Pfizer Inc. (PFE) Earnings Call Transcript & Summary

Good afternoon. I'm Chris Schott at JPMorgan. It's my pleasure to be hosting a fireside chat today with Pfizer. From the company, we have Albert Bourla, the company's Chairman and CEO. Before I start, I did want to mention that as in the past, we're going to be hosting this fireside, but we will not be doing a breakout after the presentation.

So maybe, Albert, just to kick off, you're roughly a year into your tenure as CEO at Pfizer. Maybe discuss that first year in the role, the changes you've made to Pfizer during that time and the priorities you have as you look out to 2020.

Thank you. Thank you for having me here. We started the year with 3 businesses. And as you said, we very quickly took decisive and thoughtful steps to strengthen each one of them. So let me walk you through a little bit. Our consumer business was a very strong business in the U.S. but was subscale in Europe. We didn't exist in Japan. We had good sizing in China. GSK on the contrary, they have very strong business in Europe and Japan. They were less strong in the U.S. where we're very strong. By putting together the 2, we have created the largest by far. When I say the largest, 70% larger than the second one, consumer health care company in the world. And given the portfolio and the brands that they have, arguably, the best consumer health care business in the world. And we have a clear exit strategy with this business. We announced already that this business in 3 to 4 years' time, they will do an IPO. And this is the time that we will be able to exit from this partnership, and I'm sure that this business will have a fantastic IPO. Our Upjohn business has unique commercial capabilities in places where generic specialty market is booming right now, like in Asia or in China, but we didn't have a pipeline. Mylan, on the other hand, they have a terrific pipeline, a pipeline of difficult-to-make generic products like injectables, like biosimilars, like sprays or patches, not solid oral doses only. But they didn't have presence in the areas that matter for generic business, like in China. By putting together the 2, not only are creating the largest specialty generic company in the world but also the only one that will have access to both Chinese patients and West countries' patients. And then the remaining Pfizer, I call it the new Pfizer, obviously, is going to be 20% less in size. But in this new scale, we retain all the growth drivers, all the products that are driving the growth and to retain the entire pipeline. As a result, this company will be, from day 1 after the separation, a best-in-class revenue growth, long term, sustainable story with a relatively unlevered balance sheet at this company and the best pipeline we ever had. So we can do miracles with this company.

That's great. I guess my question I've looked at was when I look at that, the new Pfizer, it seems really well positioned to accelerate growth as we look out over the next 5 years or so. I guess the struggle I'm still having is when I look at the longer-term sustainability of that growth. So I know it's ridiculous to look out this far, but we still got like in '26, '27, there's another patent cycle we start running into, how do you get confident that you have the assets you need within Pfizer and the resources external to Pfizer to be able to sustain that growth over a longer period of time given that you are creating a leaner company, one that could be a little bit more volatile as you go through a patent cycle?

First of all, it's very refreshing to see Wall Street worrying about long-term growth rather than the next quarter and particularly worrying about the growth in '27. But nevertheless, I think I heard the concern. And let me clarify a few things. We will start having again in '26 one product going LOE and then '27 a second one. '27 will be really the year that we will have some sizable LOEs. This is a return to normality. This is normal for a pharmaceutical company: as long as they keep launching products, that products will keep losing patent. What is abnormal is the situation what we are living right now for Pfizer that we are going to have a period of 6 years that basically very few, if any, LOEs will happen. This is very good. We are enjoying this boost of growth. But it's not an indication -- it's an indication that our R&D, 15 years back, was not in good shape. So we did not launch any product for many years, that's why we don't lose any patent for many years. Right now, the pipeline is a very, very different story. We have one of the best pipelines, I think, in the industry and the best definitely what we ever had in Pfizer. And the base is smaller, so the pipeline can move the needle. And organically, we're going to have significant introductions of new products but also have a balance sheet that we will try to augment with our mid-year strategy the launches that will come again this period. So I think it's a long period, as we said, to worry about '27, but we do take steps to make sure that the growth will be sustainable and will be sustainable at that level, at 6%.

Okay. Great. Looking out to, I guess, this year. I know you're not giving guidance for another few weeks. But it seems as though the company is much more confident in its outlook today than 6 months ago when you gave some of those initial targets or kind of guidance ranges with the Upjohn deal. Maybe just talk about what's changed there and how you're thinking about the core business today.

