Pfizer Inc (PFE) — Q4 2015 Earnings Call Transcript

Good morning, and thanks for joining us today to review Pfizer's fourth quarter and full year 2015 performance, as well as 2016 financial guidance. I am joined here today as usual by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, President of Vaccines, Oncology and Consumer; Geno Germano, President of Global Innovative Pharma; John Young, President of Established Pharma; and Doug Lankler, General Counsel. The slides that will be presented on this call can be viewed on our homepage, pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Fourth Quarter 2015, which is located in the For Investors Section in the lower right hand corner of the page. Before we start, I'd like to remind you that our discussion during the call will include forward-looking statements and that actual results could differ materially from those projected in the statements. Factors that could cause actual results to differ are discussed in Pfizer's 2014 Annual Report on Form 10-K, as well as on our reports in Forms 10-Q and 8-K. Discussions during the call will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of the 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. Also, today's call is not intended to, and does not constitute an offer to sell or the solicitation of an offer to subscribe for, or buy securities of Pfizer or Allergan. We will now make prepared remarks and then we will move to a question-and-answer session. With that, I'll now turn the call over to Ian Read. Ian?

Thank you Chuck, and good morning everyone. We finished 2015 with strong financial and operational performance. For the full year, we exceeded our 2015 revenue guidance and met the top-end of our adjusted diluted EPS guidance. Excuse me; and we achieved our first year of operational revenue growth in five years. Frank will take you through the numbers. Before he does, I have a few brief comments about what is driving our performance, some thoughts regarding where we expect to see pipeline advancements during the year, and I will close with a few comments about Allergan. Throughout the year and especially in the fourth quarter, our business executed flawlessly despite a challenging operational environment. We ended 2015 with solid momentum in both developed and emerging markets. Specifically in developed markets, during the year we gained incremental market penetration driven by continued success of products that are early in their life cycles, including Prevnar 13 adults, Ibrance, Eliquis, Xeljanz, and we still saw steady growth from key inline products in 2015, specifically Lyrica in markets where it remains patent protected. And during the year in emerging markets we saw operational revenue growth primarily due to the performance of Prevnar, Lipitor, and Enbrel, as well as from the addition of legacy Hospira products. The integration of the Hospira business into Pfizer Global Established pharma businesses is on track, and we look forward to this business being an attractive potential growth driver. This acquisition is indeed proving to be an excellent strategic fit, and we are seeing the expected value contribution to our GAAP business that we anticipated. Frank will speak to our 2016 guidance in a moment. We expect to deliver operational revenue growth in 2016. Our key growth drivers will continue to be Ibrance, Eliquis, and Xeljanz. And we believe that Prevnar adult global revenues will be comparable to the strong results we achieved in 2015. Additionally, we believe our near-term pipeline will help accelerate this ongoing growth forward. In looking at the year ahead, we expect our businesses will continue to execute well. They are competitively positioned to win their markets and are performing strongly against their competitors' set. Regarding the pipeline, we anticipate advancing many of our Phase III programs during the year. For Bococizumab, we reported today that the first of our six Phase III efficacy studies achieved its primary endpoint, and we expect readouts of the remaining five Bococizumab lipid-lowering studies shortly during 2016. For other indications, this year, we and our partners Merck will begin to deliver results from our comprehensive Phase III clinical program. In 2016, the alliance expects to submit applications for regulatory approval in the U.S. for both monotherapy and two fixed-dose combination tablets using data from eight clinical trials. For Dacomitinib, we expect results in the second half of the year for a Phase III study in first-line EGFR mutant non-small-cell lung cancer, and we'll discuss our regulatory strategy with the FDA. So for Xeljanz in the first half of this year we expect top-line results for our Phase III program in psoriatic arthritis. We believe Xeljanz can potentially fill a significant unmet need in psoriatic arthritis when non-biologic DMARDs do not have proven success, and where there are currently few alternatives for patients who have inadequate responses to anti-TNF therapy. In addition, in the first half of the year we anticipate decisions from the FDA for a once-a-day daily Xeljanz formulation for rheumatoid arthritis, and we remain on track to re-file our application for RA in the EU. For Ibrance, we expect to see the top-line PALOMA-2 study results in first-line advanced breast cancer in combination with letrozole, and we have an April PDUFA date for second and third-line treatment for advanced breast cancer based on the PALOMA-3 data. We could also see a regulatory decision for Ibrance in the EU by year-end. Additionally, in the oncology business, we have a PDUFA date this year in the U.S. with Xalkori in ROS1 non-small-cell lung cancer, and we expect to file for approval of Inotuzumab for acute lymphoblastic leukemia in the U.S. And in immuno-oncology, we now have a broad portfolio of compounds that we believe has the potential to support the development of a strong, deep competitive market position. We now have five immuno-oncology assets in the clinic and expect to have up to 10 in the clinic by the end of 2016. As a result of our partnership with Merck KGaA, as of the end of 2015, we had 28 ongoing clinical development programs for Avelumab, with seven of them being pivotal registrational studies. We anticipate some of these studies will give us potential registrations in areas like Merkel cell, ovarian, bladder, gastric, and lung cancer. Of these seven studies, we expect to present data in Merkel cell this year, and to see data from the other tumor types in the following two years. And we continue to believe that the winners in this space will be those that have a breadth of portfolio assets to support rational combinations. We have a range of assets to combine with Avelumab when compared to other companies' assets, and we have already initiated six combination studies with Avelumab. In 2016, we expect to see data from 4-1BB in combination with Keytruda and in combination with Avelumab in various tumors, 4-1BB in combination with Rituximab in lymphoma, a combination of Lorlatinib, our next generation ALK inhibitor with Avelumab, and ALK-positive non-small-cell lung cancer, and data from other combinations with Avelumab in renal cell carcinoma. Finally, we may see data from OX40 as a single agent this year. Taking all of this into account, we believe we are well on our way to being a leading player in this space. And now a few comments about our proposed combination with Allergan. We're excited about bringing two great companies together that have a strong strategic fit. The transaction is about accelerating growth potential in our innovative businesses and strengthening our established business, and more efficiently allocating our capital around the world. We are confident that we are taking appropriate steps so that we can achieve the key milestones needed to complete the transaction and continue to expect to close in the second half of 2016. Since the announcement, we have been working closely with Brent Saunders and his team at Allergan and have been delighted by the engagement and rapport that is occurring. We see a number of potential opportunities after closing as we continue to learn more about each other's portfolio. For example, we see complementarity in information in gastroenterology, and we will have a broader presence in cardiovascular disease with Eliquis and Bystolic. In neuroscience, Allergan's work in Alzheimer's, schizophrenia, and major depressive disorders will be highly complementary to Pfizer's promising early work in such areas as Parkinson's, Alzheimer's, and Duchenne muscular dystrophy. When you look at over the next few years we expect both companies to contribute several potential new drugs to launch. We'll also continue to be excited about the international potential. And by coming together, we are enhancing category leadership throughout our complementary inline portfolio and a combined pipeline with great late-stage and mid-stage assets across each of our key therapeutic areas. Both companies bring a great deal of scientific and product expertise to the proposed combination and a shared philosophy in our approach to research and development. Upon the close of the transaction, the combined company will be an influential player in the industry with a competitive product portfolio with several leadership positions, a robust pipeline, a compelling capital structure, and financial position, and aligned cultures that are based on ownership and an entrepreneurial spirit creating shareholder value and meeting patients' needs. This combination is about investing in our business. It's about accelerating our existing strategy while preserving our options of putting the company into an innovative business and an established business if we determine that is the best way to unlock the most value for our shareholders. By the end of the current quarter, our integration teams will be fully engaged, and we anticipate announcing post-closing leadership positions. Throughout the year we will continue to keep you updated on our progress. In summary, we're looking at a year ahead with a sound strategy and a strong business. Our outlook and financial guidance for the year takes into account the benefit of anticipated positive organic growth from key products, as well as the impact from foreign exchange. We have a solid portfolio of market-leading inline products and a healthy pipeline. We expect to further strengthen the growth potential of the business with the pending addition of Allergan. We will continue to have the means by which we can create value for our shareholders and bring innovative medicines to patients by producing expected top-line growth, progressing key pipeline assets, pursuing strategic business development, and returning capital to shareholders through dividends and buybacks. Now I'll turn it over to Frank for additional details on the quarter and our 2016 financial guidance.

