Good day, everyone and welcome to Pfizer's Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. 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..

Thank you, operator. Good morning and thank you for joining us today to review Pfizer's second quarter 2014 performance.

I am joined today in by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, President of Vaccines, Oncology and Consumer; Geno Germano, President of Global Innovative Pharma; John Young, President of Established Pharma and Doug Lankler, General Counsel.

The slides that will be presented on the call can be viewed at pfizer.com, by clicking on the link for Pfizer Quarterly Corporate Performance Second Quarter 2014, which located in the Investor Presentations section in the lower right hand corner of this page.

Before we start, I would like to remind you that our discussions during the call will include forward-looking statements and that 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 2013 Annual Report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussion during the call will also 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. We will now make prepared remarks and then we will move to a question and answer session. With that, I will now turn the call over to Ian Read.

Ian?.

Thank you Chuck and thank you all for joining our call this morning. I will begin with some brief comments from the quarter. Overall we saw good performance and strong operational growth in a number of areas including Lyrica in developed markets, Prevnar primarily in the U.S. and in emerging markets and Celebrex worldwide.

Our recently launched brands are making solid gains. Eliquis grew sequentially 50% quarter-on-quarter on a global basis while Xeljanz posted sequential growth quarter roughly 30% primarily in the U.S.

With the continuation of this momentum these products are on a trajectory to become meaningful contributors to our underlying business in the coming quarters. We also are looking continued uptake with Xalkori and Inlyta globally. Revenues in our consumer business increased 15% operationally primarily due to the recent launch of Nexium 24HR in the U.S.

in late May. We also saw strong companywide performance within the emerging markets, revenue increased 11% operationally compared to the year ago quarter driven by growth in China, Venezuela, Argentina and Brazil.

Despite to somewhat slower start to the year, each of our businesses is performing well in the face of ongoing product losses of exclusivity for innovative businesses and continued pricing pressures and changing market dynamics effecting our established business.

I would also point out the negative impact of LOEs and the revenue loss resulting from the exploration of some co-promoted revenues was 1.7 billion for the first six months. This impact mass the companywide operational revenue growth from all other products during the first half of the year which was 3% overall.

In evaluating our performance now that we have been operating in our new commercial model since the beginning of the year, I believe this structure is providing greater transparency into the operations of each business and on a daily basis it enables decision making that better optimizes the performance and portfolio of each of our segments.

Furthermore we remain encouraged by key developments that demonstrate our pipeline momentum. Of particular note, we expect to complete the submission of the palbociclib new drug application to the FDA in August.

This submission is based on the final result of PALOMA-1, a randomized, Phase 2 trial comparing the combination of palbociclib plus letrozole versus letrozole alone as the first line treatment of postmenopausal women with estrogen positive HER2 negative advanced breast cancer. We will publically communicate once we’ve completed our submission.

Also of note, our Phase III palbociclib trials in advanced breast cancer PALOMA-II and PALOMA-III are progressing and both trials have completed recruitment of new patients.

In addition, the number of Phase III studies where we are collaborating with leading international breast cancer investigators are open and enrolling patients with both advanced and early breast cancer and we have active exploration underway of multiple Phase I and II studies in non-breast indications.

Given the outbreaks of meningitis B disease on several US college campuses in 2013, we work closely with the FDA to submit our biologics license application for accelerated approval of our meningitis B vaccine for the prevention of meningococcal disease and in adolescent to young adults.

We look forward to the meeting that adjusted the scheduled to take place on August 13th by the CDC Advisory committee on immunization practices ACIP to discuss and vote on a potentially expanded recommendation for Prevnar 13 use in adults.

We had a comprehensive Xeljanz program that is progressing with Phase III studies underway and you see in psoriatic arthritis and Phase II studies in psoriasis for top reviews, Crohn’s disease and ankylosing spondylitis.

We continue to enroll patients in Phase III trials of bococizumab for cholesterol lowering and high risk individuals, the total flows into the treatment of diabetes and later this year we expect to begin enrolling patients for the Rapunzel for the treatment of vaso-occlusive crises individuals of sickle cell anemia.

As we ended the second half of this year, our strategy, focus and priorities remain unchanged, supported by the steady performance of each of our commercial segments.

When it comes to business development, we will continue to evaluate all opportunities regardless of the size through the lens of value creation for our shareholders and enhancing the competitors of our businesses. Our most recent announced acquisitions and collaborations are example to enablers of our strategy.

We expect far more meaningfully increase the size of our sterile injectable business through their existing and out licensed portfolios sterile injectables as well as the medium and long-term through the potential of their pipeline.

And if we see promising result as we move forward with the selector’s collaboration to develop immune therapies against select [indiscernible] oncology, we believe it has the potential for changing the way cancer is treated.

In summary, for the remainder of this year, we will be focused on executing our plans and taking the actions that will further strengthen and globally position us as the market leader in each of our business segments.

We remain committed to advancing innovative therapies on behalf of patients we serve, prudently managing deploying capital, to drive the greatest value for our shareholders and creating a culture within the organization where [indiscernible] creatively take prudent risk in operating with an entrepreneurial mindset.

I will now turn it over to Frank to take you through the financial details of the quarter..

Thanks Ian and good day everyone. As always the charts we are reviewing today are included in our webcast.

As a reminder, because of the focused position of Zoetis on June 23, 2013, the financial results of the animal health business and the gain associated with its fully disposition are reported as a discontinued operation in the consolidated statements of income for the second quarter and first six months of 2013. Now let’s move on to the financials.

Second quarter 2014 revenues of approximately 12.8 billion decreased 2% year-over-year, reflecting a 1% negative impact from foreign exchange to an operational decline of approximately 1% driven mainly by the expiration on October the 31, 2013 of the co-promotion terms for Enbrel in U.S.

and Canada, the ongoing terminations and expirations of the Spiriva collaboration in certain countries, the loss of exclusivity is subsequent to multi-sourced generic competition for Detrol LA in the U.S. and other product losses of exclusivity in various markets.

