EX-13 8 pfe-exhibit13x12312017x10k.htm 2017 FINANCIAL REPORT Exhibit
EXHIBIT 13

Pfizer Inc. 2017 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 2017 Financial Report (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this 2017 Financial Report, most of which are explained or defined below:
2017 Financial Report
This Financial Report for the fiscal year ended December 31, 2017, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2017
2017 Form 10-K
Annual Report on Form 10-K for the fiscal year ended December 31, 2017
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
BRCA
BReast CAncer susceptibility gene
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.
CLBP
chronic low back pain
CML
chronic myelogenous leukemia
Developed Markets
U.S., Western Europe, Japan, Canada, Australia, South Korea, Scandinavian countries, Finland and New Zealand
EEA
European Economic Area
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, Eastern Europe, Africa, the Middle East, Central Europe and Turkey
EPS
earnings per share
EU
European Union
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
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
Hisun
Zhejiang Hisun Pharmaceuticals Co., Ltd.
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive
ICU Medical
ICU Medical, Inc.
IH
Innovative Health
InnoPharma
InnoPharma, Inc.

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IPR&D
in-process research and development
IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
IV
intravenous
Janssen
Janssen Biotech Inc.
J&J
Johnson & Johnson Corp.
King
King Pharmaceuticals, Inc.
LDL
low density lipoprotein
LEP
Legacy Established Products
LIBOR
London Interbank Offered Rate
Lilly
Eli Lilly & Company
LOE
loss of exclusivity
MCC
Merkel Cell Carcinoma
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
OA
osteoarthritis
OPKO
OPKO Health, Inc.
OTC
over-the-counter
PARP
poly ADP ribose polymerase

PBM
Pharmacy Benefit Manager
PBO
Projected benefit obligation
Pharmacia
Pharmacia Corporation
PPS
Portfolio Performance Shares
PP&E
Property, plant & equipment
PSAs
Performance Share Awards
PTSRUs
Performance Total Shareholder Return Units
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
Sangamo
Sangamo Therapeutics, Inc.
SEC
U.S. Securities and Exchange Commission
SGA
small for gestational age
S&P
Standard and Poor’s
SIP
Sterile Injectable Pharmaceuticals
Tax Cuts and Jobs Act or TCJA
H.R.1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”
Teuto
Laboratório Teuto Brasileiro S.A.
Teva
Teva Pharmaceuticals USA, Inc.
TSR
Total Shareholder Return
TSRUs
Total Shareholder Return Units
UC
urothelial carcinoma
U.K.
United Kingdom
U.S.
United States
VAI
Voluntary Action Indicated
VAT
value added tax
ViiV
ViiV Healthcare Limited
WRD
Worldwide Research and Development
Zoetis
Zoetis Inc.

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Financial Review
Pfizer Inc. and Subsidiary Companies

 

INTRODUCTION

See the Glossary of Defined Terms at the beginning of this 2017 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. and its subsidiaries (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 2017 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: Financial Highlights, Our Business; Our 2017 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 2018.
 
Beginning on page 16
 
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 20
 
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 34
 
This sub-section provides a discussion about our costs and expenses.
 
 
Beginning on page 37
 
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 52
 
This section provides a discussion of changes in certain components of other comprehensive income.
 
Beginning on page 53
 
This section provides a discussion of changes in certain balance sheet accounts, including Accumulated other comprehensive loss.
 
Beginning on page 54
 
This section provides an analysis of our consolidated cash flows for the three years ended December 31, 2017.
 
Beginning on page 56
 
This section provides an analysis of selected measures of our liquidity and of our capital resources as of December 31, 2017 and December 31, 2016, as well as a discussion of our outstanding debt and other commitments that existed as of December 31, 2017 and December 31, 2016. 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 61
 
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 66
 
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, including anticipatory regulatory submissions, data read-outs, approvals, performance, timing of exclusivity and potential benefits of Pfizer’s products and product candidates, strategic reviews, capital allocation, business-development plans, manufacturing and products supply 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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Financial Review
Pfizer Inc. and Subsidiary Companies

 

OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Financial Highlights

The following charts provide a summary of certain financial performance (in billions, except per share data):
2017 Total Revenues––$52.5 billion
2017 Net Cash Flow from Operations––$16.5 billion
A decrease of 1% compared to 2016
An increase of 4% compared to 2016
totalrevenue2017.jpgnetcashflow-operations2017.jpg
2017 Reported Diluted EPS––$3.52
2017 Adjusted Diluted EPS (Non-GAAP)––$2.65*
An increase of over 100% compared to 2016
An increase of 11% compared to 2016
reporteddilutedeps2017.jpgadjdilutedepsnongaap2017.jpg
*
For an understanding of Adjusted diluted EPS (which is a non-GAAP financial measure), including reconciliations of certain GAAP reported to non-GAAP adjusted information, see the “Non-GAAP Financial Measure (Adjusted Income)” section of this Financial Review.
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). 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, the ability to replenish innovative biopharmaceutical products, 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 2017 Form 10-K.

The financial information included in our consolidated financial statements for our subsidiaries operating outside the 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.

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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, Eastern Europe, Africa, the Middle East, Central Europe 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 in 2015. 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.

On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of the TCJA. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the Federal corporate income tax rate from 35% to 21%, transitioning U.S. international taxation from a worldwide tax system to a territorial tax system and imposing a repatriation tax on deemed repatriated accumulated post-1986 earnings of foreign subsidiaries. For information on estimates and assumptions in connection with the TCJA, see Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.

In October 2017, we announced that we are reviewing strategic alternatives for our Consumer Healthcare business. A range of options will be considered, including a full or partial separation of the Consumer Healthcare business from Pfizer through a spin-off, sale or other transaction, and we may ultimately determine to retain the business.

Our significant business development activities include:

On February 3, 2017, we completed the sale of our global infusion systems 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. At closing, we received 3.2 million newly issued shares of ICU Medical common stock, which we initially valued at approximately $428 million, 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. The operating results of HIS are included in our consolidated statement of income and EH’s operating results through February 2, 2017 and, therefore, our financial results, and EH’s operating results, for the year ended December 31, 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations, while our financial results, and EH’s operating results, for the year ended December 31, 2016 reflect 12 months of HIS global operations and for the year ended December 31, 2015 reflect four months of HIS U.S. operations and three months of HIS international operations. 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. for $1,045 million, composed of cash and contingent consideration. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of this business, and, in accordance with our international reporting period, our financial results, EH’s operating results, and cash flows for the year ended December 31, 2017 reflect approximately 11 months of the small molecule anti-infectives business acquired from AstraZeneca.

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. The remaining consideration was paid as of December 31, 2017. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Medivation. Therefore, Medivation operations are reflected in our financial results, IH’s operating results, and cash flows for the year ended December 31, 2017. In accordance with our domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately three months of 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. Therefore, Anacor operations are reflected in our financial results, IH’s operating results, and cash flows for the year ended December 31, 2017. In accordance with our domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately six months of Anacor operations.
On April 6, 2016, we announced that the merger agreement between Pfizer and Allergan entered into on November 22, 2015 was terminated by mutual agreement of the companies. The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement. In connection with the termination of the merger agreement, on April 8, 2016 (which fell into Pfizer’s second fiscal quarter of 2016), 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

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domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2015 reflect four months of Hospira U.S. operations and three months of Hospira international operations.
For additional information, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment and the “Our Strategy”, “Our Business Development Initiatives” and “Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” sections of this Financial Review.

