EX-13 5 c46660_ex13.htm

Exhibit 13







P f i z e r   I n c .
2 0 0 6   F i n a n c i a l   R e p o r t


















(PFIZER LOGO)



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Financial Review
Pfizer Inc and Subsidiary Companies

 


Introduction
Our Financial Review is provided in addition to the accompanying consolidated financial statements and footnotes to assist readers in understanding Pfizer’s results of operations, financial condition and cash flows. The Financial Review is organized as follows:

 

 

Overview of Our Performance and Operating Environment. This section provides information about the following: our business; our 2006 performance; our operating environment and response to key opportunities and challenges; our productivity and cost-savings program; our strategic initiatives, such as significant licensing and new business development transactions, as well as the disposition of our Consumer Healthcare business; and our expectations for 2007 and 2008.

 

 

Accounting Policies. This section, beginning on page 9, discusses those accounting policies that we consider important in understanding Pfizer’s consolidated financial statements. For additional accounting policies, which include those considered to be critical accounting policies, see Notes to Consolidated Financial Statements—Note 1. Significant Accounting Policies.

 

 

Analysis of the Consolidated Statement of Income. This section, beginning on page 13, provides an analysis of our revenues and products for the three years ended December 31, 2006, including an overview of important product developments; a discussion about our costs and expenses, including an analysis of the financial statement impact of our discontinued operations and dispositions during the period; and a discussion of Adjusted income, which is an alternative view of performance used by management.

 

 

Financial Condition, Liquidity and Capital Resources. This section, beginning on page 28, provides an analysis of our balance sheet as of December 31, 2006 and 2005, and cash flows for the three years ended December 31, 2006, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2006. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund Pfizer’s future activities.

 

 

New Accounting Standards. This section, beginning on page 31, discusses accounting standards that we have recently adopted, as well as those that have been recently issued, but not yet adopted by us. For those standards that we have not yet adopted, we have included a discussion of the expected impact to Pfizer, if known.

 

 

Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 32, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this Financial Review relating to our financial results, operations and business plans and prospects. Such forward-looking statements are based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section are discussions of Financial Risk Management and Legal Proceedings and Contingencies.

Overview of Our Performance and Operating Environment

Our Business

We are a global, research-based company that is dedicated to better health and greater access to healthcare for people and their valued animals. Our purpose is to help people live longer, healthier, happier and more productive lives. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of breakthrough medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness, and increased access to quality healthcare. Our value proposition is to demonstrate that our medicines can effectively treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems and their related costs. This improvement can be achieved by increasing effective prevention and treatment and by reducing the need for hospitalization. Our revenues are derived from the sale of our products, as well as through alliance agreements, under which we co-promote products discovered by other companies.

Our Pharmaceutical segment represented 93% of our total revenues in 2006 and, therefore, developments relating to the pharmaceutical industry can have a significant impact on our operations.

Our 2006 Performance

We showed a solid performance in 2006, with our in-line products in the aggregate performing well in a tough operating environment and many of our new products making important contributions as well, largely offset by revenue declines from the loss of U.S. exclusivity on Zithromax in November 2005 and Zoloft at the end of June 2006, and other factors.

Specifically, in 2006:

 

 

Revenues increased 2% to $48.4 billion over 2005, due primarily to the solid aggregate performance of our broad portfolio of patent-protected medicines and an aggregate year-over-year increase in revenues from new products launched since 2004, largely offset by the impact of the loss of U.S. exclusivity on Zithromax in November 2005 and Zoloft in June 2006. Those two products collectively experienced a decline in revenues of about $2.5 billion in 2006 compared to 2005. These declines were offset by an aggregate revenue increase in the balance of our portfolio of patent-protected products, such as Lipitor (up 6%), Norvasc (up 3%), Caduet (up 99%), Geodon/Zeldox (up 29%), Celebrex (up 18%), Zyvox (up 27%), Vfend (up 30%), Detrol/Detrol LA (up 11%), Aromasin (up 30%), Xalatan (up 6%), and Zyrtec (up 15%), as well as the successful launches of several new medicines since 2004. As of October 2006, our portfolio of medicines included three of the world’s 25 best-selling medicines, with seven medicines that led their therapeutic areas. (See further discussion in the “Analysis of the Consolidated Statement of Income” section of this Financial Review.)

