10-Q 1 pfe-7032016x10q.htm 10-Q Document
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 July 3, 2016

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 August 8, 20166,065,652,424 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and six months ended July 3, 2016 and June 28, 2015
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 3, 2016 and June 28, 2015
 
 
Condensed Consolidated Balance Sheets as of July 3, 2016 and December 31, 2015
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2016 and June 28, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:
2015 Financial Report
Financial Report for the fiscal year ended December 31, 2015, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2015
2015 Form 10-K
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
ACA
U.S. Patient Protection and Affordable Care Act, as amended by the Health Care Reconciliation Act
ACIP
Advisory Committee on Immunization Practices
ALK
anaplastic lymphoma kinase
Allergan
Allergan plc
Alliance revenues
revenues from alliance agreements under which we co-promote products discovered by other companies
AM-Pharma
AM-Pharma B.V.
Anacor
Anacor Pharmaceuticals, Inc.
ASU
Accounting Standards Update
Baxter
Baxter International Inc.
BMS
Bristol-Myers Squibb Company
CDC
U.S. Centers for Disease Control and Prevention
Developed Markets
U.S., Western Europe, Japan, Canada, Australia, Scandinavia, South Korea, Finland and New Zealand
DOJ
U.S. Department of Justice
DVT
deep vein thrombosis
EEA
European Economic Area
EH
Essential Health
EMA
European Medicines Agency
Emerging Markets
Includes, but is not limited to, the following markets: Asia (excluding Japan and South Korea), Latin America, Africa, Eastern Europe, Central Europe, the Middle East and Turkey
EPA
U.S. Environmental Protection Agency
EPS
earnings per share
EU
European Union
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDA
U.S. Food and Drug Administration
GAAP
Generally Accepted Accounting Principles
GHD
growth hormone deficiency
GIST
gastrointestinal stromal tumors
GEP
Global Established Pharmaceutical segment
GIP
Global Innovative Pharmaceutical segment
GPD
Global Product Development organization
GS&Co.
Goldman, Sachs & Co.
HER2-
human epidermal growth factor receptor 2-negative
hGH-CTP
human growth hormone
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive
IH
Innovative Health
IPR&D
in-process research and development
IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
LDL
low density lipoprotein
Lilly
Eli Lilly & Company
LOE
loss of exclusivity

3


MCO
managed care organization
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDV
multi-dose vial
Moody’s
Moody’s Investors Service
mRCC
metastatic renal cell carcinoma
NDA
new drug application
NOAC
Novel Oral Anticoagulant
NovaQuest
NovaQuest Co-Investment Fund II, L.P. or NovaQuest Co-Investment Fund V, L.P., as applicable
NSCLC
non-small cell lung cancer
NYSE
New York Stock Exchange
OPKO
OPKO Health, Inc.
OTC
over-the-counter
PBM
Pharmacy Benefit Manager
PDUFA
Prescription Drug User Fee Act
PE
pulmonary embolism
PGS
Pfizer Global Supply
Pharmacia
Pharmacia Corporation
PP&E
Property, plant & equipment
Quarterly Report on Form 10-Q
Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2016
RAR
Revenue Agent’s Report
RCC
renal cell carcinoma
recAP
recombinant human Alkaline Phosphatase
R&D
research and development
RPI
RPI Finance Trust
Sandoz
Sandoz, Inc., a division of Novartis AG
SEC
U.S. Securities and Exchange Commission
SGA
small for gestational age
S&P
Standard and Poor’s
Teuto
Laboratório Teuto Brasileiro S.A.
U.K.
United Kingdom
U.S.
United States
VAT
value added tax
VOC
Global Vaccines, Oncology and Consumer Healthcare segment
WRD
Worldwide Research and Development
Zoetis
Zoetis Inc.

4


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)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

Revenues
 
$
13,147

 
$
11,853

 
$
26,152

 
$
22,717

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
3,174

 
2,180

 
6,026

 
4,018

Selling, informational and administrative expenses(a)
 
3,471

 
3,386

 
6,856

 
6,491

Research and development expenses(a)
 
1,748

 
1,734

 
3,478

 
3,620

Amortization of intangible assets
 
961

 
872

 
1,966

 
1,811

Restructuring charges and certain acquisition-related costs
 
316

 
86

 
457

 
146

Other (income)/deductions––net
 
1,068

 
55

 
1,398

 
9

Income from continuing operations before provision for taxes on income
 
2,410

 
3,539

 
5,971

 
6,621

Provision for taxes on income
 
375

 
905

 
910

 
1,610

Income from continuing operations
 
2,035

 
2,635

 
5,060

 
5,011

Discontinued operations––net of tax
 
1

 
1

 
1

 
6

Net income before allocation to noncontrolling interests
 
2,035

 
2,635

 
5,061

 
5,017

Less: Net income attributable to noncontrolling interests
 
16

 
9

 
25

 
14

Net income attributable to Pfizer Inc.
 
$
2,019

 
$
2,626

 
$
5,036

 
$
5,002

 
 
 
 
 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.33

 
$
0.43

 
$
0.82

 
$
0.81

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.33

 
$
0.43

 
$
0.82

 
$
0.81

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.33

 
$
0.42

 
$
0.82

 
$
0.80

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.33

 
$
0.42

 
$
0.82

 
$
0.80

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,068

 
6,159

 
6,110

 
6,181

Weighted-average shares––diluted
 
6,137

 
6,243

 
6,176

 
6,267

Cash dividends paid per common share
 
$
0.30

 
$
0.28

 
$
0.60

 
$
0.56

(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9A. Identifiable Intangible Assets and Goodwill:Identifiable Intangible Assets.
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

Net income before allocation to noncontrolling interests
 
$
2,035

 
$
2,635

 
$
5,061

 
$
5,017

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments, net
 
514

 
(327
)
 
581

 
(1,635
)
 
 
514

 
(327
)
 
581

 
(1,635
)
Unrealized holding gains/(losses) on derivative financial instruments, net
 
(571
)
 
452

 
(845
)
 
137

Reclassification adjustments for realized (gains)/losses(a)
 
469

 
(743
)
 
130

 
(510
)
 
 
(102
)
 
(291
)
 
(714
)
 
(373
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
350

 
(200
)
 
479

 
(527
)
Reclassification adjustments for realized (gains)/losses(a)
 
(226
)
 
498

 
(16
)
 
745

 
 
124

 
299

 
463

 
218

Benefit plans: actuarial gains/(losses), net
 
(19
)
 
(9
)
 
(19
)
 
22

Reclassification adjustments related to amortization(b)
 
139

 
134

 
278

 
269

Reclassification adjustments related to settlements, net(b)
 
22

 
22

 
48

 
62

Other
 
(57
)
 
(29
)
 
(18
)
 
130

 
 
85

 
118

 
288

 
483

Benefit plans: prior service credits and other, net
 
87

 
507

 
87

 
506

Reclassification adjustments related to amortization(b)
 
(41
)
 
(34
)
 
(81
)
 
(69
)
Reclassification adjustments related to curtailments, net(b)
 

 
(7
)
 
(6
)
 
(17
)
Other
 
1

 
(2
)
 
6

 
(2
)
 
 
48

 
464

 
6

 
418

Other comprehensive income/(loss), before tax
 
669

 
263

 
624

 
(890
)
Tax provision/(benefit) on other comprehensive income/(loss)(c)
 
36

 
228

 
(5
)
 
332

Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
633

 
$
35

 
$
629

 
$
(1,222
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
2,668

 
$
2,670

 
$
5,690

 
$
3,795

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 
21

 
8

 
24

 
(3
)
Comprehensive income attributable to Pfizer Inc.
 