Impact of Recent Hurricanes in Puerto Rico

We have manufacturing and commercial operations in Puerto Rico, which were impacted by the recent hurricanes toward the end of the third quarter in 2017. While our three manufacturing sites sustained some damage and became inoperable due to issues impacting Puerto Rico overall, as of the date of this 2017 Financial Report filing, all three sites have resumed operations and remediation activities continue. Given prior inoperability along with ongoing remediation of our sites, there could be certain product shortages in the coming months. Our commercial sales offices in Puerto Rico have been operational since October 9, 2017.

In 2017, we recorded $195 million in Cost of sales for inventory losses, overhead costs related to the period in which the plants could not operate, and incremental costs to date resulting from the hurricanes in Puerto Rico. We may record additional losses in future periods but we are unable to predict them with certainty at this time. As a result of dual source supply options and sufficient pre-hurricane inventory levels, we currently expect the impact on future revenues to be insignificant. We will continue to monitor the situation closely and make any updates to our outlook if warranted.

Product Manufacturing

We periodically encounter difficulties or delays in manufacturing, including due to legal or regulatory actions, such as warning letters, suspension of manufacturing or voluntary recall of a product. In February 2017, for example, we received a warning letter from the FDA communicating the FDA’s view that certain violations of current Good Manufacturing Practice regulations exist at Hospira’s manufacturing facility in McPherson, Kansas. We are undertaking corrective actions to address the concerns raised by the FDA. In January 2018, the FDA upgraded the status of Pfizer’s McPherson, Kansas manufacturing facility to VAI based on an October 2017 inspection. The change to VAI status will lift the compliance hold that the FDA placed on approval of pending applications, and is an important step toward resolving the issues cited in the February 2017 FDA warning letter. Within our Essential Health portfolio, we have been experiencing product shortages with some products. The product shortages are primarily for products from the legacy Hospira portfolio and are largely driven by capacity constraints and technical issues. Any continued product shortage interruption at this manufacturing facility could negatively impact our financial results, specifically in our SIP portfolio. In addition to the McPherson facility, we continue to remediate issues at other legacy Hospira facilities manufacturing sterile injectables within our Essential Health portfolio. We expect to make substantial progress on our remediation efforts during 2018.
Our 2017 Performance

Revenues––2017

Revenues in 2017 decreased by $278 million, or 1%, compared to 2016, which reflects a slight net operational decrease of $20 million, or less than 1%, and an unfavorable impact of foreign exchange of $259 million, or less than 1%.
Compared to 2016, total revenues for 2017 were unfavorably impacted by approximately $200 million as a result of 2017 having one less selling day in both U.S. and international markets.
The following graph illustrates the components of the decrease in revenues in 2017:
overviewrev2017v2016.jpg
*
LOE generally pertains to period-over-period revenue impacts for products across our portfolios experiencing patent expirations or loss of regulatory exclusivity in certain developed markets.

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The following provides an analysis of the decrease in revenues in 2017:
(MILLIONS OF DOLLARS)
 
 
 
 
 
2016 Revenues
 
$
52,824

 
 
 
Operational growth/(decline):
 
 
Continued growth from key brands(a) and growth from Biosimilars(b)
 
2,810

Increase in Xtandi alliance revenues in the U.S. (September 2016 acquisition of Medivation)
 
450

Declines from Peri-LOE Products, Enbrel (driven by declines in most developed Europe markets), Viagra (IH) (in the U.S.), and our SIP and LEP portfolios, as well as a decline in Prevnar 13/Prevenar 13 (primarily in the U.S.)
 
(2,375
)
Disposition-related operational impact––February 2017 sale of HIS(c)
 
(1,062
)
Other operational factors, net
 
157

Operational decline, net
 
(20
)
 
 
 
Operational revenues
 
52,804

Unfavorable impact of foreign exchange
 
(259
)
2017 Revenues
 
$
52,546

(a) 
Key brands include Ibrance and Eliquis (both globally), as well as Xeljanz and Lyrica (IH) (both primarily in the U.S.).
(b) 
Growth in Biosimilars was primarily driven by Inflectra in the U.S. and developed Europe markets.
(c) 
In 2017, financial results include approximately one month of HIS domestic operations and approximately two months of HIS international operations, compared to 12 months of HIS global operations in 2016.

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/(Benefit) for Taxes on Income––2017
The following provides an analysis of the increase in Income from continuing operations before provision/benefit) for taxes on income for 2017:
(MILLIONS OF DOLLARS)
 
 
 
 
 
Income from continuing operations before provision/(benefit) for taxes on income for the year ended December 31, 2016
 
$
8,351

 
 
 
Unfavorable change in revenues
 
(278
)
 
 
 
Favorable/(Unfavorable) changes:
 
 
Nonrecurrence of 2016 impairment on remeasurement of HIS net assets and lower loss on sale of HIS(a)
 
1,657

Lower Restructuring charges and certain acquisition-related costs(b)
 
1,237

Lower Cost of sales(c)
 
1,089

Lower certain asset impairments(a)
 
1,052

Lower certain legal matters, net(a)
 
269

Higher dividend income(a)
 
256

Lower business and legal entity alignment costs(a) 
 
190

Higher net gains on asset disposals(a)
 
172

Lower Selling, information and administrative expenses(d)
 
53

Higher Amortization of intangible assets(e)
 
(703
)
Higher net losses on early retirement of debt(a)
 
(687
)
Lower royalty-related income(a)
 
(406
)
All other items, net
 
52

Income from continuing operations before provision/(benefit) for taxes on income for the year ended December 31, 2017
 
$
12,305

(a) 
See the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions—Net.
(b) 
See the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this Financial Review.
(c) 
See the “Costs and Expenses––Cost of Sales” section of this Financial Review.
(d) 
See the “Costs and Expenses––Selling, Informational and Administrative Expenses” section of this Financial Review.
(e) 
See the “Costs and Expenses––Amortization of Intangible Assets” section of this Financial Review.
For information on our tax provision and effective tax rate see the “Provision/(Benefit) for Taxes on Income” section of this Financial Review and Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.

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Our Operating Environment

Industry-Specific Challenges

Intellectual Property Rights and Collaboration/Licensing Rights

The loss, expiration or invalidation of intellectual property rights, patent litigation settlements with generic manufacturers 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. Also, if one of our patents is found to be invalid by judicial, court or administrative proceedings, such as inter partes review, post-grant review, re-examination or opposition proceedings, before the U.S. Patent and Trademark Office, the European Patent Office, or other foreign counterparts, generic or competitive products could be introduced into the market resulting in the erosion of sales of our existing products. For example, several of the patents in our pneumococcal vaccine portfolio have been challenged in inter partes review and post-grant review proceedings in the U.S. The invalidation of these patents could potentially allow a competitor pneumococcal vaccine into the marketplace.

As a result of a patent litigation settlement, Teva launched a generic version of Viagra in the U.S. in December 2017.

