10-Q 1 q1-04pfe1.htm




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 28, 2004

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
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES    X            NO     

At May 5, 2004, 7,630,536,483 shares of the issuer's common stock were outstanding (voting).

 

 

 

 

 

 

 

 

 

FORM 10-Q

For the Quarter Ended
March 28, 2004

Table of Contents

 

PART I.  FINANCIAL INFORMATION

Page

 

 

Item 1.

 

 

 

Financial Statements:

 

 

 

Condensed Consolidated Statement of Income for the three months ended March 28, 2004 and March 30, 2003

3

 

 

Condensed Consolidated Balance Sheet at March 28, 2004 and December 31, 2003

4

 

 

Condensed Consolidated Statement of Cash Flows for the three months ended March 28, 2004 and March 30, 2003

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Independent Accountants' Review Report

17

 

 

Item 2.

 

 

 

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

18

 

 

Item 4.

 

 

 

Disclosure Controls and Procedures

39

 

 

PART II.  OTHER INFORMATION

 

 

 

Item 1.

 

 

 

Legal Proceedings

40

 

 

Item 2.

 

 

 

Changes in Securities, Use of Proceeds and Issuer

42

Purchases of Equity Securities

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

42

 

 

Item 6.

 

 

 

Exhibits and Reports on Form 8-K

44

 

 

Signature

45

 

 

Certifications

48

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

 

 

Three Months Ended

(millions of dollars, except per common share data)

 

March 28, 
2004 

 

March 30, 
2003 

 

 

 

 

 

Revenues 

$

12,487 

$

8,506 

 

 

 

 

 

Costs and expenses:

 

 

 

 

Cost of sales       

 

1,794 

 

1,058 

Selling, informational and administrative expenses             

 

3,933 

 

2,740 

Research and development expenses   

 

1,649 

 

1,218 

Merger-related in-process research and development charges              

 

955 

 

-- 

Merger-related costs           

 

247 

 

91 

Other (income)/deductions-net           

 

780 

 

183 

 

 

 

 

 

Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles           

 

3,129 

 

3,216 

 

 

 

 

 

Provision for taxes on income

 

809 

 

761 

 

 

 

 

 

Minority interests   

 

 

-- 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles          

 

2,318 

 

2,455 

 

 

 

 

 

Discontinued operations:

 

 

 

 

Income from operations of discontinued businesses and product lines-net of tax 

 

13 

 

38 

Gains on sales of discontinued businesses and product lines-net of tax 

 

-- 

 

2,202 

 

 

 

 

 

Discontinued operations-net of tax         

 

13 

 

2,240 

 

 

 

 

 

Income before cumulative effect of change in accounting principles       

 

2,331 

 

4,695 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax             

 

-- 

 

(30)

 

 

 

 

 

Net income             

$

2,331 

$

4,665 

 

 

 

 

 

Earnings per common share - Basic:

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles     

$

.31 

$

.40 

Discontinued operations:

 

 

 

 

Income from operations of discontinued businesses and product lines-net of tax             

 

-- 

 

-- 

Gains on sales of discontinued businesses and product lines-net of tax             

 

-- 

 

.36 

Discontinued operations-net of tax     

 

-- 

 

.36 

Income before cumulative effect of change in accounting principles   

 

.31 

 

.76 

Cumulative effect of change in accounting principles-net of tax         

 

-- 

 

-- 

Net income         

$

.31 

$

.76 

 

 

 

 

 

Earnings per common share - Diluted:

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles     

$

.30 

$

.40 

Discontinued operations:

 

 

 

 

Income from operations of discontinued businesses and product lines-net of tax             

 

-- 

 

-- 

Gains on sales of discontinued businesses and product lines-net of tax             

 

-- 

 

.36 

Discontinued operations-net of tax     

 

-- 

 

.36 

Income before cumulative effect of change in accounting principles   

 

.30 

 

.76 

Cumulative effect of change in accounting principles-net of tax         

 

-- 

 

-- 

Net income         

$

.30 

$

.76 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

Basic   

 

7,586.4 

 

6,101.4 

 

 

 

 

 

Diluted

 

7,678.5 

 

6,161.7 

 

 

 

 

 

Cash dividends paid per common share

$

.17 

$

.15 

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBISIDARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

(millions of dollars)

 

March 28, 
2004*

 

Dec. 31, 
2003**

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents           

$

965 

$

1,520 

Short-term investments 

 

12,987 

 

10,432 

Accounts receivable, less allowance for doubtful accounts: $192 and $185        

 

10,415 

 

8,636 

Short-term loans             

 

448 

 

391 

Inventories      

 

5,942 

 

5,699 

Prepaid expenses and taxes          

 

3,052 

 

2,758 

Assets of discontinued businesses and product lines held for sale     

 

1,580 

 

1,241 

Total current assets              

 

35,389 

 

30,677 

Long-term investments and loans    

 

5,430 

 

6,142 

Property, plant and equipment, less accumulated depreciation: $7,366 and $6,916 

 

17,703 

 

18,156 

Goodwill               

 

24,264 

 

22,265 

Identifiable intangible assets, net    

 

35,190 

 

35,591 

Other assets, deferred taxes and deferred charges        

 

4,313 

 

3,944 

Total assets            

$

122,289 

$

116,775 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

Short-term borrowings, including current portion of long-term debt: $932 and $726          

$

10,692 

$

8,818 

Accounts payable          

 

2,479 

 

2,587 

Dividends payable         

 

 

1,300 

Income taxes payable     

 

1,948 

 

1,910 

Accrued compensation and related items  

 

1,636 

 

1,740 

Accrued litigation settlements     

 

714 

 

1,402 

Other current liabilities  

 

6,857 

 

5,850 

Liabilities of discontinued businesses and product lines held for sale 

 

308 

 

302 

Total current liabilities          

 

24,637 

 

23,909 

Long-term debt    

 

7,144 

 

5,755 

Pension benefit obligations              

 

2,915 

 

2,858 

Postretirement benefit obligations   

 

1,464 

 

1,451 

Deferred taxes      

 

13,053 

 

13,012 

Other noncurrent liabilities

 

4,028 

 

4,413 

Total liabilities        

 

53,241

 

51,398 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

Preferred stock

 

211 

 

219 

Common stock

 

436 

 

435 

Additional paid-in capital              

 

66,767 

 

66,396 

Retained earnings           

 

31,707 

 

29,382 

Accumulated other comprehensive expense             

 

1,729 

 

195 

Employee benefit trust   

 

(1,532)

 

(1,898)

Treasury stock, at cost  

 

(30,270)

 

(29,352)

 

 

 

 

 

Total shareholders' equity   

 

69,048 

 

65,377 

Total liabilities and shareholders' equity           

$

122,289 

$

116,775 

*    Unaudited.

**  Condensed from audited financial statements.

See accompanying Notes to Condensed Financial Statements.

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

 

 

Three Months Ended

(millions of dollars)

 

March 28, 
 2004 

 

March 30, 
2003 

 

 

 

 

 

Operating Activities:

 

 

 

 

Net income             

$

2,331 

$

4,665 

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

 

 

 

 

Cumulative effect of change in accounting principles          

 

-- 

 

30 

Income from operations of discontinued businesses and product lines  

 

(13)

 

(38)

Depreciation and amortization           

 

1,261 

 

269 

Merger-related in-process research and development charges              

 

955 

 

-- 

Gains on sales of discontinued businesses and product lines  

 

-- 

 

(3,746)

Gains on sales of products   

 

-- 

 

(17)

Deferred income taxes        

 

(284)

 

22 

Other  

 

174 

 

177 

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

 

(2,841)

 

961 

 

 

 

 

 

Net cash provided by continuing operating activities               

 

1,583 

 

2,323 

 

 

 

 

 

Investing Activities:

 

 

 

 

Purchases of property, plant and equipment       

 

(472)

 

(382)

Purchases of short-term investments  

 

(4,603)

 

(5,295)

Proceeds from redemptions of short-term investments       

 

2,613 

 

2,727 

Purchases of long-term investments   

 

(453)

 

(356)

Proceeds from redemptions of long-term investments        

 

816 

 

182 

Purchases of other assets    

 

(153)

 

(158)

Proceeds from sales of other assets     

 

109 

 

80 

Acquisition of businesses, net of cash acquired     

 

(1,443)

 

-- 

Proceeds from the sales of businesses and product lines       

 

-- 

 

1,178 

Other investment activities

 

(135)

 

141 

 

 

 

 

 

Net cash used in investing activities        

 

(3,721)

 

(1,883)

 

 

 

 

 

Financing Activities:

 

 

 

 

Increase in short-term borrowings-net

 

1,776 

 

919 

Decrease in short-term borrowings-net               

 

(106)

 

(89)

Proceeds from issuances of long-term debt          

 

1,524 

 

600 

Principal payments on long-term debt

 

(3)

 

(256)

Proceeds from common stock issuances              

 

17 

 

15 

Purchases of common stock               

 

(912)

 

(598)

Cash dividends paid             

 

(1,282)

 

(906)

Stock option transactions and other   

 

569 

 

63 

 

 

 

 

 

Net cash provided by/(used in) financing activities  

 

1,583 

 

(252)

Net cash provided by discontinued operations         

 

-- 

 

14 

Effect of exchange-rate changes on cash and cash equivalents 

 

-- 

 

(12)

Net increase/(decrease) in cash and cash equivalents

 

(555)

 

190 

Cash and cash equivalents at beginning of period     

 

1,520 

 

1,878 

 

 

 

 

 

Cash and cash equivalents at end of period              

$

965 

$

2,068 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Income taxes 

$

796 

$

312 

Interest          

 

69 

 

65 

See accompanying Notes to Condensed Financial Statements.

