UNITED STATES X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended July OR TRANSITION REPORT PURSUANT TO SECTION 13 For the transition period from________to_______ COMMISSION FILE NUMBER 1-3619 ---- | |
PFIZER INC. | |
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DELAWARE | 13-5315170 |
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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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Large accelerated filer X Accelerated 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 Ended
July 2, 20061, 2007
Table of Contents
PART I. FINANCIAL INFORMATION | Page |
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Item 1. | |
Financial | |
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Condensed Consolidated Statements of Income for the three months and six months ended July | 3 |
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Condensed Consolidated Balance Sheets | 4 |
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Condensed Consolidated Statements of Cash Flows for the six months ended July | 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 |
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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 |
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Item 1A. | |
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 |
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Item 4. | |
Submission of Matters to a Vote of Security Holders |
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Item 5. | |
Other Information |
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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 | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||
(millions of dollars, except per common share data) | July 2, | July 3, | July 2, | July 3, | ||||||||||||
(millions, except per common share data) | July 1, | July 2, | July 1, | July 2, | ||||||||||||
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Revenues | $ | 11,741 | $ | 11,452 | $ | 23,488 | $ | 23,595 | $ | 11,084 | $ | 11,741 | $ | 23,558 | $ | 23,488 |
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Costs and expenses: | ||||||||||||||||
Cost of sales(a) | 1,790 | 1,762 | 3,461 | 3,639 | 2,109 | 1,790 | 3,996 | 3,461 | ||||||||
Selling, informational and administrative expenses(a) | 3,881 | 3,766 | 7,276 | 7,431 | 3,844 | 3,881 | 7,205 | 7,276 | ||||||||
Research and development expenses(a) | 1,742 | 1,830 | 3,285 | 3,547 | 2,165 | 1,742 | 3,830 | 3,285 | ||||||||
Amortization of intangible assets | 823 | 856 | 1,648 | 1,736 | 783 | 823 | 1,598 | 1,648 | ||||||||
Merger-related in-process research and development charges | 513 | 260 | 513 | 262 | ||||||||||||
Restructuring charges and merger-related costs | 268 | 264 | 567 | 480 | ||||||||||||
Acquisition-related in-process research and development charges | -- | 513 | 283 | 513 | ||||||||||||
Restructuring charges and acquisition-related costs | 1,051 | 268 | 1,863 | 567 | ||||||||||||
Other (income)/deductions - net | (359) | (198) | (615) | 854 | (487) | (359) | (889) | (615) | ||||||||
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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 | ||||||||||||
Income from continuing operations before provision for taxes on income and minority interests | 1,619 | 3,083 | 5,672 | 7,353 | ||||||||||||
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Provision/(benefit) for taxes on income | 790 | (464) | 1,052 | 2,111 | ||||||||||||
Provision for taxes on income | 272 | 790 | 961 | 1,052 | ||||||||||||
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Minority interests | 3 | 1 | 5 | 4 | 2 | 3 | 5 | 5 | ||||||||
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Income from continuing operations | 2,290 | 3,375 | 6,296 | 3,531 | 1,345 | 2,290 | 4,706 | 6,296 | ||||||||
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Discontinued operations: | ||||||||||||||||
Income from discontinued operations - net of tax | 108 | 88 | 210 | 191 | -- | 108 | -- | 210 | ||||||||
Gains on sales of discontinued operations - net of tax | 17 | -- | 20 | 41 | ||||||||||||
Gains/(losses) on sales of discontinued operations - net of tax | (78) | 17 | (47) | 20 | ||||||||||||
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Discontinued operations - net of tax | 125 | 88 | 230 | 232 | (78) | 125 | (47) | 230 | ||||||||
Net income | $ | 2,415 | $ | 3,463 | $ | 6,526 | $ | 3,763 | $ | 1,267 | $ | 2,415 | $ | 4,659 | $ | 6,526 |
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Earnings per common share - basic: | ||||||||||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | $ | 0.86 | $ | 0.48 | $ | 0.19 | $ | 0.31 | $ | 0.67 | $ | 0.86 |
Discontinued operations - net of tax | 0.02 | 0.01 | 0.03 | 0.03 | (0.01) | 0.02 | (0.01) | 0.03 | ||||||||
Net income | $ | 0.33 | $ | 0.47 | $ | 0.89 | $ | 0.51 | $ | 0.18 | $ | 0.33 | $ | 0.66 | $ | 0.89 |
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Earnings per common share - diluted: | ||||||||||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | $ | 0.86 | $ | 0.48 | $ | 0.19 | $ | 0.31 | $ | 0.67 | $ | 0.86 |
Discontinued operations - net of tax | 0.02 | 0.01 | 0.03 | 0.03 | (0.01) | 0.02 | (0.01) | 0.03 | ||||||||
Net income | $ | 0.33 | $ | 0.47 | $ | 0.89 | $ | 0.51 | $ | 0.18 | $ | 0.33 | $ | 0.66 | $ | 0.89 |
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Weighted-average shares used to calculate earnings per common share: | ||||||||||||||||
Basic | 7,282 | 7,366 | 7,298 | 7,391 | 6,966 | 7,282 | 7,009 | 7,298 | ||||||||
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Diluted | 7,305 | 7,418 | 7,330 | 7,445 | 6,990 | 7,305 | 7,033 | 7,330 | ||||||||
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Cash dividends paid per common share | $ | 0.24 | $ | 0.19 | $ | 0.48 | $ | 0.38 | $ | 0.29 | $ | 0.24 | $ | 0.58 | $ | 0.48 |
(a) | Exclusive of amortization of intangible assets, except as disclosed in Note |
See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(millions of dollars) | July 2, | Dec. 31, | July 1, | Dec. 31, | ||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 1,921 | $ | 2,247 | $ | 2,138 | $ | 1,827 |
Short-term investments | 12,829 | 19,979 | 20,115 | 25,886 | ||||
Accounts receivable, less allowance for doubtful accounts | 9,275 | 9,103 | 9,497 | 9,392 | ||||
Short-term loans | 511 | 510 | 540 | 514 | ||||
Inventories | 6,392 | 5,478 | 5,734 | 6,111 | ||||
Prepaid expenses and taxes | 3,262 | 2,903 | 3,564 | 3,157 | ||||
Assets of discontinued operations and other assets held for sale | 6,804 | 6,659 | 34 | 62 | ||||
Total current assets | 40,994 | 46,879 | 41,622 | 46,949 | ||||
Long-term investments and loans | 2,387 | 2,497 | 5,067 | 3,892 | ||||
Property, plant and equipment, less accumulated depreciation | 16,483 | 16,233 | 16,298 | 16,632 | ||||
Goodwill | 21,057 | 20,985 | 20,985 | 20,876 | ||||
Identifiable intangible assets, less accumulated amortization | 26,134 | 26,244 | 22,902 | 24,350 | ||||
Other assets, deferred taxes and deferred charges | 4,495 | 4,860 | 3,529 | 2,138 | ||||
Total assets | $ | 111,550 | $ | 117,698 | $ | 110,403 | $ | 114,837 |
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LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Short-term borrowings, including current portion of long-term debt | $ | 3,779 | $ | 11,589 | $ | 2,432 | $ | 2,434 |
Accounts payable | 1,740 | 2,073 | 1,845 | 2,019 | ||||
Dividends payable | 1,757 | 1,772 | 2,010 | 2,055 | ||||
Income taxes payable | 4,356 | 3,618 | 516 | 6,466 | ||||
Accrued compensation and related items | 1,399 | 1,602 | 1,573 | 1,903 | ||||
Other current liabilities | 5,655 | 6,564 | 6,760 | 6,510 | ||||
Liabilities of discontinued operations and other liabilities held for sale | 1,369 | 1,237 | -- | 2 | ||||
Total current liabilities | 20,055 | 28,455 | 15,136 | 21,389 | ||||
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Long-term debt | 5,450 | 6,347 | 5,777 | 5,546 | ||||
Pension benefit obligations | 2,721 | 2,681 | 3,389 | 3,632 | ||||
Postretirement benefit obligations | 1,447 | 1,424 | 1,955 | 1,970 | ||||
Deferred taxes | 10,369 | 10,392 | 7,602 | 8,015 | ||||
Other taxes payable | 5,426 | -- | ||||||
Other noncurrent liabilities | 3,019 | 2,635 | 3,024 | 2,927 | ||||
Total liabilities | 43,061 | 51,934 | 42,309 | 43,479 | ||||
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Shareholders' Equity | ||||||||
Shareholders' equity | ||||||||
Preferred stock | 152 | 169 | 110 | 141 | ||||
Common stock | 440 | 439 | 442 | 441 | ||||
Additional paid-in capital | 68,217 | 67,759 | 69,555 | 69,104 | ||||
Employee benefit trust, at fair value | (700) | (923) | (604) | (788) | ||||
Treasury stock | (41,755) | (39,767) | (51,833) | (46,740) | ||||
Retained earnings | 40,627 | 37,608 | 50,304 | 49,669 | ||||
Accumulated other comprehensive income | 1,508 | 479 | ||||||
Accumulated other comprehensive income/(expense) | 120 | (469) | ||||||
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Total shareholders' equity | 68,489 | 65,764 | 68,094 | 71,358 | ||||
Total liabilities and shareholders' equity | $ | 111,550 | $ | 117,698 | $ | 110,403 | $ | 114,837 |
* 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)
Six Months Ended | ||||
(millions of dollars) | July 2, | July 3, | ||
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Operating Activities: | ||||
Net income | $ | 6,526 | $ | 3,763 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation and amortization | 2,694 | 2,776 | ||
Share-based compensation expense | 326 | 79 | ||
Merger-related in-process research and development charges | 513 | 262 | ||
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) | (636) | (369) | ||
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Net cash provided by operating activities | 9,104 | 6,983 | ||
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Investing Activities: | ||||
Purchases of property, plant and equipment | (887) | (997) | ||
Purchases of short-term investments | (5,663) | (7,441) | ||
Proceeds from redemptions of short-term investments | 13,239 | 12,570 | ||
Purchases of long-term investments | (248) | (560) | ||
Proceeds from sales of long-term investments | 47 | 568 | ||
Purchases of other assets | (78) | (99) | ||
Proceeds from sales of other assets | 3 | 6 | ||
Proceeds from the sales of businesses, products and product lines | 14 | 101 | ||
Acquisitions, net of cash acquired | (1,989) | (255) | ||
Other investing activities | (116) | 276 | ||
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Net cash provided by investing activities | 4,322 | 4,169 | ||
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Financing Activities: | ||||
Increase in short-term borrowings, net | 938 | 90 | ||
Principal payments on short-term borrowings | (10,583) | (5,800) | ||
Proceeds from issuances of long-term debt | 1,054 | 2 | ||
Principal payments on long-term debt | (2) | (22) | ||
Purchases of common stock | (2,000) | (3,304) | ||
Cash dividends paid | (3,468) | (2,930) | ||
Stock option transactions and other | 318 | 278 | ||
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Net cash used in financing activities | (13,743) | (11,686) | ||
Effect of exchange-rate changes on cash and cash equivalents | (9) | 2 | ||
Net decrease in cash and cash equivalents | (326) | (532) | ||
Cash and cash equivalents at beginning of period | 2,247 | 1,808 | ||
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Cash and cash equivalents at end of period | $ | 1,921 | $ | 1,276 |
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Supplemental Cash Flow Information: | ||||
Cash paid during the period for: | ||||
Income taxes | $ | 921 | $ | 1,296 |
Interest | 414 | 329 |
Six Months Ended | ||||
(millions of dollars) | July 1, | July 2, | ||
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Operating Activities: | ||||
Net income | $ | 4,659 | $ | 6,526 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation and amortization | 2,712 | 2,694 | ||
Share-based compensation expense | 228 | 326 | ||
Acquisition-related in-process research and development charges | 283 | 513 | ||
Gains on disposal of investments, products and product lines | (79) | (168) | ||
(Gains)/losses on sales of discontinued operations | 39 | (31) | ||
Deferred taxes from continuing operations | (951) | (438) | ||
Other deferred taxes | -- | 45 | ||
Other non-cash adjustments | 37 | 270 | ||
Changes in assets and liabilities (net of businesses acquired and divested) | (2,020) | (633) | ||
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Net cash provided by operating activities | 4,908 | 9,104 | ||
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Investing Activities: | ||||
Purchases of property, plant and equipment | (757) | (887) | ||
Purchases of short-term investments | (10,738) | (5,663) | ||
Proceeds from redemptions of short-term investments | 17,101 | 13,239 | ||
Purchases of long-term investments | (1,243) | (248) | ||
Proceeds from redemptions of long-term investments | 22 | 47 | ||
Purchases of other assets | (82) | (78) | ||
Proceeds from sales of other assets | 29 | 3 | ||
Proceeds from the sales of businesses, products and product lines | 14 | 14 | ||
Acquisitions, net of cash acquired | (463) | (1,989) | ||
Other investing activities | (336) | (116) | ||
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Net cash provided by investing activities | 3,547 | 4,322 | ||
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Financing Activities: | ||||
Increase in short-term borrowings, net | 78 | 938 | ||
Principal payments on short-term borrowings | (763) | (10,583) | ||
Proceeds from issuances of long-term debt | 1,243 | 1,054 | ||
Principal payments on long-term debt | (60) | (2) | ||
Purchases of common stock | (4,999) | (2,000) | ||
Cash dividends paid | (4,040) | (3,468) | ||
Stock option transactions and other | 383 | 318 | ||
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Net cash used in financing activities | (8,158) | (13,743) | ||
Effect of exchange-rate changes on cash and cash equivalents | 14 | (9) | ||
Net increase/(decrease) in cash and cash equivalents | 311 | (326) | ||
Cash and cash equivalents at beginning of period | 1,827 | 2,247 | ||
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Cash and cash equivalents at end of period | $ | 2,138 | $ | 1,921 |
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Supplemental Cash Flow Information: | ||||
Cash paid during the period for: | ||||
Income taxes | $ | 3,672 | $ | 921 |
Interest | 354 | 414 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
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 six-monthsix month periods ended May 28, 200627, 2007, and May 29, 2005.28, 2006.
