10-Q 1 q208pfe1.htm Pfizer Inc. 2 Q 2008 Form 10-Q

 

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

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

For the quarterly period ended June 29, 2008

OR

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

For the transition period from________to_______

COMMISSION FILE NUMBER 1-3619

----

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

   

DELAWARE
(State of Incorporation)

13-5315170
(I.R.S. Employer Identification No.)

    

235 East 42nd Street, New York, New York   10017
     (Address of principal executive offices)   (zip code)
(212) 573-2323
(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES    X             NO     

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES                    NO     X   

At August 5, 2008, 6,740,994,347 shares of the issuer's voting common stock were outstanding.

FORM 10-Q

For the Quarter Ended
June 29, 2008

Table of Contents

PART I.  FINANCIAL INFORMATION

Page

   

Item 1.

Financial Statements

   

Condensed Consolidated Statements of Income for the three months and six months ended June 29, 2008, and July 1, 2007

3

   

Condensed Consolidated Balance Sheets as of June 29, 2008, and December 31, 2007

4

   

Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2008, and July 1, 2007

5

   

Notes to Condensed Consolidated Financial Statements

6

   

Review Report of Independent Registered Public Accounting Firm

16

   

Item 2.

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

17

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

   

Item 4.

Controls and Procedures

44

   

PART II.  OTHER INFORMATION

 

   

Item 1.

Legal Proceedings

45

   

Item 1A.

Risk Factors

47

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

   

Item 3.

Defaults Upon Senior Securities

48

   

Item 4.

Submission of Matters to a Vote of Security Holders

48

   

Item 5.

Other Information

48

   

Item 6.

Exhibits

49

   

Signature

50

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

Three Months Ended

Six Months Ended

 

(millions, except per common share data)

June 29, 
2008 

July 1, 2007

June 29, 
2008 

July 1, 2007

   

Revenues

$

12,129 

$

11,084 

$

23,977 

$

23,558 

  

Costs and expenses:

Cost of sales(a)

2,289 

2,109 

4,275 

3,996 

Selling, informational and administrative expenses(a)

3,863 

3,844 

7,355 

7,205 

Research and development expenses(a)

1,966 

2,165 

3,757 

3,830 

Amortization of intangible assets

663 

783 

1,442 

1,598 

Acquisition-related in-process research and development charges

156 

-- 

554 

283 

Restructuring charges and acquisition-related costs

569 

1,051 

747 

1,863 

Other (income)/deductions - net

(167)

(487)

(500)

(889)

  

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

2,790 

1,619 

6,347 

5,672 

  

Provision for taxes on income

25  

272 

788 

961 

  

Minority interests

12 

  

Income from continuing operations

2,759 

1,345 

5,547 

4,706 

  

Discontinued operations:

Loss from discontinued operations - net of tax

(1)

-- 

(5)

-- 

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

18 

(78)

18 

(47)

  

Discontinued operations - net of tax

17 

(78)

13 

(47)

   

Net income

$

2,776 

$

1,267 

$

5,560 

$

4,659 

  

Earnings per common share - basic:

Income from continuing operations

$

0.41 

$

0.19 

$

0.82 

$

0.67 

Discontinued operations - net of tax

-- 

(0.01)

0.01 

(0.01)

Net income

$

0.41 

$

0.18 

$

0.83 

$

0.66 

  

Earnings per common share - diluted:

Income from continuing operations

$

0.41 

$

0.19 

$

0.82 

$

0.67 

Discontinued operations - net of tax

-- 

(0.01)

-- 

(0.01)

Net income

$

0.41 

$

0.18 

$

0.82 

$

0.66 

  

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

Basic

6,732 

6,966 

6,736 

7,009 

  

Diluted

6,748 

6,990 

6,754 

7,033 

  

Cash dividends paid per common share

$

0.32 

$

0.29 

$

0.64 

$

0.58 

   

(a)

Exclusive of amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.

See accompanying Notes to Condensed Consolidated Financial Statements.

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

(millions of dollars)

June 29, 
2008*

Dec. 31, 
2007**

ASSETS

Cash and cash equivalents

$

820 

$

3,406 

Short-term investments

25,359 

22,069 

Accounts receivable, less allowance for doubtful accounts

10,245 

9,843 

Short-term loans

1,041 

617 

Inventories

5,334 

5,302 

Taxes and other current assets

5,711 

5,498 

Assets held for sale

141 

114 

Total current assets

48,651 

46,849 

Long-term investments and loans

7,105 

4,856 

Property, plant and equipment, less accumulated depreciation

14,925 

15,734 

Goodwill

21,704 

21,382 

Identifiable intangible assets, less accumulated amortization

19,875 

20,498 

Other assets, deferred taxes and deferred charges

4,255 

5,949 

Total assets

$

116,515 

$

115,268 

   

LIABILITIES AND SHAREHOLDERS' EQUITY

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

$

9,448 

$

5,825 

Accounts payable

1,928 

2,270 

Dividends payable

2,147 

2,163 

Income taxes payable

930 

1,380 

Accrued compensation and related items

1,640 

1,974 

Other current liabilities

7,100 

8,223 

Total current liabilities

23,193 

21,835 

    

Long-term debt

7,246 

7,314 

Pension benefit obligations

2,487 

2,599 

Postretirement benefit obligations

1,746 

1,708 

Deferred taxes

5,885 

7,696 

Other taxes payable

6,605 

6,246 

Other noncurrent liabilities

2,635 

2,746 

Total liabilities

49,797 

50,144 

  

Minority interests

149 

114 

   

Preferred stock

81 

93 

Common stock

443 

442 

Additional paid-in capital

69,996 

69,913 

Employee benefit trust, at fair value

(399)

(550)

Treasury stock

(57,385)

(56,847)

Retained earnings

50,912 

49,660 

Accumulated other comprehensive income

2,921 

2,299 

   

Total shareholders' equity

66,569 

65,010 

Total liabilities and shareholders' equity

$

116,515 

$

115,268 

  

*    Unaudited.
**  Condensed from audited financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

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

Six Months Ended

(millions of dollars)

June 29, 
2008 

July 1, 
2007 

   

Operating Activities:

Net income

$

5,560 

$

4,659 

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

Depreciation and amortization

2,716 

2,712 

Share-based compensation expense

166 

228 

Acquisition-related in-process research and development charges

554 

283 

Deferred taxes from continuing operations

439 

(951)

Other non-cash adjustments

509 

(4)

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

(1,631)

(2,019)

   

Net cash provided by operating activities

8,313 

4,908 

   

Investing Activities:

Purchases of property, plant and equipment

(868)

(757)

Purchases of short-term investments

(16,106)

(10,738)

Proceeds from sales and redemptions of short-term investments

12,463 

17,101 

Purchases of long-term investments

(3,856)

(1,243)

Proceeds from sales and redemptions of long-term investments

632 

22 

Purchases of other assets

(32)

(82)

Acquisitions, net of cash acquired

(962)

(463)

Other investing activities

(219)

(293)

   

Net cash (used in)/provided by investing activities

(8,948)

3,547 

   

Financing Activities:

Increase in short-term borrowings, net

16,310 

78 

Principal payments on short-term borrowings

(14,097)

(763)

Proceeds from issuances of long-term debt

602 

1,243 

Principal payments on long-term debt

-- 

(60)

Purchases of common stock

(500)

(4,999)

Cash dividends paid

(4,277)

(4,040)

Stock option transactions and other

33 

383 

   

Net cash used in financing activities

(1,929)

(8,158)

Effect of exchange-rate changes on cash and cash equivalents

(22)

14 

Net (decrease)/increase in cash and cash equivalents

(2,586)

311 

Cash and cash equivalents at beginning of period

3,406 

1,827 

   

Cash and cash equivalents at end of period

$

820 

$

2,138 

   

Supplemental Cash Flow Information:

Cash paid during the period for:

Income taxes

$

1,056 

$

3,672 

Interest

446 

354 

  

See accompanying Notes to Condensed Consolidated Financial Statements.

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

Note 1.  Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month and six-month periods ended May 25, 2008, and May 27, 2007.

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

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

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

Note 2.  Adoption of New Accounting Policies

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

Many, but not all, of our financial instruments are carried at fair value. For example, substantially all of our cash equivalents, short-term investments and long-term investments are classified as available-for-sale securities and are carried at fair value, with unrealized gains and losses, net of tax, reported in Other comprehensive income.  Derivative financial instruments are carried at fair value, with changes in fair value reported in various balance sheet categories (see both Note 10 D. Financial Instruments: Derivative Financial Instruments and Hedging Activities in our Annual Report on Form 10-K for the year ended December 31, 2007, and Note 7C. Financial Instruments: Derivative Financial Instruments and Hedging Activities in this Quarterly Report) and ultimately, in Other (income)/deductions - net. Virtually all of our valuation measurements are Level 2 measurements.  The adoption of SFAS 157 did not have a significant impact on our consolidated financial statements. We did not elect to adopt SFAS 157 for acquired nonfinancial assets and assumed nonfinancial liabilities.

