Earnings Call: Q3 2012

Nov 1, 2012

Summary

Q3 revenue fell 16% YoY and adjusted EPS declined 12%, as Lipitor LOE and FX pressure outweighed cost reductions. FY guidance narrowed, while buybacks, emerging-market growth and prospective launches supported the outlook.

Good day, everyone, and welcome to Pfizer's third quarter 2012 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. Thanks, operator. Good morning, everyone, and thank you for joining us today to review Pfizer's third quarter 2012 performance. Today, I'm joined 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, who is joining us remotely due to the storm situation; Geno Germano, President and General Manager of Specialty Care and Oncology; Amy Schulman, General Counsel, President, and General Manager of Pfizer Nutrition; and John Young, President and General Manager of Primary Care. The slides that will be presented on this call can be viewed at pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Third Quarter 2012, located in the investor presentations section in the lower right-hand corner of this page. Before we start, I'd like to remind you that our discussions during this conference 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 2011 annual report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussion during this call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer's current report on Form 8-K, dated today, November 1st, 2012. In addition, we will offer some brief comments regarding our preparation and target timeline for the potential IPO of a minority stake in our animal health business, Zoetis. As I'm sure you'll understand, we are not going to be able to respond to questions on that subject in light of the quiet period imposed by securities laws. With that, I'll now turn the call over to Ian Read. Ian? Thank you, Chuck. During my remarks this morning, I will briefly discuss the quarter and touch on some noteworthy events that happened in the weeks. Overall, our performance remains in line with our full-year guidance. As we've discussed over the course of this year, our financial performance in the near term will continue to be impacted by the losses of exclusivity, notably Lipitor in all major developed countries. Year to date, we've absorbed approximately $5.5 billion in LOEs. I would note the most significant impact on revenues from LOEs will be in 2012, and this impact will decline significantly in subsequent years. To mitigate the impact to our earnings per share, we are producing growth from key in-lines, patented products including Lyrica and Celebrex globally and Viagra in the U.S. We are seeing growth in emerging markets, most notably in China, Mexico, and Russia. On a year-to-date basis, our emerging market business has delivered solid performance with 10% growth on an operational basis. We have been effectively managing our cost structure and using the strength of our balance sheet. For example, while revenue for the quarter declined 12% on an operational basis, our adjusted cost of sales, SI&A expenses, and R&D expenses in total decreased operationally by 8%. If you exclude the $250 million payment to AstraZeneca for the exclusive worldwide rights to the over-the-counter Nexium, they would have declined 11% operationally, bringing costs down in line with the revenue decline we saw this quarter. We continue to execute our share repurchase program. During the quarter, we repurchased $1.8 billion of common stock, and our year-to-date repurchases are almost $6 billion. The board has authorized an additional $10 billion in share repurchases to be utilized over time upon completion of the sale of Nutritionals to Nestlé, which we now anticipate in the next few months. A potential IPO for Animal Health remains on track, and depending on market conditions, we continue to expect the IPO to happen during the first half of 2013. As for our regular practice, I expect the board to set the dividend rate for 2013 at its meeting in December. Turning now to some recent noteworthy events. I remain confident in the quality of the assets and the progress I see in our pipeline. We have a robust set of potential high-value assets across our key therapeutic areas. They include some in early and mid stages for diabetes, pain, and cardiovascular diseases, vaccines for MenB, adolescents, and Staph Aureus, late stage oncology compounds, and recent advances for key pipeline assets. Concerning tofacitinib, we are looking forward to hearing from the FDA about our NDA on or before the upcoming PDUFA date this month. Tofa was discovered by Pfizer scientists in our labs in Groton, Connecticut, and if approved, will be the first new oral disease-modifying therapy for moderate to severe rheumatoid arthritis in more than 10 years. It has the potential to change the way healthcare providers treat RA. It would also be the first RA treatment in a new class of drugs known as Janus kinase or JAK inhibitors. If approved, it will be a first-in-class product that we believe will offer a compelling clinical profile and effective new treatment option for patients. Regarding Eliquis, the FDA has resumed its review of the Eliquis NDA and set a new action date of March 17, 2013. We and our alliance partners, Bristol Myers Squibb, remain confident in the therapeutic profile of Eliquis, and that we can receive FDA approval by the new PDUFA date. Turning to oncology, Xalkori just received conditional marketing authorization in the EU for previously treated ALK-positive advanced non-small cell lung cancer patients. A conditional marketing authorization in the EU is similar to accelerated approval for the United States. They are granted to medical products with positive benefit/risk assessment that addresses unmet medical needs and whose availability would result in a significant public health benefit. Pfizer will submit data to the EMA from the recently completed study, which met its primary endpoint in previously treated ALK-positive advanced non-small cell lung cancer patients. Following review of this data, the European Commission will consider converting the conditional marketing authorization to a full marketing authorization. Coming out of our consumer business, we're encouraged by