Pfizer Earnings Conference Call Q2 2018

Thank you, Chuck, and good morning everyone. During my remarks, I will discuss the progress we are making within each of our businesses, the latest advancements within our R&D pipeline and some of the steps we are taking to prepare the Company to accelerate top line growth in the future. In the second quarter, total Company revenues were up 2% operationally, driven by the continued growth of key brands, biosimilars and emerging markets. These growth drivers were partially offset by the loss of exclusivity of Viagra in the U.S. in December 2017, a decline in U.S. legacy established products and product supply shortages related to our legacy Hospira products. I'll begin with a few words about each of our businesses starting with Pfizer Innovative Health. This business had another solid quarter, growing its top line 5% operationally thanks to the continued strength of several of our biggest selling medicines. In the second quarter, global Ibrance revenues were up 19% operationally to just over $1 billion. This was driven by strong growth in international developed markets, which represents our next avenue of growth potential for the brand and to a lesser extent, in emerging markets and the U.S. Ibrance continues to hold a leadership position in first-line hormone receptor-positive HER2 negative metastatic breast cancer. Since its launch, approximately 12,000 physicians have prescribed Ibrance in the U.S. and more than 140,000 patients have been prescribed the medicine worldwide. The overall CDK class continues to grow within the eligible patient population, although penetration has decelerated with approximately 64% of eligible first-line newly started patients in the U.S. receiving CDK therapy. Within the CDK category, which now includes two competitors, Ibrance total prescription share is 91%. Xtandi's U.S. alliance revenue grew 21% to $171 million. We received good news earlier this month when the U.S. FDA approved a supplementary new drug application for Xtandi based on results from the Phase 3 PROSPER trial. The approval broadens the indication for Xtandi to now include men with non-metastatic castration-resistant prostate cancer. This makes Xtandi the first and only oral medication that is FDA approved for both non-metastatic and metastatic CRPC and the anticipated approval of this indication was a key factor in our valuation of Medivation. Xeljanz continues its strong performance, with revenues increasing 37% operationally in the quarter to $463 million. We received several additional regulatory milestones since our last call. In May, the FDA approved Xeljanz for the treatment of adults with moderately to severely active ulcerative colitis. Days earlier, it was also approved in Japan for the same indication. In June, the European Commission approved Xeljanz in combination with Methotrexate for the treatment of active psoriatic arthritis in adult patients. In addition, we recently received a positive opinion from the CHMP in Europe recommending marketing authorization for Xeljanz for adult patients with ulcerative colitis, and we look forward to the potential approval of this indication. For a broad array of indications, ease-of-use and a good tolerability profile, we see Xeljanz increasingly becoming a go-to product with rheumatologists and GI physicians. Worldwide, Pfizer's revenue for Eliquis were up 42% operationally to $889 million, driven by strong growth in the U.S. and the EU. In the U.S., Eliquis now makes up more than half of novel oral anticoagulant prescriptions, widening its market share lead in the quarter from 10 to 13 percentage points ahead of our primary competitors. Finally, we continue to review strategic options for our Consumer Healthcare business, which delivered another solid quarter. Turning now to Pfizer Essential Health. We once again saw strong operational growth in emerging markets and in our biosimilars portfolio. Overall, Essential Health revenues for the quarter declined, however, due in large part to the ongoing product supply shortages in the sterile injectable business, continuing product LOEs, namely Lyrica in developed Europe and a decline in the legacy established products portfolio in developed markets. Emerging markets revenue within the Essential Health business grew 10% operationally for the quarter to nearly $2 billion. China led the way, growing 24% operationally. Revenues from our biosimilars business grew 44% operationally in the quarter to $188 million. Our growth in biosimilars was driven primarily by Inflectra in certain channels in the U.S. as well as in developed Europe. We expect to broaden our biosimilars portfolio in the U.S. by potentially bringing five biosimilars to the market in the next two years. In our sterile injectables business, as stated in first quarter earnings, we expect to see improvements in the year-over-year comparisons during the third and fourth