Pfizer Inc. (PFE) Earnings Call Transcript & Summary

Good day, everyone, and welcome to Pfizer's Analyst and Investor Call to review Amended U.S. government PAXLOVID Supply Agreement and updated full year 2023 guidance. Today's call is being recorded. At this time, I would like to turn the call over to Francesca DeMartino, Chief Investor Relations Officer and Senior Vice President. Please go ahead, ma'am.

Good morning, and welcome to our call to review Pfizer's amended U.S. government PAXLOVID supply agreement and updated full year 2023 guidance. I'm Francesca DeMartino, Pfizer's Chief Investor Relations Officer. On behalf of the Pfizer team, thank you for joining us. This call is being made available via audio webcast at pfizer.com. The news and guidance update that we will be discussing today was issued in a press release last Friday, which is available on our website at pfizer.com. Leading today's call are Dr. Albert Bourla, our Chairman and CEO; and Dave Denton, our CFO. Albert and Dave have some prepared remarks, and we will then open the call for questions. Joining for the Q&A session, we also have Doug Lankler, our General Counsel. Before we get started, I want to remind you that we will be making forward-looking statements and discussing certain non-GAAP financial measures. I encourage you to read the disclaimers in the press release we issued on Friday and the disclosures in our SEC filings, which are all available on the IR website on pfizer.com. Forward-looking statements on the call speak only as of the date of the call. I also want to remind you that today's call will focus solely on the topics covered in Friday's press release. We are still finalizing our third quarter results, and therefore, may need to defer answering some of your questions until our upcoming third quarter earnings call, which is scheduled for October 31. With that, I will turn the call over to Albert.

Thank you, Francesca. Hello, everyone, and thank you for joining us today. Last Friday, we announced an important agreement with the U.S. government that provides us with a clear pathway to U.S. commercialization of PAXLOVID next year. We believe this agreement will make it easier for eligible patients to access PAXLOVID, will ensure that the United States will have a robust stockpile for future use and helps provide more clarity on the commercial market for our COVID-related products. The commercial transition will begin in November of 2023 as the U.S. government begins to discontinue the distribution of EUA-labeled PAXLOVID. Pfizer will ensure commercial readiness by providing NDA-labeled commercial supply to all channels by the end of 2023. However, EUA-labeled PAXLOVID will remain available free-of-charge to all eligible patients until the end of this year. Therefore, we expect only minimal uptake of NDA-labeled commercial product before January 1, 2024. Ultimately, this transition to commercialization will enable more pharmacies and other health care side to stock PAXLOVID, unlocking access for a greater number of eligible patients across the U.S. The price of PAXLOVID sold to privately insured commercial patients will be negotiated with payers. The agreement has an important component, which is a noncash transaction, whereby the U.S. government will return an estimated 7.9 million unused EUA-labeled PAXLOVID Treatment Courses at the end of this year at the original contract price, and will receive a volume-based credit from Pfizer for NDA-labeled treatment courses to be supplied on behalf of the government in the future. This credit will be used by the U.S. government: First, to distribute PAXLOVID to federal entities and operate a patient assistance program on behalf of the U.S. government for the uninsured and underinsured from 2024 through 2028; second, in 2024, to allow patients insured through federal programs, such as Medicare and Medicaid, to continue to receive treatment free of charge through this same program. Separately, Pfizer will provide the U.S. government with 1 million NDA-labeled PAXLOVID treatment courses for a strategic national stockpile in 2024 at no cost to the taxpayer, and refresh stock prior to expiry through 2028 or earlier if the stockpile [is depleted]. By 2024, Pfizer will recognize revenue as PAXLOVID commercial product is delivered to U.S. privately insured patients at prices negotiated with payers. Also beginning in 2024, any PAXLOVID distributed in the U.S. outside of commercial channels will be applied against the U.S. government's credit. Revenue will be recognized by Pfizer as these treatment courses and the stockpile treatment courses are delivered based on the original contract price adjusted to reflect the stockpile. This agreement will affect Pfizer in a number of ways, including providing us with greater clarity regarding the commercial market for this important treatment and reducing future uncertainty for our broader COVID-19 portfolio. Through 2023, we have taken actions to continue to mitigate the uncertainty in our COVID-19 portfolio. As previously announced, the European Union contract for Comirnaty supply was renegotiated with amended purchasing obligations through 2026. The U.S. market for Comirnaty transitioned to commercially available product in September 2023. And now this amended agreement with the U.S. government provide us with a time frame for commercializing PAXLOVID as well. Finally, by the end of this year, we expect additional clarification on the expected trends for global vaccination and treatment rates. We believe the rates we see this fall will provide a solid foundation for future expectations. We have come through the period of fear that define the early days of COVID, where everybody wanted to be vaccinated very quick. In fact, we are right now in the middle of COVID fatigue where everyone wants to forget about the disease, and we are experiencing a peak of anti-vaccination rhetoric. Therefore, we believe those who are getting vaccines and medicines in the current environment are people who believe in the value of protection and treatment and will continue this behavior in the years to come. Given that clarity, combined with the lower-than-forecasted demand for both PAXLOVID and COMIRNATY, we are currently experiencing globally. We have revised our full year 2023 guidance and launched a program designed to reduce our cost and align them with our longer-term revenue expectations. At this time, I will turn it over to Dave Denton who will provide more details on guidance and our cost realignment program. David?

