UNITED STATES X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended OR TRANSITION REPORT PURSUANT TO SECTION 13 For the transition period from________to_______ COMMISSION FILE NUMBER 1-3619 ---- | |
PFIZER INC. | |
DELAWARE | 13-5315170 |
235 East 42nd Street, New York, New York 10017 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X At |
FORM 10-Q
For the Quarter EndedOctoberApril 2, 20052006
Table of Contents
PART I. FINANCIAL INFORMATION | Page |
Item 1. | |
Financial Statements: | |
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Condensed Consolidated Statements of Income for the three months ended April 2, 2006 and | 3 |
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Condensed Consolidated Balance Sheets at | 4 |
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Condensed Consolidated Statements of Cash Flows for the | 5 |
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Notes to Condensed Consolidated Financial Statements | 6 |
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Review Report of Independent Registered Public Accounting Firm |
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Item 2. | |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | |
Quantitative and Qualitative Disclosures About Market Risk | 46 |
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Item 4. | |
Controls and Procedures |
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PART II. OTHER INFORMATION |
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Item 1. | |
Legal Proceedings | 47 |
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Item | |
Risk Factors | 48 |
Item 2. | |
Unregistered Sales of Equity Securities and Use of Proceeds | 48 |
Item 3. | |
Defaults Upon Senior Securities | 48 |
Item 4. | |
Submission of Matters to a Vote of Security Holders | 48 |
Item 5 | |
Other Information | 50 |
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Item 6. | |
Exhibits | 50 |
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Signature | 51 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||
(millions of dollars, except per common share data) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | April 2, | April 3, | ||||||
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Revenues | $ | 12,189 | $ | 12,831 | $ | 37,705 | $ | 37,593 | $ | 12,660 | $ | 13,091 |
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Costs and expenses: | ||||||||||||
Cost of sales(a) | 1,908 | 1,640 | 6,180 | 5,185 | 1,973 | 2,191 | ||||||
Selling, informational and administrative expenses(a) | 3,931 | 4,036 | 12,242 | 12,227 | 3,810 | 4,085 | ||||||
Research and development expenses(a) | 1,783 | 1,888 | 5,421 | 5,356 | 1,588 | 1,764 | ||||||
Amortization of intangible assets | 836 | 843 | 2,576 | 2,496 | 828 | 882 | ||||||
Merger-related in-process research and development charges | 1,390 | -- | 1,652 | 955 | -- | 2 | ||||||
Restructuring charges and merger-related costs | 307 | 190 | 796 | 726 | 306 | 219 | ||||||
Other (income)/deductions - net | (163) | 283 | 669 | 140 | (272) | 1,038 | ||||||
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Income from continuing operations before provision for taxes on income, and minority interests | 2,197 | 3,951 | 8,169 | 10,508 | ||||||||
Income from continuing operations before provision for taxes on income and minority interests | 4,427 | 2,910 | ||||||||||
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Provision for taxes on income | 591 | 650 | 2,815 | 2,040 | 315 | 2,635 | ||||||
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Minority interests | 4 | 3 | 9 | 7 | 4 | 3 | ||||||
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Income from continuing operations | 1,602 | 3,298 | 5,345 | 8,461 | 4,108 | 272 | ||||||
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Discontinued operations: | ||||||||||||
(Loss)/income from discontinued operations - net of tax | (16) | (3) | (37) | 27 | ||||||||
Loss from discontinued operations - net of tax | -- | (12) | ||||||||||
Gains on sales of discontinued operations - net of tax | 3 | 46 | 44 | 48 | 3 | 41 | ||||||
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Discontinued operations - net of tax | (13) | 43 | 7 | 75 | 3 | 29 | ||||||
Net income | $ | 1,589 | $ | 3,341 | $ | 5,352 | $ | 8,536 | $ | 4,111 | $ | 301 |
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Earnings per common share - Basic: | ||||||||||||
Earnings per common share - basic: | ||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.44 | $ | 0.73 | $ | 1.12 | $ | 0.56 | $ | 0.04 |
Discontinued operations - net of tax | -- | 0.01 | -- | 0.01 | -- | -- | ||||||
Net income | $ | 0.22 | $ | 0.45 | $ | 0.73 | $ | 1.13 | $ | 0.56 | $ | 0.04 |
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Earnings per common share - Diluted: | ||||||||||||
Earnings per common share - diluted: | ||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.43 | $ | 0.72 | $ | 1.11 | $ | 0.56 | $ | 0.04 |
Discontinued operations - net of tax | -- | 0.01 | -- | 0.01 | -- | -- | ||||||
Net income | $ | 0.22 | $ | 0.44 | $ | 0.72 | $ | 1.12 | $ | 0.56 | $ | 0.04 |
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Weighted-average shares used to calculate earnings per common share: | ||||||||||||
Basic | 7,333 | 7,501 | 7,372 | 7,554 | 7,314 | 7,416 | ||||||
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Diluted | 7,382 | 7,569 | 7,424 | 7,642 | 7,324 | 7,474 | ||||||
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Cash dividends paid per common share | $ | 0.19 | $ | 0.17 | $ | 0.57 | $ | 0.51 | $ | 0.24 | $ | 0.19 |
(a) |
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See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(millions of dollars) | Oct. 2, | Dec. 31, | April 2, | Dec. 31, | ||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 959 | $ | 1,808 | $ | 2,869 | $ | 2,247 |
Short-term investments | 12,430 | 18,085 | 12,633 | 19,979 | ||||
Accounts receivable, less allowance for doubtful accounts: 2005 - $181; 2004 - $205 | 9,348 | 9,367 | ||||||
Accounts receivable, less allowance for doubtful accounts | 10,352 | 9,765 | ||||||
Short-term loans | 611 | 653 | 445 | 510 | ||||
Inventories | 6,556 | 6,660 | 6,663 | 6,039 | ||||
Prepaid expenses and taxes | 2,724 | 2,939 | 4,302 | 3,196 | ||||
Assets held for sale | 140 | 182 | 151 | 160 | ||||
Total current assets | 32,768 | 39,694 | 37,415 | 41,896 | ||||
Long-term investments and loans | 2,784 | 3,873 | 2,543 | 2,497 | ||||
Property, plant and equipment, less accumulated depreciation: | 17,519 | 18,385 | ||||||
Property, plant and equipment, less accumulated depreciation | 17,103 | 17,090 | ||||||
Goodwill | 23,806 | 23,756 | 23,741 | 23,774 | ||||
Identifiable intangible assets, less accumulated amortization | 28,976 | 33,251 | 28,073 | 27,786 | ||||
Other assets, deferred taxes and deferred charges | 4,490 | 4,725 | 4,084 | 4,522 | ||||
Total assets | $ | 110,343 | $ | 123,684 | $ | 112,959 | $ | 117,565 |
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LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Short-term borrowings, including current portion of long-term debt: | $ | 6,729 | $ | 11,266 | ||||
Short-term borrowings, including current portion of long-term debt | $ | 5,059 | $ | 11,589 | ||||
Accounts payable | 1,809 | 2,672 | 1,892 | 2,226 | ||||
Dividends payable | 3 | 1,418 | 5 | 1,772 | ||||
Income taxes payable | 4,226 | 1,963 | 3,495 | 3,617 | ||||
Accrued compensation and related items | 1,636 | 1,939 | 1,504 | 1,675 | ||||
Other current liabilities | 5,990 | 7,136 | 7,717 | 7,522 | ||||
Liabilities held for sale | 2 | 64 | 2 | 2 | ||||
Total current liabilities | 20,395 | 26,458 | 19,674 | 28,403 | ||||
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Long-term debt | 5,414 | 7,279 | 6,508 | 6,347 | ||||
Pension benefit obligations | 2,771 | 2,821 | 2,665 | 2,717 | ||||
Postretirement benefit obligations | 1,442 | 1,450 | 1,448 | 1,443 | ||||
Deferred taxes on income | 10,780 | 12,632 | ||||||
Deferred taxes | 10,337 | 10,240 | ||||||
Other noncurrent liabilities | 2,734 | 4,766 | 2,718 | 2,651 | ||||
Total liabilities | 43,536 | 55,406 | 43,350 | 51,801 | ||||
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Shareholders' Equity | ||||||||
Preferred stock | 175 | 193 | 159 | 169 | ||||
Common stock | 439 | 438 | 439 | 439 | ||||
Additional paid-in capital | 67,530 | 67,098 | 67,931 | 67,759 | ||||
Employee benefit trust, at fair value | (970) | (1,229) | (729) | (923) | ||||
Treasury stock | (39,385) | (35,992) | (40,757) | (39,767) | ||||
Retained earnings | 38,033 | 35,492 | 41,715 | 37,608 | ||||
Accumulated other comprehensive income | 985 | 2,278 | 851 | 479 | ||||
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Total shareholders' equity | 66,807 | 68,278 | 69,609 | 65,764 | ||||
Total liabilities and shareholders' equity | $ | 110,343 | $ | 123,684 | $ | 112,959 | $ | 117,565 |
* Unaudited.
** Condensed from audited financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | Three Months Ended | |||||||
(millions of dollars) | Oct. 2, | Sept. 26, | April 2, | April 3, | ||||
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Operating Activities: | ||||||||
Net income | $ | 5,352 | $ | 8,536 | $ | 4,111 | $ | 301 |
Adjustments to reconcile net income to net cash provided by continuing operating activities: | ||||||||
Discontinued operations - net of tax | (7) | (75) | ||||||
Depreciation and amortization | 4,143 | 3,782 | 1,351 | 1,366 | ||||
Share-based compensation expense | 172 | 22 | ||||||
Merger-related in-process research and development charges | 1,652 | 955 | -- | 2 | ||||
Asset impairment charge and other costs associated with the suspension of Bextra sales | 1,216 | -- | ||||||
Deferred taxes | (279) | (471) | ||||||
Other | 193 | 479 | ||||||
Intangible asset impairments and other associated non-cash charges | -- | 1,213 | ||||||
Gains on disposal of investments, products and product lines | (76) | (4) | ||||||
Loss from discontinued operations | -- | 18 | ||||||
Gains on sales of discontinued operations | (5) | (65) | ||||||
Deferred taxes from continuing operations | (714) | 483 | ||||||
Other deferred taxes | -- | (4) | ||||||
Other non-cash adjustments | 25 | 98 | ||||||
Changes in assets and liabilities (net of businesses acquired and divested) | (2,274) | (2,856) | (903) | (237) | ||||
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Net cash provided by continuing operating activities | 9,996 | 10,350 | 3,961 | 3,193 | ||||
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Investing Activities: | ||||||||
Purchases of property, plant and equipment | (1,493) | (1,526) | (418) | (465) | ||||
Purchases of short-term investments | (16,840) | (11,369) | (2,735) | (4,891) | ||||
Proceeds from redemptions of short-term investments | 23,179 | 6,427 | 10,438 | 2,531 | ||||
Purchases of long-term investments | (650) | (1,132) | (216) | (494) | ||||
Proceeds from sales of long-term investments | 655 | 1,432 | 4 | 437 | ||||
Purchases of other assets | (392) | (613) | (35) | (70) | ||||
Proceeds from sales of other assets | 6 | 267 | 3 | 5 | ||||
Proceeds from the sales of businesses, product lines and other products | 7 | 93 | ||||||
Acquisitions, net of cash acquired | (2,104) | (1,443) | (1,440) | -- | ||||
Proceeds from the sales of businesses and product lines | 108 | 1,192 | ||||||
Other investing activities | 238 | 32 | (177) | 149 | ||||
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Net cash provided by/(used in) investing activities | 2,707 | (6,733) | 5,431 | (2,705) | ||||
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Financing Activities: | ||||||||
Increase in short-term borrowings, net | 9 | 2,094 | 826 | 1,591 | ||||
Principal payments on short-term borrowings | (5,274) | (238) | (8,056) | (205) | ||||
Proceeds from issuances of long-term debt | 5 | 2,592 | 1,035 | 1 | ||||
Principal payments on long-term debt | (1,042) | (29) | (1) | (1) | ||||
Proceeds from common stock issuances | 45 | 53 | ||||||
Purchases of common stock | (3,415) | (4,787) | (1,000) | (919) | ||||
Cash dividends paid | (4,177) | (3,821) | (1,743) | (1,400) | ||||
Stock option transactions and other | 301 | 856 | 173 | 115 | ||||
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Net cash used in financing activities | (13,548) | (3,280) | (8,766) | (818) | ||||
Effect of exchange-rate changes on cash and cash equivalents | (4) | 7 | (4) | (2) | ||||
Net (decrease)/increase in cash and cash equivalents | (849) | 344 | ||||||
Net increase/(decrease) in cash and cash equivalents | 622 | (332) | ||||||
Cash and cash equivalents at beginning of period | 1,808 | 1,520 | 2,247 | 1,808 | ||||
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Cash and cash equivalents at end of period | $ | 959 | $ | 1,864 | $ | 2,869 | $ | 1,476 |
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Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 3,738 | $ | 2,374 | $ | 640 | $ | 557 |
Interest | 485 | 312 | 213 | 141 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1:1. Basis of Presentation
General
We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month and nine-month periods ended August 28, 2005February 26, 2006 and August 22, 2004. The fiscal first quarter and nine months of 2005 had three additional business days compared to the fiscal first quarter and nine months of 2004.February 27, 2005.
We made certain reclassifications to the 20042005 condensed consolidated financial statements to conform to the 20052006 presentation.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2004.2005.
Note 2. Acquisitions and Dispositions
A. Acquisitions
On February 28, 2006, we completed the acquisition of the sanofi-aventis world-wide rights, including patent rights and production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.4 billion (including transaction costs). In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded an intangible asset for developed technology rights of approximately $1.0 billion, inventory valued at $218 million and goodwill of approximately $166 million, all of which have been allocated to our Human Health segment. The amortization of the developed technology rights will be primarily included in Cost of Sales. Given the size and complexity of the acquisition, the fair valuation and allocation work is still being finalized and is expected to be substantially complete in the second quarter. To the extent that our estimates need to be adjusted, we will do so.
Prior to the acquisition, in connection with our collaboration agreement with sanofi-aventis, we recorded a research and development milestone due to us from sanofi-aventis of approximately $118 million ($71 million, after tax) in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).
B. Dispositions
We evaluate our businesses and product lines periodically for strategic fit within our operations. As a result of our evaluation, we decided to sell a number of businesses and product lines, certain of which qualified for Discontinued operations treatment. As of December 31, 2005, all of the transactions were completed. The impact of these divested businesses and product lines was not material to the consolidated operating results of Pfizer in the periods presented.
Share-Based PaymentsAssets held for sale and Liabilities held for sale on the balance sheet at April 2, 2006 and December 31, 2005, relate primarily to assets in Europe that we intend to sell but that are not related to Discontinued operations.
Note 3. Adoption of New Accounting Standards
In accordance withOn January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, as supplemented by the interpretation provided by SEC Staff Accounting Bulletin (SAB) No. 107, issued in March 2005. (SFAS 123R replaced SFAS 123, Accounting for Stock-Based Compensation, issued in 1995.) We have elected the modified prospective application transition method of adoption and, as such, prior period financial statements have not been restated. Under this method, the fair value of all stock options granted or modified after adoption must be recognized in the consolidated statement of income and total compensation cost related to nonvested awards not yet recognized, determined under the original provisions of SFAS 123, must also be recognized in the consolidated statement of income.
Prior to January 1, 2006, we elect to accountaccounted for our stock-based compensationstock options under Accounting PrinciplesPrinciple Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The, an elective accounting policy permitted by SFAS 123. Under this standard, since the exercise price of our stock options granted equalsis set equal to the market price on the date of grant; as such, there is no recorded compensationthe grant, we did not record any expense related to grantsthe condensed consolidated statement of stock options.
The weighted-average fair value per stock option granted was $5.00 and $6.33 for the three months ended October 2, 2005 and September 26, 2004, and $5.15 and $6.88 for the nine months ended October 2, 2005 and September 26, 2004. We estimated the fair values, as required under GAAP, using the Black-Scholes option-pricing model, modified for dividends and using the assumptions below. Pro forma compensation expenseincome related to stock options, subjectunless certain original grant date terms were subsequently modified. However, as required, we disclosed, in the Notes to accelerated vesting upon retirement is recognized overConsolidated Financial Statements, the period of employment up to the vesting datepro forma expense impact of the grant. In the first quarter of 2005, we changed our method of estimating expected dividend yield from historical patterns of dividend payments to a method that reflects a constant dividend yield during the expected term of the option.
Three Months Ended | Nine Months Ended | ||||
Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | ||
Expected dividend yield | 2.76% | 2.98% | 2.90% | 2.90% | |
Risk-free interest rate | 3.81% | 3.36% | 3.96% | 3.32% | |
Expected stock price volatility | 20.00% | 22.88% | 21.93% | 22.15% | |
Expected term until exercise (years) | 5.59 | 5.64 | 5.75 | 5.75 |
The following table shows the effect on results for the three-month and nine-month periods ended October 2, 2005 and September 26, 2004stock option grants as if we had applied the fair-value-based recognition provisions of SFAS 123 to measure stock-based compensation expense123.
The adoption of SFAS 123R primarily impacted our accounting for the option grants:
Three Months Ended | Nine Months Ended | |||||||
(millions of dollars, except per common share data) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | ||||
| ||||||||
Net income available to common shareholders used in the calculation of basic earnings per common share: | ||||||||
As reported under GAAP* | $ | 1,588 | $ | 3,340 | $ | 5,348 | $ | 8,532 |
Compensation expense - net of tax | (104) | (148) | (356) | (421) | ||||
Pro forma | $ | 1,484 | $ | 3,192 | $ | 4,992 | $ | 8,111 |
| ||||||||
Basic earnings per common share: | ||||||||
As reported under GAAP* | $ | 0.22 | $ | 0.45 | $ | 0.73 | $ | 1.13 |
Compensation expense - net of tax | (0.02) | (0.02) | (0.05) | (0.06) | ||||
Pro forma | $ | 0.20 | $ | 0.43 | $ | 0.68 | $ | 1.07 |
| ||||||||
Net income available to common shareholders used in the calculation of diluted earnings per common share: | ||||||||
As reported under GAAP* | $ | 1,588 | $ | 3,340 | $ | 5,349 | $ | 8,531 |
Compensation expense - net of tax | (104) | (148) | (356) | (421) | ||||
Pro forma | $ | 1,484 | $ | 3,192 | $ | 4,993 | $ | 8,110 |
| ||||||||
Diluted earnings per common share: | ||||||||
As reported under GAAP* | $ | 0.22 | $ | 0.44 | $ | 0.72 | $ | 1.12 |
Compensation expense - net of tax | (0.02) | (0.02) | (0.05) | (0.06) | ||||
Pro forma | $ | 0.20 | $ | 0.42 | $ | 0.67 | $ | 1.06 |
|
|
Net income available to common shareholders used in the calculation of basic earnings per common share represents net income reduced by preferred stock dividends - net of tax. Net income available to common shareholders used in the calculation of diluted earnings per common share represents net income reduced by the incremental allocation of shares to the Employee Stock Ownership Plans (ESOPs) acquired as part of the Pharmacia acquisition.options (See Note 13, Share-Based Payments).
