Earnings Call: Q2 2013

Jul 30, 2013

Summary

Q2 revenue fell 7% YoY and adjusted EPS declined 5%, with exclusivity losses and FX partly offset by growth in oncology, consumer and China. Zoetis was fully separated; full-year adjusted guidance was reaffirmed, while emerging-market growth expectations were reduced.

Good day, everyone, and welcome to Pfizer's second 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. Good morning, and thank you for joining us today to review Pfizer's second quarter 2013 performance. I am joined today as usual by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Olivier Brandicourt, President and General Manager of Emerging Markets and Established Products; Mikael Dolsten, President of Worldwide Research and Development; Geno Germano, President and General Manager of Specialty Care and Oncology; Amy Schulman, General Counsel and Business Unit Lead for our Consumer Business; and John Young, President and General Manager of Primary Care. The slides that will be presented on this call can be viewed on our homepage at pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Second Quarter 2013, which is located in the investor presentation section in the lower right-hand corner of this page. Before we start, I would like to remind you that our discussions during this call will include forward-looking statements, and that actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer's 2012 annual report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussions during this conference 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, July 30, 2013. Also, as we outlined in our earnings release, as a result of the full disposition of Zoetis, the financial results of the animal health business are now reported as a discontinued operation for the second quarter and year to date for both 2012 and 2013. With that, I will now turn the call over to Ian Read. Ian? Thank you, Chuck. I will begin with some comments on the quarter. We saw solid operational revenue growth in a number of areas. Within our innovative business, oncology grew 28%, driven by the uptake of new products, mostly Inlyta, Xalkori in several major markets. We saw strong performance from Lyrica in developed markets, which grew 14%, and Celebrex in the U.S., which grew by 13%. The consumer business grew 5% operationally, primarily due to strong global growth from Centrum. China had strong volume growth, most notably for Lipitor and Prevnar. Overall, total China revenues grew 14% operationally or 22% excluding the impact of product transfers in connection with forming our partnership with Hisun. We continue to expect that the second half of this year will be stronger than the first half for emerging markets. Although on a full-year basis, we now expect to see operational revenue growth of mid-single digits rather than high single digits. This is mainly due to a slowdown in growth in Brazil and Russia and the impact of cost containment measures in Colombia, Poland, Thailand, and Turkey. We completed the full separation of Zoetis into a standalone public company. The transactions related to the disposition of Zoetis generated approximately $17.2 billion of after-tax value for Pfizer shareholders. Our board of directors authorized a new $10 billion share repurchase program to be utilized over time. This new program is an addition to the $3.1 billion of authorization remaining under the company's current share repurchase program. Turning to our products and pipeline assets. The launches of both Eliquis and Xeljanz continue to progress in various markets around the world, and we are gaining market approvals for both Xeljanz and Eliquis in additional countries. We are encouraged with the potential for both of these therapies over time. For Eliquis, we are focused on gaining preferred formulary acceptance, continuing to obtain reimbursement, and building physician knowledge and comfort about the drug and its profile. With its unique profile in atrial fibrillation, as the only product with superiority versus warfarin in stroke prevention, major bleeding, and a proven mortality benefit, we are confident we will continue to see steady growth that will build over time. For Xeljanz, we are seeing good opportunities with patients who are switching from their current biologic therapy, as well as patients who are initiating Xeljanz therapy in a second-line setting. That is following methotrexate but before a biologic DMARD. In fact, almost half of our recent prescriptions are in the second-line setting, with the remainder being patients who have been on one or more biologic DMARDs and not achieving satisfactory results. In addition, we began our direct consumer campaign in the U.S. early in June and have seen a subsequent uptick in prescription volume. Last month, we announced that the FDA accepted for review our supplementary new drug application to include progression of structural damage in the Xeljanz label. As of today, Xeljanz will be commercially available in Japan, where it will be co-promoted by Pfizer and Takeda Pharmaceutical Company Limited. Overall, we remain encouraged by what we are seeing with physicians' and patients' experience so far. I would describe our progress as measured and steady, and we recognize it will continue to take time for rheumatologists to feel comfortable making a change. The launch is consistent with our expectations for new oral mechanisms. Turning to the status of Xeljanz in Europe, last week, we announced that the Committee for Medicinal Products for Human Use in the EU confirmed their prior opinion for the marketing authorization application for Xeljanz, although with a much closer vote. Given the novel mechanism of action for Xeljanz, the CHMP wanted to see more data, particularly around safety, to better understand the full profile of Xeljanz relative to other agents used in this patient population. As a result of the re-examination process, we addressed several of the questions and have more clarity on the remaining ones. We plan to work with the European Medicines Agency to determine what additional data will be needed in order to resubmit a marketing authorization application and anticipate this will result in several years' delay. Regarding the Xeljanz phase III psoriasis program, it continues to progress. However, given the large size and complexity of this data set, the analysis and reporting of the data have been more complicated than we anticipated. That said, there is no issue with the integrity of the data, and this delay is purely due to operational issues. As a result, we now expect to announce the top-line results from two of our four psoriasis ongoing studies by the end of the year. One of the studies expected to read out this year evaluates maintenance or efficacy when patients are withdrawn from and then retreated with Xeljanz