Thank you, Albert, and good morning. As we announced on Friday, we now anticipate our full year 2023 revenue to be in the range of $58 billion to $61 billion compared to our prior range of $67 billion to $70 billion. The reduced range is solely due to the expected performance of our COVID products. We're reducing our full year 2023 revenue expectations for PAXLOVID by approximately $7 billion, and for COMIRNATY by approximately $2 billion. Now for PAXLOVID, the $7 billion reduction includes an estimated $4.2 billion noncash revenue reversal. This will be recorded in the fourth quarter of 2023 for the return of approximately 7.9 million unused EUA-labeled treatment courses from the U.S. government's inventory. It is important to note that our non-COVID product portfolio remains strong. We continue to expect these products to achieve year-over-year operational revenue growth in the range of 6% to 8% in 2023. Due to lower-than-expected utilization for our COVID products, we have recorded a noncash charge of $5.5 billion to cost of goods sold in the third quarter of '23. This charge is primarily related to inventory write-offs for PAXLOVID of $4.6 billion and, to a lesser extent, for inventory write-offs and other charges for COMIRNATY of $0.9 billion. We also expect to deliver approximately $1 billion in savings in 2023 through our cost realignment program versus our prior guidance, which I'll speak about in just a moment. Our revised guidance also reflects anticipated improvements in our effective tax rate on adjusted income for '23 from approximately 15% in our original guidance to approximately 12%. Due to the combined impact of these items, we now expect full year '23 adjusted diluted earnings per share to be in the range of $1.45 to $1.65 compared with our original guidance range of $3.25 to $3.45. The change represents a reduction of $1.80, with $1.46 associated with the onetime impact from the return of PAXLOVID from the U.S. government and the write-offs, with $0.34 from the lower-than-expected COVID revenues for 2023. Now let me touch briefly on the cost realignment program we also announced on Friday. During our second quarter earnings call, we shared that we were carefully monitoring the demand for our COVID products. At that time, we also said we were preparing, if needed, to adjust our '24 total operating expenses to align with our longer-term revenue expectations. Given the new realities that Albert just mentioned, we now know that we need to adjust our cost base accordingly. We expect our enterprise-wide program to deliver annualized targeted savings of at least $3.5 billion by the end of 2024. This includes the $1 billion of targeted savings in '23 that I mentioned earlier, and an additional $2.5 billion in targeted savings to be realized in 2024. This comprehensive cost realignment program will touch all parts of the business in all regions. We have established a program management office comprised of senior leaders from the company to help ensure these savings are realized. The onetime cost to achieve these savings are expected to be approximately $3 billion, which will primarily result in a cash outlay in 2024. These costs will include severance as well as implementation costs. We will continue to revise our estimates and our targeted savings in the associated costs over the remainder of this year and will incorporate them into our full year guidance for 2024. Lastly, I want to point out that our revised guidance and cost realignment program have no impact on, and have not been impacted by our plan to acquire Seagen. We remain extremely excited about the deal, which reflects our significant commitment to helping lead the battle against cancer. We continue to expect the transaction to close later this year or early in 2024, subject to customary closing conditions, including the receipt of all regulatory approvals. We have raised $31 billion in acquisition financing so far and continue to expect incremental 2030 revenues in excess of $10 billion and cost efficiencies of $1 billion without impacting R&D programs. And with that, I'll hand it back to the operator so we can open it up for questions.

