring maximum value. Gino, do you want to add any comments on- Yeah, just to comment on our data sets. Our Eliquis data set is really an outstanding data set, a randomized prospective controlled clinical trial demonstrating superiority across three important efficacy and safety endpoints is an extremely strong database. Frankly, having randomized trials with those results is the strongest form of evidence that we could possibly have. What we're doing with that's really helping us in a competitive field, is taking it to, frankly, the clinicians that can understand and appreciate the data the best, and that's the specialists, the cardiologists. We've increased substantially our medical education, our focus on the cardiologists, and as a result, we've seen a nice response. In fact, we use as a leading indicator new-to-brand prescriptions, and we're watching new to brand prescriptions. This is prescriptions where the patient is getting a new brand. Across all of the business, we are at now over 25%, and among cardiologists, we are about 30%. We have surpassed Pradaxa, and we are growing at a more rapid rate than Xarelto. We think we have got some good momentum going here, and it is on the back of the excellent data set that we have. Thank you. Thank you, and thank you this morning for everyone's attention. Thanks. So long, everybody. Thank you. Ladies and gentlemen, this concludes Pfizer's fourth quarter 2013 earnings conference call. Thank you for participating. You may now disconnect.