 

 

Income from continuing operations before cumulative effect of a change in accounting principles was $11.0 billion compared with $7.6 billion in 2005. The increase was primarily due to event-driven expenses, such as:

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lower Acquisition-related in-process research and development charges (IPR&D). In 2006, we incurred IPR&D expenses of $835 million, primarily related to our acquisitions of PowderMed Ltd., and Rinat Neuroscience Corp. (Rinat), as compared with IPR&D of $1.7 billion in 2005, primarily related to our acquisitions of Vicuron Pharmaceuticals, Inc. (Vicuron) and Idun Pharmaceuticals, Inc. (Idun).

 

 

 

 

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lower asset impairment charges. In 2006, we expensed $320 million related to the impairment of our Depo-Provera intangible asset while, in 2005, we expensed $1.2 billion related to the impairment of our Bextra intangible asset.

 

 

 

 

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a lower effective income tax rate. In 2006, our effective tax rate on continuing operations of 15.3% was lower than the 29.4% rate in 2005, which largely reflected the impact of our decision to repatriate approximately $37 billion of foreign earnings to the United States in 2005.


 

 

 

(See further discussion in the “Analysis of the Consolidated Statement of Income” section of this Financial Review.)

 

 

Discontinued operations—net of tax were $8.3 billion in 2006, compared with $498 million in 2005. The results in both years relate primarily to our Consumer Healthcare business, which was sold on December 20, 2006. The 2006 amount includes the gain on the sale of this business of approximately $7.9 billion, after tax. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Dispositions” and “Analysis of the Consolidated Statement of Income” sections of this Financial Review.)

 

 

We completed a number of strategic acquisitions that we believe will strengthen and broaden our existing pharmaceutical capabilities. We acquired the worldwide rights to manufacture and sell Exubera, an inhaled form of insulin, for about $1.4 billion. We also acquired two companies, PowderMed Ltd., a U.K. company specializing in the emerging science of DNA-based vaccines for the treatment of influenza and chronic viral diseases, and Rinat, a biologics company with several new central nervous system product candidates. (See further discussion in the “Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

 

 

We made significant progress with our Adapting to Scale (AtS) productivity initiative, which is a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. We realized approximately $2.6 billion in savings in 2006, exceeding our original savings goal of about $2 billion for this period, while incurring related costs of $2.1 billion in 2006 and $763 million in 2005. Building on what had already been accomplished, we significantly expanded the goals of this initiative in October 2006 and are now targeting an absolute net reduction in the pre-tax expense component of Adjusted income and the creation of a more flexible cost structure. In addition to these cost-centered goals, we have announced other priorities, such as maximizing revenues from the current product portfolio, investing in medium- and long-term growth opportunities though our internal pipeline and externally-sourced products and creating smaller, more focused and accountable operating units. (See further discussion in the “Our Productivity and Cost Savings Program” section of this Financial Review. For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

Our Operating Environment and Response to Key Opportunities and Challenges

We and our industry are facing significant challenges in a profoundly changing business environment and we are taking steps to fundamentally change the way we run our business to meet these challenges, as well as to take advantage of the diverse and attractive opportunities that we see in the marketplace.

There are a number of industry-wide factors that may affect our business and they should be considered along with the information presented in the “Forward-Looking Information and Factors That May Affect Future Results,” section of this Financial Review. Such industry-wide factors include pricing and access, intellectual property rights, product competition, the regulatory environment and pipeline productivity and the changing business environment.

Pricing and Access

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 hospitalization or emergency room costs. Notwithstanding the benefits of our products, the pressures from governments and other payer groups are continuing and increasing. These pressure points can include price controls, price cuts (directly or by rebate actions) and regulatory changes that limit access to certain medicines.

 

 

Governments around the world continue to seek discounts on our products, either by leveraging their significant purchasing power or by mandating prices or implementing price controls. In the U.S., the enactment of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act), which went into effect in 2006, expanded access to medicines to patients-in-need through prescription drug benefits for Medicare beneficiaries. While expanded access results in increased sales of our products, such increases could be offset by increased pricing pressures in the future, due to the enhanced purchasing power of the private sector providers that negotiate on behalf of Medicare beneficiaries.