[Operator Instructions] We'll take our first question from Robyn Karnauskas of Truist Securities.

I think as we've digested all the news over the weekend, I think the big picture question that we had was how do you actually think about coming up with a formula to guide for next year? How do you [with certainty] that how PAXLOVID will be used, and how testing will be done and how the vaccine business will shape up? It seems like there's so many unknowns that you may not be able to give a great job of guiding for next year given there's so much uncertainty to start off with that big picture question.

Yes. First of all, we will provide guidance for next year when time comes. And usually this time, it is when we report our fourth quarter results. But I think when it comes to COVID revenues, I think you have enough elements to make your own calculations right now because a lot of the uncertainties have been -- that they were this year now have been eliminated. And some of them, by the end of the year, will become more clear when we [bought more ]. COMIRNATY, EU you have now a way to calculate it because the contract has been renegotiated, and there are purchase obligations every year so that we can calculate this. On the U.S., the uncertainty was, are we going to commercialize? That happened in September. So now we are into the market with the new price that you will see this year. The only uncertainty that remains for the vaccination, it is vaccination rates. And those, we are going to see them how that evolve by the end of the year. I think it is fair to say that whatever will be the vaccination rates this year, this is our expectation, will become a solid foundation of what will be the vaccination rates for the years to come because those are the people that truly believe, as I said, in vaccination, the value of vaccines because we are really far away from the COVID fear, but everybody wanted it. We are in the middle of the COVID fatigue, nobody wants speak about COVID. We have the peak of anti-vaccination rhetorics. With all of that, those people that will go to get vaccine this year, I think, will go get next year as well. Now let's move to PAXLOVID, there was a clear uncertainty what happens with the U.S. stocks that were -- or government stocks that were quite significant. And we estimate at the end of the year will be $7.9 billion that are enough for an additional year of utilization, right? So this also uncertainty is going away. We will wait now to see how the treatment rates evolve and then you can calculate what will be the treatment rates for the next year and then you should apply the new prices and for the commercial that you don't know, but you will find out pretty soon because we are currently starting negotiations with the payers. And also for every Medicare or Medicaid or uninsured patients that we will be providing product in 2024, we will be reporting sales for these volumes and the price is approximately pandemic prices. It is a pandemic price of [ $530 ] as you know, adjusted slightly for the inventory for accounting -- of the stockpile for accounting grade. So I think you have enough elements right now to estimate the future revenue COVID in '24 and beyond. And that by the end of the year, when you have vaccination and treatment rates that are more clear, and you can do even more accurate job.

Robyn, this is Dave. Maybe I'll just emphasize a couple of points. One is, clearly, the COVID products will be informed by the remainder of the year as we commercialize these products. As we've always anticipated these products become more standard and more consistent, so we'll be able to predict them better. And third, I think we've learned a lot over the last 1.5 years of how these products will perform. We -- our expectation is we will model that. We will come into the market next year with guidance that we believe is appropriate and conservative and give you the risk and opportunities associated with that.

We'll take our next question from Evan Seigerman of BMO Capital Markets.

So you indicated that we're reaching a peak under vaccination rate in your prepared remarks. Does this imply that you think we could actually see an increase in vaccination rates going forward? Or should this be the new normal? And as it comes to PAXLOVID, can you walk us through kind of what has changed from second quarter to now? Is this solely driven by a renegotiation of the government contract? Or are there other factors at play that really drove the guidance cut?

For the new normal of vaccination rates, I think that, as I explained, because of the circumstances of this year, whoever would get vaccines likely are the people that they are truly believers in the value of the vaccine. So that should be a good foundation, for conservative, if you want, estimation of what should be the vaccination rates going forward. Are there chances that this could become even higher or not, I think only either combination vaccines, that could be a significant catalyst into the market, combination with flu and RSV. But right now, what we assume it is that vaccination rates of next year will be similar to that our vaccination rates of this year. I will ask David to speak a little bit about what changed, was it only the U.S. government or what else we get under that...

