Good day, everyone, and welcome to Pfizer's second quarter 2015 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..

our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide R&D; Albert Bourla, President of Vaccines, Oncology and Consumer; Geno Germano, President of Global Innovative Pharma; John Young, President of Established Pharma; and Doug Lankler, our General Counsel.

The slides that will be presented on this call can be viewed on our home page, Pfizer.com, by clicking on the link for Pfizer Quarterly Corporate Performance Second Quarter 2015, which is located in the Investor Presentation section in the lower right-hand corner of this page.

Before we start, I'd like to remind you that our discussions during this conference call will include forward-looking statements, and actual results could differ materially from those projected in these statements.

The factors that could cause actual results to differ are discussed in Pfizer's 2014 Annual Report on Form 10-K and in our reports on Forms 10-Q and 8-K. Discussions 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 our current report on Form 8-K dated today. We'll now make some prepared remarks and then we'll move to a Q&A session. With that, I'll now turn the call over to Ian Read.

Ian?.

Thank you, Chuck, and thank you for joining our call this morning. During my remarks this morning, I will briefly recap the highlights from the quarter, provide some comments on key areas of focus in the pipeline, and close with a few words about business development and the pending Hospira acquisition.

Starting with the quarter, it was another quarter of strong operational performance. For the third consecutive quarter, we saw operational revenue growth excluding the impact of foreign exchange and despite LOE headwinds.

We continue to see solid revenue growth from our newer products as a result of the investments we are making R&D and our commercial operations. Specifically in the second quarter as compared to same period last year, ELIQUIS alliance revenues nearly tripled on a global basis, and XELJANZ revenues nearly doubled. PREVNAR 13 revenue in the U.S.

increased 87%, primarily due to continued strong uptake in PREVNAR 13 in adults, with most of the growth in the overall PREVNAR 13 franchise coming from the adult indication in this quarter.

We have done an excellent job for the first half of this year of getting to patients and capturing the potential of PREVNAR 13 in adults in the U.S., as evidenced by the outstanding year-to-date performance which has been primarily driven by the catch-up opportunity. Over the next few years, we believe this catch-up opportunity in the U.S.

will be robust. However, we will likely need to expend more effort to reach these individuals, and the opportunity will moderate over time as the catch-up opportunity becomes fully realized.

Given current demographics and aging trends, approximately 4 million Americans will turn 65 each year, and a part of these adults will be part of our immunization effort.

As we move through the catch-up population and get to a more normalized adult immunization rate domestically, we will be expanding our efforts to capture expected new growth outside the U.S. Given the Asian demographic trends, we expect to obtain several pneumonia recommendations and reimbursements between 2016 and 2018 in many international markets.

IBRANCE continues to be well received by oncologists treating post-menopausal women with ER-positive HER2-negative advanced breast cancer. There are approximately 3,000 healthcare practitioners already prescribing IBRANCE. This is up from 800 at the end of the first quarter.

Our current first-line market share in this patient population was approximately 22% during the quarter, up from 10% during the first quarter. We look forward to filing for approval in the EU later this year, and are working to add the data from the PALOMA-3 study to our U.S.

label for women with HR-positive HER2-negative metastatic breast cancer whose disease has progressed during and after endocrine therapy. I would note that all of these products I just mentioned are now meaningful contributors to our business.

We also saw quarter-over-quarter operational growth from several of our inline key products, including LYRICA, SUTENT, XALKORI, and INLYTA. In our Consumer business, we saw quarter-over-quarter operational growth from several brands, including CENTRUM, ADVIL, ROBITUSSIN, and EMERGEN-C.

We are seeing strong performance from NEXIUM OTC despite a decline this quarter due to the non-recurrence of initial retailer stocking associated with the launch last May. Since its launch, NEXIUM has generated revenues of approximately $300 million, making it one of the largest and most successful Rx-to-OTC switches.

Regarding other Rx-to-OTC opportunities, we received the top line results from the LIPITOR actual-use trial that was completed last December. Results show that co-primary endpoints were not achieved. Based on our analysis of the data and recent feedback from the FDA on the overall program, we have decided to terminate the program.

That said, we continue to evaluate other products for potential Rx-to-OTC switches. Moving to emerging markets, revenues increased 6% operationally compared to the year-ago quarter, driven by operational growth in PREVNAR, LYRICA, and LIPITOR. This quarter was a further example of our track record of solid operating performance.

Given our strong execution across the businesses during the first half of the year coupled with an improved operational outlook for the remainder of this year, we are raising the midpoints of our 2015 financial guidance for reported revenue by $500 million and for reported diluted EPS by $0.03 per share and adjusted EPS by $0.04.

As we enter the second half of this year, our strategy, focus, and priorities remain unchanged. Top line growth remains a priority. Over the last three quarters we have seen top line operational growth on a total company basis. Recent product launches in key inline products are performing well, while the impact from the remaining LOEs has diminished.

For example, the impact from the CELEBREX LOE will be annualized after another two quarters and ZYVOX shortly after that. Once this happens, we will have put the most significant LOEs behind us and expect to return to a more measured cycle of product loss of exclusivity.

We remain steadfast in our efforts to deliver the next wave of potential new innovative therapies over the coming years. The areas where we see the largest potential to benefit patients and where we are focusing our resources include building a strong immuno-oncology portfolio.

Per our agreement with Merck KGaA, we believe we have one of the most comprehensive bio platforms in development in the pharma industry today. We expect to have five different IO drugs in the clinic this year and up to 10 different drugs by 2016.

The key targets include avelumab, the anti-PD-L1, OX40, 4-1BB, our vaccine-based immuno-therapy regime, CCR2, IDO1, and several bi-functional antibodies. We believe that these combinations are the key to better patient outcomes in IO. And given the breadth of our assets, we think we are well positioned to win here.

We'll be collaborating on up to 20 studies with Merck KGaA, and we plan to have up to six immunology Phase 3 trials ongoing by the end of the year across several tumor types, including non-small-cell lung cancer, ovarian, renal, bladder, and gastric. Our second-line non-small-cell lung cancer registration study is currently recruiting.