Thanks, Ian. Good day everyone. As always, the charts that we're viewing today are included in our webcast. As a reminder, because we completed the acquisition of Hospira on September 3, 2015, Pfizer's full year financial results for the year ended December 31, 2015 include four months of legacy Hospira U.S. operations and three months of legacy Hospira international operations. Financial results for the fourth quarter 2015 include three months of legacy Hospira Global operations. By comparison, financial results for the full year and fourth quarter 2014 do not include any contribution from legacy Hospira operations. Now, moving on to the financials; fourth quarter 2015 reported revenues were approximately $14 billion, and reflect year-over-year operational growth of $1.9 billion or 14%, mainly driven by the addition of legacy Hospira operations. The continued strong performance of products that are early in their lifecycles, such as Prevnar 13 adult, Ibrance, Eliquis, and Xeljanz, Lyrica primarily in the U.S., and 5% operational growth in emerging markets, mainly from legacy Hospira operations, Prevnar 13, and certain other products. Reported revenues continued to be unfavorably impacted by foreign exchange of $934 million or 7%. Excluding the inclusion of legacy Hospira operations of $1.2 billion, the negative impact of foreign exchange, and to a much lesser extent, the inclusion of $35 million of revenues associated with vaccines acquired from Baxter, Pfizer standalone achieved operational growth of $646 million or 5% while at the same time absorbing a $720 million negative operational impact from product losses of exclusivity. Fourth quarter adjusted diluted EPS was $0.53 versus $0.54 in the year ago quarter. The decrease is primarily due to an aggregate operational increase in adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses of $1.8 billion or 21%, and $0.07 due to foreign exchange and the continued product losses of exclusivity in certain geographies. These were partially offset by revenue growth in certain new, inline, and acquired products, a lower effective tax rate, and fewer diluted weighted average shares outstanding which declined by 125 million shares versus the year ago quarter due to our share repurchase program which includes the impact of a $5 billion accelerated share repurchase agreement executed in February 2015 and completed in July. Reported diluted EPS was $0.10 compared with $0.19 in the year ago quarter due to the previously mentioned factors and the unfavorable impact of foreign currency losses related to Venezuela, increased purchase accounting adjustments, acquisition-related costs, restructuring charges, and asset impairment charges versus the prior year quarter, and non-recurring charges related to pension settlements, which were partially offset by the non-recurrence of a charge associated with the global strategic alliance formed with Merck KGaA in November 2014 to jointly develop and commercialize Avelumab, lower charges for certain legal matters, and a lower effective tax rate. Foreign exchange negatively impacted fourth quarter reported revenues by approximately $934 million or 7% and positively impacted adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses in the aggregate by $435 million or 5%. As a result, foreign exchange negatively impacted fourth quarter adjusted diluted EPS by approximately $0.07 compared with the year-ago quarter. Now, moving on to the financial highlights of our business segments; in the fourth quarter, Global Innovative Pharmaceutical revenues increased 10% operationally year-over-year due to the strong performance of recently launched products including Eliquis globally and Xeljanz in the U.S. and the strong performance of Lyrica in the U.S. and Japan. Income before taxes increased 17% operationally due to the increase in revenues and a 5% operational decrease in cost of sales. Cost of sales as a percentage of revenue decreased 1.7 percentage points operationally because of low royalty expenses and increased alliance revenues with no associated cost of sales. IBT was unfavorably impacted by a 4% operational increase in SI&A expenses as a result of additional investment in Eliquis, Xeljanz, and Chantix, and an 11% operational increase in R&D reflecting investments in our late-stage pipeline primarily for Bococizumab and Tanezumab. Fourth quarter VOC revenues increased 38% operationally, reflecting operational revenue growth in each business. Global vaccine revenues grew 53% operationally driven by a 102% increase of Prevnar 13 U.S. revenues due to the strong uptake among adults. Global oncology revenues grew 61% operationally driven by Ibrance in the U.S. and to a lesser extent by Sutent and Xalkori globally. And consumer healthcare revenues grew 4% operationally due to Nexium 24HR in the U.S. Income before taxes increased 33% operationally, mainly due to increased revenues and associated improvement in gross margin, which were partially offset by a 66% operational increase in SI&A expenses as a result of higher promotional expenses in the U.S. for newly launched consumer healthcare products, Ibrance, and Prevnar 13 adult. And the 46% operational increase in R&D expenses due to increased costs associated with oncology programs, primarily our alliance with Merck KGaA and Ibrance. Fourth quarter, Global Established Pharmaceutical revenues increased 5% operationally, mainly due to the previously mentioned inclusion of legacy Hospira revenues contributing $1.2 billion, which was partially offset by loss of exclusivity and generic competition for Celebrex in the U.S. and certain other developed markets, Lyrica