These were partially offset by the strong operational growth in developed markets of Lyrica, Nexium 24HR in the U.S., Prevnar, Eliquis, Xeljanz, Celebrex, Xalkori and Inlyta and by strong operational growth of 11% in emerging markets. In addition reported revenues included 71 million transitional manufacturing and supply agreements with Zoetis.

I want to point out LOEs in declining alliance revenues had a negative impact of approximately $840 million, during the quarter.

Adjusted diluted EPS of $0.68 increased 4% primarily due to fewer diluted weighted average shares outstanding due to ongoing share repurchases and the impact of the Zoetis exchange offer which were partially offset by a 4% aggregate operational increase and adjusted cost of sales, adjusted SI&A, adjusted R&D expenses resulting from an unfavorable shift in product mix and recently initiated Phase III programs for bococizumab, ertugliflozin, palbociclib and the meningitis B vaccine and for the studies of Xeljanz and certain other products and potential new indications.

However, adjusted SI&A expenses decreased because of continued benefits from cost reduction productivity initiatives.

Reported diluted EPS of $0.45 compared with the $1.98 in the year ago quarter was primarily due to the non-recurrence in the second quarter 2014 of income from discontinued operations in the year ago quarter attributable to the animal health business including the gain associated with its disposition and the income in the year ago quarter from a litigation settlement for patent-infringement damages.

And to a lesser extent the LOE from the exploration of the co-promotion term of certain products, all of which were partially offset by lower acquisition related cost, purchase accounting adjustments, and asset impairment charges.

A lower effective tax rate due to the resolution in the second quarter of 2014 of certain prior year tax positions with various foreign tax authorities, a favorable change in the jurisdictional mix of earnings and the non-recurrence of the unfavorable impact of the tax rate associated with the aforementioned patent litigation settlement income and finally fewer shares outstanding.

Foreign exchange negatively impacted second quarter revenues by 1% or 87 million that had a net positive impact of 18 million on the aggregate of adjusted cost of sales, adjusted SI&A expenses and adjusted R&D expenses. Consequently, foreign exchange negatively impacted adjusted diluted EPS by approximately $0.01 compared with a year ago quarter.

Now moving onto the financial highlights of our businesses, in second quarter Global Innovative Pharmaceuticals revenues decreased 5% operationally year-over-year due to the previously mentioned exploration of the co-promotion term for Enbrel in the U.S. and Canada and the loss of exclusivity for Lyrica in Canada in February of 2013.

And the exploration of the co-promotion term for Enbrel and LOEs of certain products resulted in an operational decline of $459 million; however, all other GEP revenues grew 9% operationally driven by strong growth from Lyrica primarily in the U.S.

and Japan as well as the performance of recently launched products including Eliquis globally and Xeljanz primarily in the U.S. Income before taxes declined 12% operationally due to the decrease in revenues, a 5% operational increase in cost of sales or a 1.2 percentage point increase as a percentage of revenues.

I want to point out here that the loss of Enbrel alliance revenues in the second quarter 2014 negatively impacted cost of sales as a percentage of revenues by 1.5 percentage points operationally, 13% operational increase in SI&A expenses from an increased investment in new products and in line brands such as Lyrica and Viagra as well as a 41% operational increase in R&D expenses due to recently initiated Phase 3 programs for bococizumab, ertugliflozin, and additional Xeljanz indications.

In the second quarter, revenues from our vaccines, oncology and consumer healthcare business grew 15% operationally year-over-year due to the strong operational growth of Prevnar 13 in the U.S. and emerging markets, the launch of Nexium 24HR in the U.S. in late May 2014 and the continued strong uptake of Xalkori and Inlyta globally.

Income before taxes increased 10% operationally due to increased revenues, which were partially offset by a 23% operational increase in cost of sales driven by increased sales volumes in unfavorable change in product mix, an 18% operational increase in SI&A expenses associated with the launch of Nexium 24HR and the prelaunch marketing expenses to the meningitis B vaccine palbociclib.

And the 16% increase in R&D expenses supporting the acceleration of the meningitis B vaccine at palbociclib development programs. The second quarter Global Established Pharmaceuticals revenues decreased 5% operationally year-over-year due to the loss of exclusivity and subsequent launch of multi-source generic competition for Detrol LA in the U.S.

January 2014, Viagra in most European markets in June of 2013, and Aricept in Canada in December of 2013 as well as the ongoing termination of the co-promotion agreement for Spiriva in most countries including the U.S. in April and the ongoing exploration in certain other countries.

These were partially offset by the strong operational performance of Celebrex in most major markets, Lyrica in Europe and Lipitor primarily in China.

The LOEs of certain products, the loss of alliance revenue for Aricept and Spiriva and Lipitor in developed markets negatively impacted GEP revenues by 395 million operationally; however, all other GEP revenues grew 1% operationally.

Income before taxes declined 4% operationally due to the decrease in revenues was partially offset by the aggregate decrease, cost of sales, SI&A and R&D expenses which included increased spending on biosimilar development programs.

Now moving onto our 2014 financial guidance, we've updated several components of our adjusted guidance and reaffirmed our 2014 adjusted diluted EPS guidance range. Because of the anticipated negative impact from the expected multi-source generic competition for Celebrex in the U.S.

in December 2014 we now expect revenues to be in the range of 48.7 billion to 50.7 billion versus 49.2 billion to 51.2 billion. This range absorbs the negative impact of approximately 3.4 billion due to declining alliance revenues and expected product losses of exclusivity.

In addition, we are decreasing our adjusted SI&A expense range due to an expected reduction in promotional spending for Celebrex in second half of 2014 and now expect adjusted SI&A to be in the range of 13.3 billion to 14.3 billion compared with 13.5 billion to 14.5 billion previously.

