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 EndedOctoberJuly 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 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 | 52 |
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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 | 53 |
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Risk Factors |
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Item 2. | |
Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | |
Defaults Upon Senior Securities | 55 |
Item 4. | |
Submission of Matters to a Vote of Security Holders | 55 |
Item 5. | |
Other Information | 55 |
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Item 6. | |
Exhibits |
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Signature |
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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 | |||||||
(millions of dollars, except per common share data) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | ||||
| ||||||||
Revenues | $ | 12,189 | $ | 12,831 | $ | 37,705 | $ | 37,593 |
| ||||||||
Costs and expenses: | ||||||||
Cost of sales(a) | 1,908 | 1,640 | 6,180 | 5,185 | ||||
Selling, informational and administrative expenses(a) | 3,931 | 4,036 | 12,242 | 12,227 | ||||
Research and development expenses(a) | 1,783 | 1,888 | 5,421 | 5,356 | ||||
Amortization of intangible assets(a) | 836 | 843 | 2,576 | 2,496 | ||||
Merger-related in-process research and development charges | 1,390 | -- | 1,652 | 955 | ||||
Restructuring charges and merger-related costs | 307 | 190 | 796 | 726 | ||||
Other (income)/deductions - net | (163) | 283 | 669 | 140 | ||||
| ||||||||
Income from continuing operations before provision for taxes on income, and minority interests | 2,197 | 3,951 | 8,169 | 10,508 | ||||
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Provision for taxes on income | 591 | 650 | 2,815 | 2,040 | ||||
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Minority interests | 4 | 3 | 9 | 7 | ||||
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Income from continuing operations | 1,602 | 3,298 | 5,345 | 8,461 | ||||
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Discontinued operations: | ||||||||
(Loss)/income from discontinued operations - net of tax | (16) | (3) | (37) | 27 | ||||
Gains on sales of discontinued operations - net of tax | 3 | 46 | 44 | 48 | ||||
| ||||||||
Discontinued operations - net of tax | (13) | 43 | 7 | 75 | ||||
Net income | $ | 1,589 | $ | 3,341 | $ | 5,352 | $ | 8,536 |
| ||||||||
Earnings per common share - Basic: | ||||||||
Income from continuing operations | $ | 0.22 | $ | 0.44 | $ | 0.73 | $ | 1.12 |
Discontinued operations - net of tax | -- | 0.01 | -- | 0.01 | ||||
Net income | $ | 0.22 | $ | 0.45 | $ | 0.73 | $ | 1.13 |
| ||||||||
Earnings per common share - Diluted: | ||||||||
Income from continuing operations | $ | 0.22 | $ | 0.43 | $ | 0.72 | $ | 1.11 |
Discontinued operations - net of tax | -- | 0.01 | -- | 0.01 | ||||
Net income | $ | 0.22 | $ | 0.44 | $ | 0.72 | $ | 1.12 |
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Weighted-average shares used to calculate earnings per common share: | ||||||||
Basic | 7,333 | 7,501 | 7,372 | 7,554 | ||||
| ||||||||
Diluted | 7,382 | 7,569 | 7,424 | 7,642 | ||||
| ||||||||
Cash dividends paid per common share | $ | 0.19 | $ | 0.17 | $ | 0.57 | $ | 0.51 |
Three Months Ended | Six Months Ended | |||||||
(millions of dollars, except per common share data) | July 2, | July 3, | July 2, | July 3, | ||||
| ||||||||
Revenues | $ | 11,741 | $ | 11,452 | $ | 23,488 | $ | 23,595 |
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Costs and expenses: | ||||||||
Cost of sales(a) | 1,790 | 1,762 | 3,461 | 3,639 | ||||
Selling, informational and administrative expenses(a) | 3,881 | 3,766 | 7,276 | 7,431 | ||||
Research and development expenses(a) | 1,742 | 1,830 | 3,285 | 3,547 | ||||
Amortization of intangible assets | 823 | 856 | 1,648 | 1,736 | ||||
Merger-related in-process research and development charges | 513 | 260 | 513 | 262 | ||||
Restructuring charges and merger-related costs | 268 | 264 | 567 | 480 | ||||
Other (income)/deductions - net | (359) | (198) | (615) | 854 | ||||
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Income from continuing operations before provision/(benefit) for taxes on income and minority interests | 3,083 | 2,912 | 7,353 | 5,646 | ||||
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Provision/(benefit) for taxes on income | 790 | (464) | 1,052 | 2,111 | ||||
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Minority interests | 3 | 1 | 5 | 4 | ||||
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Income from continuing operations | 2,290 | 3,375 | 6,296 | 3,531 | ||||
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Discontinued operations: | ||||||||
Income from discontinued operations - net of tax | 108 | 88 | 210 | 191 | ||||
Gains on sales of discontinued operations - net of tax | 17 | -- | 20 | 41 | ||||
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Discontinued operations - net of tax | 125 | 88 | 230 | 232 | ||||
Net income | $ | 2,415 | $ | 3,463 | $ | 6,526 | $ | 3,763 |
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Earnings per common share - basic: | ||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | $ | 0.86 | $ | 0.48 |
Discontinued operations - net of tax | 0.02 | 0.01 | 0.03 | 0.03 | ||||
Net income | $ | 0.33 | $ | 0.47 | $ | 0.89 | $ | 0.51 |
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Earnings per common share - diluted: | ||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | $ | 0.86 | $ | 0.48 |
Discontinued operations - net of tax | 0.02 | 0.01 | 0.03 | 0.03 | ||||
Net income | $ | 0.33 | $ | 0.47 | $ | 0.89 | $ | 0.51 |
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Weighted-average shares used to calculate earnings per common share: | ||||||||
Basic | 7,282 | 7,366 | 7,298 | 7,391 | ||||
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Diluted | 7,305 | 7,418 | 7,330 | 7,445 | ||||
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Cash dividends paid per common share | $ | 0.24 | $ | 0.19 | $ | 0.48 | $ | 0.38 |
(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, | July 2, | Dec. 31, | ||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 959 | $ | 1,808 | $ | 1,921 | $ | 2,247 |
Short-term investments | 12,430 | 18,085 | 12,829 | 19,979 | ||||
Accounts receivable, less allowance for doubtful accounts: 2005 - $181; 2004 - $205 | 9,348 | 9,367 | ||||||
Accounts receivable, less allowance for doubtful accounts | 9,275 | 9,103 | ||||||
Short-term loans | 611 | 653 | 511 | 510 | ||||
Inventories | 6,556 | 6,660 | 6,392 | 5,478 | ||||
Prepaid expenses and taxes | 2,724 | 2,939 | 3,262 | 2,903 | ||||
Assets held for sale | 140 | 182 | ||||||
Assets of discontinued operations and other assets held for sale | 6,804 | 6,659 | ||||||
Total current assets | 32,768 | 39,694 | 40,994 | 46,879 | ||||
Long-term investments and loans | 2,784 | 3,873 | 2,387 | 2,497 | ||||
Property, plant and equipment, less accumulated depreciation: | 17,519 | 18,385 | ||||||
Property, plant and equipment, less accumulated depreciation | 16,483 | 16,233 | ||||||
Goodwill | 23,806 | 23,756 | 21,057 | 20,985 | ||||
Identifiable intangible assets, less accumulated amortization | 28,976 | 33,251 | 26,134 | 26,244 | ||||
Other assets, deferred taxes and deferred charges | 4,490 | 4,725 | 4,495 | 4,860 | ||||
Total assets | $ | 110,343 | $ | 123,684 | $ | 111,550 | $ | 117,698 |
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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 | $ | 3,779 | $ | 11,589 | ||||
Accounts payable | 1,809 | 2,672 | 1,740 | 2,073 | ||||
Dividends payable | 3 | 1,418 | 1,757 | 1,772 | ||||
Income taxes payable | 4,226 | 1,963 | 4,356 | 3,618 | ||||
Accrued compensation and related items | 1,636 | 1,939 | 1,399 | 1,602 | ||||
Other current liabilities | 5,990 | 7,136 | 5,655 | 6,564 | ||||
Liabilities held for sale | 2 | 64 | ||||||
Liabilities of discontinued operations and other liabilities held for sale | 1,369 | 1,237 | ||||||
Total current liabilities | 20,395 | 26,458 | 20,055 | 28,455 | ||||
| ||||||||
Long-term debt | 5,414 | 7,279 | 5,450 | 6,347 | ||||
Pension benefit obligations | 2,771 | 2,821 | 2,721 | 2,681 | ||||
Postretirement benefit obligations | 1,442 | 1,450 | 1,447 | 1,424 | ||||
Deferred taxes on income | 10,780 | 12,632 | ||||||
Deferred taxes | 10,369 | 10,392 | ||||||
Other noncurrent liabilities | 2,734 | 4,766 | 3,019 | 2,635 | ||||
Total liabilities | 43,536 | 55,406 | 43,061 | 51,934 | ||||
| ||||||||
Shareholders' Equity | ||||||||
Preferred stock | 175 | 193 | 152 | 169 | ||||
Common stock | 439 | 438 | 440 | 439 | ||||
Additional paid-in capital | 67,530 | 67,098 | 68,217 | 67,759 | ||||
Employee benefit trust, at fair value | (970) | (1,229) | (700) | (923) | ||||
Treasury stock | (39,385) | (35,992) | (41,755) | (39,767) | ||||
Retained earnings | 38,033 | 35,492 | 40,627 | 37,608 | ||||
Accumulated other comprehensive income | 985 | 2,278 | 1,508 | 479 | ||||
| ||||||||
Total shareholders' equity | 66,807 | 68,278 | 68,489 | 65,764 | ||||
Total liabilities and shareholders' equity | $ | 110,343 | $ | 123,684 | $ | 111,550 | $ | 117,698 |
* 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 | Six Months Ended | |||||||
(millions of dollars) | Oct. 2, | Sept. 26, | July 2, | July 3, | ||||
| ||||||||
Operating Activities: | ||||||||
Net income | $ | 5,352 | $ | 8,536 | $ | 6,526 | $ | 3,763 |
Adjustments to reconcile net income to net cash provided by continuing operating activities: | ||||||||
Discontinued operations - net of tax | (7) | (75) | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 4,143 | 3,782 | 2,694 | 2,776 | ||||
Share-based compensation expense | 326 | 79 | ||||||
Merger-related in-process research and development charges | 1,652 | 955 | 513 | 262 | ||||
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 | (114) | (53) | ||||||
Gains on sales of discontinued operations | (31) | (65) | ||||||
Deferred taxes from continuing operations | (438) | (931) | ||||||
Other deferred taxes | 45 | 93 | ||||||
Other non-cash adjustments | 219 | 215 | ||||||
Changes in assets and liabilities (net of businesses acquired and divested) | (2,274) | (2,856) | (636) | (369) | ||||
| ||||||||
Net cash provided by continuing operating activities | 9,996 | 10,350 | ||||||
Net cash provided by operating activities | 9,104 | 6,983 | ||||||
| ||||||||
Investing Activities: | ||||||||
Purchases of property, plant and equipment | (1,493) | (1,526) | (887) | (997) | ||||
Purchases of short-term investments | (16,840) | (11,369) | (5,663) | (7,441) | ||||
Proceeds from redemptions of short-term investments | 23,179 | 6,427 | 13,239 | 12,570 | ||||
Purchases of long-term investments | (650) | (1,132) | (248) | (560) | ||||
Proceeds from sales of long-term investments | 655 | 1,432 | 47 | 568 | ||||
Purchases of other assets | (392) | (613) | (78) | (99) | ||||
Proceeds from sales of other assets | 6 | 267 | 3 | 6 | ||||
Proceeds from the sales of businesses, products and product lines | 14 | 101 | ||||||
Acquisitions, net of cash acquired | (2,104) | (1,443) | (1,989) | (255) | ||||
Proceeds from the sales of businesses and product lines | 108 | 1,192 | ||||||
Other investing activities | 238 | 32 | (116) | 276 | ||||
| ||||||||
Net cash provided by/(used in) investing activities | 2,707 | (6,733) | ||||||
Net cash provided by investing activities | 4,322 | 4,169 | ||||||
| ||||||||
Financing Activities: | ||||||||
Increase in short-term borrowings, net | 9 | 2,094 | 938 | 90 | ||||
Principal payments on short-term borrowings | (5,274) | (238) | (10,583) | (5,800) | ||||
Proceeds from issuances of long-term debt | 5 | 2,592 | 1,054 | 2 | ||||
Principal payments on long-term debt | (1,042) | (29) | (2) | (22) | ||||
Proceeds from common stock issuances | 45 | 53 | ||||||
Purchases of common stock | (3,415) | (4,787) | (2,000) | (3,304) | ||||
Cash dividends paid | (4,177) | (3,821) | (3,468) | (2,930) | ||||
Stock option transactions and other | 301 | 856 | 318 | 278 | ||||
| ||||||||
Net cash used in financing activities | (13,548) | (3,280) | (13,743) | (11,686) | ||||
Effect of exchange-rate changes on cash and cash equivalents | (4) | 7 | (9) | 2 | ||||
Net (decrease)/increase in cash and cash equivalents | (849) | 344 | ||||||
Net decrease in cash and cash equivalents | (326) | (532) | ||||||
Cash and cash equivalents at beginning of period | 1,808 | 1,520 | 2,247 | 1,808 | ||||
| ||||||||
Cash and cash equivalents at end of period | $ | 959 | $ | 1,864 | $ | 1,921 | $ | 1,276 |
| ||||||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 3,738 | $ | 2,374 | $ | 921 | $ | 1,296 |
Interest | 485 | 312 | 414 | 329 | ||||
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-monthsix-month periods ended AugustMay 28, 20052006 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.May 29, 2005.
We made certain reclassifications to the 20042005 condensed consolidated financial statements to conform to the 20052006 presentation. These reclassifications are primarily related to discontinued operations (see Note 3, Discontinued Operations) as well as to better reflect jurisdictional netting of deferred taxes.
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
On May 16, 2006, we completed the acquisition of all of the outstanding shares of Rinat Neuroscience Corp., a biologics company with several new central-nervous-system product candidates. In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded $478 million, pre-tax, in Share-Based PaymentsMerger-related in-process research and development charges.
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 accordanceconnection 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 completed in the third 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 the first quarter of 2006 in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).
Note 3. Discontinued Operations
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:
• | In June 2006, we entered into an agreement to sell our Consumer Healthcare business for approximately $16.6 billion in cash. This business comprises substantially all of our former Consumer Healthcare segment and other associated amounts, such as purchase-accounting impacts and merger-related costs, and restructuring and implementation costs related to our Adapting to Scale (AtS) productivity initiative, previously reported in the Corporate/Other segment. In addition, certain manufacturing facility assets and liabilities, which were previously part of our Human Health or Corporate/Other segment, are included in the planned sale of the Consumer Healthcare business. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business that will be discontinued have been reclassified into Discontinued operations - net of tax in the condensed consolidated statements of income and the assets and liabilities associated with this business that will be sold have been reclassified into Assets/Liabilities of discontinued operations and other assets/liabilities held for sale, as appropriate, on the condensed consolidated balance sheets. The divestiture of the Consumer Healthcare business is expected to close in late 2006 and is subject to customary closing conditions, including receipt of regulatory approvals. |
• | In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses, which had been included in our Human Health segment, for 70 million euros (approximately $93 million) and recorded a gain of $57 million ($36 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income. In addition, we recorded an impairment charge of $9 million ($6 million, net of tax) related to the third European generic business in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the six months ended July 3, 2005. |
The following amounts, primarily related to our Consumer Healthcare business, have been segregated from continuing operations and included in Discontinued operations - net of tax in the condensed consolidated statements of income:
Three Months Ended | Six Months Ended | ||||||||
(in millions) | July 2, | July 3, |
| July 2, | July 3, | ||||
| |||||||||
Revenues | $ | 1,027 | $ | 987 | $ | 1,946 | $ | 1,951 | |
| |||||||||
Pre-tax income | $ | 160 | $ | 134 | $ | 315 | $ | 290 | |
Provision for taxes on income | (52) | (46) | (105) | (99) | |||||
Income from operations of discontinued businesses - net of tax | 108 | 88 | 210 | 191 | |||||
Pre-tax gains on sales of discontinued businesses | 26 | -- | 31 | 65 | |||||
Provision for taxes on gains | (9) | -- | (11) | (24) | |||||
Gains on sales of discontinued businesses - net of tax | 17 | -- | 20 | 41 | |||||
Discontinued operations-net of tax | $ | 125 | $ | 88 | $ | 230 | $ | 232 | |
The following assets and liabilities, primarily related to our Consumer Healthcare business, have been segregated and included in Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations and other liabilities held for sale, as appropriate, in the condensed consolidated balance sheets:
(in millions) | July 2, | Dec. 31, | ||
| ||||
Accounts receivable, less allowance for doubtful accounts | $ | 742 | $ | 661 |
Inventories | 567 | 561 | ||
Prepaid expenses and taxes | 81 | 71 | ||
Property, plant and equipment - net | 986 | 1,002 | ||
Goodwill | 2,756 | 2,789 | ||
Identifiable intangible assets, less accumulated amortization | 1,643 | 1,557 | ||
Other assets, deferred taxes and deferred charges | 29 | 18 | ||
Assets of discontinued operations and other assets held for sale | $ | 6,804 | $ | 6,659 |
| ||||
Current liabilities | $ | 610 | $ | 538 |
Other | 759 | 699 | ||
Liabilities of discontinued operations and other liabilities held for sale | $ | 1,369 | $ | 1,237 |
Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant for the six months ended July 2, 2006 and July 3, 2005.