Note 2:4. Asset Impairment Charge and Other Costs Associated with the Suspension of Bextra Sales
In the first nine monthsquarter of 2005, we recorded charges totaling $1.2 billion ($762766 million, net of tax) in connection with the decision to suspend sales and marketing of Bextra. This decision resulted from an April 7, 2005 request from the U.S. Food and Drug Administration (FDA), as part of its safety review of all COX-2 medicines.
The pre-tax chargescharge included $1.1 billion related to the impairment of developed technology rights associated with Bextra and $7$10 million related to the write-off of machinery and equipment, both of which arewere included in Other (income)/deductions - net.net In addition, in connection with the suspension, we also recorded $56 million in write-offs of inventory(See Note 11, Goodwill and exit costs, included in Cost of salesOther Intangible Assets; $8 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; and $212 million for an estimate of customer returns, primarily included against Revenues. Substantially all of these charges were recorded in the first quarter of 2005.).
Note 3: Income Taxes
Income Tax Charge Associated with Repatriation Decision
In the first nine months of 2005, we recorded an income tax charge of $1.7 billion, included in Provision for taxes on income, in connection with our decision to repatriate about $36.7 billion of foreign earnings in accordance with the American Jobs Creation Act of 2004 (the Jobs Act). In the first quarter of 2005, we recorded an initial estimated income tax charge of $2.2 billion based on the decision to repatriate $28.3 billion of foreign earnings; in the second quarter of 2005, we reduced our original estimate of the tax charge by $863 million and revised the repatriation of foreign earnings to $28.1 billion, principally as a result of guidance issued by the U.S. Treasury in May 2005. In the second quarter of 2005, we also recorded an additional tax charge of $373 million, primarily due to our decision to repatriate an additional $8.6 billion of foreign earnings.
As of October 2, 2005, we intend to continue to permanently reinvest the earnings of our international subsidiaries and, therefore, we have not recorded a U.S. tax provision on the remaining amount of unremitted earnings.
Tax Contingencies
In the second quarter of 2005, we recorded a tax benefit of $586 million primarily related to the resolution of certain tax positions. We believe that the IRS audits of the Pfizer Inc. tax returns for the years 1999-2001 and the Warner-Lambert Company tax returns for the years 1999 through the date of the merger with Pfizer (June 19, 2000) are substantially complete. In connection with those audits, we are currently in the process of appealing one matter related to the tax deductibility of a breakup fee paid by Warner-Lambert Company in 2000.
The IRS has commenced the audit of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005 tax year is also currently under audit.
As previously disclosed, with respect to Pharmacia Corporation (formerly known as Monsanto Company), the IRS has completed and closed its income tax return examinations and appeals through 1999 and has commenced the audit of the tax returns for the years 2000 through the date of merger with Pfizer (April 16, 2003).
We periodically reassess the likelihood of assessments resulting from audits of federal, state and foreign income tax filings. We believe that our accruals for tax liabilities are adequate for all open years.
Note 4:5. Adapting to Scale Initiative
We incurred the following costs in connection with our Adapting to Scale (AtS) productivity initiative, which was announcedlaunched in the second quarter ofearly 2005:
First Quarter | ||||||||
(millions of dollars) | Three | Nine | 2006 | 2005 | ||||
| ||||||||
Implementation costs(a) | $ | 104 | $ | 136 | $ | 186 | $ | -- |
Restructuring charges(b) | 153 | 174 | 301 | -- | ||||
Total AtS costs | $ | 257 | $ | 310 | $ | 487 | $ | -- |
(a) | Included in Cost of sales ($ |
(b) | Included in Restructuring charges and merger-related costs. |
In connection with the AtS initiative, Pfizer management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures, in a company-wide effort to improve performance and efficiency. We expect the costs associated with this multi-year effort to continue through 2008 and to total approximately $4 billion to $5 billion, on a pre-tax basis. The actions associated with the AtS initiative will include restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated implementation costs, such as accelerated depreciation charges, primarily associated with plant network optimization efforts, and expenses associated with system and process standardization and the expansion of shared services.
Through OctoberApril 2, 2005,2006, the restructuring charges primarily relate to employee termination costs at our manufacturing facilities in North Americaplant network optimization efforts and the restructuring of our U.S. marketing and worldwide research and development operations, while the implementation costs primarily relate to system and process standardization, and toas well as the expansion of shared services.
The components of restructuring costscharges associated with AtS follow:
(millions of dollars) | Nine | Utilization |
| Accrual at | (a) | Costs | Utilization |
| Accrual | (a) | ||||||
Employee termination costs | $ | 106 | $ | 49 | $ | 57 | $ | 478 | $ | 351 | $ | 127 | ||||
Asset impairments | 62 | 62 | -- | 250 | 250 | -- | ||||||||||
Other | 6 | -- | 6 | 23 | 7 | 16 | ||||||||||
| $ | 174 | $ | 111 | $ | 63 | $ | 751 | $ | 608 | $ | 143 |
(a) | Included in Other current liabilities. |
During the three months ended October 2, 2005,first quarter of 2006, we expensed $85$173 million for Employee termination costs, $62$119 million for Asset impairments and $6$9 million in Other. Through OctoberApril 2, 2005,2006, Employee termination costs represent the approved reduction of the workforce by 9223,886 employees, mainly in manufacturing, sales and research. We notified affected individuals and 9033,610 employees were terminated as of OctoberApril 2, 2005.2006. Employee termination costs are recorded as incurred and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write-off inventory and write down intangible assets, and property, plant and equipment. Other primarily includes costs to exit certain activities.
Note 5:6. Merger-Related Costs
We incurred the following merger-related costs primarily in connection with our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003:costs:
Three Months Ended | Nine Months Ended | First Quarter | |||||||||||||
(millions of dollars) | (millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | 2006 | 2005 | ||||||||
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Integration costs | Integration costs | $ | 93 | $ | 113 | $ | 390 | $ | 367 | Integration costs | $ | 2 | $ | 106 | |
Restructuring costs(a) | 61 | 77 | 232 | 359 | |||||||||||
Restructuring charges | 3 | 113 | |||||||||||||
Total merger-related costs | Total merger-related costs | $ | 154 | $ | 190 | $ | 622 | $ | 726 | Total merger-related costs | $ | 5 | $ | 219 | |
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(a) | Included in Restructuring charges and merger-related costs. |
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In connection with the acquisition of Pharmacia, Pfizer management approved plans to restructure and integrate the operations of both legacy Pfizer and legacy Pharmacia to combine operations, eliminate duplicative facilities and reduce costs. Total merger-related expenditures expected to be incurred during 2003 through 2005 to achieve anticipated synergies are about $5.1 billion, on a pre-tax basis, with $5.0 billion incurred through October 2, 2005. The restructuring of our operations as a result of our acquisition of Pharmacia includes consulting, systems integrations,
(a) | Included in Restructuring charges and merger-related costs. Amounts in 2005 primarily relate to our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003. |
Restructuring charges included severance, costs of vacating duplicative facilities, contract termination and other exit costs.
Through April 15, 2004, we recorded restructuring costs associated with employee terminations and exiting certain activities of legacy Pharmacia as liabilities assumed in the purchase business combination and recorded an increase to goodwill. Changes to previous estimates of restructuring costs included as part of the purchase allocation of Pharmacia are recorded as a reduction to goodwill or an expense to operations, as appropriate. Restructuring costs incurred for legacy Pfizer and restructuring costs incurred after April 15, 2004 for legacy Pharmacia are charged to the results of operations.
The components of merger-related restructuring costs associated with legacy Pfizer and legacy Pharmacia follow:
(millions of dollars) | Total | Utilization | (a) | Accrual at | (b) | |||
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Costs capitalized through April 15, 2004: | ||||||||
Employee termination costs | $ | 1,535 | $ | 1,502 | $ | 33 | ||
Other | 624 | 517 | 107 | |||||
$ | 2,159 | $ | 2,019 | $ | 140 | |||
Costs expensed: | ||||||||
Employee termination costs | $ | 590 | $ | 508 | $ | 82 | ||
Asset impairments | 421 | 421 | -- | |||||
Other | 96 | 74 | 22 | |||||
| $ | 1,107 | $ | 1,003 | $ | 104 |
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During the three months ended October 2, 2005 and September 26, 2004, we expensed $1 million and $53 million for Employee termination costs, $53 million and $8 million for Asset impairments, and $7 million and $16 million in Other. During the first nine months of 2005 and 2004, we expensed $73 million and $201 million for Employee termination costs, $131 million and $122 million for Asset impairments, and $22 million and $31 million in Other.Through October 2, 2005, Employee termination costs represent the approved reduction of the legacy Pfizer and legacy Pharmacia work force by 17,086 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 16,385 employees were terminated as of October 2, 2005. Employee termination costs are recorded as incurred and include accrued severance benefits and costs associated with change-in-control provisions of certain Pharmacia employment contracts. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities of legacy Pfizer and legacy Pharmacia.Note 7. Taxes on Income
Note 6: AcquisitionsA. Taxes on Income
On September 14, 2005, we completedJanuary 23, 2006, the acquisition of all of the outstanding shares of Vicuron Pharmaceuticals, Inc. (Vicuron), a biopharmaceutical company focusedInternal Revenue Service (IRS) issued final regulations on the development of novel anti-infectives, for approximately $1.9 billion in cash (including transaction costs). Vicuron has two products currently under New Drug Application (NDA) review by the FDA: anidulafungin for fungal infectionsStatutory Mergers and dalbavancin for Gram-positive infections. The allocation of the purchase price includes in-process research and development of approximately $1.4 billion,Consolidations, which was expensed and included in Merger-related in-process research and development charges, and goodwill of $243 million, which has been allocated to our Human Health segment. Neither of these items is deductible for tax purposes.
On April 12, 2005, we completed the acquisition of Idun Pharmaceuticals, Inc. (Idun), a biopharmaceutical company focused on the discovery and development of therapies to control apoptosis, and on August 15, 2005, we completed the acquisition of all outstanding shares of Bioren Inc. (Bioren), which focuses on technology for optimizing antibodies. The aggregate cost of these and other smaller acquisitions was approximately $340 million for the nine months ended October 2, 2005.
On February 10, 2004, we completed the acquisition of all the outstanding shares of Esperion Therapeutics, Inc., (Esperion), a biopharmaceutical company, for $1.3 billion in cash (including transaction costs). The allocation of the purchase price included in-process research and development of $920 million, which was expensed, and goodwill of $235 million, which was allocated to our Human Health segment. Neither of these items was deductible for tax purposes. The aggregate cost of other smaller acquisitions was approximately $170 million for the nine months ended September 26, 2004.
Note 7: Dispositions
We evaluate our businesses and product lines periodically for strategic fit within our operations.impacted certain prior-period transactions. In the first quarter of 2004, we decided to sell a number of businesses and product lines and2006, we recorded a tax benefit of $217 million, reflecting the results of these operations in Discontinued operations for 2005 and 2004. As of October 2, 2005, all of these discontinued operations have been sold. Thetotal impact of these divested businessesregulations.
In the first quarter of 2005, we recorded an income tax charge of $2.2 billion, included in Provision for taxes on income, in connection with our decision to repatriate about $28.3 billion of foreign earnings in accordance with the American Jobs Creation Act of 2004 (the Jobs Act). This first quarter impact was based on preliminary information available at the time. The final charge in 2005 was $1.7 billion on a repatriation amount of $37 billion. The change in the repatriation and product linescorresponding tax amount was not materialdue primarily to guidance issued by the U.S. Treasury in the second quarter of 2005, as well as our decision to increase the amount of the repatriation.
B.Tax Contingencies
On January 25, 2006, the Company was notified by the IRS Appeals Division that a resolution had been reached on the matter that we were in the process of appealing related to the consolidated operating resultstax deductibility of Pfizer Inca breakup fee paid by Warner-Lambert Company in 2000. As a result, in the periods presented.
Assets held for sale and Liabilities held for sale on the balance sheet at October 2, 2005, relate primarily to assets in Europe thatfirst quarter of 2006 we intend to sell but that are notrecorded a tax benefit of approximately $441 million related to Discontinued operations. the resolution of this issue.
The IRS is currently conducting audits of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005 and 2006 tax years are also currently under audit under the IRS Compliance Assurance Process, a recently introduced real time audit process.
With respect to Pharmacia Corporation, the IRS has completed audits of the tax returns for the years 2000 through 2002 and is currently conducting an audit for the 2003 tax year through the date of the merger with Pfizer (April 16, 2003).
We periodically reassess the likelihood of assessments resulting from audits of federal, state and foreign income tax filings. We believe that our accruals for tax liabilities are adequate for all open years.
Note 8:8. Comprehensive Income/(Expense)
The components of comprehensive income/(expense) follow:
Three Months Ended | Nine Months Ended | First Quarter | |||||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | 2006 | 2005 | |||||||
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Net income | $ | 1,589 | $ | 3,341 | $ | 5,352 | $ | 8,536 | $ | 4,111 | $ | 301 | |
Other comprehensive income/(expense): | |||||||||||||
Net unrealized gain/(loss) on available-for-sale securities arising during the period - net of tax | 7 | (30) | (98) | 153 | |||||||||
Currency translation adjustment and other | (183) | 689 | (1,195) | 451 | 310 | (277) | |||||||
Net unrealized gains/(losses) on derivative financial instruments | 71 | (19) | |||||||||||
Net unrealized gains/(losses) on available-for-sale securities | 3 | (71) | |||||||||||
Minimum pension liability | (12) | (2) | |||||||||||
Total other comprehensive income/(expense) | (176) | 659 | (1,293) | 604 | 372 | (369) | |||||||
Total comprehensive income/(expense) | $ | 1,413 | $ | 4,000 | $ | 4,059 | $ | 9,140 | $ | 4,483 | $ | (68) |
Note 9:9. Financial Instruments
A. Long-Term Debt
On February 22, 2006, we issued the following Japanese yen fixed-rate bonds, to be used for general corporate purposes:
• | $508 million equivalent, senior unsecured notes, due February 2011, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.2%; and |
• | $466 million equivalent, senior unsecured notes, due February 2016, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.8%. |
The notes were issued under a $5 billion debt shelf registration filed with the SEC in November 2002. As of April 2, 2006, we had the ability to borrow $1 billion by issuing debt securities under our existing debt shelf registration statement filed with the SEC in November 2002.
B. Derivative Financial Instruments and Hedging Activities
During the first nine monthsquarter of 2005,2006, we entered into the following incremental or new derivative and hedging activities:
Instrument(a) | Primary | (b) |
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LT yen debt | LTD | NI | Yen net investments | $510 | 2011 | |||||
LT yen debt | LTD | NI | Yen net investments | 467 | 2016 |
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(b) | The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to | ||||||||
(c) | NI = Net investment hedge |
These foreign exchange derivativesdebt instruments serve to protect net income and net investments against the impact of the translation into U.S. dollars of certain foreign exchange denominated transactions.
There was no material ineffectiveness in any hedging relationship reported in earnings in the first nine monthsquarter of 2005.2006.
Long-Term Debt
In July 2005, we decided to exercise Pfizer's option to call, at par-value plus accrued interest, $1 billion of senior unsecured floating-rate notes, which were included in Long-term debt at December 31, 2004. Notice to call was given to the Trustees and the notes were redeemed in September 2005.
Note 10:10. Inventories
The components of inventories follow:
(millions of dollars) | Oct. 2, | Dec. 31, | ||
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Finished goods | $ | 2,600 | $ | 2,643 |
Work-in-process | 2,714 | 2,703 | ||
Raw materials and supplies | 1,242 | 1,314 | ||
Total inventories | $ | 6,556 | $ | 6,660 |
A reclassification was made in 2004 from Finished goods to Work-in-process to better reflect the stage of completion.
(millions of dollars) | April 2, | Dec. 31, | ||||
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Finished goods | $ | 2,559 | $ | 2,303 | ||
Work-in-process | 2,905 | 2,379 | ||||
Raw materials and supplies | 1,199 | 1,357 | ||||
Total inventories(a) | $ | 6,663 | $ | 6,039 | ||
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(a) | Increase primarily due to the acquisition of sanofi-aventis' Exubera inventory, the build-up of inventory in advance of product launches and the impact of foreign exchange. |
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Note 11:11. Goodwill and Other Intangible Assets
A. Goodwill
The changes in the carrying amount of goodwill by segment for the nine months ended October 2, 2005first quarter of 2006 follow:
(millions of dollars) | Human | Consumer | Animal | Other | Total | |||||
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Balance, December 31, 2004 | $ | 20,966 | $ | 2,701 | $ | 79 | $ | 10 | $ | 23,756 |
Other(a) | 13 | 62 | (25) | -- | 50 | |||||
Balance, October 2, 2005 | $ | 20,979 | $ | 2,763 | $ | 54 | $ | 10 | $ | 23,806 |
(millions of dollars) | Human | Consumer | Animal | Other | Total | |||||
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Balance, December 31, 2005 | $ | 20,919 | $ | 2,789 | $ | 56 | $ | 10 | $ | 23,774 |
Additions(a) | 166 | -- | -- | -- | 166 | |||||
Other(b) | (204) | 5 | -- | -- | (199) | |||||
Balance, April 2, 2006 | $ | 20,881 | $ | 2,794 | $ | 56 | $ | 10 | $ | 23,741 |
(a) | Primarily related to Exubera. |
(b) | Includes a reduction to goodwill related to the |
B. Other Intangible Assets
The components of identifiable intangible assets, primarily included in our Human Health segment, follow:
Oct. 2, 2005 | Dec. 31, 2004 | April 2, 2006 | Dec. 31, 2005 | |||||||||||||
(millions of dollars) | Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | ||||||||
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Finite-lived intangible assets: | ||||||||||||||||
Developed technology rights | $ | 31,102 | $ | (8,070) | $ | 33,137 | $ | (5,967) | $31,848 | $ (9,662) | $30,781 | $(8,819) | ||||
Brands | 1,057 | (48) | 1,037 | (14) | 1,024 | (72) | 1,022 | (60) | ||||||||
License agreements | 165 | (28) | 158 | (17) | 164 | (34) | 160 | (30) | ||||||||
Trademarks | 157 | (92) | 134 | (90) | 152 | (91) | 152 | (91) | ||||||||
Other(a) | 436 | (205) | 390 | (186) | 504 | (228) | 452 | (207) | ||||||||
Total amortized finite-lived intangible assets | 32,917 | (8,443) | 34,856 | (6,274) | 33,692 | (10,087) | 32,567 | (9,207) | ||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Brands | 3,898 | -- | 4,012 | -- | 3,871 | -- | 3,864 | -- | ||||||||
License agreements | 316 | -- | 356 | -- | 302 | -- | 296 | -- | ||||||||
Trademarks | 227 | -- | 235 | -- | 227 | -- | 227 | -- | ||||||||
Other(b) | 61 | -- | 66 | -- | 68 | -- | 39 | -- | ||||||||
Total indefinite-lived intangible assets | 4,502 | -- | 4,669 | -- | 4,468 | -- | 4,426 | -- | ||||||||
Total identifiable intangible assets | $ | 37,419 | $ | (8,443) | $ | 39,525 | $ | (6,274) | $38,160 | $(10,087) | $36,993 | $(9,207) |
Total identifiable intangible assets, less accumulated amortization | $ |
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(a) | Includes patents, non-compete agreements, customer contracts and other intangible assets. |
(b) | Includes pension-related intangible assets. |
In the first nine monthsquarter of 2006, we acquired the sanofi-aventis worldwide rights, including patent rights and production technology, to manufacture and sell Exubera. In connection with the acquisition, we recorded an intangible asset for developed technology rights of approximately $1.0 billion. The amortization of these developed technology rights will primarily be included in Cost of Sales.
