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PFE Pfizer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-3619

----

PFIZER INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)

235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)

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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES   X 
NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated filer  X                 Accelerated filer  ___                Non-accelerated filer  ___          Smaller reporting company  ___    Emerging growth company  ___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

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 November 5, 2018, 5,780,474,578 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
  
 
 
  
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and October 1, 2017
  
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and October 1, 2017
  
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
  
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and October 1, 2017
  
  
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  

2


GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:
2017 Financial ReportFinancial Report for the fiscal year ended December 31, 2017, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2017
2017 Form 10-KAnnual Report on Form 10-K for the fiscal year ended December 31, 2017
ACA (Also referred to as U.S. Healthcare Legislation)U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
ACIPAdvisory Committee on Immunization Practices
ALKanaplastic lymphoma kinase
Alliance revenuesRevenues from alliance agreements under which we co-promote products discovered or developed by other companies or us
AllogeneAllogene Therapeutics, Inc.
AMPAα-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid
AnacorAnacor Pharmaceuticals, Inc.
AOCIAccumulated Other Comprehensive Income
AstellasAstellas Pharma Inc., Astellas US LLC and Astellas Pharma US, Inc.
ASUAccounting Standards Update
ATM-AVIaztreonam-avibactam
AvillionAvillion LLP
Bain CapitalBain Capital Private Equity and Bain Capital Life Sciences
BiogenBiogen Inc.
BMSBristol-Myers Squibb Company
BRCABReast CAncer susceptibility gene
CAR Tchimeric antigen receptor T cell
CDCU.S. Centers for Disease Control and Prevention
CellectisCellectis S.A.
CerevelCerevel Therapeutics, LLC
CIAScognitive impairment associated with schizophrenia
CitibankCitibank, N.A.
CMLchronic myelogenous leukemia
Developed MarketsU.S., Western Europe, Japan, Canada, Australia, South Korea, Scandinavian countries, Finland and New Zealand
EEAEuropean Economic Area
EHEssential Health
EMAEuropean Medicines Agency
Emerging MarketsIncludes, but is not limited to, the following markets: Asia (excluding Japan and South Korea), Latin America, Eastern Europe, Africa, the Middle East, Central Europe and Turkey
EPSearnings per share
EUEuropean Union
Exchange ActSecurities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FDAU.S. Food and Drug Administration
GAAPGenerally Accepted Accounting Principles
GISTgastrointestinal stromal tumors
GPDGlobal Product Development
HER2-human epidermal growth factor receptor 2-negative
hGH-CTPhuman growth hormone
HISHospira Infusion Systems
Hisun PfizerHisun Pfizer Pharmaceuticals Company Limited
HospiraHospira, Inc.
HR+hormone receptor-positive
ICU MedicalICU Medical, Inc.
IHInnovative Health
IPR&Din-process research and development
IRSU.S. Internal Revenue Service

3


IVintravenous
JanssenJanssen Biotech Inc.
J&JJohnson & Johnson
KingKing Pharmaceuticals LLC (formerly King Pharmaceuticals, Inc.)
LDLlow density lipoprotein
LEPLegacy Established Products
LIBORLondon Interbank Offered Rate
LillyEli Lilly & Company
LOEloss of exclusivity
MCCMerkel Cell Carcinoma
MCOManaged Care Organization
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MedivationMedivation LLC (formerly Medivation, Inc.)
MerckMerck & Co., Inc.
MeridianMeridian Medical Technologies, Inc.
Moody’sMoody’s Investors Service
NDAnew drug application
NovaQuestNovaQuest Co-Investment Fund V, L.P.
NSCLCnon-small cell lung cancer
NYSENew York Stock Exchange
OPKOOPKO Health, Inc.
OTCover-the-counter
PARPpoly ADP ribose polymerase
PBMPharmacy Benefit Manager
PharmaciaPharmacia Corporation
PP&EProperty, plant & equipment
Quarterly Report on Form 10-QQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2018
RCCrenal cell carcinoma
R&Dresearch and development
RPIRPI Finance Trust
SandozSandoz, Inc., a division of Novartis AG
SECU.S. Securities and Exchange Commission
ServierLes Laboratoires Servier SAS
SFJSFJ Pharmaceuticals Group
ShireShire International GmbH
SI&ASelling, informational and administrative
SIPSterile Injectable Pharmaceuticals
S&PStandard and Poor’s
StratCOStrategy and Commercial Operations
Tax Cuts and Jobs Act or TCJALegislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017
TeutoLaboratório Teuto Brasileiro S.A.
U.K.United Kingdom
U.S.United States
ViiVViiV Healthcare Limited
WRDWorldwide Research and Development


4


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
  Three Months Ended Nine Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)��September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Revenues $13,298
 $13,168
 $39,670
 $38,843
Costs and expenses:        
Cost of sales(a)
 2,694
 2,844
 8,173
 7,972
Selling, informational and administrative expenses(a)
 3,494
 3,504
 10,448
 10,249
Research and development expenses(a)
 2,008
 1,865
 5,549
 5,367
Amortization of intangible assets 1,253
 1,177
 3,640
 3,571
Restructuring charges and certain acquisition-related costs 85
 114
 172
 267
Other (income)/deductions––net (414) 79
 (1,143) 65
Income from continuing operations before provision for taxes on income 4,177
 3,585
 12,831
 11,351
Provision for taxes on income 66
 727
 1,270
 2,287
Income from continuing operations 4,111
 2,858
 11,562
 9,064
Discontinued operations––net of tax 11
 
 10
 1
Net income before allocation to noncontrolling interests 4,122
 2,858
 11,571
 9,066
Less: Net income attributable to noncontrolling interests 8
 18
 25
 32
Net income attributable to Pfizer Inc. $4,114
 $2,840
 $11,546
 $9,034
         
Earnings per common share––basic:
  
  
  
  
Income from continuing operations attributable to Pfizer Inc. common shareholders $0.70
 $0.48
 $1.96
 $1.51
Discontinued operations––net of tax 
 
 
 
Net income attributable to Pfizer Inc. common shareholders $0.70
 $0.48
 $1.96
 $1.51
         
Earnings per common share––diluted:
  
  
  
  
Income from continuing operations attributable to Pfizer Inc. common shareholders $0.69
 $0.47
 $1.92
 $1.49
Discontinued operations––net of tax 
 
 
 
Net income attributable to Pfizer Inc. common shareholders $0.69
 $0.47
 $1.92
 $1.49
         
Weighted-average shares––basic 5,875
 5,951
 5,899
 5,972
Weighted-average shares––diluted 5,986
 6,041
 5,998
 6,057
Cash dividends paid per common share $0.34
 $0.32
 $1.02
 $0.96
(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9A. Identifiable Intangible Assets and Goodwill: Identifiable Intangible Assets.
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Net income before allocation to noncontrolling interests $4,122
 $2,858
 $11,571
 $9,066
       
  
Foreign currency translation adjustments, net (567) 878
 (507) 1,352
Reclassification adjustments (2) (3) (22) 110
  (569) 875
 (530) 1,461
Unrealized holding gains/(losses) on derivative financial instruments, net 222
 (50) 236
 (149)
Reclassification adjustments for (gains)/losses included in net income(a)
 (235) 56
 119
 (393)
  (13) 6
 355
 (542)
Unrealized holding gains/(losses) on available-for-sale securities, net 149
 384
 (65) 698
Reclassification adjustments for gains included in net income(a)
 (36) (278) (67) (181)
Reclassification adjustments for unrealized gains included in Retained earnings(b)
 
 
 (462) 
  112
 106
 (595) 518
Benefit plans: actuarial gains/(losses), net 8
 (103) 114
 (41)
Reclassification adjustments related to amortization 60
 140
 183
 448
Reclassification adjustments related to settlements, net 42
 38
 108
 89
Other 49
 (76) 69
 (111)
  158
 (1) 474
 384
Benefit plans: prior service costs and other, net 
 
 
 (2)
Reclassification adjustments related to amortization (46) (46) (137) (138)
Reclassification adjustments related to curtailments, net (4) (3) (18) (14)
Other 
 1
 1
 2
  (50) (48) (154) (151)
Other comprehensive income/(loss), before tax (361) 938
 (449) 1,669
Tax provision/(benefit) on other comprehensive income/(loss) 62
 (80) 667
 (218)
Other comprehensive income/(loss) before allocation to noncontrolling interests $(422) $1,018
 $(1,116) $1,888
         
Comprehensive income before allocation to noncontrolling interests $3,700
 $3,876
 $10,455
 $10,953
Less: Comprehensive income attributable to noncontrolling interests 
 19
 5
 48
Comprehensive income attributable to Pfizer Inc. $3,700
 $3,857
 $10,450
 $10,906
(a) 
Reclassified into Other (income)/deductions—net and Cost of sales in the condensed consolidated statements of income. For additional information on amounts reclassified into Cost of sales, see Note 7F. Financial Instruments: Derivative Financial Instruments and Hedging Activities.
(b) 
For additional information, see Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards.
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

6


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS) September 30,
2018

 December 31,
2017

  (Unaudited)  
Assets    
Cash and cash equivalents $3,559
 $1,342
Short-term investments 13,680
 18,650
Trade accounts receivable, less allowance for doubtful accounts: 2018—$567; 2017—$584 10,024
 8,221
Inventories 8,184
 7,578
Current tax assets 3,686
 3,050
Other current assets 2,450
 2,301
Total current assets 41,583
 41,141
Long-term investments 6,444
 7,015
Property, plant and equipment, less accumulated depreciation: 2018—$17,078; 2017—$16,172 14,036
 13,865
Identifiable intangible assets, less accumulated amortization 45,306
 48,741
Goodwill 55,614
 55,952
Noncurrent deferred tax assets and other noncurrent tax assets 1,875
 1,855
Other noncurrent assets 2,980
 3,227
Total assets $167,838
 $171,797
     
Liabilities and Equity  
  
Short-term borrowings, including current portion of long-term debt: 2018—$4,255; 2017—$3,546 $7,385
 $9,953
Trade accounts payable 4,297
 4,656
Dividends payable 1,963
 2,029
Income taxes payable 2,781
 477
Accrued compensation and related items 2,096
 2,196
Other current liabilities 10,490
 11,115
Total current liabilities 29,013
 30,427
     
Long-term debt 33,652
 33,538
Pension benefit obligations, net 4,886
 5,926
Postretirement benefit obligations, net 1,455
 1,504
Noncurrent deferred tax liabilities 5,512
 3,900
Other taxes payable 15,289
 18,697
Other noncurrent liabilities 6,367
 6,149
Total liabilities 96,174
 100,141
     
Commitments and Contingencies 

 

     
Preferred stock 20
 21
Common stock 466
 464
Additional paid-in capital 85,828
 84,278
Treasury stock (96,574) (89,425)
Retained earnings 91,995
 85,291
Accumulated other comprehensive loss (10,417) (9,321)
Total Pfizer Inc. shareholders’ equity 71,319
 71,308
Equity attributable to noncontrolling interests 346
 348
Total equity 71,664
 71,656
Total liabilities and equity $167,838
 $171,797
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

7


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

  Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

Operating Activities    
Net income before allocation to noncontrolling interests $11,571
 $9,066
Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:  
  
Depreciation and amortization 4,743
 4,695
Asset write-offs and impairments 88
 326
Adjustments to loss on sale of HIS net assets (1) 52
TCJA impact(a)
 (410) 
Deferred taxes from continuing operations (974) 241
Share-based compensation expense 682
 595
Benefit plan contributions in excess of income––2018 and expense––2017
 (1,000) (1,042)
Other adjustments, net (1,169) (604)
Other changes in assets and liabilities, net of acquisitions and divestitures (2,441) (3,616)
Net cash provided by operating activities 11,089
 9,713
     
Investing Activities  
  
Purchases of property, plant and equipment (1,357) (1,256)
Purchases of short-term investments (7,364) (6,469)
Proceeds from redemptions/sales of short-term investments 12,752
 5,778
Net proceeds from redemptions/sales of short-term investments with original maturities of three months or less 385
 2,758
Purchases of long-term investments (1,503) (2,526)
Proceeds from redemptions/sales of long-term investments 2,174
 2,403
Acquisitions of businesses, net of cash acquired 
 (1,000)
Acquisitions of intangible assets (47) (188)
Other investing activities, net 248
 519
Net cash provided by investing activities 5,289
 19
     
Financing Activities  
  
Proceeds from short-term borrowings 1,945
 7,003
Principal payments on short-term borrowings (4,239) (7,659)
Net (payments on)/proceeds from short-term borrowings with original maturities of three months or less (973) 566
Proceeds from issuance of long-term debt 4,974
 5,273
Principal payments on long-term debt (3,104) (4,474)
Purchases of common stock (7,168) (5,000)
Cash dividends paid (6,015) (5,750)
Proceeds from exercise of stock options 1,099
 656
Other financing activities, net (553) (223)
Net cash used in financing activities (14,034) (9,607)
Effect of exchange-rate changes on cash and cash equivalents and restricted cash and cash equivalents (116) 67
Net increase in cash and cash equivalents and restricted cash and cash equivalents 2,227
 193
Cash and cash equivalents and restricted cash and cash equivalents, beginning 1,431
 2,666
Cash and cash equivalents and restricted cash and cash equivalents, end $3,658
 $2,858
   
  
Supplemental Cash Flow Information    
Non-cash transactions:    
Receipt of ICU Medical common stock(b)
 $
 $428
Promissory note from ICU Medical(b)
 
 75
Equity investment in Cerevel Therapeutics, Inc. in exchange for Pfizer’s portfolio of clinical and preclinical neuroscience assets(b)
 343
 
Equity investment in Allogene received in exchange for Pfizer's allogeneic CAR T developmental program assets(b)
 92
 
Cash paid (received) during the period for:  
  
Income taxes $1,666
 $1,424
Interest 968
 1,101
Interest rate hedges (104) (183)
(a) 
As a result of the enactment of the TCJA in December 2017, Pfizer’s Provision for taxes on income for the nine months ended September 30, 2018 was favorably impacted by approximately $410 million, primarily related to certain tax initiatives associated with the TCJA, as well as favorable adjustments to the provisional estimates of the legislation. See Note 5A. Tax Matters: Taxes on Income from Continuing Operations.
(b) 
For additional information, see Note 2B. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment: Divestitures.
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

8


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout the condensed consolidated financial statements and related notes in this Quarterly Report on Form 10-Q.

We prepared the condensed consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted.

The financial information included in our condensed consolidated financial statements for subsidiaries operating outside the U.S. is as of and for the three and nine months ended August 26, 2018 and August 27, 2017. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and nine months ended September 30, 2018 and October 1, 2017.

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 Quarterly Report on Form 10-Q. The interim financial statements include all normal and recurring adjustments that are considered necessary for the fair statement of our condensed consolidated balance sheets and condensed consolidated statements of income. 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 our 2017 Financial Report.

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). For additional information, see Note 13 and Notes to Consolidated Financial Statements––Note 18. Segment, Geographic and Other Revenue Information in Pfizer’s 2017 Financial Report.

Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts.

In the first quarter of 2018, as of January 1, 2018, we adopted eleven new accounting standards. See Note 1B for further information.

Our significant business development activities include:
On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, to ICU Medical. The operating results of HIS are included in our condensed consolidated statement of income and EH’s operating results through February 2, 2017 and, therefore, our financial results, and EH’s operating results, for the third quarter of 2017 do not reflect any contribution from HIS global operations, while our financial results, and EH’s operating results, for the first nine months of 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations. Our financial results, and EH’s operating results, for 2018 do not reflect any contribution from HIS global operations.
On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of this business, and, in accordance with our international reporting period, our financial results, EH’s operating results, and cash flows for the third quarter and first nine months of 2017 reflect approximately three months and eight months, respectively, of the small molecule anti-infectives business acquired from AstraZeneca. Our financial results, EH’s operating results, and cash flows for the third quarter and first nine months of 2018 reflect three months and nine months, respectively, of the small molecule anti-infectives business acquired from AstraZeneca.
For additional information, see Note 2 and Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment in Pfizer’s 2017 Financial Report.

9


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Adoption of New Accounting Standards
On January 1, 2018, we adopted eleven new accounting standards. The quantitative impacts on our prior period condensed consolidated financial statements of adopting the following new standards are summarized in the tables within the section titled Impacts to our Condensed Consolidated Financial Statements, further below.
Revenues––We adopted a new accounting standard for revenue recognition and changed our revenue recognition policies accordingly. Generally, the previous revenue recognition standards permitted recognition when persuasive evidence of a contract existed, delivery had occurred, and the seller's price to the buyer was fixed or determinable. Under the new standard, revenue is recognized upon transfer of control of the product to our customer in an amount that reflects the consideration we expect to receive in exchange. We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $584 million on a pre-tax basis ($450 million after-tax). This amount includes $500 million (pre-tax) related to the timing of recognizing Other (income)/deductions––net primarily for upfront and milestone payments on our collaboration arrangements ($394 million, pre-tax) and, to a lesser extent, product rights and out-licensing arrangements, and $84 million (pre-tax) related to the timing of recognizing Revenues and Cost of sales on certain product shipments. The impact of adoption did not have a material impact to our condensed consolidated statements of income for the three and nine months ended September 30, 2018 or our condensed consolidated balance sheet as of September 30, 2018. For additional information, see Note 1C.
Financial Assets and Liabilities––The new accounting standard related to the recognition and measurement of financial assets and liabilities makes the following changes to prior guidance and requires:
certain equity investments to be measured at fair value with changes in fair value now recognized in net income. However, equity investments that do not have readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer;
a qualitative assessment of equity investments without readily determinable fair values to identify impairment; and
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $462 million on a pre-tax basis ($419 million after-tax) related to the net impact of unrealized gains and losses primarily on available-for-sale equity securities, restricted stock and private equity securities. In the third quarter of 2018, we recorded net unrealized gains on equity securities of $8 million and in the first nine months of 2018, we recorded net unrealized gains on equity securities of $344 million, in Other (income)/deductions––net. For additional information, see Note 4 and Note 7.

Presentation of Net Periodic Pension and Postretirement Benefit Cost––We adopted a new accounting standard that requires the net periodic pension and postretirement benefit costs other than the service costs be presented in Other (income)/deductions––net, and that the presentation be applied retrospectively. We adopted the presentation of the net periodic benefit costs other than service costs by reclassifying these costs from Cost of sales, Selling, informational and administrative expenses, Research and development expenses and Restructuring charges and certain acquisition-related costs to Other (income)/deductions––net. We elected to apply the practical expedient as it is impracticable to determine the disaggregation of the cost components for amounts capitalized within Inventories and property, plant and equipment and amortized in each of those periods. We have therefore reclassified the prior period net periodic benefit costs/(credits) disclosed in Note 10 to apply the retrospective presentation for comparative periods.
As of January 1, 2018, only service costs will be included in amounts capitalized in Inventories or property, plant and equipment, while the other components of net periodic benefit costs will be included in Other (income)/deductions––net. For additional information, see Note 4 and Note 10.
Income Tax Accounting––The new guidance removes the prohibition against recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, unless the asset transferred is inventory. We adopted the standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to decrease the opening balance of Retained earnings by $189 million.

10


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Accounting for Hedging Activities––The standard includes the following changes:
Permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk;
Changes the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk;
No longer requires the separate measurement and reporting of hedge ineffectiveness, but requires the income statement presentation of the earnings effect of the hedging instrument with the earnings effect of the hedged item;
Permits us to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness; and
Simplifies hedge effectiveness testing.
We early adopted the new accounting standard on January 1, 2018 on a prospective basis. In the third quarter of 2018, we recorded income of $23 million and in the first nine months of 2018, we recorded income of $68 million in Other (income)/deductions––net, whereas this item would have been classified in interest income in prior periods. For additional information, see Note 7F.
Reclassification of Certain Tax Effects from AOCI––We early adopted a new accounting standard that provides guidance on the reclassification of certain tax effects from AOCI. Under the new guidance, we elected to reclassify the stranded tax amounts related to the TCJA from AOCI to Retained earnings. We adopted the new accounting standard utilizing the modified retrospective method, and recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $495 million, primarily due to the effect of the change in the U.S. Federal corporate tax rate. The impact on other stranded tax amounts related to the application of the TCJA was not material to our condensed consolidated financial statements.
Classification of Certain Transactions in the Statement of Cash Flows––We retrospectively adopted an accounting standard that changed the presentation of certain information in the condensed consolidated statements of cash flows, including the classification of:
debt prepayment and extinguishment costs, resulting in an increase in Operating activities––Other adjustments, net and a decrease in Financing activities––Other financing activities, net of $7 million for the nine months ended September 30, 2018; and
accreted interest on the settlement of commercial paper debt instruments, resulting in a decrease in Operating activities––Other adjustments, net, and an increase in Financing activities––Other financing activities, net of $69 million for the nine months ended September 30, 2018.
The new standard also establishes guidance on the classification of certain cash flows related to contingent consideration in a business acquisition. Cash payments made soon after a business acquisition date will be classified as Investing activities, while payments made thereafter will be classified as Financing activities. Payments made in excess of the amount of the original contingent consideration liability will be classified as Operating activities. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.
Presentation of Restricted Cash in the Statement of Cash Flows––We adopted, on a retrospective basis, the new accounting standard, which requires that restricted cash and restricted cash equivalents be included with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the condensed consolidated statements of cash flows. As a result, for the nine months ended September 30, 2018, $10 million is presented as an increase in Cash, cash equivalents, restricted cash and restricted cash equivalents.
Definition of a Business––We prospectively adopted the standard for determining whether business development transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, the transaction will not qualify for treatment as a business. To be considered a business, a set of integrated activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs, without regard as to whether a purchaser could replace missing elements. In addition, the definition of the term “output” has been narrowed to make it consistent with the updated revenue recognition guidance. In the third quarter and first nine months of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Derecognition of Nonfinancial Assets––We prospectively adopted the standard, which applies to the full or partial sale or transfer of nonfinancial assets, including intangible assets, real estate and inventory. The standard provides that the gain or loss is determined by the difference between the consideration received and the carrying value of the asset. In the third quarter and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

first nine months of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Accounting for Modifications of Share-Based Payment Awards––We prospectively adopted the standard, which clarifies that certain changes in the terms or conditions of a share-based payment award be accounted for as a modification. There was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Impacts to our Condensed Consolidated Financial Statements––The impacts on our prior period condensed consolidated financial statements of adopting the new standards described above are summarized in the following tables:
Adoption of the standard related to pension and postretirement benefit costs impacted our prior period condensed consolidated statements of income as follows:
  Three Months Ended October 1, 2017
(MILLIONS OF DOLLARS) As Previously Reported
 
Effect of Change
Higher/(Lower)

 As Restated
Cost of sales $2,847
 $(3) $2,844
Selling, informational and administrative expenses 3,500
 4
 3,504
Research and development expenses 1,859
 6
 1,865
Restructuring charges and certain acquisition-related costs 149
 (35) 114
Other (income)/deductions––net 51
 28
 79
Income from continuing operations before provision for taxes on income 3,585
 
 3,585
       
  Nine Months Ended October 1, 2017
(MILLIONS OF DOLLARS) As Previously Reported
 
Effect of Change
Higher/(Lower)

 As Restated
Cost of sales $7,980
 $(9) $7,972
Selling, informational and administrative expenses 10,233
 16
 10,249
Research and development expenses 5,346
 21
 5,367
Restructuring charges and certain acquisition-related costs 377
 (110) 267
Other (income)/deductions––net (16) 81
 65
Income from continuing operations before provision for taxes on income
 11,351
 
 11,351
Adoption of the standards impacted our condensed consolidated balance sheet as follows:
    Effect of New Accounting Standards Higher/(Lower)  
(MILLIONS OF DOLLARS) As Previously Reported Balance at December 31, 2017
 Revenues
 Financial Assets and Liabilities
 
Income
Tax Accounting

 Reclassification of Certain Tax Effects from AOCI
 Balance at January 1, 2018
Trade accounts receivable $8,221
 $13
 $
 $
 $
 $8,234
Inventories 7,578
 (11) 
 
 
 7,567
Current tax assets 3,050
 (11) 
 (3) 
 3,036
Noncurrent deferred tax assets and other noncurrent tax assets 1,855
 (17) 
 
 
 1,838
Other noncurrent assets 3,227
 
 
 (204) 
 3,023
Other current liabilities 11,115
 (123) 
 
 
 10,992
Noncurrent deferred tax liabilities 3,900
 106
 
 (18) 
 3,988
Other noncurrent liabilities 6,149
 (459) 
 
 
 5,690
Retained earnings 85,291
 450
 419
 (189) 495
 86,466
Accumulated other comprehensive loss (9,321) 
 (419) 
 (495) (10,235)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Adoption of the standards related to the classification of certain transactions in the statement of cash flows and the presentation of restricted cash in the statement of cash flows impacted our condensed consolidated statement of cash flows as follows:
  Nine Months Ended October 1, 2017
    Effect of New Accounting Standards Inflow/(Outflow)  
(MILLIONS OF DOLLARS) As Previously Reported
 Cash Flow Classification
 Restricted Cash
 As Restated
Operating Activities        
Other adjustments, net $(561) $(43) $
 $(604)
Other changes in assets and liabilities, net of acquisitions and divestitures (3,644) 
 28
 (3,616)
Investing Activities        
Proceeds from redemptions/sales of short-term investments 5,783
 
 (5) 5,778
Proceeds from redemptions/sales of long-term investments 2,417
 
 (14) 2,403
Financing Activities        
Principal payments on short-term borrowings (7,691) 33
 
 (7,659)
Net proceeds from short-term borrowings with original maturities of three months or less 555
 10
 
 566
Net increase in cash and cash equivalents and restricted cash and cash equivalents 184
 
 9
 193
Cash and cash equivalents and restricted cash and cash equivalents, beginning 2,595
 
 70
 2,666
Cash and cash equivalents and restricted cash and cash equivalents, ending 2,779
 
 79
 2,858
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:
(MILLIONS OF DOLLARS) September 30, 2018
 December 31,
2017

Cash and cash equivalents $3,559
 $1,342
Restricted cash and cash equivalents in Short-term investments
 40
 
Restricted cash and cash equivalents in Long-term investments
 59
 
Restricted cash and cash equivalents in Other current assets
 
 14
Restricted cash and cash equivalents in Other noncurrent assets
 
 75
Total cash and cash equivalents and restricted cash and cash equivalents shown in the condensed consolidated balance sheets $3,658
 $1,431
Amounts included in restricted cash represent those required to be set aside by a contractual agreement in connection with ongoing litigation or to secure delivery of Pfizer medicines at the agreed upon terms. The restriction will lapse upon the resolution of the litigation or the proper delivery of the medicines.