We made certain reclassifications to the 2005 condensed consolidated financial statementsprior period amounts to conform to the 2006second-quarter 2007 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, 2005.2006.
Note 2. Adoption of New Accounting Policy
As of January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, and supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007, and changed our policy related to the accounting for income tax contingencies. To understand the cumulative effect of these accounting changes, see Note 6A.Taxes on Income: Adoption of New Accounting Standard.
We continue to account for income taxcontingencies using a benefit recognition model.Beginning January 1, 2007, if we consider that a tax position is 'more likely than not' of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and we often obtain assistance from external advisors.
Under the benefit recognition model, if our initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit: (i) if there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency.
Liabilities associated with uncertain tax positions are now classified as current only when we expect to pay cash within the next 12 months. Interest and penalties, if any, continue to be recorded in Provision for taxes on income and are classified on the balance sheet with the related tax liability.
Prior to 2007, our policy had been to account for income tax contingencies based on whether we determined our tax position to be 'probable' under current tax law of being sustained, as well as an analysis of potential outcomes under a given set of facts and circumstances.In addition, we previously considered all tax liabilities as current once the associated tax year was under audit.
Note 3. Acquisitions
On May 16,In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp., a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, Inc., an animal health company that possesses a unique vaccine delivery system known as Inovoject, which enables baby chicks to be vaccinated while inside their eggs. In connection with these and other small acquisitions, we recorded $283 million, in Acquisition-related in-process research and development charges in the first quarter of 2007.
In the second quarter of 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,this and other smaller acquisitions, we recorded $478$513 million, pre-tax, in Merger-relatedAcquisition-related in-process research and development charges.charges in the second quarter of 2006.
On February 28, 2006, we completed the acquisition of the sanofi-aventis world-wideworldwide 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 2006, in connection with the acquisition, as part of our preliminaryfinal purchase price allocation, we recorded an intangible asset for$1.0 billion of developed technology rights, of approximately $1.0 billion, inventory valued at $218 million and goodwill of approximatelyinventory and $166 million of Goodwill, all of which have been allocated to our Human HealthPharmaceutical segment. The amortization of the developed technology rights will beis primarily included in Cost of Salessales. 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 3.4. 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:
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The following amounts, primarily related to our Consumer Healthcare business which was sold in December 2006 for $16.6 billion, 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 | Three Months Ended | Six Months Ended | |||||||||||||||
(in millions) | July 2, | July 3, |
| July 2, | July 3, | |||||||||||||
(millions of dollars) | July 1, | July 2, |
| July 1, | July 2, | |||||||||||||
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Revenues | $ | 1,027 | $ | 987 | $ | 1,946 | $ | 1,951 | $ | -- | $ | 1,027 | $ | -- | $ | 1,946 | ||
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Pre-tax income | $ | 160 | $ | 134 | $ | 315 | $ | 290 | $ | -- | $ | 160 | $ | -- | $ | 315 | ||
Provision for taxes on income | (52) | (46) | (105) | (99) | -- | (52) | -- | (105) | ||||||||||
Income from operations of discontinued businesses - net of tax | 108 | 88 | 210 | 191 | -- | 108 | -- | 210 | ||||||||||
Pre-tax gains on sales of discontinued businesses | 26 | -- | 31 | 65 | ||||||||||||||
Pre-tax gains/(losses) on sales of discontinued businesses | (79) | 26 | (39) | 31 | ||||||||||||||
Provision for taxes on gains | (9) | -- | (11) | (24) | 1 | (9) | (8) | (11) | ||||||||||
Gains on sales of discontinued businesses - net of tax | 17 | -- | 20 | 41 | ||||||||||||||
Discontinued operations-net of tax | $ | 125 | $ | 88 | $ | 230 | $ | 232 | ||||||||||
Gains/(losses) on sales of discontinued operations - net of tax | (78) | 17 | (47) | 20 | ||||||||||||||
Discontinued operations - net of tax | $ | (78) | $ | 125 | $ | (47) | $ | 230 |
The following assetsFor a period of time, we will continue to generate cash flows and liabilities, primarily related to report income statement activity in continuing operations that are associated with our former Consumer Healthcare business. The activities that give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business have been segregatedoperations to the new owner. Included in continuing operations for the second quarter of 2007 were the following amounts associated with these transition service agreements that will no longer occur after the full transfer of activities to the new owner: Revenues of $50 million; Cost of sales of $45 million; Selling, informational and included in Assetsadministrative expense of discontinued operations and other assets held for sale$5 million; and LiabilitiesOther (income)/deduction-net of discontinued operations and other liabilities held for sale, as appropriate,$7 million in the condensed consolidated balance sheets:
(in millions) | July 2, | Dec. 31, | ||
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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 |
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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, 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 accounted for stock options under Accounting Principle Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, an elective accounting policy permitted by SFAS 123. Under this standard, since the exercise price of our stock options granted is set equal to the market price on the date of the grant, we did not record any expense to the condensed consolidated statement of income related to stock options, unless certain original grant date terms were subsequently modified. However, as required, we disclosed, in the Notes to Consolidated Financial Statements, the pro forma expense impact of the stock option grants as if we had applied the fair-value-based recognition provisions of SFAS 123.
The adoption of SFAS 123R primarily impacted our accounting for stock options (see Note 14, Share-Based Payments).
Note 5. Asset Impairment Charge
In the first six months of 2005, we recorded charges totaling $1.2 billion ($761 million, net2007: Revenues of tax) in connection with the decision to suspend$94 million; Cost of sales of Bextra. The pre-tax charge included $1.1 billion related to the impairment$80 million; Selling, informational and administrative expense of developed technology rights$7 million; and $7 million related to the write-off of machinery and equipment, both of which were included in Other (income)/deductions - netdeduction-net (see Note 12, Goodwill and Other Intangible Assets).of $9 million in income.
Note 6.5. Adapting to Scale Productivity Initiative
We incurred the following costs in connection with our Adapting to Scale (AtS) productivity initiative, which was launched in early 2005:2005 and broadened in October 2006:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
(millions of dollars) | July 2, | July 3, | July 2, | July 3, | July 1, | July 2, | July 1, | July 2, | ||||||||||||||
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Implementation costs(a) | $ | 180 | $ | 33 | $ | 365 | $ | 33 | $ | 317 | $ | 180 | $ | 491 | $ | 365 | ||||||
Restructuring charges(b) | 262 | 21 | 556 | 21 | 1,035 | 262 | 1,830 | 556 | ||||||||||||||
Total AtS costs | $ | 442 | $ | 54 | $ | 921 | $ | 54 | $ | 1,352 | $ | 442 | $ | 2,321 | $ | 921 |
(a) |
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(b) | Included in Restructuring charges and |
Included inAtS costs associated with Discontinued operations - net of tax are additional pre-tax AtS costs of $7 million and $15 million for the three months and six months ended July 2, 2006.in 2006 were not significant.
Through July 2, 2006,1, 2007, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our U.S.worldwide marketing and worldwide research and development operations, while the implementation costs primarily relate to system and process standardization, as well as the expansion of shared services.
The components of restructuring charges associated with AtS follow:
(millions of dollars) | Costs | Utilization |
| Accrual | (a) | Costs | Utilization |
| Accrual | (a) | ||||||
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| ||||||||||||||
Employee termination costs | $ | 635 | $ | 528 | $ | 107 | $ | 2,664 | $ | 1,306 | $ | 1,358 | ||||
Asset impairments | 299 | 299 | -- | 606 | 606 | -- | ||||||||||
Other | 61 | 22 | 39 | 294 | 197 | 97 | ||||||||||
| $ | 995 | $ | 849 | $ | 146 | ||||||||||
Total | $ | 3,564 | $ | 2,109 | $ | 1,455 |
(a) | Included in Other current |
During the three months and six months ended July 2, 2006,second quarter of 2007, we expensed $166 million and $331$821 million for Employee termination costs, $58 million and $177$93 million for Asset impairments and $121 million in Other. During the first six months of 2007, we expensed $1.6 billion for Employee termination costs, $116 million for Asset impairmentsand $38 million and $48$162 million in Other. Through July 2, 2006,1, 2007, costs incurred for Employee termination costs represent the approvedexpected reduction of the workforce by 5,096approximately 18,400 employees, mainly in research, manufacturing sales and research. We notified affected individuals and 4,714 employees were terminated assales. As of July 2, 2006.1, 2007, approximately 9,900 of these employees have been formally terminated. Employee termination costs are recorded as incurredwhen the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write off inventory and write down property, plant and equipment. Other primarily includes costs to exit certain activities.
Note 7. Merger-Related Costs
We incurred the following merger-related costs:
Three Months Ended | Six Months Ended | ||||||||
(millions of dollars) | July 2, | July 3, | July 2, | July 3, | |||||
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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 |
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Included in Discontinued operations - net of tax are additional pre-tax merger-related costs of $4 million and $5 million for the three months and six months ended July 2, 2006 and $9 million and $16 million for the three months and six months ended July 3, 2005.
