EX-13 8 pfe-exhibit13x12312018x10k.htm 2018 FINANCIAL REPORT Exhibit
EXHIBIT 13

Pfizer Inc. 2018 Financial Report
 
pfizercoverlogoa01.jpg
 



Financial Review
Pfizer Inc. and Subsidiary Companies

 

GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this 2018 Financial Report (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this 2018 Financial Report, most of which are explained or defined below:
2018 Financial Report
This Financial Report for the fiscal year ended December 31, 2018, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018
2018 Form 10-K
Annual Report on Form 10-K for the fiscal year ended December 31, 2018
ABO
Accumulated postretirement benefit obligation
ACA (Also referred to as U.S. Healthcare Legislation)
U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
ACIP
Advisory Committee on Immunization Practices
ALK
anaplastic lymphoma kinase
Allergan
Allergan plc
Alliance revenues
Revenues from alliance agreements under which we co-promote products discovered or developed by other companies or us
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
Bamboo
Bamboo Therapeutics, Inc.
Biogen
Biogen Inc.
Biopharma
Pfizer Biopharmaceuticals Group
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, South Korea, Australia, Scandinavian countries, Finland and New Zealand
EEA
European Economic Area
EGFR
epidermal growth factor receptor
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 organization
GSK
GlaxoSmithKline plc
GS&Co.
Goldman, Sachs & Co. LLC
HER
human epidermal growth factor receptor
HER2-
human epidermal growth factor receptor 2-negative
hGH-CTP
human growth hormone
HIS
Hospira Infusion Systems
Hisun
Zhejiang Hisun Pharmaceuticals Co., Ltd.
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive
ICU Medical
ICU Medical, Inc.
IH
Innovative Health
InnoPharma
InnoPharma, Inc.
IPR&D
in-process research and development

2018 Financial Report    
 
 
i


Financial Review
Pfizer Inc. and Subsidiary Companies

 

IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
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 and Company
LOE
loss of exclusivity
MCC
Merkel Cell Carcinoma
MCO
Managed Care Organization
Medivation
Medivation, Inc.
Merck
Merck & Co., Inc.
Meridian
Meridian Medical Technologies, Inc.
Moody’s
Moody’s Investors Service
NAV
Net asset value
NDA
new drug application
NovaQuest
NovaQuest Co-Investment Fund II, L.P. or NovaQuest Co-Investment Fund V, L.P., as applicable
NSCLC
non-small cell lung cancer
NYSE
New York Stock Exchange
OPKO
OPKO Health, Inc.
OTC
over-the-counter
PARP
poly ADP ribose polymerase

PBM
Pharmacy Benefit Manager
PBO
Projected benefit obligation
Pharmacia
Pharmacia Corporation
PPS
Portfolio Performance Shares
PP&E
Property, plant & equipment
PSAs
Performance Share Awards
PsA
psoriatic arthritis
PTSRUs
Performance Total Shareholder Return Units
PTUs
Profit Units
RA
rheumatoid arthritis
RCC
renal cell carcinoma
R&D
research and development
RPI
RPI Finance Trust
RSUs
Restricted Stock Units
Sandoz
Sandoz, Inc., a division of Novartis AG
Sangamo
Sangamo Therapeutics, Inc.
SEC
U.S. Securities and Exchange Commission
Servier
Les Laboratoires Servier SAS
SFJ
SFJ Pharmaceuticals
Shire
Shire International GmbH
SI&A
Selling, informational and administrative
S&P
Standard and Poor’s
SIP
Sterile Injectable Pharmaceuticals
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.
Teva
Teva Pharmaceuticals USA, Inc.
TSR
Total Shareholder Return
TSRUs
Total Shareholder Return Units
U.K.
United Kingdom
U.S.
United States
ViiV
ViiV Healthcare Limited
WRD
Worldwide Research and Development

ii
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

INTRODUCTION

See the Glossary of Defined Terms at the beginning of this 2018 Financial Report for terms used throughout this Financial Review. Our Financial Review is provided to assist readers in understanding the results of operations, financial condition and cash flows of Pfizer Inc. and its subsidiaries (the Company). It should be read in conjunction with the consolidated financial statements and Notes to Consolidated Financial Statements. The discussion in this Financial Review contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in Part 1, Item 1A, “Risk Factors” of our 2018 Form 10-K and in the “Forward-Looking Information and Factors That May Affect Future Results”, “Our Operating Environment” and “Our Strategy” sections of this Financial Review.

The Financial Review is organized as follows:
 
Beginning on page 2
 
 
This section provides information about the following: Financial Highlights; Our Business; Our 2018 Performance; Our Operating Environment; The Global Economic Environment, Our Strategy; Our Business Development Initiatives, such as acquisitions, dispositions, licensing and collaborations; and Our Financial Guidance for 2019.
 
 
Beginning on page 16
 
 
This section discusses those accounting policies and estimates that we consider important in understanding our consolidated financial statements. For additional discussion of our accounting policies, see Notes to Consolidated Financial Statements—Note 1. Basis of Presentation and Significant Accounting Policies.
 
 
Beginning on page 20
 
 
This section includes the following sub-sections:
 
 
Beginning on page 20
 
 
This sub-section provides a high-level summary of our revenues, including revenue deductions.
 
 
Beginning on page 22
 
 
This sub-section provides an overview of revenues by segment and geography.
 
 
Beginning on page 24
 
 
This sub-section provides an overview of several of our biopharmaceutical products.
 
 
Beginning on page 29
 
 
This sub-section provides an overview of important biopharmaceutical product developments.
 
 
Beginning on page 33
 
 
This sub-section provides a discussion about our costs and expenses.
 
 
Beginning on page 36
 
 
This sub-section provides a discussion of items impacting our tax provisions.
 
 
Beginning on page 37
 
 
This sub-section provides a discussion of an alternative view of performance used by management.
 
 
Beginning on page 42
 
 
This section provides a discussion of the performance of each of our operating segments.
 
 
Beginning on page 51
 
 
This section provides a discussion of changes in certain components of other comprehensive income.
 
 
Beginning on page 52
 
 
This section provides a discussion of changes in certain balance sheet accounts, including Accumulated other comprehensive loss.
 
 
Beginning on page 53
 
 
This section provides an analysis of our consolidated cash flows for the three years ended December 31, 2018.
 
 
Beginning on page 55
 
 
This section provides an analysis of selected measures of our liquidity and of our capital resources as of December 31, 2018 and December 31, 2017, as well as a discussion of our outstanding debt and other commitments that existed as of December 31, 2018 and December 31, 2017. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer’s future activities.
 
 
Beginning on page 59
 
 
This section discusses accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.
 
 
Beginning on page 61
 
 
This section provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this Financial Review. Also included in this section are discussions of Financial Risk Management and Contingencies, including legal and tax matters.
 
Certain amounts in our Financial Review may not add due to rounding. All percentages have been calculated using unrounded amounts.

2018 Financial Report    
 
 
1


Financial Review
Pfizer Inc. and Subsidiary Companies

 

OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Financial Highlights

The following charts provide a summary of certain financial performance (in billions, except per share data):
2018 Total Revenues––$53.6 billion
2018 Net Cash Flow from Operations––$15.8 billion
An increase of 2% compared to 2017
A decrease of 6% compared to 2017
totalrevenue2018.jpgnetcashflow-operations2018.jpg
2018 Reported Diluted EPS––$1.87
2018 Adjusted Diluted EPS (Non-GAAP)––$3.00*
A decrease of 47% compared to 2017
An increase of 13% compared to 2017
reporteddilutedeps2018.jpgadjdilutedepsnon-gaap2018.jpg
*
For an understanding of Adjusted diluted EPS (which is a non-GAAP financial measure), including reconciliations of certain GAAP reported to non-GAAP adjusted information, see the “Non-GAAP Financial Measure (Adjusted Income)” section of this Financial Review.
Our Business

We apply science and our global resources to bring therapies to people that extend and significantly improve their lives through the discovery, development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world’s best-known consumer healthcare products. We work across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases of our time. We collaborate with healthcare providers, governments and local communities to support and expand access to reliable, affordable healthcare around the world. Our revenues are derived from the sale of our products and, to a much lesser extent, from alliance agreements, under which we co-promote products discovered or developed by other companies or us (Alliance revenues).
From the second quarter of our 2016 fiscal year until the end of 2018, we managed our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). For additional information about this operating structure, see Notes to Consolidated Financial Statements––Note 18A. Segment, Geographic and Other Revenue Information: Segment Information. At the beginning of our 2019 fiscal year, we began to manage our commercial operations through a new global commercial structure consisting of three businesses. See the “Our Strategy––Organizing for Growth” and “––Commercial Operations” sections of this Financial Review below for additional information.
On January 1, 2019, Dr. Albert Bourla succeeded Ian Read as Chief Executive Officer of the company and Ian Read transitioned from his role as Chairman and Chief Executive Officer to Executive Chairman of Pfizer’s Board of Directors.
The majority of our revenues come from the manufacture and sale of biopharmaceutical products. The biopharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. These factors include, among others: the loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights, the ability to replenish innovative biopharmaceutical products, healthcare legislation, pipeline productivity, the regulatory environment, pricing and access pressures and competition. We also face challenges as a result of the global economic environment. For additional information about these factors and challenges, see the “Our Operating Environment” and “The Global Economic Environment” sections of this Financial Review and Part I, Item 1A, “Risk Factors” of our 2018 Form 10-K.

2
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

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

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

Our significant recent business development activities include:
On December 19, 2018, we announced that we entered into a definitive agreement with GSK under which we and GSK have agreed to combine our respective consumer healthcare businesses into a new consumer healthcare joint venture that will operate globally under the GSK Consumer Healthcare name. The joint venture is expected to be a category leader in pain relief, respiratory, vitamin and mineral supplements, digestive health, skin health and therapeutic oral health and will be the largest global OTC consumer healthcare business. In exchange for contributing our Consumer Healthcare business, we will receive a 32% equity stake in the company and GSK will own the remaining 68%. The transaction is expected to close in the second half of 2019, subject to customary closing conditions including GSK shareholder approval and required regulatory approvals. For additional information, see Notes to Consolidated Financial Statements––Note 2C. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment: Assets and Liabilities Held for Sale and the “Our Strategy” section of this Financial Review below.
On February 3, 2017, we completed the sale of Pfizer’s global infusion systems net assets, HIS, to ICU Medical for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing. At closing, we received 3.2 million newly issued shares of ICU Medical common stock, which we initially valued at approximately $428 million (all of which we sold during 2018), a promissory note in the amount of $75 million and net cash of approximately $200 million before customary adjustments for net working capital. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. The operating results of HIS are included in our consolidated statement of income and EH’s operating results through February 2, 2017 and, therefore, our financial results, and EH’s operating results, for the year ended December 31, 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations, while our financial results, and EH’s operating results, for the year ended December 31, 2016 reflect 12 months of HIS global operations. 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. for $1,040 million, composed of cash and contingent consideration. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of this business, and, in accordance with our international reporting period, our financial results, EH’s operating results, and cash flows for the year ended December 31, 2017 reflect approximately 11 months of the small molecule anti-infectives business acquired from AstraZeneca.
On September 28, 2016, we acquired Medivation for $81.50 per share. The total fair value of consideration transferred for Medivation was approximately $14.3 billion in cash ($13.9 billion, net of cash acquired). Of this consideration, approximately $365 million was not paid as of December 31, 2016, and was recorded in Other current liabilities. The remaining consideration was paid as of December 31, 2017. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Medivation. In accordance with our domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately three months of Medivation operations.
On June 24, 2016, we acquired Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion, net of cash acquired), plus $698 million debt assumed. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Anacor. In accordance with our domestic and international reporting periods, our consolidated financial statements for the year ended December 31, 2016 reflect approximately six months of Anacor operations.
On April 6, 2016, we announced that the merger agreement between Pfizer and Allergan entered into on November 22, 2015 was terminated by mutual agreement of the companies. The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement. In connection with the termination of the merger agreement, on April 8, 2016 (which fell into Pfizer’s second fiscal quarter of 2016), Pfizer paid Allergan

2018 Financial Report    
 
 
3


Financial Review
Pfizer Inc. and Subsidiary Companies

 

$150 million (pre-tax) for reimbursement of Allergan’s expenses associated with the terminated transaction (see the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net). Pfizer and Allergan also released each other from any and all claims in connection with the merger agreement.
For additional information, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment and the “Our Strategy” and “Our Business Development Initiatives” sections of this Financial Review below.

