Pfizer Inc. (PFE) Q4 2010 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to Pfizer's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. And thank you for joining us today to review Pfizer's fourth quarter 2010 performance, 2011 financial guidance and 2012 targets. I'm here with our CEO, Ian Read; Frank D'Amelio, our CFO; Olivier Brandicourt, President and General Manager of Primary Care; Mikael Dolsten, President of Worldwide Research and Development; Geno Germano, President and General Manager of Specialty Care and Oncology; Amy Schulman, our General Counsel and Business Unit Lead for Nutritionals; and David Simmons, President and General Manager of Emerging Markets and Established Products. The financial charts that will be presented on this call can be viewed on our home page, pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance Fourth Quarter 2010, which is located in the Investor Presentation section in the lower right-hand corner of this page. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in Pfizer's 2009 annual report on Form 10-K and in our reports on Form 10-Q and Form 8-K. Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those 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, February 1, 2011. These reports are available on our website at pfizer.com in the Investors SEC Filings section. With that, I'll now turn the call over to Ian Read. Ian?

Thanks, Chuck. Let me begin by welcoming everyone to our call today. I'll start with a few comments about 2010. We ended the year with a clear focus on meeting our financial commitments, managing our cost structure, executing on our strategy, successfully integrating Wyeth and enhancing shareholder value. I'm pleased to report that we've made steady progress across these areas and finished 2010 on a strong note with a very solid fourth quarter and a solid year, overall. Frank will take you through the details shortly but there are a few notable highlights for the year. We met our top and bottom line commitments. We are on track to achieve our multiyear targeted cost reductions. We grew revenues in key emerging markets like China and Brazil. We grew key assets in our branded portfolio, Prevnar 13, Lyrica, Enbrel, SUTENT. We saw encouraging results in our late-stage pipeline, Prevnar 13 adult; Tosocitinib, the new name for tasocitinib; presotinib [ph] and apixaban. We expanded the portfolio through strategic and business development deals, King, Teuto, Vicuron and we returned a meaningful level of capital to shareholders through dividends and share repurchases. In summary, I would say 2010 was a year we once again did what we said we would do. We made additional progress in laying out a solid foundation to build sustainable shareholder value over time. I'd now like to spend some time sharing my thoughts about Pfizer's future, our key challenges and the steps we're taking to shape our future. As most of you know, I spent my career at Pfizer. It's an honor for me to take over as CEO at this important time for both Pfizer and the industry. We operate in an industry that continues to face multiple challenges. There is ongoing pressure from payers, governments and society to deliver greater value. Growth is slowing in traditional markets and shifting to rapidly expanding Emerging Markets where different approaches and different resource levels are required. And universally, the industry has to find an innovative model that produces consistent returns. We understand these challenges, and I remain very optimistic that Pfizer will be a leader in driving the right solutions. I believe no company is better prepared to address, head-on, market dynamics. We have the talent, global footprint, commercially competitive businesses, capital resources and the foundation for leading-edge science, which now includes small molecules, large molecules, vaccines and different modalities represented by [ph] and [ph]. My job as CEO is to manage and focus our capabilities, assets and talent, to drive the most value for our shareholders. We will invest our human and financial capital in those areas where we can lead. And where we don't have core capabilities, we will look to partner or license assets. We are evolving our culture, including research, to be a result-driven and entrepreneurial organization. For 2011, we will continue to take a hard look at our core capabilities. During today's call, I'm sharing with you the important first steps I and my leadership team have underway to position Pfizer for the future. I will focus on our financial targets, our plans to address R&D productivity, the pipeline, our business portfolio and plans for capital allocation. Starting with our financial targets. I believe we have provided a greater degree of certainty regarding our 2012 adjusted diluted EPS target, which we have maintained and strengthened our ability to grow earnings beyond 2012. The revenue range we are sharing with you today includes projected revenue from the King acquisition that no longer includes any revenue contribution from future business development. This does not mean that we've decided to pull back on pursuing business development. Our approach will be continue to be optimistic and disciplined. We will pursue those deals that best enhance the portfolio and give us the best opportunity for growth. If we believe that a deal will meaningfully impact our targets, we will adjust them accordingly. With this approach, I believe we are providing both a transparent and disciplined use of shareholder cash. Next, I'll go through the meaningful steps we've taken to improve the performance of our innovative core. I fundamentally believe in the power of innovation in pharmaceuticals, but I recognize, to be successful over time, we need to substantially improve the rigor of our approach. First, we will sharpen our focus to the core research areas that give us the best promise at scientific and commercial success. We will maintain or increase investment in neuroscience, CB med, oncology, inflammation and immunology and vaccines. In addition, these areas will be augmented by the advanced modalities delivered by [ph] and [ph]. We will put in place dedicated units focused on pain and sensory disorders in bio-stimulus. We will stop funding in areas of greater risk and/or less productivity, such as allergy and respiratory, urology, internal medicine and tissue repair, and we will create focus within our post-POC concept portfolio. This will include a mix of owned and partnered assets in our higher priority disease areas that together will improve our risk return portfolio. Key actions will be determined over the next few months. Second, we will set up industry-leading models for external collaboration that allows us to share risk and gain access to the best science and technology. We will do this through: Strategic collaborations with industry and academia, like the announcement that seven of New York City's top research hospitals are joining Pfizer's Centers for Therapeutic Innovation; establishing external research units in collaboration