quarter. We continue to strengthen and advance our pipeline, which we believe has the largest and most promising array of late-stage prospects it has had in decades. Let me touch on some of our more promising recent developments. In rare diseases, following the positive top-line results from our Phase 3 study in patients with TTR cardiomyopathy, tafamidis received breakthrough therapy designation from the U.S. FDA and a similar designation from the Japanese Ministry of Health, Labor and Welfare. We see this as a potentially highly important break for these patients and we look forward to presenting the full study results in August at the European Society of Cardiology conference. In internal medicine, on July 18 we, along with our partner Eli Lilly, announced that a Phase 3 study evaluating subcutaneous administration of our investigational humanized monoclonal antibody tanezumab in patients with arthritis pain met all three co-primary endpoints. This study was a 16-week dose titration study evaluating tanezumab for the treatment of osteo pain. If approved, tanezumab would be the first in a new class of non-opioid treatments for this disease. In oncology, we currently have four potential medicines under priority review at the FDA, lorlatinib, dacomitinib, talazoparib, and glasdegib. In inflammation and immunology, we have built what we believe is a true leadership position with our JAK franchise and currently have 10 ongoing selective immunokinase programs. We are continuing to recruit for our Phase 3 study for our JAK1 molecule in atopic dermatitis, for which we received a breakthrough designation by the FDA. We initiated a Phase 3 study of our own Xeljanz, our first JAK inhibitor, in adult patients with active ankylosing spondylitis. We initiated a Phase 1 study of a topical agent in patients with mild to moderate plaque psoriasis, and later this year we expect to share progress in our next generation JAK assets that has the potential to be a first-in-class treatment for alopecia areata, a disease for which there is no approved preventive therapy or cure. In vaccines, we achieved proof of concept for our next generation multivalent pneumococcal conjugate vaccine candidate with the potential to cover 20 serotypes, and we are currently planning our Phase 3 program. We have currently three gene therapy programs in clinical studies, the Factor IX collaborative program with Spark Therapeutics has started to enroll patients for Phase 3. This marks the first gene therapy Phase 3 program that Pfizer has initiated, and this remains an area of high interest to us. Our gene therapy program for Duchenne's muscular disease has started dosing the first few patients in a Phase 1/2 trial and our collaboration with Sangamo is advancing the Phase 1/2 dose escalation study cohort. Through 2022, we continue to see the potential for approximately 25 to 30 approvals, of which up to 15 have the potential to be blockbusters subject to some expected attrition. The previously referenced approvals for Xeljanz and Xtandi represent the first two of these 15. Before I close, let me briefly recap the announcement we made on July 11 regarding the modifications we'll be making to our structure. Effective at the beginning of the company's 2019 fiscal year, Pfizer will have three businesses, a science-based innovative medicines business, which will now include biosimilars and a new hospital business unit for anti-infectives and sterile injectables, an off-patent branded and generic established medicines business operating with substantial autonomy, and a Consumer Healthcare business. This new structure represents a natural evolution for our business as we transition to a period post 2020 where we expect a higher and more sustained revenue growth profile. And given the growing importance of emerging markets to Pfizer's business, we see this new structure better positioning each business to accelerate its growth. In summary, we continue to deliver on our strategy and believe we remain well positioned to deliver new medicines for patients, enhance shareholder value and prepare the company for accelerating growth in the future. Our in-market products remain strong. Our late-stage pipeline contains several potential blockbusters. We remain prudent with regard to capital allocation, and our engagement with policymakers around the world continues to focus on creating an environment that maximizes a benefit for both innovators and patients. It's our job not only to discover and develop medicines and vaccines, but also to advocate for affordable access so they can help the maximum number of people who need them. As such, we will continue to work with the president on his blueprint for strengthening the healthcare system, providing more access and relieving the burden on patients at the point-of-sale. Now I will turn it over to Frank to provide details on the quarter and our revised financial outlook for 2018.