First of all, let me reiterate that we are going to give guidance in few weeks as usually, at the end of January, we want to speak about our quarter results. But you are right that things changed since the time of July that we gave a direction, $40 billion, approximately $40 billion, in revenues for the RemainCo and approximately 35% of -- 30 -- mid-30s profitability. And other things changed when we gave -- from second to third quarter, when we spoke, there were a lot of uncertainties. We had the ACIP recommendation, but we didn't know how is going to be reflected in the final issuance of the guidance and how it would affect the market. The best scenario played out. And by the way, the market doesn't seem that the response was in any negative form to that. We have just, in July launch, have seen the first results of a new strategy with Ibrance. We tried -- instead of focusing on competition to maintain our share, we changed the strategy to try to expand the market, try to expand the CDK market, and we were trying to convert monotherapies into combination therapies. And that did very well in second quarter, but it was too early. The third quarter was fantastic. Xtandi, we had just launched the PROSPER data about bringing Xtandi earlier. But we didn't know how that will do. The third quarter, we had 25% growth. Xeljanz, we had just received, a day before we speak about our projections, a black label warning and black box warning in our label. And we didn't know how the physicians' prescription habits would change as a result of that. Xeljanz grew 40% almost. We had the Inlyta but we had just issued results in combination with KEYTRUDA. We didn't know how that will go. Inlyta grew 100% in the U.S. So many things changed. As a result, in the third quarter, not only we didn't speak about next year, we raised significantly our guidance for the full year 2019. And very similar story also with Upjohn. In Upjohn, we spoke and we said we expect to have $7.5 billion to $8 billion of revenues in 2020, but we're significantly lower than what The Street was think. And to explain, it is because we are factoring the impact that changes in China will have on the Upjohn business. And we said, for this reason, we are lowering 2020, but also we are expecting in China Upjohn to have a single to mid-digit growth. In third quarter, we did much better. So we changed the guidance for the year. And we said, now we are expecting Upjohn in China to be middle to high single-digits growth. So it was a great quarter, and it happened that all growth drivers did much better. It's not 1 or 2. So that creates very different level of optimism.

Absolutely. And when I think about the model, you mentioned that $40 billion top line, you've got these businesses that seem to be directionally trending much better than expected, should I also think about that flowing through and implying margins that might be better than that initial range that came through and that some of that top line upside will just flow through the P&L?

Yes, I think so. Because in our business, growth in revenues drives disproportionate growth on the bottom line because there are very high margins. And I think that we will see it also, not only that I think we can see better revenues but also better margins. And also, of course, we'll take steps with the margins. Right now, the new Pfizer, I expect that the gross margin, because of the new product portfolio, will become even larger. So we'll have an increase. I think that the R&D levels, we will maintain the investments and grow it. So as a result, from being the lowest in the industry, we will be among the high end -- not the highest but the high end of R&D spend compared to revenues. But for SI&A, that will go a little bit higher when -- as percentage of sales when Upjohn is separated from Pfizer. This is where I think we should expect to take some fresh look in the way that we build business. One way to think about, however, a pharmaceutical business is organized is every big pharma has 3 core units. There's an R&D unit where they are discovering and developing new products. They have a manufacturing unit where they are making the products. And then they have a commercial unit where they are making products -- they're making sure the products find their way to the patients. But in addition to that, we have a lot of enabling functions enabling all of them. We have legal. We have HR. We have finance. We have digital. This is a significant ticket item. From '19 guidance of Pfizer, we spoke that we're going to have $13.5 billion to $14 billion SI&A expenses. $4.5 billion of that amount, it's part of the enabling functions, what I call indirect expenses. I think there's an opportunity over there to simplify the way that we support our core businesses and have some significant synergies.

Any sense of the magnitude of that opportunity and the timing that we could see that appear in the P&L?

I think it's too early to speak about that, both the magnitude and the time, but I think the opportunity is large. And also, I think that when you do this type of transformation, you better move faster than slower.