therapy. The second study compares the efficacy and safety of Xeljanz to Enbrel and placebo. We anticipate reporting the top-line results from the two pivotal studies that will be part of our planned regulatory submission in the second quarter of next year, sorry. For Prevenar, sales this quarter were adversely impacted in the U.S. by the variability of CDC purchase patterns and a lower birth cohort in the U.S., as well as the end of a supplementary dose program in Asia. Regarding CAPiTA, we continue to accumulate events, and based on current event rates, we expect to complete the study this year. Given the size of the study, which is approximately 85,000 patients, once the number of events is achieved, it will still take several months to complete the necessary database validation and related activities prior to unblinding the results. Given where we are today, we expect that we should see top-line results in the first half of 2014. As we announced yesterday, we are moving forward with formally internally separating our commercial and management structure into innovative and value business segments, and we will integrate emerging markets fully into each of these segments. One of the innovative business segments will be led by Geno Germano, who will become Group President, Innovative Products. This business segment will generally include products that have exclusivity beyond 2015 across multiple therapeutic areas consisting of immunology and inflammation, including Enbrel, cardiovascular metabolic, neuroscience and pain, rare diseases, and women's and men's health. Xeljanz and Eliquis are examples of products in this business. The other innovative business segment will be led by Amy Schulman, who will become Group President of Vaccines, Oncology, and Consumer Healthcare. Each of these businesses will operate in a separate global business. Each has a different operating model with distinct specializations around science, talent, and market approach. The value product segment will be led by John Young. It will include the brands that have lost their exclusivity and generally the mature patent-protected products that are expected to lose exclusivity through 2015 in most markets. Some examples include Celebrex, Zyvox, Viagra outside of the U.S., and Lyrica in the EU. The value business will also include our biosimilars portfolio and current and future collaborations for broadening our off-patent portfolio, such as our existing partnerships with Mylan in Japan, Hisun in China, and Teuto in Brazil. While we have decided to integrate emerging markets into the innovative and value businesses, these markets will continue to play an important role in Pfizer's long-term success. We see the fastest-growing emerging markets becoming more aligned with the profile of developed markets. With these changing dynamics, we believe this is the right strategic move for us at this time. I have asked Olivier Brandicourt to lead the transition from the current emerging markets business into each of the three business segments. With Amy Schulman becoming the Group President for Vaccines, Oncology, and Consumer Healthcare, we are appointing Doug Lankler, currently our Chief Compliance and Risk Officer, to be Pfizer General Counsel. In addition, Rady Johnson, Senior Vice President, Associate General Counsel, will become the new Chief Compliance and Risk Officer. All of the leadership changes are effective January 1, 2014. We will be moving towards operating in the new commercial structure at the start of 2014, while we continue to manage our business and report our financial results in the existing structure for the balance of 2013. All of the current leaders will continue in their roles for the remainder of this year. Starting with the release of our financial results for the first quarter of 2014, we will provide greater transparency into the financial profile of each of the three new business segments. Our plan is to provide a 2014 baseline management view of profit and loss for each segment. We anticipate providing additional financial detail as we move forward within the new structure effective January 1, 2015. In summary I believe this new commercial structure will put us in a better position to assess the capabilities, progress, and opportunities of our innovative core and provide our value business dedicated resources required to further strengthen and globally position it to be a market leader. Now I will turn it over to Frank D'Amelio to take you through the details for the quarter. Thanks, Ian. Good day, everyone. As always, the charts I am reviewing today are included in our webcast. Before I begin, I want to point out that as a result of the full disposition of Zoetis on June 24, 2013, the financial results of the animal health business are now reported as a discontinued operation in the condensed consolidated statements of income for the second quarter and year to date for both 2012 and 2013. Now let's move on to the financials. Second quarter 2013 revenues of approximately $13 billion decreased 7% year-over-year, reflecting a 3% negative impact from foreign exchange and an operational decline of approximately 4%, driven mainly by the loss of exclusivity of several key products in certain geographies, most notably Lipitor in developed Europe in the second quarter of 2012 and multi-source generic competition for Lipitor in the U.S. beginning in late May 2012. The decline in Pfizer's share of revenues for the terms of the co-promotion agreements for Spiriva, which are in their final year in the U.S., Australia, Canada, and certain European countries, the timing of government purchases of Prevnar in various markets, and the transfer of certain product rights to our joint venture in China with Hisun in the first quarter. Adjusted diluted EPS of $0.56 decreased 5%, primarily due to the previously mentioned decrease in revenues and the impact of foreign exchange, which were partially offset by a lower effective tax rate and fewer diluted weighted average shares outstanding, primarily due to our ongoing share repurchase program. Reported diluted EPS was $1.98 compared with $0.43 in the year-ago quarter. This was mainly driven by the pre-tax gain of $10.5 billion associated with the full disposition of Zoetis and to a much lesser extent by the PROTONIX patent litigation settlement and lower legal charges, which were partially offset by the previously mentioned decrease in revenues and a 5.1 percentage point increase in the effective tax rate on reported income from continuing operations, mainly attributable to the tax liability associated with the previously mentioned PROTONIX patent litigation settlement. During the second quarter, biopharmaceutical revenues in the BRIC-MT markets declined 2% operationally, primarily due to the timing of government purchases of Enbrel in Brazil and Prevnar