Wall Street Unleashes Fury at Pfizer's $1.5B Revenue Discrepancy
Pfizer (PFE) CFO Frank D'Amelio told Wall Street analysts that he included Wyeth's Animal Health unit in his revenue estimates for the merger of the two companies even though he knew the unit would have to be divested, according to a transcript of the conference call.
D'Amelio's admission came Wednesday, when investors punished Pfizer, taking the better part of a dollar off its stock, after the company missed its earnings guidance by 2 cents and lowered its 2012 revenue guidance by $1.5 billion. The sound of harried analysts furiously updating their spreadsheet models with Pfizer's new numbers could be heard all across investment banking land.
The stock's fall came after a conference call in which analysts repeatedly badgered CEO Jeff Kindler and his team over why the numbers they presented this week were so different from the numbers they had touted earlier. Of particular concern was 2012 revenue guidance, which Pfizer now says will be $68.5 billion tops, not $70 billion.
Catherine Arnold of Credit Suisse went first, using the dread words "trust" and "confidence," which is a sort of Wall Street code for "don't you dare lie to me":
... on the 2010 guidance, we would obviously like to trust that the reinvestment that you are making in the products is prudent and beneficial in the long-term strategic outlook for the company, but I think, we need a little bit more color so that we can have that confidence. ... And then, if you could comment on the 2012 revenue difference and where that primarily came from.CFO Frank D'Amelio gave a technical answer. Three elements of Pfizer's business had changed, he said, which required a recalculation:
Three things, the planned Animal Health divestitures, the second item is the HIV joint venture, ViiV Healthcare. And then, the third item is basically the return of Relistor rights to the licensor.So far so good. (The Animal Health unit makes vet drugs.) But not good enough for Steve Scala of Cowen & Co.:
I would like to follow-up on the 2012 revenue questions. In January 2009, when Pfizer gave the revenue guidance, it anticipated Animal Health divestitures to my recollection, is that not correct? And despite that anticipation, it was not in the guidance, is that how we should be viewing that situation?D'Amelio gave a long answer in which he appears to confess that Pfizer counted the Animal Health division in its revenue estimates at the time of the Wyeth merger, even though the company knew the unit would have to be divested. He said, per the transcript:
In terms of the Animal Health divestitures, being adjusted to the 2012 targets, the short answer is, we included, let me say it differently, we knew Animal Health was going to be digested, and we had made some assumptions for that. When we gave the $70 billion target that was based on, among other things, the combined revenue of both companies for 2008, which included all of the Animal Health revenues. So, the $70 billion, although, we knew, we were going to be making Animal Health divestitures, we did not adjust the $70 billion for Animal Health divestitures. So, the answer to that is, it is a new entry relative to what was included and assumed in the $70 billion."We did not adjust the $70 billion for Animal Health divestitures," would be the key admission: It suggests that Pfizer gave analysts revenue guidance it knew had not been adjusted for the sale of the animal health unit. (The unit was sold in September to satisfy antitrust concerns.)
That wasn't the only problem with Pfizer's numbers. David Risinger of Morgan Stanley didn't like Pfizer's tax estimates, which leaped from 22 percent to 30 percent. Eric Lo of Bank of America wanted to know why, if revenue estimates were coming down, sales expenses were going up. Shouldn't they move in tandem, he wondered?
And then Tim Anderson of Sanford Bernstein inserted his knife delicately between Kindler's ribs. Pfizer had announced it expected to reduce its R&D costs by about $1 billion in 2012. While that may save the company cash it is a big risk -- drug companies only make money if they can find new drugs, and R&D is where new drugs come from. Anderson said:
So, you put forth some pretty aggressive R&D cost cutting figures for 2010 and 2012. As I think kind of the core of the organization, how are you confident that that isn't going to ultimately come around to bite you for potentially under investing in R&D?D'Amelio replied:
In terms of the R&D programs, $9.1 billion to $9.6 billion in 2010, $8 billion to $8.5 billion in 2012 with the targets, those numbers have obviously been worked in detail with Martin, with Mikael, we have done bottoms up analytics on that. We announced our updated pipeline last week. It went from 600 programs to 500 programs.So there it is: 100 pipeline products have been axed, one-sixth of Pfizer's entire R&D effort. The core of the organization just got a lot slimmer.