in most developed markets in Europe and Zyvox in the U.S. Emerging market revenues were flat operationally, which reflected the positive impact of the inclusion of legacy Hospira operations and continued strong growth in China offset by declines in certain markets in the Middle East. Income before taxes declined 12% operationally reflecting the unfavorable impact of a 4.7 percentage point operational increase in cost of sales as a percentage of revenues due to the inclusion of Hospira operations and the impact of losses of exclusivity, a 24% operational increase in SI&A expenses driven in part by the addition of Hospira operations and the 53% operational increase in R&D expenses due to increased legacy Hospira development programs. We exceeded the top of our guidance range of expectations for 2015 reported revenues by approximately $400 million. Adjusted cost of sales as a percentage of revenues was 18.5% versus 18.7% at the low end of our guidance range due to increased alliance revenues and sales volumes, and we exceeded our expectation for our effective tax rate on adjusted income as a result of the favorable change in our jurisdictional mix of earnings. We met our expectations for adjusted R&D expenses and achieved the top end of our adjusted diluted EPS. Adjusted SI&A expenses are $14.3 billion, or higher than our guidance range due to increased expenses for recently launched products such as Prevnar 13 adult and Ibrance, other inline products, and certain Consumer Healthcare brands. We recorded adjusted other income of $409 million versus our expectation of approximately $500 million. Finally, reported diluted EPS was $1.24 versus our expected range of a $1.37 to a $1.43, mainly as a result of increased purchase accounting adjustments, acquisition-related costs, and restructuring charges primarily related to the acquisition of Hospira, the negative impact of foreign currency losses related to Venezuela, and non-recurring charges related to pension settlements. Now I'd like to walk you through the 2016 guidance ranges for reported revenues, reported diluted EPS, and adjusted diluted EPS relative to our 2015 actual results. First, it's important to note that our 2016 financial guidance excludes the impact of our pending combination with Allergan. Our 2016 reported revenue guidance range reflects anticipated strong growth of certain new inline and acquired products that are partially offset by an anticipated $2.3 billion negative impact due to continuing product losses of exclusivity. I want to point out that that would be in this range and consistent with our previous comments we expect full-year Prevnar 13 adult global revenues to be comparable with its full-year 2015 global revenue level. We expect adverse changes in foreign exchange based on mid-January 2016 rates relative to the U.S. dollar compared with actual foreign exchange rates in 2015 to have an additional $2.3 billion negative impact on the reported revenues, including an estimated $800 million negative currency impact related to Venezuela. Consequently, we expect 2016 reported revenues to be in the range of $49 billion to $51 billion. Reported diluted EPS and adjusted diluted EPS guidance also include the negative impact from product losses of exclusivity, as well as an expected $0.09 negative impact from foreign exchange rates and the $0.07 negative currency impact related to Venezuela. As a result, we expect reported diluted EPS to be in the range of $1.54 to $1.67, and adjusted diluted EPS to be in the range of $2.20 to $2.30. In addition, I want to remind everyone that guidance ranges for both reported and adjusted diluted EPS incorporate $5 billion of anticipated share repurchases in 2016, which consists of our previously announced intention to execute a $5 billion accelerated share repurchase program in the first half of 2016. These repurchases are expected to more than offset the potential dilution related to employee compensation programs. In summary, to exclude anticipated foreign exchange impacts, including the negative currency impact related to Venezuela, full-year 2016 revenue and adjusted EPS guidance midpoints are 7% and 10% greater than actual full-year 2015 levels, respectively. The remaining elements of our 2016 financial guidance are set forth on this chart. Now moving on to key takeaways, we had a very strong financial performance in 2015 and we achieved operational revenue growth every quarter, including 14% operational growth in the fourth quarter. For the full year 2015, we achieved 6% operational revenue growth that was mainly driven by new products that are early in their lifecycles and we achieved this growth despite a $3.2 billion negative impact from product losses of exclusivity. Our full-year 2016 reported revenue guidance range of $49 billion to $51 billion absorbs a $4.6 billion combined negative impact of product losses of exclusivity, adverse changes in foreign exchange rates, and the negative currency impact related to Venezuela. And the adjusted diluted EPS guidance range includes an anticipated $0.16 negative impact from foreign exchange, including Venezuela. We announced our proposed combination with Allergan and continue to expect the transaction to close in the second half of 2016. And we continue to create shareholder value through prudent capital allocation. In 2015, we returned $13.1 billion to our shareholders through dividends and share repurchases. And we expect to execute a $5 billion accelerated share repurchase program in the first half of 2016. Finally, we remain committed to delivering attractive shareholder returns in 2016 and beyond. Now I'll turn it back to Chuck.

