10-Q 1 pfe-09302018x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-3619

----

PFIZER INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)

235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES   X 
NO ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES   X 
NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated filer  X                 Accelerated filer  ___                Non-accelerated filer  ___          Smaller reporting company  ___    Emerging growth company  ___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ____
NO   X 

At November 5, 20185,780,474,578 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and October 1, 2017
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and October 1, 2017
 
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and October 1, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:
2017 Financial Report
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
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
Alliance revenues
Revenues from alliance agreements under which we co-promote products discovered or developed by other companies or us
Allogene
Allogene Therapeutics, Inc.
AMPA
α-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid
Anacor
Anacor Pharmaceuticals, Inc.
AOCI
Accumulated Other Comprehensive Income
Astellas
Astellas Pharma Inc., Astellas US LLC and Astellas Pharma US, Inc.
ASU
Accounting Standards Update
ATM-AVI
aztreonam-avibactam
Avillion
Avillion LLP
Bain Capital
Bain Capital Private Equity and Bain Capital Life Sciences
Biogen
Biogen Inc.
BMS
Bristol-Myers Squibb Company
BRCA
BReast CAncer susceptibility gene
CAR T
chimeric antigen receptor T cell
CDC
U.S. Centers for Disease Control and Prevention
Cellectis
Cellectis S.A.
Cerevel
Cerevel Therapeutics, LLC
CIAS
cognitive impairment associated with schizophrenia
Citibank
Citibank, N.A.
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
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
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDA
U.S. Food and Drug Administration
GAAP
Generally Accepted Accounting Principles
GIST
gastrointestinal stromal tumors
GPD
Global Product Development
HER2-
human epidermal growth factor receptor 2-negative
hGH-CTP
human growth hormone
HIS
Hospira Infusion Systems
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive
ICU Medical
ICU Medical, Inc.
IH
Innovative Health
IPR&D
in-process research and development
IRS
U.S. Internal Revenue Service

3


IV
intravenous
Janssen
Janssen Biotech Inc.
J&J
Johnson & Johnson
King
King Pharmaceuticals LLC (formerly 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
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Medivation
Medivation LLC (formerly Medivation, Inc.)
Merck
Merck & Co., Inc.
Meridian
Meridian Medical Technologies, Inc.
Moody’s
Moody’s Investors Service
NDA
new drug application
NovaQuest
NovaQuest Co-Investment Fund V, L.P.
NSCLC
non-small cell lung cancer
NYSE
New York Stock Exchange
OPKO
OPKO Health, Inc.
OTC
over-the-counter
PARP
poly ADP ribose polymerase
PBM
Pharmacy Benefit Manager
Pharmacia
Pharmacia Corporation
PP&E
Property, plant & equipment
Quarterly Report on Form 10-Q
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018
RCC
renal cell carcinoma
R&D
research and development
RPI
RPI Finance Trust
Sandoz
Sandoz, Inc., a division of Novartis AG
SEC
U.S. Securities and Exchange Commission
Servier
Les Laboratoires Servier SAS
SFJ
SFJ Pharmaceuticals Group
Shire
Shire International GmbH
SI&A
Selling, informational and administrative
SIP
Sterile Injectable Pharmaceuticals
S&P
Standard and Poor’s
StratCO
Strategy and Commercial Operations
Tax Cuts and Jobs Act or TCJA
Legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017
Teuto
Laboratório Teuto Brasileiro S.A.
U.K.
United Kingdom
U.S.
United States
ViiV
ViiV Healthcare Limited
WRD
Worldwide Research and Development


4


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
September 30,
2018

 
October 1,
2017

 
September 30,
2018

 
October 1,
2017

Revenues
 
$
13,298

 
$
13,168

 
$
39,670

 
$
38,843

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
2,694

 
2,844

 
8,173

 
7,972

Selling, informational and administrative expenses(a)
 
3,494

 
3,504

 
10,448

 
10,249

Research and development expenses(a)
 
2,008

 
1,865

 
5,549

 
5,367

Amortization of intangible assets
 
1,253

 
1,177

 
3,640

 
3,571

Restructuring charges and certain acquisition-related costs
 
85

 
114

 
172

 
267

Other (income)/deductions––net
 
(414
)
 
79

 
(1,143
)
 
65

Income from continuing operations before provision for taxes on income
 
4,177

 
3,585

 
12,831

 
11,351

Provision for taxes on income
 
66

 
727

 
1,270

 
2,287

Income from continuing operations
 
4,111

 
2,858

 
11,562

 
9,064

Discontinued operations––net of tax
 
11

 

 
10

 
1

Net income before allocation to noncontrolling interests
 
4,122

 
2,858

 
11,571

 
9,066

Less: Net income attributable to noncontrolling interests
 
8

 
18

 
25

 
32

Net income attributable to Pfizer Inc.
 
$
4,114

 
$
2,840

 
$
11,546

 
$
9,034

 
 
 
 
 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.70

 
$
0.48

 
$
1.96

 
$
1.51

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.70

 
$
0.48

 
$
1.96

 
$
1.51

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.69

 
$
0.47

 
$
1.92

 
$
1.49

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.69

 
$
0.47

 
$
1.92

 
$
1.49

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
5,875

 
5,951

 
5,899

 
5,972

Weighted-average shares––diluted
 
5,986

 
6,041

 
5,998

 
6,057

Cash dividends paid per common share
 
$
0.34

 
$
0.32

 
$
1.02

 
$
0.96

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

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2018

 
October 1,
2017

 
September 30,
2018

 
October 1,
2017

Net income before allocation to noncontrolling interests
 
$
4,122

 
$
2,858

 
$
11,571

 
$
9,066

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments, net
 
(567
)
 
878

 
(507
)
 
1,352

Reclassification adjustments
 
(2
)
 
(3
)
 
(22
)
 
110

 
 
(569
)
 
875

 
(530
)
 
1,461

Unrealized holding gains/(losses) on derivative financial instruments, net
 
222

 
(50
)
 
236

 
(149
)
Reclassification adjustments for (gains)/losses included in net income(a)
 
(235
)
 
56

 
119

 
(393
)
 
 
(13
)
 
6

 
355

 
(542
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
149

 
384

 
(65
)
 
698

Reclassification adjustments for gains included in net income(a)
 
(36
)
 
(278
)
 
(67
)
 
(181
)
Reclassification adjustments for unrealized gains included in Retained earnings(b)
 

 

 
(462
)
 

 
 
112

 
106

 
(595
)
 
518

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

 
(103
)
 
114

 
(41
)
Reclassification adjustments related to amortization
 
60

 
140

 
183

 
448

Reclassification adjustments related to settlements, net
 
42

 
38

 
108

 
89

Other
 
49

 
(76
)
 
69

 
(111
)
 
 
158

 
(1
)
 
474

 
384

Benefit plans: prior service costs and other, net
 

 

 

 
(2
)
Reclassification adjustments related to amortization
 
(46
)
 
(46
)
 
(137
)
 
(138
)
Reclassification adjustments related to curtailments, net
 
(4
)
 
(3
)
 
(18
)
 
(14
)
Other
 

 
1

 
1

 
2

 
 
(50
)
 
(48
)
 
(154
)
 
(151
)
Other comprehensive income/(loss), before tax
 
(361
)
 
938

 
(449
)
 
1,669

Tax provision/(benefit) on other comprehensive income/(loss)
 
62

 
(80
)
 
667

 
(218
)
Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
(422
)
 
$
1,018

 
$
(1,116
)
 
$
1,888

 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
3,700

 
$
3,876

 
$
10,455

 
$
10,953

Less: Comprehensive income attributable to noncontrolling interests
 

 
19

 
5

 
48

Comprehensive income attributable to Pfizer Inc.
 