Note 4. Adoption of New Accounting Standards
On 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 |
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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 |
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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 14, Share-Based Payments).
Note 2:5. Asset Impairment Charge and Other Costs Associated with the Suspension of Bextra Sales
In the first ninesix months of 2005, we recorded charges totaling $1.2 billion ($762761 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 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 12, 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 4:6. Adapting to Scale Productivity 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:
Three Months Ended | Six Months Ended | ||||||||||||||
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Implementation costs(a) | $ | 104 | $ | 136 | $ | 180 | $ | 33 | $ | 365 | $ | 33 | |||
Restructuring charges(b) | 153 | 174 | 262 | 21 | 556 | 21 | |||||||||
Total AtS costs | $ | 257 | $ | 310 | $ | 442 | $ | 54 | $ | 921 | $ | 54 | |||
(a) | Included in Cost of sales ($ |
(b) | Included in Restructuring charges and merger-related costs. |
In connection withIncluded in Discontinued operations - net of tax are additional pre-tax AtS costs of $7 million and $15 million for the AtS initiative, Pfizer management has performed a comprehensive review of our processes, organizations, systemsthree months 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.six months ended July 2, 2006.
Through OctoberJuly 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 |
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Employee termination costs | $ | 106 | $ | 49 | $ | 57 | $ | 635 | $ | 528 | $ | 107 | ||||
Asset impairments | 62 | 62 | -- | 299 | 299 | -- | ||||||||||
Other | 6 | -- | 6 | 61 | 22 | 39 | ||||||||||
| $ | 174 | $ | 111 | $ | 63 | $ | 995 | $ | 849 | $ | 146 | ||||
(a) | Included in Other current liabilities. |
During the three months and six months ended OctoberJuly 2, 2005,2006, we expensed $85$166 million and $331 million for Employee termination costs, $62$58 million and $177 million for Asset impairments, and $6$38 million and $48 million in Other. Through OctoberJuly 2, 2005,2006, Employee termination costs represent the approved reduction of the workforce by 9225,096 employees, mainly in manufacturing, sales and research. We notified affected individuals and 9034,714 employees were terminated as of OctoberJuly 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 5:7. Merger-Related Costs
We incurred the following merger-related costs:
Three Months Ended | Six Months Ended | ||||||||
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Integration costs | $ | 3 | $ | 191 | $ | 5 | $ | 293 | |
Restructuring charges | 3 | 52 | 6 | 166 | |||||
Total merger-related costs(a) | $ | 6 | $ | 243 | $ | 11 | $ | 459 | |
(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. |
Included in Discontinued operations - net of tax are additional pre-tax merger-related costs primarily in connection with our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003:
Three Months Ended | Nine Months Ended | |||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | ||||||
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Integration costs(a) | $ | 93 | $ | 113 | $ | 390 | $ | 367 | ||
Restructuring costs(a) | 61 | 77 | 232 | 359 | ||||||
Total merger-related costs | $ | 154 | $ | 190 | $ | 622 | $ | 726 | ||
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In connection with$4 million and $5 million for the acquisition of Pharmacia, Pfizer management approved plans to restructurethree months and integratesix months ended July 2, 2006 and $9 million and $16 million for the operations of both legacy Pfizerthree months 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,six months ended July 3, 2005. The restructuring of our operations as a result of our acquisition of Pharmacia includes consulting, systems integrations,
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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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 8. 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 businesses and product linesregulations.
In the first six months of 2005, we recorded an income tax charge of $1.7 billion, included in Provision/(benefit) for taxes on income, in connection with our decision to repatriate about $37 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 estimate 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 $490 million, due primarily to guidance issued by the U.S. Treasury in the second quarter of 2005, partially offset by our decision to increase the amount of the repatriation.
B.Tax Contingencies
On January 25, 2006, the Company was not materialnotified 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.
In the second quarter of 2005, we recorded a tax benefit of $586 million primarily related to the resolution of certain tax positions.
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 8:9. Comprehensive Income/(Expense)Income
The components of comprehensive income/(expense) follow:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | (millions of dollars) | July 2, | July 3, | July 2, | July 3, | |||||||||
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Net income | $ | 1,589 | $ | 3,341 | $ | 5,352 | $ | 8,536 | Net income | $ | 2,415 | $ | 3,463 | $ | 6,526 | $ | 3,763 | |
Other comprehensive income/(expense): | 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 | ||||||||||||||
Currency translation adjustment and other(a) | Currency translation adjustment and other(a) | 688 | (708) | 998 | (985) | |||||||||||||
Net unrealized gains/(losses) on derivative financial instruments(b) | Net unrealized gains/(losses) on derivative financial instruments(b) | 22 | (8) | 93 | (27) | |||||||||||||
Net unrealized gains/(losses) on available-for-sale securities(b) | Net unrealized gains/(losses) on available-for-sale securities(b) | (36) | (48) | (33) | (119) | |||||||||||||
Minimum pension liability(b) | Minimum pension liability(b) | (17) | 16 | (29) | 14 | |||||||||||||
Total other comprehensive income/(expense) | (176) | 659 | (1,293) | 604 | Total other comprehensive income/(expense) | 657 | (748) | 1,029 | (1,117) | |||||||||
Total comprehensive income/(expense) | $ | 1,413 | $ | 4,000 | $ | 4,059 | $ | 9,140 | ||||||||||
Total comprehensive income | Total comprehensive income | $ | 3,072 | $ | 2,715 | $ | 7,555 | $ | 2,646 | |||||||||
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(a) | Includes changes in currency translation adjustments of $19 million and $21 million for the three months and six months ended July 2, 2006, and ($17) million and ($25) million for the three months and six months ended July 2, 2005 related to discontinued operations. |
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(b) | Amounts associated with discontinued operations are not significant. |
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Note 9:10. Financial Instruments
Derivative Financial Instruments and Hedging ActivitiesA. Long-Term Debt
During the first nine months of 2005,On February 22, 2006, we entered intoissued the following incremental or new derivative and hedging activities:Japanese yen fixed-rate bonds, to be used for general corporate purposes:
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These foreign exchange derivatives serveThe notes were issued under a $5 billion debt shelf registration filed with the SEC in November 2002. As of July 2, 2006, we had the ability 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 months of 2005.
Long-Term Debtborrow approximately $1 billion by issuing debt securities under that debt shelf registration statement.
In July 2005,May 2006, 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 atas of December 31, 2004.2005 and included in Short-term debt as of July 2, 2006. Notice to call was given to the Trustees and the notes were redeemed early in September 2005.the third quarter of 2006.
B. Derivative Financial Instruments and Hedging Activities
There was no material ineffectiveness in any hedging relationship reported in earnings in the first six months of 2006.
Foreign Exchange Risk
During the first six months of 2006, we entered into the following new or incremental hedging or offset activities:
Instrument(a) | Primary | (b) |
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| Hedged or Offset Item | Notional Amount as of | Maturity Date | |
Forward | OCL | -- | Short-term foreign currency assets and liabilities(d) | $1,074 | 2006 | |||||
Forward | Prepaid | CF | Euro intercompany loan |
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LT yen debt | LTD | NI | Yen net investments | 523 | 2011 | |||||
LT yen debt | LTD | NI | Yen net investments | 480 | 2016 |
(a) | Forward = Forward-exchange contracts; LT yen debt = Long-term yen debt |
(b) | The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge foreign exchange risk. OCL = Other current liabilities; Prepaid = Prepaid expenses and taxes; LTD = Long-term debt |
(c) | CF = Cash flow hedge; NI = Net investment hedge |
(d) | Forward-exchange contracts used to offset short-term foreign currency assets and liabilities were primarily for intercompany transactions in euros, Japanese yen, Canadian dollars, U.K. pounds and Australian dollars. |
These foreign exchange instruments serve to protect us against the impact of the translation into U.S. dollars of certain foreign exchange denominated transactions.
Note 10:11. 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.
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Finished goods | $ | 2,223 | $ | 1,742 | ||
Work-in-process | 3,153 | 2,379 | ||||
Raw materials and supplies | 1,016 | 1,357 | ||||
Total inventories(a) | $ | 6,392 | $ | 5,478 | ||
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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 11:12. Goodwill and Other Intangible Assets
A. Goodwill
The changes in the carrying amount of goodwill by segment for the ninesix months ended OctoberJuly 2, 20052006 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 | Animal | Other | Total | ||||
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Balance, December 31, 2005 | $ | 20,919 | $ | 56 | $ | 10 | $ | 20,985 |
Additions(a) | 166 | -- | -- | 166 | ||||
Other(b) | (99) | 5 | -- | (94) | ||||
Balance, July 2, 2006 | $ | 20,986 | $ | 61 | $ | 10 | $ | 21,057 |
(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 | July 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) | $ | 32,426 | $ | (10,637) | $ | 30,729 | $ | (8,810) |
Brands | 1,057 | (48) | 1,037 | (14) | 887 | (73) | 885 | (51) | ||||||||
License agreements | 165 | (28) | 158 | (17) | 155 | (34) | 152 | (27) | ||||||||
Trademarks | 157 | (92) | 134 | (90) | 109 | (69) | 106 | (65) | ||||||||
Other(a) | 436 | (205) | 390 | (186) | 518 | (247) | 446 | (203) | ||||||||
Total amortized finite-lived intangible assets | 32,917 | (8,443) | 34,856 | (6,274) | 34,095 | (11,060) | 32,318 | (9,156) | ||||||||
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Brands | 3,898 | -- | 4,012 | -- | 2,990 | -- | 2,990 | -- | ||||||||
License agreements | 316 | -- | 356 | -- | ||||||||||||
Trademarks | 227 | -- | 235 | -- | 79 | -- | 79 | -- | ||||||||
Other(b) | 61 | -- | 66 | -- | 30 | -- | 13 | -- | ||||||||
Total indefinite-lived intangible assets | 4,502 | -- | 4,669 | -- | 3,099 | -- | 3,082 | -- | ||||||||
Total identifiable intangible assets | $ | 37,419 | $ | (8,443) | $ | 39,525 | $ | (6,274) | $ | 37,194 | $ | (11,060) | $ | 35,400 | $ | (9,156) |
Total identifiable intangible assets, less accumulated amortization | $ | 26,134 | $ |
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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 ninesix months 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 be primarily included in Cost of Sales.
In the first six months 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 of Bextra Sales) which wasBextra. In addition, in connection with the suspension, we recorded $7 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; $5 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; and $173 million for an estimate of customer returns, primarily included against Revenues. Substantially all of these charges were recorded in the first quarter of 2005.
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$848 million and $874 million for the three months ended OctoberJuly 2, 2006 and July 3, 2005, and September 26, 2004 and $2.6$1.7 billion and $2.5$1.8 billion for the ninesix months ended OctoberJuly 2, 2006 and July 3, 2005.
Included in Discontinued operations - net of tax is additional pre-tax amortization expense for finite-lived intangible assets of $4 million and $3 million for the three months ended July 2, 2006 and July 3, 2005 and September 26, 2004.$7 million and $5 million for the six months ended July 2, 2006 and July 3, 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 billion in 2009, 2010 and 2010.2011.
Note 12:13. Benefit Plans
The components of net periodic benefit cost of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the three months ended OctoberJuly 2, 2006 and July 3, 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 | $ | 80 | $ | 71 | $ | 9 | $ | 8 | $ | 71 | $ | 67 | $ | 10 | $ | 7 | $ | 92 | $ | 80 | $ | 11 | $ | 10 | $ | 75 | $ | 76 | $ | 12 | $ | 10 |
Interest cost | 104 | 98 | 15 | 15 | 76 | 71 | 28 | 18 | 112 | 102 | 15 | 14 | 76 | 78 | 31 | 28 | ||||||||||||||||
Expected return on plan assets | (148) | (143) | -- | -- | (77) | (74) | (6) | (4) | (154) | (149) | -- | -- | (79) | (80) | (6) | (5) | ||||||||||||||||
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Prior service costs/(gains) | 4 | 5 | -- | -- | (1) | 3 | 1 | -- | ||||||||||||||||||||||||
Prior service costs/(credits) | 2 | 3 | (1) | 1 | -- | -- | 1 | (1) | ||||||||||||||||||||||||
Net transition obligation | -- | -- | -- | -- | 1 | -- | -- | -- | -- | -- | -- | -- | 1 | 1 | -- | -- | ||||||||||||||||
Actuarial losses | 26 | 25 | 10 | 9 | 23 | 15 | 4 | -- | 28 | 25 | 10 | 9 | 25 | 23 | 8 | 5 | ||||||||||||||||
Curtailments and settlements - net | 3 | -- | -- | -- | 1 | 18 | -- | -- | 21 | -- | 1 | -- | 7 | 10 | 12 | -- | ||||||||||||||||
Special termination benefits | 1 | -- | -- | -- | 1 | -- | 1 | -- | 4 | -- | -- | -- | 7 | 3 | 2 | -- | ||||||||||||||||
Less: amounts included in discontinued operations | (4) | (4) | (1) | (1) | (4) | (4) | (1) | (1) | ||||||||||||||||||||||||
Net periodic benefit costs | $ | 70 | $ | 56 | $ | 34 | $ | 32 | $ | 95 | $ | 100 | $ | 38 | $ | 21 | $ | 101 | $ | 57 | $ | 35 | $ | 33 | $ | 108 | $ | 107 | $ | 59 | $ | 36 |
The components of net periodic benefit cost of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the ninesix months ended OctoberJuly 2, 2006 and July 3, 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 | 2005 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
Service cost | $ | 239 | $ | 215 | $ | 28 | $ | 25 | $ | 224 | $ | 197 | $ | 29 | $ | 27 | $ | 186 | $ | 159 | $ | 22 | $ | 19 | $ | 149 | $ | 153 | $ | 24 | $ | 19 |
Interest cost | 310 | 293 | 44 | 44 | 234 | 214 | 84 | 80 | 224 | 206 | 30 | 29 | 150 | 158 | 63 | 56 | ||||||||||||||||
Expected return on plan assets | (445) | (429) | -- | -- | (238) | (215) | (17) | (15) | (315) | (297) | -- | -- | (156) | (161) | (14) | (11) | ||||||||||||||||
Amortization of: | ||||||||||||||||||||||||||||||||
Prior service costs/(gains) | 11 | 13 | 1 | 1 | (2) | 7 | 1 | 1 | ||||||||||||||||||||||||
Prior service costs/(credits) | 4 | 7 | (1) | 1 | -- | (1) | 1 | -- | ||||||||||||||||||||||||
Net transition obligation | -- | -- | -- | -- | 2 | 1 | -- | -- | -- | -- | -- | -- | 1 | 1 | -- | -- | ||||||||||||||||
Actuarial losses | 77 | 74 | 29 | 27 | 71 | 42 | 14 | 12 | 59 | 51 | 21 | 19 | 51 | 48 | 17 | 10 | ||||||||||||||||
Curtailments and settlements - net | 3 | -- | -- | -- | 11 | (1) | -- | -- | 25 | -- | -- | -- | 9 | 10 | 15 | -- | ||||||||||||||||
Special termination benefits | 1 | -- | -- | -- | 11 | -- | 1 | -- | 10 | -- | -- | -- | 11 | 10 | 5 | -- | ||||||||||||||||
Less: amounts included in discontinued operations | (8) | (8) | (1) | (1) | (8) | (7) | (2) | (2) | ||||||||||||||||||||||||
Net periodic benefit costs | $ | 196 | $ | 166 | $ | 102 | $ | 97 | $ | 313 | $ | 245 | $ | 112 | $ | 105 | $ | 185 | $ | 118 | $ | 71 | $ | 67 | $ | 207 | $ | 211 | $ | 109 | $ | 72 |
For the first ninesix months of 2005,2006, we contributed from the Company's general assets, $52 million to our U.S. qualified pension plans, $301 million to our international pension plans, $124$59 million to our U.S. supplemental (non-qualified) pension plans, $294 million to our international pension plans, and $123$88 million to our postretirement plans. AsIn July 2006, we made voluntary tax-deductible contributions in excess of October 2, 2005,minimum funding requirements of $450 million to certain of our U.S. qualified pension plans and voluntary tax-deductible contributions of $90 million to certain of our postretirement plans.
During 2006, we expect to contribute, from the Company's general assets, during 2005, a total (inclusive of amounts contributed during the first nine months of 2005) of $53$453 million to our U.S. qualified pension plans, $396 million to our international pension plans, $137$76 million to our U.S. supplemental (non-qualified) pension plans, $449 million to our international pension plans and $166$253 million to our postretirement plans. Contributions expected to be made for 2006 are inclusive of amounts contributed during the first six months of 2006 and voluntary contributions made in July 2006. The contributions from the Company's general assets include direct employer benefit payments. Amounts associated with discontinued operations are not significant.
Note 14. 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 that 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. RSUs, PSAs, PCSAs and restricted stock grants count as three shares while 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 July 2, 2006, 305 million shares were available for award, which include 26 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, to a lesser extent, shares held in our Employee Benefit Trust to satisfy our obligations under these programs.
