10-Q 1 q3-08pfe1.htm Pfizer Inc. 3 Q 2008 Form 10-Q

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 28, 2008

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) 573-2323
(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  X           Accelerated filer            Non-accelerated filer           Smaller reporting company

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 4, 2008, 6,742,935,405 shares of the issuer's voting common stock were outstanding.

FORM 10-Q

For the Quarter Ended
September 28, 2008

Table of Contents

PART I.  FINANCIAL INFORMATION

Page

   

Item 1.

Financial Statements

   

Condensed Consolidated Statements of Income for the three months and nine months ended September 28, 2008, and September 30, 2007

3

   

Condensed Consolidated Balance Sheets as of September 28, 2008, and December 31, 2007

4

   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2008, and September 30, 2007

5

   

Notes to Condensed Consolidated Financial Statements

6

   

Review Report of Independent Registered Public Accounting Firm

18

   

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

   

Item 4.

Controls and Procedures

50

   

PART II.  OTHER INFORMATION

 

   

Item 1.

Legal Proceedings

51

   

Item 1A.

Risk Factors

53

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

   

Item 3.

Defaults Upon Senior Securities

54

   

Item 4.

Submission of Matters to a Vote of Security Holders

54

   

Item 5.

Other Information

54

   

Item 6.

Exhibits

54

   

Signature

55

 

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)

Sept. 28, 
2008 

Sept. 30, 
2007 

Sept. 28, 
2008 

Sept. 30, 
2007 

   

Revenues

$

11,973 

$

11,990 

$

35,950 

$

35,548 

  

Costs and expenses:

Cost of sales(a)

2,122 

4,618 

6,397 

8,614 

Selling, informational and administrative expenses(a)

3,523 

3,768 

10,878 

10,973 

Research and development expenses(a)

1,885 

1,999 

5,642 

5,829 

Amortization of intangible assets

621 

774 

2,063 

2,372 

Acquisition-related in-process research and development charges

13 

-- 

567 

283 

Restructuring charges and acquisition-related costs

366 

455 

1,113 

2,318 

Other (income)/deductions - net

721 

(260)

221 

(1,149)

  

Income from continuing operations before provision/(benefit) for taxes on income and minority interests

2,722 

636 

9,069 

6,308 

  

Provision/(benefit) for taxes on income

463 

(161)

1,251 

800 

  

Minority interests

18 

  

Income from continuing operations

2,253 

796 

7,800 

5,502 

  

Discontinued operations:

Gain/(loss) from discontinued operations - net of tax

-- 

(4)

-- 

Gains/(losses) on sales of discontinued operations - net of tax

24 

(35)

42 

(82)

  

Discontinued operations - net of tax

25 

(35)

38 

(82)

   

Net income

$

2,278 

$

761 

$

7,838 

$

5,420 

  

Earnings per common share - basic:

Income from continuing operations

$

0.34 

$

0.12 

$

1.16 

$

0.79 

Discontinued operations - net of tax

-- 

(0.01)

-- 

(0.01)

Net income

$

0.34 

$

0.11 

$

1.16 

$

0.78 

  

Earnings per common share - diluted:

Income from continuing operations

$

0.33 

$

0.12 

$

1.16 

$

0.79 

Discontinued operations - net of tax

0.01 

(0.01)

-- 

(0.01)

Net income

$

0.34 

$

0.11 

$

1.16 

$

0.78 

  

Weighted-average shares used to calculate earnings per common share:

Basic

6,718 

6,875 

6,730 

6,964 

  

Diluted

6,736 

6,894 

6,750 

6,986 

  

Cash dividends paid per common share

$

0.32 

$

0.29 

$

0.96 

$

0.87 

   

(a)

Exclusive of amortization of intangible assets, except as disclosed in Note 10B. Goodwill and Other Intangible Assets: Other Intangible Assets.

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(millions of dollars)

Sept. 28, 
2008*

Dec. 31, 
2007**

ASSETS

Cash and cash equivalents

$

1,265 

$

3,406 

Short-term investments

24,752 

22,069 

Accounts receivable, less allowance for doubtful accounts

9,901 

9,843 

Short-term loans

849 

617 

Inventories

4,788 

5,302 

Taxes and other current assets

6,486 

5,498 

Assets held for sale

186 

114 

Total current assets

48,227 

46,849 

Long-term investments and loans

8,430 

4,856 

Property, plant and equipment, less accumulated depreciation

14,332 

15,734 

Goodwill

21,353 

21,382 

Identifiable intangible assets, less accumulated amortization

18,978 

20,498 

Other assets, deferred taxes and deferred charges

3,929 

5,949 

Total assets

$

115,249 

$

115,268 

   

LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term borrowings, including current portion of long-term debt

$

9,193 

$

5,825 

Accounts payable

1,649 

2,270 

Dividends payable

2,163 

Income taxes payable

735 

1,380 

Accrued compensation and related items

1,752 

1,974 

Other current liabilities

8,173 

8,223 

Total current liabilities

21,503 

21,835 

    

Long-term debt

7,152 

7,314 

Pension benefit obligations

2,425 

2,599 

Postretirement benefit obligations

1,747 

1,708 

Deferred taxes

5,824 

7,696 

Other taxes payable

6,594 

6,246 

Other noncurrent liabilities

2,513 

2,746 

Total liabilities

47,758 

50,144 

  

Minority interests

156 

114 

   

Preferred stock

76 

93 

Common stock

443 

442 

Additional paid-in capital

70,162 

69,913 

Employee benefit trust, at fair value

(432)

(550)

Treasury stock

(57,389)

(56,847)

Retained earnings

53,175 

49,660 

Accumulated other comprehensive income

1,300 

2,299 

   

Total shareholders' equity

67,335 

65,010 

Total liabilities and shareholders' equity

$

115,249 

$

115,268 

  

*    Unaudited.

**  Condensed from audited financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

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

Nine Months Ended

(millions of dollars)

Sept. 28, 
2008 

Sept. 30, 
2007 

   

Operating Activities:

Net income

$

7,838 

$

5,420 

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

3,912 

4,084 

Share-based compensation expense

263 

335 

Acquisition-related in-process research and development charges

567 

283 

Intangible asset impairments and other associated non-cash charges

-- 

2,220 

Deferred taxes from continuing operations

580 

(1,969)

Other non-cash adjustments

649 

393 

Changes in assets and liabilities (net of businesses acquired and divested)

(1,544)

(1,180)

   

Net cash provided by operating activities

12,265 

9,586 

   

Investing Activities:

Purchases of property, plant and equipment

(1,312)

(1,218)

Purchases of short-term investments

(22,369)

(16,606)

Proceeds from sales and redemptions of short-term investments

20,642 

23,426 

Purchases of long-term investments

(5,292)

(1,406)

Proceeds from sales and redemptions of long-term investments

639 

173 

Purchases of other assets

(36)

(93)

Acquisitions, net of cash acquired

(962)

(464)

Other investing activities

(1,365)

(218)

   

Net cash (used in)/provided by investing activities

(10,055)

3,594 

   

Financing Activities:

Increase in short-term borrowings, net

31,035 

130 

Principal payments on short-term borrowings

(28,518)

(744)

Proceeds from issuances of long-term debt

605 

1,243 

Principal payments on long-term debt

(561)

(61)

Purchases of common stock

(500)

(7,494)

Cash dividends paid

(6,409)

(6,021)

Stock option transactions and other

41 

537 

   

Net cash used in financing activities

(4,307)

(12,410)

Effect of exchange-rate changes on cash and cash equivalents

(44)

14 

Net (decrease)/increase in cash and cash equivalents

(2,141)

784 

Cash and cash equivalents at beginning of period

3,406 

1,827 

   

Cash and cash equivalents at end of period

$

1,265 

$

2,611 

   

Supplemental Cash Flow Information:

Cash paid during the period for:

Income taxes

$

1,707 

$

4,207 

Interest

541 

465 

  

See accompanying Notes to Condensed Consolidated Financial Statements.

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

Note 1.  Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month and nine-month periods ended August 24, 2008, and August 26, 2007.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2007.

Note 2.  Adoption of New Accounting Policies

As of September 28, 2008, we adopted Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. This FSP clarifies Statement of Financial Accounting Standards (SFAS) No. 157 and provides an example of determining fair value when the market for a financial asset is not active. The adoption of FASB FSP No. 157-3 did not have a significant impact on our consolidated financial statements.

As of January 1, 2008, we adopted on a prospective basis certain required provisions of SFAS No. 157, Fair Value Measurements, as amended by FASB FSP No. 157-2, Effective Date of FASB Statement No. 157. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities.  SFAS 157 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available.

Many, but not all, of our financial instruments are carried at fair value. For example, substantially all of our cash equivalents, short-term investments and long-term investments are classified as available-for-sale securities and are carried at fair value, with unrealized gains and losses, net of tax, reported in Other comprehensive income. Derivative financial instruments are carried at fair value, with changes in fair value reported in various balance sheet categories (see both Note 10 D. Financial Instruments: Derivative Financial Instruments and Hedging Activities in our Annual Report on Form 10-K for the year ended December 31, 2007, and Note 8C. Financial Instruments: Derivative Financial Instruments and Hedging Activities in this Quarterly Report) and ultimately, in Other (income)/deductions - net. Virtually all of our valuation measurements are Level 2 measurements.  The adoption of SFAS 157 did not have a significant impact on our consolidated financial statements. We did not elect to adopt SFAS 157 for acquired nonfinancial assets and assumed nonfinancial liabilities.

Emerging Issues Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, became effective for new contracts entered into on or after January 1, 2008. EITF Issue No. 07-3 requires that non-refundable advance payments for goods and services that will be used in future research and development (R&D) activities be expensed when the R&D activity has been performed or when the R&D goods have been received rather than when the payment is made. The adoption of EITF Issue No. 07-3 did not have a significant impact on our consolidated financial statements.

Note 3.  Acquisitions

During the first nine months of 2008 and 2007, we acquired the following:

In the second quarter of 2008, we acquired Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company, whose main product (Thelin), for the treatment of pulmonary arterial hypertension, is commercially available in much of the E.U., is approved in certain other markets, and is under review by the Food and Drug Administration (FDA). The cost of acquiring Encysive, through a tender offer and subsequent merger, was approximately $200 million, including transaction costs. Upon our acquisition of Encysive, Encysive's change of control repurchase obligations under its $130 million, 2.5% convertible notes came into effect and, as such, Encysive repurchased the convertible notes in consideration for their par value plus accrued interest in June 2008. In addition, in the second quarter of 2008, we acquired Serenex, Inc. (Serenex), a privately held biotechnology company with SNX-5422, an oral Heat Shock Protein 90 (Hsp90) inhibitor currently in Phase I trials for the potential treatment of solid tumors and hematological malignancies, and an extensive Hsp90 inhibitor compound library, which has potential uses in treating cancer and inflammatory and neurodegenerative diseases. In connection with these acquisitions, in the first nine months of 2008, we recorded approximately $170 million in Acquisition-related in-process research and development charges and approximately $450 million in intangible assets.  

 

   

In the first quarter of 2008, we acquired CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform that we expect will enhance our biologic portfolio. Also in the first quarter of 2008, we acquired all the outstanding shares of Coley Pharmaceutical Group, Inc., (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In connection with these and two smaller acquisitions related to Animal Health, in the first nine months of 2008, we recorded $398 million in Acquisition-related in-process research and development charges.

 

   

In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp., a privately held biopharmaceutical company with a novel technology platform for developing new protein drug candidates, and Embrex, Inc., an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. In connection with these and other small acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges.

   

Note 4.  Certain Charges

A.  Product Litigation - Celebrex and Bextra

In the third quarter of 2008, we reached agreements in principle to resolve the pending U.S. consumer fraud purported class action cases and more than 90% of the known U.S. personal injury claims involving Celebrex and Bextra, and we reached agreements to resolve substantially all of the cases and claims of state attorneys general involving Celebrex and Bextra. In connection with these actions, we have recorded charges of approximately:

$745 million applicable to all known U.S. personal injury claims;

 

   

$89 million applicable to the pending U.S. consumer fraud purported class action cases; and

 

   

$60 million applicable to agreements to resolve civil cases and claims brought by 33 states and the District of Columbia, primarily relating to alleged Bextra promotional practices. Under these agreements, we will make a payment to the states and adopt compliance measures that complement policies and procedures previously established by us.

   

In connection with these actions, we recorded total litigation-related charges of approximately $900 million in Other (income)/deductions - net in the third quarter of 2008. Virtually all of this amount is included in Other current liabilities on the condensed consolidated balance sheet as of September 28, 2008. Although we believe that we have insurance coverage for a portion of the proposed personal injury settlements, no insurance recoveries have been recorded.

We believe that the charges of approximately $745 million will be sufficient to resolve all known U.S. personal injury claims, including those not being settled at this time. However, additional charges may have to be taken in the future in connection with certain pending claims and unknown claims relating to Celebrex and Bextra.