$
3,700

 
$
3,857

 
$
10,450

 
$
10,906

(a) 
Reclassified into Other (income)/deductions—net and Cost of sales in the condensed consolidated statements of income. For additional information on amounts reclassified into Cost of sales, see Note 7F. Financial Instruments: Derivative Financial Instruments and Hedging Activities.
(b) 
For additional information, see Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards.
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

6


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
September 30,
2018

 
December 31,
2017

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
3,559

 
$
1,342

Short-term investments
 
13,680

 
18,650

Trade accounts receivable, less allowance for doubtful accounts: 2018—$567; 2017—$584
 
10,024

 
8,221

Inventories
 
8,184

 
7,578

Current tax assets
 
3,686

 
3,050

Other current assets
 
2,450

 
2,301

Total current assets
 
41,583

 
41,141

Long-term investments
 
6,444

 
7,015

Property, plant and equipment, less accumulated depreciation: 2018—$17,078; 2017—$16,172
 
14,036

 
13,865

Identifiable intangible assets, less accumulated amortization
 
45,306

 
48,741

Goodwill
 
55,614

 
55,952

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,875

 
1,855

Other noncurrent assets
 
2,980

 
3,227

Total assets
 
$
167,838

 
$
171,797

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt: 2018—$4,255; 2017—$3,546
 
$
7,385

 
$
9,953

Trade accounts payable
 
4,297

 
4,656

Dividends payable
 
1,963

 
2,029

Income taxes payable
 
2,781

 
477

Accrued compensation and related items
 
2,096

 
2,196

Other current liabilities
 
10,490

 
11,115

Total current liabilities
 
29,013

 
30,427

 
 
 
 
 
Long-term debt
 
33,652

 
33,538

Pension benefit obligations, net
 
4,886

 
5,926

Postretirement benefit obligations, net
 
1,455

 
1,504

Noncurrent deferred tax liabilities
 
5,512

 
3,900

Other taxes payable
 
15,289

 
18,697

Other noncurrent liabilities
 
6,367

 
6,149

Total liabilities
 
96,174

 
100,141

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
20

 
21

Common stock
 
466

 
464

Additional paid-in capital
 
85,828

 
84,278

Treasury stock
 
(96,574
)
 
(89,425
)
Retained earnings
 
91,995

 
85,291

Accumulated other comprehensive loss
 
(10,417
)
 
(9,321
)
Total Pfizer Inc. shareholders’ equity
 
71,319

 
71,308

Equity attributable to noncontrolling interests
 
346

 
348

Total equity
 
71,664

 
71,656

Total liabilities and equity
 
$
167,838

 
$
171,797

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

7


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2018

 
October 1,
2017

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
11,571

 
$
9,066

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

 
 

Depreciation and amortization
 
4,743

 
4,695

Asset write-offs and impairments
 
88

 
326

Adjustments to loss on sale of HIS net assets
 
(1
)
 
52

TCJA impact(a)
 
(410
)
 

Deferred taxes from continuing operations
 
(974
)
 
241

Share-based compensation expense
 
682

 
595

Benefit plan contributions in excess of income––2018 and expense––2017
 
(1,000
)
 
(1,042
)
Other adjustments, net
 
(1,169
)
 
(604
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(2,441
)
 
(3,616
)
Net cash provided by operating activities
 
11,089

 
9,713

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(1,357
)
 
(1,256
)
Purchases of short-term investments
 
(7,364
)
 
(6,469
)
Proceeds from redemptions/sales of short-term investments
 
12,752

 
5,778

Net proceeds from redemptions/sales of short-term investments with original maturities of three months or less
 
385

 
2,758

Purchases of long-term investments
 
(1,503
)
 
(2,526
)
Proceeds from redemptions/sales of long-term investments
 
2,174

 
2,403

Acquisitions of businesses, net of cash acquired
 

 
(1,000
)
Acquisitions of intangible assets
 
(47
)
 
(188
)
Other investing activities, net
 
248

 
519

Net cash provided by investing activities
 
5,289

 
19

 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
1,945

 
7,003

Principal payments on short-term borrowings
 
(4,239
)
 
(7,659
)
Net (payments on)/proceeds from short-term borrowings with original maturities of three months or less
 
(973
)
 
566

Proceeds from issuance of long-term debt
 
4,974

 
5,273

Principal payments on long-term debt
 
(3,104
)
 
(4,474
)
Purchases of common stock
 
(7,168
)
 
(5,000
)
Cash dividends paid
 
(6,015
)
 
(5,750
)
Proceeds from exercise of stock options
 
1,099

 
656

Other financing activities, net
 
(553
)
 
(223
)
Net cash used in financing activities
 
(14,034
)
 
(9,607
)
Effect of exchange-rate changes on cash and cash equivalents and restricted cash and cash equivalents
 
(116
)
 
67

Net increase in cash and cash equivalents and restricted cash and cash equivalents
 
2,227

 
193

Cash and cash equivalents and restricted cash and cash equivalents, beginning
 
1,431

 
2,666

Cash and cash equivalents and restricted cash and cash equivalents, end
 
$
3,658

 
$
2,858

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Non-cash transactions:
 
 
 
 
Receipt of ICU Medical common stock(b)
 
$

 
$
428

Promissory note from ICU Medical(b)
 

 
75

Equity investment in Cerevel Therapeutics, Inc. in exchange for Pfizer’s portfolio of clinical and preclinical neuroscience assets(b)
 
343

 

Equity investment in Allogene received in exchange for Pfizer's allogeneic CAR T developmental program assets(b)
 
92

 

Cash paid (received) during the period for:
 
 

 
 

Income taxes
 
$
1,666

 
$
1,424

Interest
 
968

 
1,101

Interest rate hedges
 
(104
)
 
(183
)
(a) 
As a result of the enactment of the TCJA in December 2017, Pfizer’s Provision for taxes on income for the nine months ended September 30, 2018 was favorably impacted by approximately $410 million, primarily related to certain tax initiatives associated with the TCJA, as well as favorable adjustments to the provisional estimates of the legislation. See Note 5A. Tax Matters: Taxes on Income from Continuing Operations.
(b) 
For additional information, see Note 2B. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment: Divestitures.
Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

8


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


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

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

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

The financial information included in our condensed consolidated financial statements for subsidiaries operating outside the U.S. is as of and for the three and nine months ended August 26, 2018 and August 27, 2017. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and nine months ended September 30, 2018 and October 1, 2017.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited financial statements included in this Quarterly Report on Form 10-Q. The interim financial statements include all normal and recurring adjustments that are considered necessary for the fair statement of our condensed consolidated balance sheets and condensed consolidated statements of income. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2017 Financial Report.

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). For additional information, see Note 13 and Notes to Consolidated Financial Statements––Note 18. Segment, Geographic and Other Revenue Information in Pfizer’s 2017 Financial Report.

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

In the first quarter of 2018, as of January 1, 2018, we adopted eleven new accounting standards. See Note 1B for further information.

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. The operating results of HIS are included in our condensed 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 third quarter of 2017 do not reflect any contribution from HIS global operations, while our financial results, and EH’s operating results, for the first nine months of 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations. Our financial results, and EH’s operating results, for 2018 do not reflect any contribution from HIS global operations.
On December 22, 2016, which fell 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. 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 third quarter and first nine months of 2017 reflect approximately three months and eight months, respectively, of the small molecule anti-infectives business acquired from AstraZeneca. Our financial results, EH’s operating results, and cash flows for the third quarter and first nine months of 2018 reflect three months and nine months, respectively, of the small molecule anti-infectives business acquired from AstraZeneca.
For additional information, see Note 2 and 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 in Pfizer’s 2017 Financial Report.

9


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

B. Adoption of New Accounting Standards
On January 1, 2018, we adopted eleven new accounting standards. The quantitative impacts on our prior period condensed consolidated financial statements of adopting the following new standards are summarized in the tables within the section titled Impacts to our Condensed Consolidated Financial Statements, further below.
Revenues––We adopted a new accounting standard for revenue recognition and changed our revenue recognition policies accordingly. Generally, the previous revenue recognition standards permitted recognition when persuasive evidence of a contract existed, delivery had occurred, and the seller's price to the buyer was fixed or determinable. Under the new standard, revenue is recognized upon transfer of control of the product to our customer in an amount that reflects the consideration we expect to receive in exchange. We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $584 million on a pre-tax basis ($450 million after-tax). This amount includes $500 million (pre-tax) related to the timing of recognizing Other (income)/deductions––net primarily for upfront and milestone payments on our collaboration arrangements ($394 million, pre-tax) and, to a lesser extent, product rights and out-licensing arrangements, and $84 million (pre-tax) related to the timing of recognizing Revenues and Cost of sales on certain product shipments. The impact of adoption did not have a material impact to our condensed consolidated statements of income for the three and nine months ended September 30, 2018 or our condensed consolidated balance sheet as of September 30, 2018. For additional information, see Note 1C.
Financial Assets and Liabilities––The new accounting standard related to the recognition and measurement of financial assets and liabilities makes the following changes to prior guidance and requires:
certain equity investments to be measured at fair value with changes in fair value now recognized in net income. However, equity investments that do not have readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer;
a qualitative assessment of equity investments without readily determinable fair values to identify impairment; and
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $462 million on a pre-tax basis ($419 million after-tax) related to the net impact of unrealized gains and losses primarily on available-for-sale equity securities, restricted stock and private equity securities. In the third quarter of 2018, we recorded net unrealized gains on equity securities of $8 million and in the first nine months of 2018, we recorded net unrealized gains on equity securities of $344 million, in Other (income)/deductions––net. For additional information, see Note 4 and Note 7.

