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 nine months ended August 28, 2016 and August 23, 2015. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and nine months ended October 2, 2016 and September 27, 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 nine months ended September 27, 2015, we performed certain reclassifications to conform to the current presentation of Other changes in assets and liabilities, net of acquisitions and divestitures, Principal payments on short-term borrowings, and Principal payments on long-term debt, for debt issuance costs in accordance with the adoption of a new accounting standard. For additional information, see Note 1B.

On October 6, 2016, we announced that we 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. Pfizer has also agreed to certain restrictions on transfer of its ICU Medical shares for at least 18 months. Assets and liabilities associated with HIS were reclassified as held for sale in the condensed consolidated balance sheet as of October 2, 2016. The companies expect to complete the transaction in the first quarter of 2017, subject to customary closing conditions, including required regulatory approvals. For additional information, see Note 2B.

On September 28, 2016 (the acquisition date), we acquired Medivation for $81.50 per share. The total fair value of consideration transferred for Medivation was approximately $14.3 billion in cash ($13.9 billion, net of cash acquired). Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Medivation, and, in accordance with our domestic and international reporting periods, our consolidated financial statements for the three and nine months ended October 2, 2016 reflect three business days of legacy Medivation operations, which were immaterial. See Note 2A for additional information.

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, operating results and cash flows of Anacor, and, in accordance with our domestic reporting period, our consolidated financial statements for the three and nine months ended October 2, 2016 reflect approximately three months of legacy Anacor operations, which 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 fell 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.

On September 3, 2015, we acquired 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 third quarter and first nine months of 2016. In accordance with our domestic and international reporting periods, our consolidated statements of income for the third quarter and first nine months of 2015 reflect only one month of legacy Hospira U.S. operations but no financial results from legacy Hospira international operations. Legacy Hospira assets and liabilities are reflected in our balance sheets as of October 2, 2016 and December 31, 2015. See Note 2A for additional information.

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 October 2, 2016, debt issuance costs were $89 million and are presented as contra-liabilities to Short-term borrowings, including current portion of long-term debt ($1 million) and Long-term debt ($88 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 third quarter and first nine 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.