 

 

We have recently seen restrictive measures on access and pricing taken by influential decision-makers in several large European markets and the growing power of managed care organizations in the U.S. has increased the pressure on pharmaceutical prices and access.

 

 

A rise in consumer-directed health plans, as well as tiered co-pay in managed care plans, has increased end-customer sensitization to the cost of healthcare. Consumers have become aware of global price differences that result from price controls imposed by certain governments and have become more willing to seek less expensive alternatives, such as sourcing medicines across national borders, despite the increased risk of receiving inferior or counterfeit products, and switching to generics.

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Our response:

 

 

We will 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 access to patients and minimize the impact on our revenues.

 

 

We will continue to actively engage payers, patients and physicians in dialogues about the value of our products and how we can best work with them to fight disease and improve outcomes.

 

 

We will continue to encourage payers to work with us early in the development process to ensure that our approved products will deliver the value expected by those payers.

 

 

We will continue to be a constructive force in helping to shape healthcare policy and regulation of our products.

Intellectual Property Rights

Our business model is highly dependent on intellectual property rights, primarily in the form of government-granted patent rights, and on our ability to enforce and defend those rights around the world.

 

 

Intellectual property legal protections and remedies are a significant factor in our business. Many of our products are protected by a wide range of patents, such as composition-of-matter patents, compound patents, patents covering processes and procedures and/or patents issued for additional indications or uses. As such, many of our products have multiple patents that expire at varying dates, thereby strengthening our overall patent protection. However, once the patent protection period has expired, generic pharmaceutical manufacturers generally produce similar products and sell those products for a lower price. This price competition can substantially decrease our revenues for products that lose exclusivity, often by as much as 80% in the U.S. in the first year after patent expiration.

 

 

The loss of patent protection with respect to any of our major products can have a material adverse effect on future revenues and our results of operations. As mentioned above, our performance in 2006 was significantly impacted by the loss of U.S. exclusivity of Zithromax in November 2005 and Zoloft at the end of June 2006. Further, we face a substantial adverse impact on our performance from the loss of U.S. exclusivity for Norvasc and Zyrtec in 2007 and Camptosar in 2008. These five products represented 26% of our total revenues for the year ended December 31, 2005, and 21% of our total revenues for the year ended December 31, 2006.

 

 

Patents covering our products are also subject to legal challenges. Increasingly, generic pharmaceutical manufacturers are launching products that are under legal challenge for patent infringement before the final resolution of the associated legal proceedings—called an “at-risk” launch. The success of any of these “at-risk” challenges could significantly impact our revenues and results of operations.

 

 

There is a continuing disparity in the recognition and enforcement of intellectual property rights among countries worldwide. Organizations such as the World Trade Organization (WTO), under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), have been instrumental in educating governments about the long-term benefits of strong patent laws. However, until patent rights are uniformly recognized around the world, the profitability of our products can be significantly impacted in markets with weak or nonexistent protections.


 

 

The integrity of our products is subject to an increasingly predatory atmosphere, seen in the growing problem of counterfeit drugs, which harm patients either through a lack of active ingredients or through the inclusion of harmful components. Our ability to work with law enforcement to successfully counter these dangerous criminal activities will have an impact on our revenues and results of operations.

 

Our response:

 

 

We will continue to aggressively defend our patent rights against infringement, whenever appropriate, but the number and aggressiveness of these infringements has increased substantially in the past few years. (See also Notes to the Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies).

 

 

We will continue to participate in the generics market for our products, whenever appropriate, once they lose exclusivity.

 

 

We will continue to take actions to deliver more products of greater value more quickly. (See further discussion in the “Regulatory Environment and Pipeline Productivity” section of this Financial Review.)

 

 

We will continue to support efforts that strengthen worldwide recognition of patent rights, while taking necessary steps to ensure appropriate patient access.

 

 

We will continue to employ innovative approaches to prevent counterfeit pharmaceuticals from entering the supply chain and to achieve greater control over the distribution of our products.

 

Product Competition

 

Some of our products face competition in the form of new branded products or generic drugs, which treat similar diseases or indications. For example, Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, as well as other competitive pressures. In addition, as noted above, we face the loss of U.S. exclusivity for Norvasc and Zyrtec during 2007 and Camptosar in 2008.