A. Impact on Net Income
The components of share-based compensation expense and the associated tax benefit follow:
Three Months Ended | Six Months Ended | ||||||||||
(millions of dollars) | July 2, | July 3, | July 2, | July 3, | |||||||
|
|
|
| ||||||||
Stock option expense | $ | 100 | $ | -- | $ | 221 | $ | -- | |||
Restricted stock unit expense | 50 | 37 | 90 | 51 | |||||||
Performance share awards and performance-contingent share awards expense | 4 | 20 | 15 | 28 | |||||||
Share-based payment expense | 154 | 57 | 326 | 79 | |||||||
Tax benefit for share-based compensation expense | (45) | (20) | (93) | (27) | |||||||
Share-based payment expense, net of tax | $ | 109 | $ | 37 | $ | 233 | $ | 52 | |||
Included in Discontinued operations - net of tax is additional share-based compensation expense as shown in the following table:
Three Months Ended | Six Months Ended | ||||||||||
(millions of dollars) | July 2, |
| July 3, |
| July 2, |
| July 3, | ||||
| |||||||||||
Share-based payment expense | $ | 7 | $ | 2 | $ | 15 | $ | 3 | |||
Tax benefit for share-based compensation expense | (2) | (1) | (5) | (1) | |||||||
Share-based payment expense, net of tax | $ | 5 | $ | 1 | $ | 10 | $ | 2 | |||
Amounts capitalized as part of inventory cost were not significant. In the three months and six months ended July 2, 2006, the impact of modifications under the AtS productivity initiative to share-based awards was not significant and, in the three months and six months ended July 3, 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 expenses 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 allocating stock option compensation expense to a method 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 typically occurs in equal annual installments after three, four and five years from the grant date. 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. In the event of a divestiture, options held by employees of the divested business are immediately vested and are exercisable from three months to their remaining term, depending on various conditions.
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:
Three Months Ended | Six Months Ended | ||||||
July 2, | July 3, | July 2, | July 3, | ||||
|
| ||||||
Expected dividend yield (a) | 3.66% |
| 2.72% |
| 3.66% |
| 2.90% |
Risk-free interest rate (b) | 4.59% |
| 3.75% | 4.59% | 3.96% | ||
Expected stock price volatility (c) | 24.50% |
| 16.90% | 24.50% | 21.93% | ||
Expected term (d) (years) | 6 |
| 2.75 | 6 | 5.75 | ||
(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 2005, we used an average term structure of volatility quoted to us by financial institutions, after consideration of historical volatility.
The following table summarizes all stock option activity during the six months ended July 2, 2006:
Shares (thousands) | Weighted- | Weighted- | Aggregate | ||||
Outstanding, January 1, 2006 | 627,404 | $33.51 | |||||
Granted | 68,699 | 26.20 | |||||
Exercised | (17,764) | 15.52 | |||||
Forfeited | (4,987) | 31.37 | |||||
Cancelled | (36,909) | 32.43 | |||||
Outstanding, July 2, 2006 | 636,443 | 33.31 | 5.5 | $286 | |||
Vested and expected to vest(b), July 2, 2006 | 627,736 | 33.34 | 5.5 | 286 | |||
Exercisable, July 2, 2006 | 436,636 | 34.50 | 4.1 | 286 |
(a) | Market price of underlying stock less exercise price. |
(b) | The number of options expected to vest takes into account an estimate of expected forfeitures. |
The following table provides data related to all stock option activity:
Three Months Ended | Six Months Ended | ||||||||||||
(millions of dollars, except per stock option amounts and years) | July 2, |
| July 3, |
| July 2, |
| July 3, | ||||||
| |||||||||||||
Weighted-average grant date fair value per stock option | $ | 5.42 | $ | 3.23 | $ | 5.42 | $ | 5.15 | |||||
Aggregate intrinsic value on exercise | $ | 66 | $ | 210 | $ | 171 | $ | 296 | |||||
Cash received upon exercise | $ | 109 | $ | 160 | $ | 267 | $ | 262 | |||||
Tax benefits realized related to exercise | $ | 20 | $ | 80 | $ | 53 | $ | 103 | |||||
Total compensation cost related to nonvested stock options not yet recognized, pre-tax(a) | $ | 567 | N/A | $ | 567 | N/A | |||||||
Weighted-average period in years over which stock option compensation cost is expected to be recognized(b) | 1.6 | N/A | 1.6 | N/A | |||||||||
|
|
| |||||||||||
(a) | The total compensation cost related to our Consumer Healthcare business is $27 million. |
| |||||||||||
(b) | The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
| |||||||||||
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 of continuous service; 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. 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 all RSU activity during the six months ended July 2, 2006:
(thousands of shares) | Shares |
| Weighted-Average |
| |||
Nonvested, January 1, 2006 | 12,803 | $26.89 | |
Granted | 12,682 | 26.15 | |
Vested | (3,300) | 27.31 | |
Reinvested dividend equivalents | 307 | 25.01 | |
Forfeited | (782) | 26.06 | |
Nonvested, July 2, 2006 | 21,710 | 26.36 |
The following table provides data related to all RSU activity:
Three Months Ended | Six Months Ended | ||||||||||||
(millions of dollars, except per RSU amounts and years) | July 2, |
| July 3, |
| July 2, |
| July 3, | ||||||
| |||||||||||||
Weighted-average grant date fair value per RSU | $ | 25.75 | $ | 27.53 | $ | 26.35 | $ | 26.24 | |||||
Total fair value of shares vested | $ | 1 | $ | 1 | $ | 90 | $ | 1 | |||||
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax(a) | $ | 388 | N/A | $ | 388 | N/A | |||||||
Weighted-average period in years over which RSU cost is expected to be recognized(b) | 4.3 | N/A | 4.3 | N/A | |||||||||
|
|
| |||||||||||
(a) | The total compensation cost related to our Consumer Healthcare business is $20 million. |
| |||||||||||
(b) | The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
| |||||||||||
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 that 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 expenses 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 that 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 are adjusted to the fair value of our common stock at each accounting period until the date of payment.
The following table summarizes all PSA and PCSA activity during the six months ended July 2, 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 | 1,539 | 26.19 | |
Vested | (1,583) | 26.20 | |
Forfeited(a) | (1,513) | 26.20 | |
Nonvested, July 2, 2006 | 11,809 | 23.82 |
(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 following table provides data related to all PSA and PCSA activity:
Three Months Ended | Six Months Ended | ||||||||||||
(millions of dollars, except per PCSA amounts and years) | July 2, |
| July 3, |
| July 2, |
| July 3, | ||||||
| |||||||||||||
Weighted-average grant date intrinsic value per PCSA | $ | 23.47 | $ | 27.10 | $ | 23.47 | $ | 27.10 | |||||
Total intrinsic value of vested PCSA shares | $ | -- | $ | -- | $ | 50 | $ | 56 | |||||
Total compensation cost related to nonvested PSA grants not yet recognized, pre-tax(a) | $ | 17 | N/A | $ | 17 | N/A | |||||||
Weighted-average period in years over which PSA cost is expected to be recognized(b) | 2.5 | N/A | 2.5 | N/A | |||||||||
| |||||||||||||
(a) | The total compensation cost related to our Consumer Healthcare business is nominal. |
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(b) | The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
| |||||||||||
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 |
| July 2, |
| Dec. 31, |
| |||||
3,051 | $33.85 | 0.4 | -- | ||
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 three months and six months ended July 3, 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) |
| Three Months |
| Six Months |
| ||||
Net income available to common shareholders used in the calculation of basic earnings per common share: | ||||
As reported under GAAP(a) | $ | 3,461 | $ | 3,761 |
Compensation expense - net of tax(b) | (104) | (252) | ||
Pro forma | $ | 3,357 | $ | 3,509 |
Basic earnings per common share: | ||||
As reported under GAAP(a) | $ | 0.47 | $ | 0.51 |
Compensation expense - net of tax(b) | (0.01) | (0.04) | ||
Pro forma | $ | 0.46 | $ | 0.47 |
Net income available to common shareholders used in the calculation of diluted earnings per common share: | ||||
As reported under GAAP(a) | $ | 3,461 | $ | 3,761 |
Compensation expense - net of tax(b) | (104) | (252) | ||
Pro forma | $ | 3,357 | $ | 3,509 |
Diluted earnings per common share: | ||||
As reported under GAAP(a) | $ | 0.47 | $ | 0.51 |
Compensation expense - net of tax(b) | (0.02) | (0.04) | ||
Pro forma | $ | 0.45 | $ | 0.47 |
(a) | Includes stock-based compensation expense, net of related tax effects, of $38 million and $53 million for the three months and six months ended July 3, 2005. |
(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 13:15. 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 | Three Months Ended | Six Months Ended | |||||||||||||
(millions) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | July 2, | July 3, | July 2, | July 3, | ||||||||
| ||||||||||||||||
EPS Numerator - Basic: | ||||||||||||||||
Income from continuing operations | $ | 1,602 | $ | 3,298 | $ | 5,345 | $ | 8,461 | $ | 2,290 | $ | 3,375 | $ | 6,296 | $ | 3,531 |
Less: Preferred stock dividends - net of tax | 1 | 1 | 4 | 4 | 2 | 2 | 3 | 2 | ||||||||
Income available to common shareholders from continuing operations | 1,601 | 3,297 | 5,341 | 8,457 | 2,288 | 3,373 | 6,293 | 3,529 | ||||||||
Discontinued operations - net of tax | (13) | 43 | 7 | 75 | 125 | 88 | 230 | 232 | ||||||||
Net income available to common shareholders | $ | 1,588 | $ | 3,340 | $ | 5,348 | $ | 8,532 | $ | 2,413 | $ | 3,461 | $ | 6,523 | $ | 3,761 |
| ||||||||||||||||
EPS Denominator - Basic: | ||||||||||||||||
Weighted-average number of common shares outstanding | 7,333 | 7,501 | 7,372 | 7,554 | 7,282 | 7,366 | 7,298 | 7,391 | ||||||||
| ||||||||||||||||
EPS Numerator - Diluted: | ||||||||||||||||
Income from continuing operations | $ | 1,602 | $ | 3,298 | $ | 5,345 | $ | 8,461 | $ | 2,290 | $ | 3,375 | $ | 6,296 | $ | 3,531 |
Less: ESOP contribution - net of tax | 1 | 1 | 3 | 5 | 1 | 2 | 2 | 2 | ||||||||
Income available to common shareholders from continuing operations | 1,601 | 3,297 | 5,342 | 8,456 | 2,289 | 3,373 | 6,294 | 3,529 | ||||||||
Discontinued operations - net of tax | (13) | 43 | 7 | 75 | 125 | 88 | 230 | 232 | ||||||||
Net income available to common shareholders | $ | 1,588 | $ | 3,340 | $ | 5,349 | $ | 8,531 | $ | 2,414 | $ | 3,461 | $ | 6,524 | $ | 3,761 |
| ||||||||||||||||
EPS Denominator - Diluted: | ||||||||||||||||
Weighted-average number of common shares outstanding | 7,333 | 7,501 | 7,372 | 7,554 | 7,282 | 7,366 | 7,298 | 7,391 | ||||||||
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock | 49 | 68 | 52 | 88 | 23 | 52 | 32 | 54 | ||||||||
Weighted-average number of common shares outstanding and common share equivalents | 7,382 | 7,569 | 7,424 | 7,642 | 7,305 | 7,418 | 7,330 | 7,445 | ||||||||
Outstanding stock options, representing about 563592 million shares and 513591 million shares of common stock during the three-month and nine-monthsix-month periods ended OctoberJuly 2, 2005,2006 and about 391513 million shares and 319519 million shares of common stock during the three-month and nine-monthsix-month periods ended September 26, 2004,July 3, 2005, 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 14:16. 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. |
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| |
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|
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 and minority interests and certaininterests. Certain costs, such as significant impacts of purchase accounting for acquisitions, merger-related costs and restructuring charges and merger-related costs.costs related to our AtS productivity initiative, are included in Corporate/Other only. 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.our businesses.
Revenues and profit/(loss) by segment for the three months and ninesix months ended OctoberJuly 2, 2006 and July 3, 2005, and September 26, 2004, follow:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
(millions of dollars) | Oct. 2, | Sept. 26, | Oct. 2, | Sept. 26, | July 2, | July 3, |
| July 2, |
| July 3, | ||||||||||||||
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Revenues: | ||||||||||||||||||||||||
Human Health | $ | 10,552 | $ | 11,288 | $ | 32,629 | $ | 33,033 | $ | 10,999 | $ | 10,723 | $ | 22,099 | $ | 22,236 | ||||||||
Consumer Healthcare | 921 | 851 | 2,835 | 2,524 | ||||||||||||||||||||
Animal Health | 503 | 475 | 1,576 | 1,387 | 583 | 578 | 1,094 | 1,073 | ||||||||||||||||
Corporate/Other(a) | 213 | 217 | 665 | 649 | 159 | 151 | 295 | 286 | ||||||||||||||||
Total revenues | $ | 12,189 | $ | 12,831 | $ | 37,705 | $ | 37,593 | $ | 11,741 | $ | 11,452 | $ | 23,488 | $ | 23,595 | ||||||||
| ||||||||||||||||||||||||
Profit/(loss) | ||||||||||||||||||||||||
Segment profit/(loss)(b) | ||||||||||||||||||||||||
Human Health | $ | 4,876 | $ | 5,332 | $ | 14,811 | $ | 15,269 | $ | 5,046 | $ | 4,581 | $ | 10,794 | $ | 9,966 | ||||||||
Consumer Healthcare | 169 | 170 | 457 | 483 | ||||||||||||||||||||
Animal Health | 85 | 82 | 288 | 237 | 117 | 123 | 215 | 203 | ||||||||||||||||
Corporate/Other(a) | (2,933) | (b) | (1,633) | (c) | (7,387) | (b) | (5,481) | (c) | (2,080) | (c) | (1,792) | (d) | (3,656) | (c) | (4,523) | (d) | ||||||||
Total profit/(loss) | $ | 2,197 | $ | 3,951 | $ | 8,169 | $ | 10,508 | $ | 3,083 | $ | 2,912 | $ | 7,353 | $ | 5,646 | ||||||||
(a) |
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(b) |
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(c) | For the three months and |
(d) | For the three months and six months ended July 3, 2005, Corporate/Other includes (i) significant impacts of |
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 | Six Months Ended | ||||||||||||
(millions of dollars) | July 2, | July 3, |
| % |
| July 2, | July 3, |
| % | ||||
| |||||||||||||
HUMAN HEALTH | |||||||||||||
Cardiovascular and metabolic diseases | $ | 4,769 | $ | 4,471 | 7% | $ | 9,517 | $ | 9,197 | 3% | |||
Central nervous system disorders | 1,643 | 1,537 | 7 | 3,287 | 3,129 | 5 | |||||||
Arthritis and pain | 627 | 549 | 14 | 1,268 | 1,188 | 7 | |||||||
Infectious and respiratory diseases | 835 | 1,102 | (24) | 1,772 | 2,585 | (31) | |||||||
Urology | 660 | 626 | 6 | 1,323 | 1,328 | -- | |||||||
Oncology | 540 | 513 | 5 | 1,010 | 992 | 2 | |||||||
Ophthalmology | 352 | 341 | 3 | 689 | 674 | 2 | |||||||
Endocrine disorders | 232 | 263 | (12) | 478 | 521 | (8) | |||||||
All other | 1,017 | 1,073 | (5) | 2,107 | 2,132 | (1) | |||||||
Alliance revenue | 324 | 248 | 31 | 648 | 490 | 32 | |||||||
Total Human Health | 10,999 | 10,723 | 3 | 22,099 | 22,236 | (1) | |||||||
ANIMAL HEALTH | 583 | 578 | 1 | 1,094 | 1,073 | 2 | |||||||
OTHER | 159 | 151 | 6 | 295 | 286 | 4 | |||||||
Total revenues | $ | 11,741 | $ | 11,452 | 3 | $ | 23,488 | $ | 23,595 | -- | |||
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 OctoberJuly 2, 2005,2006, the related condensed consolidated statements of income for the three-month and nine-monthsix-month periods ended OctoberJuly 2, 20052006 and September 26, 2004,July 3, 2005, and the related condensed consolidated statements of cash flows for the nine-monthsix-month periods ended OctoberJuly 2, 20052006 and September 26, 2004.July 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, 2005August 11, 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 26, provides a general description of Pfizer's business; discusses significant acquisitions made during the first six months of 2006, as well as the planned disposition of the Consumer Healthcare business; provides information about our operating environment; and summarizes our productivity initiative. |
• | Revenues. This section, beginning on page 29, provides an analysis of our products and revenues for the three months and six months ended July 2, 2006 and July 3, 2005, as well as an overview of important product developments. |
• | Costs and Expenses. This section, beginning on page 39, provides a discussion about our costs and expenses. |
• | Provision/(Benefit) for Taxes on Income. This section, beginning on page 40, provides a discussion of items impacting our tax provision for the periods presented. |
• | Adjusted Income. This section, beginning on page 41, provides a discussion of an alternative view of performance used by management. |
• | Financial Condition, Liquidity and Capital Resources. This section, beginning on page 45, provides an analysis of our balance sheets as of July 2, 2006 and December 31, 2005, and cash flows for the six months ended July 2, 2006 and July 3, 2005, as well as a discussion of our outstanding debt and commitments that existed as of July 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 49, provides a discussion of forecasted financial performance. |
• | Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 50, 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 | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
(millions of dollars, except per common share data) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | July 2, | July 3, | % Change | July 2, | July 3, | % Change | ||||||||||||||||
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Revenues | $ | 12,189 | $ | 12,831 | (5) | $ | 37,705 | $ | 37,593 | -- | $ | 11,741 | $ | 11,452 | 3% | $ | 23,488 | $ | 23,595 | --% | ||||||||
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Cost of sales | 1,908 | 1,640 | 16 | 6,180 | 5,185 | 19 | 1,790 | 1,762 | 2 | 3,461 | 3,639 | (5) | ||||||||||||||||