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

Note 1:  Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month period ended February 22, 2004 and February 23, 2003. We have made certain reclassifications to the 2003 condensed consolidated financial statements to conform to the 2004 presentation. This includes the results of operations, the assets and liabilities held for sale and cash flows related to certain businesses and product lines reported as discontinued operations during the three months ended March 28, 2004 - See Note 12, "Discontinued Operations."

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.

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.

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, 2003.

On April 16, 2003 we completed our acquisition of Pharmacia Corporation (Pharmacia) in a stock-for-stock transaction accounted for under the purchase method of accounting - See Note 3, "Pharmacia Acquisition." Starting with the date of acquisition, April 16, 2003, the Pharmacia assets acquired and liabilities assumed were recorded at their respective fair values and our results of operations include Pharmacia's product sales and expenses from the acquisition date. Therefore, our operating results for the first three months of 2004 reflect the impact of the acquisition of Pharmacia as compared to the first three months of 2003, which do not.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we elected to account for our stock-based compensation under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The exercise price of stock options granted equals the market price on the date of grant. There is no recorded expense related to grants of stock options.

The weighted-average fair value per stock option granted was $6.88 for the three months ended March 28, 2004, and $7.17 for the three months ended March 30, 2003. We estimated the fair values, as required under GAAP, using the Black-Scholes option-pricing model, modified for dividends and using the assumptions below. In the first quarter of 2004, we changed our method of estimating expected stock price volatility to reflect market-based inputs under emerging stock option valuation considerations. The Black-Scholes model is a trading option-pricing model that neither considers the non-traded nature of employee stock options, nor considers the restrictions on trading, the lack of transferability or the ability of employees to forfeit the options prior to expiry. If the model adequately permitted considerations of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different.

 

Three Months Ended

 

March 28,
2004

March 30,
2003

 

 

 

Expected dividend yield

2.90%

3.11%

Risk-free interest rate

3.32%

2.70%

Expected stock price volatility

22.15%

32.60%

Expected term until exercise (years)

5.75   

5.50   

 

The following table summarizes our results for the three months ended March 28, 2004 and March 30, 2003 as if we had recorded compensation expense for the options grants:

 

 

Three Months Ended

 

(millions of dollars, except per common share data)

 

March 28, 
2004 

 

March 30, 
2003 

 

 

 

 

 

 

 

Net income available to common shareholders used in the calculation of basic earnings per common share:

 

 

 

 

 

As reported under GAAP*

$

2,330 

$

4,665 

 

Compensation expense

 

(126)

 

(112)

 

Pro forma

$

2,204 

$

4,553 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

As reported under GAAP*

$

.31 

$

.76 

 

Compensation expense

 

(.02)

 

(.01)

 

Pro forma

$

.29 

$

.75 

 

 

 

 

 

 

 

Net income available to common shareholders used in the calculation of diluted earnings per common share:

 

 

 

 

 

As reported under GAAP*

$

2,330 

$

4,665 

 

Compensation expense

 

(126)

 

(112)

 

Pro forma

$

2,204 

$

4,553 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

As reported under GAAP*

$

.30 

$

.76 

 

Compensation expense

 

(.01)

 

(.02)

 

Pro forma

$

.29 

$

.74 

 

 

 

*

Includes stock-based compensation expense, net of related tax benefits, of $29.2 million for the three months ended March 28, 2004 and $8.7 million for the three months ended March 30, 2003.

For the three months ended March 28, 2004, net income available to common shareholders used in the calculation of basic earnings per common share represents net income reduced by preferred stock dividends-net of tax and net income available to common shareholders used in the calculation of diluted earnings per common share represents net income reduced by the incremental allocation of shares to the Employee Stock Ownership Plan (ESOP) acquired as part of the Pharmacia acquisition.

Note 2:  Adoption of New Accounting Standards

On January 1, 2004, we adopted the provisions of FASB Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. FIN 46R replaces the same titled FIN 46 that was issued in January 2003. FIN 46R identifies when entities must be consolidated with the financial statements of a company where the investors in an entity do not have the characteristics of a controlling financial interest or the entity does not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN 46R did not have a material impact on our consolidated financial statements.

Note 3:  Pharmacia Acquisition

A.  Description of Acquisition

On April 16, 2003, Pfizer acquired Pharmacia for a purchase price of $55,972 million, which included the issuance of approximately 1.8 billion shares of Pfizer common stock, 180 million options on Pfizer common stock, six thousand shares of Pfizer Series A convertible perpetual preferred stock (convertible into approximately 15.5 million shares of Pfizer common stock) and vested share awards, as well as transaction costs.

The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed from Pharmacia are recorded at the date of acquisition, at their respective fair values. The consolidated financial statements and reported results of operations of Pfizer issued after completion of the acquisition reflect these values.

B.  Allocation of Purchase Price

The purchase price has been allocated based on an estimate of the fair value of assets acquired and liabilities assumed.

(millions of dollars)

 

 

 

 

 

 

 

Book value of net assets acquired

 

$

8,795 

Less:  existing goodwill and other intangible assets

 

 

1,559 

Tangible book value of net assets acquired

 

 

7,236 

Remaining allocation:

 

 

 

Increase inventory to fair value

 

 

2,939 

Increase long-term investments to fair value

 

 

40 

Decrease property, plant and equipment to fair value

 

 

(288)

Record in-process research and development charge

 

 

5,052 

Record identifiable intangible assets

 

 

37,066 

Increase long-term debt to fair value

 

 

(370)

Increase benefit plan liabilities to fair value

 

 

(1,471)

Increase other net assets to fair value

 

 

(483)

Restructuring costs incurred through March 28, 2004

 

 

(2,685)

Tax adjustments

 

 

(13,293)

Goodwill

 

 

22,229 

Purchase price

 

$

55,972 

Since our interim allocation in the fourth quarter of 2003, our estimate has been revised for fixed assets ($727 million decrease). In addition, we recorded an additional $1,107 million in restructuring charges.

The more significant revisions to our estimates relating to our initial allocation of the purchase price in the second quarter of 2003 include inventory ($1,331 million increase), fixed assets ($1,099 million decrease) and identifiable intangible assets ($560 million increase). In addition, we recorded an additional $1,918 million in restructuring charges.

All of these revisions reflect our greater understanding of Pharmacia net assets since the acquisition date.

Note 4:  Esperion Therapeutics, Inc.

On February 10, 2004, we completed the acquisition of Esperion Therapeutics, Inc. (Esperion), a biopharmaceutical company focused on the development of high-density-lipoprotein (HDL) cholesterol-targeted therapies for the treatment of cardiovascular disease, for $1.3 billion in cash (including transaction costs). The acquisition has been accounted for as a purchase business combination. The preliminary allocation of the purchase price includes in-process research and development of $920 million, which was expensed, and goodwill of $233 million, which has been allocated to our pharmaceutical segment and is not deductible for tax purposes. Esperion did not have any approved products.

Note 5:  Merger-Related Costs

We incurred the following merger-related costs primarily in connection with our acquisition of Pharmacia which was completed on April 16, 2003:

 

 

Three Months Ended

(millions of dollars)

 

March 28, 
2004 

 

March 30, 
2003 

 

 

 

 

 

Integration costs:

 

 

 

 

Pharmacia

$

101 

$

80 

Other

 

 

Restructuring costs:

 

 

 

 

Pharmacia

 

143 

 

-- 

Other

 

-- 

 

Total merger-related costs - expensed

$

247 

$

91 

Total merger-related costs - capitalized

$

1,107 

$

-- 

Integration costs represent external, incremental costs directly related to an acquisition, including expenditures for consulting and systems integration when incurred.

In connection with the acquisition of Pharmacia, Pfizer management approved plans throughout 2003 and during the first three months of 2004 to restructure the operations of both legacy Pfizer and legacy Pharmacia to eliminate duplicative facilities and reduce costs. The restructuring of our operations as a result of our acquisition of Pharmacia is expected to continue through 2005 and include severance, costs of vacating duplicative facilities and contract termination and other exit costs. Total merger-related expenditures incurred during 2003-2005 are expected to be about $6.0 billion, on a pre-tax basis.