Thanks, Ian and Frank. Operator, can we please poll for questions?

Good morning, and congrats on the solid finish for the year. So a couple of product-specific questions if I may, on the Prevnar franchise, you've posted strong 4Q numbers. Could you just talk about your expectations for the trajectory going forward? On Ibrance there's been a lot of discussion around a potential threat to Ibrance. What's your view here? And then just lastly on Biosimilars, can you update us on the status of your Biosimilar candidates, and when we should expect any data readouts? Thanks.

Thank you, Colin. I'll ask Albert to manage the Prevnar and Ibrance, and then pass it over to John for Biosimilars.

Thank you very much for the question, Colin. Let me provide some insight to help you understand the situation moving forward. In the U.S., obviously we have done an excellent job with the catch-up opportunity. We have achieved 86% market penetration, 92% at retailers. We have 90% awareness of the recommendation among healthcare practitioners. And as a result, over the 45 million adults eligible at the time of recommendation for vaccination, we have already captured about a third of them. Now while many adults remain, this cohort is more difficult to capture, as the low-hanging fruit is gone. It will require more innovative strategies that we all have in place, but even if we assume a similar or higher penetration rate this year, it will be on a much smaller pool of adults. However, we expect this will be mitigated by Europe, which has a very different growth profile. Even with prices lower than in the U.S., the demographics are very favorable, with a much larger eligible population, and who have already received pneumonia in our label in 2015, and we are working to obtain broad recommendations, and following that reimbursement from the authorities. Now this will be phased likely over a two-year window period, because in Europe this is done country-by-country, and sometimes region-by-region within the same country. But all in all, we expect very strong growth in Europe next year. Now let me move on to Ibrance and your question about competition or particularly about competitive drugs. Look, while in the same class, that competitive drug is for a different indication. The refractory patient population for which we have received breakthrough designation is a very small population with few options available. In fact, the average refractory patient undergoes seven lines of treatment. So they are in a high unmet need area. Now speaking generally on competition, there is only limited clinical data in the public domain, and we need to see more efficacy and safety data to make comparisons. What I can tell you is about our strategic position. We are the only company with a registered product in the U.S., and six other countries, and an accepted filing in Europe, where we may obtain registration as early as next year. We have very good clinical experience with the product. Ibrance has been prescribed by 5,000 physicians in more than 20,000 patients. And so far feedback is very positive, particularly on patients' quality of life. We are having a very heavy clinical program. We have two pivotal studies in first-line metastatic breast cancer, two studies in recurrent metastatic breast cancer, and three in early breast cancer. Ibrance is part of 88 investigational initiated trials, approximately 50 in breast cancer and 38 in other tumor types. So as you can see, we are investing heavily to stay ahead of the competition.