To reflect the planned 80 million upfront payment to Cellectis for our global strategic collaboration and anticipated increased expenses for the acceleration of certain late-stage clinical programs including palbociclib and bococizumab among others, we now expect R&D expenses to be in the range of 6.7 to 7.2 billion versus 6.4 to 6.9 billion previously.

We now expect approximately 200 million of other income versus approximately 100 million of other deducts because of lower expecting net interest expense for the remainder of 2014 and gains realized during the first half of 2014 mainly on sales of product rights and investments in equity securities.

We expected reported diluted EPS to be in the range of $1.47 to a $1.62 due to charges related to certain legal matters primarily related to Neurontin incurred during the first quarter 2014.

And we are reaffirming our 2014 adjusted diluted EPS guidance range of $2.20 to $2.30 which absorbs approximately $0.05 per share for anticipated negative impact related to Celebrex and $0.01 related to the planned upfront payment to the Cellectis collaboration. Now moving on to key takeaways, we recorded solid second quarter 2014 results.

We reaffirmed our adjusted diluted EPS range which absorbs an approximately $0.05 anticipated negative impact related to Celebrex and $0.01 related to Cellectis. We achieved several key R&D milestones including the initiation for rolling submission in June 2014 of an NDA seeking approval for palbociclib which is expected to complete this August.

In June we submitted a Biologics License Application to the FDA for our meningitis B vaccine candidate and we discussed with the ACIP at its June meeting a potential expanded recommendation for Prevnar 13 used with adults. We expect the ACIP’s decision on August 13.

We announced several business development opportunities to further strengthen our position in key strategic areas and we continue to create shareholder value through prudent capital allocation. To date 2014, we repurchased 2.9 billion or approximately 95.1 million shares and we continue to expect to repurchase 5 billion of our common stock this year.

These repurchases and planned repurchases for the remainder of the year are expected to reduce total shares outstanding year-over-year by a total of approximately 100 million shares by the end of 2014 after considering actual and projected dilution related to employee compensation programs.

Finally, we remain committed to delivering attractive shareholder returns in 2014 and beyond. Now, I will turn it back to Chuck..

Thank you, Frank. Operator, at this point can we call for questions..

Thank you. (Operator Instructions) Your first question comes from Chris Schott from JPMorgan..

Great, thanks very much for the questions. Just two here. The first one on assumptions is the first time you've been at this recently but on business development, just how are you thinking about DDA at this point.

I guess given the valuation research and pipeline recovery that’s occurred within this space, is it more challenging to find larger deals that both advance the Pfizer story and give your investors (indiscernible) they are looking for? And the second question for the past year or so until the Astra approach that better focus on potential breakup of Pfizer based on your new corporate structure you are creating coupled with your pipeline recovery, can you update us on your thoughts on that potential split of Pfizer over time, has your view of breakup making potential sense making at all? And I guess do you still see merits in the idea of splitting the company over time? Thanks very much..

Thank you for questions Chris. On BD, BD is not a strategy, it's an enabler strategy. We continue to aggressively look at all cuts of BD regardless of size that we believe would add value to shareholders. So, that our stance on BD and on this much discussed potential breakup as before, we are managing the business in two segments broadly speaking.

One being innovative and the other being established. And in the innovative we have sub businesses like oncology and a consumer and vaccines that are very distinct from other parts of the innovative business. So, we are giving you transparency on those segments and we are collecting both P&L and balance sheet information to give us optionality.

What we do eventually will really depend upon how those business perform, how our shareholders value those businesses and we will look at that after an appropriate period of time of both collecting the data we need for optionality and the performance in the marketplace. Thank you..

The only thing I would add Chris to punctuate what Ian said is and I think for the time being and for the near future the most important thing those businesses can do is execute with excellence so that operational performance and that will create all kinds of options and choices for us in the future..

And fundamentally I see BD is adding to what I see as a strong hand we have with our core strategies..

Your next question comes from Vamil Divan from Credit Suisse..

Thanks for taking the question. Couple here. Again, I'm sure you've gotten some of these before as well. But one around the increased rhetoric in Washington around inversions.

Would that impact, or is it impacting any way the way you look at doing an inversion-based deal in the future? And then the second one, just on the pipeline around Palbo, I think there's still a lot of questions.

You said obviously you're going to file next month, a lot of questions around with what the FDA is going to do and really, why would the FDA approve it on an expedited basis when you'll be getting full Phase III data just a few months later? And so if you can give us any updates there around discussions you've had with the FDA and why the need to, again, just maybe take a little bit more of a risk to get this out just a few months ahead of the full data session.

Thanks..

In Washington, we remain committed to discussing and advocating for fundamental tax report. And that will play out with the political parties we suspect over the next coming years.

And it’s really difficult to comment more than that other than we do believe the tax system is inherently puts the companies at a disadvantage and we would like to see the tax system reformed. On palbo, I think there is some confusion as to when we get the final Phase III data, but I will ask to Albert to comment on the palbo submission..

As you are aware, our submission is based on the final results for our Phase II trial and this has happened after conversations with FDA. I don’t want to speculate what FDA will request as we go through the review process but I can tell you that until now, they have not placed any conditions on us related to the Phase III trial results.

As we learn a little bit the Phase III has completed recruitment and it is expected to come to final completion at the end in December of 2015 and the final report would be available in 2016..

Your next question comes from Tim Anderson from Sanford Bernstein..

Just going back to M&A and I know you all probably struggle to answer this question, but in your prepared remarks, you said you would continue to evaluate all opportunities regardless of size.

My question is whether it’s reasonable to expect that Pfizer could find strategically attractive targets that are big enough such as tax conversion could be one of the benefits, so the operative here for me would be strategically attractive.

Because I can think of other theoretical inversion targets but I am not sure I see the strategic value on those, I’d like to get your opinion on that.

And then on palbociclib in Europe, do you expect that PALOMA-1 will be adequate first submission or will regulatory authorities likely require at least interim Phase III results before proving kind of like a date with Xalkori?.