$
2,647

 
$
2,663

 
$
5,666

 
$
3,797

(a) 
Reclassified into Other (income)/deductions—net in the condensed consolidated statements of income.
(b) 
Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income. For additional information, see Note 10. Pension and Postretirement Benefit Plans.
(c) 
See Note 5C. Tax Matters: Tax Provision/(Benefit) on Other Comprehensive Income/(Loss).
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

6


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
December 31,
2015

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
3,411

 
$
3,641

Short-term investments
 
17,531

 
19,649

Trade accounts receivable, less allowance for doubtful accounts: 2016—$670; 2015—$384
 
9,138

 
8,176

Inventories
 
7,614

 
7,513

Current tax assets
 
3,127

 
2,662

Other current assets
 
3,023

 
2,163

Total current assets
 
43,845

 
43,804

Long-term investments
 
13,124

 
15,999

Property, plant and equipment, less accumulated depreciation: 2016—$14,637; 2015—$13,502
 
13,609

 
13,766

Identifiable intangible assets, less accumulated amortization
 
43,056

 
40,356

Goodwill
 
50,600

 
48,242

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,805

 
1,794

Other noncurrent assets
 
4,618

 
3,420

Total assets
 
$
170,658

 
$
167,381

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
13,724

 
$
10,159

Trade accounts payable
 
3,261

 
3,620

Dividends payable
 
1,820

 
1,852

Income taxes payable
 
647

 
418

Accrued compensation and related items
 
1,594

 
2,359

Other current liabilities
 
11,053

 
10,990

Total current liabilities
 
32,099

 
29,399

 
 
 
 
 
Long-term debt
 
30,457

 
28,740

Pension benefit obligations, net
 
5,224

 
6,310

Postretirement benefit obligations, net
 
1,877

 
1,809

Noncurrent deferred tax liabilities
 
28,300

 
26,877

Other taxes payable
 
4,116

 
3,992

Other noncurrent liabilities
 
5,518

 
5,257

Total liabilities
 
107,592

 
102,384

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
25

 
26

Common stock
 
461

 
459

Additional paid-in capital
 
82,138

 
81,016

Treasury stock
 
(84,313
)
 
(79,252
)
Retained earnings
 
73,350

 
71,993

Accumulated other comprehensive loss
 
(8,891
)
 
(9,522
)
Total Pfizer Inc. shareholders’ equity
 
62,769

 
64,720

Equity attributable to noncontrolling interests
 
297

 
278

Total equity
 
63,066

 
64,998

Total liabilities and equity
 
$
170,658

 
$
167,381

Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

7


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
June 28,
2015

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
5,061

 
$
5,017

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

 
 

Depreciation and amortization
 
2,812

 
2,461

Asset write-offs and impairments
 
983

 
42

Deferred taxes from continuing operations
 
(10
)
 
(183
)
Share-based compensation expense
 
387

 
347

Benefit plan contributions in excess of expense
 
(857
)
 
(842
)
Other adjustments, net
 
170

 
(194
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(3,316
)
 
(1,879
)
Net cash provided by operating activities
 
5,230

 
4,770

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(702
)
 
(497
)
Purchases of short-term investments
 
(8,744
)
 
(16,029
)
Proceeds from redemptions/sales of short-term investments
 
14,757

 
20,483

Net (purchases of)/proceeds from redemptions/sales of short-term investments with original maturities of three months or less
 
(249
)
 
3,020

Purchases of long-term investments
 
(3,126
)
 
(5,422
)
Proceeds from redemptions/sales of long-term investments
 
2,427

 
3,291

Acquisitions of businesses, net of cash acquired
 
(4,616
)
 
(679
)
Acquisitions of intangible assets
 
(96
)
 
(12
)
Other investing activities, net
 
26

 
333

Net cash (used in)/provided by investing activities
 
(323
)
 
4,487

 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
2,307

 
2,022

Principal payments on short-term borrowings
 
(2,291
)
 
(11
)
Net proceeds from short-term borrowings with original maturities of three months or less
 
2,182

 
481

Proceeds from issuance of long-term debt
 
5,031

 

Principal payments on long-term debt
 
(4,317
)
 
(2,995
)
Purchases of common stock
 
(5,000
)
 
(6,000
)
Cash dividends paid
 
(3,675
)
 
(3,483
)
Proceeds from exercise of stock options
 
696

 
981

Other financing activities, net
 
(2
)
 
154

Net cash used in financing activities
 
(5,069
)
 
(8,852
)
Effect of exchange-rate changes on cash and cash equivalents
 
(68
)
 
(78
)
Net increase/(decrease) in cash and cash equivalents
 
(230
)
 
327

Cash and cash equivalents, beginning
 
3,641

 
3,343

Cash and cash equivalents, end
 
$
3,411

 
$
3,670

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,111

 
$
1,124

Interest
 
903

 
914

Amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

8


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

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout the condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.

We prepared the condensed consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted.

The financial information included in our condensed consolidated financial statements for subsidiaries operating outside the U.S. is as of and for the three and six months ended May 29, 2016 and May 24, 2015. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and six months ended July 3, 2016 and June 28, 2015.

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 2015 Form 10-K.

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to Pfizer Inc. and its subsidiaries.

Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts.