We lost or 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. Pfizer is currently pursuing a six-month patent-term extension for pediatric exclusivity for Lyrica in the U.S. with the FDA.
For additional information, see the “Recent Losses and Expected Losses of Product Exclusivity” section below.

Our biotechnology products, including BeneFIX, ReFacto, Xyntha, Bavencio, Prevnar 13/Prevenar 13 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 referencing our biotechnology products, our biotechnology products may become subject to competition from these biosimilars, with attendant competitive pressure, and price reductions could follow. For example, Enbrel faces ongoing biosimilar competition in most developed Europe markets, which is expected to continue. The expiration or successful challenge of applicable patent rights could trigger this competition, assuming any relevant regulatory exclusivity period has expired.

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.

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 2018, 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,
 
 
 
 
 
 
2017

 
2016

 
2015

Viagra(b)
 
June 2013
May 2014
December 2017
 
Major European markets
Japan
U.S.
 
$
850

 
$
1,217

 
$
1,338

Rapamune
 
January 2014
June 2015
 
U.S.
Major European markets
 
90

 
115

 
129

Inspra(c)
 
March 2014
July 2015
 
Major European markets
Japan
 
87

 
97

 
118

Lyrica(d)
 
July 2014
December 2018
 
Major European markets
U.S.
 
3,901

 
3,831

 
3,710

Zyvox(e)
 
August 2014
First half of 2015
January 2016
 
Japan
U.S.
Major European markets
 
103

 
235

 
644

Enbrel(f)
 
August 2015
September 2015
 
Major European markets
Japan
 
1,686

 
2,146

 
2,402

Relpax
 
December 2015
December 2016
 
Major European markets
U.S.
 
176

 
263

 
295

Vfend
 
July 2016
January 2016
 
Major European markets
Japan
 
150

 
299

 
349

Tygacil
 
April 2016
 
U.S.
 
45

 
80

 
110

Pristiq(g)
 
March 2017
 
U.S.
 
133

 
578

 
553

(a) 
Unless stated otherwise, “Key Dates” indicate patent-based expiration dates.

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Pfizer Inc. and Subsidiary Companies

 

(b) 
As a result of a patent litigation settlement, Teva launched a generic version of Viagra in the U.S. in December 2017.
(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. The basic product patent for Lyrica in the U.S. is expected to expire in December 2018. Pfizer is currently pursuing a six-month patent-term extension for pediatric exclusivity in the U.S. with the FDA.
(e) 
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.
(f) 
In January 2016, an etanercept biosimilar referencing Enbrel was approved by the European Commission.
(g) 
As a result of a patent litigation settlement with several generic manufacturers, generic versions of Pristiq launched 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,
 
 
 
 
 
 
2017

 
2016

 
2015

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

Rebif(b)
 
End of 2015
 
U.S.
 
13

 

 
371

(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. Patent litigation brought by Biogen Idec MA Inc. against EMD Serono Inc. and Pfizer is pending in the U.S. District Court for the District of New Jersey, and EMD Serono Inc. has acknowledged that they are obligated to satisfy any award of damages.

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 2017 Form 10-K.
Our financial results in 2017 reflect the impact of the loss of exclusivity of various products (and the expiration of certain alliance product contract rights) discussed above.
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 Discussion” 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 2017 Form 10-K.
We recorded the following amounts as a result of the U.S. Healthcare Legislation:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2017

 
2016

 
2015

Reduction to Revenues, related to the Medicare “coverage gap” discount provision
 
$
450

 
$
410

 
$
399

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
 
307

 
312

 
251


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

The pricing of medicines by pharmaceutical manufacturers and the cost of healthcare, which includes medicines, medical services and hospital services, continues to be important to payors, governments, patients, and other stakeholders. We believe that medicines are amongst the most powerful tool for patients in curing, treating and preventing illness and disability, and that all patients should have appropriate access to the medicines their doctors prescribe. We consider a number of factors when determining a medicine’s price, including, for example, its impact on patients and their disease, other available treatments, the medicine’s potential to reduce other healthcare costs (such as hospital stays), and affordability. Within the U.S., in particular, we may also engage with patients, doctors and healthcare plans regarding their views. We then negotiate with insurers, including PBMs and MCOs, often providing significant discounts to them from the initial price. The price that patients pay for the medicines their physicians prescribe is ultimately set by healthcare providers and insurers. On average, insurers cover a much lower share of prescription drug costs than medical services, which results in a greater proportion of out-of-pocket costs being passed on to patients for medicines, thereby making them less accessible and affordable. We will continue to work with insurance providers, governments and others to improve access to today’s innovative treatments.


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Pfizer Inc. and Subsidiary Companies

 

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-to-zero direct cost to consumers at the point of care and have significant power as large single payers to 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., government action to reduce federal spending on entitlement programs including Medicare and Medicaid may affect payment for our products or services provided using our products. Any significant spending reductions or cost controls affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented 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 Congress 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.

Efforts by government officials or legislators to implement measures to regulate prices or payments for pharmaceutical products, including legislation on drug importation, could adversely affect our business if implemented. Recently, there has been considerable public and government scrutiny of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. There have also been recent state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices. Recent legislation enacted includes, for example, a 2017 Maryland law that prohibits a generic drug manufacturer or wholesale distributor from engaging in price gouging in the sale of certain off-patent or generic drugs, and a 2017 California law that requires manufacturers to provide advanced notification of price increases to certain purchasers and report specified drug pricing information to the state. Certain state legislation, like the Maryland law, has been subject to legal challenges.

Adoption of new legislation at the federal or state level could further affect demand for, or pricing of, our products. We believe medicines are the most efficient and effective use of healthcare dollars based on the value they deliver to the overall healthcare system. We will continue to work with law makers and advocate for solutions that effectively improve patient health outcomes, lower costs to the healthcare system, and ensure access to medicines within an efficient and affordable healthcare system.

We face uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. The likelihood of such a repeal currently appears low given the failure of the Senate’s multiple attempts to repeal various combinations of ACA provisions. In October 2017, the President signed an Executive Order directing federal agencies to look for ways to authorize more health plans that could be less expensive because the plans would not have to meet all of the ACA’s coverage requirements, and announced that his administration will withhold the cost-sharing subsidies paid to health insurance exchange plans serving low-income enrollees. In December 2017, the comprehensive tax reform package signed into law, the TCJA (see the “The Global Economic Environment” section below for more information), includes a provision that effectively repealed the ACA’s individual mandate by removing the penalties. These and similar actions by the administration are widely expected to lead to fewer Americans having comprehensive ACA-compliant health insurance, even in the absence of a legislative repeal. However, the revenues generated for Pfizer by the health insurance exchanges under the ACA are minor, so the impact of the recent administration actions is expected to be limited. There is no assurance that any future replacement, modification or repeal of the ACA will not adversely affect our business and financial results, particularly if the legislation reduces incentives for employer-sponsored insurance coverage. We also may face uncertainties if our industry is looked to for savings to fund certain legislation, such as lifting the debt ceiling. One recent example is the Bipartisan Budget Act of 2018, which increased the discount we pay in the Medicare Part D coverage gap from 50% to 70%, which will modestly reduce our future Medicare Part D revenues.

