EX-13 4 pfe-12312016x10kexhibit13.htm 2016 FINANCIAL REPORT Exhibit
EXHIBIT 13

Pfizer Inc. 2016 Financial Report
 
pfizercoverlogoa01.jpg
 



Financial Review
Pfizer Inc. and Subsidiary Companies

 
 
 

GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this 2016 Financial Report (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this 2016 Financial Report, most of which are explained or defined below:
2016 Financial Report
This Financial Report for the fiscal year ended December 31, 2016, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2016
2016 Form 10-K
Annual Report on Form 10-K for the fiscal year ended December 31, 2016
AAV
Adeno-Associated Virus
ABO
Accumulated postretirement benefit obligation
ACA (Also referred to as U.S. Healthcare Legislation)
U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education 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 or developed by other companies or us
AM-Pharma
AM-Pharma B.V.
Anacor
Anacor Pharmaceuticals, Inc.
Astellas
Astellas Pharma U.S. Inc.
ASU
Accounting Standards Update
ATM-AVI
aztreonam-avibactam
Bamboo
Bamboo Therapeutics, Inc.
Baxter
Baxter International Inc.
BMS
Bristol-Myers Squibb Company
CDC
U.S. Centers for Disease Control and Prevention
Cellectis
Cellectis SA
Celltrion
Celltrion Inc. and Celltrion Healthcare, Co., Ltd. (collectively)
Citibank
Citibank N.A.
Developed Markets
U.S., Western Europe, Japan, Canada, Australia, South Korea, Scandinavian countries, Finland and New Zealand
EEA
European Economic Area
EGWP
Employer Group Waiver Plan
EH
Essential Health
ELT
Executive Leadership Team
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
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
GIP
Global Innovative Pharmaceutical segment
GPD
Global Product Development organization
GS&Co.
Goldman, Sachs & Co.
HER
human epidermal growth factor receptor
HER2-
human epidermal growth factor receptor 2-negative
hGH-CTP
human growth hormone
HIS
Hospira Infusion Systems
HIV
human immunodeficiency virus
Hisun
Zhejiang Hisun Pharmaceuticals Co., Ltd.
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive

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ICU Medical
ICU Medical, Inc.
IH
Innovative Health
InnoPharma
InnoPharma, Inc.
IPR&D
in-process research and development
IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
IV
intravenous
Janssen
Janssen Biotech Inc.
King
King Pharmaceuticals, Inc.
LDL
low density lipoprotein
LIBOR
London Interbank Offered Rate
Lilly
Eli Lilly & Company
LOE
loss of exclusivity
MCO
Managed Care Organization
MDV
multi-dose vial
Medivation
Medivation, Inc.
Merck
Merck & Co., Inc.
Moody’s
Moody’s Investors Service
NAV
Net asset value
NDA
new drug application
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
PBO
Projected benefit obligation
PCS
Pfizer CentreSource
PE
pulmonary embolism
PGS
Pfizer Global Supply
Pharmacia
Pharmacia Corporation
PPS
Portfolio Performance Shares
PP&E
Property, plant & equipment
PSAs
Performance Share Awards
PTUs
Profit Units
RCC
renal cell carcinoma
recAP
recombinant human Alkaline Phosphatase
R&D
research and development
RPI
RPI Finance Trust
RSUs
Restricted Stock Units
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.
TSR
Total Shareholder Return
TSRUs
Total Shareholder Return Units
U.K.
United Kingdom
U.S.
United States
VAT
value added tax
VIE
Variable interest entity
ViiV
ViiV Healthcare Limited
VOC
Global Vaccines, Oncology and Consumer Healthcare segment
WRD
Worldwide Research and Development
Zoetis
Zoetis Inc.

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Pfizer Inc. and Subsidiary Companies

 
 
 

INTRODUCTION

See the Glossary of Defined Terms at the beginning of this 2016 Financial Report for terms used throughout this Financial Review. Our Financial Review is provided to assist readers in understanding the results of operations, financial condition and cash flows of Pfizer Inc. (the Company). It should be read in conjunction with the consolidated financial statements and Notes to Consolidated Financial Statements. The discussion in this Financial Review contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in Part 1, Item 1A, “Risk Factors” of our 2016 Form 10-K and in the “Forward-Looking Information and Factors That May Affect Future Results”, “Our Operating Environment” and “Our Strategy” sections of this Financial Review.

The Financial Review is organized as follows:
Beginning on page 2
 
This section provides information about the following: Our Business; Our 2016 Performance; Our Operating Environment; The Global Economic Environment, Our Strategy; Our Business Development Initiatives, such as acquisitions, dispositions, licensing and collaborations; and Our Financial Guidance for 2017.
 
Beginning on page 14
 
This section discusses those accounting policies and estimates that we consider important in understanding our consolidated financial statements. For additional discussion of our accounting policies, see Notes to Consolidated Financial Statements—Note 1. Basis of Presentation and Significant Accounting Policies.
 
Beginning on page 21
 
This section includes a Revenues Overview section as well as the following sub-sections:
 
Beginning on page 26
 
This sub-section provides an overview of several of our biopharmaceutical products.
 
 
Beginning on page 30
 
This sub-section provides an overview of important biopharmaceutical product developments.
 
 
Beginning on page 33
 
This sub-section provides a discussion about our costs and expenses.
 
 
Beginning on page 38
 
This sub-section provides a discussion of items impacting our tax provisions.
 
 
Beginning on page 38
 
This sub-section provides a discussion of an alternative view of performance used by management.
 
Beginning on page 44
 
This section provides a discussion of the performance of each of our operating segments.
 
Beginning on page 51
 
This section provides a discussion of changes in certain components of other comprehensive income.
 
Beginning on page 51
 
This section provides a discussion of changes in certain balance sheet accounts, including Accumulated other comprehensive loss.
 
Beginning on page 52
 
This section provides an analysis of our consolidated cash flows for the three years ended December 31, 2016.
 
Beginning on page 54
 
This section provides an analysis of selected measures of our liquidity and of our capital resources as of December 31, 2016 and December 31, 2015, as well as a discussion of our outstanding debt and other commitments that existed as of December 31, 2016 and December 31, 2015. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer’s future activities.
 
Beginning on page 59
 
This section discusses accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.
 
Beginning on page 61
 
This section provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this Financial Review relating to, among other things, our anticipated operating and financial performance, business plans and prospects, in-line products and product candidates, strategic reviews, capital allocation, business-development plans and plans relating to share repurchases and dividends. Also included in this section are discussions of Financial Risk Management and Contingencies, including legal and tax matters.
 
Certain amounts in our Financial Review may not add due to rounding. All percentages have been calculated using unrounded amounts.

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OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Our Business

We apply science and our global resources to bring therapies to people that extend and significantly improve their lives through the discovery, development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world’s best-known consumer healthcare products. We work across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases of our time. We collaborate with healthcare providers, governments and local communities to support and expand access to reliable, affordable healthcare around the world. Our revenues are derived from the sale of our products and, to a much lesser extent, from alliance agreements, under which we co-promote products discovered or developed by other companies or us (Alliance revenues).

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). Each operating segment has responsibility for its commercial activities and for certain IPR&D projects for new investigational products and additional indications for in-line products that generally have achieved proof-of-concept. For additional information, see Notes to Consolidated Financial Statements––Note 18A. Segment, Geographic and Other Revenue Information: Segment Information and the “Our Strategy––Commercial Operations” section of this Financial Review below.

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. The biopharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. These factors include, among others: the loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights, healthcare legislation, pipeline productivity, the regulatory environment, pricing and access pressures and competition. We also face challenges as a result of the global economic environment. For additional information about these factors and challenges, see the “Our Operating Environment” and “The Global Economic Environment” sections of this Financial Review and Part I, Item 1A, “Risk Factors,” of our 2016 Form 10-K.

The financial information included in our consolidated financial statements for our subsidiaries operating outside the United States (U.S.) is as of and for the year ended November 30 for each year presented. Pfizer's fiscal year-end for U.S. subsidiaries is as of and for the year ended December 31 for each year presented.
References to developed and emerging markets in this Financial Review include:
Developed markets
 
U.S., Western Europe, Japan, Canada, Australia, South Korea, Scandinavian countries, Finland and New Zealand
 
 
 
Emerging markets (include, but are not limited to)
 
Asia (excluding Japan and South Korea), Latin America, Africa, Eastern Europe, Central Europe, the Middle East and Turkey
References to operational variances in this Financial Review pertain to period-over-period growth rates that exclude the impact of foreign exchange as well as the negative currency impact related to Venezuela. The operational variances are determined by multiplying or dividing, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiplying or dividing, as appropriate, those amounts by the prior-year average foreign exchange rates. Although exchange rate changes are part of our business, they are not within our control. Exchange rate changes, however, can mask positive or negative trends in the business; therefore, we believe presenting operational variances provides useful information to evaluate the results of our business.

Our significant business development activities include:

On February 3, 2017, we completed the sale of our global infusion therapy net assets, HIS, to ICU Medical for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing. Assets and liabilities associated with HIS are presented as held for sale in the consolidated balance sheet as of December 31, 2016.

On December 22, 2016, which falls in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S., including the commercialization and development rights to the newly approved EU drug Zavicefta™ (ceftazidime-avibactam), the marketed agents Merrem™/Meronem™ (meropenem) and Zinforo™ (ceftaroline fosamil), and the clinical development assets ATM-AVI and CXL (ceftaroline fosamil-AVI).

On September 28, 2016, 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). Of this consideration, approximately $365 million was not paid as of December 31, 2016, and was recorded in Other current liabilities. 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 reporting periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately three months of legacy Medivation operations.
On June 24, 2016, we acquired 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 periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately six months of legacy Anacor operations, which were immaterial.
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

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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 the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net). 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 for approximately $16.1 billion in cash ($15.7 billion, net of cash acquired). Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Hospira. In accordance with our domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2015 reflect four months of legacy Hospira U.S. operations and three months of legacy Hospira international operations.
For additional information, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment and the “Our Strategy”, “Our Business Development Initiatives”, “Significant Accounting Policies and Application of Critical Accounting Estimates and Assumptions––Acquisition of Hospira” and “Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” sections of this Financial Review).
Our 2016 Performance

Revenues––2016

Revenues in 2016 were $52.8 billion, an increase of 8% compared to 2015. This reflects an operational increase of 11%, which was partially offset by the unfavorable impact of foreign exchange of 3%.

Compared to 2015, international revenues for 2016 were favorably impacted by approximately $100 million as a result of having one more selling day in international markets. In the U.S., there was no difference in selling days in 2016, compared to 2015.
The following provides an analysis of the 2016 revenue growth:
(BILLIONS OF DOLLARS)
 
 
 
 
 
2015 Revenues
 
$
48.9

 
 
 
Acquisition-related growth
 
 
Hospira
 
3.1

Medivation
 
0.1

 
 
 
Pfizer-standalone
 
 
Operational revenue growth from certain key products, net
 
4.0

Operational revenue decline due to product losses of exclusivity and the expiry of the collaboration agreement to co-promote Rebif in the U.S.
 
(1.8
)
 
 
5.5

 
 
 
2016 Operational Revenues
 
54.3

Unfavorable impact of foreign exchange
 
(1.5
)
2016 Revenues
 
$
52.8


See the “Analysis of the Consolidated Statements of Income––Revenues––Overview” section below for more information, including a discussion of key drivers of our revenue performance.

Income from Continuing Operations Before Provision for Taxes on Income––2016

Income from continuing operations before provision for taxes on income was $8.4 billion in 2016, compared to $9.0 billion in 2015, primarily reflecting, among other items, in addition to the operational and foreign exchange impacts for Revenues described above:
higher Cost of sales (up $2.7 billion) (see the “Costs and Expenses––Cost of Sales” section of this Financial Review);
a $1.7 billion charge related to the write-down of HIS net assets to fair value less estimated costs to sell (see the Notes to Consolidated Financial Statements––Note 2B. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment: Assets and Liabilities Held for Sale);
higher asset impairments (up $629 million) (see the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net);
higher Restructuring charges and certain acquisition-related costs (up $571 million) (see the Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives);
higher Amortization of intangible assets (up $328 million) (see the “Costs and Expenses––Amortization of Intangible Assets” section of this Financial Review); and
higher Research and development expenses (up $182 million) (see the “Costs and Expenses––Research and Development Expenses” section of this Financial Review);

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partially offset by:
the non-recurrence of a foreign currency loss ($806 million) related to Venezuela in 2015 (see the Notes to Financial Statements––Note 4. Other (Income)/Deductions––Net);
lower charges for legal matters (down $466 million) (see the Notes to Financial Statements––Note 4. Other (Income)/Deductions––Net); and
lower Other, net deductions (down $318 million) (see the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net).
For information on our tax provision and effective tax rate see the “Provision for Taxes on Income” section of the Financial Review and Notes to Consolidated Financial Statements––Note 5. Tax Matters.
Our Operating Environment

Industry-Specific Challenges

Intellectual Property Rights and Collaboration/Licensing Rights

The loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights can have a significant adverse effect on our revenues. Many of our branded products have multiple patents that expire at varying dates, thereby strengthening our overall patent protection. However, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, we lose exclusivity on these products, and generic pharmaceutical manufacturers generally produce similar products and sell them for a lower price. The date at which generic competition commences may be different from the date that the patent or regulatory exclusivity expires. However, when generic competition does commence, the resulting price competition can substantially decrease our revenues for the impacted products, often in a very short period of time.