Effective in the second quarter of 2016, our segments were reorganized to reflect that we now manage our innovative pharmaceutical and consumer healthcare operations as one business segment, Pfizer Innovative Health (IH) (previously these businesses were managed as two segments: the GIP segment and the VOC segment). Also, in the second quarter of 2016, we changed the name of our Established Products business to Pfizer Essential Health (EH). We have revised prior-period segment information to reflect the reorganization. For additional information, see Note 13.
In the condensed consolidated balance sheet as of December 31, 2015, we performed certain reclassifications to conform to the current period presentation of Other current assets, Other noncurrent assets, Short-term borrowings, including current portion of long-term debt and Long-term debt, and in the condensed consolidated statement of cash flows for the six months ended June 28, 2015, we performed certain reclassifications to conform to the current presentation of Proceeds from short-term borrowings for debt issuance costs in accordance with the adoption of a new accounting standard (for additional information, see Note 1B).
On June 24, 2016 (the acquisition date), we completed our acquisition of Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion, net of cash acquired), plus $698 million debt assumed. Commencing from the acquisition date, our financial statements reflect the assets, liabilities and cash flows of Anacor. The operating results for Anacor for five days from June 24, 2016 to July 3, 2016 were immaterial. See Note 2A for additional information.

On April 6, 2016, we announced that the merger agreement between Pfizer and Allergan entered into on November 22, 2015 was terminated by mutual agreement of the companies. The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement. In connection with the termination of the merger agreement, on April 8, 2016 (which falls into Pfizer’s second fiscal quarter), Pfizer paid Allergan $150 million (pre-tax) for reimbursement of Allergan’s expenses associated with the terminated transaction (see Note 4). Pfizer and Allergan also released each other from any and all claims in connection with the merger agreement.


9


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

On September 3, 2015, we completed our acquisition of Hospira and, commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Hospira. As a result, legacy Hospira operations are reflected in our results of operations, EH’s operating results, and cash flows for the second quarter and first six months of 2016, but not for the second quarter and first six months of 2015. Legacy Hospira assets and liabilities are reflected in our balance sheets as of July 3, 2016 and December 31, 2015.

B. Adoption of New Accounting Standards

We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. The update does not impact the measurement or recognition of debt issuance costs. As of July 3, 2016, debt issuance costs were $93 million and are presented as contra-liabilities to Short-term borrowings, including current portion of long-term debt ($2 million) and Long-term debt ($91 million). In the December 31, 2015 condensed consolidated balance sheet, we have reclassified debt issuance costs of $79 million ($1 million from Other current assets and $79 million from Other noncurrent assets) and have presented them as contra-liabilities to Short-term borrowings, including current portion of long-term debt ($1 million) and Long-term debt ($79 million) to conform to the current period presentation. For additional information, see Note 7A.

We adopted a new standard as of January 1, 2016 that requires an acquirer to recognize adjustments made in the measurement period to provisional amounts of assets acquired and liabilities assumed in a business combination in the reporting period in which the adjustment amounts are determined. There was no material impact to our condensed consolidated financial statements in the second quarter and first six months of 2016 from adopting this standard. For additional information, see Note 2A.

We adopted a new standard as of January 1, 2016 related to the accounting for hybrid financial instruments issued or held as investments and there was no material impact to our condensed consolidated financial statements from adopting this standard.

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 inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (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.
Note 2. Acquisitions, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment

A. Acquisitions

Anacor Pharmaceuticals, Inc.

On June 24, 2016 (the acquisition date), we completed our acquisition of Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion net of cash acquired), plus $698 million debt assumed. Anacor is now a wholly-owned subsidiary of Pfizer. Anacor is a biopharmaceutical company focused on novel small-molecule therapeutics derived from its boron chemistry platform. Included within Anacor’s pipeline is crisaborole, a non-steroidal topical PDE-4 inhibitor with anti-inflammatory properties. In connection with this acquisition, we recorded $698 million as the fair value of notes payable in cash, and provisionally recorded $5.0 billion in Identifiable intangible assets, primarily consisting of $4.8 billion of In-process research and development, and provisionally recorded $1.8 billion of Goodwill and $1.6 billion of net deferred tax liabilities. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not been finalized.


10


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

Hospira, Inc.

On September 3, 2015 (the acquisition date), we acquired Hospira, a leading provider of sterile injectable drugs and infusion technologies as well as a provider of biosimilars, for $90 per share in cash. The total fair value of consideration transferred for Hospira was approximately $16.1 billion in cash ($15.7 billion, net of cash acquired). Hospira is now a subsidiary of Pfizer. The combination of local Pfizer and Hospira entities may be pending in various jurisdictions and integration is subject to completion of various local legal and regulatory steps.

The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date, as well as adjustments made in the first six months of 2016 to the provisional amounts initially recorded in 2015 (measurement period adjustments) with a corresponding change to goodwill. Certain estimated values are not yet finalized (see below) and are subject to change. We will finalize the amounts recognized as we obtain the information necessary to complete the analyses, but no later than one year from the acquisition date.
(MILLIONS OF DOLLARS)
 
Amounts Recognized
as of Acquisition Date (as previously reported as of December 31, 2015)

 
Measurement Period Adjustments(a)

 
Amounts Recognized as of Acquisition Date (as adjusted)

Working capital, excluding inventories
 
$
274

 
$
(16
)
 
$
257

Inventories
 
1,924

 
(23
)
 
1,901

PP&E
 
2,410

 
(57
)
 
2,352

Identifiable intangible assets, excluding IPR&D
 
8,270

 
20

 
8,290

IPR&D
 
995

 
35

 
1,030

Other noncurrent assets
 
408

 
(46
)
 
362

Long-term debt
 
(1,928
)
 

 
(1,928
)
Benefit obligations
 
(117
)
 

 
(117
)
Net income tax accounts
 
(3,394
)
 
84

 
(3,310
)
Other noncurrent liabilities
 
(39
)
 

 
(39
)
Total identifiable net assets
 
8,803

 
(4
)
 
8,799

Goodwill
 
7,284

 
4

 
7,288

Net assets acquired/total consideration transferred
 
$
16,087

 
$

 
$
16,087

(a) 
The changes in the estimated fair values are primarily to better reflect market participant assumptions about facts and circumstances existing as of the acquisition date. The measurement period adjustments did not result from intervening events subsequent to the acquisition date.
The change in the provisional amounts did not have a material impact on our results of operations.
The following items are subject to change:
Amounts for certain legal and environmental contingencies, pending receipt of certain information that could affect provisional amounts recorded.
Amounts for intangibles and PP&E, pending finalization of valuation efforts.
Amounts for income tax assets, receivables and liabilities, pending the filing of Hospira pre-acquisition tax returns and the receipt of information including but not limited to that from taxing authorities, which may change certain estimates and assumptions used.
The following table provides supplemental pro forma information as if the acquisition of Hospira had occurred on January 1, 2014:
 
 
Unaudited Supplemental
Pro Forma Consolidated Results
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
 