In the first quarter of 2005, we recorded an impairment charge of $1.1 billion in Other (income)/deductions- net related to the developed technology rights for Bextra, a selective COX-2 inhibitor (see Note 2, Asset Impairment Charge and Other Costs Associated(included in our Human Health segment) in connection with the Suspensiondecision to suspend sales and marketing of Bextra Sales) which wasBextra. In addition, in connection with the suspension, we recorded $10 million related to the write-off of machinery and equipment included in Other (income)/deductions - net.; $56 million in write-offs of inventory and exit costs, included in Cost of sales; $2 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; and $71 million for an estimate of customer returns, primarily included against Revenues.
Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute our products are included in Amortization of intangible assets as they benefit multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function are included in Cost of sales, Selling, informational and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $859$855 million for the three months ended October 2, 2005first quarter of 2006 and September 26, 2004 and $2.6 billion and $2.5 billion$901 million for the nine months ended October 2, 2005 and September 26, 2004.first quarter of 2005.
The annual amortization expense expected for the fiscal years 20052006 through 20102011 is $3.5 billion in 2005, $3.4 billion in 2006 and 2007,2006; $3.3 billion in 2007; $2.7 billion in 20082008; and $2.5$2.4 billion in 2009, 2010 and 2010.2011.
Note 12:12. Benefit Plans
The components of net periodic benefit cost of the U.S. and international pension plans and the postretirement plans for the three months ended October 2,first quarter of 2006 and 2005 and September 26, 2004 follow:
Pension Plans | ||||||||||||||||
U.S. Qualified | U.S. Supplemental | International | Postretirement Plans | |||||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||
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Service cost | $ | 80 | $ | 71 | $ | 9 | $ | 8 | $ | 71 | $ | 67 | $ | 10 | $ | 7 |
Interest cost | 104 | 98 | 15 | 15 | 76 | 71 | 28 | 18 | ||||||||
Expected return on plan assets | (148) | (143) | -- | -- | (77) | (74) | (6) | (4) | ||||||||
Amortization of: | ||||||||||||||||
Prior service costs/(gains) | 4 | 5 | -- | -- | (1) | 3 | 1 | -- | ||||||||
Net transition obligation | -- | -- | -- | -- | 1 | -- | -- | -- | ||||||||
Actuarial losses | 26 | 25 | 10 | 9 | 23 | 15 | 4 | -- | ||||||||
Curtailments and settlements - net | 3 | -- | -- | -- | 1 | 18 | -- | -- | ||||||||
Special termination benefits | 1 | -- | -- | -- | 1 | -- | 1 | -- | ||||||||
Net periodic benefit costs | $ | 70 | $ | 56 | $ | 34 | $ | 32 | $ | 95 | $ | 100 | $ | 38 | $ | 21 |
The components of net periodic benefit cost of the U.S. and international pension plans and the postretirement plans for the nine months ended October 2, 2005 and September 26, 2004 follow:
Pension Plans | Pension Plans | |||||||||||||||||||||||||||||||
U.S. Qualified | U.S. Supplemental | International | Postretirement Plans | U.S. Qualified | U.S. Supplemental | International | Postretirement Plans | |||||||||||||||||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
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Service cost | $ | 239 | $ | 215 | $ | 28 | $ | 25 | $ | 224 | $ | 197 | $ | 29 | $ | 27 | $ | 94 | $ | 79 | $ | 11 | $ | 9 | $ | 74 | $ | 77 | $ | 12 | $ | 9 |
Interest cost | 310 | 293 | 44 | 44 | 234 | 214 | 84 | 80 | 112 | 104 | 15 | 15 | 74 | 80 | 32 | 28 | ||||||||||||||||
Expected return on plan assets | (445) | (429) | -- | -- | (238) | (215) | (17) | (15) | (161) | (148) | -- | -- | (77) | (81) | (8) | (6) | ||||||||||||||||
Amortization of: | ||||||||||||||||||||||||||||||||
Prior service costs/(gains) | 11 | 13 | 1 | 1 | (2) | 7 | 1 | 1 | ||||||||||||||||||||||||
Net transition obligation | -- | -- | -- | -- | 2 | 1 | -- | -- | ||||||||||||||||||||||||
Prior service costs/(credits) | 2 | 4 | -- | -- | -- | (1) | -- | 1 | ||||||||||||||||||||||||
Actuarial losses | 77 | 74 | 29 | 27 | 71 | 42 | 14 | 12 | 31 | 26 | 11 | 10 | 26 | 25 | 9 | 5 | ||||||||||||||||
Curtailments and settlements - net | 3 | -- | -- | -- | 11 | (1) | -- | -- | 4 | -- | (1) | -- | 2 | -- | 3 | -- | ||||||||||||||||
Special termination benefits | 1 | -- | -- | -- | 11 | -- | 1 | -- | 6 | -- | -- | -- | 4 | 7 | 3 | -- | ||||||||||||||||
Net periodic benefit costs | $ | 196 | $ | 166 | $ | 102 | $ | 97 | $ | 313 | $ | 245 | $ | 112 | $ | 105 | $ | 88 | $ | 65 | $ | 36 | $ | 34 | $ | 103 | $ | 107 | $ | 51 | $ | 37 |
For the first nine monthsquarter of 2005,2006, we contributed from the Company's general assets, $52 million to our U.S. qualified pension plans, $301$91 million to our international pension plans, $124$40 million to our U.S. supplemental (non-qualified) pension plans and $123$48 million to our postretirement plans. The Company made no contributions to our U.S. qualified pension plans during the first quarter of 2006. As of OctoberApril 2, 2005,2006, we expect to contribute, from the Company's general assets during 2005,2006, a total (inclusive of amounts contributed during the first nine monthsquarter of 2005)2006) of $53$3 million to our U.S. qualified pension plans, $396$343 million to our international pension plans, $137$115 million to our U.S. supplemental (non-qualified) pension plans and $166$159 million to our postretirement plans. The contributions from the Company's general assets include direct employer benefit payments.
Note 13. Share-Based Payments
Our compensation programs can include share-based payments. In 2006 and 2005, the primary share-based awards and their generalterms and conditions are as follows:
• | Stock options, which entitle the holder to purchase, at the end of a vesting term, a specified number of shares of Pfizer common stock at a price per share set equal to the market price of Pfizer common stock on the date of grant. |
• | Restricted stock units (RSUs), which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs. |
• | Performance share awards (PSAs) and performance-contingent share awards (PCSAs), which entitle the holder to receive, at the end of a vesting term, a number of shares of Pfizer common stock, within a range of shares from zero to a specified maximum, calculated using a non-discretionary formula, which measures Pfizer's performance relative to an industry peer group. |
• | Restricted stock grants, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, and which also entitle the holder to receive dividends paid on such grants. |
The Company's shareholders approved the Pfizer Inc. 2004 Stock Plan (the 2004 Plan) at the Annual Meeting of Shareholders held on April 22, 2004 and, effective upon that approval, new stock option and other share-based awards may be granted only under the 2004 Plan. The 2004 Plan allows a maximum of 3 million shares to be awarded to any employee per year and 475 million shares in total. Whole share awards count as three shares and stock options count as one share under the 2004 Plan toward the maximums.
In the past, we had various employee stock and incentive plans under which stock options and other share-based awards were granted. Stock options and other share-based awards that were granted under prior plans and were outstanding on April 22, 2004 continue in accordance with the terms of the respective plans.
As of April 2, 2006, 294 million shares were available for award, which include 17 million shares available for award under the legacy Pharmacia Long-Term Incentive Plan, which reflects award cancellations returned to the pool of available shares for legacy Pharmacia commitments.
Although not required to do so, historically, we have used authorized and unissued shares and shares held in our Employee Benefit Trust to satisfy our obligations under these programs.
A. Impact on Net Income
Our net income for the first quarter of 2006 and 2005 includes $172 million and $22 million of total compensation cost for share-based payment arrangements ($124 million and $15 million, net of tax). Amounts capitalized as part of inventory cost were not significant. In the first quarter of 2006, the impact of modifications under the AtS productivity initiative to share-based awards was not significant and, in 2005, the impact of modifications under the Pharmacia restructuring program was not significant. Generally, these modifications resulted in an acceleration of vesting either in accordance with plan terms or at management's discretion.
B. Stock Options
Stock options, which entitle the holder to purchase, at the end of a vesting term, a specified number of shares of Pfizer common stock at a price per share set equal to the market price of Pfizer common stock on the date of grant, are accounted for at fair value at the date of grant in the income statement beginning in 2006. These fair values are generally amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expense and Research and development expenses, as appropriate.
In 2005 and earlier years, stock options were accounted for under APB No. 25 using the intrinsic value method in the income statement and fair value information was disclosed. In these disclosures of fair value, we allocated stock option compensation expense based on the nominal vesting period, rather than the expected time to achieve retirement eligibility. In 2006, we changed our method of allocation and we allocate stock option compensation expense based on the substantive vesting period for all new awards, while continuing to allocate outstanding nonvested awards not yet recognized as of December 31, 2005 under the nominal vesting period method. Specifically, under this prospective change in accounting policy, compensation expense related to stock options granted prior to 2006 that are subject to accelerated vesting upon retirement eligibility is being recognized over the vesting term of the grant, even though the service period after retirement eligibility is not considered to be a substantive vesting requirement. The impact of this change was not significant.
All employees may receive stock option grants. In virtually all instances, stock options vest after three years of continuous service from the grant date and have a contractual term of ten years; for certain members of management, vesting may occur ratably over an extended period of up to five years. In all cases, even for stock options that are subject to accelerated vesting upon voluntary retirement, stock options must be held for at least one year from grant date before any vesting may occur.
The fair value of each stock option grant is estimated on the grant date using the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values, as follows:
First Quarter | |||
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Expected dividend yield (a) | 3.66% |
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Risk-free interest rate (b) | 4.59% |
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Expected stock price volatility (c) | 24.50% |
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Expected term until exercise (d) (years) | 6.00 |
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(a) | Determined using a constant dividend yield during the expected term of the option. |
(b) | Determined using the extrapolated yield on U.S. Treasury zero-coupon issues. |
(c) | Determined using implied volatility, after consideration of historical volatility. |
(d) | Determined using historical exercise and post-vesting termination patterns. |
In the first quarter of 2006, we changed our method of estimating expected stock price volatility to reflect market-based inputs under emerging stock option valuation considerations. We use the implied volatility in a long-term traded option, after consideration of historical volatility. In the first quarter of 2005, we used an average term structure of volatility quoted to us by financial institutions, after consideration of historical volatility.
The following table summarizes stock option activity during the first quarter of 2006:
Shares (thousands) | Weighted- | Weighted- | Aggregate | ||||
Outstanding, January 1, 2006 | 627,404 | $33.51 | |||||
Granted | 68,539 | 26.20 | |||||
Exercised | (10,246) | 15.42 | |||||
Forfeited | (2,489) | 31.58 | |||||
Cancelled | (6,890) | 35.78 | |||||
Outstanding, April 2, 2006 | 676,318 | 33.03 | 5.7 | $427 | |||
Vested and expected to vest(a), April 2, 2006 | 666,752 | 33.06 | 5.6 | 427 | |||
Exercisable, April 2, 2006 | 459,142 | 34.12 | 4.3 | 427 |
(a) | The number of options expected to vest takes into account an estimate of expected forfeitures. |
The weighted-average grant date fair value per stock option in the first quarter of 2006 and 2005 was $5.42 and $5.15. The aggregate intrinsic value of stock options exercised in the first quarter of 2006 and 2005 was $105 million and $86 million. Cash received from the exercise of stock options in the first quarter of 2006 and 2005 was $159 million and $102 million, and the related tax benefits realized were $33 million and $23 million. As of April 2, 2006, the total compensation cost related to nonvested stock option awards not yet recognized was $680 million, pre-tax, and the weighted-average period over which the cost is expected to be recognized is 1.7 years.
C. Restricted Stock Units
RSUs, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs, are accounted for at fair value at the date of grant. Most RSUs vest in substantially equal portions each year over five years; the fair value related to each year's portion is then amortized evenly into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate.
All employees may receive RSU grants. In most instances, as per above, RSUs vest over five years of continuous service from the grant date and have a contractual term of five years; for certain members of senior and key management, vesting may occur after three years of continuous service.
The fair value of each RSU grant is estimated on the grant date using the average price of Pfizer common stock on the date of grant.
The following table summarizes RSU activity during the first quarter of 2006:
(thousands of shares) | Shares |
| Weighted-Average |
| |||
Nonvested, January 1, 2006 | 12,803 | $26.89 | |
Granted | 12,635 | 26.15 | |
Vested | (3,268) | 27.28 | |
Reinvested dividend equivalents | 104 | 25.77 | |
Forfeited | (337) | 26.32 | |
Nonvested, April 2, 2006 | 21,937 | 26.38 |
The weighted-average grant date fair value per RSU in the first quarter of 2005 was $26.21. The total fair value of shares vested during the first quarter of 2006 was $89 million. Generally, a major RSU program was initiated in 2005 and, therefore, no significant shares vested in the first quarter of 2005. As of April 2, 2006, the total compensation cost related to nonvested RSU awards not yet recognized was $458 million, pre-tax, and the weighted-average period over which the cost is expected to be recognized is 4.5 years.
D. Performance Share Awards (PSAs) and Performance-Contingent Share Awards (PCSAs)
PSAs in 2006 and PCSAs prior to 2006 entitle the holder to receive, at the end of a vesting term, a number of shares of Pfizer common stock, within a specified range of shares, calculated using a non-discretionary formula, which measures Pfizer's performance relative to an industry peer group. PSAs are accounted for at fair value at the date of grant in the income statement beginning with grants in 2006. Further, PSAs are generally amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expense and Research and development expenses, as appropriate. For grants in 2005 and earlier years, PCSA grants are accounted for using the intrinsic value method in the income statement.
Senior and other key members of management may receive PSA and PCSA grants. In most instances, PSA grants vest after three years and PCSA grants vest after five years of continuous service from the grant date. In certain instances, PCSA grants vest over two to four years of continuous service from the grant date. The vesting terms are equal to the contractual terms.
The 2004 Plan limitations on the maximum amount of share-based awards apply to all awards including PCSA and PSA grants. In 2001, our shareholders approved the 2001 Performance-Contingent Share Award Plan (the 2001 Plan), allowing a maximum of 12.5 million shares to be awarded to all participants. This maximum was applied to awards for performance periods beginning after January 1, 2002 through 2004. The 2004 Plan is the only plan under which share-based awards may be granted in the future.
PSA grants made in 2006 will vest and be paid based on a non-discretionary formula, which measures our performance using relative total shareholder return over a performance period relative to an industry peer group. If our minimum performance in the measure is below the threshold level relative to the peer group, then no shares will be paid. PCSA grants made prior to 2006 will vest and be paid based on a non-discretionary formula, which measures our performance using relative total shareholder return and relative change in diluted earnings per common share (EPS) over a performance period relative to an industry peer group. If our minimum performance in the measures is below the threshold level relative to the peer group, then no shares will be paid.
As of January 1, 2006, we measure PSA grants at fair value using the average price of Pfizer common stock on the date of grant times the target number of shares. The target number of shares is determined by reference to the fair value of share-based awards to similar employees in the industry peer group. We measure PCSA grants at intrinsic value whereby the probable award was allocated over the term of the award, then the resultant shares were adjusted to fair value of our common stock at each accounting period until date of payment.
The following table summarizes PSA and PCSA activity during the first quarter of 2006, with the shares granted representing the maximum award that could be achieved:
(thousands of shares) | Shares |
| Weighted-Average |
| |||
Nonvested, January 1, 2006 | 13,366 | $23.32 | |
Granted | 1,533 | 26.20 | |
Vested | (1,583) | 26.20 | |
Forfeited(a) | (1,513) | 26.20 | |
Nonvested, April 2, 2006 | 11,803 | 25.09 |
(a) | Forfeited includes 345 thousand shares that were forfeited by retirees. At the discretion of the Compensation Committee, of the Company's Board of Directors, $9 million in cash was paid to such retirees, which amount was equivalent to the fair value of the forfeited shares pro rated for the portion of the performance period that was completed prior to retirement. |
The weighted-average grant date intrinsic value per PCSA in the first quarter of 2005 was $26.15. The total intrinsic value of PCSA grants vested during the first quarter of 2006 and 2005 was $50 million and $56 million. As of April 2, 2006, the total compensation cost related to nonvested PSA grants not yet recognized was $18 million, pre-tax, and the weighted-average period over which the cost is expected to be recognized is 2.75 years.
We entered into forward-purchase contracts that partially offset the potential impact on net income of our obligation under the pre-2006 PCSAs. At settlement date we will, at the option of the counterparty to each of the contracts, either receive our own stock or settle the contracts for cash. Other contract terms are as follows:
Per Share | Maximum | ||||
(thousands of shares) | Purchase | April 2, | Dec. 31, | ||
| |||||
3,051 | $33.85 | 0.6 | -- | ||
3,051 | 33.84 | -- | 0.4 |
The financial statements include the following items related to these contracts:
Prepaid expenses and taxes includes:
fair value of these contracts
Other (income)/deductions - net includes:
changes in the fair value of these contracts
E. Restricted Stock
Restricted stock grants, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, and which also entitle the holder to receive dividends paid on such grants, are accounted for at fair value at the date of grant.
Senior and key members of management received restricted stock awards prior to 2005. In most instances, restricted stock grants vest after three years of continuous service from the grant date. The vesting terms are equal to the contractual terms.
These awards have not been significant.