positive news about multivitamins resulting from the Physicians' Health Study II conducted by investigators at Brigham and Women's Hospital in a teaching hospital of Harvard University. We are pleased that the study investigators chose Centrum Silver based on its quality and consistency, among other factors, for the duration of the 11-year study that tested the role of multivitamins in relation to long-term health benefits. I would note that Centrum is the sixth-largest OTC brand in the world, and Centrum Silver is the world's number one selling multivitamin for adults 50 and over. We have recently launched new products, Enbrel in Europe, Bosulif in the U.S., and we will soon launch Xalkori in Europe. I remain confident that we have a strong pipeline focused in the therapeutic areas where we have strengths and which can deliver our next wave of innovative products. I am pleased with how we are executing on decisions we have made to create meaningful incremental shareholder value through the potential Zoetis IPO and Nutrition sale. We are seeing good results from the actions we're taking to manage costs across the business. We continue to make shareholder-friendly capital allocation decisions. Finally, we are making decisions that we believe have the potential to drive future EPS growth. Now I'll turn it over to Frank. Thanks, Ian. Good day, everyone. As always, the charts I'm reviewing today are included in our webcast. I want to again remind you that the Nutrition business is presented as a discontinued operation in the consolidated statements of income for all periods presented. As you know, discontinued operations are excluded from adjusted financial results. Consequently, throughout 2012, the results of the Nutrition business have been excluded from adjusted results. Now let's move on to the financials. Third quarter 2012 revenues of approximately $14 billion decreased 16% year-over-year, reflecting a 4% negative impact from foreign exchange and an operational decline of approximately 12%, driven mainly by the LOE of several key products in certain geographies, notably Lipitor in all major markets. Adjusted diluted EPS of $0.53 decreased 12%, primarily due to the previously mentioned decrease in revenues, which was partially offset by an aggregate operational decrease of 8% in adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses, primarily resulting from cost reduction and productivity initiatives. A lower adjusted tax rate of 28.3% and fewer weighted average shares outstanding due to our continued share repurchases. Reported diluted EPS of $0.43 decreased 10%. In addition to the factors previously mentioned, reported diluted EPS was favorably impacted primarily by a U.S. tax settlement and negatively impacted primarily from the non-recurrence of the gain on the sale of Capsugel in the year-ago quarter. Foreign exchange negatively impacted third quarter revenues by 4%, or $699 million, and favorably impacted adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses by $440 million or 5%. This negative impact was primarily driven by the euro and to a lesser extent, the Brazilian real versus the US dollar. As a result, foreign exchange negatively impacted third quarter adjusted diluted EPS by approximately $0.02. In the third quarter of 2012, emerging markets biopharmaceutical revenues were approximately $2.4 billion, which reflects operational growth of 6% and the negative impact of foreign exchange of 8%. I want to point out that the volatility in our emerging markets' quarterly revenues was driven primarily by Prevnar purchasing patterns, specifically the timing of government purchases of Prevnar 13 in Turkey compared with the year-ago quarter. Volume growth of 8% in emerging markets was partially offset by price reductions of 2%, resulting in the 6% operational growth. Of the third quarter emerging markets biopharmaceutical revenues, approximately 41% was generated by established products, 33% by specialty and oncology products, and 26% by primary care products. Third quarter biopharmaceutical revenues in the BRIC-MT markets were approximately $1.1 billion, which reflects operational growth of 9% and the unfavorable impact of foreign exchange of 10%. Of the third quarter BRIC-MT biopharmaceutical revenues, approximately 42% was generated by established products, 30% by specialty and oncology products, and 28% by primary care products. During the third quarter, biopharmaceutical volume growth of 10% in the BRIC-MT markets, most notably in China, Mexico, and Russia, was partially offset by price reductions of 1%, resulting in operational growth of 9%. Year-to-date operational growth in the BRIC-MT markets was 13% versus the year-ago quarter, reflecting volume growth of 16%, partially offset by price reductions of 3%. Based on our year-to-date performance and outlook for the remainder of the year, we are narrowing the ranges for our full year financial guidance components. We are narrowing the reported revenue range to $58 billion-$59 billion from $58 billion-$60 billion. We are decreasing and narrowing the range of adjusted cost of sales as a percentage of revenues to 18.7%-19.2%. We are decreasing and narrowing our adjusted SI&A expense range to $16.3 billion-$16.8 billion. We are narrowing our R&D guidance range to $7 billion-$7.25 billion. I want to point out that our R&D guidance includes the $250 million payment to AstraZeneca for the exclusive global over-the-counter rights to Nexium, which we recorded in the third quarter. We now expect other deductions to be approximately $900 million and continue to expect the effective tax rate on adjusted income to be approximately 29%. We are increasing and narrowing the range of our reported diluted EPS to $1.30 to $1.38, and we are narrowing our adjusted diluted EPS range to $2.14 to $2.17. Finally, we now expect operating cash flow to be approximately $18.5 billion, which reflects the charge related to the RAPAMUNE settlement recorded in the third quarter. Our third quarter results continue to reflect the loss of exclusivity of certain products, mainly Lipitor in all major markets. That said, we're continuing to mitigate the impact of the Lipitor LOE with expense discipline and share