in Turkey and the transfer of certain product rights to the Pfizer-Hisun joint venture in the first quarter. These were partially offset by strong volume growth in China, especially for Lipitor and Prevnar. In these BRIC-MT markets, volume growth of 1% was more than offset by price reductions of 3% versus the year-ago quarter. In addition, foreign exchange negatively impacted BRIC-MT revenue by 1% in the second quarter of 2013. Revenue from all emerging markets increased 4% operationally in the second quarter. If you exclude the portfolio of products whose rights were transferred to our joint venture in China with Hisun, we would have had operational revenue growth of 5% in our emerging markets business and 22% in China, and BRIC-MT operational revenue would have been flat compared with the year-ago quarter. Operational biopharmaceutical revenue growth from all emerging markets business is expected to accelerate in the second half of the year to a high single-digit percentage. However, we now expect full-year operational revenue growth in our emerging markets business to be in the mid-single digits percentage due to continued slowing growth in some markets as pricing pressures continue to build and governments take additional steps to contain rising healthcare expenditures. As we've previously stated, because of the continued volatility in emerging markets, we anticipate our performance in that business to fluctuate from quarter to quarter. Foreign exchange negatively impacted second quarter revenues by 3% to $392 million and had a net positive impact of 3% or $228 million on the aggregate of adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses. As a result, foreign exchange negatively impacted second quarter adjusted diluted EPS by approximately $0.02 compared with the year-ago quarter. Now moving on to our 2013 financial guidance. We are reaffirming all components of our full-year 2013 adjusted financial guidance that we updated on June 24 to solely reflect the impact of the Zoetis exchange offer. I want to remind everyone that the weighted average shares outstanding used in the calculation of adjusted and reported diluted EPS reflects the net reduction of 405.1 million shares of Pfizer's outstanding common stock as a result of the exchange offer. Because the exchange offer was completed on June 24, we will recognize only a partial year benefit to our full-year 2013 adjusted and reported diluted EPS. As an additional reminder, when we completed the full disposition of Zoetis in June, we announced that the expected impact of the removal of the full-year 2013 financial contribution of Zoetis and the impact of the partial year benefit from the net reduction in shares of our outstanding common stock due to the exchange offer would result in a $0.04 decrease to the upper and lower ends of our projected range for 2013 adjusted diluted EPS. Today, we've also updated our 2013 reported diluted EPS guidance range to $3.07-$3.22 to reflect the gain associated with the full disposition of Zoetis and income from the previously mentioned litigation settlement. Now moving on to key takeaways. Second quarter results reflect the loss of exclusivity of certain products in various geographies, as well as the continued volatility in emerging markets. As I previously mentioned, we expect high single-digit operational revenue growth in emerging markets during the second half of 2013, and now expect mid-single digit growth for the full year. We continue to mitigate the earnings impact of product LOEs with both expense discipline and share repurchases. We completed the full disposition of Zoetis during the second quarter, and we accepted 405.1 million shares of Pfizer common stock in exchange for our remaining interest in Zoetis. We continue to expect the transaction to be accretive to reported and adjusted diluted EPS on a full-year basis in 2014. We are reaffirming all components of our 2013 adjusted financial guidance. We remain excited about the potential of our new product launches in mid to late-stage pipeline. We've announced our intention to implement the new commercial structure beginning in fiscal 2014, which we expect will better position Pfizer for long-term success, and we continue to create shareholder value through prudent capital allocation. In the second quarter, we repurchased approximately $3.3 billion of our common stock. To date, in 2013, we have repurchased approximately $8.7 billion or approximately 309 million shares and have $13.1 billion remaining under our current authorization. We continue to expect to repurchase in the mid-teens of billions of dollars of our common stock this year, despite the blackout period for share repurchases during and for 10 business days after the Zoetis exchange offer period. Finally, we remain committed to delivering attractive shareholder returns in 2013 and beyond. Now, I'll turn it back to Chuck. Thanks, Frank and Ian, for the update. Operator, can we please now poll for questions? Your first question comes from the line of Chris Schott from J.P. Morgan. Thanks very much for the questions. The first one was on the corporate structure. Can you just elaborate a little bit on why three divisions here as compared to simply the Innovative and Value Core franchises you have discussed in the past? As you are talking about that, is there a scenario where Pfizer could break itself into three companies at some point in the future? My second question was, just so I am clear, can you elaborate a little bit more on what type of P&L granularity we should be anticipating in 2014 and then maybe even looking forward to 2015 for these three operating divisions? Thank you. Thank you, Chris. Why the three rather than two? I think it basically is very strong operational reasons that the Innovative business under Geno has a collection of large disease areas that cut across both the primary care and specialty. They have challenges, both capital allocation and of the go-to-market model as we look to be more efficient in how we deliver the message and how we get to see primary care physicians. Whereas the oncology business and the vaccine business have a very distinct culture. They are smaller businesses that I want to make sure that did not get subsumed into a larger primary care business. They have specific customers. They have dedicated research facilities and research focus. I thought it was very important for those businesses to maintain their unique focus and extend it globally. That was the prime reason for maintaining or creating a structure where we had two Innovative businesses. On the details, I will turn it over to Frank. Chris, on the P&L granularity for 2014, and then you asked about beyond 2014. For 2014 fiscal year, we will show revenue for each of the three businesses. We will show direct cost, and we will show direct expenses. What