Thank you, Albert. I think just on Ibrance, you mentioned next year, you meant this year, late this year we may be able to get registration...

Okay. So thanks for the question on Biosimilars, Colin. So I think we're obviously very excited to bring together the combination of Hospira's current inline biosimilars that are already in the market. So we have three assets, as you know, which are already in the market in Europe, Nivestim, Retacrit, and Inflectra. And to bring that together along with the legacy Pfizer monoclonal antibody pipeline, plus some additional assets that Hospira has. So in total, when you look at the pipeline, we have nine distinct biosimilar molecules in different stages of development. Infliximab, outside of the EU, Adalimumab, Trastuzumab, Bevacizumab, Rituximab, Pegfilgrastim, Ranibizumab, Denosumab, and Ustekinumab. So overall we have a very strong pipeline. A number of those assets are in Phase III, late-phase development. And the first dataset there you'd be seeing from our Phase III studies would come from the legacy Pfizer Infliximab program where we would expect to produce data from our Phase III towards the end of this year.

Thank you, John.

Thanks, John.

Operator, can we please move to the next question?

Thank you. Sorry about that. Don't really know what happened on my end, but anyway, just a few questions. Frank, can you tell us what the Venezuela revenues are? I guess we are in consensus, we're surprised by the size of the hit; can you all hear me?

Yes, we can hear you. You're a little static, but we can hear you.

Can you provide more details on Venezuela and the reasons for the significant impact? Ian, I have a couple of questions regarding the breakup thesis and its timing. I believe investors were initially let down by the timeline you shared when announcing the Allergan deal, indicating a decision would be made by the end of 2018. Since the announcement, the stock has declined considerably, and while the market seems optimistic, I wonder if the widening valuation gap between your stock and a sum-of-the-parts valuation might prompt you to expedite your decision. Additionally, regarding revenue growth, there have been numerous fluctuations in your figures mainly due to currency impacts and patent expirations. Could you remind us of when you anticipate seeing a positive growth inflection point in reported revenue, excluding the Allergan acquisition? Operationally, when do you expect to see improvement, as my models indicate revenue has been declining for several years, mainly due to divestitures and spins? Revenue has been fairly flat to down since 2013. When will this trend reverse, and what factors will contribute to that change from Pfizer's perspective? Thank you.

Let me start with the revenue growth. As I mentioned, 2015 was the first year we experienced revenue growth, and for 2016, we expect it to remain relatively stable. We anticipate flat performance for Hospira and Allergan, mainly because we achieved significant growth from adult vaccines in 2015, and we don't foresee that franchise growing further. However, we do expect strong growth from our existing and newly launched products, despite facing challenges with a couple of billion in losses from exclusivity. As we gain traction with more clinical trials for Ibrance and see the launch of our next wave of products getting approved, we expect to return to substantial growth. One reason for pursuing the Allergan deal was to ensure robust growth in our innovative business, and we are conscious of that need. Regarding the breakup timing, while the stock has declined, I believe it's in line with the broader market. Although I dislike seeing the stock decrease, such pressure was anticipated. Our focus now is on successfully integrating the two companies, and we need to address critical questions that shareholders will likely want answered. We need to demonstrate that we can run the business effectively within Pfizer. With our acquisition of Hospira, we're already seeing progress in sterile injectables and biosimilars, and if we exclude the losses, we expect the core business to stabilize and grow. We're also considering whether the business could be run more effectively outside of Pfizer and if we can unlock value in a tax-efficient way. These are serious considerations involving large companies. By innovating, we aim to make decisions that serve our shareholders' best interests. I recognize your desire for quicker decisions, but given the scope of work required for integration and ensuring the success of the Allergan transaction, I believe we are taking the right approach for shareholder value.

Venezuela?

Yes.

So, Jami, the revenues from Venezuela that were initially projected for 2016 were about $800 million, which is roughly the same as 2015. If you consider the adjustments we made, we changed the exchange rate from 6.3 Bolivar per dollar to 200 Bolivar per dollar, using the SIMADI rate for Venezuela. This change in the translation is what led to the adjustment we made for 2016. We believed that this timing was appropriate given the oil prices, the current economic situation in Venezuela, and the flow of dollars coming out of Venezuela. The primary factor causing the adjustment for 2016 is the conversion from 6.3 to 200 Bolivar per dollar.

Now, Jami, as Venezuela goes through this crisis and eventually re-establishes a normal economy, we anticipate that the country's growth could reach between $200 million and $400 million annually. Therefore, the actual medium-term difference is expected to be up to $400 million, considering the previous overvalued currency situation.

Thank you.

Thanks, Ian and Frank. Can we move to the next question please?