B.  Adjustment of Prior Years' Liabilities for Product Returns

Revenues in the third quarter of 2008 include a reduction of $217 million to adjust our prior years' liabilities for product returns. After a recent detailed review of our returns experience, we determined that our previous methodology needed to be revised, as the lag time between product sale and return was actually longer than we had previously assumed. Although fully recorded in the current period, virtually all of the adjustment relates back several years.

Since this is the correction of an error, we performed an evaluation of the impact of this error on prior periods, as well the impact of correcting the error on a cumulative basis in the current quarter.  As a result of that analysis, we determined that the correction of the error in prior periods would not have been material to any individual period and we determined that the cumulative correction was not material to our projected results for fiscal 2008. As such, the cumulative correction was recorded in the third quarter of 2008. We have also reviewed our expense calculations for the prior years and determined that the expense recorded in those years was not materially different from what would have been recorded under our revised approach.

C.  Exubera

In the third quarter of 2007, we exited Exubera, an inhalable form of insulin for the treatment of diabetes. Total pre-tax charges for the third quarter and first nine months of 2007 were $2.8 billion and were included primarily in Cost of sales ($2.6 billion), Selling, informational and administrative expenses ($83 million), and Research and development expenses ($131 million). The charges were comprised of asset write-offs of $2.2 billion (intangibles, inventory and fixed assets) and other exit costs, primarily severance, contract and other termination costs. As of September 28, 2008, the remaining accrual for other exit costs is approximately $220 million.  Substantially all of this cash spending is expected to be completed in 2009.

Note 5.  Cost-Reduction Initiatives

The costs incurred in connection with our cost-reduction initiatives, which began in early 2005, follow:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28,
2008

Sept. 30,
2007

Sept. 28,
2008

Sept. 30,
2007

  

Implementation costs(a)

$

378

$

373

$

1,140

$

864

Restructuring charges(b)

338

437

1,077

2,267

Total costs related to our cost-reduction initiatives

$

716

$

810

$

2,217

$

3,131

   

(a)

For the third quarter of 2008, included in Cost of sales ($172 million), Selling, informational and administrative expenses ($95 million), Research and development expenses ($108 million), and Other (income)/deductions - net ($3 million). For the third quarter of 2007, included in Cost of sales ($173 million), Selling, informational and administrative expenses ($70 million), and Research and development expenses ($130 million). For the first nine months of 2008, included in Cost of sales ($520 million), Selling, informational and administrative expenses ($270 million), Research and development expenses ($348 million), and Other (income)/deductions - net ($2 million). For the first nine months of 2007, included in Cost of sales ($437 million), Selling, informational and administrative expenses ($198 million), Research and development expenses ($292 million), and Other (income)/deduction - net ($63 million income).

(b)

Included in Restructuring charges and acquisition-related costs.

   

Through September 28, 2008, the restructuring charges primarily relate to our supply network transformation efforts and the restructuring of our U.S. marketing and worldwide research and development operations, while the implementation costs primarily relate to accelerated depreciation of certain assets, as well as system and process standardization and the expansion of shared services.

The components of restructuring charges associated with our cost-reduction initiatives follow:

(millions of dollars)

Costs
Incurred
Through
Sept. 28,
2008

Activity
Through
Sept. 28,
2008

(a)

Accrual
as of
Sept. 28,
2008

(b)

  

Employee termination costs

$

3,639

$

2,687

$

952

Asset impairments

1,268

1,268

--

Other

427

335

92

Total

$

5,334

$

4,290

$

1,044

  

(a)

Includes adjustments for foreign currency translation.

(b)

Included in Other current liabilities ($883 million) and Other noncurrent liabilities ($161 million).

   

During the third quarter of 2008, we expensed $249 million for Employee termination costs, $52 million for Asset impairments and $37 million in Other. During the first nine months of 2008, we expensed $493 million for Employee termination costs, $518 million for Asset impairments and $66 million in Other. Through September 28, 2008, Employee termination costs represent the expected reduction of the workforce by 23,100 employees, mainly in manufacturing, sales and research; and approximately 17,400 employees have been terminated. Employee termination costs include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

Note 6.  Taxes on Income

In the second quarter of 2008, we effectively settled certain issues common among multinational corporations with various foreign tax authorities primarily relating to years 2000 through 2005. As a result, we recognized $305 million in tax benefits. Also, in the second quarter of 2008, we sold one of our biopharmaceutical companies, Esperion Therapeutics, Inc. (Esperion), to a newly formed company that is majority-owned by a group of venture capital firms. The sale, for nominal consideration, resulted in a loss for tax purposes that reduced our tax expense by $426 million. This tax benefit is a result of the significant initial investment in Esperion in 2004, primarily reported as an income statement charge for in-process research and development at acquisition date.

Included in Taxes and other current assets are tax-related assets of $4.9 billion as of September 28, 2008 and $4.3 billion as of December 31, 2007.

Note 7.  Comprehensive Income

The components of comprehensive income/(expense) follow:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28,
2008

Sept. 30,
2007

Sept. 28,
 2008

Sept. 30,
2007

   

Net income

$

2,278 

$

761 

$

7,838 

$

5,420 

Other comprehensive income/(expense):

Currency translation adjustment and other

(1,768)

(72)

(1,245)

300 

Net unrealized gains/(losses) on derivative financial instruments

13 

(5)

41 

13 

Net unrealized gains/(losses) on available-for-sale securities

(25)

(6)

(39)

(1)

Benefit plan adjustments

159 

56 

244  

250 

Total other comprehensive income/(expense)

(1,621)

(27)

(999)

562 

Total comprehensive income

$

657 

$

734 

$

6,839 

$

5,982 

   

Note 8.  Financial Instruments

A.  Financial Instruments

As of January 1, 2008, we adopted on a prospective basis certain required provisions of SFAS 157, as amended by FSP 157-2. (See Note 2. Adoption of New Accounting Policies).

Information about certain of our financial assets and liabilities follows:

Fair Value(a)

(millions of dollars)

As of
Sept. 28,
2008

Level 1

Level 2

Level 3

Financial assets carried at fair value:

Trading securities(b)

$

207

$

--

$

207

$

--

Available-for-sale debt securities(c)

29,387

--

29,387

--

Available-for-sale money market funds(d)

1,373

--

1,373

--

Available-for-sale equity securities(e)

227

132

95

--

Derivative financial instruments(f)

879

--

879

--

Total

$

32,073

$

132

$

31,941

$

--

   

Other financial assets:

Held-to-maturity debt securities carried at amortized cost(g)

$

2,568

Short-term loans carried at cost

849

Long-term loans carried at cost(b)

1,596

Non-traded equity securities carried at cost(b)

235

Total

$

5,248

   

Financial liabilities carried at fair value:

Derivative financial instruments(h)

$

857

$

--

$

857

$

--

Total

$

857

$

--

$

857

$

--

Financial liabilities carried at historical proceeds:

Short-term borrowings

$

9,193

Long-term debt, including adjustments for fair value hedges of interest rate risk

7,152

Total

$

16,345

   

(a)

Fair values are determined based on valuation techniques categorized as follows: Level 1 means the use of quoted prices for identical instruments in active markets; Level 2 means the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; Level 3 means the use of unobservable inputs.

(b)

Included in Long-term investments and loans.

(c)

Included in Short-term investments ($23.2 billion) and Long-term investments and loans ($6.2 billion).

(d)

Included in Short-term investments. Virtually all of these money market funds participate in the U.S. Treasury Department's Temporary Guarantee Program for Money Market Funds.

(e)

Included in Long-term investments and loans. Includes gross unrealized gains ($55 million) and gross unrealized losses ($20 million).

(f)

Primarily included in Taxes and other current assets ($692 million) and Other assets, deferred taxes and deferred charges ($187 million).

(g)

Primarily included in Cash and cash equivalents. Amortized cost approximates fair value as unrealized gains and losses are not significant.

(h)

Included in Other current liabilities ($681 million) and Other noncurrent liabilities ($176 million).

   

We use a matrix-pricing model for all of our available-for-sale debt securities and derivative financial instruments.  We use pricing services that principally use a composite of observable prices for money market funds and certain available-for-sale equity securities.

On an ongoing basis, we evaluate our investments in debt and equity securities to determine if a decline in fair value is other-than-temporary. When a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. The aggregate cost and related unrealized losses related to non-traded equity investments are not significant.

B.  Long-Term Debt and Other Securities

In March 2007, we filed a securities registration statement with the Securities and Exchange Commission. This registration statement was filed under the automatic shelf registration process available to "well-known seasoned issuers" and is effective for three years. We can issue securities of various types under that registration statement at any time, subject to approval by our Board of Directors in certain circumstances.

C.  Derivative Financial Instruments and Hedging Activities

There was no material ineffectiveness in any hedging relationship reported in earnings in the third quarter and first nine months of 2008.

Foreign Exchange Risk

During the first nine months of 2008, we entered into the following new or incremental hedging or offset activities:

Instrument(a)

Primary
Balance Sheet
Caption

(b)

  

Hedge
Type

(c)

  

Hedged or Offset Item

Notional Amount as of
Sept. 28, 2008
(millions of dollars)

Maturity Date

Forward

OCL

CF

Swedish krona intercompany borrowing

$

5,368            

2008

Forward

OCA

CF

Euro available-for-sale investments

4,648            

2008

Forward

OCA

CF

Yen available-for-sale investments

4,329            

2008

Forwards

OCL

--

Short-term foreign currency assets and liabilities(d)

2,405            

2008/2009

Forward

OCA

CF

U.K. pound available-for-sale investments

1,302            

2008

Forward

OCL

CF

U.K. pound intercompany borrowing

598            

2009

Forward

OCL

CF

Euro intercompany borrowing

577            

2009

   

(a)

Forward = Forward-exchange contracts.

(b)

The primary balance sheet caption indicates the financial statement classification of the amount associated with the financial instrument used to hedge or offset foreign exchange risk. The abbreviations used are defined as follows: OCA = Taxes and other current assets; and OCL = Other current liabilities.

(c)

CF = Cash flow hedge.

(d)

Forward-exchange contracts used to offset short-term foreign currency assets and liabilities are primarily for intercompany transactions in Swedish krona, euros and Japanese yen.

   

These foreign-exchange instruments serve to protect us against the impact of the translation into U.S. dollars of certain foreign currency denominated transactions.

D.  Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to 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. As of September 28, 2008, we had $5.5 billion due from a well-diversified, highly-rated group (primarily Standard & Poor's rating of AA or better) of bank counterparties around the world.

Note 9.  Inventories

The components of inventories follow:

(millions of dollars)

Sept. 28,
2008

Dec. 31,
2007

   

Finished goods

$

2,248

$

2,064

Work-in-process

1,693

2,353

Raw materials and supplies

847

885

Total inventories(a)

$

4,788

$

5,302

   

(a)

Certain amounts of inventories are in excess of one year's supply. There are no recoverability issues associated with these quantities and the amounts are not significant.

 

Note 10.  Goodwill and Other Intangible Assets

A.  Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended September 28, 2008, follow:

(millions of dollars)

Pharmaceutical 

Animal 
Health 

Other 

Total

   

Balance, December 31, 2007

$

21,256 

$

108 

$

18 

$

21,382 

Additions(a)

17 

15 

-- 

32 

Other(b)

(68)

-- 

(61)

Balance, September 28, 2008

$

21,205 

$

130 

$

18 

$

21,353 

  

(a)

Primarily related to our acquisition of Coley and two acquisitions in Animal Health.

(b)

Primarily tax adjustments.

   

B.  Other Intangible Assets

The components of identifiable intangible assets, primarily included in our Pharmaceutical segment, follow:

As of Sept. 28, 2008

As of Dec. 31, 2007

(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

$

32,931 

$

(17,871)

$

15,060

$

32,433 

$

(15,830)

$

16,603

Brands

1,017 

(493)

524

1,017 

(452)

565

License agreements

217 

(73)

144

212 

(59)

153

Trademarks

145 

(85)

60

128 

(82)

46

Other(a)

545 

(293)

252

459 

(264)

195

Total amortized finite-lived intangible assets

34,855 

(18,815)

16,040

34,249 

(16,687)

17,562

Indefinite-lived intangible assets:

Brands

2,865 

-- 

2,865

2,864 

-- 

2,864

Trademarks

70 

-- 

70

71 

-- 

71

Other

-- 

3

-- 

1

Total indefinite-lived intangible assets

2,938 

-- 

2,938

2,936 

-- 

2,936

Total identifiable intangible assets

$

37,793 

$

(18,815)

$

18,978

(b)

$

37,185 

$

(16,687)

$

20,498

(b)

   

(a)

Includes patents, non-compete agreements, customer contracts and other intangible assets.

(b)

Decrease was primarily related to amortization, partially offset by acquisitions.

  

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $652 million for the third quarter of 2008, $817 million for the third quarter of 2007, $2.2 billion for the first nine months of 2008 and $2.5 billion for the first nine months of 2007.

The expected annual amortization expense is $3.0 billion in 2008; $2.5 billion in each of 2009, 2010 and 2011; $2.1 billion in 2012; and $1.6 billion in 2013.