June 28,
2015

 
June 28,
2015

Revenues
 
$
13,037

 
$
25,075

Net income attributable to Pfizer Inc. common shareholders
 
2,703

 
5,079

Diluted EPS attributable to Pfizer Inc. common shareholders
 
0.43

 
0.81


11


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

The unaudited supplemental pro forma consolidated results do not purport to reflect what the combined company’s results of operations would have been had the acquisition occurred on January 1, 2014, nor do they project the future results of operations of the combined company or reflect the expected realization of any cost savings associated with the acquisition. The actual results of operations of the combined company may differ significantly from the pro forma adjustments reflected here due to many factors. The unaudited supplemental pro forma financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and the liabilities assumed from Hospira.
The unaudited supplemental pro forma consolidated results reflect the historical financial information of Pfizer and Hospira, adjusted to give effect to the acquisition of Hospira as if it had occurred on January 1, 2014, primarily for the following pre-tax adjustments:
Elimination of Hospira’s historical intangible asset amortization expense (approximately $12 million in the second quarter of 2015 and $24 million in the first six months of 2015).
Additional amortization expense (approximately $124 million in the second quarter of 2015 and $251 million in the first six months of 2015) related to the preliminary estimate of the fair value of identifiable intangible assets acquired.
Additional depreciation expense (approximately $21 million in the second quarter of 2015 and $43 million in the first six months of 2015) related to the preliminary estimate of the fair value adjustment to PP&E acquired.
Adjustment related to the preliminary estimate of the non-recurring fair value adjustment to acquisition-date inventory estimated to have been sold (the addition of $5 million of charges in the second quarter of 2015 and $9 million of charges in the first six months of 2015).
Adjustment to decrease interest expense (approximately $10 million in the second quarter of 2015 and $20 million in the first six months of 2015) related to the fair value adjustment of Hospira debt.
Adjustment for non-recurring acquisition-related costs directly attributable to the acquisition (the elimination of $30 million of charges in the second quarter of 2015 and $44 million of charges in the first six months of 2015), reflecting non-recurring charges incurred by both Hospira and Pfizer, which would have been recorded in 2014 under the pro forma assumption that the Hospira acquisition was completed on January 1, 2014.

The above adjustments were adjusted for the applicable tax impact. The taxes associated with the adjustments related to the preliminary estimate of the fair value adjustment for acquired intangible assets, PP&E, inventory and debt reflect the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred. The taxes associated with the elimination of Hospira’s historical intangible asset amortization expense and the adjustment for the acquisition-related costs directly attributable to the acquisition were based on the tax rate in the jurisdiction in which the related deductible costs were incurred.
Marketed Vaccines Business of Baxter International Inc.
On December 1, 2014 (which falls in the first fiscal quarter of 2015 for our international operations), we acquired Baxters portfolio of marketed vaccines for a final purchase price of $648 million. The portfolio that was acquired consists of NeisVac-C and FSME-IMMUN/TicoVac. NeisVac-C is a vaccine that helps protect against meningitis caused by group C meningococcal meningitis and FSME-IMMUN/TicoVac is a vaccine that helps protect against tick-borne encephalitis. In connection with this acquisition, we recorded $376 million in Identifiable intangible assets, primarily consisting of $371 million in Developed technology rights. We also recorded $194 million of Inventories and $12 million in Goodwill. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.

12


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

B. Research and Development and Collaborative Arrangements

Research and Development Arrangement with NovaQuest Co-Investment Fund II, L.P.
In May 2016, our agreement with NovaQuest became effective, under which NovaQuest will fund up to $250 million in development costs related to certain Phase III clinical trials of Pfizer’s bococizumab compound and Pfizer will use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. Following potential regulatory approval, NovaQuest will be eligible to receive a combination of fixed milestone payments of up to $195 million in total based on achievement of first commercial sale and certain levels of cumulative net sales as well as royalties on bococizumab net sales over approximately nine years. NovaQuest’s development funding is expected to cover up to 40% of the development costs and will be received over five quarters during 2016 and 2017. As there is a substantive and genuine transfer of risk to NovaQuest, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the second quarter and first six months of 2016 totaled $69.3 million. Fixed sales-based milestone payments will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the bococizumab product and royalties on net sales will be recorded as Cost of sales when incurred.
Research and Development Arrangement with NovaQuest Co-Investment Fund V, L.P.
In April 2016, Pfizer entered into an agreement with NovaQuest under which NovaQuest will fund up to $200 million in development costs related to certain Phase III clinical trials of Pfizer’s rivipansel compound and Pfizer will use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. Following potential regulatory approval, NovaQuest will be eligible to receive a combination of fixed milestone payments of up to approximately $267 million in total based on achievement of first commercial sale and certain levels of cumulative net sales as well as royalties on rivipansel net sales over approximately eight years. NovaQuest’s development funding is expected to cover up to 100% of the development costs and will be received over approximately twelve quarters from 2016 to 2019. As there is a substantive and genuine transfer of risk to NovaQuest, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the second quarter and first six months of 2016 totaled $15.0 million. Fixed sales-based milestone payments will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the rivipansel product and royalties on net sales will be recorded as Cost of sales when incurred.

Research and Development Arrangement with RPI Finance Trust

In January 2016, Pfizer entered into an agreement with RPI, a subsidiary of Royalty Pharma, under which RPI will fund up to $300 million in development costs related to certain Phase III clinical trials of Pfizer’s Ibrance (palbociclib) product primarily for adjuvant treatment of hormone receptor positive early breast cancer (the Indication). If successful and upon approval of Ibrance in the U.S. or certain major markets in the EU for the Indication based on the applicable clinical trials, RPI will be eligible to receive a combination of approval-based fixed milestone payments of up to $250 million dependent upon results of the clinical trials and royalties on certain Ibrance sales over approximately seven years. RPI’s development funding is expected to cover up to 100% of the costs primarily for the applicable clinical trials through 2021. As there is a substantive and genuine transfer of risk to RPI, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the second quarter of 2016 totaled $12.9 million and for the first six months of 2016 totaled $21.7 million. Fixed milestone payments due upon approval will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the Ibrance product and sales-based royalties will be recorded as Cost of sales when incurred.
Collaboration with Eli Lilly & Company

In October 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizer’s tanezumab, which provides that Pfizer and Lilly will equally share product-development expenses as well as potential revenues and certain product-related costs. Following the decision by the FDA in March 2015 to lift the partial clinical hold on the tanezumab development program, we received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which is recorded as deferred income in our condensed consolidated balance sheet and is being recognized into Other (income)/deductions––net over a multi-year period beginning in the second quarter of 2015. Pfizer and Lilly resumed the Phase 3 chronic pain program for tanezumab in July 2015, which will consist of six studies in approximately 7,000 patients across osteoarthritis, chronic low back pain and cancer pain. Under the collaboration agreement

13


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

with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.