Hi. Three questions please, two of them very short. Firstly, perhaps you could just outline sequential growth for China, say, last quarter? Second, do you anticipate extra notice from Treasury on conversion, and obviously how restricted do you see any measures to impact the Allergan transaction? And then finally, just returning to the Phase 2 trial, which accelerates approval that have not seen Palbociclib in early line of therapy, is that an approval process given the design of that trial, given the fact you are approved for the indication or does that include any regulatory approval for the drug? Thank you.

Okay. I am going to do the notice first. We at the moment understand that the Treasury is working on formalizing and regulating the first two notices they issued, which are not in many ways applicable to our transaction as we're at below 50% ownership. I really can't speculate if there is going to be a third notice or not. We feel confident the transaction is fully within U.S. law and fully within accepted interpretation of that law and expect the transaction to close in the second half of next year. With that, I'll go to growth to Frank, and I would ask Mikael to talk about Palbociclib.

On China, for the quarter, China grew 10%. Full year, China grew about 10%. Nice numbers. Somewhat moderated from 2014. In 2014, China grew to about 15%. So, we saw some moderation in the growth in China. That said, Andrew, we remain very bullish on China. Has an increasing population, increasing personal wealth, government is committed to healthcare. We see increased spending in the government, and the GDP rate is still very healthy. Not as high as it has been in the past, but still quite healthy. So, we remain very bullish on the China market on an ongoing basis.

Yes. Thank you, Andrew, for a good question here. Two things; first, I want to just to point out that Abemaciclib is somewhat different from Palbo and Novartis drug in that it seems to be less selective and has a different resident profile likely due to hitting multiple CDKs particularly with reported significant GI issues. So it's a different profile, and we, as Albert very well pointed out, have been extremely pleased with the favorable profile that allows patients to benefit from Ibrance with very good reliability. Now you asked about this late-stage population studies, and how that population in the future will evolve. We anticipate as Ibrance is having a very nice uptake in the marketplace in the first line metastatic and some also more advanced lines, and hopefully with Prevnar 3 approval, Ibrance is likely to be used in multiple lines. Hence, monotherapy with another CDK will of course have the potential to face patient population that have seen CDK inhibitor, and that's why we are developing a strategy for how we can see patients benefit from drugs like Ibrance at various stages with different anti-hormonal therapies. And we are also now studying Ibrance in triple therapy. So I think you can see that multiple drugs are likely to be preferred as patients become more advanced.

Thank you, Mikael.

Thank you. Next question please.

Great. Good morning everyone. Thanks for taking the questions. So…

Good morning.

Hi, good morning. Just again on the Biosimilars front, I know there has been a couple of questions, but just a couple of more if I could. One is specifically on Enbrel, and if you can discuss in terms of 2016 how you are viewing the impact of Biosimilars to your performance for that product? And then second, now that Hospira has closed, I am just wondering, I guess this is a question for John or whoever wants to jump in, in terms of the value of having a Biosimilar business under the same broad umbrella as your innovative business so you can leverage that commercial infrastructure in areas like oncology and autoimmune disorders. Is there any way to sort of maybe make more sense than to keep Pfizer as a single entity as opposed to splitting up and then needing to rebuild the commercial infrastructure for your Biosimilars in those similar areas where you do have innovative products? Thanks.

Vamil, I'll ask Geno to talk about Enbrel and the impact of Biosimilars in Europe.

Sure. So, the first Biosimilar for Etanercept has been approved in Europe. And we've been watching the situation very closely and evaluating adoption of Biosimilars across each of the countries throughout Europe for a while now. Our overall expectation is that there will be somewhat modest impact in 2016. The Biosimilar landscape is clearly still developing. There are different approaches being taken by different countries. And we have a very clear detailed roadmap for how to address each of the dynamics that exist in these different countries. So we are fairly confident that we are going to continue to have a strong Enbrel business throughout Europe. We think that the new patients would be probably most at risk of being exposed to the Biosimilars and hope that the availability of lower-cost biologics will expand the market. So overall, we see this as again a modest impact to our business in the initial period of time.

And Vamil, maybe a very interesting question on the connectivity between the Biosimilars and the other space. I would say that that would be taken into account if there was any such linkage that was positive in our TSAs, the setup of the separate companies to ensure that as overall we maximize value between both companies in the contracts we would sign if we decided to split. Thank you.

Thanks, Ian.

Next question please.

Couple of questions. First, apologies if I missed the explanation, but the 2016 guidance includes roughly an incremental $4 billion in revenue and $0.08 in earnings from Hospira implying significantly down underlying sales for the legacy Pfizer and flattish to down EPS, and it seems that generic exposure in currency cannot be the explanation because the predicted $4.6 billion hurdle in 2016 from these factors is well less than the $6 billion plus predicted in 2015 at this time last year. So actually the comparison on generic exposure in currency is improving and more than offsets the year-over-year increase in Prevnar. So, any thoughts on that would be appreciated. And one more, how should we think about the long-term outlook for Sutent particularly given the competition from immuno-oncology agents. Do you think Sutent will soon become a defining asset or do you see growth in the future? Thanks.