F. Transition Information
The following table shows the effect on results for the first quarter of 2005 as if we had applied the fair-value-based recognition provisions of SFAS 123R to measure stock-based compensation expense for the option grants:
(millions of dollars, except per common share data) | First | |
Net income available to common shareholders used in the calculation of basic earnings per common share: | ||
As reported under GAAP(a) | $ | 299 |
Compensation expense - net of tax(b) | (147) | |
Pro forma | $ | 152 |
Basic earnings per common share: | ||
As reported under GAAP(a) | $ | 0.04 |
Compensation expense - net of tax(b) | (0.02) | |
Pro forma | $ | 0.02 |
Net income available to common shareholders used in the calculation of diluted earnings per common share: | ||
As reported under GAAP(a) | $ | 300 |
Compensation expense - net of tax(b) | (147) | |
Pro forma | $ | 153 |
Diluted earnings per common share: | ||
As reported under GAAP(a) | $ | 0.04 |
Compensation expense - net of tax(b) | (0.02) | |
Pro forma | $ | 0.02 |
(a) | Includes stock-based compensation expense, net of related tax effects, of $15 million. |
(b) | Pro forma compensation expense related to stock options that are subject to accelerated vesting upon retirement is recognized over the period of employment up to the vesting date of the grant. |
Note 13:14. Earnings Per Common Share
Basic and diluted earnings per common share (EPS)EPS were computed using the following common share data:
Three Months Ended | Nine Months Ended | First Quarter | ||||||||||
(millions) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | 2006 | 2005 | ||||||
| ||||||||||||
EPS Numerator - Basic: | ||||||||||||
Income from continuing operations | $ | 1,602 | $ | 3,298 | $ | 5,345 | $ | 8,461 | $ | 4,108 | $ | 272 |
Less: Preferred stock dividends - net of tax | 1 | 1 | 4 | 4 | 1 | 2 | ||||||
Income available to common shareholders from continuing operations | 1,601 | 3,297 | 5,341 | 8,457 | 4,107 | 270 | ||||||
Discontinued operations - net of tax | (13) | 43 | 7 | 75 | 3 | 29 | ||||||
Net income available to common shareholders | $ | 1,588 | $ | 3,340 | $ | 5,348 | $ | 8,532 | $ | 4,110 | $ | 299 |
| ||||||||||||
EPS Denominator - Basic: | ||||||||||||
Weighted-average number of common shares outstanding | 7,333 | 7,501 | 7,372 | 7,554 | 7,314 | 7,416 | ||||||
| ||||||||||||
EPS Numerator - Diluted: | ||||||||||||
Income from continuing operations | $ | 1,602 | $ | 3,298 | $ | 5,345 | $ | 8,461 | $ | 4,108 | $ | 272 |
Less: ESOP contribution - net of tax | 1 | 1 | 3 | 5 | 1 | 1 | ||||||
Income available to common shareholders from continuing operations | 1,601 | 3,297 | 5,342 | 8,456 | 4,107 | 271 | ||||||
Discontinued operations - net of tax | (13) | 43 | 7 | 75 | 3 | 29 | ||||||
Net income available to common shareholders | $ | 1,588 | $ | 3,340 | $ | 5,349 | $ | 8,531 | $ | 4,110 | $ | 300 |
| ||||||||||||
EPS Denominator - Diluted: | ||||||||||||
Weighted-average number of common shares outstanding | 7,333 | 7,501 | 7,372 | 7,554 | 7,314 | 7,416 | ||||||
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock | 49 | 68 | 52 | 88 | ||||||||
Common share equivalents: stock options, stock issuable under employee compensation plans and convertible preferred stock | 10 | 58 | ||||||||||
Weighted-average number of common shares outstanding and common share equivalents | 7,382 | 7,569 | 7,424 | 7,642 | 7,324 | 7,474 |
Outstanding stock options, representing about 563617 million shares and 513579 million shares of common stock during the three-monthfirst quarter of 2006 and nine-month periods ended October 2, 2005, and about 391 million and 319 million shares of common stock during the three-month and nine-month periods ended September 26, 2004, had exercise prices greater than the average market price of our common stock. These options were excluded from the computation of diluted EPS for these periods because their inclusion would have had an antidilutiveanti-dilutive effect.
Also, in the diluted computation, income from continuing operations and net income are reduced by the incremental contribution to the ESOPs, which were acquired as part of our Pharmacia acquisition. This contribution is the after-tax difference between the income that the ESOPs would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding.
Note 14:15. Segment Information
We operate in the following business segments:
Human Health | |
| |
• | The Human Health segment, which represents our pharmaceutical business, includes treatments for cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies. The Human Health segment also includes our contract manufacturing and bulk pharmaceutical chemicals business. |
Consumer Healthcare | |
| |
• | The Consumer Healthcare segment includes self-medications for oral care, |
Animal Health | |
| |
• | The Animal Health segment includes prevention and treatments for diseases in livestock and companion animals. |
Segment profit/(loss) is measured based on income from continuing operations before provision for taxes on income, minority interests and certain costs, such as significant impacts of purchase accounting for acquisitions and restructuring chargesmerger-related costs and merger-related costs.costs related to our AtS productivity initiative. This methodology is utilized by management to evaluate each business. Certain income/(expense) items that are excluded from the operating segments' profit/(loss) are considered corporate items and therefore are included in Corporate/Other.
Revenues and profit/(loss) by segment for the three monthsfirst quarter of 2006 and nine months ended October 2, 2005, and September 26, 2004, follow:
Three Months Ended | Nine Months Ended | First Quarter | ||||||||||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | 2006 | 2005 | ||||||||||||
|
| |||||||||||||||||
Revenues: | ||||||||||||||||||
Human Health | $ | 10,552 | $ | 11,288 | $ | 32,629 | $ | 33,033 | $ | 11,113 | $ | 11,517 | ||||||
Consumer Healthcare | 921 | 851 | 2,835 | 2,524 | 900 | 945 | ||||||||||||
Animal Health | 503 | 475 | 1,576 | 1,387 | 511 | 496 | ||||||||||||
Corporate/Other(a) | 213 | 217 | 665 | 649 | 136 | 133 | ||||||||||||
Total revenues | $ | 12,189 | $ | 12,831 | $ | 37,705 | $ | 37,593 | $ | 12,660 | $ | 13,091 | ||||||
| ||||||||||||||||||
Profit/(loss) | ||||||||||||||||||
Segment profit/(loss) (b) | ||||||||||||||||||
Human Health | $ | 4,876 | $ | 5,332 | $ | 14,811 | $ | 15,269 | $ | 5,745 | $ | 5,378 | ||||||
Consumer Healthcare | 169 | 170 | 457 | 483 | 146 | 159 | ||||||||||||
Animal Health | 85 | 82 | 288 | 237 | 99 | 81 | ||||||||||||
Corporate/Other(a) | (2,933) | (b) | (1,633) | (c) | (7,387) | (b) | (5,481) | (c) | (1,563) | (c) | (2,708) | (d) | ||||||
Total profit/(loss) | $ | 2,197 | $ | 3,951 | $ | 8,169 | $ | 10,508 | $ | 4,427 | $ | 2,910 |
(a) |
|
| |
(b) |
|
| |
(c) | For the |
(d) | For the first quarter of 2005, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $857 million, including acquired in-process R&D charges, incremental intangible asset amortization and other charges, (ii) merger-related costs of $219 million and (iii) costs associated with the |
Revenues for each group of similar products follow:
Three Months Ended | Nine Months Ended | ||||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | % | Oct. 2, | Sept. 26, | % | |||||
| |||||||||||
HUMAN HEALTH | |||||||||||
Cardiovascular and metabolic diseases | $ | 4,467 | $ | 4,251 | 5% | $ | 13,664 | $ | 12,335 | 11% | |
Central nervous system disorders | 1,590 | 2,090 | (24) | 4,718 | 6,072 | (22) | |||||
Arthritis and pain | 545 | 1,274 | (57) | 1,729 | 3,596 | (52) | |||||
Infectious and respiratory diseases | 1,073 | 1,015 | 6 | 3,657 | 3,375 | 8 | |||||
Urology | 629 | 647 | (3) | 1,958 | 1,865 | 5 | |||||
Oncology | 507 | 368 | 38 | 1,499 | 1,049 | 43 | |||||
Ophthalmology | 338 | 304 | 11 | 1,011 | 874 | 16 | |||||
Endocrine disorders | 262 | 226 | 16 | 783 | 668 | 17 | |||||
All other | 874 | 919 | (5) | 2,853 | 2,723 | 5 | |||||
Alliance revenue | 267 | 194 | 38 | 757 | 476 | 59 | |||||
Total Human Health | 10,552 | 11,288 | (7) | 32,629 | 33,033 | (1) | |||||
CONSUMER HEALTHCARE | 921 | 851 | 8 | 2,835 | 2,524 | 12 | |||||
ANIMAL HEALTH | 503 | 475 | 6 | 1,576 | 1,387 | 14 | |||||
OTHER | 213 | 217 | (2) | 665 | 649 | 2 | |||||
Total revenues | $ | 12,189 | $ | 12,831 | (5) | $ | 37,705 | $ | 37,593 | -- |
Three Months Ended | ||||||
(millions of dollars) | April 2, | April 3, |
|
| ||
| ||||||
HUMAN HEALTH | ||||||
Cardiovascular and metabolic diseases | $ | 4,748 | $ | 4,726 | --% | |
Central nervous system disorders | 1,644 | 1,591 | 3 | |||
Arthritis and pain | 640 | 637 | -- | |||
Infectious and respiratory diseases | 937 | 1,482 | (37) | |||
Urology | 663 | 702 | (6) | |||
Oncology | 470 | 479 | (2) | |||
Ophthalmology | 337 | 333 | 1 | |||
Endocrine disorders | 246 | 257 | (4) | |||
All other | 1,104 | 1,068 | 3 | |||
Alliance revenue | 324 | 242 | 34 | |||
Total Human Health | 11,113 | 11,517 | (4) | |||
CONSUMER HEALTHCARE | 900 | 945 | (5) | |||
ANIMAL HEALTH | 511 | 496 | 3 | |||
OTHER | 136 | 133 | 1 | |||
Total revenues | $ | 12,660 | $ | 13,091 | (3) |
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Pfizer Inc:
We have reviewed the condensed consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of OctoberApril 2, 2005,2006, the related condensed consolidated statements of income for the three-month and nine-month periods ended OctoberApril 2, 20052006 and September 26, 2004,April 3, 2005, and the related condensed consolidated statements of cash flows for the nine-monththree-month periods ended OctoberApril 2, 20052006 and September 26, 2004.April 3, 2005. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of December 31, 2004,2005, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2005,2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004,2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
New York, New YorkNovember 9, 2005May 8, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations (MD&A)
Introduction
Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding Pfizer's results of operations, financial condition and cash flows. The MD&A is organized as follows:
• | Overview of Consolidated Operating Results. This section, beginning on page 23, provides a general description of Pfizer's business; discusses significant acquisitions made by Pfizer during the first quarter of 2006; provides information about our operating environment; and summarizes our productivity initiative. |
• | Revenues. This section, beginning on page 25, provides an analysis of our products and revenues for the first quarters of 2006 and 2005, as well as an overview of important product developments. |
• | Costs and Expenses. This section, beginning on page 34, provides a discussion about our costs and expenses. |
• | Provision for Taxes on Income. This section, beginning on page 36, provides a discussion of items impacting our tax provision for the periods presented. |
• | Adjusted Income. This section, beginning on page 36, provides a discussion of an alternative view of performance used by management. |
• | Financial Condition, Liquidity and Capital Resources. This section, beginning on page 40, provides an analysis of our balance sheets as of April 2, 2006 and December 31, 2005, and cash flows for the three months ended April 2, 2006 and April 3, 2005, as well as a discussion of our outstanding debt and commitments that existed as of April 2, 2006 and December 31, 2005. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future commitments. |
• | Outlook. This section, beginning on page 43, provides a discussion of our expectations for 2006. |
• | Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 44 provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this report relating to the financial results, operations and business prospects of the Company. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section is a discussion of Legal Proceedings and Contingencies. |
Components of the Condensed Consolidated Statement of Income follow:
Third Quarter | First Nine Months | First Quarter | |||||||||||||||||||
(millions of dollars, except per common share data) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | 2006 | 2005 | % Change | ||||||||||||
| |||||||||||||||||||||
Revenues | $ | 12,189 | $ | 12,831 | (5) | $ | 37,705 | $ | 37,593 | -- | $ | 12,660 | $ | 13,091 | (3) | ||||||
| |||||||||||||||||||||
Cost of sales | 1,908 | 1,640 | 16 | 6,180 | 5,185 | 19 | 1,973 | 2,191 | (10) | ||||||||||||
% of revenues | 15.7 | % | 12.8 | % | 16.4 | % | 13.8 | % | 15.6 | % | 16.7 | % | |||||||||
| |||||||||||||||||||||
Selling, informational and administrative expenses | 3,931 | 4,036 | (3) | 12,242 | 12,227 | -- | 3,810 | 4,085 | (7) | ||||||||||||
% of revenues | 32.3 | % | 31.5 | % | 32.5 | % | 32.5 | % | 30.1 | % | 31.2 | % | |||||||||
| |||||||||||||||||||||
Research and development expenses | 1,783 | 1,888 | (6) | 5,421 | 5,356 | 1 | 1,588 | 1,764 | (10) | ||||||||||||
% of revenues | 14.6 | % | 14.7 | % | 14.4 | % | 14.2 | % | 12.5 | % | 13.5 | % | |||||||||
| |||||||||||||||||||||
Amortization of intangible assets | 836 | 843 | (1) | 2,576 | 2,496 | 3 | 828 | 882 | (6) | ||||||||||||
% of revenues | 6.9 | % | 6.6 | % | 6.8 | % | 6.6 | % | 6.5 | % | 6.7 | % | |||||||||
| |||||||||||||||||||||
Merger-related in-process research and development charges | 1,390 | -- | * | 1,652 | 955 | 73 | -- | 2 | * | ||||||||||||
% of revenues | 11.4 | % | -- | 4.4 | % | 2.5 | % | -- | % | 0.02 | % | ||||||||||
| |||||||||||||||||||||
Restructuring charges and merger-related costs | 307 | 190 | 62 | 796 | 726 | 10 | 306 | 219 | 40 | ||||||||||||
% of revenues | 2.5 | % | 1.5 | % | 2.1 | % | 1.9 | % | 2.4 | % | 1.7 | % | |||||||||
| |||||||||||||||||||||
Other (income)/deductions - net | (163) | 283 | * | 669 | 140 | 378 | (272) | 1,038 | * | ||||||||||||
| |||||||||||||||||||||
Income from continuing operations before provision for taxes on income and minority interests | 2,197 | 3,951 | (44) | 8,169 | 10,508 | (22) | 4,427 | 2,910 | 52 | ||||||||||||
% of revenues | 18.0 | % | 30.8 | % | 21.7 | % | 28.0 | % | 35.0 | % | 22.2 | % | |||||||||
| |||||||||||||||||||||
Provision for taxes on income | 591 | 650 | (9) | 2,815 | 2,040 | 38 | 315 | 2,635 | (88) | ||||||||||||
| |||||||||||||||||||||
Effective tax rate | 26.9 | % | 16.5 | % | 34.4 | % | 19.4 | % | 7.1 | % | 90.6 | % | |||||||||
| 53 | ||||||||||||||||||||
Minority interests | 4 | 3 | 9 | 7 | 33 | 4 | 3 | 16 | |||||||||||||
| |||||||||||||||||||||
Income from continuing operations | 1,602 | 3,298 | (51) | 5,345 | 8,461 | (37) | 4,108 | 272 | M+ | ||||||||||||
% of revenues | 13.1 | % | 25.7 | % | 14.2 | % | 22.5 | % | 32.5 | % | 2.1 | % | |||||||||
| |||||||||||||||||||||
Discontinued operations - net of tax | (13) | 43 | * | 7 | 75 | (91) | 3 | 29 | (90) | ||||||||||||
| |||||||||||||||||||||
Net income | $ | 1,589 | $ | 3,341 | (52) | $ | 5,352 | $ | 8,536 | (37) | $ | 4,111 | $ | 301 | M+ | ||||||
% of revenues | 13.0 | % | 26.0 | % | 14.2 | % | 22.7 | % | 32.5 | % | 2.3 | % | |||||||||
| |||||||||||||||||||||
Earnings per common share - Basic: | |||||||||||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.44 | (50) | $ | 0.73 | $ | 1.12 | (35) | $ | 0.56 | $ | 0.04 | M+ | ||||||
Discontinued operations - net of tax | -- | 0.01 | * | -- | 0.01 | * | -- | -- | * | ||||||||||||
Net income | $ | 0.22 | $ | 0.45 | (51) | $ | 0.73 | $ | 1.13 | (35) | $ | 0.56 | $ | 0.04 | M+ | ||||||
| |||||||||||||||||||||
Earnings per common share - Diluted: | |||||||||||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.43 | (49) | $ | 0.72 | $ | 1.11 | (35) | $ | 0.56 | $ | 0.04 | M+ | ||||||
Discontinued operations - net of tax | -- | 0.01 | * | -- | 0.01 | * | -- | -- | * | ||||||||||||
Net income | $ | 0.22 | $ | 0.44 | (50) | $ | 0.72 | $ | 1.12 | (36) | $ | 0.56 | $ | 0.04 | M+ | ||||||
| |||||||||||||||||||||
Cash dividends paid per common share | $ | 0.19 | $ | 0.17 | $ | 0.57 | $ | 0.51 | |||||||||||||
Cash dividends paid per common - share | $ | 0.24 | $ | 0.19 | |||||||||||||||||
| |||||||||||||||||||||
* Calculation not meaningful | |||||||||||||||||||||
M+ Change greater than one thousand percent. |
OVERVIEW OF OUR CONSOLIDATED OPERATING RESULTS
Our Business
We are a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines for humans and animals, as well as many of the world's best known consumer healthcare products. Our longstanding value proposition has been to prove that our medicines cure or treat disease, including symptoms and suffering, and this remains our core mission. We have expanded our value proposition to also show that our medicines not only can our medicines cure or treat disease, but that they can also can markedly improve health systems by reducing overall healthcare costs, improving societies' economic well-being and increasing effective prevention and treatment of disease. We generate revenue through the sale of our products, as well as through alliance agreements by copromotingco-promoting products discovered by other companies.
Acquisitions
On September 14, 2005,February 28, 2006, we completed the acquisition of allthe sanofi-aventis world-wide rights, including patent rights and production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the outstanding shares of Vicuron Pharmaceuticals, Inc. (Vicuron), a biopharmaceutical company focused on the development of novel anti-infectives,insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.9$1.4 billion in cash (including transaction costs). Vicuron has two products currently under New Drug Application (NDA) review byIn connection with the U.S. Food and Drug Administration (FDA): anidulafungin for fungal infections and dalbavancin for Gram-positive infections. The allocationacquisition, as part of theour preliminary purchase price includes in-process research and developmentallocation, we recorded an intangible asset for developed technology rights of approximately $1.4$1.0 billion, which was expensed and included in Merger-related in-process research and development charges,inventory valued at $218 million and goodwill of $243approximately $166 million, all of which hashave been allocated to our Human Health segment. NeitherThe amortization of these items is deductible for tax purposes.
On April 12, 2005, we completedthe developed technology rights will be primarily included in Cost of Sales. Given the size and complexity of the acquisition, of Idun Pharmaceuticals, Inc. (Idun), a biopharmaceutical company focused on the discoveryfair valuation and development of therapiesallocation work is still being finalized and is expected to control apoptosis, and on August 15, 2005,be substantially complete in the second quarter. To the extent that our estimates need to be adjusted, we completedwill do so.