% of revenues | 15.7 | % | 12.8 | % | 16.4 | % | 13.8 | % | 15.2 | % | 15.4 | % | 14.7 | % | 15.4 | % | ||||||||||||
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Selling, informational and administrative expenses | 3,931 | 4,036 | (3) | 12,242 | 12,227 | -- | 3,881 | 3,766 | 3 | 7,276 | 7,431 | (2) | ||||||||||||||||
% of revenues | 32.3 | % | 31.5 | % | 32.5 | % | 32.5 | % | 33.1 | % | 32.9 | % | 31.0 | % | 31.5 | % | ||||||||||||
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Research and development expenses | 1,783 | 1,888 | (6) | 5,421 | 5,356 | 1 | 1,742 | 1,830 | (5) | 3,285 | 3,547 | (7) | ||||||||||||||||
% of revenues | 14.6 | % | 14.7 | % | 14.4 | % | 14.2 | % | 14.8 | % | 16.0 | % | 14.0 | % | 15.0 | % | ||||||||||||
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Amortization of intangible assets | 836 | 843 | (1) | 2,576 | 2,496 | 3 | 823 | 856 | (4) | 1,648 | 1,736 | (5) | ||||||||||||||||
% of revenues | 6.9 | % | 6.6 | % | 6.8 | % | 6.6 | % | 7.0 | % | 7.5 | % | 7.0 | % | 7.4 | % | ||||||||||||
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Merger-related in-process research and development charges | 1,390 | -- | * | 1,652 | 955 | 73 | 513 | 260 | 97 | 513 | 262 | 96 | ||||||||||||||||
% of revenues | 11.4 | % | -- | 4.4 | % | 2.5 | % | 4.4 | % | 2.3 | % | 2.2 | % | 1.1 | % | |||||||||||||
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Restructuring charges and merger-related costs | 307 | 190 | 62 | 796 | 726 | 10 | 268 | 264 | 2 | 567 | 480 | 18 | ||||||||||||||||
% of revenues | 2.5 | % | 1.5 | % | 2.1 | % | 1.9 | % | 2.3 | % | 2.3 | % | 2.4 | % | 2.0 | % | ||||||||||||
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Other (income)/deductions - net | (163) | 283 | * | 669 | 140 | 378 | (359) | (198) | 81 | (615) | 854 | (172) | ||||||||||||||||
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Income from continuing operations before provision for taxes on income and minority interests | 2,197 | 3,951 | (44) | 8,169 | 10,508 | (22) | ||||||||||||||||||||||
Income from continuing operations before provision/(benefit) for taxes on income, and minority interests | 3,083 | 2,912 | 6 | 7,353 | 5,646 | 30 | ||||||||||||||||||||||
% of revenues | 18.0 | % | 30.8 | % | 21.7 | % | 28.0 | % | 26.3 | % | 25.4 | % | 31.3 | % | 23.9 | % | ||||||||||||
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Provision for taxes on income | 591 | 650 | (9) | 2,815 | 2,040 | 38 | ||||||||||||||||||||||
Provision/(benefit) for taxes on income | 790 | (464) | * | 1,052 | 2,111 | (50) | ||||||||||||||||||||||
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Effective tax rate | 26.9 | % | 16.5 | % | 34.4 | % | 19.4 | % | 25.6 | % | (15.9) | % | 14.3 | % | 37.4 | % | ||||||||||||
| 53 | |||||||||||||||||||||||||||
Minority interests | 4 | 3 | 9 | 7 | 33 | 3 | 1 | 154 | 5 | 4 | 67 | |||||||||||||||||
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Income from continuing operations | 1,602 | 3,298 | (51) | 5,345 | 8,461 | (37) | 2,290 | 3,375 | (32) | 6,296 | 3,531 | 78 | ||||||||||||||||
% of revenues | 13.1 | % | 25.7 | % | 14.2 | % | 22.5 | % | 19.5 | % | 29.5 | % | 26.8 | % | 15.0 | % | ||||||||||||
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Discontinued operations - net of tax | (13) | 43 | * | 7 | 75 | (91) | 125 | 88 | 43 | 230 | 232 | -- | ||||||||||||||||
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Net income | $ | 1,589 | $ | 3,341 | (52) | $ | 5,352 | $ | 8,536 | (37) | $ | 2,415 | $ | 3,463 | (30) | $ | 6,526 | $ | 3,763 | 73 | ||||||||
% of revenues | 13.0 | % | 26.0 | % | 14.2 | % | 22.7 | % | 20.6 | % | 30.2 | % | 27.8 | % | 15.9 | % | ||||||||||||
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Earnings per common share - Basic: | ||||||||||||||||||||||||||||
Earnings per common share - basic: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.44 | (50) | $ | 0.73 | $ | 1.12 | (35) | $ | 0.31 | $ | 0.46 | (33) | $ | 0.86 | $ | 0.48 | 79 | ||||||||
Discontinued operations - net of tax | -- | 0.01 | * | -- | 0.01 | * | 0.02 | 0.01 | 100 | 0.03 | 0.03 | -- | ||||||||||||||||
Net income | $ | 0.22 | $ | 0.45 | (51) | $ | 0.73 | $ | 1.13 | (35) | $ | 0.33 | $ | 0.47 | (30) | $ | 0.89 | $ | 0.51 | 75 | ||||||||
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Earnings per common share - Diluted: | ||||||||||||||||||||||||||||
Earnings per common share - diluted: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.22 | $ | 0.43 | (49) | $ | 0.72 | $ | 1.11 | (35) | $ | 0.31 | $ | 0.46 | (33) | $ | 0.86 | $ | 0.48 | 79 | ||||||||
Discontinued operations - net of tax | -- | 0.01 | * | -- | 0.01 | * | 0.02 | 0.01 | 100 | 0.03 | 0.03 | -- | ||||||||||||||||
Net income | $ | 0.22 | $ | 0.44 | (50) | $ | 0.72 | $ | 1.12 | (36) | $ | 0.33 | $ | 0.47 | (30) | $ | 0.89 | $ | 0.51 | 75 | ||||||||
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Cash dividends paid per common share | $ | 0.19 | $ | 0.17 | $ | 0.57 | $ | 0.51 | $ | 0.24 | $ | 0.19 | $ | 0.48 | $ | 0.38 | ||||||||||||
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* Calculation not meaningful | ||||||||||||||||||||||||||||
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.animals. 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 cure orour medicines 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
An area where we are expanding aggressively is in biologics, large-molecule approaches to treating disease where small molecules are not available or effective. On September 14, 2005,May 16, 2006, we completed the acquisition of all of the outstanding shares of Vicuron Pharmaceuticals, Inc. (Vicuron)Rinat Neuroscience Corp., a biopharmaceuticalbiologics company focused onwith several new central-nervous-system product candidates. In connection with the developmentacquisition, as part 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 U.S. Food and Drug Administration (FDA): anidulafungin for fungal infections and dalbavancin for Gram-positive infections. The allocation of theour preliminary purchase price includes in-process research and development of approximately $1.4 billion, which was expensed and includedallocation, we recorded $478 million, pre-tax, in Merger-related in-process research and development chargescharges.,
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 $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 completed in the third 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 which was expensed,($71 million, after tax) in the first quarter of 2006 in Research and goodwilldevelopment expenses upon the approval 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 forExubera in January 2006 by the nine months ended September 26, 2004.Food and Drug Administration (FDA).
Discontinued Operations
We evaluate our businesses and product lines periodically for strategic fit within our operations. We sold or are in the process of selling the following businesses that do not fit our strategic goals:
• | In June 2006, we entered into an agreement to sell our Consumer Healthcare business to Johnson & Johnson for approximately $16.6 billion in cash. This business comprises substantially all of our former Consumer Healthcare segment and other associated amounts, such as purchase-accounting impacts and merger-related costs, and restructuring and implementation costs related to our Adapting to Scale (AtS) productivity initiative, previously reported in the Corporate/Other segment. In addition, certain manufacturing facility assets and liabilities, which were previously part of our Human Health or Corporate/Other segment, are included in the planned sale of the Consumer Healthcare business. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business that will be discontinued have been reclassified into Discontinued operations - net of tax in the condensed consolidated statements of income and the assets and liabilities associated with this business that will be sold have been reclassified into Assets/Liabilities of discontinued operations and other assets/liabilities held for sale, as appropriate, on the condensed consolidated balance sheets. The divestiture of the Consumer Healthcare business is expected to close in late 2006 and is subject to customary closing conditions, including receipt of regulatory approvals. |
• | In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses which had been included in our Human Health segment for 70 million euros (approximately $93 million) and recorded a gain of $57 million ($36 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income. In addition, we recorded an impairment charge of $9 million ($6 million, net of tax) related to the third European generic business in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the six months ended July 3, 2005. |
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 is to drive growth in our in-line medicines and to invest in promising new medicines.
We have a broad presence in the healthcare industry, with important medicines in many major therapeutic areas. While we continue to look for the most innovative products to fill gaps in our portfolio, we also continue to face a dynamically challenging and dynamically changing environment in our pharmaceutical business, includingbusiness. This includes 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.
We believe that the strong aggregate performance of our in-line product portfolio and the potential of our new-product pipeline demonstrate our ability to generate new revenues. Our performance in 20052006 has been, and will continue to be, substantially adversely impacted by loss of U.S. exclusivity of four major products --Neurontin, Diflucan Neurontin, and Accupril/Accuretic duringin 2004, and Zithromax in November 2005.2005 and Zoloft at the end of June 2006. In addition, we face a substantial adverse impact on our performance from the loss of U.S. exclusivity for Zoloft during 2006 and Norvasc and Zyrtec during 2007.2007 and Camptosar and Inspra in 2008. These sevennine products represented 33%31% of our Human Health revenues and 29% 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. 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"Human Health--Selected Product Descriptions"). Our total revenues decreased 5%increased 3% in the third quarter of 2005three months ended July 2, 2006 and were flat in the first ninesix months of 2005ended July 2, 2006 as compared to the same periods in 2004.2005.
Partially offsetting these impacts in the first ninethree months of 2005and six months ended July 2, 2006 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. So far this year, we have launched three new medicines in the U.S.--Sutent, Eraxis and Chantix, and initial supplies of Exubera will be available in the U.S. in September 2006. In June 2006, we received an approvable letter from the FDA for Zeven (dalbavancin) and now expect approval and launch in 2007. In June 2006, after certain decisions by the FDA, we notified Neurocrine Biosciences, Inc. (Neurocrine) that we are returning the development and marketing rights for indiplon to Neurocrine.
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 productivity initiative, which is a focused,broad-based, 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 six months 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 annual 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 expectedbillion.
We continue 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.
During 2005, we anticipateexpect 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 in excess of $2 billion in savings targeted for 2006, about $3.5 billion in 2007 andgrowing to about $4 billion annually upon completion in 2008.2008, notwithstanding the planned divestiture of our Consumer Healthcare business and the expense reductions associated with that business. These savings are expected to be realized in procurement, operating expenses and facilities, among other sources. Savings realized during the second quarter and first six months of 2006 total approximately $500 million and $1 billion. 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 |
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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 significantly reduced from |
| |
• | Reducing costs in purchased goods and services. Purchasing initiatives |
REVENUES
TotalWorldwide revenues decreased 5%by segment and geographic area for the three months and six months ended July 2, 2006 and July 3, 2005 follow:
Three Months Ended | ||||||||||||||||||||||
Worldwide | U.S. | International | % Change in Revenues | |||||||||||||||||||
July 2, | July 3, | July 2, | July 2, | July 2, | July 3, | Worldwide | U.S. | International | ||||||||||||||
(millions of dollars) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 06/05 | 06/05 | 06/05 | |||||||||||||
| ||||||||||||||||||||||
Human Health | $ | 10,999 | $ | 10,723 | $ | 5,781 | $ | 5,419 | $ | 5,218 | $ | 5,304 | 3 | 7 | (2) | |||||||
Animal Health | 583 | 578 | 262 | 263 | 321 | 315 | 1 | -- | 2 | |||||||||||||
Other | 159 | 151 | 51 | 46 | 108 | 105 | 6 | 9 | 4 | |||||||||||||
Total Revenues | $ | 11,741 | $ | 11,452 | $ | 6,094 | $ | 5,728 | $ | 5,647 | (a) | $ | 5,724 | (a) | 3 | 6 | (1) | |||||
(a) | Includes revenue from Japan of $852 million (7.3% of total revenues) and $877 million (7.7% of total revenues) for the three months ended July 2, 2006 and July 3, 2005. |
Six Months Ended | ||||||||||||||||||||||
Worldwide | U.S. | International | % Change in Revenues | |||||||||||||||||||
July 2, | July 3, | July 2, | July 2, | July 2, | July 3, | Worldwide | U.S. | International | ||||||||||||||
(millions of dollars) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 06/05 | 06/05 | 06/05 | |||||||||||||
| ||||||||||||||||||||||
Human Health | $ | 22,099 | $ | 22,236 | $ | 12,121 | $ | 11,656 | $ | 9,978 | $ | 10,580 | (1) | 4 | (6) | |||||||
Animal Health | 1,094 | 1,073 | 491 | 482 | 603 | 591 | 2 | 2 | 2 | |||||||||||||
Other | 295 | 286 | 98 | 90 | 197 | 196 | 4 | 9 | 1 | |||||||||||||
Total Revenues | $ | 23,488 | $ | 23,595 | $ | 12,710 | $ | 12,228 | $ | 10,778 | (b) | $ | 11,367 | (b) | -- | 4 | (5) | |||||
(b) | Includes revenue from Japan of $1.6 billion (6.7% of total revenues) and $1.7 billion (7.4% of total revenues) for the six months ended July 2, 2006 and July 3, 2005. |
Human Health Revenues
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 and other challenges tempered our growth in the thirdthree months ended July 2, 2006 and more than offset that performance for the six months ended July 2, 2006, as shown in the following table:
Human Health Revenues |
| |||||||||
(millions of dollars, except % growth) | Three |
| Impact on | Six Months |
| Impact on | ||||
| ||||||||||
In-Line Products(a) and New Products(b) | $ | 9,827 | 6 | % | $ | $19,596 | 4 | % | ||
Loss-of-exclusivity products and Bextra(c) | 1,172 | (3) | 2,503 | (5) | ||||||
Total Human Health revenues | $ | 10,999 | 3 | % | $ | $22,099 |
| (1) | % | |
(a) | In-Line Products is defined as worldwide revenues for the three months and six months ended July 2, 2006 of all Human Health products other than those referred to in notes (b) and (c). |
(b) | New Products is defined as worldwide revenues for the three months and six months ended July 2, 2006 of products launched since the beginning of 2004--Caduet, Eraxis, Exubera, Inspra, Lyrica, Macugen, Olmetec, Onsenal, Revatio, Sutent and Zmax. |
(c) | Loss-of-Exclusivity Products and Bextra is defined as worldwide revenues for the three months and six months ended July 2, 2006 of products that have lost U.S. exclusivity since the beginning of 2004--Accupril/Accuretic, Diflucan, Neurontin, Zithromax and Zoloft--and of Bextra, sales of which were suspended in 2005. |
Total Human Health revenues increased 3% in the second quarter and were flatdown 1% in the first ninesix months of 2005,2006, as compared to the same periods in 2004. 2005, primarily due to:
• | the solid aggregate performance of our broad portfolio of patent-protected medicines; |
• | an aggregate increase in revenues from new products launched in 2005 and within the first six months of 2006 of approximately $294 million for the second quarter of 2006 and $507 million for the first six months of 2006; and |
• | an increase in revenues due to price changes of about 3.7% and 3.6% in the second quarter and first six months of 2006; |
partially offset in the second quarter of 2006 and more than offset in the first six months of 2006 by: | |
• | a decrease in revenue from the loss of U.S. exclusivity of Zithromax in November 2005 of $260 million for the second quarter of 2006 and $807 million for the first six months of 2006; |
• | the continued decline in revenue by $61 million for the second quarter of 2006 and $179 million for the first six months of 2006 of Neurontin, Diflucan and Accupril/Accuretic, which lost U.S. exclusivity in 2004; |
• | the strengthening of the U.S. dollar relative to many foreign currencies, especially the euro, which decreased revenue by $195 million for the second quarter of 2006 and $534 million for the first six months of 2006; and |
• | lower revenue for Zoloft, which has lost exclusivity in many European markets, by $90 million for the second quarter of 2006 and $156 million for the first six months of 2006. |
The revenue decrease reflectsthree months and six months ended July 2, 2006 were also impacted by increased competition and 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 significantoverall market decline, in prescription volumeas branded prescriptions in the arthritis market. The decrease also reflects lower prescription growthU.S. declined 2% 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.