Impact of Hurricanes in Puerto Rico

We have manufacturing and commercial operations in Puerto Rico, which were impacted by the hurricanes toward the end of the third quarter in 2017. While our three manufacturing sites in Puerto Rico sustained some damage and became inoperable due to issues impacting Puerto Rico overall, all three sites have resumed operations and remediation activities were completed in 2018. Our commercial sales offices in Puerto Rico have been operational since October 2017.

Product Manufacturing

We periodically encounter difficulties or delays in manufacturing, including due to suspension of manufacturing or voluntary recall of a product, or legal or regulatory actions such as warning letters. For example, Hospira’s manufacturing facility in McPherson, Kansas is currently under the FDA inspection status of Official Action Indicated (OAI). As a result of this status, the FDA may refuse to grant premarket approval of applications and/or the FDA may refuse to grant export certificates related to products manufactured at our McPherson site until the site status is upgraded, which will require a successful re-inspection by the FDA. Future FDA inspections and regulatory activities will further assess the adequacy and sustainability of corrections implemented at the site. Communication with the FDA on the status of the McPherson site is ongoing. For additional information regarding the FDA inspection of the McPherson site, see Part I, Item 1A, “Risk Factors––Product Manufacturing, Sales and Marketing Risks” of our 2018 Form 10-K.

The product shortages we have been experiencing within our portfolio are primarily for products from the legacy Hospira portfolio and are largely driven by capacity constraints, technical issues and supplier quality concerns. We continue to remediate issues at legacy Hospira facilities manufacturing sterile injectables. Any continuing product shortage interruption at these manufacturing facilities could negatively impact our financial results, specifically in our SIP portfolio. We continue to make progress on our comprehensive remediation plan to upgrade and modernize these facilities, and we expect our supply issues to be substantially improved by the end of 2019.
Our 2018 Performance

Revenues––2018

Revenues in 2018 increased by $1.1 billion, or 2%, compared to 2017, which reflects operational growth of $791 million, or 2%, and the favorable impact of foreign exchange of $310 million, or less than 1%.
The following graph illustrates the components of the increase in revenues in 2018:
overviewrev2018v2017.jpg
*
LOE generally pertains to period-over-period revenue impacts for products across our portfolios experiencing patent expirations or loss of regulatory exclusivity in certain developed markets.

4
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

The following provides an analysis of the changes in revenues in 2018:
(MILLIONS OF DOLLARS)
 
 
 
 
 
2017 Revenues
 
$
52,546

 
 
 
Operational growth/(decline):
 
 
Continued growth from key brands(a) and from recently launched products(b), as well as growth from Biosimilars(c) and our Consumer Healthcare business, and the impact from CentreOne
 
3,377

Declines from total Viagra(d) (primarily in the U.S.), the Peri-LOE Products portfolio (excluding Viagra EH(d), which was impacted by the shift in the reporting of U.S. and Canada Viagra revenues to EH), the SIP portfolio (primarily in developed markets), the LEP portfolio (primarily in developed markets), Enbrel (driven by declines in most developed Europe markets) and the hemophilia portfolio (primarily in developed Europe)
 
(2,520
)
Disposition-related impact of the February 2017 sale of HIS(e)
 
(97
)
Other operational factors, net
 
31

Operational growth, net
 
791

 
 
 
Operational revenues
 
53,337

Favorable impact of foreign exchange
 
310

2018 Revenues
 
$
53,647

(a) 
Key brands represent Ibrance, Eliquis, Xeljanz, Prevnar 13/Prevenar 13, Xtandi, Lyrica-IH and Chantix/Champix.
(b) 
Growth from recently launched products include Eucrisa in the U.S., as well as Besponsa and Bavencio, primarily in the U.S. and developed Europe.
(c) 
Growth in Biosimilars, primarily from Inflectra in certain channels in the U.S., as well as in developed Europe.
(d) 
Viagra lost exclusivity in the U.S. in December 2017. In 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, were reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, in 2018, total Viagra revenues were reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
(e) 
Impact on financial results for the sale of HIS in February 2017. The 2018 financial results do not reflect any contribution from HIS global operations, compared to approximately one month of HIS domestic operations and approximately two months of HIS international operations in 2017.

See the “Analysis of the Consolidated Statements of Income––Revenues––Overview” section below for more information, including a discussion of key drivers of our revenue performance.
Income from Continuing Operations Before Provision/(Benefit) for Taxes on Income––2018
The following provides an analysis of the decrease in Income from continuing operations before provision/benefit) for taxes on income for 2018:
(MILLIONS OF DOLLARS)
 
 
 
 
 
Income from continuing operations before provision/(benefit) for taxes on income for the year ended December 31, 2017
 
$
12,305

 
 
 
Favorable change in revenues
 
1,101

 
 
 
Favorable/(Unfavorable) changes:
 
 
Higher certain asset impairments(a)
 
(2,720
)
Higher Restructuring charges and certain acquisition-related costs(b)
 
(693
)
Higher Research and development expenses(c)
 
(322
)
Impact of net realized (gains)/losses on sales of investments in debt securities(a)
 
(186
)
Lower net losses on early retirement of debt(a)
 
996

Impact of net periodic benefit costs/(credits) other than service costs(a)
 
389

Higher net gains recognized during the period on investments in equity securities(a)
 
362

Lower Selling, information and administrative expenses(d)
 
350

Higher income from collaborations, out-licensing arrangements and sales of compound/product rights(a)
 
271

All other items, net
 
33

Income from continuing operations before provision/(benefit) for taxes on income for the year ended December 31, 2018
 
$
11,885

(a) 
See the Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions—Net.
(b) 
See the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” and Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
(c) 
See the “Costs and Expenses––Research and Development (R&D) Expenses” section of this Financial Review.
(d) 
See the “Costs and Expenses––Selling, Informational and Administrative (SI&A) Expenses” section of this Financial Review.
For information on our tax provision and effective tax rate see the “Provision/(Benefit) for Taxes on Income” section of this Financial Review and Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.

2018 Financial Report    
 
 
5


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Our Operating Environment

Industry-Specific Challenges

Intellectual Property Rights and Collaboration/Licensing Rights

The loss, expiration or invalidation of intellectual property rights, patent litigation settlements with generic manufacturers and the expiration of co-promotion and licensing rights can have a significant adverse effect on our revenues. Many of our branded products have multiple patents that expire at varying dates, thereby strengthening our overall patent protection. However, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, we lose exclusivity on these products, and generic pharmaceutical manufacturers generally produce similar products and sell them for a lower price. The date at which generic competition commences may be different from the date that the patent or regulatory exclusivity expires. However, when generic competition does commence, the resulting price competition can substantially decrease our revenues for the impacted products, often in a very short period of time. Also, if one of our patents is found to be invalid by judicial, court or administrative proceedings, such as inter partes review, post-grant review, re-examination or opposition proceedings, before the U.S. Patent and Trademark Office, the European Patent Office, or other foreign counterparts, generic or competitive products could be introduced into the market resulting in the erosion of sales of our existing products. For example, several of the patents in our pneumococcal vaccine portfolio were challenged in inter partes review and post-grant review proceedings in the U.S. In June 2018, the Patent Trial and Appeal Board ruled on one patent, holding that one claim was valid and that all other claims were invalid. The party challenging that patent has appealed the decision. Challenges to other patents remain pending before the U.S. Patent and Trademark Office. The invalidation of these patents could potentially allow a competitor pneumococcal vaccine into the marketplace.

A number of our current products have experienced patent-based expirations or loss of regulatory exclusivity in certain markets in the last few years. For example, as a result of a patent litigation settlement, Teva launched a generic version of Viagra in the U.S. in December 2017. In addition, the basic product patent for Lyrica in the U.S. will expire in June 2019, which includes the FDA’s grant of pediatric exclusivity that extended the period of market exclusivity in the U.S. for Lyrica for an additional six months from December 2018.
For additional information, see the “Recent Losses and Expected Losses of Product Exclusivity” section below.

Our biologic products, including BeneFIX, ReFacto, Xyntha, Bavencio, Prevnar 13/Prevenar 13 and Enbrel (we market Enbrel outside the U.S. and Canada), may face in the future, or already face, competition from biosimilars (also referred to as follow-on biologics). If competitors are able to obtain marketing approval for biosimilars referencing our biologic products, our biologic products may become subject to competition from these biosimilars, with attendant competitive pressure, and price reductions could follow. For example, Enbrel faces ongoing biosimilar competition in most developed Europe markets. The expiration or successful challenge of applicable patent rights could trigger this competition, assuming any relevant regulatory exclusivity period has expired.

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

Specifically:

Recent Losses and Expected Losses of Product Exclusivity
The following table provides information about certain of our products recently experiencing, or expected to experience in 2019, patent expirations or loss of regulatory exclusivity in the U.S., Europe or Japan, showing, by product, the key dates or expected key dates, the markets impacted and the revenues associated with those products in those markets:
(MILLIONS OF DOLLARS)
 
 
 
 
 
Product Revenues in Markets Impacted
Products
 
Key Dates(a)
 
Markets Impacted
 
Year Ended December 31,
 
 
 
 
 
 
2018

 
2017

 
2016

Viagra(b)
 
June 2013
May 2014
December 2017
 
Major European markets
Japan
U.S.
 
$
274

 
$
850

 
$
1,217

Lyrica(c)
 
July 2014
June 2019
 
Major European markets
U.S.
 
3,852

 
3,901

 
3,831

Zyvox(d)
 
August 2014
First half of 2015
January 2016
 
Japan
U.S.
Major European markets
 
62

 
103

 
235

Relpax
 
December 2015
December 2016
 
Major European markets
U.S.
 
90

 
176

 
263

Vfend
 
July 2016
January 2016
 
Major European markets
Japan
 
106

 
150

 
299

Tygacil
 
April 2016
 
U.S.
 
25

 
45

 
80

Pristiq(e)
 
March 2017
 
U.S.
 
71

 
133

 
578

(a) 
Unless stated otherwise, “Key Dates” indicate patent-based expiration dates.
(b) 
As a result of a patent litigation settlement, Teva launched a generic version of Viagra in the U.S. in December 2017.
(c) 
In November 2018, the FDA granted pediatric exclusivity for Lyrica in the U.S. for an additional six months to June 2019; pediatric exclusivity applies to both the basic product patent for Lyrica and a method of treatment patent, both of which expired in the U.S. in December 2018.
(d) 
Pursuant to terms of a settlement agreement, certain formulations of Zyvox became subject to generic competition in the U.S. in January 2015. Other formulations of Zyvox became subject to generic competition in the U.S. in the first half of 2015.
(e) 
As a result of a patent litigation settlement with several generic manufacturers, generic versions of Pristiq launched in the U.S. in March 2017.

6
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

For additional information, including the patent rights we consider most significant in relation to our business as a whole, together with the year in which the basic product patent expires, see the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business” of our 2018 Form 10-K.
Our financial results in 2018 reflect the impact of the loss of exclusivity of various products discussed above.
We will continue to aggressively defend our patent rights whenever we deem appropriate. For a discussion of certain recent developments with respect to patent litigation, see Notes to Consolidated Financial Statements––Note 17A1. Contingencies and Certain Commitments: Legal Proceedings––Patent Litigation.