repurchases. We received U.S. regulatory approval for Vasceleub, and in the European Union, we received approval for Inlyta and conditional marketing authorization for Xalkori. We filed a registration statement in mid-August for a potential initial public offering of up to a 20% ownership stake in the animal health business to be named Zoetis. In addition, we filed an amendment to the S-1 on October the 10th, which included updated financial statements through the second quarter 2012. We remain on track to complete a potential IPO in the first half of 2013. As we continue to work toward a separation of the business, we remain open to all alternatives to maximize the after-tax return for our shareholders. We continue to create shareholder value through prudent capital allocation with approximately $5.9 billion or 255 million shares repurchased through October the 31st. Approximately $4.1 billion of authorization remains under the current repurchase program. The board of directors also just recently authorized a new program upon the sale of the nutrition business to repurchase up to $10 billion of our shares over time. We now expect to complete the sale of our nutrition business to Nestlé in the next few months. Finally, we expect to return more than $12 billion to our shareholders through dividends and share repurchases during 2012. Now, I'll turn it back to Chuck. Thanks for the review, Frank. At this point, operator, if we could please poll for questions. Ladies and gentlemen, to ask a question, please press star then the number 1 on your telephone keypads. Your first question comes from Jami Rubin from Goldman Sachs. Ian and Frank, question for you both. If you can give us some sort of granularity and color on what the revenue outlook for this company might look like 2013 and beyond. Obviously, 2012, we were in the teeth of patent expirations with the Lipitor LOE. How should we think about directionally revenue outlook going forward? Just also to follow up on Tofa, Ian, you said you expected the FDA to act on or before the PDUFA date. Can you share with us your expectations for what kind of label you might receive? Thank you. Thank you, Jami. Well, revenue outlook, I'll make a few comments and then let Frank add anything he wants to, and I'll ask Gino to answer on the Tofa question. The peak year of a patent expiration for us, as far as we can see, is 2012 of approximately $8 billion. Subsequent to that, 2013, 2014, and 2015 will continue to be faced with LOEs and alliance revenue losses that will be substantially lower than that, probably a peak of $4 billion in one of the years, but between $3.5 billion and $4 billion in the subsequent three years. Still subject to alterations and fluctuations as patents expire. Countering that, of course, we will have in-line growth from our patented products. We'll have emerging market growth. We'll have the launch we expect of tofacitinib and Eliquis, and we expect also have the launch of adult vaccine. Those are the two currents, I would say, that would be affecting our revenue over those years. Frank, do you want to add anything to that? I would simply add that in addition to everything Ian said, we will also continue to manage our cost structure, and we'll continue to do share repurchases. All those things will lead to steady, consistent earnings growth over time. Thank you. Gino, on Tofa. Yeah, just a couple of comments, Jami, on Tofa. We're nearing, I think, the end of the review process. We do expect that we'll have an action by the PDUFA date this month. With regard to our expectations, I think you know that we have a very robust dataset behind Tofa with five large pivotal trials showing good efficacy and safety in both the pre-TNF and post-TNF setting. We think that the results that we've seen across this broad range of trials and broad range of patient types showed very consistent response, and we're expecting to have a very competitive label. Thank you, Gino. Thanks, Gino. Next question please, operator. Your next question comes from the line of Tim Anderson from Sanford Bernstein. Ian, you had mentioned this earlier about all strategic options being on the table for Pfizer. Last year, in July of 2011, you disavowed splitting up the drug side of the business when you gave your strategic update. That language in 2012 has changed subtly, and I'm just wondering if you can provide any more specifics on potentially splitting up the drug side. What could it look like? What could the structure be? Importantly, when would we hear more? Then on tofacitinib, if I can just ask one question, do you expect that you'll get both the 5 and the 10-milligram doses approved on the first go-around? Okay, well, I'll take the overall company question and then ask Gino to reply on tofa. I think I've tried to be clear on this, that I see if putting consumer to one side, which fits with either of the other two remaining businesses, I see us having two businesses going forward once we finish the, if we do complete the separation of Pfizer Nutrition and animal health. I see us having a growth business or an innovative business which is fueled by the pipeline and that I discussed earlier in my comments today. Then I see a value business, which is depending on post-LOE or peri-LOE products, very broad geographic capabilities, large capabilities in reimbursement and managing a global business. So those two businesses, I think, are core businesses for us. We already have, in the developed market, separated those businesses out. We do have an innovative business and an established products business, which equates roughly to those two segments. In the emerging markets, we continue to manage them as country organizations. Now, once we get through the changes of animal health and nutritional, we will continue to look at how to best structure those two businesses so they can maximize the value to Pfizer. Gino, do you want to comment? Yeah, sure. Tim, regarding the 5 and 10, as you know, in all five of the pivotal trials that we conducted, we tested both the 5-milligram and the 10-milligram doses. Again, the results were very consistent across the board, across the patient types and the trials that were done. We believe that the benefit