Restructuring Costs Associated with Legacy Pfizer - Expensed

We have recorded restructuring costs associated with exiting certain activities of legacy Pfizer, including severance, costs of vacating duplicative facilities and contract termination and other costs. These costs have been recorded as a charge to the results of operations and are included in Merger-related costs. The components of the restructuring charges associated with the acquisition of Pharmacia, which were expensed, follow:

 

 

Provisions

 

 

 

 

(millions of dollars)

 

Year
2003

 

Three
Months Ended
March 28,
2004

 

Total

 

Utilization 
Through 
March 28,
2004 

 

Reserve*
March 28,
2004

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

$

140

$

92

$

232

$

110

$

122

Asset impairments

 

21

 

42

 

63

 

63

 

--

Other

 

16

 

9

 

25

 

13

 

12

 

$

177

$

143

$

320

$

186

$

134

*Included in Other current liabilities.

Through March 28, 2004, the employee termination costs represent the approved reduction of the legacy Pfizer work force by 2,091 people, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and as of March 28, 2004, 1,452 employees were terminated. Asset impairments primarily include charges to writedown property, plant and equipment. Other primarily includes costs to exit certain activities of legacy Pfizer.

Restructuring Costs Associated with Legacy Pharmacia - Capitalized

We have recorded $2,685 million of restructuring costs associated with employee terminations and exiting certain activities of legacy Pharmacia. These costs are recognized as liabilities assumed in the purchase business combination. Accordingly, the restructuring charges incurred in the first year after the acquisition are considered part of the purchase price of Pharmacia and have been recorded as an increase to goodwill. These restructuring costs also include costs associated with relocation. Future restructuring charges associated with legacy Pharmacia will be charged to the results of operations. The components of the restructuring costs capitalized as a cost of the acquisition of Pharmacia follow:

 

 

Costs Incurred

 

 

 

 

(millions of dollars)

 

Year
2003

 

Three
Months Ended
March 28,
2004

 

Total

 

Utilization
Through
March 28,
2004

 

Reserve*
March 28,
2004

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

$

1,289

$

263

$

1,552

$

1,315

$

237

Other

 

289

 

844

 

1,133

 

161

 

972

 

$

1,578

$

1,107

$

2,685

$

1,476

$

1,209

 

 

 

 

 

 

 

 

 

 

 

* Included in Other current liabilities.

Through March 28, 2004, the employee termination costs represent the approved reduction of the legacy Pharmacia work force by 13,045 people, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and as of March 28, 2004, 11,596 employees were terminated. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Pharmacia employment contracts. Other includes costs to exit certain activities of legacy Pharmacia.

Note 6:  Inventories

The components of inventories follow:

(millions of dollars)

 

March 28,
2004

 

Dec. 31,
2003

 

 

 

 

 

Finished goods

$

2,341

$

2,198

Work-in-process

 

2,445

 

2,204

Raw materials and supplies

 

1,156

 

1,297

Total inventories

$

5,942

$

5,699

Note 7:  Goodwill and Other Intangible Assets

A.  Goodwill

The changes in the carrying amount of goodwill for the three months ended March 28, 2004, by segment, follow:

(millions of dollars)

 

Pharmaceutical

 

Consumer
Healthcare

 

Animal 
Health 

 

Other 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

$

19,487

$

2,615

$

78 

$

85 

$

22,265

Pharmacia goodwill adjustments

 

1,642

 

155

 

(14)

 

(1)

 

1,782

Other*

 

232

 

30

 

29 

 

(74)

 

217

Balance, March 28, 2004

$

21,361

$

2,800

$

93 

$

10 

$

24,264

*Includes additions from acquisitions (primarily Esperion), reclassifications to Assets of discontinued businesses and product lines held for sale and the impact of foreign exchange.

B.  Intangibles

The components of identifiable intangible assets follow:

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

(millions of dollars)

 

March 28, 
2004 

 

Dec. 31, 
2003 

 

 

March 28, 
2004 

 

Dec. 31, 
2003 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Developed technology rights

$

32,052 

$

31,566 

 

$

(3,186)

$

(2,364)

Trademarks

 

111 

 

107 

 

 

(71)

 

(68)

Other

 

575 

 

583 

 

 

(178)

 

(186)

Total amortized intangible assets

 

32,738 

 

32,256 

 

 

(3,435)

 

(2,618)

Unamortized identifiable intangible assets:

 

 

 

 

 

 

 

 

 

Brands

 

5,238 

 

5,305 

 

 

-- 

 

-- 

Trademarks

 

267 

 

266 

 

 

-- 

 

-- 

Other

 

382 

 

382 

 

 

-- 

 

-- 

Total unamortized intangible assets

 

5,887 

 

5,953 

 

 

-- 

 

-- 

Total identifiable intangible assets

$

38,625 

$

38,209 

 

$

(3,435)

$

(2,618)

Total amortization expense for finite-lived intangible assets was $843 million for the three months ended March 28, 2004 and is primarily included in Other (income)/deductions-net.

The annual amortization expense expected for the years 2004 through 2009 is as follows:

 

(in millions of dollars)

2004

$

3,337

 

2005

 

3,334

 

2006

 

3,228

 

2007

 

3,077

 

2008

 

2,563

 

2009

 

2,353

 

Note 8:  Financial Instruments

A.  Long-Term Debt

In February 2004, we issued:

-

$750 million senior unsecured notes, due February 2014, which pay interest semi-annually, beginning on August 15, 2004, at a rate of 4.5%; and

 

 

-

$700 million senior unsecured notes, due March 2007, which pay interest semi-annually, beginning on September 15, 2004, at a rate of 2.5%.

The notes were issued under a $5 billion debt shelf registration statement filed with the SEC in November 2002.

B.  Derivative Financial Instruments and Hedging Activities

During the first three months ended March 28, 2004, we entered into the following new interest rate derivatives:

Financial Instrument

 

Hedge Type

 

Hedged or Offset Item

 

Notional Amount
(millions of dollars)

 

Maturity Date

 

 

 

 

 

 

 

 

 

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

            $750

 

2014

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

              700

 

2007

 

 

 

 

 

 

 

 

 

(1)

Serves to reduce exposure to long-term U.S. dollar interest rates by effectively converting fixed rates associated with long-term debt obligations to floating rates.

 

There was no material ineffectiveness in any hedging relationship reported in earnings in the first three months of 2004.

Note 9:  Benefit Plans

Components of Net Periodic Benefit Costs

The components of net periodic benefit cost of the U.S. and international pension plans and the postretirement plans for the three months ended March 28, 2004 and March 30, 2003 follow:

 

 

Pension Plans

 

 

 

 

U.S. Qualified

 

U.S. Supplemental
(non-qualified)

 

International

 

Postretirement Plans

(millions of dollars)

 

2004 

 

2003 

 

2004

 

2003

 

2004 

 

2003 

 

2004 

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

71 

$

46 

$

8

$

7

$

68 

$

41 

$

10 

$

5

Interest cost

 

97 

 

67 

 

15

 

13

 

71 

 

40 

 

31 

 

15

Expected return on plan assets

 

(143)

 

(75)

 

--

 

--

 

(71)

 

(41)

 

(5)

 

--

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service costs

 

 

 

--

 

--

 

 

 

-- 

 

3

Net transition asset

 

-- 

 

--

 

--

 

--

 

 

-- 

 

-- 

 

--

Actuarial (gains)/losses

 

26 

 

29 

 

9

 

8

 

13 

 

 

 

5

Curtailments and settlements-net

 

-- 

 

 

--

 

1

 

(1)

 

 

-- 

 

1

Net periodic benefit costs

$

55 

$

72 

$

32

$

29

$

87 

$

53 

$

42 

$

29

Note 10:  Comprehensive Income

 

 

Three Months Ended

(millions of dollars)

 

March 28, 
2004 

 

 

March 30, 
2003 

 

 

 

 

 

 

Net income

$

2,331 

 

$

4,665 

Other comprehensive income/(expense):

 

 

 

 

 

Holding gain/(loss) on investment securities arising during period-net of tax

 

148 

 

 

(26)

Currency translation adjustment and hedges

 

1,386 

 

 

659 

Total other comprehensive income/(expense)

 

1,534 

 

 

633 

Total comprehensive income

$

3,865 

 

$

5,298 

The change in currency translation adjustment and hedges included in Accumulated other comprehensive expense for the first three months of 2004 was:

(millions of dollars)

 

2004

 

 

 

Opening balance

$

632

Translation adjustment and hedges

 

1,386

Ending balance

$

2,018

 

Note 11:  Earnings Per Common Share

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

 

 

Three Months Ended

(millions of dollars)

 

March 28, 
2004 

 

March 30, 
2003 

 

 

 

 

 

EPS Numerator - Basic:

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

2,318 

$

2,455 

 

 

 

 

 

Less:  Preferred stock dividends - net of tax

 

 

-- 

 

 

 

 

 

Income available to common shareholders from continuing operations before cumulative effect of change in accounting principles

 

2,317 

 

2,455 

 

 

 

 

 

Discontinued operations:

 

 

 

 

Income from operations of discontinued businesses and product lines-net of tax

 