we will do is on expenses that we do not allocate today, that we do not allocate come fiscal 2014, we will provide some qualitative directional statements so that you will all be able to model some good full-stream P&Ls. Come fiscal 2015, we will provide that same information, and then we will provide some additional balance sheet information as well. That is kind of the rhythm of how we are thinking about this. Thanks, Frank. Next question, please. Your next question comes from Greg Gilbert from Bank of America Merrill Lynch. Sure. On the separation, was curious, as you internally separate these businesses, are you considering any changes that could affect the overall tax structure at Pfizer? On Palbo, I have a couple of questions. By when will you know that you might not have data in time for San Antonio? I assume it's some time before the actual start of that conference, so let us know if there's a key date there. Lilly has a program that's much earlier in that class, but they talk about the ability of their product to be dosed continuously. Any comments on that subject of continuous dosing versus otherwise? Thanks. Greg, thank you. I'll ask Frank to comment on the tax issue. Sure. In terms of the tax structure, the creation of these three businesses in and of themselves does not impact in any material way the tax structure. But we're always doing tax planning to see what we can do to be more efficient from a tax perspective. And then if, Geno, could you respond to the questions on Palbo? Yeah. With regard to the timing on Palbo, we are continuing to accumulate events. Based on the rate of accumulation that we are seeing at this point, we think it is unlikely that we will be presenting data at San Antonio. I do not have a specific date to give you, but I think our best view at this point is it is unlikely that we will present at San Antonio. We still expect to accumulate the required events around the end of the year, but unlikely we will meet the San Antonio date. With regard to continuous dosing, I am really not sure and familiar with the Lilly program, so I cannot really comment on that. Thanks, Geno. Next question, please. Your next question comes from Tim Anderson from Sanford Bernstein. Thank you. A couple of questions on the split-up. Can you give us a very rough preliminary idea of how operating margins might compare across those different businesses? Could established products have the highest margins because those products tend to kick off a lot of cash and don't require a lot of support? Even directional guidance on this sort of thing would be very helpful because that's what folks I think are going to be interested in as we head into 2014. Separately, you've talked about needing three years of audited financials before you could potentially truly split up the company, if that's what you're ultimately destined to do. There's been some speculation that perhaps you could use historic data for this three-year requirement, which means you wouldn't have to wait until 2017 or so until you really carve it up. Is this a possibility, or should we really think of 2017 as being the earliest you could really split things up? Well, I'll ask Frank to answer the margin issue the best he can, and also your hypothetical question on data needed to split. Sure. Let me answer the second question first, which is on data requirements, if we were ever to decide to do something external to the company, and obviously we haven't decided anything yet. Which is, it requires three years of audited financials, and our current thinking is those would be prospective. The thought of trying to retrospectively create those, when we look at everything that would need to be done, would be extremely difficult. The current thinking is clearly that those would be prospective in terms of the three years of audited financials. So that's how I'd answer the second question. On the first question on operating margins, the way I think about this is we're going to provide 2014 guidance. We're going to start providing more granularity relative to these three businesses. So, Tim, for the time being, I really don't want to start projecting the margins on those businesses until we start showing them come 2014. Then we'll give lots more clarity when that time comes. Thanks, Frank. Next question, please, operator. The next question comes from Jami Rubin from Goldman Sachs. Thank you. Just to follow up on that last question. Frank, is there a difference in SEC requirements for a spin versus a split? A question for you, Ian, on M&A. You've done an amazing job returning cash to shareholders, which we've all strongly applauded. You also say that, with respect to M&A, that you would always use share buybacks as the case to beat, but with your stock at a 12 to 13 multiple, there really is no case to beat relative to a share buyback. I am wondering how you are thinking about M&A going forward, especially as it relates to the potential to split the company into multiple parts that might require more growth drivers or M&A activity. Thanks. Thank you. On the BD issues, we look at BD, not as a strategy, but as a way of creating shareholder value and strengthening parts of our franchises or portfolio. We always try to analyze it in the light of new capabilities or strengthening capabilities we already had. We have tended to talk in terms of bolt-ons, and you would have to think that bolt-ons would be, you would easily consider single digit in billions of bolt-on for this company. We have also said we will look at any type of acquisition, never say never to larger acquisitions if it made sense. Regarding when would we consider our share price to be at a level that BD would be more effective. Well, it depends on what deal we are looking at in BD, how it is priced, and where our expectations are of our multiple is going in the next two to three years. I do not think I can answer that in a hypothetical way, but more in a, well, we look at each case by case. We look at each deal. We are active in looking at deals. We compare it to what we think the value of buybacks are, and we take that decision on a deal-by-deal basis. Do you want to add anything to that, Frank? Yeah, let me just add quickly to that, and then I will answer the question about split versus spin, which is, and Jami, when we look at deals, remember, in terms of the case to beat being buybacks, it is also over what timeframe. Is it year one? Is it year two? Then how do we feel about the certainty of being able to achieve those EPS projections based on assumptions on synergies and the like? In my mind, to Ian's point, it is deal by deal, situational, and then over what timeframe do we see that being, I will call it accretive relative to the buybacks. Then in terms of the split versus the spin question, and is there any difference in required