Prior to the acquisition, of all outstanding shares of Bioren Inc. (Bioren), which focuses on technology for optimizing antibodies. The aggregate cost of these and other smaller acquisitions was approximately $340 million for the nine months ended October 2, 2005.
On February 10, 2004,in connection with our collaboration agreement with sanofi-aventis, we completed the acquisition of all the outstanding shares of Esperion Therapeutics, Inc., (Esperion),recorded a biopharmaceutical company, for $1.3 billion in cash (including transaction costs). The allocation of the purchase price included in-process research and development milestone due to us from sanofi-aventis of $920approximately $118 million ($71 million, after tax) in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).
In April 2006, we entered into an agreement to acquire Rinat Neurosciences Corp., which was expensed, and goodwill of $235 million, which was allocated to our Human Health segment. Neither of these items was deductible for tax purposes. The aggregate cost of other smaller acquisitions was approximately $170 millionis developing therapeutic proteins for the nine months ended September 26, 2004.treatment of central-nervous-system disorders, including an approach to alter the progression of Alzheimer's disease. In addition, in April 2006, we reached an agreement with Schwarz Pharma AG to acquire exclusive worldwide rights to fesoterodine, a new drug candidate for treatment of overactive bladder.
Our Operating Environment
We are navigating a period of significant change for the Company. Aggressive cost-cutting efforts, coupled with investments in business development and significantly improved research and development (R&D) productivity, are preparing us to transition to the next-generation Pfizer. Our strategy of driving growth in our in-line medicines and investing in promising new medicines is the essence of the new Pfizer.
We continue to face a dynamically challenging and dynamically changing environment in our pharmaceutical business, including the loss of exclusivity of major products, continuing pressures onuncertainty concerning selective COX-2 inhibitor products, the increasing regulatory scrutiny of drug safety, the adoption of new direct-to-consumer advertising guidelines and lower prescription growth rates and increased competition in certain therapeutic areas.
Our performance in 20052006 has been, and will continue to be, impacted by loss of U.S. exclusivity of four major products --Neurontin, Diflucan Neurontin, and Accupril/Accuretic duringin 2004 and Zithromax in November 2005. In addition, we face the loss of U.S. exclusivity for Zoloft duringat the end of the second quarter of 2006 and Norvasc and Zyrtec during 2007. These seven products represented 33%29% of our Human Health revenues and 29%25% of our total revenues for the year ended December 31, 2004.2005. In addition, some of our products face competition in the form of new branded products or generic drugs, which treat similar diseases or indications. We have been able to limit the impact on revenues by highlighting the proven track record of safety and efficacy of our products. For example, the success of Lipitor is the result of an unprecedented array of clinical data supporting both efficacy and safety. Revenues in 20052006 have also been, and may continue to be, impacted by publicity and regulatory actionsuncertainty regarding selective COX-2 inhibitor products (see further discussion in the section "Selected Product Descriptions"). Our total revenues decreased 5% in the third quarter of 2005 and were flat3% in the first nine monthsquarter of 20052006 as compared to the same periodsperiod in 2004.2005.
Partially offsetting these impacts in the first nine monthsquarter of 20052006 was the solid aggregate performance in the aggregate of the balance of our broad portfolio of patent-protected medicines. Our portfolio of medicines includes fivethree of the world's 25 best-selling medicines, with 11four medicines that lead their therapeutic areas. Our results reflect two underlying forces. First, Pfizer markets the broadest array of in-line and recently launched products in the industry; and second, Pfizer is a business going through a process of reinventing itself.transformation. We are addressing the loss of exclusivity of a number of products by advancing a number of internally developed, in-licensed and copromotedco-promoted product candidates. During 2006, we expect to launch six new medicines--Exubera, Sutent and Eraxis, which already have been approved by the FDA, and varenicline, Zeven and indiplon, which are under review by the FDA.
We believe we have important competitive advantages that will serve us well and distinguish us from others in our industry. Our product portfolio and pipeline demonstrate the benefits of Pfizer's scale and our skill at leveraging the opportunities it provides us. Scale also enhances our status as 'partner of choice' with other companies who have promising product candidates and technologies, as well as giving us influence as a global purchaser of goods and services. We continue to build on and enhance our Research & Development capabilities through acquisitions and collaborations; and throughcollaborations. Through targeted acquisitions, licensing opportunities and internal development, we are augmenting our commercial portfolio. We have also made progress with our Adapting to Scale initiative, which is a focused, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the section "Adapting to Scale Productivity Initiative and Merger-Related Synergies.")
We believe that our strategic and operating flexibility allows us to marshal and focus resources when and where they are needed, to change with a changing environment and to recognize and seize emerging opportunities.
Adapting to Scale Productivity Initiative and Merger-Related Synergies
During 2005 and the second and third quartersfirst quarter of 2005,2006, we made progress with our multi-year productivity initiative, called Adapting to Scale (AtS), designed to increase efficiency and streamline decision makingdecision-making across the Company. This initiative, first announcedlaunched in Aprilearly 2005, follows the integration of Warner-Lambert and Pharmacia Corporation (Pharmacia), which resulted in the tripling of Pfizer's revenues over the past fivesix years. The integration of those two companies will resultresulted in a combined expense reduction of approximately $6 billion, inclusive of $4.2 billion in Pharmacia-related synergies that will be achieved this year. The new AtS productivity initiative is expected to yield $4 billion in cost savings on an annual basis by 2008, based on a top-to-bottom business review completed during the first half of 2005.billion.
During 2005, we anticipateWe now expect that cost savings from our AtS productivity initiative will exceed $600 million, greater than previously forecasted, mainly attributable to the Human Health business. We expect that annual cost savings will accelerate over the following three years, with aboutbe at least $2 billion in savings targeted for 2006, about $3.5 billion in 2007 andgrowing to about $4 billion annually upon completion in 2008. These savings are expected to be realized in procurement, operating expenses and facilities, among other sources. We plan to use the cost savings we generate, in part, to fund key investments, including new product launches and the development of the many promising new medicines in our pipeline. The Company expects that the aggregate cost of implementing this initiative through 2008 will be approximately $4 billion to $5 billion on a pre-tax basis.
While some projects are already underway, during the fourth quarterProjects in various stages of 2005, we will continue to accelerate the implementation of changes, including:include:
• | Reorganizing Pfizer Global Research & Development (PGRD) to increase efficiency and effectiveness in bringing new therapies to patients-in-need while reducing the cost of research and development. PGRD |
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• | Continuing our optimization of Pfizer Global Manufacturing's plant network, which began with the acquisition of Pharmacia, to ensure that the Company's manufacturing facilities are aligned with current and future product needs. |
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• | Realigning our European marketing teams and implementing initiatives designed to improve the effectiveness of our field force in Japan. During |
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• | Pursuing savings in information technology resulting from significant reductions in application software (already reduced from |
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• | Reducing costs in purchased goods and services. Purchasing initiatives will focus on rationalizing suppliers, leveraging the approximately $16 billion of goods and services that Pfizer purchases annually, improving demand management to optimize levels of outside services needed and strategic sourcing from lower-cost sources. For example, savings from demand management will be derived in part from reductions in travel, entertainment, consulting and other external service expenses. Facilities savings are being found in site rationalization, energy conservation, and renegotiated service contracts. |
REVENUES
Total revenues decreased 5% in the third quarter and were flat3% in the first nine monthsquarter of 2005,2006, as compared to the same periodsperiod in 2004. The revenue decrease reflects the loss of exclusivity of key products and regulatory actions on the selective COX-2 inhibitors and other nonspecific non-steroidal anti-inflammatory drug (NSAID) products, which has resulted in a significant decline in prescription volume in the arthritis market. The decrease also reflects lower prescription growth and increased competition in key markets in the U.S., such as the lipid-lowering market, where the rate of growth in the third quarter declined significantly versus the first half of the year; and the erectile-dysfunction market, which has been in decline compared to 2004. In addition, although we anticipate a positive long-term impact of our initiative designed to increase the efficiency of our U.S. Human Health field force through stronger alignment with our customers (completed in September 2005), the short-term impact was a tempering of revenue performance in the third quarter. Partially offsetting these impacts in the first nine months of 2005, was the solid performance in the aggregate of the balance of our broad portfolio of patent-protected medicines.primarily due to:
• | the loss of U.S. exclusivity of Zithromax in November 2005; |
• | the continued decline in sales of Neurontin, Diflucan and Accupril/Accuretic, which lost U.S. exclusivity in 2004; |
• | the suspension of sales of Bextra in the second quarter of 2005; |
• | the strengthening of the U.S. dollar relative to many foreign currencies; |
• | lower revenue for Zoloft, which has lost exclusivity in many European markets and will lose U.S. exclusivity at the end of the second quarter of 2006; and |
• | lower revenue for Viagra, reflecting increased competition and declining overall erectile-dysfunction sales in several major markets; |
partially offset by: | |
• | the solid aggregate performance in the balance of our broad portfolio of patent-protected medicines; and |
• | revenues from new products launched in 2005 and the first quarter of 2006. |
Changes in foreign exchange rates increased revenues in the third quarter of 2005 by $175 million, or 1.4%, and increaseddecreased total revenues in the first nine monthsquarter of 20052006 by $909$377 million, or 2.4%3%, compared to the same periodsperiod in 2004.2005. The foreign exchange impact on the thirdfirst quarter and first nine months of 20052006 revenue comparisonscomparison to the same periodsperiod in 20042005 was due to the weakeningstrengthening of the U.S. dollar relative to many foreign currencies, especially the euro. We expect 2005 revenueseuro which accounted for about 62% of the full year, at current foreign exchange rates, to evidence a modest decline relative to 2004, although a somewhat larger decline than previously anticipated, reflecting lower U.S. Human Health revenues.impact in the first quarter of 2006.
The impact of price changes on revenues was 3.2% in the thirdfirst quarter of 2005 and 2.8% in the first nine months of 2005.2006.
The loss of patent protection with respect to any of our major products could have a material adverse effect on revenue and net income. We expect a substantial adverse impact from the loss of exclusivity of certain major products over the next few years.
Deductions from Revenues
As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations.organizations with respect to our pharmaceutical products. These deductions represent estimates of the related liabilitiesobligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual have not been material; on a quarterly basis, they generally have been less than 0.5% of Human Health net sales and can result in either a net increase or a net decrease to income.
Rebates under Medicaid and related state programs reduced revenues by $257$205 million in the first quarter of 2006 and $956$375 million forin the three months and nine months ended October 2, 2005 and $338 million and $1.0 billion for the three months and nine months ended September 26, 2004.first quarter of 2005. Performance-based contracts also provide for rebates to several customers. Contractcontract rebates reduced revenues by $513$544 million in the first quarter of 2006 and $1.7 billion for$587 million in the three months and nine months ended October 2, 2005 and $501 million and $1.5 billion for the three months and nine months ended September 26, 2004.first quarter of 2005. These contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold. Chargebacks (primarily discounts to U.S. federal government agencies) reduced revenues by $324$352 million in the first quarter of 2006 and $916$294 million forin the three months and nine months ended October 2, 2005 and $290 million and $864 million for the three months and nine months ended September 26, 2004.first quarter of 2005.
Our accruals for Medicaid rebates, contract rebates and chargebacks totaled $1.7$1.8 billion at OctoberApril 2, 20052006 and December 31, 2004.2005.
Revenues by Country
Revenues by country for the thirdfirst quarter and first nine months of 20052006 and the changes from the same periodsperiod in 20042005 follow:
Third Quarter | First Quarter | ||||||||||||||||||||||
(millions of dollars) | 2005 | % of | 2004 | % of | % | 2006 | % of | 2005 | % of | % | |||||||||||||
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United States | $ | 6,395 | 52.5 | % | $ | 7,377 | 57.5 | % | (13)% | $ | 7,067 | 55.8 | $ | 6,974 | 53.3 | 1 | |||||||
Japan | 848 | 7.0 | 760 | 5.9 | 12 | 716 | 5.7 | 882 | 6.7 | (19) | |||||||||||||
All other | 4,946 | 40.5 | 4,694 | 36.6 | 5 | 4,877 | 38.5 | 5,235 | 40.0 | (7) | |||||||||||||
Consolidated | $ | 12,189 | 100.0 | % | $ | 12,831 | 100.0 | % | (5) | $ | 12,660 | 100.00 | $ | 13,091 | 100.00 | (3) | |||||||
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First Nine Months | |||||||||||||||||||||||
(millions of dollars) | 2005 | % of | 2004 | % of | % | ||||||||||||||||||
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United States | $ | 19,558 | 51.9 | % | $ | 21,122 | 56.2 | % | (7)% | ||||||||||||||
Japan | 2,631 | 7.0 | 2,309 | 6.1 | 14 | ||||||||||||||||||
All other | 15,516 | 41.1 | 14,162 | 37.7 | 10 | ||||||||||||||||||
Consolidated | $ | 37,705 | 100.0 | % | $ | 37,593 | 100.0 | % | -- |
Geographic Revenues by Segment
Geographic revenues by segment for the thirdfirst quarter and first nine months of 20052006 and the changes from the same periodsperiod in 20042005 follow:
Third Quarter | ||||||||||||||||||||||||
Revenues | % Change in Revenues | First Quarter | % Change in Revenues | |||||||||||||||||||||
U.S. | International | U.S. | International | U.S. | International | U.S. | International | |||||||||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 05/04 | 05/04 | 2006 |
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Human Health | $ | 5,609 | $ | 6,619 | $ | 4,943 | $ | 4,669 | (15)% | 6% | $6,340 | $6,229 | $4,773 | $5,288 | 2 | (10) | ||||||||
Consumer Healthcare | 493 | 453 | 428 | 398 | 9 | 8 | 451 | 483 | 449 | 462 | (6) | (3) | ||||||||||||
Animal Health | 228 | 231 | 275 | 244 | (1) | 12 | 229 | 219 | 282 | 277 | 4 | 2 | ||||||||||||
Other | 65 | 74 | 148 | 143 | (14) | 4 | 47 | 43 | 89 | 90 | 10 | (3) | ||||||||||||
Total Revenues | $ | 6,395 | $ | 7,377 | $ | 5,794 | $ | 5,454 | (13) | 6 | $7,067 | $6,974 | $5,593 | $6,117 | 1 | (9) | ||||||||
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First Nine Months | ||||||||||||||||||||||||
Revenues | % Change in Revenues | |||||||||||||||||||||||
U.S. | International | U.S. | International | |||||||||||||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 05/04 | 05/04 | ||||||||||||||||||
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Human Health | $ | 17,203 | $ | 18,967 | $ | 15,426 | $ | 14,066 | (9)% | 10% | ||||||||||||||
Consumer Healthcare | 1,439 | 1,290 | 1,396 | 1,234 | 12 | 13 | ||||||||||||||||||
Animal Health | 710 | 647 | 866 | 740 | 10 | 17 | ||||||||||||||||||
Other | 206 | 218 | 459 | 431 | (5) | 6 | ||||||||||||||||||
Total Revenues | $ | 19,558 | $ | 21,122 | $ | 18,147 | $ | 16,471 | (7) | 10 |
Human Health
Pfizer's Human Health business continued to show solid performance in many of our products, although revenue declines from loss of exclusivity on major products, the impact of foreign exchange and other challenges to revenue more than offset that performance.
Pfizer's Human Health worldwide revenues declined 7%4% in the thirdfirst quarter of 20052006 compared to the third quartersame period of 2004 and 1% year-to-date.2005. In the U.S., Human Health revenues declined 15%increased 2% in the thirdfirst quarter of 2006 compared to the same period of 2005. The decline in Human Health revenue internationally of 10% is attributable to the unfavorable impact of foreign exchange of $338 million (7% of the decline). Also contributing to the decline in Human Health international revenue is a 32% decline in international sales of Celebrex in the first quarter 2006, due to strong sales in the beginning of the first quarter of 2005 comparedrelated to the thirdVioxx withdrawal.
The first quarter of 2004 and 9% year-to-date. The loss of exclusivity on key products (primarily Neurontin) has resulted in a decline in third-quarter worldwide revenues of approximately $800 million and year-to-date worldwide revenues of approximately $2.4 billion in comparison to the same periods in the prior year. The regulatory actions relating to Celebrex and the suspension of sales of Bextra have contributed to an additional decline in third-quarter 2005 selective COX-2 inhibitor worldwide revenues of $754 million (down 67%) and year-to-date selective COX-2 inhibitor worldwide revenues of $2.0 billion (down 62%) in comparison to the same periods in the prior year.
The third quarter of 20052006 was also impacted by increased competition and the overall market decline foras branded prescriptions in the U.S. Branded prescriptionsdeclined 3.6% in the U.S. declined 3% in the thirdfirst quarter of 2005 relative to the third quarter of 2004. The third quarter of 2005 also exhibited a significant change in growth trends relative2006 compared to the first halfquarter of 2005.
Our in-line medicines are continuing to drive performance; recent and upcoming launches of new medicines will replenish and expand the yearportfolio as older medicines lose exclusivity.