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

In March 2010, the ACA was enacted in the U.S. For additional information, see the “Government Regulation and Price Constraints” section in Part I, Item 1, “Business”, of our 2018 Form 10-K.
We recorded the following amounts as a result of the U.S. Healthcare Legislation:


Year Ended December 31,
(MILLIONS OF DOLLARS)

2018


2017


2016

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

$
674


$
450


$
410

Selling, informational and administrative expenses, related to the fee payable to the federal government (which is not deductible for U.S. income tax purposes), based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs. 2018 also reflected a favorable true-up associated with the updated 2017 invoice received from the federal government, which reflected a lower expense than what was previously estimated for invoiced periods.

184


307


312


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

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

Governments, MCOs and other payer groups continue to seek increasing discounts on our products through a variety of means, such as leveraging their purchasing power, implementing price controls, and demanding price cuts (directly or by rebate actions). In Europe, Japan, China, Canada, South Korea and some other international markets, governments provide healthcare at low-to-zero direct cost to consumers at the point of care and have significant power as large single payers to regulate pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system, particularly under recent global economic pressures. In the U.S., government action to reduce federal spending on entitlement programs including Medicare and Medicaid may affect payment for our products or services provided using our products. Any significant spending reductions or cost controls affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented could have an adverse impact on our results of operations. Significant Medicare reductions could also result if, for example, Congress proceeds with certain proposals to convert the Medicare fee-for-service program into a premium support program, or Congress chooses to implement the recommendations made annually by the Medicare Payment Advisory Commission, which are primarily intended to extend the fiscal solvency of the Medicare program.

Consolidation among MCOs has increased the negotiating power of MCOs and other third-party payers. Private third-party payers, as well as governments, increasingly employ formularies to control costs by taking into account discounts in connection with decisions about formulary inclusion or favorable formulary placement. Failure to obtain or maintain timely or adequate pricing or favorable formulary placement for our products, or failure to obtain such formulary placement at favorable pricing, could adversely impact revenue.

Efforts by government officials or legislators to implement measures to regulate prices or payment for pharmaceutical products, including legislation on drug importation, could adversely affect our business if implemented. Recently, there has been considerable public and government scrutiny of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. At the federal level, for example, in May 2018, President Trump released his Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (Blueprint). Pfizer communicated a formal response to the request for information that accompanied the Blueprint, and is participating in the subsequent rule-making process to advance the proposals that are most likely to bring meaningful out-of-pocket cost relief to patients. Certain proposals in the Blueprint, and related drug pricing measures proposed since the Blueprint, could cause significant operational and reimbursement changes for the pharmaceutical industry. As another example, in October 2018, the Centers for Medicare and Medicaid Services solicited public comments on potential changes to payment for certain Medicare Part B drugs, including reducing the Medicare payment amount for selected Medicare Part B drugs to more closely align with international drug prices. In addition, in January 2019, the White House Office of Management and Budget released the long awaited proposed rule submitted by the Office of Inspector General of the Department of Health and Human Services to remove safe harbor protections for drug rebates paid to insurance plans and PBMs for Medicare Part D and Managed Medicaid

2018 Financial Report    
 
 
7


Financial Review
Pfizer Inc. and Subsidiary Companies

 

and to create new safe harbors. Among other changes, the proposed rule would explicitly exclude the reductions in price offered by drug manufacturers to PBMs in Medicare Part D and Managed Medicaid plans from protection under the “discount” safe harbor. It would also create a new safe harbor designed specifically for price reductions in pharmaceutical products, but only those that are fully reflected in the price to the patient at the pharmacy counter. Additionally, a new safe harbor was proposed to protect administrative fees paid to PBMs, which must be at fair market value, a fixed fee and not based upon a percentage of volume or list price. Manufacturers could continue to negotiate price reductions with PBMs and Medicare Part D and Managed Medicaid plans if their reductions meet that criterion. The proposed rule represents a large step toward significantly altering the current rebate model in place with MCOs. We are in the process of evaluating the implications of the proposed rule on our operations and processes, as well as the infrastructure that will be required in order to implement the rule once it is finalized. There have also been state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices. Certain state legislation has been subject to legal challenges. Adoption of new legislation regulating drug pricing at the federal or state level could further affect demand for, or pricing of, our products.

We believe medicines are the most efficient and effective use of healthcare dollars based on the value they deliver to the overall healthcare system. We will continue to work with lawmakers and advocate for solutions that effectively improve patient health outcomes, lower costs to the healthcare system, and ensure access to medicines within an efficient and affordable healthcare system.

There have been significant efforts at the federal and state levels to reform the healthcare system by enhancing access to healthcare, improving the delivery of healthcare and further rationalizing payment for healthcare. For example, we face uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA. For example, tax reform legislation enacted at the end of 2017 eliminates the tax penalty for individuals who do not maintain sufficient health insurance coverage beginning in 2019 (the so-called “individual mandate”). We anticipate continued Congressional interest in modifying provisions of the ACA, particularly given the recent ruling in Texas v. Azar to invalidate the law as unconstitutional. At this time, the law remains in effect pending appeals of the decision. Given the outcomes of the 2018 U.S. midterm elections with Democrats taking over the U.S. House of Representatives and Republicans growing their majority in the U.S. Senate, we believe it is unlikely Congress will find bipartisan consensus to advance any significant changes to the ACA until the legal process unfolds. The revenues generated for Pfizer by the health insurance exchanges and Medicaid expansion under the ACA are not material, so the impact of the change in law and similar recent administration actions is expected to be limited. Any future replacement, modification or repeal of the ACA may adversely affect our business and financial results, particularly if the legislation reduces incentives for employer-sponsored insurance coverage. As another example, the Bipartisan Budget Act of 2018, which increased the discount we pay in the Medicare Part D “coverage gap” from 50% to 70%, will modestly increase our future Medicare Part D rebates. Any future healthcare reform efforts may adversely affect our business and financial results.

Pfizer continues to monitor the ongoing dialogue around drug pricing and will take necessary action accordingly. After deferring previously announced price increases in July 2018, Pfizer increased the list price of certain products (comprising about 10% of its entire drug portfolio) effective January 15, 2019.

The potential for additional pricing and access pressures in the commercial sector continues to be significant. Some employers, seeking to avoid the tax on high-cost health insurance in the ACA to be imposed in 2022, are already scaling back healthcare benefits and an increasing number are implementing high deductible benefit designs. This is a trend that is likely to continue. Private third-party payers, such as health plans, increasingly challenge pharmaceutical product pricing, which could result in lower prices, lower reimbursement rates and a reduction in demand for our products. Pricing pressures for our products may occur as a result of highly competitive insurance markets. Healthcare provider purchasers, directly or through group purchasing organizations, are seeking enhanced discounts or implementing more rigorous bidding or purchasing review processes.

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

Outside the U.S., governments, including the different EU Member States, Japan, China, Canada and South Korea, may use a variety of cost-containment measures for our pharmaceutical products, including price cuts, mandatory rebates, health technology assessments, forced localization as a condition of market access and international reference pricing (i.e., the practice of a country linking its regulated medicine prices to those of other countries). This international patchwork of price regulation and differing economic conditions and incomplete value assessments across countries has led to varying health outcomes and some third-party trade in our products between countries.

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

In addition, several important multilateral organizations, such as the United Nations (UN), including the World Health Organization (WHO), and the Organization for Economic Cooperation and Development (OECD), are increasing scrutiny of international pharmaceutical pricing through issuing reports and policy recommendations (e.g., 2016 UN High Level Panel Report on Access to Medicines). Late in 2018, two new reports critical of the pharmaceutical industry’s pricing practices were published: OECD’s Pharmaceutical Innovation and Access to Medicines and WHO’s Pricing of Cancer Medicines and its Impacts. These reports and upcoming public forums focused on their recommendations will continue to exert additional pricing pressures.


8
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

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

Regulatory Environment––Pipeline Productivity

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

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

Competition

Many of our prescription pharmaceutical products face competition in the form of branded or generic drugs or biosimilars that treat similar diseases or indications. For additional information, see the “Competition” section in Part I, Item 1, “Business” of our 2018 Form 10-K.
The Global Economic Environment

In addition to the industry-specific factors discussed above, we, like other businesses of our size, are exposed to the economic cycle, which impacts our biopharmaceutical operations globally.
Governments, corporations, and insurance companies, which provide insurance benefits to patients, have implemented increases in cost-sharing and restrictions on access to medicines, potentially causing patients to switch to generic or biosimilar products, delay treatments, skip doses or use less effective treatments. Government financing pressures can lead to negative pricing pressure in various markets where governments take an active role in setting prices, access criteria (e.g., through public or private health technology assessments), or other means of cost control. Examples include the different EU Member States, Japan, China, Canada, South Korea and a number of other international markets. The U.S. continues to maintain competitive insurance markets, but has also seen significant increases in patient cost-sharing and growing government influence as government programs continue to grow as a source of coverage.
Significant portions of our revenues, costs and expenses, as well as our substantial international net assets, are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk also is managed through the use of derivative financial instruments and foreign currency debt. As we operate in multiple foreign currencies, including the euro, the Japanese yen, the Chinese renminbi, the U.K. pound, the Canadian dollar and approximately 100 other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses. If the U.S. dollar were to weaken against another currency, assuming all other variables remained constant, our revenues would increase, having a positive impact on earnings, and our overall expenses would increase, having a negative impact on earnings. Conversely, if the U.S. dollar were to strengthen against another currency, assuming all other variables remained constant, our revenues would decrease, having a negative impact on earnings, and our overall expenses would decrease, having a positive impact on earnings. Therefore, significant changes in foreign exchange rates can impact our results and our financial guidance.
The impact of possible currency devaluations in countries experiencing high inflation rates or significant exchange fluctuations, including Venezuela and Argentina, can impact our results and financial guidance. For further information about our exposure to foreign currency risk, see the “Analysis of Financial Condition, Liquidity and Capital Resources” and the “Our Financial Guidance for 2019” sections of this Financial Review.
In June 2016, the U.K. electorate voted in a referendum to leave the EU, which is commonly referred to as “Brexit”. In March 2017, the U.K. government formally notified the European Council of its intention to leave the EU after it triggered Article 50 of the Lisbon Treaty to begin the two-year negotiation process establishing the terms of the exit and outlining the future relationship between the U.K. and the EU. Formal negotiations officially started in June 2017. This process continues to be highly complex and the end result of these negotiations may pose certain implications to our research, commercial and general business operations in the U.K. and the EU, including the approval and supply of our products. The EMA will be relocating from London, U.K. to Amsterdam, Netherlands by the scheduled date of Brexit at the end of March 2019. At present, it is still unclear whether and to what extent the U.K. will remain within or aligned to the EU system of medicines regulation, and/or what separate requirements will be imposed in the U.K. after it leaves the EU. However, both the U.K. and the EU have issued detailed guidance for the industry on how medicines, medical devices and clinical trials will be separately regulated in their respective territories in the event of a ‘hard Brexit’, meaning an outcome where no negotiated settlement is reached.

2018 Financial Report    
 
 
9


Financial Review
Pfizer Inc. and Subsidiary Companies

 

We generated approximately 2% of our worldwide revenues from the U.K. in 2018 including the foreign currency exchange impact from the weakening U.K. pound relative to the U.S. dollar to date. We recognize that there are still significant uncertainties surrounding the ultimate resolution of Brexit negotiations, and we will continue to monitor any changes that may arise and assess their potential impact on our business.
Pfizer’s preparations are well advanced to make the changes necessary to meet EU legal requirements after the U.K. is no longer a member state, especially in the regulatory, research, manufacturing and supply chain areas. The aim is to ensure the continuity of supply to patients in Europe (EU and the U.K.) and other global markets impacted by these changes. The one-time costs of making these adaptations are currently estimated at approximately $100 million and are expected to be incurred between 2018 and 2021.
On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of the TCJA. The TCJA is complex and significantly changes the U.S. corporate income tax system by, among other things, reducing the U.S. Federal corporate tax rate from 35% to 21%, transitioning U.S. international taxation from a worldwide tax system to a territorial tax system and imposing a repatriation tax on deemed repatriated accumulated post-1986 earnings of foreign subsidiaries. For additional information, see the “Provision/(Benefit) for Taxes on Income” and “Analysis of Financial Condition, Liquidity and Capital Resources” sections of this Financial Review and Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from Continuing Operations.