to focus on high potential areas in Primary Care, Specialty Care such as women's health, urology, genetic diseases and retinal care; in-license to access high-quality, external molecules and technology platforms; and focusing internal Pfizer R&D capabilities in areas where we deliver unique value, i.e., target selection, molecule design and selection and safety regulatory strategies. We will look to establish external relationships with those R&D capabilities that do not drive competitive value for Pfizer, such as API and dosage for manufacturing, toxology study conduct, monitoring and bio-analytics. With this change to our services model, we will create greater financial flexibility and reduce capital deployed. Third, we are strengthening the fundamentals that drive biomedical innovation with a series of actions including: More closely aligning our global R&D network footprint with key hubs for science and technology; we intend to enhance our presence in Cambridge, Massachusetts to complement our existing R&D networks including those sites located in hubs like San Francisco, New York, La Jolla and Cambridge, U.K.; we are establishing and embedding a strong precision medicine platform across R&D to drive the next generation of high-impact differentiated medicines and vaccines; and we are driving a greater and tighter integration of science and business through an alignment between our research units and business units. This includes a more rigorous portfolio decision-making and governance process. We are also proposing to make six several significant changes to our global R&D network. This includes a proposal to exit the Sandwich, U.K. site and reduce and then shift certain resources in Groton, Connecticut to Cambridge, Massachusetts. This is not a reflection on the U.K. operating environment or the quality of science in the U.K. Rather, it's a business decision to focus our R&D footprint in must-win areas. Taken together, we expect that all of these actions will have the net effect of reducing the R&D spend to the range of $6.5 billion to $7 billion during 2012, as compared to our original target of $8 billion to $8.5 billion. More importantly, we believe these actions should strengthen our engine for innovation. We believe they will better balance our modality mix, improve our probability of technical and regulatory success, deliver more differentiated products and yield a higher return on investment for R&D, while achieving a small and flexible cost base. Turning to our existing pipeline. We now have a very promising mix of small molecules, biologics and vaccines, something we have never had before at Pfizer. We will be tracking several key late-stage assets through 2011, including the Tosocitinib, apixaban, Prevnar 13 adult, crizotinib, axitinib and bosutinib. We know there's more work to do here, and the actions we are taking to improve R&D productivity form the foundation of our efforts. In addition, we are giving more business ownership and accountability to our chief scientific officers to create a greater ROI mentality in research. And we're establishing clearer metrics for proof of concept success. We believe we are putting in place the tools, talent and decision-making authority that will help us not merely move in line with the industry, but to become a leader in the industry. Now turning to our business portfolio. I believe we have strong commercial capabilities. We are the number one player across many of our businesses, Primary Care, Specialty Care and Animal Health. We will continue to look at the value creation potential of all our businesses. This includes the investment needed to make them profitable, growing businesses, their competitive global position and where they can create the most value, be it inside or outside of Pfizer. We have already initiated several actions, including continue to invest in: Emerging Markets, where we are significantly increasing our geographic reach and field force in China, to support a very strong product portfolio that is well in line with patient needs and demographics; launching a competitive sterile injectible business that has attractive returns within the Established Products business; solidifying our Primary Care, Pain portfolio with King acquisition; and exploring strategic alternatives for Capsugel. The mere fact that we have size and scale will not be a driver for how we make decisions. It will however help enable us make decisions that can enhance our competitive market position through smart business development choices. As an underlying principle, we want to ensure that the whole is greater than sum of the parts. We established the current business line up about 16 months ago. Our job is to make sure Pfizer is taking the best actions for each of these businesses to maximize the value they create and their potential return to shareholders. This has been an ongoing process which we will expect to complete during 2011, and I will update you regarding any decision we take during the year. And finally, a few words about the actions we're taking to directly enhance shareholder value. The board increased the dividend for the first quarter 2011. We continue to target a dividend payout ratio comparable to the current industry average of approximately 14% in about three years. We are reallocating cash in order to expand our share repurchase activity. The board approved a new $5 billion share repurchase plan, which increases our total remaining current authorization to $9 billion. We intend to purchase approximately $5 billion this year. We believe this will provide our shareholders an attractive return, while also giving a higher degree of control and certainty regarding any initiatives that can directly impact EPS without sacrificing our ability to do bolt-on deals. The growth in the dividend, in addition to our share repurchases, will result in significant capital allocation directly to shareholders. In closing, let me end this call where I began. We started 2010 focused on enhancing shareholder value. As we enter 2011, we are squarely focused on accelerating these efforts. Frank will be getting into more detail in a moment, but in summary, I believe we have provided a greater degree of certainty and a more clearly defined path to achieve our 2012 adjusted diluted EPS target, taking a significant step forward in addressing the R&D productivity challenge, targeted completing our business portfolio assessment during this year that will focus on shareholder return and make significant capital allocation decisions. At the same time, we are building a strong, late-stage product pipeline and continue to have financial flexibility. As I look ahead, I can say with confidence that we are investing in the right areas of growth that take advantage of our core capabilities. We are taking the right actions to manage our costs and expenses, and we are building an entrepreneurial culture that makes the most effective use of our global talent. Now, let me turn over to Frank to give you more detail on the quarter and the years 2011 and 2012.