Presentation of Net Periodic Pension and Postretirement Benefit Cost––We adopted a new accounting standard that requires the net periodic pension and postretirement benefit costs other than the service costs be presented in Other (income)/deductions––net, and that the presentation be applied retrospectively. We adopted the presentation of the net periodic benefit costs other than service costs by reclassifying these costs from Cost of sales, Selling, informational and administrative expenses, Research and development expenses and Restructuring charges and certain acquisition-related costs to Other (income)/deductions––net. We elected to apply the practical expedient as it is impracticable to determine the disaggregation of the cost components for amounts capitalized within Inventories and property, plant and equipment and amortized in each of those periods. We have therefore reclassified the prior period net periodic benefit costs/(credits) disclosed in Note 10 to apply the retrospective presentation for comparative periods.
As of January 1, 2018, only service costs will be included in amounts capitalized in Inventories or property, plant and equipment, while the other components of net periodic benefit costs will be included in Other (income)/deductions––net. For additional information, see Note 4 and Note 10.
Income Tax Accounting––The new guidance removes the prohibition against recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, unless the asset transferred is inventory. We adopted the standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to decrease the opening balance of Retained earnings by $189 million.

10


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

Accounting for Hedging Activities––The standard includes the following changes:
Permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk;
Changes the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk;
No longer requires the separate measurement and reporting of hedge ineffectiveness, but requires the income statement presentation of the earnings effect of the hedging instrument with the earnings effect of the hedged item;
Permits us to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness; and
Simplifies hedge effectiveness testing.
We early adopted the new accounting standard on January 1, 2018 on a prospective basis. In the third quarter of 2018, we recorded income of $23 million and in the first nine months of 2018, we recorded income of $68 million in Other (income)/deductions––net, whereas this item would have been classified in interest income in prior periods. For additional information, see Note 7F.
Reclassification of Certain Tax Effects from AOCI––We early adopted a new accounting standard that provides guidance on the reclassification of certain tax effects from AOCI. Under the new guidance, we elected to reclassify the stranded tax amounts related to the TCJA from AOCI to Retained earnings. We adopted the new accounting standard utilizing the modified retrospective method, and recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $495 million, primarily due to the effect of the change in the U.S. Federal corporate tax rate. The impact on other stranded tax amounts related to the application of the TCJA was not material to our condensed consolidated financial statements.
Classification of Certain Transactions in the Statement of Cash Flows––We retrospectively adopted an accounting standard that changed the presentation of certain information in the condensed consolidated statements of cash flows, including the classification of:
debt prepayment and extinguishment costs, resulting in an increase in Operating activities––Other adjustments, net and a decrease in Financing activities––Other financing activities, net of $7 million for the nine months ended September 30, 2018; and
accreted interest on the settlement of commercial paper debt instruments, resulting in a decrease in Operating activities––Other adjustments, net, and an increase in Financing activities––Other financing activities, net of $69 million for the nine months ended September 30, 2018.
The new standard also establishes guidance on the classification of certain cash flows related to contingent consideration in a business acquisition. Cash payments made soon after a business acquisition date will be classified as Investing activities, while payments made thereafter will be classified as Financing activities. Payments made in excess of the amount of the original contingent consideration liability will be classified as Operating activities. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.
Presentation of Restricted Cash in the Statement of Cash Flows––We adopted, on a retrospective basis, the new accounting standard, which requires that restricted cash and restricted cash equivalents be included with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the condensed consolidated statements of cash flows. As a result, for the nine months ended September 30, 2018, $10 million is presented as an increase in Cash, cash equivalents, restricted cash and restricted cash equivalents.
Definition of a Business––We prospectively adopted the standard for determining whether business development transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, the transaction will not qualify for treatment as a business. To be considered a business, a set of integrated activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs, without regard as to whether a purchaser could replace missing elements. In addition, the definition of the term “output” has been narrowed to make it consistent with the updated revenue recognition guidance. In the third quarter and first nine months of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Derecognition of Nonfinancial Assets––We prospectively adopted the standard, which applies to the full or partial sale or transfer of nonfinancial assets, including intangible assets, real estate and inventory. The standard provides that the gain or loss is determined by the difference between the consideration received and the carrying value of the asset. In the third quarter and

11


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

first nine months of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Accounting for Modifications of Share-Based Payment Awards––We prospectively adopted the standard, which clarifies that certain changes in the terms or conditions of a share-based payment award be accounted for as a modification. There was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Impacts to our Condensed Consolidated Financial Statements––The impacts on our prior period condensed consolidated financial statements of adopting the new standards described above are summarized in the following tables:
Adoption of the standard related to pension and postretirement benefit costs impacted our prior period condensed consolidated statements of income as follows:
 
 
Three Months Ended October 1, 2017
(MILLIONS OF DOLLARS)
 
As Previously Reported

 
Effect of Change
Higher/(Lower)

 
As Restated

Cost of sales
 
$
2,847

 
$
(3
)
 
$
2,844

Selling, informational and administrative expenses
 
3,500

 
4

 
3,504

Research and development expenses
 
1,859

 
6

 
1,865

Restructuring charges and certain acquisition-related costs
 
149

 
(35
)
 
114

Other (income)/deductions––net
 
51

 
28

 
79

Income from continuing operations before provision for taxes on income
 
3,585

 

 
3,585

 
 
 
 
 
 
 
 
 
Nine Months Ended October 1, 2017
(MILLIONS OF DOLLARS)
 
As Previously Reported

 
Effect of Change
Higher/(Lower)

 
As Restated

Cost of sales
 
$
7,980

 
$
(9
)
 
$
7,972

Selling, informational and administrative expenses
 
10,233

 
16

 
10,249

Research and development expenses
 
5,346

 
21

 
5,367

Restructuring charges and certain acquisition-related costs
 
377

 
(110
)
 
267

Other (income)/deductions––net
 
(16
)
 
81

 
65

Income from continuing operations before provision for taxes on income
 
11,351

 

 
11,351

Adoption of the standards impacted our condensed consolidated balance sheet as follows:
 
 
 
 
Effect of New Accounting Standards Higher/(Lower)
 
 
(MILLIONS OF DOLLARS)
 
As Previously Reported Balance at December 31, 2017

 
Revenues

 
Financial Assets and Liabilities

 
Income
Tax Accounting

 
Reclassification of Certain Tax Effects from AOCI

 
Balance at January 1, 2018

Trade accounts receivable
 
$
8,221

 
$
13

 
$

 
$

 
$

 
$
8,234

Inventories
 
7,578

 
(11
)
 

 

 

 
7,567

Current tax assets
 
3,050

 
(11
)
 

 
(3
)
 

 
3,036

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,855

 
(17
)
 

 

 

 
1,838

Other noncurrent assets
 
3,227

 

 

 
(204
)
 

 
3,023

Other current liabilities
 
11,115

 
(123
)
 

 

 

 
10,992

Noncurrent deferred tax liabilities
 
3,900

 
106

 

 
(18
)
 

 
3,988

Other noncurrent liabilities
 
6,149

 
(459
)
 

 

 

 
5,690

Retained earnings
 
85,291

 
450

 
419

 
(189
)
 
495

 
86,466

Accumulated other comprehensive loss
 
(9,321
)
 

 
(419
)
 

 
(495
)
 
(10,235
)

12


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

Adoption of the standards related to the classification of certain transactions in the statement of cash flows and the presentation of restricted cash in the statement of cash flows impacted our condensed consolidated statement of cash flows as follows:
 
 
Nine Months Ended October 1, 2017
 
 
 
 
Effect of New Accounting Standards Inflow/(Outflow)
 
 
(MILLIONS OF DOLLARS)
 
As Previously Reported

 
Cash Flow Classification

 
Restricted Cash

 
As Restated

Operating Activities
 
 
 
 
 
 
 
 
Other adjustments, net
 
$
(561
)
 
$
(43
)
 
$

 
$
(604
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(3,644
)
 

 
28

 
(3,616
)
Investing Activities
 
 
 
 
 
 
 
 
Proceeds from redemptions/sales of short-term investments
 
5,783

 

 
(5
)
 
5,778

Proceeds from redemptions/sales of long-term investments
 
2,417

 

 
(14
)
 
2,403

Financing Activities
 
 
 
 
 
 
 
 
Principal payments on short-term borrowings
 
(7,691
)
 
33

 

 
(7,659
)
Net proceeds from short-term borrowings with original maturities of three months or less
 
555

 
10

 

 
566

Net increase in cash and cash equivalents and restricted cash and cash equivalents
 
184

 

 
9

 
193

Cash and cash equivalents and restricted cash and cash equivalents, beginning
 
2,595

 

 
70

 
2,666

Cash and cash equivalents and restricted cash and cash equivalents, ending
 
2,779

 

 
79

 
2,858

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:
(MILLIONS OF DOLLARS)
 
September 30, 2018

 
December 31,
2017

Cash and cash equivalents
 
$
3,559

 
$
1,342

Restricted cash and cash equivalents in Short-term investments
 
40

 

Restricted cash and cash equivalents in Long-term investments
 
59

 

Restricted cash and cash equivalents in Other current assets
 

 
14

Restricted cash and cash equivalents in Other noncurrent assets
 

 
75

Total cash and cash equivalents and restricted cash and cash equivalents shown in the condensed consolidated balance sheets
 
$
3,658

 
$
1,431

Amounts included in restricted cash represent those required to be set aside by a contractual agreement in connection with ongoing litigation or to secure delivery of Pfizer medicines at the agreed upon terms. The restriction will lapse upon the resolution of the litigation or the proper delivery of the medicines.