risk is favorable for both the 5 and the 10 milligram. At this point in our discussions with FDA, we're not going to comment any further on what we expect the final outcome to be. Thank you, Gino. Next question, please. Your next question comes from the line of Mark Schoenebaum from ISI Group. Hey, guys. Thanks a lot for taking the question. Maybe if I could just first build on Tim's question. Will you report out separately at any point in the next year or so the established products P&L versus the branded products P&L? So not breaking the company up, but just giving us more disclosure in the K's and the Q's around those business operations. Then I had a question, if I may, for Mikael Dolsten. I was wondering if he could update us just on timelines, make sure everything's on track for the Prevnar CAPiTA trial, and also bring us up to speed on the MenB and Staph Aureus vaccine programs. Thank you. Okay. I'm going to ask Frank to answer the question on the reporting structure, and then, Mikael, if you could take those, the questions on the CAPiTA trial. On reporting, we provide revenue detail today by individual business units. In the charts that I walked through, there's clearly revenue detail by business unit. In terms of beyond revenue detail, I think the way to think about this is the established products business has lower gross margins than the traditional pharmaceutical businesses, but has comparable operating margins because it requires less expenses, which is something that we've talked about previously. Going forward, we'll do what we always do, which is see where are there opportunities to improve the transparency of the company. To the extent that we see those opportunities to be more transparent, we'll incorporate those into our external reporting. Thank you, Frank. Mikael, if you're- Yeah. Can you answer? Yeah. Thank you. Thank you for your interest in our vaccine pipeline. The Prevnar CAPiTA trial is an event-driven and pending the seasonality and severity of pneumonias often triggered by colds and flu seasons. We have in our projections that CAPiTA may have sufficient events during 2013 to allow us to aggregate data during the latter part of that year. MenB has gone through very productive dialogues with regulatory agencies in U.S. and Europe, and we anticipate starting and plan to start before end of this year. Staph Aureus vaccine contains two studies that are in phase II with a readout during next year. Thank you, Michael. Next question please, operator. Your next question comes from Tony Butler from Barclays Capital. Thanks, and good morning. Two housekeeping questions and one R&D question, please. What were the sales for Xalkori and Lotra? Second, if you look at SUTENT, could we argue that it might be slowing if you simply look at its Then for Dr. Dolsten, an earlier stage product in PCSK9. Pfizer seems to be a little bit behind at least two competitors given the phase II-B just started from a dosing perspective and will not complete until next year, suggesting the phase III trial would not necessarily start up until sometime later next year or even later than that. The question really is, how would you envision this emerging? Is a year behind not that big of a deal? More importantly, do you think that there is a unique characteristic for your molecule that may be different from others? Thank you very much. Thank you, Tony. Frank, could you address the sales of Xalkori and Inlyta? Perhaps Gina wants to comment on SUTENT, then I'll make a couple of comments on PCSK9 and ask Mikael to comment further. Sure. So on Xalkori, revenues for the third quarter, almost $40 million. For Inlyta, revenues for the third quarter were almost $30 million. So approximately $40 million, approximately $30 million for those two drugs, respectively. Yeah. For SUTENT is doing very well. It remains the number one choice in first-line metastatic RCC. Frankly, it's showing a lot of durability. So we're looking forward to continuing our leadership position in RCC now with SUTENT, Inlyta, and TORISEL. It's a real strong franchise for us. Thank you. On Xalkori, the testing has gone up from 11%, I think at the beginning, now to 55%, which is very encouraging because that required a change in physician practice. As that occurs, it makes us more optimistic about the potential for Xalkori going forward. Of course, we now have the launch coming in Europe. On PCSK9, yeah, I believe that we may be potentially a little bit behind some of our competitors. It really is an issue of, as you say, is the differentiation. If we do not have a first-in-class, do we believe we potentially have a best-in-class asset? Clearly, the development of this asset has several strategic options. Mikael, you want to add anything on the science of that? Yeah. Let me just add a few words there. We are very excited about this drug class. We think there may be differences between antibodies in their performance, in their immunogenicity, and in the dosing regimen. It is important to have the optimal dose regimen to allow sustained relevant cholesterol levels in a convenient manner to be accomplished. Thank you, Mikael. Next question, please, operator. The next question comes from David Risinger from Morgan Stanley. Two pipeline questions. The first is specific. I am hoping to better understand the MenB development program. As I see it on clinicaltrials.gov, you are running a phase III safety study involving 7,500 patients. Since it has the word safety in the title, I am assuming that the drug or the vaccine cannot be filed after that trial, that there will need to be additional phase III trial work, but I may be wrong. Just wondering if that trial successfully concludes, can you file or do you need to do additional phase III work? The second question is for Mikael Dolsten. Mikael, can you just highlight the key phase II product readouts that we should be watching in the next 12 to 18 months besides the PCSK9 which you have already discussed? Thank you. Thank you, David. Mikael, could you handle the MenB question and also address the pipeline? Yeah. In the MenB program, it is correct, we have a safety study ongoing, but we are planning this year to start, and also early next year, several other