Albert, would you like to discuss tafamidis? I think it's a name that you will very soon remember very clearly as you see its impact on patients. But Albert can talk to tafamidis. I'll make some opening comments on the reorganization and then Albert, continue to explain the reorganization.

Thank you, Albert. So, Gregg, on the restructuring, this is something that Albert as COO was reviewing in that role, discussed extensively with me. It basically represents I think a pivot in the company towards growth as we see the strength of our pipeline, the need to invest in our pipeline and the need to structure around growth drivers, certainly emphasized by the fact that the optionality construct, as we said in the first quarter, we no longer saw as viable. So with that, I'd like Albert to explain a little bit why we are structured around growth and why this is good for the company.

Jami, thank you for the questions. So I undoubtedly believe that Pfizer has always organized itself in a way that was structurally prevalent for the market of that time and our objectives. I think this recent reorganization is around growth drivers. It does bring an element of simplification and I think it allows us to continue to evaluate our business segments to see if they're worth more inside Pfizer than outside of Pfizer. So we will continue to do that. We're very focused, have always been focused on shareholders return, not the size of the company. And so rest assured that we will, as these businesses continue to develop, look at opportunities to maximize their value. Albert, do you want to add anything to that?

And, Frank, you want to answer Jami's beyond 2019 perspective?

Thank you, Chris. I'll let Albert discuss Ibrance and then I'll come back to your question on the evolving pricing and our market access situation in the U.S.

Thank you, Albert. On the present blueprint, I mean we have submitted comments, which I believe are public record. Pharma has submitted comments. Overall, we're very supportive of the blueprint. I think the president is trying to maintain a market-based system in the United States which is positive. Probably one of the largest changes, which I think would be overall positive for the industry, is the secretary's intention to remove the Safe Harbor for discounts so as to eliminate rebates. At the moment in time, about 40% of pharmaceutical prices are subsidies to the rest of the health care system. We realize some 58% of our list price. The rest goes to subsidize profitability of PBMs, insurance companies and frankly premiums for those that are healthy. This is not a sustainable position, and so removal of the rebates I believe will be very beneficial to patients and our industry, especially those companies who are launching, those companies who are launching new products over the next five years or so. With the removal of the rebates, we will remove the sort of what we call the rebate trap, whereby access is denied to innovative products because of a strong position of another product with its rebates. That example would be Xeljanz's slow penetration but steady into its market, given the situation of rebates of bigger competitors. I think the president is focused on improving through trade agreement the free riding that occurs on American consumers and research. He wants to promote value-driven healthcare by linking payments to performance. He's focusing on improving the efficacy of the FDA and I think that's going well so far. And he intends to reform the 340B program, which I believe is important. This is completely distorted compared to what congress had originally intended for that program. So overall, I suppose we see more focus on net prices, rebates going away and the blueprint being implemented, which is I believe is positive for patients and positive for innovative companies.

Okay. On the rebates, I do believe that the intention of the administration is to remove the Safe Harbor for rebates. Today, I would believe we're going to go to a marketplace where we don't have rebates. I don't know the speed of that, but I do believe the administration has been focused on that because that will reduce pharmaceutical prices at the point-of-sale and very positively by removing the 40% subsidy that goes to the rest of the healthcare system and putting it back on reducing pharmaceutical prices at the point-of-sale. So we will be focusing on net price increases and you would expect them to fluctuate around healthcare inflation. As new data comes available, you may see different value equations for products that in general are around health care inflation and I don't see that as any obstacle to us growing to middle to high single digits as our growth will be coming from innovative products creating new markets. So, and as I said before, I think the removal of the rebate trap will be advantageous to Xeljanz and be advantageous to our biosimilars programs. Would you like to answer the Ibrance question please, Mikael?

Okay. Let me answer the structure as it relates to the type of deals and then Mikael will answer your questions on the pipeline, Vamil. So you know our view of BD hasn't changed much in the last couple of years. We view BD as an enabler of our strategy, not a strategy in itself, and our compass for any deal has always been generating value for Pfizer shareholders. Specifically, at this time, regarding a large or transformative deal, I don't believe we need such a deal to drive the growth of this Company. I would be and I think our leadership team is united on this view, we'd be far better off focusing on developing our pipeline, investing in our pipeline, bringing these products to market, growing these products than undertaking a large deal. A large deal is always available to us, but the chance of developing this pipeline is unique in this moment. It requires more research, more focus and as I say, any large deal is always available to a Company with our balance sheet and size. So we would be looking at, if we were doing business development and we continue to look at the market for business development, more in single deals, things around late Phase 2, early Phase 3, something that can continue to boost our pipeline in sort of five-plus years. So that would be our focus right now. As I said, never say never, situations change, valuations change, but at this moment that is our thinking around BD and it links to this new structure with its focus on growth in all segments of the business. Mikael, would like to answer the question?