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

These and other industry-wide factors that may affect our businesses should be considered along with information presented in the “Forward-Looking Information and Factors That May Affect Future Results” section of this Financial Review and in Part I, Item 1A, “Risk Factors” of our 2018 Form 10-K.
Our Strategy

We believe that our medicines provide significant value for both healthcare providers and patients, not only from the improved treatment of diseases but also from a reduction in other healthcare costs, such as emergency room or hospitalization costs, as well as improvements in health, wellness and productivity. We continue to actively engage in dialogues about the value of our medicines and how we can best work with patients, physicians and payers to prevent and treat disease and improve outcomes. We continue to work within the current legal and pricing structures, as well as continue to review our pricing arrangements and contracting methods with payers, to maximize patient access and minimize any adverse impact on our revenues. We remain firmly committed to fulfilling our company’s purpose: Breakthroughs that change patients’ lives. By doing so, we expect to create value for the patients we serve and for our shareholders.
Organizing for Growth
Today Pfizer has what we believe is the best pipeline in our history and several new industry-leading medicines that position us well for future growth. Following the impact of the expected patent expiration of Lyrica in the U.S. in mid-2019, we expect to enter a period of significantly reduced revenue impact from patent expiries. This confluence of events has given us an opportunity to look at and refine how we organize our business to best achieve sustainable growth and to deliver our medicines and vaccines to the maximum number of people who need them.
At the beginning of our fiscal year 2019, we began to manage our commercial operations through a new global structure consisting of three businesses, each of which is led by a single manager—Pfizer Biopharmaceuticals Group (Biopharma), Upjohn and Pfizer’s Consumer Healthcare business. We designed this new global structure to take advantage of new growth opportunities driven by the evolving and unique dynamics of relevant markets.
Some additional information about each business follows:
Biopharma—a science-based innovative medicines business that includes our Innovative Health business units (except our Consumer Healthcare business), as well as a new Hospital business unit that commercializes our global portfolio of sterile injectable and anti-infective medicines. We also incorporated our biosimilar portfolio into our Oncology and Inflammation & Immunology therapeutic areas.
Upjohn—an off-patent branded and generic established medicines business, headquartered in China that includes 20 of our off-patent solid oral dose legacy brands including Lyrica, Lipitor, Norvasc, Viagra and Celebrex, as well as certain generic medicines.
Pfizer’s Consumer Healthcare business—an over-the-counter medicines business, which we announced on December 19, 2018 will be contributed to, and combined with, GSK’s consumer healthcare business to form a new consumer healthcare joint venture, of which we will own 32%. See Notes to Consolidated Financial Statements––Note 2C. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment: Assets and Liabilities Held for Sale.
We also reorganized our R&D operations as part of our Organizing for Growth reorganization:
WRD is renamed Worldwide Research, Development and Medical (WRDM) as we have created a new Worldwide Medical & Safety organization in WRD that incorporates the former Chief Medical Office as well as the Worldwide Safety function;
The R&D organization within the EH business has been integrated into the WRDM, GPD and Upjohn organizations, including moving biosimilars into WRDM and GPD and realigning them with the relevant therapeutic areas (e.g., Oncology and Inflammation & Immunology);
The Regulatory function has been moved from the WRDM organization into the GPD organization; and
Late-stage portfolio spend has been moved from IH to GPD and from EH to GPD and Upjohn.

10
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

We re-aligned our commercial operations in 2019 for a number of reasons, including:
Bringing biosimilars into their therapeutic categories gives us the potential to leverage our R&D, regulatory and commercial infrastructure within the Biopharma business to more efficiently bring those assets to market;
Making a business unit that is solely focused on medicines that are used in hospitals can potentially bring greater focus and attention to serving those customers and developing those relationships;
Giving the Upjohn business more autonomy and a focus on maximizing the value of its products, particularly in emerging markets, gives it the opportunity to operate as a standalone business within Pfizer with the potential for sustainable modest growth; and
We believe this new structure better positions each business to achieve its growth potential as we transition to a period post-2020 where we expect higher and more sustained revenue growth due to declining LOEs and the potential of our late-stage pipeline.
Biopharma seeks to leverage a strong pipeline, organize around operational growth drivers, and capitalize on trends creating long-term growth opportunities, including:
An aging global population that is generating increased demand for innovative medicines that address patients’ unmet needs;
Advances in both biological science and digital technology that are enhancing the delivery of breakthrough new medicines; and
The increasingly significant role of hospitals in healthcare systems.
Urbanization and the rise of the middle class in emerging markets, particularly in Asia, provide growth opportunities for the Upjohn business. Our ability to work collaboratively within local markets and to be fast, focused and flexible is intended to position this business to seize these opportunities. Upjohn will have distinct and dedicated manufacturing, marketing, regulatory and, subject to limited exceptions, enabling functions that report directly into the business providing autonomy and positioning Upjohn to operate as a true stand-alone division. We created this new structure to, among other things, position Upjohn to optimize its distinct growth potential and provide us with the flexibility to access further opportunities to enhance value, which we continue to consider.
Results for 2018 and prior periods in our 2018 Form 10-K and in this 2018 Financial Report are reported on the basis under which we managed our business in 2018 and do not reflect the 2019 reorganization. Beginning with our first-quarter 2019 financial results, our financial reporting will reflect the new organizational structure. We are evaluating the impact to our operating segments and other costs and activities based on how the businesses are managed in 2019.
As we prepare for expected growth, we are focused on creating a simpler, more efficient organization by streamlining structures, process and governance within each business and the functions that support them. As our innovative pipeline matures with the anticipated progression of current trials and the initiation of new pivotal trials, we will need to increase our R&D investments. In addition, as our pipeline potentially delivers new commercialization opportunities, we will need to increase our investments in new-market-creation activities. We are also initiating an enterprise-wide digital effort to help speed up drug development, enhance patient and physician experiences and access and leverage technology and robotics to simplify and automate our processes.
In the fourth quarter of 2018, we took steps to simplify the organization, increase spans of control and reduce organizational layers, which impacted some managerial roles and responsibilities. The impacts of these voluntary and involuntary plans were recorded as a special termination benefit, as well as severance in the fourth quarter of 2018, and were reflected as Certain Significant Items and excluded from our non-GAAP measure of Adjusted Income. We also offered enhancements to certain employee benefits for a short period of time. The expenses related to these enhancements for certain employee benefits did not have a material impact on our 2018 results of operations and any expected future impact of these enhancements are reflected in the totality of our annual guidance for 2019. To partially offset the incremental cost increases of increased R&D investments and marketing activities in future periods, we expect to generate cost reduction opportunities, particularly in indirect SI&A.

Commercial Operations

From the second quarter of our 2016 fiscal year until the end of 2018, we managed our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). The IH and EH operating segments were each led by a single manager. Each operating segment had responsibility for its commercial activities and for certain IPR&D projects for new investigational products and additional indications for in-line products that generally have achieved proof-of-concept. Each business had a geographic footprint across developed and emerging markets.

2018 Financial Report    
 
 
11


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Some additional information about our business segments as of December 31, 2018 (prior to our new 2019 commercial organizational re-alignment) follows:
pihlogo.jpg
 
pehlogo.jpg
IH focused on developing and commercializing novel, value-creating medicines and vaccines that significantly improve patients’ lives, as well as products for consumer healthcare.

Key therapeutic areas included internal medicine, vaccines, oncology, inflammation & immunology, rare disease and consumer healthcare.
 
EH included legacy brands that have lost or will soon lose market exclusivity in both developed and emerging markets, branded generics, generic sterile injectable products, biosimilars and select branded products including anti-infectives. EH also included an R&D organization, as well as our contract manufacturing business. Through February 2, 2017, EH also included HIS.
Leading brands included:
- Prevnar 13/Prevenar 13
- Xeljanz
- Eliquis
- Lyrica (U.S., Japan and certain other markets)
-
Enbrel (outside the U.S. and Canada)
-
Ibrance
- Xtandi
- Chantix/Champix
- Several OTC consumer healthcare products*
 
Leading brands included:
- Lipitor
- Norvasc
- Lyrica
(Europe, Russia, Turkey, Israel and Central Asia countries)
-
Celebrex
- Viagra**
- Inflectra/Remsima
- Sulperazon
-
Several other sterile injectable products
*
According to Nicholas Hall’s retail sales data (based on moving annual total data through the third quarter of 2018), in 2018, 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 healthcare brands (Centrum and Advil) in the world.
**
Viagra lost exclusivity in the U.S. in December 2017. In 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, were reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, in 2018, total Viagra worldwide revenues were reported in EH.
For additional information about the 2018 performance of each of our operating segments, see the “Analysis of Operating Segment Information” section of this Financial Review.
Description of Research and Development Operations

The following description of R&D operations reflects operations as of December 31, 2018.
Innovation is critical to the success of our company, and drug discovery and development is time-consuming, expensive and unpredictable. Our goal is to discover, develop and bring to market innovative products that address major unmet medical needs. Our R&D priorities include:
delivering a pipeline of differentiated therapies and vaccines with the greatest medical and commercial potential;
advancing our capabilities that can position Pfizer for long-term leadership; and
creating new models for biomedical collaboration that will expedite the pace of innovation and productivity.
To that end, our R&D primarily focuses on:
Inflammation and Immunology;
Internal Medicine;
Oncology;
Rare Diseases;
Vaccines; and
Biosimilars.
In January 2018, we announced our decision to end internal neuroscience discovery and early development efforts and re-allocate funding to other areas where we have stronger scientific leadership. The development of tanezumab and potential treatments for rare neuromuscular disorders is not impacted by this decision. In June 2018, we announced our plan to invest up to $600 million in biotechnology and other emerging growth companies through Pfizer Ventures, our venture investment vehicle. 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. For additional information on the transaction with Bain Capital, see the Notes to Consolidated Financial Statements––Note 2B. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment: Divestitures.

In 2018, we continued to strengthen our global R&D organization and pursue strategies intended to improve innovation and overall productivity in R&D to achieve a sustainable pipeline that is positioned to deliver value in the near term and over time. Our R&D spending was conducted through a number of matrix organizations:
Research Units within our WRD organization were generally responsible for research and early-stage development assets for our IH business (assets that have not yet achieved proof-of-concept). Our Research Units were organized by therapeutic area to enhance flexibility, cohesiveness and focus. Because of our structure, we were able to rapidly redeploy resources within a Research Unit between various projects as necessary because in many instances the workforce shares similar skills, expertise and/or focus.

12
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Our R&D organization within the EH business supported the large base of EH products and helped develop potential new sterile injectable drugs and therapeutic solutions, as well as biosimilars.
Our GPD organization, a unified center for late-stage development for our innovative products that was generally responsible for the operational execution of clinical trials for both early-stage assets in the WRD portfolio as well as late-stage assets in the Innovative portfolio. For WRD assets, GPD worked in close collaboration with the Early Clinical Development group, which has expertise in various disciplines such as Biostatistics, Clinical Pharmacology and Digital Medicine. GPD helped enable more efficient and effective development and enhance our ability to accelerate and progress assets through our pipeline.
Our science-based and other platform-services organizations, where a significant portion of our R&D spending occurred, provided technical expertise and other services to the various R&D projects, and were organized into science-based functions (which were part of our WRD organization), such as Pharmaceutical Sciences, Medicine Design, Regulatory and Drug Safety, and non-science-based functions, such as Facilities, Business Technology and Finance. As a result, within each of these functions, we were able to migrate resources among projects, candidates and/or targets in any therapeutic area and in most phases of development, allowing us to react quickly in response to evolving needs.