C. Revenues

On January 1, 2018, we adopted a new accounting standard for revenue recognition. For further information, see Note 1B.
We recorded direct product sales and/or alliance revenues of more than $1 billion for each of nine products in 2017. These direct products sales and/or alliance product revenues represented 46% of our revenues in 2017. The loss or expiration of intellectual property rights can have a significant adverse effect on our revenues as our contracts with customers will generally be at lower selling prices due to added competition and we generally provide for higher sales returns during the period in which individual markets begin to near the loss or expiration of intellectual property rights. Our Consumer Healthcare business includes OTC brands with a focus on dietary supplements, pain management, gastrointestinal and respiratory and personal care. According to Euromonitor International’s retail sales data, in 2017, our Consumer Healthcare business was the fifth-largest branded multi-national, OTC consumer healthcare business in the world and produced two of the ten largest selling consumer

13


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

healthcare brands (Centrum and Advil) in the world. We sell biopharmaceutical products after patent expiration, and under patent, and, to a much lesser extent, consumer healthcare products worldwide to developed and emerging market countries.
Revenue Recognition––We record revenues from product sales when there is a transfer of control of the product from us to the customer. We determine transfer of control based on when the product is shipped or delivered and title passes to the customer.
Customers––Our biopharmaceutical products are sold principally to wholesalers but we also sell directly to retailers, hospitals, clinics, government agencies and pharmacies, and, in the case of our vaccine products in the U.S., we primarily sell directly to the CDC, wholesalers and individual provider offices. Our consumer healthcare customers include retailers and, to a lesser extent, wholesalers and distributors.
Biopharmaceutical products that ultimately are used by patients are generally covered under governmental programs, managed care programs and insurance programs, including those managed through pharmacy benefit managers, and are subject to sales allowances and/or rebates payable directly to those programs. Those sales allowances and rebates are generally negotiated, but government programs may have legislated amounts by type of product (e.g., patented or unpatented).
Our Sales Contracts––Sales on credit are typically under short-term contracts. Collections are based on market payment cycles common in various markets, with shorter cycles in the U.S. Sales are adjusted for sales allowances, chargebacks, rebates and sales returns and cash discounts. Sales returns occur due to loss of exclusivity, product recalls or a changing competitive environment.
Deductions from Revenues––Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions on gross sales for a reporting period.
Specifically:
In the U.S., we sell our products to distributors and hospitals under our sales contracts. However, we also have contracts with managed care or pharmacy benefit managers and legislatively mandated contracts with the federal and state governments under which we provide rebates to them based on medicines utilized by the lives they cover. We record provisions for Medicare, Medicaid, and performance-based contract pharmaceutical rebates based upon our experience ratio of rebates paid and actual prescriptions written during prior quarters. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. We estimate discounts on branded prescription drug sales to Medicare Part D participants in the Medicare “coverage gap,” also known as the “doughnut hole,” based on the historical experience of beneficiary prescriptions and consideration of the utilization that is expected to result from the discount in the coverage gap. We evaluate this estimate regularly to ensure that the historical trends and future expectations are as current as practicable. For performance-based contract rebates, we also consider current contract terms, such as changes in formulary status and rebate rates.
Outside the U.S., the majority of our pharmaceutical sales allowances are contractual or legislatively mandated and our estimates are based on actual invoiced sales within each period, which reduces the risk of variations in the estimation process. In certain European countries, rebates are calculated on the government’s total unbudgeted pharmaceutical spending or on specific product sales thresholds and we apply an estimated allocation factor against our actual invoiced sales to project the expected level of reimbursement. We obtain third-party information that helps us to monitor the adequacy of these accruals.
Provisions for pharmaceutical chargebacks (primarily reimbursements to U.S. wholesalers for honoring contracted prices to third parties) closely approximate actual amounts incurred, as we settle these deductions generally within two to five weeks of incurring the liability.
Provisions for pharmaceutical sales returns are based on a calculation for each market that incorporates the following, as appropriate: local returns policies and practices; historical returns as a percentage of sales; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, such as loss of exclusivity, product recalls or a changing competitive environment. Generally, returned products are destroyed, and customers are refunded the sales price in the form of a credit.
We record sales incentives as a reduction of revenues at the time the related revenues are recorded or when the incentive is offered, whichever is later. We estimate the cost of our sales incentives based on our historical experience with similar incentives programs to predict customer behavior.

14


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

Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $5.5 billion as of September 30, 2018 and $4.9 billion as of December 31, 2017.
The following table provides information about the balance sheet classification of these accruals:
(MILLIONS OF DOLLARS)
 
September 30, 2018

 
December 31, 2017

Reserve against Trade accounts receivable, less allowance for doubtful accounts
 
$
1,297

 
$
1,352

 
 
 
 
 
Other current liabilities:
 
 
 
 
Accrued rebates
 
3,235

 
2,674

Other accruals
 
641

 
512

 
 
 
 
 
Other noncurrent liabilities
 
374

 
385

Total accrued rebates and other accruals
 
$
5,548

 
$
4,923

Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. 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.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.
D. Collaborative Arrangements
Payments to and from our collaboration partners are presented in our condensed consolidated statements of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our collaboration partners as alliance revenues, a component of Revenues, when our collaboration partners are the principal in the transaction and we receive a share of their net sales or profits. Alliance revenues are recorded as we perform co-promotion services for the collaboration and the collaboration partners sell the products to their customers within the applicable period. The related expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In collaborative arrangements where we manufacture a product for our collaboration partners, we record revenues when we transfer control of the product to our collaboration partners. All royalty payments to collaboration partners are included in Cost of sales. Royalty payments received from collaboration partners are included in Other (income)/deductions—net.
Reimbursements to or from our collaboration partners for development costs are recorded net in Research and development expenses. Upfront payments and pre-approval milestone payments due from us to our collaboration partners in development stage collaborations are recorded as Research and development expenses. Milestone payments due from us to our collaboration partners after regulatory approval has been attained for a medicine are recorded in Identifiable intangible assets—Developed technology rights. Upfront and pre-approval milestone payments earned from our collaboration partners by us are recognized in Other (income)/deductions—net over the development period for the collaboration products, when our performance obligations include providing R&D services to our collaboration partners. Upfront, pre-approval and post-approval milestone payments earned by us may be recognized in Other (income)/deductions—net immediately when earned or over other periods depending upon the nature of our performance obligations in the applicable collaboration. Where the milestone event is regulatory approval for a medicine, we generally recognize milestone payments due to us in the transaction price when regulatory approval in the applicable jurisdiction has been attained. We may recognize milestone payments due to us in the transaction price earlier than the milestone event in certain circumstances when recognition of the income would not be probable of a significant reversal.
On January 1, 2018, we adopted a new accounting standard on revenue recognition (see Note 1B). As a result of the adoption, we recognized the following cumulative effect adjustments related to collaboration arrangements to Retained earnings:
$394 million (pre-tax) for collaborative arrangements where upfront, pre-approval and regulatory approval milestone payments received from our collaboration partners are recognized in Other (income)/deductions—net over a reduced period. Under the new standard, the income from upfront and pre-approval milestone payments due to us is typically recognized over the development period for the collaboration when our performance obligation, in addition to granting a license, is to provide research and development services to our collaboration partners, and major regulatory approval milestones are typically recognized immediately when earned as the related development period has ended. The income from upfront and milestone payments is typically recognized immediately as earned if our performance obligation, in addition to granting a license, is