Why don’t you take the palbo question and I will come back to the M&A?.

Look I mean as you can expect we have begun discussions with the European and other regulatory health authorities and those discussions are for palbociclib and those discussions include discussions on the clinical data.

Also we have presented to them our development program and we have entered into discussions about the potential regulatory path forward. But it is too early to disclose at this stage, our regulatory strategy for these reasons..

Thank you. And Tim on M&A, we look and continue to look at a very wide spectrum of M&A transaction, so we have substantial financial ability and balance sheet and tax inversion is one part of the value equation. I mean we're looking at AZ, we’ve looked at both their pipeline the synergies and the tax inversion.

So we will continue to look very broadly at deploying our capital in a way that makes sense for shareholder return..

Your next question is from Jami Rubin from Goldman Sachs..

I know we are all kind of dancing around the same issue Ian but just on the assumption that AstraZeneca does not materialize, is there actually a plan B in place? What we have seen since then is a small acquisition InnoPharma and is that the kind of deals that we should anticipate going forward or is there still a plan in place to achieve a lower tax rate to enhance the pipeline? And then I don’t know if Mikael Dolsten is on the call, but just a question on business development in out licensing activity.

I mean we have seen recently a couple of high profile licensing deals, tremelimumab to AstraZeneca and neratinib to Puma and regrettably those look like a very unfortunate decisions and just Ian, are you working internally and are you pleased with the team that you have in place who are charged with making these critical decisions? Thanks very much..

So on the BD, we looked at both those assets that you mentioned early on in their lifecycle and we looked at the opportunities with inside our portfolio and took decision given that they were lower -- we believe lower value assets to what we knew about those assets at the time to out license them.

In the case of the Puma asset they acquired neratinib, we outlicensed this so what we looked at almost 10 companies and most of them major pharmaceutical companies. And the only company that was interested in this development was Puma. And as such, we were pleased with the outlicensing we struck with them and the royalty rate.

I have not seen the data, nor has Pfizer seen the data that may or may not indicate that the product has value and we will be in discussions with Puma vis-à-vis our legal rights as to that data and the consequences of that data.

On the tremelimumab, it was a decision to outlicense to AZ and I am not aware of any data that would make me believe that we made a mistake given the fact we had other products that we were developing of higher productivity value.

Now with regard to plan B, my comment would be our plan A is a plan to continue to develop our innovative pipeline to restore the vigor in our pipeline. We're making progress with mid-and late-stage pipelines including Prevnar adult, palbociclib, bococizumab, ertugliflozin mening B and Xeljanz follow indications.

We're continuing to grow on newly launched brands such as Eliquis, Xeljanz, Inlyta, Lyrica and Embrel. And we’re focusing on the emerging markets, so plan A is to continue with the strategy we’ve always articulated which is to re-vigor our innovative core, make our R&D productive, and make smart and shareholder friendly capital allocation decisions.

Any BD that we do will be looked at for the view of accelerating those strategies and improving returns to shareholders and the deal that you are in a pharma and Cellectis are deals that are opportunistic and add on and we can build and help the underlying BUs, but certainly are not representative of the total firepower of corporate strategy of Pfizer.

Frank do you want anything to that?.

Your next question come is from the John Boris from SunTrust Robinson..

First question for Frank, in 2013 and for the front half 2014, you returned a significant amount of cash through share repurchases and through dividends in both of those years, can you just remind us what the total amount that you returned and how much cash that you have to bring back offshore to be able to fund your share repurchase and your dividend from offshore? Second question for Ian on large scale versus tuck-in type acquisitions, if you look at your U.S.

operation which is traditionally the most profitable operation as a major pharma, it seems with ongoing losses of exclusivity and losses of alliance revenue that that operation seems to be under a fair amount of pressure, you do have some pipeline assets that you’re successfully launching through there, but is the scale of what you’re launching large enough to be able to offset some of those pressures that you have from continued losses of exclusivity losses of alliance revenue? And then on your established products business traditionally you’ve had a lot of success bringing in injectable assets into that business but on a global basis is it of scale where you have the regulatory capabilities needed to be able to successfully launch other types of assets on a global basis through that strategically? Thanks..

Thank you, John.

Frank, do you want to take the first question?.

Sure. So John just in terms of running the numbers, last year we returned 23 billion to our shareholders between share buybacks and dividends. The buyback piece of that was 16.3 billion. This year the buyback piece year-to-date is 2.9 billion.

If you look our dividend on an annual basis, we got on average call it 6.4 billion, 6.5 billion shares at above full dividend, and call that 6.5 billion to 7 billion so from midyear piece of that to another 3 billion, 3.5 billion.

And then if you look by the way just in terms of numbers, if you look over the last three years ’11, ’12, and ’13, we returned about 53 billion to our shareholders in terms of buybacks and dividends. In terms of major way we have funded that as then through some our unlocking value activities.

So we sell Capsugel the cellular nutrition and we exchange for Zoetis. So those are three of the ways we have done that and obviously through very effective and efficient tax plan..

Thank you, Frank.

On your question about scale of the innovative business, obviously your question goes to the strategic issue we’ve been dealing with as we’re trying take care of the LOEs while trying to minimize revenue decreases while growing our EPS, and I think we've been doing a good job of doing that while we manage the sort of onslaught of LOEs with EPS growth.

So, it comes down to with the question of the growth of Lyrica, the growth of Eliquis, the growth of Xeljanz, the adult vaccine, the mening B, the Xeljanz follow ons.

What is the extent of growth we can get from that while we continue and of course palbociclib and when it launches that compared to the LOEs plus the growth we can get out of them as you market, so it’s a very good question. We feel that our strategy is the right one.

We will continue to be challenged on revenue growth that we see that we can manage through this cycle through those products I just mentioned and behind that we see a wave of very exciting products coming as we get through the LOEs. On EP I would ask John to comment..