 

Our response:

 

 

We will continue to highlight the benefits of our products, in terms of cost, safety and efficacy, as appropriate. For example, the success of Lipitor is the result of an unprecedented array of clinical data supporting both efficacy and safety, and we have launched a new advertising campaign that highlights these benefits.

 

Regulatory Environment and 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 strong operation of our businesses.

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We are confronted by 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.

 

 

The opportunities for improving human health remain abundant as scientific innovation increases daily into new and more complex areas and as the extent of unmet medical needs remains high. However, according to The Pharmaceutical Research and Manufacturers of America, 2006 Pharmaceutical Industry Profile, the cost to successfully develop and obtain regulatory approvals for a new medicine is about $800 million, and the process can take up to 10 to 15 years.

 

 

Our product lines must be replenished over time in order to offset future revenue losses when products lose their exclusivity, as well as to provide for growth.

 

 

Our response:

 

 

As the world’s largest privately funded biomedical operation, and through our global scale, we will continue to develop and deliver innovative medicines that will benefit patients around the world. We will continue to make the investments necessary to serve patients’ needs and to generate long-term growth. For example:


 

 

 

 

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During 2006, we continued to introduce new products, including Eraxis, Sutent, Exubera and Chantix in the U.S. In Europe, Sutent and Exubera entered the marketplace, and Champix (the trade name for Chantix in Europe) was launched in December 2006.

 

 

 

 

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During 2006, we or our development partners submitted two new drug applications (NDAs) to the U.S. Food and Drug Administration (FDA) for important new drug candidates: maraviroc and fesoterodine.

 

 

 

 

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In December 2006, we filed a supplemental NDA with the FDA for Lyrica for the treatment of fibromyalgia.

 

 

 

 

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Several key medicines received approval for new indications in 2006, including approvals for Lyrica for central neuropathic pain and generalized anxiety disorder in the E.U., and Celebrex for juvenile arthritis in the U.S.

 

 

 

 

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We continue to conduct research on a scale that can help redefine medical practice. We have over 240 novel compounds in development, spanning multiple therapeutic areas, and we are leveraging our status as the industry’s partner of choice to expand our licensing operations. Our research and development (R&D) pipeline includes 249 projects in development: 177 new molecular entities and 72 product-line extensions. In addition, we have more than 350 projects in discovery research. During 2006, 47 new compounds were advanced from discovery research into preclinical development, 29 preclinical development candidates progressed into Phase 1 human testing and 18 Phase 1 clinical development candidates advanced into Phase 2 proof-of-concept trials.


 

 

We will continue to focus on reducing attrition as a key component of our R&D productivity improvement effort. For several years, we have been revising the quality hurdles for candidates entering development, as well as throughout the development process. As the quality of candidates has improved, the development attrition rate has begun to fall. Our goal is to launch four new products a year from internal development beginning in 2011.

 

 

While a significant portion of R&D is done internally, we will continue to seek to expand our pipeline by entering into agreements with other companies to develop, license or acquire promising compounds, technologies or capabilities. Co-development, alliance and license agreements allow us to capitalize on these compounds to expand our pipeline of potential future products.


 

 

 

 

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Due to our strength in marketing and our global reach, we are able to attract other organizations that may have promising compounds and that can benefit from our strength and skills. We have more than 800 alliances across the entire spectrum of the discovery, development and commercialization process.

 

 

 

 

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Over the past three years, we have invested $6.7 billion in acquisitions for these purposes. For example, an area where we are expanding aggressively is in biologics, large-molecule approaches to treating disease when small molecules are not available or effective. In 2006, we acquired Rinat, a biologics company with several new central-nervous-system product candidates. In 2005, the acquisition of Vicuron built on Pfizer’s extensive experience in anti-infectives and demonstrates our commitment to strengthen and broaden our pharmaceutical business through strategic product acquisitions.

 

 

 

 

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By acquiring PowderMed Ltd. in 2006, we look forward to exploring vaccines across various therapeutic areas using the acquired vaccine technology and delivery device. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

 

 

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Our goal is to launch two new externally-sourced products each year beginning in 2010.