Restructuring charges included severance, costs of vacating duplicative facilities, contract termination and other exit costs.
Note 8.6. Taxes on Income
A. Adoption of New Accounting Standard
As of January 1, 2007, we adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, as supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007. See Note 2.Adoption of New Accounting Policy, for a full description of our accounting policy related to the accounting for income tax contingencies. As a result of the implementation of FIN 48, at the date of adoption, we reduced our existing liabilities for uncertain tax positions by approximately $11 million, which has been recorded as a direct adjustment to the opening balance of Retained earnings and changed the classification of virtually all amounts associated with uncertain tax positions approximately $4.0 billion, including the associated accrued interest of approximately $780 million, from current to noncurrent. For details, see section C. Tax Contingencies below.
B. Taxes on Income
On January 23, 2006, the Internal Revenue Service (IRS) issued final regulations on Statutory Mergers and Consolidations, which impacted certain prior-period transactions. In the first quarter of 2006, we recorded a tax benefit of $217 million, reflecting the total impact of these regulations.
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 waswe were 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 aan acquisition-related breakup fee paid by Warner-Lambert Company in 2000. As a result, in the first quarter of 2006, we recorded a tax benefit of approximately $441 million related to the resolution of this issue.issue.
InAs of July 1, 2007, we intend to permanently reinvest the second quarterearnings of 2005,our international subsidiaries and, therefore, we have not recorded a U.S. tax benefitprovision on unremitted earnings.
C.Tax Contingencies
We are subject to income tax in many jurisdictions and a certain degree of $586 million primarilyestimation is required in recording the assets and liabilities related to income taxes. For a description of our accounting policy associated with accounting for income taxcontingencies, see Note 2.Adoption of New Accounting Policy. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. Tax audits can involve complex issues and the resolution of certainissues may span multiple years, particularly if subject to negotiation or litigation.
The United States is one of our major tax positions.
Thejurisdictions and the IRS is currently conducting audits of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005, 2006 and 20062007 tax years are also currently under audit underas part of the IRS Compliance Assurance Process (CAP), a recently introduced real-time audit process.
All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations. 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 year 2003 tax year through the date of the merger with Pfizer (April 16, 2003). Although the U.S. audits for Pharmacia Corporation for all previous years have been closed, tax years 2000 through 2002 are still open under the statute of limitations. In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (1998-2006), Japan (2004-2006), Europe (1996-2006, primarily reflecting Ireland, the U.K., France, Italy, Spain and Germany), and Puerto Rico (2002-2006).
We periodically reassessregularly reevaluate our tax positions and the likelihood of assessmentsassociated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings.filings, as well as changes in tax law that would either increase or decrease the technical merits of a position relative to the more likely than not standard. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Our evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.
Because tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. The amounts associated with uncertain tax positions are as follows:
(millions of dollars) | July 1, | January 1, | ||
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Non-current deferred tax assets(a) | $ | 451 | $ | 395 |
Other tax assets(a) | 726 | 647 | ||
Income taxes payable(b) | (135) | (47) | ||
Other taxes payable(b) | (5,426) | (4,962) | ||
Total amounts associated with uncertain tax positions | $ | (4,384) | $ | (3,967) |
(a) | Included in Other assets, deferred taxes and deferred charges. |
(b) | Includes gross accrued interest. Accrued penalties are not significant. |
Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.
Tax assets associated with uncertain tax positions represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities to minimize double taxation. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction.
If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our financial statements could be materially affected in the period of settlement as we treat settlements as discrete items in the period of resolution. Based on the protocol of finalizing audits by the relevant taxing authorities, which could include formal administrative and legal proceedings, except for amounts reflected in Income taxes payable, we are unable to estimate the range of reasonably possible change related to our uncertain tax positions within the next 12 months. However, any settlements would likely result in a significant decrease in our uncertain tax positions.
Note 9.7. Comprehensive Income
The components of comprehensive income/(expense) follow:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
(millions of dollars) | (millions of dollars) | July 2, | July 3, | July 2, | July 3, | July 1, | July 2, | July 1, | July 2, | |||||||||||
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Net income | Net income | $ | 2,415 | $ | 3,463 | $ | 6,526 | $ | 3,763 | $ | 1,267 | $ | 2,415 | $ | 4,659 | $ | 6,526 | |||
Other comprehensive income/(expense): | Other comprehensive income/(expense): | |||||||||||||||||||
Currency translation adjustment and other | Currency translation adjustment and other | 688 | (708) | 998 | (985) | Currency translation adjustment and other | 500 | 688 | 372 | 998 | ||||||||||
Net unrealized gains/(losses) on derivative financial instruments | Net unrealized gains/(losses) on derivative financial instruments | 22 | (8) | 93 | (27) | Net unrealized gains/(losses) on derivative financial instruments | 9 | 22 | 18 | 93 | ||||||||||
Net unrealized gains/(losses) on available-for-sale securities | Net unrealized gains/(losses) on available-for-sale securities | (36) | (48) | (33) | (119) | Net unrealized gains/(losses) on available-for-sale securities | 9 | (36) | 5 | (33) | ||||||||||
Minimum pension liability(b) | (17) | 16 | (29) | 14 | ||||||||||||||||
Benefit plan adjustments | 113 | (17) | 194 | (29) | ||||||||||||||||
Total other comprehensive income/(expense) | Total other comprehensive income/(expense) | 657 | (748) | 1,029 | (1,117) | 631 | 657 | 589 | 1,029 | |||||||||||
Total comprehensive income | Total comprehensive income | $ | 3,072 | $ | 2,715 | $ | 7,555 | $ | 2,646 | $ | 1,898 | $ | 3,072 | $ | 5,248 | $ | 7,555 | |||
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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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Amounts of comprehensive income associated with discontinued operations in 2006 were not significant.
Note 10.8. Financial Instruments
A. Long-Term Debt
On February 22, 2006,May 11, 2007, we issued the following Japanese yen fixed-rate bonds,notes to be used for general corporate purposes:
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$1.2 billion equivalent, senior, unsecured, euro-denominated notes, due May 15, 2017, which pay interest annually, beginning on May 15, 2008, at a fixed rate of 4.55%.
| |
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The notes were issued under a $5 billion debt shelfnew securities registration statement filed with the SEC in November 2002. As of July 2, 2006, we had the ability to borrow approximately $1 billion by issuing debt securities under that debt shelf registration statement.
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 early in the third quarter of 2006.March 2007.
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 2006.2007.
Foreign Exchange Risk
During the first six months of 2006,2007, we entered into the following new or incremental hedging or offset activities:
Instrument(a) | Primary | (b) |
| Hedge | (c) |
| 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 |
| 792 | 2006 | ||||
LT yen debt | LTD | NI | Yen net investments | 523 | 2011 | |||||
LT yen debt | LTD | NI | Yen net investments | 480 | 2016 |
Instrument(a) | Primary | (b) |
| Hedge | (c) |
| Hedged or Offset Item | Notional Amount as of | Maturity Date | |
Forwards | OCL | -- | Short-term foreign currency assets and liabilities(d) | $ 2,651 | 2007 | |||||
Forwards | Prepaid | CF | Yen available-for-sale investments | 2,212 | 2007 | |||||
Swap | ONCL | -- | Euro fixed rate debt | 1,216 | 2017 | |||||
Forwards | OCL | CF | Euro available-for-sale investments | 1,041 | 2007 | |||||
Forwards | Prepaid | CF | Euro available-for-sale investments | 696 | 2007 | |||||
Swap | Other assets | FV | Swiss franc loan | 143 | 2009 |
(a) |
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(b) | The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge foreign exchange risk. |
(c) | CF = Cash flow hedge; |
(d) | Forward-exchange contracts used to offset short-term foreign currency assets and liabilities |
These foreign exchangeforeign-exchange instruments serve to protect us against the impact of the translation into U.S. dollars of certain foreign exchangecurrency denominated transactions.
Interest Rate Risk
During the first six months of 2007, we entered into the following new hedging activities:
Instrument | Primary | (a) |
| Hedge | (b) |
| Hedged Item | Notional Amount as of | Maturity Date | |
Swap | ONCL | FV | Euro fixed rate debt | $ 1,216 | 2017 | |||||
Swaps | ONCL | CF | Available-for-sale investments | 646 | 2009 |
(a) | The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge interest rate risk. The abbreviation used is defined as follows: ONCL = Other noncurrent liabilities. |
(b) | FV = Fair value hedge; CF = Cash flow hedge. |
The interest rate instruments serve to hedge the fixed or variable interest rates on the hedged items, matching the amount and timing of the hedged items.
Note 11.9. Inventories
The components of inventories follow:
(millions of dollars) | (millions of dollars) | July 2, | Dec. 31, | (millions of dollars) | July 1, | Dec. 31, | ||||||
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Finished goods | Finished goods | $ | 2,223 | $ | 1,742 | Finished goods | $ | 1,898 | $ | 1,651 | ||
Work-in-process | Work-in-process | 3,153 | 2,379 | Work-in-process | 2,624 | 3,198 | ||||||
Raw materials and supplies | Raw materials and supplies | 1,016 | 1,357 | Raw materials and supplies | 1,212 | 1,262 | ||||||
Total inventories | Total inventories | $ | 6,392 | $ | 5,478 | Total inventories | $ | 5,734 | $ | 6,111 | ||
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| 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 12.10. Goodwill and Other Intangible Assets
A. Goodwill
The changes in the carrying amount of goodwill by segment for the six months ended July 2, 20061, 2007, follow:
(millions of dollars) | Human | Animal | Other | Total | Pharmaceutical | Animal | Other | Total | ||||||||
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Balance, December 31, 2005 | $ | 20,919 | $ | 56 | $ | 10 | $ | 20,985 | ||||||||
Balance, December 31, 2006 | $ | 20,798 | $ | 61 | $ | 17 | $ | 20,876 | ||||||||
Additions(a) | 166 | -- | -- | 166 | -- | 39 | -- | 39 | ||||||||
Other(b) | (99) | 5 | -- | (94) | 69 | -- | 1 | 70 | ||||||||
Balance, July 2, 2006 | $ | 20,986 | $ | 61 | $ | 10 | $ | 21,057 | ||||||||
Balance, July 1, 2007 | $ | 20,867 | $ | 100 | $ | 18 | $ | 20,985 |
(a) | Primarily related to |
(b) | Includes |
B. Other Intangible Assets
The components of identifiable intangible assets, primarily included in our Human HealthPharmaceutical segment, follow:
July 2, 2006 | Dec. 31, 2005 | July 1, 2007 | Dec. 31, 2006 | |||||||||||||
(millions of dollars) | Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | Gross | Accumulated | ||||||||
Finite-lived intangible assets: | ||||||||||||||||
Developed technology rights | $ | 32,426 | $ | (10,637) | $ | 30,729 | $ | (8,810) | $ | 32,993 | $ | (14,093) | $ | 32,769 | $ | (12,423) |
Brands | 887 | (73) | 885 | (51) | 1,016 | (434) | 888 | (417) | ||||||||
License agreements | 155 | (34) | 152 | (27) | 209 | (50) | 189 | (41) | ||||||||
Trademarks | 109 | (69) | 106 | (65) | 117 | (75) | 113 | (73) | ||||||||
Other(a) | 518 | (247) | 446 | (203) | 529 | (285) | 508 | (266) | ||||||||
Total amortized finite-lived intangible assets | 34,095 | (11,060) | 32,318 | (9,156) | 34,864 | (14,937) | 34,467 | (13,220) | ||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Brands | 2,990 | -- | 2,990 | -- | 2,863 | -- | 2,991 | -- | ||||||||
Trademarks | 79 | -- | 79 | -- | 77 | -- | 77 | -- | ||||||||
Other(b) | 30 | -- | 13 | -- | 35�� | -- | 35 | -- | ||||||||
Total indefinite-lived intangible assets | 3,099 | -- | 3,082 | -- | 2,975 | -- | 3,103 | -- | ||||||||
Total identifiable intangible assets | $ | 37,194 | $ | (11,060) | $ | 35,400 | $ | (9,156) | $ | 37,839 | $ | (14,937) | $ | 37,570 | $ | (13,220) |
Total identifiable intangible assets, less accumulated amortization | $ |
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| $ |
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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 six 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 (included in our Human Health segment) in connection with the decision to suspend sales of Bextra. 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, compounds and intellectual property 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 expensesor,and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $848 million and $874$826 million for the three months ended July 2,second quarter of 2007 and $848 million for the second quarter of 2006, and July 3, 2005, and $1.7 billion and $1.8 billion for the first six months ended July 2, 2006of both 2007 and July 3, 2005.