studies that include large efficacy studies and different batch lot consistency studies and potentially concomitant vaccine studies. It will be a broad program that will be aimed to show effectiveness to raise relevant immune responses and applicability for young and adolescent patients to use the vaccine. When it comes to the pipeline, what should be the next wave to watch? Let me briefly mention some 10 key opportunities in four therapeutic areas. In oncology, I would mention Dacomitinib for non-small cell lung cancer, Inotuzumab for B-cell malignancies, and PD-0332991, our exciting CDK inhibitor for advanced breast cancer. We are planning to present phase II data at the San Antonio Breast Cancer Symposium in December. In vaccines, we already spoke about MenB vaccine and the Staph Aureus vaccine, which we will have a POC readout during next year. Tofacitinib is, of course, the flagship in our immunology therapeutic area with a portfolio of opportunities beyond RA. We are in phase III for psoriasis and ulcerative colitis. We are studying additional indication in phase II, including Crohn, and we are supplementing our inflammatory bowel disease activity with POC studies for MAdCAM and IL-6 antibodies, which will have readouts in the next 12 to 18 months. The IL-6 antibody will also have utility, and there is a POC study ongoing in lupus. Finally, in the cardiovascular metabolic area, in addition to PCSK9, we also have an exciting pancreatic-acting glucokinase drug. As you can see, I just selected some 10 key opportunities of a very rich and diverse pipeline of some 90 projects. Thank you. Thank you, Mikael. I would just add to that, clearly we started the safety program in MenB because those trials take longer than the efficacy programs. Clearly, as we started our phase III trials, we now have an agreed-upon development program with the FDA that we believe will lead to approval. Great. Thank you. Next question please, operator. Your next question comes from Chris Schott from J.P. Morgan. Much, just a couple here. First, emerging market growth. It looks like it is about 10% year-to-date, kind of year-over-year growth. Obviously, a nice step up over the 2011 results, but just interested in your thoughts on the longer-term growth opportunity in these markets. I guess, do you think you can sustain low double-digit growth in the emerging markets over time, or has enough changed in the macro environment where that is no longer a reasonable target? Second question was on the commercial opportunity for Eliquis. Just any thoughts on your expectations for the label you might receive there and how you are thinking about that market and how it has evolved so far with your competitors? Finally, can you just give us an update on the status of Remoxy and Embeda, just kind of how we should be thinking about those? Thank you. Okay, thank you. I am going to ask Olivier to comment on emerging market growth potential, then John Young will do the Eliquis and Remoxy. Chris, yeah, we think we can continue to perform in line with our goals of high single-digit growth over the period. The macro trends continue to be favorable with increased amount of spending on healthcare and the pharmaceutical market, which is growing at 12%-15% in the next few years. Again, we think we can maintain the high single digit. Again, if you look at the 6% we achieved during the quarter, it is very much influenced by the Prevnar and Enbrel institutional sales to government. If you take out that cadence, you look at the base business during Q1 2012, we grew by 9% the second quarter 2012, and this quarter it is still 11%. All of that indicates that we have a pretty strong foundation, and we think we can continue to build on it. Yeah, I would add also, we are very pleased with our presence in the BRIC-MT markets. We have accelerated growth there and the strength of our organizations. We are the number one multinational in China, and we have impressive positions in the other BRIC-MT markets. With that, John, would you like to take the other questions? Okay. Thanks for your questions, Chris. Let me take Eliquis first and say that obviously, as you are aware, and as we announced previously on September 26, the FDA acknowledged our receipt of the Eliquis NDA resubmission for our non-valvular atrial fibrillation indication. Those discussions between Pfizer and BMS and the FDA are ongoing. We continue to work very closely with them. As you know, the target date for the FDA to complete their review is March 17, 2013, which is when the PDUFA date occurs. In terms of your question about how we see the potential, clearly we believe that Eliquis is differentiated from warfarin because it's demonstrated superior efficacy, bleeding, and all-cause mortality compared to warfarin in a single dose. We believe that we should have a compelling profile for both cardiologists as well as primary care physicians, and we are obviously working very closely with our partners BMS to finalize the strategies and plans and make sure that we are very well prepared for launch. If I turn now to Remoxy and Embeda. If I take Embeda first of all, we met with the FDA in May of this year to discuss our proposal for reintroduction of Embeda to the market. The required stability programs are underway, and we anticipate a submission of a prior approval supplement in the first half of 2013. If I turn to Remoxy, as you probably know from previous calls, Remoxy has been a challenging asset that our teams have been working on very diligently since the acquisition of King. As a result of that work and the extensive insights that we have gained around the formulation, we have initiated confirmatory bioavailability studies to assess the pharmacokinetic or PK profile of modified Remoxy formulation compositions. We expect those studies to read out early in 2013. We think that the results of those studies will provide us with much greater clarity on whether or not we will be able to adequately address the questions raised in the complete response letter that we received from the FDA. So we are targeting a late March meeting with the FDA to discuss those outputs and agree on a go or no-go decision. I think one last comment just to make is that