Changes in foreign exchange rates increased revenues in the third quarter of 2005 by $175 million, or 1.4%, and increased revenues in the first nine months of 2005 by $909 million, or 2.4%,3% compared to the same periods in 2004. The foreign exchange impact on the third quarterthree months and first ninesix months of 2005 revenue comparisons to the same periods in 2004 was due to the weakening of the U.S. dollar relative to many foreign currencies, especially the euro. We expect 2005 revenues for 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.
The impact of price changes on revenues was 3.2% in the third quarter of 2005 and 2.8% in the first nine months ofended July 3, 2005.
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 impact from the loss of exclusivity of certain major products over the next few years.Geographically:
Deductions from Revenues
• | in the U.S., Human Health revenues increased 7% and 4% in the three months and six months ended July 2, 2006 compared to the same periods in 2005 primarily due to revenues from new products and growth in Lipitor and Celebrex sales, partially offset by the loss of exclusivity of Zithromax in November 2005; and |
• | in our international markets, Human Health revenues declined in the three months and six months ended July 2, 2006 compared to the same periods in 2005 by 2% and 6%, primarily due to the unfavorable impact of foreign exchange of $195 million (all of the decline) and $534 million (5 percentage points of the decline) and lower revenues of Zoloft due to the loss of exclusivity in many key international markets. |
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%1% 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$169 million and $956$374 million forin the three months and ninesix months ended OctoberJuly 2, 20052006 and $338$324 million and $1.0 billion for$699 million in the three months and ninesix months ended September 26, 2004.July 3, 2005. The decrease in Medicaid and related state program rebates is due primarily to the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act), effective January 1, 2006. Performance-based contracts also provide for rebates to several customers. Contractcontract rebates reduced revenues by $513$368 million and $1.7 billion for$911 million in the three months and ninesix months ended OctoberJuly 2, 20052006 and $501$573 million and $1.5$1.2 billion forin the three months and ninesix months ended September 26, 2004.July 3, 2005. The decrease in performance-based contract rebates is due primarily to the expiration of our contract with Express Scripts Inc. on December 31, 2005 and reduced managed care rebates related to Zithromax, which lost exclusivity in the U.S in November 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$335 million and $916$688 million forin the three months and ninesix months ended OctoberJuly 2, 20052006 and $290$298 million and $864$592 million forin the three months and ninesix months ended September 26, 2004.July 3, 2005.
Our accruals for Medicaid rebates, contract rebates and chargebacks totaled $1.7$1.6 billion at Octoberas of July 2, 2005 and2006, a decrease from $1.8 billion as of December 31, 2004.2005 due primarily to the impact of the Medicare Act.
Revenues by Country
Revenues by country for the third quarter and first nine months of 2005 and the changes from the same periods in 2004 follow:
Third Quarter | ||||||||||||
(millions of dollars) | 2005 | % of | 2004 | % of | % | |||||||
| ||||||||||||
United States | $ | 6,395 | 52.5 | % | $ | 7,377 | 57.5 | % | (13)% | |||
Japan | 848 | 7.0 | 760 | 5.9 | 12 | |||||||
All other | 4,946 | 40.5 | 4,694 | 36.6 | 5 | |||||||
Consolidated | $ | 12,189 | 100.0 | % | $ | 12,831 | 100.0 | % | (5) | |||
| ||||||||||||
| ||||||||||||
First Nine Months | ||||||||||||
(millions of dollars) | 2005 | % of | 2004 | % of | % | |||||||
| ||||||||||||
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 third quarter and first nine months of 2005 and the changes from the same periods in 2004 follow:
Third Quarter | ||||||||||||
Revenues | % Change in Revenues | |||||||||||
U.S. | International | U.S. | International | |||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 05/04 | 05/04 | ||||||
| ||||||||||||
Human Health | $ | 5,609 | $ | 6,619 | $ | 4,943 | $ | 4,669 | (15)% | 6% | ||
Consumer Healthcare | 493 | 453 | 428 | 398 | 9 | 8 | ||||||
Animal Health | 228 | 231 | 275 | 244 | (1) | 12 | ||||||
Other | 65 | 74 | 148 | 143 | (14) | 4 | ||||||
Total Revenues | $ | 6,395 | $ | 7,377 | $ | 5,794 | $ | 5,454 | (13) | 6 | ||
| ||||||||||||
| ||||||||||||
First Nine Months | ||||||||||||
Revenues | % Change in Revenues | |||||||||||
U.S. | International | U.S. | International | |||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | 05/04 | 05/04 | ||||||
| ||||||||||||
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 HealthHealth--Selected Product Revenues
Pfizer's Human Health business continued to show solid performance in many of our products, although challenges to revenue more than offset that performance.
Pfizer's Human Health worldwide revenues declined 7% in the third quarter of 2005 compared to the third quarter of 2004 and 1% year-to-date. In the U.S., Human Health revenues declined 15% in the third quarter of 2005 compared to the third 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 2005 was also impacted by the overall market decline for branded prescriptions in the U.S. Branded prescriptions in the U.S. declined 3% in the third quarter of 2005 relative to the third quarter of 2004. The third quarter of 2005 also exhibited a significant change in growth trends relative to the first half of the year in a number of U.S. therapeutic markets. Examples include the branded statins market, where total prescriptions grew 7% in the third quarter versus 10% in the first half of 2005, and the erectile-dysfunction market, with total prescriptions declining 7% in the third quarter versus zero growth in the first half of 2005.
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 | |||||||
(millions of dollars) | Primary Indications | 2005 | % Change | 2005 | % Change | |||
| ||||||||
Cardiovascular and | ||||||||
Lipitor | Reduction of LDL cholesterol | $2,897 | 6 % | $8,829 | 16 % | |||
Norvasc | Hypertension | 1,131 | 9 | 3,462 | 8 | |||
Cardura | Hypertension/Benign prostatic hyperplasia | 132 | (12) | 441 | (4) | |||
Accupril/Accuretic | Hypertension/Congestive heart failure | 77 | (51) | 250 | (50) | |||
Caduet | Reduction of LDL cholesterol and hypertension | 48 | 927 | 121 | 249 | |||
Central nervous | ||||||||
Zoloft | Depression and anxiety disorders | 807 | 1 | 2,448 | 2 | |||
Neurontin | Epilepsy and post-herpetic neuralgia | 155 | (80) | 498 | (78) | |||
Geodon | Schizophrenia and acute manic or mixed episodes associated with bipolar disorder | 148 | 18 | 430 | 33 | |||
Xanax/Xanax XR | Anxiety/Panic disorders | 101 | -- | 306 | 13 | |||
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 | |||
Arthritis and pain: | ||||||||
Celebrex | Arthritis pain and inflammation, acute pain | 446 | (44) | 1,258 | (45) | |||
Bextra | Arthritis pain and inflammation | (73) | * | (59) | * | |||
Infectious and | ||||||||
Zithromax/Zmax | Bacterial infections | 402 | 19 | 1,623 | 38 | |||
Zyvox | Bacterial infections | 157 | 30 | 453 | 38 | |||
Vfend | Fungal infections | 106 | 54 | 285 | 40 | |||
Diflucan | Fungal infections | 103 | (52) | 370 | (54) | |||
Urology: | ||||||||
Viagra | Erectile dysfunction | 386 | (4) | 1,215 | 1 | |||
Detrol/Detrol LA | Overactive bladder | 231 | -- | 705 | 14 | |||
Oncology: | ||||||||
Camptosar | Metastatic colorectal cancer | 229 | 81 | 674 | 85 | |||
Ellence | Breast cancer | 86 | -- | 273 | 7 | |||
Aromasin | Breast cancer | 63 | 61 | 176 | 88 | |||
Ophthalmology: | ||||||||
Xalatan/Xalacom | Glaucoma and ocular hypertension | 338 | 11 | 1,011 | 16 | |||
Endocrine disorders: | ||||||||
Genotropin | Replacement of human growth hormone | 200 | 14 | 604 | 13 | |||
All other: | ||||||||
Zyrtec/Zyrtec-D | Allergies | 338 | 2 | 1,035 | 10 | |||
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 | |||
Three Months Ended | Six Months Ended | |||||||
(millions of dollars) | Primary Indications | July 2, |
| % Change |
| July 2, |
| % Change |
Cardiovascular and | ||||||||
Lipitor | Reduction of LDL cholesterol | $3,123 | 9% | $6,230 | 5% | |||
Norvasc | Hypertension | 1,158 | -- | 2,341 | -- | |||
Cardura | Hypertension/Benign prostatic hyperplasia | 139 | (10) | 265 | (14) | |||
Caduet | Reduction of LDL cholesterol and hypertension | 80 | 92 | 157 | 116 | |||
Accupril/Accuretic | Hypertension/Congestive heart failure | 69 | (6) | 137 | (21) | |||
Central nervous | ||||||||
Zoloft | Depression and certain anxiety disorders | 706 | (11) | 1,485 | (9) | |||
Lyrica | Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy | 271 | 606 | 463 | 693 | |||
Geodon/Zeldox | Schizophrenia and acute manic or mixed episodes associated with bipolar disorder | 165 | 14 | 347 | 23 | |||
Neurontin | Epilepsy and post-herpetic neuralgia | 123 | (23) | 250 | (27) | |||
Aricept(a) | Alzheimer's disease | 88 | 3 | 170 | -- | |||
Xanax/Xanax XR | Anxiety/Panic disorders | 79 | (24) | 161 | (22) | |||
Relpax | Migraine headaches | 67 | 35 | 133 | 29 | |||
Arthritis and pain: | ||||||||
Celebrex | Arthritis pain and inflammation, acute pain | 471 | 17 | 962 | 18 | |||
Infectious and | ||||||||
Zyvox | Bacterial infections | 167 | 9 | 353 | 19 | |||
Zithromax/Zmax | Bacterial infections | 166 | (61) | 425 | (65) | |||
Vfend | Fungal infections | 118 | 30 | 235 | 32 | |||
Diflucan | Fungal infections | 110 | (14) | 217 | (19) | |||
Urology: | ||||||||
Viagra | Erectile dysfunction | 394 | 1 | 784 | (5) | |||
Detrol/Detrol LA | Overactive bladder | 255 | 15 | 515 | 9 | |||
Oncology: | ||||||||
Camptosar | Metastatic colorectal cancer | 238 | 2 | 450 | 1 | |||
Ellence | Breast cancer | 86 | (11) | 159 | (15) | |||
Aromasin | Breast cancer | 75 | 31 | 145 | 29 | |||
Sutent | Metastatic renal cell carcinoma (mRCC) and malignant gastrointestinal stromal tumors (GIST) | 36 | * | 52 | * | |||
Ophthalmology: | ||||||||
Xalatan/Xalacom | Glaucoma and ocular hypertension | 351 | 3 | 688 | 2 | |||
Endocrine disorders: | ||||||||
Genotropin | Replacement of human growth hormone | 191 | (5) | 388 | (4) | |||
All other: | ||||||||
Zyrtec/Zyrtec-D | Allergies | 377 | 6 | 798 | 15 | |||
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) | 324 | 31 | 648 | 32 | |||
|
|
| 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. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006 as well as other competitive pressures. In | |
New clinical findings continue to demonstrate the benefit of Lipitor | |
| |
In addition, | |
In May 2006, the European Commission approved Lipitor for the prevention of cardiovascular events such as heart attacks and strokes in patients who are at a higher risk | |
See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of recent developments with | |
| |
• | Norvasc is the world's most-prescribed branded medicine for treating hypertension. |
• | Exubera, the first ever inhaled human insulin therapy for glycemic control received approvals from both the FDA and the European Commission for the treatment of adults with type 1 and type 2 diabetes in January 2006. Millions of people with diabetes are not achieving or maintaining acceptable blood sugar levels, despite the availability of current therapies. Exubera meets a critical medical need by offering a highly effective and needle-free alternative to diabetes pills and insulin injections to manage this complicated, debilitating disease. Exubera was launched in Germany and Ireland in May 2006. In the U.S., a comprehensive physician and patient education and training program began on July 24, 2006, and is being rolled out in phases. The manufacturing process for Exubera is extremely complex and we are continuing to build inventory while working at production capacity at the Exubera manufacturing facilities. Initial supplies of Exubera will be available across the U.S. beginning in September 2006. See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent patent litigation relating to Exubera. |
| |
• | Zoloft, which has lost exclusivity in many European markets, experienced a 9% revenue decline in the first six months 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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|
Geodon/Zeldox, a psychotropic agent, is a dopamine and serotonin receptor antagonist indicated for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder. It is available in both an oral capsule and rapid-acting intramuscular formulation. In the U.S., Geodon hit an all-time new prescription share weekly high of 7.3% during June 2006 and is the second-fastest-growing atypical anti-psychotic medication. In the first six months of 2006, total Geodon worldwide sales grew 23% compared to the same period in 2005.
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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 $463 million in worldwide revenue in the first six months 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. |
| |
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 |
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In | |
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• | Zithromax |
• |
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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 |
Pfizer has introduced new branded and unbranded advertising to encourage men with erectile dysfunction to talk to their physicians about their condition and specifically about Viagra. | |
| |
• | Sutent isa breakthrough oral multi-targeted tyrosine kinase inhibitor that combines anti-angiogenic and anti-tumor activity to simultaneously inhibit the blood supply to tumors and directly attack tumor cells. Sutent wasapproved by the FDA in January 2006 for metastatic renal cell carcinoma (mRCC) and gastrointestinal stromal tumors (GIST) and has recorded $52 million in sales worldwide in the first half of 2006. In |
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• | Camptosar |
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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 2% in the first six months 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. |
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• | Caduet, |
Consumer HealthcareChantix/Champix,
Revenues of our Consumer Healthcare business, which include three additional business days the first new prescription treatment for smoking cessation in our fiscal calendarnearly a decade, became available to patients in the first quarter and nine months of 2005 compared toU.S. in late July 2006. On July 28, 2006, the same periodsCommittee for Medicinal Products for Human Use (CHMP) issued a positive opinion recommending that the European Commission grant marketing authorization for Champix in 2004, follow:Europe.
Third Quarter | First Nine Months | ||||||||||
(millions of dollars) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||
| |||||||||||
Consumer Healthcare | $ | 921 | $ | 851 | 8% | $ | 2,835 | $ | 2,524 | 12% | |
The increase in Consumer Healthcare revenues in the third quarter and first nine months of 2005, as compared to the same periods in 2004, was attributable to:
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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 quarterthree months and ninesix months of 2005ended July 2, 2006 compared to the same periods in 2004,three months and six months ended July 3, 2005 follow:
Third Quarter | First Nine Months | Three Months Ended | Six Months Ended | |||||||||||||||||||
(millions of dollars) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | July 2, | July 3, | % Change |
| July 2, | July 3, | % Change | |||||||||
| ||||||||||||||||||||||
Livestock products | $ | 301 | $ | 287 | 5% | $ | 958 | $ | 840 | 14% | $ | 359 | $ | 354 | 1% | $ | 671 | $ | 657 | 2 % | ||
Companion animal products | 202 | 188 | 8 | 618 | 547 | 13 | 224 | 224 | -- | 423 | 416 | 2 | ||||||||||
Total Animal Health | $ | 503 | $ | 475 | 6 | $ | 1,576 | $ | 1,387 | 14 | $ | 583 | $ | 578 | 1 | $ | 1,094 | $ | 1,073 | 2 | ||
The increase in Animal Health revenues in the third quarterthree months and first ninesix months of 2005,ended July 2, 2006, as compared to the same periods in 2004,2005, was primarily 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, |
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• | a decline in U.S. Rimadyl revenues due to lower than anticipated NSAID market growth and intense branded competition, as well as increased generic competition 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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Pending U.S. New Drug Applications (NDAs) and Supplemental Filings:
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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 June 2006, after certain decisions by the FDA, we notified Neurocrine that we are returning the development and marketing rights for indiplon, a medicine in development to treat insomnia, to Neurocrine. This includes both the collaboration to develop and co-market indiplon in the U.S., as well as Pfizer's exclusive license to develop and market indiplon outside of the U.S.
In September 2005, an FDA advisory committee recommended thatJune 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 now anticipate a rapid and successful resolution of outstanding issues to allow final NDAFDA approval and launch in 2007.
In the third quarter of 2006, we completed the acquisition of exclusive worldwide rights to the new drug candidate fesoterodine, for treatment of overactive bladder, from Schwarz Pharma AG for approximately $100 million in cash, which will be expensed in the coming months. The additionthird quarter of these two medications would broaden Pfizer's existing portfolio2006. Additional payments of anti-infectives, whereup to $110 million will be payable upon regulatory approvals in the Company has a long historyU.S. and Europe and other performance milestones. In March 2006, Schwarz submitted an NDA for fesoterodine with both the FDA and the European Medicines Evaluation Agency (EMEA). Also in the third quarter of providing patients2006, we reached an agreement with Bayer Pharmaceuticals Corporation to acquire exclusive worldwide rights for several compounds for treatment of obesity and physicians with life-saving medicines.diabetes.