Note 11.  Pension and Postretirement Benefit Plans  

The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the three months ended September 28, 2008, and September 30, 2007, follow:

Pension Plans

U.S. Qualified

U.S.
Supplemental
(Non-Qualified)

International

Postretirement
Plans

(millions of dollars)

2008 

2007 

2008 

2007 

2008 

2007 

2008 

2007 

   

Service cost

$

59 

$

68 

$

$

$

63 

$

72 

$

10 

$

10 

Interest cost

115 

106 

14 

100 

87 

35 

34 

Expected return on plan assets

(162)

(167)

--  

--  

(111)

(96)

(8)

(9)

Amortization of:

Actuarial losses

15 

11 

10 

25 

10 

Prior service costs/(credits)

-- 

(1)

(1)

(1)

-- 

Curtailments and settlements - net

39 

-- 

-- 

-- 

Special termination benefits

-- 

-- 

Less: amounts included in discontinued operations

-- 

(27)

-- 

-- 

-- 

-- 

-- 

-- 

Net periodic benefit costs

$

34 

$

39 

$

28 

$

31 

$

69 

$

95 

$

46

$

54 

   

The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the first nine months of 2008 and 2007, follow:

Pension Plans

U.S. Qualified

U.S. Supplemental
(Non-Qualified)

International

Postretirement Plans

(millions of dollars)

2008 

2007 

2008 

2007 

2008 

2007 

2008 

2007 

   

Service cost

$

179 

$

216 

$

17 

$

21 

$

191 

$

217 

$

30 

$

32 

Interest cost

346 

340 

30 

42 

300 

259 

106 

103 

Expected return on plan assets

(487)

(527)

--  

--   

(333)

(284)

(26)

(27)

Amortization of:

Actuarial losses

24 

50 

22 

34 

32 

72 

21 

31 

Prior service costs/(credits)

(2)

(2)

(1)

Curtailments and settlements - net

13 

52 

121 

(99)

Special termination benefits

21 

10 

-- 

-- 

19 

11 

13 

Less: amounts included in discontinued operations

-- 

(27)

-- 

-- 

-- 

-- 

-- 

-- 

Net periodic benefit costs

$

98 

$

120 

$

188 

$

100 

$

214

$

171 

$

149 

$

156 

  

The increase in net periodic benefit costs in the first nine months of 2008, compared to the first nine months of 2007, for our U.S. supplemental (non-qualified) pension plans was largely driven by settlement charges required to be recognized due to lump sum benefit payments made to certain of our former executive officers and other former executives in the first quarter of 2008.

The international plans' net periodic benefit costs for the first nine months of 2007 include a settlement gain at our Japanese affiliate recorded in the first quarter of 2007. Japanese pension regulations permit employers with certain pension obligations to separate the social security benefits portion of those obligations and transfer it, along with related plan assets, to the Japanese government. This transfer resulted in a settlement gain of approximately $106 million.

For the first nine months of 2008, we contributed from our general assets $246 million to our U.S. supplemental (non-qualified) pension plans, $284 million to our international pension plans and $113 million to our postretirement plans. Contributions to our U.S. qualified pension plans in the first nine months of 2008 were not significant.

During 2008, we expect to contribute, from our general assets, a total of $254 million to our U.S. supplemental (non-qualified) pension plans, $442 million to our international pension plans and $151 million to our postretirement plans. We do not expect to make any significant contributions to our U.S. qualified pension plans during 2008, primarily due to the overfunded status of many of the plans as of the beginning of the year. Contributions expected to be made for 2008 are inclusive of amounts contributed during the first nine months of 2008. The contributions from our general assets include direct employer benefit payments.

Note 12.  Earnings Per Common Share

Basic and diluted earnings per common share (EPS) were computed using the following data:

Three Months Ended

Nine Months Ended

(millions)

Sept. 28, 
2008 

Sept. 30, 
2007 

Sept. 28, 
2008 

Sept. 30, 
2007 

  

EPS Numerator - Basic:

Income from continuing operations

$

2,253 

$

796 

$

7,800 

$

5,502 

Less:  Preferred stock dividends - net of tax

-- 

Income available to common shareholders from continuing operations

2,253 

795 

7,798 

5,499 

Discontinued operations - net of tax

25 

(35)

38 

(82)

Net income available to common shareholders

$

2,278 

$

760 

$

7,836 

$

5,417 

  

EPS Denominator - Basic:

Weighted-average number of common shares outstanding

6,718 

6,875 

6,730 

6,964 

  

EPS Numerator - Diluted:

Income from continuing operations

$

2,253 

$

796 

$

7,800 

$

5,502 

Less:  ESOP contribution - net of tax

-- 

-- 

Income available to common shareholders from continuing operations

2,253 

794 

7,800 

5,499 

Discontinued operations - net of tax

25 

(35)

38 

(82)

Net income available to common shareholders

$

2,278 

$

759 

$

7,838 

$

5,417 

  

EPS Denominator - Diluted:

Weighted-average number of common shares outstanding

6,718 

6,875 

6,730 

6,964 

Common share equivalents: stock options, restricted stock units, stock issuable under other employee compensation plans and convertible preferred stock

18 

19 

20 

22 

Weighted-average number of common shares outstanding and common share equivalents

6,736 

6,894 

6,750 

6,986 

   

Stock options that had exercise prices greater than the average market price of our common stock issuable under employee compensation plans(a)

499 

538 

499 

531 

   

(a)

These common stock equivalents were outstanding during the three months and nine months ended September 28, 2008, and September 30, 2007, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.

   

In the computation of diluted EPS, Income from continuing operations and Net income are reduced by the incremental contribution to the ESOPs, which were acquired as part of our Pharmacia acquisition. This contribution is the after-tax difference between the income that the ESOPs would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding.

Note 13.  Segment Information

We operate in the following business segments:

Pharmaceutical

The Pharmaceutical segment includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye diseases and endocrine disorders, among others.

   

Animal Health

The Animal Health segment includes products that prevent and treat diseases in livestock and companion animals.

   

Segment profit/(loss) is measured based on income from continuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, acquisition-related costs, costs related to our cost-reduction initiatives and transition activity associated with our former Consumer Healthcare business, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.

Revenues and profit/(loss) by segment for the three months and nine months ended September 28, 2008, and September 30, 2007, follow:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28, 
2008 

Sept. 30, 
2007 

  

Sept. 28, 
2008 

  

Sept. 30, 
2007 

Revenues:

Pharmaceutical

$

10,976 

$

11,036 

$

32,933 

$

32,722 

Animal Health

708 

636 

2,042 

1,854 

Corporate/Other(a)

289 

318 

975 

972 

Total revenues

$

11,973 

$

11,990 

$

35,950 

$

35,548 

   

Segment profit/(loss)(b)

Pharmaceutical

$

5,335 

$

5,399 

$

15,997 

$

16,152 

Animal Health

192 

143 

512 

422 

Corporate/Other(a)

(2,805)

(c)

(4,906)

(d)

(7,440)

(e)

(10,266)

(f)

Total profit/(loss)

$

2,722 

$

636 

$

9,069 

$

6,308 

  

(a)

Corporate/Other includes our gelatin capsules business, our contract manufacturing business and a bulk pharmaceutical chemicals business, and transition activity associated with our former Consumer Healthcare business (sold in December 2006). Corporate/Other under Segment profit/(loss) also includes interest income/(expense), corporate expenses (e.g., corporate administration costs), other income/(expense) (e.g., realized gains and losses attributable to our investments in debt and equity securities), certain performance-based and all share-based compensation expenses, significant impacts of purchase accounting for acquisitions, acquisition-related costs, intangible asset impairments and costs related to our cost-reduction initiatives.

  

(b)

Segment profit/(loss) equals Income from continuing operations before provision/(benefit) for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, acquisition-related costs, costs related to our cost-reduction initiatives and transition activity associated with our former Consumer Healthcare business, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.

  

(c)

For the three months ended September 28, 2008, Corporate/Other includes: (i) charges associated with the resolution of certain non-steroidal anti-inflammatory drugs (NSAID) litigation of approximately $900 million (see Note 4A. Certain Charges: Product Litigation - Celebrex and Bextra); (ii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $716 million; (iii) significant impacts of purchase accounting for acquisitions of $604 million, including acquired in-process research and development, intangible asset amortization and other charges; (iv) all share-based compensation expense; (v) acquisition-related costs of $28 million; and (vi) transition activity associated with our former Consumer Healthcare business ($9 million).

  

(d)

For the three months ended September 30, 2007, Corporate/Other includes: (i) $2.8 billion of charges associated with Exubera (see Note 4C. Certain Charges: Exubera) ; (ii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $810 million; (iii) significant impacts of purchase accounting for acquisitions of $767 million, including intangible asset amortization and other charges; (iv) all share-based compensation expense; (v) acquisition-related costs of $1 million; and (vi) transition activity associated with our former Consumer Healthcare business ($8 million income).

  

(e)

For the nine months ended September 28, 2008, Corporate/Other includes: (i) significant impacts of purchase accounting for acquisitions of $2.5 billion, including acquired in-process research and development, intangible asset amortization and other charges; (ii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $2.2 billion; (iii) charges associated with the resolution of certain NSAID litigation of approximately $900 million (see Note 4A. Certain Charges: Product Litigation - Celebrex and Bextra); (iv) all share-based compensation expense; (v) acquisition-related costs of $36 million; and (vi) transition activity associated with our former Consumer Healthcare business ($3 million income).

  

(f)

For the nine months ended September 30, 2007, Corporate/Other includes: (i) restructuring charges and implementation costs associated with our cost-reduction initiatives of $3.1 billion; (ii) $2.8 billion of charges associated with Exubera (see Note 4C. Certain Charges: Exubera); (iii) significant impacts of purchase accounting for acquisitions of $2.7 billion, including acquired in-process research and development, intangible asset amortization and other charges; (iv) all share-based compensation expense; (v) acquisition-related costs of $8 million; and (vi) transition activity associated with our former Consumer Healthcare business ($24 million income).

   

Revenues for each group of similar products follow:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28,
2008

Sept. 30,
2007

  


Change 

Sept. 28,
2008

Sept. 30,
2007

  


Change 

   

PHARMACEUTICAL

Cardiovascular and metabolic diseases

$

4,537

$

4,620

(2)%

$

13,498

$

13,858

(3)%

Central nervous system disorders

1,556

1,297

20    

4,426

3,716

19    

Arthritis and pain

768

735

5    

2,279

2,110

8    

Infectious and respiratory diseases

989

859

15    

2,920

2,609

12    

Urology

820

758

8    

2,369

2,172

9    

Oncology

645

664

(3)   

1,932

1,911

1    

Ophthalmology

459

413

11    

1,316

1,179

12    

Endocrine disorders

294

271

9    

857

769

11    

All other

337

962

(65)   

1,714

3,151

(46)   

Alliance revenues

571

457

25    

1,622

1,247

30    

Total Pharmaceutical

10,976

11,036

(1)   

32,933

32,722

1    

ANIMAL HEALTH

708

636

11    

2,042

1,854

10    

OTHER

289

318

(9)   

975

972

--    

Total revenues

$

11,973

$

11,990

--    

$

35,950

$

35,548

1    

 

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Pfizer Inc:

We have reviewed the condensed consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of September 28, 2008, the related condensed consolidated statements of income for the three-month and nine-month periods ended September 28, 2008, and September 30, 2007, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 28, 2008, and September 30, 2007. These condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of December 31, 2007, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 29, 2008, 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, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

New York, New York
November 7, 2008

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Introduction

Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding Pfizer's results of operations, financial condition and cash flows. The MD&A is organized as follows:

Overview of Our Performance and Operating Environment. This section, beginning on page 21, provides information about the following: our business; certain charges related to product litigation, an adjustment to prior years' liabilities for product returns and Exubera; our performance during the three months and nine months ended September 28, 2008; our operating environment; our strategic initiatives, such as acquisitions and our cost-reduction initiatives.

   

Revenues. This section, beginning on page 26, provides an analysis of our products and revenues for the three months and nine months ended September 28, 2008, and September 30, 2007, as well as an overview of important product developments.

   

Costs and Expenses. This section, beginning on page 36, provides a discussion about our costs and expenses.

    

Provision for Taxes on Income. This section, on page 38, provides a discussion of items impacting our tax provision for the periods presented.

   

Adjusted Income. This section, beginning on page 38, provides a discussion of an alternative view of performance used by management.

   

Financial Condition, Liquidity and Capital Resources. This section, beginning on page 43, provides an analysis of our balance sheets as of September 28, 2008, and December 31, 2007, and cash flows for the nine months ended September 28, 2008, and September 30, 2007, as well as a discussion of our outstanding debt and commitments that existed as of September 28, 2008, and December 31, 2007. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.

 

   

Outlook. This section, beginning on page 47, provides a discussion of our expectations for full-year 2008.

   

Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 48, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this MD&A relating to our financial results, operations and business plans and prospects. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section is a discussion of Legal Proceedings and Contingencies.