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

Note 3.  Acquisitions

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

In the second quarter of 2008, we acquired Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company, whose main product (Thelin), for the treatment of pulmonary arterial hypertension, is commercially available in much of the E.U., is approved in certain other markets, and is under review by the Food and Drug Administration (FDA). The cost of acquiring Encysive, through a tender offer and subsequent merger, was approximately $200 million, including transaction costs. Upon our acquisition of Encysive, Encysive's change of control repurchase obligations under its $130 million 2.5% convertible notes came into effect and, as such, Encysive repurchased the convertible notes in consideration for their par value plus accrued interest in June 2008. In addition, in the second quarter of 2008, we acquired Serenex, Inc. (Serenex), a privately held biotechnology company with SNX-5422, an oral Heat Shock Protein 90 (Hsp90) inhibitor currently in Phase I trials for the potential treatment of solid tumors and hematological malignancies and an extensive Hsp90 inhibitor compound library, which has potential uses in treating cancer, inflammatory and neurodegenerative diseases. In connection with these acquisitions, we recorded $156 million in Acquisition-related in-process research and development charges and approximately $450 million in intangible assets.

 

  

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

 

   

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

   

Note 4.  Cost-Reduction Initiatives

The costs incurred in connection with our cost-reduction initiatives follow:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29,
2008

July 1,
2007

June 29,
2008

July 1,
2007

  

Implementation costs(a)

$

405 

$

317 

$

762 

$

491 

Restructuring charges(b)

562 

1,035 

739 

1,830 

Total costs related to our cost-reduction initiatives

$

967 

$

1,352 

$

1,501 

$

2,321 

   

(a)

For the second quarter of 2008, included in Cost of sales ($210 million), Selling, informational and administrative expenses ($100 million), Research and development expenses ($94 million), and Other (income)/deductions - net ($1 million).  For the second quarter of 2007, included in Cost of sales ($170 million), Selling, informational and administrative expenses ($79 million),  Research and development expenses ($131 million) and Other (income)/deductions - net ($63 million income).  For the first six months of 2008, included in Cost of sales ($348 million), Selling, informational and administrative expenses ($175 million), Research and development expenses ($240 million), and Other (income)/deductions - net ($1 million income).  For the first six months of 2007, included in Cost of sales ($264 million), Selling, informational and administrative expenses ($128 million), Research and development expenses ($162 million) and Other (income)/deduction - net ($63 million income).

(b)

Included in Restructuring charges and acquisition-related costs.

   

Through June 29, 2008, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our U.S. marketing and worldwide research and development operations, while the implementation costs primarily relate to accelerated depreciation of certain assets, as well as system and process standardization and the expansion of shared services.

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

(millions of dollars)

Costs
Incurred
Through
June 29,
2008

Activity
Through
June 29,
2008

(a)

Accrual
as of
June 29,
2008

(b)

  

Employee termination costs

$

3,391

$

2,395

$

996

Asset impairments

1,215

1,215

-- 

Other

390

294

96

Total

$

4,996

$

3,904

$

1,092

  

(a)

Includes adjustments for foreign currency translation.

(b)

Included in Other current liabilities ($950 million) and Other noncurrent liabilities ($142 million).

   

During the second quarter of 2008, we expensed $118 million for Employee termination costs, $432 million for Asset impairments and $12 million in Other. During the first six months of 2008, we expensed $244 million for Employee termination costs, $466 million for Asset impairments and $29 million in Other.  Through June 29, 2008, Employee termination costs represent the expected reduction of the workforce by 21,300 employees, mainly in manufacturing, sales and research. Approximately 16,200 employees were terminated as of June 29, 2008. Employee termination costs include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

Note 5.  Taxes on Income

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

Note 6.  Comprehensive Income

The components of comprehensive income/(expense) follow:

Three Months Ended

  

Six Months Ended

(millions of dollars)

June 29, 2008 

July 1, 
2007 

June 29, 2008 

July 1, 
2007 

   

Net income

$

2,776 

$

1,267 

$

5,560 

$

4,659 

Other comprehensive income/(expense):

Currency translation adjustment and other

1,100 

500 

523 

372 

Net unrealized gains/(losses) on derivative financial instruments

27 

28 

18 

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

-- 

(14)

Benefit plan adjustments

113 

85 

194 

Total other comprehensive income/(expense)

1,128 

631 

622 

589 

Total comprehensive income

$

3,904 

$

1,898 

$

6,182 

$

5,248 

  

Note 7.  Financial Instruments

A.  Financial Instruments

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

Information about certain of our financial assets and liabilities follows:

Fair Value(a)

(millions of dollars)

As of
June 29,
2008

Level 1

Level 2

Level 3

Financial assets carried at fair value:

Trading securities(b)

$

211

$

--

$

211

$

--

Available-for-sale debt securities(c)

29,993

--

29,993

--

Available-for-sale equity securities(d)

408

234

174

--

Derivative financial instruments(e)

514

--

514

--

Total

$

31,126

$

234

$

30,892

$

--

   

Other financial assets:

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

1,538

Short-term loans carried at cost

1,041

Long-term loans carried at cost(b)

1,450

Non-traded equity securities carried at cost(b)

219

Total

$

4,248

   

Financial liabilities carried at fair value:

Derivative financial instruments(g)

534

--

534

--

Total

$

534

$

--

$

534

$

--

Financial liabilities carried at historical proceeds:

Short-term borrowings

9,448

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

7,246

Total

$

16,694

   

(a)

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

(b)

Included in Long-term investments and loans.

(c)

Included in Short-term investments ($25.0 billion) and Long-term investments and loans ($4.9 billion).

(d)

Included in Short-term investments ($143 million, comprised of money market funds) and Long-term investments and loans ($265 million).  Includes gross unrealized gains ($71 million) and gross unrealized losses ($17 million).

(e)

Primarily included in Taxes and other current assets ($205 million) and Other assets, deferred taxes and deferred charges ($309 million).

(f)

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

(g)

Included in Other current liabilities ($295 million) and Other noncurrent liabilities ($239 million).

   

We use a matrix-pricing model for all of our financial instruments carried at fair value, except for available-for-sale equity securities, for which we use market quotes.

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

B.  Long-Term Debt and Other Securities

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

C.  Derivative Financial Instruments and Hedging Activities

There was no material ineffectiveness in any hedging relationship reported in earnings in the first six months of 2008.

Foreign Exchange Risk

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

Instrument(a)

Primary
Balance Sheet
Caption

(b)

  

Hedge
Type

(c)

  

Hedged or Offset Item

Notional Amount as of
June 29, 2008
(millions of dollars)

Maturity Date

Forward

OCL

--

Short-term foreign currency assets and liabilities(d)

$

2,520            

2008

Forward

OCL

CF

Yen available-for-sale investments

2,257            

2008

Forward

OCL

CF

Euro available-for-sale investments

2,129            

 2008

Forward

OCA

CF

Yen intercompany loan

1,701            

2009

Forward

OCL

CF

Swedish krona intercompany loan

1,031            

2008

Forward

OCL

CF

U.K. pound available-for-sale investments

977            

2008

Forward

OCA

CF

Euro intercompany loan

621            

2009

   

(a)

Forward = Forward-exchange contracts.

(b)

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

(c)

CF = Cash flow hedge.

(d)

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

   

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

D.  Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements.

There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty.  As of June 29, 2008, we had $5.2 billion due from a broad group of banks around the world.

Note 8.  Inventories

The components of inventories follow:

(millions of dollars)

June 29,
2008

Dec. 31,
2007

   

Finished goods

$

2,178

$

2,064

Work-in-process

2,407

2,353

Raw materials and supplies

749

885

Total inventories(a)

$

5,334

$

5,302

   

(a)

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

    

Note 9.  Goodwill and Other Intangible Assets

A.  Goodwill

The changes in the carrying amount of goodwill by segment for the six months ended June 29, 2008, follow:

(millions of dollars)

Pharmaceutical 

Animal 
Health 

Other 

Total

   

Balance, December 31, 2007

$

21,256 

$

108 

$

18 

$

21,382 

Additions(a)

17 

15 

-- 

32 

Other(b)

271 

18 

290 

Balance, June 29, 2008

$

21,544 

$

141 

$

19 

$

21,704 

  

(a)

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

(b)

Primarily the impact of foreign exchange.

   

B.  Other Intangible Assets

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

As of June 29, 2008

As of Dec. 31, 2007

(millions of dollars)

Gross 
Carrying 
Amount 

Accumulated 
Amortization 

Identifiable
Intangible
Assets, less
Accumulated
Amortization

Gross 
Carrying 
Amount 

Accumulated 
Amortization 

Identifiable
Intangible
Assets, less
Accumulated
Amortization

Finite-lived intangible assets:

Developed technology rights

$

33,497 

$

(17,591)

$

15,906

$

32,433 

$

(15,830)

$

16,603

Brands

1,017 

(470)

547

1,017 

(452)

565

License agreements

218 

(69)

149

212 

(59)

153

Trademarks

151 

(86)

65

128 

(82)

46

Other(a)

556 

(287)

269

459 

(264)

195

Total amortized finite-lived intangible assets

35,439 

(18,503)

16,936

34,249 

(16,687)

17,562

Indefinite-lived intangible assets:

Brands

2,865 

-- 

2,865

2,864 

-- 

2,864

Trademarks

71 

-- 

71

71 

-- 

71

Other

-- 

3

-- 

1

Total indefinite-lived intangible assets

2,939 

-- 

2,939

2,936 

-- 

2,936

Total identifiable intangible assets

$

38,378 

$

(18,503)

$

19,875

(b)

$

37,185 

$

(16,687)

$

20,498

(b)

   

(a)

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

(b)

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

   

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $694 million for the second quarter of 2008, $826 million for the second quarter of 2007, $1.5 billion for the first six months of 2008 and $1.7 billion for the first six months of 2007.