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. Private third-party payers, such as health plans, increasingly challenge pharmaceutical 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, health technology assessments, and international reference pricing (i.e., the practice of a country linking its 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, varying health outcomes 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 can hinder patient access and innovation. Price variations, exacerbated by international reference pricing systems, also have resulted from exchange rate fluctuations. The

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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 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.

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 2017 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 or biosimilar 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, costs and expenses, 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 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, 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 2018” sections

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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”. In March 2017, the U.K. government formally notified the European Council of its intention to leave the EU after it triggered 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. Formal negotiations officially started in June 2017. This process continues to be highly complex and 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, including the approval and supply of our products.
We generated approximately 2% of our worldwide revenues from the U.K. in 2017. 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.
On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of the TCJA. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the Federal corporate income tax rate from 35% to 21%, transitioning U.S. international taxation from a worldwide tax system to a territorial tax system and imposing a repatriation tax on deemed repatriated accumulated post-1986 earnings of foreign subsidiaries. Given the significant changes resulting from and complexities associated with the TCJA, the estimated financial impacts for 2017 as well as the estimated impact on 2018 financial guidance for the effective tax rate on adjusted income are provisional and subject to further analysis, interpretation and clarification of the TCJA, which could result in changes to these estimates during 2018. For additional information, see the “Our Financial Guidance for 2018”, “Provision/(Benefit) for Taxes on Income” and “Analysis of Financial Condition, Liquidity and Capital Resources” sections of this Financial Review and Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.

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 2017 Form 10-K.
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). 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.

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Some additional information about our business segments as of the date of the filing of this 2017 Financial Report follows:
 
innovativehealthrgb.jpg
 
 
pehlogo.jpg
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 disease 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, select branded products including anti-infectives and, through February 2, 2017, HIS. EH also includes an R&D organization, as well as our contract manufacturing business.
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.
IH will have continued focus on R&D productivity and pipeline strength while maximizing the value of our recently launched brands and in-line portfolio. Our acquisitions of Anacor and Medivation expanded our pipeline in the high priority therapeutic areas of inflammation and immunology and oncology.
 
For EH, we 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 systems net assets, representing the infusion systems net assets that we acquired as part of the Hospira transaction, HIS, to ICU Medical.
 

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

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

*
Viagra lost exclusivity in the U.S. in December 2017. Beginning in the first quarter of 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through December 2017, will be reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, total Viagra worldwide revenues will be reported in EH from 2018 forward.
For additional information about the 2017 performance of each of our operating segments, see the “Analysis of Operating Segment Information” section of this Financial Review.
Description of Research and Development Operations

Innovation is critical to the success of our company, and drug discovery and development is time-consuming, expensive and unpredictable. Our goal is to discover, develop and bring to market innovative products that address major unmet medical needs. Our R&D priorities include:
delivering a pipeline of differentiated therapies and vaccines with the greatest medical and commercial potential;
advancing our 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 R&D primarily focuses on:
Biosimilars;
Inflammation and Immunology;
Metabolic Disease and Cardiovascular Risks;
Oncology;
Rare Diseases; and
Vaccines.

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In January 2018, we announced our decision to end internal neuroscience discovery and early development efforts and re-allocate funding to other areas where we have stronger scientific leadership. We plan to create a dedicated neuroscience venture fund to support continued efforts to advance the field. The development of tanezumab and potential treatments for rare neuromuscular disorders is not impacted by this decision.

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 spending is conducted through a number of matrix organizations:
Research Units within our WRD organization are generally responsible for research and early-stage development assets for our IH business (assets that have not yet achieved proof-of-concept). Our Research Units are organized by therapeutic area to enhance flexibility, cohesiveness and focus. Because of our structure, we can rapidly redeploy resources within a Research Unit between various projects as necessary because the workforce shares similar skills, expertise and/or focus.
Our R&D organization within the EH business supports the large base of EH products and is expected to develop potential new sterile injectable drugs and therapeutic solutions, as well as biosimilars.
Our GPD organization is a unified center for late-stage development for our innovative products and is generally responsible for the operational execution of clinical development of assets that are in clinical trials for our WRD and Innovative portfolios. 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. GPD also provides technical support and other services to Pfizer R&D projects.
Our science-based and other platform-services organizations, where a significant portion of our R&D spending occurs, provide technical expertise and other services to the various R&D projects, and are organized into science-based functions (which are part of our WRD organization), such as Pharmaceutical Sciences, Medicinal Chemistry, Regulatory and Drug Safety, and non-science-based functions, such as Facilities, Business Technology and Finance. As a result, within each of these functions, we are able to migrate resources among projects, candidates and/or targets in any therapeutic area and in most phases of development, allowing us to react quickly in response to evolving needs.

We manage R&D operations on a total-company basis through our matrix organizations described above. Specifically, a single committee with representation from the R&D groups and the IH commercial organization is accountable for aligning resources among all of our WRD, GPD and IH R&D projects and for seeking to ensure optimal capital allocation across the Innovative R&D portfolio. We believe that this approach also serves to maximize accountability and flexibility. Our EH R&D organization manages its resources separately from the WRD and GPD organizations.
Generally, we do not disaggregate total R&D expense by development phase or by therapeutic area since, as described above, we do not manage a significant portion of our R&D operations by development phase or by therapeutic area. Further, as we are able to adjust a significant portion of our spending quickly, as conditions change, we believe that any prior-period information about R&D expense by development phase or by therapeutic area would not necessarily be representative of future spending.
While a significant portion of R&D is done internally, we continue to 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.

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 and certain other patent proceedings, 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 2017 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.
In December 2017, our Board of Directors declared a first-quarter 2018 dividend of $0.34 per share, an increase from the $0.32 per-share quarterly dividend paid during 2017. 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.

Increasing Investment in the U.S.––After evaluating the expected positive net impact the TCJA will have on us, we have decided to take several actions:
Over the next five years, we plan to invest approximately $5.0 billion in capital projects in the U.S., including the strengthening of our manufacturing presence in the U.S.
In the fourth quarter of 2017, we made a $200 million charitable contribution to the Pfizer Foundation, an organization that provides grant and investment funding to support organizations and social entrepreneurs in an effort to improve healthcare delivery.
We made a $500 million voluntary contribution to our U.S. pension plan in February 2018.
We have also allocated approximately $100 million for a special, one-time bonus to be paid to all non-executive Pfizer colleagues that is expected to be paid in the first quarter of 2018.