financials? The answer is no. Both scenarios require three years of audited financials. Operator, can we move to the next question, please? Your next question comes from Mark Schoenebaum from ISI Group. Hey, guys. Excuse me. Thank you very much for taking the question. Maybe I can build on Jamie's question around use of cash. I think in the past, I have heard you say things like your priorities are cancer vaccines and also general practitioner drugs. I wondered if you could clarify or confirm that. When you say you never say never to a larger deal, maybe you could just expand on that. Is that just a theoretical statement or is that something that we should be thinking about as a possible move for Pfizer? Under the new structure, have you decided will BD be centralized or will each unit have independent BD M&A functions within them? Maybe just a quick R&D if I can. Do you expect the NGF antibody to return to clinical development? Thank you. Okay. So you asked about BD by segment. Well, clearly, BD that builds on a capability that allows you to synergize your expense base are easier to get done than BD when you are going to a totally new space. So while we look at any good intellectual property that we could bring to patients and use our capabilities to bring to patients, they are easy to get done if you have got some inherent synergies. On a big deal, all I would say is, look, we are focused on creating value for shareholders, and you do the analysis and you look at the risks and you look at the uncertainties, and you make your decisions as you go forward. We have been, up to date, primarily focused on bolt-ons. Frank, do you want to talk about the BD? Certainly, I would say part of the rationale for creating these global businesses is that I now feel I can have management teams tasked on creating both organic and inorganic growth, and they're obviously going to have close ties and working with our BD organization. Frank, do you want to add to that? Sure. On the BD org structure question, the way we approach this is the BD resources are centralized. However, there's matrix from a client support perspective. When you look at any of the businesses, they'll have folks that are dedicated to them that literally from a business perspective, are on their team. Who they report to, from my perspective, is irrelevant. We matrix this in such a way that their reporting is transparent. They're living with those folks. They're co-located with those folks. They're working with those folks on a dedicated day-to-day basis. That's how we do it, quite frankly, for just about all of our enabling functions. John, you want to add something? Yeah. Thanks for the question about tanezumab, which is our NGF antibody. Just a quick update on that. On the 19th of July this year, we actually received notification from the FDA that the partial clinical hold for tanezumab has been lifted. You may know that the partial clinical hold had been placed on the development of all the NGF inhibitors back in December 2012 based on observation in some animal tox studies conducting NGF inhibitors in development through other manufacturers. The partial clinical hold was lifted on a commitment by Pfizer to submit non-clinical data before initiating dosing in clinical trials, and thereafter to limit any dosing duration until the additional non-clinical data has been submitted and reviewed by the FDA. So those requisite non-clinical data studies have already been started, and with the lifting of the partial clinical hold and on the assumption of a positive review of the non-clinical data by the FDA, we are preparing for a resumption of phase III clinical studies in 2014. Yeah. Thanks, John. Next question, please. Your next question comes from Alex Arfaei from BMO Capital Markets. Good morning, and thank you for taking the questions. First, on the R&D and perhaps M&A front, either for Ian or Geno, could you comment on the extent to which cancer immunotherapy is a priority for you? And then for Frank, you have obviously returned a lot of cash to shareholders in terms of buybacks, but any thoughts on a dividend increase given your relatively low payout ratio? Thank you. Mikael, do you want to take the R&D question? We have a broad effort on oncology and immunology, and we certainly have interest also in the cancer immunology area. On one hand, we have some vaccines in the cancer immunology area that are starting to move into pre-clinical development, but we also have some monoclonal antibodies. Let me mention the 4-1BB or CD137 checkpoint activating antibody that we now have in phase I studied in hematological and solid tumors and are following with quite some interest that antibody and other assets. Thank you, Mikael. Frank, do you want to- Dividend? Dividend. Sure. Let me just run the numbers on the dividend, and then I'll answer the question, which is when we announced the Wyeth acquisition back in 2009, we cut the dividend in half from $1.28 to $0.64. Since then, we've increased the dividend 9 to 10 to 11 to 12 to 13 from $0.64 to $0.72 to $0.80 to $0.88 to $0.96. 12.5%, 11%, 10%, and 9% dividend increases over the last four years. Our cadence is always at our December board meeting. We typically, Ian and I make a recommendation to the board relative to what we expect or what we want the dividend to be for the following year. Once the board approves that, we come out with a release to let everyone know what the new dividend will be. That's what we're expecting to do this year. And then in terms of just absolute dollar amounts, at the current dividend level, we will be paying more than $6 billion in cash to our shareholders this year. So big number. You mentioned the payout ratio. If you use the midpoint of our guidance and then use the $0.96, you get about 45%, which is roughly in line with the industry, maybe a couple of points below. But we have been closing that gap over the last couple of years with our increases. Thank you, Frank. Thanks, Frank. Next question, please. Your next question comes from Mark Goodman from BPS. Morning. First is PCSK9, the sub Q. I think we were supposed to hear about that in mid-year. I was just wondering, update there. Second, on Xeljanz, I know you are working on a once-daily version. I was curious if you could update us there. Then there were a couple of products in the U.S. that were very strong, Lyrica and Celebrex. Was there stocking that drove that, or can you help us there? Thanks. Okay, Mikael, do you want to talk about PCSK9 results? Then Gina will talk about Xeljanz, and John on Lyrica and Celebrex. Yeah. So thank you for your interest in PCSK9. We do believe there will be a limited number of entrants in this new drug class. We think it has potential to be a very important drug class with substantial clinical and commercial potential. Key here will be to, over time, demonstrate