We manage R&D operations on a total-company basis through our matrix organizations described above. Specifically, a single committee with representation from the R&D groups and the IH commercial organization was accountable for aligning resources among all of our WRD, GPD and IH R&D projects and for seeking to ensure optimal capital allocation across the Innovative R&D portfolio. We believe that this approach also served to maximize accountability and flexibility. Our EH R&D organization managed its resources separately from the WRD and GPD organizations.

Generally, we do not disaggregate total R&D expense by development phase or by therapeutic area since, as described above, we do not manage a significant portion of our R&D operations by development phase or by therapeutic area. Further, as we are able to adjust a significant portion of our spending quickly, as conditions change, we believe that any prior-period information about R&D expense by development phase or by therapeutic area would not necessarily be representative of future spending.

While a significant portion of R&D is done internally, we continue to seek out promising chemical and biological lead molecules and innovative technologies developed by third parties to incorporate into our discovery and development processes or projects, as well as our product lines, by entering into collaboration, alliance and license agreements with other companies, as well as leveraging acquisitions and equity- or debt-based investments. These agreements enable us to co-develop, license or acquire promising compounds, technologies or capabilities. We also enter into agreements pursuant to which a third party agrees to fund a portion of the development costs of one or more of our pipeline products in exchange for rights to receive potential milestone payments, revenue sharing payments, profit sharing payments and/or royalties. Collaboration, alliance, license and funding agreements and equity- or debt-based investments allow us to share risk and cost and to access external scientific and technological expertise, and provide us the opportunity to advance our own products as well as the in-licensed or acquired products.

For additional information about R&D by operating segment, see the “Analysis of Operating Segment Information” section of this Financial Review. For additional information about our pending new drug applications and supplemental filings, see the “Analysis of the Consolidated Statements of Income––Product Developments––Biopharmaceutical” section of this Financial Review. For additional information about recent transactions and strategic investments that we believe have the potential to advance our pipeline, see the “Our Business Development Initiatives” section of this Financial Review.
Intellectual Property Rights
We continue to aggressively defend our patent rights whenever appropriate against increasingly aggressive infringement, and we will continue to support efforts that strengthen worldwide recognition of patent rights while taking necessary steps to ensure appropriate patient access. In addition, we will continue to employ innovative approaches designed to prevent counterfeit pharmaceuticals from entering the supply chain and to achieve greater control over the distribution of our products, and we will continue to participate in the generics market for our products, whenever appropriate, once they lose exclusivity. Also, the pursuit of valid business opportunities may require us to challenge intellectual property rights held by other companies that we believe were improperly granted. Such challenges may include negotiation and litigation, which may not always be successful. For additional information about our current efforts to enforce our intellectual property rights and certain other patent proceedings, see Notes to Consolidated Financial Statements––Note 17A1. Contingencies and Certain Commitments: Legal Proceedings––Patent Litigation. For information on risks related to patent protection and intellectual property claims by third parties, see Part I, Item 1A, “Risk Factors––Risks Related to Intellectual Property” in our 2018 Form 10-K.
Capital Allocation and Expense Management
We seek to maintain a strong balance sheet and robust liquidity so that we continue to have the financial resources necessary to take advantage of prudent commercial, research and business development opportunities and to directly enhance shareholder value through share repurchases and dividends. For additional information about our financial condition, liquidity, capital resources, share repurchases (including accelerated share repurchases) and dividends, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review. For additional information about our recent business development activities, see the “Our Business Development Initiatives” section of this Financial Review.
In December 2018, our Board of Directors declared a first-quarter 2019 dividend of $0.36 per share, an increase from the $0.34 per-share quarterly dividend paid during 2018. For additional information, see the “Analysis of Financial Condition, Liquidity and Capital Resources” section of this Financial Review and Notes to Consolidated Financial Statements––Note 12. Equity.

We remain focused on achieving an appropriate cost structure for our company. For additional information about our cost-reduction and productivity initiatives, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-

2018 Financial Report    
 
 
13


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Reduction/Productivity Initiatives” section of this Financial Review and Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Increasing Investment in the U.S.––After evaluating the expected positive net impact the TCJA will have on us, in early 2018, we decided to take several actions:
Over the five-year period from 2018 through 2022, we plan to invest approximately $5.0 billion in capital projects in the U.S., including the strengthening of our manufacturing presence in the U.S. As part of this plan, in July 2018, we announced that we will increase our commitment to U.S. manufacturing with a $465 million investment to build one of the most technically advanced sterile injectable pharmaceutical production facilities in the world in Portage, Michigan. This U.S. investment will strengthen our capability to produce and supply critical, life-saving injectable medicines for patients around the world. Known as Modular Aseptic Processing, the new, multi-story, 400,000-square-foot production facility will also support the area economy by creating an estimated 450 new jobs over the next several years.
We made a $500 million voluntary contribution to the U.S. Pfizer Consolidated Pension Plan in February 2018.
In the fourth quarter of 2017, we made a $200 million charitable contribution to the Pfizer Foundation, an organization that provides grant and investment funding to support organizations and social entrepreneurs in an effort to improve healthcare delivery.
In the first quarter of 2018, we paid a special, one-time bonus to virtually all Pfizer colleagues, excluding executives, of $119 million in the aggregate.

Our Business Development Initiatives
We are committed to capitalizing on growth opportunities by advancing our own pipeline and maximizing the value of our in-line products, as well as through various forms of business development, which can include alliances, licenses, joint ventures, collaborations, equity- or debt-based investments, dispositions, mergers and acquisitions. We view our business development activity as an enabler of our strategies, and we seek to generate earnings growth and enhance shareholder value by pursuing a disciplined, strategic and financial approach to evaluating business development opportunities. We continue to evaluate business development transactions that have the potential to strengthen our businesses and their capabilities, such as our acquisitions of Hospira, Medivation, Anacor and AstraZeneca’s small molecule anti-infectives business, as well as collaborations, and alliance and license agreements with other companies. We assess our businesses, assets and scientific capabilities/portfolio as part of our regular, ongoing portfolio review process and also continue to consider business development activities that will advance our businesses.

For additional information on our business development activities, see Notes to Consolidated Financial Statements––Note 2. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment.
The more significant recent transactions and events are described below:
Agreement to Form a New Consumer Healthcare Joint Venture (IH)––On December 19, 2018, we announced that we entered into a definitive agreement with GSK under which we and GSK agreed to combine our respective consumer healthcare businesses into a new consumer healthcare joint venture that will operate globally under the GSK Consumer Healthcare name. The joint venture is expected to be a category leader in pain relief, respiratory, vitamin and mineral supplements, digestive health, skin health and therapeutic oral health and will be the largest global OTC consumer healthcare business.
Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)––On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, to ICU Medical. In connection with this transaction, we recognized pre-tax income of $1 million in 2018 and pre-tax losses of $55 million in 2017 in Other (income)/deductions––net, representing adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell.
Acquisition of 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. The total fair value of the consideration transferred for this business was approximately $1,040 million, inclusive of cash paid and the fair value of contingent consideration.
Acquisition of Medivation, Inc. (IH)––On September 28, 2016, we acquired Medivation for $81.50 per share. The total fair value of consideration transferred for Medivation was approximately $14.3 billion in cash ($13.9 billion, net of cash acquired). Medivation’s portfolio includes Xtandi (enzalutamide), an androgen receptor inhibitor that blocks multiple steps in the androgen receptor signaling pathway within tumor cells, and talazoparib, which was approved by the FDA in October 2018, under the trade name Talzenna, for the treatment of adults with germline BRCA-mutated HER2-negative locally advanced or metastatic breast cancer and is currently in development for other types of cancer. Xtandi is being developed and commercialized through a collaboration with Astellas. Astellas has exclusive commercialization rights for Xtandi outside the U.S.
Acquisition of Bamboo Therapeutics, Inc. (IH)––On August 1, 2016, we acquired all the remaining equity in Bamboo, a privately-held biotechnology company focused on developing gene therapies for the potential treatment of patients with certain rare diseases relating to neuromuscular conditions and those affecting the central nervous system, for $150 million plus potential milestone payments of up to $495 million contingent upon the progression of key assets through development, regulatory approval and commercialization.
Acquisition of Anacor Pharmaceuticals, Inc. (IH)––On June 24, 2016, we acquired Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion net of cash acquired) plus $698 million debt assumed. Anacor’s crisaborole, a non-steroidal topical PDE-4 inhibitor with anti-inflammatory properties, was approved by the FDA in December 2016 under the trade name, Eucrisa, for the treatment of mild-to-moderate atopic dermatitis in patients two years of age and older, commonly referred to as a type of eczema. Anacor also holds the rights to Kerydin, a topical treatment for onychomycosis (toenail fungus) that is distributed and commercialized by Sandoz in the U.S.

14
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Research and Development Arrangement with NovaQuest Co-Investment Fund II, L.P.––On November 1, 2016, we announced the discontinuation of the global clinical development program for bococizumab. During December 2016, $31.3 million was refunded to NovaQuest representing amounts NovaQuest prepaid for development costs (under the May 2016 agreement described below) that were not used for program expenses due to the discontinuation of the development program. No additional payments have been or are expected to be received from or paid to NovaQuest with respect to this agreement, which was terminated effective as of November 18, 2016.
In May 2016, our agreement with NovaQuest became effective, under which NovaQuest agreed to fund up to $250 million in development costs related to certain Phase 3 clinical trials of Pfizer’s bococizumab compound and Pfizer agreed to use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. NovaQuest’s development funding was expected to cover up to 40% of the development costs and was to be received over five quarters during 2016 and 2017. As there was a substantive and genuine transfer of risk to NovaQuest, the development funding applicable to program expenses during 2016 was recognized as an obligation to perform contractual services and therefore has been recognized as a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for 2016 totaled $180.3 million.
Research and Development Arrangement with NovaQuest Co-Investment Fund V, L.P.––In April 2016, Pfizer entered into an agreement with NovaQuest under which NovaQuest would fund up to $200 million in development costs related to certain Phase 3 clinical trials of Pfizer’s rivipansel compound and Pfizer will use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. NovaQuest’s development funding is expected to cover up to 100% of the development costs and will be received over approximately 13 quarters from 2016 through the second quarter of 2019 after which Pfizer will be responsible for the remaining development costs. As there is a substantive and genuine transfer of risk to NovaQuest, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses totaled $57.6 million for 2018, $72.1 million for 2017 and $46.6 million for 2016. Following potential regulatory approval, NovaQuest will be eligible to receive a combination of fixed milestone payments of up to approximately $267 million in total, based on achievement of first commercial sale and certain levels of cumulative net sales as well as royalties on rivipansel net sales over approximately eight years. Fixed sales-based milestone payments will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the rivipansel product and royalties on net sales will be recorded as Cost of sales when incurred.
Research and Development Arrangement with RPI Finance Trust––In January 2016, Pfizer entered into an agreement with RPI, a subsidiary of Royalty Pharma, under which RPI would fund up to $300 million in development costs related to certain Phase 3 clinical trials of Pfizer’s Ibrance (palbociclib) product primarily for adjuvant treatment of hormone receptor positive early breast cancer (the Indication). RPI’s development funding is expected to cover up to 100% of the costs primarily for the applicable clinical trials until the second quarter of 2020 after which Pfizer will be responsible for the remaining cost of the trials. As there is a substantive and genuine transfer of risk to RPI, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses totaled $99.3 million in 2018, $75.6 million for 2017 and $44.9 million for 2016. If successful and upon approval of Ibrance in the U.S. or certain major markets in the EU for the Indication based on the applicable clinical trials, RPI will be eligible to receive a combination of approval-based fixed milestone payments of up to $250 million dependent upon results of the clinical trials and royalties on certain Ibrance sales over approximately seven years. Fixed milestone payments due upon approval will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the Ibrance product and sales-based royalties will be recorded as Cost of sales when incurred.