And where possible, we will be looking to accelerate these studies. For example, we are planning to move quickly into a registration study with avelumab in combination with INLYTA in kidney cancer later this year.

We also continue to build our palbo [palbociclib] franchise, moving our R&D efforts into early stages of the treatment paradigm as well as in non-breast cancer indications.

In cardiovascular, we have a comprehensive Phase 3 trial program for bococizumab, our investigational PCSK9 inhibitor, for its potential to lower low-density lipoprotein cholesterol and improve cardiovascular outcomes.

We anticipate our LIPITOR low-end trials will complete in 2016, and we estimate that our CV outcomes data will be available in the first half of 2018.

The outcomes studies are timed to event trials, so it is difficult to predict exact dates, but we anticipate that this will be consistent with the timing of other industry outcome studies expected by our peers. Our ertugliflozin Phase 3 program is well underway.

And given JANUVIA's recent positive CV outcomes in clinical trial results, we remain enthusiastic about the demand potential for the ertugliflozin-JANUVIA combination in an area of significant patient need. In vaccines, we recently started a Phase 2b study for our staph-aureus vaccine.

And depending on final results, it could serve as a registrational study. Also this month, we initiated a Phase 2 study to evaluate the safety, tolerability, and immunogenicity of our investigational C.difficile vaccine. Both of these vaccines could be key to stemming the spread of the leading causes of serious healthcare associated infections.

In immunology, the FDA accepted review for a supplementary new drug application for XELJANZ once-a-day modified release tablets. Our PDUFA date is February of next year.

If approved, it would bring us one step closer to offering the first and only once-a-day oral JAK kinase inhibitor treatment for those living with moderate to severe RA who have had an inadequate response or intolerance to methotrexate. We believe this will be an important product modification.

In rare diseases, we enrolled the first patients in Phase 3 clinical trials assessing the efficacy and safety of rivipansel for the treatment of vaso-occlusive crisis in hospitalized individuals with sickle cell disease who are six years of age or older. And additional clinical studies are underway for prevention of sickle cell crisis disease.

We believe this will build on our strength in researching and bringing to market therapies for hematological rare diseases based on our deep history in hemophilia. In biosimilars, we started a Phase 3 clinical trial of our potential biosimilar to bevacizumab, making a total of five monoclonal biosimilars now in Phase 3 development.

In sterile injectables, we're excited about the opportunity to combine Pfizer's branded portfolio and global commercial organization with HOSPIRA's demonstrated R&D capability and manufacturing capacity of sterile injectable products, and this will occur upon the close of the acquisition.

Overall, as a result of the work we have done to focus our R&D efforts in the areas we believe offer the greatest potential for therapeutic benefit and chance of commercial success, we are building a stronger portfolio on behalf of our patients that we believe will create value for our shareholders.

Turning now to a few words on business development, it remains an enabler of our strategies and, as I said before, is not a strategy on its own.

While we have seen strong performance from our recent product launches, over the next few years we are looking at business development as a way to invest in generating sustained near-term and future growth, knowing that the next wave of our potential major registrations or launches won't happen until 2017.

In the interim, we have the financial capacity to actually seek out the right deals at the right price that will create value for our shareholders. We are optimistic that we can find these deals as we go through the period to 2017.

In keeping with this philosophy, we have proactively evaluated virtually all of the deals announced this year and have chosen to pursue only those that efficiently use capital to strengthen the business, drive growth, and accelerate value.

For example, we have entered into several agreements year to date that have bolstered our scientific and technical capabilities and provided us with the potential for new growth opportunities. Of particular note are the two most significant transactions with Merck KGaA in immuno-oncology and the pending acquisition of HOSPIRA.

Regarding HOSPIRA, we are proceeding on track and are awaiting regulatory approval from several jurisdictions. We continue to expect the transaction to close in the second half of the year. In closing, I am pleased with our strong financial position, new and inline product performance, pipeline advancements, and recent business development activity.

We are performing well. And for the remainder of this year, we will focus on further strengthening both our innovative and established businesses to best position them for their long-term success. I will now turn it over to Frank to take you through the financial details of the quarter..

PREVNAR 13 Adult, ELIQUIS, IBRANCE, and XELJANZ. Also I want to point out that this is the third consecutive quarter of operational revenue growth. We raised the midpoints of our 2015 reported revenue and EPS guidance ranges to reflect our strong operational performance and improved operational outlook for the remainder of 2015.

We achieved several key R&D milestones since our first quarter update, including FDA acceptance of our NDA for XELJANZ once-daily, the anticipated PDUFA date of February of 2016 and the presentation of data from our immuno-oncology portfolio at ASCO, which included 10 abstracts on avelumab with our partner Merck KGaA, as well as results from a Phase 1 study of our anti-4-1BB antibody.

We continue to create shareholder value through prudent capital allocation. To-date in 2015, we've returned $9.6 billion to shareholders through dividends and share repurchases and we continue to expect to return approximately $13 billion to shareholders in 2015 through a combination of dividends and share repurchases.

Finally, we remain committed to delivering attractive shareholder returns in 2015 and beyond. Now I'll turn it back to Chuck..

Thank you, Frank and Ian, for the summary.

With that, operator, can we please poll for questions?.

Your first question comes from Gregg Gilbert from Deutsche Bank..

Good morning, guys. First on the immuno-oncology franchise. While you're somewhat behind, Ian, can you comment on some of the aspects of your strategy in IO that might not be fully appreciated by the investment community? And my second question, perhaps for either of you on the subject of what you call business and legal entity alignment activities.

Those costs are growing strongly. Can you offer any color as to when those activities might wrap up, or at least what some key mile markers are along the way on that process? Thanks..

Thank you, Gregg. We believe that we will be first in some tumor types with the PD-L1 from Merck, but we also feel it's very important to understand that we're just at the beginning of this immuno-oncology wave.

And we have, as I commented previously, a substantial number of assets that can be combined and added, both with immuno-oncology assets and with the backbone targeted therapies or chemotherapy or with INLYTA or with XALKORI, with IBRANCE potentially.