   

Components of the Condensed Consolidated Statements of Income follow:

Three Months Ended

Nine Months Ended

(millions of dollars, except per common share data)

Sept. 28, 
2008 

Sept. 30, 
2007 

% Change

Sept. 28, 
2008 

Sept. 30, 
2007 

% Change

   

Revenues

$

11,973 

$

11,990 

-- 

$

35,950 

$

35,548 

  

Cost of sales

2,122 

4,618 

(54)

6,397 

8,614 

(26)

% of revenues

17.7 

%

38.5 

%

17.8 

%

24.2 

%

  

Selling, informational and administrative expenses

3,523 

3,768 

(7)

10,878 

10,973 

(1)

% of revenues

29.4 

%

31.4 

%

30.3 

%

30.9 

%

  

Research and development expenses

1,885 

1,999 

(6)

5,642 

5,829 

(3)

% of revenues

15.7 

%

16.7 

%

15.7 

%

16.4 

%

  

Amortization of intangible assets

621 

774 

(20)

2,063 

2,372 

(13)

% of revenues

5.2 

%

6.5 

%

5.7 

%

6.7 

%

  

Acquisition-related in-process research and development charges

13 

-- 

567 

283 

100 

% of revenues

0.1 

%

1.6 

%

0.8 

%

  

Restructuring charges and acquisition-related costs

366 

455 

(20)

1,113 

2,318 

(52)

% of revenues

3.1 

%

3.8 

%

3.1 

%

6.5 

%

  

Other (income)/deductions - net

721 

(260)

221 

(1,149)

   

Income from continuing operations before provision for taxes on income, and minority interests

2,722 

636 

328 

9,069 

6,308 

44 

% of revenues

22.7 

%

5.3 

%

25.2 

%

17.7 

%

  

Provision /(benefit) for taxes on income

463 

(161)

1,251 

800 

56 

  

Effective tax rate

17.0 

%

(25.4)

%

13.8 

%

12.7 

%

  

Minority interests

 378 

18 

199 

  

Income from continuing operations

2,253 

796 

183 

7,800 

5,502 

42 

% of revenues

18.8 

%

6.6 

%

21.7 

%

15.5 

%

  

Discontinued operations - net of tax

25 

(35)

38 

(82)

  

Net income

$

2,278 

$

761 

199 

$

7,838 

$

5,420 

45 

% of revenues

19.0 

%

6.3 

%

21.8 

%

15.2 

%

  

Earnings per common share - basic:

Income from continuing operations

$

0.34 

$

0.12 

183 

$

1.16 

$

0.79 

47 

Discontinued operations - net of tax

-- 

(0.01)

-- 

(0.01)

Net income

$

0.34 

$

0.11 

209 

$

1.16 

$

0.78 

49 

  

Earnings per common share - diluted:

Income from continuing operations

$

0.33 

$

0.12 

175 

$

1.16 

$

0.79 

47 

Discontinued operations - net of tax

0.01 

(0.01)

-- 

(0.01)

Net income

$

0.34 

$

0.11 

209 

$

1.16 

$

0.78 

49 

  

Cash dividends paid per common share

$

0.32 

$

0.29 

$

0.96 

$

0.87 

  

* Calculation not meaningful

   

OVERVIEW OF OUR PERFORMANCE AND OPERATING ENVIRONMENT

Our Business

We are a global, research-based company applying innovative science to improve world health. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of safe and effective medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness, and increased access to quality healthcare. Our value proposition is to demonstrate that our medicines can effectively prevent and treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems and their related costs. Our revenues are derived from the sale of our products, as well as through alliance agreements, under which we co-promote products discovered by other companies.

Certain Charges

A.  Product Litigation - Celebrex and Bextra

In October 2008, we reached agreements in principle to resolve the pending U.S. consumer fraud purported class action cases and more than 90% of the known U.S. personal injury claims involving Celebrex and Bextra, and we reached agreements to resolve substantially all of the cases and claims of state attorneys general involving Celebrex and Bextra. In connection with these actions, we recorded litigation-related charges of approximately $900 million in Other (income)/deductions - net in the third quarter of 2008. Virtually all of this amount is included in Other current liabilities on the condensed consolidated balance sheet as of September 28, 2008.

(See Part II - Other information, Item 1.  Legal Proceedings, of this Form 10-Q for a discussion of certain recent developments with respect to litigation related to Celebrex and Bextra.)

B.  Adjustment of Prior Years' Liabilities for Product Returns

Revenues in the third quarter of 2008 include a reduction of $217 million to adjust our prior years' liabilities for product returns. After a recent detailed review of our returns experience, we determined that our previous methodology needed to be revised, as the lag time between product sale and return was actually longer than we had previously assumed. Although fully recorded in the current period, virtually all of the adjustment relates back several years. We have also reviewed our expense calculations for the prior years and determined that the expense recorded in those years was not materially different from what would have been recorded under our revised approach.

C.  Exubera

In the third quarter of 2007, we exited Exubera, an inhalable form of insulin for the treatment of diabetes. Total pre-tax charges for the third quarter and first nine months of 2007 were $2.8 billion and were included primarily in Cost of sales ($2.6 billion), Selling, informational and administrative expenses ($83 million), and Research and development expenses ($131 million). The charges were comprised of asset write-offs of $2.2 billion (intangibles, inventory and fixed assets) and other exit costs, primarily severance, contract and other termination costs. As of September 28, 2008, the remaining accrual for other exit costs is approximately $220 million.  Substantially all of this cash spending is expected to be completed in 2009.

Since our decision in the third quarter of 2007 to exit Exubera, patients have been transitioning to other diabetes therapies. On September 16, 2008, we announced an agreement with MannKind Corporation (Mannkind) to transition certain Exubera patients with a continuing need for inhaled insulin to Mannkind's inhaled insulin product. Pfizer has agreed to reimburse some of Mannkind's costs up to $1.6 million for transitioning the patients.

Our Performance for the Three Months and Nine Months Ended September 28, 2008

Revenues in the third quarter of 2008 were approximately $12.0 billion, comparable to the same period in 2007. Revenues in the first nine months of 2008 increased 1% to $36.0 billion, compared to the same period in 2007. The significant product and alliance revenue impacts on revenues for the third quarter and first nine months of 2008, compared to the same periods in 2007, are as follows:

Third Quarter

Nine Months

Increase/

Increase/

(decrease)

% Change

(decrease)

% Change

(millions of dollars)

08/07

  

08/07

08/07

  

08/07

  

Zyrtec/Zyrtec D(a)

$

(428)

%

$

(1,149)

(90)

%

Camptosar(a)

(121)

(50)

(262)

(37)

Norvasc(b)

(78)

(12)

(649)

(28)

Chantix/Champix(c)

(59)

(24)

63 

10 

Lipitor(d)

(28)

(1)

-- 

Lyrica

210 

45 

606 

48 

Sutent(e)

75 

49 

228 

57 

Viagra

59 

13 

166 

13 

Zyvox

49 

21 

140 

20 

Xalatan/Xalacom

48 

12 

140 

12 

Geodon/Zeldox

30 

13 

109 

18 

Vfend

27 

17 

92 

20 

Alliance revenues

114 

25 

375 

30 

*

Calculation not meaningful.

(a)

Zyrtec/Zyrtec D lost U.S. exclusivity in late January 2008, at which time we ceased selling this product. Camptosar lost U.S. exclusivity in February 2008.

(b)

Norvasc lost U.S. exclusivity in March 2007.

(c)

Chantix/Champix is a new product that was launched since 2006 and has been negatively impacted by the changes to its U.S. label in prior 2008 quarters.

(d)

Lipitor has been impacted by competitive pressures and other factors.

(e)

Sutent is a new product that was launched since 2006.

   

Revenues benefited from favorable foreign exchange impacts of approximately $620 million, or 5%, in the third quarter of 2008 and $2.0 billion, or 6%, in the first nine months of 2008. In addition, revenues in the third quarter of 2008 and first nine months of 2008 were negatively impacted by a $217 million adjustment to the prior years' liabilities for product returns (see the "Certain Charges: B. Adjustment of Prior Years' Liabilities for Product Returns" section of this MD&A).  In the U.S., revenues decreased 15% in the third quarter of 2008 and decreased 13% in the first nine months of 2008, compared to the same periods in 2007, while international revenues increased 13% in the third quarter of 2008 and increased 15% in the first nine months of 2008, compared to the same periods in 2007.

The impact of rebates in the third quarter of 2008 decreased revenues by approximately $780 million, compared to approximately $645 million in the third quarter of 2007. The increase in rebates was due primarily to:

the impact of our contracting strategies with both government and non-government entities in the U.S.,

 

   

partially offset by:

 

  

changes in product mix, among other factors.

    

The impact of rebates in the first nine months of 2008 decreased revenues by approximately $2.4 billion, compared to approximately $1.9 billion in the first nine months of 2007. The increase in rebates was due primarily to:

the impact of our contracting strategies with both government and non-government entities in the U.S.; and

 

   

a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act), which went into effect in 2006,

 

   

partially offset by:

 

  

changes in product mix, among other factors.

  

(See further discussion in the "Revenues - Pharmaceutical Revenues" section of this MD&A.)

Income from continuing operations for the third quarter of 2008 was $2.3 billion, compared to $796 million in the third quarter of 2007, and $7.8 billion in the first nine months of 2008, compared to $5.5 billion in the first nine months of 2007.  The increases were primarily due to:

a $2.1 billion after-tax charge recorded in the third quarter of 2007 related to our decision to exit Exubera;

 

   

lower restructuring costs associated with our cost-reduction initiatives;

 

   

the favorable impact of foreign exchange;

 

   

tax benefits in the second quarter of 2008 related to favorable effectively settled tax issues and the sale of one of our biopharmaceutical companies (Esperion Therapeutics, Inc.);

 

   

savings related to our cost-reduction initiatives; and

 

   

the payment recorded in the second quarter of 2007 to Bristol-Myers Squibb Company (BMS) in connection with our collaboration to develop and commercialize apixaban,

  

partially offset by:

the $640 million after-tax charge related to the resolution of certain non-steroidal anti-inflammatory drugs (NSAID) litigation;

 

   

the $150 million after-tax charge to adjust our prior years' liabilities for product returns; and

 

   

the increase in Acquisition-related in-process research and development charges.

   

(See further discussion in the "Certain Charges," "Costs and Expenses" and "Provision for Taxes on Income" sections of this MD&A.)

In the second quarter of 2008, we acquired Serenex, Inc. and Encysive Pharmaceuticals Inc. In the first quarter of 2008, we acquired CovX and Coley Pharmaceutical Group, Inc. and completed two smaller acquisitions related to Animal Health. In the first quarter of 2007, we acquired Embrex, Inc. and BioRexis Pharmaceutical Corp. (See further discussion in the "Our Strategic Initiatives - Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations" section of this MD&A.)

We have also made progress with our cost-reduction initiatives, which comprise a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the "Our Cost-Reduction Initiatives" section of this MD&A.)

Our Operating Environment

Despite the challenging financial markets, Pfizer maintains a strong financial position. We have a strong balance sheet and excellent liquidity that provides us with financial flexibility. Our long-term debt is rated high quality and investment grade. We have and will continue to take a conservative approach to our investments. Both short-term and long-term investments consist primarily of high-quality, highly liquid, well-diversified, investment-grade, available-for-sale debt securities. As a result, we continue to believe that we have the ability to meet our financing needs for the foreseeable future. However, as market conditions change, we will continue to monitor our liquidity position. (For further discussion of our financial condition, see the "Financial Condition, Liquidity and Capital Resources section of this MD&A.)

We and our industry continue to face significant challenges in a profoundly changing business environment, as explained more fully in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2007. Industry-wide factors, including pharmaceutical product pricing and access, intellectual property rights, product competition, the regulatory environment, pipeline productivity and the changing business environment, can significantly impact our businesses. In order to meet these challenges and capitalize on opportunities in the marketplace, we are taking steps to change the way we run our businesses.

Generic competition and patent expirations significantly impact our business. We lost U.S. exclusivity for Camptosar in February 2008 and Norvasc in March 2007 and, as expected, significant revenue declines followed. Zyrtec/Zyrtec D lost its U.S. exclusivity in late January 2008, at which time we ceased selling this product. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, in addition to other competitive pressures. The volume of patients who start on or switch to generic simvastatin continues to negatively impact Lipitor prescribing trends, particularly in the managed-care environment. (For more detailed information about Lipitor, Norvasc, Zyrtec, Camptosar and other significant products, see further discussion in the "Revenues - Pharmaceutical - Selected Product Descriptions" section of this MD&A.)

We will continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate.

(See Part II - Other Information; Item 1. Legal Proceedings, of this Form 10-Q for a discussion of certain recent developments with respect to patent litigation.)

These and other industry-wide factors that may affect our businesses should be considered along with the information presented in the "Forward-Looking Information and Factors That May Affect Future Results" section of this MD&A.