Collaboration with OPKO Health, Inc.
We entered into a collaborative agreement with OPKO, which closed in January 2015, to develop and commercialize OPKO’s long-acting hGH-CTP for the treatment of GHD in adults and children, as well as for the treatment of growth failure in children born SGA who fail to show catch-up growth by two years of age. hGH-CTP has the potential to reduce the required dosing frequency of human growth hormone to a single weekly injection from the current standard of one injection per day. We have received the exclusive license to commercialize hGH-CTP worldwide. OPKO will lead the clinical activities and will be responsible for funding the development programs for the key indications, which include Adult and Pediatric GHD and Pediatric SGA. We will be responsible for all development costs for additional indications, all postmarketing studies, manufacturing and commercialization activities for all indications, and we will lead the manufacturing activities related to product development. In February 2015, we made an upfront payment of $295 million to OPKO, which was recorded in Research and development expenses, and OPKO is eligible to receive up to an additional $275 million upon the achievement of certain regulatory milestones. OPKO is also eligible to receive royalty payments associated with the commercialization of hGH-CTP for Adult GHD, which is subject to regulatory approval. Upon the launch of hGH-CTP for Pediatric GHD, which is subject to regulatory approval, the royalties will transition to tiered gross profit sharing for both hGH-CTP and our product, Genotropin.

C. Equity-Method Investments

Investment in Hisun Pfizer Pharmaceuticals Company Limited

In the first quarter of 2016 and in the second quarter of 2016, we determined that we had other-than-temporary declines in the value of Hisun Pfizer, our 49%-owned equity-method investment in China, and, therefore, we recognized a loss of $81 million in the first quarter of 2016 and a loss of $130 million in the second quarter of 2016 in Other (income)/deductions––net (see Note 4). The declines in value resulted from lower expectations as to the future cash flows to be generated by Hisun Pfizer, primarily as a result of an increase in risk due to the continued slowdown in the Chinese economy and changes in the expected timing and number of new product introductions by Hisun Pfizer. As of July 3, 2016, the carrying value of our investment in Hisun Pfizer is $530 million, which is included in Long-term investments.
In valuing our investment in Hisun Pfizer, we used discounted cash flow techniques, utilizing a 13.0% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal, economic and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk. Changes in economic conditions or other factors underlying these assumptions could negatively impact the value of our investment in Hisun Pfizer in future periods.

Investment in Laboratório Teuto Brasileiro S.A.

In the first quarter of 2016, we determined that we had an other-than-temporary decline in the value of Teuto, a 40%-owned generics company in Brazil, and, therefore, we recognized a loss of $50 million in Other (income)/deductions––net (see Note 4) related to our equity-method investment. The decline in value resulted from lower expectations as to the future cash flows to be generated by Teuto, primarily due to a slowdown in Brazilian economic conditions, which have been impacted by political risk, higher inflation, and the depreciation of the Brazilian Real.

In valuing our investment in Teuto, we used discounted cash flow techniques, utilizing a 17.5% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal, economic and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk.


14


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

We have an option to acquire the remaining 60% of Teuto, and Teuto’s shareholders have an option to sell their 60% stake in the company to us. Under the terms of our agreement with Teuto’s other shareholders, 2016 is the final year in which the call and put options may be exercised. Our investment in Teuto is accounted for under the equity method due to the significant influence we have over the operations of Teuto through our board representation, minority veto rights and 40% voting interest.

D. Cost-Method Investment

AM-Pharma B.V.

In April 2015, we acquired a minority equity interest in AM-Pharma, a privately-held Dutch biopharmaceutical company focused on the development of recAP for inflammatory diseases, and secured an exclusive option to acquire the remaining equity in the company. The option becomes exercisable upon delivery of the clinical trial report after completion of a Phase II trial of recAP in the treatment of Acute Kidney Injury related to sepsis, which is expected to read out in 2017. Under the terms of the agreement, we paid $87.5 million for both the exclusive option and the minority equity interest, which was recorded as a cost-method investment in Long-term investments, and we may make additional payments of up to $512.5 million upon exercise of the option and potential launch of any product that may result from this investment.
Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

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

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as groups such as information technology, shared services and corporate operations.

In connection with our acquisition of Hospira, we are focusing our efforts on achieving an appropriate cost structure for the combined company. For up to a three-year period post-acquisition, we expect to incur costs of approximately $1 billion (not including costs of $215 million in 2015 associated with the return of acquired in-process research and development rights as described in the Current-Period Key Activities section of Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives in our 2015 Financial Report) associated with the integration of Hospira.

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. We have the following initiatives underway associated with these programs:
Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of six sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $400 million associated with prior acquisition activity and costs of approximately $1.0 billion associated with new non-acquisition-related cost-reduction initiatives. Through July 3, 2016, we incurred approximately $364 million and $685 million, respectively, associated with these initiatives.
The 2014 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 different reporting requirements. Through July 3, 2016, we incurred costs of approximately $219 million and have completed this initiative.
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 $800 million. Through July 3, 2016, we incurred approximately $657 million associated with these initiatives.

15


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

The costs expected to be incurred during 2014-2016, of approximately $2.4 billion in total for the above-mentioned programs (but not including expected costs associated with the Hospira integration), include restructuring charges, 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 six months of 2016, we incurred approximately $625 million in cost-reduction and acquisition-related costs (excluding transaction costs) primarily in connection with the integration of Hospira and the aforementioned manufacturing plant network rationalization and optimization program.
The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
93

 
$
34

 
$
117

 
$
65

Asset impairments
 
16

 
5

 
18

 
11

Exit costs
 
31

 
4

 
35

 
10

Total restructuring charges
 
141

 
43

 
170

 
85

Transaction costs(b)
 
36

 
1

 
60

 
6

Integration costs(c)
 
139

 
42

 
227

 
54

Restructuring charges and certain acquisition-related costs
 
316

 
86

 
457

 
146

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

 
 

 
 

 
 

Cost of sales
 
52

 
28

 
99

 
45

Research and development expenses
 
1

 
1

 
5

 
2

Total additional depreciation––asset restructuring
 
53

 
28

 
104

 
47

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

 
 

 
 

 
 