So we feel that, as this market develops, what's going to be really important is the ability to have combination products and the ability to have a more full control of the total value of the total pricing of those combination products to the payers.

So we believe that Pfizer will be very well positioned with multiple combinations of immuno-oncology assets and combinations of its own inline assets to be very, very effective in those combinations. Frank, do you want to talk about the....

Sure. So on the business and legal entity alignment, let me run the numbers first and then I'll answer the question, which is for the quarter we spent $63 million, year to date $164 million in business and legal entity alignment cost. I said previously we forecasted a spend of approximately $400 million for the year.

We'll be give or take in that range of approximately $400 million. The spend will continue obviously for the rest of 2015 through 2016.

We've talked about a decision on alignment in the fourth quarter of 2016, by no later than the fourth quarter of 2016, suspending obviously we've continue through then, at which point we make a determination going forward based on the decision that we make..

Thanks, Frank.

Next question, please, operator?.

Your next question comes from Marc Goodman from UBS..

First question is can you give us your latest thoughts on what's going on in China as well as just the broader emerging markets? Second, in the press release it talked about for PREVNAR the Gavi shipments and emerging markets had some special programs.

Can you just give us a sense of how much of that was one-timers versus what we should expect ongoing? And then I think you mentioned how much FX hit your expenses. But can you carve out the gross margin specifically and how much that had an impact? Thanks..

Okay, look. We remain, as we've said, optimistic about the long term in China and the emerging markets. We continue to see a secular movement to the middle class and wealth creation.

I would ask John Young, who manages the majority of our business in the emerging markets, to make some comments specifically on China, and perhaps his view of the opportunities more broadly in emerging markets..

Okay, thanks for the question, Marc. So I think Ian hit on our view in summary form. It's obviously a significant population, 1.3 billion people. We continue to see strong economic growth, albeit moderating economic growth, but we envision that the economic growth will continue.

And I think as Ian has already flagged, we see a continued commitment from the Chinese government to expand access to healthcare, to quality healthcare to its citizens. We don't see that trend halting in the short to medium, even the longer term.

And so we believe that actually for manufacturers such as ourselves who are positioned well in China with a strong existing base, a strong network of joint ventures, and a portfolio frankly that is well suited to the needs of Chinese patients, ranging from our innovative portfolio with oncology medicines and vaccines in the future as well as today's portfolio such as LIPITOR, which is obviously a leading treatment to help to manage cardiovascular disease, which is a growing concern for Chinese patients.

So when you sum all of that up, we know that we will continue to see some pressures on our business in China and pricing. We've factored that into our forward-looking views, and we will continue to see China being a significant opportunity for future growth..

Okay. And similar stories played out in most of the emerging markets, too, and in differing forms.

Albert, do you want to talk about the Gavi shipments and those items that were raised?.

Yes, I wouldn't call them one-time. What is happening with the Gavi businesses is there is volatility. Volatility depends on when the CDC places an order or when Gavi will place an order or where or when an IP will occur. So this volatility will continue. This is the normal course of the vaccines business.

But in general, pediatric is doing very well this quarter with 5% overall growth..

Thank you.

Frank, on the FX?.

Sure. So, Marc, lots of moving parts, obviously, that impact gross margin. Favorable items would be things like our oncology and alliance revenue growth. An unfavorable item would be our U.S. LOEs. But maybe the easiest way to do this macro level with the numbers, Q2 last year our cost of sales as a percentage of revenue 18.9%, this quarter 17.9%.

If we remove foreign exchange from this quarter, which reduced cost of sales by $255 million, that 17.9% becomes 18.4%, so roughly flat year over year. If you go year to date, last year, year to date 17.9%; this year, year to date 17.3%.

If we remove foreign exchange, that's 17.3% becomes 18.2%, once again, relatively flat year over year with a lot of moving parts impacting the number..

Thank you, Frank.

Operator, next question, please?.

Your next question comes from Tim Anderson from Bernstein..

Thanks. If I could go back to the topic of M&A, and, Ian, I know you made some comments earlier. Watching the big pharma industry for almost 20 years, it seems like big pharma companies have very often not participated in biotech M&A because there has been this longstanding sense that the valuations are too high.

And if I listen to what several companies say now at the current point in time, several big pharma companies again – and I raise that concern if I look at what Pfizer has bought over years, it's generally been either big pharma companies or other types of targets like Hospira.

So my question to you is how do you currently view valuations in the biotech space? And have you loosened up at all in your valuation framework such that you think you can find value in the biotech landscape at the current levels of valuation? And then second question is on ENBREL and whether you expect to see any pressure caused by biosimilar REMICADE now being available in Europe, or do you expect pressure in year 2016 or 2017 or maybe even in the current year?.

Okay. I'll make some comments on M&A, and then I'll ask Geno to comment on ENBREL in Europe. Tim, I believe that the marketplace is extremely efficient and that the valuations in biotech are in many ways price perfection. But all the deals that have been done, we have looked at them.

The deals work for some companies because of their portfolio, because of their ability to achieve synergies in ways that perhaps we couldn't. We do remain disciplined on our cost of capital. We think long term that's important, that people who invest in Pfizer expect a risk-adjusted return on the cost of capital.

That means that we don't expect to find value in the marketplace. There are always opportunities. We stand ready. We have the cash. We have the capability. We have the management team. We are continually looking for those opportunities. As I say, I'm optimistic that we'll be able to deploy our capital in a way that will increment value to shareholders.

I would say further that if you look at the Established Products business and the Innovative business, if there were two projects and both of them were risk-adjusted equal, our inclination would be to do, for portfolio reasons, something in the Innovative space rather than the Established space, given that we've done the Hospira acquisition for Established.

So once again, I'm very well aware that there is an active market for business development. We think we've done the ones that are prudent. We evaluate all opportunities, and we're optimistic that we're going to find and have sufficient courage to find those opportunities that come into the marketplace.

So with that, I'll pass it over to Geno to look at ENBREL..

Sure, Tim. ENBREL continues to do well. We had good 2% operational growth this quarter outside the United States on a very large base, so the business continues to deliver for us. With regard to REMICADE biosimilars, we're not seeing a significant impact on the ENBREL business.