Thanks, Ian. Good day, everyone. As always, the charts I'm reviewing today are included on our webcast. Now, let's move on to the fourth quarter financial results. The $1.1 billion or 6% year-over-year increase in fourth quarter 2010 revenues was primarily attributable to the addition of Wyeth products, which favorably impacted revenues by $2.3 billion or 14%, partially offset by a decrease of $1.2 billion or 7% in legacy Pfizer product revenues and a $70 million or 1% negative impact from foreign exchange. The year-over-year increase in fourth quarter 2010 reported diluted EPS was primarily due to revenues from Wyeth products and lower restructuring charges associated with the Wyeth acquisition. These were partially offset by lower revenues from Pfizer products, expenses associated with legacy Wyeth operations and charges for asbestos litigation. Also during the quarter, we reached a settlement with the IRS which had a favorable impact on net income. Finally, adjusted diluted EPS decreased 4% year-over-year to $0.47 per share. While revenues from legacy Wyeth operations and a decreased effective tax rate favorably impacted adjusted diluted EPS in the fourth quarter, it was unfavorably impacted by expenses from legacy Wyeth products and lower revenues from legacy Pfizer products. Fourth quarter adjusted total cost was negatively impacted primarily by the addition of Wyeth operations, and to a lesser extent, foreign exchange. The increase in adjusted cost of sales as a percentage of revenue from 17.5% to 21.5% was primarily due to the change in the mix of products and businesses resulting from the addition of Wyeth operations and the negative impact of foreign exchange. The 7% increase in adjusted SI&A expenses was primarily driven by the addition of Wyeth operations. R&D expenses were essentially flat due to the ongoing cost reductions that were offset by the addition of Wyeth operations and continued investment in our late-stage development portfolio. In the fourth quarter 2010, foreign exchange had a negative impact of $70 million on revenues and a negative impact of $96 million on adjusted total cost. In total, foreign exchange negatively impacted fourth quarter adjusted diluted EPS by approximately $0.01. Revenues from our Biopharmaceutical business increased 3% or about $450 million to $15.1 billion in the fourth quarter with operational growth of 4%, of which $1.6 billion or 11% was attributable to legacy Wyeth products, which was partially offset by a $1.1 billion or 8% decrease in revenues from legacy Pfizer products. Within the Biopharmaceutical units, legacy Pfizer's year-over-year operational performance reflects the continued negative effect of the loss of exclusivity of certain products, including LIPITOR, which lost exclusivity in Canada in May of 2010 and Spain, July of 2010. As well as Aricept in the U.S. in November of 2010, which in the aggregate, decreased legacy Pfizer's Primary Care revenues by about $500 million year-over-year. With that said, select Pfizer brands, such as Lyrica, Chantix and Celebrex, among others, experienced growth in key international markets, especially Japan. In addition, continued pricing pressure in Europe and the impact of the U.S. healthcare reform also negatively affected Biopharmaceutical revenues in the fourth quarter. Fourth quarter Diversified revenues increased year-over-year by approximately 34% due to the addition of Wyeth products. Fourth quarter revenues generated in Emerging Markets, which include both legacy Pfizer and legacy Wyeth Biopharmaceutical and Diversified operations, increased 38% year-over-year. It's important to note that over the same period, Brazil, Russia, India, China, Mexico and Turkey, contributed a combined 47% to the overall growth in Emerging Markets. And legacy Pfizer Biopharmaceutical revenues in these BRIC-MT markets grew operationally by 5% in the fourth quarter and by a 9% for the 2010 fiscal year. As you can see on the chart, in 2010, we again met or exceeded all elements of our full year financial guidance, including achieving more than $2 billion or 50% of our cost-reduction target. Alright, I'd like to comment specifically on a few elements of our 2011 guidance. In particular, we expect reported revenues in the range of $66 billion to $68 billion; cost of sales as a percentage of revenues of 19.5% to 20.5%, which is primarily driven by the shift in business, product mix, resulting from the Wyeth acquisition; the continued shift in geographic mix with a greater percentage of revenues expected from Emerging Markets and from Established Products; the loss of U.S. exclusivity of LIPITOR later this year; and the impact of the Puerto Rico excise tax; adjusted SI&A expenses in the range of $19.2 billion to $20.2 billion, which is similar to 2010 level of $19.5 billion, driven by our continued expansion in Emerging Markets; the reclassification to SI&A of the U.S. healthcare reform fee; planned investment in new products, such as Prevnar 13 and in support of late-stage assets; it's also important to note that while the overall trend in spending and support of LIPITOR will continue to moderate in 2011, we continue to invest in certain markets, such as Europe and Japan, where LIPITOR is still under patent protection; we expect 2011 adjusted R&D expenses in the range of $8 billion to $8.5 billion; and finally, we expect adjusted diluted EPS in the range of $2.16 to $2.26. We've updated some of the elements of our 2012 financial targets, and we now expect reported revenues in the range of $63 billion to $65.5 billion, which includes anticipated revenue from our acquisition of King Pharmaceuticals but does not assume any meaningful revenue contribution from future business development transactions. Adjusted R&D expenses in the range of $6.5 billion to $7 billion, which reflects the impact of our efforts to improve innovation and overall productivity, while focusing our investments in areas that we believe provide the best opportunity for scientific and commercial success. Adjusted other income and deducts to be approximately $1 billion. The effective tax rate on adjusted income to be approximately 29% and reported EPS to be in the range of $1.58 to $1.73. In addition, we're providing, for the first-time, a target range for 2012 adjusted SI&A expenses of $17.5 billion to $18.5 billion, which is notably lower than our 2011 guidance. The remaining elements remain unchanged, including adjusted diluted EPS. It's important to note that our adjusted diluted EPS range of $2.25 to $2.35 per share includes the favorable impact of expected revenue growth from key in line and new products, including Enbrel, LYRICA and Prevnar 13, and the anticipated revenues from our King acquisition, expected revenue growth in Emerging Markets Established Products in the Diversified Businesses, lower SI&A and R&D expenses, and the full year effect of our planned repurchase of about $5 billion of our common stock during 2011. So moving on to key takeaways. First and foremost, we met or exceeded all components of our 2010 financial guidance, including our 2010 operational cost-reduction target, we provided financial guidance for full year 2011, we also anticipate completing the ongoing review of our portfolio during 2011, and finally, we've updated our 25 financial targets to no longer assume any contribution from future business development transactions and our revenue targets to reflect a significant increase in planned share repurchases, to add a target range for SI&A expenses that is significantly lower than the 2011 guidance range and to reflect lower R&D expenses, and we're reaffirming our 2012 adjusted diluted EPS target range of $2.25 to $2.35, which incorporates the full-year effect of the $5 billion of anticipated share repurchases in 2011. Now, I'll turn it back to Chuck.