The expected annual amortization expense is $2.9 billion in 2008; $2.5 billion in each of 2009, 2010 and 2011; $2.0 billion in 2012; and $1.6 billion in 2013.

Note 10.  Pension and Postretirement Benefit Plans

The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the three months ended June 29, 2008, and July 1, 2007, follow:

Pension Plans

U.S. Qualified

U.S.
Supplemental
(Non-Qualified)

International

Postretirement
Plans

(millions of dollars)

2008 

2007 

2008

2007

2008 

2007 

2008 

2007 

   

Service cost

$

59 

$

71 

$

$

$

65 

$

72 

$

11 

$

11 

Interest cost

115 

111 

14 

101 

86 

37 

35 

Expected return on plan assets

(162)

(170)

--  

--  

(111)

(94)

(9)

(9)

Amortization of:

Actuarial losses

15 

11 

11 

23 

Prior service costs/(credits)

-- 

-- 

-- 

-- 

-- 

Curtailments and settlements - net

(2)

(5)

(2)

Special termination benefits

-- 

-- 

Net periodic benefit costs/(credit)

$

31 

$

36 

$

22 

$

30 

$

78 

$

84 

$

56 

$

48 

   

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

Pension Plans

U.S. Qualified

U.S. Supplemental
(Non-Qualified)

International

Postretirement Plans

(millions of dollars)

2008 

2007 

2008

2007

2008 

2007 

2008 

2007 

   

Service cost

$

120 

$

148 

$

12 

$

14 

$

128 

$

145 

$

20 

$

22 

Interest cost

231 

234 

21 

28 

200 

172 

71 

69 

Expected return on plan assets

(325)

(360)

--  

--  

(222)

(188)

(18)

(18)

Amortization of:

Actuarial losses

16 

35 

15 

23 

22 

47 

15 

21 

Prior service costs/(credits)

(1)

(1)

-- 

-- 

-- 

Curtailments and settlements - net

13 

113 

(105)

-- 

Special termination benefits

16 

-- 

-- 

13 

Net periodic benefit costs/(credit)

$

64 

$

81 

$

160 

$

69 

$

145 

$

76 

$

103 

$

102 

  

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

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

For the first six months of 2008, we contributed from our general assets $239 million to our U.S. supplemental (non-qualified) pension plans, $213 million to our international pension plans and $80 million to our postretirement plans. Contributions to our U.S. qualified pension plans in the first six months of 2008 were not significant.

During 2008, we expect to contribute, from our general assets, a total of $254 million to our U.S. supplemental (non-qualified) pension plans, $442 million to our international pension plans and $162 million to our postretirement plans. We do not expect to make any significant contributions to our U.S. qualified pension plans during 2008, primarily due to the overfunded status of many of the plans. Contributions expected to be made for 2008 are inclusive of amounts contributed during the first six months of 2008. The contributions from our general assets include direct employer benefit payments.

Note 11.  Earnings Per Common Share

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

Three Months Ended

Six Months Ended

(millions)

June 29, 
2008 

July 1, 
2007 

June 29, 
2008 

July 1, 
2007 

  

EPS Numerator - Basic:

Income from continuing operations

$

2,759 

$

1,345 

$

5,547 

$

4,706 

Less:  Preferred stock dividends - net of tax

Income available to common shareholders from continuing operations

2,757 

1,344 

5,545 

4,704 

Discontinued operations - net of tax

17 

(78)

13 

(47)

Net income available to common shareholders

$

2,774 

$

1,266 

$

5,558 

$

4,657 

  

EPS Denominator - Basic:

Weighted-average number of common shares outstanding

6,732 

6,966 

6,736 

7,009 

  

EPS Numerator - Diluted:

Income from continuing operations

$

2,759 

$

1,345 

$

5,547 

$

4,706 

Less:  ESOP contribution - net of tax

-- 

-- 

-- 

Income available to common shareholders from continuing operations

2,759 

1,345 

5,547 

4,705 

Discontinued operations - net of tax

17 

(78)

13 

(47)

Net income available to common shareholders

$

2,776 

$

1,267 

$

5,560 

$

4,658 

  

EPS Denominator - Diluted:

Weighted-average number of common shares outstanding

6,732 

6,966 

6,736 

7,009 

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

16 

24 

18 

24 

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

6,748 

6,990 

6,754 

7,033 

   

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

542 

403 

542 

404 

   

(a)

These common stock equivalents were outstanding during the three months and six months ended June 29, 2008 and July 1, 2007, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.

   

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

Note 12.  Segment Information

We operate in the following business segments:

Pharmaceutical

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

   

Animal Health

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

   

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

Revenues and profit/(loss) by segment for the three months and six months ended June 29, 2008, and July 1, 2007, follow:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29, 
2008 

July 1, 
2007 

  

June 29, 
2008 

  

July 1, 
2007 

Revenues:

Pharmaceutical

$

11,053 

$

10,105 

$

21,957 

$

21,686 

Animal Health

715 

632 

1,334 

1,218 

Corporate/Other(a)

361 

347 

686 

654 

Total revenues

$

12,129 

$

11,084 

$

23,977 

$

23,558 

   

Segment profit/(loss)(b)

Pharmaceutical

$

5,068 

$

4,273 

$

10,662 

$

10,753 

Animal Health

175 

142 

320 

279 

Corporate/Other(a)

(2,453)

(c)

(2,796)

(d)

(4,635)

(e)

(5,360)

(f)

Total profit/(loss)

$

2,790 

$

1,619 

$

6,347 

$

5,672 

  

(a)

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

  

(b)

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

  

(c)

For the three months ended June 29, 2008, Corporate/Other includes: (i) restructuring charges and implementation costs associated with our cost-reduction initiatives of $967 million; (ii) significant impacts of purchase accounting for acquisitions of $788 million, including acquired in-process research and development, intangible asset amortization and other charges; (iii) all share-based compensation expense; (iv) acquisition-related costs of $7 million; and (v) transition activity associated with our former Consumer Healthcare business ($9 million income).

  

(d)

For the three months ended July 1, 2007, Corporate/Other includes: (i) restructuring charges and implementation costs associated with our cost-reduction initiatives of $1.4 billion; (ii) significant impacts of purchase accounting for acquisitions of $782 million, including acquired in-process research and development, intangible asset amortization and other charges; (iii) all share-based compensation expense; (iv) a $25 million charge for litigation-related matters; (v) acquisition-related costs of $9 million; and (vi) transition activity associated with our former Consumer Healthcare business ($7 million income).

  

(e)

For the six months ended June 29, 2008, Corporate/Other includes: (i) significant impacts of purchase accounting for acquisitions of $1.9 billion, including acquired in-process research and development, intangible asset amortization and other charges; (ii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $1.5 billion; (iii) all share-based compensation expense; (iv) acquisition-related costs of $8 million; and (v) transition activity associated with our former Consumer Healthcare business ($12 million income).

  

(f)

For the six months ended July 1, 2007, Corporate/Other includes: (i) restructuring charges and implementation costs associated with our cost-reduction initiatives of $2.3 billion; (ii) significant impacts of purchase accounting for acquisitions of $1.9 billion, including acquired in-process research and development, intangible asset amortization and other charges; (iii) all share-based compensation expense; (iv) acquisition-related costs of $7 million; (v) a $25 million charge for litigation-related matters; and (vi) transition activity associated with our former Consumer Healthcare business ($16 million income).

     

Revenues for each group of similar products follow:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29,
2008

July 1,
2007

  


Change 

  

June 29,
2008

July 1,
2007

  


Change 

   

PHARMACEUTICAL

Cardiovascular and metabolic diseases

$

4,467

$

4,083

9 %

$

8,961

$

9,238

(3)%

Central nervous system disorders

1,484

1,174

26    

2,870

2,419

19    

Arthritis and pain

756

626

21    

1,511

1,375

10    

Infectious and respiratory diseases

1,000

837

20    

1,931

1,750

10    

Urology

765

663

15    

1,549

1,414

10    

Oncology

650

652

--    

1,287

1,247

3    

Ophthalmology

444

400

11    

857

766

12    

Endocrine disorders

305

253

20    

563

498

13    

All other

619

1,025

(40)   

1,377

2,189

(37)   

Alliance revenues

563

392

44    

1,051

790

33    

Total Pharmaceutical

11,053

10,105

9    

21,957

21,686

1    

ANIMAL HEALTH

715

632

13    

1,334

1,218

10    

OTHER

361

347

4    

686

654

5    

Total revenues

$

12,129

$

11,084

9    

$

23,977

$

23,558

2    

  

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Pfizer Inc:

We have reviewed the condensed consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of June 29, 2008, the related condensed consolidated statements of income for the three-month and six-month periods ended June 29, 2008, and July 1, 2007, and the related condensed consolidated statements of cash flows for the six-month periods ended June 29, 2008, and July 1, 2007. These condensed consolidated financial statements are the responsibility of the Company's management.

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

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

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

KPMG LLP

New York, New York
August 8, 2008

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

Introduction

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

Overview of Our Performance and Operating Environment. This section, beginning on page 19, provides information about the following: our business; our performance during the three months and six months ended June 29, 2008; our operating environment; our strategic initiatives, such as acquisitions; and our cost-reduction initiatives.

   

Revenues. This section, beginning on page 23, provides an analysis of our products and revenues for the three months and six months ended June 29, 2008, and July 1, 2007, as well as an overview of important product developments.