Given the different administration routes, REMICADE being an infusion and ENBREL and HUMIRA and others being self-injected therapies, we don't see a lot of overlap there. There's a lot of experimentation going on country by country, so there's always the possibility that we'll see some new things happening.

But overall, we're not seeing or expecting a major shift in the ENBREL business related to the REMICADE biosimilar..

Thank you, Geno.

Operator, can we move to the next question, please?.

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

Ian, in your prepared remarks, you signaled M&A activity focused on top line growth bridging the gap to 2017 filings, so I have two questions related to that.

Are you backing off from breaking up the company, a strategy you outlined or certainly outlined the optionality for a couple years ago? Where are you on that? And number two, how big would you consider going? Can you throw out some parameters there in terms of size? Is it all about top line growth? Is synergies a big consideration? And just also you had talked before about tax inversions being an important part of that equation too.

So if you can, put that in perspective. And then my last question relates to Lipitor OTC. Now that that product doesn't appear to be going forward, would you consider putting your Consumer business up for sale? Thanks..

Okay, Jami, as always, pretty big questions. Okay, on the breakup, we have not changed our views on wanting to have the optionality of the breakup. We continue to spend considerable amounts of money preparing and putting ourselves in a place to trigger that optionality if we take that decision.

And as I said, we've laid out the criteria for that, which includes are the businesses doing well, do we think they could do well on their own, is there trapped value, and is there after-tax value that could be achieved? And we will make that decision by the latest the fourth quarter of 2016 on whether to trigger that optionality.

On your question about big, small growth opportunities, we look at it from the point of view of, as a pharmaceutical company, we want to buy – the ideal of course is to buy a pipeline and also products that are growing.

These products and opportunities, you have to have a belief in the future – often the future potential of the products you're buying. There's a lot involved in an acquisition this large.

It's a combination of what you think the portfolio will do, what you believe the synergies that will come through on the operational side, and of course tax and tax planning plays a role in that.

So to a certain extent, the discussions that are going on in Washington right now about potential international tax reform does affect the way we look at the different opportunities we have in the marketplace. You would expect us to be looking at that very carefully.

Certainly, any acquisition we do make will have a bias on the near-term revenue opportunities and on accretion. OTC, look, the Consumer business is a tremendous business, a tremendous store of value. We took NEXIUM OTC and it has been an incredible success. We continue to invest in the Consumer business.

We always look at our businesses, all of them, on a regular basis and our strategic plan vis-à-vis what part they play in the total value to Pfizer shareholders. We're always reviewing that. At this moment, I think the Consumer business is a very valuable and growing asset for Pfizer. Thank you..

Thanks, Ian, our next question, please, operator?.

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

Hey, guys. Thank you for a very clear opening statement from all of you. It's always very helpful. I want to go back and build on some of the questions that have already been asked.

But the first one is just, Ian, I know you get asked this every quarter, and I'm sure Chuck tells you you're going to asked this every quarter, but this quarter I think it's become a little bit more of a focus for investors. There are widespread Wall Street rumors that you might be interested in something like an Allergan.

I understand you wouldn't comment on that.

But can you just comment in general on your interest in inverting at this point? What kind of thresholds would need to be versus what the official thresholds right now to make you comfortable that such an inversion could be completed? Is inversion still a priority I guess for Pfizer? The second question was for Frank. Maybe you've disclosed this.

I'm not sure, so shame on me if you have. But I've heard from little birdies that money that you've already spent preparing for separation, this might have been embedded into an earlier answer, it wasn't clear to me. But the money that you've already spent preparing for a separation of Pfizer is on the order of $1 billion.

I'd just like to know if that number is – if you're willing publicly to talk about whether or not that number is realistic. And then the final question, and this is a tougher one. I don't know if you'll be able to answer it.

But some of us have been now thinking about if and when Pfizer splits, perhaps instead of floating one or more of these companies, they might be a strategic acquirer for one or more of these companies.

I think we're all trying to get a sense of what the cost basis is for these companies so that we could understand if it's realistic that someone could buy them, or would the tax burden on such a transaction be prohibitive? I don't know if there's any kind of even finger in the wind, words of wisdom you can give us, Frank. Thank you..

So, Mark, on the inversion question, the reason you do any deal is, as we said before, and it sounds like mother putting up a pie, but it's that we believe it's going to create value for shareholders long term. And so we can remain interested in the potential of an inversion because it would facilitate and enable wealth creation for shareholders.

It would certainly also position Pfizer on the current tax laws to be – it would liberate our balance sheet and would position us to be far more active in the M&A space and competitive, which is why there's always a push to have tax reform because at the moment the American companies are not as competitive as the European companies given the different tax rate.

So the inversion is attractive both because it creates immediate value and enables you to meet the premiums to acquire the company. And it's attractive because it will liberate your balance sheet for future activity and spending and cash flow.

And that, in its turn, informs you as to what level of inversion you find acceptable, whether you want an inversion that is between 60% and 80% or below 60%. So it's a complex issue. And we're not focused totally on inversions.

It's only a component of the business development strategy and only comes in when you believe you need that value that's created by the inversion to get to the premium to buy the company. But inversion is not our one-track business development strategy. With that, I will pass it over to Frank, who will answer the other two difficult questions..

The little birdie question..

The little birdie question..

So, Mark, year to date, cumulatively to date, because that's what you're asking, not year to date, cumulatively to date we've spent give or take approximately $300 million. And I include the $164 million year to date this year. The thing to remember about these kinds of optionality projects, think about carve-outs, as I said.

There's a massive amount of work that needs to be done. And when you're looking at I'll call it the total cost structure, these kinds of projects, they do run into the low billions of dollars. That's the nature of what they do. But here's what you've got to remember. In that number, there's tax leakage.

Now you do everything you can to minimize tax leakage, but you've got to create multiple legal entities. Anytime you're creating multiple legal entities or more than one in a country, you create tax exposure, tax leakage. There's potential leakage regarding debt and the decision making you make around whether or not you're going to repurchase debt.