the important CV outcome value for the patients, physicians, and payers. Our own antibody is now fully enrolled in phase II-B and will soon complete that study. We have seen interim results, showing a potent antibody with a competitive profile. We will assemble all the data from the phase II-B, and look at the opportunity for subcutaneous delivery at various time intervals and make a decision at end of this year about the next step forward. Thank you, Michael. With regard to the Xeljanz once-a-day program, we do have a delayed release formulation that we're moving forward with. We've had dialogue with the FDA on the development plan, and we have determined that the registration package will be comprised primarily of pharmacokinetic data, PK data, without a requirement for a clinical phase III trial, which will accelerate the development of that program. We expect to be filing by early 2015. Okay. Mark, with regard to your question about the operational performance of Lyrica and Celebrex, essentially both products have seen strong operational growth in the quarter and year to date. We haven't seen any effect of stocking or changes in inventory levels in the marketplace. In fact, those have been very steady. The performance that you're seeing is really just a reflection of the combination of both price and volume in the U.S. and a value proposition that continues to resonate very well with physicians. Thanks, John. Next question, please. Your next question comes from David Risinger from Morgan Stanley. Yes, thanks very much. I have three questions on the new business structure and then a pipeline question. First, is it dilutive to create three business units and build the matrix and enabling functions? Second, could you discuss breaking up the sales forces in emerging markets and applying them to the new segments? Then third, regarding the three years of audited financials, I am assuming that is to affect tax-free exits. But would you consider divesting one of the units, for example, established products, before you have three years of audited financials, or is that just not realistic given the necessity to ensure tax-free transactions? Then, for Mikael, could you just tell us what the key pipeline disclosures are to watch through year-end, including whether you are going to provide any updates on your breakthrough therapy discussions with the FDA on palbociclib? Thank you. Okay. We do not believe this new structure will be dilutive to our present structure. In fact, we assume that there will be some modest savings as we go to that structure. You have to remember, we already have, in the developed markets, we already have a primary care, a specialty care, vaccines and oncology business, and then we have an emerging markets business in the rest of the world, and we are effectively collapsing most of the primary care and specialty business into one BU. So we do not believe that standing up those BUs are going to be dilutive. On the field force in emerging markets, it really depends country by country. But if you take a country like China, the vast majority of the field force will sit in the value business, and we will have internal service agreements to provide field force support for the innovative products. I do not see that at all as an operational issue. It is something we have been doing for quite some time, is sharing field forces between BUs. I would ask Frank to talk about the three years and the possibility of divestiture prior to that, and then we will go to Mikael. Sure. On the tax-free question that you asked, Dave, the way I think about this is taxes aside, if we would ever do anything externally, we have not decided, we would need to file a registration statement. Those registration statements require Three years of audited financials. That is the way I think about that. In terms of something prior to three years of audited financials, our current thinking is this is all about getting these three businesses to hum internally, to operate with excellence inside the company. Our current thinking is all around three years of prospective financials that would be auditable. David, thank you for your interest in our pipeline. I am very excited about the pipeline, both short-term and over the next couple of years. With a focus on this year, we already touched upon our phase II-B in PCSK9 that will get data readout during this second half of the year. Xeljanz, Ian has touched upon the two trials that will have a readout this year that will give us some first insights how Xeljanz is performing this new indication. We also have, I would like to say, in psoriasis, a topical study that now is running, which I think is a very interesting further exploration of tofacitinib. You heard about Prevnar 13 adult that we are expecting to complete during the later part of this year. Within the vaccines franchise, we are also now in the finalization of our reports from Staphylococcus aureus POC trials that we will share during the later part of this year. I am very encouraged by the profile I have seen so far when it comes to this unique technology that we are deploying for a very broad immune response to Staph aureus. In oncology, we have the two dacomitinib trials for second, third line, and third line or fourth line that we expect to have data this year that will be probably shared early next year. You heard earlier Ian comment on palbociclib that we expect to have the final pieces of the data coming together this year. We have previously had very good dialogues with FDA on the breakthrough designation. We expect a continuous, very close dialogue and our guidance how to best use those data to the benefit of patients. On top of that, in phase II, let me just point to a couple of intriguing areas. We have a best-in-class IL-6 antibody, very long-acting antibody with a good potency, and we expect readouts this fall in lupus and later next year in Crohn's. We have a readout in COPD related to a p38 inhibitor. We have our second biosimilar that have a readout this year, rituximab. We have earlier communicated positive data from our first biosimilar to HERCEPTIN. Then we are broadening our inflammation efforts to also involve the intersection of cardiovascular disease with a readout from a novel PDE5 inhibitor in chronic kidney disease. I do look forward to share with you the output from all of these studies in the next years to come. Excellent. Thank you, Mikael. Good comment. Our next question, please. Your next question comes from Tony Butler from Barclays Capital. Thank you very much. Some brief questions on the new structure, if I may. If we could go back to the notion of business development, and if we use an example, say, in Established Products with your partnership with the Brazilian company, Teuto. I believe there is an option to actually buy the entire company. The