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Revatio | Approval in Canada for treating pulmonary arterial hypertension | May 2006 | -- | |||
Zyvox | Approval in Japan for methicillin-resistant staphylococcus aureus | April 2006 | -- | |||
Zoloft | Approval in Japan for treatment of depression | April 2006 | -- | |||
Detrol/Detrol LA | Approval in Japan for treatment of overactive bladder | April 2006 | -- | |||
Celebrex | Submitted in the E.U. for the treatment of ankylosing spondylitis | -- | April 2006 | |||
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Lyrica | Approval in | March 2006 | -- | |||
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Fesoterodine | Application submitted in the E.U. for treatment of overactive bladder | -- | March 2006 | |||
Chantix/Champix | Application submitted in Canada for smoking cessation | -- | February 2006 | |||
Application submitted in the E.U. for smoking cessation(a) | -- | November 2005 | ||||
Exubera | Approval in the E.U. as an inhaled form of insulin for use in adults with type 1 and 2 diabetes | January 2006 | -- | |||
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In September and October of 2005, the CHMP of the European Medicines Evaluation Agency issued positive opinions recommending that marketing authorizations be granted by the European Commission for Macugen and Exubera, respectively. 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.
Ongoing or planned clinical trials for additional uses and dosage forms for our products include:
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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 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)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. We anticipate completion of the three ongoing imaging trials by the end of this year. Assuming that we see the expected improvements over the comparative agent (Lipitor) in these imaging studies, we plan to file the torcetrapib/atorvastatin NDA in 2007.
In addition to these Phase 3 studies, the development program includes a definitive mortality and morbidity trial that is enrolling 13,00015,000 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-cholesterolHDL cholesterol and further lowering LDL-cholesterolLDL 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 clinicaldisease. In addition to the torcetrapib/atorvastatin development program, for the selective cytotoxic agent edotecarin was terminated in the first quarter of 2005; development rights for edotecarin were returnedPfizer plans 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 returneddevelop torcetrapib as concurrent therapy to Shiongi & Co. Ltd and Altana Pharma, Inc. respectively.be used with other statins or lipid-lowering medications.
Additional product-related programs are in various stages of discovery and development.
Recent Collaborations:
We have entered into promising research collaborations with NicOx S.A. in ophthalmic disorders, NOXXON Pharma AG in obesity, and Incyte Corporation for CCR2 antagonists for use in a broad range of diseases.
COSTS AND EXPENSES
Cost of Sales
Cost of sales increased 2% and decreased 5% in the three months and six months ended July 2, 2006 as compared to the same periods in 2005. Cost of sales as a percentage of revenues decreased in the three months and six months ended July 2, 2006 as compared to the same periods in 2005. The decrease reflects a favorable geographic mix, representing a greater portion of sales in the U.S.; operational efficiencies, reflecting savings related to our AtS productivity initiative; the favorable impact on expenses of foreign exchange; as well as the impact in the prior-year period of inventory write-offs of $56 million related to the suspension of Bextra sales, partially offset by higher costs related to our AtS productivity initiative.
Selling, Informational and Administrative Expenses
Selling, informational and administrative expenses increased 3% and decreased 2% in the three months and six months ended July 2, 2006, as compared to the same periods in 2005. The increase in the three months ended July 2, 2006 reflected higher costs related to our AtS productivity initiative and expenses related to share-based payments, partially offset by savings related to our AtS productivity initiative and the favorable impact on expenses of foreign exchange. The decrease in the six months ended July 2, 2006 reflected savings related to our AtS productivity initiative and the favorable impact on expenses of foreign exchange.
Research and Development Expenses
R&D expenses decreased 5% and 7% in the three months and six months ended July 2, 2006, as compared to the same periods in 2005, reflecting savings related to our AtS productivity initiative, a R&D milestone due to us from sanofi-aventis (approximately $118 million, pre-tax, in the first quarter of 2006) and the favorable impact on expenses of foreign exchange.
Merger-Related In-Process Research and Development Charges
The estimated fair value of merger-related Merger-related in-process research and development charges (IPR&D) is expensed at the acquisition date. In 2005, we expensed $1.7 billion2006, IPR&D of IPR&D,$513 million, pre-tax, was recorded in the second quarter and first six months of 2006 primarily related to our acquisition of Vicuron Pharmaceuticals, Inc.Rinat on September 14,May 16, 2006, as compared to $262 million, pre-tax, recorded in the first six months of 2005, ($1.4 billion) andwhich primarily related to our acquisition 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, 2004.2005.
Adapting to Scale Initiative
(millions of dollars) | Three | Nine | ||
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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 continue to 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 continue to expect that cost savings from our AtS productivity initiative will be in excess of $2 billion in 2006, growing to about $4 billion annually upon completion in 2008, notwithstanding the planned divestiture of our Consumer Healthcare business and the expense reductions associated with that business. Savings realized during the second quarter and first six months of 2006 total approximately $500 million and $1 billion, respectively. 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 6, Adapting to Scale Productivity Initiative).
Through October 2, 2005,
We incurred the restructuring charges primarily relate to employee terminationfollowing costs atin connection with our manufacturing facilities in North America and the implementation costs primarily relate to system and process standardization and to expansion of shared services.
The components of restructuring costs associated with AtS follow:productivity initiative:
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Employee termination costs | $ | 106 | $ | 49 | $ | 57 | ||
Asset impairments | 62 | 62 | -- | |||||
Other | 6 | -- | 6 | |||||
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Implementation costs(a) | $ | 180 | $ | 33 | $ | 365 | $ | 33 |
Restructuring charges(b) | 262 | 21 | 556 | 21 | ||||
Total AtS costs | $ | 442 | $ | 54 | $ | 921 | $ | 54 |
(a) | Included in Cost of sales ($104 million), Selling, informational and administrative expenses ($58 million), Research and developmentexpenses ($40 million) and in Other (income)/deductions - net ($22 million income) for the three months ended July 2, 2006 and included in Cost of sales ($228 million), Selling, informational and administrative expenses ($97 million), Research and developmentexpenses ($62 million) and in Other (income)/deductions - net ($22 million income) for the six months ended July 2, 2006. Included in Cost of sales ($1 million), Selling, informational and administrative expenses ($21 million), and Research and developmentexpenses ($11 million) for the three months and six months ended July 3, 2005. |
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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 include charges to write down intangible assets, and property, plant and equipment. Other primarily includes costs to exit certain activities.
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 actions.
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:
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Integration costs | Integration costs | $ | 93 | $ | 113 | $ | 390 | $ | 367 | Integration costs | $ | 3 | $ | 191 | $ | 5 | $ | 293 | |
Restructuring costs(a) | 61 | 77 | 232 | 359 | |||||||||||||||
Restructuring charges | 3 | 52 | 6 | 166 | |||||||||||||||
Total merger-related costs | Total merger-related costs | $ | 154 | $ | 190 | $ | 622 | $ | 726 | Total merger-related costs | $ | 6 | $ | 243 | $ | 11 | $ | 459 | |
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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:
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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 monthssix month 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 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.
InPROVISION/(BENEFIT) FOR TAXES ON INCOME
On January 25, 2006, the thirdCompany 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 2004, Pfizer2006 we recorded a litigation-related chargetax benefit of $369approximately $441 million related to the resolution of claims against Quigley Company, Inc., a wholly owned subsidiary of Pfizer,this issue.
On January 23, 2006, the IRS issued final regulations on Statutory Mergers and Consolidations, which is included in Other (income)/deductions - net.
PROVISION FOR TAXES ON INCOME
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).impacted certain prior-period transactions. In the first quarter of 2005,2006, we recorded an initial estimated incomea tax chargebenefit of $2.2 billion based on$217 million, reflecting the decision to repatriate $28.3 billiontotal impact 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.these regulations.
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%14.3% for the first ninesix months of 20052006 compared to 19.4%37.4% in the same period in 2004.2005. The increase in the effectivelower tax rate for the first ninesix months of 20052006 is primarily 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 primarilybenefits related to the resolution of certainthe tax positions. Income taxesmatter and the change in tax regulations as discussed above. The higher tax rate for the first ninesix months of 2004 were impacted by2005 is primarily due to the recording of a $955 million non-deductible$1.7 billion charge for IPR&D, primarily relatingrelated to our acquisitiondecision to repatriate certain foreign earnings under the American Jobs Creation Act of Esperion.2004 (the Jobs Act). (See Notes to Condensed Consolidated Financial Statements--Note 8, Taxes on Income).
AsDISCONTINUED OPERATIONS - NET OF TAX
In June 2006, we entered into an agreement to sell our Consumer Healthcare business and this business has been presented as a discontinued operation. The increase in pre-tax income for discontinued operations of October19% and 9% for the three months and six months ended July 2, 2006 compared to the same periods in 2005 we intendis primarily due to continuepre-tax losses from discontinued operations in 2005 related to permanently reinvestcertain European generics businesses, our in-vitro allergy and autoimmune diagnostics testing, and surgical ophthalmics, as well as femhrt women's health product lines, while pre-tax income from our Consumer Healthcare business increased 10% and decreased 2% for the earnings of our international subsidiariesthree months and therefore, we have not recorded a U.S. tax provision onsix months ended July 2, 2006, compared to the remaining amount of unremitted earnings.same periods in 2005.
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--prioranimals--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, VicuronRinat, Idun, and Esperionsanofi-aventis' rights to Exubera, 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 the results of operations included in discontinued operations, such as our Consumer Healthcare business which we have agreed to sell, as well as any related gains or losses on the sale of businesses and product lines included in discontinued operations as well as the related results ofsuch 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 productivity 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 | Three Months Ended | Six Months Ended | |||||||||||||||||||
(millions of dollars) | 2005 | 2004 | % Incr./ | 2005 | 2004 | % Incr./ | July 2, | July 3, | % Incr./ |
| July 2, | July 3, | % Incr./ | |||||||||
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Reported Net income | $ | 1,589 | $ | 3,341 | (52)% | $ | 5,352 | $ | 8,536 | (37)% | ||||||||||||
Reported net income | $ | 2,415 | $ | 3,463 | (30)% | $ | 6,526 | $ | 3,763 | 73% | ||||||||||||
Purchase accounting adjustments - net of tax | 1,963 | 521 | 276 | 3,401 | 2,558 | 33 | 1,085 | 815 | 33 | 1,666 | 1,436 | 16 | ||||||||||
Merger-related costs - net of tax | 67 | 112 | (40) | 397 | 463 | (14) | 2 | 172 | (99) | 5 | 320 | (98) | ||||||||||
Discontinued operations - net of tax | 13 | (43) | * | (7) | (75) | (91) | (125) | (88) | 43 | (230) | (232) | -- | ||||||||||
Certain significant items - net of tax | 179 | 229 | (22) | 2,092 | 269 | 678 | 286 | (1,042) | (127) | 46 | 1,913 | (98) | ||||||||||
Adjusted income | $ | 3,811 | $ | 4,160 | (8) | $ | 11,235 | $ | 11,751 | (4) | $ | 3,663 | $ | 3,320 | 10 | $ | 8,013 | $ | 7,200 | 11 | ||
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Certain amounts and percentages may reflect rounding adjustments. |
Adjusted income as shown above excludes the following items:
Third Quarter | First Nine Months | Three Months Ended | Six Months Ended | |||||||||||||||
(millions of dollars) | 2005 | 2004 | 2005 | 2004 | July 2, | July 3, |
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Purchase accounting adjustments, pre-tax: | ||||||||||||||||||
In-process research and development charges(a) | $ | 1,390 | $ | -- | $ | 1,652 | $ | 955 | $ | 513 | $ | 260 | $ | 513 | $ | 262 | ||
Intangible amortization and other(b) | 811 | 827 | 2,494 | 2,450 | 801 | 826 | 1,611 | 1,680 | ||||||||||
Total purchase accounting adjustments, pre-tax | 2,201 | 827 | 4,146 | 3,405 | 1,314 | 1,086 | 2,124 | 1,942 | ||||||||||
Income taxes | (238) | (306) | (745) | (847) | (229) | (271) | (458) | (506) | ||||||||||
Total purchase accounting adjustments - net of tax | 1,963 | 521 | 3,401 | 2,558 | 1,085 | 815 | 1,666 | 1,436 | ||||||||||
Merger-related costs, pre-tax: | ||||||||||||||||||
Integration costs(c) | 93 | 113 | 390 | 367 | 3 | 191 | 5 | 293 | ||||||||||
Restructuring costs(c) | 61 | 77 | 232 | 359 | ||||||||||||||
Restructuring charges(c) | 3 | 52 | 6 | 166 | ||||||||||||||
Total merger-related costs, pre-tax | 154 | 190 | 622 | 726 | 6 | 243 | 11 | 459 | ||||||||||
Income taxes | (87) | (78) | (225) | (263) | (4) | (71) | (6) | (139) | ||||||||||
Total merger-related costs - net of tax | 67 | 112 | 397 | 463 | 2 | 172 | 5 | 320 | ||||||||||
Discontinued operations, pre-tax: | ||||||||||||||||||
Loss/(income) from discontinued operations (d) | 10 | 3 | 44 | (42) | ||||||||||||||
Income from discontinued operations (d) | (160) | (134) | (315) | (290) | ||||||||||||||
Gains on sales of discontinued operations(d) | (7) | (65) | (72) | (68) | (26) | -- | (31) | (65) | ||||||||||
Total discontinued operations, pre-tax | 3 | (62) | (28) | (110) | (186) | (134) | (346) | (355) | ||||||||||
Income taxes | 10 | 19 | 21 | 35 | 61 | 46 | 116 | 123 | ||||||||||
Total discontinued operations - net of tax | 13 | (43) | (7) | (75) | (125) | (88) | (230) | (232) | ||||||||||
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) | 262 | 21 | 556 | 21 | ||||||||||||||
Implementation costs - Adapting to Scale(g) | 180 | 33 | 365 | 33 | ||||||||||||||
Gain on disposals of investments and other(h) | (23) | -- | (74) | -- | ||||||||||||||
Total certain significant items, pre-tax | 260 | 369 | 1,526 | 433 | 419 | 54 | 729 | 1,267 | ||||||||||
Income taxes | (81) | (140) | (547) | (164) | (133) | (20) | (242) | (467) | ||||||||||
Resolution of certain tax positions(i) | -- | -- | (586) | -- | -- | (586) | (441) | (586) | ||||||||||
Tax impact of the repatriation of foreign earnings(i) | -- | -- | 1,699 | -- | -- | (490) | -- | 1,699 | ||||||||||
Total certain significant items - net of tax | 179 | 229 | 2,092 | 269 | 286 | (1,042) | 46 | 1,913 | ||||||||||
Total purchase accounting adjustments, merger-related costs, discontinued operations and certain significant items - net of tax |
| 2,222 | $ | 819 | $ | 5,883 | $ | 3,215 |
| 1,248 | $ | (143) | $ | 1,487 | $ | 3,437 | ||
(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. |
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(e) | Included in Cost of sales ($56 million), Selling informational and administrative expenses ($ |
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(g) | Included in Cost of sales ($104 million), Selling, informational and administrative expenses ($58 million), Research and developmentexpenses ($40 million) and in Other (income)/deductions - net ($22 million income) for the three months ended July 2, 2006 and included in Cost of sales ($228 million), Selling, informational and administrative expenses ($97 million), Research and developmentexpenses ($62 million) and in Other (income)/deductions - net ($22 million income) for the six months ended July 2, 2006. Included in Cost of sales ($1 million), Selling, informational and administrative expenses ($21 million), and Research and developmentexpenses ($11 million) for the three months and six months ended July 3, 2005. |
(h) | Included in Other (income)/deductions - net. |
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net Financial Asset PositionAssets
Our net financial asset position follows:
(millions of dollars) | Oct. 2, | Dec. 31, | July 2, | Dec. 31, | ||||
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Financial assets: | ||||||||
Cash and cash equivalents | $ | 959 | $ | 1,808 | $ | 1,921 | $ | 2,247 |
Short-term investments | 12,430 | 18,085 | 12,829 | 19,979 | ||||
Short-term loans | 611 | 653 | 511 | 510 | ||||
Long-term investments and loans | 2,784 | 3,873 | 2,387 | 2,497 | ||||
Total financial assets | 16,784 | 24,419 | 17,648 | 25,233 | ||||
Debt: | ||||||||
Short-term borrowings | 6,729 | 11,266 | 3,779 | 11,589 | ||||
Long-term debt | 5,414 | 7,279 | 5,450 | 6,347 | ||||
Total debt | 12,143 | 18,545 | 9,229 | 17,936 | ||||
Net financial assets | $ | 4,641 | $ | 5,874 | $ | 8,419 | $ | 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 six months of 2006 and the proceeds were primarily used to pay down short-term borrowings.
Long-Term Debt Capacity
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.
In May 2006, 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 as of December 31, 2005 and included in Short-term debt as of July 2, 2006. Notice to call was given to the Trustees and the notes were redeemed in the third quarter of 2006.
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 June 2006 of the agreement to sell our Consumer Healthcare business and our target to purchase up to $17 billion of Pfizer stock in 2006 and 2007, Moody's again reaffirmed our AAAAaa rating with a negative outlook. The negative outlook reflects Moody's overall general negative rating outlook for the major pharmaceutical sector and, maintainsspecifically, its 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.
S&P views our rating outlook as stable.stable, while they note a slowdown in sales and earnings growth as a result of major patent expirations and increased competition. S&P relies on Pfizer's excellent position in the worldwide pharmaceutical market, highlighted by its diverse drug portfolio and deep product pipeline, together with our superior financial profile and cash-generating ability.