13 

 

38 

Gains on sales of discontinued businesses and product lines-net of tax

 

-- 

 

2,202 

 

 

 

 

 

Discontinued operations-net of tax

 

13 

 

2,240 

 

 

 

 

 

Income available to common shareholders before cumulative effect of change in accounting principles

 

2,330 

 

4,695 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax

 

-- 

 

(30)

 

 

 

 

 

Net income available to common shareholders

$

2,330 

$

4,665 

 

 

 

 

 

EPS Denominator - Basic:

 

 

 

 

Weighted average number of common shares outstanding

 

7,586.4 

 

6,101.4 

 

 

 

 

 

EPS Numerator - Diluted:

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

2,318 

$

2,455 

 

 

 

 

 

Less:  ESOP allocation - net of tax

 

 

-- 

 

 

 

 

 

Income available to common shareholders from continuing operations before cumulative effect of change in accounting principles

 

2,317 

 

2,455 

 

 

 

 

 

Discontinued operations:

 

 

 

 

Income from operations of discontinued businesses and product lines-net of tax

 

13 

 

38 

Gains on sales of discontinued businesses and product lines-net of tax

 

-- 

 

2,202 

 

 

 

 

 

Discontinued operations-net of tax

 

13 

 

2,240 

 

 

 

 

 

Income available to common shareholders before cumulative effect of change in accounting principles

 

2,330 

 

4,695 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax

 

-- 

 

(30)

 

 

 

 

 

Net income available to common shareholders

$

2,330 

$

4,665 

 

 

 

 

 

EPS Denominator - Diluted:

 

 

 

 

Weighted average number of common shares outstanding

 

7,586.4 

 

6,101.4 

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

 

92.1 

 

60.3 

Weighted average number of common shares outstanding and common share equivalents

 

7,678.5 

 

6,161.7 

Stock options and stock issuable under employee compensation plans representing equivalents of 193 million shares of common stock during the three months ended March 28, 2004 and 289 million shares of common stock during the three months ended March 30, 2003 had exercise prices greater than the average market price of our common stock. These common stock equivalents were outstanding during the three months ended March 28, 2004 and March 30, 2003 but were excluded from the computation of diluted EPS for this period because their inclusion would have had an antidilutive effect.

Also, in the diluted computation for the three months ended March 28, 2004, income from continuing operations and net income are reduced by the incremental contribution to the ESOP, which was acquired as part of the Pharmacia acquisition. This contribution is the after-tax difference between the income that the ESOP would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding.

Note 12:  Discontinued Operations

We evaluate our businesses and product lines on an ongoing basis for strategic fit within our operations. As a result of our evaluation, in the first three months of 2004, we decided to sell the following businesses and product lines:

-

In January 2004, we agreed to sell our in-vitro allergy and autoimmune diagnostics testing (Diagnostics) business, formerly included in the "Corporate/Other" category of our segment information, for $575 million in cash. The sale was completed on April 23, 2004. The Diagnostics business was acquired in connection with our acquisition of Pharmacia in April 2003. We recorded $153 million in revenues from this business in 2003.

 

 

-

In March 2004, we decided to sell certain non-core consumer products marketed primarily in Europe by our Consumer Healthcare segment. The majority of these products are small brands, sold in single markets only and include certain products that became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded $103 million in revenues for all of these products in 2003.

 

 

-

In March 2004, we decided to sell certain European generic pharmaceutical businesses. The European generic businesses were included in our Pharmaceutical segment and became a part of Pfizer in April 2003, in connection with our acquisition of Pharmacia. We recorded $94 million in revenues from these businesses in 2003.

 

 

-

In March 2004, we decided to sell our surgical ophthalmic business and in April 2004, we agreed to sell this business for $450 million in cash. The surgical ophthalmic business was included in our Pharmaceutical segment and became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded $102 million in revenues from these products in 2003.

We have included the results of operations of these businesses and product lines in discontinued operations for the three months ended March 28, 2004. Due to the timing of our acquisition of Pharmacia in April 2003, there were no results relating to these businesses and product lines included in our consolidated results of operations for the three months ended March 30, 2003 except for those relating to certain legacy Pfizer non-core consumer healthcare products which have been included in discontinued operations for the three months ended March 30, 2003.

The significant assets and liabilities relating to these businesses and product lines include intangible assets, goodwill, property, plant and equipment, inventory, accounts receivable, accrued liabilities and deferred taxes.

 

As a result of our evaluation, in 2003 we sold the following businesses and product lines:

-

In March 2003, we sold the Adams confectionery products business, formerly part of our Consumer Healthcare segment, for $4.2 billion in cash. We recognized a gain on the sale of this business of $3,091 million ($1,824 million net of tax) in the consolidated statement of income for the first three months of 2003.

 

 

-

In March 2003, we sold the Schick-Wilkinson Sword shaving products business, formerly part of our Consumer Healthcare segment, for $930 million in cash. We recognized a gain on the sale of this business of $462 million ($262 million net of tax) in the consolidated statement of income for the first three months of 2003.

 

 

-

In March 2003, we sold the oral contraceptives Estrostep and Loestrin, formerly part of our Pharmaceutical segment, for $197 million in cash with a right to receive up to $47.3 million contingent on Estrostep retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of these two products of $193 million ($116 million net of tax) in the consolidated statement of income for the first three months of 2003.

 

 

-

In April 2003, we completed the sale of the hormone replacement therapy femhrt, formerly part of our Pharmaceutical segment, for $160 million in cash with a right to receive up to $63.8 million contingent on femhrt retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of this product in our second quarter 2003 results.

These businesses and product lines are reported as discontinued operations in the three months ended March 30, 2003.

The following amounts have been segregated from continuing operations and reported as discontinued operations:

 

 

Three Months Ended

(millions of dollars)

 

March 28,
2004

 

March 30,
2003

 

 

 

 

 

Revenues

$

150

$

624

 

 

 

 

 

Pre-tax income

$

20

$

62

Provision for taxes on income

 

7

 

24

Income from operations of discontinued businesses and product lines-net of tax

 

13

 

38

Pre-tax gains on sales of discontinued businesses and product lines

 

--

 

3,746

Provision for taxes on gains

 

--

 

1,544

Gains on sales of discontinued businesses and product lines-net of tax

 

--

 

2,202

Discontinued operations-net of tax

$

13

$

2,240

Note 13:  Segment Information

We operate in the following three business segments:

Pharmaceutical

 

 

-

The Pharmaceutical segment includes treatments for cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies.

 

Consumer Healthcare

 

 

-

The Consumer Healthcare segment includes self medications for oral care, upper respiratory health, tobacco dependence, gastrointestinal health, skin care, eye care and hair growth.

 

 

Animal Health

 

 

-

The Animal Health segment includes treatments for diseases in livestock and companion animals.

We operate several other businesses which include the manufacture of empty soft-gelatin capsules, contract manufacturing and bulk pharmaceutical chemicals. Due to the size of these businesses, they are grouped into the "Other" category.

Revenues and profits/(losses) by segment for the three months ended March 28, 2004 and March 30, 2003 were as follows:

(millions of dollars)

 

 

 

Pharma-
ceutical

 

Consumer
Healthcare

 

Animal
Health

 

Other

(a)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

2004

 

 

$11,041

 

$804

 

$428

 

$  214 

 

$

12,487

 

 

 

2003

 

 

7,546

 

579

 

269

 

112 

 

 

8,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit/(loss)

2004

 

 

$  3,601

 

$157

 

$  45

 

$(674)

(b)

$

3,129

(c)

 

 

2003

 

 

3,404

 

133

 

35

 

(356)

(b)

 

3,216

 

 

 

 

(a)

Includes Capsugel, Pfizer CentreSource and Corporate/Other.

 

 

(b)

Includes interest income/(expense), corporate expenses, other income/(expense), certain performance-based compensation expenses not allocated to the operating segments and merger-related costs.

 

 

(c)

Equals income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles. Segment profit/(loss) includes the impact of purchase accounting for acquisitions.

Revenues for each group of similar products are as follows:

 

 

Three Months Ended

(millions of dollars)

 

March 28,
2004

 

March 30,
2003

 


% Change

 

 

 

 

 

 

 

PHARMACEUTICAL

 

 

 

 

 

 

Cardiovascular and metabolic diseases

$

4,291

$

3,559

 

21 

Central nervous system disorders

 

1,947

 

1,610

 

21 

Arthritis and pain

 

1,176

 

89

 

M+

Infectious and respiratory diseases

 

1,234

 

1,088

 

13 

Urology

 

636

 

475

 

34 

Oncology

 

243

 

--

 

-- 

Ophthalmology

 

279

 

--

 

-- 

Endocrine disorders

 

219

 

--

 

-- 

All other

 

872

 

394

 

121 

Alliance revenue

 

144

 

331

 

(56)

Total Pharmaceutical

 

11,041

 

7,546

 

46 

CONSUMER HEALTHCARE

 

804

 

579

 

39 

ANIMAL HEALTH

 

428

 

269

 

59 

OTHER

 

214

 

112

 

91 

Total revenues

$

12,487

$

8,506

 

47 

 

 

 

 

 

 

 

M+  Change greater than one thousand percent.