15


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

only for commercialization activities. Under the old standard, this income was recognized over the combined development and estimated commercialization (including co-promotion) period for the collaboration products.
$82 million (pre-tax) for collaborative arrangements where we manufacture products for our collaboration partners and recognize Revenues and Cost of sales for product shipments at an earlier point in time. Under the new standard, revenue is recognized when we transfer control of the products to our collaboration partners. Under the old standard, revenue was recognized when our collaboration partners sell the products and transfer title to their third party customers.
Note 2. Acquisition, Divestitures, Licensing Arrangements, Collaborative Arrangements and Privately Held Investment

A. Acquisition
AstraZeneca’s Small Molecule Anti-Infectives Business (EH)
On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S., including the commercialization and development rights to the approved EU drug Zavicefta™ (ceftazidime-avibactam), the marketed agents Merrem™/Meronem™ (meropenem) and Zinforo™ (ceftaroline fosamil), and the clinical development assets ATM-AVI and CXL (ceftaroline fosamil-AVI). In 2017, under the terms of the agreement, we made payments of approximately $605 million to AstraZeneca related to the transaction. We made an additional milestone payment of $125 million in our first fiscal quarter of 2018 and we will make a deferred payment of $175 million to AstraZeneca in January 2019. In addition, we may be required to pay an additional milestone payment of $75 million if the related milestone is achieved prior to December 31, 2021, and up to $600 million if sales of Zavicefta™ exceed certain thresholds prior to January 1, 2026, as well as tiered royalties on sales of Zavicefta™ and ATM-AVI in certain markets for a period ending on the later of 10 years from first commercial sale or the loss of patent protection or loss of regulatory exclusivity. The total royalty payments are unlimited during the royalty term and the undiscounted payments are expected to be in the range of approximately $292 million to $512 million. The total fair value of consideration transferred for AstraZeneca’s small molecule anti-infectives business was approximately $1,040 million inclusive of cash paid and the fair value of contingent consideration. In connection with this acquisition, we recorded $894 million in Identifiable intangible assets, consisting of $728 million in Developed technology rights and $166 million in IPR&D. We also recorded $92 million in Other current assets related to the economic value of inventory which was retained by AstraZeneca for sale on our behalf, $73 million in Goodwill and $19 million of net deferred tax liabilities. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.
B. Divestitures
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)
On October 6, 2016, we announced that we entered into a definitive agreement under which ICU Medical agreed to acquire all of our global infusion systems net assets, HIS, for approximately $1 billion in cash and ICU Medical common stock. HIS includes IV pumps, solutions, and devices. As a result of the performance of HIS relative to ICU Medical’s expectations, on January 5, 2017, we entered into a revised agreement with ICU Medical under which ICU Medical would acquire HIS for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing.
The revised transaction closed on February 3, 2017. At closing, we received 3.2 million newly issued shares of ICU Medical common stock (as originally agreed), which we initially valued at approximately $428 million (based upon the closing price of ICU Medical common stock on the closing date less a discount for lack of marketability) and which are reported as equity securities at fair value in Long-term investments on the condensed consolidated balance sheet. In August 2018, we sold 700,000 shares of ICU Medical common stock for which we recognized a gain during the period of $50 million, reflecting the increase in fair value of the equity investment since the beginning of the year, most of which was previously recognized as 2018 unrealized gains. In addition, we continue to hold 2.5 million shares of ICU Medical common stock and we recognized unrealized gains of $24 million in the third quarter of 2018 and unrealized gains of $229 million in the first nine months of 2018 related to these remaining shares. We also received a promissory note in the amount of $75 million, which was repaid in full as of December 31, 2017, and net cash of approximately $200 million before customary adjustments for net working capital, which is reported in Other investing activities, net on the condensed consolidated statement of cash flows for the nine months ended October 1, 2017. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. After our recent sale of ICU Medical shares, we own approximately 12% of ICU Medical. We recognized pre-tax income of $2 million in the third quarter of 2018 and pre-tax income of $1 million in the first nine months of 2018, and

16


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

we recognized pre-tax income of $12 million in the third quarter of 2017 and pre-tax losses of $52 million in the first nine months of 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. For additional information, see Note 4 and 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 in Pfizer’s 2017 Financial Report.
While we have received the full purchase price excluding the contingent amount as of the February 3, 2017 closing, the sale of the HIS net assets was not fully completed in certain non-U.S. jurisdictions as of the third quarter of 2018 due to temporary regulatory or operational constraints. In these jurisdictions, which represent a relatively small portion of the HIS net assets, we continued to operate the net assets for the net economic benefit of ICU Medical, and we were indemnified by ICU Medical against risks associated with such operations during the interim period, subject to our obligations under the definitive transaction agreements. We have previously treated these jurisdictions as sold for accounting purposes.
In connection with the sale transaction, we entered into certain transitional agreements designed to facilitate the orderly transition of the HIS net assets to ICU Medical. These agreements primarily relate to administrative services, which are generally to be provided for a period of up to 24 months after the closing date. We will also manufacture and supply certain HIS products for ICU Medical and ICU Medical will manufacture and supply certain retained Pfizer products for us after closing, generally for a term of five years. These agreements are not material to Pfizer and none confers upon us the ability to influence the operating and/or financial policies of ICU Medical subsequent to the sale.
Contribution Agreement Between Pfizer and Allogene Therapeutics, Inc. (WRD)
In April 2018, Pfizer and Allogene announced that the two companies entered into a contribution agreement for Pfizer’s portfolio of assets related to allogeneic CAR T therapy, an investigational immune cell therapy approach to treating cancer. Under this agreement, Allogene received from Pfizer rights to pre-clinical and clinical CAR T assets, all of which were previously licensed to Pfizer from French cell therapy company, Cellectis, beginning in 2014 and French pharmaceutical company, Servier, beginning in 2015. Allogene assumed responsibility for all potential financial obligations to both Cellectis and Servier. Pfizer will continue to participate financially in the development of the CAR T portfolio through an ownership stake in Allogene. Separately, Pfizer continues to maintain its approximate 7% ownership stake in Cellectis that was obtained in 2014 as part of the licensing agreement in which Pfizer obtained exclusive rights to pursue the development and commercialization of certain Cellectis CAR T therapies in exchange for an upfront payment of $80 million, as well as potential future development, regulatory and commercial milestone payments and royalties. In connection with the Allogene transaction, Pfizer recognized a non-cash $50 million pre-tax gain in Other (income)/deductions––net in the second quarter of 2018, representing the difference between the $127 million fair value of the equity investment received and the book value of assets transferred (including an allocation of goodwill) (see Note 4).
In October 2018, Allogene consummated an initial public offering of new shares of its common stock, which resulted in Pfizer’s preferred stock converting into common stock and a decrease in our ownership percentage from approximately 25% to approximately 19%. The closing price on the day of the initial public offering was $25 per share. Beginning as of the date of the initial public offering, our investment in Allogene, which is reported at $127 million in Long-term investments on the condensed consolidated balance sheet as of September 30, 2018, will be measured at fair value with changes in fair value recognized in net income.
Sale of Phase 2b Ready AMPA Receptor Potentiator for CIAS to Biogen Inc. (WRD)
In April 2018, we sold our Phase 2b ready AMPA receptor potentiator for CIAS to Biogen. We received $75 million upfront and have the opportunity to receive up to $515 million in future development and commercialization milestones, as well as tiered royalties in the low-to-mid-teen percentages. We recognized $75 million in Other (income)/deductions––net in the second quarter of 2018 (see Note 4). We will record the milestones and royalties to Other (income)/deductions––net when due, or earlier if we have sufficient experience to determine such amounts are not probable of significant reversal.
Divestiture of Neuroscience Assets (WRD)
In September 2018, we and Bain Capital entered into a transaction to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system including Parkinson’s disease, epilepsy, Alzheimer’s disease, schizophrenia and addiction. These assets were part of the neuroscience discovery and early development efforts, which we announced we were ending in January 2018. In connection with this transaction, we out-licensed the portfolio to Cerevel in exchange for a 25% ownership stake in Cerevel’s parent company, Cerevel Therapeutics, Inc., and potential future regulatory and commercial milestone payments and royalties. Bain Capital has committed to invest $350 million to develop the portfolio, with the potential for additional funding as the assets advance. In connection with the transaction, we recognized a non-cash $343 million pre-tax gain in Other (income)/