question is: Is that a decision by John Young and his group? They make a recommendation to you, Ian, and Frank, and the board. How does that capital actually get allocated if that were to occur? The second question is around R&D to the structures. This may seem silly, but is 100% of the R&D allocated to these three structures? I say this because if they were split apart, one could argue if all the R&D should go in one of the innovative areas versus one of the others, or not at all, or could be less than. Similarly, in the Established Products group with respect to R&D allocation, I could actually argue under the Pfizer umbrella, there's very little R&D, but yet I suspect if it were standalone, if you look at Teva and Mylan as examples, 6% of total, 6%-6.8% of total revenue is actually R&D. I'm just trying to understand when we see this in January, Frank, how does it actually look, if you could provide some additional granularity. Thanks again. On Teuto, what the global business units will do is they will be champions of projects and BD. But we need to maximize the use of BD across the Pfizer portfolio, so the decision is taken at the corporate level, and the BU leaders have to champion the deals. On the R&D, clearly there are parts of R&D that are specific to the BUs and parts that are general infrastructure underneath it, and I think we'll work through that as we go. But I'll ask Frank to comment on that. Tony, let me provide a little more granularity, see if this is helpful. Before when I talked about direct expenses to the new businesses, clearly the post-POC expenses that are in the business units today would continue to be in the business units tomorrow. Then if you look at, I'll call it the pre-POC spend that we have that resides in Mikael Dolsten's organization today, in what we call WRD, Worldwide Research and Development. That doesn't get allocated to the business units today. We're looking at how best to To guide you all relative to that spend. That's stuff that we're working our way through, and we'll work our way through that through the year and obviously give you guys updates as we go. But we're looking at how best to communicate that to you all so that you can model this appropriately, point one. Then you mentioned EP, and if I could give you a little bit more direction, the answer is, of course, I can. If you look at the overall R&D spend, the value business as a percentage of revenue will have a lower spend than innovative co businesses as a percentage of revenue. Once again, how we best direct and guide you all for next year is some of the sub-ledger detail that we're working our way through. Tony, this is part of one of the benefits I expect to get out of having global businesses with presidents who are champions. The R&D today that would probably go to established is more the type of R&D that is safety, registration, regulatory, some biosimilars, and then some work around special formulations and that type of work. John Young's role will be to look at that, and as you say, compare it to what he needs to do to drive growth and look at competitors and argue for capital allocation, if appropriate, into his R&D. This is the benefit you get out of this type of focus on businesses. Thanks, Ian. Next question, please. Your next question comes from Steve Scala from Cowen. Thank you. First on Xeljanz. Is the CHMP seeking longer-term safety data, or is there a potentially rare and/or serious issue that they are requiring clarification upon? Secondly is, CAPiTA's delay due to a lower than expected event rate, or is it due to some other reason? Then thirdly, on emerging markets, may we anticipate high single-digit growth will return in 2014 and beyond, or is this a business where mid-single digit growth is more likely? Thank you. Gina. Yeah, Steve. With regard to CHMP and Xeljanz, obviously, we're somewhat disappointed at the outcome following what was really a positive scientific advisory group meeting and a positive view from the rapporteurs this time around. Ultimately CHMP members, at least some of the CHMP members, a small majority, wanted to see additional safety data, and in particular, wanted to understand the full profile of tofacitinib with a new mechanism of action relative to other agents that are used in this patient population. So it's not entirely clear whether we're looking for longer-term data or a larger database. As you know, we continue to collect safety data. We have long-term extension trials. We have registries. We have a post-marketing study that we're kicking off from the U.S. registration. So, we have multiple ways, and then of course, we have the psoriasis and psoriatic arthritis programs. We have a number of mechanisms to generate additional safety data, and we'll obviously continue to do that. It's not entirely clear at the moment what we'll need to do to achieve a registration. We do anticipate we'll need to do some additional clinical work, and as Ian mentioned before, we think this could require several years of delay in Europe. So that's the best way I can characterize the situation there with the CHMP. With regard to CAPiTA, it's difficult to predict what the event rate is going to be. It's going to depend on the various dynamics like the severity of the flu seasons, the efficacy of the vaccine. So if it's a highly effective vaccine, then the only cases that you're accumulating are cases in the placebo group. It is difficult to predict, and we are becoming very close to the target number of events and hope to be able to present more clarity in the very near future. On EM, we've always said that EM will be volatile, and we'll see swings in quarter-on-quarter and even year-to-year. I think we'd all agree that secondly, that's where we're seeing the vast majority of volume growth is coming from in the foreseeable future as these economies continue to spend more on healthcare. The growth rates are going to fluctuate depending on how the volume is doing and what pricing pressures you're getting in the quarter. I would say it's really too early to tell or to reset expectations for where we think long-term growth in emerging markets are going to go. We'll look at it in our 2014 guidance. But overall, we continue to be very bullish on the underlying demand for healthcare in emerging markets. Okay. Thanks, Ian. Next question, please, operator. Your next question comes from Andrew Baum from Citi. Yeah, good afternoon. Couple of questions. First on the immunotherapy asset. You mentioned Mikael, the CD137. When do we get the first readout in NHL? Is that next year? On the same topic, before you divested tremelimumab to Astra, you maintained some rights. Perhaps you could outline what indications you have retained. Separately for Ian, one of your competitors is having some very visible issues in China. To what extent do you think that