10-Q 1 pfe-3312013x10q.htm 10-Q PFE - 3/31/2013 - 10Q
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 March 31, 2013

OR

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

For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-3619

----
 
PFIZER INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)
 
235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES   X 
NO ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 May 6, 2013, 7,093,223,330 shares of the issuer’s voting common stock were outstanding.



FORM 10-Q
 
For the Quarterly Period Ended
March 31, 2013
 
Table of Contents
Page
   
 
 
 
   
 
   
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and April 1, 2012
 
 
   
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and April 1, 2012
   
 
   
 
   
 
 
   
 
 
   
 
 

 
 

 
 

 
 
   
 
 
   
 
 
   
 
 
 
 
 
   
 
 
   
 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
March 31,
2013

 
April 1,
2012

Revenues
 
$
13,500

 
$
14,885

Costs and expenses:
 
 

 
 

Cost of sales(a)
 
2,652

 
2,745

Selling, informational and administrative expenses(a)
 
3,585

 
3,968

Research and development expenses(a)
 
1,800

 
2,062

Amortization of intangible assets
 
1,234

 
1,420

Restructuring charges and certain acquisition-related costs
 
138

 
597

Other deductions––net
 
170

 
1,658

Income from continuing operations before provision for taxes on income
 
3,921

 
2,435

Provision for taxes on income
 
1,160

 
711

Income from continuing operations
 
2,761

 
1,724

Discontinued operations––net of tax
 
4

 
79

Net income before allocation to noncontrolling interests
 
2,765

 
1,803

Less: Net income attributable to noncontrolling interests
 
15

 
9

Net income attributable to Pfizer Inc.
 
$
2,750

 
$
1,794

 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.38

 
$
0.23

Discontinued operations––net of tax
 

 
0.01

Net income attributable to Pfizer Inc. common shareholders
 
$
0.38

 
$
0.24

 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.38


$
0.23

Discontinued operations––net of tax
 

 
0.01

Net income attributable to Pfizer Inc. common shareholders
 
$
0.38

 
$
0.24

 
 
 
 
 
Weighted-average shares––basic
 
7,187

 
7,537

Weighted-average shares––diluted
 
7,269

 
7,598

Cash dividends paid per common share
 
$
0.24

 
$
0.22

(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.


See Notes to Condensed Consolidated Financial Statements.

3


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

Net income before allocation to noncontrolling interests
 
$
2,765

 
$
1,803

 
 
 

 
 

Foreign currency translation adjustments
 
$
(292
)
 
$
263

Unrealized holding gains/(losses) on derivative financial instruments
 
(417
)
 
427

Reclassification adjustments for realized (gains)/losses(a) 
 
381

 
(300
)
 
 
(36
)
 
127

Unrealized holding gains/(losses) on available-for-sale securities
 
11

 
80

Reclassification adjustments for realized (gains)/losses(a) 
 
(13
)
 
17

 
 
(2
)
 
97

Benefit plans: Actuarial gains
 
18

 
61

Reclassification adjustments related to amortization(b) 
 
151

 
117

Reclassification adjustments related to curtailments and settlements, net(b)
 
59

 
60

Other
 
97

 
15

 
 
325

 
253

Benefit plans: Prior service (costs)/credits and other
 
3

 

Reclassification adjustments related to amortization(b) 
 
(16
)
 
(18
)
Reclassification adjustments related to curtailments and settlements, net(b)
 
(9
)
 
(9
)
Other
 
(2
)
 
(3
)
 
 
(24
)
 
(30
)
Other comprehensive income/(loss), before tax
 
(29
)
 
710

Tax provision on other comprehensive income/(loss)(c) 
 
176

 
204

Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
(205
)
 
$
506

 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,560

 
$
2,309

Less: Comprehensive income attributable to noncontrolling interests
 
12

 
8

Comprehensive income attributable to Pfizer Inc.
 
$
2,548

 
$
2,301

(a) 
Reclassified into Other deductions—net in the condensed consolidated statements of income.
(b) 
Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income. For additional information, see Note 10. Pension and Postretirement Benefit Plans.
(c) 
See Note 5C. Tax Matters: Taxes on Items of Other Comprehensive Income/(Loss).

See Notes to Condensed Consolidated Financial Statements.

4


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
December 31,
2012


 
(Unaudited)
 

Assets
 

 

Cash and cash equivalents
 
$
2,134

 
$
10,389

Short-term investments
 
33,212

 
22,319

Accounts receivable, less allowance for doubtful accounts
 
12,735

 
12,378

Inventories
 
7,035

 
7,063

Taxes and other current assets
 
9,647

 
9,266

Total current assets
 
64,763

 
61,415

Long-term investments
 
15,392

 
14,149

Property, plant and equipment, less accumulated depreciation
 
13,950

 
14,461

Goodwill
 
43,752

 
44,672

Identifiable intangible assets, less accumulated amortization
 
44,109

 
46,013

Taxes and other noncurrent assets
 
5,432

 
5,088

Total assets
 
$
187,398

 
$
185,798

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
8,896

 
$
6,424

Accounts payable
 
3,279

 
4,264

Dividends payable
 
5

 
1,734

Income taxes payable
 
1,158

 
1,010

Accrued compensation and related items
 
1,684

 
2,046

Other current liabilities
 
12,521

 
13,141

Total current liabilities
 
27,543

 
28,619

 
 
 
 
 
Long-term debt
 
31,481

 
31,036

Pension benefit obligations
 
7,733

 
7,830

Postretirement benefit obligations
 
3,470

 
3,493

Noncurrent deferred tax liabilities
 
22,445

 
21,593

Other taxes payable
 
6,761

 
6,610

Other noncurrent liabilities
 
5,138

 
4,939

Total liabilities
 
104,571

 
104,120

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
38

 
39

Common stock
 
450

 
448

Additional paid-in capital
 
75,778

 
72,608

Employee benefit trusts
 
(1
)
 
(1
)
Treasury stock
 
(44,832
)
 
(40,121
)
Retained earnings
 
56,972

 
54,240

Accumulated other comprehensive loss
 
(6,155
)
 
(5,953
)
Total Pfizer Inc. shareholders’ equity
 
82,250

 
81,260

Equity attributable to noncontrolling interests
 
577

 
418

Total equity
 
82,827

 
81,678

Total liabilities and equity
 
$
187,398

 
$
185,798


See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
2,765

 
$
1,803

Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
1,774

 
2,221

Share-based compensation expense
 
189

 
130

Gain associated with the transfer of certain product rights to an equity-method investment
 
(490
)
 

Asset write-offs and impairment charges
 
513

 
650

Deferred taxes from continuing operations
 
927

 
(396
)
Deferred taxes from discontinued operations
 

 
(8
)
Benefit plan contributions (in excess of)/less than expense
 
71

 
(65
)
Other non-cash adjustments, net
 
(115
)
 
(28
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(3,393
)
 