Our biotechnology products, including BeneFIX, ReFacto, Xyntha and Enbrel (we market Enbrel outside the U.S. and Canada), may face in the future, or already face, competition from biosimilars (also referred to as follow-on biologics). If competitors are able to obtain marketing approval for biosimilars that reference our biotechnology products, our biotechnology products may become subject to competition from these biosimilars, with attendant competitive pressure, and price reductions could follow. Expiration or successful challenge of applicable patent rights could trigger this competition, assuming any relevant exclusivity period has expired. However, biosimilar manufacturing is complex. At least initially upon approval of a biosimilar competitor, biosimilar competition with respect to biologics may not be as significant as generic competition with respect to small molecule drugs.

We have lost exclusivity for a number of our products in certain markets and we have lost collaboration rights with respect to a number of our alliance products in certain markets, and we expect certain products to face significantly increased generic competition over the next few years.


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Specifically:

Recent Losses and Expected Losses of Product Exclusivity
The following table provides information about certain of our products recently experiencing, or expected to experience in 2017, patent expirations or loss of regulatory exclusivity in the U.S., Europe or Japan, showing, by product, the key dates or expected key dates, the markets impacted and the revenues associated with those products in those markets:
(MILLIONS OF DOLLARS)
 
 
 
 
 
Product Revenues in Markets Impacted
Products
 
Key Dates(a)
 
Markets Impacted
 
Year Ended December 31,
 
 
 
 
 
 
2016

 
2015

 
2014

Viagra(b)
 
June 2013
May 2014
December 2017
 
Major European markets
Japan
U.S.
 
$
1,217

 
$
1,338

 
$
1,260

Rapamune
 
January 2014
June 2015
 
U.S.
Major European markets
 
115

 
129

 
254

Inspra(c)
 
March 2014
July 2015
 
Major European markets
Japan
 
97

 
118

 
208

Lyrica(d)
 
July 2014
 
Major European markets
 
692

 
1,048

 
1,634

Celebrex(e)
 
November 2014
December 2014
 
Major European markets
U.S.
 
148

 
189

 
1,872

Zyvox(f)
 
August 2014
First half of 2015
January 2016
 
Japan
U.S.
Major European markets
 
235

 
644

 
1,116

Enbrel(g)
 
August 2015
September 2015
 
Major European markets
Japan
 
2,146

 
2,402

 
2,832

Relpax
 
December 2015
December 2016
 
Major European markets
U.S.
 
263

 
295

 
317

Vfend
 
July 2016
January 2016
 
Major European markets
Japan
 
299

 
349

 
403

Tygacil
 
April 2016
 
U.S.
 
80

 
110

 
112

Pristiq(h)
 
March 2017
 
U.S.
 
578

 
553

 
553

(a) 
Unless stated otherwise, “Key Dates” indicate patent-based expiration dates.
(b) 
As a result of a patent litigation settlement, Teva Pharmaceuticals USA, Inc. will be allowed to launch a generic version of Viagra in the U.S. in December 2017, or earlier under certain circumstances.
(c) 
Generic versions of Inspra became available in major European markets following the March 2014 expiry of regulatory exclusivity for Inspra in most major European markets, allowing generic companies to submit applications for marketing authorizations for their generic products.
(d) 
Generic versions of Lyrica became available in major European markets following the July 2014 expiry of regulatory exclusivity for Lyrica in the EU, allowing generic companies to submit applications for marketing authorizations for their generic products.
(e) 
In December 2014, generic versions of Celebrex became available pursuant to settlement agreements with several generic manufacturers.
(f) 
Pursuant to terms of a settlement agreement, certain formulations of Zyvox became subject to generic competition in the U.S. in January 2015. Other formulations of Zyvox became subject to generic competition in the U.S. in the first half of 2015.
(g) 
In January 2016, an etanercept biosimilar referencing Enbrel was approved by the European Commission.
(h) 
As a result of a patent litigation settlement with several generic manufacturers, generic versions of Pristiq will be allowed to launch in the U.S. in March 2017.

Recent Losses of Collaboration Rights
The following table provides information about certain of our alliance revenue products that have experienced losses of collaboration rights, showing, by product, the date of the loss of the collaboration rights, the markets impacted and the alliance revenues associated with those products in those markets:
(MILLIONS OF DOLLARS)
 
 
 
 
 
Alliance Revenues in
Markets Impacted
Products
 
Date of Loss of
Collaboration Rights
 
Markets Impacted
 
Year Ended December 31,
 
 
 
 
 
 
2016

 
2015

 
2014

Spiriva(a)
 
April 2014 (U.S.), between 2012 and 2016 (Japan, certain European countries, Australia, Canada and South Korea)
 
U.S., Japan, certain European countries, Australia, Canada and South Korea
 
$
6

 
$
27

 
$
168

Rebif(b)
 
End of 2015
 
U.S.
 

 
371

 
415

(a) 
Our collaboration with Boehringer Ingelheim for Spiriva expired on a country-by-country basis between 2012 and 2016. On April 29, 2014, our alliance in the U.S. came to an end.
(b) 
Our collaboration agreement with EMD Serono Inc. to co-promote Rebif in the U.S. expired at the end of 2015.

In addition, we expect to lose exclusivity for various other products in various markets over the next few years, including among others, the expiration of the basic product patent for Lyrica in the U.S. in December 2018. For additional information, see the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business”, of our 2016 Form 10-K.


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Our financial results in 2016 and our 2017 financial guidance, respectively, reflect the impact and projected impact of the loss of exclusivity of various products and the expiration of certain alliance product contract rights discussed above. For additional information about our 2017 financial guidance, see the “Our Financial Guidance for 2017” section of this Financial Review.

We will continue to aggressively defend our patent rights whenever we deem appropriate. For more detailed information about our significant products, see the discussion in the “Revenues––Major Products” and “Revenues––Selected Product Descriptions” sections of this Financial Review. For a discussion of certain recent developments with respect to patent litigation, see Notes to Consolidated Financial Statements––Note 17A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation.

Regulatory Environment/Pricing and Access––U.S. Healthcare Legislation

In March 2010, the ACA was enacted in the U.S. For additional information, see the “Government Regulation and Price Constraints” section in Part I, Item 1, “Business”, of our 2016 Form 10-K.
Impacts on our 2016 Results

We recorded the following amounts in 2016 as a result of the U.S. Healthcare Legislation:
$410 million recorded as a reduction to Revenues, related to the Medicare “coverage gap” discount provision; and
$312 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government (which is not deductible for U.S. income tax purposes) based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs.
Impacts on our 2015 Results

We recorded the following amounts in 2015 as a result of the U.S. Healthcare Legislation:
$399 million recorded as a reduction to Revenues, related to the Medicare “coverage gap” discount provision; and
$251 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government (which is not deductible for U.S. income tax purposes) based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. The decrease in the impact of the U.S. Healthcare Legislation on Selling, informational and administrative expenses in 2015 compared to 2014 was primarily a result of the non-recurrence of the $215 million charge in 2014 to account for an additional year of the non-tax deductible Branded Prescription Drug Fee, partially offset by a lower favorable true-up in 2015, compared to the favorable true-up in 2014, associated with the final invoice for the respective prior-calendar year received from the federal government, which reflected a lower share than that of the initial invoice.
Impacts on our 2014 Results

We recorded the following amounts in 2014 as a result of the U.S. Healthcare Legislation:
$382 million recorded as a reduction to Revenues, related to the Medicare “coverage gap” discount provision; and
$362 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government. 2014 included a $215 million charge to account for an additional year of the non-tax deductible Branded Prescription Drug Fee in accordance with final regulations issued in the third quarter of 2014 by the IRS. The amount in 2014 also reflected a favorable true-up associated with the final 2013 invoice received from the federal government, which reflected a lower share than that of the initial 2013 invoice.
The final regulations issued by the IRS did not change the payment schedule for the Branded Prescription Drug Fee; accordingly there was no cash flow impact in 2014 from the $215 million charge.

Regulatory Environment/Pricing and Access––Government and Other Payer Group Pressures

Governments, MCOs and other payer groups continue to seek increasing discounts on our products through a variety of means, such as leveraging their purchasing power, implementing price controls, and demanding price cuts (directly or by rebate actions). In Europe, Japan, China, Canada, South Korea and some other international markets, governments provide healthcare at low direct cost to patients and regulate pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system, particularly under recent global economic pressures. In the U.S., a primary government activity with implications for pharmaceutical pricing is deficit reduction. Any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented, and/or any significant additional taxes or fees that may be imposed on us, as part of any broad deficit-reduction effort could have an adverse impact on our results of operations. Significant Medicare reductions could also result if Congress proceeds with certain proposals to convert the Medicare fee-for-service program into a premium support program, or it chooses to implement the recommendations made annually by the Medicare Payment Advisory Commission, which are primarily intended to extend the fiscal solvency of the Medicare program.
Consolidation among MCOs has increased the negotiating power of MCOs and other private insurers. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary inclusion. Failure to obtain or maintain timely or adequate pricing or formulary placement for our products or obtaining such pricing or placement at unfavorable pricing could adversely impact revenue.

Additionally, efforts by government officials or legislators to implement measures to regulate prices or payment for pharmaceutical products could adversely affect our business if implemented. There has recently been considerable public and government scrutiny of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. We believe medicines are the most efficient and effective use of

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healthcare dollars based on the value they deliver to the overall healthcare system. We continue to work with stakeholders to ensure access to medicines within an efficient and affordable healthcare system.

Adoption of other new legislation at the federal or state level could further affect demand for, or pricing of, our products. In 2017, we may face uncertainties because there likely will be federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. Although the revenues generated for Pfizer by the Medicaid expansion and health insurance exchanges under the ACA have been exceeded by the new rebates, discounts, and taxes, there is no assurance that repeal or replacement of the ACA will not adversely affect our business and financial results, particularly if replacement legislation reduces incentives for employer-sponsored insurance coverage, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business. We will continue to actively work with law makers and advocate for solutions that effectively improve patient health outcomes and lower costs to the healthcare system.

The potential for additional pricing and access pressures in the commercial sector continues to be significant. Some employers, seeking to avoid the tax on high-cost health insurance in the ACA to be imposed in 2020, are already scaling back healthcare benefits and an increasing number are implementing high deductible benefit designs. This is a trend that is likely to continue, especially if proposals to limit the tax exclusion for employer sponsored health insurance ultimately become law. Private third-party payers, such as health plans, increasingly challenge pharmaceutical and medical device product pricing, which could result in lower prices, lower reimbursement rates and a reduction in demand for our products. Pricing pressures for our products may occur as a result of highly competitive insurance markets. Healthcare provider purchasers, directly or through group purchasing organizations, are seeking enhanced discounts or implementing more rigorous bidding or purchasing review processes.

Overall, there is increasing pressure on U.S. providers to deliver healthcare at a lower cost and to ensure that those expenditures deliver demonstrated value in terms of health outcomes. Longer term, we are seeing a shift in focus away from fee-for-service payments towards outcomes-based payments and risk-sharing arrangements that reward providers for cost reductions. These new payment models can, at times, lead to lower prices for, and restricted access to, new medicines. At the same time, these models can also expand utilization by encouraging physicians to screen, diagnose and focus on outcomes.

Outside the U.S., governments, including the different EU Member States, may use a variety of cost-containment measures for our pharmaceutical products, including price cuts, mandatory rebates, value-based pricing, and international reference pricing (i.e., the practice of many countries linking their regulated medicine prices to those of other countries). This international patchwork of price regulation and differing economic conditions and assessments of value across countries has led to different prices in different countries and some third-party trade in our products between countries.