Note 14:  Subsequent Events

Action of Board of Directors

On April 22, 2004, our board of directors declared a $.17 per share second quarter 2004 cash dividend on our common stock, payable on June 4, 2004 to shareholders of record on May 14, 2004.

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

 

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 March 28, 2004 and the related condensed consolidated statements of income for the three-month periods ended March 28, 2004 and March 30, 2003 and cash flows for the three-month periods then ended. These condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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 review, 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 accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Pfizer Inc. and Subsidiary Companies as of December 31, 2003, 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 26, 2004, 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, 2003, 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
May 7, 2004

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

The components of the Condensed Consolidated Statement of Income follow:

 

 

First Quarter

(millions of dollars, except per common share data)

 

2004    

 

2003   

% Change

 

 

 

 

 

 

Revenues

$

12,487   

$

8,506   

47

 

 

 

 

 

 

Cost of sales

 

1,794   

 

1,058   

69

% of revenues

 

14.4%

 

12.4%

 

 

 

 

 

 

 

Selling, informational and administrative expenses

 

3,933   

 

2,740   

44

% of revenues

 

31.5%

 

32.2%

 

 

 

 

 

 

 

Research and development expenses

 

1,649   

 

1,218   

35

% of revenues

 

13.2%

 

14.3%

 

 

 

 

 

 

 

Merger-related in-process research and development charges

 

955   

 

--   

--

% of revenues

 

7.7%

 

--   

 

 

 

 

 

 

 

Merger-related costs

 

247   

 

91   

170

% of revenues

 

2.0%

 

1.1%

 

 

 

 

 

 

 

Other (income)/deductions-net

 

780   

 

183   

327

 

 

 

 

 

 

Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles

 

3,129   

 

3,216   

(3)

% of revenues

 

25.1%

 

37.8%

 

 

 

 

 

 

 

Provision for taxes on income

 

809   

 

761   

6

 

 

 

 

 

 

Effective tax rate

 

25.8%

 

23.7%

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

 

2,318   

 

2,455   

(6)

% of revenues

 

18.6%

 

28.9%

 

 

 

 

 

 

 

Discontinued operations-net of tax

 

13   

 

2,240   

(99)

 

 

 

 

 

 

Income before cumulative effect of change in accounting principles

 

2,331   

 

4,695   

(50)

% of revenues

 

18.7%

 

55.2%

 

 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax

 

--   

 

(30)  

*

 

 

 

 

 

 

Net income

$

2,331   

$

4,665   

(50)

% of revenues

 

18.7%

 

54.8%

 

 

 

 

 

 

 

Earnings per common share - Basic:

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

.31   

$

.40   

(23)

Discontinued operations-net of tax

 

--   

 

.36   

*

Cumulative effect of change in accounting principles-net of tax

 

--   

 

--   

--

Net income

$

.31   

$

.76   

(59)

 

 

 

 

 

 

Earnings per common share - Diluted:

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

.30   

$

.40   

(25)

Discontinued operations-net of tax

 

--   

 

.36   

*

Cumulative effect of change in accounting principles-net of tax

 

--   

 

--   

--

Net income

$

.30   

$

.76   

(61)

 

 

 

 

 

 

Cash dividends paid per common share

$

.17   

$

.15   

 

 

 

 

 

 

 

*  Calculation not meaningful.

Percentages in the table may reflect rounding adjustments.

OVERVIEW

We are a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines for humans and animals, as well as many of the world's best known consumer healthcare products. We generate revenue through the sale of our products as well as through alliance agreements by copromoting products discovered by other companies.

Pharmacia Acquisition

On April 16, 2003, by acquiring Pharmacia Corporation (Pharmacia),we furthered our position as the world's largest pharmaceutical company, with the scientific depth, global marketing strength and financial resources to take greater advantage of new opportunities and to bring innovative new products to market faster. We acquired Pharmacia in a stock-for-stock transaction valued at approximately $56 billion. This non-cash transaction was accounted for as a purchase business combination under accounting principles generally accepted in the United States of America (GAAP).

The results of operations discussed below include Pharmacia's product sales and expenses from the acquisition date. Therefore, our operating results for the first three months of 2004 as compared to the first three months of 2003 reflect the impact of the acquisition of Pharmacia.

In connection with the acquisition, we continue to take actions to integrate and restructure the Pharmacia operations in order to increase our profitability through cost savings and operating efficiencies. To achieve the savings, we have incurred certain merger-related expenditures of about $4.0 billion during the year ended December 31, 2003 and through March 28, 2004, which are discussed in more detail in the "Costs and Expenses" section. As a result of these activities and the combining of operations, it is not possible to provide separate results of operations for Pharmacia for the period after the acquisition date.

Esperion Acquisition

On February 10, 2004 we completed the acquisition of Esperion Therapeutics, Inc. (Esperion), a biopharmaceutical company focused on the development of high-density-lipoprotein (HDL) cholesterol-targeted therapies for the treatment of cardiovascular disease, for $1.3 billion in cash (including transaction costs). The acquisition has been accounted for as a purchase business combination. The preliminary allocation of the purchase price includes in-process research and development of $920 million, which was expensed and goodwill of $233 million, which has been allocated to our pharmaceutical segment and is not deductible for tax purposes. Esperion did not have any approved products.

Other Financial Impacts

During the first three months of 2004, we decided to sell certain businesses and product lines that were primarily acquired in connection with our acquisition of Pharmacia because they do not fit within our strategic plans. Specifically, in January 2004, we agreed to sell our in-vitro allergy and autoimmune diagnostics testing business for $575 million in cash (closed on April 23, 2004). In March 2004, we decided to sell our surgical ophthalmic business which, in April 2004, we agreed to sell for $450 million in cash (a transaction expected to close in the third quarter of 2004). In addition, in March 2004 we decided to sell certain non-core consumer healthcare products primarily marketed in Europe and certain European generic businesses. All of these businesses and product lines are reported as discontinued operations in the three months ended March 28, 2004 and in the comparable prior period where applicable.

During the first three months of 2003, we sold the Adams confectionery business, the Schick-Wilkinson Sword shaving products business and certain women's health product lines, which in the aggregate, increased net income by $2,202 million after tax. These divestitures are reported as discontinued operations in the three months ended March 30, 2003.

In the first three months of 2003, we incurred non-cash charges, which reduced net income by $30 million after tax in connection with our January 1, 2003 adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. This charge was reported as a cumulative effect of a change in accounting principle.

REVENUES

Revenues increased 47% in the first quarter of 2004, as compared to the first quarter of 2003.

The revenue increase was primarily due to the inclusion of Pharmacia results, strong performances by a number of our in-line products and newly launched products across major businesses and regions and the weakening of the U.S. dollar relative to many other currencies. Eleven products--Lipitor, Norvasc, Zoloft, Celebrex, Neurontin, Zithromax, Viagra, Diflucan, Zyrtec, Bextra and Xalatan/Xalcom--each achieved revenues of more than $250 million in the quarter.

Changes in foreign exchange rates increased revenues in the first quarter of 2004 by $436 million or 5.1% compared to the same period in 2003. The foreign exchange impact on the first quarter 2004 revenue growth, relative to the same period last year, is associated with legacy Pfizer revenues only and primarily reflects the weakening of the U.S. dollar against major currencies. The revenues of legacy Pharmacia products, recorded as of the acquisition date of April 16, 2003, do not affect the impact from foreign exchange, given their treatment as incremental volume.

The loss of patent protection with respect to any of our major products, including those described in the Legal Proceedings section, could have a material adverse effect on our projected revenues and net income.

Revenues by Country

Revenues by country for the first quarter and the changes over the prior year were as follows:

 

 

First Quarter

(millions of dollars)

 

2004

 

% of
Revenues

 

 

2003

 

% of
Revenues

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

7,149

 

57.3

 

$

5,433

 

63.9

 

32

Japan

 

728

 

5.8

 

 

474

 

5.6

 

54

All other

 

4,610

 

36.9

 

 

2,599

 

30.5

 

77

Consolidated

$

12,487

 

100.0

 

$

8,506

 

100.0

 

47

Revenues by Segment

Revenues by segment for the first quarter and the changes over the prior year were as follows:

 

 

First Quarter

(millions of dollars)

 

2004

 

% of
Revenues

 

 

2003

 

% of
Revenues

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical

 

 

 

 

 

 

 

 

 

 

 

U.S.