Yes. Yes. Maybe moving over to the pipeline, are there particular assets driving the gap between your expectations and Street consensus? So when you look at what we're all focusing on and you're looking at what you're excited about internally, what are the assets you'd highlight to us that we should be focused on?

How much time we have? Well, let me start and see if we -- I can speak some. Vaccines. I know, and because I'm monitoring all of the projections, that The Street is projecting the pneumococcal 20 over there. But I don't think any, if very few, are having numbers for Clostridium difficile, but it's going to read out, the people that started this year. About pentavalent, in meningococcal, we are having proof-of-concept reading right now with very strong data, I hope. About the maternal RSV and streptococcus B platform, nothing of that. In rare diseases, I know that The Street projects the growth of tafamidis and now the increase of VYNDAQEL, the projections, but I haven't seen anyone having numbers for our gene therapy platform. Right now, we have 3 organic projects. We have 3 in clinic. We just licensed 2 more with Vivet and Therachon. We have 7 in addition to those 5, they are preclinical. And we are building in some [ fort ] here in the U.S. the largest gene therapy manufacturing capacity in the world. And there's nothing, I think, in the projection of The Street about that. Also some smaller products in gene therapy. In rare diseases, I haven't seen anything. Hemophilia, for example, the pan hemophilia, pan A and B hemophilia, or the growth hormone. Let's go to our immuno-inflammation franchise, which is likely one of the most advanced in -- compared to competition. We do have 5 different JAKs that we're starting in more than 10 different indications. Only one of them I have seen some minor projections in The Street analysts. So I can go on and on. What I want to say is that there's a significant gap. And I think we are also responsible because, for many years, we didn't have an R&D Day, so that we will be able to shed some light on the significant advancements. And as you know very well, we announced that we are going to have a comprehensive R&D Day with investors on March 31.

Another topic on R&D I know we've had discussion about is the late-stage pipeline is exciting. It seems like you've also seen some trends on the earlier-stage success rates. Can you just talk a little bit about some of the numbers around that? And what do you think has enabled your early and mid-stage R&D productivity to increase?

Yes. I think the productivity is dramatically improved. And I will give you some data to back up this. And unless if I had seen this, so that we have a very diverse and rich pipeline and a very good machine, R&D machine, that can transform potential opportunities to medicines, I wouldn't take the step to take the strategic moves that we have right now so that we can expose the company a lot through success of R&D. For example, Phase II success rates. The industry, it is at 30%. Pfizer, for many years, was at 15% because we're taking the approach of very little rigor scientific in progressing assets to Phase II and we were trying multiple shots, so we had thrown money in multiple approaches. We changed our governance in the last 5 years. Right now, the success rate of Phase II, it is 50%, 5-0, compared to 30% for the industry. This is a significant transformation. And that's one of the indications of what we are doing in R&D. And it was not a simple thing to do that. It was a lot of effort and took a lot of time. It took at least 10 years to turn around our R&D. And I will give you some examples of the things we did. In 2010, Pfizer was operating in 13 therapeutic areas. We were spread very thin: our research, our resources. And we were okay or mediocre in each one of them. Today, we are focusing on 6 therapeutic areas, and we are double-downing on them. As a result, we attract the best scientists and we attract the best scientific substrate. So we are mastering those ones. And I can go on and on in [ stages of it ].

Yes. That's good to hear. On the pipeline, you've got a very important readout this year with Ibrance in the adjuvant setting. I guess what gives you such confidence in that program? So just help us get our hands around it because I know that is, at least in our model, a very significant driver of growth for Pfizer over the next 5 to 7 years.

So if we knew the outcome of each project, we would be doing a different job. But we need to wait to see the data to read out. But with Ibrance, for example, when I see the totality of data and leading indicators, when I see how the product -- clinical years, when I see the clinical responses in the metastatic, and when I see that earlier, you start the treatment in metastatic, the better the results. And when we had the results of the pilot study, I feel very confident. But no one knows if that will be successful until you see the results, but I feel very confident. But the point I was trying to make is this is the beauty when you have a pipeline that is so rich. You're not dependent on binary events. If Ibrance fails and if Clostridium fails and if pneumococcal 20 fails and if gene therapy fails, and I can go on and on, likely we'll have an issue. That is very unlikely. It's unlikely that half of them will succeed and half of them will fail. When I speak about 6% growth, this is what I take, this risk-adjusted growth. If everything is successful, I'm going to have 12% to 15% growth. But I know that not everything will be successful, but they are not depending with our -- the fate of the company is not dependent on 1 or 2 studies that can succeed or fail.