Included in Discontinued operations - net2006. Amounts 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,associated with discontinued operations in 2006 and July 3, 2005 and $7 million and $5 million for the six months ended July 2, 2006 and July 3, 2005.were not significant.
The expected annual amortization expense expected for the fiscal years 2006 through 2011 is $3.4 billion in 2006; $3.3 billion in 2007; $2.7$2.8 billion in 2008; and $2.5$2.6 billion in 2009,2009; $2.5 in each of 2010 and 2011.2011; and $2.3 billion in 2012.
Note 13.11. Pension and Postretirement Benefit Plans
The components of net periodic benefit costcosts 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 July 1, 2007, and July 2, 2006, and July 3, 2005 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) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||
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Service cost | $ | 92 | $ | 80 | $ | 11 | $ | 10 | $ | 75 | $ | 76 | $ | 12 | $ | 10 | $ | 71 | $ | 92 | $ | 7 | $ | 11 | $ | 72 | $ | 75 | $ | $ | 12 | |
Interest cost | 112 | 102 | 15 | 14 | 76 | 78 | 31 | 28 | 111 | 112 | 14 | 15 | 86 | 76 | 31 | |||||||||||||||||
Expected return on plan assets | (154) | (149) | -- | -- | (79) | (80) | (6) | (5) | (170) | (154) | -- | -- | (94) | (79) | (6) | |||||||||||||||||
Amortization of: | ||||||||||||||||||||||||||||||||
Actuarial losses | 15 | 28 | 11 | 10 | 23 | 25 | 9 | 8 | ||||||||||||||||||||||||
Prior service costs/(credits) | 2 | 3 | (1) | 1 | -- | -- | 1 | (1) | 2 | 2 | -- | (1) | -- | 1 | 1 | |||||||||||||||||
Net transition obligation | -- | -- | -- | -- | 1 | 1 | -- | -- | ||||||||||||||||||||||||
Actuarial losses | 28 | 25 | 10 | 9 | 25 | 23 | 8 | 5 | ||||||||||||||||||||||||
Curtailments and settlements - net | 21 | -- | 1 | -- | 7 | 10 | 12 | -- | 4 | 21 | (2) | 1 | (5) | 7 | 12 | |||||||||||||||||
Special termination benefits | 4 | -- | -- | -- | 7 | 3 | 2 | -- | 3 | 4 | -- | -- | 2 | 7 | 2 | |||||||||||||||||
Less: amounts included in discontinued operations | (4) | (4) | (1) | (1) | (4) | (4) | (1) | (1) | -- | (4) | -- | (1) | -- | (4) | -- | (1) | ||||||||||||||||
Net periodic benefit costs | $ | 101 | $ | 57 | $ | 35 | $ | 33 | $ | 108 | $ | 107 | $ | 59 | $ | 36 | $ | 36 | $ | 101 | $ | 30 | $ | 35 | $ | 84 | $ | 108 | $ | 48 | $ | 59 |
The components of net periodic benefit costcosts 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 first six months ended July 2,of 2007 and 2006, follow:
Pension Plans | ||||||||||||||||
U.S. Qualified | U.S. Supplemental | International | Postretirement Plans | |||||||||||||
(millions of dollars) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||
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Service cost | $ | 148 | $ | 186 | $ | 14 | $ | 22 | $ | 145 | $ | 149 | $ | 22 | $ | 24 |
Interest cost | 234 | 224 | 28 | 30 | 172 | 150 | 69 | 63 | ||||||||
Expected return on plan assets | (360) | (315) | -- | -- | (188) | (156) | (18) | (14) | ||||||||
Amortization of: | ||||||||||||||||
Actuarial losses | 35 | 59 | 23 | 21 | 47 | 51 | 21 | 17 | ||||||||
Prior service costs/(credits) | 5 | 4 | (1) | (1) | -- | 1 | -- | 1 | ||||||||
Curtailments and settlements - net | 13 | 25 | 5 | -- | (105) | 9 | -- | 15 | ||||||||
Special termination benefits | 6 | 10 | -- | -- | 5 | 11 | 8 | 5 | ||||||||
Less: amounts included in discontinued operations | -- | (8) | -- | (1) | -- | (8) | -- | (2) | ||||||||
Net periodic benefit costs | $ | 81 | $ | 185 | $ | 69 | $ | 71 | $ | 76 | $ | 207 | $ | 102 | $ | 109 |
Japanese pension regulations permit employers with certain pension obligations to separate the social security benefits portion of those obligations and July 3, 2005 follow:transfer it, along with related plan assets, to the Japanese government. During the first quarter of 2007, our Japanese affiliate completed this transfer and effectively received a subsidy from the Japanese government of approximately $168 million. This subsidy was the result of the transfer of pension obligations of approximately $309 million (excluding the effect of any future salary increases of approximately $9 million) along with related plan assets of approximately $141 million. This transfer resulted in a settlement gain of approximately $106 million.
Pension Plans | ||||||||||||||||
U.S. Qualified | U.S. Supplemental | International | Postretirement Plans | |||||||||||||
(millions of dollars) | 2006 | 2005 | 2005 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||
Service cost | $ | 186 | $ | 159 | $ | 22 | $ | 19 | $ | 149 | $ | 153 | $ | 24 | $ | 19 |
Interest cost | 224 | 206 | 30 | 29 | 150 | 158 | 63 | 56 | ||||||||
Expected return on plan assets | (315) | (297) | -- | -- | (156) | (161) | (14) | (11) | ||||||||
Amortization of: | ||||||||||||||||
Prior service costs/(credits) | 4 | 7 | (1) | 1 | -- | (1) | 1 | -- | ||||||||
Net transition obligation | -- | -- | -- | -- | 1 | 1 | -- | -- | ||||||||
Actuarial losses | 59 | 51 | 21 | 19 | 51 | 48 | 17 | 10 | ||||||||
Curtailments and settlements - net | 25 | -- | -- | -- | 9 | 10 | 15 | -- | ||||||||
Special termination benefits | 10 | -- | -- | -- | 11 | 10 | 5 | -- | ||||||||
Less: amounts included in discontinued operations | (8) | (8) | (1) | (1) | (8) | (7) | (2) | (2) | ||||||||
Net periodic benefit costs | $ | 185 | $ | 118 | $ | 71 | $ | 67 | $ | 207 | $ | 211 | $ | 109 | $ | 72 |
For the first six months of 2006,2007, we contributed from the Company'sour general assets $59$3 million to our U.S. qualified pension plans, $48 million to our U.S. supplemental (non-qualified) pension plans, $294$234 million to our international pension plans and $88$79 million to our postretirement plans. In July 2006, we made voluntary tax-deductible contributions in excess of 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 2006,2007, we expect to contribute, from the Company'sour general assets, a total of $453$105 million to our U.S. qualified pension plans, $76$68 million to our U.S. supplemental (non-qualified) pension plans, $449$442 million to our international pension plans and $253$158 million to our postretirement plans. Contributions expected to be made for 20062007 are inclusive of amounts contributed during the first six months of 2006 and voluntary contributions made in July 2006.2007. The contributions from the Company'sour general assets include direct employer benefit payments. Amounts associated with discontinued operations are not significant.
Note 14.12. 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:
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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 oneunits and performance share underawards in the 2004 Plan towardfirst quarter of each year. Net income included the maximums.
In the past, we had various employee stock and incentive plans under which stock options and otherfollowing 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:benefit:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
(millions of dollars) | July 2, | July 3, | July 2, | July 3, | July 1, | July 2, | July 1, | July 2, | ||||||||||||||
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Stock option expense | $ | 100 | $ | -- | $ | 221 | $ | -- | $ | 51 | $ | 100 | $ | 154 | $ | 221 | ||||||
Restricted stock unit expense | 50 | 37 | 90 | 51 | 42 | 50 | 96 | 90 | ||||||||||||||
Performance share awards and performance-contingent share awards expense | 4 | 20 | 15 | 28 | (6) | 4 | (22) | 15 | ||||||||||||||
Share-based payment expense | 154 | 57 | 326 | 79 | 87 | 154 | 228 | 326 | ||||||||||||||
Tax benefit for share-based compensation expense | (45) | (20) | (93) | (27) | (30) | (45) | (71) | (93) | ||||||||||||||
Share-based payment expense, net of tax | $ | 109 | $ | 37 | $ | 233 | $ | 52 | $ | 57 | $ | 109 | $ | 157 | $ | 233 |
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, | ||||
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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, theThe 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.any period presented above. 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 Share-based compensation expense based on the nominal vesting period, rather than the expected time to achieve retirement eligibility. Inassociated with Discontinued operations 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, | ||||
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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 |
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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 |
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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, |
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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 | |||||||||
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(a) | The total compensation cost related to our Consumer Healthcare business is $27 million. |
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(b) | The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
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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 |
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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, |
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| July 2, |
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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 | |||||||||
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(a) | The total compensation cost related to our Consumer Healthcare business is $20 million. |
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(b) | The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
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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 |
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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 |
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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, |
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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 | |||||||||
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(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. |
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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 |
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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) |
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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 |
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Note 15.13. Earnings Per Common Share
Basic and diluted EPSearnings per common share (EPS) were computed using the following common share data:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||
(millions) | July 2, | July 3, | July 2, | July 3, | July 1, | July 2, | July 1, | July 2, | ||||||||
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EPS Numerator - Basic: | ||||||||||||||||
Income from continuing operations | $ | 2,290 | $ | 3,375 | $ | 6,296 | $ | 3,531 | $ | 1,345 | $ | 2,290 | $ | 4,706 | $ | 6,296 |
Less: Preferred stock dividends - net of tax | 2 | 2 | 3 | 2 | 1 | 2 | 2 | 3 | ||||||||
Income available to common shareholders from continuing operations | 2,288 | 3,373 | 6,293 | 3,529 | 1,344 | 2,288 | 4,704 | 6,293 | ||||||||
Discontinued operations - net of tax | 125 | 88 | 230 | 232 | (78) | 125 | (47) | 230 | ||||||||
Net income available to common shareholders | $ | 2,413 | $ | 3,461 | $ | 6,523 | $ | 3,761 | $ | 1,266 | $ | 2,413 | $ | 4,657 | $ | 6,523 |
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EPS Denominator - Basic: | ||||||||||||||||
Weighted-average number of common shares outstanding | 7,282 | 7,366 | 7,298 | 7,391 | 6,966 | 7,282 | 7,009 | 7,298 | ||||||||
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EPS Numerator - Diluted: | ||||||||||||||||
Income from continuing operations | $ | 2,290 | $ | 3,375 | $ | 6,296 | $ | 3,531 | $ | 1,345 | $ | 2,290 | $ | 4,706 | $ | 6,296 |
Less: ESOP contribution - net of tax | 1 | 2 | 2 | 2 | -- | 1 | 1 | 2 | ||||||||
Income available to common shareholders from continuing operations | 2,289 | 3,373 | 6,294 | 3,529 | 1,345 | 2,289 | 4,705 | 6,294 | ||||||||
Discontinued operations - net of tax | 125 | 88 | 230 | 232 | (78) | 125 | (47) | 230 | ||||||||
Net income available to common shareholders | $ | 2,414 | $ | 3,461 | $ | 6,524 | $ | 3,761 | $ | 1,267 | $ | 2,414 | $ | 4,658 | $ | 6,524 |
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EPS Denominator - Diluted: | ||||||||||||||||
Weighted-average number of common shares outstanding | 7,282 | 7,366 | 7,298 | 7,391 | 6,966 | 7,282 | 7,009 | 7,298 | ||||||||
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock | 23 | 52 | 32 | 54 | 24 | 23 | 24 | 32 | ||||||||
Weighted-average number of common shares outstanding and common share equivalents | 7,305 | 7,418 | 7,330 | 7,445 | 6,990 | 7,305 | 7,033 | 7,330 | ||||||||
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Stock options that had exercise prices greater than the average market price of our common stock and stock issuable under employee compensation plans* | 403 | 592 | 404 | 591 |
* | These common stock equivalents were outstanding during these periods but were not included in the computation of diluted EPS for these periods because their inclusion would have had an anti-dilutive effect. |
Outstanding stock options, representing about 592 million shares and 591 million shares of common stock during the three-month and six-month periods ended July 2, 2006 and about 513 million shares and 519 million shares of common stock during the three-month and six-month periods ended July 3, 2005, had exercise prices greater than the average market price of our common stock. These options were excluded fromIn the computation of diluted EPS, for these periods because their inclusion would have had an anti-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 16.14. Segment Information
We operate in the following business segments:
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Pharmaceutical The Pharmaceutical segment includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies. Animal Health The Animal Health segment includes products that prevent and treat diseases in livestock and companion animals.