the ongoing investigations over fraud are going to impact pricing or demand in that market? Okay. Mikael? Yeah. We are just now running the phase I-B studies here with our 4-1BB. We think we have a really interesting antibody, and we have seen some encouraging early signs of activity here. I would expect as we finalize the phase I studies here, we will use conventional oncology conferences to report outcome. We also have behind it a couple of other antibodies, such as OX40 and GITR. You should see it as a second wave of checkpoint inhibitors trying to benefit from the early enthusiasm around the PD-1 space, but building on that and bringing the field further on. Tremelimumab, we did retain particular rights to use it for vaccines. I shared with you some enthusiasm about our cancer vaccines platform. I can inform you that it does include tremelimumab as one of the options for adjuvant effect on cancer vaccines. That was a really good way for us to plan when we did that retention. Thank you. On China, I cannot really comment on individual cases. I would say what we have seen in China is that as the government focuses on spending more on healthcare, they clearly want to be good buyers of value of pharmaceuticals. So we would expect to continue to have robust conversations and debates with them as we go forward as to the value of the innovation we bring. I think you will continue to see as they have been doing. They do price reviews of segments of the market, and they reset prices. Normally volume responds to different price points. So I think that will continue in China as we go forward. Thank you, Ian. Moving along to the next question, please. The next question comes from Seamus Fernandez from Leerink. Oh, thanks very much. Just a couple of questions here. First, can you talk a little bit about how you are going to be thinking about cost of goods and some of the overlapping dynamics there? Is this a situation where Pfizer might consider a Coke bottling or Lonza type structure over time? Should the units be split out, or how is that going to operate as we think about it? Separately, can you also talk a little bit about Europe and infrastructure there relative to the overall industry's profitability? One of your competitors commented on that, and I think that might be perhaps particularly relevant for Geno's business unit. Then finally, as it relates to the emerging markets, Ian, you mentioned specifically that you see the emerging markets, some of the larger emerging markets starting to operate more similarly to the developed markets. Can you just give us a little bit of a better sense in what regard that is? Is it in distribution, reimbursement? What is it specifically? Are we talking about more similar to the U.S. or more similar to Europe? Thanks. Thank you. On the cost of goods in terms of absorption, 50% of our plants are absorbed through the value business and 50% are absorbed through the innovative business. There are a limited number of plants that are specific to one business or the other. I would expect that internally, it is simply a cross-supply issue between the plants. If there was anything ever externally done, I think this is easily handled by supply agreements. Today, Pfizer purchases about 30% of its requirements from external suppliers. This is easily handled in the ordinary course of business. The next question was on- Europe and infrastructure. Europe and infrastructure. Look, the pricing squeeze that Europe has applied to the industry over the last few years, which has accelerated from low single digits to mid-single digits, is of course pushing companies to look at what their infrastructure is, how they deliver the educational messages to physicians and their investment in general. Part of our restructuring into the Innovative1, Innovative2, and the value business are response to that in the sense that we effectively are merging our primary care and our specialty BU into one. I expect in Europe you'll continue to see pharmaceutical companies look for more cost-efficient ways to deliver their message to physicians. On the EM issue, I think if you look at Turkey, you can see Turkey's gone to a full reimbursement model more like Europe. Out-of-pocket has now become less important in Turkey. The government is more influential. They tend to be more dominant in the way they make acquisitions of pharmaceuticals and their pricing requests. In sophistication, I talk really about the way the markets are beginning to be regulated in terms of compliance, in terms of the rules that are similar in Europe and the U.S. I just see these markets evolving, and also you're beginning to see more commonality in the requirements they ask for registration. That's really the sense of my comment about their evolving to looking more like mature markets. Thanks, Ian. Operator, if we could please take our last question. Your final question comes from Damien Conover from Morningstar. Great. Thanks for taking the question. I just had a question on the restructuring. I wanted to see how products would flow from the innovative pieces to the value piece post 2014, and whether or not there'd be any precedent set up for any sort of transfer of value that could be used if the entities actually fully separated. My second question on the breakup, was just had a question on the consumer health business. If I remember correctly, one of the driving reasons to have that business within the Pfizer umbrella is to help with any sort of Rx to OTC switches. Given that it's going in the vaccine and oncology bucket, I still wanted to know if that Rx to OTC switch was still a major driving force behind that business staying underneath the Pfizer umbrella. Thank you. Thank you, Damien. I think the movement of products between the businesses will continue as they have been in the last three years. As products that are in Innovative 1 go LOE, we will move them over to the Value business and they will be managed that way. In any hypothetical situation where the two businesses weren't in the same corporate shell, then you would make your decisions based on what's the best way to continue to commercialize those products at a later date. But that's really very early to speculate on. Amy, would you like to take the consumer? Sure. With respect to the pipeline that we have for Rx to OTC switches, we continue to feel very comfortable with the pipeline. It's robust and assuming regulatory approval, we will proceed with the Nexium launch in 2014. Then we have a number of other promising molecules in the pipeline, some of which we have talked about previously. Thank you, Amy. Thanks, Amy. And thank you everybody for your attention this morning. Thank you. Ladies and gentlemen, this does conclude the Pfizer second quarter 2013 earnings conference call. Thank you for participating. You may now disconnect.