Okay. Great. The other topic we have a lot of discussion around is Prevnar and the evolution of the pneumococcal business. So I guess maybe you could share how do you see the competitive landscape playing out as we think about your 20-valent program relative to your competitors' 15-valent programs in development.

I think let's take the assumption that both products will be successful and will overcome their regulatory hurdles. Then, I think we will have an adult product, very similar time, likely the same ACIP recommendation. One will be 15, the other will be 20. And then on pediatric, likely we'll have a window for a year that Merck will come first with a 15 and we will come with a 20. So the question is, is 15 versus 20 clinically, meaningfully different or not because that will dictate the success given that they're coming in the same time frame. And the answer is dramatically different. Right now, the disease that the 20-valent can control compared to the 15-valent, so basically, the 5 missing serotypes, accounts for 32% more disease in adults. In kids, accounts for 42% more, so it's much broader. So this is the landscape. I think we will have likely, if they are both successful, 2 products but will have very different profile, and then physicians have to choose.

So with that dynamic, that maybe 1-year gap on the infant side, it sounds like you're not overly concerned about that timing difference.

No, I'm not. Actually, I think that the difference is so big that we will be able to prevail significantly.

Okay. Great. I guess the last topic here, just cash flow profile of kind of the new Pfizer. Talk about how you're planning to prioritize share repo, dividend and business development as we think about the business evolving over the next few years.

Let me start with the dividend. The dividend -- actually a growing dividend, not only a dividend, a dividend that grows every year, it's a very big part of our investment thesis, so we will maintain that. We have the ability to maintain it. We feel very comfortable, and this is what we are going to do. We may not grow it, in the smaller Pfizer in the beginning, the same rate of $0.02 basically, but we're growing every quarter, $0.08 per year. But we will still grow it because we have huge payout. So as we will grow the dividend, but the cash flows will grow disproportionately more, we will catch up with similar, right now, payouts. Then with the remaining of capital, of course, we will invest CapEx as needed to make sure that we modernize our manufacturing facilities and our R&D. And then the difference between Pfizer of today compared to Pfizer of the past is that right now, we have many more options to create value. In the past, when we were dealing with revenue declines and with an R&D organization that was trying to improve productivity, obviously, share backs -- buyback of shares, share buybacks, was a way of financial engineering to create value. Right now, we can do better. So I think we will limit to less the share buybacks, and we will invest much more in business development. And to clarify, when I speak about business development, I -- we can do -- we never say never to anything, and we can do a big M&A. We don't want right now to do a big M&A. What is our strategic direction? I don't think Pfizer was ever more clear as to what are the beadiest strategic directions are as follows: we want to acquire or in-license programs, Phase II-ready, Phase III-ready. These programs that can become medicines in '24, '25, '26, '27 where you indicated that we need to make sure that we sustain the growth. And also, we want to make this in-licensing or acquisitions in the 6 therapeutic areas that we master. I don't want to go outside that because this is where we have the right to win. This is where we have the best scientists. This is where our scientists will make fewer mistakes in selecting those opportunities. And more importantly, they will be the right clinical protocols to develop.

So that seems to imply maybe more of a series of smaller deals versus something transformational or something more commercial stage. Is that a fair way of thinking about it?

I think it's a fair way. And by -- as I said, never say never because we have the balance sheet to do whatever we want. But it is fair. Right now, we have a unique window of opportunity, not -- to get it right with our launches and get it right with our pipeline. So I don't want -- usually, this type of transformation, acquisitions are creating also a lot of disruption. This is not what we need right now. And by the way, we don't need the revenue growth right now. We have. What we want is to ensure that we augment our pipeline so the growth -- the revenue growth will be sustainable.

Great. Well, I think we're just out of time. It sounds like a very different Pfizer from the days of old, but it should be exciting few years ahead. I appreciate the time though.

Thank you very, very much.

Yes. Thank you.