And then there's all that I call blocking and tackling that needs to be done in areas like systems, legal entity and tax planning, regulatory work, supply chain. It's a massive amount of work. And think about the visual. This is a company that's been restructuring for a decade, integrating, putting things together.

And now you want to do something where you're taking a major piece of the company and you're going to carve it out, in a sense undo much of the work that you've done previously. It requires a lot of effort. It costs a bunch of money. But year-to-date, which is what you asked me, cumulatively to-date, it's been about $300 million..

That being said, we do see the logic because there are two different businesses and we do feel that the amounts we will need to spend to put ourselves in a position to complete optionality as being money well spent for shareholders given the potential upside of what optionality could produce..

Essentially, the cost of having the option is really what it translates to, Mark. It's really the cost of having the option. And then the last piece about tax basis, obviously it's premature to get into tax basis of the businesses.

But what I would say is to just punctuate what Ian said, the fourth criteria is being able to unlock that trapped value assuming there is some, in a tax efficient way. So obviously, anything we would do with that extensive tax planning would maximize the after-tax return to our shareholders..

Thanks, Ian and Frank.

Next question, please, operator?.

Your next question comes from Andrew Baum from Citigroup..

Hi. Three questions, please. Firstly, just revisiting the tax question. Could you give us some sense over the next three years to five years where your effective tax rate is going as the business currently stands given the change in mix of the business, particularly the increasing U.S.

contribution? And second on the tax, how do you feel the ongoing debate in Washington, what the probability you feel of any meaningful change may improve the effective tax rate that you pay? Second, could you comment how the recent Teva-Allergan deal impacts the M&A landscape from a Pfizer perspective? And then finally, you obviously reported a very strong quarter for PREVNAR 13.

To what extent should we expect an inventory destock in the following quarter, i.e., how much of this is industry stocking, given I imagine that most of the vaccinations are going to happen (44:10)? But please correct me if I'm wrong..

Thank you, Andrew. On the tax question, we don't project our tax rate. There are just too many variables in there, including business development, including where we make our earnings, including potential changes in U.S. tax law, and we give guidance on a yearly basis on our tax rate.

Frank, do you want to add anything to that?.

Just that year-to-date, our tax rate is 25%. Our guidance for the year is 25%. So for 2015, we're running pretty much right according to our guidance. And then just to punctuate what Ian said, there's just too many moving parts to try to project out tax rates beyond the current year.

But we'll obviously include the 2016 rate when we provide our 2016 guidance..

Thank you. On DC, look, it's too difficult to speculate on what would happen on tax legislation. I do think I am heartened by the conversations that are occurring and the acknowledgment in Washington that something has to be done to allow global U.S. corporations to become competitive, given the nature of the U.S. tax system.

And hopefully they will take action earlier rather than later to allow us to be competitive. And I think we will see that unfold in the next five months as to whether Washington will take any action on that or not. On the Teva-Allergan, does it change the landscape for us? I don't think it changes the landscape for Pfizer in any material way.

We continue to have our own strategies and pursue our own BD objectives and this doesn't impinge upon that. Frank, do you want to talk about anything else? Oh, yeah, and then it's Albert on the PREVNAR 13..

Yes, Andrew. I'm monitoring the inventories and there was no significant inventory build in the quarter. So inventories didn't materially affect the Adult performance also..

So I think, Andrew, what we need to do on PREVNAR 13 Adult is, you have three influences or four influences going on. One, you have the underlying rate of U.S. citizens becoming 65, which is about 4 million a year. You have then in the U.S.

the bolus of catch-up, which is significant and we believe will last certainly this year and next and maybe into the third year. And then you have the progress in the G6 countries as we get and have had per our registration and labeling changes to enable adult vaccine to be sold to the 65 and above.

And there, of course, you have a huge cohort of probably substantially larger than the U.S., probably twice the size of the U.S. And that's going to take market development. We're going to have to work on that country by country. But we see there also the movement of the population to over 65 plus the catch-up opportunity.

So overall when you look at those waves of opportunities, we feel that the adult vaccine is an interesting ongoing large franchise for Pfizer..

Thank you.

Next question, please?.

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

A couple of quick ones. On your AVASTIN biosimilar, you started the Phase 3 trial with a primary endpoint of objective response rate.

Can you talk about the discussions you've had with regulators and whether you anticipate objective response will be an approvable endpoint? And then just two, on the IO pipeline, can you walk us through the key readouts we should be paying attention to over the next 12 months? Thanks..

Okay. Technical question there, Colin, on that.

I don't know if, Mikael, you want to address that question?.

All of our Pfizer biosimilars have been evolved in their development strategies in close consultations with the major regulatory agencies, in particular the FDA. So they all reflect input and robustness in trial design and what should be predicted the best choice of endpoint for approval opportunity..

So I think we feel satisfied that we have an agreement with the major agencies and the endpoints will be the ones necessary to get approval. IO pipeline.

Mikael, do you want to run through that or tell them what you think are the significant things coming forward and when we're likely to be issuing results?.

So I am really excited about our IO pipeline. And starting with anchor drug, avelumab, we have now more than 1,000 patients that have been on avelumab. And we feel that we see a consistent good response rate, substantial clinical durability in responses and a robust safety profile.

And we reported some studies at ASCO and now we have positive readouts in lung, gastric, ovarian and bladder. You're aware and Ian alluded to that we've started a second-line lung cancer trial. We expect in the relatively near term opportunity to move to first-line in that setting.

Our experience across the various indications will lead this year to numerous announcements of Phase 3, up to six pivotal studies that include several in lung, gastric, ovarian, bladder and renal.

We also at ASCO communicated favorable data on 4-1BB already seen in the Phase 1 in follicle lymphoma showing good tolerability and together with rituximab favorable responses. We are expanding that study.

4-1BB, which is a unique molecule, one of the few I think in this industry this advanced, is also in studies with katuda (50:41) as well as soon to be in an extensive program with avelumab. We also have recently entered clinical studies with OX40 as another positive event for our immuno-oncology pipeline.