($ millions, except % growth) | Human Health | Impact on Total | ||
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In-Line Products(a) and New Products(b) | $10,561 | 2 | % | |
Loss-of-exclusivity products and Bextra(c) | 552 | (6) | ||
Total Human Health revenues | $11,113 |
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(a) | In-Line Products is defined as first-quarter 2006 worldwide revenues of all Human Health products other than those referred to in notes (b) and (c). |
(b) | New Products is defined as first-quarter 2006 worldwide revenues of products launched since the beginning of 2004--Caduet, Inspra, Lyrica, Macugen, Olmetec, Onsenal, Revatio, Sutent, and Zmax. |
(c) | Loss-of-Exclusivity Products and Bextra is defined as first-quarter 2006 worldwide revenues of products that have lost U.S. exclusivity since the beginning of 2004--Accupril/Accuretic, Diflucan, Neurontin, and Zithromax--and of Bextra, sales of which were suspended in |
Revenue information for several of our major Human Health products which includes three additional business days in our fiscal calendar in the first quarter and nine months of 2005 compared to the same periods in 2004, follows:follow:
Third Quarter | First Nine Months | First Quarter | ||||||||||
(millions of dollars) | Primary Indications | 2005 | % Change | 2005 | % Change | Primary Indications | 2006 |
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Cardiovascular and | ||||||||||||
Lipitor | Reduction of LDL cholesterol | $2,897 | 6 % | $8,829 | 16 % | Reduction of LDL cholesterol | $3,107 | 1% | ||||
Norvasc | Hypertension | 1,131 | 9 | 3,462 | 8 | Hypertension | 1,183 | 1 | ||||
Cardura | Hypertension/Benign prostatic hyperplasia | 132 | (12) | 441 | (4) | Hypertension/Benign prostatic hyperplasia | 126 | (18) | ||||
Caduet | Reduction of LDL cholesterol and hypertension | 77 | 147 | |||||||||
Accupril/Accuretic | Hypertension/Congestive heart failure | 77 | (51) | 250 | (50) | Hypertension/Congestive heart failure | 68 | (32) | ||||
Caduet | Reduction of LDL cholesterol and hypertension | 48 | 927 | 121 | 249 | |||||||
Central nervous | ||||||||||||
Zoloft | Depression and anxiety disorders | 807 | 1 | 2,448 | 2 | Depression and certain anxiety disorders | 779 | (8) | ||||
Lyrica | Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy | 192 | 860 | |||||||||
Geodon/Zeldox | Schizophrenia and acute manic or mixed episodes associated with bipolar disorder | 182 | 32 | |||||||||
Neurontin | Epilepsy and post-herpetic neuralgia | 155 | (80) | 498 | (78) | Epilepsy and post-herpetic neuralgia | 127 | (30) | ||||
Geodon | Schizophrenia and acute manic or mixed episodes associated with bipolar disorder | 148 | 18 | 430 | 33 | |||||||
Aricept(a) | Alzheimer's disease | 82 | (3) | |||||||||
Xanax/Xanax XR | Anxiety/Panic disorders | 101 | -- | 306 | 13 | Anxiety/Panic disorders | 82 | (20) | ||||
Aricept** | Alzheimer's disease | 85 | 11 | 255 | 15 | |||||||
Lyrica | Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy | 80 | M+ | 139 | M+ | |||||||
Relpax | Migraine headaches | 67 | 42 | 170 | 49 | Migraine headaches | 66 | 24 | ||||
Arthritis and pain: | ||||||||||||
Celebrex | Arthritis pain and inflammation, acute pain | 446 | (44) | 1,258 | (45) | Arthritis pain and inflammation, acute pain | 491 | 19 | ||||
Bextra | Arthritis pain and inflammation | (73) | * | (59) | * | Arthritis pain and inflammation | -- | * | ||||
Infectious and | ||||||||||||
Zithromax/Zmax | Bacterial infections | 402 | 19 | 1,623 | 38 | Bacterial infections | 259 | (67) | ||||
Zyvox | Bacterial infections | 157 | 30 | 453 | 38 | Bacterial infections | 186 | 30 | ||||
Vfend | Fungal infections | 106 | 54 | 285 | 40 | Fungal infections | 117 | 33 | ||||
Diflucan | Fungal infections | 103 | (52) | 370 | (54) | Fungal infections | 107 | (23) | ||||
Urology: | ||||||||||||
Viagra | Erectile dysfunction | 386 | (4) | 1,215 | 1 | Erectile dysfunction | 390 | (11) | ||||
Detrol/Detrol LA | Overactive bladder | 231 | -- | 705 | 14 | Overactive bladder | 260 | 3 | ||||
Oncology: | ||||||||||||
Camptosar | Metastatic colorectal cancer | 229 | 81 | 674 | 85 | Metastatic colorectal cancer | 212 | -- | ||||
Ellence | Breast cancer | 86 | -- | 273 | 7 | Breast cancer | 73 | (19) | ||||
Aromasin | Breast cancer | 63 | 61 | 176 | 88 | Breast cancer | 70 | 26 | ||||
Sutent | Metastatic renal cell carcinoma (mRCC) and malignant gastrointestinal stromal tumors (GIST) | 16 | * | |||||||||
Ophthalmology: | ||||||||||||
Xalatan/Xalacom | Glaucoma and ocular hypertension | 338 | 11 | 1,011 | 16 | Glaucoma and ocular hypertension | 337 | 1 | ||||
Endocrine disorders: | ||||||||||||
Genotropin | Replacement of human growth hormone | 200 | 14 | 604 | 13 | Replacement of human growth hormone | 197 | (3) | ||||
All other: | ||||||||||||
Zyrtec/Zyrtec-D | Allergies | 338 | 2 | 1,035 | 10 | Allergies | 421 | 23 | ||||
Alliance revenue: | ||||||||||||
Aricept, Macugen, Mirapex, Olmetec, Rebif and Spiriva | Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson's disease (Mirapex), hypertension (Olmetec), multiple sclerosis (Rebif), chronic obstructive pulmonary disease (Spiriva) | 267 | 38 | 757 | 59 | Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson's disease (Mirapex), hypertension (Olmetec), multiple sclerosis (Rebif), chronic obstructive pulmonary disease (Spiriva) | 324 | 34 |
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| Represents direct sales under license agreement with Eisai Co., Ltd. |
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Certain amounts and percentages may reflect rounding adjustments. |
SelectedHuman Health--Selected Product Descriptions:
• | Lipitor, for the treatment of elevated cholesterol levels in the blood, is the most widely used treatment for lowering cholesterol and the best-selling pharmaceutical product of any kind in the |
Lipitor began to face competition in the U.S. | |
New clinical findings continue to demonstrate the benefit of Lipitor on a wide range of endpoints, helping to support its differentiation versus the competition and maintain its rank as the world's top-selling medicine. Data from a | |
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• | Norvasc is the world's most-prescribed branded medicine for treating hypertension. It achieved |
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• | Zoloft, which has lost exclusivity in many European markets and will lose U.S. market exclusivity at the end of the second quarter of 2006, experienced an 8% revenue decline in the first quarter of 2006 compared to the same period in 2005. It is the most-prescribed antidepressant in the U.S. It is indicated for the treatment of major depressive disorder, panic disorder, obsessive-compulsive disorder (OCD) in adults and children, post-traumatic stress disorder (PTSD), premenstrual dysphoric disorder (PMDD) and social anxiety disorder (SAD). Zoloft is approved for acute and long-term use in all of these indications, with the exception of |
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The U.S. Patent and Trademark Office granted a five-year extension to the Geodon U.S. patent, extending its exclusivity to 2012. | |
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• | Lyrica achieved $192 million in worldwide revenue in the first quarter of 2006. It was approved by the European Commission on March 27, 2006, to treat generalized anxiety disorder (GAD) in adults, thereby providing a new treatment option for the approximately 12 million Europeans living with GAD. |
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Lyrica was approved by the FDA in June 2005 for adjunctive therapy for adults with partial onset seizures. This | |
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• | Celebrex and Bextra |
Celebrex achieved a 19% increase in worldwide sales in the first quarter of 2006 compared to the same period in 2005. Strong clinical data continue to support Celebrex as an important medicine for patients with arthritis. The SUCCESS-1 study (Successive Celecoxib Efficacy and Safety Study), recently published in the American Journal of Medicine, showed that people with osteoarthritis who take Celebrex experience significantly fewer gastrointestinal problems than patients who take non-specific non-steroidal anti-inflammatory drugs. | |
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It was this gastrointestinal profile that led researchers to choose high-dose Celebrex for investigational trials in the area of chemoprevention. The first efficacy data from two of these long-term clinical studies -- Adenoma Prevention with Celecoxib (APC) and Prevention of Sporadic Adenomatous Polyps (PreSAP) -- were presented in April 2006 at the American Association for Cancer Research meeting. These studies showed that Celebrex helps stop the regrowth of pre-cancerous polyps (adenomas) that can lead to colon cancer. The final cardiovascular safety results from these long-term polyp studies are consistent with the current Celebrex label. | |
Pfizer began to reintroduce branded advertising in April 2006, in alignment with our new Direct-to-Consumer (DTC) advertising principles, highlighting Celebrex's unique clinical profile and benefits. In July 2005, the FDA approved a sixth indication for Celebrex --ankylosing spondylitis -- a form of spinal arthritis that affects more than one million people in the U.S. | |
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On April 7, 2005, the FDA announced a decision to require boxed warnings of potential cardiovascular risk for all COX-2 pain relievers and all prescription | |
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In June 2005, the Committee for Human Medicinal Products (CHMP) concluded its COX-2 referral process and recommended that both Celebrex and Dynastat (parecoxib) remain available to patients. The European Medicines Evaluation Agency (EMEA) | |
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• | Zithromax |
• | Zmax,a single-dose, sustained-release form of azithromycin for adults, was introduced in the U.S. in |
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• | Viagra remains the leading treatment for erectile dysfunction and one of the world's most recognized pharmaceutical brands, with more than |
Viagra sales declined 11% worldwide in the first quarter of 2006 compared to the same period in 2005, reflecting aggressive competition and declining overall erectile dysfunction sales in | |
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• | Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is the most-prescribed branded glaucoma medicine in the world. Clinical data showing its advantages in treating intra-ocular pressure compared with beta blockers should support the continued growth of this important medicine. Xalacom, the only fixed combination prostaglandin (Xalatan) and beta blocker, is available primarily in European markets. Xalatan/Xalacom sales grew 1% in the first quarter of 2006 compared to the same period in 2005. |
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• | Zyrtecprovides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec continues to be the most-prescribed antihistamine in the U.S. in a challenging market. The 23% increase in sales in the first |
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Consumer Healthcare
Revenues of our Consumer Healthcare business which include three additional business days in our fiscal calendar in the first quarter and nine months of 20052006 compared to the same periodsperiod in 2004,2005 follow:
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Consumer Healthcare | $ | 921 | $ | 851 | 8% | $ | 2,835 | $ | 2,524 | 12% | $ | 900 | $ | 945 | (5) |
On February 7, 2006, we announced that we are exploring strategic options for our Consumer Healthcare business, including possible sale or spin-off of the business. We expect to reach a decision by the end of the third quarter of 2006.
The increasedecrease in Consumer Healthcare revenues in the thirdfirst quarter and first nine months of 2005,2006, as compared to the same periodsperiod in 2004,2005, was attributable to:
• | a 36% decrease in Zantac reflecting the |
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Animal Health
Revenues of our Animal Health business which include three additional business days in our fiscal calendar in the first quarter and nine months of 20052006 compared to the same periodsperiod in 2004,2005 follow:
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Livestock products | $ | 301 | $ | 287 | 5% | $ | 958 | $ | 840 | 14% | $ | 312 | $ | 303 | 3 | |
Companion animal products | 202 | 188 | 8 | 618 | 547 | 13 | 199 | 193 | 3 | |||||||
Total Animal Health | $ | 503 | $ | 475 | 6 | $ | 1,576 | $ | 1,387 | 14 | $ | 511 | $ | 496 | 3 |
The increase in Animal Health revenues in the thirdfirst quarter and first nine months of 2005,2006, as compared to the same periodsperiod in 2004,2005, was attributable to:
• | in livestock, the continued performance of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe and in the U.S. |
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• | in companion animal, increased promotional activities throughout our markets resulted in Revolution (a parasiticide for dogs and |
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• | a decline in sales of Rimadyl due to a slow-down in the |
• | the unfavorable impact of the |
COSTS AND EXPENSES
Cost of Sales
Cost of sales grew 16% in the third quarter of 2005 and 19% for the first nine months of 2005, and increased as a percentage of revenues, as compared with the prior year periods. The increases reflect unfavorable geographic, segment and product mix, and adverse changes in production volume, among other factors. In the first quarter of 2005, we also recorded charges for write-offs of inventory and exit costs related to the suspension of Bextra sales (see Note 2, Asset Impairment Charge and Other Costs Associated with the Suspension of Bextra Sales).
Cost of sales as a percentage of revenues will remain under pressure throughout the remainder of 2005.
Selling, Informational and Administrative Expenses
Selling, informational and administrative expenses decreased 3% in the third quarter and were flat in the first nine months of 2005, as compared to the same periods in 2004, reflecting an increase in merger-related synergies, and the impact of the Company's AtS productivity initiative, partially offset by the unfavorable impact of foreign exchange.
Research and Development Expenses
Research and development (R&D) expenses decreased 6% in the third quarter and increased 1% in the first nine months of 2005, as compared to the same periods in 2004. The decline in the third quarter of 2005 reflects the initial benefits associated with the AtS productivity initiative and changes in year-over-year timing of various expenses.
Product Developments
We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. We have a broad and deep pipeline of medicines in development. However, there are no assurances as to when, or if, we will receive regulatory approval for additional indications for existing products or any of our other products in development.
Certain significant regulatory actions by, and filings pending with, the FDA and other regulatory authorities follow:
Recent FDA Approvals:
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We continue to expect to launch Exubera in the U.S. about mid-year 2006 and we will be launching Exubera in certain European countries shortly.
Pending U.S. New Drug Applications (NDAs) and Supplemental Filings:
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Aricept | Treatment of severe Alzheimer's disease | August | |
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Vfend | Pediatric filing | June 2005 | |
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Indiplon | Modified-release tablets for treatment of multiple aspects of insomnia | May 2005 | |
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Norvasc | Reduction of cardiovascular risk, including risk of coronary heart disease, myocardial infarction, cardiovascular procedures and strokes | August 2004 | |
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In September 2005, weWe received "not-approvable" letters from the FDA for Oporia for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We are currently in discussions with the FDA regarding these letters, and we continue to develop Oporia. In March 2006, we received a "not-approvable" letter for Fragmin for use in oncology patients, and we are currently in discussions with the FDA regarding this letter as well. In September 2005, we received a "not-approvable" letter for Dynastat (parecoxib), an injectable prodrug for valdecoxib for the treatment of acute pain. PfizerWe have had discussions with the FDA regarding this letter, and we are developing plans to discuss these "not-approvable" letters withseek to address the FDA.FDA's concerns
In September 2005, an FDA advisory committee recommended thatJanuary 2006, the FDA approve Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes. The FDA is not obligated to follow the recommendation of the advisory committee. In October 2005, the FDA extended the review period for Exubera to study more data on the diabetes treatment.
An NDA for Sutent, a novel multi-targeted oral compound for treatment of metastatic renal cell carcinoma (mRCC) and malignant gastrointestinal stromal tumors (GIST), was submitted to the FDA on August 10, 2005. The FDA has accepted this submission and granted Sutent priority-review status for this important cancer therapy. Priority designation allows for an expedited review of the NDA filing and is intended for product candidates that may provide a significant improvement compared to marketed products. An MAA for Sutent was also submitted to European regulatory authorities during the quarter.
On September 14, 2005, Pfizer completed the acquisition of Vicuron. Anidulafungin, one of the key products acquired in the Vicuron acquisition, is a novel, broad-spectrum antifungal agent of the echinocandin class that is currently under review by the FDA. The filing for the treatment of candidemia/invasive candidiasis has been granted priority-review status. In a Phase 3 trial, anidulafungin demonstrated clinical efficacy greater than fluconazole, including disease due to Candida glabrata, with a comparable safety profile in the treatment of candidemia/invasive candidiasis. Pfizer is currently assessing the potential of anidulafungin in treating additional patient populations.
The FDA has designated as approvable the NDA for DalbavancinZeven , a new injectable antibiotic to treat Gram-positive infections, which was also acquired in the Vicuron acquisition.(dalbavancin). We anticipate a rapid and successful resolution of outstanding issues to allow final NDAFDA approval in the comingnext several months. The addition of these two medications would broaden Pfizer's existing portfolio of anti-infectives, where
An NDA for varenicline, a nicotine-receptor partial agonist for smoking cessation, was submitted to the Company hasFDA in November 2005. In December 2005, the FDA granted varenicline priority-review status.
In April 2006, Pfizer entered into an agreement with Schwarz Pharma AG (Schwarz) under which Pfizer will acquire exclusive worldwide rights to fesoterodine, a long history of providing patientsnew drug candidate for treatment for overactive bladder. Earlier this year, Schwarz submitted an NDA for fesoterodine with both the FDA and physicians with life-saving medicines.the EMEA.
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Somavert | Application submitted in Japan for Acromegaly | -- | May 2005 | |
Revatio | Application submitted in Canada for treating pulmonary arterial hypertension | -- | December 2004 | |
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Zmax | Application submitted in the E.U. for sustained release | -- | October 2004 | |
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Genotropin | Application submitted in Japan for treatment of short stature and growth problems | -- | July 2004 | |
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In September and October of 2005,On April 28, 2006, the CHMP of the European Medicines Evaluation Agency issued a positive opinionsopinion recommending that marketing authorizations be granted by the European Commission grant conditional marketing authorization for MacugenSutent to treat mRCC, or advanced kidney cancer, after failure of interferon alpha or interleukin-2-based therapy. A positive opinion was also granted for GIST, a rare stomach and Exubera, respectively.intestinal cancer, in patients who are resistant or intolerant to imatinib mesylate. The approvals require final authorization from the European Commission is not obligated to follow the opinions of the CHMP. The European Commission is expected to act upon the CHMP recommendations for Macugen by the end of 2005 and Exubera in early 2006.Commission.
Ongoing or planned clinical trials for additional uses and dosage forms for our products include:
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Camptosar IV | Adjuvant colorectal cancer |
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Lyrica | Fibromyalgia |
Revatio | Pediatric pulmonary arterial hypertension |
Macugen | Diabetic |
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Xalatan (new delivery device) | Ocular hypertension |
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Zyvox | Catheter-related infections |
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Drug candidates in late-stage development include varenicline, a nicotine-receptor partial agonist for smoking cessation, which has concluded Phase 3 trials; maraviroc (UK-427,857), a CCR-5 receptor antagonist for HIV; torcetrapib/atorvastatin, a combination CETP inhibitor/statin for heart disease; asenapine, for schizophrenia and bipolar disorder, under co-development with Akzo Nobel's Organon healthcare unit; and Zithromax/chloroquine for treatment of malaria. The Company anticipates filingmalaria; PF-3512676, a toll-like receptor 9 agonist for non-small cell lung cancer developed in partnership with Coley Pharmaceutical Group, Inc.; and ticilimumab (CP-675,206), an NDA with the FDAanti-CTLA4 monoclonal antibody for varenicline by the end of 2005.melanoma. The FDA has granted fast-track designation for maraviroc's clinical development program.
Torcetrapib/atorvastatin, which combines the new chemical entity torcetrapib (a CETP inhibitor discovered by Pfizer that raises HDL-cholesterol) with atorvastatin (Lipitor), iscontinuing in global Phase 3 clinical trials. This comprehensive 12,000-subject development program includes three comparative atherosclerotic imaging trials (a coronary intravascular ultrasound study and two carotid ultrasound studies), as well as a full range of blood-lipid efficacy studies comparing torcetrapib/atorvastatin to Lipitor, other statins and fibrates. In addition to these Phase 3 studies, the development program includes a definitive mortality and morbidity trial that is enrolling 13,000 patients.
Despite effective treatments, cardiovascular disease remains the number one killer worldwide with a residual relative risk of 6060% to 70% after treatment with statins. Therefore, the primary objective of the torcetrapib/atorvastatin development program is to provide clear evidence that substantially raising HDL-cholesterol and further lowering LDL-cholesterol can reduce cardiovascular risk beyond what can be achieved with current treatments. Torcetrapib will beis being developed with atorvastatin in order to rigorously test this hypothesis and the new CETP inhibition mechanism of action. This development program represents a major commitment by Pfizer to significantly advance the understanding of lipids and atherosclerosis in order to provide an important new tool for patients and prescribers in preventing and treating the global burden of cardiovascular disease.
The clinical development program for the selective cytotoxic agent edotecarin was terminated in the first quarter of 2005; development rights for edotecarin were returned to Banyu Pharmaceuticals, Inc.