In particular, international reference pricing adds to the regional impact of price cuts in individual countries and hinders patient access and innovation. Price variations, exacerbated by international reference pricing systems, also have resulted from exchange rate fluctuations. The downward pricing pressure resulting from this dynamic can be expected to continue as a result of reforms to international reference pricing policies and measures targeting pharmaceuticals in some European countries.

In addition, several important multilateral organizations, such as the United Nations (UN) and the Organization for Economic Cooperation and Development (OECD), are increasing policy pressures and scrutiny of international pharmaceutical pricing through issuing reports and policy recommendations (e.g., 2016 UN High Level Panel Report on Access to Medicines and 2017 OECD Report on New Health Technologies––Managing Access, Value and Sustainability). Government adoption of these recommendations may lead to additional pricing pressures.

In response to the evolving U.S. and global healthcare spending landscape, we are continuing to work with health authorities, health technology assessment and quality measurement bodies and major U.S. payers throughout the product-development process to better understand how these entities value our compounds and products. Further, we are seeking to develop stronger internal capabilities focused on demonstrating the value of the medicines that we discover or develop, register and manufacture, by recognizing patterns of usage of our medicines and competitor medicines along with patterns of healthcare costs.

Regulatory Environment––Pipeline Productivity

The discovery and development of safe, effective new products, as well as the development of additional uses for existing products, are necessary for the continued strength of our businesses. We have encountered increasing regulatory scrutiny of drug safety and efficacy, even as we continue to gather safety and other data on our products, before and after the products have been launched. Our product lines must be replenished over time in order to offset revenue losses when products lose their market exclusivity, as well as to provide for earnings growth. We devote considerable resources to R&D activities. These activities involve a high degree of risk and cost and may take many years, and with respect to any specific R&D project, there can be no assurance that the development of any particular product candidate or new indication for an in-line product will achieve the desired clinical endpoints and safety profile, will be approved by regulators or will be successful commercially.

During the development of a product, we conduct clinical trials to provide data on the drug’s safety and efficacy to support the evaluation of its overall benefit-risk profile for a particular patient population. In addition, after a product has been approved and launched, we continue to monitor its safety as long as it is available to patients, and post-marketing trials may be conducted, including trials requested by regulators and trials that we do voluntarily to gain additional medical knowledge. For the entire life of the product, we collect safety data and report potential problems to the FDA and other regulatory authorities. The FDA and regulatory authorities in other jurisdictions may evaluate potential safety concerns related to a product or a class of products and take regulatory actions in response, such as updating a product’s labeling, restricting the use of a product, communicating new safety information to the public, or, in rare cases, removing a product from the market.


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Competition

Many of our prescription pharmaceutical products face competition in the form of branded or generic drugs or biosimilars that treat similar diseases or indications. For additional information, see the “Competition” section in Part I, Item 1, “Business”, of our 2016 Form 10-K.
The Global Economic Environment

In addition to the industry-specific factors discussed above, we, like other businesses, are exposed to the economic cycle, which impacts our biopharmaceutical operations globally.
Governments, corporations, and insurance companies, which provide insurance benefits to patients, have implemented increases in cost-sharing and restrictions on access to medicines, potentially causing patients to switch to generic products, delay treatments, skip doses or use less effective treatments. Government financing pressures can lead to negative pricing pressure in various markets where governments take an active role in setting prices, access criteria (e.g., through public or private health technology assessments), or other means of cost control. Examples include Europe, Japan, China, Canada, South Korea and a number of other international markets. The U.S. continues to maintain competitive insurance markets, but has also seen significant increases in patient cost-sharing and growing government influence as government programs continue to grow as a source of coverage.
We continue to monitor developments regarding government and government agency receivables in several European markets, including Greece, where economic conditions remain challenging and uncertain. For further information about our Accounts Receivable, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review.
Significant portions of our revenues and earnings, as well as our substantial international net assets, are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk also is managed through the use of derivative financial instruments and foreign currency debt. As we operate in multiple foreign currencies, including the euro, the Japanese yen, the Chinese renminbi, the U.K. pound, the Canadian dollar and approximately 100 other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses. If the U.S. dollar were to weaken against another currency, assuming all other variables remained constant, our revenues would increase, having a positive impact on earnings, and our overall expenses would increase, having a negative impact on earnings. Conversely, if the U.S. dollar were to strengthen against another currency, assuming all other variables remained constant, our revenues would decrease, having a negative impact on earnings, and our overall expenses would decrease, having a positive impact on earnings. Therefore, significant changes in foreign exchange rates, including those changes resulting from the volatility following the U.K. referendum in which voters approved the exit from the EU, can impact our results and our financial guidance.
The impact of possible currency devaluations in countries experiencing high inflation rates or significant exchange fluctuations, including Venezuela and more recently Egypt, can impact our results and financial guidance. In the fourth quarter of 2015, we recorded a foreign currency loss of $806 million and an inventory impairment charge of $72 million related to conditions in Venezuela. For further information about our exposure to foreign currency risk, see the “Analysis of Financial Condition, Liquidity and Capital Resources” and the “Our Financial Guidance for 2017” sections of this Financial Review. For further information about our foreign currency losses related to Venezuela, see Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net.
In June 2016, the U.K. electorate voted in a referendum to leave the EU, which is commonly referred to as “Brexit”. The U.K. government has not formally notified the European Council of their intention to leave the EU. In January 2017, the U.K. Parliament voted in favor of legislation to give the Prime Minister the power to trigger Article 50 of the Lisbon Treaty to begin the two-year negotiation process establishing the terms of the exit and outlining the future relationship between the U.K. and the EU. The U.K. Prime Minister has said the negotiations are expected to begin at the end of March 2017. This process is expected to be highly complex, and, in January 2017, the Prime Minister announced a 12-point plan of negotiating objectives and confirmed that the U.K. government will not seek continued membership of the EU single market. The end result of these negotiations may pose certain implications to our research, commercial and general business operations in the U.K. and the EU.
We generated approximately 2% of our worldwide revenues from the U.K. in 2016. However, except for the foreign currency exchange impact from the weakening U.K. pound relative to the U.S. dollar to date, there are no other immediate-term impacts to our business as there has not yet been a formal change in the relationship between the U.K. and the EU. In addition, because of the significant uncertainties associated with the negotiation process, any potential long-term impacts are not currently determinable.

Pfizer maintains a strong financial position while operating in a complex global environment. Due to our significant operating cash flows, financial assets, access to capital markets and available lines of credit and revolving credit agreements, we continue to believe that we have, and will maintain, the ability to meet our liquidity needs for the foreseeable future. Our long-term debt is rated high quality by both S&P and Moody’s. As market conditions change, we continue to monitor our liquidity position. We have taken and will continue to take a conservative approach to our financial investments. Both short-term and long-term investments consist primarily of high-quality, highly liquid, well-diversified, available-for-sale debt securities. For further discussion of our financial condition and credit ratings, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review.

These and other industry-wide factors that may affect our businesses should be considered along with information presented in the “Forward-Looking Information and Factors That May Affect Future Results” section of this Financial Review and in Part I, Item 1A, “Risk Factors,” of our 2016 Form 10-K.

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Our Strategy

We believe that our medicines provide significant value for both healthcare providers and patients, not only from the improved treatment of diseases but also from a reduction in other healthcare costs, such as emergency room or hospitalization costs, as well as improvements in health, wellness and productivity. We continue to actively engage in dialogues about the value of our medicines and how we can best work with patients, physicians and payers to prevent and treat disease and improve outcomes. We continue to work within the current legal and pricing structures, as well as continue to review our pricing arrangements and contracting methods with payers, to maximize patient access and minimize any adverse impact on our revenues. We remain firmly committed to fulfilling our company’s purpose of innovating to bring therapies to patients that extend and significantly improve their lives. By doing so, we expect to create value for the patients we serve and for our shareholders.

Commercial Operations

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH), which was previously known as Established Products. Beginning in the second quarter of 2016, we reorganized our operating segments to reflect that we now manage our innovative pharmaceutical and consumer healthcare operations as one business segment, IH. From the beginning of our fiscal year 2014 until the second quarter of 2016, these operations were managed as two business segments: the GIP segment and the VOC segment. We have revised prior-period information to reflect the reorganization. The IH and EH operating segments are each led by a single manager. Each operating segment has responsibility for its commercial activities and for certain IPR&D projects for new investigational products and additional indications for in-line products that generally have achieved proof-of-concept. Each business has a geographic footprint across developed and emerging markets.
Some additional information about our business segments follows:
IH Segment
 
EH Segment
IH focuses on developing and commercializing novel, value-creating medicines and vaccines that significantly improve patients’ lives, as well as products for consumer healthcare.
Key therapeutic areas include internal medicine, vaccines, oncology, inflammation & immunology, rare diseases and consumer healthcare.
 
EH includes legacy brands that have lost or will soon lose market exclusivity in both developed and emerging markets, branded generics, generic sterile injectable products, biosimilars and, through February 2, 2017, infusion systems. EH also includes an R&D organization, as well as our contract manufacturing business.

Leading brands include:
- Prevnar 13
- Xeljanz
- Eliquis
- Lyrica (U.S., Japan and certain other markets)
- Enbrel (outside the U.S. and Canada)
- Viagra (U.S. and Canada)
- Ibrance
- Xtandi
- Several OTC consumer products (e.g., Advil and Centrum)
 

Leading brands include:
- Lipitor
- Premarin family
- Norvasc
- Lyrica (Europe, Russia, Turkey, Israel and Central Asia countries)
- Celebrex
- Pristiq
- Several sterile injectable products

We expect that the IH biopharmaceutical portfolio of innovative, largely patent-protected, in-line and newly launched products will be sustained by ongoing investments to develop promising assets and targeted business development in areas of focus to help ensure a pipeline of highly-differentiated product candidates in areas of unmet medical need. The assets managed by IH are science-driven, highly differentiated and generally require a high-level of engagement with healthcare providers and consumers.
EH is expected to generate strong consistent cash flow by providing patients around the world with access to effective, lower-cost, high-value treatments. EH leverages our biologic development, regulatory and manufacturing expertise to seek to advance its biosimilar development portfolio. Additionally, EH leverages capabilities in formulation development and manufacturing expertise to help advance its generic sterile injectables portfolio. EH may also engage in targeted business development to further enable its commercial strategies.
The following change in 2016 impacted IH:
In connection with the formation in early 2016 of the GPD organization, a new unified center for late-stage development for our innovative products, which is generally responsible for the clinical development of assets that are in clinical trials for our WRD and Innovative portfolios, certain development-related functions transferred from IH to GPD.
The following changes in 2016 impacted EH:
Beginning in 2016, our contract manufacturing business, Pfizer CentreOne, is part of EH. Pfizer CentreOne consists of (i) the revenues and expenses of legacy Pfizer's contract manufacturing and active pharmaceutical ingredient sales operation (previously known as Pfizer CentreSource or PCS), including the revenues and expenses related to our manufacturing and supply agreements with Zoetis, which prior to 2016 was managed outside EH as part of PGS and previously reported in “Other Unallocated” costs; and (ii) the revenues and expenses of legacy Hospira's One-2-One sterile injectables contract manufacturing operation, which has been included in EH since we acquired Hospira on September 3, 2015.
In connection with the formation of a new EH R&D organization effective in the first quarter of 2016, certain functions transferred from Pfizer’s WRD organization to the new EH R&D organization. The new R&D organization within EH expects to develop potential new sterile injectable drugs and therapeutic solutions, as well as biosimilars.