17


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

deductions––net, representing the fair value of the equity investment received as the assets transferred had a book value of $0 (see Note 4). Our investment in Cerevel Therapeutics, Inc. is reported in Long-term investments on the consolidated balance sheet as of September 30, 2018.
C. Licensing Arrangements
Shire International GmbH (IH)
In 2016, we out-licensed PF-00547659, an investigational biologic being evaluated for the treatment of moderate-to-severe inflammatory bowel disease, including ulcerative colitis and Crohn’s disease, to Shire for an upfront payment of $90 million, up to $460 million in development and sales-based milestone payments and potential future royalty payments on commercialized products. The $90 million upfront payment was initially deferred and recognized in Other (income)/deductions––net ratably through December 2017. In the first quarter of 2018, we recognized $75 million in Other (income)/deductions––net for a milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of the compound for the treatment of ulcerative colitis, and in the third quarter of 2018, we recognized $35 million in Other (income)/deductions––net for a milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of the compound for the treatment of Crohn’s disease (see Note 4).
BionTech AG (WRD)
In August 2018, a multi-year R&D arrangement went into effect between BionTech AG (BionTech), a privately held company, and Pfizer to develop mRNA-based vaccines for prevention of influenza (flu). In September 2018, we made an upfront payment of $50 million to BionTech, which was recorded in Research and development expenses, and BionTech is eligible to receive up to an additional $325 million in future development and sales based milestones and future royalty payments associated with worldwide sales. As part of the transaction, we also purchased 169,670 newly-issued ordinary shares of BionTech for $50 million in the third quarter of 2018, which are reported in Long-term investments in the condensed consolidated balance sheet as of September 30, 2018.
D. Collaboration Arrangements
Collaboration with Merck & Co., Inc. (IH)
Under a worldwide collaboration agreement, except for Japan, we collaborated with Merck on the clinical development of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and Januvia (sitagliptin) tablets, which were approved by the FDA in December 2017 and the European Commission in March 2018 as Steglatro, Segluromet and Steglujan. Merck will exclusively promote Steglatro and the two fixed-dose combination products and we will share revenues and certain costs with Merck on a 60%/40% basis, with Pfizer having the 40% share. Pfizer records its share of the collaboration revenues as product sales as we supply the ertugliflozin active pharmaceutical ingredient to Merck for use in the alliance products.
In the first quarter of 2017, we received a $90 million milestone payment from Merck upon the FDA’s acceptance for review of the NDAs for ertugliflozin and two fixed-dose combinations (ertugliflozin plus Januvia (sitagliptin) and ertugliflozin plus metformin), which, as of December 31, 2017, was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in Other (income)/deductions––net over a multi-year period. As of December 31, 2017, we were due a $60 million milestone payment from Merck, which we received in the first quarter of 2018, in conjunction with the approval of ertugliflozin by the FDA. As of December 31, 2017, the $60 million due from Merck was deferred and primarily reported in Other noncurrent liabilities. In the first quarter of 2018, in connection with the approval of ertugliflozin in the EU, we recognized a $40 million milestone payment from Merck in Other (income)/deductions––net (see Note 4). We are eligible for additional payments associated with the achievement of future commercial milestones. In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, the $60 million of deferred income and approximately $85 million of the $90 million of deferred income associated with the above-mentioned milestone payments were recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information.

18


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

Collaboration with Eli Lilly & Company (IH)
In 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizer’s tanezumab, which provides that Pfizer and Lilly will equally share product-development expenses as well as potential revenues and certain product-related costs. We received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in 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 osteoarthritis and chronic low back pain 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.
In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, approximately $107 million of deferred income associated with the above-mentioned upfront payment was recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information. Approximately $33 million of the upfront payment continues to be deferred, of which approximately $24 million is reported in Other current liabilities and approximately $9 million is reported in Other noncurrent liabilities as of September 30, 2018. This amount is expected to be recognized in Other (income)/deductions––net over the remaining development period for the product between 2018 and 2020.
E. Privately Held Investment

AM-Pharma B.V. (WRD)

In April 2015, we acquired a minority equity interest in AM-Pharma B.V., a privately-held Dutch biopharmaceutical company focused on the development of human recombinant Alkaline Phosphatase (recAP) for inflammatory diseases, and secured an exclusive option to acquire the remaining equity in the company. The option became exercisable after completion of a Phase 2 trial of recAP for the treatment of Acute Kidney Injury related to sepsis in the first quarter of 2018. We declined to exercise the option and the option expired unexercised during the second quarter of 2018.
Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

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

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

In connection with our acquisition of Hospira in September 2015, we focused our efforts on achieving an appropriate cost structure for the combined company. We expect to incur costs of approximately $1 billion (not including costs of $215 million associated with the return of acquired IPR&D rights as described in the Current-Period Key Activities section of Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives in our 2017 Financial Report) associated with the integration of Hospira. The majority of these costs were incurred within the three-year period post-acquisition.
As a result of the evaluation performed in connection with our decision in September 2016 to not pursue, at that time, splitting IH and EH into two separate publicly-traded companies, we identified new opportunities to potentially achieve greater optimization and efficiency to become more competitive in our business. Therefore, in early 2017, we initiated new enterprise-wide cost reduction/productivity initiatives, which we expect to substantially complete by the end of 2019. These initiatives encompass all areas of our cost base and include:

19


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

Optimization of our manufacturing plant network to support IH and EH products and pipelines. During 2017-2019, we expect to incur costs of approximately $700 million related to this initiative. Through September 30, 2018, we incurred approximately $322 million associated with this initiative.
Activities in non-manufacturing related areas, which include further centralization of our corporate and platform functions, as well as other activities where opportunities are identified. During 2017-2019, we expect to incur costs of approximately $450 million related to this initiative. Through September 30, 2018, we incurred approximately $252 million associated with this initiative.
The costs expected to be incurred during 2017-2019, of approximately $1.2 billion for the above-mentioned programs (but not including the costs associated with the Hospira integration), include restructuring charges, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about 20% of the total charges will be non-cash.
Current-Period Key Activities

For the first nine months of 2018, we incurred costs of $226 million associated with the 2017-2019 program, $186 million associated with the integration of Hospira and $35 million associated with all other acquisition-related initiatives.
The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2018

 
October 1,
2017

 
September 30,
2018

 
October 1,
2017

Restructuring (credits)/charges:
 
 

 
 

 
 

 
 

Employee terminations
 
$
(24
)
 
$
(55
)
 
$
(53
)
 
$
(113
)
Asset impairments(a)
 
12

 
101

 
8

 
126

Exit costs
 
14

 
10

 
14

 
16

Restructuring charges/(credits)(b)
 
1

 
56

 
(32
)
 
28

Transaction costs(c)
 
1

 
(14
)
 
1

 
4

Integration costs(d)
 
82

 
73

 
202

 
235

Restructuring charges and certain acquisition-related costs
 
85

 
114

 
172

 
267

Net periodic benefit costs recorded in Other (income)/deductions––net(e)
 
41

 
35

 
103

 
110

Additional depreciation––asset restructuring, virtually all of which is recorded in Cost of sales(f)
 
12

 
39

 
43

 
74

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

 
 

 
 

 
 

Cost of sales
 
21

 
26

 
57

 
77

Selling, informational and administrative expenses
 
17

 
22

 
51

 
46

Research and development expenses
 
9

 
9

 
22

 
26

Total implementation costs
 
48

 
57

 
130

 
150

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
186

 
$
245

 
$
447

 
$
601

(a) 
The asset impairment charges for the three and nine months ended October 1, 2017 are largely associated with our acquisitions of Hospira and Medivation.
(b) 
In the third quarter of 2018, restructuring charges are primarily due to accruals for exit costs and asset write downs related to our acquisition of Hospira, partially offset by the reversal of previously recorded accruals for employee termination costs. In the first nine months of 2018, restructuring credits are mostly related to the reversal of previously recorded accruals for employee termination costs. In the three and nine months ended October 1, 2017, restructuring charges were mainly associated with our acquisitions of Hospira and Medivation, partially offset by credits associated with cost-reduction and productivity initiatives not associated with acquisitions that mostly related to the reversal of previously recorded accruals for employee termination costs. Employee terminations primarily include revisions of our estimates of severance benefits. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, many of which may be paid out during periods after termination.