Cost of sales
 
38

 
28

 
81

 
41

Selling, informational and administrative expenses
 
20

 
13

 
33

 
39

Research and development expenses
 
5

 
3

 
9

 
12

Other (income)/deductions––net
 
1

 
1

 
1

 
1

Total implementation costs
 
64

 
45

 
124

 
93

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
433

 
$
159

 
$
685

 
$
286

(a) 
In the six months ended July 3, 2016, Employee terminations represent the expected reduction of the workforce by approximately 600 employees, mainly in manufacturing, sales and research. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits, many of which may be paid out during periods after termination.
The restructuring charges for 2016 are associated with the following:
For the second quarter of 2016, the IH segment ($5 million); the EH segment ($11 million income); WRD, GPD and Medical (M) (WRD/GPD/M) ($49 million); manufacturing operations ($59 million); and Corporate ($39 million).
For the first six months of 2016, IH ($14 million); EH ($8 million income); WRD/GPD/M ($52 million); manufacturing operations ($73 million); and Corporate ($40 million).
The restructuring charges for 2015 are associated with the following:
For the second quarter of 2015, IH ($21 million); EH ($2 million income); WRD/GPD/M ($4 million); manufacturing operations ($14 million); and Corporate ($6 million).
For the first six months of 2015, IH ($46 million); EH ($8 million); WRD/GPD/M ($16 million); manufacturing operations ($8 million income); and Corporate ($24 million).
(b) 
Transaction costs represent external costs for banking, legal, accounting and other similar services, most of which in the second quarter of 2016 are directly related to the acquisition of Anacor, and most of which in the first six months of 2016 includes costs related to the Anacor acquisition, as well as costs associated with our terminated transaction with Allergan.
(c) 
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. In the second quarter and first six months of 2016, integration

16


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

costs primarily relate to our acquisition of Hospira and the terminated transaction with Allergan. Integration costs in 2015 represent external incremental costs directly related to our acquisition with Hospira.
(d) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(e) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.
The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)
 
Employee
Termination Costs

 
Asset
Impairment Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2015(a)
 
$
1,109

 
$

 
$
48

 
$
1,157

Provision
 
117

 
18

 
35

 
170

Utilization and other(b)
 
(248
)
 
(18
)
 
(43
)
 
(309
)
Balance, July 3, 2016(c)
 
$
978

 
$

 
$
40

 
$
1,018

(a) 
Included in Other current liabilities ($776 million) and Other noncurrent liabilities ($381 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($541 million) and Other noncurrent liabilities ($477 million).

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

Interest income(a)
 
$
(122
)
 
$
(119
)
 
$
(234
)
 
$
(211
)
Interest expense(a)
 
292

 
278

 
598

 
587

Net interest expense
 
170

 
159

 
363

 
375

Royalty-related income
 
(274
)
 
(257
)
 
(461
)
 
(479
)
Certain legal matters, net(b)
 
261

 
99

 
534

 
99

Net gains on asset disposals(c)
 
(31
)
 
(19
)
 
(39
)
 
(195
)
Certain asset impairments(d)
 
816

 
25

 
947

 
25

Business and legal entity alignment costs(e)
 
60

 
63

 
111

 
164

Other, net(f)
 
66

 
(15
)
 
(57
)
 
20

Other (income)/deductions––net
 
$
1,068

 
$
55

 
$
1,398

 
$
9

(a) 
Interest income increased in the second quarter and first six months of 2016, primarily due to higher investment returns. Interest expense increased in the second quarter and first six months of 2016, primarily due to interest on legacy Hospira debt acquired in September 2015 and the addition of new fixed rate debt in the second quarter of 2016, partially offset by the maturity of other fixed rate debt.
(b) 
In the second quarter and first six months of 2016, primarily includes amounts to resolve a Multi-District Litigation relating to Celebrex and Bextra pending against the Company in New York federal court for $486 million, which is subject to the negotiation of a final settlement agreement and court approval, a portion of which was accrued for during the first quarter of 2016 and the full amount of which was accrued for during the first six months of 2016, partially offset by the reversal of a legal accrual where a loss is no longer deemed probable. In addition, the first six months of 2016 includes a settlement related to a patent matter. See Note 12A2 for additional information.
(c) 
In the first six months of 2016, primarily includes gains on sales/out-licensing of product and compound rights (approximately $31 million). In the first six months of 2015, primarily includes gains on sales/out-licensing of product and compound rights (approximately $69 million) and gains on sales of investments in equity securities (approximately $125 million).
(d) 
In the second quarter and first six months of 2016, primarily includes intangible asset impairment charges of $641 million, reflecting (i) $331 million related to developed technology rights for a generic injectable antibiotic product for the treatment of bacterial infections; (ii) $265 million related to an IPR&D compound for the treatment of anemia; and (iii) $45 million of other IPR&D assets, all acquired in connection with our acquisition of Hospira and associated with the EH segment. In addition, 2016 includes an impairment loss of $130 million in the second quarter and $211 million in the first six months related to Pfizer’s 49%-owned equity-method investment with Zhejiang Hisun Pharmaceuticals Co., Ltd. in China, Hisun Pfizer, and the first six months of 2016 includes an impairment loss of $50 million related to Pfizer's 40%-owned equity-method investment in Teuto. For additional information concerning Hisun Pfizer and Teuto, see Note 2C.
The intangible asset impairment charge for the IPR&D compound for the treatment of anemia reflects, among other things, the impact of regulatory delays, including delays resulting from a recent court ruling, requiring a 180-day waiting period after approval before a biosimilar product can be launched. The intangible asset impairment charges for 2016 for developed technology rights and other IPR&D

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

assets reflect, among other things, the impact of new scientific findings, updated commercial forecasts, changes in pricing, and an increased competitive environment.
(e) 
In the second quarter and first six months of 2016 and 2015, represents expenses for changes to our infrastructure to align our commercial operations, including costs to internally separate our businesses into distinct legal entities, as well as to streamline our intercompany supply operations to better support each business.
(f) 
In the second quarter and first six months of 2016, primarily includes among other things, $150 million paid to Allergan for reimbursement of Allergan’s expenses associated with the terminated transaction (see Note 1A). The first six months of 2016, also includes income of $116 million from resolution of a contract disagreement.
The following table provides additional information about the intangible assets that were impaired during 2016 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Six Months Ended
July 3, 2016
(MILLIONS OF DOLLARS)
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––IPR&D(b)
 
$
35

 
$

 
$

 
$
35

 
$
310

Intangible assets––Developed technology rights (b)
 
66

 

 

 
66

 
331

Total
 
$
101

 
$

 
$

 
$
101

 
$
641

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C.
(b) 
Reflects intangible assets written down to fair value in the first six months of 2016. 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 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 15.6% for the second quarter of 2016, compared to 25.6% for the second quarter of 2015 and was 15.2% for the first six months of 2016, compared to 24.3% for the first six months of 2015.
The lower effective tax rate for the second quarter of 2016 in comparison with the same period in 2015 was primarily due to:
a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; as well as
an increase in benefits associated with the U.S. R&D tax credit, which was not in effect in the prior year quarter but was permanently extended on December 18, 2015.
The lower effective tax rate for the first six months of 2016 in comparison with the same period in 2015 was primarily due to:
benefits related to the final resolution of an agreement in principle reached in February 2016 to resolve certain claims related to Protonix, which resulted in the receipt of information that raised our assessment of the likelihood of prevailing on the technical merits of our tax position;
a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business;
benefits associated with our Venezuela operations;
an increase in benefits associated with the U.S. R&D tax credit, which was not in effect in the first six months of the prior year but was permanently extended on December 18, 2015; as well as
an increase in tax benefits associated with the resolution of certain tax positions pertaining to prior years primarily with various foreign tax authorities, and the expiration of certain statutes of limitations.

