Basis of Presentation and Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

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

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

The financial information included in our condensed consolidated financial statements for subsidiaries operating outside the U.S. is as of and for the three and six months ended May 26, 2019 and May 27, 2018. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and six months ended June 30, 2019 and July 1, 2018.

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

We are responsible for the unaudited financial statements included in this Quarterly Report on Form 10-Q. The interim financial statements include all normal and recurring adjustments that are considered necessary for the fair statement of results for the interim periods presented. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2018 Financial Report.

At the beginning of our 2019 fiscal year, we began to manage our commercial operations through a new global structure consisting of three business segments––Pfizer Biopharmaceuticals Group (Biopharma), Upjohn and through July 31, 2019, Consumer Healthcare. Biopharma and Upjohn are the only reportable segments. We have revised prior-period segment information to reflect the reorganization. For additional information, see Note 13.

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

In the first quarter of 2019, as of January 1, 2019, we adopted four new accounting standards. See Note 1B for further information.

Our recent significant business development activities include:

• Formation of a New Consumer Healthcare Joint Venture––On July 31, 2019, which fell in the third fiscal quarter of 2019, we closed the transaction in which we and GSK combined our respective consumer healthcare businesses into a new consumer healthcare joint venture that operates globally under the GSK Consumer Healthcare name. Assets and liabilities associated with our Consumer Healthcare business were reclassified as held for sale in the consolidated balance sheets as of June 30, 2019 and December 31, 2018.

• Acquisition of Array BioPharma Inc.––On July 30, 2019, which fell in the third fiscal quarter of 2019, we acquired Array, a commercial stage biopharmaceutical company focused on the discovery, development and commercialization of targeted small molecule medicines to treat cancer and other diseases of high unmet need, for $48 per share in cash, for a total enterprise value of approximately $11.4 billion. We financed the majority of the transaction with debt and the balance with existing cash.

• Agreement to Combine Upjohn with Mylan––On July 29, 2019, which fell in the third fiscal quarter of 2019, we announced that we entered into a definitive agreement to combine Upjohn with Mylan, creating a new global pharmaceutical company. Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, Upjohn is expected to be spun off or split off to Pfizer’s shareholders and simultaneously combined with Mylan. Pfizer shareholders would own 57% of the combined new company, and Mylan shareholders would own 43%. The transaction is expected to be tax free to Pfizer and Pfizer shareholders. The transaction is anticipated to close in mid-2020, subject to Mylan shareholder approval and customary closing conditions, including receipt of regulatory approvals.

• Acquisition of Therachon Holding AG––On July 1, 2019, which fell in the third fiscal quarter of 2019, we acquired all the remaining shares of Therachon, a privately-held clinical-stage biotechnology company focused on rare diseases, with assets in development for the treatment of achondroplasia, a genetic condition and the most common form of short-limb dwarfism, for $340 million upfront, plus potential milestone payments of up to $470 million, contingent on the achievement of key milestones in the development and commercialization of the lead asset TA-46. In 2018, Pfizer acquired 3% of Therachon’s outstanding shares.

For additional information, see Note 2 below and 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 in Pfizer’s 2018 Financial Report.

B. Adoption of New Accounting Standards

On January 1, 2019, we adopted four new accounting standards.

Leases––On January 1, 2019, we adopted a new accounting standard for leases and changed our lease policies accordingly. Under the new standard, the most significant change is the requirement of balance sheet recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. We adopted the new accounting standard utilizing the modified retrospective method using a simplified transition approach, and, therefore, no adjustments were made to our prior period financial statements. We have elected the package of practical expedients for transition which are permitted in the new standard. Accordingly, we did not reassess whether (i) any expired or existing contracts are or contain leases under the new standard, (ii) classification of leases as operating leases or capital leases would be different under the new standard, or (iii) any initial direct costs would have met the definition of initial direct costs under the new standard. Additionally, we did not elect to use hindsight in determining the lease term for existing leases as of January 1, 2019. We recorded noncurrent ROU assets of $1.4 billion and current and noncurrent operating lease liabilities of $1.4 billion as of January 1, 2019. We also recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $30 million on a pre-tax basis ($20 million after-tax), relating to previously deferred sale-leaseback gains that can be recognized under the new rules.

Adopting the standard related to leases impacted our prior period condensed consolidated balance sheet as follows:
(MILLIONS OF DOLLARS)	As Previously Reported Balance at December 31, 2018		Effect of Change Higher/(Lower)			Balance at January 1, 2019
Other current assets	$	2,461	$	(1	)	$	2,460
Noncurrent deferred tax assets and other noncurrent tax assets	1,924		(11		)	1,913
Other noncurrent assets	2,799		1,351			4,149
Other current liabilities	10,753		258			11,011
Other noncurrent liabilities	5,850		1,060			6,910
Retained earnings	89,554		20			89,574

Adoption of the standard related to leases did not have a material impact on our condensed consolidated statements of income or condensed consolidated statements of cash flows for the six months ended June 30, 2019. For additional information, see Note 1D.