My conversations with the president were centered around his blueprint and the actions he wants to take in those blueprints. I didn't obviously -- you don't get definitive dates out of an administration. But I think I would say I see a huge sense of urgency on the part of the administration to act on the rebate part of the middlemen where they see that the subsidy that pharmaceuticals is delivering to the rest of the healthcare system is unsustainable and needs to be corrected. So I expect the administration to act on that with as much urgency as they can. With regard to the gene therapy, I mean we have made a substantial investment in manufacturing in gene therapy. The plan is, we'll come online within the next couple years, about $300 million to date. We've committed to that. We're committed to gene therapy. We have the gene therapy that Mikael had just mentioned. We would look to tuck-ins if they were available. That's part of our view on buying intellectual property that has within the next five years launch potential. And we're committed to this area and we think we have a strong franchise. We certainly are not going to buy gene therapy that we think is way overpriced, but we will buy gene therapy that we think has value. On the US R&D, I'll really ask Mikael and Albert to comment on specific programs, but I would say that most of it is focused on ensuring that those 15 products get launched and in development spend. Albert, do you want to make a comment here?

Thank you. Thanks, Mikael. Okay. I'd just add to that, that we also have trials that are extremely large in the vaccine, 20, where we're entering into Phase III, and we tend to be very competitive there and also in our vaccine for which is -- and for C diff. Now C diff is a large trial. We are the leader in that category. One of our competitors withdrew from developing their products. This is a significant disease burden. We need to invest. We need to make sure we get to the events and expand the cohorts. So we're putting a lot of money into vaccine trials as well. And many Phase III are coming right now, so it's a good time for R&D pipeline.

Thank you. Look, you know, reform of systems is unpredictable. I believe that the administration is focused on rebate reform. I believe that initially their reforms will be focused on the public sector where they have the authority to take the rebates out of the Safe Harbor, but I believe that will extend to the commercial business very, very quickly as I can't really see a bifurcated system where half the system is on net price and the other is on a rebate. It's just the transparency won't allow that. So I would see rebates going away and the system accommodating itself to negotiations on value and net price. But as I said, this is a political decision, and you have one person's view and we'll have to see. But I do think it's a priority for the administration. Mikael, would you want to talk about Phase I?

We will not be giving guidance for the individual units. We'll be giving guidance for the stock ticker of Pfizer. But I believe this is about more about getting the right focus and the right management and positioning our headquarters of this new BU or positioning the leader that's that way in China. I think it will lead to simplification, will lead to savings in our expense base. But that is not a primary motivation for doing this. It's more about getting focus of management around key sectors. Albert, would you like to add to that?

Okay. Why don't we have Albert talk about the size of the market for alopecia areata and then we'll have pipeline answers by Mikael.

So, Louise, just adding to Mikael's and my detail on those comments, I do think we see the alopecia areata and the clinical indications around that mechanism of action to be a blockbuster status. So where I can do forecasts, I would consider that to be a blockbuster. And I just want to correct something on the gene therapy plant, it'll be ready to produce at industrial scale in early 2019.

Well, thank you for the question, Dave. U.S. pricing, I accept that companies, that companies and PBMs that set the co-pays and set the structure by in which commercial companies pay, there's a system that's opaque in many ways to the end user and to the payer for that matter. So I think that if you have the public sector with clarity on what net price is, then I think you'll see that the private sector will not ignore the net prices that are occurring in the public sector, so I think it will effectively force transparency into the private sector as well. And I would see a situation where patients are paying their co-pays and their coinsurance over net price and not list price, and so I think it's very positive for the health of the pharmaceutical market. Of course, you may see that rebates in the commercial sector hold on for longer than we expect and we'll have to see exactly how the administration does in fact take away the rebates in the public sector, so there's a lot of uncertainty. So what you're getting is basically a simplified view from my perspective of saying that if the administration is determined to take rebates out and they can act in the public sector, I would expect that transparency to push the private sector to remove rebates and would be pricing over net price. So I think it's very positive for the pharmaceutical industry for patients.

Well on Xeljanz, I think our marketplace is clearly replacing injectable TNF factors and that would be the structure of the pricing. I don't think we're going to be particularly concerned about the pricing of a product that comes in with a, what I would classify as not as strong a label as Xeljanz. So maybe we'll leave it at that on that one. And then other question was, Mikael, on tafamidis?

So, Geoff, thank you for the questions. I think what we said was that the previous construct we didn't believe would produce value, the optionality construct we had previously that we were reorganizing around growth factors, that our priority was standing up the new construct of the established products unit with a leader working out of China and that we would continue to look at all alternatives to maximize value, all our different business units to Pfizer. So I hope that answers your question on that and, Mikael, would you like to discuss the other issues?