Our Strategic Initiatives - Strategy and Recent Transactions

Acquisitions, Licensing and Collaborations

We are committed to capitalizing on new growth opportunities by advancing our new-product pipeline, and maximizing the value of our in-line products, as well as through opportunistic licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, vaccines, oncology, diabetes, Alzheimer's disease, inflammation/immunology, pain, psychoses (schizophrenia) and other products and services that seek to provide valuable healthcare solutions. Some of our most significant business-development transactions during the first nine months of 2008 and 2007 are described below.

In the second quarter of 2008, we acquired Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company, whose main product (Thelin), for the treatment of pulmonary arterial hypertension, is commercially available in much of the E.U., is approved in certain other markets, and is under review by the Food and Drug Administration (FDA). The cost of acquiring Encysive, through a tender offer and subsequent merger, was approximately $200 million, including transaction costs. Upon our acquisition of Encysive, Encysive's change of control repurchase obligations under its $130 million, 2.5% convertible notes came into effect and as such, Encysive repurchased the convertible notes in consideration for their par value plus accrued interest in June 2008. In addition, in the second quarter of 2008, we acquired Serenex, Inc. (Serenex), a privately held biotechnology company with SNX-5422, an oral Heat Shock Protein 90 (Hsp90) inhibitor currently in Phase I trials for the potential treatment of solid tumors and hematological malignancies, and an extensive Hsp90 inhibitor compound library, which has potential uses in treating cancer and inflammatory and neurodegenerative diseases. In connection with these acquisitions, in the first nine months of 2008, we recorded approximately $170 million in Acquisition-related in-process research and development charges and approximately $450 million in intangible assets.

 

  

In the second quarter of 2008, we entered into an agreement with a subsidiary of Celldex Therapeutics Inc. (Celldex) for an exclusive worldwide license to CDX-110, an experimental therapeutic vaccine in Phase II development for the treatment of glioblastoma multiforme, and exclusive rights to the use of EGFRvIII vaccines in other potential indications. Under the license and development agreement, an up-front payment of approximately $40 million in Research and development expenses and an equity investment of approximately $10 million were recorded in the second quarter of 2008. Additional payments exceeding $390 million could potentially be made to Celldex based on the successful development and commercialization of CDX-110 and additional EGFRvIII vaccine products.

 

   

In the first quarter of 2008, we acquired CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform that we expect will enhance our biologic portfolio. Also in the first quarter of 2008, we acquired all the outstanding shares of Coley Pharmaceutical Group, Inc. (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In connection with these and two smaller acquisitions related to Animal Health, we recorded $398 million in Acquisition-related in-process research and development charges.

 

   

In the second quarter of 2007, we entered into a collaboration agreement with BMS to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS. We made an up-front payment to BMS of $250 million and additional payments to BMS related to product development efforts, which are included in Research and development expenses for the nine months ended September 30, 2007. We may also make additional payments of up to $750 million to BMS based on development and regulatory milestones. In a separate agreement, we are also collaborating with BMS on the research, development and commercialization of a Pfizer discovery program, which includes preclinical compounds with potential applications for the treatment of metabolic disorders, including diabetes. We exited research efforts in the area of obesity during the third quarter of 2008.

 

  

In the second quarter of 2007, we agreed with OSI Pharmaceuticals, Inc. (OSI) to terminate a 2002 collaboration agreement to co-promote Macugen, for the treatment of age-related macular degeneration, in the U.S. We also agreed to amend and restate a 2002 license agreement for Macugen, and to return to OSI all rights to develop and commercialize Macugen in the U.S. In return, OSI granted us an exclusive right to develop and commercialize Macugen in the rest of the world.

 

  

In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp. (BioRexis), a privately held biopharmaceutical company with a novel technology platform for developing new protein drug candidates, and Embrex, Inc. (Embrex), an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. In connection with these and other small acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges.

  

The following transactions were not completed as of the end of the third quarter of 2008, and are not reflected in our consolidated financial statements as of September 28, 2008:

In October 2008, we received a one-time cash payment of $425 million, pre-tax, in exchange for the termination of a license agreement, including the right to receive future royalties.  These proceeds will be included in Other (income)/deductions - net in the fourth quarter of 2008.

 

   

In the fourth quarter of 2008, we concluded the acquisition of a number of animal health product lines from Schering-Plough Corporation for sale in the European Economic Area in the following categories: swine e.coli vaccines; equine influenza and tetanus vaccines; ruminant neonatal and clostridia vaccines; rabies vaccines; companion animal veterinary specialty products; and parasiticides and anti-inflammatories. The cost of acquiring these product lines was approximately $170 million.

 

   

In September 2008, we announced an agreement with Medivation, Inc. (Medivation) to develop and commercialize Dimebon, Medivation's investigational drug for treatment of Alzheimer's disease and Huntington's disease. Following the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, the agreement went into effect in October 2008. Dimebon currently is being evaluated in a Phase III trial in patients with mild-to-moderate Alzheimer's disease. Under the collaboration agreement with Medivation, we made an up-front payment of $225 million in October 2008, which will be included in Research and development expenses in the fourth quarter of 2008. We may also make additional payments of up to $500 million based upon development and regulatory milestones, as well as additional milestone payments based upon the successful commercialization of the product.

  

Our Cost-Reduction Initiatives

We have made significant progress with our multi-year productivity initiatives, which are designed to increase efficiency and streamline decision-making across the company.

We are generating net cost reductions through site rationalization in research and development (R&D) and manufacturing, reductions in our global sales force, streamlined organizational structures, staff function reductions, increased outsourcing and procurement savings and prioritizing our R&D portfolio. Projects in various stages of completion include:

Reorganization of our Field Force - Since 2004, we have reduced our global field force by 13%. Additional savings are being generated from de-layering, eliminating duplicative work and strategically realigning various functions.

 

   

Strategic Outsourcing - We are undergoing a reorganization within our information technology infrastructure and are also consolidating a number of third-party service providers, thereby reducing labor costs. We expect to generate considerable annual savings and provide consistent global service levels related to information technology.

 

   

Supply Network Transformation - We are transforming our global manufacturing network into a global strategic supply network, consisting of our internal network of plants together with strategic external manufacturers, and including purchasing, packaging and distribution. As of the end of the third quarter of 2008, we have reduced our internal network of plants from 93 four years ago to 51, which includes the acquisition of seven plants. We plan to reduce our internal network of plants around the world to 43 by the end of 2009. The cumulative impact will be a more focused, streamlined and competitive manufacturing operation, with less than 50% of our former internal plants and more than 47% fewer manufacturing employees, compared to 2003. As part of the transformation to a global strategic supply network, we currently expect to increase outsourced manufacturing of our products from approximately 17% of our products, on a cost basis, to approximately 30% over the next two to three years.

 

   

Enhanced R&D Productivity - We have taken important steps to prioritize our research and development portfolio to maximize value. After a review of all our therapeutic areas, in September 2008, we announced our decision to exit certain disease areas - anemia, atherosclerosis/hyperlipidemia, bone health/frailty, gastrointestinal, heart failure, liver fibrosis, muscle, obesity, osteoarthritis (disease modifying concepts only) and peripheral arterial disease - and give higher priority to the following disease areas: Alzheimer's disease, diabetes, inflammation/immunology, oncology, pain and psychoses (schizophrenia). We also will continue to work in many other disease areas, such as asthma, chronic obstructive pulmonary disorder, genitourinary, infectious diseases, ophthalmology, smoking cessation, thrombosis and transplant, among others. These decisions will not affect our portfolio of marketed products, the development of compounds currently in Phase III or any launches planned over the next three years.

 

   

 

To increase efficiency and effectiveness in bringing new therapies to patients-in-need, in January 2007, Pfizer Global Research and Development (PGRD) announced a number of actions to transform the division. Of six sites that were identified for exit by PGRD, two (Mumbai, India, and Plymouth Township, Michigan) have been closed. We have ceased R&D operations in Ann Arbor and Kalamazoo, Michigan, and in Nagoya, Japan. On July 1, 2008, the former Pfizer R&D site in Nagoya became the base of operations of an R&D spin-off in which Pfizer retains a small interest. Operations in Amboise, France, have ceased and decommissioning of the Amboise site is now underway. Pfizer concluded the legal process of consultation with the PGRD Amboise Works Council and local authorities in late September 2008. The reorganization of the research and development division has resulted in smaller, more agile units designed to drive the growth of our bigger pipeline and generate more products, without increasing costs.

  

By the end of 2008, on a constant currency basis (the actual foreign exchange rates in effect during 2006), we now expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $2.0 billion, compared to 2006. As of September 28, 2008, we had achieved $1.7 billion of the target. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)

REVENUES

Worldwide revenues by segment and geographic area for the third quarter and first nine months of 2008 and 2007 follow:

Three Months Ended

% Change in Revenues

Worldwide

U.S.

International

World-

Inter-

Sept. 28,

Sept. 30,

Sept. 28,

Sept. 30

Sept. 28,

Sept. 30,

wide

U.S.

national

(millions of dollars)

2008

2007

2008

2007

2008

2007

08/07

08/07

08/07

   

Pharmaceutical

$

10,976

$

11,036

$

4,525

$

5,352

$

6,451

$

5,684

(1)

(15)

14 

Animal Health

708

636

303

292

405

344

11 

17 

Other

289

318

80

103

209

215

(9)

(22)

(3)

Total Revenues

$

11,973

$

11,990

$

4,908

$

5,747

$

7,065

(a)

$

6,243

(a)

-- 

(15)

13 

   

(a)

Includes revenues from Japan of $899 million (7.5% of total revenues) for the three months ended September 28, 2008, and $815 million (6.8% of total revenues) for the three months ended September 30, 2007.

  

Nine Months Ended

% Change in Revenues

Worldwide

U.S.

International

World-

Inter-

Sept. 28,

Sept. 30,

Sept. 28,

Sept. 30,

Sept. 28,

Sept. 30,

wide

U.S.

national

(millions of dollars)

2008

2007

2008

2007

2008

2007

08/07

08/07

08/07

   

Pharmaceutical

$

32,933

$

32,722

$

14,048

$

16,287

$

18,885

$

16,435

(14)

15 

Animal Health

2,042

1,854

812

810

1,230

1,044

10 

--   

18 

Other

975

972

325

341

650

631

-- 

(5)

Total Revenues

$

35,950

$

35,548

$

15,185

$

17,438

$

20,765

(b)

$

18,110

(b)

(13)

15 

  

(b)

Includes revenues from Japan of $2.7 billion (7.5% of total revenues) for the nine months ended September 28, 2008, and $2.4 billion (6.8% of total revenues) for the nine months ended September 30, 2007.

   

Pharmaceutical Revenues

Worldwide Pharmaceutical revenues for the first nine months of 2008 were $32.9 billion, an increase of 1% compared to the first nine months of 2007, due primarily to:

an aggregate increase in revenues from products launched since 2006, particularly Sutent and Chantix, of $348 million in the first nine months of 2008, and from many in-line products, including Lyrica, which increased 48% in the first nine months of 2008; and

 

   

the weakening of the U.S. dollar relative to many foreign currencies, especially the euro, Japanese yen and Canadian dollar, which increased Pharmaceutical revenues by approximately $1.8 billion, or 6%, in the first nine months of 2008,

  

partially offset by:  

a decrease in revenues for Zyrtec/Zyrtec D of $1.1 billion in the first nine months of 2008, primarily due to the loss of U.S. exclusivity and cessation of selling this product in January 2008;

 

a decrease in revenues for Norvasc of $649 million in the first nine months of 2008, primarily due to the loss of U.S. exclusivity in March 2007;

 

   

an increase in rebates in the first nine months of 2008 due to a 2007 favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act, as well as the impact of our contracting strategies with both government and non-government entities in the U.S.;

 

  

a decrease in revenues for Lipitor in the U.S. of $614 million in the first nine months of 2008, primarily resulting from competitive pressures from generics, among other factors;

 

   

a decrease in revenues for Camptosar in the U.S. of $311 million in the first nine months of 2008, primarily due to the loss of U.S. exclusivity in February 2008; and

 

   

an adjustment to the prior years' liabilities for product returns of $217 million recorded in the third quarter of 2008 (see the "Certain Charges: B. Adjustment of Prior Years' Liabilities for Product Returns" section of this MD&A).

 

   

Worldwide Pharmaceutical revenues for the third quarter of 2008 were $11.0 billion, a decrease of 1% compared to the third quarter of 2007, due primarily to the factors discussed above and lower sales of Chantix in the third quarter of 2008, which were negatively impacted by the changes to its U.S. label in prior 2008 quarters.