C. Revenues

On January 1, 2018, we adopted a new accounting standard for revenue recognition. For further information, see Note 1B.
We recorded direct product sales and/or alliance revenues of more than $1 billion for each of nine products in 2017. These direct products sales and/or alliance product revenues represented 46% of our revenues in 2017. The loss or expiration of intellectual property rights can have a significant adverse effect on our revenues as our contracts with customers will generally be at lower selling prices due to added competition and we generally provide for higher sales returns during the period in which individual markets begin to near the loss or expiration of intellectual property rights. Our Consumer Healthcare business includes OTC brands with a focus on dietary supplements, pain management, gastrointestinal and respiratory and personal care. According to Euromonitor International’s retail sales data, in 2017, our Consumer Healthcare business was the fifth-largest branded multi-national, OTC consumer healthcare business in the world and produced two of the ten largest selling consumer

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

healthcare brands (Centrum and Advil) in the world. We sell biopharmaceutical products after patent expiration, and under patent, and, to a much lesser extent, consumer healthcare products worldwide to developed and emerging market countries.
Revenue Recognition––We record revenues from product sales when there is a transfer of control of the product from us to the customer. We determine transfer of control based on when the product is shipped or delivered and title passes to the customer.
Customers––Our biopharmaceutical products are sold principally to wholesalers but we also sell directly to retailers, hospitals, clinics, government agencies and pharmacies, and, in the case of our vaccine products in the U.S., we primarily sell directly to the CDC, wholesalers and individual provider offices. Our consumer healthcare customers include retailers and, to a lesser extent, wholesalers and distributors.
Biopharmaceutical products that ultimately are used by patients are generally covered under governmental programs, managed care programs and insurance programs, including those managed through pharmacy benefit managers, and are subject to sales allowances and/or rebates payable directly to those programs. Those sales allowances and rebates are generally negotiated, but government programs may have legislated amounts by type of product (e.g., patented or unpatented).
Our Sales Contracts––Sales on credit are typically under short-term contracts. Collections are based on market payment cycles common in various markets, with shorter cycles in the U.S. Sales are adjusted for sales allowances, chargebacks, rebates and sales returns and cash discounts. Sales returns occur due to loss of exclusivity, product recalls or a changing competitive environment.
Deductions from Revenues––Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions on gross sales for a reporting period.
Specifically:
In the U.S., we sell our products to distributors and hospitals under our sales contracts. However, we also have contracts with managed care or pharmacy benefit managers and legislatively mandated contracts with the federal and state governments under which we provide rebates to them based on medicines utilized by the lives they cover. We record provisions for Medicare, Medicaid, and performance-based contract pharmaceutical rebates based upon our experience ratio of rebates paid and actual prescriptions written during prior quarters. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. We estimate discounts on branded prescription drug sales to Medicare Part D participants in the Medicare “coverage gap,” also known as the “doughnut hole,” based on the historical experience of beneficiary prescriptions and consideration of the utilization that is expected to result from the discount in the coverage gap. We evaluate this estimate regularly to ensure that the historical trends and future expectations are as current as practicable. For performance-based contract rebates, we also consider current contract terms, such as changes in formulary status and rebate rates.
Outside the U.S., the majority of our pharmaceutical sales allowances are contractual or legislatively mandated and our estimates are based on actual invoiced sales within each period, which reduces the risk of variations in the estimation process. In certain European countries, rebates are calculated on the government’s total unbudgeted pharmaceutical spending or on specific product sales thresholds and we apply an estimated allocation factor against our actual invoiced sales to project the expected level of reimbursement. We obtain third-party information that helps us to monitor the adequacy of these accruals.
Provisions for pharmaceutical chargebacks (primarily reimbursements to U.S. wholesalers for honoring contracted prices to third parties) closely approximate actual amounts incurred, as we settle these deductions generally within two to five weeks of incurring the liability.
Provisions for pharmaceutical sales returns are based on a calculation for each market that incorporates the following, as appropriate: local returns policies and practices; historical returns as a percentage of sales; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, such as loss of exclusivity, product recalls or a changing competitive environment. Generally, returned products are destroyed, and customers are refunded the sales price in the form of a credit.
We record sales incentives as a reduction of revenues at the time the related revenues are recorded or when the incentive is offered, whichever is later. We estimate the cost of our sales incentives based on our historical experience with similar incentives programs to predict customer behavior.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $5.5 billion as of September 30, 2018 and $4.9 billion as of December 31, 2017.
The following table provides information about the balance sheet classification of these accruals:
(MILLIONS OF DOLLARS) September 30, 2018
 December 31, 2017
Reserve against Trade accounts receivable, less allowance for doubtful accounts
 $1,297
 $1,352
     
Other current liabilities:
    
Accrued rebates 3,235
 2,674
Other accruals 641
 512
     
Other noncurrent liabilities 374
 385
Total accrued rebates and other accruals $5,548
 $4,923
Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in Revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.
D. Collaborative Arrangements
Payments to and from our collaboration partners are presented in our condensed consolidated statements of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our collaboration partners as alliance revenues, a component of Revenues, when our collaboration partners are the principal in the transaction and we receive a share of their net sales or profits. Alliance revenues are recorded as we perform co-promotion services for the collaboration and the collaboration partners sell the products to their customers within the applicable period. The related expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In collaborative arrangements where we manufacture a product for our collaboration partners, we record revenues when we transfer control of the product to our collaboration partners. All royalty payments to collaboration partners are included in Cost of sales. Royalty payments received from collaboration partners are included in Other (income)/deductions—net.
Reimbursements to or from our collaboration partners for development costs are recorded net in Research and development expenses. Upfront payments and pre-approval milestone payments due from us to our collaboration partners in development stage collaborations are recorded as Research and development expenses. Milestone payments due from us to our collaboration partners after regulatory approval has been attained for a medicine are recorded in Identifiable intangible assets—Developed technology rights. Upfront and pre-approval milestone payments earned from our collaboration partners by us are recognized in Other (income)/deductions—net over the development period for the collaboration products, when our performance obligations include providing R&D services to our collaboration partners. Upfront, pre-approval and post-approval milestone payments earned by us may be recognized in Other (income)/deductions—net immediately when earned or over other periods depending upon the nature of our performance obligations in the applicable collaboration. Where the milestone event is regulatory approval for a medicine, we generally recognize milestone payments due to us in the transaction price when regulatory approval in the applicable jurisdiction has been attained. We may recognize milestone payments due to us in the transaction price earlier than the milestone event in certain circumstances when recognition of the income would not be probable of a significant reversal.
On January 1, 2018, we adopted a new accounting standard on revenue recognition (see Note 1B). As a result of the adoption, we recognized the following cumulative effect adjustments related to collaboration arrangements to Retained earnings:
$394 million (pre-tax) for collaborative arrangements where upfront, pre-approval and regulatory approval milestone payments received from our collaboration partners are recognized in Other (income)/deductions—net over a reduced period. Under the new standard, the income from upfront and pre-approval milestone payments due to us is typically recognized over the development period for the collaboration when our performance obligation, in addition to granting a license, is to provide research and development services to our collaboration partners, and major regulatory approval milestones are typically recognized immediately when earned as the related development period has ended. The income from upfront and milestone payments is typically recognized immediately as earned if our performance obligation, in addition to granting a license, is

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

only for commercialization activities. Under the old standard, this income was recognized over the combined development and estimated commercialization (including co-promotion) period for the collaboration products.
$82 million (pre-tax) for collaborative arrangements where we manufacture products for our collaboration partners and recognize Revenues and Cost of sales for product shipments at an earlier point in time. Under the new standard, revenue is recognized when we transfer control of the products to our collaboration partners. Under the old standard, revenue was recognized when our collaboration partners sell the products and transfer title to their third party customers.
Note 2. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment

A. Acquisition
AstraZeneca’s Small Molecule Anti-Infectives Business (EH)
On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S., including the commercialization and development rights to the approved EU drug Zavicefta™ (ceftazidime-avibactam), the marketed agents Merrem™/Meronem™ (meropenem) and Zinforo™ (ceftaroline fosamil), and the clinical development assets ATM-AVI and CXL (ceftaroline fosamil-AVI). In 2017, under the terms of the agreement, we made payments of approximately $605 million to AstraZeneca related to the transaction. We made an additional milestone payment of $125 million in our first fiscal quarter of 2018 and we will make a deferred payment of $175 million to AstraZeneca in January 2019. In addition, we may be required to pay an additional milestone payment of $75 million if the related milestone is achieved prior to December 31, 2021, and up to $600 million if sales of Zavicefta™ exceed certain thresholds prior to January 1, 2026, as well as tiered royalties on sales of Zavicefta™ and ATM-AVI in certain markets for a period ending on the later of 10 years from first commercial sale or the loss of patent protection or loss of regulatory exclusivity. The total royalty payments are unlimited during the royalty term and the undiscounted payments are expected to be in the range of approximately $292 million to $512 million. The total fair value of consideration transferred for AstraZeneca’s small molecule anti-infectives business was approximately $1,040 million inclusive of cash paid and the fair value of contingent consideration. In connection with this acquisition, we recorded $894 million in Identifiable intangible assets, consisting of $728 million in Developed technology rights and $166 million in IPR&D. We also recorded $92 million in Other current assets related to the economic value of inventory which was retained by AstraZeneca for sale on our behalf, $73 million in Goodwill and $19 million of net deferred tax liabilities. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.
B. Divestitures
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)
On October 6, 2016, we announced that we entered into a definitive agreement under which ICU Medical agreed to acquire all of our global infusion systems net assets, HIS, for approximately $1 billion in cash and ICU Medical common stock. HIS includes IV pumps, solutions, and devices. As a result of the performance of HIS relative to ICU Medical’s expectations, on January 5, 2017, we entered into a revised agreement with ICU Medical under which ICU Medical would acquire HIS for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing.
The revised transaction closed on February 3, 2017. At closing, we received 3.2 million newly issued shares of ICU Medical common stock (as originally agreed), which we initially valued at approximately $428 million (based upon the closing price of ICU Medical common stock on the closing date less a discount for lack of marketability) and which are reported as equity securities at fair value in Long-term investments on the condensed consolidated balance sheet. In August 2018, we sold 700,000 shares of ICU Medical common stock for which we recognized a gain during the period of $50 million, reflecting the increase in fair value of the equity investment since the beginning of the year, most of which was previously recognized as 2018 unrealized gains. In addition, we continue to hold 2.5 million shares of ICU Medical common stock and we recognized unrealized gains of $24 million in the third quarter of 2018 and unrealized gains of $229 million in the first nine months of 2018 related to these remaining shares. We also received a promissory note in the amount of $75 million, which was repaid in full as of December 31, 2017, and net cash of approximately $200 million before customary adjustments for net working capital, which is reported in Other investing activities, net on the condensed consolidated statement of cash flows for the nine months ended October 1, 2017. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. After our recent sale of ICU Medical shares, we own approximately 12% of ICU Medical. We recognized pre-tax income of $2 million in the third quarter of 2018 and pre-tax income of $1 million in the first nine months of 2018, and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

we recognized pre-tax income of $12 million in the third quarter of 2017 and pre-tax losses of $52 million in the first nine months of 2017 in Other (income)/deductions––net, representing adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell. For additional information, see Note 4 and Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment in Pfizer’s 2017 Financial Report.
While we have received the full purchase price excluding the contingent amount as of the February 3, 2017 closing, the sale of the HIS net assets was not fully completed in certain non-U.S. jurisdictions as of the third quarter of 2018 due to temporary regulatory or operational constraints. In these jurisdictions, which represent a relatively small portion of the HIS net assets, we continued to operate the net assets for the net economic benefit of ICU Medical, and we were indemnified by ICU Medical against risks associated with such operations during the interim period, subject to our obligations under the definitive transaction agreements. We have previously treated these jurisdictions as sold for accounting purposes.
In connection with the sale transaction, we entered into certain transitional agreements designed to facilitate the orderly transition of the HIS net assets to ICU Medical. These agreements primarily relate to administrative services, which are generally to be provided for a period of up to 24 months after the closing date. We will also manufacture and supply certain HIS products for ICU Medical and ICU Medical will manufacture and supply certain retained Pfizer products for us after closing, generally for a term of five years. These agreements are not material to Pfizer and none confers upon us the ability to influence the operating and/or financial policies of ICU Medical subsequent to the sale.
Contribution Agreement Between Pfizer and Allogene Therapeutics, Inc. (WRD)
In April 2018, Pfizer and Allogene announced that the two companies entered into a contribution agreement for Pfizer’s portfolio of assets related to allogeneic CAR T therapy, an investigational immune cell therapy approach to treating cancer. Under this agreement, Allogene received from Pfizer rights to pre-clinical and clinical CAR T assets, all of which were previously licensed to Pfizer from French cell therapy company, Cellectis, beginning in 2014 and French pharmaceutical company, Servier, beginning in 2015. Allogene assumed responsibility for all potential financial obligations to both Cellectis and Servier. Pfizer will continue to participate financially in the development of the CAR T portfolio through an ownership stake in Allogene. Separately, Pfizer continues to maintain its approximate 7% ownership stake in Cellectis that was obtained in 2014 as part of the licensing agreement in which Pfizer obtained exclusive rights to pursue the development and commercialization of certain Cellectis CAR T therapies in exchange for an upfront payment of $80 million, as well as potential future development, regulatory and commercial milestone payments and royalties. In connection with the Allogene transaction, Pfizer recognized a non-cash $50 million pre-tax gain in Other (income)/deductions––net in the second quarter of 2018, representing the difference between the $127 million fair value of the equity investment received and the book value of assets transferred (including an allocation of goodwill) (see Note 4).
In October 2018, Allogene consummated an initial public offering of new shares of its common stock, which resulted in Pfizer’s preferred stock converting into common stock and a decrease in our ownership percentage from approximately 25% to approximately 19%. The closing price on the day of the initial public offering was $25 per share. Beginning as of the date of the initial public offering, our investment in Allogene, which is reported at $127 million in Long-term investments on the condensed consolidated balance sheet as of September 30, 2018, will be measured at fair value with changes in fair value recognized in net income.
Sale of Phase 2b Ready AMPA Receptor Potentiator for CIAS to Biogen Inc. (WRD)
In April 2018, we sold our Phase 2b ready AMPA receptor potentiator for CIAS to Biogen. We received $75 million upfront and have the opportunity to receive up to $515 million in future development and commercialization milestones, as well as tiered royalties in the low-to-mid-teen percentages. We recognized $75 million in Other (income)/deductions––net in the second quarter of 2018 (see Note 4). We will record the milestones and royalties to Other (income)/deductions––net when due, or earlier if we have sufficient experience to determine such amounts are not probable of significant reversal.
Divestiture of Neuroscience Assets (WRD)
In September 2018, we and Bain Capital entered into a transaction to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system including Parkinson’s disease, epilepsy, Alzheimer’s disease, schizophrenia and addiction. These assets were part of the neuroscience discovery and early development efforts, which we announced we were ending in January 2018. In connection with this transaction, we out-licensed the portfolio to Cerevel in exchange for a 25% ownership stake in Cerevel’s parent company, Cerevel Therapeutics, Inc., and potential future regulatory and commercial milestone payments and royalties. Bain Capital has committed to invest $350 million to develop the portfolio, with the potential for additional funding as the assets advance. In connection with the transaction, we recognized a non-cash $343 million pre-tax gain in Other (income)/

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

deductions––net, representing the fair value of the equity investment received as the assets transferred had a book value of $0 (see Note 4). Our investment in Cerevel Therapeutics, Inc. is reported in Long-term investments on the consolidated balance sheet as of September 30, 2018.
C. Licensing Arrangements
Shire International GmbH (IH)
In 2016, we out-licensed PF-00547659, an investigational biologic being evaluated for the treatment of moderate-to-severe inflammatory bowel disease, including ulcerative colitis and Crohn’s disease, to Shire for an upfront payment of $90 million, up to $460 million in development and sales-based milestone payments and potential future royalty payments on commercialized products. The $90 million upfront payment was initially deferred and recognized in Other (income)/deductions––net ratably through December 2017. In the first quarter of 2018, we recognized $75 million in Other (income)/deductions––net for a milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of the compound for the treatment of ulcerative colitis, and in the third quarter of 2018, we recognized $35 million in Other (income)/deductions––net for a milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of the compound for the treatment of Crohn’s disease (see Note 4).
BionTech AG (WRD)
In August 2018, a multi-year R&D arrangement went into effect between BionTech AG (BionTech), a privately held company, and Pfizer to develop mRNA-based vaccines for prevention of influenza (flu). In September 2018, we made an upfront payment of $50 million to BionTech, which was recorded in Research and development expenses, and BionTech is eligible to receive up to an additional $325 million in future development and sales based milestones and future royalty payments associated with worldwide sales. As part of the transaction, we also purchased 169,670 newly-issued ordinary shares of BionTech for $50 million in the third quarter of 2018, which are reported in Long-term investments in the condensed consolidated balance sheet as of September 30, 2018.
D. Collaboration Arrangements
Collaboration with Merck & Co., Inc. (IH)
Under a worldwide collaboration agreement, except for Japan, we collaborated with Merck on the clinical development of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and Januvia (sitagliptin) tablets, which were approved by the FDA in December 2017 and the European Commission in March 2018 as Steglatro, Segluromet and Steglujan. Merck will exclusively promote Steglatro and the two fixed-dose combination products and we will share revenues and certain costs with Merck on a 60%/40% basis, with Pfizer having the 40% share. Pfizer records its share of the collaboration revenues as product sales as we supply the ertugliflozin active pharmaceutical ingredient to Merck for use in the alliance products.
In the first quarter of 2017, we received a $90 million milestone payment from Merck upon the FDA’s acceptance for review of the NDAs for ertugliflozin and two fixed-dose combinations (ertugliflozin plus Januvia (sitagliptin) and ertugliflozin plus metformin), which, as of December 31, 2017, was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in Other (income)/deductions––net over a multi-year period. As of December 31, 2017, we were due a $60 million milestone payment from Merck, which we received in the first quarter of 2018, in conjunction with the approval of ertugliflozin by the FDA. As of December 31, 2017, the $60 million due from Merck was deferred and primarily reported in Other noncurrent liabilities. In the first quarter of 2018, in connection with the approval of ertugliflozin in the EU, we recognized a $40 million milestone payment from Merck in Other (income)/deductions––net (see Note 4). We are eligible for additional payments associated with the achievement of future commercial milestones. In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, the $60 million of deferred income and approximately $85 million of the $90 million of deferred income associated with the above-mentioned milestone payments were recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Collaboration with Eli Lilly & Company (IH)
In 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizer’s tanezumab, which provides that Pfizer and Lilly will equally share product-development expenses as well as potential revenues and certain product-related costs. We received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in Other (income)/deductions––net over a multi-year period beginning in the second quarter of 2015. Pfizer and Lilly resumed the Phase 3 chronic pain program for tanezumab in July 2015. The FDA granted Fast Track designation for tanezumab for the treatment of chronic pain in patients with osteoarthritis and chronic low back pain in June 2017. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.
In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, approximately $107 million of deferred income associated with the above-mentioned upfront payment was recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information. Approximately $33 million of the upfront payment continues to be deferred, of which approximately $24 million is reported in Other current liabilities and approximately $9 million is reported in Other noncurrent liabilities as of September 30, 2018. This amount is expected to be recognized in Other (income)/deductions––net over the remaining development period for the product between 2018 and 2020.
E. Privately Held Investment

AM-Pharma B.V. (WRD)

In April 2015, we acquired a minority equity interest in AM-Pharma B.V., a privately-held Dutch biopharmaceutical company focused on the development of human recombinant Alkaline Phosphatase (recAP) for inflammatory diseases, and secured an exclusive option to acquire the remaining equity in the company. The option became exercisable after completion of a Phase 2 trial of recAP for the treatment of Acute Kidney Injury related to sepsis in the first quarter of 2018. We declined to exercise the option and the option expired unexercised during the second quarter of 2018.
Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction/productivity initiatives. For example:
In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and
In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems.

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as groups such as information technology, shared services and corporate operations.

In connection with our acquisition of Hospira in September 2015, we focused our efforts on achieving an appropriate cost structure for the combined company. We expect to incur costs of approximately $1 billion (not including costs of $215 million associated with the return of acquired IPR&D rights as described in the Current-Period Key Activities section of Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives in our 2017 Financial Report) associated with the integration of Hospira. The majority of these costs were incurred within the three-year period post-acquisition.
As a result of the evaluation performed in connection with our decision in September 2016 to not pursue, at that time, splitting IH and EH into two separate publicly-traded companies, we identified new opportunities to potentially achieve greater optimization and efficiency to become more competitive in our business. Therefore, in early 2017, we initiated new enterprise-wide cost reduction/productivity initiatives, which we expect to substantially complete by the end of 2019. These initiatives encompass all areas of our cost base and include:

19


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Optimization of our manufacturing plant network to support IH and EH products and pipelines. During 2017-2019, we expect to incur costs of approximately $700 million related to this initiative. Through September 30, 2018, we incurred approximately $322 million associated with this initiative.
Activities in non-manufacturing related areas, which include further centralization of our corporate and platform functions, as well as other activities where opportunities are identified. During 2017-2019, we expect to incur costs of approximately $450 million related to this initiative. Through September 30, 2018, we incurred approximately $252 million associated with this initiative.
The costs expected to be incurred during 2017-2019, of approximately $1.2 billion for the above-mentioned programs (but not including the costs associated with the Hospira integration), include restructuring charges, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about 20% of the total charges will be non-cash.
Current-Period Key Activities

For the first nine months of 2018, we incurred costs of $226 million associated with the 2017-2019 program, $186 million associated with the integration of Hospira and $35 million associated with all other acquisition-related initiatives.
The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Restructuring (credits)/charges:  
  
  
  
Employee terminations $(24) $(55) $(53) $(113)
Asset impairments(a)
 12
 101
 8
 126
Exit costs 14
 10
 14
 16
Restructuring charges/(credits)(b)
 1
 56
 (32) 28
Transaction costs(c)
 1
 (14) 1
 4
Integration costs(d)
 82
 73
 202
 235
Restructuring charges and certain acquisition-related costs 85
 114
 172
 267
Net periodic benefit costs recorded in Other (income)/deductions––net(e)
 41
 35
 103
 110
Additional depreciation––asset restructuring, virtually all of which is recorded in Cost of sales(f)
 12
 39
 43
 74
Implementation costs recorded in our condensed consolidated statements of income as follows(g):
  
  
  
  
Cost of sales 21
 26
 57
 77
Selling, informational and administrative expenses 17
 22
 51
 46
Research and development expenses 9
 9
 22
 26
Total implementation costs 48
 57
 130
 150
Total costs associated with acquisitions and cost-reduction/productivity initiatives $186
 $245
 $447
 $601
(a) 
The asset impairment charges for the three and nine months ended October 1, 2017 are largely associated with our acquisitions of Hospira and Medivation.
(b) 
In the third quarter of 2018, restructuring charges are primarily due to accruals for exit costs and asset write downs related to our acquisition of Hospira, partially offset by the reversal of previously recorded accruals for employee termination costs. In the first nine months of 2018, restructuring credits are mostly related to the reversal of previously recorded accruals for employee termination costs. In the three and nine months ended October 1, 2017, restructuring charges were mainly associated with our acquisitions of Hospira and Medivation, partially offset by credits associated with cost-reduction and productivity initiatives not associated with acquisitions that mostly related to the reversal of previously recorded accruals for employee termination costs. Employee terminations primarily include revisions of our estimates of severance benefits. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, many of which may be paid out during periods after termination.

20


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The restructuring activities for 2018 are associated with the following:
For the third quarter of 2018, IH ($13 million credit); EH ($7 million charge); manufacturing operations ($1 million charge); WRD/GPD ($3 million charge); and Corporate ($3 million charge).
For the first nine months of 2018, IH ($25 million credit); EH ($5 million credit); WRD/GPD ($1 million charge); manufacturing operations ($16 million charge); and Corporate ($19 million credit).
The restructuring activities for 2017 are associated with the following:
For the third quarter of 2017, IH ($1 million charge); EH ($1 million charge); WRD/GPD ($2 million charge); manufacturing operations ($40 million charge); and Corporate ($12 million charge).
For the first nine months of 2017, IH ($1 million credit); EH ($11 million credit); WRD/GPD ($24 million credit); manufacturing operations ($48 million charge); and Corporate ($15 million charge).
(c) 
Transaction costs represent external costs for banking, legal, accounting and other similar services, which in the third quarter of 2017 reflect the reversal of an accrual related to the acquisition of Medivation. Transaction costs for the first nine months of 2017 were directly related to our acquisitions of Hospira, Anacor and Medivation.
(d) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes. In the third quarter and first nine months of 2018, integration costs were primarily related to our acquisition of Hospira. In the third quarter and first nine months of 2017, integration costs primarily relate to our acquisitions of Hospira and Medivation. The first nine months of 2017 also include a net gain of $12 million related to the settlement of the Hospira U.S. qualified defined benefit pension plan (see Note 10).
(e) 
In the three and nine months ended September 30, 2018, primarily represents the net pension curtailments and settlements included in Other (income)/deductions––net upon the adoption of a new accounting standard in the first quarter of 2018. In the three and nine months ended October 1, 2017, primarily represents the net pension curtailments and settlements, partially offset by net periodic benefit credits, excluding service costs, related to our acquisition of Hospira, both of which were reclassified to Other (income)/deductions––net as a result of the retrospective adoption of a new accounting standard in the first quarter of 2018. These credits included a net settlement gain, partially offset by accelerated amortization of actuarial losses and prior service costs upon the settlement of the remaining obligation associated with the Hospira U.S. qualified defined benefit pension plan. For additional information, see Note 1B and Note 10.
(f) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(g) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.
The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS) 
Employee
Termination Costs

 
Asset
Impairment Charges

 Exit Costs
 Accrual
Balance, December 31, 2017(a)
 $1,039
 $
 $66
 $1,105
Provision/(Credit) (53) 8
 14
 (32)
Utilization and other(b)
 (235) (8) (34) (277)
Balance, September 30, 2018(c)
 $750
 $
 $46
 $796
(a) 
Included in Other current liabilities ($643 million) and Other noncurrent liabilities ($462 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($397 million) and Other noncurrent liabilities ($399 million).

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018


October 1,
2017

 September 30,
2018

 October 1,
2017

Interest income(a)
 $(82) $(99) $(240) $(275)
Interest expense(a)
 310
 320
 946
 940
Net interest expense 228
 220
 706
 666
Royalty-related income (143) (140) (360) (331)
Net gains on asset disposals(b)
 (4) (13) (19) (36)
Net gains recognized during the period on investments in equity securities(c)
 (94) (45) (460) (111)
Net realized (gains)/losses on sales of investments in debt securities 8
 (23) 12
 (45)
Income from collaborations, out-licensing arrangements and sales of compound/product rights(d)
 (139) (78) (455) (163)
Net periodic benefit costs/(credits) other than service costs(e)
 (65) 28
 (231) 81
Certain legal matters, net(f)
 37
 183
 (70) 194
Certain asset impairments(g)
 (1) 130
 40
 143
Adjustments to loss on sale of HIS net assets(h)
 (2) (12) (1) 52
Business and legal entity alignment costs(i)
 
 16
 4
 54
Other, net(j)
 (239) (186) (309) (439)
Other (income)/deductions––net $(414) $79
 $(1,143) $65
(a) 
Interest income decreased in the third quarter and first nine months of 2018, primarily driven by a lower investment balance. Interest expense decreased in the third quarter of 2018, primarily as a result of refinancing activity that occurred in the fourth quarter of 2017 and a credit to interest expense due to settlement of a tax indemnification case. Interest expense increased for the first nine months of 2018, primarily as a result of higher short-term interest rates, offset, in part, by refinancing activity that occurred in the fourth quarter of 2017.
(b) 
In the first nine months of 2017, primarily includes a realized gain on sale of property of $52 million, partially offset by a realized net loss of $30 million related to the sale of our 40% ownership investment in Teuto, including the extinguishment of a put option for the then remaining 60% ownership interest.
(c) 
The net gains on investments in equity securities for the third quarter of 2018 include unrealized net gains on equity securities of $8 million and, for the first nine months of 2018, include unrealized net gains on equity securities of $344 million, reflecting the adoption of a new accounting standard in the first quarter of 2018. We continue to hold 2.5 million shares of ICU Medical common stock and we recognized unrealized gains of $24 million in the third quarter of 2018 and unrealized gains of $229 million in the first nine months of 2018 related to these remaining shares. Prior to the adoption of a new accounting standard in the first quarter of 2018, net unrealized gains and losses on virtually all equity securities with readily determinable fair values were reported in Accumulated other comprehensive income. For additional information, see Note 1B, Note 2B and Note 7B.
(d) 
Includes income from upfront and milestone payments from our collaboration partners and income from out-licensing arrangements and sales of compound/product rights. In the third quarter of 2018, primarily includes, among other things, (i) $40 million in milestone income from a certain licensee, (ii) a $35 million milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of a compound out-licensed by Pfizer to Shire for the treatment of Crohn’s disease and (iii) $45 million in gains related to sales of compound/product rights. In the first nine months of 2018, primarily includes, among other things, (i) approximately $128 million in milestone income from multiple licensees, (ii) an upfront payment to us of $75 million for the sale of an AMPA receptor potentiator for CIAS to Biogen, (iii) $110 million in milestone payments received from Shire, of which $75 million was received in the first quarter of 2018 related to their first dosing of a patient in a Phase 3 clinical trial for the treatment of ulcerative colitis and $35 million was received from Shire related to their first dosing of a patient in a Phase 3 clinical trial for the treatment of Crohn’s disease, (iv) a $40 million milestone payment from Merck in conjunction with the approval of ertugliflozin in the EU and (v) $45 million in gains related to sales of compound/product rights. In the third quarter of 2017, primarily includes, among other things, $50 million in milestone income from a certain licensee and a $15 million gain related to the sale of compound/product rights. In the first nine months of 2017, primarily includes, among other things, approximately $81 million in milestone income from multiple licensees and a $43 million gain related to the sale of compound/product rights. For additional information, see Note 2B, Note 2C and Note 2D.
(e) 
Represents the net periodic benefit costs/(credits), excluding service costs, as a result of the adoption of a new accounting standard in the first quarter of 2018. Effective January 1, 2018, the U.S. Pfizer Consolidated Pension Plan was frozen to future benefit accruals and for the third quarter and first nine months of 2018, resulted in the recognition of lower net periodic benefit costs due to the extension of the amortization period for the actuarial losses. There was also a greater than expected gain on plan assets due to a higher plan asset base compared to the third quarter and first nine months of 2017. For additional information, see Note 1B and Note 10.
(f) 
For the first nine months of 2018, the net credits primarily represent the reversal of a legal accrual where a loss was no longer deemed probable. In the third quarter and first nine months of 2017, primarily includes a $94 million charge to resolve a class action lawsuit filed by direct purchasers relating to Celebrex, which was approved by the court in April 2018, and a $79 million charge to reflect damages awarded by a jury in a patent matter.
(g) 
In the first nine months of 2018, primarily includes a $31 million intangible asset impairment charge recorded in the second quarter of 2018 related to an IH finite-lived developed technology right, acquired in connection with our acquisition of Anacor, for the treatment for toenail fungus marketed in the U.S. market only. The impairment charge recorded in the second quarter of 2018 related to IH reflects, among other things, updated commercial forecasts. In the third quarter and first nine months of 2017, primarily includes an intangible asset impairment charge of $127 million related to developed technology rights, acquired in connection with our acquisition of Hospira, for a generic sterile injectable product for the treatment of edema associated with certain conditions.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The intangible asset impairment charge for the third quarter and first nine months of 2017 is associated with EH and reflects, among other things, updated commercial forecasts and an increased competitive environment.
(h) 
Represents adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell related to the sale of HIS net assets to ICU Medical on February 3, 2017. For additional information, see Note 2B.
(i) 
Represents expenses for changes to our infrastructure to align our commercial operations of our current segments, including costs to internally separate our businesses into distinct legal entities, as well as to streamline our intercompany supply operations to better support each business.
(j) 
In the third quarter and first nine months of 2018, includes a non-cash $343 million pre-tax gain associated with our transaction with Bain Capital to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system (see Note 2B). The third quarter and first nine months of 2018 also include, among other things, dividend income of $91 million and $226 million, respectively, from our investment in ViiV, and charges of $122 million and $257 million, respectively, reflecting the change in the fair value of contingent consideration. The first nine months of 2018 also include a non-cash $50 million pre-tax gain on the contribution of Pfizer’s allogeneic CAR T therapy development program assets obtained from Cellectis and Servier in connection with our contribution agreement entered into with Allogene in which Pfizer obtained a 25% ownership stake in Allogene (see Note 2B), and a non-cash $17 million pre-tax gain on the cash settlement of a liability that we incurred in April 2018 upon the EU approval of Mylotarg (see Note 7E). In the third quarter and first nine months of 2017, includes, among other things, dividend income of $54 million and $211 million, respectively, from our investment in ViiV and income of $62 million from resolution of a contract disagreement.
The following table provides additional information about the intangible asset that was impaired during 2018 in Other (income)/deductions:
  
Fair Value(a)
 Nine Months Ended September 30, 2018
(MILLIONS OF DOLLARS) Amount Level 1 Level 2 Level 3 Impairment
Intangible assets––Developed technology right, finite-lived(b)
 $35
 $
 $
 $35
 $31
(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis.
(b) 
Reflects an intangible asset written down to fair value in the first nine months of 2018. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the product; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
Note 5. Tax Matters

A. Taxes on Income from Continuing Operations
In the fourth quarter of 2017, we recorded an estimate of certain tax effects of the TCJA, including the impact on deferred tax assets and liabilities from the reduction in the U.S. Federal corporate tax rate from 35% to 21%, the impact on valuation allowances and other state income tax considerations, the $15.2 billion repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect payment over eight years through 2026 (with the first of eight installments due in April 2019) that is reported primarily in Other taxes payable, and deferred taxes on basis differences expected to give rise to future taxes on global intangible low-taxed income. In addition, we had provided deferred tax liabilities in the past on foreign earnings that were not indefinitely reinvested. As a result of the TCJA, we reversed an estimate of the deferred taxes that are no longer expected to be needed due to the change to the territorial tax system. The estimated amounts recorded may change in the future due to uncertain tax positions. With respect to the aforementioned repatriation tax liability related to the TCJA repatriation tax, our obligations may vary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.
The TCJA subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that we are permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-taxed income in future years or provide for the tax expense related to such income in the year the tax is incurred. We have elected to recognize deferred taxes for temporary differences expected to reverse as global intangible low-taxed income in future years. However, given the complexity of these provisions, we have not finalized our analysis. We were able to make a reasonable estimate of the deferred taxes on the temporary differences expected to reverse in the future and provided a provisional deferred tax liability of approximately $1 billion as of December 31, 2017. The provisional amount is based on the evaluation of certain temporary differences inside each of our foreign subsidiaries that are expected to reverse as global intangible low-taxed income. However, as we continue to evaluate the TCJA’s global intangible low-taxed income provisions during the measurement period, we may revise the methodology used for determining the deferred tax liability associated with such income.
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded remain provisional as we have not completed our analysis of the complex and far reaching effects of the TCJA. Further, we continue to consider our assertions on any remaining outside basis differences in our foreign subsidiaries as of

23


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

September 30, 2018 and have not completed our analysis. In the third quarter of 2018, we recorded a favorable adjustment to the provisional estimate of the impact of the legislation, primarily related to the remeasurement of deferred tax assets and liabilities as well as revised estimates of benefits related to certain tax initiatives. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the TCJA on deferred taxes, valuation allowances, state tax considerations, the repatriation tax liability, global intangible low-taxed income, and any remaining outside basis differences in our foreign subsidiaries during the fourth quarter of 2018, as we complete the remainder of our tax return filings and as any interpretations or clarifications of the TCJA occur through further legislation or U.S. Treasury actions or other means.
Our effective tax rate for continuing operations was 1.6% for the third quarter of 2018, compared to 20.3% for the third quarter of 2017 and was 9.9% for the first nine months of 2018, compared to 20.1% for the first nine months of 2017.
The lower effective tax rate for the third quarter and first nine months of 2018 in comparison with the same periods in 2017 was primarily due to:
the adoption of a territorial system and the lower U.S. tax rate as a result of the December 2017 enactment of the TCJA as well as favorable adjustments to the provisional estimate of the impact of the legislation;
the favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; as well as
an increase in benefits associated with the resolution of certain tax positions pertaining to prior years primarily with various foreign tax authorities, and the expiration of certain statutes of limitations.
B. Deferred Taxes

We have not completed our analysis of the TCJA on our prior assertion of indefinitely reinvested earnings. Accordingly, we continue to evaluate our assertion with respect to our accumulated foreign earnings subject to the deemed repatriation tax and we also continue to evaluate the amount of earnings that are indefinitely reinvested. Additionally, we continue to evaluate our assertions on any remaining outside basis differences in our foreign subsidiaries as of September 30, 2018 as we have not finalized our analysis of the effects of all of the new provisions in the TCJA. As of September 30, 2018, it is not practicable to estimate the additional deferred tax liability that would be recorded if the earnings subject to the deemed repatriation tax and any remaining outside basis differences as of September 30, 2018 are not indefinitely reinvested. In accordance with the authoritative guidance issued by the SEC Staff Accounting Bulletin 118, we expect to complete our analysis within the measurement period.
C. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.
The U.S. is one of our major tax jurisdictions, and we are regularly audited by the IRS:
With respect to Pfizer, the IRS has issued a Revenue Agent’s Report (RAR) for tax years 2009-2010. We are not in agreement with the RAR and are currently appealing certain disputed issues. Tax years 2011-2015 are currently under audit. Tax years 2016-2018 are open but not under audit. All other tax years are closed.
With respect to Hospira, the federal income tax audit of tax year 2014 through short-year 2015 was effectively settled in the second quarter of 2018. All other tax years are closed.
With respect to Anacor and Medivation, the open tax years are not considered material to Pfizer.
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2013-2018), Japan (2017-2018), Europe (2011-2018, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2018, primarily reflecting Brazil) and Puerto Rico (2011-2018).