Okay so thanks for the question, John its sterile injectable. And I think maybe the first point to make is that we actually have a very strong sterile injectable business globally not only in the U.S.

But one of the features of the market overall is actually is pretty concentrated and thereabout five markets globally that probably represent about 80% of the total profit pool and sterile injectable. The US is obviously one of those markets but the other markets would include China, Japan, France and Italy.

It was actually more concentrated that you would think and I think the answer to your question as we actually feel very confident about the underlying capabilities that we have particularly in regulatory affairs could be able to bring to market products in that portfolio either products that we're developing organically or hopefully in the future pending completion of the acquisition of InnoPharma products that would come out of the pipeline outside of that company..

I would add John, our established products, our international presence is probably the strongest of the American company and certainly on the power of any of the Europeans, they had great strength broadly speaking in emerging markets with a number one multinational in China.

I’m very confident we have the talent, the distribution and the know how to fully leverage our products globally. Thank you for the question..

Your next question is from David Risinger from Morgan Stanley..

Yes, thanks very much. I have two strategic questions and then one cost question.

So, on the first two, number one I was just wondering if you could provide feedback that you received on the final offer of 55 for AstraZeneca that you received from major investors? And second, are you considering other major tax redomiciling transactions and then with respect to net cost obviously Pfizer continues to cut costs but also needs to reinvest.

So, beyond 2014 Frank, should we think about Pfizer being able to reduce net cost in terms of selling and general administrative and R&D or at the end of this year will you be at the point of essentially looking at flattish cost or rising cost going forward? Thank you..

So, now you see, you understand I can’t make any forward looking statements on AZ, I would like to put in context of I believe inflations already been reported. We were faced with the AZ management with an indication that they would not engage with us in a meaningful way unless we had an opening of approximately 59 pound.

Faced with that, we made report was a full and final offer of 55 pound that fully valued the company and gave appropriate sharing of synergies to the appropriate shareholders. We have in general received good feedback from our shareholders that we demonstrated appropriate capital discipline. Are we looking at additional or other BD deals? Absolutely.

And would the tax inversions because that value, this was with AZ, it will be part of the value that we look at, but we also look for a strengthening parts of our businesses as well as we do that fundamentally what we look for is will any BD create long term value for our shareholders and that’s the lens we look at it through not necessarily through financial strategic but overall is it value creating against our cost of capital.

Frank, on a cost -- ?.

And so David, just in terms of timing, when we close out the year we are on the end of January or at least February call it 15, we'll close out Q4 and then I will give specific guidance by line item for 2015, so you will get the specific numbers then, but I will comment, I'll answer your question now and maybe macro-context, what I have said this year, last few quarters is I think we’ve entered delayed innings on cost reduction.

We have got some pressure on R&D is that we have initiated some late stage and development programs that we have eluded on the call, we've had some pressure on SI&A and due to launch cost cutting products is a good problem to have.

That said in terms of managing our cost and expense structure, our expectation is that we will continuously improve as we go forward and there are still opportunities to improve our cost structure and we'll capitalize on those opportunities and we will drop as much of that to the bottom line as we can and that will be a balance between cost benefit analysis and how we deploy our capital..

Your next question is from Colin Bristow from Bank of America..

Thanks. A few product questions, if I may. On Xeljans, can you just give us a little more color on the performance in the quarter? And then looking forward, where are you in terms of getting the 10-milligram dose approved in RA.

Given you intend to follow the 5-milligram and 10-milligram doses in psoriasis, what gives you confidence the FDA will feel comfortable with a 10-milligram dose in this setting? And then on the once-daily formulation, what are the timelines associated with this? And then finally on ertugliflozin, how do you see yourself competing, given it looks like you'll be fourth to market and historically, third or fourth entrants in these types of commoditized markets have struggled to gain meaningful share? Thanks..

Sure. So, let me start out with Xeljanz so we had a good with Xeljanz. We grew by over 30% from the first quarter this year. We think we have really hit an inflexion point with the launch of the structure data that they came after in the first quarter this year. So, we have some momentum and we’re feeling good about the performance in the U.S.

With regard to the 10 milligram in RA, we think that that’s going to be -- that’s going to take a while, that’s going to take accumulation of additional safety data to satisfy the FDA. Although we have 10 milligram registrations in other countries, so we will just see how that plays out.

With regard to psoriasis, we have a fairly large comprehensive data base over 3,600 patients and four significant trials in psoriasis. The results that we saw across the 5 milligram and 10 milligram doses were consistent in those trials. It is obviously a different a patient population with a different safety and efficacy profile overall.

So we are in the process now of assembling our dossier and we will file a dossier and have discussions with the agency on the appropriate benefit risk and the appropriate dosages for that indication. With regard to the once a day, we are continuing to make really make really good progress with the once a day program.

As you may know, we are not needing to do any addition clinical work, we are doing some pharmacology and PK work. So we expect to be filing in the first half of 2015.

And with regard to ertugliflozin, we have, again a comprehensive program and partnership with Merck developing ertugliflozin as a single entity molecule or product and also in combination with JANUVIA and metformin and we will have an overall strategy that involves both the single entity and combination products to make our way into that marketplace..

Thank you, Geno. Of course I should say fourth in, but it depends upon the quality of the clinical trial and the results we get and we believe that it is potentially best in class molecule..

Your next question is from Marc Goodman from UBS..

Geno, I was wondering if you could also give us an update on Xalkori and Inlyta, how those products are doing in the trends and how much more you think we can get from those. Second question is an update on tanezumab and third, China, maybe you could talk about some of the trends in China.

Are we still gaining market share over there? Are we adding sales reps, are we moving into new cities and how the Hisun JV has worked out. Thanks..

So Albert in fact will -- has oncology and his responsibility, he will answer the Xalkori, Inlyta questions and then we will go to Mikael for tanezumab. And then perhaps in general, perhaps John could answer the China question..