20


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

The restructuring activities for 2018 are associated with the following:
For the third quarter of 2018, IH ($13 million credit); EH ($7 million charge); manufacturing operations ($1 million charge); WRD/GPD ($3 million charge); and Corporate ($3 million charge).
For the first nine months of 2018, IH ($25 million credit); EH ($5 million credit); WRD/GPD ($1 million charge); manufacturing operations ($16 million charge); and Corporate ($19 million credit).
The restructuring activities for 2017 are associated with the following:
For the third quarter of 2017, IH ($1 million charge); EH ($1 million charge); WRD/GPD ($2 million charge); manufacturing operations ($40 million charge); and Corporate ($12 million charge).
For the first nine months of 2017, IH ($1 million credit); EH ($11 million credit); WRD/GPD ($24 million credit); manufacturing operations ($48 million charge); and Corporate ($15 million charge).
(c) 
Transaction costs represent external costs for banking, legal, accounting and other similar services, which in the third quarter of 2017 reflect the reversal of an accrual related to the acquisition of Medivation. Transaction costs for the first nine months of 2017 were directly related to our acquisitions of Hospira, Anacor and Medivation.
(d) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes. In the third quarter and first nine months of 2018, integration costs were primarily related to our acquisition of Hospira. In the third quarter and first nine months of 2017, integration costs primarily relate to our acquisitions of Hospira and Medivation. The first nine months of 2017 also include a net gain of $12 million related to the settlement of the Hospira U.S. qualified defined benefit pension plan (see Note 10).
(e) 
In the three and nine months ended September 30, 2018, primarily represents the net pension curtailments and settlements included in Other (income)/deductions––net upon the adoption of a new accounting standard in the first quarter of 2018. In the three and nine months ended October 1, 2017, primarily represents the net pension curtailments and settlements, partially offset by net periodic benefit credits, excluding service costs, related to our acquisition of Hospira, both of which were reclassified to Other (income)/deductions––net as a result of the retrospective adoption of a new accounting standard in the first quarter of 2018. These credits included a net settlement gain, partially offset by accelerated amortization of actuarial losses and prior service costs upon the settlement of the remaining obligation associated with the Hospira U.S. qualified defined benefit pension plan. For additional information, see Note 1B and Note 10.
(f) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(g) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.
The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)
 
Employee
Termination Costs

 
Asset
Impairment Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2017(a)
 
$
1,039

 
$

 
$
66

 
$
1,105

Provision/(Credit)
 
(53
)
 
8

 
14

 
(32
)
Utilization and other(b)
 
(235
)
 
(8
)
 
(34
)
 
(277
)
Balance, September 30, 2018(c)
 
$
750

 
$

 
$
46

 
$
796

(a) 
Included in Other current liabilities ($643 million) and Other noncurrent liabilities ($462 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($397 million) and Other noncurrent liabilities ($399 million).

21


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

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2018


October 1,
2017

 
September 30,
2018

 
October 1,
2017

Interest income(a)
 
$
(82
)
 
$
(99
)
 
$
(240
)
 
$
(275
)
Interest expense(a)
 
310

 
320

 
946

 
940

Net interest expense
 
228

 
220

 
706

 
666

Royalty-related income
 
(143
)
 
(140
)
 
(360
)
 
(331
)
Net gains on asset disposals(b)
 
(4
)
 
(13
)
 
(19
)
 
(36
)
Net gains recognized during the period on investments in equity securities(c)
 
(94
)
 
(45
)
 
(460
)
 
(111
)
Net realized (gains)/losses on sales of investments in debt securities
 
8

 
(23
)
 
12

 
(45
)
Income from collaborations, out-licensing arrangements and sales of compound/product rights(d)
 
(139
)
 
(78
)
 
(455
)
 
(163
)
Net periodic benefit costs/(credits) other than service costs(e)
 
(65
)
 
28

 
(231
)
 
81

Certain legal matters, net(f)
 
37

 
183

 
(70
)
 
194

Certain asset impairments(g)
 
(1
)
 
130

 
40

 
143

Adjustments to loss on sale of HIS net assets(h)
 
(2
)
 
(12
)
 
(1
)
 
52

Business and legal entity alignment costs(i)
 

 
16

 
4

 
54

Other, net(j)
 
(239
)
 
(186
)
 
(309
)
 
(439
)
Other (income)/deductions––net
 
$
(414
)
 
$
79

 
$
(1,143
)
 
$
65

(a) 
Interest income decreased in the third quarter and first nine months of 2018, primarily driven by a lower investment balance. Interest expense decreased in the third quarter of 2018, primarily as a result of refinancing activity that occurred in the fourth quarter of 2017 and a credit to interest expense due to settlement of a tax indemnification case. Interest expense increased for the first nine months of 2018, primarily as a result of higher short-term interest rates, offset, in part, by refinancing activity that occurred in the fourth quarter of 2017.
(b) 
In the first nine months of 2017, primarily includes a realized gain on sale of property of $52 million, partially offset by a realized net loss of $30 million related to the sale of our 40% ownership investment in Teuto, including the extinguishment of a put option for the then remaining 60% ownership interest.
(c) 
The net gains on investments in equity securities for the third quarter of 2018 include unrealized net gains on equity securities of $8 million and, for the first nine months of 2018, include unrealized net gains on equity securities of $344 million, reflecting the adoption of a new accounting standard in the first quarter of 2018. We continue to hold 2.5 million shares of ICU Medical common stock and we recognized unrealized gains of $24 million in the third quarter of 2018 and unrealized gains of $229 million in the first nine months of 2018 related to these remaining shares. Prior to the adoption of a new accounting standard in the first quarter of 2018, net unrealized gains and losses on virtually all equity securities with readily determinable fair values were reported in Accumulated other comprehensive income. For additional information, see Note 1B, Note 2B and Note 7B.
(d) 
Includes income from upfront and milestone payments from our collaboration partners and income from out-licensing arrangements and sales of compound/product rights. In the third quarter of 2018, primarily includes, among other things, (i) $40 million in milestone income from a certain licensee, (ii) a $35 million milestone payment received from Shire related to their first dosing of a patient in a Phase 3 clinical trial of a compound out-licensed by Pfizer to Shire for the treatment of Crohn’s disease and (iii) $45 million in gains related to sales of compound/product rights. In the first nine months of 2018, primarily includes, among other things, (i) approximately $128 million in milestone income from multiple licensees, (ii) an upfront payment to us of $75 million for the sale of an AMPA receptor potentiator for CIAS to Biogen, (iii) $110 million in milestone payments received from Shire, of which $75 million was received in the first quarter of 2018 related to their first dosing of a patient in a Phase 3 clinical trial for the treatment of ulcerative colitis and $35 million was received from Shire related to their first dosing of a patient in a Phase 3 clinical trial for the treatment of Crohn’s disease, (iv) a $40 million milestone payment from Merck in conjunction with the approval of ertugliflozin in the EU and (v) $45 million in gains related to sales of compound/product rights. In the third quarter of 2017, primarily includes, among other things, $50 million in milestone income from a certain licensee and a $15 million gain related to the sale of compound/product rights. In the first nine months of 2017, primarily includes, among other things, approximately $81 million in milestone income from multiple licensees and a $43 million gain related to the sale of compound/product rights. For additional information, see Note 2B, Note 2C and Note 2D.
(e) 
Represents the net periodic benefit costs/(credits), excluding service costs, as a result of the adoption of a new accounting standard in the first quarter of 2018. Effective January 1, 2018, the U.S. Pfizer Consolidated Pension Plan was frozen to future benefit accruals and for the third quarter and first nine months of 2018, resulted in the recognition of lower net periodic benefit costs due to the extension of the amortization period for the actuarial losses. There was also a greater than expected gain on plan assets due to a higher plan asset base compared to the third quarter and first nine months of 2017. For additional information, see Note 1B and Note 10.
(f) 
For the first nine months of 2018, the net credits primarily represent the reversal of a legal accrual where a loss was no longer deemed probable. In the third quarter and first nine months of 2017, primarily includes a $94 million charge to resolve a class action lawsuit filed by direct purchasers relating to Celebrex, which was approved by the court in April 2018, and a $79 million charge to reflect damages awarded by a jury in a patent matter.
(g) 
In the first nine months of 2018, primarily includes a $31 million intangible asset impairment charge recorded in the second quarter of 2018 related to an IH finite-lived developed technology right, acquired in connection with our acquisition of Anacor, for the treatment for toenail fungus marketed in the U.S. market only. The impairment charge recorded in the second quarter of 2018 related to IH reflects, among other things, updated commercial forecasts. In the third quarter and first nine months of 2017, primarily includes an intangible asset impairment charge of $127 million related to developed technology rights, acquired in connection with our acquisition of Hospira, for a generic sterile injectable product for the treatment of edema associated with certain conditions.