I think it's important to remember that our commitment to this area is very strong, and as such, we continue to invest in our compound ALO-02, which is an extended-release oxycodone, which uses the naltrexone platform technology, and it's currently in phase III. Thank you, John. Thanks, John. Next question please, operator. Your next question comes from Steve Scala from Cowen. For Frank, would you dissect the strength in gross profit margin? How much was currency, how much were efficiencies, and how much was mix? Also, how much of the narrowing of the range in sales and EPS guidance for the year is due to adverse currency fluctuations? Then one for Dr. Dolsten, what is your postmortem on bapineuzumab? Was it a flawed molecule? Did you study the wrong patients, or is the mechanism, in your view, unlikely to be effective? Thank you. All right. Let me hit the two questions you asked me, Steve. First, on efficiencies, foreign exchange relative to the quarter, let me run the numbers which is, if you look at our total adjusted costs for the quarter, they were down, and this includes cost of goods sold, SI&A, and R&D, they were down $1.3 billion. From $9.5 billion last year to $8.2 billion this year. Foreign exchange helped that by $440 million. If you take the $1.3 billion, subtract $440 million, you get roughly $850 million. That was down 8% operationally. If you also add back or adjust for the Nexium payment that we made, that 8% becomes 11%, which is what Ian Read mentioned in his opening remarks. In terms of foreign exchange to the bottom line, foreign exchange hurt the quarter by $0.02. By the way, just in terms of rhythm of the numbers, if you look last year in Q3, it actually helped Q3 by $0.04. It was a $0.04 good guy last quarter, $0.02 bad guy this quarter. In terms of the revenue guidance, the updated guidance is within the guidance that we provided for the year. We had said $58 billion to $60 billion. We tightened it this quarter, left the lower end of the range and then lowered the top end of the range from $60 billion to $59 billion. That decrease, if you look from midpoint to midpoint, is really primarily driven by foreign exchange. You can't just look at the euro, which is typically what we do, and that's a big piece of our revenues. About 18% of our revenues are euro-denominated. The yen and the Brazilian real have really been moving against us, quite frankly, since the beginning of the year, the real more recently. When we tighten the ranges, it has a more pronounced effect, which is why we lower the range from $58 billion to $60 billion to $58 billion to $59 billion. The short answer is foreign exchange is the driver relative to our revenue guidance. Thank you, Frank D'Amelio. Within the euro being roughly 18% of our sales, the yen represents 10%, and the real represents 4%. Basically, while traditionally people just look at the euro, you've got to look at that mix to model the impact of exchange on Pfizer. I'm going to ask Olivier Brandicourt to answer the question on bapi, and then I'll ask Mikael Dolsten to add anything if he thinks he wants to do that after Olivier Brandicourt's comments. All right, Steve, we are currently closing out the bapi I.V. program. As you know, we have not seen any evidence of clinical activity in any of the relevant subpopulation we study. We reported the results earlier in October and as we speak at the clinical trial AD meeting this week in Monte Carlo. The only study which is remaining with bapi is a sub-Q formulation study, which is called the SUMMIT-AD. It's actually fully enrolled at this point, and we are expecting to see the results during the first quarter 2013. I'd like to mention that it's only a biomarker study. It's not an efficacy or safety study at this point. The alliance is going to look at all the biomarker analysis we have, not only coming from what we have already, but an additional two product, ACC001 and also AAB003. That information will actually inform our future work regarding potential for Romo AD with any of those candidates which we have in our pipeline. We continue to believe in the beta-amyloid pathway, and we're committed to research in AD. To that point, I'd like to ask Mikael eventually to mention a few. Yeah, Mikael, I would assume anything you would say would be speculation, but go ahead. Yeah. I think Olivier summarized it in an excellent manner, and we do continue, as many in the field, to believe that effective intervention with amyloid formation at an early stage of the disease is a valid way forward to explore. We have a broad AD pipeline with both disease-modifying and symptomatic approaches. Let me mention our SAM-760, 5-HT6 antagonist that has completed phase I and is considered for further studies. We have other ways to interfere with amyloid formation, such as BACE and gamma-secretase inhibitors in late preclinical. As Olivier mentioned, we are assessing different antibody approaches to modulating beta amyloid, and this reflects our continued interest to research in Alzheimer's disease. Thank you, Mikael. Next question please, operator. Your next question comes from Seamus Fernandez from Leerink Swann. Thanks for the question. Just wondering, can we get a little bit more color on how we should be thinking about the growth drivers of Prevnar 13, particularly in the pediatric indications going forward? What percentage of NIPs are now kind of filled, given the fact that we are seeing this slowdown in the U.S.? And then separately, as we think about some of the 2013 phase III catalysts, Mikael, maybe you could give us a little bit of your thoughts on the catalyst that you're most focused on. I think historically, there's been talk about inotuzumab products. For the antibody drug conjugates, as well as dacomitinib on the oncology side. Those are two that jump out at me. Thanks a lot. Okay. Gino, would you like to comment on- Sure Prevnar and the interplay between pediatric and adult? Then Mikael will comment on the 13. Yeah. I think with Prevnar pediatric, what we're seeing now is primarily the effect of the success that we had with the catch-up opportunity, where we added over $1 billion in value to the company by taking full advantage of the catch-up opportunity