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

D. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of Tax provision/(benefit) on other comprehensive income/(loss):
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Foreign currency translation adjustments, net(a)
 $14
 $(62) $82
 $(192)
Unrealized holding gains/(losses) on derivative financial instruments, net 35
 28
 39
 30
Reclassification adjustments for (gains)/losses included in net income (28) (29) 36
 (169)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
 
 1
 
  7
 (1) 77
 (139)
Unrealized holding gains/(losses) on available-for-sale securities, net 20
 37
 (8) 93
Reclassification adjustments for gains included in net income (6) (49) (8) (45)
Reclassification adjustments for tax on unrealized gains from AOCI to Retained earnings(c)
 
 
 (45) 
  14
 (12) (62) 47
Benefit plans: actuarial gains/(losses), net 2
 (37) 27
 (15)
Reclassification adjustments related to amortization 15
 60
 43
 152
Reclassification adjustments related to settlements, net 10
 22
 25
 30
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
 
 637
 
Other 11
 (33) 18
 (46)
  38
 11
 750
 121
Benefit plans: prior service costs and other, net 
 
 
 
Reclassification adjustments related to amortization (11) (17) (33) (50)
Reclassification adjustments related to curtailments, net (1) (1) (4) (5)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
 
 (144) 
Other 1
 1
 1
 1
  (11) (17) (179) (55)
Tax provision/(benefit) on other comprehensive income/(loss) $62
 $(80) $667
 $(218)
(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
(b) 
For additional information on the adoption of a new accounting standard related to reclassification of certain tax effects from AOCI, see Note 1B.
(c) 
For additional information on the adoption of a new accounting standard related to financial assets and liabilities, see Note 1B.
Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
  Net Unrealized Gains/(Losses) Benefit Plans  
(MILLIONS OF DOLLARS) Foreign Currency Translation Adjustments
 Derivative Financial Instruments
 Available-For-Sale Securities
 Actuarial Gains/(Losses)
 Prior Service (Costs)/Credits and Other
 Accumulated Other Comprehensive Income/(Loss)
Balance, December 31, 2017 $(5,180) $(30) $401
 $(5,262) $750
 $(9,321)
Other comprehensive income/(loss) due to the adoption of new accounting standards(a)
 (2) (1) (416) (637) 144
 (913)
Other comprehensive income/(loss)(b)
 (589) 279
 (116) 361
 (118) (183)
Balance, September 30, 2018 $(5,772) $248
 $(131) $(5,538) $776
 $(10,417)
(a) 
Amounts represent the cumulative effect adjustments as of January 1, 2018 from the adoption of new accounting standards related to (i) financial assets and liabilities and (ii) the reclassification of certain tax effects from AOCI. For additional information, see Note 1B.
(b) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $20 million loss for the first nine months of 2018.
As of September 30, 2018, with respect to derivative financial instruments, the amount of unrealized pre-tax net gains on derivative financial instruments estimated to be reclassified into income within the next 12 months is approximately $177 million, which is expected to be offset primarily by net losses resulting from reclassification adjustments related to net losses related to foreign currency exchange-denominated forecasted intercompany inventory sales and available-for-sale debt securities.

25


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7. Financial Instruments

A. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

On January 1, 2018, we adopted a new accounting and disclosure standard related to accounting for the recognition of financial assets and liabilities. For additional information see Note 1B.
The following table presents the financial assets and liabilities measured at fair value using a market approach on a recurring basis by balance sheet categories and fair value hierarchy level as defined in Notes to Consolidated Financial Statements––Note 1E. Basis of Presentation and Significant Accounting Policies: Fair Value in Pfizer’s 2017 Financial Report:
  September 30, 2018 December 31, 2017
(MILLIONS OF DOLLARS) Total Level 1 Level 2 Total Level 1 Level 2
Financial assets measured at fair value on a recurring basis:            
Short-term investments            
Classified as equity securities:            
Money market funds $1,184
 $
 $1,184
 $2,115
 $
 $2,115
Equity(a)
 29
 17
 12
 35
 16
 19
  1,213
 17
 1,196
 2,150
 16
 2,134
Classified as available-for-sale debt securities:            
Government and agency—non-U.S. 8,336
 
 8,336
 12,242
 
 12,242
Corporate 2,890
 
 2,890
 2,766
 
 2,766
Government—U.S. 8
 
 8
 252
 
 252
Agency asset-backed—U.S. 17
 
 17
 23
 
 23
Other asset-backed 5
 
 5
 79
 
 79
  11,256
 
 11,256
 15,362
 
 15,362
Total short-term investments 12,469
 17
 12,452
 17,512
 16
 17,496
Other current assets            
Derivative assets:            
Interest rate contracts 88
 
 88
 104
 
 104
Foreign exchange contracts 488
 
 488
 234
 
 234
Total other current assets 576
 
 576
 337
 
 337
Long-term investments            
Classified as equity securities:            
Equity(a)
 1,563
 1,527
 36
 1,440
 1,398
 42
Classified as trading securities:            
Debt 50
 50
 
 73
 73
 
  1,612
 1,577
 36
 1,514
 1,472
 42
Classified as available-for-sale debt securities:            
Government and agency—non-U.S. 106
 
 106
 387
 
 387
Corporate 3,210
 
 3,210
 4,172
 36
 4,136
Government—U.S. 421
 
 421
 495
 
 495
Other asset-backed 4
 
 4
 35
 
 35
  3,742
 
 3,742
 5,090
 36
 5,054
Total long-term investments 5,354
 1,577
 3,778
 6,603
 1,507
 5,096
Other noncurrent assets            
Derivative assets:            
Interest rate contracts 246
 
 246
 477
 
 477
Foreign exchange contracts 220
 
 220
 7
 
 7
Total other noncurrent assets 467
 
 467
 484
 
 484
Total assets $18,866
 $1,594
 $17,272
 $24,937
 $1,523
 $23,414
             
Financial liabilities measured at fair value on a recurring basis:            
Other current liabilities            
Derivative liabilities:            
Interest rate contracts $9
 $
 $9
 $1
 $
 $1
Foreign exchange contracts 80
 
 80
 201
 
 201
Total other current liabilities 89
 
 89
 201
 
 201
Other noncurrent liabilities            
Derivative liabilities:            
Interest rate contracts 653
 
 653
 177
 
 177
Foreign exchange contracts 432
 
 432
 313
 
 313
Total other noncurrent liabilities 1,085
 
 1,085
 490
 
 490
Total liabilities $1,174
 $
 $1,174
 $691
 $
 $691
(a) 
As of September 30, 2018, short-term equity securities of $12 million and long-term equity securities of $35 million are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan. As of December 31, 2017, short-term equity securities of $19 million and long-term equity securities of $42 million are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.

26


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The following table presents the financial liabilities not measured at fair value on a recurring basis, including the carrying values and estimated fair values:
  September 30, 2018 December 31, 2017
  Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
(MILLIONS OF DOLLARS)   Total Level 2   Total Level 2
Financial Liabilities            
Long-term debt, excluding the current portion $33,652
 $36,243
 $36,243
 $33,538
 $37,253
 $37,253
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, restricted stock and private equity securities at cost, and short-term borrowings not measured at fair value on a recurring basis were not significant as of September 30, 2018 or December 31, 2017, except for our investment in Allogene (see Note 2B). The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs. The fair value measurements of our private equity securities carried at cost, which represent investments in the life sciences sector, are based on Level 3 inputs.

In addition, as of September 30, 2018 and December 31, 2017, we had long-term receivables whose fair value is based on Level 3 inputs. As of September 30, 2018 and December 31, 2017, the differences between the estimated fair values and carrying values of these receivables were not significant.
Total Short-Term and Long-Term Investments
The following table represents our investments by classification type:
(MILLIONS OF DOLLARS) September 30, 2018
 December 31, 2017
Short-term investments    
Equity securities $1,213
 $2,150
Available-for-sale debt securities 11,256
 15,362
Held-to-maturity debt securities 1,211
 1,138
Total Short-term investments $13,680
 $18,650
     
Long-term investments    
Equity securities $1,563
 $1,440
Trading debt securities 50
 73
Available-for-sale debt securities 3,742
 5,090
Held-to-maturity debt securities 63
 4
Private equity investments carried at equity-method or cost 1,027
 408
Total Long-term investments $6,444
 $7,015
Held-to-maturity cash equivalents $237
 $719

Fair Value Methodology
The following inputs and valuation techniques were used to estimate the fair value of our financial assets and liabilities:
Trading debt securities—quoted market prices.
Available-for-sale debt securities—third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and credit-adjusted interest rate yield curves. Mortgage-backed, loan-backed and receivable-backed securities are valued by third-party models that use significant inputs derived from observable market data like prepayment rates, default rates, and recovery rates.
Equity securities—quoted market prices.
Derivative assets and liabilities (financial instruments)—third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data. Where applicable, these models discount future cash flow amounts using market-based observable inputs, including interest rate yield curves, and forward and spot prices for currencies. The credit risk impact to our derivative financial instruments was not significant.
Money market funds—observable net asset value prices.

27


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We periodically review the methodologies, inputs and outputs of third-party pricing services for reasonableness. Our procedures can include, for example, referencing other third-party pricing models, monitoring key observable inputs (like LIBOR interest rates) and selectively performing test-comparisons of values with actual sales of financial instruments.
B. Investments
At September 30, 2018, the investment securities portfolio consisted of debt securities that were virtually all investment-grade. Information on investments in debt and equity securities at September 30, 2018 and December 31, 2017 is as follows, including, as of September 30, 2018, the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
  September 30, 2018 December 31, 2017
    Gross Unrealized   Maturities (in Years)    Gross Unrealized   
(MILLIONS OF DOLLARS) Amortized Cost
 Gains
 Losses
 Fair Value
 Within 1
 
Over 1
to 5

 Over 5
 Total
 Amortized Cost
 Gains
 Losses
 Fair Value
Available-for-sale debt securities                        
Government and agency––non-U.S.
 $8,476
 $9
 $(43) $8,442
 $8,336
 $106
 $
 $8,442
 $12,616
 $61
 $(48) $12,629
Corporate(a)
 6,192
 2
 (94) 6,100
 2,890
 2,356
 854
 6,100
 6,955
 15
 (33) 6,938
Government––U.S. 451
 
 (23) 428
 8
 421
 
 428
 765
 
 (19) 747
Agency asset-backed––U.S. 18
 
 (1) 18
 17
 
 
 18
 24
 
 (1) 24
Other asset-backed(b)
 9
 
 
 9
 5
 3
 2
 9
 114
 
 
 114
Held-to-maturity debt securities                        
Time deposits and other 734
 
 
 734
 670
 23
 40
 734
 1,091
 
 
 1,091
Government and agency––non-U.S. 778
 
 
 778
 778
 
 
 778
 770
 
 
 770
Total debt securities $16,658
 $11
 $(160) $16,509
 $12,704
 $2,909
 $896
 $16,509
 $22,337
 $77
 $(100) $22,313
Available-for-sale equity securities(c)
                        
Money market funds                 $2,115
 $
 $
 $2,115
Equity                 728
 586
 (124) 1,190
Total available-for-sale equity securities                 $2,843
 $586
 $(124) $3,304
(a) 
Issued by a diverse group of corporations.
(b) 
Includes mortgage-backed, loan-backed and receivable-backed securities, all of which are in senior positions in the capital structure of the security. Mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages. Loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans. Receivable-backed securities are collateralized by credit cards receivables.
(c) 
Upon the 2018 adoption of a new accounting standard related to financial assets and liabilities, available-for-sale equity securities were classified as equity securities. For additional information see Note 1B.
The following table presents the net unrealized gains and losses for the period that relates to equity securities still held at the reporting date, calculated as follows:
(MILLIONS OF DOLLARS) Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
Net gains recognized during the period on investments in equity securities(a)
 $94
$460
Less: Net gains recognized during the period on equity securities sold during the period (54)(90)
Net unrealized gains during the reporting period on equity securities still held at the reporting date(b)
 $40
$370
(a) 
The net gains on investments in equity securities are reported in Other (income)/deductions––net and, for the third quarter and first nine months of 2018, include unrealized net gains on equity securities reflecting the adoption of a new accounting standard in the first quarter of 2018. For additional information, see Note 4.
(b) 
The third quarter of 2018 includes $8 million of unrealized net gains in Other (income)/deductions––net reflecting the adoption of a new accounting standard in the first quarter of 2018 and $32 million of unrealized gains on other equity securities. The first nine months of 2018 includes $344 million of unrealized net gains in Other (income)/deductions––net reflecting the adoption of a new accounting standard in the first quarter of 2018 and $26 million of unrealized gains on other equity securities. For additional information, see Note 1B and Note 4.

28


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Short-Term Borrowings
Short-term borrowings include:
(MILLIONS OF DOLLARS) September 30,
2018

 December 31,
2017

Commercial paper $2,600
 $6,100
Current portion of long-term debt, principal amount 4,260
 3,532
Other short-term borrowings, principal amount(a)
 537
 320
Total short-term borrowings, principal amount 7,396
 9,951
Net fair value adjustments related to hedging and purchase accounting (5) 14
Net unamortized discounts, premiums and debt issuance costs (7) (12)
Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted
 $7,385
 $9,953
(a) 
Other short-term borrowings primarily include cash collateral. For additional information, see Note 7F.
D. Long-Term Debt
New Issuances
In the third quarter of 2018, we issued the following senior unsecured notes:
    Principal
(MILLIONS OF DOLLARS) Maturity Date As of September 30, 2018
3.000% notes(a)
 September 15, 2021 $1,000
Floating rate notes (LIBOR plus 0.33%)(b)
 September 15, 2023 300
3.200% notes(a)
 September 15, 2023 1,000
3.600% notes(a)
 September 15, 2028 1,000
4.100% notes(a)
 September 15, 2038 700
4.200% notes(a)
 September 15, 2048 1,000
Total long-term debt issued in the third quarter of 2018   $5,000
(a) 
Fixed rate notes may be redeemed by us at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest.
(b) 
Floating rate notes may not be redeemed by their terms prior to maturity.
The following table provides the aggregate principal amount of our senior unsecured long-term debt, and adjustments to report our aggregate long-term debt:
(MILLIONS OF DOLLARS) September 30,
2018

 December 31,
2017

Total long-term debt, principal amount $33,658
 $32,783
Net fair value adjustments related to hedging and purchase accounting 129
 872
Net unamortized discounts, premiums and debt issuance costs (142) (125)
Other long-term debt 7
 8
Total long-term debt, carried at historical proceeds, as adjusted $33,652
 $33,538
Current portion of long-term debt, carried at historical proceeds, as adjusted $4,255
 $3,546
E. Other Noncurrent Liabilities

Mylotarg (gemtuzumab ozogamicin)
In April 2018, the EU approved Mylotarg for the treatment of acute myeloid leukemia. In connection with the EU approval, we incurred an obligation to make guaranteed fixed annual payments over a ten-year period aggregating $301 million related to a research and development arrangement. We recorded the estimated net present value of $240 million as a liability and an intangible asset in Developed technology rights as of the approval date. In June 2018, we entered into a transaction with the obligee to buyout the remaining liability for the fixed annual payments for a lump sum payment of $224 million. As a result of the buyout transaction, the liability was extinguished and we recognized a non-cash $17 million pre-tax gain in Other (income)/deductions––net in the second quarter of 2018 (see Note 4).
Bosulif (bosutinib)
In December 2017, the U.S. FDA approved Bosulif for the treatment of patients with newly-diagnosed chronic-phase Ph+ CML. In connection with the U.S. approval, we incurred an obligation to make guaranteed fixed annual payments over a ten-

29


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

year period aggregating $416 million related to a research and development arrangement. We recorded the estimated net present value of $364 million as of the approval date as an intangible asset in Developed technology rights. In August 2018, we entered into a transaction with the obligee to buyout a portion of the remaining liability for the fixed annual payments for a lump sum payment of $71 million. As a result of the buyout transaction, the liability was reduced and we recognized a non-cash $9 million pre-tax gain in Other (income)/deductions––net in the third quarter of 2018. The present value of the remaining future payments as of September 30, 2018 is $208 million, of which $23 million is recorded in Other current liabilities and $185 million is recorded in Other noncurrent liabilities.
Besponsa (inotuzumab ozogamicin)
In August 2017, the U.S. FDA approved Besponsa and in June 2017, the EU approved Besponsa as monotherapy for the treatment of adults with relapsed or refractory CD22-positive B-cell precursor acute lymphoblastic leukemia. In connection with the U.S. approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $296 million related to a research and development arrangement. We recorded the estimated net present value of $248 million as of the approval date as an intangible asset in Developed technology rights. The present value of the remaining future payments as of September 30, 2018 is $240 million, of which $7 million is recorded in Other current liabilities and $233 million is recorded in Other noncurrent liabilities. In connection with the EU approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $148 million related to a research and development arrangement. We recorded the estimated net present value of $123 million as of the approval date as an intangible asset in Developed technology rights. The present value of the remaining future payments as of September 30, 2018 is $121 million, of which $3 million is recorded in Other current liabilities and $118 million is recorded in Other noncurrent liabilities.
The differences between the estimated fair values in the Level 2 fair value hierarchy and carrying values of these obligations were not significant as of September 30, 2018.
F. Derivative Financial Instruments and Hedging Activities

We adopted a new accounting standard in the first quarter of 2018, as of January 2018. For additional information, see Note 1B.
Foreign Exchange Risk

A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. We also manage our foreign exchange risk, depending on market conditions, through fair value, cash flow, and net investment hedging programs through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to protect net income against the impact of remeasurement into another currency, or against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

All derivative financial instruments used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the consolidated balance sheet. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound and Swedish krona. Changes in fair value are reported in earnings or in Other comprehensive income/(loss), depending on the nature and purpose of the financial instrument (hedge or offset relationship) and the effectiveness of the hedge relationships, as follows:
Generally, we recognize the gains and losses on foreign exchange contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. Upon the adoption of the new standard in 2018, for certain foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize that excluded amount through an amortization approach. We also recognize the offsetting foreign exchange impact attributable to the hedged item in earnings.
Generally, we record in Other comprehensive income/(loss) gains or losses on foreign exchange contracts that are designated as cash flow hedges and reclassify those amounts, as appropriate, into earnings in the same period or periods during which the hedged transaction affects earnings. Upon the adoption of the new standard in 2018, for certain foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize that excluded amount through an amortization approach.
Historically, as part of our net investment hedging program, we recognize the gain and loss impact on foreign exchange contracts designated as hedges of our net investments in earnings in three ways: over time––for the periodic net swap payments; immediately––to the extent of any change in the difference between the foreign exchange spot rate and forward rate; and upon sale or substantial liquidation of our net investments––to the extent of change in the foreign exchange spot rates. Upon the adoption of the new standard in 2018, for foreign exchange contracts, we exclude an amount from the

30


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

assessment of hedge effectiveness and recognize that excluded amount through an amortization approach. We record in Other comprehensive income/(loss) the foreign exchange gains and losses related to foreign exchange-denominated debt designated as a hedge of our net investments in foreign subsidiaries and reclassify those amounts into earnings upon the sale or substantial liquidation of our net investments.
For certain foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on foreign currency exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.
As a part of our cash flow hedging program, we designate foreign exchange contracts to hedge a portion of our forecasted euro, Japanese yen, Chinese renminbi, Canadian dollar, U.K. pound, and Australian dollar-denominated intercompany inventory sales expected to occur no more than two years from the date of each hedge.
For the third quarter and first nine months ended October 1, 2017, any ineffectiveness is recognized immediately into earnings. There is no significant ineffectiveness for these periods.
Interest Rate Risk
Our interest-bearing investments and borrowings are subject to interest rate risk. With respect to our investments, we strive to maintain a predominantly floating-rate basis position, but our strategy may change based on prevailing market conditions. We currently borrow primarily on a long-term, fixed rate basis. Historically, we strove to borrow primarily on a floating-rate basis; but in recent years we borrowed on a long-term, fixed-rate basis. From time to time, depending on market conditions, we will change the profile of our outstanding debt by entering into derivative financial instruments like interest rate swaps. We entered into derivative financial instruments to hedge or offset the fixed interest rates on the hedged item, matching the amount and timing of the hedged item. The derivative financial instruments primarily hedge U.S. dollar fixed-rate debt.

All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings, as follows:
We recognize the gains and losses on interest rate contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. We also recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk in earnings.
For the third quarter and first nine months ended October 1, 2017, any ineffectiveness is recognized immediately into earnings. There is no significant ineffectiveness for these periods.
The following table provides the fair value of the derivative financial instruments and the related notional amounts presented between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:
(MILLIONS OF DOLLARS) September 30, 2018 December 31, 2017
    Fair Value   Fair Value
  Notional Asset Liability Notional Asset Liability
Derivatives designated as hedging instruments:            
Foreign exchange contracts(a)
 $19,955
 $590
 $464
 $18,723
 $179
 $459
Interest rate contracts 11,300
 335
 661
 12,430
 581
 178
    925
 1,126
   760
 637
             
Derivatives not designated as hedging instruments:            
Foreign exchange contracts $16,798
 118
 48
 $14,300
 62
 54
             
Total   $1,043
 $1,174
   $822
 $691
(a) 
As of September 30, 2018, the notional amount of outstanding foreign currency forward-exchange contracts hedging our intercompany forecasted inventory sales was $5.4 billion.


31


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
 
Amount of
Gains/(Losses)
Recognized in OID
(a), (b)

Amount of Gains/(Losses)
Recognized in OCI
(a), (c)

Amount of Gains/(Losses)
Reclassified from
OCI into OID and COS
(a), (c)
(MILLIONS OF DOLLARS) Sep 30,
2018

 Oct 1,
2017

 Sep 30,
2018

 Oct 1,
2017

 Sep 30,
2018

 Oct 1,
2017

Three Months Ended            
Derivative Financial Instruments in Cash Flow Hedge Relationships:            
Foreign exchange contracts(d)
 $
 $1
 $183
 $(51) $198
 $(56)
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach 
 
 39
 
 36
 
             
Derivative Financial Instruments in Fair Value Hedge Relationships:            
Interest rate contracts (195) 10
 
 
 
 
Hedged item gain/(loss) 195
 (10) 
 
 
 
Foreign exchange contracts 1
 (11) 
 
 
 
Hedged item gain/(loss) (1) 11
 
 
 
 
             
Derivative Financial Instruments in Net Investment Hedge Relationships:  
  
  
  
  
  
Foreign exchange contracts 
 
 43
 
 
 
The portion of gains/(losses) on foreign exchange contracts excluded from the assessment of hedge effectiveness 
 
 14
 
 21
 
             
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:  
  
  
  
  
  
Foreign currency short-term borrowings(e)
 
 
 8
 
 
 
Foreign currency long-term debt(e)
 
 
 17
 (166) 
 
             
Derivative Financial Instruments Not Designated as Hedges:            
Foreign exchange contracts 150
 33
 
 
 
 
All other net 
 
 
 1
 
 
  $150
 $34
 $304
 $(216) $256
 $(55)

32


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

  
Amount of
Gains/(Losses)
Recognized in OID
(a), (b)
 
Amount of Gains/(Losses)
Recognized in OCI
(a), (c)
 
Amount of Gains/(Losses)
Reclassified from
OCI into OID and COS
(a), (c)
(MILLIONS OF DOLLARS) Sep 30,
2018

 Oct 1,
2017

 Sep 30,
2018

 Oct 1,
2017

 Sep 30,
2018

 Oct 1,
2017

Nine Months Ended            
Derivative Financial Instruments in Cash Flow Hedge Relationships:  
  
  
  
  
  
Foreign exchange contracts(d)
 $
 $(5) $147
 $(149) $(204) $394
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach 
 
 87
 
 84
 
             
Derivative Financial Instruments in Fair Value Hedge Relationships:            
Interest rate contracts (715) 19
 
 
 
 
Hedged item gain/(loss) 715
 (19) 
 
 
 
Foreign exchange contracts 5
 (19) 
 
 
 
Hedged item gain/(loss) (5) 19
 
 
 
 
             
Derivative Financial Instruments in Net Investment Hedge Relationships:            
Foreign exchange contracts 
 
 191
 
 
 
The portion of gains/(losses) on foreign exchange contracts excluded from the assessment of hedge effectiveness 
 
 41
 
 47
 
             
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:            
Foreign currency short-term borrowings(e)
 
 
 50
 
 
 
Foreign currency long-term debt(e)
 
 
 111
 (518) 
 
             
Derivative Financial Instruments Not Designated as Hedges:            
Foreign exchange contracts 156
 (112) 
 
 
 
All other net 
 
 1
 1
 1
 
  $156
 $(117) $629
 $(666) $(72) $394
(a) 
OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. COS = Cost of Sales, included in Cost of sales in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) 
For the third quarter and first nine months ended October 1, 2017, there was no significant ineffectiveness.
(c) 
For derivative financial instruments in cash flow hedge relationships, the gains and losses are included in Other comprehensive income/(loss)––Unrealized holding gains/(losses) on derivative financial instruments, net. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––Foreign currency translation adjustments, net.
(d) 
Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax gain of $120 million within the next 12 months into Cost of sales. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $1.8 billion U.K. pound debt maturing in 2043.
(e) 
Short-term borrowings include foreign currency short-term borrowings with carrying values of $1.5 billion as of September 30, 2018, which are used as hedging instruments in net investment hedges. Long-term debt includes foreign currency long-term borrowings with carrying values of $3.2 billion as of September 30, 2018, which are used as hedging instruments in net investment hedges.
The following table provides the total amount of each income and expense line in which the results of fair value or cash flow hedges are recorded:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30, 2018
 September 30, 2018
Cost of sales $2,694
 $8,173
Other (income)/deductions—net (414) (1,143)

33


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides the amounts recorded in our condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
  Carrying Amount of Hedged Assets/Liabilities
 Cumulative Amount of Fair Value Hedging Adjustment Gains/(Losses) Included in the Carrying Amount of the Hedged Assets/Liabilities
(MILLIONS OF DOLLARS) September 30, 2018
 September 30, 2018
Short-term investments $156
 $
Long-term investments 45
 (1)
Short-term borrowings, including current portion of long-term debt 1,490
 8
Long-term debt 9,548
 407
Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce both counterparties’ exposure to risk of defaulting on amounts owed by the other party. As of September 30, 2018, the aggregate fair value of these derivative instruments that are in a net liability position was $545 million, for which we have posted collateral of $535 million in the normal course of business. If there had been a downgrade to below an A rating by S&P or the equivalent rating by Moody’s, we would not have been required to post any additional collateral to our counterparties.
As of September 30, 2018, we received cash collateral of $472 million from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, the obligations are reported in Short-term borrowings, including current portion of long-term debt.
G. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty, except for certain significant customers. For additional information as to significant customers, see Notes to Consolidated Financial Statements––Note 18C. Segment, Geographic and Other Revenue Information: Other Revenue Information in Pfizer’s 2017 Financial Report. As of September 30, 2018, we had amounts due from a well-diversified, high quality group of banks ($2.1 billion) from around the world. For details about our investments, see Note 7B above.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under credit-support agreements that provide for the ability to request to receive cash collateral, depending on levels of exposure, our credit rating and the credit rating of the counterparty, see Note 7F above.
Note 8. Inventories
The following table provides the components of Inventories:
(MILLIONS OF DOLLARS) September 30,
2018

 December 31,
2017

Finished goods $2,581
 $2,883
Work-in-process 4,764
 3,908
Raw materials and supplies 839
 788
Inventories(a)
 $8,184
 $7,578
Noncurrent inventories not included above(b)
 $576
 $683
(a) 
The change from December 31, 2017 reflects increases for certain products to meet targeted levels in the normal course of business, including inventory build for supply recovery, network strategy and new product launches, partially offset by a decrease due to foreign exchange.
(b) 
Included in Other noncurrent assets. There are no recoverability issues associated with these amounts.