Pfizer's participation in the clinical development programs for capravirine, a non-nucleoside reverse transcriptase inhibitor for HIV, and Daxas, a phosphodiesterase-4 inhibitor for chronic obstructive pulmonary disease and asthma, was terminated in the second quarter 2005; development rights were returned to Shiongi & Co. Ltd and Altana Pharma, Inc. respectively.
Additional product-related programs are in various stages of discovery and development.
Merger-Related In-Process COSTS AND EXPENSES
Cost of Sales
Cost of sales decreased 10% in the first quarter of 2006, and decreased as a percentage of revenues, as compared with the same period in 2005. The decrease reflects operational efficiencies, reflecting savings related to our AtS productivity initiative of about $100 million and the favorable impact of foreign exchange.
Selling, Informational and Administrative Expenses
Selling, informational and administrative expenses decreased 7% in the first quarter of 2006, as compared to the same period in 2005, reflecting savings related to our AtS productivity initiative of about $300 million and the favorable impact of foreign exchange.
Research and Development ChargesExpenses
The estimated valueR&D expenses decreased 10% in the first quarter of merger-related in-process research and development charges (IPR&D) is expensed at2006, as compared to the acquisition date. Insame period in 2005, we expensed $1.7 billion of IPR&D, primarilyreflecting savings related to our acquisitionAtS productivity initiative of Vicuron Pharmaceuticals, Inc. on September 14, 2005 ($1.4 billion)about $100 million, a R&D milestone due to us from sanofi-aventis (approximately $118 million, pre-tax), and our acquisitionthe favorable impact of Idun Pharmaceuticals, Inc. on April 12, 2005 ($250 million). In 2004, we expensed $955 million of IPR&D, primarily related to our acquisition of Esperion Therapeutics, Inc. on February 10, 2004.foreign exchange.
Adapting to Scale Initiative
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Implementation costs(a) | $ | 104 | $ | 136 |
Restructuring charges(b) | 153 | 174 | ||
Total AtS costs | $ | 257 | $ | 310 |
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In connection with the AtS productivity initiative, which was launched in early 2005, Pfizer management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures, in a company-wide effort to improve performance and efficiency. We expect the costs associated with this multi-year effort to continue through 2008 and to total approximately $4 billion to $5 billion, on a pre-tax basis. We now expect that cost savings from our AtS productivity initiative will be at least $2 billion in 2006, growing to about $4 billion annually upon completion in 2008. The actions associated with the AtS productivity initiative will include restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated implementation costs, such as accelerated depreciation charges, primarily associated with plant network optimization efforts, and expenses associated with system and process standardization and the expansion of shared services.services (See Notes to the Condensed Consolidated Financial Statements - Note 5, Adapting to Scale Initiative.)
Through October 2, 2005,We incurred the following costs in connection with our AtS productivity initiative:
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Implementation costs(a) | $ | 186 | $ | -- |
Restructuring charges(b) | 301 | -- | ||
Total AtS costs | $ | 487 | $ | -- |
(a) | Included in Cost of sales ($124 million), Selling, informational and administrative expenses ($40 million), and Research and development expenses ($22 million). |
(b) | Included in Restructuring charges and merger-related costs. |
Merger-Related Costs
In connection with acquisitions, we typically restructure and integrate the operations of the acquired companies to eliminate duplicative facilities and reduce costs. In certain instances, legacy Pfizer operations may be impacted by restructuring charges primarily relate to employee termination costs at our manufacturing facilities in North America andactions.
We incurred the implementation costs primarily relate to system and process standardization and to expansion of shared services.following merger-related costs:
The components of restructuring costs associated with AtS follow:
(millions of dollars) | Nine | Utilization |
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Employee termination costs | $ | 106 | $ | 49 | $ | 57 | ||
Asset impairments | 62 | 62 | -- | |||||
Other | 6 | -- | 6 | |||||
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Integration costs | $ | 2 | $ | 106 |
Restructuring charges | 3 | 113 | ||
Total merger-related costs(a) | $ | 5 | $ | 219 |
(a) | Included in Restructuring charges and merger-related costs. Amounts in 2005 primarily relate to our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003. |
During the three months ended October 2, 2005, we expensed $85 million for Employee termination costs, $62 million for Asset impairments and $6 million in Other. Through October 2, 2005, Employee termination costs represent the approved reduction of the workforce by 922 employees, mainly in manufacturing, sales and research. We notified affected individuals and 903 employees were terminated as of October 2, 2005. Employee termination costs are recorded as incurred and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily includeRestructuring charges to write down intangible assets, and property, plant and equipment. Other primarily includes costs to exit certain activities.
Merger-Related Costs
We incurred the following merger-related costs primarily in connection with our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003:
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Integration costs(a) | $ | 93 | $ | 113 | $ | 390 | $ | 367 | ||
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Total merger-related costs | $ | 154 | $ | 190 | $ | 622 | $ | 726 | ||
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In connection with the acquisition of Pharmacia, Pfizer management approved plans to restructure and integrate the operations of both legacy Pfizer and legacy Pharmacia to combine operations, eliminate duplicative facilities and reduce costs. Total merger-related expenditures expected to be incurred during 2003 through 2005 to achieve anticipated synergies are about $5.1 billion, on a pre-tax basis, with $5.0 billion incurred through October 2, 2005. The restructuring of our operations as a result of our acquisition of Pharmacia includes consulting, systems integrations,included severance, costs of vacating duplicative facilities, contract termination and other exit costs.
Through April 15, 2004, we recorded restructuring costs associated with employee terminations and exiting certain activities of legacy Pharmacia as liabilities assumed in the purchase business combination and recorded an increase to goodwill. Changes to previous estimates of restructuring costs included as part of the purchase allocation of Pharmacia are recorded as a reduction to goodwill or an expense to operations, as appropriate. Restructuring costs incurred for legacy Pfizer and restructuring costs incurred after April 15, 2004 for legacy Pharmacia are charged to the results of operations.
The components of merger-related restructuring costs associated with legacy Pfizer and legacy Pharmacia follow:
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Employee termination costs | $ | 1,535 | $ | 1,502 | $ | 33 | ||
Other | 624 | 517 | 107 | |||||
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Employee termination costs | $ | 590 | $ | 508 | $ | 82 | ||
Asset impairments | 421 | 421 | -- | |||||
Other | 96 | 74 | 22 | |||||
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During the three months ended October 2, 2005 and September 26, 2004, we expensed $1 million and $53 million for Employee termination costs, $53 million and $8 million for Asset impairment, and $7 million and $16 million in Other. During the first nine months of 2005 and 2004, we expensed $73 million and $201 million for Employee termination costs, $131 million and $122 million for Asset impairment, and $22 million and $31 million in Other.Through October 2, 2005, Employee termination costs represent the approved reduction of the legacy Pfizer and legacy Pharmacia work force by 17,086 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 16,385 employees were terminated as of October 2, 2005. Employee termination costs are recorded as incurred and include accrued severance benefits and costs associated with change-in-control provisions of certain Pharmacia employment contracts. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities of legacy Pfizer and legacy Pharmacia.
Other (Income)/Deductions - Net
In the first nine monthsquarter of 2005, we recorded impairment charges of $1.1 billion related to the developed technology rights for Bextra, a selective COX-2 inhibitor, and $7$10 million related to the write-off of machinery and equipment, (see Note 2, Asset Impairment Charge and Other Costs Associated with the Suspension of Bextra Sales), both of which are included in Other (income)/deductions - net.
In addition, in connection with the suspension of Bextra sales, we recorded $56 million in write-offs of inventory and exit costs, included in- Cost of sales; $8 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; and $212 million for an estimate of customer returns, primarily included against Revenues. Substantially all of these charges were recorded in the first quarter of 2005.
In the third quarter of 2004, Pfizer recorded a litigation-related charge of $369 million related to the resolution of claims against Quigley Company, Inc., a wholly owned subsidiary of Pfizer, which is included in Other (income)/deductions - net.
PROVISION FOR TAXES ON INCOME
On January 25, 2006, the Company was notified by the Internal Revenue Service (IRS) Appeals Division that a resolution had been reached on the matter that we were in the process of appealing related to the tax deductibility of a breakup fee paid by the Warner-Lambert Company in 2000. As a result, in the first quarter of 2006 we recorded a tax benefit of approximately $441 million related to the resolution of this issue.
On January 23, 2006, the IRS issued final regulations on Statutory Mergers and Consolidations, which impacted certain prior-period transactions. In the first nine monthsquarter of 2006, we recorded a tax benefit of $217 million, reflecting the total impact of these regulations.
Our effective tax rate for continuing operations was 7.1% for the first quarter of 2006 compared to 90.6% in the same period in 2005. The lower tax rate for the first quarter of 2006 is primarily due to tax benefits related to the resolution of the tax matter and the change in tax regulations as discussed above. The higher tax rate for the first quarter of 2005 we recorded an income taxis primarily due to the recording of a $2.2 billion charge of $1.7 billion, included in Provision for taxes on income, in connection withrelated to our decision to repatriate about $36.7 billion ofcertain foreign earnings in accordance withunder the American Jobs Creation Act of 2004 (the Jobs Act). In in the first quarter of 2005 we recorded an initial estimated income tax charge of $2.2 billion based(See Notes to Condensed Consolidated Financial Statements--Note 7, Taxes on the decision to repatriate $28.3 billion of foreign earnings. In the second quarter of 2005, we reduced our original estimate of the tax charge by $863 million and revised the repatriation of foreign earnings to $28.1 billion, principally as a result of guidance issued by the U.S. Treasury in May 2005. In the second quarter of 2005, we also recorded an additional tax charge of $373 million, primarily due to our decision to repatriate an additional $8.6 billion of foreign earnings.Income).
In the second quarter of 2005, we recorded a tax benefit of $586 million, primarily related to the resolution of certain tax positions.
Our effective tax rate for continuing operations was 34.4% for the first nine months of 2005 compared to 19.4% in the same period in 2004. The increase in the effective tax rate for the first nine months of 2005 is due to the previously mentioned tax charge associated with the repatriation of foreign earnings and a $1.7 billion non-deductible charge for IPR&D, primarily relating to our acquisition of Vicuron Pharmaceuticals, Inc. and Idun Pharmaceuticals, Inc., partially offset by the tax benefit of $586 million primarily related to the resolution of certain tax positions. Income taxes in the first nine months of 2004 were impacted by a $955 million non-deductible charge for IPR&D, primarily relating to our acquisition of Esperion.
As of October 2, 2005, we intend to continue to permanently reinvest the earnings of our international subsidiaries and, therefore, we have not recorded a U.S. tax provision on the remaining amount of unremitted earnings.
ADJUSTED INCOME
General Description of Adjusted Income Measure
Adjusted income is an alternative view of performance used by management and we believe that investors' understanding of our performance is enhanced by disclosing this performance measure. The Company reports Adjusted income in order to portray the results of our major operations--the discovery, development, manufacture, marketing and sale of prescription medicines for humans and animals, as well as our over-the-counter products--prior to considering certain income statement elements. We have defined Adjusted income as Net income before discontinued operations, significant impact of purchase accounting for acquisitions, merger-related costs, discontinued operations and certain significant items. The Adjusted income measure is not, and should not be viewed as, a substitute for U.S. GAAP Net income.
The Adjusted income measure is an important internal measurement for Pfizer. We measure the performance of the overall Company on this basis. The following are examples of how the Adjusted income measure is utilized.
• | Senior management receives a monthly analysis of the operating results of our Company that is prepared on an Adjusted income basis; |
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• | The annual budgets of our Company are prepared on an Adjusted income basis; and |
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• | Annual and long-term compensation, including annual cash bonuses, merit-based salary adjustments and stock options, for various levels of management, is based on financial measures that include Adjusted income. The Adjusted income measure currently represents a significant portion of target objectives that are utilized to determine the annual compensation for various levels of management, although the actual weighting of the objective may vary by level of management and job responsibility and may be considered in the determination of certain long-term compensation plans. The portion of senior management's bonus, merit-based salary increase and stock option awards based on the Adjusted income measure ranges from 10% to 30%. |
Despite the importance of this measure to management in goal setting and performance measurement, we stress that Adjusted income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted income (unlike U.S. GAAP Net income) may not be comparable with the calculation of similar measures for other companies. Adjusted income is presented solely to permit investors to more fully understand how management assesses the performance of our Company.
We also recognize that, as an internal measure of performance, the Adjusted income measure has limitations and we do not restrict our performance-management process solely to this metric. A limitation of the Adjusted income measure is that it provides a view of our Company's operations without including all events during a period such as the effects of an acquisition, merger-related costs or amortization of purchased intangibles and does not provide a comparable view of our performance to other companies in the pharmaceutical industry. We also use other specifically tailored tools designed to ensure the highest levels of performance in our Company. For example, our R&D organization has productivity targets, upon which its effectiveness is measured. In addition, for senior levels of management, a portion of their long-term compensation is based on U.S. GAAP Net income.
Purchase Accounting Adjustments
Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to our acquisitions of Pharmacia Vicuron and EsperionExubera, as well as net-assetnet asset acquisitions. These impacts can include charges for purchased in-process research and development,R&D, the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value and the incremental charges related to the amortization of finite-lived intangible assets for the increase to fair value. Therefore, the Adjusted income measure includes the revenues earned upon the sale of the acquired products without considering the aforementioned significant charges.
Certain of the purchase-accounting adjustments associated with a business combination, such as the amortization of intangibles acquired in connection with our acquisition of Pharmacia, can occur for up to 40 years (these assets have a weighted-average useful life of approximately 10nine years), but this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by trying to provide a degree of parity to internally developed intangible assets for which research and development costs have been previously expensed.
However, a completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through Adjusted income. This component of Adjusted income is derived solely with the impacts of the items listed in the first paragraph of this section. We have not factored in the impacts of any other differences in experience that might have occurred if Pfizer had discovered and developed those intangible assets on its own and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our research and development costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting sales, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our Adjusted income amounts would have been the same as presented had Pfizer discovered and developed the acquired intangible assets.
Merger-Related Costs
Adjusted income is calculated prior to considering integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate two businesses as a result of the acquisition decision. For additional clarity, only restructuring and integration activities that are associated with a purchase business combination or a net-asset acquisition are included in merger-related costs. We have not factored in the impacts onof synergies that would have resulted had these costs not been incurred.
We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees--a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in other, more normal business contexts.
The integration and restructuring costs associated with a business combination may occur over several years with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the highly regulated nature of the pharmaceutical business, the closure of excess facilities can take several years as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA. In other situations, we may be required by local laws to obtain approvals prior to terminating certain employees. This approval process can delay the termination action.
Discontinued Operations
Adjusted income is calculated prior to considering gains or losses on the sale of businesses and product lines included in discontinued operations as well as the related results of operations. We believe that this presentation is meaningful to investors because, while we review our businesses and product lines on an ongoing basisperiodically for strategic fit with our operations, we do not build or run our businesses with an intent to sell them.
Certain Significant Items
Adjusted income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program which is specific in nature with a defined term, such as those related to our Adapting to ScaleAtS initiative; costs associated with a significant recall of one of our products; charges related to sales or disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; the impact of adopting certain significant, event-driven tax legislation, such as charges attributable to the repatriation of foreign earnings in accordance with the Jobs Act; or possible charges related to legal matters, such as certain of those discussed in Legal Proceedings in our Form 10-K and in Part II: Other Information; Item 1, Legal Proceedings included in our Form 10-Q filings. Normal, ongoing defense costs of the Company or settlements and accruals on legal matters made in the normal course of our business would not be considered a certain significant item.