when we introduced the 13-valent. Now we're reaching a point where it's the base birth cohort that's driving the pediatric business. We have very strong NIP performance across most of the developed world. We're still growing in Japan. I think future growth for the pediatric business will come from growth in emerging markets and in markets where we haven't introduced the 13-valent yet, which would include Japan and China. In the U.S., you get a little bit from price each year, but it's fundamentally a strong base of business that we think we can grow to some extent, but probably not dramatically in the developed markets. The growth opportunity truly comes from the adult business. As you know, without the formal recommendations in place yet, the adult business is slow to develop. In the U.S., we've recently gotten an ACIP recommendation for immunocompromised patients. CDC has indicated that they will make Prevnar a recommended vaccine as part of the hospital quality measures. These are things that will help bring attention to the use of the conjugate vaccine in the adult population. But we think the real lift and the real big opportunity for growth in the franchise comes when we have a broader set of recommendations from the major recommending bodies around the world, which will occur post CAPiTA. Thank you, Geno. Mikael? Yeah. So let me underline, there are a couple of interesting conferences end of this year already with data, starting with the ACR Rheumatology Conference, where we will have several abstracts on tofacitinib, including the ORAL Start study on structure endpoint in pre-methotrexate treated patients. American Heart Association, we will have PCSK9 and also sub-analysis from Eliquis studies. I briefly mentioned San Antonio Breast Cancer Symposium in December. We will report the phase II data from CDK in advanced breast cancer. As you mentioned, dacomitinib, we will have two phase III studies that are expected to be presented at the conference in 2013. We will also show final analysis at the relevant medical conference in 2013 on Inlyta, and we will continue to generate important data on tofacitinib in psoriasis, and as Yun-Yang mentioned, ALO-02, our oxycodone abuse-deterrent compound. Thank you, Mikael. Thanks, Mikael. Next question, please, operator. Your next question comes from Jeff Holford from Jefferies. Hi. Thanks for taking my questions. Firstly, can you just comment on your review regarding M&A opportunities out there? Does this authorization of a new share repurchase program imply any view from you, any change in view on the attractiveness of bolt-on opportunities and acquisitions that may or may not be out there? Secondly, the cost saving does appear to be running somewhat ahead of at least our expectations. I am wondering if this is, from your point of view, just faster delivery than you may have originally anticipated, or do you think you can go beyond what you have previously guided in terms of cost saving and efficiencies within the business? Then just lastly, I wonder if you can make some sort of comment about the tax rate beyond this year. It appears you may be seeing some structural mix changes in your tax rate. I was wondering if you can talk a little bit about that in terms of a two, three-year outlook on the tax rate. Thank you. Okay. Thank you for the questions, Jeff. On the bolt-on opportunities, we don't see that the increased authorization for buybacks in any way diminishes our ability to do bolt-on M&A transactions if we find cases that can beat share buyback. I'd ask Frank to talk about the cost savings and the tax rate. Yeah. So on the tax rate, we reiterate our guidance for the year, approximately 29%. I think going forward, with all the uncertainty around tax reform, we should assume 29%. The one thing I'll say is relative to tax reform, we support any tax reform that will enhance the global competitive of U.S. companies that are operating internationally. But I think, going forward, given the uncertainty around this, we'll continue to assume approximately 29%. In terms of the cost savings, I think the way I'll answer this is almost in terms of what inning we're in relative to a baseball game. So if you think about a nine-inning game, we're clearly not in the early innings. I don't think we're in the late innings. I think we're towards the end of the middle innings. So there's still opportunity, but clearly, the absolute size of the opportunity isn't what the size of the opportunity was a few years ago, given the billions of dollars we've already taken out of our cost structure. Yeah, I would say the changes going forward, if it ever was easy, some of the targets, some more obvious targets, have already been taken care of. Now, it's going to be cost reductions or increased efficiency going to be coming from exactly that. Looking at business models and structure and as Frank says, the targets that were there available have been hit and taken care of. With that, I think we'll move on. Your next question comes from Alex Arfaei from BMO. Good morning. Thank you for taking my questions. First, Enbrel and other TNFs seem to be a little weaker in Europe this quarter. We've heard about some cost containment measures focused on TNFs. To what extent do you see this as an opportunity for Tofa as a potentially cheaper option that has similar efficacy? As a follow-up, the animal health business was a little bit lighter operationally compared to what we've seen with some of your peers. Is there anything that was unique to this quarter that we should be aware of? Thank you. Thank you. Gina, if you could do Enbrel, and then Frank, if you'd like to answer animal health. Sure. I think that the TNF inhibitors, and frankly, the whole pharmaceutical portfolio has experienced some challenge with cost containment measures in Europe. Our TNF business has been impacted more in the Southern European countries than in the North. But there is some effect there. The volume growth remains fairly strong. I think the place for TNF inhibitors is relatively secure. I think in terms of Tofa, we will announce our pricing strategy once we have approval, and we're ready to introduce the product. Thank you. On animal health, let me run the