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In September 2016, we announced our decision to maintain our current business structure and not pursue a split into two separate publicly-traded companies at that time. Following this decision, we will continue to operate two distinct businesses, each with a focus on our strategic priorities to grow and increase operational efficiency. For IH, this means a continued focus on R&D productivity and pipeline strength while maximizing the value of our recently launched brands and in-line portfolio. Our recent acquisitions of Anacor and Medivation expanded our pipeline in the high priority therapeutic areas of inflammation and immunology and oncology. For EH, we will continue to invest in growth drivers and manage the portfolio to extract additional value while seeking opportunities for operating efficiencies. This strategy includes active management of our portfolio; maximizing growth of core product segments; acquisitions to strengthen core areas of our portfolio further, such as our recent acquisition of AstraZeneca’s small molecule anti-infectives business; and divestitures to increase focus on our core strengths. In line with this strategy, on February 3, 2017, we completed the sale of Pfizer’s global infusion therapy net assets, representing the infusion systems net assets that we acquired as part of the Hospira transaction, HIS, to ICU Medical, a global device manufacturer. For additional information, see Notes to Consolidated Financial Statements––Note 2B. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment: Assets and Liabilities Held for Sale.
For additional information about our operating structure, see Notes to Consolidated Financial Statements––Note 18A. Segment, Geographic and Other Revenue Information: Segment Information.
For additional information about the 2016 performance of each of our operating segments, see the “Analysis of Operating Segment Information” section of this Financial Review.
Research and Development Operations

We continue to strengthen our global R&D organization and pursue strategies intended to improve innovation and overall productivity in R&D to achieve a sustainable pipeline that will deliver value in the near term and over time. Our R&D priorities include delivering a pipeline of differentiated therapies and vaccines with the greatest medical and commercial promise, innovating new capabilities that can position Pfizer for long-term leadership and creating new models for biomedical collaboration that will expedite the pace of innovation and productivity. To that end, our research primarily focuses on:
Biosimilars;
Inflammation and Immunology;
Metabolic Disease and Cardiovascular Risks;
Neuroscience;
Oncology;
Rare Diseases; and
Vaccines.
While a significant portion of R&D is done internally, we also seek out promising chemical and biological lead molecules and innovative technologies developed by third parties to incorporate into our discovery and development processes or projects, as well as our product lines, by entering into collaborations, alliance and license agreements with other companies, as well as leveraging acquisitions and equity- or debt-based investments. These agreements enable us to co-develop, license or acquire promising compounds, technologies or capabilities. We also enter into agreements pursuant to which a third party agrees to fund a portion of the development costs of one of our pipeline products in exchange for rights to receive potential milestone payments, revenue sharing payments, profit sharing payments and/or royalties. Collaboration, alliance, license and funding agreements and equity- or debt-based investments allow us to share risk and cost and to access external scientific and technological expertise, and enable us to advance our own products as well as in-licensed or acquired products.

In early 2016, we formed the GPD organization, a new, unified center for late-stage development for our innovative products. GPD is expected to enable more efficient and effective development and enhance our ability to accelerate and progress assets through our pipeline. GPD combines certain previously separate development-related functions from the IH business and the WRD organization to achieve a development capability that is expected to deliver high-quality, efficient, and well-executed clinical programs by enabling greater speed, greater cost efficiencies, and reduced complexity across our development portfolio.

For additional information about R&D by operating segment, see the “Analysis of Operating Segment Information” section of this Financial Review. For additional information about our pending new drug applications and supplemental filings, see the “Analysis of the Consolidated Statements of Income––Product Developments––Biopharmaceutical” section of this Financial Review. For additional information about recent transactions and strategic investments that we believe have the potential to advance our pipeline, see the “Our Strategy––Our Business Development Initiatives” section of this Financial Review.

Intellectual Property Rights
We continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate, and we will continue to support efforts that strengthen worldwide recognition of patent rights while taking necessary steps to ensure appropriate patient access. In addition, we will continue to employ innovative approaches designed to prevent counterfeit pharmaceuticals from entering the supply chain and to achieve greater control over the distribution of our products, and we will continue to participate in the generics market for our products, whenever appropriate, once they lose exclusivity. Also, the pursuit of valid business opportunities may require us to challenge intellectual property rights held by other companies that we believe were improperly granted. Such challenges may include negotiation and litigation, which may not be successful. For additional information about our current efforts to enforce our intellectual property rights, see Notes to Consolidated Financial Statements––Note 17A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation. For information on risks related to patent protection and intellectual property claims by third parties, see "Risks Related to Intellectual Property" in Part I, Item 1A, “Risk Factors” in our 2016 Form 10-K.

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Capital Allocation and Expense Management
We seek to maintain a strong balance sheet and robust liquidity so that we continue to have the financial resources necessary to take advantage of prudent commercial, research and business development opportunities and to directly enhance shareholder value through share repurchases and dividends. For additional information about our financial condition, liquidity, capital resources, share repurchases (including accelerated share repurchases) and dividends, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review. For additional information about our recent business development activities, see the “Our Strategy––Our Business Development Initiatives” section of this Financial Review.
On December 12, 2016, our Board of Directors declared a first-quarter 2017 dividend of $0.32 per share, an increase from the $0.30 per-share quarterly dividend paid during 2016. For additional information, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review and Notes to Consolidated Financial Statements––Note 12. Equity.

We remain focused on achieving an appropriate cost structure for the Company. For additional information about our cost-reduction and productivity initiatives, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this Financial Review and Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Our Business Development Initiatives

We are committed to capitalizing on growth opportunities by advancing our own pipeline and maximizing the value of our in-line products, as well as through various forms of business development, which can include alliances, licenses, joint ventures, collaborations, equity- or debt-based investments, dispositions, mergers and acquisitions. We view our business development activity as an enabler of our strategies, and we seek to generate earnings growth and enhance shareholder value by pursuing a disciplined, strategic and financial approach to evaluating business development opportunities. We continue to evaluate business development transactions that have the potential to strengthen one or both of our businesses and their capabilities, such as our acquisitions of Hospira, Medivation, Anacor and AstraZeneca’s small molecule anti-infectives business, as well as collaborations, and alliance and license agreements with other companies, including our collaborations with Cellectis, OPKO and Merck KGaA. We assess our businesses, assets and scientific capabilities/portfolio as part of our regular, ongoing portfolio review process and also continue to consider business development activities that will advance our businesses. For additional information on our business development activities, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment and the “Significant Accounting Policies and Application of Critical Accounting Estimates and Assumptions––Acquisition of Hospira” section of this Financial Review.
The more significant recent transactions and events are described below:
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc.––On February 3, 2017, we completed the sale of our global infusion therapy net assets, HIS, to ICU Medical for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing. HIS includes IV pumps, solutions and devices. Under the terms of the agreement, we received 3.2 million newly issued shares of ICU Medical common stock, which we valued at approximately $430 million (based upon the closing price of ICU Medical common stock on the closing date less a discount for lack of marketability), a promissory note in the amount of $75 million and net cash of approximately $200 million before customary adjustments for net working capital. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. After receipt of the ICU Medical shares, we own approximately 16.4% of ICU Medical as of the closing date. We have agreed to certain restrictions on transfer of our ICU Medical shares for 18 months. The promissory note from ICU Medical has a term of three years and bears interest at LIBOR plus 2.25% for the first year and LIBOR plus 2.50% for the second and third years. At December 31, 2016, we determined that the carrying value of the HIS net assets held for sale exceeded their fair value less estimated costs to sell, resulting in a pre-tax impairment charge of $1.7 billion which is included in Other (income)/deductions––net (see Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net). The difference between the carrying value and fair value of the HIS net assets held for sale and the resulting pre-tax impairment may change when determined as of the February 3, 2017 closing date as a result of several factors, such as changes in the carrying value of the HIS net assets between December 31, 2016 and the closing date.
Acquisition of AstraZeneca’s Anti-Infectives Business (EH)––On December 22, 2016, which falls in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S., including the commercialization and development rights to the newly approved EU drug Zavicefta™ (ceftazidime-avibactam), the marketed agents Merrem™/Meronem™ (meropenem) and Zinforo™ (ceftaroline fosamil), and the clinical development assets ATM-AVI and CXL (ceftaroline fosamil-AVI). Under the terms of the agreement, Pfizer made an upfront payment of approximately $550 million to AstraZeneca upon the close of the transaction and will make a deferred payment of $175 million in January 2019. In addition, AstraZeneca is eligible to receive up to $250 million in milestone payments, up to $600 million in sales-related payments, as well as tiered royalties on sales of Zavicefta™ and ATM-AVI in certain markets.
Acquisition of Medivation, Inc. (IH)––On September 28, 2016, 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). Medivation’s portfolio includes Xtandi (enzalutamide), an androgen receptor inhibitor that blocks multiple steps in the androgen receptor signaling pathway within tumor cells. Xtandi is being developed and commercialized through a collaboration between Pfizer and Astellas. Astellas has exclusive commercialization rights for Xtandi outside the U.S. In addition, Medivation has two development-stage oncology assets in its pipeline: talazoparib, which is currently in a Phase 3 study for the treatment of BRCA-mutated breast cancer, and pidilizumab, an immuno-oncology asset being developed for diffuse large B-cell lymphoma and other hematologic malignancies. We expect this acquisition will accelerate our leadership in Oncology––a high priority area for our company.

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Acquisition of Bamboo Therapeutics, Inc. (R&D)––On August 1, 2016, we acquired all the remaining equity in Bamboo, a privately-held biotechnology company, focused on developing gene therapies for the potential treatment of patients with certain rare diseases relating to neuromuscular conditions and those affecting the central nervous system, for $150 million, plus potential milestone payments of up to $495 million contingent upon the progression of key assets through development, regulatory approval and commercialization. We previously purchased a minority stake in Bamboo in the first quarter of 2016 for a payment of approximately $43 million. This acquisition provides us with several clinical and pre-clinical assets that complement our rare disease portfolio, an advanced recombinant AAV vector design and production technology, and a fully functional Phase I/II gene therapy manufacturing facility.
Acquisition of Anacor Pharmaceuticals, Inc. (IH)––On June 24, 2016, we acquired 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’s crisaborole, a non-steroidal topical PDE-4 inhibitor with anti-inflammatory properties, was approved by the FDA on December 14, 2016 under the trade name, Eucrisa, for the treatment of mild-to-moderate atopic dermatitis in patients two years of age and older, commonly referred to as a type of eczema. Anacor also holds the rights to Kerydin, a topical treatment for onychomycosis (toenail fungus) that is distributed and commercialized by Sandoz in the U.S.
Research and Development Arrangement with NovaQuest Co-Investment Fund II, L.P. ––On November 1, 2016, we announced the discontinuation of the global clinical development program for bococizumab. During December 2016, $31.3 million was refunded to NovaQuest representing amounts NovaQuest prepaid for development costs (under the May 2016 agreement described below) that were not used for program expenses due to the discontinuation of the development program. No additional payments are expected to be received from or paid to NovaQuest under this agreement, which was effectively terminated on November 18, 2016.
In May 2016, our agreement with NovaQuest became effective, under which NovaQuest agreed to fund up to $250 million in development costs related to certain Phase III clinical trials of Pfizer’s bococizumab compound and Pfizer agreed to use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. NovaQuest’s development funding was expected to cover up to 40% of the development costs and was to be received over five quarters during 2016 and 2017. As there was a substantive and genuine transfer of risk to NovaQuest, the development funding applicable to program expenses during 2016 was recognized as an obligation to perform contractual services and therefore has been recognized as a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for 2016 totaled $180.3 million.
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. 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 2016 totaled $46.6 million. 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. 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.
Terminated Agreement to Combine with Allergan plc––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. 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. Pfizer and Allergan also released each other from any and all claims in connection with the merger agreement. For additional information, see Notes to Consolidated Financial Statements––Note 4. Other (Income)/DeductionsNet and the “Our Business” section of this Financial Review.
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). 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 2016 totaled $44.9 million. 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. 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.
Acquisition of Hospira (EH)––On September 3, 2015, we acquired Hospira, a leading provider of sterile injectable drugs and infusion technologies as well as a provider of biosimilars, for approximately $16.1 billion in cash ($15.7 billion, net of cash acquired). For additional information, see the “Our Business” section of this Financial Review.
Acquisition of a Minority Interest in AM-Pharma B.V. (IH)––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 after completion of a Phase II trial of recAP in the treatment of Acute Kidney Injury related to sepsis, which is expected 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.