And we have communicated favorable data with our CCR2 in pancreatic cancer. And later this year we expect a vaccine to start dosing for prostate cancer, and we have numerous compounds, NMEs, that will also enter next year. So you see really us evolving a very comprehensive monotherapy and a combination therapy. We will over time share more data.

There is an ESMO conference that we'll give you an update on avelumab and will include particular lung cancer, ovarian, and also some bladder we expect, and we'll continue to inform you about the progress of 4-1BB..

Thank you, Mikael.

Next question, please?.

Your next question comes from Vamil Divan from Credit Suisse. Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker) Great, thanks so much for taking my questions, so two if I could, one building a little bit on what you talked about earlier around the amount of cost around planning for a potential split.

Do you have a sense of what the dyssynergies would be to actually execute a split of the company at this point if you're trying to split it into two parts? I just think you may have some sense of that by now. And as more of us view Pfizer as a sum of the parts basis, it would be helpful to have a sense of how you think the dyssynergies would be.

And then the second question I had was just on the vaccine side with the VOC business, a lot of focus on oncology obviously. But can you talk a little more generally about your strategy in vaccines? You're obviously making good progress with PREVNAR in adults.

Staph is moving along and that obviously looks promising, but maybe a little more broadly where you see other potential areas for value there. You've obviously made some deals. You have maternal vaccines. You talk about C.diff.

What do you think people might be underappreciating with your vaccines business as opposed to how you see it internally right now? Thanks..

Okay, on the cost of dyssynergies, Frank, do you want to make a comment on that?.

From my perspective, we've obviously been looking at this. We've been analyzing it in detail. I think I'd summarize it by saying we don't see it as being a material dyssynergy relative to optionality based on all our current analysis..

So your question the vaccines, I'll try and do a summarized answer, and then I'll ask Albert if he wants to add anything to it. I think you're seeing us continue to drive and maximize the PREVNAR 13 opportunity both in infants and adults. We believe that the opportunity in adults is broad and deep and durable, so we're confident in that.

We continue to work on PREVNAR, on the PREVNAR family to look at further enhancements. We believe there's a real opportunity to accelerate as long as the Phase 2 trial on the back surgery performs as we expect, we think there's an opportunity to accelerate the staph-aureus vaccine.

We're in Phase 2 with what we believe is a very good vaccine with C.difficile. And then we've made acquisitions of other vaccines like the Baxter (54:08) acquisition to add some critical mass to what our field force carries. We have TRUMENBA, which we think will develop over time as an important vaccine.

And then we've done acquisitions and licensing of vaccines for infants.

So do you want to add some more detail to that, Albert?.

Very few things to add, Ian. I think in vaccines we have substantial scientific capabilities and significant substrate, research substrate, that allows us to see optimistically into the future, and we've had a very good track record of delivery. With staph, we have already initiated, as Ian said, the Phase 2b study, and that's in 2,600 patients.

If the Phase 2b data show considerable efficacy, we will consider requesting an accelerated approval from this product, and the study that we are running now could potentially serve to support registration..

And have breakthrough status, right?.

And have breakthrough status. And the same as it was for C.difficile. That has breakthrough status, but also as you recall we had outed recruitment and vaccinations in a previously initiated Phase 2b study as a result of some cases of redness that we observed at the injection site.

Now we have already recently received approval from the FDA to initiate a new Phase 2 program with a different formulation. So we are moving full speed in materializing that as well..

Okay, thank you..

Thanks, next question, please?.

Your next question comes from Chris Schott from JPMorgan..

Great, thanks for the questions. The first one was just a little bit more color on PREVNAR 13 adult. I appreciate the earlier comments, but can you just give us little more color? When you think about the U.S.

catch-up bolus, how large is that bolus and how far through are you at this point? Do you have any numbers on that front? It would be pretty helpful. Second on your PD-L1, you highlighted in the past the high disease control rate that we've seen with some of the studies.

I guess when can we see more survival data that could help us assess that disease control rate versus maybe some higher overall response rates we're seeing from other products as we just think about this as a combinable agent longer term? And the final one was just coming back to business development.

It does seems like we're just seeing a significant consolidation in the industry at the same time we're seeing an uptick in innovation. I know Pfizer has priorities in terms of what it needs to do given its product cycle.

But could you just elaborate a little bit more just how this rapidly changing environment is impacting your business development priorities, either in terms of further sense of urgency, willingness to broaden the scope of what you're looking at? I'm just trying to understand how the backdrop of the sector affects how you're pursuing deals.

Thanks very much..

Thank you. PREVNAR 13, Albert, why don't you give us – yeah..

Again, I will express my excitement about the success that they're having so far with PREVNAR in the U.S. And basically, we're able to make pneumonia vaccination for adults an age-based event, so people would get vaccinated when they come to age of 65 rather than a seasonal event.

But of course, we were very successful in catching up a lot of previously vaccinated. To give you a sense of the numbers in the U.S., as Ian said, approximately 4 million people are turning 65 every year.

In 2014, when we started with PREVNAR, there was a large cohort of approximately 27 million people that that were previously vaccinated with an old technology vaccine. And there was also another cohort of 18 million people that had never received a vaccine; so in total 45 million people.

Usually there are 2.6 million deaths also that are happening per year in that cohort. So main, we don't have exact split of how much is catch-up and how much is normal business in the U.S. But given the massive number of vaccinations that are occurring, a big part is coming from catch-up, and this is large, as we said.

That's why we said that this year we'll continue growing and will be very big. Next year also will be substantial, very big, might not grow versus 2015, but will be very big. And then we move internationally. Internationally, the age and demographics are more compelling than the U.S.

because the percentage of people that are living above 65 is much higher. Countries like Japan, for example, is almost double than in the U.S. in terms of percentage, 14% approximately in the U.S. to 26%, 27%, 28% in Japan.

And this is where we expect in the G7 to start getting a wave of recommendations now that we've got approval in Europe for pneumonia. But as long as we get recommendation, then reinvestment comes and then we start commercially penetrating very aggressively, as we did in the U.S..

Thank you, Albert. I believe the cohort in the G6 countries are around 94 million..