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. In October 2017, we announced that we are reviewing strategic alternatives for our Consumer Healthcare business. A range of options will be considered, including a full or partial separation of the Consumer Healthcare business from Pfizer through a spin-off, sale or other transaction, and we may ultimately determine to retain the business. We expect that any decision regarding strategic alternatives for Consumer Healthcare would be made during 2018. For additional information on our business development activities, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment.
The more significant recent transactions and events are described below:
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)––On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, to ICU Medical. In connection with this transaction, we recognized pre-tax losses of approximately $55 million in 2017 in Other (income)/deductions––net, representing adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell. We may record additional adjustments to the loss on the sale of HIS net assets in future periods, pending final working capital adjustments, among other agreement provisions, which we do not expect to have a material impact on our consolidated financial statements.
Acquisition of AstraZeneca’s Small Molecule 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. The total fair value of the consideration transferred for this business was approximately $555 million in cash plus the fair value of contingent consideration of $490 million.
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 with Astellas. Astellas has exclusive commercialization rights for Xtandi outside the U.S. In addition, Medivation has a development-stage oncology asset in its pipeline, talazoparib, which is currently in a Phase 3 study for the treatment of BRCA-mutated breast cancer.
Acquisition of Bamboo Therapeutics, Inc. (IH)––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

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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 have been or 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 12 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 totaled $72.1 million for 2017 and $46.6 million for 2016. 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.
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 totaled $75.6 million for 2017 and $44.9 million for 2016. 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).
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 currently expected in the first quarter of 2018. Under the terms of the agreement, we originally 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. During the fourth quarter of 2017, we recognized a loss of $43 million for an impairment of our long-term investment.
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.

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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 approved as Bavencio for metastatic MCC and for patients with locally advanced or metastatic UC in certain countries and in development as a potential treatment for multiple other types of cancer. 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. As of December 31, 2017, we made $140 million in milestone payments to Merck KGaA for approvals of avelumab received in 2017 for the MCC indication in the U.S., the EU and Japan, and for the metastatic UC indication in the U.S. Both companies 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.
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. The FDA granted Fast Track designation for tanezumab for the treatment of chronic pain in patients with OA and CLBP in June 2017. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.

Our Financial Guidance for 2018
The following table provides our financial guidance for full-year 2018(a), (b):
Revenues
$53.5 to $55.5 billion
Adjusted cost of sales as a percentage of revenues
20.5% to 21.5%
Adjusted selling, informational and administrative expenses
$14.0 to $15.0 billion
Adjusted research and development expenses
$7.4 to $7.9 billion
Adjusted other (income)/deductions
Approximately $400 million of income
Effective tax rate on adjusted income
Approximately 17.0%
Adjusted diluted EPS
$2.90 to $3.00
(a) 
The 2018 financial guidance reflects the following:
A full year contribution from Consumer Healthcare. Pfizer continues to expect that any decision regarding strategic alternatives for Consumer Healthcare would be made during 2018.
Does not assume the completion of any business development transactions not completed as of December 31, 2017, including any one-time upfront payments associated with such transactions.
Exchange rates assumed are as of mid-January 2018.
Reflects an anticipated negative revenue impact of $2.0 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. Assumes no generic competition for Lyrica in the U.S. until June 2019, which is contingent upon a six-month patent-term extension granted by the FDA for pediatric exclusivity, which the company is currently pursuing.
Reflects the anticipated favorable impact of $900 million on revenues and $0.06 on adjusted diluted EPS as a result of favorable changes in foreign exchange rates relative to the U.S. dollar compared to foreign exchange rates from 2017.
Guidance for the effective tax rate on Adjusted income reflects our provisional estimate of the impact of the TCJA.
Guidance for adjusted diluted EPS assumes diluted weighted-average shares outstanding of approximately 6.0 billion shares, which reflects anticipated share repurchases totaling $5.0 billion in 2018. Dilution related to share-based employee compensation programs is expected to offset by approximately half the reduction in shares associated with these anticipated share repurchases.
(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 actual costs and anticipated costs and cost savings associated with our three-year cost-reduction initiative entered into in the fourth quarter of 2016, 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 2018 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 2017 Form 10-K.

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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 Assets and Liabilities and 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 Notes to Consolidated Financial Statements—Note 2A. Acquisitions, Sale of Hospira Infusion Systems Net Assets, 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. Fair Value Measurements.

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.

Revenues

Our gross product revenues are subject to a variety of deductions, that generally are 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.


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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, 2017, 2016 and 2015. 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 $5.2 billion as of December 31, 2017) 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, 2017, and we do not believe the risk of impairment is significant at this time.

We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors that we consider include, for example, macroeconomic and industry conditions, overall financial performance and other relevant entity-specific events. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then perform a quantitative fair value test.

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.
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 2017 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

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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, 2018, accruals for future benefits under the Pfizer Consolidated Pension Plan (our largest U.S. defined benefit plan) and the defined benefit section of the Pfizer Group Pension Scheme (our largest pension plan in the U.K.) were frozen and will result in elimination of future service costs for the plan. The Pfizer defined contribution savings plan will provide additional annual contributions to those previously accruing benefits under the Pfizer Consolidated Pension Plan and active members of the Pfizer Group Pension Scheme will start accruing benefits under the defined contribution section of that plan.

As of December 31, 2017, the noncurrent portion of our pension benefit obligations, net, and our postretirement benefit obligations, net decreased, in the aggregate, by approximately $742 million compared to December 31, 2016. The decrease reflects, among other things, the $1.0 billion voluntary pension contribution we made in January 2017 and an increase in actual returns on plan assets, partially offset by the impact of a decrease in the discount rate used in the measurement of plan obligations.

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):
 
 
2017

 
2016

 
2015

U.S. Qualified Pension Plans
 
 
 
 
 
 
Expected annual rate of return on plan assets
 
7.5
%
 
8.0
%
 
8.0
 %
Actual annual rate of return on plan assets
 
16.2

 
8.1

 
(0.8
)
Discount rate used to measure the plan obligations
 
3.8

 
4.3

 
4.5

International Pension Plans
 
 
 
 
 
 
Expected annual rate of return on plan assets
 
4.4

 
4.7

 
5.2

Actual annual rate of return on plan assets
 
10.3

 
9.3

 
3.6

Discount rate used to measure the plan obligations
 
2.3

 
2.4

 
3.1

(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 February 2018, Pfizer made a voluntary contribution of $500 million to the U.S. qualified pension plans. In 2018, this contribution was 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 2018 Net Periodic Benefit Costs
Assumption
 
 
 
 
Expected annual rate of return on plan assets
 
50 basis point decline
 
$110

The actual return on plan assets resulted in a net gain on our plan assets of approximately $2.9 billion during 2017.

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 is 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.

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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
 
Increase in 2018 Net Periodic Benefit Costs
 
2017 Benefit Obligations
Assumption
 
 
 
Increase
 
Increase
Discount rate
 
10 basis point decline
 
$8
 
$463

The change in the discount rates used in measuring our plan obligations as of December 31, 2017 resulted in an increase in the measurement of our aggregate plan obligations by approximately $1.3 billion.
Income Tax Assets and Liabilities