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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.
Acquisition of Marketed Vaccines Business of Baxter International Inc. (IH)––On December 1, 2014 (which fell in the first fiscal quarter of 2015 for our international operations), we acquired Baxter’s 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.
Collaboration with Merck KGaA (IH)––In November 2014, we entered into a collaborative arrangement with Merck KGaA, to jointly develop and commercialize avelumab, the proposed international non-proprietary name for the investigational anti-PD-L1 antibody (MSB0010718C), currently in development as a potential treatment for multiple types of cancer. We and Merck KGaA are exploring the therapeutic potential of this novel anti-PD-L1 antibody as a single agent as well as in various combinations with our and Merck KGaA’s broad portfolio of approved and investigational oncology therapies. Our avelumab program with Merck KGaA has 30 programs on-going, ten of which are potentially registration enabling trials (two in lung cancer, two in gastric cancer, two in ovarian cancer, and one each in bladder cancer, Merkel cell carcinoma (MCC), squamous cell carcinoma of the head and neck and RCC). We received FDA breakthrough therapy designation for avelumab in metastatic MCC. In the fourth quarter of 2016, the FDA biologics license application and the EMA marketing authorization application for MCC were accepted for review. We and Merck KGaA are also combining resources and expertise to advance Pfizer’s anti-PD-1 antibody into Phase 1 trials. Under the terms of the agreement, in the fourth quarter of 2014, we made an upfront payment of $850 million to Merck KGaA and Merck KGaA is eligible to receive regulatory and commercial milestone payments of up to approximately $2.0 billion. Both companies will jointly fund all development and commercialization costs, and split equally any profits generated from selling any anti-PD-L1 or anti-PD-1 products from this collaboration. Also, as part of the agreement, we gave Merck KGaA certain co-promotion rights for Xalkori in the U.S. and several other key markets, and co-promotion activities were initiated in key select markets in 2015. In 2014, we recorded $1.2 billion of Research and development expenses associated with this collaborative arrangement, composed of the $850 million upfront cash payment as well as an additional amount of $309 million, reflecting the estimated fair value of the co-promotion rights given to Merck KGaA.
Acquisition of InnoPharma, Inc. (IH)––On September 24, 2014, we completed our acquisition of InnoPharma, a privately-held pharmaceutical development company, for an upfront cash payment of $225 million and contingent consideration of up to $135 million.
License from Cellectis SA––In June 2014, we entered into a global arrangement with Cellectis to develop Chimeric Antigen Receptor T-cell immunotherapies in the field of oncology directed at select cellular surface antigen targets. In August 2014, in connection with this licensing agreement, we made an upfront payment of $80 million to Cellectis, which was recorded in Research and development expenses. We will also fund R&D costs associated with up to 15 Pfizer-selected targets and, for the benefit of Cellectis, a portion of the R&D costs associated with four Cellectis-selected targets within the arrangement. Cellectis is eligible to receive development, regulatory and commercial milestone payments of up to $185 million per product that results from the Pfizer-selected targets as well as tiered royalties on net sales of any products that are commercialized by Pfizer.
Collaboration with Eli Lilly & Company––In 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizers 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 revenue in our 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. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.
License of Nexium OTC Rights––In August 2012, we entered into an agreement with AstraZeneca for the exclusive, global, OTC rights for Nexium, a prescription drug approved to treat the symptoms of gastroesophageal reflux disease. On May 27, 2014, we launched Nexium 24HR in the U.S., and on July 11, 2014, we paid AstraZeneca a related $200 million product launch milestone payment. On August 1, 2014, we launched Nexium Control in Europe, and on September 15, 2014, we paid AstraZeneca a related $50 million product launch milestone payment. These post-approval milestone payments were recorded in Identifiable intangible assets, less accumulated amortization and are being amortized over the estimated useful life of the Nexium brand. Included in Other current liabilities at December 31, 2015 are accrued milestone payments to AstraZeneca of $93 million, which were subsequently paid to AstraZeneca in April 2016. AstraZeneca is eligible to receive additional milestone payments of up to approximately $200 million, based on the level of worldwide sales as well as quarterly royalty payments based on worldwide sales.


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Our Financial Guidance for 2017
The following table provides our financial guidance for full-year 2017(a), (b):
Revenues
$52.0 to $54.0 billion
Adjusted cost of sales as a percentage of revenues
20.0% to 21.0%
Adjusted selling, informational and administrative expenses
$13.7 to $14.7 billion
Adjusted research and development expenses
$7.5 to $8.0 billion
Adjusted other (income)/deductions
Approximately $100 million of deductions
Effective tax rate on adjusted income
Approximately 23.0%
Adjusted diluted EPS
$2.50 to $2.60
(a) 
The 2017 financial guidance reflects the following:
The disposition of the HIS net assets in February 2017, which contributed $1.2 billion of revenues and $0.03 of adjusted diluted EPS in 2016.
Does not assume the completion of any business development transactions not completed as of December 31, 2016, including any one-time upfront payments associated with such transactions, except for the disposition of HIS in February 2017.
Exchange rates assumed are as of mid-January 2017.
Reflects an anticipated negative revenue impact of $2.4 billion due to recent and expected generic and biosimilar competition for certain products that have recently lost or are anticipated to soon lose patent protection.
Reflects the anticipated negative impact of $0.9 billion on revenues and $0.05 on adjusted diluted EPS as a result of unfavorable changes in foreign exchange rates relative to the U.S. dollar compared to foreign exchange rates from 2016.
Guidance for adjusted diluted EPS assumes diluted weighted-average shares outstanding of approximately 6.1 billion shares, which reflects our $5.0 billion accelerated share repurchase agreement announced in February 2017, which is expected to more than offset potential dilution related to employee compensation programs.
(b) 
For an understanding of Adjusted income and its components and Adjusted diluted EPS (all of which are non-GAAP financial measures), see the “Non-GAAP Financial Measure (Adjusted Income)” section of this Financial Review.
Pfizer does not provide guidance for GAAP Reported financial measures (other than Revenues) or a reconciliation of forward-looking non-GAAP financial measures to the most directly comparable GAAP Reported financial measures on a forward-looking basis because it is unable to predict with reasonable certainty the ultimate outcome of pending litigation, unusual gains and losses, acquisition-related expenses and potential future asset impairments without unreasonable effort. These items are uncertain, depend on various factors, and could have a material impact on GAAP Reported results for the guidance period.
For information about our three-year cost-reduction initiative entered into in the fourth quarter of 2016 and actual costs and cost savings associated with our cost-reduction initiatives announced in 2014, the Hospira acquisition, our recent business development activities, and global commercial structure, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this Financial Review and Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Our 2017 financial guidance is subject to a number of factors and uncertainties as described in the “Our Operating Environment”, “The Global Economic Environment”, “Our Strategy” and “Forward-Looking Information and Factors That May Affect Future Results” sections of this Financial Review; and Part I, Item 1A, “Risk Factors” of our 2016 Form 10-K.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

For a description of our significant accounting policies, see Notes to Consolidated Financial Statements––Note 1. Basis of Presentation and Significant Accounting Policies. Of these policies, the following are considered critical to an understanding of our consolidated financial statements as they require the application of the most subjective and the most complex judgments: (i) Acquisitions (Note 1D); (ii) Fair Value (Note 1E); (iii) Revenues (Note 1G); (iv) Asset Impairments (Note 1K); (v) Income Tax Contingencies (Note 1O); (vi) Pension and Postretirement Benefit Plans (Note 1P); and Legal and Environmental Contingencies (Note 1Q).

Following is a discussion about the critical accounting estimates and assumptions impacting our consolidated financial statements. See also Notes to Consolidated Financial Statements––Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions for a discussion about the risks associated with estimates and assumptions.

Acquisitions and Fair Value

For a discussion about the application of Fair Value to our recent acquisitions, see “Acquisition of Hospira” below and Notes to Consolidated Financial Statements—Note 2A. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment: Acquisitions.

For a discussion about the application of Fair Value to our investments, see Notes to Consolidated Financial Statements—Note 7A. Financial Instruments: Selected Financial Assets and Liabilities.

For a discussion about the application of Fair Value to our benefit plan assets, see Notes to Consolidated Financial Statements––Note 11D. Pension and Postretirement Benefit Plans and Defined Contribution Plans: Plan Assets.

For a discussion about the application of Fair Value to our asset impairment reviews, see “Asset Impairment Reviews” below.


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Revenues

Our gross product revenues are subject to a variety of deductions that are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent chargebacks, rebates and sales allowances to wholesalers, and, to a lesser extent, distributors like MCOs, retailers and government agencies with respect to our pharmaceutical products. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period, and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with U.S. Medicare, Medicaid and performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.

Asset Impairment Reviews

We review all of our long-lived assets for impairment indicators throughout the year. We perform impairment testing for indefinite-lived intangible assets and goodwill at least annually and for all other long-lived assets whenever impairment indicators are present. When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets. Our impairment review processes are described in the Notes to Consolidated Financial Statements––Note 1K. Basis of Presentation and Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

Examples of events or circumstances that may be indicative of impairment include:
A significant adverse change in legal factors or in the business climate that could affect the value of the asset. For example, a successful challenge of our patent rights would likely result in generic competition earlier than expected.
A significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the FDA or other regulatory authorities could affect our ability to manufacture or sell a product.
A projection or forecast that indicates losses or reduced profits associated with an asset. This could result, for example, from a change in a government reimbursement program that results in an inability to sustain projected product revenues and profitability. This also could result from the introduction of a competitor’s product that results in a significant loss of market share or the inability to achieve the previously projected revenue growth, as well as the lack of acceptance of a product by patients, physicians and payers. For IPR&D projects, this could result from, among other things, a change in outlook based on clinical trial data, a delay in the projected launch date or additional expenditures to commercialize the product.

Identifiable Intangible Assets

As a result of our identifiable intangible asset impairment review work, we recognized a number of impairments of identifiable intangible assets for the years ended December 31, 2016, 2015 and 2014. See Notes to Consolidated Financial Statements––Note 4. Other (Income)/DeductionsNet.

When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply 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 projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; 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.

While all intangible assets other than goodwill can face events and circumstances that can lead to impairment, in general, intangible assets other than goodwill that are most at risk of impairment include IPR&D assets (approximately $10.1 billion as of December 31, 2016) and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are high-risk assets, as R&D is an inherently risky activity. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment as the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value at the end of each reporting period. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.

Goodwill

As a result of our goodwill impairment review work, we concluded that none of our goodwill was impaired as of December 31, 2016, and we do not believe the risk of impairment is significant at this time.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Examples of events or circumstances that could impact the estimated fair value of a reporting unit may include items such as changes in operating results, anticipated future cash flows, the discount rate and market multiples, among others. Our Consumer Healthcare reporting unit has the

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narrowest difference between estimated fair value and estimated book value. However, we believe that it would take a significant negative change in the undiscounted cash flows, the discount rate and/or the market multiples in the consumer industry for the Consumer Healthcare reporting unit goodwill to be impaired. Our Consumer Healthcare reporting unit performance and consumer healthcare industry market multiples are highly correlated with the overall economy and our specific performance is also dependent on our and our competitors’ innovation and marketing effectiveness, and on regulatory developments affecting claims, formulations and ingredients of our products.

When we are required to determine the fair value of a reporting unit, as appropriate for the individual reporting unit, we mainly use the income approach but we may also use the market approach, or a weighted-average combination of both approaches.
The income approach is a forward-looking approach to estimating fair value and relies primarily on internal forecasts. Within the income approach, the method that we use is the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then we apply a reporting unit-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 technological risk and competitive, legal and/or regulatory forces on the projections, as well as the selection of a long-term growth rate; 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.
The market approach is a historical approach to estimating fair value and relies primarily on external information. Within the market approach are two methods that we may use:
Guideline public company method—this method employs market multiples derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market and the application of the identified multiples to the corresponding measure of our reporting unit’s financial performance.
Guideline transaction method—this method relies on pricing multiples derived from transactions of significant interests in companies engaged in the same or similar lines of business and the application of the identified multiples to the corresponding measure of our reporting unit’s financial performance.
The market approach is only appropriate when the available external information is robust and deemed to be a reliable proxy for the specific reporting unit being valued; however, these assessments may prove to be incomplete or inaccurate. Some of the more significant estimates and assumptions inherent in this approach include: the selection of appropriate guideline companies and transactions and the determination of applicable premiums and discounts based on any differences in ownership percentages, ownership rights, business ownership forms or marketability between the reporting unit and the guideline companies and transactions.
Specifically:
When we estimate the fair value of our six biopharmaceutical reporting units, we rely solely on the income approach. We use the income approach exclusively as the use of the comparable guideline company method is not practical or reliable. For the income approach, we use the discounted cash flow method.
When we estimate the fair value of our Consumer Healthcare reporting unit, we use a combination of approaches and methods. We use the income approach and the market approach, which we weight equally in our analysis. We weight them equally as we have equal confidence in the appropriateness of the approaches for this reporting unit. For the income approach, we use the discounted cash flow method and for the market approach, we use both the guideline public company method and the guideline transaction method, which we weight equally to arrive at our market approach value.
For all of our reporting units, there are a number of future events and factors that may impact future results and that could potentially have an impact on the outcome of subsequent goodwill impairment testing. For a list of these factors, see the “Forward-Looking Information and Factors That May Affect Future Results” section of this Financial Review and Part I, Item 1A, “Risk Factors” in our 2016 Form 10-K.

Benefit Plans

The majority of our employees worldwide are covered by defined benefit pension plans, defined contribution plans or both. In the U.S., we have both IRC-qualified and supplemental (non-qualified) defined benefit plans and defined contribution plans, as well as other postretirement benefit plans consisting primarily of medical insurance for retirees and their eligible dependents.