(1,533
)
Net cash provided by operating activities
 
2,241

 
2,774

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(202
)
 
(254
)
Purchases of short-term investments
 
(10,742
)
 
(6,344
)
Proceeds from redemptions and sales of short-term investments
 
6,386

 
8,119

Net (purchases of)/proceeds from redemptions and sales of short-term investments with
original maturities of 90 days or less
 
(5,596
)
 
623

Purchases of long-term investments
 
(2,246
)
 
(1,184
)
Proceeds from redemptions and sales of long-term investments
 
1,444

 
302

Acquisitions, net of cash acquired
 

 
(782
)
Other investing activities
 
26

 
(29
)
Net cash provided by/(used in) investing activities
 
(10,930
)
 
451

 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 

 
1,561

Net proceeds from/(payments on) short-term borrowings with original maturities of 90 days or less
 
3,485

 
(1,791
)
Proceeds from issuance of long-term debt(a)
 
2,624

 

Principal payments on long-term debt
 
(2
)
 
(3
)
Purchases of common stock
 
(4,626
)
 
(1,659
)
Cash dividends paid
 
(1,735
)
 
(1,650
)
Proceeds from exercise of stock options and other financing activities
 
688

 
35

Net cash provided by/(used in) financing activities
 
434

 
(3,507
)
Effect of exchange-rate changes on cash and cash equivalents
 

 
34

Net decrease in cash and cash equivalents
 
(8,255
)
 
(248
)
Cash and cash equivalents, beginning
 
10,389

 
3,182

Cash and cash equivalents, end
 
$
2,134

 
$
2,934

 
 
 
 
 
Supplemental Cash Flow Information
 
 

 
 

Non-cash transactions:
 
 
 
 
Exchange of Zoetis senior notes for the retirement of Pfizer commercial paper issued in 2012(b)
 
$
992

 
$

Exchange of Zoetis common stock for the retirement of Pfizer commercial paper issued in 2013(b)
 
2,479

 

Transfer of certain product rights to an equity-method investment(c)
 
1,233

 

Cash paid during the period for:
 
 

 
 

Income taxes
 
$
554

 
$
451

Interest
 
433

 
508

(a) 
Represents the issuance of senior notes by Zoetis, our Animal Health subsidiary, net of the non-cash exchange of Zoetis senior notes for the retirement of Pfizer commercial paper issued in 2012. See Note 7D. Financial Instruments: Long-Term Debt.
(b) 
See Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.
(c) 
See Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

See Notes to Condensed Consolidated Financial Statements.

6

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


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the U.S. 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 months ended February 24, 2013, and February 26, 2012.

On February 6, 2013, an initial public offering (IPO) of the Class A common stock of our subsidiary, Zoetis Inc. (Zoetis), was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis, which represented approximately 19.8% of the total outstanding Zoetis shares. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

On November 30, 2012, we completed the sale of our Nutrition business to Nestlé. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statement of income for the three months ended April 1, 2012. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

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

We are responsible for the unaudited financial statements included in this Quarterly Report on Form 10-Q. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and results of operations.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2012 Annual Report on Form 10-K/A.

B. Adoption of New Accounting Standards

There were no new accounting and disclosure standards adopted as of January 1, 2013.

C. Fair Value

Our fair value methodologies depend on the following types of inputs:
Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.


7

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

Note 2. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment

A. Acquisitions

NextWave Pharmaceuticals, Inc.
In the first quarter of 2013, we finalized the allocation of the consideration transferred to the assets acquired and the liabilities assumed in the acquisition of NextWave Pharmaceuticals Incorporated (NextWave), completed on November 27, 2012. The total consideration for the acquisition was approximately $442 million, and we recorded approximately $519 million in Identifiable intangible assets, consisting of $474 million in Developed technology rights and $45 million in In-process research and development; $166 million in net deferred tax liabilities; and $89 million in Goodwill.

Alacer Corp.

On February 26, 2012, we completed our acquisition of Alacer Corp., a company that manufactures, markets and distributes Emergen-C, a line of effervescent, powdered drink mix vitamin supplements that is the largest-selling branded vitamin C line in the U.S. In connection with this Consumer Healthcare acquisition, we recorded $181 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand; $69 million in net deferred tax liabilities; and $192 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has been finalized.

Ferrosan Holding A/S

On December 1, 2011, we completed our acquisition of the consumer healthcare business of Ferrosan Holding A/S (Ferrosan), a Danish company engaged in the sale of science-based consumer healthcare products, including dietary supplements and lifestyle products, primarily in the Nordic region and the emerging markets of Russia and Central and Eastern Europe. This acquisition is reflected in our condensed consolidated financial statements beginning in the first fiscal quarter of 2012. Our acquisition of Ferrosan’s consumer healthcare business increases our presence in dietary supplements with a new set of brands and pipeline products. Also, we believe that the acquisition allows us to expand the marketing of Ferrosan’s brands through Pfizer’s global footprint and provide greater distribution and scale for certain Pfizer brands, such as Centrum and Caltrate, in Ferrosan’s key markets. In connection with this Consumer Healthcare acquisition, we recorded $362 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands; $94 million in net deferred tax liabilities; and $322 million in Goodwill. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has been finalized.

B. Divestitures

Formation of Zoetis and IPO

On January 28, 2013, our then wholly owned subsidiary, Zoetis, issued $3.65 billion aggregate principal amount of senior notes, net of an original issue debt discount of $10 million. For additional information, see Note 7D. Financial Instruments: Long-Term Debt. Also, on January 28, 2013, we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business in exchange for all of the Class A and Class B common stock of Zoetis, $1.0 billion of the $3.65 billion of Zoetis senior notes, and an amount of cash equal to substantially all of the cash proceeds received by Zoetis from the remaining $2.65 billion of senior notes issued. The $1.0 billion of Zoetis senior notes received by Pfizer were exchanged by Pfizer for the retirement of Pfizer commercial paper issued in 2012, and the cash proceeds received by Pfizer of approximately $2.5 billion were restricted to use for debt repayment, dividends and/or stock buybacks.

On February 6, 2013, an IPO of the Class A common stock of Zoetis was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis (all of the Class A common stock, including shares sold pursuant to the underwriters' overallotment option to purchase additional shares, which was exercised in full) in exchange for the retirement of approximately $2.5 billion of Pfizer commercial paper issued in 2013. The Class A common stock sold in the IPO represented approximately 19.8% of the total outstanding Zoetis shares. On February 1, 2013, Zoetis shares began trading on the New York Stock Exchange under the symbol “ZTS.” The excess of the consideration received over the net book value of our divested interest was approximately $2.3 billion and was recorded in Additional paid-in capital. For additional information, see Note 6. Certain Changes in Total Equity.


8

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

In summary, as a result of the above transactions, we received approximately $6.1 billion of cash (of which approximately $2.5 billion was restricted to use for debt repayment, dividends and/or stock buybacks), and incurred approximately $3.65 billion in Zoetis long-term debt.

