Other (Income)/Deductions—Net



The following table provides components of Other (income)/deductions––net:
	Three Months Ended						Nine Months Ended
(MILLIONS OF DOLLARS)	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
Interest income^(a)	$	(123	)	$	(121	)	$	(357	)	$	(332	)
Interest expense^(a)	291			278			889			864
Net interest expense	168			157			532			533
Royalty-related income	(233		)	(204		)	(695		)	(683		)
Certain legal matters, net^(b)	(40		)	—			494			99
Net gains on asset disposals^(c)	(47		)	(35		)	(81		)	(230		)
Impairment on remeasurement of HIS net assets^(d)	1,422			—			1,422			—
Certain asset impairments^(e)	133			633			1,080			658
Business and legal entity alignment costs^(f)	69			60			180			224
Other, net^(g)	(55		)	50			(117		)	70
Other (income)/deductions––net	$	1,417		$	661		$	2,815		$	670

^(a)

Interest income increased in the first nine months of 2016, primarily due to higher investment returns. Interest expense increased in the third quarter and first nine 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 in the second quarter of 2016.

^(b)

In the first nine 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 final court approval, partially offset by the reversal of a legal accrual where a loss is no longer deemed probable. In addition, the first nine months of 2016 includes a settlement related to a patent matter. See Note 12A2 for additional information.


^(c)	In the first nine months of 2016, includes gains on sales/out-licensing of product and compound rights (approximately $49 million). In the first nine months of 2015, primarily includes gains on sales/out-licensing of product and compound rights (approximately $76 million) and gains on sales of investments in equity securities (approximately $160 million).

^(d)

In the third quarter and first nine months of 2016, represents a charge related to the write-down of the HIS net assets to fair value less estimated costs to sell. In October 2016, ICU Medical and Pfizer announced that they entered into a definitive agreement under which ICU Medical will acquire all of Pfizer’s global infusion therapy net assets, HIS, for approximately $1 billion in cash and ICU Medical stock. HIS includes IV pumps, solutions and devices. See Note 2B for additional information.

^(e)

In the third quarter of 2016, primarily includes intangible asset impairment charges of $126 million, reflecting $97 million of sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma and $29 million of other IPR&D assets acquired in connection with our acquisition of King in 2011. The intangible asset impairment charges for the third quarter of 2016 are associated with the following: EH ($97 million) and IH ($29 million). In the first nine months of 2016, primarily includes intangible asset impairment charges of $767 million, reflecting (i) $331 million related to developed technology rights for a generic injectable antibiotic product for the treatment of bacterial infections; and (ii) $265 million related to an IPR&D compound for the treatment of anemia, both acquired in connection with our acquisition of Hospira; (iii) $97 million of sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma; and (iv) $74 million of other IPR&D assets, $45 million of which were acquired in connection with our acquisition of Hospira and $29 million of which were acquired in connection with our acquisition of King in 2011. The intangible asset impairment charges for the first nine months of 2016 are associated with the following: EH ($738 million) and IH ($29 million). In addition, the first nine months of 2016 includes an impairment loss of $211 million related to Pfizer’s 49%-owned equity-method investment with Zhejiang Hisun Pharmaceuticals Co., Ltd. in China, Hisun Pfizer, and 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 2D.

The intangible asset impairment charge for 2016 for the IPR&D compound for the treatment of anemia acquired in connection with our acquisition of Hospira 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 the sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma reflect, among other things, the impact of portfolio prioritization decisions and decreased commercial profiles of certain compounds. The intangible asset impairment charges for 2016 for developed technology rights and other IPR&D assets acquired in connection with our acquisition of Hospira reflect, among other things, the impact of new scientific findings, updated commercial forecasts, changes in pricing, and an increased competitive environment. The intangible asset impairment charges for 2016 for other IPR&D assets acquired in connection with our acquisition of King reflect changes in the competitive environment.

In the third quarter and first nine months of 2015, primarily includes an impairment loss of $470 million related to Pfizer's 49%-owned equity-method investment in Hisun Pfizer, and impairment charges for intangible assets of $163 million reflecting (i) $115 million related to developed technology rights for the treatment of attention deficit hyperactivity disorder; (ii) $28 million related to an IPR&D project for the treatment of attention deficit hyperactivity disorder; and (iii) $20 million related to an indefinite-lived Consumer Healthcare brand. The intangible asset impairment charges for the third quarter and first nine months of 2015 are associated with the following: IH ($20 million) and EH ($143 million). The intangible asset impairment charges for 2015 reflect, among other things, updated commercial forecasts due to increased competition.


^(f)	In the third quarter and first nine 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.


^(g)	In the first nine months of 2016, 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 nine 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)								Nine Months Ended October 2, 2016
(MILLIONS OF DOLLARS)	Amount		Level 1		Level 2		Level 3		Impairment
Intangible assets––IPR&D^(b)	$	50	$	—	$	—	$	50	$	436
Intangible assets––Developed technology rights ^(b)	66		—		—		66		331
Total	$	116	$	—	$	—	$	116	$	767


^(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 nine 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.