The accounting for benefit plans is highly dependent on actuarial estimates, assumptions and calculations, which can result from a complex series of judgments about future events and uncertainties. The assumptions and actuarial estimates required to estimate the net employee benefit obligations for the defined benefit and postretirement plans include the discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality (life expectancy); expected return on plan assets; and healthcare cost trend rates.
Effective January 1, 2016, we changed the approach used to measure service and interest costs for certain international pension and other postretirement benefits. For fiscal 2015 and 2014, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the respective plan obligations. For fiscal 2016, we elected to measure service and interest costs by applying the spot rates along the yield curve for certain international plans to the plans' liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis. The reduction in expense for 2016 associated with this change in estimate was $42 million, primarily related to certain international pension plans, which was recognized evenly over each quarter of the year. The change in approach for the postretirement benefit plans was not material to the 2016 consolidated statement of income.


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In the fourth quarter of 2014, we approved a change, effective January 1, 2016, to the U.S. postretirement medical plan to transfer certain plan participants to a retiree drug coverage program eligible for a Medicare Part D plan subsidy (EGWP). This change resulted in a decrease to the postretirement benefit obligation of approximately $600 million as of December 31, 2014.

As of December 31, 2016, the noncurrent portion of our pension benefit obligations, net, and our postretirement benefit obligations, net increased, in the aggregate, by approximately $53 million compared to December 31, 2015. The increase reflects, among other things, a decrease in our discount rate assumptions used in the measurement of the plan obligations, largely offset by an increase in actual returns on plan assets and a decrease in the postretirement plan obligations due to medical plan cap changes with the U.S. and Puerto Rico postretirement plans and the adoption of the EGWP by the Puerto Rico postretirement plan.
Our assumptions reflect our historical experiences and our judgment regarding future expectations that have been deemed reasonable by management. The judgments made in determining the costs of our benefit plans can materially impact our results of operations.
The following table provides (i) at the end of each year, the expected annual rate of return on plan assets for the following year, (ii) the actual annual rate of return on plan assets achieved in each year, and (iii) the weighted-average discount rate used to measure the benefit obligations at the end of each year for our U.S. qualified pension plans and our international pension plans(a):
 
 
2016

 
2015

 
2014

U.S. Qualified Pension Plans
 
 
 
 
 
 
Expected annual rate of return on plan assets
 
8.0
%
 
8.0
 %
 
8.3
%
Actual annual rate of return on plan assets
 
8.1

 
(0.8
)
 
6.8

Discount rate used to measure the plan obligations
 
4.3

 
4.5

 
4.2

International Pension Plans
 
 
 
 
 


Expected annual rate of return on plan assets
 
4.7

 
5.2

 
5.5

Actual annual rate of return on plan assets
 
9.3

 
3.6

 
13.2

Discount rate used to measure the plan obligations
 
2.4

 
3.1

 
3.0

(a) 
For detailed assumptions associated with our benefit plans, see Notes to Consolidated Financial Statements—Note 11B. Pension and Postretirement Benefit Plans and Defined Contribution Plans: Actuarial Assumptions.
Expected Annual Rate of Return on Plan Assets

The assumptions for the expected annual rate of return on all of our plan assets reflect our actual historical return experience and our long-term assessment of forward-looking return expectations by asset classes, which is used to develop a weighted-average expected return based on the implementation of our targeted asset allocation in our respective plans.

The expected annual rate of return on plan assets for our U.S. plans and the majority of our international plans is applied to the fair value of plan assets at each year-end and the resulting amount is reflected in our net periodic benefit costs in the following year. In January 2017, Pfizer made a voluntary contribution of $1.0 billion to plan assets. In 2017, this contribution will be included in the plan asset balance for purposes of determining the expected return on plan assets.
The following table illustrates the sensitivity of net periodic benefit costs to a 50 basis point decline in our assumption for the expected annual rate of return on plan assets, holding all other assumptions constant (in millions, pre-tax):
 
 
Change
 
Increase in 2017 Net Periodic Benefit Costs
Assumption
 
 
 
 
Expected annual rate of return on plan assets
 
50 basis point decline
 
$102

The actual return on plan assets resulted in a net gain on our plan assets of approximately $1.7 billion during 2016.

Discount Rate Used to Measure Plan Obligations

The weighted-average discount rate used to measure the plan obligations for our U.S. defined benefit plans is determined at least annually and evaluated and modified, as required, to reflect the prevailing market rate of a portfolio of high-quality fixed income investments, rated AA/Aa or better, that reflect the rates at which the pension benefits could be effectively settled. The discount rate used to measure the plan obligations for our international plans is determined at least annually by reference to investment grade corporate bonds, rated AA/Aa or better, including, when there are sufficient data, a yield-curve approach. These discount rate determinations are made in consideration of local requirements.

The measurement of the plan obligations at the end of the year will affect the amount of service cost, interest cost and amortization expense reflected in our net periodic benefit costs in the following year.
The following table illustrates the sensitivity of net periodic benefit costs and benefit obligations to a 10 basis point decline in our assumption for the discount rate, holding all other assumptions constant (in millions, pre-tax):
 
 
Change
 
2017 Net Periodic Benefit Costs
 
2016 Benefit Obligations
Assumption
 
 
 
Increase
 
Increase
Discount rate
 
10 basis point decline
 
$34
 
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The change in the discount rates used in measuring our plan obligations as of December 31, 2016 resulted in an increase in the measurement of our aggregate plan obligations by approximately $2.0 billion.
Contingencies

For a discussion about income tax contingencies, see Notes to Consolidated Financial Statements—Note 5D. Tax Matters: Tax Contingencies.

For a discussion about legal and environmental contingencies, guarantees and indemnifications, see Notes to Consolidated Financial Statements—Note 17. Commitments and Contingencies
Acquisition of Hospira
Description of Transaction
On September 3, 2015, we acquired Hospira, a leading provider of sterile injectable drugs and infusion technologies as well as a provider of biosimilars, for approximately $16.1 billion in cash ($15.7 billion, net of cash acquired).
Recording of Assets Acquired and Liabilities Assumed
Our acquisition of Hospira has been accounted for using the acquisition method of accounting, which generally requires that most assets acquired and liabilities assumed be recorded at fair value as of the acquisition date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. Our judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. For instance, the determination of asset lives can impact our results of operations as different types of assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
For the amounts recognized for the Hospira assets acquired and liabilities assumed as of the acquisition date, including measurement period adjustments recognized in 2016 to the amounts initially recorded in 2015, see Notes to Consolidated Financial Statements––Note 2A. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment: Acquisitions.
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of certain classes of assets and liabilities of Hospira as of the acquisition date.
For financial instruments acquired from Hospira, our valuation approach was consistent with our valuation methodologies used for our legacy Pfizer financial instruments. For additional information on the valuation of our financial instruments, see Notes to Consolidated Financial Statements—Note 7. Financial Instruments.
Inventories—The fair value of acquired inventory ($1.9 billion) was determined as follows:
Finished goods—Estimated selling price, less an estimate of costs to be incurred to sell the inventory, and an estimate of a reasonable profit allowance for that selling effort.
Work in process—Estimated selling price of an equivalent finished good, less an estimate of costs to be incurred to complete the work-in-process inventory, an estimate of costs to be incurred to sell the inventory and an estimate of a reasonable profit allowance for those manufacturing and selling efforts.
Raw materials and supplies—Estimated cost to replace the raw materials and supplies.
The fair value of inventory is recognized in our results of operations as the inventory is sold. Some of the more significant estimates and assumptions inherent in the estimate of the fair value of inventory include stage of completion, costs to complete, costs to dispose and selling price. All of these judgments and estimates can materially impact our results of operations.
Property, Plant and Equipment—The fair value of acquired property, plant and equipment is determined using a variety of valuation approaches, depending on the nature of the asset and the quality of available information. The fair value of acquired property, plant and equipment was primarily determined as follows:
Land––Market, a sales comparison approach that measures value of an asset through an analysis of sales and offerings of comparable property.
Buildings, Machinery and equipment and Furniture and fixtures—Replacement cost, an approach that measures the value of an asset by estimating the cost to acquire or construct comparable assets. For buildings that are not highly specialized or that could be income producing if leased to a third party, we also considered market and income factors.
Construction in progress—Replacement cost, generally assumed to equal historical book value.

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The amounts recorded for the major components of acquired property, plant and equipment are as follows:
(MILLIONS OF DOLLARS)
 
Useful Lives
(Years)
 
Amounts Recognized
as of Acquisition Date
(as adjusted) Final

Land
 
 
 
$
111

Buildings
 
33—50
 
511

Machinery and equipment
 
8—20
 
1,049

Furniture, fixtures and other
 
3—121/2
 
141

Construction in progress
 
 
 
541

Total Property, plant and equipment
 
 
 
$
2,352

The fair value of property, plant and equipment will be recognized in our results of operations over the expected useful life of the individual depreciable assets. Some of the more significant inputs, estimates and assumptions inherent in the estimate of the fair value of property, plant and equipment include the nature, age, condition or location of the land, buildings, machinery and equipment, furniture and fixtures, and construction in progress, as applicable, as well as the estimate of market and replacement cost and the determination of the appropriate valuation premise, in-use or in-exchange. The in-use valuation premise assesses the value of an asset when used in combination with other assets (for example, on an installed basis), while the in-exchange valuation assesses the value of an asset on a stand alone basis. All of these judgments and estimates can materially impact our results of operations.

Identifiable Intangible AssetsThe fair value of acquired identifiable intangible assets generally is determined using an income approach. This method starts with a forecast of all of the expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.
The amounts recorded for the major components of acquired identifiable intangible assets are as follows:
MILLIONS OF DOLLARS
 
Amounts Recognized As of Acquisition Date (as adjusted) Final

 
Weighted-Average Useful Lives (Years)

Developed technology rights––finite lived
 
$
7,720

 
17

Other––finite-lived
 
570

 
12

IPR&D
 
1,030

 

For information about our identifiable intangible assets, see Notes to Consolidated Financial Statements––Note 10A. Identifiable Intangible Assets and Goodwill: Identifiable Intangible Assets.
The fair value of finite-lived identifiable intangible assets will be recognized in our results of operations over the expected useful life of the individual assets.
As of the acquisition date, we recognized IPR&D assets of $685 million for biosimilar programs and $345 million for sterile injectable programs.
Biosimilar IPR&D Acquired Assets:
In order to eliminate certain redundancies in Pfizer’s biosimilar drug products pipeline created as a result of the acquisition of Hospira, in September 2015 we opted to return to Celltrion Inc. and Celltrion Healthcare, Co., Ltd. (collectively Celltrion) rights that Hospira had previously acquired to potential biosimilars to Rituxan® (rituximab) and Herceptin® (trastuzumab). In connection with the return of these rights, we wrote off these IPR&D assets, totaling $170 million. See the Notes to Consolidated Financial Statements—Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives for additional information.
As of the acquisition date, the higher value remaining biosimilar IPR&D assets acquired from Hospira had been submitted to the FDA for approval and include potential biosimilars for (i) epoetin alfa (treatment of anemia in dialysis and oncology applications); and (ii) infliximab (rheumatoid arthritis and gastrointestinal disorders), which we began selling in the U.S. in November 2016. These biosimilars and filgrastim (oncology) are already available in certain markets outside the U.S. Filgrastim in the U.S. market and other biosimilar IPR&D assets acquired from Hospira are in late-stage development. See the “Product Developments––Biopharmaceutical” section of this Financial Review for additional information about these programs.
Sterile Injectable IPR&D Acquired Assets:
The sterile injectable IPR&D assets acquired from Hospira are in various therapeutic areas including anti-infectives, oncology, cardiovascular and neurology, among others. The sterile injectable IPR&D assets are in various stages of development with anticipated launch dates as of the acquisition date across 2016, 2017 and 2018.
Some of the more significant estimates and assumptions inherent in the estimate of the fair value of identifiable intangible assets include all assumptions associated with forecasting product profitability from the perspective of a market participant.