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 OctoberJuly 2, 2005,2006, we had access to $3.0$3.6 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$2.1 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 OctoberAs of July 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 OctoberJuly 2, 2005,2006, goodwill totaled $23.8$21.1 billion (21%(19% of our total assets) and other intangible assets, net of accumulated amortization, totaled $29.0$26.1 billion (26%(23% 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 $21.8 billion ofrelated to developed technology rights and $3.9$814 million related to brands. Indefinite-lived intangible assets include $3.0 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 OctoberJuly 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) | July 2, | Dec. 31, | ||
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Cash and cash equivalents and short-term investments and loans | $ | 15,261 | $ | 22,736 |
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Working capital(a) | $ | 20,939 | $ | 18,424 |
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Ratio of current assets to current liabilities | 2.04:1 | 1.65:1 | ||
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Shareholders' equity per common share(b) | $ | 9.43 | $ | 8.98 |
(a) | Working capital includes assets of discontinued operations and other assets held for sale of $6.8 billion and $6.7 billion and liabilities of discontinued operations and other liabilities held for sale of $1.4 billion and $1.2 billion, as of July 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 July 2, 2006 as compared to December 31, 2004 to October 2, 2005 was primarily reflects:due to:
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cash from current-period operations.
Net Cash Provided by Operating Activities
During the first nine months of 2005, net cash provided by continuing operating activities was $10.0 billion, as compared to $10.4 billion in the same period of 2004. The decrease in net cash provided by operating activities was primarily driven by lower current period income from operations, net of non-cash items, partially offset by the timing of receipts and payments in the ordinarily course of business. In the cash flows statement, Other includes adjustments for non-cash items such as valuation adjustments.
Net Cash Provided by/(Used in) Investing Activities
During the first nine months of 2005, net cash provided by investing activities was $2.7 billion, compared to net cash used of $6.7 billion in the same period in 2004. The change from net cash used in 2004 to net cash provided by investing activities in 2005 was primarily attributable to:
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Net Cash Used in FinancingProvided by Operating Activities
During the first ninesix months of 2005,2006, net cash used in financingprovided by operating activities was $13.5$9.1 billion, as compared to $3.3$7.0 billion in the same period in 2004.of 2005. The increase in net cash used in financingprovided by operating activities in 2005 was primarily attributable to:
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• | the timing of other receipts and payments in the ordinary course of business. |
The net cash flows associated with discontinued operations were not significant.
Net Cash Provided by Investing Activities
During the first six months of 2006, net cash provided by investing activities was $4.3 billion, as compared to $4.2 billion in the same period in 2005. The increase in net cash provided by investing activities was primarily attributable to:
• | higher net redemptions of investments in 2006 (a positive change in cash and cash equivalents of $2.2 billion); in 2006, the proceeds of which were utilized to repay debt and in 2005, the proceeds of which were used to fund the repatriation of foreign earnings as a |
partially offset by: | |
• | the acquisition of Rinat and sanofi-aventis' rights to Exubera in 2006 compared to the acquisition of Idun in 2005 (an increased use of cash of $1.7 billion). |
The net cash flows associated with discontinued operations were not significant.
Net Cash Used in Financing Activities
During the first six months of 2006, net cash used in financing activities was $13.7 billion, as compared to $11.7 billion in the same period in 2005. The increase in net cash used in financing activities was primarily attributable to:
• | net repayments of $8.6 billion on total borrowings in 2006, compared to $5.7 billion in |
• | an increase in cash dividends paid of |
partially offset by: | |
• | lower purchases of common stock in the first six months of 2006 of $2.0 billion as compared to $3.3 billion the first six months of 2005. |
The net cash flows associated with discontinued operations were not significant.
In June 2005, we announced a $5 billion share-purchase program which is being funded by operating cash flows. Through July 2, 2006, we purchased approximately 102 million shares under that program for approximately $2.5 billion. In June 2006, the Board of Directors increased our share-purchase authorization from $5 billion to $18 billion.
In October 2004, we announced a $5 billion share-purchase program. Weprogram, which we completed this share-purchase program by purchasing approximately $2.4 billion of the Company's stock in the second quarter of 2005.2005 and was funded from operating cash flows. In June 2005, Pfizer's Board of Directors authorized a new $5 billion share-purchase program. Duringtotal, under the third quarter of 2005,October 2004 program, we purchased approximately 4.3185 million shares of common stock at a cost of approximately $111 million under the new program. The Company has purchased nearly 126 million shares of common stock, at a cost of approximately $3.4 billion, during 2005. We remain committed to completing this newly authorized $5 billion share-purchase program.shares.
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 generally paid significant amounts under these provisions and at Octoberas of July 2, 2005,2006, recorded amounts for the estimated fair value of these indemnifications are not material.significant.
Certain of our copromotionco-promotion or license agreements include additional provisions that give our alliancelicensors or partners the rightrights to negotiate for, or in some cases to obtain, under certain financial conditions, copromotionco-promotion or other rights in specified countries with respect to certain of our products.
RECENTLY ISSUEDADOPTED ACCOUNTING STANDARDS
Share-Based Payment
In December 2004,On January 1, 2006, we adopted the Financial Accounting Standards Board (FASB) issuedprovisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment,. SFASas supplemented by the guidance provided by Staff Accounting Bulletin (SAB) 107, issued in March 2005. (SFAS 123R replaces SFAS 123,Stock-Based Compensation. SFAS 123R requires that the fair value, issued in 1995.) (See Notes to Condensed Consolidated Financial Statements - Note 4, Adoption of the grant of employee stock options be reported as an expense. We plan to adopt SFAS 123R, when required, beginning in the first quarter of 2006. (We had previously disclosed an intention to adopt, when required, in mid-2005, but the SEC delayed the required effective date). Determining the impact of SFAS 123R on our future results of operations requires a number of complex estimates about future events. For example, such an assessment would require a prediction about the number of options to be granted, primarily in February of next year,New Accounting Standards, and a forecast, as of the grant date, of our stock price, the market-based stock price volatility and the risk-free interest rate, all of which can be highly variable and difficult to predict. As such, currently, we cannot reasonably estimate the impact of SFAS 123R on our results of operations in 2006.Note 14, Share-Based Payments).
Conditional Asset Retirement ObligationsRECENTLY ISSUED ACCOUNTING STANDARDS
In March 2005,June 2006, the FASB issued Interpretation No. 47,48 (FIN 48), Accounting for Conditional Asset Retirement ObligationsUncertainty in Income Taxes (FIN 47). FIN 47 clarifies that conditional obligations meet the definition, an interpretation of an asset retirement obligation in SFAS 143,109, Accounting for Asset Retirement ObligationsIncome Taxes,. FIN 48 provides guidance relative to the recognition, derecognition and therefore should be recognized if their fair value is reasonably estimable. We plan to adopt FIN 47 in the fourth quartermeasurement of 2005. We do not expect thetax positions for financial statement purposes. The standard also requires expanded disclosures. The provisions of FIN 47 to have a material48 are effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the impact on our consolidatedthe financial statements.statements of adopting FIN 48.
OUTLOOK
Results in 20052006 have been, and will continue to be, impacted by the loss of U.S. exclusivity of four major products--Diflucan, Neurontin, and Accupril/Accuretic during 2004 and Zithromax in November 2005.certain key products since the beginning of 2004. Revenues also have been, and may continue to be, impacted by publicity and regulatory actions regardinguncertainty related to selective COX-2 inhibitors, as well as lower prescription growth andor increased competition in key markets in the U.S., such Second quarter 2006 results reflect a solid operating performance with robust revenue growth of many key in-line and new products, further leveraged by tempered operating expenses in Adjusted income. Second-quarter and year-to-date results benefited as well from a number of seasonalization factors, including the impact of production variances and geographic mix on cost of sales, the timing of promotional expenditures for new-product launches and of expenditures for research and development programs, as well as the lipid-lowering market andeffective tax rate. In the erectile-dysfunction market. Full-year revenuessecond half of 2006, some of these factors are expected to evidence a modest decline relativereverse direction.
The anticipated growth of four products--Lipitor, Celebrex, Lyrica and Geodon--is expected to 2004,contribute significantly to our 2006 revenues. At current exchange rates, we are targeting achievement of our revenue goals for these four products and continue to expect 2006 aggregate revenues to be comparable to overall revenues in 2005. We are targeting Lipitor sales of about $13 billion this year, although a somewhat larger declineit is an ambitious goal in light of the recent introduction of generic simvastatin in the U.S., as well as other competitive pressures. New clinical data, educational campaigns on Lipitor that highlight its strong benefit profile and advantageous formulary positioning are expected to contribute to growth. We continue to expect full-year Celebrex revenues of at least $2 billion, although it is an ambitious target given the ongoing pressures in the arthritis market. Celebrex remains an important treatment option for millions of arthritis patients. In the first six months of 2006, Geodon delivered excellent results and we continue to expect full-year Geodon revenues of about $800 million. Lyrica has exceeded our high initial expectations and we now expect Lyrica revenues to be more than previously anticipated, reflecting lower Human Health revenues.$1 billion in 2006. The contribution of new products is expected to continue to accelerate as we launch new products throughout the year.
In 2005,We expect our cash flow from operations to exceed $16 billion in 2006. Our expected cash flow from operations over the next 30 months and the expected after-tax proceeds from the sale of our Consumer Healthcare business of about $13.5 billion will together amount to approximately $34 billion, after capital expenditures and dividends. We have allocated about $17 billion of these resources for the possible acquisition of products and technologies that will drive long-term growth of the business. Further, we anticipate Pharmacia merger-related synergiesexpect to purchase up to $7 billion of approximately $4.2our stock in 2006 and up to an additional $10 billion in 2007 under our recently expanded share-purchase program.
We expect AtS-related cost savings in excess of $2 billion in 2006, an increase of $600 millionat least $1.2 billion over 2004 synergies. We also expect to achieve approximately $600 million in cost savings from our AtS productivityinitiative during 2005 greater than previously forecasted, mainly attributable to the Human Health business.savings.
Given these and other factors, a reconciliation, at current exchange rates we expect 2005and reflecting management's current assessment for 2006, of forecasted 2006 Adjusted income of $14.2 to $14.4 billion,and Adjusted diluted EPS of $1.92 to $1.94,forecasted 2006 reported Net income of $7.5 to $7.7 billion, and reported diluted EPS of $1.02 to $1.04,follows:
($ billions, except per-share amounts) | Net Income(a) | Diluted EPS(a) | |
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Forecasted Adjusted income/diluted EPS | ~$14.7 | ~$2.00 | |
Purchase accounting impacts, net of tax(b) | (2.9) | (0.40) | |
Adapting to scale costs, net of tax | (1.1) | (0.15) | |
Income from discontinued operations, net of tax(c) | 0.5 | 0.07 | |
Equity sales/other | 0.2 | 0.02 | |
Resolution of certain tax positions | 0.4 | 0.06 | |
Forecasted reported Net income/diluted EPS | ~$11.8 | ~$1.60 |
(a) | Includes the Consumer Healthcare business as discontinued operations and excludes the effects of other business-development transactions not completed as of the endof the second quarter of 2006 and the potential impact from a substantial prospective gain on the divestiture of Pfizer Consumer Healthcare. |
(b) | Increase in purchase accounting impacts versus the prior estimate reflects Merger-related in-process research and development charges associated primarily with the Rinat acquisition. |
(c) | Primarily reflects the reclassification of Pfizer Consumer Healthcare to discontinued operations. |
Our forecasted financial performance in 2006 is subject to a number of factors and uncertainties--as described in the "Cautionary"Forward Looking Information and Factors That May Affect Future Results" section below. The forecasted Adjusted income and diluted EPS ranges, as well as the forecasted reported Net income and diluted EPS ranges, are subject to a number of factors and uncertainties--changes in prescription growth rates and increased competition in key therapeutic markets and geographies; Adapting to Scale restructuring activities; the timing and rate of commercial acceptance of new-product launches; changes in the geographic, product, and segment mix of our revenues and income; changes in foreign exchange; the timing of regulatory actions; and other factors. Some of these factors and uncertainties may persist over theour planning horizon. We are currently assessing these factors and other variables as part of our annual planning process and have withdrawn our previously provided financial guidance for 2006 and 2007.
A reconciliation of forecasted 2005 Adjusted income and Adjusted diluted EPS to forecasted 2005 reported Net income and reported diluted EPS follows:
($ billions, except per-share amounts) | Net Income | Diluted EPS | |
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Forecasted Adjusted income/diluted EPS | $14.2 - $14.4 | $1.92 - $1.94 | |
Intangible amortization and other | (2.3) | (.32) | |
In-process R&D charges (primarily Vicuron & Idun) | (1.7) | (.22) | |
Merger-related costs/productivity-initiative costs | (.9) | (.13) | |
Equity gains | .1 | .02 | |
Asset-impairment charges and other costs associated with the suspension of selling Bextra | (.8) | (.10) | |
Tax impact on repatriation of foreign earnings | (1.7) | (.23) | |
Resolution of certain tax positions | .6 | .08 | |
Forecasted reported Net income/diluted EPS | $ 7.5 - $ 7.7 | $1.02 - $1.04 |
Pfizer's estimates of 2005 reported Net income of approximately $7.5 billion to $7.7 billion and reported diluted earnings per share of approximately $1.02 to $1.04, have been revised from the prior guidance of $9.1 billion and about $1.24. The revision is principally attributable to in-process R&D charges of $1.4 billion ($0.19 per share) related to the acquisition of Vicuron during the third quarter of 2005 and revised expectations (reflective of a lower revenue outlook, partially offset by greater expected savings associated with the Adapting to Scale productivity initiative and other expense revisions, and a lower effective tax rate), partially offset by anticipated gains on the sale of equity investments.
We expect to spend about $7.6 billion on research and development in 2005 and approximately $2.2 billion in capital expenditures for the full year 2005.
CAUTIONARYFORWARD-LOOKING INFORMATION AND FACTORS THAT MAY AFFECT FUTURE RESULTS
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 products in researchproduct candidates that involve substantial risks and uncertainties.uncertainties, including, without limitation, information about the Company's agreement to sell its Consumer Healthcare business to Johnson & Johnson and the use of sale proceeds, as well as about the Company's stock-purchase plans. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target," "forecast" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.performance or business prospects. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:
• | the success of research and development activities; |
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• | decisions by regulatory authorities regarding whether and when to approve our drug applications as well as their decisions regarding labeling and other matters that could affect the availability or commercial potential of our products; |
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• | the speed with which regulatory authorizations, pricing approvals, and product launches may be achieved; |
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• | competitive developments affecting our current growth products; |
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• | the ability to successfully market both new and existing products domestically and internationally; |
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• | difficulties or delays in manufacturing; |
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• | trade buying patterns; |
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• | the ability to meet generic and branded competition after the loss of patent protection for our products and competitor products; |
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• | the impact of existing and future regulatory provisions on product exclusivity; |
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• | trends toward managed care and healthcare cost containment; |
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• | possible U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including under Medicaid and Medicare, the importation of prescription drugs that are marketed outside the U.S. and sold at prices that are regulated by governments of various foreign countries, and the involuntary approval of prescription medicines for over-the-counter use; |
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• | the potential impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003; |
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• | legislation or regulations in markets outside the U.S. affecting product pricing, reimbursement or access; |
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• | contingencies related to actual or alleged environmental contamination; |
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• | claims and concerns that may arise regarding the safety or efficacy of in-line products and product candidates; |
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• | legal defense costs, insurance expenses, settlement costs and the risk of an adverse decision or settlement related to product liability, patent protection, governmental investigations, ongoing efforts to explore various means for resolving asbestos litigation and other legal proceedings; |
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• | the Company's ability to protect its patents and other intellectual property both domestically and internationally; |
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• | interest rate and |
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• | governmental laws and regulations affecting domestic and foreign operations, including tax obligations; |
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• | changes in U.S. generally accepted accounting principles; |
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• | any changes in business, political and economic conditions due to the threat of future terrorist activity in the U.S. and other parts of the world, and related U.S. military action overseas; |
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• | growth in costs and expenses; |
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• | changes in our product, segment and geographic mix; and |
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• | the impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual items, including our ability to |
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 varydiffer 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 20042005 fiscal year listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 11A, of that filing under the heading "Cautionary"Risk Factors and Cautionary Factors That May Affect Future Results." We incorporate that section of that Form 10-K in this filing and investors should refer to it. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
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 occurredbeen any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we do wish to highlight some changes which, taken together, are expected to have a favorable impact on our controls over a multi-year period. We continue to pursue 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. These are enhancements of on-going activities to support the growth of our financial shared service capabilities and standardize our financial systems. None of these initiatives is in response to any identified deficiency or weakness in our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
Certain legal proceedings in which we are involved are discussed in Note 1718 to the consolidated financial statements included in our 20042005 Financial Report; Part I, Item 3, of our Annual Report on Form 10-K for the year ended December 31, 2004;2005; and Part II, Item 1, of our Quarterly ReportsReport on Form 10-Q for the quartersquarter ended April 3 and July 3, 2005.2, 2006. The following discussion is limited to certain recent developments concerning our legal proceedings and should be read in conjunction with those earlier Reports. Unless otherwise indicated, all proceedings discussed in those earlier Reports remain outstanding. Reference also is made to the Legal Proceedings and Contingencies section in Part I, Item 2, of this Form 10-Q.
Product Liability Matters
Asbestos
As previously reported with regard to the Chapter 11 bankruptcy case involving Quigley Company, Inc. (Quigley), a wholly owned subsidiary of Pfizer, more than 75% of Quigley's claimants holding claims that represent more than two-thirds in value of claims against Quigley voted to accept Quigley's plan of reorganization. On August 9, 2006, in reviewing the voting tabulation methodology, the Bankruptcy Court ruled that certain votes that accepted the plan were not predicated upon the actual value of the claim. As a result, the reorganization plan was not accepted.