That's correct. It's double the U.S..

Double the U.S., okay. PD-L1 data, yeah, that we are in partnership with Merck KGaA....

So at a more higher level we can say when we carefully go through data from lung, ovarian, gastric, and bladder, where we have extensive number of patients for six months or more, we see response rates that are very comparable to other PD-1, PD-L1 agents. Of course, it depends on how you cut your data.

We have generally looked at response rate including all patients and not solely PD-L1-positive, and that's part of our long-term strategy that it seems that patients that even have low expression of PD-L1 will benefit, particularly when you later develop combination therapies.

So we accumulate experiences across all PD-L1 spectrum, but will of course in various endpoints look at PD-L1-positive. That was the strategy in our second-line lung cancer, which is all-inclusive for lung cancer patients in second-line, but the primary endpoint is on PD-L1-positive.

Disease control rates are very high in our studies, in general, 50% or higher across several indications.

And when we again compare to others, where do we look at disease control rate, six months progression-free survival, et cetera, we are very pleased with avelumab both for efficacy and tolerability, and you will get further data update at the ESMO oncology conference..

Thank you. Going back to BD, look, we look at BD probably in two large ways in Pfizer. One is when we're looking at individual needs of the business units, which can be like a smaller tuck-in or can be an acquisition of an individual product.

When we look at individual products, it tends to have normally – because very often you're buying the product at the beginning of it, either before it's approved or after it's approved, but you're looking at opportunities to expand indications. And so we look at the risk-adjusted return and we make a decision whether to participate in that franchise.

And that can be influenced by the ability to combine it with our existing therapeutic areas if we can get also additional synergies through operational savings. So that's one way we're looking at BD which is more opportunistic, product related.

Second type of BD is trying to buy technology, like perhaps gene therapy or selectors when we're going to CAR-T technology. Those tend to be longer-term investments. And the third type of BD is what you would say is a more traditional BD, where we look at total companies.

And there the driver of value often is existing pipeline, existing products, potential pipeline product opportunities, synergies, and potentially tax savings and future liberation of the balance sheet because you are no longer are constrained by the U.S. tax situation.

So I think what you've been seeing in the marketplace is foreign companies with significant tax advantages taking advantage of acquisitions in the U.S. and building up their organization.

You've seen a refocusing by some companies, and you've seen with the Allergan-Teva transaction where one company needs to strengthen its portfolio and focus by acquiring the generic of the other company. So look, we are actively monitoring this process. I don't think we've lost out to any opportunities that would have made sense for our shareholders.

We're determined if an opportunity is there we will not lose out. We have the world. We have the capability. We have the capital. We have the management team. So I feel that, frankly, our BD strategy and philosophy and approach is appropriate for this point of time in the value cycles..

Thank you, Ian.

Next question, please?.

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

Thanks, gents, and congratulations on a strong quarter. First on biosimilars, you have five antibodies in development. You're obviously making a significant investment there.

Can you update us on your updated views on the potential of Pfizer in the biosimilar market in light of what we're seeing in Europe and how we should think about the opportunity for Pfizer? To follow up on that, given these investments, how should we think about some of the overlapping assets that you're getting from Hospira? And then finally, could you comment on the recent PCSK9 approval and potential implications for your bococizumab? Thank you very much..

Thanks for the question, Alex. So first of all in terms of your question about the size of the market, we continue see around about $100 billion of currently patented biologic medicines that will lose patent protection over the next five to ten years.

That's a significant market opportunity for companies that have the technology platform capability and current biosimilar portfolio to be able to capitalize on that opportunity. So we continue to think that we are very well placed.

And in relation to your question about Hospira, we continue to see that our portfolio and Hospira's are highly complementary and we're very excited about the opportunity that that presents post-close..

On the PCSK9 approval by in Europe from Amgen in the U.S., by Sanofi Regeneron, I think we expected on LDL lowering. I don't see substantial – I see modest use of these products until the outcomes data comes through. We don't think we would be that far behind on outcomes data. I think the size of the market is difficult to predict at this time.

It really depends on how the CETP development comes through.

If the CETPs which are oral come through, I could see a market that is segmented three ways; i.e., statin use that sees you get to goals, statin plus a CETP, or a CETP alone if you're statin intolerant; and then potentially PCSK9 being held in reserve if the CETP can't get you to the goals of the statin.

So it's very, very difficult to predict how this market will shake out in value. And I think it's interesting to see what will happen in 2016 if the CETPs are approved and what type of label, what type of pricing they come into the market with and what type of pricing we see develop on the PCSK9s as negotiations occur with managed care..

Thank you, Ian.

Next question, please, operator?.

Your next question comes from John Boris from SunTrust..

Thanks for taking the questions and congratulations on the quarter.

Just back to PREVNAR 13, can you quantify the shipments that you made into Gavi and the vaccine alliance and also provide some additional color on which national immunization programs included PREVNAR 13 into their program? And then secondly, on your XELJANZ filing in the EU, can you remind us what led to the rejection and what remedies that you've made to the filing? I believe you mentioned you're on track to file before the end of the year in the EU.

That would help enhance the ability to secure approval on XELJANZ in Europe. Thanks..

Thank you. Geno can deal with the XELJANZ question and then I'll see if Albert has any data at hand that's pretty specific on your question, John, or we'll just have to answer in generalities right now. But let's get to Geno first..

Thanks, John. I think the questions from the CHMP revolved a lot around the immune system effects of XELJANZ, understanding the safety profile primarily.

So we have done some additional pharmacology studies, we've done a study with the herpes zoster vaccine to demonstrate a lack of interference with the immunogenicity of the vaccine and of course collected longer-term follow-up data from our long-term extension trials and our post-marketing surveillance trial.

So it will be a combination of these data points that will comprise the resubmission that we're planning on for later this year..

Okay..

John, I don't have handy the numbers, so I will have to come back to you. But in general in emerging markets, the growth was 18% for pediatric approximately for the quarter. And this volatility will continue to exist..

Yeah, because it depends on the timing of NIP, the timing of Gavi..

Correct..