In the fourth quarter of 2017, we recorded an estimate of certain tax effects of the TCJA, including the impact on deferred tax assets and liabilities from the reduction in the corporate tax rate from 35% to 21%, the impact on valuation allowances and other state income tax considerations, a repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect payment over eight years through 2026 that is reported in Other taxes payable, and deferred taxes on basis differences expected to give rise to future taxes on global intangible low-taxed income. In addition, we had provided deferred tax liabilities in the past on foreign earnings that were not indefinitely reinvested. As a result of the TCJA, we reversed an estimate of the deferred taxes that are no longer expected to be needed due to the change to the territorial tax system. The estimated amounts recorded may change in the future due to uncertain tax positions.
The TCJA subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that we are permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-taxed income in future years or provide for the tax expense related to such income in the year the tax is incurred. We have elected to recognize deferred taxes for temporary differences expected to reverse as global intangible low-taxed income in future years. However, given the complexity of these provisions, we have not finalized our analysis. We were able to make a reasonable estimate of the deferred taxes on the temporary differences expected to reverse in the future and provided a provisional deferred tax liability as of December 31, 2017. The provisional amount is based on the evaluation of certain temporary differences inside each of our foreign subsidiaries that are expected to reverse as global intangible low-taxed income. However, as we continue to evaluate the TCJA’s global intangible low-taxed income provisions during the measurement period, we may revise the methodology used for determining the deferred tax liability associated with such income.
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded are provisional as we have not completed our analysis of the complex and far reaching effects of the TCJA. Further, we continue to consider our assertions on any remaining outside basis differences in our foreign subsidiaries as of December 31, 2017 and have not completed our analysis. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the TCJA on deferred taxes, valuation allowances, state tax considerations, the repatriation tax liability, global intangible low-taxed income, and any remaining outside basis differences in our foreign subsidiaries during 2018 as we complete our analysis, computations and assertions. We will revise these estimates during 2018 as we gather additional information to complete our tax returns and as any interpretation or clarification of the TCJA occurs through legislation, U.S. Treasury actions or other means.

Income tax assets and liabilities also include Income tax valuation allowances and accruals for uncertain tax positions. For additional information, see Notes to Consolidated Financial Statements—Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions; Note 1O. Basis of Presentation and Significant Accounting Policies: Tax Assets and Liabilities and Income Tax Contingencies and Note 5A. Tax Matters: Taxes on Income from Continuing Operations, as well as the “Analysis of Financial Condition, Liquidity and Capital Resources––Selected Measures of Liquidity and Capital Resources—Contractual Obligations” section of this Financial Review.

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

2017 Financial Report    
 
 
19


Financial Review
Pfizer Inc. and Subsidiary Companies

 

ANALYSIS OF THE CONSOLIDATED STATEMENTS OF INCOME
  
 
Year Ended December 31,
 
% Change
(MILLIONS OF DOLLARS)
 
2017
 
2016
 
2015
 
17/16
 
16/15
Revenues
 
$
52,546

 
$
52,824

 
$
48,851

 
(1
)
 
8

Cost of sales
 
11,240

 
12,329

 
9,648

 
(9
)
 
28

% of revenues
 
21.4
 %
 
23.3
%
 
19.7
%
 
 
 
 
Selling, informational and administrative expenses
 
14,784

 
14,837

 
14,809

 

 

% of revenues
 
28.1
 %
 
28.1
%
 
30.3
%
 
 
 
 
Research and development expenses
 
7,657

 
7,872

 
7,690

 
(3
)
 
2

% of revenues
 
14.6
 %
 
14.9
%
 
15.7
%
 
 
 
 
Amortization of intangible assets
 
4,758

 
4,056

 
3,728

 
17

 
9

% of revenues
 
9.1
 %
 
7.7
%
 
7.6
%
 
 
 
 
Restructuring charges and certain acquisition-related costs
 
487

 
1,724

 
1,152

 
(72
)
 
50

% of revenues
 
0.9
 %
 
3.3
%
 
2.4
%
 
 
 
 
Other (income)/deductions—net
 
1,315

 
3,655

 
2,860

 
(64
)
 
28

Income from continuing operations before provision/(benefit) for taxes on income
 
12,305

 
8,351

 
8,965

 
47

 
(7
)
% of revenues
 
23.4
 %
 
15.8
%
 
18.4
%
 
 
 
 
Provision/(benefit) for taxes on income
 
(9,049
)
 
1,123

 
1,990

 
*

 
(44
)
Effective tax rate
 
(73.5
)%
 
13.4
%
 
22.2
%
 
 
 
 
Income from continuing operations
 
21,353

 
7,229

 
6,975

 
*

 
4

% of revenues
 
40.6
 %
 
13.7
%
 
14.3
%
 
 
 
 
Discontinued operations—net of tax
 
2

 
17

 
11

 
(87
)
 
49

Net income before allocation to noncontrolling interests
 
21,355

 
7,246

 
6,986

 
*

 
4

% of revenues
 
40.6
 %
 
13.7
%
 
14.3
%
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
47

 
31

 
26

 
54

 
20

Net income attributable to Pfizer Inc.
 
$
21,308

 
$
7,215

 
$
6,960

 
*

 
4

% of revenues
 
40.6
 %
 
13.7
%
 
14.2
%
 
 
 
 
Certain amounts and percentages may reflect rounding adjustments.
*
Indicates calculation not meaningful or result is equal to or greater than 100%.
Revenues—Overview
Compared to 2016, total revenues for 2017 were unfavorably impacted by approximately $200 million as a result of 2017 having one less selling day in both U.S. and international markets.
Total revenues in 2017 compared to 2016 reflect a slight operational decrease of $20 million, or less than 1%, and an unfavorable impact of foreign exchange of $259 million, or less than 1%, in 2017, compared to 2016.
Compared to 2015, international revenues for 2016 were favorably impacted by approximately $100 million as a result of 2016 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 an unfavorable impact of foreign exchange of $1.5 billion, or 3%, in 2016 compared to 2015.
See the “Revenues by Segment and Geography” and “Revenues—Major Products” sections of this Financial Report for additional analyses.
See the “Intellectual Property Rights and Collaboration/Licensing Rights” section of this Financial Report for information about (i) recent losses and expected losses of product exclusivity impacting product revenues and (ii) recent losses of collaboration rights impacting alliance revenues.
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 2017 Form 10-K.

20
 
 
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Financial Review
Pfizer Inc. and Subsidiary Companies

 

We have significant operations outside the U.S., with revenues exceeding $500 million in the following number of countries:
countriesoutsideus500mrev.jpg
By total revenues, the U.S., Japan and China are our three largest national markets:
revenuesbynatlmrkt.jpg
Inventory Stocking

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 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.

2017 Financial Report    
 
 
21


Financial Review
Pfizer Inc. and Subsidiary Companies

 

The following table provides information about revenue deductions:
  
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2017

 
2016

 
2015

Medicare rebates(a)
 
$
1,316

 
$
1,063

 
$
1,002

Medicaid and related state program rebates(a)
 
1,860

 
1,473

 
1,263

Performance-based contract rebates(a), (b)
 
3,245

 
2,560

 
2,253

Chargebacks(c)
 
6,047

 
5,736

 
4,961

Sales allowances(d)
 
5,165

 
4,623

 
4,200

Sales returns and cash discounts
 
1,493

 
1,441

 
1,335

Total(e)
 
$
19,126

 
$
16,895

 
$
15,014

(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 2017, associated with the following segments: IH ($9.0 billion); and EH ($10.1 billion). 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).

Total revenue deductions for 2017 increased 13% compared to 2016, primarily as a result of:
an increase in performance-based contract rebates primarily due to increased sales of certain IH products to managed care customers in the U.S., and certain IH and EH products in developed Europe;
an increase in sales allowances as a result of sales growth, primarily in emerging markets;
an increase in Medicaid and related state program rebates, primarily as a result of increased sales of both IH and EH products through these programs;
higher chargebacks resulting from increased sales through U.S. wholesalers of certain IH products, partially offset by decreases in sterile injectable sales; and
an increase in Medicare rebates driven by increased sales of IH products through this channel, offset by certain EH products which have recently lost exclusivity.
For information on our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts, including the balance sheet classification of these accruals, see Notes to Consolidated Financial Statements––Note 1G. Basis of Presentation and Significant Accounting Policies: Revenues and Trade Accounts Receivable.