 

 

Changing Business Environment

 

 

With the business environment changing rapidly, as described above, we recognize that we must also fundamentally change the way we run our company to meet those challenges.

 

 

Our response:

 

 

We will continue to streamline our company to reduce bureaucracy and enable us to move quickly.

 

 

We will continue to restructure our cost base to drive efficiencies and enable greater agility and operating flexibility.

 

 

We will continue to simplify our R&D organization and will improve productivity by consolidating each of the research teams focused on any given therapeutic area to one of four major sites.

 

 

We will restructure our U.S. Pharmaceutical Operations into four business units to create a more focused and entrepreneurial

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environment that will enhance innovation while allowing us to draw on the advantages of our scale and resources. A fifth business unit will be responsible for customer support and specifically focused on managed care and access.

 

 

We will continue to address the wide array of patient populations through our innovative access and affordability programs.

 

 

Fundamentally, we will change the way we run our company to meet the challenges of a changing business environment. (See further discussion in the “Our Productivity and Cost-Savings Program” section of this Financial Review.)

 

 

In addition to the above challenges and opportunities, we believe that there are other opportunities for revenue generation for our products, including:

 

 

Current demographics of developed countries indicate that people are living longer and, therefore, will have a greater need for the most effective medicines.

 

 

The large number of untreated patients within our various therapeutic categories. For example, of the tens of millions of Americans who need medical therapy for high cholesterol, we estimate only about one-fourth are actually receiving treatment.

 

 

Refocusing the debate on health policy to address the cost of disease that remains untreated and the benefits of investing in prevention and wellness to not only improve health, but save money.

 

 

Developing medicines that meet medical need and that patients will take; that physicians will prescribe; that customers will pay for; and that add the most value for Pfizer.

 

 

The promise of technology to improve upon existing therapies and to introduce treatments where none currently exist.

 

 

Our increased presence in emerging markets worldwide, where economic expansion is creating new growth opportunities.

 

 

Worldwide emphasis on the need to find solutions to difficult problems in healthcare systems.

 

 

Our Productivity and Cost-Savings Program

 

 

During 2006 and 2005, we made significant progress with our multi-year productivity initiative, called Adapting to Scale (AtS), which was designed to increase efficiency and streamline decision-making across the company. This initiative, launched in early 2005, and broadened in October 2006, follows the integration of Warner-Lambert and Pharmacia. During 2006 and 2005, cost savings realized from our AtS productivity initiative were approximately $2.6 billion and $800 million.

 

 

On January 22, 2007, we announced plans to fundamentally change the way we run our business to meet the challenges of a changing business environment and take advantage of the diverse opportunities in the marketplace. We intend to generate cost savings through site rationalization in research and manufacturing, reductions in our global sales force, streamlined organizational structures, staff function reductions, and increased outsourcing and procurement savings. Our cost reduction initiatives will result in the elimination of about 10,000 positions, or about 10% of our total worldwide workforce by the end of 2008. This includes the 20% reduction of our U.S. sales force completed in December 2006 and, subject to consultation with works councils and local labor law, a reduction of our sales force in Europe by more than 20%. These and other actions will allow us to reduce costs in support services and facilities, and to redeploy a portion of the hundreds of millions of dollars saved into the discovery and development work of our scientists. These and other new initiatives are discussed below.

 

 

Net of various cost increases and investments during the period, by the end of 2007, we expect to decrease the Selling, informational and administrative expense (SI&A) pre-tax component of Adjusted income by $500 million compared to 2006. By the end of 2008, we expect to achieve an absolute net reduction of the pre-tax expense component of Adjusted income of between $1.5 billion and $2.0 billion, compared to 2006. (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

 

 

Projects in various stages of implementation include:

 

 

Pfizer Global Research and Development (PGRD)—

 

 

Creating a More Agile and Productive Organization—To increase efficiency and effectiveness in bringing new therapies to patients-in-need, in January 2007, PGRD announced a number of actions that will continue to transform the research division, including consolidating each research therapeutic area into a single site. We also announced that PGRD will exit two discovery therapeutic areas (gastroenterology and dermatology), but will continue developing compounds in those areas that are already in the pipeline. The remaining nine research therapeutic areas are: cardiovascular, metabolic and endocrine; neuroscience; inflammation; allergy and respiratory; infectious diseases; pain; oncology; urology and sexual health and ophthalmology. In addition, five sites were identified for closure (Ann Arbor, Esperion and Kalamazoo, Michigan; Nagoya, Japan; and Amboise, France), subject to consultation with works councils and local labor law in the case of Nagoya and Amboise. This reorganization has been designed to create smaller, more agile research units, drive the growth of our bigger pipeline while maintaining costs, and generate more products from a smaller, more productive organization.