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Segment profit/(loss) is measured based on income from continuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, merger-relatedacquisition-related costs, and costs related to our AtS productivity initiative and transition activity associated with our former Consumer Healthcare business, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.
Revenues and profit/(loss) by segment for the three months and six months ended July 1, 2007, and July 2, 2006, and July 3, 2005, follow:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
(millions of dollars) | July 2, | July 3, |
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| July 3, | July 1, | July 2, |
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Revenues: | ||||||||||||||||||||||||
Human Health | $ | 10,999 | $ | 10,723 | $ | 22,099 | $ | 22,236 | ||||||||||||||||
Pharmaceutical | $ | 10,105 | $ | 10,915 | $ | 21,686 | $ | 21,932 | ||||||||||||||||
Animal Health | 583 | 578 | 1,094 | 1,073 | 632 | 583 | 1,218 | 1,094 | ||||||||||||||||
Corporate/Other(a) | 159 | 151 | 295 | 286 | 347 | 243 | 654 | 462 | ||||||||||||||||
Total revenues | $ | 11,741 | $ | 11,452 | $ | 23,488 | $ | 23,595 | $ | 11,084 | $ | 11,741 | $ | 23,558 | $ | 23,488 | ||||||||
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Segment profit/(loss)(b) | ||||||||||||||||||||||||
Human Health | $ | 5,046 | $ | 4,581 | $ | 10,794 | $ | 9,966 | ||||||||||||||||
Pharmaceutical | $ | 4,273 | $ | 5,262 | $ | 10,753 | $ | 11,216 | ||||||||||||||||
Animal Health | 117 | 123 | 215 | 203 | 142 | 125 | 279 | 234 | ||||||||||||||||
Corporate/Other(a) | (2,080) | (c) | (1,792) | (d) | (3,656) | (c) | (4,523) | (d) | (2,796) | (c) | (2,304) | (d) | (5,360) | (c) | (4,097) | (d) | ||||||||
Total profit/(loss) | $ | 3,083 | $ | 2,912 | $ | 7,353 | $ | 5,646 | $ | 1,619 | $ | 3,083 | $ | 5,672 | $ | 7,353 |
(a) | Corporate/Other includes |
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(b) | Segment profit/(loss) equals income from continuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, |
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(c) | For the three months and six months ended July 1, 2007, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $782 million and $1.9 billion, including acquired in-process research and development, intangible asset amortization and other charges, (ii) acquisition-related costs of $16 million and $33 million, (iii) restructuring charges and implementation costs associated with the AtS productivity initiative of $1.4 billion and $2.3 billion, (iv) all share-based compensation expense, (v) transition activity associated with our former Consumer Healthcare business of $7 million income and $16 million income and (vi) a $25 million charge for litigation-related matters. |
(d) | For the three months and six months ended July 2, 2006, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $1.3 billion and $2.1 billion, including acquired in-process research and development charges and incremental intangible asset amortization and other charges, (ii) |
(d)
For the three months and six months ended July 3, 2005, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $1.1 billion and $1.9 billion, including acquired in-process R&D charges, incremental intangible asset amortization and other charges, (ii) merger-related costs of $243 million and $459 million, (iii) costs associated with the suspension of Bextra's sales in the first quarter of 2005 of $1.2 billion, and (iv) restructuring charges and implementation costs associated with the AtS productivity initiative of $54 million in the second quarter of 2005.
Revenues for each group of similar products follow:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||
(millions of dollars) | July 2, | July 3, |
| % |
| July 2, | July 3, |
| % | July 1, | July 2, |
| % |
| July 1, | July 2, |
| % | ||||||||
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HUMAN HEALTH | ||||||||||||||||||||||||||
PHARMACEUTICAL | ||||||||||||||||||||||||||
Cardiovascular and metabolic diseases | $ | 4,769 | $ | 4,471 | 7% | $ | 9,517 | $ | 9,197 | 3% | $ | 4,083 | $ | 4,769 | (14)% | $ | 9,238 | $ | 9,517 | (3)% | ||||||
Central nervous system disorders | 1,643 | 1,537 | 7 | 3,287 | 3,129 | 5 | 1,174 | 1,643 | (29) | 2,419 | 3,287 | (26) | ||||||||||||||
Arthritis and pain | 627 | 549 | 14 | 1,268 | 1,188 | 7 | 626 | 627 | -- | 1,375 | 1,268 | 8 | ||||||||||||||
Infectious and respiratory diseases | 835 | 1,102 | (24) | 1,772 | 2,585 | (31) | 837 | 835 | -- | 1,750 | 1,772 | (1) | ||||||||||||||
Urology | 660 | 626 | 6 | 1,323 | 1,328 | -- | 663 | 660 | -- | 1,414 | 1,323 | 7 | ||||||||||||||
Oncology | 540 | 513 | 5 | 1,010 | 992 | 2 | 652 | 540 | 21 | 1,247 | 1,010 | 24 | ||||||||||||||
Ophthalmology | 352 | 341 | 3 | 689 | 674 | 2 | 400 | 352 | 14 | 766 | 689 | 11 | ||||||||||||||
Endocrine disorders | 232 | 263 | (12) | 478 | 521 | (8) | 253 | 232 | 9 | 498 | 478 | 4 | ||||||||||||||
All other | 1,017 | 1,073 | (5) | 2,107 | 2,132 | (1) | 1,025 | 933 | 10 | 2,189 | 1,940 | 13 | ||||||||||||||
Alliance revenue | 324 | 248 | 31 | 648 | 490 | 32 | 392 | 324 | 21 | 790 | 648 | 22 | ||||||||||||||
Total Human Health | 10,999 | 10,723 | 3 | 22,099 | 22,236 | (1) | ||||||||||||||||||||
Total Pharmaceutical | 10,105 | 10,915 | (7) | 21,686 | 21,932 | (1) | ||||||||||||||||||||
ANIMAL HEALTH | 583 | 578 | 1 | 1,094 | 1,073 | 2 | 632 | 583 | 9 | 1,218 | 1,094 | 11 | ||||||||||||||
OTHER | 159 | 151 | 6 | 295 | 286 | 4 | 347 | 243 | 43 | 654 | 462 | 42 | ||||||||||||||
Total revenues | $ | 11,741 | $ | 11,452 | 3 | $ | 23,488 | $ | 23,595 | -- | $ | 11,084 | $ | 11,741 | (6) | $ | 23,558 | $ | 23,488 | -- |
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 July 2, 2006,1, 2007, the related condensed consolidated statements of income for the three-month and six-monthsix month periods ended July 2, 20061, 2007 and July 3, 2005,2, 2006, and the related condensed consolidated statements of cash flows for the six-monthsix month periods ended July 2, 20061, 2007 and July 3, 2005.2, 2006. 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, 2005,2006, 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, 2006,27, 2007, 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, 2005,2006, 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 York
August 11, 20066, 2007
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 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 |
• | Revenues. This section, beginning on page |
• | Costs and Expenses. This section, beginning on page |
• |
|
• | Adjusted Income. This section, beginning on page |
• | Financial Condition, Liquidity and Capital Resources. This section, beginning on page |
| |
• |
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• | Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page |
Components of the Condensed Consolidated Statement of Income follow:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
(millions of dollars, except per common share data) | July 2, | July 3, | % Change | July 2, | July 3, | % Change | July 1, | July 2, | % Change | July 1, | July 2, | % Change | ||||||||||||||||
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Revenues | $ | 11,741 | $ | 11,452 | 3% | $ | 23,488 | $ | 23,595 | --% | $ | 11,084 | $ | 11,741 | (6)% | $ | 23,558 | $ | 23,488 | -- % | ||||||||
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Cost of sales | 1,790 | 1,762 | 2 | 3,461 | 3,639 | (5) | 2,109 | 1,790 | 18 | 3,996 | 3,461 | 15 | ||||||||||||||||
% of revenues | 15.2 | % | 15.4 | % | 14.7 | % | 15.4 | % | 19.0 | % | 15.2 | % | 17.0 | % | 14.7 | % | ||||||||||||
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Selling, informational and administrative expenses | 3,881 | 3,766 | 3 | 7,276 | 7,431 | (2) | 3,844 | 3,881 | (1) | 7,205 | 7,276 | (1) | ||||||||||||||||
% of revenues | 33.1 | % | 32.9 | % | 31.0 | % | 31.5 | % | 34.7 | % | 33.1 | % | 30.6 | % | 31.0 | % | ||||||||||||
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Research and development expenses | 1,742 | 1,830 | (5) | 3,285 | 3,547 | (7) | 2,165 | 1,742 | 24 | 3,830 | 3,285 | 17 | ||||||||||||||||
% of revenues | 14.8 | % | 16.0 | % | 14.0 | % | 15.0 | % | 19.5 | % | 14.8 | % | 16.3 | % | 14.0 | % | ||||||||||||
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Amortization of intangible assets | 823 | 856 | (4) | 1,648 | 1,736 | (5) | 783 | 823 | (5) | 1,598 | 1,648 | (3) | ||||||||||||||||
% of revenues | 7.0 | % | 7.5 | % | 7.0 | % | 7.4 | % | 7.1 | % | 7.0 | % | 6.8 | % | 7.0 | % | ||||||||||||
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Merger-related in-process research and development charges | 513 | 260 | 97 | 513 | 262 | 96 | ||||||||||||||||||||||
Acquisition-related in-process research and development charges | -- | 513 | * | 283 | 513 | (45) | ||||||||||||||||||||||
% of revenues | 4.4 | % | 2.3 | % | 2.2 | % | 1.1 | % | -- | % | 4.4 | % | 1.2 | % | 2.2 | % | ||||||||||||
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Restructuring charges and merger-related costs | 268 | 264 | 2 | 567 | 480 | 18 | ||||||||||||||||||||||
Restructuring charges and acquisition-related costs | 1,051 | 268 | 292 | 1,863 | 567 | 229 | ||||||||||||||||||||||
% of revenues | 2.3 | % | 2.3 | % | 2.4 | % | 2.0 | % | 9.5 | % | 2.3 | % | 7.9 | % | 2.4 | % | ||||||||||||
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Other (income)/deductions - net | (359) | (198) | 81 | (615) | 854 | (172) | (487) | (359) | 36 | (889) | (615) | 45 | ||||||||||||||||
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Income from continuing operations before provision/(benefit) for taxes on income, and minority interests | 3,083 | 2,912 | 6 | 7,353 | 5,646 | 30 | ||||||||||||||||||||||
Income from continuing operations before provision for taxes on income, and minority interests | 1,619 | 3,083 | (47) | 5,672 | 7,353 | (23) | ||||||||||||||||||||||
% of revenues | 26.3 | % | 25.4 | % | 31.3 | % | 23.9 | % | 14.6 | % | 26.3 | % | 24.1 | % | 31.3 | % | ||||||||||||
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Provision/(benefit) for taxes on income | 790 | (464) | * | 1,052 | 2,111 | (50) | ||||||||||||||||||||||
Provision for taxes on income | 272 | 790 | (66) | 961 | 1,052 | (9) | ||||||||||||||||||||||