numbers, and I'll give a little color commentary. To your point, Alex, the quarter year-to-date growth was 4%, but if you look at it on a year-to-date basis, the operating growth was 6%. We'll get some volatility quarter to quarter, but on a 9-month year-to-date basis, 6%. If you drill down a little bit, we see increased demand across the global livestock portfolio, increased demand across the companion animal portfolio, and increased demand in certain key geographies. I think the watch items are clearly the drought in the U.S. Midwest and Southwest and just what's going on in Europe, and in particular, Southern Europe relative to the economy. But net-net, year-to-date basis, 6% operating growth, which we view as nice for that business. Thank you, Frank. Thanks, Frank. Next question please, operator. Your next question comes from the line of Damien Conover from Morningstar. Great. Thanks for taking the question. Most of my questions have been asked, but just wanted to follow up on the management of the cost structure and just kind of continuing the baseball analogy. It depends, I guess, when you start the analogy, but you look at towards the end of the middle innings, it might suggest anywhere in the neighborhood of about $1 billion-$2 billion in annual cost savings still to be pulled out from Pfizer. Just wondering if you could maybe characterize where that number kind of fits in the scheme. Also, when you look at managing the cost structure, are you largely balancing costs that could be saved from products losing exclusivity versus costs that will be needed to launch new products? Then just lastly, I was wondering if you could comment on the variable costs supporting Celebrex. Thank you. When we look at our costs, you obviously look at a company that has grown by acquisitions, which has allowed us to take out costs as we do the acquisitions. You look at our global position, and we carefully analyze what is our share of voice, what is our share of mind against our competitors. We analyze that in the context of an industry that is in itself restructuring and faced with headwinds on pricing and access, so that the spend you need to put in the marketplace depends, to a large extent, on the competitive set you are against. We tend to look at the spending of our competitors and what we need to do to remain competitive as a benchmark. I want to be clear here that we are looking at our costs, but always with a view to remaining competitive in the marketplace. Frank, do you want to add anything to that? Maybe I will give a little sub-ledged detail relative to what I said relative to where we are and then some of the opportunities going forward. First, if you think about manufacturing, I have said previously, we still have, give or take, about 10 manufacturing facilities that we plan to exit over the next several years in the U.S., Puerto Rico, and Ireland, 10 manufacturing facilities. That obviously represents a significant opportunity. I think we continue to streamline our corporate center and enabling function services. We continue to believe there is additional opportunities there. Then we are looking at all of our functions, everything that we do in terms of where are there opportunities to be more efficient, more productive. We have been doing that. We will continue to do that. Those are some of the opportunity areas relative to what we can do on a going-forward basis and why I said where we are relative to the continuum. We don't really release variable or fixed costs around individual products for competitive reasons. Thank you. Okay. Operator, if we could take one more question, please. Your final question comes from the line of Mark Goodman from UBS. Hello, Mark. Yeah, hi. Ian, in the past, you've talked about cost-cutting in Europe and how you're really focused on taking more costs out of Europe and changing the business model a little bit. I was wondering if you were prepared to talk about that a little bit. Then second question is on gross margin. Once we eliminate these 10 plants and once we get through a couple more years of patent expiries, what is the sustainable gross margin? Are we still around 80%? Thanks. Okay. The opportunities in Europe, of course, center around as the European Union moves towards a more centralized regulatory environment, what do you need to do on a country-by-country basis to maintain a commercially competitive organization, and what do you need to do to maintain your marketing and medical and the infrastructure? It is interesting if you compare Europe with the U.S., which is a lot simpler because it is federal and it is one regulation. But as Europe moves towards that, we tend to sort of look at the treatment of Europe, while not identical, but more similarly to a structure you would have in the U.S. I would ask John Young if he wants to add anything to that as he has been previously managing Europe for some considerable time. Yeah, I think the only add I would give is that obviously, as we do in all of our regions with all of our businesses around the world, one of the things that we will continue to do is to make sure that we deploy our resources in line with the opportunity to generate revenue growth and value for shareholders. That is something that we have been doing very actively, as you know, over the last 3 to 4 years. In line with the continued evolution of the pipeline, we will continue to deploy our resources appropriately in Europe to maximize shareholder value as the portfolio continues to evolve. Thank you. Frank, do you want to try to answer the gross margin question? Sure. I think clearly there will be downward pressure on our gross margin on a going-forward basis when you think about how the mix of our revenues is changing. But I think the thing to focus on is our operating margins, and we can continue to generate cost reduction and productivity improvements to keep that operating margin relatively constant on a going-forward basis. Thanks, Frank, and thank you everybody for being flexible with the date change. Thanks for your time this morning. Thank you. Thanks, everyone. Ladies and gentlemen, this does conclude today's Pfizer's third quarter 2012 earnings conference call. You may now disconnect.