$

6,462

 

51.7

 

$

4,882

 

57.4

 

32

International

 

4,579

 

36.7

 

 

2,664

 

31.3

 

72

Worldwide

 

11,041

 

88.4

 

 

7,546

 

88.7

 

46

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Healthcare

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

416

 

3.3

 

 

378

 

4.4

 

10

International

 

388

 

3.1

 

 

201

 

2.4

 

93

Worldwide

 

804

 

6.4

 

 

579

 

6.8

 

39

 

 

 

 

 

 

 

 

 

 

 

 

Animal Health

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

199

 

1.6

 

 

129

 

1.5

 

55

International

 

229

 

1.8

 

 

140

 

1.7

 

63

Worldwide

 

428

 

3.4

 

 

269

 

3.2

 

59

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

72

 

0.7

 

 

44

 

0.6

 

65

International

 

142

 

1.1

 

 

68

 

0.7

 

108

Worldwide

 

214

 

1.8

 

 

112

 

1.3

 

91

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

12,487

 

100.0

 

$

8,506

 

100.0

 

47

Pharmaceutical

Worldwide revenues of the Pharmaceutical segment follow:

 

 

First Quarter

(millions of dollars)

 


2004

 

2003

 

% Change

 

 

 

 

 

 

 

PHARMACEUTICAL

 

 

 

 

 

 

Cardiovascular and metabolic diseases

$

4,291

$

3,559

 

21 

Central nervous system disorders

 

1,947

 

1,610

 

21 

Arthritis and pain

 

1,176

 

89

 

M+

Infectious and respiratory diseases

 

1,234

 

1,088

 

13 

Urology

 

636

 

475

 

34 

Oncology

 

243

 

--

 

-- 

Ophthalmology

 

279

 

--

 

-- 

Endocrine disorders

 

219

 

--

 

-- 

All other

 

872

 

394

 

121 

Alliance revenue

 

144

 

331

 

(56)

Total Pharmaceutical

$

11,041

$

7,546

 

46 

M+  Change greater than one thousand percent.

Revenue information for several of our major pharmaceutical products follow:

 

 

 

First Quarter

Product

Primary Indications

 

millions
of dollars

 

% Change from 2003

 

 

 

 

 

 

Cardiovascular and
metabolic diseases:

 

 

 

 

 

 

 

Lipitor

Reduction of LDL cholesterol

$

2,497

 

 

19 

 

Norvasc

Hypertension

 

1,141

 

 

16 

 

Accupril/Accuretic

Hypertension/Congestive heart failure

 

191

 

 

12 

 

Cardura

Hypertension/Benign prostatic hyperlasia

 

148

 

 

10 

 

Caduet

Reduction of LDL cholesterol and hypertension

 

28

 

 

-- 

 

Central nervous
system disorders:

 

 

 

 

 

 

 

Zoloft

Depression and anxiety disorders

 

810

 

 

 

Neurontin

Epilepsy and neuropathic pain

 

696

 

 

12 

 

Geodon

Schizophrenia

 

88

 

 

14 

 

Xanax/Xanax XR

Anxiety/Panic disorders

 

86

 

 

-- 

 

Aricept*

Alzheimer's disease

 

71

 

 

30 

 

Relpax

Migraine headaches

 

30

 

 

(7)

 

Arthritis and pain:

 

 

 

 

 

 

 

Celebrex

Arthritis pain and inflammation

 

769

 

 

M+

 

Bextra

Arthritis pain and inflammation

 

270

 

 

-- 

 

Infectious and
respiratory diseases:

 

 

 

 

 

 

 

Zithromax

Bacterial infections

 

466

 

 

(15)

 

Diflucan

Fungal infections

 

304

 

 

 

Vfend

Fungal infections

 

64

 

 

81 

 

Zyvox

Bacterial infections

 

97

 

 

-- 

 

Urology:

 

 

 

 

 

 

 

Viagra

Erectile dysfunction

 

416

 

 

(12)

 

Detrol/Detrol LA

Overactive bladder

 

206

 

 

-- 

 

Oncology:

 

 

 

 

 

 

 

Camptosar

Metastic colorectal cancer

 

91

 

 

-- 

 

Ellence

Breast cancer

 

80

 

 

-- 

 

Ophthalmology:

 

 

 

 

 

 

 

Xalatan/Xalcom

Glaucoma

 

279

 

 

-- 

 

Endocrine disorders:

 

 

 

 

 

 

 

Genotropin

Replacement of human growth hormone

 

179

 

 

-- 

 

All other:

 

 

 

 

 

 

 

Zyrtec

Allergies

 

299

 

 

 

Alliance revenue**:

 

 

 

 

 

 

 

Aricept, Spiriva, Rebif and Mirapex

Alzheimer's disease (Aricept), chronic obstructive pulmonary disease (Spiriva), multiple sclerosis (Rebif), Parkinson's disease (Mirapex)

 

144

 

 

(56)

 

 

 

 

*

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

 

**

Alliance revenue in 2003 included Celebrex and Bextra under copromotion agreements with Pharmacia.

 

M+

Change greater than one thousand percent.

 

Selected Product Updates:

Lipitor

Lipitor continues to maintain its position as the leading statin. The share of U.S. total prescriptions of lipid-lowering drugs held by Lipitor was 43.4% in March 2004. Despite the challenges of multiple new competitors (Crestor, Zetia, Vytorin/Inegy, and generics), Lipitor achieved 9% growth in total prescriptions in the U.S. lipid-lowering market in March 2004. In addition, despite Crestor launches in the U.K., Canada, the Netherlands, and recently in the U.S., Lipitor continues post double-digit sales growth, including 14% sales growth in the U.S. in the first quarter of 2004, compared to the same period in 2003.

Norvasc

Norvasc's success has been driven by its outstanding efficacy, once-daily dosing, consistent 24-hour control of hypertension and angina, and excellent safety and tolerability. Beyond Norvasc's current leadership, there continues to be an opportunity for growth. Hypertension affects about 50 million Americans and one billion people worldwide. In 2003, both the National Heart, Lung, and Blood Institute (NHLBI) in the U.S. and the European Society of Hypertension-European Society of Cardiology issued new hypertension guidelines that call for early and aggressive blood-pressure management and acknowledge that the majority of patients may require two or more medications to reach their blood-pressure targets. The new NHLBI guidelines include the Healthy People 2010 goal, which is to have 50% of hypertensive Americans reach the blood-pressure goal of 140/90 mm Hg or less. Currently 69% of American adults with hypertension are not at their blood-pressure goal.

Zoloft

Zoloft has proven efficacy, safety, and tolerability in treating mood and anxiety disorders and is approved for the broadest range of such disorders of any antidepressant. This breadth of coverage is important from a clinical perspective, as these mental disorders are widespread and evidence significant co-morbidity.

Neurontin

Neurontin has been approved in more than 60 markets for treatment of a range of neuropathic-pain conditions. Pfizer is focusing both on educational initiatives targeted at improving the management of neuropathic pain and efforts to ensure that Neurontin is effectively prescribed and that the recommended dose of 1,800 mg per day is achieved over a period of 15 days. To support these efforts, new 600 mg and 800 mg scored tablets were introduced in the first quarter of 2004, making it easier for the patient to achieve the recommended dose of 1,800 mg/day. Since the launch of the scored tablets and our focus on the recommended dose of 1,800 mg/day, we have seen increases in tablet sales and increases in the number of physicians of all specialities (primary-care physicians, neurologists, and pain specialists) prescribing 1,800 mg/day.

Celebrex

Celebrex is the No. 1 COX-2-specific inhibitor in the world, having the broadest range of approved indications. It provides strong efficacy, excellent tolerability, and a proven safety profile in providing relief for the pain and inflammation of osteoarthritis, rheumatoid arthritis, acute pain, and primary dysmenorrhea. Since its launch in 1999, Celebrex has accumulated more than 10 million patient years of use and more than 149 million prescriptions worldwide, demonstrating efficacy and tolerability among a patient population whose need for long-term, effective relief of pain and inflammation is great and growing.

Bextra

In February 2004, Bextra achieved a 9.4% share of new prescriptions in the U.S. NSAID market.  Additional Bextra studies in acute pain for a U.S. supplemental filing are expected to be completed in 2004.

Zithromax

The decrease in sales compared to the same period in 2003 is primarily due to a weak respiratory season in the U.S. during the first quarter.

Diflucan

Diflucan sales were adversely impacted by the entry of generic oral fluconazole products after Diflucan lost patent protection in much of Europe in 2003 as well as in Japan, the U.K., and Germany. In the U.S., the FDA granted Diflucan six months of market exclusivity through July 29, 2004, as a result of pediatric testing.

Viagra

The decrease in sales compared to the same period in 2003 reflects the impact from the launch of two competitors in the U.S. market in the second half of 2003 and a change in wholesaler stocking given the reduction in revenues and market share. In markets outside the U.S. where we have faced competition for more than a year, Viagra sales grew 8%. Viagra continues to be studied in pulmonary arterial hypertension (PAH). European regulatory authorities recently granted orphan-drug status for the use of Viagra, pending regulatory submission and approval, for the treatment of PAH, thus providing ten years of exclusivity for that indication.