We continue to consolidate Zoetis, as we retain control over Zoetis. Effective February 7, 2013, the earnings attributable to the divested interest (the Net income attributable to noncontrolling interests) are excluded from Net income attributable to Pfizer Inc., Earnings per common share––basic and Earnings per common share––diluted in the condensed consolidated statement of income. As of March 31, 2013, the noncontrolling interests associated with Zoetis are reflected in Equity attributable to noncontrolling interests in the condensed consolidated balance sheet. For additional information, see Note 6. Certain Changes in Total Equity.

Nutrition Business

On November 30, 2012, we completed the sale of our Nutrition business to Nestlé for $11.85 billion in cash, and recognized a gain of approximately $4.8 billion, net of tax. The divested business includes:
our former Nutrition operating segment and certain prenatal vitamins previously commercialized by the Pfizer Consumer Healthcare operating segment; and
other associated amounts, such as direct manufacturing costs, enabling support functions and other costs not charged to the business, purchase-accounting impacts, acquisition-related costs, impairment charges, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives, all of which are reported outside our operating segment results.

The operating results of this business are classified as Discontinued operations––net of tax in the condensed consolidated statement of income for the three months ended April 1, 2012.

The following table provides the components of Discontinued operations—net of tax, virtually all of which relate to our former Nutrition business:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
April 1,
2012

Revenues
 
$
520

Pre-tax income from discontinued operations
 
117

Provision for taxes on income(a)
 
38

Discontinued operations––net of tax
 
$
79

(a) 
Includes a deferred tax benefit of $8 million.

The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for the three months ended April 1, 2012.

C. Collaborative Arrangement

Collaboration for ertugliflozin

On April 29, 2013, we announced that we had entered into a worldwide, except Japan, collaboration agreement with Merck & Co., Inc. (“Merck”) for the development and commercialization of Pfizer's ertugliflozin (PF-04971729), an investigational oral sodium glucose cotransporter (SGLT2) inhibitor being evaluated for the treatment of type 2 diabetes. Under the terms of the agreement, we will collaborate with Merck on the clinical development and commercialization of ertugliflozin, and ertugliflozin-containing fixed-dose combinations with metformin and Januvia (sitagliptin) tablets. Merck will continue to retain the rights to its existing portfolio of sitagliptin-containing products. In 2013, we received payments totaling $60 million and we will be eligible for additional payments associated with the achievement of future clinical, regulatory and commercial milestones. The payments received to date have been deferred and will be recognized in Other deductions––net over a multi-year period. We will share potential revenues and certain costs with Merck on a 60%/40% basis, with Pfizer having the 40%

9

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

share. Each party has the right to terminate the agreement at certain times under certain circumstances, with various resulting rights and obligations depending on the nature of the termination. In addition, Merck has the right to terminate the agreement at any time up to the commencement of the first Phase III clinical trial.

D. Equity-Method Investment

Investment in Hisun Pfizer Pharmaceuticals Company Limited

On September 6, 2012, we and Zhejiang Hisun Pharmaceuticals Co., Ltd., a leading pharmaceutical company in China, formed a new company, Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer), to develop, manufacture, market and sell pharmaceutical products, primarily branded generic products, predominately in China. Hisun Pfizer was established with registered capital of $250 million, of which our portion was $122.5 million. On January 1, 2013, both parties transferred selected employees to Hisun Pfizer and contributed, among other things, certain rights to commercialized products and products in development, intellectual property rights, and facilities, equipment and distribution/customer contracts. Our contributions in 2013 constituted a business, as defined by U.S. GAAP, and included, among other things, the China rights to certain commercialized products and other products not yet commercialized and all associated intellectual property rights. As a result of the contributions from both parties, Hisun Pfizer holds a broad portfolio of branded generics covering cardiovascular disease, infectious disease, oncology, mental health, and other therapeutic areas. We hold a 49% equity interest in Hisun Pfizer.

We also entered into certain transition agreements designed to ensure and facilitate the orderly transfer of the business operations to Hisun Pfizer, primarily the Pfizer Products Transition Period Agreement and a related supply and promotional services agreement. These agreements provide for a profit margin on the manufacturing services provided by Pfizer to Hisun Pfizer and govern the supply, promotion and distribution of Pfizer products until Hisun Pfizer begins its own manufacturing and distribution. While intended to be transitional, these agreements may be extended by mutual agreement of the parties for several years and, possibly, indefinitely. These agreements are not material to Pfizer, and none confers upon us any additional ability to influence the operating and/or financial policies of Hisun Pfizer.

In connection with our contributions in the first quarter of 2013, we recognized a pre-tax gain of approximately $490 million in Other deductions––net, reflecting the transfer of the business to Hisun Pfizer (including an allocation of goodwill from our Emerging Markets reporting unit as part of the carrying amount of the business transferred). Since we hold a 49% interest in Hisun Pfizer, we have an indirect retained interest in the contributed assets; as such, 49% of the gain, or $240 million, represents the portion of the gain associated with that indirect retained interest.

In valuing our investment in Hisun Pfizer (which includes the indirect retained interest in the contributed assets), we used discounted cash flow techniques, utilizing a 11.5% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk.

We are accounting for our interest in Hisun Pfizer as an equity-method investment, due to the significant influence we have over the operations of Hisun Pfizer through our board representation, minority veto rights and 49% voting interest. Our investment in Hisun Pfizer is reported as a private equity investment in Long-term investments, and our share of Hisun Pfizer's income and expenses is recorded in Other deductions––net. As of March 31, 2013, the carrying value of our investment in Hisun Pfizer is approximately $1.3 billion, and the amount of our underlying equity in the net assets of Hisun Pfizer is approximately $686 million. The excess of the carrying value of our investment over our underlying equity in the net assets of Hisun Pfizer has been allocated, within the investment account, to goodwill and other intangible assets. The other intangible assets are being amortized into Other deductions––net over an average useful life of 25 years.

Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction/productivity initiatives. For example:

10

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

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

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as groups such as information technology, shared services and corporate operations. Since the acquisition of Wyeth on October 15, 2009, our cost-reduction initiatives announced on January 26, 2009, but not completed as of December 31, 2009, were incorporated into a comprehensive plan to integrate Wyeth’s operations to generate cost savings and to capture synergies across the combined company. In addition, among our ongoing cost-reduction/productivity initiatives, on February 1, 2011, we announced a new productivity initiative to accelerate our strategies to improve innovation and productivity in R&D by prioritizing areas that we believe have the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

Integration costs(a)
 
$
39

 
$
100

Restructuring charges:(b)
 
 

 
 

Employee terminations
 
(20
)
 
267

Asset impairments
 
105

 
218

Exit costs
 
14

 
12

Restructuring charges and certain acquisition-related costs
 
138

 
597

Additional depreciation––asset restructuring recorded in our
condensed consolidated statements of income as follows:(c)
 
 

 
 

Cost of sales
 
33

 
79

Selling, informational and administrative expenses
 
12

 
2

Research and development expenses
 
90

 
259

Total additional depreciation––asset restructuring
 
135

 
340

Implementation costs recorded in our condensed consolidated
statements of income as follows:(d)
 
 

 
 

Cost of sales
 
6

 

Selling, informational and administrative expenses
 
30

 
15

Research and development expenses
 
3

 
48

Total implementation costs
 
39

 
63

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
312

 
$
1,000

(a) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes.