34


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9. Identifiable Intangible Assets and Goodwill

A. Identifiable Intangible Assets

Balance Sheet Information
The following table provides the components of Identifiable intangible assets:
  September 30, 2018 December 31, 2017
(MILLIONS OF DOLLARS) 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Identifiable
Intangible
Assets, less
Accumulated
Amortization

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Identifiable
Intangible
Assets, less
Accumulated
Amortization

Finite-lived intangible assets            
Developed technology rights(a)
 $92,123
 $(57,786) $34,337
 $89,550
 $(54,785) $34,765
Brands 2,126
 (1,228) 898
 2,134
 (1,152) 982
Licensing agreements and other 1,938
 (1,160) 777
 1,911
 (1,096) 815
  96,187
 (60,175) 36,012
 93,595
 (57,033) 36,562
Indefinite-lived intangible assets            
Brands and other 6,909
 

 6,909
 6,929
 

 6,929
IPR&D(a)
 2,385
 

 2,385
 5,249
 

 5,249
  9,294
 

 9,294
 12,179
 

 12,179
Identifiable intangible assets(b)
 $105,481
 $(60,175) $45,306
 $105,774
 $(57,033) $48,741
(a) 
The changes in the gross carrying amount of Developed technology rights and IPR&D primarily reflect (i) the transfer of $2.7 billion from IPR&D to Developed technology rights to reflect the approval of Xtandi in the U.S. for the treatment of men with non-metastatic castration-resistant prostate cancer, which is being developed through a collaboration with Astellas, and (ii) $240 million of Developed technology rights recorded in connection with the EU approval of Mylotarg (see Note 7E).
(b)    The decrease in Identifiable intangible assets, less accumulated amortization, is primarily due to amortization, partially offset by additions, mainly consisting of $240 million of Developed technology rights recorded in connection with the EU approval of Mylotarg (see Note 7E).
Our identifiable intangible assets are associated with the following, as a percentage of total identifiable intangible assets, less accumulated amortization:
  September 30, 2018
  IH EH WRD
Developed technology rights 70% 29% 
Brands, finite-lived 75% 25% 
Brands, indefinite-lived 71% 29% 
IPR&D 64% 21% 15%

Amortization

Total amortization expense for finite-lived intangible assets was $1.3 billion for the third quarter of 2018 and $1.2 billion for the third quarter of 2017, and $3.7 billion for the first nine months of 2018 and $3.6 billion for the first nine months of 2017.
B. Goodwill
The following table provides the components of and changes in the carrying amount of Goodwill:
(MILLIONS OF DOLLARS) IH EH Total
Balance, December 31, 2017 $31,141
 $24,811
 $55,952
Other(a)
 (178) (160) (338)
Balance, September 30, 2018 $30,964
 $24,651
 $55,614
(a) 
Primarily reflects the impact of foreign exchange, as well as the contribution of the allogeneic CAR T developmental program assets and operations to Allogene that constituted a business for accounting purposes (see Note 2B).

35


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 10. Pension and Postretirement Benefit Plans
The following table provides the components of net periodic benefit cost/(credit):
  Three Months Ended
  Pension Plans  
  
U.S.
Qualified(a)
 
U.S.
Supplemental
(Non-Qualified)
 International 
Postretirement
Plans
(MILLIONS OF DOLLARS) Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
Net periodic benefit cost/(credit)(b):
                
Service cost(c)
 $
 $67
 $
 $6
 $33
 $44
 $10
 $10
Interest cost 149
 157
 14
 13
 52
 52
 18
 23
Expected return on plan assets (259) (248) 
 
 (89) (87) (9) (9)
Amortization of:  
  
  
  
    
  
  
Actuarial losses(c)
 30
 91
 3
 12
 25
 29
 2
 8
Prior service credits 
 
 
 
 (1) (1) (45) (45)
Curtailments 1
 1
 1
 
 (4) (2) (1) (3)
Settlements 38
 30
 3
 7
 
 
 
 
  $(40) $99
 $20
 $39
 $17
 $35
 $(26) $(17)
 
  Nine Months Ended
  Pension Plans  
  
U.S.
Qualified(a)
 
U.S.
Supplemental
(Non-Qualified)
 International 
Postretirement
Plans
(MILLIONS OF DOLLARS) Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
Net periodic benefit cost/(credit)(b):
                
Service cost(c)
 $
 $202
 $
 $18
 $104
 $127
 $29
 $32
Interest cost 450
 478
 40
 41
 160
 152
 54
 68
Expected return on plan assets (783) (759) 
 
 (274) (256) (28) (27)
Amortization of:                
Actuarial losses(c)
 90
 302
 10
 37
 77
 86
 5
 23
Prior service costs/(credits) 1
 3
 (1) (1) (3) (3) (135) (137)
Curtailments 11
 10
 1
 
 (4) (2) (15) (15)
Settlements 84
 54
 24
 32
 
 3
 
 
  $(147) $292
 $75
 $127
 $61
 $106
 $(89) $(57)
(a) 
In the second quarter of 2017, we settled the remaining obligation associated with the Hospira U.S. qualified defined benefit pension plan. We purchased a group annuity contract on behalf of the remaining plan participants with a third-party insurance provider. As a result, we were relieved of the $156 million net pension benefit obligation and recorded a pre-tax settlement gain of $41 million, partially offset by the recognition of actuarial losses and prior service costs upon plan settlement of approximately $30 million in Other (income)/deductions––net (see Note 3).
(b) 
We adopted a new accounting standard on January 1, 2018 that requires the net periodic pension and postretirement benefit costs other than service costs be presented in Other (income)/deductions––net on the condensed consolidated statements of income. For additional information, see Note 1B and Note 4.
(c) 
Effective January 1, 2018, we froze two significant defined benefit pension plans to future benefit accruals in the U.S. and U.K. and as a result, service costs for those plans are eliminated. In addition, due to the plan freeze, the average amortization period for the U.S. qualified plans and U.S. supplemental (non-qualified) plans was extended to the expected life expectancy of the plan participants, whereas the average amortization period in prior years utilized the expected future service period of plan participants.

36


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides the amounts we contributed, and the amounts we expect to contribute during 2018, to our pension and postretirement plans from our general assets for the periods indicated:
  Pension Plans  
(MILLIONS OF DOLLARS) U.S. Qualified U.S. Supplemental (Non-Qualified) International Postretirement Plans
Contributions from our general assets for the nine months ended September 30, 2018 $500
 $118
 $174
 $108
Expected contributions from our general assets during 2018(a)
 500
 137
 229
 149
(a) 
Contributions expected to be made for 2018 are inclusive of amounts contributed during the nine months ended September 30, 2018, including the $500 million voluntary contribution that was made in February 2018 for the U.S. qualified plans, which was considered pre-funding for future anticipated mandatory contributions and is also expected to reduce Pension Benefit Guaranty Corporation variable rate premiums. The U.S. supplemental (non-qualified) pension plan, international pension plan and the postretirement plan contributions from our general assets include direct employer benefit payments.
Note 11. Earnings Per Common Share Attributable to Common Shareholders
The following table provides the detailed calculation of EPS:
  Three Months Ended Nine Months Ended
(IN MILLIONS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

EPS Numerator––Basic        
Income from continuing operations $4,111
 $2,858
 $11,562
 $9,064
Less: Net income attributable to noncontrolling interests 8
 18
 25
 32
Income from continuing operations attributable to Pfizer Inc. 4,103
 2,840
 11,537
 9,032
Less: Preferred stock dividends––net of tax 
 
 1
 1
Income from continuing operations attributable to Pfizer Inc. common shareholders 4,103
 2,839
 11,536
 9,032
Discontinued operations––net of tax 11
 
 10
 1
Net income attributable to Pfizer Inc. common shareholders $4,114
 $2,839
 $11,546
 $9,033
EPS Numerator––Diluted  
  
  
  
Income from continuing operations attributable to Pfizer Inc. common shareholders and assumed conversions $4,103
 $2,840
 $11,537
 $9,032
Discontinued operations––net of tax, attributable to Pfizer Inc. common shareholders and assumed conversions 11
 
 10
 1
Net income attributable to Pfizer Inc. common shareholders and assumed conversions $4,114
 $2,840
 $11,546
 $9,034
EPS Denominator  
  
  
  
Weighted-average number of common shares outstanding––Basic 5,875
 5,951
 5,899
 5,972
Common-share equivalents: stock options, stock issuable under employee compensation plans, convertible preferred stock and accelerated share repurchase agreements 112
 89
 99
 85
Weighted-average number of common shares outstanding––Diluted 5,986
 6,041
 5,998
 6,057
Stock options that had exercise prices greater than the average market price of our common stock issuable under employee compensation plans(a)
 5
 47
 3
 47
(a) 
These common stock equivalents were outstanding for the periods presented, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.

37


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 12. Contingencies and Certain Commitments

We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business, including tax and legal contingencies. For a discussion of our tax contingencies, see Note 5C. For a discussion of our legal contingencies, see below.
A. Legal Proceedings

Our legal contingencies include, but are not limited to, the following:
Patent litigation, which typically involves challenges to the coverage and/or validity of patents on various products, processes or dosage forms. We are the plaintiff in the majority of these actions. An adverse outcome in actions in which we are the plaintiff could result in loss of patent protection for a drug, a significant loss of revenues from that drug or impairment of the value of associated assets.
Product liability and other product-related litigation, which can include personal injury, consumer, off-label promotion, securities, antitrust and breach of contract claims, among others, often involves highly complex issues relating to medical causation, label warnings and reliance on those warnings, scientific evidence and findings, actual, provable injury and other matters.
Commercial and other matters, which can include merger-related and product-pricing claims and environmental claims and proceedings, can involve complexities that will vary from matter to matter.
Government investigations, which often are related to the extensive regulation of pharmaceutical companies by national, state and local government agencies in the U.S. and in other jurisdictions. 

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, which could be substantial, and/or criminal charges.

We believe that our claims and defenses in matters in which we are a defendant are substantial, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of our contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions.

The principal pending matters to which we are a party are discussed below. In determining whether a pending matter is a principal matter, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be, or is, a class action and, if not certified, our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; whether related actions have been transferred to multidistrict litigation; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters in which we are the plaintiff, we consider, among other things, the financial significance of the product protected by the patent(s) at issue. As a result of considering qualitative factors in our determination of principal matters, there are some matters discussed below with respect to which management believes that the likelihood of possible loss in excess of amounts accrued is remote.

38


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A1. Legal Proceedings––Patent Litigation

Like other pharmaceutical companies, we are involved in numerous suits relating to our patents, including but not limited to, those discussed below. Most of the suits involve claims by generic drug manufacturers that patents covering our products, processes or dosage forms are invalid and/or do not cover the product of the generic drug manufacturer. Also, counterclaims, as well as various independent actions, have been filed alleging that our assertions of, or attempts to enforce, patent rights with respect to certain products constitute unfair competition and/or violations of antitrust laws. In addition to the challenges to the U.S. patents on a number of our products that are discussed below, patent rights to certain of our products are being challenged in various other jurisdictions. We are also party to patent damages suits in various jurisdictions pursuant to which generic drug manufacturers, payers, governments or other parties are seeking damages from us for allegedly causing delay of generic entry. Additionally, our licensing and collaboration partners face challenges by generic drug manufacturers to patents covering products for which we have licenses or co-promotion rights. We also are often involved in other proceedings, such as inter partes review, post-grant review, re-examination or opposition proceedings, before the U.S. Patent and Trademark Office, the European Patent Office, or other foreign counterparts relating to our intellectual property or the intellectual property rights of others. Also, if one of our patents is found to be invalid by such proceedings, generic or competitive products could be introduced into the market resulting in the erosion of sales of our existing products. For example, several of the patents in our pneumococcal vaccine portfolio were challenged in inter partes review and post-grant review proceedings in the United States. In June 2018, the Patent Trial and Appeal Board ruled on one patent, holding that one claim was valid and that all other claims were invalid. The party challenging that patent has appealed the decision. Challenges to other patents remain pending before the U.S. Patent and Trademark Office. The invalidation of these patents could potentially allow a competitor pneumococcal vaccine into the marketplace. We are also subject to patent litigation pursuant to which one or more third parties seeks damages and/or injunctive relief to compensate for alleged infringement of its patents by our commercial or other activities. For example, our Hospira subsidiaries are involved in patent and patent-related disputes over their attempts to bring generic pharmaceutical and biosimilar products to market. If one of our marketed products is found to infringe valid patent rights of a third party, such third party may be awarded significant damages, or we may be prevented from further sales of that product. Such damages may be enhanced as much as three-fold in the event that we or one of our subsidiaries, like Hospira, is found to have willfully infringed valid patent rights of a third party.

Actions In Which We Are The Plaintiff
Bosulif (bosutinib)
In December 2016, Wyeth LLC, Wyeth Pharmaceuticals Inc., and PF Prism C.V. (collectively, Wyeth) brought a patent-infringement action against Alembic Pharmaceuticals, Ltd, Alembic Pharmaceuticals, Inc. (collectively, Alembic), Sun Pharmaceutical Industries, Inc., and Sun Pharmaceutical Industries Limited (collectively, Sun), in the U.S. District Court for the District of Delaware in connection with abbreviated new drug applications respectively filed with the FDA by Alembic and Sun, each seeking approval to market generic versions of bosutinib. Alembic is challenging patents, which expire in 2026, covering polymorphic forms of bosutinib and methods of treating chronic myelogenous leukemia. Sun is challenging the patent covering polymorphic forms of bosutinib that expires in 2026. In March 2017, Wyeth brought a patent-infringement action against MSN Laboratories Private Limited and MSN Pharmaceuticals, Inc. (collectively, MSN), in the U.S. District Court for the District of Delaware in connection with an abbreviated new drug application filed with the FDA by MSN, seeking approval to market a generic version of bosutinib, and challenging a patent expiring in 2026 covering polymorphic forms of bosutinib. In September 2017, the case against MSN was dismissed. Also, in September 2017, Wyeth brought an additional patent-infringement action against Sun in the U.S. District Court for the District of Delaware asserting the infringement and validity of two other patents challenged by Sun, which expire in 2025 and 2026, respectively, covering compositions of bosutinib and methods of treating chronic myelogenous leukemia.
EpiPen
In July 2010, King, which we acquired in 2011 and is a wholly-owned subsidiary, brought a patent-infringement action against Sandoz in the U.S. District Court for the District of New Jersey in connection with Sandoz’s abbreviated new drug application filed with the FDA seeking approval to market an epinephrine injectable product. Sandoz is challenging patents, which expire in 2025, covering the next-generation autoinjector for use with epinephrine that is sold under the EpiPen brand name.
Precedex Premix
In June 2014, Ben Venue Laboratories, Inc. (Ben Venue) notified our subsidiary, Hospira, that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that a patent relating to the use of Precedex in an intensive care unit setting, which expires in March 2019, was invalid or not infringed. In August 2014, Hospira and Orion Corporation (co-owner of the patent that is the subject of the lawsuit) filed suit against Ben Venue, Hikma Pharmaceuticals PLC (Hikma), and West-Ward Pharmaceutical Corp. in the U.S. District Court for the District of Delaware asserting the validity and infringement of the patent. In October 2014,

39


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Eurohealth International Sarl was substituted for Ben Venue and Hikma. In June 2016, this case was settled on terms not material to Pfizer.
In June 2015, Amneal Pharmaceuticals LLC (Amneal) notified Hospira that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that four patents relating to the Precedex premix formulations and their use, all of which expire in 2032, were invalid or not infringed. In August 2015, Hospira filed suit against Amneal in the U.S. District Court for the District of Delaware asserting the validity and infringement of the patents that are the subject of the lawsuit. In January 2018, the District Court ruled that one of the four patents was valid and infringed, and that the other three patents were invalid. In February and March 2018, respectively, each of Amneal and Hospira appealed the District Court decision to the U.S. Court of Appeals for the Federal Circuit. 

In December 2015, Fresenius Kabi USA LLC (Fresenius) notified Hospira that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that four patents relating to the Precedex premix formulations and their use, all of which expire in 2032, were invalid or not infringed. In January 2016, Hospira filed suit against Fresenius in the U.S. District Court for the Northern District of Illinois asserting the validity and infringement of the patents that are the subject of the lawsuit.

In August 2016, Par Sterile Products, LLC (Par) notified Hospira that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that four patents relating to the Precedex premix formulations and their use, all of which expire in 2032, were invalid or not infringed. In September 2016, Hospira filed suit against Par in the U.S. District Court for the District of Delaware asserting the validity and infringement of the patents that are the subject of the lawsuit. In December 2016, the case was stayed pending the outcome of Hospira’s suit against Amneal (including all appeals).

In December 2017, Gland Pharma Limited (Gland) notified Hospira that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that six patents relating to the Precedex premix formulations and their use, all of which expire in 2032, were invalid or not infringed. In February 2018, Hospira filed suit against Gland in the U.S. District Court for the District of Delaware asserting the validity and infringement of four patents that are the subject of the lawsuit.

In December 2017, Jiangsu Hengrui Medicine Co., Ltd. (Hengrui) notified Hospira that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Hospira’s premix version of Precedex and containing allegations that six patents relating to the Precedex premix formulations and their use, all of which expire in 2032, were invalid or not infringed. In February 2018, Hospira filed suit against Hengrui in the U.S. District Court for the District of Delaware asserting the validity and infringement of four patents that are the subject of the lawsuit.

In February 2018, Baxter Healthcare Corporation (Baxter) filed a declaratory judgment action against Hospira in the U.S. District Court for the District of Delaware seeking a declaration of non-infringement of four patents relating to the Precedex premix formulations and their use. One of the patents included in the action expires in 2019 and the other three patents expire in 2032. In March 2018, Hospira filed a counterclaim for infringement of the patent expiring in 2019.
Xeljanz (tofacitinib)
In February 2017, we brought a patent-infringement action against MicroLabs USA Inc. and MicroLabs Ltd. (collectively, MicroLabs) in the U.S. District Court for the District of Delaware asserting the infringement and validity of three patents challenged by MicroLabs in its abbreviated new drug application seeking approval to market a generic version of tofacitinib 5 mg tablets. Of the three patents that are the subject of the lawsuit, one covers the active ingredient and expires in December 2025, the second covers an enantiomer of tofacitinib and expires in 2022, and the third covers a polymorphic form of tofacitinib and expires in 2023. Three other patents for Xeljanz expiring in December 2020 have not been challenged by MicroLabs.

Separately, also in February 2017, we brought a patent-infringement action against Sun Pharmaceutical Industries Ltd. in the U.S. District Court for the District of Delaware asserting the infringement and validity of our patent covering a polymorphic form of tofacitinib, expiring in 2023, that was challenged by Sun Pharmaceutical Industries Ltd. in its abbreviated new drug application seeking approval to market a generic version of tofacitinib 11 mg extended release tablets. In November 2017, we brought an additional patent-infringement action against Sun Pharmaceuticals Industries Ltd. in the U.S. District Court for the District of Delaware asserting the infringement and validity of another patent challenged by Sun Pharmaceuticals Industries Ltd, which covers the active ingredient and expires in December 2025.

In March 2017, we brought a patent-infringement action against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Ltd. (collectively, Zydus) in the U.S. District Court for the District of Delaware asserting the infringement and validity of the same

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three patents that are the subject of the action against MicroLabs, which Zydus challenged in its abbreviated new drug application seeking approval to market a generic version of tofacitinib 5 mg tablets.

Also, in March 2017, we brought separate actions in the U.S. District Court for the District of Delaware against Prinston Pharmaceutical Inc., Zhejiang Huahai Pharmaceutical Co., Ltd., Huahai US Inc. and Solco Healthcare US, LLC (collectively, Prinston) and against Breckenridge Pharmaceutical Inc., Pensa Pharma S.A. and Laboratorios Del Dr. Esteve, S.A. (collectively, Breckenridge) on the two patents expiring in 2022 and 2023, respectively, that were challenged by Prinston and Breckenridge in their respective abbreviated new drug applications seeking approval to market generic versions of tofacitinib 5 mg tablets. In October 2017, we brought an additional patent-infringement action against Breckenridge in the U.S. District Court for the District of Delaware asserting the infringement and validity of four additional patents challenged by Breckenridge, three of which expire in December 2020 and one of which expires in December 2025. In March 2018, we brought another patent infringement action against Prinston in the U.S. District Court for the District of Delaware asserting the infringement and validity of an additional patent, which had been subsequently challenged by Prinston and which expires in December 2025. In May 2018, we settled all of our claims against Breckenridge on terms not material to Pfizer.
Xtandi (enzalutamide)
In December 2016, Medivation and Medivation Prostate Therapeutics, Inc. (collectively, the Medivation Group); Astellas Pharma Inc., Astellas US LLC and Astellas Pharma US, Inc. (collectively, Astellas); and The Regents of the University of California filed patent-infringement suits in the U.S. District Court for the District of Delaware against Actavis Laboratories FL, Inc. and Actavis LLC (collectively, Actavis); Zydus; and Apotex Inc. and Apotex Corp. (collectively, Apotex) in connection with those companies’ respective abbreviated new drug applications filed with the FDA for approval to market generic versions of enzalutamide. The generic manufacturers are challenging patents, which expire as early as 2026, covering enzalutamide and treatments for prostate cancer. In May 2017, the Medivation Group filed a patent-infringement suit against Roxane Laboratories Inc. (Roxane) in the same court in connection with Roxane’s abbreviated new drug application with the FDA for approval to market a generic version of enzalutamide. In June and July 2018, we settled all of our claims against Actavis and Apotex, respectively, on terms not material to Pfizer.
Inlyta (axitinib)
In April 2018, Apotex Inc. notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Inlyta. Apotex Inc. asserts the invalidity and non-infringement of the crystalline form patent for Inlyta that expires in 2030. In May 2018, we filed suit against Apotex Inc. in the U.S. District Court for the District of Delaware, asserting the validity and infringement of the crystalline form patent for Inlyta.
Kerydin (tavaborole)
In September 2018, several generic companies notified us that they had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Kerydin. The generic companies assert the invalidity and non-infringement of methods of use and formulation patents for tavaborole that expire in 2026 and 2027, including pediatric exclusivity. In October 2018, Anacor, our wholly-owned subsidiary, filed infringement lawsuits against each of the generic filers in the U.S. District Court for the District of Delaware.

Matters Involving Our Collaboration/Licensing Partners
Toviaz (fesoterodine)––Inter-Partes Reviews
In January 2016, Mylan Pharmaceuticals and Mylan Laboratories (collectively, Mylan) filed petitions with the U.S. Patent and Trademark Office requesting inter partes reviews of five of the patents covering fesoterodine, the active ingredient in Toviaz: three composition-of-matter patents and a method-of-use patent that expire in 2019 and a patent covering salts of fesoterodine that expires in 2022. The patents are owned by UCB Pharma GmbH, and we have an exclusive, worldwide license to market Toviaz from UCB Pharma GmbH. In July 2016, the Patent Trial and Appeal Board agreed to institute inter partes reviews of all five patents. Amerigen Pharmaceuticals Limited (Amerigen), Alembic Pharmaceuticals Limited and Torrent Pharmaceuticals Limited joined the inter partes reviews. In July 2017, the U.S. Patent and Trademark Office issued decisions upholding all five patents. In September 2017, Mylan and Amerigen appealed the U.S. Patent and Trademark Office decisions to the U.S. Court of Appeals for the Federal Circuit. In January 2018, Mylan withdrew its appeal. Amerigen’s appeal of the decision upholding the patent covering salts of fesoterodine that expires in 2022 is the only pending appeal.

Eliquis
In February, March, and April 2017, twenty-five generic companies sent BMS Paragraph-IV certification letters informing BMS that they had filed abbreviated new drug applications seeking approval of generic versions of Eliquis, challenging the validity and infringement of one or more of the three patents listed in the Orange Book for Eliquis. The patents currently are set to expire in 2019, 2026, and 2031. Eliquis has been jointly developed and is being commercialized by BMS and Pfizer. In April 2017, BMS and Pfizer filed patent-infringement actions against all generic filers in the U.S. District Court for the District of

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Delaware and the U.S. District Court for the District of West Virginia, asserting that each of the generic companies’ proposed products would infringe each of the patent(s) that each generic filer challenged. Some generic filers challenged only the 2031 patent, some challenged both the 2031 and 2026 patent, and one generic company challenged all three patents. We and BMS have settled with certain of the generic companies on terms not material to Pfizer, and we and BMS may settle with other generic companies in the future.
Actions In Which We Are The Defendant
Inflectra (infliximab-dyyb)
In March 2015, Janssen and New York University, together, brought a patent-infringement action in the U.S. District Court for the District of Massachusetts against Hospira, Celltrion Healthcare Co. Ltd. and Celltrion Inc. alleging that infliximab-dyyb, to be marketed by Hospira in the U.S. under the brand name Inflectra, would infringe six patents relating to infliximab, its manufacture and use. Claims with respect to four of the patents were dismissed by the plaintiffs, leaving two patents at issue: the infliximab antibody patent and a patent relating to cell culture media. In January 2018, the antibody patent was declared invalid by the Court of Appeals for the Federal Circuit. In July 2018, the U.S. District Court for the District of Massachusetts granted defendants’ motion for summary judgment and ruled that the patent relating to cell culture media was not infringed.
Bavencio (avelumab)
In July 2017, BMS, E.R. Squibb & Sons LLC, Ono Pharmaceutical Co. Ltd., and Tasuku Honjo brought a patent-infringement action in the U.S. District Court for the District of Delaware against Pfizer, Merck KGaA, and EMD Serono, Inc., alleging that Bavencio (avelumab) infringes one patent relating to methods for treating tumors with anti-PD-L1 antibodies, which expires in 2023.
A2. Legal Proceedings––Product Litigation

Like other pharmaceutical companies, we are defendants in numerous cases, including but not limited to those discussed below, related to our pharmaceutical and other products. Plaintiffs in these cases seek damages and other relief on various grounds for alleged personal injury and economic loss.
Asbestos
Between 1967 and 1982, Warner-Lambert owned American Optical Corporation (American Optical), which manufactured and sold respiratory protective devices and asbestos safety clothing. In connection with the sale of American Optical in 1982, Warner-Lambert agreed to indemnify the purchaser for certain liabilities, including certain asbestos-related and other claims. As of September 30, 2018, approximately 56,880 claims naming American Optical and numerous other defendants were pending in various federal and state courts seeking damages for alleged personal injury from exposure to asbestos and other allegedly hazardous materials. Warner-Lambert was acquired by Pfizer in 2000 and is a wholly-owned subsidiary of Pfizer. Warner-Lambert is actively engaged in the defense of, and will continue to explore various means of resolving, these claims.

Numerous lawsuits are pending against Pfizer in various federal and state courts seeking damages for alleged personal injury from exposure to products allegedly containing asbestos and other allegedly hazardous materials sold by Pfizer and certain of its previously owned subsidiaries.
There also are a small number of lawsuits pending in various federal and state courts seeking damages for alleged exposure to asbestos in facilities owned or formerly owned by Pfizer or its subsidiaries.

Effexor
Beginning in May 2011, actions, including purported class actions, were filed in various federal courts against Wyeth and, in certain of the actions, affiliates of Wyeth and certain other defendants relating to Effexor XR, which is the extended-release formulation of Effexor. The plaintiffs in each of the class actions seek to represent a class consisting of all persons in the U.S. and its territories who directly purchased, indirectly purchased or reimbursed patients for the purchase of Effexor XR or generic Effexor XR from any of the defendants from June 14, 2008 until the time the defendants’ allegedly unlawful conduct ceased. The plaintiffs in all of the actions allege delay in the launch of generic Effexor XR in the U.S. and its territories, in violation of federal antitrust laws and, in certain of the actions, the antitrust, consumer protection and various other laws of certain states, as the result of Wyeth fraudulently obtaining and improperly listing certain patents for Effexor XR in the Orange Book, enforcing certain patents for Effexor XR and entering into a litigation settlement agreement with a generic drug manufacturer with respect to Effexor XR. Each of the plaintiffs seeks treble damages (for itself in the individual actions or on behalf of the putative class in the purported class actions) for alleged price overcharges for Effexor XR or generic Effexor XR in the U.S. and its territories since June 14, 2008. All of these actions have been consolidated in the U.S. District Court for the District of New Jersey.
In October 2014, the District Court dismissed the direct purchaser plaintiffs’ claims based on the litigation settlement agreement but declined to dismiss the other direct purchaser plaintiff claims. In January 2015, the District Court entered partial final

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judgments as to all settlement agreement claims, including those asserted by direct purchasers and end-payer plaintiffs, which plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit. In August 2017, the U.S. Court of Appeals for the Third Circuit reversed the District Court’s decisions and remanded the claims to the District Court.
Lipitor

Antitrust Actions
Beginning in November 2011, purported class actions relating to Lipitor were filed in various federal courts against, among others, Pfizer, certain affiliates of Pfizer, and, in most of the actions, Ranbaxy, Inc. (Ranbaxy) and certain affiliates of Ranbaxy. The plaintiffs in these various actions seek to represent nationwide, multi-state or statewide classes consisting of persons or entities who directly purchased, indirectly purchased or reimbursed patients for the purchase of Lipitor (or, in certain of the actions, generic Lipitor) from any of the defendants from March 2010 until the cessation of the defendants’ allegedly unlawful conduct (the Class Period). The plaintiffs allege delay in the launch of generic Lipitor, in violation of federal antitrust laws and/or state antitrust, consumer protection and various other laws, resulting from (i) the 2008 agreement pursuant to which Pfizer and Ranbaxy settled certain patent litigation involving Lipitor, and Pfizer granted Ranbaxy a license to sell a generic version of Lipitor in various markets beginning on varying dates, and (ii) in certain of the actions, the procurement and/or enforcement of certain patents for Lipitor. Each of the actions seeks, among other things, treble damages on behalf of the putative class for alleged price overcharges for Lipitor (or, in certain of the actions, generic Lipitor) during the Class Period. In addition, individual actions have been filed against Pfizer, Ranbaxy and certain of their affiliates, among others, that assert claims and seek relief for the plaintiffs that are substantially similar to the claims asserted and the relief sought in the purported class actions described above. These various actions have been consolidated for pre-trial proceedings in a Multi-District Litigation (In re Lipitor Antitrust Litigation MDL-2332) in the U.S. District Court for the District of New Jersey.

In September 2013 and 2014, the District Court dismissed with prejudice the claims by direct purchasers. In October and November 2014, the District Court dismissed with prejudice the claims of all other Multi-District Litigation plaintiffs. All plaintiffs have appealed the District Court’s orders dismissing their claims with prejudice to the U.S. Court of Appeals for the Third Circuit. In addition, the direct purchaser class plaintiffs appealed the order denying their motion to amend the judgment and for leave to amend their complaint to the U.S. Court of Appeals for the Third Circuit. In August 2017, the U.S. Court of Appeals for the Third Circuit reversed the District Court’s decisions and remanded the claims to the District Court.