Revenues by Segment and Geography

The following graphs show revenues by geography (dollars in billions):
revsbysegandgeogus-intnl.jpg

22
 
 
2017 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

The following table provides worldwide revenues by operating segment and geography:
 
 
Year Ended December 31,
 
% Change
 
 
Worldwide
 
U.S.
 
International
 
Worldwide
 
U.S.
 
International
(MILLIONS OF DOLLARS)
 
2017

 
2016

 
2015

 
2017

 
2016

 
2015

 
2017

 
2016

 
2015

 
17/16

 
16/15
 
17/16

 
16/15
 
17/16

 
16/15

Operating Segments(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IH
 
$
31,422

 
$
29,197

 
$
26,758

 
$
18,460

 
$
16,773

 
$
14,446

 
$
12,962

 
$
12,424

 
$
12,312

 
8

 
9
 
10

 
16
 
4

 
1

EH
 
21,124

 
23,627

 
22,094

 
7,567

 
9,596

 
7,258

 
13,557

 
14,031

 
14,836

 
(11
)
 
7
 
(21
)
 
32
 
(3
)
 
(5
)
Total revenues
 
$
52,546

 
$
52,824

 
$
48,851

 
$
26,026

 
$
26,369

 
$
21,704

 
$
26,519

 
$
26,455

 
$
27,147

 
(1
)
 
8
 
(1
)
 
21
 

 
(3
)
(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.
We recorded direct product and/or alliance revenues of more than $1 billion for each of nine products in 2017 and 2016 and for seven products in 2015.
Direct Product And/Or Alliance Revenues of More Than $1 Billion
2017
 
2016
 
2015
Prevnar 13/Prevenar 13
 
Prevnar 13/Prevenar 13
 
Prevnar 13/Prevenar 13
Lyrica
 
Lyrica
 
Lyrica
Ibrance
 
Enbrel
 
Enbrel
Eliquis*
 
Ibrance
 
Lipitor
Enbrel
 
Lipitor
 
Viagra
Lipitor
 
Eliquis*
 
Sutent
Xeljanz
 
Viagra
 
Premarin family of products
Viagra
 
Sutent
 
 
Sutent
 
Premarin family of products
 
 
* Eliquis includes alliance revenues and direct sales in 2017 and 2016.
These direct product sales and/or alliance product revenues represent 46% of our revenues in 2017, 43% of our revenues in 2016 and 41% of our revenues in 2015. See the Revenues—Major Products section of this Financial Review for additional information.


2017 Financial Report    
 
 
23


Financial Review
Pfizer Inc. and Subsidiary Companies

 

2017 v. 2016

The following provides an analysis of the change in revenues by geographic areas in 2017:
(MILLIONS OF DOLLARS)
 
Worldwide
 
U.S.
 
International
 
 
 
 
 
 
 
Disposition-related operational impact:
 
 
 
 
 
 
Approximately one month of HIS domestic operations and approximately two months of HIS international operations in 2017, compared to twelve months of HIS global operations in 2016 (February 2017 sale)
 
$
(1,062
)
 
$
(841
)
 
$
(221
)
 
 
 
 
 
 
 
Other operational growth/(decline):
 
 
 
 
 
 
Continued growth from key brands including Eliquis (globally), as well as Xeljanz and Lyrica (IH) (both primarily in the U.S.)
 
1,608

 
1,104

 
503

Ibrance global growth: U.S. revenues increased primarily due to continued strong uptake in the metastatic breast cancer setting. International revenues increased operationally, but were negatively impacted by a one-time price adjustment to 2017 revenues related to finalizing reimbursement agreements in certain developed Europe markets.
 
993

 
757

 
236

Increase in Xtandi alliance revenues in the U.S. (September 2016 acquisition of Medivation)
 
450

 
450

 

Growth from Biosimilars, primarily from Inflectra in the U.S. and developed Europe markets
 
209

 
115

 
94

Decline from Peri-LOE Products, primarily due to expected declines in Pristiq in the U.S. as well as Lyrica (EH) and Vfend (both primarily in developed Europe markets)
 
(957
)
 
(448
)
 
(509
)
Lower revenues for Enbrel primarily in developed Europe markets due to continued biosimilar competition
 
(448
)
 

 
(448
)
Lower revenues for Viagra (IH) in the U.S. due to generic competition that began in December 2017
 
(359
)
 
(359
)
 

Decline from the Sterile Injectable Pharmaceuticals portfolio, primarily due to legacy Hospira product shortages in the U.S.
 
(315
)
 
(460
)
 
145

Decline in the Legacy Established Products portfolio primarily due to generic competition in developed markets
 
(188
)
 
(419
)
 
231

Decline in Prevnar 13/Prevenar 13 revenues. U.S. revenues decreased primarily due to the 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 2016, partially offset by growth from the pediatric indication. International revenues increased primarily due to the favorable overall impact of timing and increased volume associated with government purchases in certain emerging markets for the pediatric indication compared with prior year, as well as from the inclusion of Prevenar 13 in additional national immunization programs in certain emerging markets for the adult and pediatric indications in the fourth of quarter 2017.
 
(108
)
 
(311
)
 
203

Other operational factors, net
 
157

 
68

 
89

Operational growth/(decline), net
 
(20
)
 
(343
)
 
323

 
 
 
 
 
 
 
Unfavorable impact of foreign exchange
 
(259
)
 

 
(259
)
Revenues increase/(decrease)
 
$
(278
)
 
$
(343
)
 
$
64

Emerging markets revenues increased $979 million, or 9%, in 2017 to $11.4 billion, reflecting an operational increase of $1.1 billion, or 11%. Foreign exchange had unfavorable impact of approximately 2% on emerging markets revenues. The operational increase in emerging markets was primarily driven by our IH segment as well as our Legacy Established Products and Sterile Injectable Pharmaceuticals portfolios.

24
 
 
2017 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

2016 v. 2015

The following provides an analysis of the change in revenues by geographic areas in 2016:
(MILLIONS OF DOLLARS)
 
Worldwide
 
U.S.
 
International
Acquisition-related operational impact:
 
 
 
 
 
 
 
 
 
 
 
 
 
The inclusion of Xtandi alliance revenues in the U.S. (September 2016 acquisition of Medivation)
 
$
140

 
$
140

 
$

 
 
 
 
 
 
 
Other operational growth/(decline):
 
 
 
 
 
 
Continued operational growth from key brands including Ibrance, Lyrica (IH), Xeljanz, Chantix/Champix and Consumer Healthcare (all primarily in the U.S.), as well as Eliquis and Xalkori (both globally)
 
3,582

 
2,936

 
646

Twelve months of revenues from legacy Hospira global operations in 2016, compared to four months of legacy Hospira U.S. operations and three months of legacy Hospira international operations in 2015
 
3,125

 
2,229

 
896

Operational growth in the legacy Pfizer Sterile Injectable Pharmaceuticals portfolio, mostly in emerging markets and the U.S.
 