11

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

(b) 
From the beginning of our cost-reduction/productivity initiatives in 2005 through March 31, 2013, Employee termination costs represent the expected reduction of the workforce by approximately 62,000 employees, mainly in manufacturing and sales and research, of which approximately 54,000 employees have been terminated as of March 31, 2013. For the three months ended March 31, 2013, the credit to employee terminations reflects a change in estimate related to the number of employees to be terminated and the expected total cost of planned terminations.
The restructuring charges for the three months ended March 31, 2013 are associated with the following:
Primary Care operating segment ($5 million income), Specialty Care and Oncology operating segment ($6 million), Established Products and Emerging Markets operating segment ($11 million), other operating segments ($2 million), research and development operations ($2 million), manufacturing operations ($4 million) and Corporate ($79 million).
The restructuring charges for the three months ended April 1, 2012 are associated with the following:
Primary Care operating segment ($3 million), Specialty Care and Oncology operating segment ($3 million), Established Products and Emerging Markets operating segment ($3 million), other operating segments ($6 million), research and development operations ($12 million), manufacturing operations ($152 million) and Corporate ($318 million).
(c) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(d) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.

The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)
 
Employee
Termination
Costs/(Credits)

 
Asset
Impairment
Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2012(a)
 
$
1,793

 
$

 
$
157

 
$
1,950

Provision
 
(20
)
 
105

 
14

 
99

Utilization and other(b)
 
(340
)
 
(105
)
 
(33
)
 
(478
)
Balance, March 31, 2013(c)
 
$
1,433

 
$

 
$
138

 
$
1,571

(a) 
Included in Other current liabilities ($1.2 billion) and Other noncurrent liabilities ($731 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($919 million) and Other noncurrent liabilities ($652 million).

Total restructuring charges incurred from the beginning of our cost-reduction/productivity initiatives in 2005 through March 31, 2013 were $15.7 billion.

The asset impairment charges included in restructuring charges for the three months ended March 31, 2013 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.

The following table provides additional information about the long-lived assets that were impaired during the first quarter of 2013 in Restructuring charges and certain acquisition-related costs:
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 Fair Value(a)
 
2013
(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Assets held for sale(b)
 
$
84

 
$

 
$
84

 
$

 
$
64

Assets abandoned/demolished
 

 

 

 

 
41

Long-lived assets
 
$
84

 
$

 
$
84

 
$

 
$
105

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects property, plant and equipment and other long-lived held-for-sale assets written down to their fair value of $84 million, less costs to sell of $2 million (a net of $82 million), in the first three months of 2013. Fair value was determined primarily using a market approach, with various inputs, such as recent sales transactions.


12

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

Note 4. Other Deductions—Net

The following table provides components of Other deductions––net:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

Interest income(a)
 
$
(95
)
 
$
(81
)
Interest expense(a)
 
391

 
390

Net interest expense
 
296

 
309

Royalty-related income
 
(71
)
 
(97
)
Gain associated with the transfer of certain product rights to an equity-method investment(b)
 
(490
)
 

Net gain on asset disposals
 
(26
)
 
(7
)
Certain legal matters, net(c)
 
(83
)
 
814

Certain asset impairment charges(d)
 
399

 
432

Costs associated with the separation of Zoetis(e)
 
17

 
32

Other, net
 
128

 
175

Other deductions––net
 
$
170

 
$
1,658

(a) 
Interest income increased in the first quarter of 2013 due to higher cash equivalents and investment balances. Interest expense was virtually unchanged in the first quarter of 2013 compared to the first quarter of 2012 as the impact of the Zoetis debt issuance on January 28, 2013 was offset by otherwise lower debt balances.
(b) 
Represents the gain associated with the transfer of certain product rights to our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.
(c) 
In the first quarter of 2013, primarily includes an $80 million insurance recovery related to a certain litigation matter. In the first quarter of 2012, primarily relates to a $450 million charge in connection with an agreement-in-principle to settle a lawsuit by Brigham Young University related to Celebrex (which was ultimately settled for that amount), and charges for hormone-replacement therapy litigation. For additional information, see Note 12. Commitments and Contingencies.
(d) 
In the first quarter of 2013, includes intangible asset impairment charges of $395 million, of which $394 million relates to developed technology, for use in the development of bone and cartilage, acquired in connection with our acquisition of Wyeth. The intangible asset impairment charges for 2013 reflect, among other things, updated commercial forecasts. The impairment charges for the first quarter of 2013 are associated with the following: Specialty Care ($394 million) and Animal Health (Zoetis) ($1 million).

In the first quarter of 2012, includes intangible asset impairment charges of approximately $395 million, reflecting (i) $297 million of in-process research and development (IPR&D) assets that targeted autoimmune and inflammatory diseases, (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (ii) $53 million of developed technology rights comprising the impairment of two assets. Substantially all of these impairment charges relate to intangible assets that were acquired as part of our acquisition of Wyeth. The intangible asset impairment charges reflect, among other things, the impact of new scientific findings for IPR&D and an increased competitive environment for Robitussin. The impairment charges for the first quarter of 2012 are associated with the following: Specialty Care ($316 million); Consumer Healthcare ($45 million); and Primary Care ($34 million).
(e) 
Costs incurred in connection with the IPO of an approximate 19.8% ownership interest in Zoetis. Includes expenditures for banking, legal, accounting and similar services. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

The asset impairment charges included in Other deductions––net for the first quarter of 2013 primarily relate to identifiable intangible assets and are based on estimates of fair value.

The following table provides additional information about one of the intangible assets that was impaired during the first quarter of 2013 in Other deductions––net:
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
Fair Value(a)
 
2013
(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible asset––Developed Technology(b)
 
$
564

 
$

 
$

 
$
564

 
$
394


13

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

(a) 
The fair value amount is presented as of the date of impairment, as this asset is not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects an intangible asset written down to its fair value of $564 million in the first quarter of 2013. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then we applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the product; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 29.6% for the first quarter of 2013, compared to 29.2% for the first quarter of 2012. The effective tax rate for the first quarter of 2013 was unfavorably impacted by the non-deductibility of the goodwill derecognized and the jurisdictional mix of the other intangible assets divested as part of the transfer of certain product rights to our equity-method investment in China, largely offset by the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, as well as the extension of the U.S. R&D tax credit which was signed into law in January 2013, resulting in the full-year benefit of the 2012 R&D tax credit and a portion of the 2013 R&D tax credit being recorded in the first quarter of 2013. For additional information about the transfer of certain product rights, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

B. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. We treat these events as discrete items in the period of resolution.