I'll ask Albert to talk about Sutent and its possible combinations and the other studies we have already had on Sutent. And then I'll ask Frank to come back on your questions about growth rates.

We remain very confident in our position in the RCC space and that includes both, Sutent and Inlyta, because they are very well known by physicians and other stakeholders. The recent approval in RCC for immunotherapy does not affect Sutent. It is in the second line. Sutent is used primarily in first line. As we have previously disclosed, we are studying Inlyta, and Inlyta plus other PD-1 inhibitors pretty aggressively so that we can achieve better results in monotherapy in RCC second line.

Frank?

Yes, let me address your question. We don’t provide a specific revenue figure for Hospira for 2016, but I can still provide some insights. If we look at the midpoint of our guidance before considering foreign exchange effects in Venezuela, it stands at $52.3 billion. When we compare that to the $48.9 billion we reported in 2015, adjusted for foreign exchange, we see an operational increase of about $3.5 billion. Ian mentioned earlier that revenue, excluding Hospira, remained essentially flat year-over-year while incurring $2.3 billion in LOEs for 2016. Additionally, we generated $1.5 billion in Hospira sales this year, so when we state that most of the growth comes from Hospira, it's important to note that this reflects growth beyond the $1.5 billion reported in 2015. That's the rationale behind our numbers and why we indicated that, operationally, the figures were flat without considering Hospira.

Thank you, Frank.

Thanks, Frank. Next question please.

Hey, how's it going? I appreciate the clarity in the communications this quarter. I have a question that has been touched on before, but I'd like to ask it directly. Do you believe there is anything under the current U.S. statute that would allow the treasury to block or significantly delay the closing of the Allergan deal? Specifically, will there be a third proposed notice? Under the current law, are you confident that the treasury cannot legally block the deal or delay it significantly, as it happened in 2017 with a new Congress and president? Additionally, Frank, could you discuss your leverage ratio? Based on my calculations, the leverage ratio of the combined company should be around 1? If my math is correct, you might be able to take that to about 3 without substantially impacting credit ratings. I’d like to hear your general thoughts on the leverage ratio of the combined company and where you might consider taking it if the deal goes through. Thank you.

Thank you, Mark. And thank you for the compliment on the clarity of communications. We strive to make them clear. So on your question regarding the current law, I do not believe there is any reason why this deal will not close; full stop.

Let me run some numbers. So on leverage let me run the Pfizer numbers based on third quarter. We haven't issued a balance sheet yet for the fourth quarter. We will do that when we file the K. We had about $37 billion of cash in investments. We had about $39 billion of debt, short and long-term debt. So to your point, call that one to one essentially, and what we said when we announced the Allergan deal, what I said was we could take the leverage ratio to about 2.5 to 3. And then, obviously, once we took it there, we would want to see what kind of rhythm that created relative to the company, the operation supporting the company in that we take it there, but that we still want access to commercial paper. We would be willing to take a one notch downgrade but we would still want to have access to commercial paper. But in terms of your math and your calculation 2.5 to 3, that's right. That's basically what I talked about when we announced the Allergan deal. So, your math was good.

Thanks, Frank. Next question please.

Yes, a few things. One is can you tell us what the key products are in Venezuela, if there are any massive ones that we need to be hitting the model on? Second, Frank, maybe you can go through some of the push-pulls on SG&A and how you are thinking about the spending this year? And then, third, can you just give us an update on the IL-6? Thanks.

So key products, I don't think there's any outstanding product, but the Enbrel is the biggest product that contributes. John, would you want to add anything to that?

Yes, I think Enbrel is the biggest product. I think in addition to that, we have a portfolio of matured established products like Lipitor and Norvasc that would be other key products for us in Venezuela. So really, just think about the basket of established products and the fit in that marketplace.

Okay. The SG&A?

So, Marc, on SG&A, let me just talk to the quarter and then I'll talk to the rhythm of the numbers. So if you look at the quarter, we had a big spend in SG&A. It's $4.6 billion all in. Three major factors there, right? One, obviously the inclusion of Hospira, which added a couple of hundred million. Two, sequentially, if you think about the fourth quarter compared to the third quarter, we had a lot more selling days in the quarter. So, internationally, we had six more selling days. Domestically, we had two more selling days. So, sequentially, Q3 of '15 to Q4 of '15, we had more selling days. So obviously, it helps revenue, but also increases the spend on our line items. And then, we had obviously I alluded to in my comments increased promotional spend in many areas of the business. Now, if you take that $4.6 billion and you annualize it, times 2 is what? $9.2 times 2 is $18.4. If you look at the guidance we gave for next year on SI&A, it's $13.2 billion to $14.2 billion. So you can't take that Q4 number and annualize it. You get to a number that's nothing close to what our guidance is for 2016, which is a combination of Hospira numbers, the selling days, and then the increased spend in the quarter. But we look at it for next year; we get a number that our annual basis is significantly lower than what that annualized number would be.

And, Mikael, do you want to discuss IL-6?