   

Costs and Expenses. This section, beginning on page 31, provides a discussion about our costs and expenses.

    

Provision for Taxes on Income. This section, beginning on page 33, provides a discussion of items impacting our tax provision for the periods presented.

   

Adjusted Income. This section, beginning on page 34, provides a discussion of an alternative view of performance used by management.

   

Financial Condition, Liquidity and Capital Resources. This section, beginning on page 38, provides an analysis of our balance sheets as of June 29, 2008, and December 31, 2007, and cash flows for the six months ended June 29, 2008, and July 1, 2007, as well as a discussion of our outstanding debt and commitments that existed as of June 29, 2008, and December 31, 2007. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.

 

   

Outlook. This section, beginning on page 41, provides a discussion of our expectations for full-year 2008.

   

Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 42, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this MD&A relating to our financial results, operations and business plans and prospects. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section is a discussion of Legal Proceedings and Contingencies.

   

Components of the Condensed Consolidated Statements of Income follow:

Three Months Ended

Six Months Ended

(millions of dollars, except per common share data)

June 29, 
2008 

July 1, 
2007 

% Change

June 29, 
2008 

July 1, 
2007 

% Change

   

Revenues

$

12,129 

$

11,084 

9%

$

23,977 

$

23,558 

2 %

  

Cost of sales

2,289 

2,109 

9   

4,275 

3,996 

7    

% of revenues

18.9 

%

19.0 

%

17.8 

%

17.0 

%

  

Selling, informational and administrative expenses

3,863 

3,844 

1   

7,355 

7,205 

2    

% of revenues

31.8 

%

34.7 

%

30.7 

%

30.6 

%

  

Research and development expenses

1,966 

2,165 

(9)  

3,757 

3,830 

(2)   

% of revenues

16.2 

%

19.5 

%

15.7 

%

16.3 

%

  

Amortization of intangible assets

663 

783 

(15)  

1,442 

1,598 

(10)   

% of revenues

5.5 

%

7.1 

%

6.0 

%

6.8 

%

  

Acquisition-related in-process research and development charges

156 

-- 

*    

554 

283 

95    

% of revenues

1.3 

%

-- 

%

2.3 

%

1.2 

%

  

Restructuring charges and acquisition-related costs

569 

1,051 

(46)  

747 

1,863 

(60)   

% of revenues

4.7 

%

9.5 

%

3.1 

%

7.9 

%

  

Other (income)/deductions - net

(167)

(487)

(66)  

(500)

(889)

(44)   

   

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

2,790 

1,619 

72   

6,347 

5,672 

12    

% of revenues

23.0 

%

14.6 

%

26.5 

%

24.1 

%

  

Provision for taxes on income

25 

272 

(91)  

788 

961 

(18)   

  

Effective tax rate

0.9 

%

16.8 

%

12.4 

%

16.9 

%

  

Minority interests

243    

12 

149    

  

Income from continuing operations

2,759 

1,345 

105    

5,547 

4,706 

18    

% of revenues

22.7 

%

12.1 

%

23.1 

%

20.0 

%

  

Discontinued operations - net of tax

17 

(78)

*    

13 

(47)

*    

  

Net income

$

2,776 

$

1,267 

119    

$

5,560 

$

4,659 

19    

% of revenues

22.9 

%

11.4 

%

23.2 

%

19.8 

%

  

Earnings per common share - basic:

Income from continuing operations

$

0.41 

$

0.19 

116    

$

0.82 

$

0.67 

22    

Discontinued operations - net of tax

-- 

(0.01)

*    

0.01 

(0.01)

*    

Net income

$

0.41 

$

0.18 

128    

$

0.83 

$

0.66 

26    

  

Earnings per common share - diluted:

Income from continuing operations

$

0.41 

$

0.19 

116    

$

0.82 

$

0.67 

22    

Discontinued operations - net of tax

-- 

(0.01)

*    

-- 

(0.01)

*    

Net income

$

0.41 

$

0.18 

128    

$

0.82 

$

0.66 

24    

  

Cash dividends paid per common share

$

0.32 

$

0.29 

$

0.64 

$

0.58 

  

*  Calculation not meaningful

   

OVERVIEW OF OUR PERFORMANCE AND OPERATING ENVIRONMENT

Our Business

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

Our Performance for the Three Months and Six Months Ended June 29, 2008

Revenues in the second quarter of 2008 increased 9% to $12.1 billion, compared to the same period in 2007.  Revenues in the first six months of 2008 increased 2% to $24.0 billion, compared to the same period in 2007.  The significant product and alliance revenue impacts on revenues for the second quarter and first six months of 2008, compared to the same periods in 2007, are as follows:

Second Quarter

Six Months

Increase/

Increase/

(decrease)

% Change

(decrease)

% Change

(millions of dollars)

08/07

  

08/07

08/07

  

08/07

  

Zyrtec/Zyrtec D(a)

$

(377)

(98)

%

$

(721)

(85)

%

Camptosar(a)

(104)

(43)

(141)

(30)

Norvasc(b)

(15)

(2)

(571)

(33)

Lipitor(c)

257 

36 

Lyrica

209 

52 

396 

50 

Celebrex

111 

23 

124 

12 

Zyvox

90 

45 

91 

20 

Viagra

81 

21 

107 

13 

Sutent(d)

65 

45 

153 

62 

Geodon/Zeldox

54 

30 

79 

20 

Xalatan/Xalacom

47 

12 

92 

12 

Vfend

42 

29 

65 

22 

Chantix/Champix(d)

122 

33 

Alliance revenues

171 

44 

261 

33 

   

(a)

Zyrtec/Zyrtec D lost U.S. exclusivity in January 2008 and Camptosar lost U.S. exclusivity in February 2008.

(b)

Norvasc lost U.S. exclusivity in March 2007.

(c)

Lipitor has been impacted by competitive pressures and other factors.

(d)

Chantix/Champix and Sutent are major new products that were launched in the U.S. since 2006.

   

Revenues benefited from favorable foreign exchange impacts of about $800 million, or 7%, in the second quarter of 2008 and $1.4 billion, or 6%,  in the first six months of 2008. In the U.S., revenues decreased 2% in the second quarter of 2008 and decreased 12% in the first six months of 2008, compared to the same periods in 2007, while international revenues increased 18% in the second quarter of 2008 and increased 15% in the first six months of 2008, compared to the same periods in 2007.

The impact of rebates in the second quarter of 2008 decreased revenues by $721 million, compared to $630 million in the second quarter of 2007. The increase in rebates was due primarily to:

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

 

   

partially offset by:

 

  

changes in product mix, among other factors.

    

The impact of rebates in the first six months of 2008 decreased revenues by approximately $1.6 billion, compared to approximately $1.3 billion in the first six months of 2007. The increase in rebates was due primarily to:

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

 

   

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

 

   

partially offset by:

 

  

changes in product mix, among other factors.

  

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

Income from continuing operations for the second quarter of 2008 was $2.8 billion, compared to $1.3 billion in the second quarter of 2007, and $5.5 billion in the first six months of 2008, compared to $4.7 billion in the first six months of 2007. The increases were primarily due to:

lower restructuring costs associated with our cost-reduction initiatives;

 

  

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

 

   

the favorable impact of foreign exchange;

 

  

savings related to our cost-reduction initiatives; and

 

  

the nonrecurrence of a one-time 2007 payment to Bristol-Myers Squibb Company (BMS) in connection with our collaboration to develop and commercialize apixaban,

  

partially offset by:

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

   

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

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

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

Our Operating Environment

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

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

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

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

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

Our Strategic Initiatives - Strategy and Recent Transactions

Acquisitions, Licensing and Collaborations

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

In the second quarter of 2008, we acquired Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company, whose main product (Thelin), for the treatment of pulmonary arterial hypertension, is commercially available in much of the E.U., is approved in certain other markets, and is under review by the Food and Drug Administration (FDA). The cost of acquiring Encysive, through a tender offer and subsequent merger, was approximately $200 million, including transaction costs. Upon our acquisition of Encysive, Encysive's change of control repurchase obligations under its $130 million 2.5% convertible notes came into effect and as such, Encysive repurchased the convertible notes in consideration for their par value plus accrued interest in June 2008. In addition, in the second quarter of 2008, we acquired Serenex, Inc. (Serenex), a privately held biotechnology company with SNX-5422, an oral Heat Shock Protein 90 (Hsp90) inhibitor currently in Phase I trials for the potential treatment of solid tumors and hematological malignancies and an extensive Hsp90 inhibitor compound library, which has potential uses in treating cancer, inflammatory and neurodegenerative diseases. In connection with these acquisitions, we recorded $156 million in Acquisition-related in-process research and development charges and approximately $450 million in intangible assets.

 

  

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

 

   

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

 

In the second quarter of 2007, we entered into a collaboration agreement with BMS to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS. We made an up-front payment to BMS of $250 million and additional payments to BMS related to product development efforts, which are included in Research and development expenses for the three months and six months ended July 1, 2007. We may also make additional payments of up to $750 million to BMS based on development and regulatory milestones. In a separate agreement, we are also collaborating with BMS on the research, development and commercialization of a Pfizer discovery program, which includes preclinical compounds with potential applications for the treatment of metabolic disorders, including obesity and diabetes.