The United States is one of our major tax jurisdictions, and we are regularly audited by the U.S. Internal Revenue Service (IRS):
With respect to Pfizer Inc., tax years 2009 and 2010 are currently under audit. Tax years 2011-2013 are not under audit. All other tax years are closed.
With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.
With respect to King, tax years 2009 and 2010 are currently under audit. Tax year January 1, 2011 through the date of acquisition (January 31, 2011) is open, but not under audit. All other tax years are closed. The open tax years and audits for King and its subsidiaries are not material to Pfizer Inc.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2013), Japan (2007-2013), Europe (2007-2013, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2013, primarily reflecting Brazil and Mexico) and Puerto Rico (2007-2013).


14

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

C. Taxes on Items of Other Comprehensive Income/(Loss)

The following table provides the components of tax provision on Other comprehensive income/(loss):
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
71

 
$
67

Unrealized holding gains/(losses) on derivative financial instruments
 
(157
)
 
159

Reclassification adjustments for realized (gains)/losses
 
144

 
(115
)
 
 
(13
)
 
44

Unrealized holding gains/(losses) on available-for-sale securities
 
13

 
14

Reclassification adjustments for realized (gains)/losses
 
(2
)
 
7


 
11

 
21

Benefit plans: Actuarial gains
 
6

 
20

Reclassification adjustments related to amortization
 
54

 
44

Reclassification adjustments related to curtailments and settlements, net
 
20

 
23

Other
 
37

 
(1
)

 
117

 
86

Benefit plans: Prior service (costs)/credits and other
 
(1
)
 

Reclassification adjustments related to amortization
 
(6
)
 
(8
)
Reclassification adjustments related to curtailments and settlements, net
 
(3
)
 
(4
)
Other
 

 
(2
)

 
(10
)
 
(14
)
Tax provision on other comprehensive income/(loss)
 
$
176

 
$
204

(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
 
Note 6. Certain Changes in Total Equity

The change in Additional paid-in capital in the first quarter of 2013 reflects, among other things, the impact of share-based payment transactions and an increase of approximately $2.3 billion related to the divestment of a 19.8% interest in Zoetis, our Animal Health subsidiary. The increase represents the excess of the consideration received over the book value of our divested interest, which was recorded in Additional paid-in capital as we retained control over Zoetis. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

The change in Equity attributable to noncontrolling interests in the first quarter of 2013 primarily reflects the addition of the noncontrolling interest associated with Zoetis. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.


15

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

The following table provides the changes, net of tax, in Accumulated other comprehensive loss, excluding noncontrolling interests:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Currency Translation Adjustments and Other

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/ Credits and Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2012
 
$
(177
)
 
$
(88
)
 
$
163

 
$
(6,110
)
 
$
259

 
$
(5,953
)
Other comprehensive income/(loss)(a)
 
(360
)
 
(23
)
 
(13
)
 
208

 
(14
)
 
(202
)
Balance, March 31, 2013
 
$
(537
)
 
$
(111
)
 
$
150

 
$
(5,902
)
 
$
245

 
$
(6,155
)
(a) 
Amounts do not include foreign currency translation loss of $3 million attributable to noncontrolling interests for the first quarter of 2013.



16

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

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities

The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
December 31,
2012

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
119

 
$
142

Available-for-sale debt securities(c)
 
43,811

 
32,584

Available-for-sale money market funds(d)
 
1,117

 
1,727

Available-for-sale equity securities, excluding money market funds(c)
 
312

 
263

Derivative financial instruments in receivable positions:(e)
 
 

 
 

Interest rate swaps
 
791

 
1,036

Foreign currency swaps
 
288

 
194

Foreign currency forward-exchange contracts
 
249

 
152


 
46,687

 
36,098

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (f)
 
1,470

 
1,513

Private equity securities, carried at equity method or at cost(f), (g)
 
2,434

 
1,239


 
3,904

 
2,752

Total selected financial assets
 
$
50,591

 
$
38,850

Financial liabilities measured at fair value on a recurring basis(a)
 
 
 
 
Derivative financial instruments in a liability position:(h)
 
 
 
 
Foreign currency swaps
 
$
823

 
$
428

Foreign currency forward-exchange contracts
 
99

 
243

Interest rate swaps
 
26

 
33


 
948

 
704

Other financial liabilities(i)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(f)
 
8,896

 
6,424

Long-term debt, carried at historical proceeds, as adjusted(j), (k)
 
31,481

 
31,036


 
40,377

 
37,460

Total selected financial liabilities
 
$
41,325

 
$
38,164

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 or Level 3 inputs.
(b) 
Trading securities are held in trust for legacy business acquisition severance benefits.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Includes $422 million as of March 31, 2013 and $408 million as of December 31, 2012 of money market funds held in trust in connection with the asbestos litigation involving Quigley Company, Inc., a wholly owned subsidiary.
(e) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $155 million as of March 31, 2013; and foreign currency forward-exchange contracts with fair values of $102 million as of December 31, 2012.
(f) 
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities at cost and short-term borrowings not measured at fair value on a recurring basis were not significant as of March 31, 2013 or December 31, 2012. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities at cost are based on Level 3 inputs, using a market approach.
(g) 
Our private equity securities represent investments in the life sciences sector. The increase in 2013 primarily reflects an increased investment in our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

17

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

(h) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $202 million and foreign currency forward-exchange contracts with fair values of $56 million as of March 31, 2013; and foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $129 million as of December 31, 2012.
(i) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.
(j) 
Includes foreign currency debt with fair values of $735 million as of March 31, 2013 and $809 million as of December 31, 2012, which are used as hedging instruments.
(k) 
The fair value of our long-term debt (not including the current portion of long-term debt) is $37.8 billion as of March 31, 2013 and $37.5 billion as of December 31, 2012. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
December 31,
2012

Assets
 
 
 
 
Cash and cash equivalents
 
$
659

 
$
1,000

Short-term investments
 
33,212

 
22,319

Long-term investments
 
15,392

 
14,149

Taxes and other current assets(a)
 
367

 
296

Taxes and other noncurrent assets(b)
 
961

 
1,086

 
 
$
50,591

 
$
38,850

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
8,896

 
$
6,424

Other current liabilities(c)
 
247

 
330

Long-term debt
 
31,481

 
31,036

Other noncurrent liabilities(d)
 
701

 
374

 
 
$
41,325

 
$
38,164

(a) 
As of March 31, 2013, derivative instruments at fair value include foreign currency forward-exchange contracts ($249 million), interest rate swaps ($64 million), and foreign currency swaps ($54 million) and, as of December 31, 2012, include foreign currency forward-exchange contracts ($152 million) and foreign currency swaps ($144 million).
(b) 
As of March 31, 2013, derivative instruments at fair value include interest rate swaps ($727 million) and foreign currency swaps ($234 million) and, as of December 31, 2012, include interest rate swaps ($1 billion) and foreign currency swaps ($50 million).
(c) 
At March 31, 2013, derivative instruments at fair value include foreign currency swaps ($148 million) and foreign currency forward-exchange contracts ($99 million) and, as of December 31, 2012, include foreign currency forward-exchange contracts ($243 million) and foreign currency swaps ($87 million).
(d) 
At March 31, 2013, derivative instruments at fair value include foreign currency swaps ($675 million) and interest rate swaps ($26 million) and, as of December 31, 2012, include foreign currency swaps ($341 million) and interest rate swaps ($33 million).