And it's not something that we are particularly focused on. We have a full-year forecast which takes into account all these fluctuations and we've built that into the change in our guidance..

That's all part of our revenue guidance..

Yes, right. Okay..

Okay, thank you.

Next question, please?.

Your next question comes from Jeff Holford from Jefferies..

Hi. Thanks very much for taking my questions. So the first one is just around business development.

If you can follow on here, so do you have a bias towards OUS-domiciled companies when you're looking at opportunities to help grow the GIP business, given where your cash is held? Second, because of your focus on doing BD in the next two years to bridge to 2017, does that mean we should expect much less cash to be diverted towards share repurchases? And then lastly just on the BD, given your want or desire to help boost the business prior to 2017, doesn't that mean given time for antitrust review or any other reviews of a transaction that we should be expecting you to announce additional deals during the second half of this year for them to come into that timeframe? And then last question just on a separate area.

Can you maybe outline for us just a couple of the biggest OTC switch opportunities that you see for the business potentially in the next two years to three years? Thank you..

Okay, on the OTC switch, I don't want to get into that because it's confidential and helps competitors prepare along with us in the marketplace. So I think you can look at our portfolio and make assumptions on your own as to which products are more likely to be switched or not. On the BD, I have no bias towards a U.S. or a foreign company.

I have a bias to value creation. I have a bias on our portfolio, if valuations are equal and opportunities are equal, I'd prefer to do a BD deal that strengthens our Innovative business as I think we've done quite a bit to strengthen the Established business.

On less cash depending on an acquisition, I think it depends on the type of acquisition and how it's structured and I think it's too early to say. But of course any deal we do we'll be looking at total shareholder returns and we would factor that in to the type of deal we're structuring.

I think that's the most you would say at this time, frankly, about that.

And then on timing, when I talk about 2017, I'm talking about – frankly, I use that as a marker given conversations I had with our owners about the fact that you've got great inline momentum, you've got these new products, you've got ELIQUIS and you've got IBRANCE an adult vaccine and all the other inlines that are moving well.

I'm just looking at ways of increasing our revenues as we develop our pipeline and we start to see that pipeline come to fruition in 2017 and launch in 2018, and we'll see those launches 2017 through 2018 through 2019. So I think it's important to get any BD we do right and I don't feel pressurized to get it right by 2017.

What's important is to get it right to create value for our shareholders. And I don't think, frankly, there's a timing pressure on us to do BD. We're going to look at it. We want to do BD. We're going to be opportunistic, but we're also going to make sure that we make the right decisions for Pfizer shareholders..

Great. Thank you, Ian.

Next question, please?.

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

Thanks very much. I have two questions. First, could you just remind us about the ex-U.S.

ENBREL exclusivity loss timing and expectations for timing of biosimilar competitor launches? And then with respect to IBRANCE, could you please discuss potential indications outside of breast cancer and what key trials we should be watching on that front? Thank you..

Okay, thank you.

Geno, could you do the ENBREL?.

ENBREL exclusivity expires at the end of this year and so we expect to see biosimilar penetration beginning next year in Europe..

Okay.

IBRANCE indications outside of breast cancer?.

We are very excited about the potential of IBRANCE. And I think we have real unique proprietary knowledge in understanding how to use science around IBRANCE combination new indications. So we have an extensive collaborative research clinical programs that you may be aware of.

But in addition to that, I'm pleased to say that we are starting a number of Pfizer-sponsored new studies. And very soon we'll start one study in head and neck cancer HPV-negative patients that are recurrent metastatic, combining IBRANCE with ERBITUX.

We have prior experience of that combination in a collaborative study and are launching a Pfizer-sponsored which could have a very interesting path forward if data is strong.

In addition to that, we have generated very compelling pre-clinical data on human tumors for pancreatic cancer, where particularly the combination of IBRANCE with nab-paclitaxel or ABRAXANE was very promising. And we are soon starting a Phase 2 study preceded by a safety lead-in with IBRANCE and ABRAXANE in pancreatic advanced cancer.

We also have significant effort in understanding patients that progress on IBRANCE after having had long significant benefit in breast cancer. And you will learn more about Pfizer's program in double and triple combination that also can further expand our stronghold and leadership in IBRANCE..

Thank you, Mikael.

If we could take our last question, please, operator?.

Your final question comes from the line of Seamus Fernandez with Leerink..

Frank, maybe could you remind us the threshold for completing an inversion? And I ask the question particularly since some smaller deals appear to have gotten as low as 20% after the treasury update. So it would just be helpful to know what your thoughts are on the threshold for inversion because I think previously you had said it was really 40%.

And then separately, as part of your optionality calculus with the split, do you also consider Pfizer as a potential target in that calculus since this would appear to be a value-add option for shareholders? Thanks..

Are you saying Pfizer or the split of Pfizer? Seamus can't reply. Okay, look, it's probably the split. We think that in the optionality, both companies will be robust and strong and would have the ability to be successful companies on their own. And we really cannot comment on whether it would be BD activity to try and buy those companies.

They would be companies that would be independent and continue to try and progress their own business strategies.

On the inversion?.

Prior to the – I'll call it the September 22 proposed rule changes by the IRS, the hurdle was less than 80%. So our shareholders had to own less than 80% of the newly formed company that we acquired to get the full benefits of an inversion.

That hurdle was lowered to less than 60%, which means we'd have to do a larger acquisition to get the full benefits. So it went from less than 80% to less than 60%..

The issue with this, Seamus, is that the full benefit or non-full benefit is very idiosyncratic depending upon the company you're doing the inversion on and the complexity of the tax rules. So it may be that if you're in below 80% but not below 60%, you still have substantial benefits from an inversion.

And therefore, despite the proposal changes or maybe on different targets, you need to be below the 60% threshold. So the universe is not constricted or reduced to only 60:40. It's very dependent upon the type of assets, debt structure, where the cash is, et cetera, et cetera..

Very company specific..

Very company specific. Thank you very much..

Thank you, and thank you all for your attention today..

Ladies and gentlemen, this concludes Pfizer's second quarter 2015 earnings conference call. Thank you for participating. You may now disconnect..