Yes. Thank you for your question. So we tested IL-6 antibody in Lupus and other conditions, and while the antibody did show some activity, we found that overall profile did not compete as well as many other real interesting immunology agents and other opportunities we have in our very rich pipeline of 90 clinical programs. So this is part of prudent portfolio prioritization within Pfizer.

Thank you, Mikael.

Can we move to the next question please?

Thanks for taking the questions and for all the clarity that you've given on the '16 guidance. Ian, first question on the timing around the breakup, I think you've indicated that integration of Allergan is very important. You've also indicated that you had time to look even deeper into the Allergan portfolio. As you think about integration, can you give us some more commentary around how you are thinking about mapping out integration? Some look at Wyeth and look at the massive amount of synergies that you are able to extract out of the Wyeth transaction and are somewhat puzzled as to why you can't do that here. So, any commentary around that? Two additional questions; one on CDK 4/6, this one is for Mikael. Mikael, when you look at preclinical models, is there any argument or hypothesis around a drug that has to be given intermittently that it might have less efficacy than one that's given on a continuous dosing? And is that supported by any preclinical models? And then, the last question just has to do with Xeljanz. Obviously, a very important asset for you not only in the U.S. but on the EU timing for filing, I think you indicated you wanted to have that filed before the end of the year. Just any update on what Europe is looking for within that filing to secure approval in Europe? And then, on psoriasis in the U.S. any developments there on the modified release from a regulatory standpoint and then obviously with Enbrel seeing generic competition what have you done with your infrastructure in Europe to still keep some infrastructure in place to support Xeljanz if and when it gets approved?

Okay. Let me quickly address the last point first. We still have very strong expectations for Enbrel in Europe, as Geno mentioned. We are not withdrawing our support for Enbrel, and we expect to fully support Xeljanz when it launches in Europe. There was a slight delay with the Xeljanz application in Europe, moving from the end of last year to the beginning of this year. We wanted to ensure everything was in the best condition possible, which caused this minor setback. Mikael, would you like to address this hypothetical regarding CDK 4/6?

Yes, thank you for the questions. Of course, always we would caution you to speculate on things that haven't been studied in humans in comparative aspects, but you know, we think it's important to hit CDK 4/6 hard for breast cancer, and when you do that with high doses you will get efficacy on the tumor, but also see some neutropenia and that's why we chose the intermittent schedules. Particularly, it seems very effective for combination therapy with multiple agents such as hormonal therapies in breast cancer. For other tumor types, we may explore various schedules for various combinations of drugs, but for breast cancer we think to show some schedule with the combinations we have studied is very effective and works well.

Thank you, Mikael.

Thank you. Next question please.

Great, thanks. Just two quick ones here. First, just more broadly on emerging markets, can you talk about the growth outlook here maybe beyond China, just given the current economic environment we're seeing? Has there been any change in your growth expectations there? And then the second question for Ian. I know you've obviously had a very large deal pending right now. But how are you thinking of business development given the recent volatility and kind of valuation reset we see in the market? I guess what's the size and scope of assets that you could be interested in at this point, given the upcoming Allergan transaction? And maybe how quickly post the Allergan transaction could this company start considering larger deals if there was an attractive opportunity in the market.

Thank you. John, you want to talk about China?

Yes, sure. I mean, I think as we always say, Chris, on the emerging markets, we're always going to see courses and course of volatility. But at the same time, we continue to expect to see growth numbers in the mid-single digit to mid to high single-digit range. Frank's already talked about China. We continue to be very positive about the prospects in the short, medium, and longer term in China. It's obviously not just the world's largest country, with 1.3, 1.4 billion population, but we continue to see a strong government commitment to expanding access to quality healthcare. We are very encouraged by steps that we see the government taking in the regulatory environment to really enhance quality standards in the marketplace. And whilst there are few headwinds, GDP growth is slowly but still positive, still mid single-digit percentage. We are seeing some pressure on pricing. But overall when you put all of those factors together, we can continue to see China being a very positive growth driver.

Thank you, John. On BD, Chris, we see we would be more focused on smaller deals than larger deals right now. But once we close, we'll look at the opportunities. And we know we still have substantial flexibility and of course it will be measured against the alternative usage of that cash which right now are scheduled for buybacks and the accretion equation. So we'll make the decisions that we believe are best for shareholders and we will take into account the asset pricing at the time when we close.

Thanks, Chris. And can we take our last question, please, operator?

Hi, it's Manoj. Thanks for taking the question. A couple on the pending Allergan transaction and one on next Tuesday, on Allergan. One, I guess if maybe just if you can highlight, what are some of the levers that would dictate whether the deal would close in early second half of '16 versus later in the second half? Two is, for Frank, on the $2 billion synergy number if you can just quantify as we fine-tune our pro forma model, if that's a gross number or a net number?

Okay, on the lever, Doug Lankler, would you indicate what you see the levers are for the close?

Sure. So, Manoj, we're working closely with regulators. We are pleased with the progress that we are making. We like the complementary nature of the businesses. And as a result, we continue to expect to close the transaction during the second half.

It's a net number.

Okay.

Thank you.

Thanks very much for your questions.

Thanks for your time everybody.