Yes. As it relates to our guidance change, the vast majority of the change within our guidance is related to the U.S. government renegotiation of the agreement. But clearly, underlying that was some change in what we see from a utilization perspective for patients for both PAXLOVID and COMIRNATY for the balance of this year.

We'll take our next question from Carter Gould of Barclays.

I guess for Dave, I don't know if you can give some additional color on the source of the cost cuts, either between R&D and SG&A? And any -- just to confirm, will that full $3.5 billion hit non-GAAP, just wanted a clarification on that as well.

So I guess, first, on the $3.5 billion, yes, it will all hit non-GAAP. So it will be within our run rate. At this point in time, we're not going to clarify any additional detail around the cost program in the different buckets. I will tell you that we have a fairly comprehensive program because we've been planning for this for a while. We have senior leaders across the organization engagements within this program with a very comprehensive project management office. We're executing our plans both this year to realize the $1 billion savings as well as, as we wrap into 2024 to get the incremental $2.5 billion. I will point out that while we're -- this is a comprehensive program across both R&D and SI&A, our core research particularly as it relates to oncology, remains intact is you can well imagine, we made a big investment in oncology. We're fully supporting the oncology business, and we think we have a big opportunity to grow that business over time.

We'll take our next question from Chris Shibutani of Goldman Sachs.

The cost savings that you've outlined, obviously, you've discussed what the implications are for '23 and '24. Would it be reasonable to expect that there would be further opportunities for savings beyond 2024, particularly as you're integrating potentially so many businesses, including Seagen, et cetera?

First of all, everything is excluding Seagen. Seagen has nothing to do with any of these effects. Now, for the Pfizer part, clearly, by '24, as David explained, you should calculate the cost base combined R&D and SI&A, that it is $3.5 billion, less than the midpoint of the combined previous guidance. Our previous guidance that -- R&D number, and SI&A number, if you add those 2, in '24, you should expect $3.5 billion less and in '23, you should expect one of this already to happen, right? So that's how to calculate. I hope I answered -- anything to add David?

No. That's it.

We'll take our next question from Colin Bristow of UBS.

To not beat the same drum here. I just wondered if -- as we think about PAXLOVID here, testing rates in the U.S. are down around 19% year-on-year and continue to trend lower. Can you just give us some idea of where you expect this to reach steady state? And then what proportion of current PAXLOVID prescriptions are being written to patients without a test confirmed diagnosis of COVID? And then just sort of a point of clarification on the cost savings and the cost-cutting program. We get lot of questions -- some confusion. You're spending $3 billion to achieve $3.5 billion in cost savings. And then the ongoing run rate, is that $3.5 billion or $2.5 billion? It sounds like in your last answer, it's $3.5 billion, but if we could just sort of draw a line under it and clarify that, that would be great.

So just real quickly on the cost savings program, the run rate will be $3.5 billion in 2024 and beyond.

Thank you for clarifying that. We were very clear, actually. It's almost like, if we are giving you guidance for the combined OpEx next year, right? So it's going to be whatever is the midpoint of the previous guidance, minus $3.5 billion. And what is already -- we gave you guidance. For this year is going to be whatever was the midpoint of the combined R&D and SI&A minus $1 billion, right? So $3.5 billion will be the running rate. Now on the PAXLOVID, the question is when are we going to reach a stable state of utilization. I think we have, right now. It was lower than what we thought, that we had. Last year, approximately 11-point something, 11.8 million courses were distributed in the world. And right now, we are trending to slightly above that so far this year. It's going to be slightly below in the U.S., it's going to be ahead in international. But we believe that we have reached a quite steady state that can become a foundation for calculating future utilizations.

Our next question is from Umer Raffat of Evercore ISI.

I appreciate you clarifying Colin's question. I feel like that was very important because there was an earlier implication that the annualized cut is $2.5 billion. So I appreciate you clarifying it's $3.5 billion. My question is, is that a gross cut? Or is that a net cost cut to Pfizer?

I guess what -- mean, gross or net, it is if that we will have -- those rates that has cuts and then we will reinvest more money on top of that. No, that's what we said, that we expect next year's cost base to be $3.5 billion less than the combined base guidance -- midpoint of guidance of R&D and SI&A that we gave until recent before we revise it on Friday.