Also, in January 2013, the State of West Virginia filed an action in West Virginia state court against Pfizer and Ranbaxy, among others, that asserts claims and seeks relief on behalf of the State of West Virginia and residents of that state that are substantially similar to the claims asserted and the relief sought in the purported class actions described above.
Personal Injury Actions
A number of individual and multi-plaintiff lawsuits have been filed against us in various federal and state courts alleging that the plaintiffs developed type 2 diabetes purportedly as a result of the ingestion of Lipitor. Plaintiffs seek compensatory and punitive damages.
In February 2014, the federal actions were transferred for consolidated pre-trial proceedings to a Multi-District Litigation (In re Lipitor (Atorvastatin Calcium) Marketing, Sales Practices and Products Liability Litigation (No. II) MDL-2502) in the U.S. District Court for the District of South Carolina. Since 2016, certain cases in the Multi-District Litigation were remanded to certain state courts. In January 2017, the District Court granted our motion for summary judgment, dismissing substantially all of the remaining cases pending in the Multi-District Litigation. In January 2017, the plaintiffs appealed the District Court’s decision to the U.S. Court of Appeals for the Fourth Circuit. In June 2018, the U.S. Court of Appeals for the Fourth Circuit affirmed the District Court’s decision.
Viagra
A number of individual and multi-plaintiff lawsuits have been filed against us in various federal and state courts alleging that the plaintiffs developed melanoma and/or the exacerbation of melanoma purportedly as a result of the ingestion of Viagra. Plaintiffs seek compensatory and punitive damages.
In April 2016, the federal actions were transferred for coordinated pre-trial proceedings to a Multi-District Litigation (In Re: Viagra (Sildenafil Citrate) Products Liability Litigation, MDL-2691) in the U.S. District Court for the Northern District of California. In December 2016, federal actions filed against Lilly and filed against both us and Lilly, were transferred for coordinated pre-trial proceedings to the Multi-District Litigation (In re: Viagra (Sildenafil Citrate) and Cialis (Tadalafil) Products Liability Litigation, MDL-2691).
Intravenous Solutions
Beginning in November 2016, purported class actions were filed in the U.S. District Court for the Northern District of Illinois against Hospira, Hospira Worldwide, Inc. and certain other defendants relating to intravenous saline solution. Plaintiffs seek to

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represent a class consisting of all persons and entities in the U.S. who directly purchased intravenous saline solution sold by any of the defendants from January 1, 2013 until the time the defendants’ allegedly unlawful conduct ceases. Plaintiffs allege that the defendants’ conduct restricts output and artificially fixes, raises, maintains and/or stabilizes the prices of intravenous saline solution sold throughout the U.S. in violation of federal antitrust laws. Plaintiffs seek treble damages (for themselves and on behalf of the putative classes) and an injunction against defendants for alleged price overcharges for intravenous saline solution in the U.S. since January 1, 2013. All of these actions have been consolidated in the U.S. District Court for the Northern District of Illinois. In July 2018, the District Court granted defendants’ motions to dismiss the consolidated amended complaint without prejudice. Plaintiffs filed a second amended complaint in September 2018. On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, which includes intravenous saline solution, to ICU Medical. The litigation is the subject of cross-claims for indemnification by both Pfizer and ICU Medical under the purchase agreement.
Separately, in April 2017, Pfizer, Hospira and two employees of Pfizer received grand jury subpoenas issued by the United States District Court for the Eastern District of Pennsylvania, in connection with an investigation by the U.S. Department of Justice, Antitrust Division. The subpoenas seek documents related to the sale, manufacture, pricing and shortages of intravenous solutions, including saline, as well as communications among industry participants regarding these issues. The Department of Justice investigation is also the subject of cross-claims for indemnification by both Pfizer and ICU Medical under the purchase agreement. In addition, in August 2015, the New York Attorney General issued a subpoena to Hospira for similar information. Hospira has produced records to the New York Attorney General and coordinated with ICU Medical to produce records to the U.S. Department of Justice.
Hormone Therapy Consumer Class Action
A certified consumer class action is pending against Wyeth in the U.S. District Court for the Southern District of California based on the alleged off-label marketing of its hormone therapy products. The case was originally filed in December 2003. The class consists of California consumers who purchased Wyeth’s hormone-replacement products between January 1995 and January 2003 and who do not seek personal injury damages therefrom. The class seeks compensatory and punitive damages, including a full refund of the purchase price.
Eliquis
A number of individual and multi-plaintiff lawsuits have been filed against us and BMS in various federal and state courts pursuant to which plaintiffs seek to recover for personal injuries, including wrongful death, due to bleeding allegedly as a result of the ingestion of Eliquis. Plaintiffs seek compensatory and punitive damages.
In February 2017, the federal actions were transferred for coordinated pre-trial proceedings to a Multi-District Litigation (In Re: Eliquis (Apixaban) Products Liability Litigation MDL-2754) in the U.S. District Court for the Southern District of New York. In July 2017, the District Court dismissed substantially all of the actions that were pending in the Multi-District Litigation. In August 2017, certain plaintiffs appealed the District Court’s dismissal to the U.S. Court of Appeals for the Second Circuit. Additional cases continue to be transferred to the Multi-District Litigation.
EpiPen
Beginning in February 2017, purported class actions were filed in various federal courts by indirect purchasers of EpiPen against Pfizer, and/or its affiliates King and Meridian, and/or various entities affiliated with Mylan N.V., and Mylan N.V. Chief Executive Officer, Heather Bresch. The plaintiffs in these actions seek to represent U.S. nationwide classes comprising persons or entities who paid for any portion of the end-user purchase price of an EpiPen between 2009 until the cessation of the defendants’ allegedly unlawful conduct. In August 2017, a similar lawsuit brought in the U.S. District Court for the District of New Jersey on behalf of a purported class of direct purchaser plaintiffs against Pfizer, King, Meridian and Mylan was voluntarily dismissed without prejudice. Against Pfizer and/or its affiliates, plaintiffs generally allege that Pfizer’s and/or its affiliates’ settlement of patent litigation regarding EpiPen delayed market entry of generic EpiPen in violation of federal antitrust laws and various state antitrust or consumer protection laws. At least one lawsuit also alleges that Pfizer and/or Mylan N.V. violated the federal Racketeer Influenced and Corrupt Organizations Act. Plaintiffs also filed various consumer protection and unjust enrichment claims against, and relating to conduct attributable solely to, Mylan Pharmaceuticals regarding EpiPen. Plaintiffs seek treble damages for alleged overcharges for EpiPen since 2009. In August 2017, the actions were consolidated for coordinated pre-trial proceedings in a Multi-District Litigation (In re: EpiPen (Epinephrine Injection, USP) Marketing, Sales Practices and Antitrust Litigation, MDL-2785) in the U.S. District Court for the District of Kansas with other EpiPen-related actions against Mylan N.V. and/or its affiliates to which Pfizer, King and Meridian are not parties.
Nexium 24HR and Protonix
A number of individual and multi-plaintiff lawsuits have been filed against Pfizer, certain of its subsidiaries and/or other pharmaceutical manufacturers in various federal and state courts alleging that the plaintiffs developed kidney-related injuries purportedly as a result of the ingestion of certain proton pump inhibitors. The cases against us involve Nexium 24HR and/or Protonix and seek compensatory and punitive damages and, in some cases, treble damages, restitution or disgorgement. In

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August 2017, the federal actions were ordered transferred for coordinated pre-trial proceedings to a Multi-District Litigation (In re: Proton-Pump Inhibitor Products Liability Litigation (No. II)) in the U.S. District Court for the District of New Jersey.
Docetaxel
Personal Injury Actions
A number of lawsuits have been filed against Hospira and Pfizer in various federal and state courts alleging that plaintiffs who were treated with Docetaxel developed permanent hair loss. The significant majority of the cases also name other defendants, including the manufacturer of the branded product, Taxotere. Plaintiffs seek compensatory and punitive damages.
In October 2016, the federal cases were transferred for coordinated pre-trial proceedings to a Multi-District Litigation (In re Taxotere (Docetaxel) Products Liability Litigation, MDL-2740) in the U.S. District Court for the Eastern District of Louisiana.
Mississippi Attorney General Government Investigation
In October 2018, the Attorney General of Mississippi filed a complaint in Mississippi state court against the manufacturer of the branded product and eight other manufacturers including Pfizer and Hospira, alleging, with respect to Pfizer and Hospira, a failure to warn about a risk of permanent hair loss in violation of the Mississippi Consumer Protection Act. The action seeks civil penalties and injunctive relief. 
A3. Legal Proceedings––Commercial and Other Matters
Average Wholesale Price Litigation
Pfizer, certain of its subsidiaries and other pharmaceutical manufacturers were sued in various state courts by a number of states alleging that the defendants provided average wholesale price (AWP) information for certain of their products that was higher than the actual average prices at which those products were sold. The AWP is used to determine reimbursement levels under Medicare Part B and Medicaid and in many private-sector insurance policies and medical plans. All but one of those actions have been resolved through settlement, dismissal or final judgment. The plaintiff state, Illinois, in the one remaining action claims that the alleged spread between the AWPs at which purchasers were reimbursed and the actual sale prices was promoted by the defendants as an incentive to purchase certain of their products. The action alleges, among other things, fraud and violation of the state’s unfair trade practices and consumer protection statutes and seeks monetary and other relief, including civil penalties and treble damages.
Monsanto-Related Matters
In 1997, Monsanto Company (Former Monsanto) contributed certain chemical manufacturing operations and facilities to a newly formed corporation, Solutia Inc. (Solutia), and spun off the shares of Solutia. In 2000, Former Monsanto merged with Pharmacia & Upjohn Company to form Pharmacia. Pharmacia then transferred its agricultural operations to a newly created subsidiary, named Monsanto Company (New Monsanto), which it spun off in a two-stage process that was completed in 2002. Pharmacia was acquired by Pfizer in 2003 and is a wholly-owned subsidiary of Pfizer.
In connection with its spin-off that was completed in 2002, New Monsanto assumed, and agreed to indemnify Pharmacia for, any liabilities related to Pharmacia’s former agricultural business. New Monsanto has defended and/or is defending Pharmacia in connection with various claims and litigation arising out of, or related to, the agricultural business, and has been indemnifying Pharmacia when liability has been imposed or settlement has been reached regarding such claims and litigation.
In connection with its spin-off in 1997, Solutia assumed, and agreed to indemnify Pharmacia for, liabilities related to Former Monsanto’s chemical businesses. As the result of its reorganization under Chapter 11 of the U.S. Bankruptcy Code, Solutia’s indemnification obligations relating to Former Monsanto’s chemical businesses are primarily limited to sites that Solutia has owned or operated. In addition, in connection with its spinoff that was completed in 2002, New Monsanto assumed, and agreed to indemnify Pharmacia for, any liabilities primarily related to Former Monsanto’s chemical businesses, including, but not limited to, any such liabilities that Solutia assumed. Solutia’s and New Monsanto’s assumption of, and agreement to indemnify Pharmacia for, these liabilities apply to pending actions and any future actions related to Former Monsanto’s chemical businesses in which Pharmacia is named as a defendant, including, without limitation, actions asserting environmental claims, including alleged exposure to polychlorinated biphenyls. Solutia and/or New Monsanto are defending Pharmacia in connection with various claims and litigation arising out of, or related to, Former Monsanto’s chemical businesses, and have been indemnifying Pharmacia when liability has been imposed or settlement has been reached regarding such claims and litigation.
Environmental Matters
In 2009, we submitted to the U.S. Environmental Protection Agency (EPA) a corrective measures study report with regard to Pharmacia’s discontinued industrial chemical facility in North Haven, Connecticut. In September 2010, our corrective measures study report was approved by the EPA, and we commenced construction of the site remedy in late 2011 under an Updated Administrative Order on Consent with the EPA.

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Also, in 2009, we submitted a revised site-wide feasibility study with regard to Wyeth Holdings Corporation’s (formerly, American Cynamid Company) discontinued industrial chemical facility in Bound Brook, New Jersey. In July 2011, Wyeth Holdings Corporation finalized an Administrative Settlement Agreement with the EPA and Order on Consent for Removal Action (the 2011 Administrative Settlement Agreement) with the EPA with regard to the Bound Brook facility. In May 2012, we completed construction of an interim remedy to address the discharge of impacted groundwater from that facility to the Raritan River. In September 2012, the EPA issued a final remediation plan for the Bound Brook facility’s main plant area, which is generally in accordance with one of the remedies evaluated in our revised site-wide feasibility study. In March 2013, Wyeth Holdings Corporation (now Wyeth Holdings LLC) entered into an Administrative Settlement Agreement and Order on Consent with the EPA to allow us to undertake detailed engineering design of the remedy for the main plant area and to perform a focused feasibility study for two adjacent lagoons. In September 2015, the U.S., on behalf of the EPA, filed a complaint and consent decree with the federal District Court for the District of New Jersey that allows Wyeth Holdings LLC to complete the design and to implement the remedy for the main plant area. In December 2015, the consent decree (which supersedes the 2011 Administrative Settlement Agreement) was entered by the District Court. We have accrued for the estimated costs of the site remedies for the North Haven and Bound Brook facilities. In September 2018, the EPA issued a final remediation plan for the two adjacent lagoons, which is generally in accordance with one of the remedies evaluated in our focused feasibility study.

We are a party to a number of other proceedings brought under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and other state, local or foreign laws in which the primary relief sought is the cost of past and/or future remediation.
Contracts with Iraqi Ministry of Health
In October 2017, a number of United States service members, civilians, and their families brought a complaint in the Federal District Court for the District of Columbia against a number of pharmaceutical and medical devices companies, including Pfizer and certain of its subsidiaries, alleging that the defendants violated the United States Anti-Terrorism Act. The complaint alleges that the defendants provided funding for terrorist organizations through their sales practices pursuant to pharmaceutical and medical device contracts with the Iraqi Ministry of Health, and seeks monetary relief. In July 2018, the U.S. Department of Justice requested documents related to this matter, which are being provided.
Allergan Complaint for Indemnity
In August 2018, Pfizer was named as a defendant in a third-party complaint for indemnity, along with King Pharmaceuticals LLC, a Pfizer subsidiary (King), filed by Allergan Finance LLC (Allergan) in a Multi-District Litigation (In re National Prescription Opiate Litigation MDL 2804) in the U.S. District Court for the Northern District of Ohio. The lawsuit asserts claims for indemnity related to Kadian, which was owned for a short period by King in 2008, prior to Pfizer's acquisition of King in 2010.
A4. Legal Proceedings––Government Investigations

Like other pharmaceutical companies, we are subject to extensive regulation by government agencies in the U.S., other developed markets and multiple emerging markets in which we operate. As a result, we have interactions with government agencies on an ongoing basis. Criminal charges, and substantial fines and/or civil penalties, as well as limitations on our ability to conduct business in applicable jurisdictions, could result from government investigations. In addition, in a qui tam lawsuit in which the government declines to intervene, the relator may still pursue a suit for the recovery of civil damages and penalties on behalf of the government. Among the investigations by government agencies are the matters discussed below.
Phenytoin Sodium Capsules
In 2012, Pfizer sold the U.K. Marketing Authorisation for phenytoin sodium capsules to a third party, but retained the right to supply the finished product to that third party. In May 2013, the U.K. Competition & Markets Authority (CMA) informed us that it had launched an investigation into the supply of phenytoin sodium capsules in the U.K. market. In August 2015, the CMA issued a Statement of Objections alleging that Pfizer and Pfizer Limited, a U.K. subsidiary, engaged in conduct that violates U.K. and EU antitrust laws. In December 2016, the CMA imposed a £84.2 million fine on Pfizer and Pfizer Limited. Pfizer appealed the CMA decision to The Competition Appeal Tribunal in February 2017. On June 7, 2018, the Competition Appeal Tribunal overturned the CMA decision as well as the associated fine. On June 28, 2018, the CMA sought permission to appeal the Competition Appeal Tribunal’s judgment.
Greenstone Investigations
Since July 2017, the U.S. Department of Justice’s Antitrust Division has been investigating our Greenstone generics business. We believe this is related to an ongoing antitrust investigation of the generic pharmaceutical industry. The government has been obtaining information from Greenstone. In April 2018, Greenstone received requests for information from the Antitrust Department of the Connecticut Office of the Attorney General. We have been providing information pursuant to these requests.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Subpoena relating to Manufacturing of Quillivant XR
In October 2018, we received a subpoena from the U.S. Attorney’s Office for the Southern District of New York seeking records relating to our relationship with another drug manufacturer and its production and manufacturing of drugs including, but not limited to, Quillivant XR. We will be producing records pursuant to the subpoena.
Intravenous Solutions
See Note 12A2. Legal Proceedings––Product Litigation––Intravenous Solutions above for information regarding government investigations related to sales of intravenous solution products.
Contracts with Iraqi Ministry of Health
See Note 12A3. Legal Proceedings––Commercial and Other Matters––Contracts with Iraqi Ministry of Health above for information regarding U.S. government investigations related to contracts with the Iraqi Ministry of Health.

Docetaxel––Mississippi Attorney General Government Investigation
See Note 12A2. Legal Proceedings––Product Litigation––Docetaxel––Mississippi Attorney General Government Investigation above for information regarding a government investigation related to Docetaxel marketing practices.

A5. Legal Proceedings--Matters Resolved During the First Nine Months of 2018
During 2018, certain matters, including the matters discussed below, were resolved or were the subject of definitive settlement agreements or settlement agreements-in-principle.
Celebrex
Beginning in July 2014, purported class actions were filed in the U.S. District Court for the Eastern District of Virginia against Pfizer and certain subsidiaries of Pfizer relating to Celebrex. The plaintiffs sought to represent U.S. nationwide or multi-state classes consisting of persons or entities who directly purchased from the defendants, or indirectly purchased or reimbursed patients for some or all of the purchase price of, Celebrex or generic Celebrex from May 31, 2014 until the cessation of the defendants’ allegedly unlawful conduct. The plaintiffs alleged delay in the launch of generic Celebrex in violation of federal antitrust laws or certain state antitrust, consumer protection and various other laws as a result of Pfizer fraudulently obtaining and improperly listing a patent on Celebrex, engaging in sham litigation and prolonging the impact of sham litigation through settlement activity that further delayed generic entry. Each of the actions sought treble damages on behalf of the putative class for alleged price overcharges for Celebrex since May 31, 2014. In December 2014, the District Court granted the parties’ joint motions to consolidate the direct purchaser and end-payer cases, and all such cases were consolidated as of March 2015. In October 2014 and March 2015, we filed motions to dismiss the direct purchasers’ and end-payers’ amended complaints, respectively. In November 2015, the District Court denied in part and granted in part our motion to dismiss the direct purchasers’ amended complaint. In February 2016, the District Court denied in part and granted in part our motion to dismiss the end-payers’ amended complaint, and in August 2016, the District Court dismissed substantially all of the end-payers’ remaining claims. In February 2017, the District Court dismissed with prejudice all of the end-payers’ claims. In March 2017, the end-payers appealed the District Court’s order dismissing their claims with prejudice to the U.S. Court of Appeals for the Fourth Circuit. In August 2017, the District Court granted the direct purchasers’ motion for class certification. In November 2017, Pfizer and the direct purchasers entered into an agreement to resolve the direct purchasers’ class action for $94 million. In April 2018, the court approved the agreement. In November 2017, Pfizer and the end-payers entered into an agreement to resolve the claims of the end-payer plaintiffs on terms not material to Pfizer.
Subpoenas relating to Copayment Assistance Organizations
In December 2015 and July 2016, Pfizer received subpoenas from the U.S. Attorney’s Office for the District of Massachusetts requesting documents related to the Patient Access Network Foundation and other 501(c)(3) organizations that provide financial assistance to Medicare patients. In May 2018, Pfizer entered into a civil settlement to resolve the matter. Pfizer paid $23.85 million to the United States, and entered into a five-year Corporate Integrity Agreement with the Office of the Inspector General of the Department of Health and Human Services.
Civil Investigative Demand relating to Pharmacy Benefit Managers
In March 2016, Pfizer received a Civil Investigative Demand from the U.S. Attorney’s Office for the Southern District of New York (SDNY) related to Pfizer’s contractual relationships with pharmacy benefit managers with respect to certain pharmaceutical products over the period from January 1, 2006 to the present. We have provided information to the government in response to this Civil Investigative Demand. In July 2018, Pfizer was served with a qui tam complaint that appears to be related to the SDNY investigation. The complaint was unsealed following the government’s decision not to intervene in the case.

47


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Guarantees and Indemnifications
In the ordinary course of business and in connection with the sale of assets and businesses and other transactions, we often indemnify our counterparties against certain liabilities that may arise in connection with the transaction or that are related to events and activities prior to or following a transaction. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we may be required to reimburse the loss. These indemnifications are generally subject to various restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2018, the estimated fair value of these indemnification obligations was not significant.
Pfizer Inc. has also guaranteed the long-term debt of certain companies that it acquired and that now are subsidiaries of Pfizer.
C. Certain Commitments
Accelerated share repurchase agreement––On March 12, 2018, we entered into an accelerated share repurchase agreement with Citibank to repurchase $4.0 billion of our common stock. Pursuant to the terms of the agreement, on March 14, 2018, we paid $4.0 billion to Citibank and received an initial delivery of approximately 87 million shares of our common stock from Citibank at a price of $36.61 per share, which represented, based on the closing price of our common stock on the NYSE on March 12, 2018, approximately 80% of the notional amount of the accelerated share repurchase agreement. On September 5, 2018, the accelerated share repurchase agreement with Citibank was completed, which, per the terms of the agreement, resulted in Citibank owing us a certain number of shares of Pfizer common stock. Pursuant to the agreement’s settlement terms, we received an additional 21 million shares of our common stock from Citibank on September 7, 2018. The average price paid for all of the shares delivered under the accelerated share repurchase agreement was $36.86 per share. The common stock received is included in Treasury stock. This agreement was entered into pursuant to our previously announced share repurchase authorization. After giving effect to the accelerated share repurchase agreement, as well as other share repurchases through September 30, 2018, our remaining share-purchase authorization was approximately $9.2 billion at September 30, 2018.
Corporate headquarters lease agreement––In April 2018, we entered an agreement to lease space in an office building in the Hudson Yards neighborhood of New York City. We will relocate our global headquarters to this property with occupancy expected beginning in 2022. Our future minimum rental commitment under this 20-year lease is approximately $1.7 billion. In July 2018, we completed the sale of our current headquarters at 219 and 235 East 42nd Street. We also agreed to lease these properties from the buyer while we complete our relocation.
Note 13. Segment, Geographic and Other Revenue Information

A. Segment Information

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). The IH and EH segments are each led by a single manager. Each operating segment has responsibility for its commercial activities and for certain IPR&D projects for new investigational products and additional indications for in-line products that generally have achieved proof-of-concept. Each business has a geographic footprint across developed and emerging markets. Our chief operating decision maker uses the revenues and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.
We regularly review our segments and the approach used by management for performance evaluation and resource allocation. In July 2018, we announced that we will reorganize our commercial operations effective at the beginning of our 2019 fiscal year. We will organize the company into three businesses: a science-based Innovative Medicines business, which will include all of the current Pfizer Innovative Health medicines and vaccines business units as well as biosimilars and a new hospital business unit for anti-infectives and sterile injectables; an off-patent branded and generic Established Medicines business operating with substantial autonomy within Pfizer; and a Consumer Healthcare business. We are currently evaluating the impact to our operating segments and other costs and activities based on how the businesses will be managed in 2019.
As described in Note 1A, the February 3, 2017 sale of HIS impacted our results of operations in 2017.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Operating Segments
Some additional information about our business segments as of September 30, 2018 follows:
innovativehealthrgb.jpg
 
pehlogo.jpg
IH focuses on developing and commercializing novel, value-creating medicines and vaccines that significantly improve patients’ lives, as well as products for consumer healthcare.
Key therapeutic areas include internal medicine, vaccines, oncology, inflammation & immunology, rare disease and consumer healthcare.
 
EH includes legacy brands that have lost or will soon lose market exclusivity in both developed and emerging markets, branded and generic sterile injectable products, biosimilars, and select branded products including anti-infectives. EH also includes an R&D organization, as well as our contract manufacturing business.
Through February 2, 2017, EH also included HIS.

Leading brands include:
- Prevnar 13/Prevenar 13
- Xeljanz
- Eliquis
- Lyrica (U.S., Japan and certain other markets)
-
Enbrel (outside the U.S. and Canada)
-
Ibrance
- Xtandi
- Several OTC consumer healthcare products (e.g., Advil and
  Centrum)
 

Leading brands include:
- Lipitor
- Norvasc
- Lyrica (Europe, Russia, Turkey, Israel and Central Asia countries)
- Celebrex
- Viagra*
- Inflectra/Remsima
- Sulperazon
- Several other sterile injectable products
*Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra worldwide revenues are reported in EH.
The following organizational change impacted our operating segments in 2018:
Effective in the first quarter of 2018, certain costs for Pfizer’s StratCO group, which were previously reported in the operating results of our operating segments and Corporate, are reported in Other Unallocated. StratCO costs primarily include headcount costs, vendor costs and data costs largely in support of Pfizer’s commercial operations. The majority of the StratCO costs reflect additional amounts that our operating segments would have incurred had each segment operated as a standalone company during the periods presented. The reporting change was made to streamline accountability and speed decision making. In the third quarter of 2017, we reclassified approximately $125 million of costs from IH, approximately $36 million of costs from EH and approximately $19 million of costs from Corporate to Other unallocated costs to conform to the current period presentation. In the first nine months of 2017, we reclassified approximately $344 million of costs from IH, approximately $114 million of costs from EH and approximately $40 million of costs from Corporate to Other unallocated costs to conform to the current period presentation.
Other Costs and Business Activities
Certain pre-tax costs are not allocated to our operating segment results, such as costs associated with the following:
WRD, which is generally responsible for research projects for our IH business until proof-of-concept is achieved and then for transitioning those projects to the IH segment via the GPD organization for possible clinical and commercial development. R&D spending may include upfront and milestone payments for intellectual property rights. The WRD organization also has responsibility for certain science-based and other platform-services organizations, which provide technical expertise and other services to the various R&D projects, including EH R&D projects. WRD is also responsible for facilitating all regulatory submissions and interactions with regulatory agencies, including all safety-event activities.
GPD, which is generally responsible for the clinical development of assets that are in clinical trials for our WRD and Innovative portfolios. GPD also provides technical support and other services to Pfizer R&D projects.
Corporate, representing platform functions (such as worldwide technology, global real estate operations, legal, finance, human resources, worldwide public affairs, compliance and worldwide procurement), the provision of medical information to healthcare providers, patients and other parties, transparency and disclosure activities, clinical trial results publication, grants for healthcare quality improvement and medical education, and partnerships with global public health and medical associations, as well as certain compensation and other corporate costs, such as interest income and expense, and gains and losses on investments. Effective in the first quarter of 2018, certain costs for StratCO, which were previously reported in the operating results of our operating segments and Corporate, are reported in Other Unallocated. For additional information, see note below on Other unallocated costs.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Other unallocated costs, representing overhead expenses associated with our manufacturing and commercial operations that are not directly assessed to an operating segment, as business unit (segment) management does not manage these costs (which include manufacturing variances associated with production). In connection with the StratCO reporting change, in the third quarter of 2017, we reclassified approximately $125 million of costs from IH, approximately $36 million of costs from EH and approximately $19 million of costs from Corporate to Other unallocated costs to conform to the current period presentation. In the first nine months of 2017, we reclassified approximately $344 million of costs from IH, approximately $114 million of costs from EH and approximately $40 million of costs from Corporate to Other unallocated costs to conform to the current period presentation.
Certain transactions and events such as (i) purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and PP&E; (ii) acquisition-related costs, where we incur costs for executing the transaction, integrating the acquired operations and restructuring the combined company; and (iii) certain significant items, representing substantive and/or unusual, and in some cases recurring, items (such as restructuring or legal charges) that are evaluated on an individual basis by management and that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items can include, but are not limited to, non-acquisition-related restructuring costs, as well as costs incurred for legal settlements, asset impairments and disposals of assets or businesses, including, as applicable, any associated transition activities.
Segment Assets

We manage our assets on a total company basis, not by operating segment, as many of our operating assets are shared (such as our plant network assets) or commingled (such as accounts receivable, as many of our customers are served by both operating segments). Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. Total assets were approximately $168 billion as of September 30, 2018 and $172 billion as of December 31, 2017.
Selected Income Statement Information
The following table provides selected income statement information by reportable segment:
  Three Months Ended
  Revenues 
Earnings(a)
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Reportable Segments:        
IH(b)
 $8,471
 $8,118
 $5,388
 $5,000
EH(b)
 4,826
 5,050
 2,527
 2,801
Total reportable segments 13,298
 13,168
 7,915
 7,801
Other business activities(c), (d)
 
 
 (736) (759)
Reconciling Items:      
  
Corporate(b), (d)
 
 
 (1,337) (1,363)
Purchase accounting adjustments(d)
 
 
 (1,309) (1,154)
Acquisition-related costs(d)
 
 
 (112) (155)
Certain significant items(e)
 
 
 213
 (449)
Other unallocated(b), (d)
 
 
 (457) (335)
  $13,298
 $13,168

$4,177
 $3,585
 
  Nine Months Ended
  Revenues 
Earnings(a)
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Reportable Segments:        
IH(b)
 $24,573
 $23,204
 $15,419
 $14,534
EH(b)
 15,097
 15,639
 8,133
 8,672
Total reportable segments 39,670
 38,843
 23,552
 23,206
Other business activities(c), (d)
 
 
 (2,130) (2,205)
Reconciling Items:        
Corporate(b), (d)
 
 
 (3,633) (3,908)
Purchase accounting adjustments(d)
 
 
 (3,665) (3,527)
Acquisition-related costs(d)
 
 
 (221) (347)
Certain significant items(e)
 
 
 (8) (797)
Other unallocated(b), (d)
 