Our Financial Guidance for 2019
The following table provides our financial guidance for full-year 2019(a), (b):
Revenues
$52.0 to $54.0 billion
Adjusted cost of sales as a percentage of revenues
20.8% to 21.8%
Adjusted selling, informational and administrative expenses
$13.5 to $14.5 billion
Adjusted research and development expenses
$7.8 to $8.3 billion
Adjusted other (income)/deductions
Approximately $100 million of income
Effective tax rate on adjusted income
Approximately 16.0%
Adjusted diluted EPS
$2.82 to $2.92
(a) 
The 2019 financial guidance reflects the following:
A full year of revenue and expense contributions from Pfizer’s Consumer Healthcare business.
Does not assume the completion of any business development transactions not completed as of December 31, 2018, including any one-time upfront payments associated with such transactions.
Financial guidance for Adjusted other (income)/deductions and Adjusted diluted EPS now excludes the impact of gains and losses on investments in equity securities. In 2018, Pfizer’s 2018 financial results included net gains on investments in equity securities, which favorably impacted Adjusted other (income)/deductions by $586 million and Adjusted diluted EPS(2) by approximately $0.08 in 2018. Beginning In 2019, we will exclude the gains and losses from equity securities from our measure of Adjusted income because of their inherent volatility, which we do not control and cannot predict with any level of certainty and because we do not believe that including these gains and losses assists investors in understanding our business or is reflective of our core operations and business. For example, we contributed assets related to our allogeneic CAR T therapy to Allogene and received equity securities. We will restate our Adjusted income and Adjusted diluted EPS for prior periods for consistency with our 2019 presentation.
Reflects an anticipated negative revenue impact of $2.6 billion due to recent and expected generic and biosimilar competition for certain products that have recently lost or are anticipated to soon lose patent protection.
Exchange rates assumed are as of mid-January 2019. Reflects the anticipated unfavorable impact of approximately $0.9 billion on revenues and approximately $0.06 on adjusted diluted EPS as a result of changes in foreign exchange rates relative to the U.S. dollar compared to foreign exchange rates from 2018.
Guidance for adjusted diluted EPS assumes diluted weighted-average shares outstanding of approximately 5.7 billion shares, which reflects share repurchases totaling $12.2 billion in 2018 and the weighted-average impact of an anticipated approximately $9 billion of share repurchases in 2019, which

2018 Financial Report    
 
 
15


Financial Review
Pfizer Inc. and Subsidiary Companies

 

have been completed through February 28, 2019. Dilution related to share-based employee compensation programs is currently expected to offset the reduction in shares associated with these share repurchases by approximately half.
(b) 
For an understanding of Adjusted income and its components and Adjusted diluted EPS (all of which are non-GAAP financial measures), see the “Non-GAAP Financial Measure (Adjusted Income)” section of this Financial Review.
Pfizer does not provide guidance for GAAP Reported financial measures (other than revenues) or a reconciliation of forward-looking non-GAAP financial measures to the most directly comparable GAAP Reported financial measures on a forward-looking basis because it is unable to predict with reasonable certainty the ultimate outcome of pending litigation, unusual gains and losses, acquisition-related expenses, net gains or losses on equity securities and potential future asset impairments without unreasonable effort. These items are uncertain, depend on various factors, and could have a material impact on GAAP Reported results for the guidance period.
For information about our actual costs and anticipated costs and cost savings associated with our three-year cost-reduction initiative entered into in the fourth quarter of 2016, the Hospira acquisition, our recent business development activities, and global commercial structure, see the “Costs and Expenses––Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this Financial Review and Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Our 2019 financial guidance is subject to a number of factors and uncertainties as described in the “Our Operating Environment”, “The Global Economic Environment”, “Our Strategy” and “Forward-Looking Information and Factors That May Affect Future Results” sections of this Financial Review; and Part I, Item 1A, “Risk Factors” of our 2018 Form 10-K.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

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

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

Acquisitions and Fair Value

For a discussion about the application of fair value to our recent acquisitions, see Notes to Consolidated Financial Statements—Note 2A. Acquisitions, Divestitures, Assets and Liabilities Held for Sale, Licensing Arrangements, Research and Development and Collaborative Arrangements, Equity-Method Investments and Privately Held Investment: Acquisitions.

For a discussion about the application of fair value to our investments, see Notes to Consolidated Financial Statements—Note 7A. Financial Instruments: Fair Value Measurements.

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

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

Revenues

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

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

Asset Impairment Reviews

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

16
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

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

Identifiable Intangible Assets

As a result of our identifiable intangible asset impairment review work, we recognized a number of impairments of identifiable intangible assets for the years ended December 31, 2018, 2017 and 2016. See Notes to Consolidated Financial Statements––Note 4. Other (Income)/DeductionsNet.
When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

While all intangible assets other than goodwill can face events and circumstances that can lead to impairment, in general, intangible assets other than goodwill that are most at risk of impairment include IPR&D assets (approximately $2.2 billion as of December 31, 2018) and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are high-risk assets, as R&D is an inherently risky activity. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment as the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value at the end of each reporting period. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.

Goodwill

As a result of our goodwill impairment review work, we concluded that none of our goodwill was impaired as of December 31, 2018, and we do not believe the risk of impairment is significant at this time.

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

When we are required to determine the fair value of a reporting unit, as appropriate for the individual reporting unit, we mainly use the income approach but we may also use the market approach, or a weighted-average combination of both approaches.
The income approach is a forward-looking approach to estimating fair value and relies primarily on internal forecasts. Within the income approach, the method that we use is the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then we apply a reporting unit-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of technological risk and competitive, legal and/or regulatory forces on the projections, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.
The market approach is a historical approach to estimating fair value and relies primarily on external information. Within the market approach are two methods that we may use:
Guideline public company method—this method employs market multiples derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market and the application of the identified multiples to the corresponding measure of our reporting unit’s financial performance.
Guideline transaction method—this method relies on pricing multiples derived from transactions of significant interests in companies engaged in the same or similar lines of business and the application of the identified multiples to the corresponding measure of our reporting unit’s financial performance.
The market approach is only appropriate when the available external information is robust and deemed to be a reliable proxy for the specific reporting unit being valued; however, these assessments may prove to be incomplete or inaccurate. Some of the more significant estimates and assumptions inherent in this approach include: the selection of appropriate guideline companies and transactions and the determination of applicable premiums and discounts based on any differences in ownership percentages, ownership rights, business ownership forms or marketability between the reporting unit and the guideline companies and transactions.

2018 Financial Report    
 
 
17


Financial Review
Pfizer Inc. and Subsidiary Companies

 

For all of our reporting units, there are a number of future events and factors that may impact future results and that could potentially have an impact on the outcome of subsequent goodwill impairment testing. For a list of these factors, see the “Forward-Looking Information and Factors That May Affect Future Results” section of this Financial Review and Part I, Item 1A, “Risk Factors” in our 2018 Form 10-K.
Benefit Plans

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

The accounting for benefit plans is highly dependent on actuarial estimates, assumptions and calculations, which can result from a complex series of judgments about future events and uncertainties. The assumptions and actuarial estimates required to estimate the net employee benefit obligations for the defined benefit and postretirement plans include the discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality (life expectancy); expected return on plan assets; and healthcare cost trend rates.

Effective January 1, 2018, accruals for future benefits under the Pfizer Consolidated Pension Plan (our largest U.S. defined benefit plan) and the defined benefit section of the Pfizer Group Pension Scheme (our largest pension plan in the U.K.) were frozen and resulted in elimination of future service costs for the plans. The Pfizer defined contribution savings plan provides additional annual contributions to those previously accruing benefits under the Pfizer Consolidated Pension Plan and active members of the Pfizer Group Pension Scheme started accruing benefits under the defined contribution section of that plan.

As of December 31, 2018, the noncurrent portion of our pension benefit obligations, net, and our postretirement benefit obligations, net decreased, in the aggregate, by approximately $747 million compared to December 31, 2017. The decrease reflects, among other things, the $500 million voluntary contribution we made to the U.S. Pfizer Consolidated Pension Plan in February 2018 and an increase in the discount rate used in the measurement of plan obligations, partially offset by the decrease in the actual returns on plan assets.

Our assumptions reflect our historical experiences and our judgment regarding future expectations that have been deemed reasonable by management. The judgments made in determining the costs of our benefit plans can materially impact our results of operations.
The following table provides (i) at the end of each year, the expected annual rate of return on plan assets for the following year, (ii) the actual annual rate of return on plan assets achieved in each year, and (iii) the weighted-average discount rate used to measure the benefit obligations at the end of each year for our U.S. qualified pension plans and our international pension plans(a):
 
 
2018

 
2017

 
2016

U.S. Qualified Pension Plans
 
 
 
 
 
 
Expected annual rate of return on plan assets
 
7.2
 %
 
7.5
%
 
8.0
%
Actual annual rate of return on plan assets
 
(5.3
)
 
16.2

 
8.1

Discount rate used to measure the plan obligations
 
4.4

 
3.8

 
4.3

International Pension Plans
 
 
 
 
 
 
Expected annual rate of return on plan assets
 
3.9

 
4.4

 
4.7

Actual annual rate of return on plan assets
 
(0.9
)
 
10.3

 
9.3

Discount rate used to measure the plan obligations
 
2.5

 
2.3

 
2.4

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

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

The expected annual rate of return on plan assets for our U.S. plans and the majority of our international plans is applied to the fair value of plan assets at each year-end and the resulting amount is reflected in our net periodic benefit costs in the following year.
The following table illustrates the sensitivity of net periodic benefit costs to a 50 basis point decline in our assumption for the expected annual rate of return on plan assets, holding all other assumptions constant (in millions, pre-tax):
 
 
Change
 
Increase in 2019 Net Periodic Benefit Costs
Assumption
 
 
 
 
Expected annual rate of return on plan assets
 
50 basis point decline
 
$104

The actual return on plan assets resulted in a net loss on our plan assets of approximately $895 million during 2018.


18
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Discount Rate Used to Measure Plan Obligations

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

The measurement of the plan obligations at the end of the year will affect the amount of service cost, interest cost and amortization expense reflected in our net periodic benefit costs in the following year.
The following table illustrates the sensitivity of net periodic benefit costs and benefit obligations to a 10 basis point decline in our assumption for the discount rate, holding all other assumptions constant (in millions, pre-tax):
 
 
Change
 
Increase in 2019 Net Periodic Benefit Costs
 
2018 Benefit Obligations
Assumption
 
 
 
Increase
 
Increase
Discount rate
 
10 basis point decline
 
$13
 
$417

The change in the discount rates used in measuring our plan obligations as of December 31, 2018 resulted in a decrease in the measurement of our aggregate plan obligations by approximately $1.5 billion.
Income Tax Assets and Liabilities

In the fourth quarter of 2017, we recorded an estimate of certain tax effects of the TCJA, including (i) the impact on deferred tax assets and liabilities from the reduction in the U.S. Federal corporate tax rate from 35% to 21%, (ii) the impact on valuation allowances and other state income tax considerations, (iii) a repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect, with the filing of our 2018 U.S. Federal Consolidated Income Tax Return, payment over eight years through 2026 that is reported in Other taxes payable in our consolidated balance sheet as of December 31, 2017, and (iv) 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, in the fourth quarter of 2017, 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 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 elected to recognize deferred taxes for temporary differences expected to reverse as global intangible low-taxed income in future years. We were able to make a reasonable estimate of the deferred taxes on the temporary differences expected to reverse in the future and provided a provisional deferred tax liability as of December 31, 2017.
In 2018, we finalized our provisional accounting for the tax effects of the TCJA based on our best estimates of available information and data, and have reported and disclosed the impacts within the applicable measurement period, in accordance with guidance issued by the SEC. The amounts recorded may change in the future due to uncertain tax positions. With respect to the aforementioned repatriation tax liability, the first installment, due in April 2019, is reported in Income taxes payable, and the remaining liability is reported in Other taxes payable in our consolidated balance sheet as of December 31, 2018. We believe that there may be additional interpretations, clarifications and guidance from the U.S. Department of Treasury. Any change to our calculations resulting from such additional interpretations, clarifications and guidance would be reflected in the period of issuance. In addition, 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.
Income tax assets and liabilities also include income tax valuation allowances and accruals for uncertain tax positions. For additional information, see Notes to Consolidated Financial Statements—Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions; Note 1P. Basis of Presentation and Significant Accounting Policies: Tax Assets and Liabilities and Income Tax Contingencies and Note 5A. Tax Matters: Taxes on Income from Continuing Operations, as well as the “Analysis of Financial Condition, Liquidity and Capital Resources––Selected Measures of Liquidity and Capital Resources—Contractual Obligations” section of this Financial Review.