In addition, we have long-term receivables where the determination of fair value employs discounted future cash flows, using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The differences between the estimated fair values and carrying values of these receivables were not significant as of March 31, 2013 or December 31, 2012.

There were no significant impairments of financial assets recognized in any period presented.


18

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

B. Investments in Debt Securities

The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
 
 
 
 

 
Over 1

 
Over 5

 
March 31,
2013

(MILLIONS OF DOLLARS)
 
Within 1

 
to 5

 
to 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
Western European, Canadian and other government debt(a)
 
$
19,028

 
$
2,076

 
$

 
$
21,104

Corporate debt(b)
 
2,165

 
4,205

 
1,612

 
7,982

U.S. government debt
 
4,023

 
99

 
37

 
4,159

Western European, Scandinavian and other government agency debt(a)
 
3,176

 
433

 

 
3,609

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 

 
2,489

 
178

 
2,667

Supranational debt(a)
 
1,979

 
688

 

 
2,667

Reverse repurchase agreements(c)
 
1,623

 

 

 
1,623

Held-to-maturity debt securities
 
 

 
 

 
 

 
 

Certificates of deposit and other
 
1,173

 
296

 
1

 
1,470

Total debt securities
 
$
33,167

 
$
10,286

 
$
1,828

 
$
45,281

(a) 
All issued by above-investment-grade governments, government agencies or supranational entities, as applicable.
(b) 
Largely issued by above-investment-grade institutions in the financial services sector.
(c) 
Involving U.S. and U.K. government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $2.7 billion as of March 31, 2013 and December 31, 2012. Additionally, on February 6, 2013, Zoetis entered into a commercial paper program with a capacity of up to $1.0 billion; no amounts are currently outstanding under that program.

D. Long-Term Debt

On January 28, 2013, our then wholly owned subsidiary, Zoetis, issued $3.65 billion aggregate principal amount of senior notes, net of an original issue debt discount of $10 million. For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

In the first quarter of 2013, we also reclassified approximately $2.5 billion of long-term debt into Short-term borrowings, including current portion of long-term debt.

The following table provides the components of the Zoetis senior unsecured long-term debt issued in the first quarter of 2013, net of unamortized discounts:
 
 
 
 
As of

 
 
 
 
March 31,

(MILLIONS OF DOLLARS)
 
Maturity Date
 
2013

3.250%
 
February 2023
 
$
1,349

4.700%
 
February 2043
 
1,142

1.875%
 
February 2018
 
749

1.150%
 
February 2016
 
400

Total long-term debt issued in the first quarter of 2013(a), (b)
 
 
 
$
3,640

(a) 
For additional information, see Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures.

19

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

(b) 
The indenture that governs the Zoetis senior notes contains covenants, including limitations on the ability of Zoetis and certain Zoetis subsidiaries to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on Zoetis' ability to consolidate, merge or sell substantially all of its assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which, the Zoetis senior notes may be declared immediately due and payable. Zoetis is able to redeem the Zoetis senior notes, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest. Except under limited circumstances, Zoetis will not be permitted to redeem the 2023 notes pursuant to this optional redemption provision. Upon the occurrence of a change of control of Zoetis and a downgrade of the senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, Zoetis is, in certain circumstances, required to make an offer to purchase each of the Zoetis senior notes at a price equal to 101% of the aggregate principal amount of the Zoetis senior notes together with accrued and unpaid interest.

The following table provides the maturity schedule of our Long-term debt outstanding as of March 31, 2013:
(MILLIONS OF DOLLARS)
 
2014

 
2015

 
2016

 
2017

 
After 2017

 
Total

Maturities

$
1,251

 
$
3,057

 
$
4,706

 
$
1,850

 
$
20,617


$
31,481


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of March 31, 2013, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $42.4 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, U.K. pound, Japanese yen and Canadian dollar. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.3 billion U.K. pound debt maturing in 2038.
 
Interest Rate Risk
 
As of March 31, 2013, the aggregate notional amount of interest rate derivative financial instruments is $11.7 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.


20

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

The following table provides information about the gains/(losses) recognized to hedge or offset operational foreign exchange or interest rate risk:
 
 
Amount of
Gains/(Losses)
Recognized in OID(a), (b), (c)
 
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
Mar 31,
2013

 
Apr 1,
2012

 
Mar 31,
2013

 
Apr 1,
2012

 
Mar 31,
2013

 
Apr 1,
2012

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Cash Flow Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
$

 
$

 
$
(417
)
 
$
428

 
$
(381
)
 
$
300

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 
(3
)
 
(1
)
 
123

 
125

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
149

 
(127
)
 

 

 

 

Foreign currency swaps
 
(4
)
 
(23
)
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 

 

 
63

 
50

 

 

All other net
 

 
(1
)
 

 
9

 

 


 
$
142

 
$
(152
)
 
$
(231
)
 
$
612

 
$
(381
)
 
$
300

(a) 
OID = Other (income)/deductions—net, included in Other deductions—net in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) 
Also includes gains and losses attributable to the hedged risk in fair value hedge relationships.
(c) 
There was no significant ineffectiveness for any period presented.
(d) 
Amounts presented represent the effective portion of the gain or loss. For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive income/(loss)––Unrealized holding gains/(losses) on derivative financial instruments. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––foreign currency translation adjustments.

For information about the fair value of our derivative financial instruments, and the impact on our condensed consolidated balance sheets, see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities above. Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. As of March 31, 2013, the aggregate fair value of these derivative instruments that are in a net liability position is $178 million, for which we have posted collateral of $105 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a downgrade in our debt ratings. If there had been a downgrade to below an A rating by S&P or the equivalent rating by Moody’s Investors Service, on March 31, 2013, we would have been required to post an additional $73 million of collateral to our counterparties. The collateral advanced receivables are reported in Cash and cash equivalents.

F. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. As of March 31, 2013, we had $2.9 billion due from a well-diversified, highly rated group (S&P ratings of mostly A+ or better) of bank counterparties around the world. For details about our investments, see Note 7B. Financial Instruments: Investments in Debt Securities.


21

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

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions. These agreements contain provisions that provide for the ability for collateral payments, depending on levels of exposure, our credit rating and the credit rating of the counterparty. As of March 31, 2013, we received cash collateral of $729 million against various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, which is included in Cash and cash equivalents, the obligations are reported in Short-term borrowings, including current portion of long-term debt.