 

   

Geographically,

in the U.S., Pharmaceutical revenues decreased 15% in the third quarter of 2008, compared to the third quarter of 2007, and decreased 14% in the first nine months of 2008, compared to the first nine months of 2007, primarily due to the effect of the loss of exclusivity of Norvasc, Zyrtec/Zyrtec D and Camptosar, an adjustment to the prior years' liabilities for product returns (approximately $160 million), higher rebates, lower sales of Lipitor, and lower sales of Chantix, which were negatively impacted by the changes to its U.S. label in prior 2008 quarters, partially offset by the increase in revenues from products launched since 2006, except for Chantix, and from many in-line products; and

   

in our international markets, Pharmaceutical revenues increased 14% in the third quarter of 2008, compared to the third quarter of 2007, and increased 15% in the first nine months of 2008, compared to the first nine months of 2007, primarily due to the favorable impact of foreign exchange on international revenues of approximately $570 million (5%) in the third quarter of 2008 and $1.8 billion (6%) in the first nine months of 2008, revenues from some of our products launched since 2006, as well as growth of certain in-line products, partially offset by an adjustment to the prior years' liabilities for product returns (approximately $60 million).

   

During the third quarter of 2008, international Pharmaceutical revenues grew to represent 58.8% of total Pharmaceutical revenues, compared to 51.5% in the third quarter of 2007. For the first nine months of 2008, international Pharmaceutical revenues grew to represent 57.3% of total Pharmaceutical revenues, compared to 50.2% in the first nine months of 2007. These increases have been fueled by higher volumes and the favorable impact of foreign exchange, despite pricing pressures in international markets.

Effective August 1, 2008, May 2, 2008, January 1, 2008, July 13, 2007, and January 1, 2007, we increased the published prices for certain U.S. pharmaceutical products. These price increases had no material effect on wholesaler inventory levels in comparison to the prior year.

As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations, with respect to our pharmaceutical products. These deductions represent estimates of the related obligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual results have not been material to our overall business. (See the "Certain Charges: B. Adjustment of Prior Years' Liabilities for Product Returns" section of this MD&A.) On a quarterly basis, our adjustments to actual results generally have been less than 1% of Pharmaceutical net sales and can result in either a net increase or a net decrease in income. Product-specific rebate charges, however, can have a significant impact on year-over-year individual product growth trends.

Rebates under Medicaid and related state programs reduced revenues by $113 million in the third quarter of 2008, compared to $141 million in the third quarter of 2007, and $356 million in the first nine months of 2008, compared to $392 million in the first nine months of 2007. The decreases in rebates under Medicaid and related state programs were due primarily to lower sales of Norvasc and Zyrtec/Zyrtec D, both of which lost exclusivity in the U.S., partially offset by the impact of price increases on January 1, 2008, May 2, 2008, and August 1, 2008.

Rebates under Medicare reduced revenues by $201 million in the third quarter of 2008, compared to $121 million in the third quarter of 2007, and $623 million in the first nine months of 2008, compared to $321 million in the first nine months of 2007. The increases in Medicare rebates were due primarily to the impact of our contracting strategies and a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act.

Performance-based contract rebates reduced revenues by $468 million in the third quarter of 2008, compared to $383 million in the third quarter of 2007, and $1.4 billion in the first nine months of 2008, compared to $1.2 billion in the first nine months of 2007. The increases in performance-based contract rebates were due to the impact of our contracting strategies, primarily related to Lipitor, partially offset by lower sales of Norvasc, Camptosar and Zyrtec/Zyrtec D. These contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.

Chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties) reduced revenues by $431 million in the third quarter of 2008, compared to $420 million in the third quarter of 2007, and $1.4 billion in the first nine months of 2008, compared to $1.1 billion in the first nine months of 2007. Chargebacks were impacted by the launch of certain generic products, including amlodipine besylate after Norvasc lost U.S. exclusivity in March 2007.

Our accruals for Medicaid rebates, Medicare rebates, contract rebates and chargebacks totaled $1.5 billion as of September 28, 2008, an increase from $1.4 billion as of December 31, 2007, due primarily to the impact of our contracting strategies and increased pricing pressures.

Pharmaceutical--Selected Product Revenues    

Revenue information for several of our major Pharmaceutical products follows:

Three Months Ended

Nine Months Ended

(millions of dollars)
Product

Primary Indications

Sept. 28,
2008

%
Change
from
2007

Sept. 28,
2008

%
Change
from
2007

Cardiovascular and
metabolic diseases:

Lipitor

Reduction of LDL cholesterol

$3,142

(1)%

$9,255

-- %

Norvasc

Hypertension

562

(12)   

1,702

(28)   

Chantix/Champix

An aid to smoking cessation

182

(24)   

666

10    

Caduet

Reduction of LDL cholesterol and hypertension

148

(1)   

441

7    

Cardura

Hypertension/Benign prostatic hyperplasia

125

6    

378

--    

Central nervous
system disorders:

Lyrica

Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia

675

45    

1,871

48    

Geodon/Zeldox

Schizophrenia and acute manic or mixed episodes associated with bipolar disorder

258

13    

731

18    

Zoloft

Depression and certain anxiety disorders

135

9    

408

3    

Aricept(a)

Alzheimer's disease

131

30    

356

25    

Neurontin

Epilepsy and post-herpetic neuralgia

102

(4)   

295

(8)   

Xanax/Xanax XR

Anxiety/Panic disorders

91

7    

267

12    

Relpax

Migraine headaches

83

2    

240

4    

Arthritis and pain:

Celebrex

Arthritis pain and inflammation, acute pain

625

8    

1,825

10    

Infectious and
respiratory diseases:

Zyvox

Bacterial infections

281

21    

832

20    

Vfend

Fungal infections

189

17    

547

20    

Zithromax/Zmax

Bacterial infections

91

2    

320

(3)   

Diflucan

Fungal infections

93

(3)   

280

(10)   

Urology:

Viagra

Erectile dysfunction

509

13    

1,432

13    

Detrol/Detrol LA

Overactive bladder

298

1    

901

4    

Oncology:

Sutent

Advanced and/or metastatic renal cell carcinoma (mRCC) and refractory gastrointestinal stromal tumors (GIST)

226

49    

627

57    

Camptosar

Metastatic colorectal cancer

122

(50)   

451

(37)   

Aromasin

Breast cancer

121

19    

342

19    

Ophthalmology:

Xalatan/Xalacom

Glaucoma and ocular hypertension

450

12    

1,291

12    

Endocrine disorders:

Genotropin

Replacement of human growth hormone

225

5    

669

8    

All other:

Zyrtec/Zyrtec D

Allergies

-- 

*    

125

(90)   

Alliance revenues:

Aricept, Macugen, Exforge, Olmetec, Rebif and Spiriva

Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), hypertension (Exforge and Olmetec), multiple sclerosis (Rebif), chronic obstructive pulmonary disease (Spiriva)

571

25    

1,622

30    

     

(a)

 Represents direct sales under license agreement with Eisai Co., Ltd.

* Calculation not meaningful.

Certain amounts and percentages may reflect rounding adjustments.

  

Pharmaceutical -- Selected Product Descriptions:

Lipitor, for the treatment of elevated LDL-cholesterol levels in the blood, is the most widely used prescription treatment for lowering cholesterol and the best-selling pharmaceutical product of any kind in the world. Lipitor recorded worldwide revenues of $3.1 billion in the third quarter of 2008, a decrease of 1%, compared to the same period in 2007, and $9.3 billion in the first nine months of 2008, which was comparable to the same period in 2007. These results reflect the favorable impact of foreign exchange, which increased revenues by approximately $130 million, or 4%, in the third quarter of 2008 and by approximately $430 million, or 5%, in the first nine months of 2008. In the U.S., revenues of $1.6 billion in the third quarter of 2008 declined 13% compared to the same period in 2007 and, in the first nine months of 2008, revenues of $4.7 billion declined 12% compared to the same period in 2007. Internationally, Lipitor revenues in the third quarter of 2008 increased 16%, with 10% due to the favorable impact of foreign exchange, and in the first nine months of 2008 increased 16% compared to the same period in 2007, with 11% due to the favorable impact of foreign exchange.

 

  

 

The decrease in Lipitor worldwide revenues in the third quarter of 2008 compared to the same period in 2007, was driven by a combination of factors, including the following:

 

 

   

 

the impact of an intensely competitive lipid-lowering market with competition from multi-source generic simvastatin and branded products in the U.S;

 

 

   

 

increased payer pressure in the U.S.; and

 

 

   

 

slower growth in the lipid-lowering market, due in part to a slower rate of growth in the Medicare Part D population and heightened overall patient cost-sensitivity in the U.S. amid the slowdown in the economy, resulting in a softening overall market demand,

  

 

partially offset by:

   

the favorable impact of foreign exchange; and

 

   

operating growth internationally.

 

   

See Part II - Other Information; Item 1. Legal Proceedings, of this Form 10-Q for a discussion of certain patent and product litigation relating to Lipitor.

   

Norvasc, for treating hypertension, lost exclusivity in the U.S. in March 2007. Norvasc has also experienced patent expirations in most E.U. countries but maintains exclusivity in Canada. Norvasc worldwide revenues in the first nine months of 2008 decreased 28% compared to the same period in 2007.

 

   

 

See Part II - Other Information; Item 1. Legal Proceedings, of this Form 10-Q for a discussion of certain patent litigation relating to Norvasc.

   

Chantix/Champix, the first new prescription treatment to aid smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006 and in select E.U. markets in December 2006. Chantix/Champix continues to demonstrate strong uptake internationally, with more than seven million patients globally having been prescribed the medicine since its launch. Chantix has been either approved or launched in all major markets. Chantix/Champix recorded worldwide revenues of $182 million in the third quarter of 2008, a decrease of 24%, compared to the same period in 2007, and $666 million in the first nine months of 2008, an increase of 10%, compared to the same period in 2007. In the U.S., revenues of $96 million in the third quarter of 2008 declined 49% compared to the same period in 2007, and revenues of $398 million in the first nine months of 2008 declined 20% compared to the same period in 2007, due primarily to changes to the Chantix U.S. label in prior 2008 quarters. Internationally, revenues of $86 million in the third quarter of 2008 increased 60% compared to the same period in 2007, and revenues of $268 million in the first nine months of 2008 increased 157% compared to the same period in 2007, due primarily to launches in additional countries and continued growth in the U.K., France, Spain, Canada and Belgium.

 

   

In May 2008, we updated the Chantix label in the U.S. to provide further guidance about the use of Chantix. The updated label advises that patients should stop taking Chantix and contact their healthcare provider immediately if agitation, depressed mood, or changes in behavior that are not typical for them are observed, or if they develop suicidal thoughts or suicidal behavior. The addition of the warning to Chantix's label in the U.S. has unfavorably impacted recent U.S. prescription trends and U.S. revenues for the product. We are continuing our educational and promotional efforts, which are focused on the Chantix benefit-risk proposition, the significant health consequences of smoking and the importance of the physician-patient dialogue in helping patients quit smoking. In September 2008, the U.S. branded direct-to-consumer campaign was relaunched with print, television and web advertising.

   

See Part II - Other Information; Item 1. Legal Proceedings, of this Form 10-Q for a discussion of certain product litigation relating to Chantix.

   

Caduet, a single pill therapy combining Norvasc and Lipitor, recorded worldwide revenues of $441 million, an increase of 7% for the first nine months of 2008, compared to the same period in 2007, due primarily to growth in new launch countries, partially offset by lower revenues in the U.S., due to the introduction of generic amlodipine besylate and increased competition in the hypertension market. A more focused message platform and highly targeted consumer campaign have recently stabilized the rate of new patient starts in the U.S.

   

Lyrica, for the treatment of epilepsy, post-herpetic neuralgia (PHN) and diabetic peripheral neuropathy (DPN), and fibromyalgia, in the U.S., and for neuropathic pain and general anxiety disorder (GAD) outside the U.S., recorded worldwide revenues of $1.9 billion in the first nine months of 2008, an increase of 48%, compared to the same period in 2007. In June 2007, Lyrica was approved in the U.S. for the management of fibromyalgia, one of the most common chronic, widespread pain conditions. This approval represents a breakthrough for the more than six million Americans who suffer from this debilitating condition who previously had no FDA-approved treatment. We are using a broad-based, multi-channel campaign in the U.S. to educate patients and prescribers on fibromyalgia and Lyrica, including webcasts, adherence programs and call centers. Active promotion is also underway to expand Lyrica's leadership in the treatment of PHN and DPN. Lyrica is now the leading branded treatment for fibromyalgia, PHN and DPN in the U.S.

   

 

In July 2008, an FDA advisory committee concurred with the FDA's finding of a potential increased signal regarding suicidal thoughts and behavior for the class of 11 epilepsy drugs reviewed, including Lyrica and Neurontin. However, the committee determined that the available data did not warrant black box labeling as had been recommended by the FDA. While the FDA is not required to follow the committee's recommendation, and some form of labeling proposal by the FDA is likely for epilepsy drugs as a class, we are encouraged by the committee's vote against a boxed warning. We have conducted an extensive review of controlled clinical trials and post-marketing reports for Lyrica and Neurontin, and they showed no evidence of an increased signal regarding suicidal thoughts and behavior. We believe that our current labeling for Lyrica and Neurontin appropriately reflects their benefit-risk profiles.