 
 (1,064) (1,070)
  $39,670
 $38,843
 $12,831
 $11,351

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(a) 
Income from continuing operations before provision for taxes on income. IH’s earnings include dividend income of $91 million and $54 million in the third quarter of 2018 and 2017, respectively, and $226 million and $211 million in the first nine months of 2018 and 2017, respectively, from our investment in ViiV. For additional information, see Note 4.
(b) 
In connection with the StratCO reporting change, in the third quarter of 2017, we reclassified approximately $125 million of costs from IH, approximately $36 million of costs from EH and approximately $19 million of costs from Corporate to Other unallocated costs to conform to the current period presentation. In the first nine months of 2017, we reclassified approximately $344 million of costs from IH, approximately $114 million of costs from EH and approximately $40 million of costs from Corporate to Other unallocated costs to conform to the current period presentation.
(c) 
Other business activities includes the costs managed by our WRD and GPD organizations.
(d) 
For a description, see the “Other Costs and Business Activities” section above.
(e) 
Certain significant items are substantive and/or unusual, and in some cases recurring, items (such as restructuring or legal charges) that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis.
For Earnings in the third quarter of 2018, certain significant items includes: (i) restructuring credits and implementation costs associated with our cost-reduction initiatives that are not associated with an acquisition of $35 million, (ii) net charges for certain legal matters of $37 million, (iii) income of $2 million, representing an adjustment to amounts previously recorded to write down the HIS net assets to fair value less costs to sell and (iv) other income of $282 million, which includes, among other things, a non-cash $343 million pre-tax gain in Other (income)/deductions––net associated with our transaction with Bain Capital to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system. For additional information, see Note 2B, Note 3 and Note 4.
For Earnings in the third quarter of 2017, certain significant items includes: (i) restructuring credits and implementation costs associated with our cost-reduction initiatives that are not associated with an acquisition of $55 million, (ii) charges for certain legal matters of $183 million, (iii) income of $12 million, representing an adjustment to amounts previously recorded to write down the HIS net assets to fair value less costs to sell, (iv) certain asset impairment charges of $127 million, (v) charges for business and legal entity alignment of $16 million and (vi) other charges of $81 million, which includes, among other things, $55 million in inventory losses, overhead costs related to the period in which our Puerto Rico plants were not operational, and incremental costs, all of which resulted from hurricanes in Puerto Rico and are included in Cost of sales. For additional information, see Note 2B, Note 3 and Note 4.
For Earnings in the first nine months of 2018, certain significant items includes: (i) restructuring credits and implementation costs associated with our cost-reduction initiatives that are not associated with an acquisition of $127 million, (ii) net credits for certain legal matters of $70 million, (iii) income of $1 million, representing an adjustment to amounts previously recorded to write down the HIS net assets to fair value less costs to sell, (iv) certain asset impairment charges of $31 million, (v) charges for business and legal entity alignment of $4 million and (vi) other income of $84 million, which includes, among other things, a non-cash $343 million pre-tax gain in Other (income)/deductions––net associated with our transaction with Bain Capital to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system, a $119 million charge, in the aggregate, in Selling, information and administrative expenses, for a special one-time bonus paid to virtually all Pfizer colleagues, excluding executives, which was one of several actions taken by us after evaluating the expected positive net impact of the December 2017 enactment of the TCJA on us, and a $50 million pre-tax gain in Other (income)/deductions––net as a result of the contribution of our allogeneic chimeric antigen receptor T cell therapy development program assets in connection with our contribution agreement entered into with Allogene. For additional information, see Note 2B, Note 3 and Note 4.
For Earnings in the first nine months of 2017, certain significant items includes: (i) restructuring credits and implementation costs associated with our cost-reduction initiatives that are not associated with an acquisition of $133 million, (ii) charges for certain legal matters of $191 million, (iii) charges of $52 million, representing adjustments to amounts previously recorded to write-down the HIS net assets to fair value less costs to sell, (iv) certain asset impairment charges of $127 million, (v) charges for business and legal entity alignment of $54 million and (v) other charges of $239 million, which include, among other things, $55 million in inventory losses, overhead costs related to the period in which our Puerto Rico plants were not operational, and incremental costs, all of which resulted from hurricanes in Puerto Rico and are included in Cost of sales, and a net loss of $30 million related to the sale of our 40% ownership investment in Teuto, including the extinguishment of a put option for the then remaining 60% ownership interest, which is included in Other (income)/deductions––net. For additional information, see Note 2B, Note 3 and Note 4.
Equity in the net income of investees accounted for by the equity method is not significant for any of our operating segments.
The operating segment information does not purport to represent the revenues, costs and income from continuing operations before provision for taxes on income that each of our operating segments would have recorded had each segment operated as a standalone company during the periods presented.
B. Geographic Information
As described in Note 1A, the February 3, 2017 sale of HIS impacted our results of operations in 2017.
The following table provides revenues by geographic area:
 
Three Months Ended
Nine Months Ended
(MILLIONS OF DOLLARS)
September 30,
2018


October 1,
2017


%
Change


September 30,
2018


October 1,
2017


%
Change

U.S.
$6,361

$6,534

(3)
$18,861

$19,516

(3)
Developed Europe(a)

2,231

2,163

3

6,657

6,309

6
Developed Rest of World(b)

1,640

1,632

1

4,795

4,797


Emerging Markets(c)

3,066

2,839

8

9,358

8,222

14
Revenues
$13,298

$13,168

1

$39,670

$38,843

2
(a) 
Developed Europe region includes the following markets: Western Europe, Scandinavian countries and Finland. Revenues denominated in euros were $1.8 billion and $1.7 billion in the third quarter of 2018 and 2017, respectively, and $5.3 billion and $5.0 billion in the first nine months of 2018 and 2017, respectively.
(b) 
Developed Rest of World region includes the following markets: Japan, Canada, Australia, South Korea and New Zealand.
(c) 
Emerging Markets region includes, but is not limited to, the following markets: Asia (excluding Japan and South Korea), Latin America, Eastern Europe, Africa, the Middle East, Central Europe and Turkey.

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PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Other Revenue Information
Significant Product Revenues
As described in Note 1A, the February 3, 2017 sale of HIS impacted our results of operations in 2017.
The following table provides detailed revenue information:
(MILLIONS OF DOLLARS)   Three Months Ended Nine Months Ended 
PRODUCT PRIMARY INDICATIONS OR CLASS September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

TOTAL REVENUES   $13,298
 $13,168
 $39,670
 $38,843
PFIZER INNOVATIVE HEALTH (IH)(a)
 $8,471
 $8,118
 $24,573
 $23,204
Internal Medicine   $2,463
 $2,455
 $7,339
 $7,245
Lyrica IH(b)
 Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia, neuropathic pain due to spinal cord injury 1,132
 1,150
 3,398
 3,382
Eliquis alliance revenues and direct sales Atrial fibrillation, deep vein thrombosis, pulmonary embolism 870
 644
 2,524
 1,813
Chantix/Champix An aid to smoking cessation treatment in adults 18 years of age or older 261
 240
 789
 727
BMP2 Development of bone and cartilage 54
 79
 206
 198
Toviaz Overactive bladder 67
 62
 197
 187
Viagra IH(c)
 Erectile dysfunction 
 206
 
 711
All other Internal Medicine Various 79
 75
 224
 228
Vaccines   $1,845
 $1,649
 $4,708
 $4,385
Prevnar 13/Prevenar 13 Vaccines for prevention of pneumococcal disease 1,660
 1,522
 4,290
 4,069
FSME/IMMUN-TicoVac Tick-borne encephalitis vaccine 57
 43
 162
 119
Trumenba Meningococcal Group B vaccine 61
 42
 95
 79
All other Vaccines Various 67
 43
 160
 117
Oncology   $1,775
 $1,616
 $5,294
 $4,551
Ibrance Advanced breast cancer 1,025
 878
 2,985
 2,410
Sutent Advanced and/or metastatic RCC, adjuvant RCC, refractory GIST (after disease progression on, or intolerance to, imatinib mesylate) and advanced pancreatic neuroendocrine tumor 248
 276
 785
 805
Xtandi alliance revenues Castration-resistant prostate cancer 180
 150
 510
 422
Xalkori ALK-positive and ROS1-positive advanced NSCLC 127
 146
 417
 442
Inlyta Advanced RCC 71
 84
 226
 256
Bosulif Philadelphia chromosome–positive chronic myelogenous leukemia 69
 57
 206
 163
All other Oncology Various 55
 26
 164
 54
Inflammation & Immunology (I&I)   $1,018
 $1,000
 $2,951
 $2,863
Enbrel (Outside the U.S. and Canada) Rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, plaque psoriasis, pediatric plaque psoriasis, ankylosing spondylitis and nonradiographic axial spondyloarthritis 531
 613
 1,589
 1,818
Xeljanz Rheumatoid arthritis, psoriatic arthritis, ulcerative colitis 432
 348
 1,221
 935
Eucrisa
Mild-to-moderate atopic dermatitis (eczema) 40
 15
 104
 33
All other I&I Various 15
 23
 37
 78
Rare Disease   $531
 $569
 $1,651
 $1,637
BeneFIX Hemophilia 132
 151
 420
 453
Genotropin Replacement of human growth hormone 143
 136
 416
 375
Refacto AF/Xyntha Hemophilia 117
 140
 388
 409
Somavert Acromegaly 64
 65
 195
 182
All other Rare Disease Various 74
 77
 232
 218
Consumer Healthcare   $839
 $829
 $2,631
 $2,522
PFIZER ESSENTIAL HEALTH (EH)(d)
   $4,826
 $5,050
 $15,097
 $15,639
Legacy Established Products (LEP)(e)
   $2,533
 $2,681
 $7,865
 $7,995
Lipitor Reduction of LDL cholesterol 507
 491
 1,539
 1,341
Norvasc Hypertension 247
 226
 773
 684
Premarin family Symptoms of menopause 204
 238
 605
 711
Xalatan/Xalacom Glaucoma and ocular hypertension 76
 83
 233
 241
Effexor Depression and certain anxiety disorders 78
 76
 228
 215
Zoloft Depression and certain anxiety disorders 72
 78
 223
 215
Zithromax Bacterial infections 54
 61
 216
 202
EpiPen Epinephrine injection used in treatment of life-threatening allergic reactions 68
 82
 215
 253
Xanax Anxiety disorders 52
 58
 163
 164
Sildenafil Citrate Erectile dysfunction 1
 
 72
 
All other LEP Various 1,176
 1,288
 3,599
 3,969

52


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(MILLIONS OF DOLLARS)   Three Months Ended Nine Months Ended 
PRODUCT PRIMARY INDICATIONS OR CLASS September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Sterile Injectable Pharmaceuticals (SIP)(f)
 $1,239
 $1,273
 $3,928
 $4,270
Sulperazon Treatment of infections 145
 114
 464
 345
Medrol Steroid anti-inflammatory 95
 109
 318
 352
Fragmin Slows blood clotting 76
 79
 221
 221
Tygacil Tetracycline class antibiotic 60
 60
 186
 192
Zosyn/Tazocin Antibiotic 55
 47
 175
 124
Precedex Sedation agent in surgery or intensive care 47
 51
 166
 182
All other SIP Various 761
 814
 2,399
 2,852
Peri-LOE Products(g)
   $698
 $794
 $2,208
 $2,398
Viagra EH(c)
 Erectile dysfunction 137
 102
 509
 285
Celebrex Arthritis pain and inflammation, acute pain 188
 212
 494
 564
Vfend Fungal infections 87
 97
 294
 305
Lyrica EH(b)
 Epilepsy, neuropathic pain and generalized anxiety disorder 81
 134
 251
 428
Zyvox Bacterial infections 50
 68
 184
 220
Revatio Pulmonary arterial hypertension 53
 58
 163
 189
Pristiq Depression 52
 69
 156
 230
All other Peri-LOE Products Various 49
 55
 157
 176
Biosimilars(h)
 Various $197
 $141
 $558
 $367
Inflectra/Remsima Inflammatory diseases 166
 112
 469
 284
All other Biosimilars Various 31
 28
 89
 82
Pfizer CentreOne(i)
   $159
 $161
 $539
 $514
Hospira Infusion Systems (HIS)(j)
 Various $
 $
 $���
 $97
Total Lyrica(b)
 Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia, neuropathic pain due to spinal cord injury $1,213
 $1,285
 $3,649
 $3,810
Total Viagra(c)
 Erectile dysfunction $137
 $308
 $509
 $996
Total Alliance revenues Various $977
 $741
 $2,820
 $2,112
(a) 
The IH business encompasses Internal Medicine, Vaccines, Oncology, Inflammation & Immunology, Rare Disease and Consumer Healthcare.
(b) 
Lyrica revenues from all of Europe, Russia, Turkey, Israel and Central Asia countries are included in Lyrica EH. All other Lyrica revenues are included in Lyrica IH. Total Lyrica revenues represent the aggregate of worldwide revenues from Lyrica IH and Lyrica EH.
(c) 
Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra revenues are reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
(d) 
The EH business encompasses Legacy Established Products, Sterile Injectable Pharmaceuticals, Peri-LOE Products, Biosimilars, Pfizer CentreOne and HIS (through February 2, 2017).
(e) 
Legacy Established Products primarily include products that have lost patent protection (excluding Sterile Injectable Pharmaceuticals and Peri-LOE Products). In the fourth quarter of 2017, we sold our equity share in Hisun Pfizer. As a result, effective in the first quarter of 2018, Hisun Pfizer-related revenues, previously reported in emerging markets within All Other LEP and All Other SIP, are reported in emerging markets within Pfizer CentreOne.
(f) 
Sterile Injectable Pharmaceuticals includes branded and generic injectables (excluding Peri-LOE Products). In the fourth quarter of 2017, we sold our equity share in Hisun Pfizer. As a result, effective in the first quarter of 2018, Hisun Pfizer-related revenues, previously reported in emerging markets within All Other LEP and All Other SIP, are reported in emerging markets within Pfizer CentreOne.
(g) 
Peri-LOE Products includes products that have recently lost or are anticipated to soon lose patent protection. These products primarily include: Lyrica in Europe, Russia, Turkey, Israel and Central Asia; worldwide revenues for Celebrex, Pristiq, Zyvox, Vfend, Revatio and Inspra; and beginning in 2018, Viagra revenues for all countries (and Viagra revenues for all countries other than the U.S. and Canada in 2017, see note (c) above).
(h) 
Biosimilars includes Inflectra/Remsima (biosimilar infliximab) in the U.S. and certain international markets, Nivestim (biosimilar filgrastim) in certain European, Asian and Africa/Middle Eastern markets and in the U.S. and Retacrit (biosimilar epoetin zeta) in certain European and Africa/Middle Eastern markets.
(i) 
Pfizer CentreOne includes revenues from our contract manufacturing and active pharmaceutical ingredient sales operation, including sterile injectables contract manufacturing, and revenues related to our manufacturing and supply agreements, including with Zoetis Inc. In the fourth quarter of 2017, we sold our equity share in Hisun Pfizer. As a result, effective in the first quarter of 2018, Hisun Pfizer-related revenues, previously reported in emerging markets within All Other LEP and All Other SIP, are reported in emerging markets within Pfizer CentreOne.
(j) 
HIS (through February 2, 2017) includes Medication Management Systems products composed of infusion pumps and related software and services, as well as IV Infusion Products, including large volume IV solutions and their associated administration sets.  


53


REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pfizer Inc.:

Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Pfizer Inc. and Subsidiary companies (the Company) as of September 30, 2018, the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2018 and October 1, 2017, the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2018 and October 1, 2017 and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2018, 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, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated 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 PCAOB, 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.



/s/ KPMG LLP
New York, New York
November 8, 2018

54


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout this MD&A. 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:
Beginning on page 57
 This section provides information about the following: Our Business; our performance during the third quarter and first nine months of 2018 and 2017; Our Operating Environment; The Global Economic Environment; Our Strategy; Our Business Development Initiatives, such as acquisitions, dispositions, licensing and collaborations; and Our Financial Guidance for 2018. 
Beginning on page 71
 
This section discusses updates to our 2017 Financial Report disclosures for those accounting policies and estimates that we consider important in understanding our consolidated financial statements. For additional discussion of our accounting policies, see Notes to Consolidated Financial Statements—Note 1. Basis of Presentation and Significant Accounting Policies.
 
Beginning on page 72
 This section includes the following sub-sections: 
 
Beginning on page 72
 This sub-section provides an overview of revenues by segment and geography as well as revenue deductions 
 
Beginning on page 76
 This sub-section provides an overview of several of our biopharmaceutical products. 
 
Beginning on page 82
 This sub-section provides an overview of important biopharmaceutical product developments. 
 
Beginning on page 85
 This sub-section provides a discussion about our costs and expenses. 
 
Beginning on page 88
 This sub-section provides a discussion of items impacting our tax provisions. 
 
Beginning on page 88
 This sub-section provides a discussion of an alternative view of performance used by management. 
Beginning on page 94
 This section provides a discussion of the performance of each of our operating segments. 
Beginning on page 102
 This section provides a discussion of changes in certain components of other comprehensive income. 
Beginning on page 102
 This section provides a discussion of changes in certain balance sheet accounts. 
Beginning on page 104
 This section provides an analysis of our cash flows for the first nine months of 2018 and 2017. 
Beginning on page 105
 This section provides an analysis of selected measures of our liquidity and of our capital resources as of September 30, 2018 and December 31, 2017, as well as a discussion of our outstanding debt and other commitments that existed as of September 30, 2018 and December 31, 2017. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer’s future activities. 
Beginning on page 109
 This section discusses accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted. 
Beginning on page 111
 This section provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this MD&A. Also included in this section is a discussion of legal proceedings and contingencies. 
Certain amounts in our MD&A may not add due to rounding. All percentages have been calculated using unrounded amounts.

55


The following table provides the components of the condensed consolidated statements of income:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS, EXCEPT PER COMMON SHARE DATA) September 30,
2018

 October 1,
2017

 
%
Change

 September 30,
2018

 October 1,
2017

 
%
Change

Revenues $13,298
 $13,168
 1
 $39,670
 $38,843
 2
             
Cost of sales(a)
 2,694
 2,844
 (5) 8,173
 7,972
 3
% of revenues 20.3% 21.6%  
 20.6% 20.5%  
             
Selling, informational and administrative expenses(a)
 3,494
 3,504
 
 10,448
 10,249
 2
% of revenues 26.3% 26.6%  
 26.3% 26.4%  
             
Research and development expenses(a)
 2,008
 1,865
 8
 5,549
 5,367
 3
% of revenues 15.1% 14.2%  
 14.0% 13.8%  
             
Amortization of intangible assets 1,253
 1,177
 6
 3,640
 3,571
 2
% of revenues 9.4% 8.9%  
 9.2% 9.2%  
             
Restructuring charges and certain acquisition-related costs 85
 114
 (26) 172
 267
 (36)
% of revenues 0.6% 0.9%  
 0.4% 0.7%  
             
Other (income)/deductions––net (414) 79
 *
 (1,143) 65
 *
Income from continuing operations before provision for taxes on income 4,177
 3,585
 17
 12,831
 11,351
 13
% of revenues 31.4% 27.2%  
 32.3% 29.2%  
             
Provision for taxes on income 66
 727
 (91) 1,270
 2,287
 (44)
Effective tax rate 1.6% 20.3%  
 9.9% 20.1%  
             
Income from continuing operations 4,111
 2,858
 44
 11,562
 9,064
 28
% of revenues 30.9% 21.7%  
 29.1% 23.3%  
             
Discontinued operations––net of tax 11
 
 *
 10
 1
 *
             
Net income before allocation to noncontrolling interests 4,122
 2,858
 44
 11,571
 9,066
 28
% of revenues 31.0% 21.7%  
 29.2% 23.3%  
             
Less: Net income attributable to noncontrolling interests 8
 18
 (53) 25
 32
 (22)
Net income attributable to Pfizer Inc. $4,114
 $2,840
 45
 $11,546
 $9,034
 28
% of revenues 30.9% 21.6%  
 29.1% 23.3%  
             
Earnings per common share––basic:
  
  
  
  
  
  
Income from continuing operations attributable to Pfizer Inc. common shareholders $0.70
 $0.48
 46
 $1.96
 $1.51
 29
Net income attributable to Pfizer Inc. common shareholders $0.70
 $0.48
 47
 $1.96
 $1.51
 29
             
Earnings per common share––diluted:
      
  
  
  
Income from continuing operations attributable to Pfizer Inc. common shareholders $0.69
 $0.47
 46
 $1.92
 $1.49
 29
Net income attributable to Pfizer Inc. common shareholders $0.69
 $0.47
 46
 $1.92
 $1.49
 29
             
Cash dividends paid per common share $0.34
 $0.32
 6
 $1.02
 $0.96
 6
* Calculation not meaningful or results are equal to or greater than 100%.
(a) 
Excludes amortization of intangible assets, except as disclosed in Notes to Condensed Consolidated Financial Statements––Note 9A. Identifiable Intangible Assets and Goodwill: Identifiable Intangible Assets.


56


OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Our Business

We apply science and our global resources to bring therapies to people that extend and significantly improve their lives through the discovery, development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world’s best-known consumer healthcare products. We work across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases of our time. We collaborate with healthcare providers, governments and local communities to support and expand access to reliable, affordable healthcare around the world. Our revenues are derived from the sale of our products and, to a much lesser extent, from alliance agreements, under which we co-promote products discovered or developed by other companies or us (Alliance revenues).

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). For additional information, see Notes to Condensed Consolidated Financial Statements––Note 13A. Segment, Geographic and Other Revenue Information: Segment Information and the “Our Strategy––Commercial Operations” section of this MD&A below, including a discussion of our plans to reorganize our operations into three businesses effective at the beginning of fiscal 2019.

In October 2018, we announced our Board of Directors unanimously elected Dr. Albert Bourla, Pfizer Chief Operating Officer, to succeed Ian Read as Chief Executive Officer effective January 1, 2019. Ian Read will transition from his current role as Chairman and Chief Executive Officer to Executive Chairman of Pfizer’s Board of Directors.

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. As explained more fully in our 2017 Form 10-K, the biopharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. These factors include, among others: the loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights, the ability to replenish innovative biopharmaceutical products, healthcare legislation, pipeline productivity, the regulatory environment, pricing and access pressures and competition. We also face challenges as a result of the global economic environment. For additional information about these factors and challenges, see the “Our Operating Environment” and “The Global Economic Environment” sections of this MD&A and of our 2017 Financial Report, Part I, Item 1A, “Risk Factors” of our 2017 Form 10-K and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

The financial information included in our condensed consolidated financial statements for our subsidiaries operating outside the U.S. is as of and for the three and nine months ended August 26, 2018 and August 27, 2017. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and nine months ended September 30, 2018 and October 1, 2017.
References to developed and emerging markets in this MD&A include:
Developed markets U.S., Western Europe, Japan, Canada, Australia, South Korea, Scandinavian countries, Finland and New Zealand
   
Emerging markets (includes, but is not limited to) Asia (excluding Japan and South Korea), Latin America, Eastern Europe, Africa, the Middle East, Central Europe and Turkey
References to operational variances in this MD&A pertain to period-over-period growth rates that exclude the impact of foreign exchange. The operational variances are determined by multiplying or dividing, as appropriate, our current period U.S. dollar results by the current period average foreign exchange rates and then multiplying or dividing, as appropriate, those amounts by the prior-year period average foreign exchange rates. Although exchange rate changes are part of our business, they are not within our control. Exchange rate changes, however, can mask positive or negative trends in the business; therefore, we believe presenting operational variances provides useful information in evaluating the results of our business.

On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of the TCJA. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the U.S. Federal corporate tax rate from 35% to 21%, transitioning U.S. international taxation from a worldwide tax system to a territorial tax system and imposing a repatriation tax on deemed repatriated accumulated post-1986 earnings of foreign subsidiaries. For information on estimates and assumptions in connection with the TCJA, see Notes to Condensed Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.
We continue to review strategic options for our Consumer Healthcare business. We remain disciplined regarding our capital allocation, and at this time we have not received an acceptable offer for the sale of this business. We will continue our

57


management of this strong business as we explore other alternatives, which could include everything from a full or partial separation of the business to ultimately deciding to retain the business. We continue to expect that any decision regarding strategic alternatives for our Consumer Healthcare business will be made during the fourth quarter of 2018.

Our other significant business development activities include:
On February 3, 2017, we completed the sale of Pfizer’s global infusion systems net assets, HIS, to ICU Medical for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing. At closing, we received 3.2 million newly issued shares of ICU Medical common stock, which we initially valued at approximately $428 million (a portion of which we sold in August 2018), a promissory note in the amount of $75 million and net cash of approximately $200 million before customary adjustments for net working capital. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. The operating results of HIS are included in our condensed consolidated statement of income and EH’s operating results through February 2, 2017 and, therefore, our financial results, and EH’s operating results, for the third quarter of 2017 do not reflect any contribution from HIS global operations, while our financial results, and EH’s operating results, for the first nine months of 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations. Our financial results, and EH’s operating results, for 2018 do not reflect any contribution from HIS global operations.
On December 22, 2016, which falls in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S. for $1,040 million, composed of cash and contingent consideration. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of this business, and, in accordance with our international reporting period, our financial results, EH’s operating results, and cash flows for the third quarter and first nine months of 2017 reflect approximately three months and eight months, respectively, of the small molecule anti-infectives business acquired from AstraZeneca. Our financial results, EH’s operating results, and cash flows for the third quarter and first nine months of 2018 reflect three months and nine months, respectively, of the small molecule anti-infective business acquired from AstraZeneca.
For additional information, see Notes to Condensed Consolidated Financial Statements––Note 2. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment and the “Our Strategy” and “Our Business Development Initiatives” sections of this MD&A below.

Impact of Hurricanes in Puerto Rico

We have manufacturing and commercial operations in Puerto Rico, which were impacted by the hurricanes toward the end of the third quarter in 2017. While our three manufacturing sites sustained some damage and became inoperable due to issues impacting Puerto Rico overall, all three sites have resumed operations and remediation activities will continue through the remainder of the year. Given prior inoperability along with ongoing remediation of our sites, there could be certain product shortages in the coming months. Our commercial sales offices in Puerto Rico have been operational since October 2017.
Product Manufacturing

We periodically encounter difficulties or delays in manufacturing, including due to suspension of manufacturing or voluntary recall of a product, or legal or regulatory actions such as warning letters. The product shortages we have been experiencing within our Essential Health portfolio are primarily for products from the legacy Hospira portfolio and are largely driven by capacity constraints, technical issues and supplier quality concerns. We continue to remediate issues at legacy Hospira facilities manufacturing sterile injectables within our Essential Health portfolio. Any continuing product shortage interruption at these manufacturing facilities could negatively impact our financial results, specifically in our SIP portfolio. We continue to make progress on our comprehensive remediation plan to upgrade and modernize these facilities, and we expect our supply issues to be significantly improved by the end of 2019.


58


Our 2018 Performance

Revenues

Revenues in the third quarter of 2018 increased $130 million, or 1%, compared to the same period in 2017, which reflects an operational increase of $243 million, or 2%, partially offset by the unfavorable impact of foreign exchange of $113 million, or 1%. Revenues in the first nine months of 2018 increased $827 million, or 2%, compared to the same period in 2017, which reflects a favorable impact of foreign exchange of $693 million, or 2%, and an operational increase of $134 million.
The following provides an analysis of the changes in revenues for the third quarter and first nine months of 2018:
(MILLIONS OF DOLLARS) Three Months
 Nine Months
Revenues, for the three and nine months ended October 1, 2017
 $13,168
 $38,843
  

  
Operational growth/(decline):    
Continued growth from key brands(a) and from recently launched products(b), as well as growth from Biosimilars(c)
 768
 2,172
Declines from the SIP portfolio (primarily in the U.S.), the Peri-LOE Products portfolio (excluding Viagra EH(d), which was impacted by the shift in the reporting of U.S. and Canada Viagra revenues to EH), total Viagra(d) (primarily in the U.S.), Enbrel (driven by declines in most developed Europe markets) and the LEP portfolio (primarily in developed markets)
 (508) (1,971)
Disposition-related impact of the February 2017 sale of HIS(e)
 
 (97)
Other operational factors, net (18) 29
Operational growth, net 243
 134
     
Operational revenues 13,410
 38,977
(Unfavorable)/favorable impact of foreign exchange (113) 693
Revenues, for the three and nine months ended September 30, 2018
 $13,298
 $39,670
(a) 
Key brands represent Eliquis, Ibrance, Xeljanz, Prevnar 13/Prevenar 13 and Xtandi, as well as, for the first nine months of 2018, Chantix/Champix.
(b) 
Growth from recently launched products include Eucrisa in the U.S., as well as Besponsa and Bavencio, primarily in the U.S. and developed Europe.
(c) 
Growth from Biosimilars, primarily from Inflectra in certain channels in the U.S., as well as in developed Europe.
(d) 
Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra revenues are reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
(e) 
Impact on financial results for the sale of HIS in February 2017. The first nine months of 2018 do not reflect any contribution from HIS global operations, compared to approximately one month of HIS domestic operations and approximately two months of HIS international operations in the same period in 2017.
For worldwide revenues, by geography, for selected products, see the discussion in the “Analysis of the Condensed Consolidated Statements of Income––Revenues and Product Developments––Revenues––Selected Product Discussion” section of this MD&A. For additional information regarding the primary indications or class of certain products, see Notes to Condensed Consolidated Financial Statements––Note 13C. Segment, Geographic and Other Revenue Information: Other Revenue Information.
See the “Analysis of the Condensed Consolidated Statements of Income––Revenues and Product Developments––Revenues by Segment and Geography” section below for more information, including a discussion of key drivers of our revenue performance.

59


Income from Continuing Operations Before Provision for Taxes on Income
The following provides an analysis of the increase in Income from continuing operations before provision for taxes on income for the third quarter and first nine months of 2018:
(MILLIONS OF DOLLARS) Three Months
 Nine Months
Income from continuing operations before provision for taxes on income, for the three and nine months ended October 1, 2017
 $3,585
 $11,351
Favorable change in revenues 130
 827
Favorable/(unfavorable) changes:  

Higher net gains recognized during the period on investments in equity securities(a)
 49
 349
Impact of net periodic benefit costs/(credits) other than service costs(a)
 93
 313
Higher income from collaborations, out-licensing arrangements and sales of compound/product rights(a)
 61
 292
Impact of certain legal matters, net(a)
 146
 264
Lower certain asset impairments(a)
 131
 103
Impact of Cost of sales(b)
 149
 (202)
Impact of Selling, information and administrative expenses(c)
 10
 (198)
Higher Research and development expenses(d)
 (144) (182)
Higher Amortization of intangible assets(e)
 (76) (69)
All other items, net 43

(17)
Income from continuing operations before provision for taxes on income, for the three and nine months ended September 30, 2018
 $4,177

$12,831
(a) 
See the Notes to Condensed Consolidated Financial Statements––Note 4. Other (Income)/Deductions—Net.
(b) 
See the “Costs and Expenses––Cost of Sales” section of this MD&A.
(c) 
See the “Costs and Expenses––Selling, Informational and Administrative (SI&A) Expenses” section of this MD&A.
(d) 
See the “Costs and Expenses––Research and Development (R&D) Expenses” section of this MD&A.
(e) 
See the “Costs and Expenses––Amortization of Intangible Assets” section of this MD&A.
For information on our tax provision and effective tax rate see the “Provision for Taxes on Income” section of this MD&A and Notes to Condensed Consolidated Financial Statements––Note 5. Tax Matters.