Note 8. Inventories

The following table provides the components of Inventories:
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
December 31,
2012

Finished goods
 
$
2,663

 
$
2,529

Work-in-process
 
3,456

 
3,794

Raw materials and supplies
 
916

 
740

Inventories
 
$
7,035

 
$
7,063

Noncurrent inventories not included above(a)
 
$
734

 
$
761

(a) 
Included in Taxes and other noncurrent assets. There are no recoverability issues associated with these amounts.

Note 9. Goodwill and Other Intangible Assets

A. Goodwill

The following table provides the components of and changes in the carrying amount of Goodwill:
(MILLIONS OF DOLLARS)
 
Primary
Care

 
Specialty
Care and
Oncology

 
Established
Products and
Emerging
Markets

 
Other Operating Segments(a)

 
Total

Balance, December 31, 2012
 
$
6,152

 
$
16,885

 
$
18,603

 
$
3,032

 
$
44,672

Derecognition(b)
 

 

 
(272
)
 

 
(272
)
Other(c)
 
(97
)
 
(266
)
 
(288
)
 
3

 
(648
)
Balance, March 31, 2013
 
$
6,055

 
$
16,619

 
$
18,043

 
$
3,035

 
$
43,752

(a) 
Reflects amounts associated with Animal Health (Zoetis) and Consumer Healthcare.
(b) 
Reflects the goodwill derecognized as part of the transfer of certain product rights, which constituted a business, to our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.
(c) 
Primarily reflects the impact of foreign exchange.
 

22

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

B. Other Intangible Assets

Balance Sheet Information

The following table provides the components of Identifiable intangible assets:
 
 
March 31, 2013
 
December 31, 2012
(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
 
$
73,310

 
$
(38,857
)
 
$
34,453

 
$
73,112

 
$
(37,069
)
 
$
36,043

Brands
 
1,880

 
(809
)
 
1,071

 
1,873

 
(781
)
 
1,092

License agreements and other
 
1,078

 
(817
)
 
261

 
1,085

 
(793
)
 
292

 
 
76,268

 
(40,483
)
 
35,785

 
76,070

 
(38,643
)
 
37,427

Indefinite-lived intangible assets
 
 

 
 

 
 

 
 

 
 

 
 

Brands
 
7,571

 

 
7,571

 
7,828

 

 
7,828

In-process research and development
 
681

 

 
681

 
688

 

 
688

Trademarks/tradenames
 
72

 

 
72

 
70

 

 
70

 
 
8,324

 

 
8,324

 
8,586

 

 
8,586

Identifiable intangible assets(a)
 
$
84,592

 
$
(40,483
)
 
$
44,109

 
$
84,656

 
$
(38,643
)
 
$
46,013

(a) 
The decrease is primarily related to amortization, an asset impairment charge and the transfer of certain product rights to our equity-method investment in China. For additional information about the asset impairment charge, see Note 4. Other DeductionsNet. For additional information about the transfer of certain product rights, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Equity-Method Investment.

As of March 31, 2013, our identifiable intangible assets are associated with the following, as a percentage of total identifiable intangible assets, less accumulated amortization:
Developed Technology Rights: Specialty Care (66%); Established Products (19%); Primary Care (13%); Animal Health (Zoetis) (1%); and Oncology (1%);
Brands, finite-lived: Consumer Healthcare (64%); Established Products (24%); and Animal Health (Zoetis) (12%);
Brands, indefinite-lived: Consumer Healthcare (68%); and Established Products (31%); and Animal Health (Zoetis) (1%); and
IPR&D: Worldwide Research and Development (55%); Established Products (20%); Primary Care (12%); Specialty Care (11%); and Animal Health (Zoetis) (2%).

There are no percentages for our Emerging Markets business unit as it is a geographic-area unit, not a product-based unit. The carrying value of the assets associated with our Emerging Markets business unit is included within the assets associated with the other four biopharmaceutical business units.

Amortization

Amortization expense related to finite-lived 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 these intangible assets benefit multiple business functions. Amortization expense related to intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $1.3 billion for the first quarter of 2013 and $1.5 billion for the first quarter of 2012.


23

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

Impairment Charges

For information about impairments of intangible assets, see Note 4. Other Deductions––Net.

For IPR&D assets, the risk of failure is significant and there can be no certainty that these assets ultimately will yield a successful product. The nature of the biopharmaceutical business is high-risk and, as such, we expect that many of these IPR&D assets will become impaired and be written off at some time in the future.
 
Note 10. Pension and Postretirement Benefit Plans

The following table provides the components of net periodic benefit cost:
 
 
Pension Plans
 
 
 
 
U.S.
Qualified(a)
 
U.S.
Supplemental
(Non-Qualified)(b)
 
International(c)
 
Postretirement
Plans
(MILLIONS OF DOLLARS)
 
March 31,
2013

 
April 1,
2012

 
March 31,
2013

 
April 1,
2012

 
March 31,
2013

 
April 1,
2012

 
March 31,
2013

 
April 1,
2012

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
77

 
$
96

 
$
7

 
$
10

 
$
56

 
$
53

 
$
16

 
$
18

Interest cost
 
168

 
183

 
14

 
17

 
97

 
101

 
42

 
46

Expected return on plan assets
 
(253
)
 
(245
)
 

 

 
(104
)
 
(105
)
 
(14
)
 
(9
)
Amortization of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Actuarial losses
 
90

 
80

 
13

 
11

 
37

 
18

 
11

 
8

Prior service credits
 
(2
)
 
(3
)
 
(1
)
 
(1
)
 
(2
)
 
(2
)
 
(11
)
 
(12
)
Curtailments and settlements––net
 
29

 
44

 
22

 
13

 
3

 
(10
)
 
(7
)
 
(11
)
Special termination benefits
 

 
5

 

 
10

 

 
2

 

 
2


 
$
109

 
$
160

 
$
55

 
$
60

 
$
87

 
$
57

 
$
37

 
$
42

(a) 
The decrease in net periodic benefit costs for the three months ended March 31, 2013, compared to the three months ended April 1, 2012, for our U.S. qualified plans was primarily driven by lower service cost resulting from the decision in 2012 to freeze the defined benefit plans in the U.S. and Puerto Rico, lower settlement activity and greater expected return on plan assets resulting from a higher plan asset base. Also, the decrease in the discount rate resulted in lower interest costs, as well as an increase in the amounts amortized for actuarial losses.
(b) 
The decrease in net periodic benefit costs for the three months ended March 31, 2013, compared to the three months ended April 1, 2012, for our U.S. supplemental (non-qualified) pension plans was primarily driven by special termination benefits in 2012 and lower service cost resulting from the decision in 2012 to freeze the defined benefit plans in the U.S. and Puerto Rico, partially offset by higher settlement activity.
(c) 
The increase in net periodic benefit costs for the three months ended March 31, 2013, compared to the three months ended April 1, 2012, for our international pension plans was primarily driven by an increase in the amounts amortized for actuarial losses resulting from decreases in discount rates and the curtailment gain in our German plans in 2012.