Contingencies

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

For a discussion about legal and environmental contingencies, guarantees and indemnifications, see Notes to Consolidated Financial Statements—Note 17. Contingencies and Certain Commitments

2018 Financial Report    
 
 
19


Financial Review
Pfizer Inc. and Subsidiary Companies

 

ANALYSIS OF THE CONSOLIDATED STATEMENTS OF INCOME
  
 
Year Ended December 31,
 
% Change
(MILLIONS OF DOLLARS)
 
2018
 
2017
 
2016
 
18/17
 
17/16
Revenues
 
$
53,647

 
$
52,546

 
$
52,824

 
2

 
(1
)
Cost of sales
 
11,248

 
11,228

 
12,322

 

 
(9
)
% of revenues
 
21.0
%
 
21.4
 %
 
23.3
%
 
 
 
 
Selling, informational and administrative expenses
 
14,455

 
14,804

 
14,844

 
(2
)
 

% of revenues
 
26.9
%
 
28.2
 %
 
28.1
%
 
 
 
 
Research and development expenses
 
8,006

 
7,683

 
7,892

 
4

 
(3
)
% of revenues
 
14.9
%
 
14.6
 %
 
14.9
%
 
 
 
 
Amortization of intangible assets
 
4,893

 
4,758

 
4,056

 
3

 
17

% of revenues
 
9.1
%
 
9.1
 %
 
7.7
%
 
 
 
 
Restructuring charges and certain acquisition-related costs
 
1,044

 
351

 
1,565

 
*

 
(78
)
% of revenues
 
1.9
%
 
0.7
 %
 
3.0
%
 
 
 
 
Other (income)/deductions—net
 
2,116

 
1,416

 
3,794

 
49

 
(63
)
Income from continuing operations before provision/(benefit) for taxes on income
 
11,885

 
12,305

 
8,351

 
(3
)
 
47

% of revenues
 
22.2
%
 
23.4
 %
 
15.8
%
 
 
 
 
Provision/(benefit) for taxes on income
 
706

 
(9,049
)
 
1,123

 
*

 
*

Effective tax rate
 
5.9
%
 
(73.5
)%
 
13.4
%
 
 
 
 
Income from continuing operations
 
11,179

 
21,353

 
7,229

 
(48
)
 
*

% of revenues
 
20.8
%
 
40.6
 %
 
13.7
%
 
 
 
 
Discontinued operations—net of tax
 
10

 
2

 
17

 
*

 
(87
)
Net income before allocation to noncontrolling interests
 
11,188

 
21,355

 
7,246

 
(48
)
 
*

% of revenues
 
20.9
%
 
40.6
 %
 
13.7
%
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
36

 
47

 
31

 
(24
)
 
54

Net income attributable to Pfizer Inc.
 
$
11,153

 
$
21,308

 
$
7,215

 
(48
)
 
*

% of revenues
 
20.8
%
 
40.6
 %
 
13.7
%
 
 
 
 
Certain amounts and percentages may reflect rounding adjustments.
*
Indicates calculation not meaningful or result is equal to or greater than 100%.
RevenuesOverview
Total revenues in 2018 compared to 2017 reflects operational growth of $791 million, or 2%, and the favorable impact of foreign exchange of $310 million, or less than 1%, in 2018, compared to 2017.
Compared to 2016, total revenues for 2017 were unfavorably impacted by approximately $200 million as a result of 2017 having one less selling day in both U.S. and international markets.
Total revenues in 2017 compared to 2016 reflect a slight operational decrease of $20 million, or less than 1%, and an unfavorable impact of foreign exchange of $259 million, or less than 1%, in 2017 compared to 2016.
See the “Revenues by Segment and Geography” and “Revenues—Selected Product Discussion” sections of this Financial Review for additional analyses.
See the “Our Operating Environment—Industry-Specific Challenges—Intellectual Property Rights and Collaboration/Licensing Rights” section of this Financial Review for information about recent losses and expected losses of product exclusivity impacting product revenues.
A number of our current products have experienced patent-based expirations or loss of regulatory exclusivity in certain markets in the last few years. For additional information, see the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business” of our 2018 Form 10-K.
We have significant operations outside the U.S., with revenues exceeding $500 million in the following number of countries:
numbercountoutsideus500mil.jpg

20
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

By total revenues, the U.S., China and Japan are our three largest national markets:
revsbynationalmarket.jpg
Inventory Stocking

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

Revenue Deductions

Our gross product revenues are subject to a variety of deductions, 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 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. Historically, our adjustments of estimates, to reflect actual results or updated expectations, have not been material to our overall business. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends.
The following table provides information about revenue deductions:
  
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

Medicare rebates(a)
 
$
1,706

 
$
1,316

 
$
1,063

Medicaid and related state program rebates(a)
 
1,969

 
1,860

 
1,473

Performance-based contract rebates(a), (b)
 
3,377

 
3,245

 
2,560

Chargebacks(c)
 
6,461

 
6,047

 
5,736

Sales allowances(d)
 
5,592

 
5,165

 
4,623

Sales returns and cash discounts
 
1,522

 
1,493

 
1,441

Total(e)
 
$
20,627

 
$
19,126

 
$
16,895

(a) 
Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.
(b) 
Performance-based contract rebates include contract rebates with managed care customers within the U.S., including health maintenance organizations and PBMs, who receive rebates based on the achievement of contracted performance terms and claims under these contracts. Outside the U.S., performance-based contract rebates include rebates to wholesalers/distributors based on achievement of contracted performance for specific products or sales milestones.
(c) 
Chargebacks primarily represent reimbursements to U.S. wholesalers for honoring contracted prices to third parties.
(d) 
Sales allowances primarily represent price reductions that are contractual or legislatively mandated outside the U.S., discounts and distribution fees.
(e) 
For 2018, associated with the following segments: IH ($8.9 billion); and EH ($11.7 billion). For 2017, associated with the following segments: IH ($9.0 billion); and EH ($10.1 billion). For 2016, associated with the following segments: IH ($7.1 billion); and EH ($9.8 billion).

Total revenue deductions for 2018 increased 8% compared to 2017, primarily as a result of:
an increase in sales allowances as a result of sales growth, primarily in international markets;
higher chargebacks to U.S. wholesalers of certain IH and EH products, partially offset by decreases in chargebacks as a result of decreases in sales of sterile injectable products;
an increase in Medicare rebates driven by increased sales of IH products through this channel; and
an increase in Medicaid and related state program rebates, primarily as a result of increased sales of IH products through these programs.
For information on our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts, including the balance sheet classification of these accruals, see Notes to Consolidated Financial Statements––Note 1G. Basis of Presentation and Significant Accounting Policies: Revenues and Trade Accounts Receivable.

2018 Financial Report    
 
 
21


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Revenues by Segment and Geography

The following graphs show revenues by geography (dollars in billions):
revbysegmentandgeography.jpg
The following table provides worldwide revenues by operating segment and geography:
 
 
Year Ended December 31,
 
% Change
 
 
Worldwide
 
U.S.
 
International
 
Worldwide
 
U.S.
 
International
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
2016

 
2018

 
2017

 
2016

 
2018

 
2017

 
2016

 
18/17

 
17/16

 
18/17

 
17/16

 
18/17
 
17/16

Operating Segments(a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IH
 
$
33,426

 
$
31,422

 
$
29,197

 
$
18,959

 
$
18,460

 
$
16,773

 
$
14,467

 
$
12,962

 
$
12,424

 
6

 
8

 
3

 
10

 
12
 
4

EH
 
20,221

 
21,124

 
23,627

 
6,370

 
7,567

 
9,596

 
13,851

 
13,557

 
14,031

 
(4
)
 
(11
)
 
(16
)
 
(21
)
 
2
 
(3
)
Total revenues
 
$
53,647

 
$
52,546

 
$
52,824

 
$
25,329

 
$
26,026

 
$
26,369

 
$
28,318

 
$
26,519

 
$
26,455

 
2

 
(1
)
 
(3
)
 
(1
)
 
7
 

(a) 
IH = the Innovative Health segment; and EH = the Essential Health segment. For additional information about each operating segment, see the “Our Strategy––Commercial Operations” section of this Financial Review and Notes to Consolidated Financial Statements––Note 18A. Segment, Geographic and Other Revenue Information: Segment Information.
We recorded direct product and/or alliance revenues of more than $1 billion for each of 10 products in 2018 and for nine products in 2017 and 2016.
Direct Product And/Or Alliance Revenues of More Than $1 Billion
2018
 
2017
 
2016
Prevnar 13/Prevenar 13
 
Prevnar 13/Prevenar 13
 
Prevnar 13/Prevenar 13
Lyrica
 
Lyrica
 
Lyrica
Ibrance
 
Ibrance
 
Enbrel
Eliquis*
 
Eliquis*
 
Ibrance
Enbrel
 
Enbrel
 
Lipitor
Lipitor
 
Lipitor
 
Eliquis*
Xeljanz
 
Xeljanz
 
Viagra
Chantix/Champix
 
Viagra
 
Sutent
Sutent
 
Sutent
 
Premarin family of products
Norvasc
 
 
 
 
* Eliquis includes alliance revenues and direct sales in 2018, 2017 and 2016.
These direct product sales and/or alliance product revenues represent 51% of our revenues in 2018, 46% of our revenues in 2017 and 43% of our revenues in 2016. See the “Analysis of the Consolidated Statements of Income—Revenues—Selected Product Discussion” section of this Financial Review for additional information.


22
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

2018 v. 2017

The following provides an analysis of the change in revenues by geographic areas in 2018:
(MILLIONS OF DOLLARS)
 
Worldwide
 
U.S.
 
International
Operational growth/(decline):
 
 
 
 
 
 
Continued growth from certain key brands(a)
 
$
2,815

 
$
1,150

 
$
1,664

Growth from Biosimilars, primarily from Inflectra in certain channels in the U.S. and developed Europe markets
 
217

 
147

 
69

Growth from recently launched products, including Eucrisa in the U.S., as well as Besponsa and Bavencio, primarily in the U.S. and developed Europe
 
195

 
158

 
37

Growth in our Consumer Healthcare business across all markets
 
107

 
26

 
81

Impact from CentreOne primarily in emerging markets
 
45

 
(127
)
 
172

Lower revenues for total Viagra(b), primarily in the U.S. due to generic competition that began in December 2017
 
(572
)
 
(572
)
 

Decline from the Peri-LOE Products portfolio, driven by lower revenues in developed markets (excluding Viagra EH), primarily due to expected declines in Lyrica in developed Europe and Celebrex and Pristiq in the U.S. due to generic competition
 
(558
)
 
(188
)
 
(371
)
Impact from the SIP portfolio, driven by lower revenues in developed markets, primarily due to increased competition across the portfolio and continued legacy Hospira product shortages in the U.S.
 
