10-Q 1 pfe-3302014x10q.htm 10-Q PFE - 3/30/2014 - 10Q

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

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

For the quarterly period ended March 30, 2014

OR

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

For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-3619

----
 
PFIZER INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)
 
235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES   X 
NO ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES   X 
NO ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ____
NO   X 

At May 5, 2014, 6,378,718,293 shares of the issuer’s voting common stock were outstanding.




Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three months ended March 30, 2014 and March 31, 2013
 
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 30, 2014 and March 31, 2013
 
 
Condensed Consolidated Balance Sheets as of March 30, 2014 and December 31, 2013
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2014 and March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
March 30,
2014

 
March 31,
2013

Revenues
 
$
11,353

 
$
12,410

Costs and expenses:
 
 
 
 
Cost of sales(a)
 
2,045

 
2,263

Selling, informational and administrative expenses(a)
 
3,040

 
3,217

Research and development expenses(a)
 
1,623

 
1,710

Amortization of intangible assets
 
1,117

 
1,219

Restructuring charges and certain acquisition-related costs
 
58

 
131

Other deductions––net
 
623

 
145

Income from continuing operations before provision for taxes on income
 
2,847

 
3,725

Provision for taxes on income
 
582

 
1,109

Income from continuing operations
 
2,265

 
2,616

Discontinued operations––net of tax
 
73

 
149

Net income before allocation to noncontrolling interests
 
2,338

 
2,765

Less: Net income attributable to noncontrolling interests
 
9

 
15

Net income attributable to Pfizer Inc.
 
$
2,329

 
$
2,750

 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.35

 
$
0.36

Discontinued operations––net of tax
 
0.01

 
0.02

Net income attributable to Pfizer Inc. common shareholders
 
$
0.36

 
$
0.38

 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.35

 
$
0.36

Discontinued operations––net of tax
 
0.01

 
0.02

Net income attributable to Pfizer Inc. common shareholders
 
$
0.36

 
$
0.38

 
 
 
 
 
Weighted-average shares––basic
 
6,389

 
7,187

Weighted-average shares––diluted
 
6,476

 
7,269

Cash dividends paid per common share
 
$
0.26

 
$
0.24

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











See Notes to Condensed Consolidated Financial Statements.

3


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

Net income before allocation to noncontrolling interests
 
$
2,338

 
$
2,765

 
 
 
 
 
Foreign currency translation adjustments
 
$
(75
)
 
$
(292
)
Reclassification adjustments(a) 
 
(62
)
 

 
 
(137
)
 
(292
)
Unrealized holding losses on derivative financial instruments
 
(58
)
 
(396
)
Reclassification adjustments for realized losses(b)
 
12

 
526

 
 
(46
)
 
130

Unrealized holding gains/(losses) on available-for-sale securities
 
108

 
(10
)
Reclassification adjustments for realized gains(b)
 
(99
)
 
(158
)
 
 
9

 
(168
)
Benefit plans: actuarial gains, net
 
6

 
22

Reclassification adjustments related to amortization(c)
 
49

 
151

Reclassification adjustments related to settlements, net(c)
 
21

 
55

Other
 
(17
)
 
97

 
 
59

 
325

Benefit plans: prior service credits and other
 

 
3

Reclassification adjustments related to amortization(c)
 
(18
)
 
(16
)
Reclassification adjustments related to curtailments, net(c)
 
(4
)
 
(9
)
Other
 
(1
)
 
(2
)
 
 
(23
)
 
(24
)
Other comprehensive loss, before tax
 
(138
)
 
(29
)
Tax provision/(benefit) on other comprehensive loss(d)
 
(17
)
 
176

Other comprehensive loss before allocation to noncontrolling interests
 
$
(121
)
 
$
(205
)
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,217

 
$
2,560

Less: Comprehensive income attributable to noncontrolling interests
 
7

 
12

Comprehensive income attributable to Pfizer Inc.
 
$
2,210

 
$
2,548

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













See Notes to Condensed Consolidated Financial Statements.

4


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
December 31,
2013

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,862

 
$
2,183

Short-term investments
 
31,019

 
30,225

Accounts receivable, less allowance for doubtful accounts
 
9,399

 
9,357

Inventories
 
6,066

 
6,166

Current deferred tax assets and other current tax assets
 
4,974

 
4,624

Other current assets
 
3,473

 
3,689

Total current assets
 
57,793

 
56,244

Long-term investments
 
15,822

 
16,406

Property, plant and equipment, less accumulated depreciation
 
12,347

 
12,397

Goodwill
 
42,467

 
42,519

Identifiable intangible assets, less accumulated amortization
 
38,122

 
39,385

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,498

 
1,554

Other noncurrent assets
 
3,759

 
3,596

Total assets
 
$
171,808

 
$
172,101

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
9,319

 
$
6,027

Accounts payable
 
2,546

 
3,234

Dividends payable
 
1

 
1,663

Income taxes payable
 
851

 
678

Accrued compensation and related items
 
1,758

 
1,792

Other current liabilities
 
10,315

 
9,972

Total current liabilities
 
24,790

 
23,366

 
 
 
 
 
Long-term debt
 
27,649

 
30,462

Pension benefit obligations, net
 
4,533

 
4,635

Postretirement benefit obligations, net
 
2,645

 
2,668

Noncurrent deferred tax liabilities
 
25,923

 
25,590

Other taxes payable
 
3,784

 
3,993

Other noncurrent liabilities
 
4,416

 
4,767

Total liabilities
 
93,740

 
95,481

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
32

 
33

Common stock
 
454

 
453

Additional paid-in capital
 
77,849

 
77,283

Treasury stock
 
(69,204
)
 
(67,923
)
Retained earnings
 
72,028

 
69,732

Accumulated other comprehensive loss
 
(3,390
)
 
(3,271
)
Total Pfizer Inc. shareholders’ equity
 
77,769

 
76,307

Equity attributable to noncontrolling interests
 
299

 
313

Total equity
 
78,068

 
76,620

Total liabilities and equity
 
$
171,808

 
$
172,101






See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
2,338

 
$
2,765

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

 
 

Depreciation and amortization
 
1,456

 
1,774

Asset write-offs, impairments and related charges
 
137

 
513

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

 
(490
)
Deferred taxes from continuing operations
 
345

 
920

Deferred taxes from discontinued operations
 

 
7

Share-based compensation expense
 
143

 
189

Benefit plan contributions (in excess of)/less than expense
 
(99
)
 
71

Other non-cash adjustments, net
 
(294
)
 
(119
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(1,091
)
 