 

  

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

 

  

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

   

The following transaction was not completed as of June 29, 2008, and is not reflected in our consolidated financial statements as of June 29, 2008:

In April 2008, we announced an agreement to acquire a number of animal health product lines from Schering-Plough Corporation for sale in the European Economic Area in the following categories: swine e.coli vaccines; equine influenza and tetanus vaccines; ruminant neonatal and clostridia vaccines; rabies vaccines; companion animal veterinary specialty products; and parasiticides and anti-inflammatories. The acquisition is subject to certain closing conditions, including anti-trust approval.

   

Our Cost-Reduction Initiatives

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

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

Reorganization of our Field Force - Since 2004, we have reduced our global field force by 23%. Additional savings are being generated from de-layering, eliminating duplicative work and strategically realigning various functions. In May 2008, we launched a new structure for our U.S. field force and implemented a hiring freeze in the U.S. and Europe.

 

   

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

 

   

Plant Network Optimization - We are transforming our global manufacturing network to improve efficiency and reduce overall cost. We have reduced our network of plants from 93 four years ago to 52 currently. The latter also reflects the acquisition of seven plants and the sites sold in 2006 as part of our Consumer Healthcare business. By the end of 2009, we plan to reduce our network of manufacturing plants around the world to 43. We expect that the result will be a more focused, streamlined and competitive manufacturing operation, with less than 50% of our plants and a reduction of more than 40% of our manufacturing employees compared to 2003. Further, we currently outsource the manufacture of approximately 17% of our products on a cost basis and plan to increase this substantially by 2010 and beyond.

 

  

Enhanced R&D Productivity - To increase efficiency and effectiveness in bringing new therapies to patients-in-need, in January 2007, Pfizer Global Research and Development (PGRD) announced a number of actions to transform the research division. Of six sites that were identified for exit by PGRD, two (Mumbai, India, and Plymouth Township, Michigan) have been closed. We have ceased R&D operations in Ann Arbor and Kalamazoo, Michigan, and in Nagoya, Japan. On July 1, 2008, the former Pfizer R&D site in Nagoya became the base of operations of an R&D spin-off in which Pfizer retains a small interest. Operations have been scaled back significantly in Amboise, France. The timing of the end of PGRD's activities in Amboise is subject to consultation with works councils and local labor law. The reorganization has resulted in smaller, more agile research units designed to drive the growth of our bigger pipeline, without increasing costs, and generating more products.

  

By the end of 2008, on a constant currency basis (the actual foreign exchange rates in effect during 2006), we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion, compared to 2006. As of June 29, 2008, we had achieved $1.2 billion of the target. We expect to achieve much of the remaining reduction in the fourth quarter of 2008, which would favorably impact fourth-quarter earnings. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)

REVENUES

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

Three Months Ended

% Change in Revenues

Worldwide

U.S.

International

World-

Inter-

June 29,

July 1,

June 29,

July 1,

June 29,

July 1,

wide

U.S.

national

(millions of dollars)

2008

2007

2008

2007

2008

2007

08/07

08/07

08/07

   

Pharmaceutical

$

11,053

$

10,105

$

4,382

$

4,467

$

6,671

$

5,638

(2)

18 

Animal Health

715

632

269

254

446

378

13 

18 

Other

361

347

115

120

246

227

(4)

Total Revenues

$

12,129

$

11,084

$

4,766

$

4,841

$

7,363

(a)

$

6,243

(a)

(2)

18 

   

(a)

Includes revenues from Japan of $1.0 billion (8.5% of total revenues) for the three months ended June 29, 2008, and $833 million (7.5% of total revenues) for the three months ended July 1, 2007.

  

Six Months Ended

% Change in Revenues

Worldwide

U.S.

International

World-

Inter-

June 29,

July 1,

June 29,

July 1,

June 29,

July 1,

wide

U.S.

national

(millions of dollars)

2008

2007

2008

2007

2008

2007

08/07

08/07

08/07

   

Pharmaceutical

$

21,957

$

21,686

$

9,523

$

10,935

$

12,434

$

10,751

(13)

16 

Animal Health

1,334

1,218

509

518

825

700

10 

(2)

18 

Other

686

654

245

238

441

416

Total Revenues

$

23,977

$

23,558

$

10,277

$

11,691

$

13,700

(b)

$

11,867

(b)

(12)

15 

   

 

(b)

Includes revenues from Japan of $1.8 billion (7.5% of total revenues) for the six months ended June 29, 2008, and $1.6 billion (6.7% of total revenues) for the six months ended July 1, 2007.

 

   

Pharmaceutical Revenues

Worldwide Pharmaceutical revenues for the second quarter of 2008 were $11.1 billion, an increase of 9% compared to the second quarter of 2007, and for the first six months of 2008 were $22.0 billion, an increase of 1% compared to the first six months of 2007, due primarily to:  

an aggregate increase in revenues from products launched since 2006, particularly Sutent and Chantix/Champix, of $90 million in the second quarter of 2008 and $302 million in the first six months of 2008, and from many in-line products, including Lyrica, which increased 52% in the second quarter of 2008 and 50% in the first six months of 2008; and

 

   

the weakening of the U.S. dollar relative to many foreign currencies, especially the euro, Japanese yen and Canadian dollar, which increased Pharmaceutical revenues by approximately $730 million, or 7%, in the second quarter of 2008 and $1.2 billion, or 6%, in the first six months of 2008,

  

partially offset by:  

a decrease in revenues for Norvasc of $15 million in the second quarter of 2008 and $571 million in the first six months of 2008, primarily due to the loss of U.S. exclusivity in March 2007;

 

   

a decrease in revenues for Zyrtec/Zyrtec D of $377 million in the second quarter of 2008 and $721 million in the first six months of 2008, primarily due to the loss of U.S. exclusivity and cessation of marketing in January 2008;

 

   

an increase in rebates in the first six months of 2008 due to a 2007 favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act;

 

  

an increase in rebates in the second quarter and first six months of 2008 due to the impact of our contracting strategies with both government and non-government entities in the U.S.;

 

   

a decrease in revenues for Lipitor in the U.S. of $373 million in the first six months of 2008, primarily resulting from competitive pressures from generics, among other factors; and

 

   

a decrease in revenues for Camptosar of $104 million in the second quarter of 2008 and $141 million in the first six months of 2008, primarily due to the loss of U.S. exclusivity in February 2008.

   

Geographically,

in the U.S., Pharmaceutical revenues decreased 2% in the second quarter of 2008, compared to the second quarter of 2007, and decreased 13% in the first six months of 2008, compared to the first six months of 2007, primarily due to the effect of the loss of exclusivity of Norvasc, Zyrtec/Zyrtec D and Camptosar, and higher rebates, partially offset by the aggregate increase in revenues from products launched since 2006 and from many in-line products; and

   

in our international markets, Pharmaceutical revenues increased 18% in the second quarter of 2008, compared to the second quarter of 2007, and increased 16% in the first six months of 2008, compared to the first six months of 2007, primarily due to the favorable impact of foreign exchange on international revenues of approximately $730 million (13%) in the second quarter of 2008 and $1.2 billion (12%) in the first six months of 2008, revenues from some of our products launched since 2006, as well as growth of certain in-line products.

   

During the second quarter of 2008, international Pharmaceutical revenues grew to represent 60.4% of total Pharmaceutical revenues, compared to 55.8% in the second quarter of 2007.  For the first six months of 2008, international Pharmaceutical revenues grew to represent 56.6% of total Pharmaceutical revenues, compared to 49.6% in the first six months of 2007. These increases have been fueled by higher volumes and the favorable impact of foreign exchange, despite pricing pressures in international markets.

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

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

Rebates under Medicaid and related state programs reduced revenues by $65 million in the second quarter of 2008, compared to $86 million in the second quarter of 2007, and $243 million in the first six months of 2008, compared to $251 million in the first six months of 2007. The decreases in rebates under Medicaid and related state programs were due primarily to lower sales of Norvasc and Zyrtec/Zyrtec D, both of which lost exclusivity in the U.S., partially offset by the impact of price increases on January 1, 2008, and May 2, 2008.

Rebates under Medicare reduced revenues by $201 million in the second quarter of 2008, compared to $153 million in the second quarter of 2007, and $422 million in the first six months of 2008, compared to $200 million in the first six months of 2007. The increases in Medicare rebates were due primarily to the impact of our contracting strategies and a favorable adjustment recorded in the first quarter of 2007 based on the actual claims experienced under the Medicare Act.

Performance-based contract rebates reduced revenues by $455 million in the second quarter of 2008, compared to $391 million in the second quarter of 2007, and $961 million in the first six months of 2008, compared to $849 million in the first six months of 2007. The increases in performance-based contract rebates were due to the impact of our contracting strategies, primarily related to Lipitor, partially offset by lower sales of Norvasc, Camptosar and Zyrtec. These contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.

Chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties) reduced revenues by $438 million in the second quarter of 2008, compared to $317 million in the second quarter of 2007, and $945 million in the first six months of 2008, compared to $690 million in the first six months of 2007. Chargebacks were impacted by the launch of certain generic products, including amlodipine besylate after Norvasc lost U.S. exclusivity in March 2007.

Our accruals for Medicaid rebates, Medicare rebates, contract rebates and chargebacks totaled $1.5 billion as of June 29, 2008, an increase from $1.2 billion as of December 31, 2007, due primarily to the impact of our contracting strategies and increased pricing pressures.