(504
)
 
(589
)
 
86

Impact from the LEP portfolio, driven by lower revenues in developed markets, primarily as a result of industry-wide pricing challenges in the U.S. and generic competition
 
(436
)
 
(592
)
 
156

Lower revenues for Enbrel, primarily in most developed Europe markets due to continued biosimilar competition
 
(350
)
 

 
(350
)
Lower revenues from the hemophilia portfolio (BeneFIX and Refacto AF/Xyntha), primarily in developed Europe
 
(100
)
 
(13
)
 
(88
)
Impact on financial results from the sale of HIS in February 2017. 2018 does not reflect any contribution from HIS global operations, compared to approximately one month of HIS domestic operations and approximately two months of HIS international operations in the same period in 2017
 
(97
)
 
(64
)
 
(33
)
Other operational factors, net
 
31

 
(34
)
 
65

Operational growth/(decline), net
 
791

 
(698
)
 
1,489

 
 
 
 
 
 
 
Favorable impact of foreign exchange
 
310

 

 
310

Revenues increase/(decrease)
 
$
1,101

 
$
(698
)
 
$
1,799

(a) 
Certain key brands represent Ibrance, Eliquis, Xeljanz, Prevnar 13/Prevenar 13, Xtandi, Lyrica––IH and Chantix/Champix. See the “Analysis of the Consolidated Statements of Income––Revenues––Selected Product Discussion" section of this Financial Review for product analysis information.
(b)  
Viagra lost exclusivity in the U.S. in December 2017. In 2018, revenues for Viagra in the U.S. and Canada, which were reported in IH through 2017, were reported in EH (which reported all other Viagra revenues excluding the U.S. and Canada through 2017). Therefore, in 2018, total Viagra revenues were reported in EH. Total Viagra revenues in 2017 represent the aggregate of worldwide revenues from Viagra IH and Viagra EH.
Emerging markets revenues increased $1.3 billion, or 11%, in 2018 to $12.7 billion, from $11.4 billion, reflecting an operational increase of $1.5 billion, or 13%. Foreign exchange had an unfavorable impact of approximately 2% on emerging markets revenues. The operational increase in emerging markets was driven by our EH segment, primarily by the Legacy Established Products portfolio and the Sterile Injectable Pharmaceuticals portfolio, as well as Prevenar 13, Ibrance and Eliquis in our IH segment.

2018 Financial Report    
 
 
23


Financial Review
Pfizer Inc. and Subsidiary Companies

 

2017 v. 2016

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

 
1,104

 
503

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

 
757

 
236

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

 
450

 

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

 
115

 
94

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

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

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

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

Decline in Prevnar 13/Prevenar 13 revenues. U.S. revenues decreased primarily due to the expected decline in revenues for the adult indication in the U.S. due to a high initial capture rate of the eligible population following its successful fourth-quarter 2014 launch, which resulted in a smaller remaining “catch up” opportunity compared to 2016, partially offset by growth from the pediatric indication. International revenues increased primarily due to the favorable overall impact of timing and increased volume associated with government purchases in certain emerging markets for the pediatric indication compared with prior year, as well as from the inclusion of Prevenar 13 in additional national immunization programs in certain emerging markets for the adult and pediatric indications in the fourth of quarter 2017.
 
(108
)
 
(311
)
 
203

Other operational factors, net
 
157

 
68

 
89

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

 
 
 
 
 
 
 
Unfavorable impact of foreign exchange
 
(259
)
 

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

(a) 
Certain key brands represent Eliquis (globally), as well as Xeljanz and Lyrica - IH (both primarily in the U.S.).
Emerging markets revenues increased $979 million, or 9%, in 2017 to $11.4 billion, reflecting an operational increase of $1.1 billion, or 11%. Foreign exchange had an unfavorable impact of approximately 2% on emerging markets revenues. The operational increase in emerging markets was primarily driven by our IH segment as well as our Legacy Established Products and Sterile Injectable Pharmaceuticals portfolios.
For additional information about operating segment revenues, see the “Analysis of Operating Segment Information” section of this Financial Review.
Revenues—Selected Product Discussion
The tables below provide worldwide revenues, by geography, for selected products. References to total change pertain to period-over-period growth rates that include foreign exchange. The difference between the total change and operational change represents the impact of foreign exchange. Amounts may not add due to rounding. All percentages have been calculated using unrounded amounts. An asterisk (*) indicates the calculation is not meaningful or results are equal to or greater than 100%.
Prevnar 13/Prevenar 13 (IH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
Total
 
Oper.
U.S.
 
$
3,360

 
$
3,334

 
1
 
 
International
 
2,443

 
2,268

 
8
 
8
Worldwide revenues
 
$
5,802

 
$
5,601

 
4
 
4
The worldwide growth in 2018 was primarily driven by international operational growth due to higher volumes for the pediatric indication resulting from the second-quarter 2017 launch in China and increased orders associated with Gavi, the Vaccine Alliance, partially offset by

24
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

lower birth cohort and volumes in certain developed markets. The growth in 2018 in the U.S. was primarily due to the pediatric indication partially offset by the continued decline in revenues for the adult indication due to a high initial capture rate of the eligible population following its successful fourth-quarter 2014 launch, which resulted in a smaller remaining “catch up” opportunity (i.e., the opportunity to reach adults aged 65 years and older who have not been previously vaccinated with Prevnar 13), compared to the prior-year period.
In 2014, the ACIP voted to recommend Prevnar 13 for routine use to help protect adults aged 65 years and older against pneumococcal disease, which for adults includes pneumonia caused by the 13 pneumococcal serotypes included in the vaccine. These ACIP recommendations were subsequently approved by the directors at the CDC and U.S. Department of Health and Human Services, and were published in the Morbidity and Mortality Weekly Report in September 2014 by the CDC. As with other vaccines, the CDC regularly monitors the impact of vaccination and reviews the recommendations. During the October 2018 ACIP meeting, the CDC presented initial data and indicated formal evaluation of evidence (grading) and a potential vote on the maintenance of the 65 years and older recommendation would likely happen in 2019. A potential adverse change in the ACIP recommendation would negatively impact future Prevnar 13 revenues. We continue to generate and publish data and communicate with the ACIP on the burden of pneumococcal disease and Prevnar 13 vaccine effectiveness and safety.
Lyrica (EH (revenues from all of Europe, Russia, Turkey, Israel and Central Asia)/IH (revenues from all other geographies)):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.

U.S.
 
$
3,594

 
$
3,463

 
4

 
 
International
 
1,375

 
1,601

 
(14
)
 
(15
)
Worldwide revenues
 
$
4,970

 
$
5,065

 
(2
)
 
(2
)
The operational decline in worldwide Lyrica revenues in 2018 was primarily driven by losses of exclusivity in developed Europe markets and Australia, partially offset by growth in the U.S. and growth in the orally dissolving tablet formulation in Japan.
The following table provides worldwide revenues for Lyrica in our IH segment, by geography:
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.

U.S.
 
$
3,594

 
$
3,463

 
4

 
 
International
 
1,028

 
1,048

 
(2
)
 
(3
)
Worldwide revenues
 
$
4,622

 
$
4,511

 
2

 
2

The operational growth in worldwide Lyrica revenues in our IH segment in 2018 was primarily due to growth in the U.S. and growth in the orally dissolving tablet formulation in Japan, partially offset by losses of exclusivity primarily in Australia.
The following table provides worldwide revenues for Lyrica in our EH segment, by geography:
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.

U.S.
 
$

 
$

 

 
 
International
 
347

 
553

 
(37
)
 
(39
)
Worldwide revenues
 
$
347

 
$
553

 
(37
)
 
(39
)
The worldwide operational decline in our EH segment in 2018 was primarily due to losses of exclusivity in developed Europe markets.
Ibrance (IH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total
 
Oper.
U.S.
 
$
2,922

 
$
2,825

 
3
 
 
International
 
1,196

 
300

 
*
 
*
Worldwide revenues
 
$
4,118

 
$
3,126

 
32
 
32
The worldwide operational growth in 2018 reflects continued uptake in international markets, mostly driven by developed Europe, Japan and select emerging markets as we launched and secured access and reimbursement through 2017 and 2018, as well as the non-recurrence of a one-time price adjustment in 2017 related to finalizing reimbursement agreements in certain developed Europe markets. The growth in 2018 in the U.S. was primarily due to continued demand growth partially offset by uptake of competitors and increased rebates. Ibrance maintains class leadership among cyclin-dependent kinase inhibitors in major markets, supported by our scientific/clinical data and continued positive patient experience.

2018 Financial Report    
 
 
25


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Eliquis alliance revenues and direct sales (IH): Eliquis has been jointly developed and is commercialized by Pfizer and BMS. Pfizer funds between 50% and 60% of all development costs depending on the study. Profits and losses are shared equally on a global basis, except in certain countries where Pfizer commercializes Eliquis and pays BMS compensation based on a percentage of net sales. We have full commercialization rights in certain smaller markets. BMS supplies the product to us at cost plus a percentage of the net sales to end-customers in these markets. Eliquis is part of the Novel Oral Anticoagulant (NOAC) market; the agents in this class were developed as alternative treatment options to warfarin in appropriate patients.
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total
 
Oper.
U.S.
 
$
1,849

 
$
1,418

 
30
 
 
International
 
1,585

 
1,105

 
43
 
40
Worldwide revenues
 
$
3,434

 
$
2,523

 
36
 
35
The worldwide operational growth in 2018 was primarily driven by continued increased adoption in non-valvular atrial fibrillation, as well as oral anti-coagulant market share gain.
Enbrel (IH, outside the U.S. and Canada):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.

U.S.
 
$

 
$

 

 
 
International
 
2,112

 
2,452

 
(14
)
 
(14
)
Worldwide revenues
 
$
2,112

 
$
2,452

 
(14
)
 
(14
)
The worldwide operational decline in 2018 was primarily due to ongoing biosimilar competition in most developed Europe markets, which is expected to continue.
Lipitor (EH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
Total

 
Oper.
U.S.
 
$
110

 
$
161

 
(31
)
 
 
International
 
1,952

 
1,754

 
11

 
9
Worldwide revenues
 
$
2,062

 
$
1,915

 
8

 
5
The worldwide operational growth in 2018 was primarily driven by increased demand in China, partially offset by pricing pressures in China, the non-recurrence of favorable U.S. rebates that occurred in the third quarter of 2017 and generic competition in Japan.
Xeljanz (IH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total
 
Oper.
U.S.
 
$
1,394

 
$
1,133

 
23
 
 
International
 
380

 
212

 
79
 
84
Worldwide revenues
 
$
1,774

 
$
1,345

 
32
 
33
The growth in the U.S. in 2018 was primarily driven by increased adoption among rheumatologists, growing awareness among patients and improvements in payer access, and to a lesser extent, launches of the PsA indication in the first quarter of 2018 and ulcerative colitis indication in the third quarter of 2018.
The operational growth internationally in 2018 was primarily driven by the 2017 approval of the RA indication in certain European markets, as well as continued uptake in Japan, Canada and emerging markets.
Chantix/Champix (IH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
Total

 
Oper.

U.S.
 
$
838

 
$
742

 
13

 
 
International
 
247

 
255

 
(3
)
 
(5
)
Worldwide revenues
 
$
1,085

 
$
997

 
9

 
8

The growth in the U.S. in 2018 was primarily due to increased volume, improved patient access and positive price impact. The operational decline in 2018 internationally was primarily driven by lower demand in South Korea.

26
 
 
2018 Financial Report


Financial Review
Pfizer Inc. and Subsidiary Companies

 

Sutent (IH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018

 
2017

 
Total

 
Oper.

U.S.
 
$
357

 
$
374

 
(4
)
 
 
International
 
692

 
707

 
(2
)
 
(3
)
Worldwide revenues
 
$
1,049

 
$
1,081

 
(3
)
 
(4
)
The worldwide operational decline in 2018 was primarily due to lower volumes driven by competitive pressure in the U.S. and key European markets.
Norvasc (EH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.
U.S.
 
$
36

 
$
38

 
(5
)
 
 
International
 
988

 
888

 
11

 
9
Worldwide revenues
 
$
1,024

 
$
926

 
11

 
9
The worldwide operational growth in 2018 was primarily driven by increased demand in China, partially offset by generic competition in Japan and pricing pressures in China.
The Premarin family of products (EH):
 
 
Year Ended December 31,
 
 
 
 
 
 
% Change
(MILLIONS OF DOLLARS)
 
2018


2017

 
Total

 
Oper.

U.S.
 
$
783

 
$
921

 
(15
)
 
 
International
 
49

 
56

 
(12