 

  

Geodon/Zeldox, a psychotropic agent, is a dopamine and serotonin receptor antagonist indicated for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder. It is available in both an oral capsule and rapid-acting intramuscular formulation. In the first nine months of 2008, Geodon worldwide revenues grew 18%, compared to the same period in 2007. Geodon is supported by Pfizer's recently launched psychiatric field force and Geodon's efficacy and favorable metabolic profile, especially in moderately ill patients.

   

Celebrex, for the treatment of osteoarthritis and rheumatoid arthritis and acute pain, experienced a 10% increase in worldwide revenues to $1.8 billion in the first nine months of 2008, supported by continued educational and promotional efforts highlighting Celebrex's efficacy and safety profile.

   

See Part II - Other Information; Item 1. Legal Proceedings, of this Form 10-Q for a discussion of certain product litigation relating to Celebrex.

   

Zyvox is the world's best-selling branded antibiotic for serious gram-positive infections caused by Methicillin-resistant Staphylococcus-aureus (MRSA) in adults and children, which increasingly are attributable to drug-resistant bacteria in hospitals and, more recently, in the community setting. Zyvox is an appropriate first-line therapy for patients with serious complicated skin and skin structure infections or nosocomial pneumonia known or suspected to be caused by gram-positive pathogens, including MRSA infection, with the flexibility of an intravenous and oral regimen. Zyvox works with a unique mechanism of action, which minimizes the potential for cross-resistance with other antibiotic classes, and thus has the potential to effectively treat MRSA infection despite growing resistance to other important antibiotics. Zyvox worldwide revenues grew 20% to $832 million in the first nine months of 2008.

 

   

Selzentry/Celsentri (maraviroc) is the first in a new class of oral HIV medicines in more than a decade known as CCR5 antagonists. CCR5 antagonists work by blocking the CCR5 co-receptor, the virus' predominant entry route into T-cells. Selzentry/Celsentri stops the R5 virus on the outside surface of the cells before it enters, rather than fighting the virus inside, as do all other classes of oral HIV medicines. Selzentry/Celsentri was approved in the U.S. in August 2007 and in Europe in September 2007, and is indicated for combination anti-retroviral treatment of treatment-experienced adults infected with only CCR5-tropic HIV-1 detectable, who have evidence of viral replication and have HIV-1 strains resistant to multiple anti-retroviral agents. A diagnostic test confirms whether a patient is infected with CCR5-tropic HIV-1, which is also known as "R5-virus." We accelerated the Selzentry/Celsentri development program to make it available to patients in need. Performance has been driven by increased access and reimbursement of tropism testing, targeted promotion and combination therapy with new agents.

 

   

Viagra remains the leading treatment worldwide for erectile dysfunction and one of the world's most recognized pharmaceutical brands after more than a decade. Viagra revenues grew 13% worldwide in the first nine months of 2008 compared to the same period in 2007. In 2008, we are celebrating Viagra's 10-year anniversary with a new, differentiated campaign, Viva Viagra, which aims to better educate and motivate men with erectile dysfunction to seek treatment and also to enhance physician and consumer understanding of the benefit-risk profile of Viagra.

   

Detrol/Detrol LA, a muscarinic receptor antagonist, is the most prescribed medicine worldwide for overactive bladder. Detrol LA is an extended-release formulation taken once daily. Worldwide Detrol/Detrol LA revenues grew 4% to $901 million in the first nine months of 2008, compared to the same period in 2007. Detrol/Detrol LA continues to lead the overactive bladder market and perform well in an increasingly competitive marketplace. In the U.S., Detrol/Detrol LA's new prescription share has declined 3% in the first nine months of 2008 compared to the same period in 2007. To address this trend, we are implementing our new customer-focused physician messaging campaign, which highlights the meaningful relief that Detrol/Detrol LA can provide to patients.

 

   

Sutent, for the treatment of advanced renal cell carcinoma, including metastatic renal cell carcinoma (mRCC), and gastrointestinal stromal tumors (GIST) after disease progression on, or intolerance to, imatinib mesylate, was launched in the U.S. in January 2006. It has now been launched in all major markets, including Japan, where it was approved in April 2008 for the treatment of GIST, after failure of imatinib treatment due to resistance, and for renal cell carcinoma not indicated for curative resection and mRCC. Sutent recorded $627 million in worldwide revenues in the first nine months of 2008, an increase of 57% compared to the same period in 2007. We continue to drive growth in the U.S. and internationally, supported by cost-effectiveness data and landmark efficacy data in first-line mRCC - including 2-year survival data, which represents the longest median overall survival of any agent in this setting, as well as through strong promotional efforts and the promotion of access and health care coverage.

   

Camptosar, indicated as first-line therapy for metastatic colorectal cancer in combination with 5-fluorouracil and leucovorin, lost exclusivity in the U.S. in February 2008. It is also indicated for patients in whom metastatic colorectal cancer has recurred or progressed despite following initial fluorouracil-based therapy. Camptosar is for intravenous use only. Worldwide revenues in the first nine months of 2008 decreased 37% to $451 million, compared to the same period in 2007. The National Comprehensive Cancer Network, an alliance of 21 of the world's leading cancer centers, has issued guidelines for the treatment of advanced colorectal cancer that include Camptosar as an option across all lines of therapy.

   

Xalatan, a prostaglandin used to lower intraocular pressure associated with glaucoma and ocular hypertension, is the world's leading branded glaucoma medicine. Xalatan's proven clinical benefits and studies demonstrating long-term safety should support the continued growth of this important medicine. Xalacom, a fixed combination prostaglandin (Xalatan) and beta blocker, is available primarily in European markets. Xalatan/Xalacom worldwide revenues grew 12% in the first nine months of 2008 compared to the same period in 2007.

 

   

Genotropin, the world's leading human growth hormone, is used in children for the treatments of short stature with growth hormone deficiency, Prader-Willi Syndrome, Turner Syndrome, Small for Gestational Age Syndrome, Idiopathic Short Stature (in the U.S. only) and Chronic Renal Insufficiency (outside the U.S. only), and also used in treatments for adults with growth hormone deficiency. Genotropin worldwide revenues grew 8% in the first nine months of 2008 to $669 million, compared to the same period in 2007, driven by its broad platform of innovative injection-delivery devices.

   

Zyrtec/Zyrtec D allergy medicines experienced a 90% decline in worldwide revenues in the first nine months of 2008, compared to the first nine months of 2007, following the loss of U.S. exclusivity in January 2008. Since we sold our rights to market Zyrtec/Zyrtec D over-the-counter in connection with the sale of our Consumer Healthcare business, we ceased selling this product in late January 2008.

   

Animal Health

Revenues of our Animal Health business follow:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28,
2008

Sept. 30,
2007

% Change

Sept. 28,
2008

Sept. 30,
2007

% Change

  

Livestock products

$

436

$

387

13%

$

1,251

$

1,122

11%

Companion animal products

272

249

9   

791

732

8   

Total Animal Health

$

708

$

636

11   

$

2,042

$

1,854

10   

   

Our Animal Health business is one of the largest in the world.

The increases in Animal Health revenues in the third quarter and first nine months of 2008, compared to the same periods in 2007, were primarily due to the impact of foreign exchange, which increased revenues by 6% in both the third quarter of 2008 and the first nine months of 2008.

Our revenue performance was also positively impacted by the following:

for livestock products, the continued good performance of our cattle biologicals and intramammaries franchises in the third quarter and first nine months of 2008, as well as revenues from Embrex, which we acquired in the first quarter of 2007; and

  

for companion animal products, the good performances of Revolution (a parasiticide for dogs and cats), and new product launches, such as Convenia (first-in-class single-dose treatment antibiotic therapy for dogs and cats) and Cerenia (treatment and prevention of vomiting in dogs).

   

Product Developments

We continue to invest in R&D to provide future sources of revenues through the development of new products, as well as through additional uses for existing in-line and alliance products, and we have taken important steps to prioritize our research and development portfolio to maximize value. After a review of all our therapeutic areas, in September 2008, we announced our decision to exit certain disease areas - anemia, atherosclerosis/hyperlipidemia, bone health/frailty, gastrointestinal, heart failure, liver fibrosis, muscle, obesity, osteoarthritis (disease modifying concepts only) and peripheral arterial disease - and give higher priority to the following disease areas: Alzheimer's disease, diabetes, inflammation/immunology, oncology, pain and psychoses (schizophrenia). We also will continue to work in many other disease areas, such as asthma, chronic obstructive pulmonary disorder, genitourinary, infectious diseases, ophthalmology, smoking cessation, thrombosis and transplant, among others. These decisions will not affect our portfolio of marketed products, the development of compounds currently in Phase III or any launches planned over the next three years. Notwithstanding our efforts, there are no assurances as to when, or if, we will receive regulatory approval for additional indications for existing products or any of our other products in development.

Below are significant regulatory actions by, and filings pending with, the FDA and regulatory authorities in the E.U. and Japan.

Recent FDA Approvals:

Product

Indication

 

Date Approved

   

  

Toviaz (fesoterodine)

Treatment of overactive bladder

October 2008

   

Zmax

Community-acquired pneumonia - Pediatric filing

October 2008

   

Pending U.S. New Drug Applications (NDAs) and Supplemental Filings:

Product

Indication

 

Date Submitted

   

Geodon

Treatment of bipolar disorders - Pediatric filing

October 2008

   

Fablyn (lasofoxifene)

Treatment of osteoporosis

December 2007

   

Spiriva

Respimat device for chronic obstructive pulmonary disease

November 2007

   

Zmax

Treatment of bacterial infections--sustained release--acute otitis media (AOM) and sinusitis - Pediatric filing

November 2006

   

   

Vfend

Treatment of fungal infections - Pediatric filing

June 2005

   

Thelin

Treatment of pulmonary arterial hypertension (PAH)

May 2005

  

We received "not-approvable" letters from the FDA for Fablyn (lasofoxifene) for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We submitted a new NDA for the treatment of osteoporosis in post-menopausal women in December 2007, including the three-year interim data from the Postmenopausal Evaluation And Risk-reduction with Lasofoxifene (PEARL) study in support of the new NDA. In September 2008, nine of the 13 members of an FDA advisory committee concluded that there is a population of women with post-menopausal osteoporosis for which the benefit of treatment with Fablyn is likely to outweigh the risks. The FDA action date for Fablyn is January 19, 2009.

In September 2008, we received a "complete response" letter from the FDA for the Spiriva Respimat submission. The FDA is seeking additional data and we are working with the FDA to provide the additional information.

In September 2007, we received an "approvable" letter from the FDA for Zmax that sets forth requirements to obtain approval for the pediatric AOM indication based on pharmacokinetic data. A supplemental filing for pediatric AOM and sinusitis remains under review.

In December 2005, we received an "approvable" letter from the FDA for our Vfend pediatric filing, which sets forth the additional requirements for approval. We have been systematically working through these requirements and addressing the FDA's concerns.

On June 10, 2008, we completed the acquisition of Encysive, including Thelin. On June 15, 2007, Encysive received a third "approvable" letter from the FDA for Thelin for the treatment of PAH. We plan to commence an additional Phase III clinical trial in patients with PAH during the fourth quarter of 2008 to address the concerns of the FDA regarding efficacy as reflected in that letter.

In September 2008, we announced that we would globally withdraw all dalbavancin marketing applications for the treatment of complicated skin and skin structure gram-positive bacterial infections in adults, including the U.S. NDA and the European marketing authorization application. We plan to conduct an additional Phase III clinical trial to support planned future regulatory submissions. A pediatric program with dalbavancin is also planned.

Regulatory Approvals and Filings in the E.U. and Japan:

    

Product

Description of Event

Date Approved

  

Date Submitted

  

Geodon

Application submitted in the E.U. for pediatric bipolar disorders

--

October 2008

rifabutin

Approval in Japan for mycobacterium infection

July 2008

--

    

Macugen

Approval in Japan for treatment of age-related macular degeneration

July 2008

--

         

Lyrica

Application submitted in Japan for the treatment of pain associated with post-herpetic neuralgia

--

May 2008

Application submitted in the E.U. for the treatment of fibromyalgia

--

March 2008

   

Sutent

Approval in Japan for treatment of mRCC and GIST

April 2008

--

  

maraviroc

Application submitted in Japan for HIV in treatment-experienced patients.