(3,327
)
Net cash provided by operating activities
 
2,935

 
2,303

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(292
)
 
(202
)
Purchases of short-term investments
 
(8,721
)
 
(10,742
)
Proceeds from redemptions and sales of short-term investments
 
7,569

 
6,386

Net (purchases of)/proceeds from redemptions/sales of investments with original maturities of 90 days or less
 
1,500

 
(5,596
)
Purchases of long-term investments
 
(1,808
)
 
(2,246
)
Proceeds from redemptions and sales of long-term investments
 
1,454

 
1,444

Acquisitions of intangible assets
 
(6
)
 
(126
)
Other investing activities
 
206

 
156

Net cash used in investing activities
 
(98
)
 
(10,926
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 

 
1,031

Principal payments on short-term borrowings
 
(3
)
 
(1,031
)
Net proceeds from short-term borrowings with original maturities of 90 days or less
 
1,031

 
3,485

Proceeds from issuance of long-term debt(a)
 

 
2,624

Principal payments on long-term debt
 
(752
)
 
(2
)
Purchases of common stock
 
(1,197
)
 
(4,626
)
Cash dividends paid
 
(1,662
)
 
(1,735
)
Proceeds from exercise of stock options
 
425

 
642

Other financing activities
 
25

 
46

Net cash provided by/(used in) financing activities
 
(2,133
)
 
434

Effect of exchange-rate changes on cash and cash equivalents
 
(25
)
 

Net increase/(decrease) in cash and cash equivalents
 
679

 
(8,189
)
Cash and cash equivalents, beginning
 
2,183

 
10,081

Cash and cash equivalents, end
 
$
2,862

 
$
1,892

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Non-cash transactions:
 
 
 
 
Exchange of subsidiary common stock (Zoetis) for the retirement of Pfizer commercial paper issued in 2013(b)
 
$

 
$
2,479

Exchange of subsidiary senior notes (Zoetis) for the retirement of Pfizer commercial paper issued in 2012(b)
 

 
992

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

 
1,233

Cash paid during the period for:
 
 

 
 

Income taxes
 
$
536

 
$
548

Interest
 
361

 
433

(a) 
Includes $2.6 billion from the issuance of senior notes by Zoetis (our former Animal Health subsidiary), net of the $1.0 billion non-cash exchange of Zoetis senior notes for the retirement of Pfizer commercial paper issued in 2012. See Note 2A. Divestiture and Equity-Method Investments: Divestiture.
(b) 
See Note 2A. Divestiture and Equity-Method Investments: Divestiture.
(c) 
See Note 2B. Divestiture and Equity-Method Investments: Equity-Method Investments.
See Notes to Condensed Consolidated Financial Statements.

6


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


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted.

Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three months ended February 23, 2014 and February 24, 2013.

In the condensed consolidated statements of comprehensive income, we have revised the presentation of other comprehensive income/(loss) shown in prior periods for derivative financial instruments and available-for-sale securities, as certain items had been reported net.

On June 24, 2013, we completed the full disposition of our Animal Health business, Zoetis Inc. (Zoetis). On February 6, 2013, an initial public offering (IPO) of the Class A common stock of Zoetis was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis, which represented approximately 19.8% of the total outstanding Zoetis shares. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statement of income for the three months ended March 31, 2013. Prior periods have been restated. For additional information, see Note 2A. Divestiture and Equity-Method Investments: Divestiture.

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

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

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2013 Annual Report on Form 10-K.

B. Adoption of New Accounting Standards

We adopted the following new accounting and disclosure standards as of January 1, 2014 and there were no impacts to our condensed consolidated financial statements:
A new standard that clarified the accounting for cumulative translation adjustment (CTA) upon derecognition of a group of assets that is a business or an equity-method investment within a foreign entity.
A new standard regarding the measurement of obligations resulting from joint and several liability arrangements that may include debt agreements, other contractual obligations and settled litigation or judicial rulings.

C. Fair Value

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

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


7


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

Note 2. Divestiture and Equity-Method Investments

A. Divestiture

Animal Health Business—(Zoetis)

On June 24, 2013, we completed the full disposition of Zoetis. The full disposition was completed through a series of steps, including, in the first quarter of 2013, the formation of Zoetis and an IPO of an approximate 19.8% interest in Zoetis and, in the second quarter of 2013, an exchange offer for the remaining 80.2% interest.

In the first quarter of 2013:
Formation of ZoetisOn January 28, 2013, our then wholly owned subsidiary, Zoetis, issued $3.65 billion aggregate principal amount of senior notes. Also, on January 28, 2013, we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business in exchange for all of the Class A and Class B common stock of Zoetis, $1.0 billion of the $3.65 billion of Zoetis senior notes, and an amount of cash equal to substantially all of the cash proceeds received by Zoetis from the remaining $2.65 billion of senior notes issued. The $1.0 billion of Zoetis senior notes received by Pfizer were exchanged by Pfizer for the retirement of Pfizer commercial paper issued in 2012, and the cash proceeds received by Pfizer of approximately $2.6 billion were used for dividends and stock buybacks.
Initial Public Offering (19.8% Interest)On February 6, 2013, an IPO of the Class A common stock of Zoetis was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis (all of the Class A common stock, including shares sold pursuant to the underwriters' over-allotment option to purchase additional shares, which was exercised in full) in exchange for the retirement of approximately $2.5 billion of Pfizer commercial paper issued in 2013. The Class A common stock sold in the IPO represented approximately 19.8% of the total outstanding Zoetis shares. The excess of the consideration received over the net book value of our divested interest was approximately $2.3 billion and was recorded in Additional paid-in capital.
In the second quarter of 2013:
Exchange Offer (80.2% Interest)On June 24, 2013, we exchanged all of our remaining interest in Zoetis for Pfizer common stock.

The operating results of the Animal Health business are reported as Discontinued operations––net of tax in the condensed consolidated statement of income for the three months ended March 31, 2013.

Total Discontinued Operations
The following table provides the components of Discontinued operations—net of tax:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

Revenues
 
$

 
$
1,089

Pre-tax income from discontinued operations
 
5

 
200

Provision for taxes on income(a)
 


51

Income from discontinued operations––net of tax
 
5

 
149

Pre-tax gain on disposal of discontinued operations
 
64

 

Benefit for taxes on income
 
(4
)
 

Gain on disposal of discontinued operations––net of tax(b)
 
68

 

Discontinued operations––net of tax
 
$
73

 
$
149

(a) 
Includes a deferred tax expense of $7 million for the three months ended March 31, 2013.
(b) 
For the three months ended March 30, 2014, represents post-close adjustments.

The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for the three months ended March 31, 2013, except that financing activities include the cash proceeds from the issuance of senior notes by Zoetis.


8


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

B. Equity-Method Investments

Investment in Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer)

On September 6, 2012, we and Zhejiang Hisun Pharmaceuticals Co., Ltd. (Hisun), a leading pharmaceutical company in China, formed a new company, Hisun Pfizer, 49% owned by Pfizer and 51% owned by Hisun, to develop, manufacture, market and sell pharmaceutical products, primarily branded generic products, predominately in China. In the first quarter of 2013, we and Hisun contributed certain assets to Hisun Pfizer. Our contributions constituted a business, as defined by U.S. GAAP, and in the first quarter of 2013, we recognized a pre-tax gain of approximately $490 million in Other deductions––net, reflecting the transfer of the business to Hisun Pfizer (including an allocation of goodwill from our former Emerging Markets reporting unit as part of the carrying amount of the business transferred). Since we hold a 49% interest in Hisun Pfizer, we had an indirect retained interest in the contributed assets; as such, 49% of the gain, or $240 million, represented the portion of the gain associated with that indirect retained interest.

Investment in ViiV Healthcare Limited

On January 21, 2014, the European Commission approved Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV Healthcare Limited (ViiV), an equity method investee. This approval, in accordance with the agreement between GlaxoSmithKline plc and Pfizer, triggered a reduction in our equity interest in ViiV from 12.6% to 11.7% and an increase in GlaxoSmithKline plc’s equity interest in ViiV from 77.4% to 78.3%, effective April 1, 2014. As a result, in the first quarter of 2014, we recognized a loss of approximately $36 million in Other deductions––net.

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

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

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D), as well as groups such as information technology, shared services and corporate operations. However, in 2014-2016, our primary activities are expected to be associated with our manufacturing plant network rationalization and optimization activities, and commercial property rationalization and consolidation.

At the end of 2013, we had substantially completed many of the initiatives launched in prior periods. In early 2014, we announced that we would be incurring costs in 2014-2016 related to new programs: our new global commercial structure reorganization and additional cost-reduction/productivity initiatives.

In 2014, we have the following initiatives underway:
Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of nine sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $450 million associated with prior acquisition activity and costs of approximately $1.5 billion associated with new non-acquisition-related cost-reduction initiatives.
New global commercial structure reorganization, which primarily includes the streamlining of certain functions, the realignment of regional locations and colleagues to support the businesses, as well as implementing the necessary system changes to support future reporting requirements. In connection with this reorganization, during 2014-2016, we expect to incur costs of approximately $350 million.
Other new cost-reduction/productivity initiatives, primarily related to commercial property rationalization and consolidation. In connection with these cost-reduction activities, during 2014-2016, we expect to incur costs of approximately $900 million.

9


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

The costs expected to be incurred during 2014-2016, of approximately $3.2 billion in total, include restructuring charges, integration costs, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about a quarter of the charges will be non-cash.

Current-Period Key Activities

In the first quarter of 2014, we incurred approximately $164 million in cost-reduction and acquisition-related costs (excluding transaction costs) in connection with the aforementioned programs, primarily associated with our manufacturing and sales operations.
The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

Restructuring charges(a):
 
 

 
 

Employee terminations
 
$
30

 
$
(21
)
Asset impairments
 
6

 
103

Exit costs
 
4

 
13

Total restructuring charges
 
40

 
95

Integration costs(b)
 
18

 
36

Restructuring charges and certain acquisition-related costs
 
58

 
131

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

 
 

Cost of sales
 
74

 
33

Selling, informational and administrative expenses
 

 
11

Research and development expenses
 

 
91

Total additional depreciation––asset restructuring
 
74

 
135

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

 
 

Cost of sales
 
6

 
6

Selling, informational and administrative expenses
 
15

 
31

Research and development expenses
 
11

 
2

Total implementation costs
 
32

 
39

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
164

 
$
305

(a) 
In the three months ended March 30, 2014, Employee terminations represent the expected reduction of the workforce by approximately 200 employees, mainly in manufacturing and sales.
The restructuring charges in 2014 are associated with the following:
For the three months ended March 30, 2014, the Global Innovative Pharmaceutical segment (GIP) ($2 million), the Global Established Pharmaceutical segment (GEP) ($7 million), Worldwide Research and Development and Medical ($1 million), manufacturing operations ($26 million) and Corporate ($4 million).
The restructuring charges in 2013 are associated with the following:
For the three months ended March 31, 2013, total operating segments ($13 million), Worldwide Research and Development and Medical ($2 million), manufacturing operations ($3 million) and Corporate ($77 million). In 2014, we revised our operating segments and are unable to identify these prior-period restructuring charges to the new individual segments.
(b)
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes.
(c)
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(d)
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.

10


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

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

 
Asset
Impairment
Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2013(a)
 
$
1,685

 
$

 
$
94

 
$
1,779

Provision
 
30

 
6

 
4

 
40

Utilization and other(b)
 
(115
)
 
(6
)
 
(25
)
 
(146
)
Balance, March 30, 2014(c)
 
$
1,600

 
$

 
$
73

 
$
1,673

(a) 
Included in Other current liabilities ($1.0 billion) and Other noncurrent liabilities ($767 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($968 million) and Other noncurrent liabilities ($705 million).

Note 4. Other Deductions—Net
The following table provides components of Other deductions––net:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

Interest income(a)
 
$
(92
)
 
$
(95
)
Interest expense(a)
 
321

 
371

Net interest expense
 
229

 
276

Royalty-related income(b)
 
(248
)
 
(63
)
Certain legal matters, net(c)
 
694

 
(83
)
Gain associated with the transfer of certain product rights(d)
 

 
(490
)
Net gains on asset disposals(e)
 
(181
)
 
(26
)
Certain asset impairments and related charges(f)
 
115

 
398

Costs associated with the Zoetis IPO(g)
 

 
18

Other, net
 
14

 
115

Other deductions––net
 
$
623

 
$
145

(a) 
Interest income decreased in the first three months of 2014 due to lower cash equivalents and investment balances and lower investment returns. Interest expense decreased in the first three months of 2014 primarily due to the benefit of the conversion of some fixed-rate liabilities to floating-rate liabilities.
(b) 
Royalty-related income increased in 2014 due to royalties earned on sales of Enbrel in the U.S. and Canada after October 31, 2013. On that date, the co-promotion term of the collaboration agreement for Enbrel in the U.S. and Canada expired, and we became entitled to royalties for a 36-month period.
(c) 
In the first quarter of 2014, includes approximately $620 million for Neurontin-related matters (including off-label promotion actions and antitrust actions) and approximately $50 million for an Effexor-related matter. In the first quarter of 2013, primarily includes an $80 million insurance recovery related to a certain litigation matter. For additional information, see Note 12A. Commitments and Contingencies: Legal Proceedings.
(d) 
Represents the gain associated with the transfer of certain product rights to Hisun Pfizer, our 49%-owned equity-method investment in China. For additional information, see Note 2B. Divestiture and Equity-Method Investments: Equity-Method Investments.
(e) 
In the first quarter of 2014, primarily includes gains on sales of product rights (approximately $70 million) and gains on sales of investments in equity securities (approximately $95 million).
(f) 
In the first quarter of 2014, includes an intangible asset impairment charge of $114 million, virtually all of which relates to an in-process research and development (IPR&D) compound for the treatment of skin fibrosis. The intangible asset impairment charge for the first quarter of 2014 is associated with Worldwide Research and Development and reflects, among other things, the impact of changes to the development program. In the first quarter of 2013, includes an intangible asset impairment charge of $394 million, all of which relates to developed technology rights for use in the development of bone and cartilage. The intangible asset impairment charge for 2013 is associated with the Global Innovative Pharmaceutical segment and reflects, among other things, updated commercial forecasts.
(g) 
Costs incurred in connection with the IPO of an approximate 19.8% ownership interest in Zoetis. Includes expenditures for banking, legal, accounting and similar services. For additional information, see Note 2A. Divestiture and Equity-Method Investments: Divestiture.

The asset impairment charges included in Other deductions––net for the first three months of 2014 virtually all relate to identifiable intangible assets and are based on estimates of fair value.

11


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

The following table provides additional information about the intangible assets that were impaired during the first three months of 2014 in Other deductions––net:
 
 
Fair Value(a)
 
Three Months Ended March 30, 2014

(MILLIONS OF DOLLARS)
 
Amount

 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––IPR&D(b)
 
$
79

 
$

 
$

 
$
79

 
$
114

Total
 
$
79

 
$

 
$

 
$
79

 
$
114

(a) 
The fair value amount is presented as of the date of impairment, as this asset is not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.
(b) 
Reflects intangible assets written down to fair value in the first three months of 2014. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then we applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the product and the impact of technological risk associated with IPR&D assets; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 20.4% for the first quarter of 2014, compared to 29.8% for the first quarter of 2013. The lower effective tax rate for the first quarter of 2014 in comparison with the same period in 2013 was primarily due to the favorable impact of the resolution in the first quarter of 2014 of certain tax positions, pertaining to prior years, primarily with various foreign tax authorities, and from the expiration of certain statutes of limitations, the non-recurrence of the unfavorable tax impact associated with the non-deductibility of the goodwill derecognized and the jurisdictional mix of the other intangible assets divested as part of the transfer of certain product rights to our 49%-owned equity-method investment, as well as the change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the expiration of the U.S. research and development (R&D) tax credit on December 31, 2013. For additional information about the transfer of certain product rights, see Note 2B. Divestiture and Equity-Method Investments: Equity-Method Investments.

B. Tax Contingencies

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

The United States is one of our major tax jurisdictions, and we are regularly audited by the U.S. Internal Revenue Service (IRS):
With respect to Pfizer Inc., tax years 2009 and 2010 are currently under audit. Tax years 2011-2014 are open, but not under audit. All other tax years are closed.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2004-2014), Japan (2013-2014), Europe (2007-2014, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2014, primarily reflecting Brazil and Mexico) and Puerto Rico (2009-2014).


12


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

C. Taxes on Items of Other Comprehensive Loss
The following table provides the components of the tax provision/(benefit) on Other comprehensive loss:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

 
 
 
 
 
Foreign currency translation adjustments(a)
 
$
(7
)
 
$
71

Unrealized holding losses on derivative financial instruments
 
(17
)
 
(155
)
Reclassification adjustments for realized (gains)/losses
 
(1
)
 
167

 
 
(18
)
 
12

Unrealized holding gains on available-for-sale securities
 
27

 
11

Reclassification adjustments for realized gains
 
(29
)
 
(25
)
 
 
(2
)
 
(14
)
Benefit plans: actuarial gains, net
 
1

 
6

Reclassification adjustments related to amortization
 
16

 
54

Reclassification adjustments related to settlements, net
 
8

 
20

Foreign currency translation adjustments and other
 
(12
)
 
37

 
 
13

 
117

Benefit plans: prior service costs and other
 

 
(1
)
Reclassification adjustments related to amortization
 
(7
)
 
(6
)
Reclassification adjustments related to curtailments, net
 
(1
)
 
(3
)
Other
 
5

 

 
 
(3
)
 
(10
)
Tax provision/(benefit) on other comprehensive loss
 
$
(17
)
 
$
176

(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
Note 6. Accumulated Other Comprehensive Loss
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Foreign Currency Translation Adjustments

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/Credits and Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2013
 
$
(590
)
 
$
79

 
$
150

 
$
(3,223
)
 
$
313

 
$
(3,271
)
Other comprehensive income/(loss)(a)
 
(128
)
 
(28
)
 
11

 
46

 
(20
)
 
(119
)
Balance, March 30, 2014
 
$
(718
)
 
$
51

 
$
161

 
$
(3,177
)
 
$
293

 
$
(3,390
)
(a) 
Amounts do not include foreign currency translation loss of $2 million attributable to noncontrolling interests for the first three months of 2014.

As of March 30, 2014, with respect to derivative financial instruments, we estimate that we will reclassify into income within the next 12 months approximately $77.5 million of unrealized pre-tax losses (which is expected to be offset by gains resulting from reclassification adjustments related to available-for-sale securities).



13


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

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities
The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
December 31,
2013

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
103

 
$
126

Available-for-sale debt securities(c)
 
35,693

 
34,899

Available-for-sale money market funds
 
977

 
945

Available-for-sale equity securities, excluding money market funds(c)
 
462

 
356

Derivative financial instruments in receivable positions(d):
 
 

 
 

Interest rate swaps
 
438

 
468

Foreign currency swaps
 
953

 
871

Foreign currency forward-exchange contracts
 
49

 
172

 
 
38,675

 
37,837

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
8,501

 
9,139

Private equity securities, carried at equity-method or at cost(e), (f)
 
2,276

 
2,270

 
 
10,777

 
11,409

Total selected financial assets
 
$
49,452

 
$
49,246

Financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(g):
 
 

 
 

Interest rate swaps
 
$
187

 
$
301

Foreign currency swaps
 
116

 
110

Foreign currency forward-exchange contracts
 
184

 
219

 
 
487

 
630

Other financial liabilities(h)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(e)
 
9,319

 
6,027

Long-term debt, carried at historical proceeds, as adjusted(i), (j)
 
27,649

 
30,462

 
 
36,968

 
36,489

Total selected financial liabilities
 
$
37,455

 
$
37,119

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 inputs.
(b) 
Trading securities are held in trust for legacy business acquisition severance benefits.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $26 million and foreign currency forward-exchange contracts with fair values of $30 million as of March 30, 2014; and, interest rate swaps with fair values of $38 million, foreign currency swaps with fair values of $30 million and foreign currency forward-exchange contracts with fair values of $66 million as of December 31, 2013.
(e) 
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities at cost and short-term borrowings not measured at fair value on a recurring basis were not significant as of March 30, 2014 or December 31, 2013. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities at cost are based on Level 3 inputs.
(f) 
Our private equity securities represent investments in the life sciences sector.
(g) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $78 million and foreign currency forward-exchange contracts with fair values of $55 million as of March 30, 2014; and, foreign currency swaps with fair values of $76 million and foreign currency forward-exchange contracts with fair values of $77 million as of December 31, 2013.
(h) 
Some carrying amounts may include adjustments for discount or premium amortization or for the effect of hedging the interest rate fair value risk associated with certain financial liabilities by interest rate swaps.
(i) 
Includes foreign currency debt with fair values of $659 million as of March 30, 2014 and $651 million as of December 31, 2013, which are used as hedging instruments.
(j) 
The fair value of our long-term debt (not including the current portion of long-term debt) is $32.6 billion as of March 30, 2014 and $35.1 billion as of December 31, 2013. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach.

14


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

Generally, the difference between the fair value of our long-term debt and the amount reported on the consolidated balance sheet is due to a decline in relative market interest rates since the debt issuance.
The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
December 31,
2013

Assets
 
 
 
 
Cash and cash equivalents
 
$
1,171

 
$
1,104

Short-term investments
 
31,019

 
30,225

Long-term investments
 
15,822

 
16,406

Other current assets(a)
 
132

 
286

Other noncurrent assets(b)
 
1,308

 
1,225

 
 
$
49,452

 
$
49,246

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
9,319

 
$
6,027

Other current liabilities(c)
 
275

 
303

Long-term debt
 
27,649

 
30,462

Other noncurrent liabilities(d)
 
212

 
327

 
 
$
37,455

 
37,119

(a) 
As of March 30, 2014, derivative instruments at fair value include interest rate swaps ($68 million), foreign currency swaps ($15 million) and foreign currency forward-exchange contracts ($49 million) and, as of December 31, 2013, include interest rate swaps ($90 million), foreign currency swaps ($24 million) and foreign currency forward-exchange contracts ($172 million).
(b) 
As of March 30, 2014, derivative instruments at fair value include interest rate swaps ($370 million) and foreign currency swaps ($938 million) and, as of December 31, 2013, include interest rate swaps ($378 million) and foreign currency swaps ($847 million).
(c) 
As of March 30, 2014, derivative instruments at fair value include interest rate swaps ($1 million), foreign currency swaps ($90 million) and foreign currency forward-exchange contracts ($184 million) and, as of December 31, 2013, include foreign currency swaps ($84 million) and foreign currency forward-exchange contracts ($219 million).
(d) 
As of March 30, 2014, derivative instruments at fair value include interest rate swaps ($186 million) and foreign currency swaps ($26 million) and, as of December 31, 2013, include interest rate swaps ($301 million) and foreign currency swaps ($26 million).

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


15


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

B. Investments in Debt Securities
The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
March 30, 2014

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Scandinavian and other government debt(a)
 
$
11,530

 
$
2,141

 
$

 
$

 
$
13,671

Corporate debt(b)
 
2,701

 
4,696

 
1,260

 
290

 
8,947

U.S. government debt
 
3,483

 
166

 

 

 
3,649

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

 
2,576

 
10

 
299

 
2,885

Supranational debt(a)
 
990

 
940

 

 

 
1,930

Western European, Scandinavian and other government agency debt(a)
 
1,568

 
356

 

 

 
1,924

Reverse repurchase agreements(c)
 
1,433

 

 

 

 
1,433

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
1,076

 
139

 

 
39

 
1,254

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Western European, Scandinavian and other government debt(a)
 
5,336

 

 

 

 
5,336

Western European, Scandinavian and other government agency debt, certificates of deposit and other(a)
 
2,995

 
169

 
1

 

 
3,165

Total debt securities
 
$
31,112

 
$
11,183

 
$
1,271

 
$
628

 
$
44,194

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

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $3.7 billion and $3.0 billion as of March 30, 2014 and December 31, 2013, respectively.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of March 30, 2014, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $38.0 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound and Swiss franc. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.5 billion U.K. pound debt maturing in 2038.

Interest Rate Risk

As of March 30, 2014, the aggregate notional amount of interest rate derivative financial instruments is $14.1 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.


16


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

The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
 
 
Amount of
Gains/(Losses)
Recognized in OID(a), (b), (c)
 
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

 
March 30,
2014

 
March 31,
2013

 
March 30,
2014

 
March 31,
2013

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

 
$

 
$
(15
)
 
$
(449
)
 
$
9

 
$
(382
)
Foreign currency forward-exchange contracts
 

 

 
(43
)
 
53

 
(21
)
 
(144
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency swaps
 

 
(3
)
 
(8
)
 
123

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(12
)
 
149

 

 

 

 

Foreign currency swaps
 
(3
)
 
(4
)
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 

 

 
(14
)
 
63

 

 

All other net
 
(3
)
 

 

 

 

 

 
 
$
(18
)
 
$
142

 
$
(80
)
 
$
(210
)
 
$
(12
)
 
$
(526
)
(a) 
OID = Other (income)/deductions—net, included in Other deductions—net in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) 
Also includes gains and losses attributable to derivative instruments designated and qualifying as fair value hedges, as well as the offsetting gains and losses attributable to the hedged items in such hedging relationships.
(c) 
There was no significant ineffectiveness for any period presented.
(d) 
For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive loss––Unrealized holding gains/(losses) on derivative financial instruments. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive loss––Foreign currency translation adjustments.

For information about the fair value of our derivative financial instruments, and the impact on our condensed consolidated balance sheets, see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities above. Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. As of March 30, 2014, the aggregate fair value of these derivative instruments that are in a net liability position is $192 million, for which we have posted collateral of $225 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a downgrade in our debt ratings. At March 30, 2014, if there had been a downgrade to below an A rating by Standard & Poor's (S&P) or the equivalent rating by Moody’s Investors Service, we would not have been required to post any additional collateral to our counterparties. The collateral advanced receivables are reported in Short-term investments.

E. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. As of March 30, 2014, we had $2.2 billion due from a well-diversified, highly rated group (S&P ratings of mostly A+ or better) of bank counterparties around the world. For details about our investments, see Note 7B. Financial Instruments: Investments in Debt Securities above.


17


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

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions and these agreements contain provisions that provide for collateral payments, depending on levels of exposure, our credit rating and the credit rating of the counterparty. For information about our financial instruments (excluding the impact of collateral), see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities and Note 7B. Financial Instruments: Investments in Debt Securities above. For information about the collateral posted on our derivative instruments, see Note 7D. Financial Instruments: Derivative Financial Instruments and Hedging Activities above. As of March 30, 2014, we received cash collateral of $1.2 billion from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, which is included in Cash and cash equivalents, the obligations are reported in Short-term borrowings, including current portion of long-term debt.

Note 8. Inventories
The following table provides the components of Inventories:
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
December 31,
2013

Finished goods
 
$
2,526

 
$
2,216

Work-in-process
 
3,013

 
3,445

Raw materials and supplies
 
527

 
505

Inventories
 
$
6,066

 
$
6,166

Noncurrent inventories not included above(a)
 
$
468

 
$
463

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

Note 9. Goodwill and Other Intangible Assets

A. Goodwill

Our businesses were previously managed through four operating segments (Primary Care, Specialty Care and Oncology, Established Products and Emerging Markets and Consumer Healthcare) and are now managed through three different operating segments: the Global Innovative Pharmaceutical segment (GIP); the Global Vaccines, Oncology and Consumer Healthcare segment (VOC); and the Global Established Pharmaceutical segment (GEP). For additional information, see Note 13. Segment, Geographic and Other Revenue Information.

As a result of this change, our goodwill is required to be reallocated to the new reporting units. The allocation of goodwill is a complex process that requires, among other things, that we determine the fair value of each reporting unit. Therefore, we have not yet completed the allocation, but we expect that it will be completed in the current year.
The following table provides the components of and changes in the carrying amount of Goodwill:
(MILLIONS OF DOLLARS)
 
GIP
 
VOC
 
GEP
 
To be Allocated(a)

 
Total

Balance, December 31, 2013
 
$
 
$
 
$
 
$
42,519

 
$
42,519

Additions
 

 

 

 

 

Other(b)
 

 

 

 
(52
)
 
(52
)
Balance, March 30, 2014
 
$
 
$
 
$
 
$
42,467

 
$
42,467

(a) 
The amount to be allocated includes the goodwill associated with our former biopharmaceutical operating segments (see above), for which the allocation to our new reporting units, and, as a result, to the new operating segments, is pending.
(b) 
Primarily reflects the impact of foreign exchange.


18


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

B. Other Intangible Assets

Balance Sheet Information
The following table provides the components of Identifiable intangible assets:
 
 
March 30, 2014
 
December 31, 2013
(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
 
$
72,064

 
$
(42,676
)
 
$
29,388

 
$
72,038

 
$
(41,541
)
 
$
30,497

Brands
 
1,742

 
(793
)
 
949

 
1,743

 
(773
)
 
970

Licensing agreements and other
 
903

 
(810
)
 
93

 
896

 
(805
)
 
91

 
 
74,709

 
(44,279
)
 
30,430

 
74,677

 
(43,119
)
 
31,558

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Brands and other
 
7,363

 


 
7,363

 
7,384

 


 
7,384

In-process research and development
 
329

 


 
329

 
443

 


 
443

 
 
7,692

 


 
7,692

 
7,827

 


 
7,827

Identifiable intangible assets(a)
 
$
82,401

 
$
(44,279
)
 
$
38,122

 
$
82,504

 
$
(43,119
)
 
$
39,385

(a) 
The decrease is primarily related to amortization and asset impairment charges. For information about impairments of intangible assets, see Note 4. Other Deductions—Net.
Our identifiable intangible assets are associated with the following, as a percentage of total identifiable intangible assets, less accumulated amortization:
 
 
March 30, 2014
 
 
GIP
 
VOC
 
GEP
 
WRD(a)
Developed technology rights
 
34
%
 
32
%
 
34
%
 
%
Brands, finite-lived
 
%
 
75
%
 
25
%
 
%
Brands, indefinite-lived
 
%
 
69
%
 
31
%
 
%
In-process research and development
 
9
%
 
58
%
 
9
%
 
24
%
(a) 
Worldwide Research and Development.

Amortization

Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $1.1 billion for the first quarter of 2014 and $1.3 billion for the first quarter of 2013.

Impairment Charges

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

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


19


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

Note 10. Pension and Postretirement Benefit Plans
The following table provides the components of net periodic benefit cost (including, in 2013, costs reported as part of discontinued operations):
 
 
Pension Plans
 
 
 
 
 
 
U.S.
Qualified(a)
 
U.S.
Supplemental
(Non-Qualified)(b)
 
International(c)
 
Postretirement
Plans
(MILLIONS OF DOLLARS)
 
March 30,
2014

 
March 31,
2013

 
March 30,
2014

 
March 31,
2013

 
March 30,
2014

 
March 31,
2013

 
March 30,
2014

 
March 31,
2013

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
64

 
$
77

 
$
5

 
$
7

 
$
52

 
$
56

 
$
14

 
$
16

Interest cost
 
175

 
168

 
15

 
14

 
100

 
97

 
42

 
42

Expected return on plan assets
 
(263
)
 
(253
)
 

 

 
(114
)
 
(104
)
 
(16
)
 
(14
)
Amortization of:
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

Actuarial losses
 
16

 
90

 
7

 
13

 
25

 
37

 
1

 
11

Prior service credits
 
(2
)
 
(2
)
 

 
(1
)
 
(2
)
 
(2
)
 
(14
)
 
(11
)
Curtailments
 
2

 
(1
)
 

 

 
(1
)
 
(1
)
 
(3
)
 
(7
)
Settlements
 
9

 
30

 
11

 
22

 
1

 
4

 

 

Special termination benefits
 

 

 

 

 
2

 

 

 

 
 
$
1

 
$
109

 
$
38

 
$
55

 
$
63

 
$
87

 
$
24

 
$
37

(a) 
The decrease in net periodic benefit costs for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, for our U.S. qualified pension plans was primarily driven by the decrease in the amounts amortized for actuarial losses resulting from the increase, in 2013, in the discount rate used to determine the benefit obligation (which reduced the amount of deferred actuarial losses), lower service cost resulting from cost-reduction initiatives, lower settlement activity and greater expected return on plan assets resulting from an increased plan asset base, partially offset by higher interest costs resulting from the increase, in 2013, in the discount rate used to determine the benefit obligation.
(b) 
The decrease in net periodic benefit costs for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, for our U.S. supplemental (non-qualified) pension plans was primarily driven by lower settlement activity and the decrease in the amounts amortized for actuarial losses resulting from the increase, in 2013, in the discount rate used to determine the benefit obligation.
(c) 
The decrease in net periodic benefit costs for the three months ended March 30, 2014, compared to the three months ended March 31, 2013, for our international pension plans was primarily driven by the decrease in the amounts amortized for actuarial losses resulting from increases, in 2013, in the discount rates used to determine the benefit obligations and greater expected return on plan assets resulting from an increased plan asset base.

As of and for the three months ended March 30, 2014, we contributed and expect to contribute from our general assets as follows:
 
 
Pension Plans
 
 
(MILLIONS OF DOLLARS)
 
U.S. Qualified
 
U.S. Supplemental (Non-Qualified)
 
International
 
Postretirement Plans
Contributions from our general assets for the three months ended March 30, 2014
 
$

 
$
83

 
$
87

 
$
55

Expected contributions from our general assets during 2014(a)
 
$
6

 
$
176

 
$
310

 
$
239

(a) 
Contributions expected to be made for 2014 are inclusive of amounts contributed during the three months ended March 30, 2014. The U.S. supplemental (non-qualified) pension plan, international pension plan and the postretirement plan contributions from our general assets include direct employer benefit payments.


20


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

Note 11. Earnings Per Common Share Attributable to Common Shareholders
The following table provides the detailed calculation of Earnings per common share (EPS):
 
 
Three Months Ended
(IN MILLIONS)
 
March 30,
2014

 
March 31,
2013

EPS Numerator––Basic
 
 
 
 
Income from continuing operations
 
$
2,265

 
$
2,616

Less: Net income attributable to noncontrolling interests
 
9

 
9

Income from continuing operations attributable to Pfizer Inc.
 
2,256

 
2,607

Less: Preferred stock dividends––net of tax
 

 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
2,256

 
2,607

Discontinued operations––net of tax
 
73

 
149

Less: Discontinued operations––net of tax, attributable to noncontrolling interests
 

 
6

Discontinued operations––net of tax, attributable to Pfizer Inc. common shareholders
 
73

 
143

Net income attributable to Pfizer Inc. common shareholders
 
$
2,329

 
$
2,750

EPS Numerator––Diluted
 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders and assumed conversions
 
$
2,256

 
$
2,607

Discontinued operations––net of tax, attributable to Pfizer Inc. common shareholders and assumed conversions
 
73

 
143

Net income attributable to Pfizer Inc. common shareholders and assumed conversions
 
$
2,329

 
$
2,750

EPS Denominator
 
 

 
 

Weighted-average number of common shares outstanding––Basic
 
6,389

 
7,187

Common-share equivalents: stock options, stock issuable under employee compensation plans and convertible preferred stock
 
87

 
82

Weighted-average number of common shares outstanding––Diluted
 
6,476

 
7,269

Stock options that had exercise prices greater than the average market price of our common stock issuable under employee compensation plans(a)
 
43

 
97

(a) 
These common stock equivalents were outstanding for the three months ended March 30, 2014 and March 31, 2013, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.

Note 12. Commitments and Contingencies

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

A. Legal Proceedings

Our non-tax contingencies include, among others, the following:
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents on various products, processes or dosage forms. We are the plaintiff in the vast majority of these actions. An adverse outcome in actions in which we are the plaintiff could result in a loss of patent protection for the drug at issue, a significant loss of revenues from that drug and impairments of any associated assets.
Product liability and other product-related litigation, which can include personal injury, consumer, off-label promotion, securities-law, antitrust and breach of contract claims, among others, often involves highly complex issues relating to medical causation, label warnings and reliance on those warnings, scientific evidence and findings, actual, provable injury and other matters.
Commercial and other matters, which can include merger-related and product-pricing claims and environmental claims and proceedings, can involve complexities that will vary from matter to matter.
Government investigations, which often are related to the extensive regulation of pharmaceutical companies by national, state and local government agencies in the U.S. and in other countries. 

21


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

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

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

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

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

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

A1. Legal Proceedings––Patent Litigation

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

Actions In Which We Are The Plaintiff

Viagra (sildenafil)

In October 2010, we filed a patent-infringement action with respect to Viagra in the U.S. District Court for the Southern District of New York against Apotex Inc. and Apotex Corp., Mylan Pharmaceuticals Inc. and Mylan Inc., Actavis, Inc. and Amneal Pharmaceuticals LLC. These generic drug manufacturers have filed abbreviated new drug applications with the FDA seeking approval to market their generic versions of Viagra. They assert the invalidity and non-infringement of the Viagra use patent, which expires in 2020 (including the six-month pediatric exclusivity period resulting from the Company’s conduct of clinical studies to evaluate Revatio in the treatment of pediatric patients with pulmonary arterial hypertension; Viagra and Revatio have the same active ingredient, sildenafil). In April 2014, we settled our claim against Amneal Pharmaceuticals LLC on terms that are not material to us.

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

22


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

against Watson and Hetero in the U.S. District Court for the Southern District of New York asserting the validity and infringement of the Viagra use patent.

In February 2014, Torrent Pharmaceuticals Ltd. (Torrent) notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market its generic version of Viagra. Torrent asserts the invalidity and non-infringement of the Viagra use patent. In March 2014, we filed actions against Torrent in the U.S. District Courts for the Southern District of New York and the District of New Jersey asserting the validity and infringement of the Viagra use patent.

Sutent (sunitinib malate)
In May 2010, Mylan Pharmaceuticals Inc. notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Sutent and challenging on various grounds the Sutent basic patent, which expires in 2021, and two other patents, which expire in 2020 and 2021. In June 2010, we filed suit against Mylan Pharmaceuticals Inc. in the U.S. District Court for the District of Delaware asserting the infringement of those three patents.

Lyrica (pregabalin)
Beginning in March 2009, several generic drug manufacturers notified us that they had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Lyrica capsules and, in the case of one generic drug manufacturer, Lyrica oral solution. Each of the generic drug manufacturers is challenging one or more of three patents for Lyrica: the basic patent, which expires in 2018, and two other patents, one of which expired in October 2013 and the other of which expires in 2018. Each of the generic drug manufacturers asserts the invalidity and/or the non-infringement of the patents subject to challenge. Beginning in April 2009, we filed actions against these generic drug manufacturers in the U.S. District Court for the District of Delaware asserting the infringement and validity of our patents for Lyrica. All of these cases were consolidated in the District of Delaware. In July 2012, the court held that all three patents are valid and infringed. In August 2012, the generic drug manufacturers appealed the decision to the U.S. Court of Appeals for the Federal Circuit. In February 2014, the Federal Circuit affirmed the decision of the District Court with respect to the validity and enforcement of one claim of the basic patent and determined, on the ground of mootness, that it did not have to render a decision on any other issues raised on appeal, including with respect to the other patent that expires in 2018. As a result, the generic drug manufacturers cannot obtain FDA approval for their generic versions of Lyrica or market those products in the U.S. prior to the expiration of the basic patent in 2018, subject to the possible filing by any of the generic drug manufacturers of a petition for certiorari requesting a review by the U.S. Supreme Court.

Apotex Inc. notified us, in May and June 2011, respectively, that it had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Lyrica oral solution and Lyrica capsules. Apotex Inc. asserts the invalidity and non-infringement of the basic patent, as well as the seizure patent that expired in October 2013. In July 2011, we filed an action against Apotex Inc. in the U.S. District Court for the District of Delaware asserting the validity and infringement of the challenged patents in connection with both of the abbreviated new drug applications.

In November 2010, Novel Laboratories, Inc. (Novel) notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Lyrica oral solution and asserting the invalidity and/or non-infringement of our three patents for Lyrica referred to above in the first paragraph of this section. In January 2011, we filed an action against Novel in the U.S. District Court for the District of Delaware asserting the validity and infringement of all three patents.

In October 2011, Alembic Pharmaceuticals Limited (Alembic) notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Lyrica capsules and asserting the invalidity of the basic patent. In addition, in December 2012, Wockhardt Limited (Wockhardt) notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Lyrica oral solution and asserting the invalidity and non-infringement of the basic patent. In December 2011 and January 2013, we filed actions against Alembic and Wockhardt, respectively, in the U.S. District Court for the District of Delaware asserting the validity and infringement of the basic patent.

Each of Novel, Alembic and Wockhardt has agreed to a stay of the respective actions described above and to be bound by any final judgment of infringement and validity of the patents at issue in the consolidated action discussed above in the first paragraph of this section.


23


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

EpiPen
King Pharmaceuticals, Inc. (King), which we acquired in 2011 and is a wholly owned subsidiary, brought a patent-infringement action against Sandoz, Inc., a division of Novartis AG (Sandoz), in the U.S. District Court for the District of New Jersey in July 2010 as the result of its abbreviated new drug application with the FDA seeking approval to market an epinephrine injectable product. Sandoz is challenging patents, which expire in 2025, covering the next-generation autoinjector for use with epinephrine that is sold under the EpiPen brand name.

Embeda (morphine sulfate/naltrexone hydrochloride extended-release capsules)
In August 2011, Watson Laboratories Inc. - Florida (Watson Florida) notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Embeda extended-release capsules. Watson Florida asserts the invalidity and non-infringement of three formulation patents that expire in 2027. In October 2011, we filed an action against Watson Florida in the U.S. District Court for the District of Delaware asserting the infringement of, and defending against the allegations of the invalidity of, the three formulation patents.

Pristiq (desvenlafaxine)
Beginning in May 2012, several generic drug manufacturers notified us that they had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Pristiq. Each of the generic drug manufacturers asserts the invalidity, unenforceability and/or non-infringement of two patents for Pristiq that expire in 2022 and 2027. Beginning in June 2012, we filed actions against these generic drug manufacturers in the U.S. District Court for the District of Delaware asserting the validity, enforceability and infringement of those patents. All of these actions have been consolidated in the District of Delaware.

Celebrex (celecoxib)
In March 2013, the U.S. Patent and Trademark Office granted us a reissue patent covering methods of treating osteoarthritis and other approved conditions with celecoxib, the active ingredient in Celebrex. The reissue patent, including the six-month pediatric exclusivity period, expires in December 2015. On the date that the reissue patent was granted, we filed suit in the U.S. District Court for the Eastern District of Virginia, asserting the infringement of the reissue patent, against Teva Pharmaceuticals USA, Inc. (Teva USA), Mylan Pharmaceuticals Inc., Watson, Lupin Pharmaceuticals USA, Inc., Apotex Corp. and Apotex Inc. Each of those generic drug companies had previously filed an abbreviated new drug application with the FDA seeking approval to market a generic version of celecoxib beginning in May 2014, upon the expiration of the basic patent (including the six-month pediatric exclusivity period) for celecoxib. In March 2014, the court granted the defendants’ motion for summary judgment, invalidating the reissue patent. In April 2014, we entered into settlement agreements with two of the defendants, Teva USA and Watson, pursuant to which we granted licenses to the reissue patent permitting Teva USA and Watson to launch their generic versions of celecoxib in the U.S. beginning in December 2014. We will appeal the District Court’s decision to the U.S. Court of Appeals for the Federal Circuit.

Toviaz (fesoterodine)
We have an exclusive, worldwide license to market Toviaz from UCB Pharma GmbH, which owns the patents relating to Toviaz.

Beginning in May 2013, several generic drug manufacturers notified us that they had filed abbreviated new drug applications with the FDA seeking approval to market generic versions of Toviaz and asserting the invalidity, unenforceability and/or non-infringement of all of our patents for Toviaz that are listed in the Orange Book. Beginning in June 2013, we filed actions against all of those generic drug manufacturers in the U.S. District Court for the District of Delaware asserting the infringement of five of our patents for Toviaz: three composition-of-matter patents and a method-of-use patent that expire in 2019, and a patent covering salts of fesoterodine that expires in 2022.

Tygacil (tigecycline)
In September 2013, Apotex Inc. notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a generic version of Tygacil. Apotex Inc. asserts the non-infringement of a polymorph patent for Tygacil that expires in 2030, but has not challenged the basic patent, which expires in 2016. In September 2013, we filed suit against Apotex Inc. in the U.S. District Court for the District of Delaware asserting the infringement of the polymorph patent.

Actions In Which We Are The Defendant

Lipitor (atorvastatin)
In an action initially brought against us by a generic drug company, the Beijing High Court upheld the validity of our patent in China covering the crystalline form of atorvastatin in Lipitor. The crystalline patent expires in July 2016 and is the only patent

24


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

covering Lipitor in China. In January 2014, the China Supreme Peop