So it is net.

It is net.

Our next question is from Terence Flynn of Morgan Stanley.

Maybe just a 2-parter for me. So just wondering, Dave, does this bring you back to pre-pandemic operating margins after adjusting for the COMIRNATY profit split? And then on PAXLOVID, in the commercial setting, can you give us any sense of how the negotiated price, where that might shake out?

Yes. So I'll talk about the operating margin, specifically. We have not obviously provided guidance for 2024. So there'll be obviously puts and takes to that. So we'll hold on to that until we give 2024. I've been very clear that the long-term outlook of our business is to get back to pre-pandemic levels adjusted for our mix, primarily the vaccine program because it does carry a lower volume -- a lower gross profit given our partnership.

Thank you, David. Now on PAXLOVID and on the pricing. Look, there are 2 components, right? '24 will be a price that we apply as we recognize revenue to Medicare and Medicaid patients and uninsured, right? If you see the current IQVIA reporting, Medicare and Medicaid account for approximately 40% of PAXLOVID's rate. That's 35% and 5%, correct. Those we pretty much know the price. The price will be the pandemic price adjusted, as I said, slightly for the inventory. So that we know. And that will be applied in '24 on. Now in '24 in addition to that, we will have the commercial plans that are the remaining of the volume, plus some additional patients. And over there, the price will be known pretty soon. We are starting negotiations with payers. So there will be list reprice and of course, there will be rebates that will apply to this list price in the venture we have [ the net ] that we will see when we give guidance, we will calculate that. I want to clarify something. As we move to the year 2025, all Medicare and Medicaid patients will be receiving commercially available product, which means commercial price. So although in '24, the Medicare, Medicaid will be recognized revenues -- we recognize revenues with lesser likely price than the commercial. In year '25, everyone will have the same price going forward. And we will be, in addition recognized revenues at the pandemic prices for underinsured and uninsured patients, but we will continue providing products through a patient assistant program that we will provide -- that we will operating on behalf of the U.S. government. And every product that will be given to this patient assistant program will go against the credit that the volume credit that the U.S. government received from us as -- will receive from us at the end of the year. So I hope that this clarifies the situation. And I think, as I said, makes quite easy, I think, for everyone to start calculating. There are 1 or 2 elements that are still missing, the commercial price of PAXLOVID and there may be refined utilization rates of treatments and vaccinations.

We'll take our next question from Mohit Bansal of Wells Fargo.

A few -- couple of questions for Dave. So is it fair to assume the majority of the cost-cum-cuts are coming from the COVID business? And then bear with me on this math. If I take the midpoint of your guidance for this year, cut the $1 billion for this year and another $2.5 billion for next year. And then if I add to $2.5 billion of OpEx for Seagen, it seems like your OpEx could be roughly flat for '24 from '23. Is that fair?

So I guess, first on the split between COVID and non-COVID. As you know, we don't kind of manage our business that way. I would say that we're continuing to -- as I articulated earlier, our cost program is comprehensive. It's across our business, both COVID and non-COVID. But clearly, if you look at the trends and the current state of the pandemic, the patient need in our COVID business is less than what it was in the hype of the pandemic. So we would obviously lean in and rationalize our cost base accordingly based on those dynamics. And then secondly, I think intellectually, the conversation you had around the midpoint is not -- is factually accurate. I think it's just too early at this point in time to give you some clarity around how and when all those costs will be integrated and combined when the acquisition is completed. So more to come on that piece, but we'll be very transparent and make sure that you understand all the puts and takes as it relates to our cost base as well as our complete business as we cycle into 2024.

Thank you, David. Again, to reiterate that everything that we are doing right now has nothing to do with the acquisition of Seagen, that's a completely different let's say, element. Close this year or next year, this is what Pfizer will look like. And then season is an additional top.

We'll take our next question from David Risinger of Leerink Partners.

So with respect to vaccine demand, given that many people avoid mRNA boosters due to fears about brief tolerability issues in the first 24 hours, could you provide an update on your efforts to minimize reactogenicity risk in both future COMIRNATY booster versions and also Pfizer novel mRNA vaccines for other diseases?