22


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

The intangible asset impairment charge for the third quarter and first nine months of 2017 is associated with EH and reflects, among other things, updated commercial forecasts and an increased competitive environment.
(h) 
Represents adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell related to the sale of HIS net assets to ICU Medical on February 3, 2017. For additional information, see Note 2B.
(i) 
Represents expenses for changes to our infrastructure to align our commercial operations of our current segments, including costs to internally separate our businesses into distinct legal entities, as well as to streamline our intercompany supply operations to better support each business.
(j) 
In the third quarter and first nine months of 2018, includes a non-cash $343 million pre-tax gain associated with our transaction with Bain Capital to create a new biopharmaceutical company, Cerevel, to continue development of a portfolio of clinical and preclinical stage neuroscience assets primarily targeting disorders of the central nervous system (see Note 2B). The third quarter and first nine months of 2018 also include, among other things, dividend income of $91 million and $226 million, respectively, from our investment in ViiV, and charges of $122 million and $257 million, respectively, reflecting the change in the fair value of contingent consideration. The first nine months of 2018 also include a non-cash $50 million pre-tax gain on the contribution of Pfizer’s allogeneic CAR T therapy development program assets obtained from Cellectis and Servier in connection with our contribution agreement entered into with Allogene in which Pfizer obtained a 25% ownership stake in Allogene (see Note 2B), and a non-cash $17 million pre-tax gain on the cash settlement of a liability that we incurred in April 2018 upon the EU approval of Mylotarg (see Note 7E). In the third quarter and first nine months of 2017, includes, among other things, dividend income of $54 million and $211 million, respectively, from our investment in ViiV and income of $62 million from resolution of a contract disagreement.
The following table provides additional information about the intangible asset that was impaired during 2018 in Other (income)/deductions:
 
 
Fair Value(a)
 
Nine Months Ended September 30, 2018
(MILLIONS OF DOLLARS)
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––Developed technology right, finite-lived(b)
 
$
35

 
$

 
$

 
$
35

 
$
31

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis.
(b) 
Reflects an intangible asset written down to fair value in the first nine months of 2018. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the product; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
Note 5. Tax Matters

A. Taxes on Income from Continuing Operations
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 U.S. Federal corporate tax rate from 35% to 21%, the impact on valuation allowances and other state income tax considerations, the $15.2 billion repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect payment over eight years through 2026 (with the first of eight installments due in April 2019) that is reported primarily 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. With respect to the aforementioned repatriation tax liability related to the TCJA repatriation tax, our obligations may vary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.
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 of approximately $1 billion 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 remain 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

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

September 30, 2018 and have not completed our analysis. In the third quarter of 2018, we recorded a favorable adjustment to the provisional estimate of the impact of the legislation, primarily related to the remeasurement of deferred tax assets and liabilities as well as revised estimates of benefits related to certain tax initiatives. 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 the fourth quarter of 2018, as we complete the remainder of our tax return filings and as any interpretations or clarifications of the TCJA occur through further legislation or U.S. Treasury actions or other means.
Our effective tax rate for continuing operations was 1.6% for the third quarter of 2018, compared to 20.3% for the third quarter of 2017 and was 9.9% for the first nine months of 2018, compared to 20.1% for the first nine months of 2017.
The lower effective tax rate for the third quarter and first nine months of 2018 in comparison with the same periods in 2017 was primarily due to:
the adoption of a territorial system and the lower U.S. tax rate as a result of the December 2017 enactment of the TCJA as well as favorable adjustments to the provisional estimate of the impact of the legislation;
the favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; as well as
an increase in benefits associated with the resolution of certain tax positions pertaining to prior years primarily with various foreign tax authorities, and the expiration of certain statutes of limitations.
B. Deferred Taxes

We have not completed our analysis of the TCJA on our prior assertion of indefinitely reinvested earnings. Accordingly, we continue to evaluate our assertion with respect to our accumulated foreign earnings subject to the deemed repatriation tax and we also continue to evaluate the amount of earnings that are indefinitely reinvested. Additionally, we continue to evaluate our assertions on any remaining outside basis differences in our foreign subsidiaries as of September 30, 2018 as we have not finalized our analysis of the effects of all of the new provisions in the TCJA. As of September 30, 2018, it is not practicable to estimate the additional deferred tax liability that would be recorded if the earnings subject to the deemed repatriation tax and any remaining outside basis differences as of September 30, 2018 are not indefinitely reinvested. In accordance with the authoritative guidance issued by the SEC Staff Accounting Bulletin 118, we expect to complete our analysis within the measurement period.
C. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.
The U.S. is one of our major tax jurisdictions, and we are regularly audited by the IRS:
With respect to Pfizer, the IRS has issued a Revenue Agent’s Report (RAR) for tax years 2009-2010. We are not in agreement with the RAR and are currently appealing certain disputed issues. Tax years 2011-2015 are currently under audit. Tax years 2016-2018 are open but not under audit. All other tax years are closed.
With respect to Hospira, the federal income tax audit of tax year 2014 through short-year 2015 was effectively settled in the second quarter of 2018. All other tax years are closed.
With respect to Anacor and Medivation, the open tax years are not considered material to Pfizer.
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2013-2018), Japan (2017-2018), Europe (2011-2018, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2018, primarily reflecting Brazil) and Puerto Rico (2011-2018).

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

D. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of Tax provision/(benefit) on other comprehensive income/(loss):
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
September 30,
2018

 
October 1,
2017

 
September 30,
2018

 
October 1,
2017

Foreign currency translation adjustments, net(a)
 
$
14

 
$
(62
)
 
$
82

 
$
(192
)
Unrealized holding gains/(losses) on derivative financial instruments, net
 
35

 
28

 
39

 
30

Reclassification adjustments for (gains)/losses included in net income
 
(28
)
 
(29
)
 
36

 
(169
)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 

 

 
1

 

 
 
7

 
(1
)
 
77

 
(139
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
20

 
37

 
(8
)
 
93

Reclassification adjustments for gains included in net income
 
(6
)
 
(49
)
 
(8
)
 
(45
)
Reclassification adjustments for tax on unrealized gains from AOCI to Retained earnings(c)
 

 

 
(45
)
 

 
 
14

 
(12
)
 
(62
)
 
47

Benefit plans: actuarial gains/(losses), net
 
2

 
(37
)
 
27

 
(15
)
Reclassification adjustments related to amortization
 
15

 
60

 
43

 
152

Reclassification adjustments related to settlements, net
 
10

 
22

 
25

 
30

Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 

 

 
637

 

Other
 
11

 
(33
)
 
18

 
(46
)
 
 
38

 
11

 
750

 
121

Benefit plans: prior service costs and other, net
 

 

 

 

Reclassification adjustments related to amortization
 
(11
)
 
(17
)
 
(33
)
 
(50
)
Reclassification adjustments related to curtailments, net
 
(1
)
 
(1
)
 
(4
)
 
(5
)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 

 

 
(144
)
 

Other
 
1

 
1

 
1

 
1

 
 
(11
)
 
(17
)
 
(179
)
 
(55
)
Tax provision/(benefit) on other comprehensive income/(loss)
 
$
62

 
$
(80
)
 
$
667

 
$
(218
)
(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
(b) 
For additional information on the adoption of a new accounting standard related to reclassification of certain tax effects from AOCI, see Note 1B.
(c) 
For additional information on the adoption of a new accounting standard related to financial assets and liabilities, see Note 1B.
Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Foreign Currency Translation Adjustments

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/Credits and Other

 
Accumulated Other Comprehensive Income/(Loss)

Balance, December 31, 2017
 
$
(5,180
)
 
$
(30
)
 
$
401

 
$
(5,262
)
 
$
750

 
$
(9,321
)
Other comprehensive income/(loss) due to the adoption of new accounting standards(a)
 
(2
)
 
(1
)
 
(416
)
 
(637
)
 
144

 
(913
)
Other comprehensive income/(loss)(b)
 
(589
)
 
279

 
(116
)
 
361

 
(118
)
 
(183
)
Balance, September 30, 2018
 
$
(5,772
)
 
$
248

 
$
(131
)
 
$
(5,538
)
 
$
776

 
$
(10,417
)
(a) 
Amounts represent the cumulative effect adjustments as of January 1, 2018 from the adoption of new accounting standards related to (i) financial assets and liabilities and (ii) the reclassification of certain tax effects from AOCI. For additional information, see Note 1B.
(b) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $20 million loss for the first nine months of 2018.
As of September 30, 2018, with respect to derivative financial instruments, the amount of unrealized pre-tax net gains on derivative financial instruments estimated to be reclassified into income within the next 12 months is approximately $177 million, which is expected to be offset primarily by net losses resulting from reclassification adjustments related to net losses related to foreign currency exchange-denominated forecasted intercompany inventory sales and available-for-sale debt securities.

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PFIZER INC. AND SUBSIDIARY COMPANIES