Pharmaceutical--Selected Product Revenues   

Revenue information for several of our major Pharmaceutical products follows:

Three Months Ended

Six Months Ended

(millions of dollars)
Product

Primary Indications

June 29, 
2008 

%
Change
from
2007

June 29, 
2008 

%
Change
from
2007

Cardiovascular and
metabolic diseases:

Lipitor

Reduction of LDL cholesterol

$2,976 

9%

$6,113 

1 %

Norvasc

Hypertension

627 

(2)  

1,140 

(33)  

Chantix/Champix

An aid to smoking cessation

207 

3   

484 

33   

Caduet

Reduction of LDL cholesterol and hypertension

146 

22   

293 

11   

Cardura

Hypertension/Benign prostatic hyperplasia

132 

5   

253 

(2)  

Central nervous
system disorders:

Lyrica

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

614 

52   

1,196 

50   

Geodon/Zeldox

Schizophrenia and acute manic or mixed episodes associated with bipolar disorder

232 

30   

473 

20   

Zoloft

Depression and certain anxiety disorders

151 

20   

273 

--   

Aricept(a)

Alzheimer's disease

121 

22   

225 

22   

Neurontin

Epilepsy and post-herpetic neuralgia

104 

(1)  

193 

(10)  

Xanax/Xanax XR

Anxiety/Panic disorders

90 

15   

176 

14   

Relpax

Migraine headaches

80 

21   

157 

6   

Arthritis and pain:

Celebrex

Arthritis pain and inflammation, acute pain

589 

23   

1,200 

12   

Infectious and
respiratory diseases:

Zyvox

Bacterial infections

292 

45   

551 

20   

Vfend

Fungal infections

187 

29   

358 

22   

Zithromax/Zmax

Bacterial infections

109 

1   

229 

(4)  

Diflucan

Fungal infections

98 

(6)  

187 

(13)  

Urology:

Viagra

Erectile dysfunction

463 

21   

923 

13   

Detrol/Detrol LA

Overactive bladder

290 

8   

603 

5   

Oncology:

Sutent

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

211 

45   

401 

62   

Camptosar

Metastatic colorectal cancer

137 

(43)  

329 

(30)  

Aromasin

Breast cancer

117 

26   

221 

19   

Ophthalmology:

Xalatan/Xalacom

Glaucoma and ocular hypertension

436 

12   

841 

12   

Endocrine disorders:

Genotropin

Replacement of human growth hormone

238 

17   

444 

10   

All other:

Zyrtec/Zyrtec D

Allergies

(98)  

125 

(85)  

Alliance revenues:

Aricept, Macugen, Exforge, Olmetec, Rebif and Spiriva

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

563 

44   

1,051 

33   

     

(a)

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

Certain amounts and percentages may reflect rounding adjustments.

  

Pharmaceutical -- Selected Product Descriptions:

Lipitor, for the treatment of elevated LDL-cholesterol levels in the blood, is the most widely used prescription treatment for lowering cholesterol and the best-selling pharmaceutical product of any kind in the world, with $3.0 billion in worldwide revenues in the second quarter of 2008, an increase of 9%, compared to the same period in 2007, and $6.1 billion in worldwide revenues in the first six months of 2008, an increase of 1%, compared to the same period in 2007. These results reflect the favorable impact of foreign exchange, which increased revenues by approximately $170 million, or 6%, in the second quarter of 2008 and by approximately $300 million, or 5%, in the first six months of 2008. In the U.S., revenues of $1.4 billion in the second quarter of 2008 increased 1% compared to the same period in 2007 and, in the first six months of 2008, revenues of $3.1 billion declined 11% compared to the same period in 2007. Internationally, Lipitor revenues in the second quarter of 2008 increased 18%, with 13% due to the favorable impact of foreign exchange, and in the first six months of 2008 increased 16% compared to the same period in 2007, with 12% due to the favorable impact of foreign exchange.

 

  

 

The increases in Lipitor worldwide revenues in the second quarter and first six months of 2008, compared to the same periods in 2007, were driven by a combination of factors, including the following:

 

 

   

 

the favorable impact of foreign exchange; and

 

 

   

 

operating growth internationally,

  

 

partially offset by:

  

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

 

   

increased payer pressure in the U.S.; and

 

   

slower growth in the lipid-lowering market, due in part to heightened patient cost-sensitivity in the U.S. amid the slowdown in the economy, resulting in a softening overall market demand.

 

   

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

   

Norvasc, for treating hypertension, lost exclusivity in the U.S. in March 2007. Norvasc has also experienced patent expirations in most E.U. countries but maintains exclusivity in Canada. Norvasc worldwide revenues in the first six months of 2008 decreased 33%, compared to the same period in 2007.

 

   

 

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

   

Chantix/Champix, the first new prescription treatment to aid smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006 and in select E.U. markets in December 2006.  Chantix/Champix continues to demonstrate strong uptake internationally, with more than six million patients globally having been prescribed the medicine since its launch. Champix launched in Japan in April 2008, a country which has one of the highest rates of smoking among developed nations. Chantix/Champix has been approved in 76 countries. Chantix/Champix recorded worldwide revenues of $207 million in the second quarter of 2008, an increase of 3% compared to the same period in 2007, and $484 million in the first six months of 2008, an increase of 33% compared to the same period in 2007. In the U.S., revenues of $109 million in the second quarter of 2008 declined 35% compared to the same period in 2007, and revenues of $302 million in the first six months of 2008 declined 3% compared to the same period in 2007. Internationally, revenues of $98 million in the second quarter of 2008 increased 197% compared to the same period in 2007, and revenues of $182 million in the first six months of 2008 increased 264% compared to the same period in 2007.

 

   

In May 2008, we updated the Chantix label in the U.S. to provide further guidance about the use of Chantix. The updated label advises that patients should stop taking Chantix and contact their healthcare provider immediately if agitation, depressed mood, or changes in behavior that are not typical for them are observed, or if they develop suicidal thoughts or suicidal behavior. The addition of the warning to Chantix's label in the U.S., as well as certain external events relating to Chantix, have unfavorably impacted recent U.S. prescription trends and U.S. revenues for the product. We are continuing our educational and promotional efforts focused on the Chantix risk-benefit proposition, the significant health consequences of smoking and the importance of the physician-patient dialogue to help patients effectively use Chantix.

   

Caduet, a single pill therapy combining Norvasc and Lipitor, recorded worldwide revenues of $293 million, an increase of 11% for the first six months of 2008, compared to the same period in 2007. This was largely driven by a more focused message platform and a highly targeted consumer campaign in the U.S. Since the introduction of generic amlodipine besylate, in addition to increased competition and fewer new patients starting therapy, growth has begun to slow.

   

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

   

Lyrica, for the treatment of epilepsy, post-herpetic neuralgia (PHN) and diabetic peripheral neuropathy (DPN), and fibromyalgia, recorded worldwide revenues of $1.2 billion in the first six months of 2008, an increase of 50% compared to the same period in 2007. In June 2007, Lyrica was approved in the U.S. for the management of fibromyalgia, one of the most common chronic, widespread pain conditions. This approval represents a breakthrough for the more than six million Americans who suffer from this debilitating condition who previously had no FDA-approved treatment. We are using a broad-based, multi-channel campaign in the U.S. to educate patients and prescribers on fibromyalgia and Lyrica, including webcasts, adherence programs and call centers. Active promotion is underway to further expand Lyrica's leadership in the treatment of PHN and DPN. Lyrica is now the leading branded treatment for fibromyalgia, PHN and DPN in the U.S.

   

 

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

 

  

Geodon/Zeldox, a psychotropic agent, is a dopamine and serotonin receptor antagonist indicated for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder. It is available in both an oral capsule and rapid-acting intramuscular formulation. In the first six months of 2008, Geodon worldwide revenues grew 20%, compared to the same period in 2007. Geodon is supported by Pfizer's newly launched psychiatric field force, recognition by prescribers of Geodon's efficacy and favorable metabolic profile, especially in moderately ill patients, and our value-based strategy.

   

Celebrex, for the treatment of osteoarthritis and rheumatoid arthritis and acute pain, experienced a 12% increase in worldwide revenues to $1.2 billion in the first six months of 2008, reflecting our value-based strategy that focuses on strengthening the understanding of Celebrex's efficacy and safety profile.

   

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

   

Zyvox is the world's best-selling branded medicine for serious gram-positive infections in adults and children, which increasingly are caused by drug-resistant bacteria in hospitals and, more recently, in the community setting. Zyvox is an appropriate first-line therapy for patients with serious complicated skin and skin structure infections or nosocomial pneumonia known or suspected to be caused by gram-positive pathogens, including Methicillin-resistant Staphylococcus-aureus (MRSA) infection, with the flexibility of an intravenous and oral regimen. Zyvox works with a unique mechanism of action, which minimizes the potential for cross-resistance with other antibiotic classes, and thus has the potential to effectively treat MRSA infection despite growing resistance to other important antibiotics. Zyvox worldwide revenues grew 20% to $551 million in the first six months of 2008.

 

   

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

 

   

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

   

Detrol/Detrol LA, a muscarinic receptor antagonist, is the most prescribed medicine worldwide for overactive bladder, a condition that affects up to 100 million people around the world. Detrol LA is an extended-release formulation taken once daily. Worldwide Detrol/Detrol LA revenues grew 5% to $603 million in the first six months of 2008, compared to the same period in 2007. Detrol/Detrol LA continues to lead the overactive bladder market and perform well in an increasingly competitive marketplace. In the U.S., Detrol/Detrol LA's new prescription share has declined in the first six months of 2008 compared to the same period in 2007. To mitigate this trend, we are implementing our new customer-focused physician messaging campaign, which highlights the meaningful relief achieved by patients using Detrol/Detrol LA.

 

  

Sutent, for the treatment of advanced renal cell carcinoma, including metastatic renal cell carcinoma (mRCC), and gastrointestinal stromal tumors (GIST) after disease progression on, or intolerance to, imatinib mesylate, was launched in the U.S. in January 2006 and has now been launched in 61 markets. In addition, in April 2008, Sutent was approved in Japan for the treatment of GIST, after failure of imatinib treatment due to resistance, and for renal cell carcinoma not indicated for curative resection and mRCC. Sutent recorded $401 million in worldwide revenues in the first six months of 2008, an increase of 62% compared to the same period in 2007. Internationally, sales are primarily being driven by new launches, whereas in the U.S., given the stage in the lifecycle for Sutent's currently approved indications, future growth is predicated on advancing Sutent's leadership position by focusing on its efficacy, and keeping patients on therapy at the appropriate dose throughout all treatment cycles, as well as pursuit of additional indications, including breast, colorectal and lung cancers. We continue to support and drive the success of Sutent through clinical data releases, strong promotional efforts and the promotion of access and health care coverage.

   

Camptosar, indicated as first-line therapy for metastatic colorectal cancer in combination with 5-fluorouracil and leucovorin, lost exclusivity in the U.S. in February 2008. It is also indicated for patients in whom metastatic colorectal cancer has recurred or progressed despite following initial fluorouracil-based therapy. Camptosar is for intravenous use only. Worldwide revenues in the first six months of 2008 decreased 30% to $329 million, compared to the same period in 2007. The National Comprehensive Cancer Network (NCCN), an alliance of 21 of the world's leading cancer centers, has issued guidelines recommending Camptosar as an option across all lines of treatment for advanced colorectal cancer.

  

Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is one of the world's leading branded glaucoma medicines. Clinical data showing its advantages in treating intraocular pressure compared with beta blockers should support the continued growth of this important medicine. Xalacom, the only fixed combination prostaglandin (Xalatan) and beta blocker, is available primarily in European markets. Xalatan/Xalacom worldwide revenues grew 12% in the first six months of 2008, compared to the same period in 2007.

 

   

Genotropin, for the treatment of short stature in children with growth hormone deficiency, Prader-Willi Syndrome, Turner Syndrome, Small for Gestational Age Syndrome and in adults with growth hormone deficiency, is the world's leading human growth hormone. Genotropin worldwide revenues grew 10% in the first six months of 2008 to $444 million, compared to the same period in 2007, driven by its broad platform of innovative injection-delivery devices.

   

Zyrtec/Zyrtec D, allergy medicines, experienced an 85% decline in worldwide revenues in the first six months of 2008, compared to the first six months of 2007, following the loss of U.S. exclusivity in January 2008. Since we sold our rights to market Zyrtec/Zyrtec D over-the-counter in connection with the sale of our Consumer Healthcare business, we ceased selling this product in late January 2008.

 

Animal Health

Revenues of our Animal Health business follow:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29,
2008

July 1,
2007

% Change

June 29,
2008

July 1,
2007

% Change

  

Livestock products

$

430

$

379

13%

$

815

$

735

11%

Companion animal products

285

253

12   

519

483

7   

Total Animal Health

$

715

$

632

13   

$

1,334

$

1,218

10   

   

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

The increases in Animal Health revenues in the second quarter and first six months of 2008, compared to the same periods in 2007, were primarily due to the impact of foreign exchange, which increased revenues by 8% in the second quarter of 2008 and 7% in the first six months of 2008.

Our revenue performance was also impacted by the following:

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

  

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

   

Product Developments

We continue to invest in R&D to provide future sources of revenues through the development of new products, as well as through additional uses for existing in-line and alliance products. We have a broad and deep pipeline of medicines in development. However, there are no assurances as to when, or if, we will receive regulatory approval for additional indications for existing products or any of our other products in development. Below are significant regulatory actions by, and filings pending with, the FDA and regulatory authorities in the E.U. and Japan.

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

Product

Indication

 

Date Submitted

   

Fablyn (lasofoxifene)

Treatment of osteoporosis

December 2007

   

Spiriva

Respimat device for chronic obstructive pulmonary disease

November 2007

   

Zmax

Treatment of bacterial infections--sustained release--Pediatric acute otitis media (AOM) filing, community acquired pneumonia (CAP)

November 2006

   

   

fesoterodine

Treatment of overactive bladder

March 2006

   

Vfend

Treatment of fungal infections - Pediatric filing

June 2005

   

Thelin

Treatment of pulmonary arterial hypertension (PAH)

May 2005

  

dalbavancin

Treatment of complicated skin/skin structure gram-positive bacterial infections

December 2004

   

We received "not-approvable" letters from the FDA for lasofoxifene for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We submitted a new NDA for the treatment of osteoporosis in post-menopausal women in December 2007, including the three-year interim data from the Postmenopausal Evaluation And Risk-reduction with Lasofoxifene (PEARL) study in support of the new NDA. An FDA advisory committee is scheduled to meet in September 2008 to review the efficacy and safety of lasofoxifene and make a recommendation to the FDA with respect to our new NDA.

On September 28, 2007, we received an "approvable" letter from the FDA for Zmax that sets forth requirements to obtain approval for the pediatric AOM indication based on pharmacokinetic data. On October 19, 2007, a supplemental filing was made for Zmax to separate the pediatric CAP indication. On May 21, 2008, the FDA informed us that all the changes to the Zmax Adult/Pediatric CAP insert submitted on May 14, 2008, are acceptable. On June 24, 2008, the FDA informed us that the new Pediatric Review Committee (PeRC) needs to review the pediatric CAP submission. The review by PeRC occurred on July 9, 2008, and an action date of August 19, 2008, has been established for the pediatric CAP submission.

We received an "approvable" letter from the FDA for fesoterodine for the treatment of overactive bladder in January 2007. Regulatory review of fesoterodine is progressing. We are working with Schwarz Pharma, the licensor, to scale up manufacturing and meet launch requirements at various sites. Subject to FDA approval, launch in the U.S. is planned for early 2009. In the E.U., Toviaz (fesoterodine) was approved in April 2007 and launched in June 2008.

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

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

In December 2007, we received a third "approvable" letter from the FDA for dalbavancin. We and the third-party manufacturer have provided to the FDA a complete response to that letter, and are continuing to work with the FDA.

In September 2005, we received a "not-approvable" letter for Dynastat (parecoxib), an injectable pro-drug for valdecoxib for the treatment of moderate to severe pain. We are not pursuing any further activity with this NDA.

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

    

Product

Description of Event

Date Approved

  

Date Submitted

  

rifabutin

Approval in Japan for mycobacterium infection

July 2008

--

    

Macugen

Approval in Japan for treatment of age-related macular degeneration

July 2008

--

   

Lyrica

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

--

May 2008

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

--

March 2008

   

Sutent

Approval in Japan for treatment of mRCC and GIST

April 2008

--

  

maraviroc

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

--

February 2008

   

Xalacom

Application submitted in Japan for the treatment of glaucoma

--

February 2008

   

sildenafil

Approval in Japan for treatment of PAH

January 2008

--

   

Zithromac

Application submitted in Japan for bacterial infections

--

January 2008

    

Fablyn/(lasofoxifene)

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

--

January 2008

   

Chantix/Champix

Approval in Japan as an aid to smoking cessation

January 2008

--

   

Caduet

Application submitted in Japan for hypertension

--

November 2007

   

dalbavancin

Application submitted in the E.U. for the treatment of skin and skin structure infections

--

July 2007

   

Celebrex

Application submitted in Japan for treatment of lower-back pain

--

February 2007

  

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

Product

Indication

  

Celebrex

Acute gouty arthritis

   

Eraxis/Vfend Combination

Aspergillosis fungal infections

   

Geodon/Zeldox

Bipolar relapse prevention; pediatric bipolar mania; adjunctive use in bipolar depression

   

Lyrica

Epilepsy monotherapy; restless legs syndrome

   

Macugen

Diabetic macular edema

   

Revatio

Pediatric pulmonary arterial hypertension

   

Selzentry/Celsentri

HIV in CCR5-tropic treatment-naïve patients

   

Sutent

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

   

Zithromax/chloroquine

Malaria

   

New drug candidates in late-stage development include: CP-945,598, a cannabinoid-1 receptor antagonist for the treatment of obesity; axitinib, a multi-targeted kinase inhibitor for the treatment of pancreatic cancer; PD-332334, an alpha2delta ligand compound for the treatment of generalized anxiety disorder; esreboxetine, for the treatment of fibromyalgia; CP-751871, an anti-insulin-like growth factor receptor 1 (IGF1R) human monoclonal antibody for the treatment of non-small cell lung cancer; and apixaban for the prevention and treatment of venous thromboembolism and the prevention of stroke in patients with atrial fibrillation and acute coronary syndrome, which is being developed in collaboration with BMS.