And at this time, operator, if we could please poll for questions.

[Operator Instructions] Your first question comes from David Maris from CLSA.

First, Ian, you touched a little bit on this in your prepared comments but if you could expand on it. On your view of the state of the company and since taking on the new role, is there anything that you think maybe The Street or investors don't fully appreciate either on the positive side or on the challenges going forward?

Well, on the state of the company, I think we went through a pretty good review of '10. I think we're in a solid position. We managed to beat slightly our targets despite hits from the European pricing and U.S. healthcare reform and slightly faster erosion in Spain of LIPITOR than we expected. We grew our key assets. So I believe we are, as a company, where we wanted to be at this stage. The sort of late-stage pipeline needs to come through. I think Pfizer certainly is ready for a win in that late-stage pipeline. And I'm sort of optimistic about how those products will come through in the next couple of years.

Your next question comes from Chris Schott from JPMorgan.

First, Pfizer's previously expressed an interest in increasing its exposure to the generic business and kind of building out that established market's portfolio. Is that something that's still of interest and on the table at this point or do you think you've addressed that through the string of we've seen over the last year or so? And then second, in the past I believe Pfizer's commented something to the extent the larger deal, for example, something north of $10 billion or $15 billion was not on the table at current times. Is that still the case? And could you just more broadly comment on the size of transactions you might be targeting at this point?

I'll make some initial comments and then I'll ask David and then Frank to add to that. So I think on the Established Products, it's a core business for unit for us. It's doing what we ask it to do. I think we're going to evaluate, as I said, all of our business units during 2011 from the point of view of their strategic positioning and return. I would say that EP's crucial, strategic decision how we continue to source that business with a wide range of products going forward. Our present strategy is to do that through in-licensing and partnerships. And we need to review that and look at if that is sufficient or do we need to bring that capability internal to Pfizer. And in regarding the business deals, we've never said never to any deal. I think we've talked about doing bolt-ons. We talked about doing them doing them if they fit. The specific gaps or needs of a BU or if we can take that intellectual property and leverage it with our core capabilities, and that's really how we look at those things. So David, do you want to add anything on Established Products?

Yes, I'll just add that we've learned a lot in the last two years from our activities in Established Products. And we're very optimistic and bullish about the future potential in both Developed and Emerging Markets in this regard. We're very early in our evolution in this business but we are bolstered by the progress we've made to date, so we remain optimistic.

And then on the business development, I think the way to think about this, Chris, is although we never say never, to Ian's point, we'll be focusing on deals that are like the deals we've been doing recently. So if you say, what are some of the recent deals -- deals like Teuto, Brazil, Biocon and King Pharmaceuticals. Same deals of those sizes will be the kinds of deals that we'll be looking at on a going-forward basis. And as Ian said, to complement our existing businesses -- so that if when you put them together, one plus one equals more than two.