259

 
86

 
173

Decline from the Peri-LOE Products portfolio, primarily due to the loss of exclusivity and associated generic competition for certain Peri-LOE Products, primarily Zyvox in the U.S. and certain developed Europe markets as well as Lyrica in certain developed Europe markets
 
(954
)
 
(169
)
 
(785
)
Decline in Rebif revenues in the U.S. due to the year-end 2015 expiry of the collaboration agreement to co-promote Rebif in the U.S., as well as lower revenues for Enbrel primarily in most developed Europe markets, primarily due to biosimilar competition
 
(571
)
 
(366
)
 
(205
)
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
 
(454
)
 
(381
)
 
(74
)
Other operational factors, net
 
328

 
190

 
138

Operational growth, net
 
5,456

 
4,665

 
791

 
 
 
 
 
 
 
Unfavorable impact of foreign exchange
 
(1,483
)
 

 
(1,483
)
Revenues increase/(decrease)
 
$
3,973

 
$
4,665

 
$
(692
)
For additional information about operating segment revenues, see the “Analysis of Operating Segment Information” section of this Financial Review.

2017 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. As described in Note 1A, acquisitions and divestitures have impacted our results of operations in 2017, 2016 and 2015.
(MILLIONS OF DOLLARS)
 
 
 
Year Ended December 31,
 
% Change
PRODUCT
PRIMARY INDICATIONS OR CLASS
 
2017

 
2016

 
2015

 
17/16
 
16/15
 
 
 
 
 
 
 
 
 
 
Total

 
Oper.

 
Total

 
Oper.

TOTAL REVENUES
 
$
52,546

 
$
52,824

 
$
48,851

 
(1
)
 

 
8

 
11

PFIZER INNOVATIVE HEALTH (IH)(a)
 
$
31,422

 
$
29,197

 
$
26,758

 
8

 
8

 
9

 
11

Internal Medicine
 
$
9,684

 
$
8,858

 
$
7,611

 
9

 
10

 
16

 
17

Lyrica IH(b)
 
Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia, neuropathic pain due to spinal cord injury
 
4,511

 
4,165

 
3,655

 
8

 
9

 
14

 
14

Eliquis alliance revenues and direct sales
 
Atrial fibrillation, deep vein thrombosis, pulmonary embolism
 
2,523

 
1,713

 
913

 
47

 
47

 
88

 
88

Chantix/Champix
 
An aid to smoking cessation treatment in adults 18 years of age or older
 
997

 
842

 
671

 
18

 
18

 
26

 
27

Viagra IH(c)
 
Erectile dysfunction
 
823

 
1,181

 
1,297

 
(30
)
 
(30
)
 
(9
)
 
(9
)
BMP2
 
Development of bone and cartilage
 
261

 
251

 
232

 
4

 
4

 
8

 
8

Toviaz
 
Overactive bladder
 
257

 
258

 
267

 

 
1

 
(3
)
 
(4
)
All other Internal Medicine
 
Various
 
312

 
447

 
577

 
(30
)
 
(30
)
 
(22
)
 
(22
)
Vaccines
 
$
6,001

 
$
6,071

 
$
6,454

 
(1
)
 
(1
)
 
(6
)
 
(5
)
Prevnar 13/Prevenar 13
 
Vaccines for prevention of pneumococcal disease
 
5,601

 
5,718

 
6,245

 
(2
)
 
(2
)
 
(8
)
 
(7
)
FSME/IMMUN-TicoVac
 
Tick-borne encephalitis vaccine
 
134

 
114

 
104

 
18

 
19

 
10

 
10

All other Vaccines
 
Various
 
266

 
239

 
104

 
11

 
12

 
*

 
*

Oncology
 
$
6,056

 
$
4,563

 
$
2,955

 
33

 
33

 
54

 
56

Ibrance
 
Advanced breast cancer
 
3,126

 
2,135

 
723

 
46

 
47

 
*

 
*

Sutent
 
Advanced and/or metastatic RCC, adjuvant RCC,
refractory GIST (after disease progression on, or intolerance to, imatinib mesylate) and advanced pancreatic neuroendocrine tumor
 
1,081

 
1,095

 
1,120

 
(1
)
 
(1
)
 
(2
)
 
1

Xalkori
 
ALK-positive and ROS1-positive advanced NSCLC
 
594

 
561

 
488

 
6

 
6

 
15

 
17

Xtandi alliance revenues
 
Advanced prostate cancer
 
590

 
140

 

 
*

 
*

 
*

 
*

Inlyta
 
Advanced RCC
 
339

 
401

 
430

 
(15
)
 
(14
)
 
(7
)
 
(6
)
Bosulif
 
Philadelphia chromosome–positive chronic myelogenous leukemia
 
233

 
167

 
111

 
39

 
40

 
50

 
49

All other Oncology
 
Various
 
93

 
63

 
83

 
46

 
48

 
(23
)
 
(23
)
Inflammation & Immunology (I&I)
 
$
3,968

 
$
3,928

 
$
3,918

 
1

 
1

 

 
6

Enbrel (Outside the U.S. and Canada)
 
Rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, plaque psoriasis, pediatric plaque psoriasis, ankylosing spondylitis and nonradiographic axial spondyloarthritis
 
2,452

 
2,909

 
3,333

 
(16
)
 
(15
)
 
(13
)
 
(6
)
Xeljanz
 
Rheumatoid arthritis; psoriatic arthritis
 
1,345

 
927

 
523

 
45

 
45

 
77

 
78

Eucrisa
 
Mild-to-moderate atopic dermatitis (eczema)
 
67

 

 

 
*

 
*

 

 

All other I&I
 
Various
 
103

 
93

 
61

 
11

 
13

 
51

 
42

Rare Disease
 
$
2,240

 
$
2,369

 
$
2,425

 
(5
)
 
(5
)
 
(2
)
 

BeneFIX
 
Hemophilia
 
604

 
712

 
752

 
(15
)
 
(15
)
 
(5
)
 
(4
)
Refacto AF/Xyntha
 
Hemophilia
 
551

 
554

 
533

 
(1
)
 

 
4

 
8

Genotropin
 
Replacement of human growth hormone
 
532

 
579

 
617

 
(8
)
 
(7
)
 
(6
)
 
(5
)
Somavert
 
Acromegaly
 
254

 
232

 
218

 
9

 
9

 
6

 
8

All other Rare Disease
 
Various
 
300

 
292

 
306

 
3

 
3

 
(5
)
 

Consumer Healthcare
 
$
3,472

 
$
3,407

 
$
3,395

 
2

 
2

 

 
5

PFIZER ESSENTIAL HEALTH (EH)(d)
 
$
21,124

 
$
23,627

 
$
22,094

 
(11
)
 
(10
)
 
7

 
11

Legacy Established Products (LEP)(e)
 
$
10,894

 
$
11,197

 
$
11,745

 
(3
)
 
(2
)
 
(5
)
 
1

Lipitor
 
Reduction of LDL cholesterol
 
1,915

 
1,758

 
1,860

 
9

 
11

 
(6
)