Our Operating Environment
Industry-Specific Challenges

Intellectual Property Rights and Collaboration/Licensing Rights

The loss, expiration or invalidation of intellectual property rights, patent litigation settlements with generic manufacturers and the expiration of co-promotion and licensing rights can have a significant adverse effect on our revenues. Many of our branded products have multiple patents that expire at varying dates, thereby strengthening our overall patent protection. However, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, we lose exclusivity on these products, and generic pharmaceutical manufacturers generally produce similar products and sell them for a lower price. The date at which generic competition commences may be different from the date that the patent or regulatory exclusivity expires. However, when generic competition does commence, the resulting price competition can substantially decrease our revenues for the impacted products, often in a very short period of time. Also, if one of our patents is found to be invalid by judicial, court or administrative proceedings, such as inter partes review, post-grant review, re-examination or opposition proceedings, before the U.S. Patent and Trademark Office, the European Patent Office, or other foreign counterparts, generic or competitive products could be introduced into the market resulting in the erosion of sales of our existing products. For example, several of the patents in our pneumococcal vaccine portfolio were challenged in inter partes review and post-grant review proceedings in the U.S. In June 2018, the Patent Trial and Appeal Board ruled on one patent, holding that one claim was valid and that all other claims were invalid. The party challenging that patent has appealed the decision. Challenges to other patents remain pending before the U.S. Patent and Trademark Office. The invalidation of these patents could potentially allow a competitor pneumococcal vaccine into the marketplace.
As a result of a patent litigation settlement, Teva Pharmaceuticals USA, Inc. launched a generic version of Viagra in the U.S. in December 2017. See the “Intellectual Property Rights and Collaboration/Licensing Rights” section of our 2017 Financial Report for additional information about (i) recent losses and expected losses of product exclusivity in the U.S., Europe and/or Japan impacting product revenues and (ii) recent losses of collaboration rights impacting alliance revenues.


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We lost or expect to lose exclusivity for various other products in various markets over the next few years, including, among others, the expiration of the basic product patent for Lyrica in the U.S. in December 2018. Pfizer is currently pursuing a six-month patent-term extension for pediatric exclusivity for Lyrica in the U.S. with the FDA.

For additional information, see the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business” of our 2017 Form 10-K.
We will continue to aggressively defend our patent rights whenever we deem appropriate. For a discussion of certain recent developments with respect to patent litigation, see Notes to Condensed Consolidated Financial Statements––Note 12A1. Contingencies and Certain Commitments: Legal Proceedings––Patent Litigation.
Regulatory Environment/Pricing and Access––U.S. Healthcare Legislation

In March 2010, the ACA was enacted in the U.S. For additional information, see the “Government Regulation and Price Constraints” section in Part I, Item 1, “Business” of our 2017 Form 10-K.
We recorded the following amounts as a result of the U.S. Healthcare Legislation:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Reduction to Revenues, related to the Medicare “coverage gap” discount provision
 $217
 $157
 $435
 $296
Selling, informational and administrative expenses, related to the fee payable to the federal government (which is not deductible for U.S. income tax purposes), based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. The first nine months of 2018 also reflected a favorable true-up associated with the updated 2017 invoice received from the federal government, which reflected a lower expense than what was previously estimated for invoiced periods.
 43
 87
 118
 218

Regulatory Environment/Pricing and Access––Government and Other Payer Group Pressures
The pricing of medicines by pharmaceutical manufacturers and the cost of healthcare, which includes medicines, medical services and hospital services, continues to be important to payers, governments, patients, and other stakeholders. We believe that medicines are amongst the most powerful tool for patients in curing, treating and preventing illness and disability, and that all patients should have appropriate access to the medicines their doctors prescribe. We may consider a number of factors when determining a medicine’s price, including, for example, its impact on patients and their disease, other available treatments, the medicine’s potential to reduce other healthcare costs (such as hospital stays), and affordability. Within the U.S., in particular, we may also engage with patients, doctors and healthcare plans regarding their views. We also negotiate with insurers, including PBMs and MCOs, often providing significant discounts to them from the initial price. The price that patients pay in the U.S. for the medicines their physicians prescribe is ultimately set by healthcare providers and insurers. On average, in the U.S., insurers cover a much lower share of prescription drug costs than medical services, which results in a greater proportion of out-of-pocket costs being passed on to patients for medicines, thereby making them less accessible and affordable. We will continue to work with insurance providers, governments and others to improve access to today’s innovative treatments.
Governments, MCOs and other payer groups continue to seek increasing discounts on our products through a variety of means, such as leveraging their purchasing power, implementing price controls, and demanding price cuts (directly or by rebate actions). In Europe, Japan, China, Canada, South Korea and some other international markets, governments provide healthcare at low-to-zero direct cost to consumers at the point of care and have significant power as large single payers to regulate pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system, particularly under recent global economic pressures. In the U.S., government action to reduce federal spending on entitlement programs including Medicare and Medicaid may affect payment for our products or services provided using our products. Any significant spending reductions or cost controls affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented could have an adverse impact on our results of operations. Significant Medicare reductions could also result if Congress proceeds with certain proposals to convert the Medicare fee-for-service program into a premium support program, or Congress chooses to implement the recommendations made annually by the Medicare Payment Advisory Commission, which are primarily intended to extend the fiscal solvency of the Medicare program.
Consolidation among MCOs has increased the negotiating power of MCOs and other private insurers. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange

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for formulary inclusion. Failure to obtain or maintain timely or adequate pricing or formulary placement for our products or obtaining such pricing or placement at unfavorable pricing could adversely impact revenue.
Efforts by government officials or legislators to implement measures to regulate prices or payment for pharmaceutical products, including legislation on drug importation, could adversely affect our business if implemented. Recently, there has been considerable public and government scrutiny of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. There have also been state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices. Certain state legislation has been subject to legal challenges.
Adoption of new legislation at the federal or state level could further affect demand for, or pricing of, our products. We believe medicines are the most efficient and effective use of healthcare dollars based on the value they deliver to the overall healthcare system. We will continue to work with law makers and advocate for solutions that effectively improve patient health outcomes, lower costs to the healthcare system, and ensure access to medicines within an efficient and affordable healthcare system.
We face uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. The likelihood of such a repeal currently appears low given the recent U.S. midterm elections, which resulted in Democratic control of the House of Representatives. Although the revenues generated for Pfizer by the health insurance exchanges under the ACA are minor, there is no assurance that any future replacement, modification or repeal of the ACA will not adversely affect our business and financial results, particularly if the legislation reduces incentives for employer-sponsored insurance coverage. We also may face uncertainties if our industry is looked to for savings to fund certain legislation, such as lifting the debt ceiling. One recent example is the Bipartisan Budget Act of 2018, which increased the discount we pay in the Medicare Part D “coverage gap” from 50% to 70%, which will modestly reduce our future Medicare Part D revenues.
In May 2018, President Trump released his Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (Blueprint). Pfizer communicated a formal response to the request for information that accompanied the Blueprint, and is participating in the subsequent rule-making process to advance the proposals that are most likely to bring meaningful out-of-pocket cost relief to patients. Certain proposals in the Blueprint, and related drug pricing measures proposed since the Blueprint, could cause significant operational and reimbursement changes for the pharmaceutical industry. On July 10, 2018, Pfizer decided to defer price increases that were effective July 1, 2018, and return those prices to their pre-July 1, 2018 levels. In addition, the price declines that we took as of July 1, 2018 remain in effect.
The potential for additional pricing and access pressures in the commercial sector continues to be significant. Some employers, seeking to avoid the tax on high-cost health insurance in the ACA to be imposed in 2022, are already scaling back healthcare benefits and an increasing number are implementing high deductible benefit designs. This is a trend that is likely to continue. Private third-party payers, such as health plans, increasingly challenge pharmaceutical product pricing, which could result in lower prices, lower reimbursement rates and a reduction in demand for our products. Pricing pressures for our products may occur as a result of highly competitive insurance markets. Healthcare provider purchasers, directly or through group purchasing organizations, are seeking enhanced discounts or implementing more rigorous bidding or purchasing review processes.
Overall, there is increasing pressure on U.S. providers to deliver healthcare at a lower cost and to ensure that those expenditures deliver demonstrated value in terms of health outcomes. Longer term, we are seeing a shift in focus away from fee-for-service payments towards outcomes-based payments and risk-sharing arrangements that reward providers for cost reductions. These new payment models can, at times, lead to lower prices for, and restricted access to, new medicines. At the same time, these models can also expand utilization by encouraging physicians to screen, diagnose and focus on outcomes.
Outside the U.S., governments, including the different EU Member States, Japan and Canada, may use a variety of cost-containment measures for our pharmaceutical products, including price cuts, mandatory rebates, health technology assessments, forced localization as a condition of market access and international reference pricing (i.e., the practice of a country linking its regulated medicine prices to those of other countries). This international patchwork of price regulation and differing economic conditions and incomplete value assessments across countries has led to different prices in different countries, varying health outcomes and some third-party trade in our products between countries.
In particular, international reference pricing adds to the regional impact of price cuts in individual countries and hinders patient access and innovation. Price variations, exacerbated by international reference pricing systems, also have resulted from exchange rate fluctuations. The downward pricing pressure resulting from this dynamic can be expected to continue as a result of reforms to international reference pricing policies and measures targeting pharmaceuticals in some European countries.
In addition, several important multilateral organizations, such as the United Nations (UN) and the Organization for Economic Cooperation and Development (OECD), are increasing scrutiny of international pharmaceutical pricing through issuing reports and policy recommendations (e.g., 2016 UN High Level Panel Report on Access to Medicines and 2017 OECD Report on New Health Technologies––Managing Access, Value and Sustainability). The recommendations from these reports and any other recommendations that may be made in the future will continue to exert additional pricing pressures.

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In response to the evolving U.S. and global healthcare spending landscape, we are continuing to work with health authorities, health technology assessment and quality measurement bodies and major U.S. payers throughout the product-development process to better understand how these entities value our compounds and products. Further, we are seeking to develop stronger internal capabilities focused on demonstrating the value of the medicines that we discover or develop, register and manufacture, by recognizing patterns of usage of our medicines and competitor medicines along with patterns of healthcare costs.
For additional information, see the “Regulatory Environment––Pipeline Productivity” and “Competition” sections of our 2017 Financial Report.
The Global Economic Environment

In addition to the industry-specific factors discussed above, we, like other businesses, are exposed to the economic cycle, which impacts our biopharmaceutical operations globally.
Governments, corporations, and insurance companies, which provide insurance benefits to patients, have implemented increases in cost-sharing and restrictions on access to medicines, potentially causing patients to switch to generic or biosimilar products, delay treatments, skip doses or use less effective treatments. Government financing pressures can lead to negative pricing pressure in various markets where governments take an active role in setting prices, access criteria (e.g., through public or private health technology assessments), or other means of cost control. Examples include Europe, Japan, China, Canada, South Korea and a number of other international markets. The U.S. continues to maintain competitive insurance markets, but has also seen significant increases in patient cost-sharing and growing government influence as government programs continue to grow as a source of coverage.
Significant portions of our revenues, costs and expenses, as well as our substantial international net assets, are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk also is managed through the use of derivative financial instruments and foreign currency debt. As we operate in multiple foreign currencies, including the euro, the Japanese yen, the Chinese renminbi, the U.K. pound, the Canadian dollar and approximately 100 other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses. If the U.S. dollar were to weaken against another currency, assuming all other variables remained constant, our revenues would increase, having a positive impact on earnings, and our overall expenses would increase, having a negative impact on earnings. Conversely, if the U.S. dollar were to strengthen against another currency, assuming all other variables remained constant, our revenues would decrease, having a negative impact on earnings, and our overall expenses would decrease, having a positive impact on earnings. Therefore, significant changes in foreign exchange rates can impact our results and our financial guidance.
The impact of possible currency devaluations in countries experiencing high inflation rates or significant exchange fluctuations, including Venezuela and Argentina, can impact our results and financial guidance. For further information about our exposure to foreign currency risk, see the “Analysis of Financial Condition, Liquidity and Capital Resources” and the “Our Financial Guidance for 2018” sections of this MD&A.
In June 2016, the U.K. electorate voted in a referendum to leave the EU, which is commonly referred to as “Brexit”. In March 2017, the U.K. government formally notified the European Council of its intention to leave the EU after it triggered Article 50 of the Lisbon Treaty to begin the two-year negotiation process establishing the terms of the exit and outlining the future relationship between the U.K. and the EU. Formal negotiations officially started in June 2017. This process continues to be highly complex and the end result of these negotiations may pose certain implications to our research, commercial and general business operations in the U.K. and the EU, including the approval and supply of our products. The EMA announced in November 2017 that it will be relocating from London, U.K. to Amsterdam, Netherlands by the expected date of Brexit in March 2019.
We generated approximately 2% of our worldwide revenues from the U.K. in 2017 and in the first nine months of 2018, including the foreign currency exchange impact from the weakening U.K. pound relative to the U.S. dollar to date. We recognize that there are still significant uncertainties surrounding the ultimate resolution of Brexit negotiations, and we will continue to monitor any changes that may arise and assess their potential impact on our business.
Pfizer’s preparations are well advanced to make the changes necessary to meet EU legal requirements after the U.K. is no longer a member state, especially in the regulatory, manufacturing and supply chain areas. The aim is to ensure the continuity of supply to patients in Europe (EU and U.K.) and other global markets impacted by these changes. The one-time costs of making these adaptations are currently estimated at approximately $100 million.
On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of the TCJA. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the U.S. Federal corporate tax rate from 35% to 21%, transitioning U.S. international taxation from a worldwide tax system to a

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territorial tax system and imposing a repatriation tax on deemed repatriated accumulated post-1986 earnings of foreign subsidiaries. Given the significant changes resulting from and complexities associated with the TCJA, the estimated financial impacts for 2017, as well as the estimated impact on 2018 financial guidance for the effective tax rate on adjusted income remain provisional and subject to further analysis, interpretation and clarification of the TCJA, which could result in further changes to these estimates during the fourth quarter of 2018. For additional information, see the “Our Financial Guidance for 2018”, “Provision for Taxes on Income” and “Analysis of Financial Condition, Liquidity and Capital Resources” sections of this MD&A and Notes to Condensed Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.
Pfizer maintains a strong financial position while operating in a complex global environment. Due to our significant operating cash flows, financial assets, access to capital markets and available lines of credit and revolving credit agreements, we continue to believe that we have, and will maintain, the ability to meet our liquidity needs for the foreseeable future. Our long-term debt is rated high quality by both S&P and Moody’s. As market conditions change, we continue to monitor our liquidity position. We have taken and will continue to take a conservative approach to our financial investments. Both short-term and long-term investments consist primarily of high-quality, highly liquid, well-diversified, available-for-sale debt securities. For further discussion of our financial condition and credit ratings, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this MD&A.
These and other industry-wide factors that may affect our businesses should be considered along with information presented in the “Forward-Looking Information and Factors That May Affect Future Results” section of this MD&A and in Part I, Item 1A, “Risk Factors” of our 2017 Form 10-K and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

Our Strategy

We believe that our medicines provide significant value for both healthcare providers and patients, not only from the improved treatment of diseases but also from a reduction in other healthcare costs, such as emergency room or hospitalization costs, as well as improvements in health, wellness and productivity. We continue to actively engage in dialogues about the value of our medicines and how we can best work with patients, physicians and payers to prevent and treat disease and improve outcomes. We continue to work within the current legal and pricing structures, as well as continue to review our pricing arrangements and contracting methods with payers, to maximize patient access and minimize any adverse impact on our revenues. We remain firmly committed to fulfilling our companys purpose of innovating to bring therapies to patients that extend and significantly improve their lives. By doing so, we expect to create value for the patients we serve and for our shareholders.
Organizing for Growth
We expect higher and more sustained growth post-2020 after our near-term patent expirations occur. Therefore, in July 2018, we announced that we will organize our company into three businesses effective at the beginning of our 2019 fiscal year. We believe the new structure better positions each business to achieve its growth potential:
a science-based Innovative Medicines business, which will include all of our current Innovative Health medicines and vaccines business units as well as biosimilars and a new Hospital Medicines business unit that will commercialize our global portfolio of sterile injectable and anti-infective medicines;
an off-patent branded and generic Established Medicines business; and
a Consumer Healthcare business, for which we continue to evaluate strategic alternatives, with a decision expected in the fourth quarter of 2018.
These changes will not be effective until the beginning of our 2019 fiscal year to allow for the necessary internal transition process. We are currently evaluating the impact to our operating segments and other costs and activities based on how the businesses will be managed in 2019. Beginning with our first-quarter 2019 financial results, our financial reporting will reflect the new organizational structure.
As we prepare for expected growth, we are focused on creating a simpler, more efficient structure within each business and the functions that support them. Further, as our innovative pipeline matures with the anticipated progression of current and the initiation of new pivotal trials, we will need to increase our R&D investments. In addition, as our pipeline potentially delivers new commercialization opportunities, we will need to increase our investments in new-market-creation activities.
To partially offset these incremental cost increases, we expect to generate cost reduction opportunities, particularly in SI&A. We are taking steps to simplify the organization, increase spans of control and reduce organizational layers. As such, we expect some managerial roles and responsibilities to be impacted. Enhancements to certain employee benefits are being offered for a short period of time. We do not yet know the impact of these voluntary and involuntary plans, but expect to record a special termination benefit as well as severance in the fourth quarter of 2018. Such benefits will be reflected as Certain Significant Items and excluded from our non-GAAP measure of Adjusted Income. We do not expect the expenses related to these

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enhancements to change our current full year 2018 guidance. Any future impact will be considered in the totality of our annual guidance for 2019.

Commercial Operations

We currently manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). The IH and EH operating segments are each led by a single manager. Each operating segment has responsibility for its commercial activities and for certain IPR&D projects for new investigational products and additional indications for in-line products that generally have achieved proof-of-concept. Each business has a geographic footprint across developed and emerging markets.
Some additional information about our business segments as of September 30, 2018 follows:
 
innovativehealthrgb.jpg
  
pehlogo.jpg
IH focuses on developing and commercializing novel, value-creating medicines and vaccines that significantly improve patients’ lives, as well as products for consumer healthcare.
Key therapeutic areas include internal medicine, vaccines, oncology, inflammation & immunology, rare disease and consumer healthcare.
 EH includes legacy brands that have lost or will soon lose market exclusivity in both developed and emerging markets, branded and generic sterile injectable products, biosimilars, and select branded products including anti-infectives. EH also includes an R&D organization, as well as our contract manufacturing business.
Through February 2, 2017, EH also included HIS.
We expect that the IH biopharmaceutical portfolio of innovative, largely patent-protected, in-line and newly launched products will be sustained by ongoing investments to develop promising assets and targeted business development in areas of focus to help ensure a pipeline of highly-differentiated product candidates in areas of unmet medical need. The assets managed by IH are science-driven, highly differentiated and generally require a high-level of engagement with healthcare providers and consumers. EH is expected to generate strong consistent cash flow by providing patients around the world with access to effective, lower-cost, high-value treatments. EH leverages our biologic development, regulatory and manufacturing expertise to seek to advance its biosimilar development portfolio. Additionally, EH leverages capabilities in formulation development and manufacturing expertise to help advance its generic sterile injectables portfolio. EH may also engage in targeted business development to further enable its commercial strategies.
IH will have continued focus on R&D productivity and pipeline strength while maximizing the value of our recently launched brands and in-line portfolio. We have also expanded our pipeline in high priority therapeutic areas such as inflammation and immunology and oncology with select business development transactions. 
For EH, we continue to invest in growth drivers and manage the portfolio to extract additional value while seeking opportunities for operating efficiencies. This strategy includes active management of our portfolio; maximizing growth of core product segments; acquisitions to strengthen core areas of our portfolio further, such as our acquisition of AstraZeneca’s small molecule anti-infectives business; and divestitures to increase focus on our core strengths. In line with this strategy, on February 3, 2017, we completed the sale of Pfizer’s global infusion systems net assets, representing the infusion systems net assets that we acquired as part of the Hospira transaction, HIS, to ICU Medical.
 

Leading brands include:
- Prevnar 13/Prevenar 13
-
Xeljanz
-
Eliquis
- Lyrica (U.S., Japan and certain other markets)
-
Enbrel (outside the U.S. and Canada)
-
Ibrance
-
Xtandi
- Several OTC consumer healthcare products (e.g.,
Advil and
  Centrum)
  

Leading brands include:
- Lipitor
- Norvasc
-
Lyrica (Europe, Russia, Turkey, Israel and Central Asia
countries)
-
Celebrex
- Viagra*
- Inflectra/Remsima
- Sulperazon
- Several other sterile injectable products
*Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra worldwide revenues are reported in EH.
For additional information about the 2018 performance for each of our operating segments, see the “Analysis of Operating Segment Information” section of this MD&A.


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Description of Research and Development Operations

The following description of R&D operations reflects operations as of September 30, 2018.
Innovation is critical to the success of our company, and drug discovery and development is time-consuming, expensive and unpredictable. Our goal is to discover, develop and bring to market innovative products that address major unmet medical needs. Our R&D priorities include:
delivering a pipeline of differentiated therapies and vaccines with the greatest medical and commercial potential;
advancing our capabilities that can position Pfizer for long-term leadership; and
creating new models for biomedical collaboration that will expedite the pace of innovation and productivity.
To that end, our R&D primarily focuses on:
Biosimilars;
Inflammation and Immunology;
Internal Medicine;
Oncology;
Rare Diseases; and
Vaccines.
In January 2018, we announced our decision to end internal neuroscience discovery and early development efforts and re-allocate funding to other areas where we have stronger scientific leadership. The development of tanezumab and potential treatments for rare neuromuscular disorders is not impacted by this decision. In June 2018, we announced our plan to invest $600 million in biotechnology and other emerging growth companies through Pfizer Ventures, our venture investment vehicle. Pfizer Ventures will seek to invest approximately 25% of its available capital ($150 million) in promising early-stage neuroscience companies. In addition to increased funding, we will extend our leadership as a venture capital investor with an expanded team that leverages expertise across venture capital investing, business development, drug discovery and clinical development. The new organization consolidates R&D Innovate, Pfizer’s R&D equity investment vehicle, with Pfizer Venture Investments, our long-standing venture investment group. In September 2018, we and Bain Capital entered into a transaction to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system including Parkinson’s disease, epilepsy, Alzheimer’s disease, schizophrenia and addiction. For additional information on the transaction with Bain Capital, see the Notes to Condensed Consolidated Financial Statements––Note 2B.Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment: Divestitures.

We continue to strengthen our global R&D organization and pursue strategies intended to improve innovation and overall productivity in R&D to achieve a sustainable pipeline that will deliver value in the near term and over time. Our R&D spending is conducted through a number of matrix organizations:
Research Units within our WRD organization are generally responsible for research and early-stage development assets for our IH business (assets that have not yet achieved proof-of-concept). Our Research Units are organized by therapeutic area to enhance flexibility, cohesiveness and focus. Because of our structure, we can rapidly redeploy resources within a Research Unit between various projects as necessary because the workforce shares similar skills, expertise and/or focus.
Our R&D organization within the EH business supports the large base of EH products and is expected to develop potential new sterile injectable drugs and therapeutic solutions, as well as biosimilars.
Our GPD organization is a unified center for late-stage development for our innovative products and is generally responsible for the operational execution of clinical development of assets that are in clinical trials for our WRD and Innovative portfolios. GPD is expected to enable more efficient and effective development and enhance our ability to accelerate and progress assets through our pipeline.
Our science-based and other platform-services organizations, where a significant portion of our R&D spending occurs, provide technical expertise and other services to the various R&D projects, and are organized into science-based functions (which are part of our WRD organization), such as Pharmaceutical Sciences, Medicinal Chemistry, Regulatory and Drug Safety, and non-science-based functions, such as Facilities, Business Technology and Finance. As a result, within each of these functions, we are able to migrate resources among projects, candidates and/or targets in any therapeutic area and in most phases of development, allowing us to react quickly in response to evolving needs.

We manage R&D operations on a total-company basis through our matrix organizations described above. Specifically, a single committee with representation from the R&D groups and the IH commercial organization is accountable for aligning resources among all of our WRD, GPD and IH R&D projects and for seeking to ensure optimal capital allocation across the Innovative

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R&D portfolio. We believe that this approach also serves to maximize accountability and flexibility. Our EH R&D organization manages its resources separately from the WRD and GPD organizations.
Generally, we do not disaggregate total R&D expense by development phase or by therapeutic area since, as described above, we do not manage a significant portion of our R&D operations by development phase or by therapeutic area. Further, as we are able to adjust a significant portion of our spending quickly, as conditions change, we believe that any prior-period information about R&D expense by development phase or by therapeutic area would not necessarily be representative of future spending.
While a significant portion of R&D is done internally, we continue to seek out promising chemical and biological lead molecules and innovative technologies developed by third parties to incorporate into our discovery and development processes or projects, as well as our product lines, by entering into collaborations, alliances and license agreements with other companies, as well as leveraging acquisitions and equity- or debt-based investments. These agreements enable us to co-develop, license or acquire promising compounds, technologies or capabilities. We also enter into agreements pursuant to which a third party agrees to fund a portion of the development costs of one of our pipeline products in exchange for rights to receive potential milestone payments, revenue sharing payments, profit sharing payments and/or royalties. Collaboration, alliance, license and funding agreements and equity- or debt-based investments allow us to share risk and cost and to access external scientific and technological expertise, and enable us to advance our own products as well as in-licensed or acquired products.
For additional information about R&D by operating segment, see the “Analysis of Operating Segment Information” section of this MD&A. For additional information about our pending new drug applications and supplemental filings, see the “Analysis of the Condensed Consolidated Statements of Income––Product Developments––Biopharmaceutical” section of this MD&A. For additional information about recent transactions and strategic investments that we believe have the potential to advance our pipeline, see the “Our Strategy––Our Business Development Initiatives” section of this MD&A.

Intellectual Property Rights
We continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate, and we will continue to support efforts that strengthen worldwide recognition of patent rights while taking necessary steps to ensure appropriate patient access. In addition, we will continue to employ innovative approaches designed to prevent counterfeit pharmaceuticals from entering the supply chain and to achieve greater control over the distribution of our products, and we will continue to participate in the generics market for our products, whenever appropriate, once they lose exclusivity. Also, the pursuit of valid business opportunities may require us to challenge intellectual property rights held by other companies that we believe were improperly granted. Such challenges may include negotiation and litigation, which may not be successful. For additional information about our current efforts to enforce our intellectual property rights and certain other patent proceedings, see Notes to Condensed Consolidated Financial Statements––Note 12A1. Contingencies and Certain Commitments: Legal Proceedings––Patent Litigation. For information on risks related to patent protection and intellectual property claims by third parties, see “Risks Related to Intellectual Property” in Part I, Item 1A, “Risk Factors” of our 2017 Form 10-K.
Capital Allocation and Expense Management
We seek to maintain a strong balance sheet and robust liquidity so that we continue to have the financial resources necessary to take advantage of prudent commercial, research and business development opportunities and to directly enhance shareholder value through share repurchases and dividends. For additional information about our financial condition, liquidity, capital resources, share repurchases (including accelerated share repurchases) and dividends, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this MD&A. For additional information about our recent business development activities, see the “Our Strategy––Our Business Development Initiatives” section of this MD&A.
We remain focused on achieving an appropriate cost structure for our company. For additional information about our cost-reduction and productivity initiatives, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this MD&A and Notes to Condensed Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Increasing Investment in the U.S.––After evaluating the expected positive net impact the TCJA will have on us, we decided to take several actions:
Over the next five years, we plan to invest approximately $5.0 billion in capital projects in the U.S., including the strengthening of our manufacturing presence in the U.S. As part of this plan, in July 2018, we announced that we will increase our commitment to U.S. manufacturing with a $465 million investment to build one of the most technically advanced sterile injectable pharmaceutical production facilities in the world in Portage, Michigan. This U.S. investment will strengthen our capability to produce and supply critical, life-saving injectable medicines for patients around the world.

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Known as Modular Aseptic Processing, the new, multi-story, 400,000-square-foot production facility will also support the area economy by creating an estimated 450 new jobs over the next several years.
We made a $500 million voluntary contribution to our U.S. pension plan in February 2018.
In the fourth quarter of 2017, we made a $200 million charitable contribution to the Pfizer Foundation, an organization that provides grant and investment funding to support organizations and social entrepreneurs in an effort to improve healthcare delivery.
In the first quarter of 2018, we paid a special, one-time bonus to virtually all Pfizer colleagues, excluding executives, of $119 million in the aggregate.
Our Business Development Initiatives

We are committed to capitalizing on growth opportunities by advancing our own pipeline and maximizing the value of our in-line products, as well as through various forms of business development, which can include alliances, licenses, joint ventures, collaborations, equity- or debt-based investments, dispositions, mergers and acquisitions. We view our business development activity as an enabler of our strategies, and we seek to generate earnings growth and enhance shareholder value by pursuing a disciplined, strategic and financial approach to evaluating business development opportunities. We continue to evaluate business development transactions that have the potential to strengthen our businesses and their capabilities, such as our acquisitions of Hospira, Medivation, Anacor, and AstraZeneca’s small molecule anti-infectives business, as well as collaborations, and alliance and license agreements with other companies. We assess our businesses, assets and scientific capabilities/portfolio as part of our regular, ongoing portfolio review process and also continue to consider business development activities that will advance our businesses.

We continue to review strategic options for our Consumer Healthcare business. We remain disciplined regarding our capital allocation, and at this time we have not received an acceptable offer for the sale of this business. We will continue our management of this strong business as we explore other alternatives, which could include everything from a full or partial separation of the business to ultimately deciding to retain the business. We continue to expect that any decision regarding strategic alternatives for our Consumer Healthcare business will be made during the fourth quarter of 2018.