Your next question comes from David Risinger from Morgan Stanley.

First, with respect to your business portfolio review and -- are you primarily evaluating the non-pharma businesses? Or are you evaluating the core pharma bio operations to consider, for example, splitting up primary and Established Products from Specialty and Oncology? And then second, I just wanted to ask about the JAK data. You had JAK data presented in November of last year. There were some mixed messages at ACR on elevated liver enzymes and whether they return to normal after stopping therapy. I was hoping that you might be able to quantify what was observed and defined normal? And then also, when we will see the next key studies in 2011?

I'll answer the first question and ask Geno to answer the JAK questions. On the portfolio, my point of view is that there are no sacred cows in this portfolio. I'm not driven by size of the business. I'm not driven by diversity per se. I want to look at all these businesses from the point of view of how do we move shareholder return. And I need to take '11, I think to do that, to look at it from a point of view of the capital we need to continue to grow those businesses and how they will be positioned against their key competitors if we continue to grow them. And we'll take those decisions in '11, and I think that we'll try and set the sort of portfolio shape for the foreseeable future by the end of '11. With that, Geno?

David, just to respond to the question about the JAK-3, the data that we presented last year at ACR, we showed the liver enzyme elevation data. There were relatively few liver enzyme elevations events. They tended to occur at a similar rate across each of the treatment groups and placebo groups, so there was no statistically significant difference between the groups. And importantly, there was no evidence of any liver damage in any patient, whether a placebo based patient or an active patient. So we're fairly confident that the data we've seen so far with regard to liver enzymes. And with regard to next presentation of data, we're going to see several trials readout in the first half of this year, and we'll look for opportunities to present the data as soon as possible, potentially as early as the EULAR meeting around the middle of the year and then at ACR later this year.

Your next question comes from Catherine Arnold from Crédit Suisse.

One is, I wanted to ask you about your R&D spend reduction. Obviously, you gave us a lot of examples of where the cuts are coming from, but if you step back, if you could comment on the extent to which this is a change in organizational philosophy as far as spending this big pot of money, versus the extent to which the Wyeth integration identified additional costs? And my second question is, to what extent if any does that is modified guidance have an impact on King? In other words, if you close King and you find some extra costs, that would be outside what you’ve today or have you already considered any change in your guidance on King?

I'll answer the R&D and then maybe I'll ask Frank to answer the questions on King. So look, I think on the research question, I would look at it as this is -- that for me, the most fundamental question that Pfizer has to fix is our innovative core. And this is the start of fixing that in a way that, that will give us the consistent productivity in our innovation. So the productivity is a denominator and a numerator. We work on the denominator by taking out expenses, where we think those expenses were in high-risk areas, with low return, or we didn't have core capabilities or where we felt that those type of activities could be better done by third parties and weren't needed to be kept inside Pfizer. So I see those reductions as being reductions that do not lower our ability to be innovative. In fact, it simplifies organization, focus our organization in key areas and allows our organization to focus on being productive. Now on the output side, it is a continuous change or a change in our culture in research that I will be working with Mikael Dolsten over the next couple of years. And probably, I think one of those important activities that he and I will undertake together, is to create the sense inside these RU units, these research units, of ownership and an entrepreneurial sense of owning the money and owning the results. And I believe that will represent a transformation in our R&D productivity. And certainly, when you couple that with the integration between what the RUs in the research area have to do to meet the business needs and the business setback with the RUs. So I think we have an integrated system that's going to move our culture and give us a sense of a results-oriented culture in research. With that, I'll pass it over to Frank.

Yes, Catherine, on King -- just to refresh, with King, we get a branded pharmaceutical business that very much compliments and solidifies our Primary Care Pain portfolio. We get Animal Health business that's in the Feed Additive business that complements our Animal Health business, and we get the Meridian business which is auto inject device driven and includes the EpiPen business. When we announced King, we also talked about the cost synergies we estimated that were part of that. All of the assumptions around King from a top-line perspective cost structure and into the bottom line have already been incorporated into our 2011 guidance and our 2012 targets.

So Michael, would you like to -- I know you're on the line, would you like to add some comments on the research area, perhaps talk about the three buckets that you see it in?

I feel we have really taken the steps to integrate scientific business and financial concentration into an accelerated R&D strategy. As Ian alluded to, we have a sharpened focus on areas where we can win, and we exit areas where it would dilute our efforts because of high risk and lower productivity. These changes allow us to align our footprint much more optimum with the major biomedical house where we will be a leading player across the globe. Like you've heard, Cambridge, M.A. and U.K, La Jolla, San Francisco, New York, and also in Shanghai. We will increase externalization and outsourcing in areas that don't drive competitive advantage, and that would provide us with more financial flexibility. We have laser focus in delivering our promising late-stage pipeline that Ian alluded to, while we build a sustainable innovation engine to refill our pipeline. I am very confident that the changes will provide a higher return of investment for R&D and differentiated, exciting drugs for patients worldwide.

Your next question comes from Jami Rubin from Goldman Sachs.