 

 

Standardization of Practices—Standardization of practices across PGRD is driving costs down and increasing efficiencies in our research facilities, resulting in significant savings. Centers of emphasis have been built to take advantage of special skill sets, reduce waste and enhance asset utilization. We substantially reduced the number of pilot plants that manufacture the active ingredients for our clinical supplies, making more efficient use of the capacity retained. Clinical supply depots across the globe are being realigned with future needs. For example, across Europe and Canada 26 out of 37 depots have been identified for rationalization, with 15 closures completed through December 31, 2006.

 

 

Enhanced Clinical Trial Design—To reduce the frequency and cost of clinical trial failures, a common problem across the industry, a key objective for PGRD has been to improve our clinical trial design process. In response, PGRD has standardized and broadly

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applied advanced improvements in quantitative techniques. For example, pharmacokinetic/pharmacodynamic modeling and computer-based clinical trial simulation, along with use of leading-edge statistical techniques, including adaptive learning and confirming approaches are being used and we have begun to transform the way clinical trials are designed. Benefits achieved to date from this initiative include improvements in positive predictive capacity, efficiency, risk management and knowledge management. Once fully implemented, this Enhanced Clinical Trial Design initiative is expected to yield significant savings and enhance research productivity.

 

 

 

A wide range of other continuous improvement practices is being applied to enable further productivity improvements in all areas of R&D.

 

 

 

In November 2006, we announced plans to triple our Phase 3 clinical trial portfolio to a projected 15 programs in 2009 in support of our goal to launch four new products a year from internal development starting in 2011. We intend to increase resources dedicated to biotherapeutics, with the objective of launching one product per year within 10 years, and strengthening our antibody platform and building our vaccine business. In addition, we will enhance our capability to identify the right targets and pathways by harnessing new biologic techniques to allow identification and prosecution of the most relevant pathways. We will fund these new investments with savings from reduced spending on support staff and facilities costs.

 

 

Pfizer Global Manufacturing (PGM)—

 

 

Plant Network Optimization—To ensure that our manufacturing facilities are aligned with current and future product needs, we are continuing to optimize Pfizer’s network of plants, which began with the acquisition of Pharmacia. We have focused on innovation and delivering value through a simplified supply network. During 2005 and 2006, 21 sites were identified for rationalization (Angers and Val de Reuil, France; Arecibo and Cruce Davila, Puerto Rico; Arnprior and Orangeville, Canada; Augusta, Georgia; Bangkok, Thailand; Bou Ismail, Algeria; Corby and Morpeth, U.K.; Groton, Connecticut; Holland, Michigan; Islamabad, Pakistan; Jakarta, Indonesia; Malardalen, Stockholm and Uppsala-Fyrislund, Sweden; Seoul, Korea; Tlalpan, Mexico; and Upper Merion, Pennsylvania). In addition, there have been extensive consolidations and realignments of operations resulting in streamlined operations and staff reductions. In particular, sites in Sandwich, U.K.; Lincoln and Omaha, Nebraska; Puerto Rico; Lititz, Pennsylvania; and Brooklyn, New York, have undergone notable staff reductions.

 

 

 

In January 2007, we announced the closure of an additional manufacturing site in Brooklyn, New York. We will also pursue the sale of sites in Omaha, Nebraska, and Feucht, Germany, the latter subject to consultation with works councils and local labor law. In February 2007, we announced that we would close a portion of the active pharmaceutical ingredient (API) plant at Ringaskiddy, Ireland, and that we would pursue the sales of the API facility in Loughbeg, Ireland, a portion of the manufacturing facility in Little Island, Ireland, and the facility in Nerviano, Italy, subject to consultation with works councils and local labor law. From 2003 to 2008, we plan to have reduced our network of manufacturing plants around the world from 100, which includes seven plants that have been acquired since 2003, to 46, including the sites mentioned for closure above, and the sites sold as part of our Consumer Healthcare business.