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Specifically:
Revenue—We use historical, forecast, industry or other sources of market data including estimates of sales volume, selling prices, market penetration, market share and year-over-year growth rates over the product’s life cycle.
Cost of sales, Sales and marketing expenses, General and administrative expenses—We use historical, forecast, industry or other sources of market data to estimate the costs associated with the identifiable intangible asset over the product’s life cycle.
R&D expenses—In the case of approved products, we estimate the appropriate level of ongoing R&D support, and for unapproved compounds, we estimate the amount and timing of costs to develop the R&D into viable products.
Estimated life of the asset—We assess the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry, expected changes in standards of practice for indications addressed by the asset, as well as obsolescence factors and estimated contract renewal rates.
Inherent risk—We use a discount rate that is primarily based on the weighted-average cost of capital with an additional premium to reflect the risks associated with the specific intangible asset, such as country risks (political, inflation, currency and property risks) and commercial risks. In addition, for unapproved assets, an additional risk factor is added for the risk of technical and regulatory success, called the probability of technical and regulatory success (PTRS).
The discount rates used in the intangible asset valuations ranged from 11% to 16%, and the estimated cash flows were projected over periods extending up to 20 years or more. For IPR&D assets, the PTRS rates ranged from 44% to 88%. Within this broad range, we recorded approximately $20 million of assets with a PTRS of 44%, $230 million of assets with a PTRS of 45% to 75% and $780 million of assets with a PTRS above 75% ($610 million after the write-off of the acquired biosimilar IPR&D assets discussed above). All of these judgments and estimates can materially impact our results of operations.
For IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product.
Contingencies—For acquisition date contingencies, see Notes to Consolidated Financial Statements––Note 2A. Acquisitions, Assets and Liabilities Held for Sale, Licensing Agreements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment: Acquisitions.


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ANALYSIS OF THE CONSOLIDATED STATEMENTS OF INCOME
  
 
Year Ended December 31,
 
% Change
(MILLIONS OF DOLLARS)
 
2016
 
2015
 
2014
 
16/15
 
15/14
Revenues
 
$
52,824

 
$
48,851

 
$
49,605

 
8

 
(2
)
Cost of sales
 
12,329

 
9,648

 
9,577

 
28

 
1

% of revenues
 
23.3
%
 
19.7
%
 
19.3
%
 
 
 
 
Selling, informational and administrative expenses
 
14,837

 
14,809

 
14,097

 

 
5

% of revenues
 
28.1
%
 
30.3
%
 
28.4
%
 
 
 
 
Research and development expenses
 
7,872

 
7,690

 
8,393

 
2

 
(8
)
% of revenues
 
14.9
%
 
15.7
%
 
16.9
%
 
 
 
 
Amortization of intangible assets
 
4,056

 
3,728

 
4,039

 
9

 
(8
)
% of revenues
 
7.7
%
 
7.6
%
 
8.1
%
 
 
 
 
Restructuring charges and certain acquisition-related costs
 
1,724

 
1,152

 
250

 
50

 
*

% of revenues
 
3.3
%
 
2.4
%
 
0.5
%
 
 
 
 
Other (income)/deductions—net
 
3,655

 
2,860

 
1,009

 
28

 
*

Income from continuing operations before provision for taxes on income
 
8,351

 
8,965

 
12,240

 
(7
)
 
(27
)
% of revenues
 
15.8
%
 
18.4
%
 
24.7
%
 
 
 
 
Provision for taxes on income
 
1,123

 
1,990

 
3,120

 
(44
)
 
(36
)
Effective tax rate
 
13.4
%
 
22.2
%
 
25.5
%
 
 
 
 
Income from continuing operations
 
7,229

 
6,975

 
9,119

 
4

 
(24
)
% of revenues
 
13.7
%
 
14.3
%
 
18.4
%
 
 
 
 
Discontinued operations—net of tax
 
17

 
11

 
48

 
49

 
(77
)
Net income before allocation to noncontrolling interests
 
7,246

 
6,986

 
9,168

 
4

 
(24
)
% of revenues
 
13.7
%
 
14.3
%
 
18.5
%
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
31

 
26

 
32

 
20

 
(21
)
Net income attributable to Pfizer Inc.
 
$
7,215

 
$
6,960

 
$
9,135

 
4

 
(24
)
% of revenues
 
13.7
%
 
14.2
%
 
18.4
%
 
 
 
 
Certain amounts and percentages may reflect rounding adjustments.
*
Calculation not meaningful.
Revenues—Overview

Compared to 2015, international revenues for 2016 were favorably impacted by approximately $100 million as a result of having one more selling day in international markets. In the U.S., there was no difference in selling days in 2016, compared to 2015.

Total revenues in 2016 compared to 2015 reflect an operational increase of $5.5 billion, or 11%, partially offset by the unfavorable impact of foreign exchange of $1.5 billion, or 3%, in 2016, compared to 2015. The operational increase was primarily the result of:
the inclusion of revenues from a full year of legacy Hospira global operations in 2016, as compared to four months of legacy Hospira U.S. operations and three months of legacy Hospira international operations in 2015, resulting in operational growth of $3.1 billion in 2016;
the continued operational growth from key brands including Ibrance, Lyrica (IH), Xeljanz and Chantix/Champix and Consumer Healthcare, (all primarily in the U.S.), as well as Eliquis and Xalkori (globally) (collectively, up approximately $3.6 billion in 2016);
operational growth in the legacy Pfizer Sterile Injectable Pharmaceuticals portfolio, mostly in emerging markets and the U.S. (up approximately $290 million); and
to a lesser extent, the inclusion of legacy Medivation operations of $140 million,
partially offset by:
the loss of exclusivity and associated generic competition for Zyvox primarily in the U.S. and certain developed Europe markets (down approximately $410 million), Lyrica (EH) in certain developed Europe markets (down approximately $330 million) and for certain other products (collectively, down approximately $440 million) as well as biosimilar competition for Enbrel in most developed Europe markets (down approximately $230 million);
the decline in Prevnar 13/Prevenar 13 revenues, primarily driven by an expected decline in revenues for the adult indication in the U.S. due to a high initial capture rate of the eligible population following its successful fourth-quarter 2014 launch, which resulted in a smaller remaining “catch up” opportunity compared to the prior-year, as well as the unfavorable impact of the timing of government purchases for the pediatric indication (down approximately $450 million); and
the year-end 2015 expiry of the collaboration agreement to co-promote Rebif in the U.S. (down approximately $370 million in 2016).

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Total revenues in 2015 compared to 2014 reflect an operational increase of $3.0 billion, or 6%, more than offset by the unfavorable impact of foreign exchange of $3.8 billion, or 8%, in 2015 compared to 2014. The operational increase was primarily the result of:
the performance of several key products in developed markets, including the continued strong uptake of Prevnar 13 among adults (largely in the U.S.), Ibrance (nearly all in the U.S.), Eliquis, Lyrica (IH) (primarily in the U.S. and Japan), Xeljanz (primarily in the U.S.), Viagra (IH) (primarily in the U.S.) and Nexium 24HR (primarily in the U.S.) (collectively, up approximately $4.1 billion);
the inclusion of four months of legacy Hospira U.S. operations and three months of legacy Hospira international operations of $1.5 billion;
a 7% operational increase in revenues in emerging markets, reflecting continued strong operational growth, primarily from Prevenar 13, Lipitor and Enbrel (up approximately $810 million); and
inclusion of the vaccines acquired from Baxter of $178 million,
partially offset by:
the loss of exclusivity and immediate multi-source generic competition for Celebrex in the U.S. in December 2014 and certain other developed markets (down approximately $1.8 billion), and the loss of exclusivity for Lyrica (EH) in certain developed Europe markets (down approximately $420 million), for Zyvox in the U.S. (down approximately $420 million), for Rapamune in the U.S. (down approximately $120 million) and for certain other products (collectively, down approximately $330 million);
the performance of certain other products in developed markets and BeneFIX in the U.S. (collectively, down approximately $370 million); and
the termination of the Spiriva co-promotion collaboration in certain countries (down approximately $100 million).

See the “Intellectual Property Rights and Collaboration/Licensing Rights” section of this Financial Report for information about (i) recent losses of product exclusivity impacting product revenues, (ii) recent losses of collaboration rights impacting alliance revenues and (iii) expected losses of product exclusivity in 2017.

In addition, we expect to lose exclusivity for various other products in various markets over the next few years. For additional information, see the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business”, of our 2016 Form 10-K.

We have significant operations outside the U.S., with revenues exceeding $500 million in the following number of countries:
pfe-12312_chartx27906.jpg
The U.S. and Japan are our two largest national markets:

Revenues by National Market
pfe-12312_chartx28783.jpgpfe-12312_chartx29440.jpgpfe-12312_chartx30335.jpg

Our policy relating to the supply of pharmaceutical inventory at domestic wholesalers, and in major international markets, is to generally maintain stocking levels under one month on average and to keep monthly levels consistent from year to year based on patterns of utilization. We historically have been able to closely monitor these customer stocking levels by purchasing information from our customers directly or by obtaining other third-party information. We believe our data sources to be directionally reliable but cannot verify their accuracy. Further, as we do not control this third-party data, we cannot be assured of continuing access. Unusual buying patterns and utilization are promptly investigated.

Revenue Deductions

Our gross product revenues are subject to a variety of deductions that are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent chargebacks, rebates and sales allowances to wholesalers, and, to a lesser extent, distributors like MCOs, retailers and government agencies with respect to our pharmaceutical products. Those deductions represent estimates

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of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with U.S. Medicare, Medicaid and performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.
The following table provides information about revenue deductions:
  
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2016

 
2015

 
2014

Medicare rebates(a)
 
$
1,063

 
$
1,002

 
$
1,077

Medicaid and related state program rebates(a)
 
1,473

 
1,263

 
779

Performance-based contract rebates(a), (b)
 
2,560

 
2,253

 
2,219

Chargebacks(c)
 
5,736

 
4,961

 
3,755

Sales allowances(d)
 
4,623

 
4,200

 
4,547

Sales returns and cash discounts
 
1,441

 
1,335

 
1,279

Total(e)
 
$
16,895

 
$
15,014

 
$
13,656

(a) 
Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.
(b) 
Performance-based contract rebates include contract rebates with managed care customers within the U.S., including health maintenance organizations and PBMs, who receive rebates based on the achievement of contracted performance terms and claims under these contracts. Outside the U.S., performance-based contract rebates include rebates to wholesalers/distributors based on achievement of contracted performance for specific products or sales milestones.
(c) 
Chargebacks primarily represent reimbursements to U.S. wholesalers for honoring contracted prices to third parties.
(d) 
Sales allowances primarily represent price reductions that are contractual or legislatively mandated outside the U.S., discounts and distribution fees.
(e) 
For 2016, associated with the following segments: IH ($7.1 billion); and EH ($9.8 billion). For 2015, associated with the following segments: IH ($5.8 billion); and EH ($9.2 billion). For 2014, associated with the following segments: IH ($4.6 billion); and EH ($9.1 billion).

Total revenue deductions for 2016 increased 13% compared to 2015. The increase in revenue deductions is consistent with increased sales, and was specifically as a result of:
an increase in chargebacks from EH products, primarily due to the inclusion of a full year of legacy Hospira sterile injectables in 2016, compared to the inclusion of only four months of legacy Hospira sterile injectables in 2015, and from certain IH products;
an increase in performance-based contract rebates, primarily due to sales to managed care customers in the U.S. and higher rebates in certain developed Europe markets due to competitive pressures post loss of exclusivity for certain products; and
an increase in Medicaid and related state program rebates, primarily as a result of updated estimates of sales related to these programs.

For additional rebate accrual information, see Notes to Consolidated Financial Statements––Note 1G. Basis of Presentation and Significant Accounting Policies: Revenues and Trade Accounts Receivable.

Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $4.3 billion as of December 31, 2016, of which approximately $2.8 billion is included in Other current liabilities, $357 million is included in Other noncurrent liabilities and approximately $1.2 billion is included against Trade accounts receivable, less allowance for doubtful accounts, in our consolidated balance sheet. Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $3.9 billion as of December 31, 2015, of which approximately $2.6 billion is included in Other current liabilities, $272 million is included in Other noncurrent liabilities and approximately $1.1 billion is included against Trade accounts receivable, less allowance for doubtful accounts, in our consolidated balance sheet.


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Revenues by Segment and Geographic Area
The following table provides worldwide revenues by operating segment and geographic area:
 
 
Year Ended December 31,
 
% Change
 
 
Worldwide
 
U.S.
 
International
 
Worldwide
 
U.S.
 