Mark, Inlyta overall very pleased with the performance with Inlyta, that was driven by very strong up take in key new regions. In the quarter we had 101 million of sales that was up 44% operationally from last year. Very seamless sentiments for Xalkori, we reported revenues of 108 million for the quarter that was up 59%.

Overall, the growth is driven as a result of we have increased testing for the [indiscernible]. It is 78% remind you that when we launched the product it was 11%, so quite a strong uptake. And second reason is because we’ve extended duration of [indiscernible] so more patients are treated and they are treated for long.

So very strong performance for both, we expect to see this growth continue..

Yes, so on tanezumab and thank you for the interest in that asset and as you may remember tanezumab delivered some very strong efficacy signal in the previous studies and represent potentially one of the few classes of new mechanics that are recently proving substantial clinical benefit.

And we have been working with FDA in some very good constructive dialogues and what needs to be demonstrated in pre-clinical toxicology in order to submit a new package that could open up at a potential for reinitiating those studies. This has been focused on pre-clinical studies on the peripheral nervous system.

And we have done some in depth studies that continue to accumulate data but so far I am encouraged about we have learned about the drug and the mechanics and we have stated that we will plan potentially to resubmit the data if we'll continue to come together in a positive way no later than first part of 2015..

So thanks for the question Marc. So I mean I think we are obviously very pleased with the performance of China this quarter. Overall, the total biopharmaceutical business in China showed operational growth of 27%. The GEP business was in line at 37% in the quarter.

And you can see the product performances when you get to the schedules and the earnings release. So pretty much across the Board what we have seen is strong volume growth driven by good operational performance in the marketplace. I think maybe just a comment on overall strategy in China for a business which clearly is very important to us.

Overall, our strategy has a number of areas of focus.

We are very focused on driving the legacy brands in China, LIPITOR is probably a standout product for us and we see a great fit with the priorities of the Chinese government to really better treat and manage patients with cardiovascular disease on a portfolio of Lipitor and Norvasc is a great fit in that regard.

You mentioned Hisun and certainly we’ve had a strategy in China for a number of years and I had to really find ways of participating in the profitable segments of the fast growing generic markets. And our partnership with Hisun is really a great example of that.

Overall generic products came for around 70% of the domestic market in China and really our partnership with Hisun places this extremely well to be able to maximize our contribution there with products that are great fit with again the means of the healthcare system.

Third clearly we’re looking to bring innovative products to market and the GIP and [warts] businesses in China are looking to maximize the performance of innovative products in the market as well as bring new products to market.

And overarching all of that, the last thing I would just say is that we’re clearly looking to find ways of collaborating very constructively with the Chinese government and with their goals for the development of the pharmaceutical industry capability in China.

We’ve had domestic manufacturing capacity in China for many years and we are also very engaged with working with the Ministry of Health to partner with them to better screen patients for cardiovascular disease in China as well. So all of those things together really can be hopefully a flavor of what is driving the performance in China this quarter..

And then Mark I’ll just run a few of the numbers and then I’ll answer your question about REPS. So John mentioned 27% operational growth for the biopharmaceutical business.

Total company for the quarter grew 24% operationally and then John mentioned Lipitor and Norvasc, Lipitor in China grew 55% operationally quarter-over-quarter, Norvasc grew 30% quarter-over-quarter. So just some really-really strong performance. And we have added a significant amount of REPS in China in the first half of the year..

Your next question is from Seamus Fernandez from Leerink..

Thanks very much. I have three questions. The first one on palbociclib, can you update us on the potential interim look in Paloma 2? The second question is really for Frank. Frank, maybe you can confirm for us, as we look at the year-over-year comparisons, we do see the 2013 numbers broken out.

But can you just confirm that this is not fully audited information that would include the balance sheet? Basically, my question is, is historically you've said that there won't be a look back at 2013 that would basically facilitate a split occurring sooner.

But as I look at that data, if it were fully audited, it would seem like that might be a possibility.

And then my last question for Ian, would you ever consider a sale of the innovative businesses, should you be approached by another company/ basically a willingness, if it made sense for shareholders in terms of that value, that might be provided to Pfizer in an eventual split? Thanks so much..

Yes there is an interim review built into the design of Phase 3 trial of PALOMA-2 but you know the timing of that review is event driven, so we cannot speculate when that review will exactly take place. As I said before, the primary completion of the study is expected to be end of ’15, so the final report is expected in ’16.

Again, it’s event driven so the actual data may vary a bit..

So Seamus, the way I think about this is no change from I have said previously which is if it’s a public transaction, if we were to decide to do something from a separation perspective in the future, it would be three years of audited financials. In that with year-one being 2014, so it would be prospectively there years of audited financials.

So no change from what I have said previously..

So on your last question, Seamus, I see myself in the management team and I am sure the Board sees themselves as custodians of shareholder value and so we would have to evaluate any proposal under its merit and we believe it produces long-term superior returns of shareholders..

Your next question is from Jeff Holford from Jefferies..

Hi. Thanks for taking my question. I've got three for you.

First off on Prevnar 13, would you just like to frame the opportunity for us again, if you were to receive a positive recommendation from the ACIP in August, and is that contained within your guidance for this year? Secondly, could you just comment around your strategic thoughts on your consumer business? Given some of the recent consolidations in that industry, does this asset still make most sense within the Pfizer structure? And then lastly, I wonder if you could just an up to date overview of your biosimilar programs and the potential timelines for any key assets.

Thank you..

Okay on the consumer business, we see the great store value. We have an active -- we’ve acquired assets in that business. We’ve just launched Nexium 24HR. We have an active RX OTC suite strategy, so we see it as a business that we want to be in. On Prevnar 13 adult, I'll ask Albert to give you some idea of the opportunity.

The early approval is included in this year's overall guidance, no major change..