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Effective tax rate | 25.6 | % | (15.9) | % | 14.3 | % | 37.4 | % | 16.8 | % | 25.6 | % | 16.9 | % | 14.3 | % | ||||||||||||
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Minority interests | 3 | 1 | 154 | 5 | 4 | 67 | 2 | 3 | (45) | 5 | 5 | (15) | ||||||||||||||||
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Income from continuing operations | 2,290 | 3,375 | (32) | 6,296 | 3,531 | 78 | 1,345 | 2,290 | (41) | 4,706 | 6,296 | (25) | ||||||||||||||||
% of revenues | 19.5 | % | 29.5 | % | 26.8 | % | 15.0 | % | 12.1 | % | 19.5 | % | 20.0 | % | 26.8 | % | ||||||||||||
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Discontinued operations - net of tax | 125 | 88 | 43 | 230 | 232 | -- | (78) | 125 | * | (47) | 230 | * | ||||||||||||||||
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Net income | $ | 2,415 | $ | 3,463 | (30) | $ | 6,526 | $ | 3,763 | 73 | $ | 1,267 | $ | 2,415 | (48) | $ | 4,659 | $ | 6,526 | (29) | ||||||||
% of revenues | 20.6 | % | 30.2 | % | 27.8 | % | 15.9 | % | 11.4 | % | 20.6 | % | 19.8 | % | 27.8 | % | ||||||||||||
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Earnings per common share - basic: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | (33) | $ | 0.86 | $ | 0.48 | 79 | $ | 0.19 | $ | 0.31 | (39) | $ | 0.67 | $ | 0.86 | (22) | ||||||||
Discontinued operations - net of tax | 0.02 | 0.01 | 100 | 0.03 | 0.03 | -- | (0.01) | 0.02 | * | (0.01) | 0.03 | * | ||||||||||||||||
Net income | $ | 0.33 | $ | 0.47 | (30) | $ | 0.89 | $ | 0.51 | 75 | $ | 0.18 | $ | 0.33 | (45) | $ | 0.66 | $ | 0.89 | (26) | ||||||||
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Earnings per common share - diluted: | ||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.31 | $ | 0.46 | (33) | $ | 0.86 | $ | 0.48 | 79 | $ | 0.19 | $ | 0.31 | (39) | $ | 0.67 | $ | 0.86 | (22) | ||||||||
Discontinued operations - net of tax | 0.02 | 0.01 | 100 | 0.03 | 0.03 | -- | (0.01) | 0.02 | * | (0.01) | 0.03 | * | ||||||||||||||||
Net income | $ | 0.33 | $ | 0.47 | (30) | $ | 0.89 | $ | 0.51 | 75 | $ | 0.18 | $ | 0.33 | (45) | $ | 0.66 | $ | 0.89 | (26) | ||||||||
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Cash dividends paid per common share | $ | 0.24 | $ | 0.19 | $ | 0.48 | $ | 0.38 | $ | 0.29 | $ | 0.24 | $ | 0.58 | $ | 0.48 | ||||||||||||
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* Calculation not meaningful |
OVERVIEW OF OUR CONSOLIDATEDPERFORMANCE AND OPERATING RESULTSENVIRONMENT
Our Business
We are a research-based, global, pharmaceuticalresearch-based company that discovers, develops, manufacturesis dedicated to better health and markets leading prescription medicinesgreater access to healthcare for humanspeople and their valued animals. Our longstandingpurpose is to help people live longer, healthier, happier and more productive lives. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of breakthrough medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness, and increased access to quality healthcare. Our value proposition has beenis to provedemonstrate that our medicines can effectively treat disease, including the associated symptoms and suffering, and this remains our core mission. We have expanded our value proposition to also show that not only can our medicines treat disease, but that theyform the basis for an overall improvement in healthcare systems and their related costs. This improvement can also markedly improve health systemsbe achieved by reducing overall healthcare costs, improving societies' economic well-being and increasing effective prevention and treatment of disease. We generate revenue throughand by reducing the need for hospitalization. Our revenues are derived from the sale of our products, as well as through alliance agreements, by co-promotingunder which we co-promote products discovered by other companies.
Our 2007 Performance
AcquisitionsRevenues
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 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 Merger-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 connection with the acquisition, as part of our preliminary purchase price allocation, we recorded an intangible asset for developed technology rights of approximately $1.0 billion, inventory valued at $218 million and goodwill of approximately $166 million, all of which have been allocated to our Human Health segment. The amortization of the developed technology rights will be primarily included in Cost of Sales. Given the size and complexity of the acquisition, the fair valuation and allocation work is still being finalized and is expected to be completed in the third quarter. To the extent that our estimates need to be adjusted, we will do so. Priorsecond quarter of 2007 decreased $657 million (6%), compared to the acquisition,same period 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)2006.Revenues in the first quartersix months of 2006 in Research and development expenses upon the approval of Exubera in January 2006 by the 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:
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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 transition2007, were comparable to the next-generation Pfizer. Our strategy is to drive growthsame period 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 challenging and dynamically changing environment in our pharmaceutical business. This includes the loss of exclusivity of major products, uncertainty concerning selective COX-2 inhibitor products, 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-line2006. The significant product portfolio and the potential of our new-product pipeline demonstrate our ability to generate new revenues. Our performance in 2006 has been, and will continue to be, substantially adversely impacted by loss of U.S. exclusivity of Neurontin, Diflucan and Accupril/Accuretic in 2004, Zithromax in November 2005 and Zoloft at the end of June 2006. In addition, we face a substantial adverse impactimpacts on our performance from the loss of U.S. exclusivity for Norvasc and Zyrtec during 2007 and Camptosar and Inspra in 2008. These nine products represented 31% of our Human Health revenues and 29% of our total revenues for the year ended December 31, 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 2006 have also been,second quarter and may continue to be, impacted by uncertainty regarding selective COX-2 inhibitor products (see further discussion in the section "Human Health--Selected Product Descriptions"). Our total revenues increased 3% in the three months ended July 2, 2006 and were flat in thefirst six months ended July 2, 2006 asof 2007, compared to the same periods in 2006, are as follows:
Second Quarter | Six Months | |||||||
Increase/ | Increase/ | |||||||
(decrease) | % Change | (decrease) | % Change | |||||
(millions of dollars) | 07/06 |
| 07/06 | 07/06 |
| 07/06 | ||
Zoloft(a) | $ | (579) | (82) | $ | (1,212) | (82) | ||
Norvasc(a) | (516) | (45) | (630) | (27) | ||||
Lipitor(b) | (404) | (13) | (153) | (2) | ||||
Chantix/Champix(c) | 200 | * | 362 | * | ||||
Lyrica(c) | 134 | 49 | 337 | 73 | ||||
Sutent(c) | 110 | 311 | 196 | 380 | ||||
Caduet | 39 | 50 | 108 | 69 | ||||
Xalatan/Xalacom | 38 | 11 | 61 | 9 | ||||
Zyvox | 35 | 21 | 107 | 30 | ||||
Vfend | 27 | 23 | 58 | 25 | ||||
Aromasin | 17 | 22 | 40 | 27 | ||||
Detrol/Detrol LA | 14 | 5 | 57 | 11 | ||||
Geodon/Zeldox | 13 | 8 | 47 | 14 | ||||
Celebrex | 7 | 1 | 114 | 12 | ||||
Alliance revenue | 68 | 21 | 142 | 22 |
(a) | Zoloft and Norvasc are products that have lost U.S. exclusivity since 2006. |
(b) | Lipitor has been impacted by competitive pressures and other factors. |
(c) | Chantix/Champix, Lyrica and Sutent are major new products that were launched since 2005. |
* | Calculation not meaningful. |
Partially offsetting theseRevenues benefited from favorable foreign exchange impacts of $284 million in the three monthssecond quarter of 2007 and $553 million in the first six months ended July 2,of 2007. Revenues also benefited from lower pharmaceutical product rebates in the first six months of 2007 of approximately $123 million, compared to the same period in 2006, primarily due to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act), effective as of January 1, 2006, changes in product mix and the impact of our contracting strategies with both government and non-government entities. The impact of rebates in the second quarter of 2007, compared to the second quarter of 2006, was the solid aggregate performancenot significant to overall revenues. (See further discussion in the balance"Revenues - Pharmaceutical Revenues" section of this MD&A.)
Income from continuing operations for the second quarter of 2007 was $1.3 billion compared to $2.3 billion in the second quarter of 2006 and $4.7 billion in the first six months of 2007 compared to $6.3 billion in the first six months of 2006. The decreases were primarily due to higher restructuring costs associated with our productivity initiatives in 2007, higher R&D expense, primarily due to the timing of our broad portfolio of patent-protected medicines. Our portfolio of medicines includes three of the world's 25 best-selling medicines,payments to Bristol-Myers Squibb Company (BMS) in connection with four medicines that lead their therapeutic areas. Our results reflect two underlying forces. First, Pfizer markets the broadest array of in-lineour collaboration to develop and recently launched products in the industry; and second, Pfizer is a business going through a process of transformation. We are addressing the loss of exclusivity of a number of products by advancing a number of internally developed, in-licensed and co-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,commercialize apixaban, as well as giving us influence asthe decline in product revenues discussed above, including the impact of product mix in revenues on Cost of sales and the absence of one-time tax benefits occurring in 2006, partially offset by the decline in Acquisition-related in-process research and development charges from 2006. (See further discussion in the "Cost and Expenses" and "Provision for Taxes on Income" sections of this MD&A.)