International
(MILLIONS OF DOLLARS)
 
2016

 
2015

 
2014

 
2016

 
2015

 
2014

 
2016

 
2015

 
2014

 
16/15
 
15/14

 
16/15
 
15/14

 
16/15

 
15/14

Operating Segments(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IH
 
$
29,197

 
$
26,758

 
$
24,005

 
$
16,773

 
$
14,446

 
$
10,958

 
$
12,424

 
$
12,312

 
$
13,047

 
9
 
11

 
16
 
32

 
1

 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EH
 
23,627

 
22,094

 
25,600

 
9,596

 
7,258

 
8,115

 
14,031

 
14,836

 
17,485

 
7
 
(14
)
 
32
 
(11
)
 
(5
)
 
(15
)
Total revenues
 
$
52,824

 
$
48,851

 
$
49,605

 
$
26,369

 
$
21,704

 
$
19,073

 
$
26,455

 
$
27,147

 
$
30,532

 
8
 
(2
)
 
21
 
14

 
(3
)
 
(11
)
(a) 
IH = the Innovative Health segment; and EH = the Essential Health segment. For additional information about each operating segment, see the “Our Strategy––Commercial Operations” section of this Financial Review and Notes to Consolidated Financial Statements––Note 18A. Segment, Geographic and Other Revenue Information: Segment Information.
Revenues

We recorded direct product sales of more than $1 billion for each of eight products in 2016, for each of seven products in 2015 and for each of ten products in 2014. We recorded more than $1 billion in alliance revenues in 2016 and 2015 (primarily Eliquis). These direct product sales and alliance revenues represent 43% of our revenues in 2016, 44% of our revenues in 2015 and 52% of our revenues in 2014. See the Revenues—Major Products section of this Financial Review for additional information.

2016 v. 2015

See the RevenuesOverview section of this Analysis of the Consolidated Statements of Income for a discussion of performance of worldwide revenues.

Geographically,
in the U.S., revenues increased $4.7 billion, or 21%, in 2016, compared to 2015, reflecting, among other things:
the inclusion of revenues from a full year of legacy Hospira U.S. operations of approximately $3.5 billion in 2016, as compared to four months of revenues from legacy Hospira U.S. operations of $1.2 billion in 2015, resulting in growth of approximately $2.2 billion in 2016; and
the continued growth of several key products including Ibrance, Lyrica (IH), Eliquis, Xeljanz and Chantix (collectively, up approximately $2.8 billion in 2016),
partially offset by:
the year-end 2015 expiry of the collaboration agreement to co-promote Rebif (down approximately $370 million in 2016);
the loss of exclusivity and associated generic competition for Zyvox (down approximately $200 million in 2016); and
the decline in revenues for the Prevnar 13 family primarily driven by the adult indication in the U.S. due to a high initial capture rate of the eligible population following its successful fourth-quarter 2014 launch, which resulted in a smaller remaining “catch up” opportunity compared to 2015 (Prevnar 13 family down approximately $380 million in 2016).
in our international markets, revenues decreased $693 million, or 3%, in 2016, compared to 2015. Foreign exchange unfavorably impacted international revenues by approximately $1.5 billion, or 5% in 2016. Operationally, revenues increased approximately $790 million, or 3%, in 2016, compared to 2015, reflecting, among other things:
the inclusion of revenues from a full year of legacy Hospira international operations of approximately $1.2 billion in 2016, compared to the inclusion of revenues from only three months of legacy Hospira international operations of approximately $270 million in 2015;
the continued growth of Eliquis (up approximately $340 million in 2016); and
the continued growth from certain other products in emerging markets, excluding the contributions from legacy Hospira and Eliquis (collectively, up approximately $500 million in 2016),
partially offset by:
lower revenues as a result of the loss of exclusivity and associated biosimilar or generic (as applicable) competition, primarily in developed Europe markets for Lyrica (EH), Enbrel and Zyvox (collectively, down approximately $770 million operationally in 2016).
In 2016, international revenues represented 50% of total revenues, compared to 56% in 2015. Excluding foreign exchange, international revenues in 2016 represented 51% of total revenues.

2015 v. 2014

See the RevenuesOverview section of this Analysis of the Consolidated Statements of Income for a discussion of performance of worldwide revenues.

Geographically,
in the U.S., revenues increased $2.6 billion, or 14%, in 2015, compared to 2014, reflecting, among other things:

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the performance of several key products, including Prevnar 13 primarily in adults (up approximately $1.9 billion), Ibrance (which was launched in the U.S. in February 2015, up approximately $720 million), as well as Lyrica (IH), Eliquis, Xeljanz, Viagra (IH) and Nexium 24HR (collectively, up approximately $1.0 billion in 2015); and
the inclusion of four months of legacy Hospira U.S. operations of $1.2 billion in 2015,
partially offset by:
losses of exclusivity and associated multi-source generic competition for Celebrex in the U.S. in December 2014 (down approximately $1.6 billion in 2015);
the loss of exclusivity for Zyvox and Rapamune, as well as the termination of our Spiriva co-promotion collaboration (collectively, down approximately $620 million in 2015); and
the performance of Lipitor and BeneFIX (collectively, down approximately $160 million in 2015).
in our international markets, revenues decreased $3.4 billion, or 11%, in 2015, compared to 2014. Foreign exchange unfavorably impacted international revenues by approximately $3.8 billion, or 12% in 2015. Operationally, revenues increased by $402 million, or 1%, in 2015 compared to 2014 reflecting, among other things:
the operational increase in revenues in emerging markets, reflecting continued strong operational growth primarily from the IH business, including Prevenar and Enbrel, among other products, and Lipitor (up approximately $600 million in 2015);
higher revenues in developed markets for Eliquis and Lyrica (IH), as well as from vaccines acquired in December 2014 from Baxter (in Europe) (collectively, up approximately $590 million in 2015); and
the inclusion of three months of legacy Hospira international operations of $270 million in 2015,
partially offset by:
lower revenues in developed markets for Lyrica (EH), Celebrex, Inspra and Viagra (EH) as a result of the loss of exclusivity, as well as the performance of Lipitor and Norvasc in developed markets, and Zosyn/Tazocin in emerging markets (collectively, down approximately $1.0 billion in 2015).
In 2015, international revenues represented 56% of total revenues, compared to 62% in 2014. Excluding foreign exchange, international revenues in 2015 represented 59% of total revenues.

For additional information about operating segment revenues, see the “Analysis of Operating Segment Information” section of this Financial Review.

2016 Financial Report    
 
 
25


Financial Review
Pfizer Inc. and Subsidiary Companies

 
 
 

Revenues—Major Products
The following table provides revenue information for several of our major products:
(MILLIONS OF DOLLARS)
 
 
 
Year Ended December 31,
 
% Change
PRODUCT
PRIMARY INDICATIONS OR CLASS
 
2016

 
2015

 
2014

 
16/15
 
15/14
 
 
 
 
 
 
 
 
 
 
Total

 
Oper.

 
Total

 
Oper.

TOTAL REVENUES
 
$
52,824

 
$
48,851

 
$
49,605

 
8

 
11

 
(2
)
 
6

PFIZER INNOVATIVE HEALTH (IH)(a):
 
$
29,197

 
$
26,758

 
$
24,005

 
9

 
11

 
11

 
19

Internal Medicine
 
$
8,858

 
$
7,611

 
$
6,727

 
16

 
17

 
13

 
17

Lyrica IH(b)
 
Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia, neuropathic pain due to spinal cord injury
 
4,165

 
3,655

 
3,350

 
14

 
14

 
9

 
13

Viagra IH(c)
 
Erectile dysfunction
 
1,181

 
1,297

 
1,181

 
(9
)
 
(9
)
 
10

 
10

Chantix/Champix
 
An aid to smoking cessation treatment
 
842

 
671

 
647

 
26

 
27

 
4

 
9

Toviaz
 
Overactive bladder
 
258

 
267

 
288

 
(3
)
 
(4
)
 
(7
)
 
1

BMP2
 
Development of bone and cartilage
 
251

 
232

 
228

 
8

 
8

 
2

 
2

Alliance revenues(d)
 
Various
 
1,588

 
1,256

 
759

 
26

 
26

 
66

 
75

All other Internal Medicine(e)
 
Various
 
573

 
233

 
276

 
*

 
*

 
(16
)
 
(12
)
Vaccines
 
$
6,071

 
$
6,454

 
$
4,480

 
(6
)
 
(5
)
 
44

 
51

Prevnar 13/Prevenar 13
 
Vaccines for prevention of pneumococcal disease
 
5,718

 
6,245

 
4,464

 
(8
)
 
(7
)
 
40

 
46

FSME/IMMUN-TicoVac
 
Tick-borne encephalitis vaccine
 
114

 
104

 

 
10

 
10

 
*

 
*

All other Vaccines
 
Various
 
239

 
104

 
16

 
*

 
*

 
*

 
*

Oncology
 
$
4,563

 
$
2,955

 
$
2,218

 
54

 
56

 
33

 
43

Ibrance
 
Advanced breast cancer
 
2,135

 
723

 

 
*

 
*

 
*

 
*

Sutent
 
Advanced and/or metastatic RCC, refractory GIST and advanced pancreatic neuroendocrine tumor
 
1,095

 
1,120

 
1,174

 
(2
)
 
1

 
(5
)
 
7

Xalkori
 
ALK-positive NSCLC and ROS1-positive NSCLC
 
561

 
488

 
438

 
15

 
17

 
11

 
20

Inlyta
 
Advanced RCC
 
401

 
430

 
410

 
(7
)
 
(6
)
 
5

 
14

Xtandi alliance revenues
 
Advanced prostate cancer
 
140

 

 

 
*

 
*

 

 

All other Oncology
 
Various
 
231

 
194

 
195

 
19

 
19

 
(1
)
 
5

Inflammation & Immunology (I&I)
 
$
3,928

 
$
3,918

 
$
4,241

 

 
6

 
(8
)
 
6

Enbrel (Outside the U.S. and Canada)
 
Rheumatoid, juvenile rheumatoid and psoriatic arthritis, plaque psoriasis and ankylosing spondylitis
 
2,909

 
3,333

 
3,850

 
(13
)
 
(6
)
 
(13
)
 
1

Xeljanz
 
Rheumatoid arthritis
 
927

 
523

 
308

 
77

 
78

 
70

 
72

All other I&I
 
Various
 
93

 
61

 
82

 
51

 
42

 
(25
)
 
(13
)
Rare Disease
 
$
2,369

 
$
2,425

 
$
2,893

 
(2
)
 

 
(16
)
 
(7
)
BeneFIX
 
Hemophilia
 
712

 
752

 
856

 
(5
)
 
(4
)
 
(12
)
 
(5
)
Genotropin
 
Replacement of human growth hormone
 
579

 
617

 
723

 
(6
)
 
(5
)
 
(15
)
 
(4
)
Refacto AF/Xyntha
 
Hemophilia
 
554

 
533

 
631

 
4

 
8

 
(16
)
 
(5
)
Somavert
 
Acromegaly
 
232

 
218

 
229

 
6

 
8

 
(5
)
 
7

Rapamune
 
Prevention of organ rejection in kidney transplantation
 
170

 
197

 
339

 
(14
)
 
(7
)
 
(42
)
 
(36
)
All other Rare Disease
 
Various
 
122

 
108

 
114

 
13

 
11

 
(4
)
 
10

Consumer Healthcare
 
$
3,407

 
$
3,395

 
$
3,446

 

 
5

 
(1
)
 
5

PFIZER ESSENTIAL HEALTH (EH)(f)
 
$
23,627

 
$
22,094

 
$
25,600

 
7

 
11

 
(14
)
 
(6
)
Legacy Established Products (LEP)(g)
 
$
11,194

 
$
11,745

 
$
13,016

 
(5
)
 

 
(10
)
 
(2
)
Lipitor
 
Reduction of LDL cholesterol
 
1,758

 
1,860

 
2,061

 
(6
)
 
2

 
(10
)
 
(4
)
Premarin family
 
Symptoms of menopause
 
1,017

 
1,018

 
1,076

 

 

 
(5
)
 
(4
)
Norvasc
 
Hypertension
 
962

 
991

 
1,112

 
(3
)
 
1

 
(11
)
 
(3
)
EpiPen
 
Epinephrine injection used in treatment of life-threatening allergic reactions
 
386

 
339

 
294

 
14

 
14

 
15

 
19

Xalatan/Xalacom
 
Glaucoma and ocular hypertension
 
363

 
399

 
495

 
(9
)
 
(8
)
 
(19
)
 
(6
)
Relpax
 
Symptoms of migraine headache
 
323

 
352

 
382

 
(8
)
 
(8
)
 
(8
)
 
(2
)
Zoloft
 
Depression and certain anxiety disorders
 
304

 
374

 
423

 
(19
)
 
(14
)
 
(12
)
 
(1
)
Effexor
 
Depression and certain anxiety disorders
 
278

 
288

 
344

 
(3
)
 

 
(16
)
 
(8
)
Zithromax/Zmax
 
Bacterial infections
 
272

 
275

 
311

 
(1
)
 
1

 
(11
)
 
(3
)
Xanax/Xanax XR
 
Anxiety disorders
 
222

 
224

 
253

 
(1
)
 
1

 
(11
)
 
2

Cardura
 
Hypertension/Benign prostatic hyperplasia
 
192

 
210

 
263

 
(9
)
 
(6
)
 
(20
)