18


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

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 U.S. is one of our major tax jurisdictions, and we are regularly audited by the IRS:
With respect to Pfizer, the IRS has issued a RAR for tax years 2009-2010. We are not in agreement with the RAR and are currently appealing certain disputed issues. Tax years 2011-2013 are currently under audit. Tax years 2014-2016 are open, but not under audit. All other tax years are closed.
With respect to Hospira, the federal income tax audit of tax years 2010-2011 was effectively settled in the second quarter of 2016. The IRS is currently auditing tax years 2012-2013. Tax years 2014-2015 (through date of acquisition) are open but not under audit. All other tax years are closed. The open tax years and audits for Hospira are not considered material to Pfizer.
With respect to Anacor, the open tax years are not considered material to Pfizer.
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2010-2016), Japan (2015-2016), Europe (2007-2016, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2016, primarily reflecting Brazil) and Puerto Rico (2010-2016).
C. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of Tax provision/(benefit) on other comprehensive income/(loss):
 
 
Three Months Ended
 
Six Months Ended
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

Foreign currency translation adjustments, net(a)
 
$
(1
)
 
$
12

 
$
(15
)
 
$
97

Unrealized holding gains/(losses) on derivative financial instruments, net
 
(157
)
 
120

 
(193
)
 
(103
)
Reclassification adjustments for realized (gains)/losses
 
122

 
(155
)
 
49

 
28

 
 
(35
)
 
(34
)
 
(144
)
 
(75
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
49

 
(37
)
 
65

 
(69
)
Reclassification adjustments for realized (gains)/losses
 
(28
)
 
63

 
(2
)
 
62

 
 
21

 
25

 
63

 
(7
)
Benefit plans: actuarial gains/(losses), net
 
(8
)
 
(4
)
 
(8
)
 
8

Reclassification adjustments related to amortization
 
47

 
45

 
93

 
90

Reclassification adjustments related to settlements, net
 
8

 
8

 
17

 
23

Other
 
(9
)
 
1

 
(9
)
 
38

 
 
38

 
49

 
93

 
159

Benefit plans: prior service credits and other, net
 
31

 
192

 
31

 
191

Reclassification adjustments related to amortization
 
(15
)
 
7

 
(30
)
 
(6
)
Reclassification adjustments related to curtailments, net
 

 
(22
)
 
(2
)
 
(26
)
Other
 
(2
)
 
(1
)
 
(1
)
 
(1
)
 
 
14

 
176

 
(3
)
 
159

Tax provision/(benefit) on other comprehensive income/(loss)
 
$
36

 
$
228

 
$
(5
)
 
$
332

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

19


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

Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
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, 2015
 
$
(5,863
)
 
$
421

 
$
(227
)
 
$
(4,733
)
 
$
880

 
$
(9,522
)
Other comprehensive income/(loss)(a)
 
598

 
(571
)
 
399

 
196

 
9

 
630

Balance, July 3, 2016
 
$
(5,265
)
 
$
(150
)
 
$
172

 
$
(4,538
)
 
$
889

 
$
(8,891
)
(a) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $1 million loss for the first six months of 2016.

As of July 3, 2016, with respect to derivative financial instruments, the amount of unrealized pre-tax losses estimated to be reclassified into income within the next 12 months is $79 million (which is expected to be offset primarily by gains resulting from reclassification adjustments related to foreign currency exchange-denominated intercompany sales).

20


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)
 
July 3,
2016

 
December 31,
2015

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading funds(b)
 
$
240

 
$
287

Available-for-sale debt securities(c)
 
27,374

 
32,078

Money market funds
 
1,113

 
934

Available-for-sale equity securities(c)
 
584

 
603

Derivative financial instruments in a receivable position(d):
 
 

 
 

Interest rate swaps
 
1,978

 
837

Foreign currency swaps
 
92

 
135

Foreign currency forward-exchange contracts
 
188

 
559

 
 
31,569

 
35,433

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
1,166

 
1,388

Private equity securities, carried at equity-method or at cost(e), (f)
 
1,027

 
1,336

 
 
2,193

 
2,724

Total selected financial assets
 
$
33,762

 
$
38,157

Selected financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(g):
 
 

 
 

Interest rate swaps
 
$
4

 
$
139

Foreign currency swaps
 
1,432

 
1,489

Foreign currency forward-exchange contracts
 
366

 
81

 
 
1,802

 
1,709

Other selected financial liabilities
 
 

 
 

Short-term borrowings:
 
 
 
 
Principal amount
 
13,442

 
10,160

Net fair value adjustments related to hedging and purchase accounting
 
290

 
2

Net unamortized discounts, premiums and debt issuance costs(h)
 
(8
)
 
(3
)
Total short-term borrowings, carried at historical proceeds, as adjusted(e)
 
13,724

 
10,159

Long-term debt:
 
 
 
 
Principal amount
 
28,113

 
27,573

Net fair value adjustments related to hedging and purchase accounting
 
2,432

 
1,294

Net unamortized discounts, premiums and debt issuance costs(h)
 
(87
)
 
(127
)
Total long-term debt, carried at historical proceeds, as adjusted(i)
 
30,457

 
28,740

 
 
44,181

 
38,899

Total selected financial liabilities
 
$
45,983

 
$
40,608

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. 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 and money market funds measured at net asset value.
(b) 
As of July 3, 2016, trading funds are composed of $184 million of trading equity funds and $57 million of trading debt funds. As of December 31, 2015, trading funds are composed of $185 million of trading equity funds and $102 million of trading debt funds. As of July 3, 2016 and December 31, 2015, trading equity funds of $66 million and $85 million, respectively, are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $77 million as of July 3, 2016; and foreign currency forward-exchange contracts with fair values of $136 million as of December 31, 2015.
(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 July 3, 2016 or December 31, 2015. 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 carried at cost are based on Level 3 inputs. Short-term borrowings include foreign currency short-term borrowings with fair values of $547 million as of December 31, 2015, which are used as hedging instruments.