Ian, I just wanted some clarification, you said something in your prepared remarks that confused me. You said that the whole is greater than the sum of parts. And based on our calculations, the whole is trading or priced right now well below the sum of parts. If you could provide clarification and as you make decisions about the right composition of businesses, are you considering what these businesses might be worth as separate entities or as the part? And then, if you do decide to spin those businesses, whether they are non-core or core such as, what I would consider the generics business, would you use those proceeds to return to shareholders? And on that topic, do you view share repurchases as providing intrinsic value to shareholders? And are you willing to use it to substantially increase earnings per share?

So on the portfolio, I think the comment I made was that I believe that the whole has to be more than sum of the parts. And that I'm focused on ensuring that it is. We will review all the businesses from the point of view of what capital they require to be successful growing businesses but what are the alternative uses between those for the use of the capital and our the businesses better off in Pfizer or outside of Pfizer with a point of view of returning value to shareholders. And regarding what we would do if we were to generate cash from those transactions? We will apply it in the best way to improve return to shareholders if we do that. I view buybacks as one of the ways we return value to shareholders and certainly, you need to look at that in the context of where you are in the moment, where the dividend yield is, where the debt is, what the alternative uses of the cash are. And you know, we take those decisions on an ongoing basis, focused on maximizing return.

And given prevailing market conditions, we view buybacks as an attractive investment opportunity and a prudent use of our capital. So we'll be very opportunistic as we buyback our shares as market conditions warrant.

Your next question comes from Tim Anderson from Sanford Bernstein.

Many of the 2012 guidance elements looked decent but the one area that kind of surprises me is SG&A, and I guess I can say the same thing with 2011 SG&A. In the setting of a big merger like Wyeth, I would've expected more reductions in this line item, and I'm just wondering if you can describe in more detail what's keeping it on the flatter side? And then second question is, I think previously, you've talked about getting back to a net cash position by 2012. If you have said that again and I missed it, I'm sorry, but are you still committed to that target or might you leave more debt on the books to do things like share buybacks?

Tim, I'll try to take a stab at the SG&A and then let Frank talk about the net cash position. We look at SG&A very carefully. We look at it from bottom up through the point of view of what do the brands need to continue to grow or to give a return as acceptable as we spend in those brands. We look at it on the context of what we need to do to compete in Emerging Markets, which is not a trivial exercise as we go from 2,000 to 3,000 to 4,000 reps in China, as we invest in our brands and these opportunities. And we look at it from a top side point of view as to how does that compare with the competitiveness in the marketplace. And we do it country by country, and we do it overall. So it's not -- I am very attentive to the amount of money were spending in SG&A. And I believe with our modeling that we're doing that the SG&A percentage as a percentage of our sales is well within the industry norms as of 2012. And we will continue to look at that it. And believe me, one of the frequent conversations we have with the research teams is how do we build and continuous improvement, and how we build in go-to-market strategies to make sure that our SG&A is as efficient as possible.

And just to punctuate Ian’s point on the SI&A, some of the areas we continue to invest is continuing to expand in Emerging Markets. There's the U.S. Healthcare perform fee, which is reclassified to SI&A in 2011. We have planned investments for some of our new products, like Prevnar 13 and some of our late-stage assets in the pipeline. And we will continue to invest in LIPITOR in markets where it continues to have patent protection like Europe and Japan. So these are just some of the examples. If you peel it down a layer, if you look at our field force in China, we added 1,000 reps during 2010 versus 2009. We're in 220 cities versus 177 cities. So that's the kind of investment that you see showing up in the SI&A line. On the net cash, my answer to that is, I don't view that as a target that we have to achieve. And if we see better uses of our capital, we'll use the capital and cash to basically get the best return for our shareholders. So the short answer is no, I don't view that as a must-deliver-on-target. I view that as one of the ways we see better opportunities to deploy our capital and get a better return, that's what we're going to do.

Your next question comes from John Boris from Citi.

Ian, first question for you. Over the next six to 12 months, obviously, there's a lot going on, but can you maybe just outline for us what your top three priorities will be as you look at the business? And then second question, on your Diversified segment, is it possible just to get an update? I think your strategic review on the Capsugel business completes by the end of first quarter. Where you are in that process? And then just your thoughts on the returns on Nutritional and consumer and your thoughts for potentially divesting those assets?

Yes, the top priorities, John -- the top priorities, I think I sort of described them. I'm going to go through it again, one is, work with Michael and research to really make sure that we are on track to turn around innovative core. I think that's an essential medium- to long-term effort and taking the expenses out and reshaping R&D, while minimizing disruption is going to be really important. The second is to look at the capital allocation, to look at our businesses and make a decision or recommendation to the board as to what I see as the structure in the businesses that Pfizer will progress in the future. So those are two pretty big tasks, which we, myself and the research team are going to be focused on. And I think that's about all I want to say on that and I'll hand it over to Frank to make some comments on Diversified.

On Capsugel, John, our strategic -- exploring strategic alternatives continues, and we continue to expect to complete that by the end of the first quarter. And then on consumer Nutri returns, I think the way to think about that and we've said this -- I've said this previously, is they generate very good returns but returns that aren't at the same level as, I'll call it, our Biopharmaceutical business. That said come all of those returns are blended into the guidance that were providing for 2011 and 2012, which has operating margins in the high 30s to low 40s for 2012.

And we see those businesses as strong businesses with growth. So I want to evaluate them and give all of them an opportunity to see how strong they can be for Pfizer.

Your next question comes from Marc Goodman from UBS.

Ian, first of all, can you talk about your view of the generics business whether it's in the United States or whether it's more of the branded generic business overseas? And how aggressive you'd like to be in building that out? And then second, can we get a little more color on Prevnar in the quarter, were there particular areas of strength, were there any one-off tenders and just things like that? And then third, last quarter, you had mentioned there were some issues in Russia. Can you address what's going on there? And then just more broadly, talk about what was the growth in the Emerging Markets because there was some type of readjustment with Korea, so I was curious what the underlying growth was for the full Emerging Markets?

Okay, Mark, I'll make some general comments on generics, and ask David to pick up the other comments you asked on Emerging Markets and ask Geno to comment on the Prevnar. So my view of generics is that we are in, in fact -- we're in three types of markets. We're in a pure generic market, which is mainly in the United States and Europe, we're in a branded generic market in most of the Emerging Markets i.e. these are brands that have been established by physician detailing and their value is both the loyalty of the physician and the loyalty of the patient and the quality that's behind those brands. And then we're in the third segment, which is trade generics. So each one of these needs to be identified differentially. We need to look at it in different theaters of operation. There's a different attractiveness to the business in Emerging Markets, where it's more complementary to our branded and our core business, and we need to look at the capital that’s required. And as I mentioned earlier, I think, one of the core strategic decisions that we have to take is how do we continue to fuel that business beyond the organic transfer of molecules at Pfizer's pipeline. And we've opted up to now to do that by partnering and licensing and we need to see if that's a viable strategy going forward or if we need to change our strategic point of view on that. We are very careful with that business. We're careful on net profitability. It's a different type of business from innovative core and we look at it basically on operating margin. So it contributes substantially on that level, to cash flow and to profits. So with that, I'd pass it over to David to add any comments on the growth rates in Russia and that perspective.

I'll touch on one point on the generics market and then go into the Emerging Markets response. As Ian very clearly laid out the three types of generic market classifications, I would add that we believe we can drive growth across all three of those segments. Obviously, the Branded segment is driven by physicians’ decisions -- leverages Pfizer's core capabilities and commercial infrastructure the most. But even in commodity markets, there are spot opportunities for us to do business as we've learned through utilizing our Greenstone apparatus in the U.S. and some of the Aurobindo licensing deals we've done. So we see growth opportunities across all three segments is the point I'd make there. On the Emerging Markets growth question, on a like-for-like basis including Wyeth and Pfizer Q4 sales in 2009, we grew 10% in Q4 2010. We're bullish on the opportunities to continue this trend. There will be quarter-to-quarter variability. So this will go up and down over time. But as a generalized trend, we do expect to achieve this type of growth. Now saying this, there's a key determinant in this, and this gets back to the generics part. We have to perform well in Emerging Markets both in our Innovative segment of our portfolio, which we're currently growing. All segments of our Innovative portfolio are growing faster than the underlying market for those products. But at the same time, we have to develop our generics capabilities in these same markets. Without a strong generics capability, we don't believe we can meet or exceed underlying market growth. So we've got to get both of those fronts right, and that's clearly what our plans of action are laying out to do. Geno?

With regard to Prevnar in the fourth quarter, we have a very good quarter. The majority of the upside for the quarter came from the U.S. where we continued to capture catch-up patient opportunities and realized incremental price benefit from 2010 versus 2009 with now 13 valet products in the market. And also, there was an uptick in replenishing inventories. As you know, last year in the fourth quarter, we actually depleted inventories in anticipation of the 13 valet launch. And so we see a quarter-over-quarter uptick in inventories in the fourth quarter. Beyond the U.S., we saw continued growth in European markets, a strong growth in Japan. We started to fulfill a tender in Turkey. We won back some of the regions in Canada that had gone to our competitor earlier in the year. But overall, just a good continued performance across the globe.

Frank, do you want to add some comments?

Yes, let me give the overall growth rates for legacy Pfizer and then I'll also just touch on Korea and Russia because I think that was part of the question, too. So if you look at legacy Pfizer, for the quarter, Emerging Markets grew 3%, for the year 5%. If you look at the BRIC-MT markets for the quarter, legacy Pfizer grew 5%, for the year, 9%. And remember, we had some headwind relative to some pricing pressure in some of the markets as well as the impact of certain LOEs. For example, LIPITOR lost exclusivity in August and Viagra in June, both in Brazil. So those are numbers that include the impact of those items. Korea is already normalized in all of those numbers. So we basically made it apples-to-apples, so it's in both the '10 number and the '09 numbers. So Korea is captured in those numbers. And then Russia, Russia we had a tough quarter. If you look at the year-over-year numbers, the sales were down, and that was really driven by some of the Emerging Market pricing pressure that we talked about on the last earnings call.

Your next question comes from Seamus Fernandez from Leerink Swan.

As we think about SG&A and the composition of SG&A, can you just discuss what percentage is currently in Emerging Markets and at what rate -- what inflationary rate you're assuming for those businesses? It seems like you're undergoing price pressure and cuts in markets like Brazil and investing in SG&A in those markets. And I'm just kind of wondering what the trade-off is and how we should envision operating margins moving in the Emerging Markets going forward given inflationary pressures that we're seeing in other markets? And then another question, just in terms of preserving the LIPITOR brand, at least during the period of generic exclusivity, what exactly -- what plans are you implementing? Is there a house brand strategy, sort of similar to what Merck executed with Zocor? Is that a tool in your quiver and what other methods can you use to kind of preserve Pfizer's LIPITOR sales? And then just as a final question, would you envision -- as you look at the portfolio and the shutdown of certain discovery areas, would you envision spinning out smaller biotech companies, maybe partnering with investors on that front from some of your internally-developed assets? I seem to remember a very interesting CEVP inhibitor, two of your competitors are moving forward there. And Pfizer has one, but I think was developed by Pharmacia that certainly could be moved forward. But obviously, there are plenty of other assets outside of that.

On the portfolio issue -- absolutely, if we decide to discontinue internal research, we'll be interested in partnering or out licensing or looking for creative ways of generating value from those assets, including all the types of suggestions you made. On the SG&A, I'll make an initial comment and then ask Frank to pick it up. I would say on the SG&A, we look at this market-by-market and competitive set by competitive set. So in Brazil, we'll be adjusting our SG&A to take into account the effects of either pricing or of patent expiration and certainly in the competitive context of Brazil and in the sense that makes an appropriate return on investment. The same in China, the same in India, the same in Korea, the same in Turkey. I would say that markets like Turkey and China, while we have pricing pressures and Brazil as well -- while we have pricing pressures -- and Brazil as well, while we have pricing pressures, the flexibility, the relationship with the demand and price is extremely elastic. So that price reductions are normally compensated by aggressive volume growth. And this is certainly true in China, where the pent-up demand in China is absolutely enormous for quality healthcare. So with that, I'll ask Frank to comment on any more issues on there. And then on LIPITOR, I just want to make a short comment on that. We are investing appropriately behind LIPITOR as we move towards LOE. We have robust strategies to handle the peri- and post-LOE. Clearly, they are competitive in nature and I don't really want to go into any more details on that. Frank, you want to talk about...

Yes, I'll just punctuate a couple of the points that were made. We really do look at how to invest the SI&A on a market by-market basis and there are clearly markets in particular, the BRIC-MT markets where I'd say we've been biasing and increasing our overall investment. And because of the opportunities that exist, and Ian mentioned China which is one of the areas where we've clearly been increasing our investment. You mentioned margins and the way to think about Emerging Markets margins is the gross margins will be lower than, I'll call it, our kind of traditional branded pharmaceutical margins. But those revenues also have lower expenses. And so, the key there is operating margins, which are very, very consistent with our overall business and then factored into our 2012 targets.

Yes, on the SG&A, just to complete that, I mean I don't think necessarily it's totally visible to The Street that we have been aggressively shifting resources out of the United States as we face LOEs, as the marketplace changes, as we adapt the way we go to market in the U.S. to more of a group practice, less individual calls and resources. I mean, I think our U.S. total field force over the last seven years or so has probably gone down by 50%. Similar numbers in Europe or that's not quite as dramatic as there and we've reinvested in Emerging Markets. So this is a continually ongoing review we do where we place our resources.

Your next question comes from Steve Scala from Cowen.

Regarding the 2012 revenue guidance, how much of the $2 billion reduction is due to eliminating future business development transactions and how much is it attributable to market conditions? What market conditions are you specifically referring to in the release? And I assume it is still fully possible that the previously contemplated business development transactions come through, so there is now upside opportunity in your 2012 revenue guidance, and I'm wondering if you agree with that? And then the second question is, is your JAK-3 product still on track to be filed in the second half of 2012 or might it be earlier? And do you believe the RA market is elastic, such that a lower JAK price will significantly increase units sold or is price less relevant to where it's used in your opinion?

On the JAK, we're finishing the trials towards the mid part of the year and we will file as soon as we have the filing ready. The pricing elasticity, I think most markets have certain elasticity. How that product is priced depends on the ultimate profile and the value it's delivering to patients and payers, and we'll take that decision as the profile develops. With that, I'll pass it over to Frank for any other comments.

And so, Steve, let me just run the numbers on the 2012 targets. The previous target was $65.2 billion to $67.7 billion. We took it down at $63 billion to $65.5 billion so $2.2 billion reduction, lower end to top end of the range, which is the $2 billion that you mentioned. Most of that comes from the removal of the future business development. The majority of our reduction comes from future business development. So to your point about is there upside to that, to the extent that we did new future meaningful business development, that would not be in the number and then we would adjust the targets upward for that kind of a transaction.

Thank you everybody for your time.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.