For additional information on our business development activities, see Notes to Condensed Consolidated Financial Statements––Note 2. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment.
The more significant recent transactions and events are described below:
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)––On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, to ICU Medical. In connection with this transaction, we recognized pre-tax income of $2 million in the third quarter of 2018 and pre-tax income of $1 million in the first nine months of 2018, and we recognized pre-tax income of approximately $12 million in the third quarter of 2017 and a pre-tax loss of approximately $52 million in the first nine months of 2017 in Other (income)/deductions––net, representing adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell. We may record additional adjustments to the loss on the sale of HIS net assets in future periods, which we do not expect to have a material impact on our consolidated financial statements.
Acquisition of AstraZeneca’s Small Molecule Anti-Infectives Business (EH)––On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S. The total fair value of the consideration transferred for this business was approximately $555 million in cash plus the fair value of contingent consideration of $485 million.
Research and Development Arrangement with NovaQuest Co-Investment Fund V, L.P.––In April 2016, Pfizer entered into an agreement with NovaQuest under which NovaQuest will fund up to $200 million in development costs related to certain Phase 3 clinical trials of Pfizer’s rivipansel compound and Pfizer will use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. NovaQuest’s development funding is expected to cover up to 100% of the development costs and will be received over approximately 12 quarters from 2016 to 2019. As there is a substantive and genuine transfer of risk to NovaQuest, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the third quarter of 2018 totaled $12.9 million and for the first nine months of 2018 totaled $44.2 million. The reduction to Research and development expenses for the third quarter of 2017 totaled $16.8 million and for the first nine months of 2017 totaled $48.8 million. Following potential regulatory approval, NovaQuest will be eligible to receive a combination of fixed milestone payments of up to approximately $267 million in total, based on achievement of first commercial sale and certain levels of cumulative net sales as well as royalties on rivipansel net sales over approximately eight years. Fixed sales-based milestone payments will be recorded as intangible assets and amortized to Amortization of

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intangible assets over the estimated commercial life of the rivipansel product and royalties on net sales will be recorded as Cost of sales when incurred.
Research and Development Arrangement with RPI Finance Trust––In January 2016, Pfizer entered into an agreement with RPI, a subsidiary of Royalty Pharma, under which RPI will fund up to $300 million in development costs related to certain Phase 3 clinical trials of Pfizer’s Ibrance (palbociclib) product primarily for adjuvant treatment of hormone receptor positive early breast cancer (the Indication). RPI’s development funding is expected to cover up to 100% of the costs primarily for the applicable clinical trials through 2021. As there is a substantive and genuine transfer of risk to RPI, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the third quarter of 2018 totaled $27.1 million and for the first nine months of 2018 totaled $78.7 million. The reduction to Research and development expenses for the third quarter of 2017 totaled $27.6 million and for the first nine months of 2017 totaled $54.4 million. If successful and upon approval of Ibrance in the U.S. or certain major markets in the EU for the Indication based on the applicable clinical trials, RPI will be eligible to receive a combination of approval-based fixed milestone payments of up to $250 million dependent upon results of the clinical trials and royalties on certain Ibrance sales over approximately seven years. Fixed milestone payments due upon approval will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the Ibrance product and sales-based royalties will be recorded as Cost of sales when incurred.
For a description of the more significant recent transactions through February 22, 2018, the filing date of our 2017 Form 10-K, see the “Our Business Development Initiatives” section of our 2017 Financial Report.
Our Financial Guidance for 2018
On October 30, 2018, we updated our 2018 financial guidance to reflect our performance to date as well as our outlook for the remainder of the year. The midpoint of our guidance range for Adjusted diluted EPS was unchanged from our July 2018 guidance update.
The guidance range for Revenues was narrowed from a range of $53.0 to $55.0 billion to a range of $53.0 to $53.7 billion, primarily reflecting:
lower-than-anticipated Essential Health revenues, primarily due to continued legacy Hospira Sterile Injectable Pharmaceuticals (SIP) product shortages in the U.S.; and
recent unfavorable changes in foreign exchange rates in relation to the U.S. dollar from mid-July 2018 to mid-October 2018, primarily the weakening of certain emerging markets currencies and the euro.
Pfizer’s updated 2018 financial guidance is presented below(a), (b):
Revenues$53.0 to $53.7 billion
 (previously $53.0 to $55.0 billion)
Adjusted cost of sales as a percentage of revenues20.8% to 21.3%
 (previously 20.5% to 21.5%)
Adjusted selling, informational and administrative expenses$14.0 to $14.5 billion
 (previously $14.0 to $15.0 billion)
Adjusted research and development expenses$7.7 to $8.1 billion
Adjusted other (income)/deductionsApproximately $1.3 billion of income
 (previously approximately $1.0 billion of income)
Effective tax rate on adjusted incomeApproximately 16.0%
Adjusted diluted EPS$2.98 to $3.02
 (previously $2.95 to $3.05)
(a) 
The 2018 financial guidance reflects the following:
A full year contribution from Consumer Healthcare. Pfizer continues to expect that any decision regarding strategic alternatives for Consumer Healthcare would be made during the fourth quarter of 2018.
Does not assume the completion of any business development transactions not completed as of September 30, 2018, including any one-time upfront payments associated with such transactions.
Guidance for Adjusted other (income)/deductions does not attempt to forecast unrealized net gains or losses on equity securities. Pfizer is unable to predict with reasonable certainty unrealized gains or losses on equity securities in a given period. Net unrealized gains and losses on equity securities are now recorded in Adjusted other (income)/deductions during each quarter, reflecting the adoption of a new accounting standard in the first quarter of 2018 (see Notes to Condensed Consolidated Financial Statements—Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards). Prior to the adoption of the new standard, net unrealized gains and losses on virtually all equity securities with readily determinable fair values were reported in Accumulated other comprehensive income.
Exchange rates assumed are a blend of the actual exchange rates in effect through third-quarter 2018 and mid-October 2018 exchange rates for the remainder of the year.

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Reflects an anticipated negative revenue impact of $1.8 billion due to recent and expected generic and biosimilar competition for certain products that have recently lost or are anticipated to soon lose patent protection. Assumes no generic competition for Lyrica in the U.S. until June 2019, which is contingent upon a six-month patent-term extension granted by the FDA for pediatric exclusivity, which the company is currently pursuing.
Reflects the anticipated favorable impact of approximately $350 million on revenues and approximately $0.02 on adjusted diluted EPS as a result of favorable changes in foreign exchange rates relative to the U.S. dollar compared to foreign exchange rates from 2017.
Guidance for adjusted diluted EPS assumes diluted weighted-average shares outstanding of approximately 6.0 billion shares, which reflects anticipated share repurchases totaling approximately $12.0 billion in 2018, including $9.0 billion of share repurchases already completed through October 30, 2018. Dilution related to share-based employee compensation programs is expected to offset the reduction in shares associated with these share repurchases by approximately half.
(b) 
For an understanding of Adjusted income and its components and Adjusted diluted EPS (all of which are non-GAAP financial measures), see the “Non-GAAP Financial Measure (Adjusted Income)” section of this MD&A.
Pfizer does not provide guidance for GAAP Reported financial measures (other than revenues) or a reconciliation of forward-looking non-GAAP financial measures to the most directly comparable GAAP Reported financial measures on a forward-looking basis because it is unable to predict with reasonable certainty the ultimate outcome of pending litigation, unusual gains and losses, acquisition-related expenses and potential future asset impairments without unreasonable effort. These items are uncertain, depend on various factors, and could have a material impact on GAAP Reported results for the guidance period.
For information about our actual costs and anticipated costs and cost savings associated with our three-year cost-reduction initiative entered into in the fourth quarter of 2016, the Hospira acquisition, our recent business development activities, and our current global commercial structure, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this MD&A and Notes to Condensed Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
Our 2018 financial guidance is subject to a number of factors and uncertainties as described in the “Our Operating Environment”, “The Global Economic Environment”, “Our Strategy” and “Forward-Looking Information and Factors That May Affect Future Results” sections of this MD&A; and Part I, Item 1A, “Risk Factors” of our 2017 Form 10-K and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

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SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

For a description of our significant accounting policies, see Notes to Consolidated Financial Statements––Note 1. Basis of Presentation and Significant Accounting Policies in our 2017 Financial Report and Notes to Condensed Consolidated Financial Statements––Note 1C. Basis of Presentation and Significant Accounting Policies: Revenues. Of these policies, the following are considered critical to an understanding of our consolidated financial statements as they require the application of the most subjective and the most complex judgments: (i) Acquisitions (2017 Financial Report Note 1D); (ii) Fair Value (2017 Financial Report Note 1E); (iii) Revenues (Note 1C in this Quarterly Report on Form 10-Q); (iv) Asset Impairments (2017 Financial Report Note 1K); (v) Income Tax Assets and Liabilities and Income Tax Contingencies (2017 Financial Report Note 1O); (vi) Pension and Postretirement Benefit Plans (2017 Financial Report Note 1P); and Legal and Environmental Contingencies (2017 Financial Report Note 1Q).
For a discussion about the critical accounting estimates and assumptions impacting our consolidated financial statements, see the “Significant Accounting Policies and Application of Critical Accounting Estimates and Assumptions” section of our 2017 Financial Report. See also Notes to Consolidated Financial Statements––Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions in our 2017 Financial Report for a discussion about the risks associated with estimates and assumptions.
For a discussion of recently adopted accounting standards and significant accounting policies, see Notes to Condensed Consolidated Financial Statements––Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards, Note 1C. Basis of Presentation and Significant Accounting Policies: Revenues and Note 1D. Basis of Presentation and Significant Accounting Policies: Collaborative Arrangements.
Revenues
Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with U.S. Medicare, Medicaid and performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.
Income Tax Assets and Liabilities

In the fourth quarter of 2017, we recorded an estimate of certain tax effects of the TCJA, including the impact on deferred tax assets and liabilities from the reduction in the U.S Federal corporate tax rate from 35% to 21%, the impact on valuation allowances and other state income tax considerations, a repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect payment over eight years through 2026 that is reported primarily in Other taxes payable, and deferred taxes on basis differences expected to give rise to future taxes on global intangible low-taxed income. In addition, we had provided deferred tax liabilities in the past on foreign earnings that were not indefinitely reinvested. As a result of the TCJA, in the fourth quarter of 2017, we reversed an estimate of the deferred taxes that are no longer expected to be needed due to the change to the territorial tax system. The estimated amounts recorded may change in the future due to uncertain tax positions.
The TCJA subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that we are permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-taxed income in future years or provide for the tax expense related to such income in the year the tax is incurred. We have elected to recognize deferred taxes for temporary differences expected to reverse as global intangible low-taxed income in future years. However, given the complexity of these provisions, we have not finalized our analysis. We were able to make a reasonable estimate of the deferred taxes on the temporary differences expected to reverse in the future and provided a provisional deferred tax liability as of December 31, 2017. The provisional amount is based on the evaluation of certain temporary differences

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inside each of our foreign subsidiaries that are expected to reverse as global intangible low-taxed income. However, as we continue to evaluate the TCJA’s global intangible low-taxed income provisions during the measurement period, we may revise the methodology used for determining the deferred tax liability associated with such income.
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded remain provisional as we have not completed our analysis of the complex and far reaching effects of the TCJA. Further, we continue to consider our assertions on any remaining outside basis differences in our foreign subsidiaries as of September 30, 2018 and have not completed our analysis. In the third quarter of 2018, we recorded a favorable adjustment to the provisional estimate of the impact of the legislation, primarily related to the remeasurement of deferred tax assets and liabilities as well as revised estimates of benefits related to certain tax initiatives. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the TCJA on deferred taxes, valuation allowances, state tax considerations, the repatriation tax liability, global intangible low-taxed income, and any remaining outside basis differences in our foreign subsidiaries during the fourth quarter of 2018, as we complete the remainder of our tax return filings and as any interpretations or clarifications of the TCJA occur through further legislation or U.S. Treasury actions or other means.

Income tax assets and liabilities also include income tax valuation allowances and accruals for uncertain tax positions. For additional information, see Notes to Consolidated Financial Statements—Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions; Note 1O. Basis of Presentation and Significant Accounting Policies: Tax Assets and Liabilities and Income Tax Contingencies and Note 5A. Tax Matters: Taxes on Income from Continuing Operations in our 2017 Form 10-K, as well as the “Analysis of Financial Condition, Liquidity and Capital Resources––Selected Measures of Liquidity and Capital Resources—Contractual Obligations” section of our 2017 Financial Report.
ANALYSIS OF THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
REVENUES AND PRODUCT DEVELOPMENTS
 
Revenues by Segment and Geography
qtdrevbysegandgeo.jpgytdrevbysegandgeo.jpg

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The following tables provide worldwide revenues by operating segment and geography:
  Three Months Ended
  Worldwide U.S. International World-wide U.S. Inter-national
(MILLIONS OF DOLLARS) Sep 30,
2018

 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 % Change in Revenues
Operating Segments(a):
                  
IH $8,471
 $8,118
 $4,881
 $4,777
 $3,590
 $3,341
 4
 2
 7
EH 4,826
 5,050
 1,480
 1,756
 3,347
 3,294
 (4) (16) 2
Total revenues $13,298
 $13,168
 $6,361
 $6,534
 $6,937
 $6,634
 1
 (3) 5
 
  Nine Months Ended
  Worldwide U.S. International World-wide U.S. Inter-national
(MILLIONS OF DOLLARS) Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 Sep 30, 2018
 Oct 1, 2017
 % Change in Revenues
Operating Segments(a):
    
    
    
  
  
  
IH $24,573
 $23,204
 $14,002
 $13,708
 $10,572
 $9,496
 6
 2
 11
EH 15,097
 15,639
 4,859
 5,808
 10,238
 9,831
 (3) (16) 4
Total revenues $39,670
 $38,843
 $18,861
 $19,516
 $20,810
 $19,327
 2
 (3) 8
(a) 
IH = the Innovative Health segment; and EH = the Essential Health segment. For additional information about each operating segment, see the “Our Strategy––Commercial Operations” and “Analysis of Operating Segment Information” sections of this MD&A and Notes to Condensed Consolidated Financial Statements––Note 13A. Segment, Geographic and Other Revenue Information: Segment Information.
Revenues––Third Quarter of 2018 vs. Third Quarter of 2017
The following provides an analysis of the worldwide change in revenues by geographic areas in the third quarter of 2018:
  Three Months Ended September 30, 2018
(MILLIONS OF DOLLARS) Worldwide U.S. International
Operational growth/(decline):      
Continued growth from certain key brands(a)
 $660
 $287
 $373
Growth from Biosimilars, primarily from Inflectra in certain channels in the U.S., as well as in developed Europe 56
 38
 18
Growth from recently launched products, including Eucrisa in the U.S., as well as Besponsa and Bavencio, primarily in the U.S. and developed Europe 52
 40
 12
Lower revenues for total Viagra(b), primarily in the U.S. due to generic competition that began in December 2017
 (169) (165) (4)
Decline from the Peri-LOE Products portfolio, driven by lower revenues in developed markets (excluding Viagra EH(b)), primarily due to expected declines in Lyrica in developed Europe
 (125) (61) (64)
Decline in the LEP portfolio primarily driven by lower revenues in developed markets (121) (180) 59
Lower revenues for Enbrel, primarily in most developed Europe markets due to continued biosimilar competition (65) 
 (65)
Decline from the SIP portfolio, driven by lower revenues in developed markets, primarily due to continued legacy Hospira product shortages in the U.S. (28) (58) 31
Other operational factors, net (18) (73) 55
Operational growth/(decline), net 243
 (173) 415
       
Unfavorable impact of foreign exchange (113) 
 (113)
Revenues increase/(decrease)
 $130
 $(173) $302
(a) 
Certain key brands represent Eliquis, Ibrance, Prevnar 13/Prevenar 13, Xeljanz and Xtandi. See the “Analysis of the Condensed Consolidated Statements of Income––Revenues––Selected Product Discussion" section of this MD&A for product analysis information.
(b) 
Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra revenues are reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
Emerging markets revenues increased $226 million, or 8%, in the third quarter of 2018 to $3.1 billion from $2.8 billion, reflecting an operational increase of $356 million, or 13%. Foreign exchange had an unfavorable impact of approximately 5% on emerging markets revenues. The operational increase in emerging markets was driven by our EH segment, primarily by the Legacy Established Products portfolio and Sterile Injectable Pharmaceuticals portfolio, as well as Prevenar 13 in our IH segment.

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Revenues––First Nine Months of 2018 vs. First Nine Months of 2017
The following provides an analysis of the change in worldwide revenues by geographic areas in the first nine months of 2018:
  Nine Months Ended September 30, 2018
(MILLIONS OF DOLLARS) Worldwide U.S. International
Operational growth/(decline):      
Continued growth from certain key brands(a)
 $1,835
 $822
 $1,013
Growth from recently launched products, including Eucrisa in the U.S., as well as Besponsa and Bavencio, primarily in the U.S. and developed Europe 172
 145
 27
Growth from Biosimilars, primarily from Inflectra in certain channels in the U.S., as well as in developed Europe 165
 115
 50
Lower revenues for total Viagra(b), primarily in the U.S. due to generic competition that began in December 2017
 (495) (491) (4)
Decline from the Peri-LOE Products portfolio, driven by lower revenues in developed markets (excluding Viagra EH(b)), primarily due to expected declines in Lyrica in developed Europe and Pristiq in the U.S. due to generic competition
 (463) (156) (307)
Decline from the SIP portfolio, driven by lower revenues in developed markets, primarily due to continued legacy Hospira product shortages in the U.S. (419) (480) 61
Decline in the LEP portfolio, primarily driven by lower revenues in developed markets (314) (460) 145
Lower revenues for Enbrel, primarily in most developed Europe markets due to continued biosimilar competition (279) 
 (279)
Impact on financial results for the sale of HIS in February 2017. The first nine months of 2018 do not reflect any contribution from HIS global operations, compared to approximately one month of HIS domestic operations and approximately two months of HIS international operations in the same period in 2017 (97) (64) (33)
Other operational factors, net 29
 (88) 117
Operational growth/(decline), net 134
 (655) 790
       
Favorable impact of foreign exchange 693
 
 693
Revenues increase/(decrease)
 $827
 $(655) $1,483
(a) 
Certain key brands represent Eliquis, Ibrance, Xeljanz, Prevnar 13/Prevenar 13, Xtandi and Chantix/Champix. See the “Analysis of the Condensed Consolidated Statements of Income––Revenues––Selected Product Discussion" section of this MD&A for product analysis information.
(b) 
Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra revenues are reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
Emerging markets revenues increased $1.1 billion, or 14%, in the first nine months of 2018 to $9.4 billion from $8.2 billion, reflecting an operational increase of $1.1 billion, or 13%. Foreign exchange had a favorable impact of approximately 1% on emerging markets revenues. The operational increase in emerging markets was driven by our EH segment, primarily by the Legacy Established Products portfolio and the Sterile Injectable Pharmaceuticals portfolio, as well as Prevenar 13 in our IH segment.
Revenue Deductions
Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends. For additional information, see Notes to Condensed Consolidated Financial Statements––Note 1C. Basis of Presentation and Significant Accounting Policies: Revenues.

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The following table provides information about revenue deductions:
  Three Months Ended Nine Months Ended
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 September 30,
2018

 October 1,
2017

Medicare rebates(a)
 $443
 $355
 $1,266
 $931
Medicaid and related state program rebates(a)
 502
 439

1,500
 1,335
Performance-based contract rebates(a), (b)
 854
 773

2,467
 2,321
Chargebacks(c)
 1,654
 1,608

4,850
 4,585
Sales allowances(d)
 1,448
 1,419

4,142
 3,718
Sales returns and cash discounts 358
 329
 1,067
 1,025
Total(e)
 $5,259
 $4,923
 $15,292
 $13,916
(a) 
Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.
(b) 
Performance-based contract rebates include contract rebates with MCOs within the U.S., including health maintenance organizations and PBMs, who receive rebates based on the achievement of contracted performance terms and claims under these contracts. Outside the U.S., performance-based contract rebates include rebates to wholesalers/distributors based on achievement of contracted performance for specific products or sales milestones.
(c) 
Chargebacks primarily represent reimbursements to U.S. wholesalers for honoring contracted prices to third parties.
(d) 
Sales allowances primarily represent price reductions that are contractual or legislatively mandated outside the U.S., discounts and distribution fees.
(e) 
For the three months ended September 30, 2018, associated with the following segments: IH ($2.3 billion) and EH ($2.9 billion). For the three months ended October 1, 2017, associated with the following segments: IH ($2.4 billion); and EH ($2.5 billion). For the nine months ended September 30, 2018, associated with the following segments: IH ($6.5 billion) and EH ($8.8 billion). For the nine months ended October 1, 2017, associated with the following segments: IH ($6.4 billion) and EH ($7.5 billion).
Total revenue deductions for the third quarter of 2018 increased 7% compared to the third quarter of 2017, and total revenue deductions for the first nine months of 2018 increased 10% compared to the first nine months of 2017, primarily as a result of:
an increase in sales allowances as a result of sales growth, primarily in international markets;
an increase in Medicare rebates driven by increased sales of IH products through this channel;
higher chargebacks to U.S. wholesalers on certain IH and EH products, partially offset by decreases in chargebacks as a result of decreases in sales of sterile injectable products; and
an increase in Medicaid and related state program rebates, primarily as a result of increased sales of IH products through these programs.
For information on our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts, including the balance sheet classification of these accruals, see Notes to Condensed Consolidated Financial Statements––Note 1C. Basis of Presentation and Significant Accounting Policies: Revenues.

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Revenues––Selected Product Discussion
The tables below provide worldwide revenues, by geography, for selected products. References to total change pertain to period-over-period growth rates that include foreign exchange. The difference between the total change and operational change represents the impact of foreign exchange. Amounts may not add due to rounding. All percentages have been calculated using unrounded amounts. An asterisk (*) indicates the calculation is not meaningful or results are equal to or greater than 100%.
•Prevnar 13/Prevenar 13 (IH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $1,089
 $971
 12   $2,597
 $2,554
 2  
International 571
 551
 4 6 1,694
 1,515
 12 10
Worldwide revenues $1,660
 $1,522
 9 10 $4,290
 $4,069
 5 5
The growth in the third quarter and first nine months of 2018 in the U.S. was primarily due to higher government purchases for the pediatric indication, partially offset by the continued decline in revenues for the adult indication due to a high initial capture rate of the eligible population following its successful fourth-quarter 2014 launch, which resulted in a smaller remaining “catch up” opportunity (i.e., the opportunity to reach adults aged 65 years and older who have not been previously vaccinated with Prevnar 13), compared to the prior-year period.
The operational growth in the third quarter of 2018 internationally was primarily due to higher volumes for the pediatric indication resulting from increased orders associated with Gavi, the Vaccine Alliance and from the second-quarter 2017 launch in China. The international operational growth in the first nine months of 2018 was primarily due to higher volumes for the pediatric indication resulting from the second-quarter 2017 launch in China and increased orders associated with Gavi, the Vaccine Alliance.
In 2014, the ACIP voted to recommend Prevnar 13 for routine use to help protect adults aged 65 years and older against pneumococcal disease, which for adults includes pneumonia caused by the 13 pneumococcal serotypes included in the vaccine. These ACIP recommendations were subsequently approved by the directors at the CDC and U.S. Department of Health and Human Services, and were published in the Morbidity and Mortality Weekly Report in September 2014 by the CDC. As with other vaccines, the CDC regularly monitors the impact of vaccination and reviews the recommendations. During the recently held October 2018 ACIP meeting, the CDC presented initial data and indicated formal evaluation of evidence (grading) and a potential vote on the maintenance of the 65 years and older recommendation would likely happen in 2019. A potential adverse change in the ACIP recommendation could negatively impact future Prevnar 13 revenues. We continue to generate and publish data and communicate with the ACIP on the burden of pneumococcal disease and Prevnar 13 vaccine effectiveness and safety.
We announced in September 2018 that our next generation 20-Valent Pneumococcal Vaccine candidate has received Breakthrough Therapy designation from the U.S. FDA.
•Lyrica (EH (revenues from all of Europe, Russia, Turkey, Israel and Central Asia)/IH (revenues from all other geographies)):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $875
 $877
 
   $2,643
 $2,602
 2
  
International 338
 408
 (17) (17) 1,006
 1,208
 (17) (19)
Worldwide revenues $1,213
 $1,285
 (6) (5) $3,649
 $3,810
 (4) (5)
The relatively flat performance in the third quarter of 2018 in the U.S. was primarily due to sustained demand. The growth in the first nine months of 2018 in the U.S. was primarily driven by sustained demand and positive price impact.
The operational decline in the third quarter of 2018 internationally was primarily due to losses of exclusivity in developed Europe markets, Australia and South Korea. The operational decline in the first nine months of 2018 internationally was primarily due to losses of exclusivity in developed Europe markets, Australia and South Korea, partially offset by growth in the orally dissolving tablet formulation in Japan.

76


The following table provides worldwide revenues for Lyrica in our IH segment, by geography:
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $875
 $877
 
   $2,643
 $2,602
 2
  
International 257
 274
 (6) (6) 755
 779
 (3) (5)
Worldwide revenues $1,132
 $1,150
 (2) (2) $3,398
 $3,382
 
 
Worldwide Lyrica revenues in our IH segment in the third quarter of 2018 decreased operationally, primarily due to losses of exclusivity in Australia in July 2017 and in South Korea in August 2017. The relatively flat performance in worldwide Lyrica revenues in our IH segment in the first nine months of 2018 was primarily due to losses of exclusivity in Australia and South Korea, offset by growth in the orally dissolving tablet formulation in Japan.
The following table provides worldwide revenues for Lyrica in our EH segment, by geography:
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $
 $
 
   $
 $
 
  
International 81
 134
 (40) (39) 251
 428
 (41) (45)
Worldwide revenues $81
 $134
 (40) (39) $251
 $428
 (41) (45)
The worldwide operational declines in our EH segment in the third quarter and first nine months of 2018 were primarily due to losses of exclusivity in developed Europe markets.
Ibrance (IH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $708
 $713
 (1)   $2,178
 $2,048
 6  
International 317
 165
 93
 98 807
 362
 * *
Worldwide revenues $1,025
 $878
 17
 18 $2,985
 $2,410
 24 23
The worldwide operational growth in the third quarter and first nine months of 2018 reflects an uptake in international markets, mostly driven by key European markets where we secured access and reimbursement in 2017 and the December 2017 launch in Japan as well as Ibrance class leadership among cyclin-dependent kinase inhibitors in major markets, supported by our scientific/clinical data and continued positive patient experience. The decline in the third quarter of 2018 in the U.S. was primarily due to the impact of competition and increased rebates. The growth in the first nine months of 2018 in the U.S. was primarily due to continued demand growth partially offset by uptake of competitors and increased rebates.
Eliquis alliance revenues and direct sales (IH): Eliquis has been jointly developed and is commercialized by Pfizer and BMS. Pfizer funds between 50% and 60% of all development costs depending on the study. Profits and losses are shared equally on a global basis, except in certain countries where Pfizer commercializes Eliquis and pays BMS compensation based on a percentage of net sales. We have full commercialization rights in certain smaller markets. BMS supplies the product to us at cost plus a percentage of the net sales to end-customers in these markets. Eliquis is part of the Novel Oral Anticoagulant (NOAC) market; the agents in this class were developed as alternative treatment options to warfarin in appropriate patients.
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $455
 $352
 29   $1,371
 $1,041
 32  
International 416
 291
 43 44 1,153
 772
 49 42
Worldwide revenues $870
 $644
 35 36 $2,524
 $1,813
 39 36
The worldwide operational growth in the third quarter and first nine months of 2018 was primarily driven by continued increased adoption in non-valvular atrial fibrillation, as well as oral anti-coagulant market share gain.

77


•Lipitor (EH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper. September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $25
 $60
 (58)   $86
 $125
 (32)  
International 482
 431
 12
 11 1,453
 1,215
 20
 14
Worldwide revenues $507
 $491
 3
 3 $1,539
 $1,341
 15
 10
The worldwide operational growth in the third quarter of 2018 was primarily driven by increased demand in China, partially offset by the non-recurrence of favorable U.S. rebates that occurred in the third quarter of 2017 and pricing pressures in China. The worldwide operational growth in the first nine months of 2018 was primarily driven by increased demand in China and certain Middle Eastern markets, partially offset by pricing pressures in China, the non-recurrence of favorable U.S. rebates that occurred in the third quarter of 2017 and generic competition in Japan.
Enbrel (IH, outside the U.S. and Canada):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $
 $
 
   $
 $
 
  
International 531
 613
 (13) (11) 1,589
 1,818
 (13) (15)
Worldwide revenues $531
 $613
 (13) (11) $1,589
 $1,818
 (13) (15)
The worldwide operational declines in the third quarter and first nine months of 2018 were primarily due to ongoing biosimilar competition in most developed Europe markets, which is expected to continue.
•Xeljanz (IH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $332
 $291
 14   $964
 $793
 22  
International 100
 57
 76 84 256
 142
 81 81
Worldwide revenues $432
 $348
 24 26 $1,221
 $935
 31 31
The growth in the U.S. in the third quarter and first nine months of 2018 was primarily driven by increased adoption among rheumatologists, growing awareness among patients and improvements in payer access, as well as launches of the psoriatic arthritis (PsA) indication in the first quarter of 2018 and ulcerative colitis indication in the third quarter of 2018.
The operational growth internationally in the third quarter and first nine months of 2018 was primarily driven by the 2017 approval of the rheumatoid arthritis indication in certain European markets, as well as continued uptake in Japan, Canada and emerging markets.
•Sutent (IH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $80
 $87
 (7)   $262
 $277
 (6)  
International 168
 189
 (11) (9) 524
 527
 (1) (5)
Worldwide revenues $248
 $276
 (10) (9) $785
 $805
 (2) (5)
The worldwide operational declines in the third quarter and first nine months of 2018 were primarily due to lower volumes driven by competitive pressure in the U.S. and certain developed and emerging Europe markets.

78


•Norvasc (EH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper. September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $9
 $9
 (2)   $27
 $28
 (4)  
International 238
 217
 10
 10 745
 656
 14
 9
Worldwide revenues $247
 $226

9
 10 $773
 $684
 13
 9
The worldwide operational growth in the third quarter and the first nine months of 2018 was primarily driven by increased demand in China, partially offset by generic competition in Japan and pricing pressures in China.
Chantix/Champix (IH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $197
 $180
 10   $602
 $542
 11  
International 64
 60
 6 7 187
 184
 2 (2)
Worldwide revenues $261
 $240
 9 9 $789
 $727
 9 8
The growth in the U.S. in the third quarter and first nine months of 2018 was primarily due to increased volume, improved patient access and, for the first nine months of 2018, positive price impact.
•The Premarin family of products (EH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $191
 $224
 (15)   $569

$670
 (15)  
International 12
 14
 (14) (12) 36
 41
 (13) (14)
Worldwide revenues $204
 $238
 (15) (15) $605
 $711
 (15) (15)
The worldwide operational declines in the third quarter and first nine months of 2018 were primarily driven by generic competition in the U.S.
•Viagra (EH): Viagra lost exclusivity in the U.S. in December 2017. Beginning in 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, are reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, beginning in 2018, total Viagra revenues are reported in EH.
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total
 Oper.
 September 30,
2018

 October 1,
2017

 Total
 Oper.
U.S. $32
 $198
 (84)   $196
 $687
 (71)  
International 105
 111
 (5) (3) 313
 309
 1
 (1)
Worldwide revenues $137
 $308
 (55) (55) $509
 $996
 (49) (50)
The declines in the U.S. in the third quarter and first nine months of 2018 were primarily due to the loss of exclusivity in December 2017.
The operational decline in the third quarter of 2018 internationally was primarily driven by lower volumes in Russia and Turkey and pricing pressures in China, partially offset by increased demand in China and Saudi Arabia.
•Sulperazon (EH):
  Three Months Ended Nine Months Ended
      % Change     % Change
(MILLIONS OF DOLLARS) September 30,
2018

 October 1,
2017

 Total Oper. September 30,
2018

 October 1,
2017

 Total Oper.
U.S. $
 $
    $
 $
   
International 145
 114
 28 26 464
 345
 34 28
Worldwide revenues $145
 $114
 28 26 $464
 $345
 34 28

79


The international operational growth in the third quarter and first nine months of 2018 was primarily due to increased demand in China.
•Xtandi alliance revenues (IH): Xtandi is being developed and commercialized through a collaboration with Astellas. The two companies share equally in the gross profits (losses) related to U.S. net sales of Xtandi. Subject to certain exceptions, Pfizer and Astellas also share equally all Xtandi commercialization costs attrib