 

 

Worldwide Pharmaceutical Operations (WPO)—

 

 

Field Force Realignment—To improve our effectiveness in and responsiveness to the business environment, we have realigned our European marketing teams and implemented productivity initiatives for our field force in Japan. In December 2006, we reduced our U.S. sales force by approximately 20%, while maintaining support for all of our products. This reduction followed the major 2005 reorganization of our U.S. field force to drive greater sales-force accountability in preparation for the launch of new medicines. The U.S. field force reduction was implemented swiftly to limit disruption of representative/ physician relationships, provide the right-sized field force and ensure a competitive voice in the marketplace.

 

 

 

In January 2007, we announced that we propose to reduce our sales force in Europe by more than 20%, subject to consultation with works councils and local labor law, while maintaining a competitive voice for our medicines and a strong organization going forward. We will also look to increase accountability in our U.S. Pharmaceutical operation.

 

 

Information Technology—

 

 

Reductions in Application Software—To achieve cost savings, we have pursued significant reductions in application software and data centers (to be reduced from 17 to 4), as well as rationalization of service providers, while enhancing our ability to invest in innovative technology opportunities to further propel our growth. Two of the 17 corporate data centers have now been reduced to local computing facilities, managed remotely from a global operations center. Vendor analysis and selection are currently underway to select a list of global infrastructure service providers. Vendor selection was completed in the fourth quarter of 2006, with transition to the new service providers occurring in 2007 and 2008.

 

Finance—

 

 

Further Capitalizing on Shared Service Centers—To achieve cost savings, we have reduced operating costs and improved service levels by standardizing, regionalizing, and/or outsourcing a wide array of transactional accounting activities. Examples include accounts payable, general accounting, accounts receivable, travel and entertainment processing and inventory accounting. In addition, a standard global platform for tax operations was developed, which leverages technology, standardizes processes, and focuses on colleague alignment and skill sets. This effort includes regionalization of tax operations for Europe and the U.S.

 

 

Global Sourcing—

 

 

Leveraging Purchasing Power—To achieve cost savings on purchased goods and services, we have focused on rationalizing suppliers, leveraging the approximately $16 billion of goods and services that Pfizer purchases annually and improving demand

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management to optimize levels of outside services needed and strategic sourcing from lower-cost sources. For example, savings from demand management are being derived in part from reductions in travel, entertainment, consulting and other external service expenses. Facilities savings are being found in site rationalization, energy conservation and renegotiated service contracts.

 

 

Our Strategic Initiatives—Strategy and Recent Transactions

 

 

Acquisitions, Licensing and Collaborations

 

 

We are committed to capitalizing on new growth opportunities by advancing our own new-product pipeline, as well as through licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, Alzheimer’s disease, vaccines and other products and services that complement and supplement our internal pipeline and that add value to our customers and patients, and that seek to provide innovative healthcare solutions.

 

 

In December 2006, we entered into a collaboration agreement with Kosan Biosciences Inc. (Kosan) to develop a gastrointestinal disease treatment. In 2006, we expensed a payment of $12 million, which was included in Research and development expenses. Additional significant milestone payments of up to approximately $238 million may be made to Kosan based upon the successful development and commercialization of a product.

 

 

In September 2006, we entered into a license agreement with Quark Biotech Inc. (Quark) for exclusive worldwide rights to a compound for the treatment of neovascular (wet) age-related macular degeneration (AMD).

 

 

In September 2006, we entered into a license and collaboration agreement with TransTech Pharma Inc. (TransTech) to develop and commercialize small- and large- molecule compounds for treatment of Alzheimer’s disease and diabetic neuropathy. Under the terms of the agreement, Pfizer received exclusive worldwide rights to TransTech’s portfolio of compounds. In 2006, we expensed a payment of $101 million, which was included in Research and development expenses. Additional significant milestone payments may be made to TransTech based upon the successful development and commercialization of a product.