Xalatan/Xalcom

Xalatan, a prostaglandin indicated for the treatment of open-angle glaucoma and ocular hypertension, is the No. 1 prescribed glaucoma medication in all promoted markets, including the U.S., Europe, and Japan. It is the first and only prostaglandin with a first-line indication for the treatment of elevated eye pressure. Xalcom consists of Xalatan with the beta blocker timolol. Future Xalatan/Xalcom global sales growth will come through market expansion. While the U.S. glaucoma market has been experiencing low unit growth, about one third of diagnosed glaucoma patients are untreated. In addition, only 10-15% of ocular-hypertensive patients (a high-risk group for developing glaucoma, based on the study described above) are currently being treated in the U.S. Several comparative clinical trials and recent European Glaucoma Society guidelines support Xalatan use in newly treated patients before less efficacious and/or poorly tolerated therapies.

Zyrtec

The increase in sales compared to the same period in 2003 was achieved despite the 16% decline in year-to-date new prescriptions in the antihistamine market due to the availability of multiple over-the-counter (OTC) branded and private-label loratadine (Claritin) products since December 2002. Zyrtec remains the only prescription antihistamine with a syrup formulation and, as of March 2004, became the only prescription antihistamine with a chewable formulation as well.

Consumer Healthcare

Revenues of our Consumer Healthcare business follow:

 

 

First Quarter

(millions of dollars)

 

2004

 

2003

% Change

 

 

 

 

 

 

Consumer Healthcare

$

804

$

579

39

The increase in consumer healthcare revenues in the first quarter of 2004, as compared to the prior year period, was primarily due to the inclusion of Pharmacia products as well as:

-

the 12% increase in the first quarter of 2004 in sales of Listerine mouthwash, which benefited from the recent U.S. launch of Natural Citrus flavor

 

 

-

the 13% and 20% increases in the first quarter of 2004 of Benadryl and Sudafed due to a strong cough/cold season

 

 

-

the favorable impact of the weakening of the U.S. dollar against major currencies

 

Animal Health

Revenues of our Animal Health business were as follows:

 

 

First Quarter

(millions of dollars)

 

2004

 

2003

% Change

 

 

 

 

 

 

Livestock products

$

266

$

145

83

Companion animal products

 

162

 

124

31

Total Animal Health

$

428

$

269

59

The increase in animal health revenues in the first quarter of 2004 as compared with the prior year period was primarily due to the inclusion of Pharmacia products, which are reflected in both product categories, and the favorable impact of the weakening of the U.S. dollar against major currencies.

Livestock product revenues increased 83% in the first quarter of 2004, as compared with the prior year period, with key performance as follows:

-

Cattle biologicals grew 19% over the prior year period driven by the launch of Spirovac (for the prevention of bacterial infection of the reproductive tract) in the first quarter of last year in the U.S., and a new claim for Bovishield (protects pregnant cows and fetal and nursing calves against viral diseases) launched in the U.S. during the fourth quarter of last year

 

 

-

Performance also reflects the launch of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe during the first quarter of 2004

partially offset by:

-

Swine vaccine sales decline of 11% in the first quarter of 2004, as compared with prior year period, due to competitive market conditions in the U.S.

 

 

-

The impact of the bovine spongiform encephalopathy issue (mad cow disease) and generic and branded competition

Companion animal product revenues increased 31% in the first quarter of 2004, as compared with the prior year period, with key brand performance as follows:

-

Revolution (for protection against fleas and heartworm) sales grew 39% in the first quarter of 2004 due to increased promotional efforts (especially in feline) throughout our markets

 

 

-

Clavamox/Synulox (an antibiotic for dogs and cats) sales grew 21% in the first quarter of 2004 primarily due to increased promotional activities in the U.S.

 

 

-

Rimadyl (for relief of arthritis pain in dogs and for post-operative pain) sales grew 20% in the first quarter of 2004 due to increased promotional efforts throughout our markets and the launch of an injectable form in the U.S.

 

COSTS AND EXPENSES

Cost of Sales

Cost of sales increased 69% in the first quarter of 2004 as compared with the prior year period, while revenues increased 47% in the first quarter of 2004.

Overall, our cost of sales in the first quarter of 2004 was impacted by:

-

change in product mix, given the addition of legacy Pharmacia's product portfolio, which has a higher product cost relative to legacy Pfizer's product portfolio

 

 

-

the impact of reflecting cost of goods sold for Celebrex and Bextra from the April 16, 2003 acquisition date of Pharmacia, compared to recognizing alliance revenue for the copromotion of Celebrex and Bextra prior to April 16, 2003, which had no cost of goods sold recorded by Pfizer

 

 

-

the unfavorable impact of foreign exchange largely due to the weakening of the dollar relative to the euro

Selling, Informational and Administrative Expenses

Selling, informational and administrative expenses (SI&A) increased 44% in the first quarter of 2004, as compared with the prior year period, mainly due to incremental expenditures associated with the consolidation of Pharmacia-SI&A related activities from the acquisition date, partially offset by cost synergies from Pharmacia-related restructuring activities. Marketing expenses of our pharmaceutical products increased 46% in the first quarter of 2004 and included costs associated with support for new product introductions and in light of new product competition.

Research and Development Expenses

Research and development (R&D) expenses increased 35% in the first quarter of 2004, as compared with the prior year period. Year over year growth for first quarter R&D spending is attributable to the incremental expenditures associated with the consolidation of Pharmacia-related activity subsequent to the acquisition date and increased support of the advanced-stage development portfolio partially offset by cost synergies from Pharmacia related restructuring activities.

Product Developments

We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. We possess a broad and deep pipeline of medicines in development. We have five new products that were recently approved or are undergoing regulatory review in the U.S. and/or E.U. (Inspra, Caduet, pregabalin, Exubera, Daxas). We have launched, or intend to launch, these products in new markets once regulatory approvals are received. However, there are no assurances as to when, or if, we will receive regulatory approval for these or any of our other new products.

Certain significant regulatory actions by and filings pending with, the FDA follow:

Recent FDA Approvals:

Product

Indication

 

Date Approved

 

 

 

 

Zyrtec

Chewable tablets for treatment of seasonal and perennial allergic rhinitis and chronic idiopathic urticaria in children aged two years and older

 

March 2004

 

 

 

 

Caduet

Single product that combines cholesterol-lowering and anti-hypertensive medications in Lipitor and Norvasc

 

January 2004

 

 

 

 

Spiriva

Chronic obstructive pulmonary disease

 

January 2004

 

 

 

 

Zithromax

Acute bacterial sinusitis

 

January 2004

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

Product

Indication

 

Date Submitted

 

 

 

 

Vfend

Treating invasive candidiasis and candidemia

 

March 2004

 

 

 

 

Depo-Provera

Injectable formulations to treat endometriosis

 

December 2003

 

Subcutaneous formulation for contraception

 

June 2003

 

 

 

 

Zyvox

Use in penicillin-resistant streptococcus pneumonia infections in patients with pneumonia

 

December 2003

 

 

 

 

Bextra

Migraine

 

November 2003

 

 

 

 

pregabalin

Neuropathic pain, add-on epilepsy, and generalized anxiety disorder

 

October 2003

 

 

 

 

Geodon

Acute mania in bipolar disorder

 

October 2003

 

Oral suspension dosage form

 

September 2002

 

 

 

 

Diflucan

Use in children to treat fungal infections

 

October 2003

 

 

 

 

Fragmin

Use to prevent the formulation of venous blood clots

 

February 2003

 

 

 

 

Viracept

Use in children with HIV

 

June 2003

 

 

 

 

Cardura XL

Benign prostatic hyperplasia (enlarged prostate)

 

April 2001

Other Regulatory Approvals and Filings:

Product/Compound in Development

Description of Event

 

Date Approved

 

Date Submitted

 

 

 

 

 

 

Inspra

Received marketing approval in The Netherlands

 

March 2004

 

--

 

 

 

 

 

 

Caduet

Received marketing approval in Brazil

 

February 2004

 

--

 

 

 

 

 

 

Vfend

Approval of a powder for oral suspension (POS) formulation was granted in the E.U.

 

February 2004

 

--

 

 

 

 

 

 

Exubera

Filing submitted in the E.U.

 

--

 

February 2004

 

 

 

 

 

 

Daxas (roflumilast)

Filing submitted in the E.U.