Yes I will -- this is a great opportunity of course globally not only in U.S. because there is a very large adult target population and there is a significant unmet need over the 300 million adults are greater than 65 years of age in the world and half of that it is in U.S. and Japan. 3.6 to 3.7 million U.S.

adults are turning 65 this year and also depending upon a ACIP recommendation. We do believe that there could be even an additional catch up opportunity for adults greater than 65 that have already received the old generation vaccine. So, we expect the Prevnar 13 to be the leading adult vaccination given the strength of our data..

Okay, thanks again for the question Jeff. So, essentially we have five monoclonals in development, all of those products we expect to come to market in the 2017-2018 timeframe after the loss of exclusivity of the basic patterns of those molecules. So just to give you a rundown of the five, we have trastuzumab which is a biosimilar for Herceptin.

That is already in Phase III, that Phase III was initiated earlier on this year. We have a biosimilar rituxumab that achieved our proof of concept in the first half of this year and we expect to initiate Phase III in the second half of 2014.

We have biosimilar infliximab Phase I that was completed or we expect to complete at the end of this year and the next milestone there would again be initiation of Phase III and the second half of this year we have biosimilar adalimumab Phase I has been initiated and the next milestone would be a proof-of-concept redirect from those Phase I studies and making this year and then we have biosimilar bevacizumab that is in preclinical and the next milestone for that program would be the initiation of Phase I studies again this year..

Your next question is from Alex Arfaei from BMO Capital Markets..

Good morning. Thank you for taking the questions.

On palbo, when can we expect updated survival data from Paloma 1? And a higher level R&D question, is there an opportunity for additional cost savings in your R&D structure? We've seen some of your peers simplify their structure and achieve significant savings without seemingly compromising productivity. Is that option for Pfizer? Thank you..

Yes, on the overall survival data, we had initial assessment but it was done when we had only 37% of the total events. Now, there is a follow up analysis that is scheduled following the accrual of additional events but the time can take really long because the average, the medium overall survival of this population it is unfortunately four years.

So, I really think that the final analysis likely will take long.

Just a reminder though here that the primary end point of their study was the progress on free survival the overall survival was one of the secondary end point and also historically agents on the market for [indiscernible] metastatic breast cancer have been approved all with PFE’s data as a primary end point..

Thank you, Albert. So on R&D question, we feel that post the acquisition of Wyeth we were very prudent in the way we dimensioned our R&D spend, I believe taking the combined spend of sum 11 million down to 6.5, 6.7.

So, I really can’t comment on what our competitors have been doing but certainly for a few years now we have accelerated the refining of how much we spend in research, where we spend it, we have really good tools internally to look at the productivity by asset and we invest behind strong signals with lots of quality gates and we had separated out the decision between proof-of-concept and a decision to move forward into Phase III between the research and the commercial business, so we've got strong internal drivers for a return on a capital.

Will we continue to look at the best ways to invest in research? Of course we have got a CTi initiative where we have major relationships with some 20 universities in the U.S. and I believe outside of the U.S.

at least one where we attempt to look to be efficient the way we discover mechanisms of action and of course this is a major expense which we are constantly monitoring to make sure its efficient.

When you have great products like we do and we are bringing them forward in the development and Phase III clearly there is pressure on the development cost of large trial such as within bococizumab or with palbociclib or with the mening B or with the staph aureus vaccine.

So, clearly there are pressures on our Phase III spend that we will continue to manage our overall R&D spend within our overall guidance and overall drive to continue to grow EPS..

The next question is from Andrew Baum from Citi..

Hi. Couple of questions, please. First, we've obviously seen increased pressure by PBMs together with lesser price disciplines from the pharma industry translating into negative pricing dynamics in respiratory and diabetes spaces. I would be interested in your view on the evolution of that into the specialty pharma segment.

And then leading on from it, and I appreciate it's a different situation, but GSK recently announced the pricing for their GLP 1 at a 65% discount for the first in class. To what extent do you think aggressive pricing strategies like that may work for products where it is late to market? And I guess I'm thinking partly of Xeljanz.

Maybe not now, but at one point does a pricing lever become a potential option for you? And then secondly, building an oncology company around one drug is not easy, particularly if you've never had a strong legacy oncology business, as I think is the case with Pfizer.

To what extent do you think you can build an oncology company without the acquisition of external talents and additional products through an M&A structure? Thank you..

Well undoubtedly the PBMs are doing what they constructed to do, is to try and aggregate volume and achieve price discounts. This has been going on in the U.S. markets for many years now and I think will continue to occur. It really depends on the value that you bring to the market place.

And we are focused on that and I think specialty products, certainly normally if you define them as having close to cures or having dramatic impact on the outcome of disease or with disease modifying have huge value. And so I believe we will continue to see an attention in there but value is rewarded, innovation is rewarded.

I really can’t comment on GSK pricing and on how we price Xeljanz? We think it reflects the both the composition of the value to the patient of value in the marketplace. And the most important thing in that market is I think is the efficacy and safety and adoption is normally slow and driven by clinical data rather than pure pricing decision.

So I would see pricing as being more for acute conditions or conditions with highly genericized and it’s not so much a sort of long term serious disease.

Geno, do you want to comment anything more on that?.

All that I would say is that as I am sure you are aware Andrew the pricing reimbursement process is particularly in the United States is very complex, very fragmented and we are dealing with not only prices but discounting, rebating, step edits, tiering of formulary status.

And so it’s not as simple as saying the price should be higher or lower, it’s really a strategic approach to the marketplace where you first and foremost have to build value for your product and then operate within the system that exists out there for maximum benefit.

So it’s a day in and day out process, we think very strategically about how to price our products, how to discount our products, how to position our products on formularies. And I think we are going to continue to need to do that..

Thank you, Geno. On Oncology, I don’t quite understand your comment about building around one product. We have Xalkori in the market, we have Inlyta in the market, Bosulif in the marketplace, we have Sutent in the marketplace. So we see palbo as another product coming to market and we have a very in depth Phase II oncology portfolio.