Discontinued Operations - net of tax, primarily related to our former Consumer Healthcare business, which was sold in December 2006, for the second quarter of 2007, was a global purchaser$78 million loss compared to $125 million in income in the second quarter of goods2006 and services. Wea $47 million loss in the first six months of 2007 compared to $230 million in income in the first six months of 2006. For a period of time, we will continue to build ongenerate cash flows and enhanceto report income statement activity in continuing operations that are associated with our Research & Development capabilities through acquisitionsformer Consumer Healthcare business. The activities that give rise to these impacts are transitional in nature and collaborations. Through targeted acquisitions, licensing opportunitiesgenerally result from agreements that ensure and internal development,facilitate the orderly transfer of business operations to the new owner. Included in continuing operations for the second quarter of 2007, are the following amounts associated with these transition service agreements that will no longer occur after the full transfer of activities to the new owner: Revenues of $50 million, Cost of sales of $45 million, Selling, informational and administrative expense of $5 million and Other (income)/deduction-net of $7 million in income, and for the first six months of 2007, are: Revenues of $94 million, Cost of sales of $80 million, Selling, informational and administrative expense of $7 million and Other (income)/deduction-net of $9 million in income. (See Notes to Condensed Consolidated Financial Statements-Note 4.Discontinued Operations.)
In the first quarter of 2007, we are augmenting our commercial portfolio. acquired Embrex, Inc. and BioRexis Pharmaceutical Corp. (See further discussion in the "Our Strategic Initiatives - Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations" section of this MD&A.)
We have also made progress with our Adapting to Scale (AtS) productivity initiative, which is a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the "Our Productivity and Cost Savings Program" section "Adaptingof this MD&A.) (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)
Our Operating Environment
We and our industry continue to Scaleface significant challenges in a profoundly changing business environment, as explained more fully in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2006. Such industry-wide factors, including pricing and access, intellectual property rights, product competition, the regulatory environment, pipeline productivity and the changing business environment, can significantly impact our businesses. We are taking steps to change the way we run our businesses.
Generic competition significantly impacts our business. We lost U.S. exclusivity for Zoloft in June 2006 and Norvasc in March 2007 and, as expected, significant revenue declines followed. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, in addition to other competitive pressures. While we anticipated the difficulty posed by these generic competitors, in the U.S., the volume of patients who switched from Lipitor to generic simvastatin following the entry of multiple generics was greater than we had predicted, particularly in the managed-care environment. In the second quarter of 2007, we improved Lipitor's switch rate volume, returning towards pre-multisource generic levels. In Canada, a lower-court decision against Pfizer has created uncertainty regarding Lipitor's patent protection in Canada. We have appealed that decision. In addition to these challenges, we face the loss of U.S. exclusivity for Zyrtec later in 2007 and Camptosar in 2008. (For more detailed information about Lipitor, Norvasc, Zoloft and other significant products, see further discussion in the "Revenues - - Pharmaceutical - Selected Product Descriptions" section of this MD&A.)
We will continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate.
(See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent developments with respect to patent litigation.)
These and other industry-wide factors that may affect our business should be considered along with the information presented in the "Forward-Looking Information and Factors that May Affect Future Results" section of this MD&A.
Response to Key Opportunities and Challenges
As announced on January 22, 2007, we are committed to changing the way we run our business in order to meet the challenges of the changing business environment and to take advantage of the diverse opportunities in the market place.
Our five immediate priorities are to:
• | Maximize our near-and long-term revenues; |
• | Establish a lower and more flexible cost base; |
• | Create smaller, more focused and more accountable operating units; |
• | Engage more productively with customers, patients, physicians and other collaborators; and |
• | Make Pfizer a great place to work. |
We believe that we are making progress on all of these goals. For details about our strategic initiatives, see "Our Strategic Initiatives - Strategy and Recent Transactions" section of this MD&A, and for details about our productivity initiative, see "Our Productivity Initiative and Merger-Related Synergies.Cost Savings Program" section of this MD&A.
We are examining a whole range of possibilities that will shape the company over the next five to 10 years. Some of the strategic elements that build on our immediate priorities while providing a framework for our longer-term opportunities may include:
• | Revitalizing our internal Research & Development (R&D) productivity byfocusing our efforts to improve productivity and give discovery and development teams more flexibility and clearer goals, as well as committing considerable resources to promising therapeutic areas including oncology, diabetes, and neurological disorders, among others. |
• | Focusing our business development by thoroughly assessing and prioritizing every therapeutic area, looking at gaps we have identified and accelerating programs we already have. We are also developing opportunistic strategies concerning the best products, product candidates and technologies. |
• | Building a major presence in biotherapeutics by recognizing that our core strength with small molecules must be complemented by large molecules, as they involve some of the most promising R&D technology and cutting-edge science in medical research, as well as integrating our investments, R&D and existing internal capabilities with disciplined business development. |
• | Driving innovation in product life cycle management by taking a broader look at our business model and examining it from all angles. We believe there are opportunities to better manage our products' growth and development throughout their entire time on the market and bring innovation to our "go to market" promotional and commercial strategies. We plan to develop ways to further enhance the value of mature products, as well as those close to losing their exclusivity and to create product-line extensions where feasible. In connection with the production of these products, we are pursuing new ways to accelerate our high-quality, low-cost manufacturing initiatives. |
• | Stepping up our focus and investments in emerging markets by developing strategies in areas, especially Eastern Europe and Asia, where changing demographics and economics will drive growing demand for high-quality healthcare and offer the best potential for our products. |
• | Seeking complementary opportunities in products and technologies that have the potential to add value to our core pharmaceutical offerings as there are many possible ways for us to enhance our pharmaceutical products with the medical technologies of the future. |
Our Strategic Initiatives - Strategy and Recent Transactions
")Acquisitions, Licensing and Collaborations
AdaptingWe are committed to Scalecapitalizing on new growth opportunities by advancing our own new-product pipeline, as well as through opportunistic licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, Alzheimer's disease, cardiovascular disease, vaccines and other products and services that seek to provide innovative healthcare solutions.
• | In the second quarter of 2007, we entered into a collaboration agreement with BMS to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS, that is being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions. We made an up-front payment to BMS of $250 million and additional payments to BMS related to product development efforts, which are included in Research and development expenses for the three months and six months ended July 1, 2007. We may also make additional payments of up to $750 million to BMS based on development and regulatory milestones. In a separate agreement, we will also collaborate with BMS on the research, development and commercialization of a Pfizer discovery program, which includes preclinical compounds with potential applications for the treatment of metabolic disorders, including obesity and diabetes. |
• | In April 2007, we agreed with OSI Pharmaceuticals, Inc. (OSI) to terminate a 2002 collaboration agreement to co-promote Macugen, for the treatment of age-related macular degeneration, in the U.S. We also agreed to amend and restate a 2002 license agreement for Macugen, and to return to OSI all rights to develop and commercialize Macugen in the U.S. In return, OSI granted us an exclusive right to develop and commercialize Macugen in the rest of the world. |
• | In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp., a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, Inc., an animal health company that possesses a unique vaccine delivery system known as Inovoject, which enables baby chicks to be vaccinated while inside their eggs. In connection with these and other small acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges. |
• | In the second quarter of 2006, we completed the acquisition of Rinat Neuroscience Corp. (Rinat), a biologics company with several new central-nervous-system product candidates. In connection with this and other smaller acquisitions, we recorded $513 million in Acquisition-related in-process research and development charges in the second quarter of 2006. |
• | In February 2006, we completed the acquisition of the sanofi-aventis worldwide 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 in cash (including transaction costs). In connection with the acquisition, as part of our final purchase price allocation, we recorded $1.0 billion of developed technology rights, $218 million of inventory and $166 million of Goodwill, all of which have been allocated to our Pharmaceutical segment. The amortization of the developed technology rights is primarily included in Cost of sales. 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). |
Our Productivity Initiative and Merger-Related SynergiesCost Savings Program
During 2005 and the first six months of 2006, weWe have made significant progress with our multi-year productivity initiative, called Adapting to Scale (AtS), which is designed to increase efficiency and streamline decision-making across the Company.company. This initiative was launched in early 2005 follows the integration of Warner-Lambert and Pharmacia Corporation (Pharmacia), which resultedbroadened in the tripling of Pfizer's revenues over the past six years. The integration of those two companies resulted in a combined annual expense reduction of approximately $6 billion.October 2006.
We continue to expect thatare generating cost savings from our AtS productivity initiative will bethrough site rationalization 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 businessresearch and the expensemanufacturing, 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.
global sales force, streamlined organizational structures, staff function reductions, and increased outsourcing and procurement savings. Projects in various stages of implementationcompletion include:
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In 2008, at current exchange rates (rates approximating foreign currency spot rates at the end of our second quarter for international operations-May 2007), we continue to expect to achieve an absolute net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion and $2.0 billion, compared to 2006. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)
REVENUES
Worldwide revenues by segment and geographic area for the three monthssecond quarter and first six months ended July 2,of 2007 and 2006 and July 3, 2005 follow:
Three Months Ended | Three Months Ended | % Change in Revenues | ||||||||||||||||||||||||||||||||||||||||||
Worldwide | U.S. | International | % Change in Revenues | Worldwide | U.S. | International | World- | Inter- | ||||||||||||||||||||||||||||||||||||
July 2, | July 3, | July 2, | July 2, | July 2, | July 3, | Worldwide | U.S. | International | July 1, | July 2, | July 1, | July 2, | July 1, | July 2, | wide | U.S. | national | |||||||||||||||||||||||||||
(millions of dollars) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 06/05 | 06/05 | 06/05 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 07/06 | 07/06 | 07/06 | ||||||||||||||||||||||||||
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Human Health | $ | 10,999 | $ | 10,723 | $ | 5,781 | $ | 5,419 | $ | 5,218 | $ | 5,304 | 3 | 7 | (2) | |||||||||||||||||||||||||||||
Pharmaceutical | $ | 10,105 | $ | 10,915 | $ | 4,467 | $ | 5,756 | $ | 5,638 | $ | 5,159 | (7) | (22) | 9 | |||||||||||||||||||||||||||||
Animal Health | 583 | 578 | 262 | 263 | 321 | 315 | 1 | -- | 2 | 632 | 583 | 254 | 262 | 378 | 321 | 9 | (3) | 18 | ||||||||||||||||||||||||||
Other | 159 | 151 | 51 | 46 | 108 | 105 | 6 | 9 | 4 | 347 | 243 | 120 | 75 | 227 | 168 | 43 | 60 | 35 | ||||||||||||||||||||||||||
Total Revenues | $ | 11,741 | $ | 11,452 | $ | 6,094 | $ | 5,728 | $ | 5,647 | (a) | $ | 5,724 | (a) | 3 | 6 | (1) | $ | 11,084 | $ | 11,741 | $ | 4,841 | $ | 6,093 | $ | 6,243 | (a) | $ | 5,648 | (a) | (6) | (21) | 11 |
Ongoing or planned clinical trials for additional uses and dosage forms for our products include:
Drug candidates in late-stage development include
In June 2007, we announced the Additional product-related programs are in various stages of discovery and development. Also, see our discussion in the "Our Strategic Initiatives--Strategy and Recent
this MD&A. COSTS AND EXPENSES Cost of Sales Cost of sales increased
partially offset by: savings related to our AtS productivity Selling, Informational and Administrative Expenses Selling, informational and administrative (SI&A) expenses
partially offset
Research and Development Expenses
partially offset by: savings related to our AtS productivity
The estimated fair value of Adapting to Scale Productivity Initiative In connection with the AtS productivity initiative, which was launched in early 2005 The actions associated with the expanded AtS productivity initiative We incurred the following costs in connection with our AtS productivity initiative:
Other (Income)/ In the second quarter and first six
On January 23, 2006, the IRS issued final regulations on Statutory Mergers and Consolidations, which impacted certain prior-period transactions. In the first quarter of 2006, we recorded a tax benefit of $217 million, reflecting the total impact of these regulations.