 

--

 

February 2004

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

Product

Indication

 

 

Viagra

Pulmonary arterial hypertension in both children and adults

 

 

Celebrex

Sporadic adenomatous polyposis--a precancerous condition caused by growths in the intestines

 

Bladder cancer

 

Barrett's esophagus--a precancerous condition caused by repeated damage from stomach acid regurgitation

 

Actinic keratosis--a precancerous skin growth caused by overexposure to sunlight

 

Ankylosing spondylitis--an inflammation of the spine

 

Chronic lower back pain

 

 

Bextra

Acute pain, including gout

 

 

Zithromax

Sustained release Zithromax (bacterial infections)

 

Cystic fibrosis

 

Drug resistant malaria (combination with chloroquine)

 

 

Vfend

Candidemia in non-neuropenic patients

 

Fungal infections in immuno-compromised patients

 

 

Camptosar IV

Use in children

 

Adjuvant colorectal cancer

 

Gastric cancer

 

 

Fragmin

Use in oncology patients to reduce cardiac toxicity associated with chemotherapy

 

 

Xalatan (new
formulation)

Ocular hypertension

Advanced-stage clinical studies are continuing for several agents including:

-

indiplon for the treatment of insomnia, under co-development with Neurocrine Biosciences, Inc. (Neurocrine)

 

 

-

Macugen for age-related macular degeneration and macular edema, under co-development with Eyetech Pharmaceuticals, Inc. (Eyetech)

 

 

-

capravirine for HIV/AIDS in treatment-experienced patients

 

 

-

SU-11,248 an agent that blocks certain kinases for treatment of gastrointestinal tumors and other cancers

 

 

-

edotecarin for glioma (brain tumor) and colorectal cancer

 

 

-

lasofoxifene for osteoporosis and other indications

 

 

-

varenicline for smoking cessation

 

 

-

Exubera, an inhalable form of insulin for Type 1 and Type 2 diabetes under co-development, co-manufacture, and co-marketing with Aventis Pharma (Aventis), with the participation of Nektar Therapeutics

 

 

-

Parecoxib (Dynastat), an injectable COX-2 inhibitor for pain and inflammation

 

 

-

Lipitor-torcetrapib for cholesterol disorders and atherosclerosis

 

 

-

Daxas (roflumilast) for chronic obstructive pulmonary disease and asthma under co-development with Altana Pharma

 

 

-

Zithromax/chloroquine combination for malaria

 

 

-

sumanirole for Parkinson's disease

 

 

-

asenapine for schizophrenia and bipolar disorders, under co-development with the Organon healthcare unit of Akzo-Nobel

Additional product-related programs are in various stages of discovery and development.

MERGER-RELATED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES

We recorded a charge of $955 million in the first quarter of 2004 based on our preliminary estimate of the portion of the purchase price allocated to in-process research and development which included $920 million for Esperion and two animal health businesses. A project-by-project valuation is being performed by independent valuation specialists to determine the fair value of research and development projects that were in-process, but not yet completed. The final valuations are expected to be completed as soon as possible but no later than one year from the respective acquisition dates. To the extent that our estimates need to be adjusted, we will do so. No additional charges for in-process research and development relating to Pharmacia are expected.

MERGER-RELATED COSTS

We incurred the following merger-related costs primarily in connection with our acquisition of Pharmacia which was completed on April 16, 2003:

 

 

Three Months Ended

(millions of dollars)

 

March 28, 
2004 

 

March 30, 
2003 

 

 

 

 

 

Integration costs:

 

 

 

 

Pharmacia

$

101 

$

80 

Other

 

 

Restructuring costs:

 

 

 

 

Pharmacia

 

143 

 

-- 

Other

 

-- 

 

Total merger-related costs - expensed

$

247 

$

91 

Total merger-related costs - capitalized

$

1,107 

$

-- 

Integration costs represent external, incremental costs directly related to an acquisition including expenditures for consulting and systems integration when incurred.

Restructuring costs represent costs associated with asset write-offs, exit activities, employee termination costs and certain relocation costs.

Cost synergies resulting from the acquisition of Pharmacia totaled more than $800 million in the first quarter of 2004 and are expected to be about $3.4 billion in full-year 2004 and about $4 billion in full year 2005. Synergies stem from a broad range of sources, including a streamlined organization, reduced operating expenses and procurement savings.

In connection with the acquisition of Pharmacia, Pfizer management approved plans throughout 2003 and during the first three months of 2004 to restructure the operations of both legacy Pfizer and legacy Pharmacia to eliminate duplicative facilities and reduce costs. The restructuring of our operations as a result of our acquisition of Pharmacia is expected to continue through 2005 and is expected to include severance, costs of vacating duplicative facilities and contract termination and other exit costs. Total merger-related expenditures (income statement and balance sheet) incurred during 2003-2005 to achieve these synergies are expected to be about $6.0 billion, on a pre-tax basis.

Restructuring Costs Associated with Legacy Pfizer - Expensed

During the first three months of 2004, we recorded $143 million of restructuring costs associated with exiting certain activities of legacy Pfizer, including severance, costs of vacating duplicative facilities and contract termination and other exit costs. Through March 28, 2004, we have recorded, in total, $320 million of restructuring costs and at March 28, 2004, liabilities for restructuring costs incurred but not paid totaled $134 million and are included in Other current liabilities.

The majority of the restructuring costs are related to employee terminations. Through March 28, 2004, employee termination costs totaling $232 million ($92 million recorded in the first three months of 2004) represent the approved reduction of the legacy Pfizer work force by 2,091 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 1,452 employees were terminated as of March 28, 2004.

Restructuring Costs Associated with Legacy Pharmacia - Capitalized

During the first three months of 2004, we recorded $1,107 million of restructuring costs associated with employee terminations and exiting certain activities of legacy Pharmacia. These costs were recognized as liabilities assumed in the purchase business combination. Accordingly, the restructuring charges incurred in the first year after the acquisition are considered part of the purchase price of Pharmacia and have been recorded as an increase to goodwill. Through March 28, 2004, we have recorded, in total, $2,685 million of restructuring costs and at March 28, 2004, liabilities for restructuring costs incurred but not paid totaled $1,209 million and are included in Other current liabilities. Future restructuring charges associated with legacy Pharmacia will be charged to the results of operations.

The majority of the restructuring costs are related to employee terminations. Through March 28, 2004, employee termination costs totaling $1,552 million ($263 million recorded in the first three months of 2004) represent the approved reduction of the legacy Pharmacia work force by 13,045 employees mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 11,596 employees were terminated as of March 28, 2004. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Pharmacia employment contracts.

Restructuring charges are recorded when specific decisions to exit activities are approved and incurred. Reductions to our estimates of restructuring charges relating to legacy Pharmacia that were originally recorded as goodwill will be recorded as an adjustment to goodwill. Increases to the estimates of completing the currently approved restructuring plans or costs related to new restructuring initiatives relating to legacy Pharmacia subsequent to April 15, 2004 will be recorded in our results of operations.

OTHER (INCOME)/DEDUCTIONS-NET

Other (income)/deductions-net includes amortization expense of $807 million (primarily relating to intangible assets acquired from Pharmacia) in the first quarter of 2004 and copromotion charges and payments for intellectual property rights of $255 million in the first quarter of 2003.

TAXES ON INCOME

The estimated effective tax rate (ETR) used in calculating full-year 2004 income from continuing operations before cumulative effect of change in accounting principles is 25.8%. The projected full-year 2004 ETR is lower than the 49.7% ETR related to our 2003 income from continuing operations before cumulative effect of change in accounting principles primarily due to the decreased merger-related in-process research and development charges, which are not deductible.

DISCONTINUED OPERATIONS

We evaluate our businesses and product lines on an ongoing basis for strategic fit within our operations. As a result of our evaluation, in the first three months of 2004, we either sold or decided to sell the following businesses and product lines:

-

In January 2004, we agreed to sell our in-vitro allergy and autoimmune diagnostics testing (Diagnostics) business, formerly included in the "Corporate/Other" category of our segment information for $575 million in cash. The sale was completed on April 23, 2004. The Diagnostics business was acquired in connection with our acquisition of Pharmacia in April 2003. We recorded $153 million in revenues from this business in 2003.

 

 

-

In March 2004, we decided to sell certain non-core consumer products marketed primarily in Europe by our Consumer Healthcare segment. The majority of these products are small brands, sold in single markets only and include certain products that became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded $103 million in revenues for all of these products in 2003.

 

 

-

In March 2004, we decided to sell certain European generic pharmaceutical businesses. The European generic businesses were included in our Pharmaceutical segment and became a part of Pfizer in April 2003, with our acquisition of Pharmacia. We recorded $94 million in revenues from these businesses in 2003.

 

 

 

-

In March 2004, we decided to sell our surgical ophthalmic business and in April 2004, we agreed to sell this business for $450 million in cash. The surgical ophthalmic business was included in our Pharmaceutical segment and became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded $102 million in revenues from these products in 2003.

 

We have included the results of operations of these businesses and product lines in discontinued operations for three months ended March 28, 2004. Due to the timing of our acquisition of Pharmacia in April 2003, there were no results relating to these businesses and product lines included in our consolidated results of operations for the three months ended March 30, 2003 except for those relating to certain legacy Pfizer non-core consumer healthcare products which have been included in discontinued operations for the three months ended March 30, 2003.

The significant assets and liabilities relating to these businesses and product lines include intangible assets, goodwill, property, plant and equipment, inventory, accounts receivable, accrued liabilities and deferred taxes.

As a result of our evaluation, in 2003 we sold the following businesses and product lines:

-

In March 2003, we sold the Adams confectionery products business, formerly part of our Consumer Healthcare segment, for $4.2 billion in cash. We recognized a gain on the sale of this business of $3,091 million ($1,824 million net of tax) in the consolidated statement of income for the first three months of 2003.<