Amortization Period for Certain Callable Debt Securities Held at a Premium––We prospectively adopted the standard, which shortens the amortization period for certain callable debt securities held at a premium. The new guidance requires the premium to be amortized to the earliest call date. We do not have any investments with features subject to this standard and, therefore, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.

Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity and Accounting for Certain Financial Instruments with Down Round Features––We prospectively adopted the standard, which changes the accounting for warrants or convertible instruments that include a down round feature. We do not have any financial instruments with features subject to this standard and, therefore, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.

Accounting for Share-Based Payments to Nonemployees––We prospectively adopted the standard, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be

fixed at the grant date. We do not have any share-based awards issued to nonemployees and, therefore, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.

On January 1, 2018, we adopted eleven new accounting standards. For additional information, see Notes to Consolidated Financial Statements––Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards in 2018 included in our 2018 Financial Report.

C. Revenues and Trade Accounts Receivable

Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $5.6 billion as of June 30, 2019 and $5.4 billion as of December 31, 2018.

The following table provides information about the balance sheet classification of these accruals:
(MILLIONS OF DOLLARS)	June 30, 2019		December 31, 2018
Reserve against Trade accounts receivable, less allowance for doubtful accounts	$	1,226	$	1,288
Other current liabilities:
Accrued rebates	3,256		3,208
Other accruals	620		531
Other noncurrent liabilities	472		399
Total accrued rebates and other accruals	$	5,574	$	5,426

D. Leases

On January 1, 2019, we adopted a new accounting standard for leases. For further information, see Note 1B.

We lease real estate, fleet, and equipment for use in our operations. Our leases generally have lease terms of 1 to 30 years, some of which include options to terminate or extend leases for up to 5 to 10 years or on a month-to-month basis. We include options that are reasonably certain to be exercised as part of the determination of lease terms. We may negotiate termination clauses in anticipation of any changes in market conditions, but generally these termination options are not exercised. Residual value guarantees are generally not included within our operating leases with the exception of some fleet leases. In addition to base rent payments, the leases may require us to pay directly for taxes and other non-lease components, such as insurance, maintenance and other operating expenses, which may be dependent on usage or vary month-to-month. Variable lease payments amounted to $59 million for the three months ended June 30, 2019 and $118 million for the six months ended June 30, 2019. We have elected the practical expedient in the new standard to not separate non-lease components from lease components in calculating the amounts of ROU assets and lease liabilities for all underlying asset classes.

We determine if an arrangement is a lease at inception of the contract in accordance with guidance detailed in the new standard and we perform the lease classification test as of the lease commencement date. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

For operating leases, the ROU assets and liabilities are presented in our condensed consolidated balance sheet as follows:
(MILLIONS OF DOLLARS)	Balance Sheet Classification	Balance at June 30, 2019
ROU assets	Other noncurrent assets	$	1,273
Lease liabilities (short-term)	Other current liabilities	263
Lease liabilities (long-term)	Other noncurrent liabilities	1,026

Our total lease costs are as follows:
	Three Months Ended			Six Months Ended
(MILLIONS OF DOLLARS)	June 30, 2019			June 30, 2019
Operating lease cost	$	100		$	200
Variable lease cost	59			118
Sublease income	(11		)	(21		)
Total lease cost	$	148		$	297

Other supplemental information includes the following:
(MILLIONS OF DOLLARS)	Weighted-Average Remaining Contractual Lease Term (Years) as of June 30, 2019	Weighted-Average Discount Rate as of June 30, 2019		Six Months Ended June 30, 2019
Operating leases	7.1	3.7	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases				$	156
ROU assets obtained in exchange for new operating lease liabilities				$	122

The table below reconciles the undiscounted cash flows for the first five years and total of the remaining years to the operating lease liabilities recorded in the condensed consolidated balance sheet as of June 30, 2019:
(MILLIONS OF DOLLARS)
Period	Operating Lease Liabilities
Next one year(a)	$	302
1-2 years	254
2-3 years	216
3-4 years	171
4-5 years	122
Thereafter	419
Total undiscounted lease payments	1,483
Less: Imputed interest	195
Present Value of Minimum Lease Payments	1,288
Less: Current portion	263
Noncurrent portion	$	1,026

^(a)  Reflects lease payments due within 12 months subsequent to the balance sheet date.

In April 2018, we entered an agreement to lease space in an office building in New York City. We expect to take control of the property in 2021 and relocate our global headquarters to this new office building in 2022. Our future minimum rental commitment under this 20-year lease is approximately $1.7 billion.

Prior to our adoption of the new lease standard, rental expense, net of sublease income, was $301 million in 2018, $314 million in 2017 and $292 million in 2016.

As of December 31, 2018, the future minimum rental commitments under non-cancelable operating leases follow:
(MILLIONS OF DOLLARS)	2019		2020		2021		2022		2023		After 2023
Lease commitments	$	300	$	252	$	210	$	267	$	248	$	2,040