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

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

COSTS AND EXPENSES

Cost of Sales

Cost of sales increased 9% in the second quarter of 2008, while revenues increased 9% in the second quarter of 2008, compared to the same period in 2007, and increased 7% in the first six months of 2008, while revenues increased 2% in the first six months of 2008, compared to the same period in 2007. Cost of sales as a percentage of revenues in the second quarter of 2008 was comparable to the same period in 2007, and increased 0.8 percentage points in the first six months of 2008, compared to the same period in 2007, reflecting:

the unfavorable impact of foreign exchange on expenses;

   

unfavorable changes in geographic mix;

 

   

the impact of higher implementation costs associated with our cost-reduction initiatives of $210 million in the second quarter of 2008, compared to $170 million in the second quarter of 2007, and $348 million in the first six months of 2008, compared to $264 million in the first six months of 2007; and

 

   

costs of $45 million for the second quarter of 2008, which were comparable to the second quarter of 2007, and $93 million for the first six months of 2008, compared to $80 million for the first six months of 2007, related to business transition activities associated with the sale of our Consumer Healthcare business, completed in December 2006,

   

offset by:

savings related to our cost-reduction initiatives.

   

Selling, Informational and Administrative Expenses

Selling, informational and administrative (SI&A) expenses increased 1% in the second quarter of 2008, compared to the second quarter of 2007, and increased 2% in the first six months of 2008, compared to the first six months of 2007, which reflects:

the unfavorable impact of foreign exchange on expenses; and

 

   

the impact of higher implementation costs associated with our cost-reduction initiatives of $100 million in the second quarter of 2008, compared to $79 million in the second quarter of 2007, and $175 million in the first six months of 2008, compared to $128 million in the first six months of 2007,

   

partially offset by:

savings related to our cost-reduction initiatives.

   

Research and Development Expenses

Research and development (R&D) expenses decreased 9% in the second quarter of 2008, compared to the second quarter of 2007, and 2% in the first six months of 2008, compared to the first six months of 2007, which reflects:

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

 

   

the impact of lower implementation costs associated with our cost-reduction initiatives of $94 million in the second quarter of 2008, compared to $131 million in the second quarter of 2007; and

 

   

savings related to our cost-reduction initiatives,

   

partially offset by:

the impact of higher implementation costs associated with our cost-reduction initiatives of $240 million in the first six months in 2008, compared to $162 million in the first six months of 2007;

 

  

higher R&D spending related to our new collaboration agreements; and

 

   

the unfavorable impact of foreign exchange on expenses.

   

Acquisition-Related In-Process Research and Development Charges

The estimated fair value of Acquisition-related in-process research and development charges (IPR&D) is expensed at acquisition date. IPR&D of $156 million was recorded in the second quarter of 2008, primarily related to our acquisitions of Encysive and Serenex. IPR&D of $398 million was recorded in the first quarter of 2008, primarily related to our acquisitions of CovX and Coley and two smaller acquisitions related to Animal Health. IPR&D of $283 million was recorded in the first quarter of 2007, primarily related to our acquisitions of BioRexis and Embrex.

Cost-Reduction Initiatives

In connection with our cost-reduction initiatives, our management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures in a company-wide effort to improve performance and efficiency, to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We are generating net cost reductions through site rationalization in R&D and manufacturing, streamlined organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. Compared to 2006, we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion by the end of 2008 on a constant currency basis (the actual foreign exchange rates in effect in 2006). As of June 29, 2008, we had achieved $1.2 billion of the target. We expect to achieve much of the remaining reduction in the fourth quarter of 2008, which would favorably impact fourth-quarter earnings. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)

The actions associated with our cost-reduction initiatives resulted in restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated implementation costs, such as accelerated depreciation charges, primarily associated with plant network optimization efforts, and expenses associated with system and process standardization and the expansion of shared services worldwide. (See Notes to Condensed Consolidated Financial Statements - Note 4. Cost-Reduction Initiatives.) The strengthening of the euro and other currencies relative to the dollar, while favorable on Revenues, has had an adverse impact on our total expenses (Cost of sales, Selling, informational and administrative expenses, and Research and development expenses), including the reported impact of these cost-reduction efforts.

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

Three Months Ended

Six Months Ended

(millions of dollars)

June 29, 
2008 

July 1, 
2007 

June 29, 
2008 

July 1, 
2007 

  

Implementation costs(a)

$

405 

$

317 

$

762 

$

491 

Restructuring charges(b)

562 

1,035 

739 

1,830 

Total costs related to our cost-reduction initiatives

$

967 

$

1,352 

$

1,501 

$

2,321 

  

(a)

For the second quarter of 2008, included in Cost of sales ($210 million), Selling, informational and administrative expenses ($100 million), Research and development expenses ($94 million) and Other (income)/deductions - net ($1 million). For the second quarter of 2007, included in Cost of sales ($170 million), Selling, informational and administrative expenses ($79 million), Research and development expenses ($131 million) and Other (income)/deductions - net ($63 million income). For the first six months of 2008, included in Cost of sales ($348 million), Selling, informational and administrative expenses ($175 million), Research and development expenses ($240 million) and Other (income)/deductions - net ($1 million income). For the first six months of 2007, included in Cost of sales ($264 million), Selling, informational and administrative expenses ($128 million), Research and development expenses ($162 million) and Other (income)/deductions - net ($63 million income).

(b)

Included in Restructuring charges and acquisition-related costs.

   

Other (Income)/Deductions - Net  

In the second quarter of 2008, we recorded lower net interest income of $99 million, compared to $286 million in the second quarter of 2007, and $302 million in the first six months of 2008, compared to $534 million in the first six months of 2007, due primarily to lower net financial assets and lower interest rates. In the second quarter of 2008, we also recorded net losses on asset disposals of $18 million, compared to net gains of $73 million in the second quarter of 2007, and net gains of $5 million in the first six months of 2008, compared to net gains of $80 million in the first six months of 2007.

PROVISION FOR TAXES ON INCOME

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

Our effective tax rate for continuing operations was 0.9% for the second quarter of 2008, compared to 16.8% for the second quarter of 2007, and 12.4% for the first six months of 2008, compared to 16.9% for the first six months of 2007. The lower tax rates in 2008 are primarily due to the tax benefits of $305 million and $426 million discussed above, partially offset by a decrease in and change in the geographic mix of expenses incurred to effect our cost-reduction initiatives and higher non-deductible charges for acquisition-related IPR&D.

ADJUSTED INCOME

General Description of Adjusted Income Measure

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

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

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

  

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

  

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

   

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

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

Purchase Accounting Adjustments

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

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

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

Acquisition-Related Costs

Adjusted income is calculated prior to considering integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate two businesses as a result of the acquisition decision. For additional clarity, only restructuring and integration activities that are associated with a purchase business combination or a net-asset acquisition are included in acquisition-related costs. We have made no adjustments for the resulting synergies.

We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees--a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in other, more normal business contexts.

The integration and restructuring costs associated with a business combination may occur over several years, with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the highly regulated nature of the pharmaceutical business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA and/or other global regulatory authorities.

Discontinued Operations

Adjusted income is calculated prior to considering the results of operations included in discontinued operations, as well as any related gains or losses on the sale of such operations. We believe that this presentation is meaningful to investors because, while we review our businesses and product lines periodically for strategic fit with our operations, we do not build or run our businesses with an intent to sell them.

Certain Significant Items

Adjusted income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program which is specific in nature with a defined term, such as those related to our cost-reduction initiatives; charges related to sales or disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; amounts associated with transition service agreements in support of discontinued operations after sale; certain intangible asset impairments; or possible charges related to legal matters, such as certain of those discussed in Legal Proceedings in our Form 10-K and in Part II - Other Information; Item 1. Legal Proceedings, included in our Form 10-Q filings. Normal, ongoing defense costs of the Company or settlements and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

Reconciliation

A reconciliation between Net income, as reported under U.S. GAAP, and Adjusted income follows:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29, 
2008 

July 1, 
2007 

% Incr./
(Decr.)

  

June 29, 
2008 

July 1, 
2007 

% Incr./
(Decr.)

  

Reported net income

$

2,776  

$

1,267 

119 %

$

5,560  

$

4,659 

19 %

Purchase accounting adjustments - net of tax

604  

597 

1    

1,538  

1,444 

7    

Acquisition-related costs - net of tax

5  

-    

6  

50    

Discontinued operations - net of tax

(17) 

78 

*    

(13) 

47 

*    

Certain significant items - net of tax

330  

997 

(67)   

706  

1,594 

(56)   

Adjusted income

$

3,698  

$

2,944 

26    

$

7,797  

$

7,748 

1    

  

* Calculation not meaningful.

Certain amounts and percentages may reflect rounding adjustments.

   

Adjusted income as shown above excludes the following items:

Three Months Ended

Six Months Ended

(millions of dollars)

June 29, 
2008 

July 1, 
2007 

June 29, 
2008 

July 1, 
2007 

   

Purchase accounting adjustments:

Intangible amortization and other(a)

$

632 

$

782 

$

1,390 

$

1,607 

In-process research and development charges(b)

156 

-- 

554 

283 

Total purchase accounting adjustments, pre-tax

788 

782 

1,944 

1,890 

Income taxes

(184)

(185)

(406)

(446)

Total purchase accounting adjustments - net of tax

604 

597 

1,538 

1,444 

Acquisition-related costs:

Integration costs(c)

-- 

11 

Restructuring charges(c)

(4)

Total acquisition-related costs, pre-tax

Income taxes

(2)

(4)

(2)

(3)

Total acquisition-related costs - net of tax

Discontinued operations:

Loss from discontinued operations

--