Quigley can adjust certain provisions in its reorganization plan and the voting procedures to conform with the Bankruptcy Court's ruling, and then possibly re-solicit the plan for acceptance or seek alternative remedies. These and other options are being considered.
If approved by the claimants and the courts, the reorganization plan will resolve all pending and future asbestos claims against Quigley and Pfizer in which claimants allege personal injury from exposure to Quigley products.
Patent Matters
Lipitor (atorvastatin)
As previously reported, in 2003, we filed suit in the U.S. District Court for the District of Delaware against Ranbaxy Laboratories Limited for infringement of both our basic product patent for atorvastatin and our patent rightscovering the active enantiomeric form of the drug. Our basic product patent, including the additional six-month pediatric exclusivity period, expires in March 2010. Our enantiomer patent, including the additional six-month pediatric exclusivity period, expires in June 2011.
In late 2005, the District Court held that both patents are valid and infringed by Ranbaxy's generic atorvastatin product. In August 2006, a panel of the U.S. Court of Appeals for the Federal Circuit affirmed the District Court's decision with respect to Lipitorour basic product patent. Subject to a possible request for a review by the full U.S. Court of Appeals for the Federal Circuit or an appeal to the U.S. Supreme Court by Ranbaxy, this decision prevents Ranbaxy from marketing a generic version of atorvastatin before March 2010.
The panel also ruled that one of the claims of our enantiomer patent is invalid on technical grounds. We are being challengedconsidering the possibility of seeking a review of the decision regarding our enantiomer patent by the full U.S. Court of Appeals for the Federal Circuit. In addition, the U.S. Patent and Trademark Office has a process for correcting technical defects in various countries. Onpatents, and we plan to pursue that process with regard to our enantiomer patent.
As previously reported, in October 12, 2005, in an action brought by generic manufacturer Ranbaxy, Ltd., the United Kingdom's High Court of Justice upheld our basic U.K. patent for Lipitor, which expires in November 2011, but ruled that a second patent covering the calcium salt of atorvastatin, which expires in July 2010, is invalid. Both sides intend to appealIn June 2006, the United Kingdom's Court of Appeal affirmed the lower court's decision. If upheld on appeal,The ruling by the decision will prohibitCourt of Appeal prohibits Ranbaxy from introducingmarketing a generic version of atorvastatin in the U.K. before the expiration of our basic patent in 2011.November 2011, subject to a possible further appeal to the House of Lords.
The trial of our Lipitor patent-infringementNorvasc (amlodipine)
Synthon Pharmaceuticals, Inc. has filed an action against Ranbaxyus in the U.S. District Court for the Eastern District of Delaware was held in late 2004. While a decision is possible later this year,Virginia alleging that our sales of Norvasc and Caduet infringe Synthon's patent relating to the court has not indicated when it intends to issue its judgment.manufacture of amlodipine.
Neurontin (gabapentin)Exubera
As previously reported, in 2000, 2001 and 2003, Warner-Lambert brought patent infringement suits in various federal courts against several generic manufacturers that had filed abbreviated new drug applications with the FDA asserting the invalidity and non-infringement of our gabapentin (Neurontin) low-lactam patent. These suits were consolidated for pre-trial purposes in the U.S. District Court for the District of New Jersey. The defendant generic manufacturers filed various summary judgment motions asserting invalidity and non-infringement on a number of grounds. In August 2005, the court, while denying eight of the ten summary judgment motions, granted two motions for summary judgment of non-infringement. It is expected that both sides will appeal the decision.
Neurontin has faced generic competition in the U.S. since last year. The FDA granted approval to a number of manufacturers for their generic gabapentin products, and the manufacturers began to market those products, in 2004.
Xalatan (lantanoprost)
As previously reported, in November 2001, a generic manufacturer notified Pharmacia that it had2006, Novo Nordisk filed an abbreviated new drug application with the FDA seeking approval to market a product containing latanoprost, which Pharmacia markets as Xalatan. In December 2001, Pharmacia filed suitaction against the generic manufacturer in the U.S. District Court for the District of New Jersey alleging infringement of various patents relating to latanoprost that are held by or licensed to Pharmacia. The generic manufacturer admitted infringement but claimed that these patents are invalid and unenforceable.
In July 2004, the court held that two of the three patents in suit are valid, infringed and enforceable, and it issued an injunction blocking sale of the generic product until the expiration of the later-expiring patent in March 2011. The generic manufacturer appealed the decision with respect to these two patents. The third patent, which also expires in March 2011, was held unenforceable. We appealed the decision with respect to the third patent. In July 2005, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court's decision as to all three patents, thereby blocking sale of the generic product until March 2011. In October 2005, the Federal Circuit denied the generic manufacturer's request for an en banc review of the three-member panel decision.
Product Liability Matters
Rezulin
As previously reported, in April 2001, Louisiana Health Service Indemnity Company and Eastern States Health and Welfare Fund filed a consolidated complaint against Warner-Lambertus in the U.S. District Court for the Southern District of New York purportedly on behalf of a class consisting of all health benefit providers that paid for or reimbursed patients for the purchase of Rezulin between February 1997 and April 2001. In September 2005, the court granted Warner-Lambert's motion for summary judgment and dismissed the complaint. In November 2005, the plaintiffs appealed the decision.
Viagra
A number of lawsuits, including purported class actions, have been filed against us in various federal and state courts alleging that Viagra causes certain typesour sales of visual injuries. The plaintiffs in the purported class actions seek to represent nationwide and certain statewide classes of Viagra users. All of the actions seek damages for personal injury, and the purported class actions also seek medical monitoring.
Commercial Matters
Lipitor
Beginning in September 2005, a number of purported class actions have been filed against us in various federal courts alleging claimsExubera infringe Novo Nordisk's patents relating to the promotioninhaled insulin and methods of Lipitor. In eachadministration of the actions, the plaintiffs seek to represent a nationwide class consisting of women (regardless of age) and men over age 65 who in each case had no history of heart disease or diabetes and who purchased Lipitor within the last four years. In certain of the actions, the plaintiffs also seek to represent health insurers, employee benefit plans and other third-party payors that paid for Lipitor used by individuals in either of the aforementioned two groups. The plaintiffs in these actions allege that the Company engaged in false and misleading advertising in violation of state consumer protection laws by allegedly promoting Lipitor for the prevention of heart disease in the aforementioned two groups. The actions seek monetary and injunctive relief, including treble damages. In addition, a purported class action on behalf of residents of the Province of Quebec has been filed against us in Canada that asserts claims under Canadian law and seeks relief substantially similar to the claims asserted and the relief sought in the U.S. actions.
Celebrex and Bextra
As previously reported, the Company is a defendant in a number of product liability, consumer fraud, securities, fiduciary duty and ERISA (Employee Retirement Income Security Act of 1974) actions, including purported class and derivative actions, relating to Celebrex and Bextra. Certain current and former officers, directors and employees of Pfizer and Pharmacia also are named as defendants in some of those actions. In June 2005, the federal securities, fiduciary duty and ERISA actions were transferred to the U.S. District Court for the Southern District of New York for consolidated pre-trial proceedings. In September 2005, the federal product liability and consumer fraud actions were transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings.
Other Matters
The Department of Justice
The U.S. Department of Justice has informed us that it is investigating Pharmacia's former contractual relationship with a health care intermediary.
We have received requests for information and documents from the U.S. Department of Justice relating to certain physician payments budgeted to our prescription pharmaceutical products.
Importation Cases
As previously reported, in 2004 a number of purported class actions were filed in the U.S. District Court for the District of Minnesota alleging that Pfizer and several other pharmaceutical manufacturers violated federal and state civil antitrust laws by conspiring to prevent the importation of brand-name prescription drugs from Canada. These suits all were consolidated into a single action, which sought to represent a nationwide class consisting of all persons who purchased or reimbursed patients for the purchase of prescription drugs manufactured and marketed by defendants that also are available in Canada. In August 2005, the court granted the defendants' motion to dismiss this action, and the plaintiffs have appealed the decision. The previously reported California state court action by a number of independent pharmacists in California that asserts similar claims under California antitrust and unfair business practices laws is still pending. The defendants' motion to dismiss the California action was partially granted and partially denied in July 2005.
Environmental Matters
As previously reported, in July 2005, the U.S. Environmental Protection Agency (EPA) proposed a civil penalty in the amount of $275,000 to settle certain alleged violations of the Federal Clean Air Act at our Kalamazoo, Michigan facility that were identified by the EPA during an inspection in 2004. In September 2005, this matter was resolved pursuant to a settlement that provides for a $47,250 civil penalty and a commitment to undertake two supplemental environmental projects at the facility. Corrective actions have been implemented.inhaled insulin.
Tax Matters
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 tax deductibility of a breakup fee paid by Warner-Lambert Company in 2000. As a result, in the first six months of 2006 we recorded a tax benefit of approximately $441 million related to the resolution of this issue.
In the second quarter of 2005, we recorded a tax benefit of $586 million primarily related to the resolution of certain tax positions. In addition, 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 auditis currently conducting audits of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005 and 2006 tax year isyears are also currently under audit as we are voluntary participants inunder the IRS Compliance Assurance Program, which results inProcess, a recently introduced real-time tax audits.audit process.
As previously disclosed, withWith 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 auditaudits of the tax returns for the years 2000 through 2002 and is currently conducting an audit for the year 2003 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.
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 third quarter of 2005:three months ended July 2, 2006:
Issuer Purchases of Equity Securities(a) | Issuer Purchases of Equity Securities(a) | Issuer Purchases of Equity Securities(a) | ||||||
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Period | Total Number of | Average Price | Total Number of | Approximate Dollar | Total Number of | Average Price | Total Number of | Approximate Dollar |
July 4, 2005 through July 31, 2005 | 24,708 | $26.64 | --- | $5,000,000,000 | ||||
August 1, 2005 through August 31, 2005 | 1,642,722 | $25.28 | 1,584,100 | $4,960,003,230 | ||||
September 1, 2005 through | 2,814,503 | $25.63 | 2,755,400 | $4,889,364,758 | ||||
April 3, 2006 through | 1,706,850 | $24.77 | 1,694,000 | $ 3,464,989,094 | ||||
May 1, 2006 through | 19,479,336 | $24.77 | 19,378,700 | $ 2,985,002,751 | ||||
June 1, 2006 through | 20,397,319 | $23.43 | 20,391,300 | $15,507,212,045 | ||||
Total | 4,481,933 | $25.51 | 4,339,500 | 41,583,505 | $24.11 | 41,464,000 | ||
(a) | On June 23, 2005, Pfizer announced that the Board of Directors authorized a $5 billion share-purchase plan (the "2005 Stock Purchase Plan"). On June 26, 2006, Pfizer announced that the Board of Directors increased the authorized amount of shares to be purchased under the 2005 Stock Purchase Plan from $5 billion to $18 billion. |
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(b) | In addition to purchases under the 2005 Stock Purchase Plan, this column reflects the following transactions during the |
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. | Exhibits. | ||
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1) Exhibit 3.1 | - | Restated Certificate of Incorporation dated April 12, 2004 | |
2) Exhibit 3.2 | - | Amendment dated May 1, 2006 to Restated Certificate of Incorporation dated April 12, 2004 | |
3) Exhibit 12 | - | Computation of Ratio of Earnings to Fixed Charges | |
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| - | Accountants' Acknowledgment | |
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| - | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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| - | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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| - | 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 | |
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| - | 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 | |
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.
Pfizer Inc. | ||
(Registrant) | ||
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Dated: | /s/ Loretta V. Cangialosi | |
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Loretta V. Cangialosi, Vice President, Controller |
Exhibit 12
PFIZER INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Nine | Year Ended December 31, | Six | Year Ended December 31, | |||||||||||||||||||||||
(in millions, except ratios) | 2005 |
| 2004 | 2003 | 2002 | 2001 | 2000 | 2006 |
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||
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Determination of earnings: | ||||||||||||||||||||||||||
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles | $ | 8,169 | $ | 14,007 | $ | 3,246 | $ | 11,766 | $ | 9,963 | $ | 5,471 | ||||||||||||||
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of a change in accounting principles | $ | 7,353 | $ | 10,800 | $ | 13,456 | $ | 2,816 | $ | 11,247 | $ | 9,469 | ||||||||||||||
Less: | ||||||||||||||||||||||||||
Minority interests | 9 | 10 | 3 | 6 | 14 | 13 | 5 | 12 | 7 | 1 | 3 | 12 | ||||||||||||||
Adjusted income | 8,160 | 13,997 | 3,243 | 11,760 | 9,949 | 5,458 | ||||||||||||||||||||
Income adjusted for minority interest | 7,348 | 10,788 | 13,449 | 2,815 | 11,244 | 9,457 | ||||||||||||||||||||
Add: | ||||||||||||||||||||||||||
Fixed charges | 471 | 510 | 442 | 322 | 305 | 444 | 377 | 630 | 505 | 438 | 318 | 301 | ||||||||||||||
Total earnings as defined | $ | 8,631 | $ | 14,507 | $ | 3,685 | $ | 12,082 | $ | 10,254 | $ | 5,902 | $ | 7,725 | $ | 11,418 | $ | 13,954 | $ | 3,253 | $ | 11,562 | $ | 9,758 | ||
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Fixed charges: | ||||||||||||||||||||||||||
Interest expense (a) | $ | 347 | $ | 347 | $ | 270 | $ | 251 | $ | 266 | $ | 381 | $ | 297 | $ | 471 | $ | 347 | $ | 270 | $ | 251 | $ | 266 | ||
Preferred stock dividends (b) | 11 | 12 | 10 | -- | -- | -- | 7 | 14 | 12 | 10 | -- | -- | ||||||||||||||
Rents (c) | 113 | 151 | 162 | 71 | 39 | 63 | 73 | 145 | 146 | 158 | 67 | 35 | ||||||||||||||
Fixed charges | 471 | 510 | 442 | 322 | 305 | 444 | 377 | 630 | 505 | 438 | 318 | 301 | ||||||||||||||
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Capitalized interest | 12 | 12 | 20 | 28 | 56 | 46 | 15 | 17 | 12 | 20 | 28 | 56 | ||||||||||||||
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Total fixed charges | $ | 483 | $ | 522 | $ | 462 | $ | 350 | $ | 361 | $ | 490 | $ | 392 | $ | 647 | $ | 517 | $ | 458 | $ | 346 | $ | 357 | ||
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Ratio of earnings to fixed charges | 17.9 | 27.8 | 8.0 | 34.5 | 28.4 | 12.0 | 19.7 | 17.6 | 27.0 | 7.1 | 33.4 | 27.3 | ||||||||||||||
All financial information reflects as applicable, the following businesses and product lines as discontinued operations:operations for all periods presented: the Consumer Healthcare business; for 2006, 2005, 2004 and 2003: certain European generics businesses; and for 2004 and 2003: our in-vitro allergy and autoimmune diagnostics testing, and surgical ophthalmic, certain European generic pharmaceutical,ophthalmics.
All financial information reflects the following as discontinued operations for 2003, 2002, and 2001: our confectionery, shaving and fish-care products businesses, certain non-core consumer healthcare products lines (primarily marketed in Europe) andas well as the Estrostep, Loestrin and femhrt women's health product lines.
Historical ratios of earnings to fixed charges reflect revisions to historical period's rent expense,lines for all the impact of which was not significant to any period.years presented.
(a) | Interest expense includes amortization of debt premium, discount and expenses. |
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(b) | Preferred stock dividends are from our Series A convertible perpetual preferred stock held by an Employee Stock Ownership Plan assumed in connection with our acquisition of Pharmacia. |
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(c) | Rents included in the computation consist of one-third of rental expense which we believe to be a conservative estimate of an interest factor in our leases, which are not material. |
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 November 9, 2005,August 11, 2006, included within the Quarterly Report on Form 10-Q of Pfizer Inc. for the quarter ended OctoberJuly 2, 2005,2006, in the following Registration Statements:
- 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 YorkNovember 9, 2005August 11, 2006
Exhibit 31.1
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Henry A. McKinnell,Jeffrey B. Kindler, certify that:
1. | I have reviewed this report on Form 10-Q of Pfizer Inc.; | |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
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b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
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c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
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d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
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5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
Date: November 9, 2005August 11, 2006
/s/ |
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Exhibit 31.2
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan G. Levin, certify that:
1. | I have reviewed this report on Form 10-Q of Pfizer Inc.; | |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
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b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
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c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
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d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
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5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
Date: November 9, 2005August 11, 2006
/s/ Alan G. Levin |
Alan G. Levin |
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,Jeffrey B. Kindler, hereby certify that, to the best of my knowledge, the Quarterly Report of Pfizer Inc. on Form 10-Q for the quarter ended OctoberJuly 2, 20052006 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Pfizer Inc.
/s/ Henry A. McKinnellJeffrey B. Kindler Henry A. McKinnellJeffrey B. KindlerChairman of the Board and Chief Executive OfficerNovember 9, 2005August 11, 2006
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 OctoberJuly 2, 20052006 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Pfizer Inc.
/s/ Alan G. Levin
Alan G. Levin
Senior Vice President and Chief Financial OfficerNovember 9, 2005August 11, 2006
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.