Our effective tax rate for continuing operations was 16.8% for the second quarter of 2007, compared to 25.6% for the second quarter of 2006, and 16.9% for the first six months of 2007, compared to 14.3% for the first six months of DISCONTINUED OPERATIONS - NET OF TAX In 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 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.
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 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 Purchase Accounting Adjustments Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to our acquisitions of 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 in 2003, can occur for up to 40 years (these assets have a weighted-average useful life of approximately nine 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
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 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. 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 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 AtS productivity initiative; Reconciliation A reconciliation between Net income, as reported under U.S. GAAP, and Adjusted income follows:
Net Cash Provided by Operating Activities During the first six months of
In 2006, the estimated net cash flows provided by operating activities associated with discontinued operations were not significant. The cash flow line item called Changes in assets and liabilities (net of businesses acquired and divested) in 2007, compared to 2006, primarily reflects higher taxes paid, partially offset by restructuring charges expensed, but not yet paid. Net Cash Provided by Investing Activities During the first six months of
partially offset by: the acquisitions of BioRexis Pharmaceutical Corp. and Embrex, Inc. in 2007, compared to the acquisitions of Rinat and sanofi-aventis' rights associated with Exubera in 2006 (a decreased use of cash of $1.5 billion). In 2006, the estimated net cash flows used in investing activities associated with discontinued operations were not significant. Net Cash Used in Financing Activities During the first six months of
In 2006, the estimated net cash flows used in financing activities associated with discontinued operations were not significant. In June 2005, we announced a $5 billion share-purchase program, which is primarily being funded by operating cash
Contractual Obligations The contractual obligations table as of December 31, 2006, included in the "Financial Review" section of our 2006 Financial Report did not reflect amounts associated with uncertain tax positions. As a result of the adoption as of January 1, 2007, of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, aninterpretation of SFAS 109, Accounting for Income Taxes, and supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007(see Notes to Condensed Consolidated Financial Statements-Note 2. Adoption of New Accounting Policy), our disclosure of contractual obligations will now include information concerning uncertain tax positions. As of July 1, 2007, there have been no significant changes in our contractual obligations. Except for amounts reflected in Income taxes payable, we are unable to predict the timing of tax settlements as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation. 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 paid significant amounts under these provisions and, as of July Certain of our co-promotion or license agreements give our licensors or partners the rights to negotiate for, or in some cases to obtain, under certain financial conditions, co-promotion or other rights in specified countries with respect to certain of our products.
As of January 1,
Recently Issued Accounting Standards, Not Adopted as of July 1, 2007 In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS 157 provides guidance for, among other things, the definition of fair value and the methods used to measure fair value. The provisions of In June 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Servicesto be Used in Future Research and Development Activities. EITF Issue No. 07-3 provides guidance concerning the accounting for non-refundable advance payments for goods and services that will be used in future R&D activities and requires that they be expensed when the research and development activity has been performed and not at the time of payment. The provisions of EITF Issue No. 07-3 are effective for the fiscal years beginning after December 15, 2007, with a cumulative-effect adjustment to Retained Earnings as of the beginning of the year of adoption. We are in the process of evaluating the impact of adopting EITF Issue No. 07-3 on our financial statements. OUTLOOK
We have incorporated into our current forecast for full-year 2007 worldwide Lipitor revenues a moderation in the
At current exchange rates, we forecast 2008 revenues of $46.5 billion to $48.5 billion, reported diluted EPS of $1.75 to $1.93 and Adjusted diluted EPS of $2.31 to $2.45. This forecast reflects a residual adverse impact next year from the loss of U.S. exclusivity for Norvasc in March 2007; heightened uncertainty regarding patent protection for Lipitor in Canada as the result of an adverse lower-court decision, which we have appealed; higher than previously anticipated favorability of foreign exchange, resulting from the further weakness of the dollar relative to various other currencies; the recent FDA approval of a fibromyalgia indication for Lyrica; and a range of variability in the performance of our At current exchange rates, we expect
"Current exchange rates", as referenced in this Outlook section, is defined as rates approximating foreign currency spot rates at the end of our second quarter for international operations (May 2007). Given these and other factors, a reconciliation, at current exchange rates and reflecting management's current assessment for
Our forecasted financial performance in FORWARD-LOOKING INFORMATION AND FACTORS THAT MAY AFFECT FUTURE RESULTS
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 We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Our Form 10-K filing for the This report includes discussion of certain clinical studies relating to various in-line products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data. Legal Proceedings and Contingencies We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, securities 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 In addition, we entered into an interest rate swap to effectively convert the fixed rate associated with the long-term euro-denominated notes issued on May 11, 2007, to a floating rate. We 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 PART II - OTHER INFORMATION Item 1. Legal Proceedings Certain legal proceedings in which we are involved are discussed in Note Patent Matters Norvasc (amlodipine) Amlodipine besylate is the salt form contained in Norvasc. As previously reported, between January 2006 and February 2007, three different federal District Courts held that our amlodipine besylate patent is valid and infringed by Torpharm/Apotex, Synthon Pharmaceuticals, Inc. and Mylan Pharmaceuticals, Inc., respectively. Each of these decisions was appealed to the U.S. Court of Appeals for the Federal Circuit. In March 2007, a panel of the Federal Circuit reversed the District Court's decision in the action against Torpharm/Apotex, which was the first of these actions to go to trial, and held that our amlodipine besylate patent is invalid. In May 2007, the full U.S. Court of Appeals for the Federal Circuit denied our request to review the panel's decision. In June 2007, the U.S. Supreme Court denied our request to recall or stay the panel's decision. On March 23, 2007, Mylan launched its own generic amlodipine besylate product and, in response, we launched our own generic amlodipine besylate product through Pfizer's Greenstone subsidiary. Subsequently, various other generic manufacturers have launched their own generic amlodipine besylate products. Lipitor (atorvastatin) As previously reported, in April 2007, Teva Pharmaceuticals USA, Inc. notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Lipitor. Teva asserts the invalidity of our enantiomer patent which, including the six-month pediatric exclusivity period, expires in June 2011, and the non-infringement of certain later-expiring patents. In June 2007, we filed suit against Teva in the U.S. District Court for the District of Delaware asserting the validity and infringement of the enantiomer patent. Teva did not challenge our basic patent which, including the six-month pediatric exclusivity period, expires in March 2010. In July 2007, a law firm that has represented Ranbaxy Pharmaceuticals Inc. in Lipitor patent litigation filed a request for a reexamination of our basic Lipitor patent with the U.S. Patent and Trademark Office (the Patent Office). The Patent Office first will determine whether it will grant the request; it is not unusual for such requests to be granted. If the Patent Office grants the request, it then will reexamine the patent on the merits. Product Liability Matters Asbestos As previously reported, In September 2004, Quigley filed a petition in the U.S. Bankruptcy Court for the Southern District of New York seeking reorganization under Chapter 11 of the U.S. Bankruptcy Code. In March 2005, Quigley filed a reorganization plan in the Bankruptcy Court that needed the approval of both the Bankruptcy Court and the U.S. District Court for the Southern District of New York after receipt of the favorable vote of 75% of the claimants. In connection with that filing, Pfizer entered into settlement agreements with lawyers representing more than 80% of the individuals with claims related to Quigley products against Quigley and Pfizer. The agreements provide for a total of $430 million in payments, of which $215 million became due in December 2005 and is being paid to claimants upon receipt by the Company of certain required documentation from each of the claimants. The reorganization plan provided for the establishment of a Trust for the payment of all remaining pending claims as well as any future claims alleging injury from exposure to Quigley products. As certified by the balloting agent in May 2006, 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. In June 2007, Quigley The Bankruptcy Court held a hearing to consider the adequacy of Quigley's disclosure statement on July 12, 2007. If the disclosure statement is approved, Quigley intends to solicit its amended reorganization plan for acceptance. If approved by the claimants and the courts, the amended reorganization plan will
The federal civil case against Pfizer and the other defendants was voluntarily withdrawn by Nigerian federal authorities as of July 6, 2007. Various media reports, however, have indicated that a The 1996 Trovan clinical study has also been the subject of
Consumer and Commercial Matters Neurontin As previously reported, a number of lawsuits, including purported class actions, have been filed against us in various federal and state courts alleging claims arising from the promotion and sale of Neurontin. The plaintiffs in the purported class actions seek to represent nationwide and certain statewide classes consisting of persons, including individuals, health insurers, employee benefit plans and other third-party payers, who purchased or reimbursed patients for the purchase of Neurontin that allegedly was used for indications other than those included in the product labeling approved by the FDA. In October 2004, many of the suits pending in federal courts, including individual actions as well as purported class actions, were transferred for consolidated pre-trial proceedings to a Multi-District Litigation (In re Neurontin Marketing, Sales Practices and Product Liability Litigation MDL-1629) in the U.S. District Court for the District of Massachusetts. Purported class actions also have been filed against us in various Canadian provincial courts alleging claims arising from the promotion and sale of Neurontin. In June 2007, a Pennsylvania state court certified a class of all individuals in Pennsylvania who allegedly purchased Neurontin for "off-label" uses from 1995 to the present. The plaintiffs seek a refund of amounts paid by class members for Neurontin. Prior to the ruling in Pennsylvania, state courts in New York and New Mexico declined to certify statewide classes of Neurontin purchasers. In the Multi-District Litigation, the U.S. District Court for the District of Massachusetts has taken under advisement a motion to certify a nationwide class of consumers and third-party payers who allegedly purchased or reimbursed patients for the purchase of Neurontin for "off-label" uses from 1994 through 2004. Plaintiffs are also seeking certification of a statewide class of purchasers in an action pending in a Kansas state court and a provincewide class in an action pending in Ontario, Canada. Celebrex and Bextra Matters As previously reported, beginning in late 2004, actions, including purported class and shareholder derivative actions, relating to Celebrex and Bextra have been filed in various federal and state courts against Pfizer, Pharmacia and certain current and former officers, directors and employees of Pfizer and Pharmacia. These actions include a purported federal shareholder derivative action and certain purported state shareholder derivative actions alleging that Tax Matters
All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations. With respect to Pharmacia Corporation, the IRS We Item 1A. Risk Factors. There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our 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
Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information. None
SIGNATURE Under the requirements of the Securities Exchange Act of 1934, this report was signed on behalf of the Registrant by the authorized person named below.
Exhibit 12 PFIZER INC. AND SUBSIDIARY COMPANIES
All financial information reflects the following as discontinued 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 ophthalmics. All financial information reflects the following as discontinued operations for 2003
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 August - 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), - Form S-3 dated March 1, 2005 (File No. 333-123058), - Form S-8 dated March 1, 2007 (File No. 333-140987), - Form S-3 dated March 1, 2007 (File No. 333-140989), and - Form S-3 dated March 30, 2007 (File No. 333-141729). Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. KPMG LLP New York, New York Exhibit 31.1 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO I, Jeffrey B. Kindler, certify that:
Date: August
Exhibit 31.2 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO I, Alan G. Levin, certify that:
Date: August
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, Jeffrey B. Kindler, hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Pfizer Inc.
/s/ Jeffrey B. Kindler 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 on Form 10-Q of Pfizer Inc. /s/ Alan G. Levin This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. |