For the three months ended March 31, 2013, we contributed from our general assets: $92 million to our U.S. supplemental (non-qualified) pension plans, $67 million to our international pension plans and $58 million to our postretirement plans. We did not make a contribution to our U.S. qualified pension plans during the first quarter of 2013.

During 2013, we expect to contribute from our general assets a total of $161 million to our U.S. supplemental (non-qualified) pension plans, $345 million to our international pension plans and $254 million to our postretirement plans. We do not expect to make contributions to our U.S. qualified pension plans during 2013. Contributions expected to be made for 2013 are inclusive of amounts contributed during the three months ended March 31, 2013. The international pension plan, postretirement plan and U.S. supplemental (non-qualified) pension plan contributions from our general assets include direct employer benefit payments.


24

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

Note 11. Earnings Per Common Share Attributable to Common Shareholders

The following table provides the detailed calculation of Earnings per common share:
 
 
Three Months Ended
(IN MILLIONS)
 
March 31,
2013

 
April 1,
2012

EPS Numerator––Basic
 
 
 
 
Income from continuing operations
 
$
2,761

 
$
1,724

Less: Net income attributable to noncontrolling interests(a)
 
23

 
9

Income from continuing operations attributable to Pfizer Inc.
 
2,738

 
1,715

Less: Preferred stock dividends––net of tax
 

 

Income from continuing operations attributable to Pfizer Inc common shareholders
 
2,738

 
1,715

Discontinued operations––net of tax
 
4

 
79

Net income attributable to Pfizer Inc. common shareholders
 
$
2,742

 
$
1,794

EPS Numerator––Diluted
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders and assumed conversions
 
$
2,738

 
$
1,715

Discontinued operations––net of tax
 
4

 
79

Net income attributable to Pfizer Inc. common shareholders and assumed conversions
 
$
2,742

 
$
1,794

EPS Denominator
 
 

 
 

Weighted-average number of common shares outstanding––Basic
 
7,187

 
7,537

Common-share equivalents: stock options, stock issuable under employee compensation plans and convertible preferred stock
 
82

 
61

Weighted-average number of common shares outstanding––Diluted
 
7,269

 
7,598

Stock options that had exercise prices greater than the average market price of our common stock issuable under employee compensation plans(b)
 
97

 
223

(a) 
Our 80.2%-owned Animal Health subsidiary, Zoetis, has issued securities, under its share-based compensations programs, that enable the holders to obtain Zoetis common stock under certain circumstances and, as such, those shares are included in computing Zoetis' earnings per share information on a standalone basis. The per-share earnings of Zoetis are included in our consolidated earnings per share calculations based on our proportionate share in Zoetis' common stock and common stock equivalents.
(b) 
These common stock equivalents were outstanding for the three months ended March 31, 2013 and April 1, 2012, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.

Note 12. Commitments and Contingencies

We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Notes to Condensed Consolidated Financial Statements––Note 5B. Tax Matters: Tax Contingencies.

A. Legal Proceedings

Our non-tax contingencies include, among others, the following:
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents on various products, processes or dosage forms. We are the plaintiff in the vast majority of these actions. An adverse outcome in actions in which we are the plaintiff could result in a loss of patent protection for the drug at issue, a significant loss of revenues from that drug and impairments of any associated assets.
Product liability and other product-related litigation, which can include personal injury, consumer, off-label promotion, securities-law, antitrust and breach of contract claims, among others, often involves highly complex issues relating to medical causation, label warnings and reliance on those warnings, scientific evidence and findings, actual, provable injury and other matters.

25

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

Commercial and other matters, which can include merger-related and product-pricing claims and environmental claims and proceedings, can involve complexities that will vary from matter to matter.
Government investigations, which often are related to the extensive regulation of pharmaceutical companies by national, state and local government agencies in the U.S. and in other countries. 
 
Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

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

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

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

The principal pending matters to which we are a party are discussed below. In determining whether a pending matter is a principal matter, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the Company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent. As a result of considering qualitative factors in our determination of principal matters, there are some matters discussed below with respect to which management believes that the likelihood of possible loss in excess of amounts accrued is remote.

A1. Legal Proceedings––Patent Litigation
 
Like other pharmaceutical companies, we are involved in numerous suits relating to our patents, including but not limited to those discussed below. Most of the suits involve claims by generic drug manufacturers that patents covering our products, processes or dosage forms are invalid and/or do not cover the product of the generic manufacturer. Also, counterclaims, as well as various independent actions, have been filed claiming that our assertions of, or attempts to enforce, our patent rights with respect to certain products constitute unfair competition and/or violations of antitrust laws. In addition to the challenges to the U.S. patents on a number of our products that are discussed below, we note that the patent rights to certain of our products are being challenged in various other countries.

Viagra (sildenafil)
In March 2010, we brought a patent-infringement action in the U.S. District Court for the Eastern District of Virginia against Teva Pharmaceuticals USA, Inc. (Teva USA) and Teva Pharmaceutical Industries Ltd. (Teva Pharmaceutical Industries), which had filed an abbreviated new drug application with the U.S. Food and Drug Administration (FDA) seeking approval to market a generic version of Viagra. Teva Pharmaceutical Industries subsequently was dismissed from this action. Teva USA asserts the invalidity and non-infringement of the Viagra use patent, which (including the six-month pediatric exclusivity period resulting from the Company’s conduct of clinical studies to evaluate Revatio in the treatment of pediatric patients with pulmonary arterial hypertension; Viagra and Revatio have the same active ingredient, sildenafil) expires in 2020. In August 2011, the court ruled that our Viagra use patent is valid and infringed, thereby preventing Teva USA from receiving FDA approval for a generic

26

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

version of Viagra and from marketing its generic product in the U.S. before 2020. In September 2011, Teva USA appealed the decision to the U.S. Court of Appeals for the Federal Circuit.

In October 2010, we filed a patent-infringement action with respect to Viagra in the U.S. District Court for the Southern District of New York against Apotex Inc. and Apotex Corp., Mylan Pharmaceuticals Inc. and Mylan Inc., Actavis, Inc. and Amneal Pharmaceuticals LLC. These generic manufacturers have filed abbreviated new drug applications with the FDA seeking approval to market their generic versions of Viagra. They assert the invalidity and non-infringement of the Viagra use patent.

In May and June 2011, respectively, Watson Laboratories Inc. (Watson) and Hetero Labs Limited (Hetero) notified us that they had filed abbreviated new drug applications with the FDA seeking approval to market their generic versions of Viagra. Each asserts the invalidity and non-infringement of the Viagra use patent. In June and July 2011, respectively, we filed actions against Watson and Hetero in the U.S. District Court for the Southern District of New York asserting the validity