Reconciliation
A reconciliation between Net income, as reported under U.S. GAAP, and Adjusted income follows:
Third Quarter | First Nine Months | First Quarter | ||||||||||||||
(millions of dollars) | 2005 | 2004 | % Incr./ | 2005 | 2004 | % Incr./ | 2006 | 2005 | % Incr./ | |||||||
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Reported Net income | $ | 1,589 | $ | 3,341 | (52)% | $ | 5,352 | $ | 8,536 | (37)% | ||||||
Reported net income | $ | 4,111 | $ | 301 | M+ | |||||||||||
Purchase accounting adjustments - net of tax | 1,963 | 521 | 276 | 3,401 | 2,558 | 33 | 582 | 622 | (6) | |||||||
Merger-related costs - net of tax | 67 | 112 | (40) | 397 | 463 | (14) | 3 | 151 | (98) | |||||||
Discontinued operations - net of tax | 13 | (43) | * | (7) | (75) | (91) | (3) | (29) | (90) | |||||||
Certain significant items - net of tax | 179 | 229 | (22) | 2,092 | 269 | 678 | (232) | 2,955 | * | |||||||
Adjusted income | $ | 3,811 | $ | 4,160 | (8) | $ | 11,235 | $ | 11,751 | (4) | $ | 4,461 | $ | 4,000 | 12 |
* | Calculation not meaningful. |
M+ | Change greater than one-thousand percent. |
Certain amounts and percentages may reflect rounding adjustments. |
Adjusted income as shown above excludes the following items:
Third Quarter | First Nine Months | First Quarter | |||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 2006 | 2005 | |||||||
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Purchase accounting adjustments, pre-tax: | |||||||||||||
In-process research and development charges(a) | $ | 1,390 | $ | -- | $ | 1,652 | $ | 955 | $ | -- | $ | 2 | |
Intangible amortization and other(b) | 811 | 827 | 2,494 | 2,450 | 812 | 855 | |||||||
Total purchase accounting adjustments, pre-tax | 2,201 | 827 | 4,146 | 3,405 | 812 | 857 | |||||||
Income taxes | (238) | (306) | (745) | (847) | (230) | (235) | |||||||
Total purchase accounting adjustments - net of tax | 1,963 | 521 | 3,401 | 2,558 | 582 | 622 | |||||||
Merger-related costs, pre-tax: | |||||||||||||
Integration costs(c) | 93 | 113 | 390 | 367 | 2 | 106 | |||||||
Restructuring costs(c) | 61 | 77 | 232 | 359 | 3 | 113 | |||||||
Total merger-related costs, pre-tax | 154 | 190 | 622 | 726 | 5 | 219 | |||||||
Income taxes | (87) | (78) | (225) | (263) | (2) | (68) | |||||||
Total merger-related costs - net of tax | 67 | 112 | 397 | 463 | 3 | 151 | |||||||
Discontinued operations, pre-tax: | |||||||||||||
Loss/(income) from discontinued operations (d) | 10 | 3 | 44 | (42) | |||||||||
Loss from discontinued operations (d) | -- | 18 | |||||||||||
Gains on sales of discontinued operations(d) | (7) | (65) | (72) | (68) | (5) | (65) | |||||||
Total discontinued operations, pre-tax | 3 | (62) | (28) | (110) | (5) | (47) | |||||||
Income taxes | 10 | 19 | 21 | 35 | 2 | 18 | |||||||
Total discontinued operations - net of tax | 13 | (43) | (7) | (75) | (3) | (29) | |||||||
Certain significant items, pre-tax | |||||||||||||
Asset impairment charges and other costs associated with the suspension of selling Bextra(e) | 3 | -- | 1,216 | -- | |||||||||
Litigation-related charge(f) | -- | 369 | -- | 369 | |||||||||
Operating results of divested legacy Pharmacia research facility(g) | -- | -- | -- | 64 | |||||||||
Restructuring charges--Adapting to Scale(c) | 153 | -- | 174 | -- | |||||||||
Implementation costs--Adapting to Scale(h) | 104 | -- | 136 | -- | |||||||||
Asset impairment charges (e) | -- | 1,213 | |||||||||||
Sanofi-aventis research and development milestone(f) | (118) | -- | |||||||||||
Restructuring charges - Adapting to Scale(c) | 301 | -- | |||||||||||
Implementation costs - Adapting to Scale(g) | 186 | -- | |||||||||||
Gain on disposals of investments(h) | (51) | -- | |||||||||||
Total certain significant items, pre-tax | 260 | 369 | 1,526 | 433 | 318 | 1,213 | |||||||
Income taxes | (81) | (140) | (547) | (164) | (109) | (447) | |||||||
Resolution of certain tax positions(i) | -- | -- | (586) | -- | (441) | -- | |||||||
Tax impact of the repatriation of foreign earnings(i) | -- | -- | 1,699 | -- | -- | 2,189 | |||||||
Total certain significant items - net of tax | 179 | 229 | 2,092 | 269 | (232) | 2,955 | |||||||
Total purchase accounting adjustments, merger-related costs, discontinued operations and certain significant items - net of tax |
| 2,222 | $ | 819 | $ | 5,883 | $ | 3,215 |
| 350 | $ | 3,699 |
(a) | Included in Merger-related in-process research and development charges. |
(b) | Included primarily in Amortization of intangible assets. |
(c) | Included in Restructuring charges and merger-related costs. |
(d) | Included in Discontinued operations - net of |
(e) | Included |
(f) |
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(g) | Included in Cost of sales ($124 million), Selling, informational and administrative expenses ($40 million), and Research and developmentexpenses ($22 million). |
(h) | Included in Other (income)/deductions - net. |
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(i) | Included in Provision for taxes on income. |
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net Financial Asset PositionAssets
Our net financial asset position follows:
(millions of dollars) | Oct. 2, | Dec. 31, | April 2, | Dec. 31, | ||||
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Financial assets: | ||||||||
Cash and cash equivalents | $ | 959 | $ | 1,808 | $ | 2,869 | $ | 2,247 |
Short-term investments | 12,430 | 18,085 | 12,633 | 19,979 | ||||
Short-term loans | 611 | 653 | 445 | 510 | ||||
Long-term investments and loans | 2,784 | 3,873 | 2,543 | 2,497 | ||||
Total financial assets | 16,784 | 24,419 | 18,490 | 25,233 | ||||
Debt: | ||||||||
Short-term borrowings | 6,729 | 11,266 | 5,059 | 11,589 | ||||
Long-term debt | 5,414 | 7,279 | 6,508 | 6,347 | ||||
Total debt | 12,143 | 18,545 | 11,567 | 17,936 | ||||
Net financial assets | $ | 4,641 | $ | 5,874 | $ | 6,923 | $ | 7,297 |
We rely largely on operating cash flow, short-term commercial paper borrowings and long-term debt to provide for the working capital needs of our operations, including our R&D activities. In addition, the proceeds from the repatriation of foreign earnings are being utilized to finance domestic activities over a multi-year time horizon, thereby reducing our reliance on domestic short-term borrowings. Our international borrowings will increase over the course of 2005 in order to fund the repatriation of foreign earnings. We believe that we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future.
Expected Impact of Repatriation of Foreign Earnings
Based on our decision to repatriate foreign earnings totaling about $36.7 billion in accordance with the Jobs Act, the use of proceeds includes domestic expenditures relating to advertising and marketing activities, research and development activities, capital assets and other asset acquisitions and non-executive compensation in accordance with the provisions of the Jobs Act (as in effect on October 2, 2005). As of October 2, 2005, we have completed the repatriation of approximately $23 billion. At October 2, 2005, our international subsidiaries held cash and cash equivalents and short-term investments totaling in excess of $3 billion. Additionally, our international subsidiaries are expected to generate cash flows during 2005, which, together with third-party borrowings as required, will be available to fund the balance of the repatriation.
Investments
Our short-term and long-term investments consist primarily of high-quality, liquid investment-grade available-for-sale debt securities. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to our operations. Where local restrictions prevent intercompany financing, working capital needs are met through operating cash flows and/or external borrowings. Our portfolio of short-term investments was reduced in the first quarter of 2006 and the proceeds were primarily used to pay down short-term borrowings.
Long-Term Debt CapacityIssuance
Our short-term borrowings are rated P-1 byOn February 22, 2006, we issued the following Japanese yen fixed-rate bonds, to be used for general corporate purposes:
• | $508 million equivalent, senior unsecured notes, due February 2011, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.2%; and |
• | $466 million equivalent, senior unsecured notes, due February 2016, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.8%. |
The notes were issued under a $5 billion debt shelf registration filed with the SEC in November 2002. Such yen debt is designated as a hedge of our yen net investments.
Credit Ratings
Two major corporate debt-rating organizations, Moody's Investors ServiceServices (Moody's) and A-1+ by Standard & Poor's (S&P). Our, assign ratings to our short-term and long-term debt. The following chart reflects the current ratings assigned to the Company's senior unsecured non-credit enhanced long-term debt is rated Aaaand commercial paper issued directly by Moody's and AAAthe Company or by S&P. Moody's and S&P are major corporate debt-rating organizations. affiliates with a guarantee from the Company by each of these agencies:
Long-Term-Debt | ||||
Name of Rating Agency | Commercial Paper | Rating | Outlook | |
Moody's | P-1 | Aaa | Negative | |
S&P | A1+ | AAA | Stable |
In early April 2005, following the market withdrawal of Bextra and the FDA's decision requiring new labeling for Celebrex, Moody's placed our Aaa rating under review for possible downgrade. The review was completed in June 2005 when Moody's removed Pfizer from review status and reaffirmed our Aaa rating. However, Moody's maintained our rating outlook as negative. S&P hasFollowing our announcement in April 2006 of our target to purchase up to $4 billion of Pfizer stock in 2006, Moody's again reaffirmed our AAAAaa rating with a negative outlook. This reflects Moody's overall negative rating outlook for the major pharmaceutical sector and, maintains our outlook as stable.specifically, their concern that disappointing product sales, setbacks in development of key pipeline products, or a shift towards a more aggressive financial profile, including an increased pace of share purchase levels, could result in Pfizer's financial metrics falling below those appropriate for a Aaa-rated company.
Our superior credit ratings are primarily based on our diversified product portfolio, our strong operating cash flow, our substantial financial assets, our strong late-stage product pipeline and on our desire to maintain a prudent financial profile. Our access to financing at favorable rates would be affected by a substantial downgrade in our credit ratings.
Debt Capacity
We have available lines of credit and revolving-credit agreements with a group of banks and other financial intermediaries. We maintain cash balances and short-term investments in excess of our commercial paper and other short-term borrowings. At OctoberApril, 2, 2005,2006, we had access to $3.0$3.5 billion of lines of credit, of which $1.1 billion expire within one year. Of these lines of credit, $2.8$3.3 billion are unused, of which our lenders have committed to loan us $1.7$2.2 billion at our request. $1.5$2.0 billion of the unused lines of credit, relatewhich expire in 2011, may be used to support our commercial paper borrowings.
At OctoberApril 2, 2005,2006, we had the ability to borrow approximately $2.0$1 billion by issuing debt securities under our existing debt shelf registration statement filed with the SEC in November 2002.
Long-Term Debt
In July 2005, we decided to exercise Pfizer's option to call, at par-value plus accrued interest, $1 billion of senior unsecured floating-rate notes, which were included in Long-term debt at December 31, 2004. Notice to call was given to the Trustees and the notes were redeemed in September 2005.
Goodwill and Other Intangible Assets
At OctoberApril 2, 2005,2006, goodwill totaled $23.8$23.7 billion (21% of our total assets) and other intangible assets, net of accumulated amortization, totaled $29.0$28.1 billion (26%(25% of our total assets). The largest components of goodwill and other intangible assets were acquired in connection with our acquisition of Pharmacia. OtherIn the first quarter of 2006, we acquired the sanofi-aventis worldwide rights, including patent rights and production technology, to manufacture and sell Exubera. In connection with the acquisition, we recorded an intangible asset for developed technology rights of approximately $1.0 billion and goodwill of approximately $166 million. Finite-lived intangible assets, included $23.0net include $22.2 billion ofrelated to developed technology rights and $952 million related to brands. Indefinite-lived intangible assets include $3.9 billion of indefinite-livedrelated to brands.
The developed technology rights primarily represent the amortized acquisition-date fair value of the commercialized products that we acquired from Pharmacia. We acquired a well-diversified portfolio of developed technology rights across the therapeutic categories displayed in the table of major Human Health products in the "Revenues" section of MD&A. While the Arthritis and Pain therapeutic category represents about 28%27% of the total value of developed technology rights at OctoberApril 2, 2005,2006, the balance of the value is evenly distributed across the following Human Health therapeutic product categories: Ophthalmology; Oncology; Urology; Infectious and Respiratory Diseases; Endocrine Disorders categories; and, as a group, the Cardiovascular and Metabolic Diseases; Central Nervous System Disorders and All Other categories.
SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain relevant measures of our liquidity and capital resources:
Oct. 2, | Dec. 31, | ||||
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Cash and cash equivalents and short-term investments and loans (millions of dollars) | $ | 14,000 | $ | 20,546 | |
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Working capital (millions of dollars)(a) | $ | 12,373 | $ | 13,236 | |
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Current ratio(b) | 1.61:1 | 1.50:1 | |||
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Shareholders' equity per common share(c) | $ | 9.11 | $ | 9.19 | |
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(a) | Working capital includes assets and liabilities held for sale at October 2, 2005 and December 31, 2004. | ||||
(b) | Current ratio is the proportion of current assets to current liabilities. | ||||
(c) | Represents total shareholders' equity divided by the actual number of common shares outstanding (which excludes treasury shares and those held by our employee benefit trust). | ||||
(millions of dollars, except ratios and per common share data) | April 2, | Dec. 31, | ||
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Cash and cash equivalents and short-term investments and loans | $ | 15,947 | $ | 22,736 |
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Working capital(a) | $ | 17,741 | $ | 13,493 |
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Ratio of current assets to current liabilities | 1.90:1 | 1.48:1 | ||
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Shareholders' equity per common share(b) | $ | 9.54 | $ | 8.98 |
(a) | Working capital includes assets and liabilities held for sale, which were not significant, as of April 2, 2006 and December 31, 2005. |
(b) | Represents total shareholders' equity divided by the actual number of common shares outstanding (which excludes treasury shares and those held by our employee benefit trust). |
The decreaseincrease in working capital fromas of April 2, 2006 as compared to December 31, 2004 to October 2, 2005 was primarily reflects:due to:
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partially offset by:
cash from current-period operations.
Net Cash Provided by Operating Activities
During the first nine monthsquarter of 2005,2006, net cash provided by continuing operating activities was $10.0$4.0 billion, as compared to $10.4$3.2 billion in the same period of 2004.2005. The decreaseincrease in net cash provided by operating activities was primarily driven by lowerattributable to:
• | higher current period income from operations, net of non-cash items,
Net Cash Provided by/Used in During the first
Net Cash Used in Financing Activities During the first quarter of 2006, net cash used in financing activities was $8.8 billion, as compared to $818 million in the same period in 2005. The increase in net cash used in financing activities was primarily attributable to:
In June 2005, we announced a new $5 billion share-purchase program which is being funded by operating cash flows. Through the first quarter of 2006, we purchased approximately 60 million shares under the new program for approximately $1.5 billion. In October 2004, we announced a $5 billion share-purchase OFF-BALANCE SHEET ARRANGEMENTS In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with a transaction or related to activities prior to a transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters, and patent infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not Certain of our RECENTLY
OUTLOOK Results in
Given these and other factors, a reconciliation, at current exchange rates
Our forecasted financial performance in 2006 is subject to a number of factors and uncertainties--as described in the
Our disclosure and analysis in this report, including but not limited to the information discussed in the Outlook section above, contain forward-looking information about our Company's financial results and estimates, business prospects, in-line products and
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Our Form 10-K filing for the This report includes discussion of certain clinical studies relating to various in-line products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data. Legal Proceedings and Contingencies We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, securities, environmental and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. We do not believe any of them will have a material adverse effect on our financial position. We record accruals for such contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable. If a range of liability is probable and estimable and some amount within the range appears to be a better estimate than any other amount within the range, we accrue that amount. If a range of liability is probable and estimable and no amount within the range appears to be a better estimate than any other amount within the range, we accrue the minimum of such probable range. Many claims involve highly complex issues relating to causation, label warnings, scientific evidence, actual damages and other matters. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and an estimation of damages are difficult to ascertain. Consequently, we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for these contingencies. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Our assessments are based on estimates and assumptions that have been deemed reasonable by management. Litigation is inherently unpredictable, and excessive verdicts do occur. Although we believe we have substantial defenses in these matters, we could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period. Patent claims include challenges to the coverage and/or validity of our patents on various products or processes. Although we believe we have substantial defenses to these challenges with respect to all our material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could result in a loss of patent protection for the drug at issue, which could lead to a significant loss of sales of that drug and could materially affect future results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Information required by this item is incorporated by reference from the discussion under the heading Financial Risk Management in our 2005 Financial Report, which is filed as exhibit 13 to our 2005 Form 10-K. We currently invest and borrow primarily on a short-term or effectively variable-rate basis. Item 4. Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be disclosed in our periodic reports filed with the SEC. During our most recent fiscal quarter, there has not In January 2006, we implemented new information systems for our financial statement consolidation. This initiative further strengthened the overall design and operating effectiveness of our financial reporting controls. Additionally, we have begun a multi-year initiative to outsource some transaction-processing activities within certain accounting processes and are migrating to a consistent enterprise resource planning system across the organization. This is an enhancement of on-going activities to further develop our financial shared service capabilities and standardize our financial systems. None of these initiatives are in response to any identified deficiency or weakness in our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Certain legal proceedings in which we are involved are discussed in Note
Product Liability Matters
Hormone-Replacement Therapy As previously reported, Pfizer and certain affiliates of Pfizer, along with several other pharmaceutical manufacturers, have been named as defendants in a
Consumer and Commercial Matters Lipitor
The plaintiffs seek to represent
Tax Matters
The IRS
We periodically reassess the likelihood of assessments resulting from audits of federal, state and foreign income tax filings. We believe that our accruals for tax liabilities are adequate for all open years. Item 1A. Risk Factors. There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our 2005 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This table provides certain information with respect to our purchases of shares of Pfizer's common stock during the fiscal
Item 3. Defaults Upon Senior Securities. None
The shareholders of the Company voted on 10 items at the Annual Meeting of Shareholders held on April 27, 2006:
The nominees for directors were elected based upon the following votes:
The proposal to ratify the appointment of KPMG LLP as independent registered public accounting firm for 2006 received the following votes:
The management proposal to amend the Company's Restated Certificate of Incorporation to eliminate the supermajority vote requirements and fair price provision received the following votes:
The shareholder proposal relating to term limits for Directors received the following votes:
The shareholder proposal requesting reporting on pharmaceutical price restraint received the following votes:
The shareholder proposal relating to cumulative voting received the following votes:
The shareholder proposal requesting separation of roles of Chairman and CEO received the following votes:
The shareholder proposal requesting a report on political contributions received the following votes:
The shareholder proposal requesting a report on the feasibility of amending Pfizer's corporate policy on laboratory animal care and use received the following votes:
The shareholder proposal requesting justification for financial contributions which advance animal-based testing methodologies received the following votes:
Item 5. Other Information. None
PFIZER INC. AND SUBSIDIARY COMPANIES SIGNATURE Under the requirements of the Securities Exchange Act of 1934, this report was signed on behalf of the Registrant by the authorized person named below.
Exhibit 12 PFIZER INC. AND SUBSIDIARY COMPANIES
All financial information reflects All financial information reflects the following as discontinued operations for 2003, 2002, and 2001: our confectionery, shaving and fish-care products businesses,
Exhibit 15 ACCOUNTANTS' ACKNOWLEDGMENT To the Shareholders and Board of Directors of Pfizer Inc: We hereby acknowledge our awareness of the incorporation by reference of our report dated - Form S-8 dated October 27, 1983 (File No. 2-87473), - Form S-8 dated March 22, 1990 (File No. 33-34139), - Form S-8 dated January 24, 1991 (File No. 33-38708), - Form S-8 dated November 18, 1991 (File No. 33-44053), - Form S-8 dated May 27, 1993 (File No. 33-49631), - Form S-8 dated May 19, 1994 (File No. 33-53713), - Form S-8 dated October 5, 1994 (File No. 33-55771), - Form S-8 dated December 20, 1994 (File No. 33-56979), - Form S-8 dated March 29, 1996 (File No. 333-02061), - Form S-8 dated September 25, 1997 (File No. 333-36371), - Form S-8 dated April 24, 1998 (File No. 333-50899), - Form S-8 dated April 22, 1999 (File No. 333-76839), - Form S-8 dated June 19, 2000 (File No. 333-90975), - Form S-8 dated June 19, 2000 (File No. 333-39606), - Form S-8 dated June 19, 2000 (File No. 333-39610), - Form S-3 dated October 20, 2000 (File No. 333-48382), - Form S-8 dated April 27, 2001 (File No. 333-59660), - Form S-8 dated April 27, 2001 (File No. 333-59654), - Form S-3 dated October 30, 2002 (File No. 333-100853), - Form S-3 dated December 16, 2002 (File No. 33-56435), - Form S-8 dated April 16, 2003 (File No. 333-104581), - Form S-8 dated April 16, 2003 (File No. 333-104582), - Form S-8 dated November 18, 2003 (File No. 333-110571), - Form S-8 dated December 18, 2003 (File No. 333-111333), - Form S-8 dated April 26, 2004 (File No.333-114852), and - Form S-3 dated March 1, 2005 (File No. 333-123058). Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. KPMG LLP New York, New York Exhibit 31.1 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO I, Henry A. McKinnell, certify that:
Date:
Exhibit 31.2 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO I, Alan G. Levin, certify that:
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Exhibit 32.1 Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U. S. C. Section 1350, I, Henry A. McKinnell, hereby certify that, to the best of my knowledge, the Quarterly Report of Pfizer Inc. on Form 10-Q for the quarter ended
/s/ Henry A. McKinnell This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. Exhibit 32.2 Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U. S. C. Section 1350, I, Alan G. Levin, hereby certify that, to the best of my knowledge, the Quarterly Report of Pfizer Inc. on Form 10-Q for the quarter ended /s/ Alan G. Levin This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. |