So perhaps Mikael, do you want to just mention a little bit about how you see the oncology portfolio developing?.

Thank you, Ian. So one hand there is significant activities on expanding palbociclib into a variety of additional indications and we have a handful of Phase I, Phase II studies exploring various segments of lung cancer including genomic defined with collaborators melanoma and we are also looking into other novel indications.

We have a very exciting smoothened EBITDA that we’re broadly expanding into a variety of blood cancer in ongoing Phase II studies, including AML and mild myelodysplastic disease.

Our gamma secretase inhibitor shows a very interesting clinical profile distinct from what we have seen previously reported and we’re moving that into triple negative breast cancers. And in immunooncology, as you know, we are collaborating with Merck on combining 41B BB with RPD1 and that study will soon start.

And over the next year we plan to bring in to clinical studies on [40] antibody followed by PD1. So during the latter part of 2015, we will have a significant oncoimmunology portfolio. And then of course we have a Phase I ongoing with a full on to cell core that shows a real interesting profile.

So this was just a brief overview of some of the more interesting compound building on what Ian said we have breadth and depth in talents and pipeline here..

Your next question comes from Mark Schoenebaum from ISI group..

Hi, thanks for fitting me in. Maybe just go back to some questions in the first half of the Q&A, if you would tolerate that. Number one, maybe for Ian.

Ian, speaking again about BD, could you perhaps, if possible, kind of prioritize therapeutic areas for us that you're interested in? I know -- I remember as recently as last summer, you had mentioned a few therapeutic areas you're most interested in. I was understanding what your priorities are now.

And then within that commentary, perhaps you could comment on strategically whether it would make sense to add, to -- whether it would make sense to add a significant generics component to your current business. And then a two-part question for Mikael, I may.

Mikael, could you update us on conversations you may have had with the regulators in the last several months around the PCSK9 class? I know Pfizer had spoken before about how you thought perhaps outcome struggles might be necessary prior to registration. I was just wondering what your current thoughts are.

And then also, just summarize your CAR T-cell program that you recently inlicensed and how it differs from the programs that are a little bit ahead. Thanks..

Thank you, Mark, and on BD clearly you want to do BD way, you have potential for not only organic growth but synergy, so you’d like look at the BD where you already are strong in therapeutic areas whether it’s pain, oncology or vaccines. Just to mention a few, anything that would you utilize a primary care field force would be of interest to us.

And adding a significant generic component, we would look at as you say, we look at all alternatives if it fits it will make sense, if we see we can leverage it in the emerging markets, if we see there is organic growth we could produce from it, we could certainly consider it.

I mean we are open to a wide range of business development activities that we believe that we can acquire at a good value for our shareholders. Mikael on the question on PCSK9 and then I think the cart technologies..

So Mark thank you for the interest in R&D program. So first on PCSK9, we have a very large clinical program that of course includes LDL [indiscernible] and a significant severe outcome study involving those patients with less than 100 patients above 100 in cholesterol and includes prime and second prevention.

And we think actually it’s the broadest program available which could you know of course bring a real insight to patients efficient and to regulators. We think it’s difficult to speculate if regulators will approve with LDL alone or wait for outcome studies I think it depends how other studies that are reading out.

We deliver on the correlation between LDL lowering in a variety of CV patients groups to outcome, but I would underline that it’s our view that what would really matter for the up take in their marketplace, my dialogues with Geno is very much that pays.

We look for outcome studies and we think we have a premier outcome program and we think it would deliver timely to competitors.

Concerning Cellectis, it’s another Pfizer entry into the different modality of oncology and I am pleased to share with you that the Cellectis is the company that use allogeneic cause which has the upside that it’s not a complex procedure but you could actually in a more industrialized process provide a defined cellular treatment for thousands of patients.

Cellectis as a unique tail-end technology that allows them to modify and optimize those cells with a position that made it very attractive for us to make a deal and it’s a significant collaboration including more than 15 targets by Pfizer.

And also we are supporting some targets that Cellectis will develop and we have first rights to refusal for those few Cellectis targets.

And it includes a number of technologies such as giving the cell the specificity such as introducing signals that allow it illuminate the cells making the cells resistant to certain standard of care that the patient may be receiving as well as enhancing the course by possibly knocking out molecules such as the PD-1 creating super course.

So I just gave you a flavor of what I think we and Cellectis will unequally do in the industry and it really combines our in-depth ability in engineering of biological with Cellectis new medicine..

Your final question comes from Steve Scala from Cowen..

Thank you very much. I have three questions.

What is your level of confidence around the August 13 ACIP vote on Prevnar 13 in adults? Would you say, for instance, that you're highly confident in the vote? Secondly, regarding the neratinib comment earlier in the call, were you suggesting that you believe you have some legal right to gain greater participation than just the 13% royalty? And then thirdly, I would think you have kept a close eye on developments at AstraZeneca maybe involving evolution of the pipeline, and I'm wondering if you would share any observations.

Thank you..

Okay on AstraZeneca, I really don’t want make any comments. It’s a very complicated legal situation whether you take a look at and I think it’s thus remain silent so far that Steve but I’m sure you’ll understand right. As Doug, you could comment on neratinib..

Sure, as we indicated before we did not see the data and believe we should – to that data and we are in the process of reviewing our contractual rights..

I think what we’re basically talking about is that we were in negotiations with them and we believe we have contractual rights to see data that we are reviewing our options.

And ACIP, Albert?.

I don’t want to speculate what the ACIP decision would be but I’m very optimistic and I think that the policy options that they proposed were both favorable, actually commercially neutral for us because either will be the only or would be the first, a vax inverter will be administered.

We think that will be a vote in this meeting and we hope to be positive..

Thank you. When you have a chance to meet Albert, he is a very optimistic personality. So, we appreciate that optimism..

Ladies and gentlemen, this does conclude Pfizer’s second quarter 2014 earnings conference call. Thank you for participating. You may now disconnect..