--

February 2008

   

Xalacom

Application submitted in Japan for the treatment of glaucoma

--

February 2008

   

sildenafil

Approval in Japan for treatment of PAH

January 2008

--

   

Zithromac

Application submitted in Japan for bacterial infections

--

January 2008

    

Fablyn/(lasofoxifene)

Application submitted in the E.U. for the treatment of osteoporosis

--

January 2008

   

Chantix/Champix

Approval in Japan as an aid to smoking cessation

January 2008

--

   

Caduet

Application submitted in Japan for hypertension

--

November 2007

   

Celebrex

Application submitted in Japan for treatment of lower-back pain

--

February 2007

   

Ongoing or planned clinical trials for additional uses and dosage forms for our in-line products include:

Product

Indication

  

Celebrex

Acute gouty arthritis

   

Eraxis/Vfend Combination

Aspergillosis fungal infections

   

Geodon/Zeldox

Bipolar relapse prevention; adjunctive use in bipolar depression

   

Lyrica

Epilepsy monotherapy; post-operative pain; GAD; restless legs syndrome

   

Macugen

Diabetic macular edema

   

Revatio

Pediatric pulmonary arterial hypertension

   

Selzentry/Celsentri

HIV in CCR5-tropic treatment-naïve patients

   

Sutent

Breast cancer; colorectal cancer; non-small cell lung cancer; prostate cancer; liver cancer

   

Zithromax/chloroquine

Malaria

   

New drug candidates in late-stage development include: axitinib, a multi-targeted kinase inhibitor for the treatment of pancreatic cancer and renal cell carcinoma; Dimebon, a novel mitochondrial protectant and enhancer being developed in partnership with Medivation for the treatment of Alzheimer's disease; PD-332334, an alpha2delta ligand compound for the treatment of GAD; esreboxetine, for the treatment of fibromyalgia; dalbavancin, for the treatment of skin and skin structure infections; CP-751871, an anti-insulin-like growth factor receptor 1 (IGF1R) human monoclonal antibody for the treatment of non-small cell lung cancer; and apixaban for the prevention and treatment of venous thromboembolism and the prevention of stroke in patients with atrial fibrillation, which is being developed in collaboration with BMS.

In November 2008, we terminated the development program for CP-945,598, a cannabinoid-1 receptor antagonist for the treatment of obesity, based on changing regulatory perspectives on the benefit-risk profile of the cannabinoid-1 class and likely new regulatory requirements for approval.

In April 2008, we announced the discontinuation of a Phase III clinical trial of single-agent tremelimumab (CP-675,206), an anti-CTLA4 monoclonal antibody, in patients with advanced melanoma, after the review of interim data showed that the trial would not demonstrate superiority to standard chemotherapy.

Additional product-related programs are in various stages of discovery and development. Also, see our discussion in the "Our Strategic Initiatives--Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations" section of this MD&A.

COSTS AND EXPENSES

Cost of Sales

Cost of sales decreased 54% in the third quarter of 2008, while revenues were flat in the third quarter of 2008, compared to the same period in 2007. Cost of sales decreased 26% in the first nine months of 2008, while revenues increased 1% in the first nine months of 2008, compared to the same period in 2007. Cost of sales as a percentage of revenues in the third quarter of 2008 decreased 20.8 percentage points compared to the same period in 2007, and decreased 6.4 percentage points in the first nine months of 2008, compared to the same period in 2007, reflecting:

a $2.6 billion charge recorded in the third quarter of 2007 related to our decision to exit Exubera (see the "Certain Charges: C. Exubera" section of this MD&A); and

   

savings related to our cost-reduction initiatives,

   

partially offset by:

the unfavorable impact of foreign exchange on expenses;

   

unfavorable changes in geographic mix; and

   

the impact of higher implementation costs associated with our cost-reduction initiatives of $520 million in the first nine months of 2008, compared to $437 million in the first nine months of 2007.

   

Selling, Informational and Administrative Expenses

Selling, informational and administrative (SI&A) expenses decreased 7% in the third quarter of 2008, compared to the third quarter of 2007, and 1% in the first nine months of 2008, compared to the first nine months of 2007, which reflects:

savings related to our cost-reduction initiatives; and

   

an $83 million charge recorded in the third quarter of 2007 related to our decision to exit Exubera (see the "Certain Charges: C. Exubera" section of this MD&A),

  

partially offset by:

the unfavorable impact of foreign exchange on expenses; and

 

   

the impact of higher implementation costs associated with our cost-reduction initiatives of $95 million in the third quarter of 2008, compared to $70 million in the third quarter of 2007, and $270 million in the first nine months of 2008, compared to $198 million in the first nine months of 2007.

  

Research and Development Expenses

Research and development (R&D) expenses decreased 6% in the third quarter of 2008, compared to the third quarter of 2007, and 3% in the first nine months of 2008, compared to the first nine months of 2007, which reflects:

the up-front payment to BMS of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in the second quarter of 2007;

 

  

a $131 million charge recorded in the third quarter of 2007 related to our decision to exit Exubera (see the "Certain Charges: C. Exubera" section of this MD&A);   

 

  

the impact of lower implementation costs associated with our cost-reduction initiatives of $108 million in the third quarter of 2008, compared to $130 million in the third quarter of 2007; and

 

   

savings related to our cost-reduction initiatives,

 

partially offset by:

the impact of higher implementation costs associated with our cost-reduction initiatives of $348 million in the first nine months of 2008, compared to $292 million in the first nine months of 2007;

 

  

higher R&D spending related to clinical trials for our expanded Phase III portfolio; and

 

   

the unfavorable impact of foreign exchange on expenses.

   

Acquisition-Related In-Process Research and Development Charges

The estimated fair value of Acquisition-related in-process research and development charges (IPR&D) is expensed at acquisition date. IPR&D of $567 million was recorded in the first nine months of 2008, primarily related to our acquisitions of Encysive, Serenex, CovX, Coley and two smaller acquisitions related to Animal Health. IPR&D of $283 million was recorded in the first nine months of 2007, primarily related to our acquisitions of BioRexis and Embrex.

Cost-Reduction Initiatives

In connection with our cost-reduction initiatives, our management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures in a company-wide effort to improve performance and efficiency, to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We are generating net cost reductions through site rationalization in R&D and manufacturing, streamlined organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. On October 21, 2008, we announced that, compared to 2006, we now expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $2.0 billion by the end of 2008 on a constant currency basis (the actual foreign exchange rates in effect in 2006). Previously, we expected to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion by the end of 2008, compared to 2006, on a constant currency basis. As of September 28, 2008, we had achieved $1.7 billion of the target. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)

The actions associated with our cost-reduction initiatives resulted in restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated implementation costs, such as accelerated depreciation charges, primarily associated with supply network transformation efforts, and expenses associated with system and process standardization and the expansion of shared services worldwide. (See Notes to Condensed Consolidated Financial Statements - Note 5. Cost-Reduction Initiatives.) The strengthening of the euro and other currencies relative to the dollar, while favorable on Revenues, has had an adverse impact on our total expenses (Cost of sales, Selling, informational and administrative expenses, and Research and development expenses), including the reported impact of these cost-reduction efforts.

We incurred the following costs in connection with our cost-reduction initiatives:

Three Months Ended

Nine Months Ended

(millions of dollars)

Sept. 28, 
2008 

Sept. 30, 
2007 

Sept. 28, 
2008 

Sept. 30, 
2007 

  

Implementation costs(a)

$

378 

$

373 

$

1,140 

$

864

Restructuring charges(b)

338 

437 

1,077 

2,267

Total costs related to our cost-reduction initiatives

$

716 

$

810 

$

2,217 

$

3,131

  

(a)

For the third quarter of 2008, included in Cost of sales ($172 million), Selling, informational and administrative expenses ($95 million), Research and development expenses ($108 million), and Other (income)/deductions - net ($3 million). For the third quarter of 2007, included in Cost of sales ($173 million), Selling, informational and administrative expenses ($70 million), and Research and development expenses ($130 million). For the first nine months of 2008, included in Cost of sales ($520 million), Selling, informational and administrative expenses ($270 million), Research and development expenses ($348 million), and Other (income)/deductions - net ($2 million). For the first nine months of 2007, included in Cost of sales ($437 million), Selling, informational and administrative expenses ($198 million), Research and development expenses ($292 million), and Other (income)/deductions - net ($63 million income).

(b)

Included in Restructuring charges and acquisition-related costs.

   

Other (Income)/Deductions - Net  

In the third quarter of 2008, we recorded lower net interest income of $186 million, compared to $280 million in the third quarter of 2007, and $488 million in the first nine months of 2008, compared to $814 million in the first nine months of 2007, due primarily to lower net financial assets and lower interest rates. In the third quarter of 2008, we also recorded litigation-related charges of approximately $900 million related to the resolution of certain litigation involving our NSAID pain medicines (see the "Certain Charges: A. Product Litigation - Celebrex and Bextra" section of this MD&A).

PROVISION FOR TAXES ON INCOME

In the second quarter of 2008, we effectively settled certain issues common among multinational corporations with various foreign tax authorities primarily relating to years 2000 through 2005. As a result, we recognized $305 million in tax benefits. Also, in the second quarter of 2008, we sold one of our biopharmaceutical companies, Esperion Therapeutics, Inc. (Esperion), to a newly formed company that is majority-owned by a group of venture capital firms. The sale, for nominal consideration, resulted in a loss for tax purposes that reduced our tax expense by $426 million. This tax benefit is a result of the significant initial investment in Esperion in 2004, primarily reported on the consolidated statement of income as Acquisition-related in-process research and development charges at acquisition date.

Our effective tax rate for continuing operations was a 17.0% cost for the third quarter of 2008, compared to a 25.4% benefit for the third quarter of 2007, and a 13.8% cost for the first nine months of 2008, compared to a 12.7% cost for the first nine months of 2007. The tax rates for 2008 reflect the tax benefits in the second quarter of 2008, as discussed above, offset by higher acquired IPR&D expenses in 2008, which are not deductible for tax purposes. The lower tax rates in 2007 reflect a tax benefit recorded in the third quarter of $681 million related to charges associated with Exubera.

On October 3, 2008, the Tax Extenders and Alternative Minimum Tax Relief Act (the Extenders Act) extended the research and development tax credit from January 1, 2008, through December 31, 2009. We estimate that this research and development credit will reduce income tax expense in the fourth quarter of 2008 by approximately $120 million to $150 million.

ADJUSTED INCOME

General Description of Adjusted Income Measure

Adjusted income is an alternative view of performance used by management and we believe that investors' understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted income in order to portray the results of our major operations--the discovery, development, manufacture, marketing and sale of prescription medicines for humans and animals--prior to considering certain income statement elements. We have defined Adjusted income as Net income before the impact of purchase accounting for acquisitions, acquisition-related costs, discontinued operations and certain significant items. The Adjusted income measure is not, and should not be viewed as, a substitute for U.S. GAAP Net income.

The Adjusted income measure is an important internal measurement for Pfizer. We measure the performance of the overall Company on this basis. The following are examples of how the Adjusted income measure is utilized.

Senior management receives a monthly analysis of our operating results that is prepared on an Adjusted income basis;

  

Our annual budgets are prepared on an Adjusted income basis; and

  

Annual and long-term compensation, including annual cash bonuses, merit-based salary adjustments and share-based payments for various levels of management, is based on financial measures that include Adjusted income. The Adjusted income measure currently represents a significant portion of target objectives that are utilized to determine the annual compensation for various levels of management, although the actual weighting of the objective may vary by level of management and job responsibility and may be considered in the determination of certain long-term compensation plans. The portion of senior management's bonus, merit-based salary increase and share-based awards based on the Adjusted income measure ranges from 15% to 20%.

   

Despite the importance of this measure to management in goal setting and performance measurement, we stress that Adjusted income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted income (unlike U.S. GAAP Net income) may not be comparable with the calculation of similar measures for other companies. Adjusted income is presented solely to permit investors to more fully understand how management assesses our performance.

We also recognize that, as an internal measure of performance, the Adjusted income measure has limitations and we do not restrict our performance-management process solely to this metric. A limitation of the Adjusted income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies in the pharmaceutical industry. We also use other specifically tailored tools designed to ensure the highest levels of our performance. For example, our R&D organization has productivity targets, upon which its effectiveness is measured. In addition, Performance Share Awards grants made in 2006, 2007, 2008 and future years will be paid based on a non-discretionary formula that measures our performance using relative total shareholder return.

Purchase Accounting Adjustments

Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to business combinations and net asset acquisitions (see Notes to Condensed Consolidated Financial Statements - Note 3. Acquisitions). These impacts can include charges for purchased in-process R&D, the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value and the incremental charges related to the amortization of finite-lived intangible assets for the increase to fair value. Therefore, the Adjusted income measure includes the revenues earned upon the sale of the acquired products without considering the aforementioned significant charges.

Certain of the purchase-accounting adjustments associated with a business combination, such as the amortization of intangibles acquired in connection with our acquisition of Pharmacia in 2003, can occur for up to 40 years (these assets have a weighted-average useful life of approximately nine years), but this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to certain acquired intangible assets provides management and investors an alternative view of our business results by trying to provide a degree of parity to internally developed intangible assets for which research and development costs have been previously expensed.

However, a completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through Adjusted income. This component of Adjusted income is derived solely with the impacts of the items listed in the first paragraph of this section. We have not factored in the impacts of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our research and development costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting sales, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our Adjusted income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.

Acquisition-Related Costs

Adjusted income is calculated prior to considering integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate two businesses as a result of the acquisition decision. For additional clarity, only restructuring and integration activities that are associated with a purchase business combination or a net-asset acquisition are included in acquisitio