21


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

(f) 
Our private equity securities represent investments in the life sciences sector.
(g) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $213 million and foreign currency forward-exchange contracts with fair values of $116 million as of July 3, 2016; and foreign currency swaps with fair values of $234 million and foreign currency forward-exchange contracts with fair values of $59 million as of December 31, 2015.
(h) 
We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. See Note 1B for additional information.
(i) 
The fair value of our long-term debt (not including the current portion of long-term debt) was $34.6 billion as of July 3, 2016 and $32.7 billion as of December 31, 2015. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach. Generally, the difference between the fair value of our long-term debt and the amount reported on the condensed 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 our condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
July 3,
2016

 
December 31,
2015

Assets
 
 
 
 
Cash and cash equivalents
 
$
848

 
$
978

Short-term investments
 
17,531

 
19,649

Long-term investments
 
13,124

 
15,999

Other current assets(a)
 
304

 
587

Other noncurrent assets(b)
 
1,954

 
944

 
 
$
33,762

 
$
38,157

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt(c)
 
$
13,724

 
$
10,159

Other current liabilities(d)
 
606

 
645

Long-term debt(c)
 
30,457

 
28,740

Other noncurrent liabilities(e)
 
1,196

 
1,064

 
 
$
45,983

 
$
40,608

(a) 
As of July 3, 2016, derivative instruments at fair value include interest rate swaps ($58 million), foreign currency swaps ($71 million) and foreign currency forward-exchange contracts ($175 million) and, as of December 31, 2015, include interest rate swaps ($2 million), foreign currency swaps ($46 million) and foreign currency forward-exchange contracts ($538 million).
(b) 
As of July 3, 2016, derivative instruments at fair value include interest rate swaps ($1.9 billion), foreign currency swaps ($21 million) and foreign currency forward-exchange contracts ($14 million) and, as of December 31, 2015, include interest rate swaps ($835 million), foreign currency swaps ($89 million) and foreign currency forward-exchange contracts ($20 million).
(c) 
We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. See Note 1B for additional information.
(d) 
As of July 3, 2016, derivative instruments at fair value include interest rate swaps ($3 million), foreign currency swaps ($265 million) and foreign currency forward-exchange contracts ($338 million) and, as of December 31, 2015, include interest rate swaps ($5 million), foreign currency swaps ($560 million) and foreign currency forward-exchange contracts ($80 million).
(e) 
As of July 3, 2016, derivative instruments at fair value include interest rate swaps ($1 million), foreign currency swaps ($1.2 billion) and foreign currency forward-exchange contracts ($28 million) and, as of December 31, 2015, include interest rate swaps ($134 million), foreign currency swaps ($928 million) and foreign currency forward-exchange contracts ($1 million).

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


22


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

B. Investments in Debt Securities
The following table provides the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
July 3,
2016

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Corporate debt(a)
 
$
4,136

 
$
4,623

 
$
1,707

 
$
33

 
$
10,499

Western European, Asian, Scandinavian and other government debt(b)
 
7,063

 
666

 
8

 

 
7,738

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
78

 
2,196

 
58

 

 
2,332

U.S. government debt
 
1,302

 
508

 
210

 

 
2,020

Western European, Scandinavian and other government agency debt(b)
 
1,700

 
162

 

 

 
1,862

Supranational debt(b)
 
804

 
375

 

 

 
1,179

Other asset-backed debt(c)
 
411

 
592

 
31

 
3

 
1,037

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
620

 
69

 
17

 

 
706

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Time deposits and other
 
1,149

 
1

 

 

 
1,151

Western European government debt(b)
 
15

 

 

 

 
15

Total debt securities
 
$
17,279

 
$
9,193

 
$
2,031

 
$
36

 
$
28,539

(a) 
Issued by a diverse group of corporations, largely consisting of financial institutions, virtually all of which are investment-grade.
(b) 
Issued by governments, government agencies or supranational entities, as applicable, all of which are investment-grade.
(c) 
Includes loan-backed, receivable-backed, and mortgage-backed securities, all of which are investment-grade and in senior positions in the capital structure of the security. Loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans, and receivable-backed securities are collateralized by credit cards receivables. Mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages. These securities are valued by third party models that use significant inputs derived from observable market data like prepayment rates, default rates, and recovery rates.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $8.0 billion as of July 3, 2016 and $4.9 billion as of December 31, 2015.

Our short-term debt increased due to the addition of legacy Anacor debt, recorded at the June 24, 2016 acquisition date fair value of $698 million. This debt is redeemable into cash at that amount by August 12, 2016, and otherwise redeemable through the maturity date by the note holders in accordance with the terms of the relevant indenture. As of July 3, 2016, $239 million of the debt has been redeemed.
The following table provides the components of unsecured short-term debt assumed from Anacor:
(MILLIONS OF DOLLARS)
 
As of July 3,
2016

2.00% Notes (Maturity Date 2021)
 
$
184

2.00% Notes (Maturity Date 2023)
 
275

Total short-term debt assumed from Anacor
 
$
459


D. Long-Term Debt

On June 3, 2016, we completed a public offering of $5.0 billion aggregate principal amount of senior unsecured notes. The notes are redeemable, in whole or in part, at any time at our option, at a redemption price equal to the greater of 100% of the principal amount of the notes or the sum of the present value of the remaining scheduled payments of principal and interest

23


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

discounted at the U.S. Treasury rate, plus an incremental spread ranging between 0.5% and 0.15%, depending on the maturity; plus, in each case, accrued and unpaid interest. Interest is payable semi-annually.
The following table provides the principal amounts and components of unsecured long-term debt issued in the second quarter of 2016:
(MILLIONS OF DOLLARS)
 
Maturity Date
 
As of July 3,
2016

1.20% Notes (2018 Notes)
 
June 1, 2018
 
$
1,250

1.45% Notes (2019 Notes)
 
June 3, 2019
 
850

1.95% Notes (2021 Notes)
 
June 3, 2021
 
1,150

2.75% Notes (2026 Notes)
 
June 3, 2026
 
1,250

4.40% Notes (2044 Notes)
 
May 15, 2044
 
500

Total long-term debt issued in the second quarter of 2016
 
 
 
$
5,000

The following table provides the maturity schedule of our Long-term debt outstanding as of July 3, 2016:
(MILLIONS OF DOLLARS)
 
2017
 
2018
 
2019
 
2020
 
After 2020
 
Total
Maturities
 
$

 
$
3,628

 
$
5,710

 
$
385

 
$
20,735

 
$
30,457


E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of July 3, 2016, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures was $31.5 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen and U.K. pound. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our 2.0 billion U.K. pound debt maturing in 2038.

Interest Rate Risk

As of July 3, 2016, the aggregate notional amount of interest rate derivative financial instruments was $19.7 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.

24


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:
 
 
Three Months Ended
 
 
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)
 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

 
July 3,
2016

 
June 28,
2015

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

 
$

 
$
(345
)
 
$
234

 
$
(243
)
 
$
240

Foreign currency forward-exchange contracts
 
(2
)
 

 
(227
)
 
204

 
(226
)
 
502

Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
3

 

 
(3
)
 
10

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges: