輝瑞 (PFE) 2004 Q4 法說會逐字稿

Dr. McKinnell you may begin.

Hello everyone and welcome to Pfizer's fourth quarter 2004 conference call and webcast. I'm Hank McKinnell, Chairman and CEO. As always, we thank you for your time and for your interest. I'm joined this afternoon in New York by several of my senior colleagues from whom you will be hearing in a few minutes.

I've spoken to you about 2004 being a year of challenges, opportunities and performance. And the fourth quarter remained true to form, reflecting each of those in abundance. One totally unforeseen and unprecedented set of challenges was presented by the tsunami in Asia on December 26th. For us, it was personal, a disaster that touched our Company, with Pfizer colleagues and their families among the missing and injured. Plus, it was also an opportunity to demonstrate once again Pfizer's compassion for and generosity to those in need. Our direct cash contributions to international and local relief organizations in the region now exceed $10 million. We are matching the more than $350,000 contributed by individual U.S. colleagues, and will do the same with overseas colleague donation drives now in progress.

Almost immediately after the disaster, Pfizer medicines and consumer products began flowing to those in need, as part of our initial $25 million relief commitment, including antibiotics to treat 500,000 patients. And we continue to work with the United Nations to make available Pfizer skills and emergency care, public health, and logistics. Our assistance has been significant, effective, and gratefully received, and the public recognition of our Company's responsiveness and value is important to all the stakeholders we serve, including our investors.

The quarter also saw a continuation of the significant business challenges we face. Including pricing pressures, new branded competition, generic competition resulting from the loss of exclusivity, and difficult political, legal, and regulatory environments. But it also saw us deliver another strong quarterly performance driven by our unequaled operational capabilities and our industry-leading product portfolio. And marked by continued product filings, and regulatory approvals.

In the fourth quarter our revenues increased 7% to nearly $15 billion. Adjusted net income increased 16% to over $4.3 billion. And adjusted diluted earnings per share, of $0.58, were also up 16%. All of our businesses performed well.

Pfizer Consumer Health care is performing ahead of expectations. Pfizer animal health continues to grow, reflecting robust results in our companion animal segment, and the introduction of new products. And in human health, we are recognizing the benefits and opportunities of our hard-won scale and global reach. We have 15 category-leading products, with clear and substantial potential for further growth. Our new product pipeline as discussed with you at our Groton meeting in November is the strongest in our history.

And we continue to achieve important milestones in advancing the next generation of Pfizer medicines to patients. Now, I will ask David Shedlarz, our chief financial officer, to provide comments on the quarter, followed by Karen Katen, President of Pfizer Global Pharmaceuticals. David?

Thank you, Hank. Pfizer achieved strong financial results in the fourth quarter of 2004, and for the full year. The Company continues to use its significant operating cash flow to make the investments in this business necessary to sustain long-term growth, as well as to pay a strong growing dividend to shareholders and to repurchase the Company's common stock.

With the passage of the American jobs creation act of 2004, and the recently-issued guidance from the U.S. Treasury, that clarifies some of the act's provision, we are now investigating whether the Company might repatriate up to $29 billion in extraordinary dividends as defined in the act during 2005. A decision of course, is subject to management and board approval. This amount could increase by $8.6 billion, the amount of Pharmacia's historical accumulated earnings, but this is subject to further U.S. Treasury guidance. Since the U.S. Treasury has not issued all the guidance it intends to issue, the Company can only make a good faith estimate of the tax liability that would have to be recorded if these extraordinary dividends are paid.

Accordingly, the company expects, based upon the information presently available, that it will record a tax liability based upon the 5.25 percent statutory rate in the act. However, the actual cost to the Company is dependent upon various factors that are currently being analyzed, including the passage of the pending technical corrections bill. While Pfizer's revenue and income growth will likely be tempered in the near term due to patent expirations and other factors, the Company will continue to make the investments necessary to sustain strong long-term growth, the prospects for which remain excellent.

We will provide more specific information on Pfizer's financial expectations for 2005 and beyond, at our New York City analyst meeting planned for April 5th of this year. We remain confident that Pfizer has the organizational strength, and resilience, as well as the financial depth and flexibility to succeed in the long term.

As usual, I need to remind you that this afternoon's discussion includes 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 our 2003 annual report on form 10-K, and in our periodic reports on form 10-Q, and form 8-K.

Also in this call, we have discussed and will be discussing financial and other information as well as some non-GAAP financial measures in talking about the Company's performance. You can find the reconciliation of these measures to the most directly comparable GAAP financial measures in our current report on form 8-K dated January 19, 2005. This report is available on our Website, at www.Pfizer.com in the "For Investors" SEC filings by Pfizer section. And now, Karen Katen.

Thank you, David. It has been an extraordinary year, and an extraordinary quarter for Pfizer. As part of the issues we've faced, we've managed to deliver strong operating results for the full year, and for the fourth quarter. Some performance highlights include 15 Pfizer medicines that lead their respective therapeutic categories, including 5 of the world's 25 top selling medicines. Ten of our products have each delivered more than $1 billion in sales this year, including Lipitor which became the world's first $10 billion pharmaceutical medicine.

Beyond our excellent medicines and powerful organization, those results are also primarily due to our strength of scale. Scale that truly sets Pfizer apart, and let us accomplish what others cannot. Our scale enables us to combine a broad and deep portfolio with global geographic reach. We use our scale to support a large in line portfolio, invest in research extending its value, and bring the next generation of medicines to the worldwide market.

Before we go on, let me first address what is probably top of mind for many of you listening right now. Celebrex and Bextra. Pfizer's response to recent concerns about their safety has always been driven by doing what is right for the patients. This means helping to ensure the doctors have relevant data available on Celebrex and Bextra so they can make appropriate decisions with their patients. We believe that the best setting for a thorough discussion of all available data on the risks and benefits of Celebrex and Bextra are the ongoing cardiovascular safety reviews by the EMEA and the FDA advisory hearing committee scheduled for February. We trust in these meetings that good science will prevail. In the meantime, we urge doctors to follow FDA guidance and evaluate all of the available information on treatment alternatives for pain medicines, including Cox-2 specific inhibitors and other prescription and over-the-counter nonselective NSAIDS when making treatment decisions with their patients.

Now I would like to touch on some other product highlights starting with our cardiovascular medicines. Lipitor continues to enjoy a substantial lead in share, sales and volume to the lipid lowering market. Its ongoing success is found in a peerless track record of safety and efficacy. That enormous and growing Lipitor wall of clinical evidence is also shaping the world of cholesterol management. We continue to go where others cannot, and break new ground in clinical research about Lipitor and it's CD benefits.

Our clinical investment has delivered good news results this year for Norvasc as well. Norvasc CD benefits were so clear that the ASCOT trial was brought to an early halt in December. Other new data from the Camelot study shows that when Norvasc was added for treatment for coronary artery disease, these patients got additional CD benefits. These included reduced risk parameters, and fewer hospitalizations. The data emerging from our clinical trial program also provide clear support for Caduet, and validate its unique benefit for treating cardiovascular risk factors concurrently.

In our neuro science portfolio, Lyrica sales have outpaced those of any other agents for neuropathic pain or epilepsy, since first launched in the U.K. and Germany. This strong uptake can be attributed to the clear benefits that Lyrica offers. Such as outstanding efficacy across the entire dosage range, and very favorable tolerability. With it's FDA approval on December 30 for the two most common forms of neuropathic pain, diabetic peripheral neuropathy and postherpetic neuralgia, the benefits of Lyrica will soon be available to patients in the United States.

In our allergy and respiratory portfolio, Spiriva, which we co-promote with it's discoverer, Boehringer Ingelheim is firmly established as a best-in-class product in the COPD market. It's #1 in seven countries including Germany and Australia, and is ranked #2 around the world. It is already ranked third in the United States, since launching just last June.

Pfizer's opthalmology portfolio is building on success of Xalatan and Xalacom which continue to outpace the growth of the total glaucoma market. Xalatan recently reached $1 billion in sales. Macugen scheduled to launch in the U.S. just this month is the latest addition to our glaucoma franchise. Co promoted with our partner ITEC pharmaceutical, Macugen is a first-in-class agent for neovascular (wet) age-related macular degeneration.

Our scale, combined with our resilience, as David alluded to, allows us to sustain growth while adapting to an ever-changing market environment. We're also redefining the parameters of our industry. Because we believe that Pfizer can uniquely use our scale to extend the value we already offer patients and providers into new arenas. That value, includes delivering an array of new medicines that fill unmet medical needs, expanding our geographic reach in communities and markets around the world, and finding solutions to difficult problems in our health care systems. Because of our financial strength, we can do research at a level that can help redefine standard medical practice, and also ensure a steady stream of valuable new medicines.

We now have more than 200 novel concepts in development across multiple therapeutic areas, and we're leveraging our status as a partner of choice to expand our licensing opportunities. We're also making a concerted effort to expand Pfizer's presence in emerging markets worldwide, such as in China, one of the world's top 10 pharmaceutical markets, and among the five fastest growing markets. We've achieved double digit sales growth over the last three years, to become China's largest multi-national pharmaceutical company. We also plan to launch up to 12 new products there in the next five years.

In the United States, we've helped address systemic health care problems by showing how we can achieve better health outcomes for vulnerable patient populations through high quality affordable care. We had a major success with the Florida: A Healthy State program and we're now exploring adapting this approach to nurturing good health with government partners in the U.K. and in Italy. Based on the case we built in Florida, Pfizer and our partner Humana, have been chosen to develop one of 10 pilot sites under the new Medicare Chronic Care Improvement program. Our three-year project in Florida called "Green Ribbon Health" will cover about 20,000 Medicare fee-for-service beneficiaries with diabetes and congestive heart failure.

Our long-standing value proposition has been to prove that our medicines cure patients and this will always be our core mission. Over the next few years, we look forward to elaborating on our expanded value propositions, and showing that our medicines can cure not only patients, but also entire health systems by reducing costs, by improving society's economic well-being, and by increasing effective prevention and treatment. Thank you. Hank, it's back to you.

Thank you, Karen. Patent expirations and competition are facts of life in our business. We have a lot to do, but a lot to do it with. Our product portfolio and pipeline, our operational capabilities, and our financial depth and flexibility, provide great resilience going forward. We're focused on transiting a period of loss of exclusivity of several major products. We remain well positioned to leverage current and future opportunities while shaping our Company for a return to top rank growth after this transition. And now, your questions please.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Catherine Arnold, you may ask your question, and please state your company name.

Thank you very much. It is Catherine Arnold from CSFB. I would like to ask you about the gross margin as well as dividend policy. First in regards to gross margin, there is obviously a lot of moving parts here, but could you speak to your expectations on timing for reaching peak manufacturing integration? Excuse me, integration benefits in 2005?

And also, in the Q&A section of today's document, you referred to production variances, as being somewhat behind, somewhat a part of the quarter, and could you tell us what these -- what products were specifically behind these variances, and the impact of rebating and pricing, given the challenging pricing environment?

And then lastly, on dividends, could you just talk to your dividend policy in times of growth deceleration, versus reacceleration, particularly in that the yield that many of your competitors shares have. Thanks very much.

Well, thank you, Catherine. Let me start and I will turn it over to David Shedlarz, our CFO. We target a payout ratio of earnings for our dividends, our dividend policy has little or if anything to do with our competitors' status, but we've been growing dividends for 40-some years now, and in line with earnings growth, we would expect dividends to continue that pattern.

Gross margin is a number of moving factors. On the variance line, for example, one of the major ones is foreign exchange. But let me ask David to try to untangle that for you a little bit.

First, dealing with the gross margins, any particular quarter can offer a number of unusual factors, and the fourth quarter of this year did, and one of the things we tried to highlight that really mix of product lines did not drive the increase, and the cost of goods as a percent of revenues, it really was these, what we call nonstandard request items and the various changes in the production volume of the Company that kind of drive that in part, as well as a write-off of inventory, for some minor product lines. And so this doesn't necessarily point to anything other than continuing to keep our production and inventory in line where we think it is appropriate, and it does have some implications in terms of the cost of goods line, in any particular quarter.

As it relates to the dividends, as you know, we announced a first quarter increase in dividends by some 12%. That we can have continue to grow dividends at a pretty significant rate over an extended timeframe, and I think the first quarter continues to be indicative of following that practice.

Next question, please.

Thank you. David Moskowitz, you may ask your question and please state your company name.

Thanks, it is Friedman Billings Ramsey. Good afternoon. Could you just go back over the gross margin answer once again and talk about the write-off items and could you quantify those for us if you would? And also, you guys talked about increasing the synergies from Pharmacia in 2006. I think you went up to 600 million. Could you talk about where those synergies are coming from? And then with Cox-2 inhibitors seemingly decreasing, in the prescription volumes, can you talk about any other restructuring, streamlining that you may have on tap besides the Pharmacia synergies. Thank you.

David, try the margin again.

Yeah, again, the margins being impacted by the change in production volume during the course of the recent past. That leads to certain production variances which need to get recorded in the cost of goods. I do not have a precise number for you in terms of the inventory write-offs related to minor product lines.

In terms of the synergies, we did put out a number, an estimate for 2005 of $4.2 billion. As you point out, that is some $600 million higher than what we achieved in 2004. And it continues to come from a broad array of opportunities the Company is pursuing, including an increasing relative contribution from the manufacturing part of our operation. We always assume that that would be the tail to the integration activities just because of the high regulatory content to make any major changes in the manufacturing network.

And on the Cox-2 and restructuring question, I don't think we will have a good sense of what the year is likely to hold for at least another month. We need another two to four weeks of prescription numbers to see what is actually happening in the marketplace. And probably most importantly of all, we need the FDA review in mid February, which then allows us to focus on the real data around both Celebrex and Bextra, and to see if we can't start to increase -- increase market share numbers. We will be discussing with you on April 5 what our expectations for the year are, both in terms of revenue and cost structure, and you will hear the answer to that question on April 5th.

I just have one follow-up question. On Exubera.

Go ahead.

Yes, thanks. Have you submitted that application to the FDA for review in the U.S. as of yet?

(Joe Fetchco), please.

The filing is continuing. We're working on it and that's all we'll say right now, we are working on it. It's going well.

Making good progress.

Okay. Thank you very much.

Thank you. Barbara Ryan, you may ask your question, and please state your company name.

Okay. Now, back to the gross margin question. [ Laughter ] I don't want to beat a dead horse here but maybe, David, in your comments, you did state that there was an inventory write-off and if we're trying to look at, you know, sort of what is an ongoing business effect and what is maybe a one-time effect in the gross margin, can you help us with just that specific aspect of it?

Yeah, well the inventory write-offs are clearly a one-time event and that's a good piece of it. The production volumes are going to change continually over time.

Right.

Depending on where we want inventories to be and where sales will be. So you are going to see those quarterly anomalies on an ongoing basis, whether they're favorable or unfavorable, and during the course of the year they've been both. Right.

But the inventory charge --

I don't have the inventory charge off the top of my head.

Can somebody get that for us? It is obviously raising some issues. It is not a material number.

Thank you very much. I appreciate it.

Okay.

Now, nobody remembers the number. It is that material.

Thank you. Timothy Anderson, you may ask your question and please state your company name.

Prudential Equity Group. A couple of questions. Can you shed any light on restructuring efforts? I hear you guys might be contemplating and when we might hear more about this, and I'm wondering if that is going to be a significant departure from prior strategy, or if this is just going to be more tweaks around the margins?

And then second question, relates to Celebrex language and the press release in question 28, that seems to suggest there has been additional negative cardiovascular signals seen in trials outside of just the APC trial, and I'm wondering if you can say more about this. Thank you.

Well, to characterize the answer to that question, as an additional Celebrex signal has it quite wrong. I will ask Joe Fetchco in a minute, who heads our Medical and Regulatory and development efforts around the world to comment on that.

With respect to restructuring we have a long history of prudent appropriate management of our business, and you will hear all that April 5. Joe, could you comment on Celebrex safety?

Yeah, that question is not describing a new signal or a new cardiovascular signal. What we have when we look at the Celebrex data, we look at composite cardiovascular end points, these include stroke, myocardial infarctions, sudden death, et cetera and whenever we look at composite cardiovascular events in patients treated with Celebrex, there is no difference in comparable to placebo or non-selective NSAIDs.

What we're alluding to in that question, is that in certain studies, some people who have looked at certain studies will point out and look at increased, numerically increased events of one type, without talking about a decrease of another type. So for instance some of our critics have looked at individual studies and said there is a numerical increase in MI without talking about the numerical decrease in stroke. There is no statistical significant difference in either one, we're not saying we're protective in stroke, or causing more myocardial infarctions. That's what we're talking about. There's been a lot of people dissecting these studies and trying to go into individual pieces of data.

All of these data have been presented to regulatory bodies. These data have been presented at various meeting. Or published. And they've all been parts of ongoing published med analyses. So there is nothing new. There is no new signal here that we're describing.

Thank you.

And Tim, the bottom line here is, this is going to be fully explored at the FDA advisory panel hearing in mid April. Sorry, mid February. And we remain very confident in the advice the FDA and us are giving, which is that physicians treating individual patients should take into account all of the data, both safety and toleration and risk, with Celebrex and the traditional nonselective NSAIDs and we're convinced that Celebrex is the appropriate option for millions of patients. So we hopefully will get through some of the confusion here by the FDA, the FDA review in February.

Thank you.

Thank you. C.J. Sylvester you may ask your question and please state your company name.

Hi, thanks. Banc of America. Just a couple of questions. One, in page 32 of your release today, you talk about certain significant items. Is this the first time you've mentioned the issue related to a large restructuring that would be considered a nonrecurring item, just that's the first question, just the clarity on that one.

And secondly, if we look at, you know, U.S. trends of your key brand, with the exception of Lipitor and Norvasc, all the key products are flat to down. Is there something temporal in nature, or is this something in terms of sales force disruption that's going on, that's making it appear that a lot of the key brands here are stagnating?

Yeah, the characterization of certain significant items is what it has been all along. It is a clarification in terms of understanding the difference between adjusted income and GAAP. You have a pretty rich description of exactly what those items are in the back of the statement of income of the Company in the press release. But nothing has changed in that regard.

And actually, the growth of individual products, I certainly wouldn't call them stagnating. We've got a number of products that are growing solidly into double digit levels. Would you comment on some of those, Karen? We don't at all see a stagnation and certainly not in sales force effort, which by the way in the 10th year in a row was recognized as the most valued sales force in the industry by physicians. Karen on some of the product trends?

As you stated, Lipitor of course is up 23%. Celebrex is up 24. Bextra at 57. And Zyvox, 73%. Camptosar, 29. Xalatan, Xalacom 23, and -- but of course, we do have declining sales in Neurontin, post patent expiration, Diflucan also, and Zithromax is down because of a slow respiratory season. So really actually, a pretty strong performance, if you think about it.

From a revenue standpoint, yes, but from a volume standpoint in the U.S. I'm just looking at the 4 Q trends, and there is a disparity between the volume and the revenue number.

Volume meaning scripts?

Correct.

I don't think so.

No.

Peter, any discrepancies there?

Not really. If you take a look at the TRX and then you add on top a couple percentage points for the price impact due to price increases taken earlier in the year, you come very close, usually within 1 or 2 percentage points of the quarterly revenue growth. Certainly that occurs too if you take a look at that on a full year basis.

And we have a long record of managing inventories within the industry more accurately than anybody. So we certainly don't see any difference in sales and prescription numbers. There is always going to be some minor variation month to month, but nothing that is anywhere near material.

Thank you. Our next question comes from Carl Seiden . You may ask your question and please state your company name.

Thanks very much. I'm from UBS. Two questions, if I could, Hank, on SG&A. One pretty specific, and one much more strategic. On the specific side, if we look at what IMS captures in terms of their audited Pfizer details, last year, 25% of all of your details were on the Cox-2 inhibitors, which was more than double what they recorded for Lipitor. Going forward, assuming the Cox-2s are still promotable, you have no competition, obviously there is an education task, but can you give us some kind of sense for what kind of Cox-2 detailing is going on right now, and where that might be going?

And I guess more strategically, if we looked at Pfizer's SG&A as a percent of sales, it is very, very close to the entire industry average, despite your meaningfully higher size, and statistically the better productivity of your sales force. Should investors think about some kind of efficiencies of scale going forward on the SG&A line? Thanks.

Let me ask Pat Kelly, who heads our U.S. business to comment on your question on details. And I will then come back on the more strategic issue.

So our U.S. representatives are quite busy, even as we speak, talking to physicians all over the country about Celebrex and Bextra, our two Cox-2 products. As they carry out the agreed upon approach, with the FDA, about describing to those physicians that there are alternatives available, including Celebrex and Bextra, for the treatment of arthritis pain and inflammation. So I guess I would characterize our field force as extraordinarily busy right now on the Cox-2s and we would expect that they will continue to be busy, pending any FDA advisory committee decision for some time to come.

And in general, our folks, as Hank has already alluded to, are already expressed to be the most valued sales force in the U.S. industry. I would also point out on that same audited detail basis, they're the most productive field force in the industry on calls per rep, on details per call, on detailed minutes per call, any term you want to look at, it is the best in the industry, and we continue to use it as best we can.

And Carl, I don't think you said it, but, you know, the question about a malaise in the sales force is dead wrong. We have a very successful group that is approaching this year with maybe even more enthusiasm than we have ever seen. It is a very motivated charged-up group. On the more strategic issue, around spending, we really are focused on communicating risks and benefits of our products to physicians, so that they can use our drugs most appropriately so that patients benefit.

And it really comes down to one question, that doctors ask all around the world. The question is, what is new? And if you don't have an answer to that question, you probably don't need a very big sales force. If you don't have much that is new.

In our case, with 20 new products being filed and the five years ending 2006, and maybe most importantly, with the avalanche of really favorable new clinical data we've seen this year, around our leading products, we have a lot to say. So I think field force size has a great deal to do with what it is you have to say, and while we always look at ways to improve the capability and structure of our sales force, I think we've got plenty to do over the next three to five years which is kind of our strategic horizon, and the field force is going to be a critical element in that promotional mix.

Thank you.

Thank you. David Risinger you may ask your question and please state your company name.

Thanks very much. From Merrill Lynch. My first question is with respect to the European Lipitor patent litigation, if you could please provide an overview of that litigation, including key developments, and timing, to expect in 2005?

And my second question is, I guess going back to that gross margin issue that everyone keeps raising, just very simply, was the explanation of the weak gross margin meant to suggest that the reported gross margin in the fourth quarter was abnormally low, such that with some of those anomalies excluded, we should be looking for a higher gross margin in the first quarter of '05. I know that you're not providing guidance, but I just wanted to clarify your explanation in terms of that being abnormally low. Thank you.

Well, let me ask Jeff Kindler, our General Counsel to comment on the European Lipitor patent litigation. And then that will give David time to try to figure out how to answer your question without telling you what we're going to tell you on April 5.

Thank you, Hank. David, first, let me just say, as Hank said earlier, the patent challenges are a way of life for us these days, and just about every major product is subject to some challenge by a generic, and the Lipitor patent is being challenged pretty much all over the world. (Grand Baxy) is challenging our Lipitor patents in Canada and several western European countries. The only one, the only country in which a trial has actually been scheduled is the United Kingdom, where there is a trial scheduled for July of this year. We expect a trial to be set in Ireland for later this year, or early next year. In addition, generics have launched Lipitor copies in various countries in Eastern Europe, South America, the Middle East, and Asia. In many of those countries, there is no process like the Hatch Waxman act, so the generics launch and then we sue to have them taken off the market, and we're doing so in those countries, and we have a pretty good track record in patent litigation, as you know.

In addition, the Canadian generic manufacturer (Apotext), has requested that we grant it a license to make and sell generic Lipitor, invoking certain compulsory licensing provisions under Canadian law. We've politely declined their request that we license Lipitor to them. And we therefore expect them to commence an action at some point. We believe we should defeat any action like that, because we have consistently met the needs of Canadian patients for this product since it was introduced in Canada in 1997, and we sell it in that country under the terms that are fully compliant with the Canadian law. But that is another -- another challenge to the patent in Canada. So that kind of gives you the world tour of Lipitor litigation.

Thank you.

David, in answer to your question, as I highlighted the inventory write-offs are one-time events. They are not the bigger contributor to the reduction in gross margin in the fourth quarter. It is really the production volume of the Company, which changes quarter to quarter, depending upon sales, forecasts, and inventory holding levels.

As Hank has highlighted, as we get into the forecast and we will expect to share it with you on April 5th, that will be one of the elements, obviously, we're taking a look at in terms of the performance of the Company, and it is subject to the sales considerations, the inventory considerations, primarily. So that's something that I would say to you, the bigger piece of this relates to the variability of production volume during the course of the quarter. In order to smooth that out, you probably want to stare closely at the full year results rather than staring at any individual quarter.

David, is the confusion here that some are comparing the fourth quarter of this year with the fourth quarter of last year? Which was polluted with purchase accounting?

No, it is the -- on the adjusted basis, the level of gross margins is about 200 basis points lower in the fourth quarter than it was in the first three quarters. I think that's the thing you're highlighting, David. And again, the bigger piece of that is the seasonality of production variances, due to volume considerations, and for that reason, you probably want to take a look at the number for the full year, rather than the individual quarter.

And do think -- Foreign exchange is part of that?

Foreign exchange was not a major contributor in the fourth quarter.

Thank you.

Thank you.

Thank you. Mario Courso you may ask your question, and please state your company name.

Equity Research Partners. Two questions. One with regard to Lipitor and the TNT study, is Pfizer planning on releasing those results at the American College of Cardiology? And then number two, with the comment in the press release on the repatriation of funds, potentially happening this year, you know, should we look at that as perhaps an unprecedented source for a stock buyback program or an increased stock buyback program going forward, given some of the growth challenges over the next couple of years? Thank you.

The second part of that is easy, under the regulations issued, you cannot use the funds brought back for repurchase of stock. We plan to use those funds to strengthen operations to pay for research, to strengthen our balance sheet. So separate from that, there could very well be stock buyback, but the two -- the two are not related, and before we publish TNT result, I guess, Joe, we need the results, could you --

TNT is event-driven and the determination about when the study will terminate and when we get the report out is really up to the steering committee and the DSMV associated with it, so this is not a time frame associated with it as much as it is event-driven.

But I guess hopefully soon would be the answer.

Yeah.

Yeah. We can't pin a specific date on it but hopefully soon. And that, as you know, is a very important study, and we're very optimistic. That will be further support for the benefits of further Lipitor reduction with Lipitor or Caduet.

Thank you. Jami Rubin, you may ask your question and please state your company name.

Morgan Stanley. Thank you. Just going back to Celebrex and Bextra, obviously were sales were quite strong in the fourth quarter, not indicative of future performance. Was there anything you mentioned that with other major products there were no unusual wholesaler stocking issues, but just given all the noise, both positive and negative in the quarter for Celebrex and Bextra following the Vioxx withdrawal, were there any unusual stocking issues going into the fourth quarter that could create a double whammy, a double negative whammy in the fourth quarter -- or rather the first quarter of '05, as that is brought down and revenues drop down to reflect the current prescription environment for those drugs? That's my first question.

And second question relates to manufacturing efficiencies. I think Hank, in the past, you've talked about opportunities to shut down plants from the previous mergers. Just wondering where you were with that, and to what extent that will be a variable in modeling gross margins for '05. Thanks.

Well, on Celebrex itself, it was a very interesting quarter, to say the least. We picked up significant scripts following the Vioxx withdrawal. And then not only did we lose share at the end of the quarter, but the overall market declined. So it was a turbulent period for sure. Let me ask Peter Brant if there was -- at the end of the year, any significant inventory changes, but it was, you know, we're being whip sawed on the upside, rushing to meet demand, and then trying to pull down sales at the end of the quarter to bring inventories back in line. Peter?

We worked very closely with the major wholesalers in the U.S. to make sure that they understood exactly what you mentioned, what was happening with prescription trends at that point in time. As you know, many of the wholesalers, they placed their orders based on historical models, so it was important to work closely with the wholesalers to make sure they fully understood what was happening at that point in time with the prescription trends. Once they understood that, they began to pull back on their orders as well. So while there may be a very slight increase over normal levels in inventory in both Celebrex and Bextra, nothing material at this point.

On the manufacturing restructuring, that continues. As you -- as I'm sure many of you know, moving production requires reregistration, in the new plant we are switching to. So as we shut down plants, or restructure our manufacturing operations, there is a period of reregistration. We are well along on that. And you can expect continuing -- continuing plant closures as we rationalize both the manufacturing and the distribution system. We're well into that process. We're down close to 20 plants already. And that process will continue. And David, the impact of that on gross margin?

Yeah, well that obviously will have a favorable impact on gross margin, but I ask you to be patient, because a lot of factors will have an impact on gross margin, and that's the process we're going through in terms of characterizing 2005, but Jami, that clearly is one that is on the the positive side of the equation

Thank you.

We're not answering these questions Jami with April 5 as the answer, but we need to know before you know, and we won't really have a good fix on production volumes next year until we have a better sense of where the Cox-2 products are going.

Thank you very much.

Thank you. Steve Scala, you may ask your question and please state your company name.

SG Cowen and Company. Thank you. I have two product-related questions. First, on Lyrica, can you update us on the status of the deliberation with the DEA regarding scheduling, and is this a scenario where scheduling could be lifted over time, perhaps via additional studies which you might carry out?

And the second question on Exubera, can you update us on the status of the agreement with Sanofi regarding the change of control provision and how Pfizer is leaning relative to its various options?

On Exubera let me deal with that one first, Steve. We are in negotiations to try to settle this matter with our preferred option being the one we're making good progress on. So hopefully there is good news there shortly. The litigation is continuing, but that will not be the critical factor here I'm sure. We do not have a DEA decision. If we did, we would have announced it. We are, what, three to four weeks away? Is that --

Unclear.

Impossible to say. But hopefully fairly soon here. And the chances of lifting that later --

We do plan on, it's Joe Fesco, we do plan on doing work post approval to come back to the Agency to try to get the scheduling lifted.

At the level of scheduling we're anticipating here, it should not have a significant impact on our opportunity here. It is large in both options.

Hank, can you tell us what your preferred option is with Exubera?

As soon as we have it, we will tell you.

Thank you. Tony Butler, you may ask your question and please state your company name.

Lehman Brothers. Thank you. Hank, a little more of a strategic question here, it really relates to comments which are continuously made about scale. And as we enter a new area with respect to Medicare modernization, one thinks about the guidelines that have been put forth from USP, suggesting maybe only two drugs per category, and I'm curious how either Pfizer may be able to leverage their scale and more importantly how you think about your product portfolio relative to that constraint, because I think we can certainly see that pricing can be much more of an issue in '06 and beyond, more so than some of the comments we've been thinking about for '05. Thanks.

Well, that is the perfect strategic question. Karen has mentioned already the Green Ribbon initiative in Florida, which we are one of nine I think, of these pilots HHS is running, and obviously in this pilot, we're going to show the benefit to health outcomes, and cost of open access to modern medicines. So that will be a formulary which provides patients access to the medicines that their doctors think are best for them.

The other approach, kind of the other approach to health care costs are very restrictive formularies, essentially rationing and price controls. And the battle is going to be for those two ideas. Do we want to live in a world with rationing of access to care, access to medicine, and government price controls? Or do we want to live in a world where doctors and patients are improving health, improving health outcomes, and by the way bringing down costs. We demonstrated already very convincingly in the Florida Healthy State initiative that open access to medicine, focusing on the patient, emphasizing health over sickness, produces benefits both for the patient and the payer. So this is a critically important experiment that we're engaged in. We're not going to see results from that for one to two years. But we will be promoting the preliminary results as soon as we get our hands on them.

The real issue around formularies is just how open the access is. And obviously, we and others in the industry believe that patients should have access to the medicines they need, and it is broader than just two drugs per category. It has to do with rights of appeal and ways that patients can get access to the medicines they truly need. But we're -- you know, with 15 category leading products, we're pretty confident that our drugs will be in those categories. As they are with managed care today.

So I don't think given that this is a private sector delivered system, with formularies set by the private sector managed care plans we're already dealing with, that it will be materially different from what we're experiencing right now. Pat, Pat Kelly, do you have anything to add to that?

No, I think again, that you've put it well, that again, this is a market that although Medicare modernization has not yet begun, given it is a private market delivery system, it is one we're quite familiar with, and quite successful in. In terms of we have the industry's leading access on those same private formularies that will be used to support the Medicare drug benefit. And we're continuing negotiation with those private drug plan sponsors to ensure that our products are still quite well represented, so we believe that again there will not be material change to our industry-leading position.

And just as our sales force is recognized as the most valued by prescribing physicians, our managed care organization has been recognized this year by the managed care medical directors, the people we interact with on formularies, as their most valued partner, so we go into this with a lot of strengths in addition to our scale. Good question, Tony, that's right on.

Thank you.

Thank you. Chris Shibutani you may ask your question and please state your company name.

Thank you. J.P. Morgan. Two questions, if I may. One on R&D and a second on the emerging markets comments. With R&D, at our recent conference, we had some leading directors of the R&D organizations from some of your competitors describe how the costs have really been spiraling, particularly for the development and clinical trials phases, double digit increases pushing 20% year-over-year increases in the cost of conducting some of these trials. As we think about the level of spending that I think many of us are projecting, what we'll need to give, if the clinical trials are increasing at this pace, are there -- is there room for you to be able to still keep the level of total spending growth down?

And my follow-up question on China, I was interested that were approaching this as an emerging market, certainly from the population and the volume, it is understandable but two key questions there, pricing and intellectual property, I know you've run into some problems with Viagra and on pricing you mentioned 12 new products you're launching, are these products that we're yet to see in our markets or are these mature products that simply are not available in those countries? Thank you.

Your question on R&D costs is exactly right. Medicines are expensive because we haven't figured out a way to make them faster and cheaper. The cost of development is going up dramatically. And let me ask John LaMattina, President of Global Research and Development, to comment on what we're doing in this regard.

So it is a good question. For us, there is really a two-fold part to this because not only are costs going up because there is a whole lot more we have to do in putting our filings together in terms of dramatically showing safety improvements and differentiating these compounds, ahead of existing therapy, at filing and not post filing, so you have that aspect, plus in our case, we have a pipeline that is far larger than ever before, and continues to grow. So that is a good thing.

Paying for it all, I think, going forward is going to be an issue for us. But certainly we're looking at improving costs. We're upgrading a lot of the ways we're doing things. We're finding ways to electronically do a lot of things that were done by paper previously, and there are a lot of places where we think we can save on costs and we're doing just that. But it is a struggle we have going forward. Which is a nice problem to have. And that is an awful lot of compounds to do an awful lot of work on.

There are two other answers to this question. One a short term and a much more important one, long term. To come back to Tony Butler's comment on scale, this helps us here enormously. Not only do we have all the contract research organizations returning our phone calls, but we've usually worked with them very recently on a product in a similar therapeutic area, so we're clearly able to do this faster, better and cheaper than anybody else in the industry.

And the ultimate answer to this question is not so much the cost of our successes but the cost of our failures. And Dr. John LaMattina and the research organization has an initiative well under way, which promises to double the productivity of our research organization. And that really is the ultimate answer to cost. We fail about 98% of the time. Somewhat amazingly, if we manage to fail 96% of the time, we would double our productivity, so that is a big part of the answer to this question. On China and pricing, Karen, do you want to take that on?

Pricing and intellectual property, actually.

Yes, that is a good one, too.

We have Lloyd Smith here who can answer that specific question, but we are quite excited about the opportunity in China, not just because of the demographics but because of the early support we've gotten from the government, on patent protection. Viagra notwithstanding. And so each product will kind of be its own case, but we feel very positively about our ability to succeed in that market. Lloyd, you want to add anything about the 12 products?

Yes, we're going to the products, the registration process in China is a little slower than much of the rest of the world. It is some two to three years time. So these are a combination of what would be in lines in our other marks, plus a range of new products, which is slightly behind the rest of the world.

And with that question, we conclude today's conference call. Thank you for being with us.

Thank you. Thank you, Lloyd.