 

 

In June 2006, we entered into a license agreement with Bayer Pharmaceuticals Corporation (Bayer) to acquire exclusive worldwide rights to DGAT-1 inhibitors, an innovative class of compounds that modify lipid metabolism. The lead compound in the class, BAY 74-4113, is a potential treatment for obesity, type 2 diabetes and other related disorders.

 

 

In February 2006, we completed the acquisition of the sanofi-aventis worldwide rights, including patent rights and production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.4 billion in cash (including transaction costs). In 2006, in connection with the acquisition, as part of our final purchase price allocation, we recorded $1.0 billion of developed technology rights, $218 million of inventory, and $166 million of Goodwill, all of which have been allocated to our Pharmaceutical segment. The amortization of the developed technology rights is primarily included in Cost of sales. Prior to the acquisition, in connection with our collaboration agreement with sanofi-aventis, we recorded a research and development milestone due to us from sanofi-aventis of $118 million ($71 million, after tax) in Research and development expenses upon the approval of Exubera in January 2006 by the FDA.

 

 

In December 2006, we completed the acquisition of PowderMed Ltd. (PowderMed), a U.K. company which specializes in the emerging science of DNA-based vaccines for the treatment of influenza and chronic viral diseases, and in May 2006, we completed the acquisition of Rinat Neurosciences Corp. (Rinat), a biologics company with several new central-nervous-system product candidates. In 2006, the aggregate cost of these and other smaller acquisitions was approximately $880 million (including transaction costs). In connection with these transactions, we recorded $835 million in Acquisition-related in-process research and development charges.

 

 

In November 2005, Pfizer entered into a research collaboration and license agreement with Incyte Corporation (Incyte) and received exclusive worldwide rights to Incyte’s portfolio of CCR2 antagonist compounds for potential use in a broad range of diseases. In 2006, we expensed a payment of $40 million, which was included in Research and development expenses. Additional milestone payments of up to $738 million could potentially be made to Incyte based upon the successful development and commercialization of products in multiple indications.

 

 

In September 2005, we completed the acquisition of all of the outstanding shares of Vicuron Pharmaceuticals Inc. (Vicuron), a biopharmaceutical company focused on the development of novel anti-infectives, for approximately $1.9 billion in cash (including transaction costs). In connection with the acquisition, as part of our final purchase price allocation, we recorded $1.4 billion in Acquisition-related in-process research and development charges, and $243 million of Goodwill, which has been allocated to our Pharmaceutical segment.

 

 

In April 2005, we completed the acquisition of Idun Pharmaceuticals Inc. (Idun), a biopharmaceutical company focused on the discovery and development of therapies to control apoptosis, and in August 2005, we completed the acquisition of Bioren Inc. (Bioren), which focuses on technology for optimizing antibodies. In 2005, the aggregate cost of these and other smaller acquisitions was approximately $340 million in cash (including transaction costs). In connection with these transactions, we recorded $262 million in Acquisition-related in-process research and development charges.

 

 

In March 2005, we entered into a license agreement with Coley Pharmaceutical Group, Inc. (Coley) for a toll-like receptor 9 (TLR9) agonist for the potential treatment, control and prevention of cancer. In 2005, we expensed a payment of $50 million, which was included in Research and development expenses, and purchased $10 million of Coley’s common stock. Additional milestone payments of up to $455 million could potentially be made to Coley based upon the successful development and commercialization of a product.

2006 Financial Report | 7


 

Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

In September 2004, we completed the acquisition of Campto/ Camptosar (irinotecan), from sanofi-aventis for $525 million in cash (including transaction costs). In 2004, in connection with the acquisition, as part of our final purchase price allocation, we recorded $445 million of developed technology rights, which have been allocated to our Pharmaceutical segment.

 

 

In February 2004, we completed the acquisition of all the outstanding shares of Esperion Therapeutics, Inc. (Esperion), a biopharmaceutical company, for $1.3 billion in cash (including transaction costs). In 2004, in connection with the acquisition, as part of our final purchase price allocation, we recorded $920 million in Acquisition-related in-process research and development charges, and $239 million of Goodwill, which has been allocated to our Pharmaceutical segment.

 

 

In 2004, we also completed several other small acquisitions. The total purchase price associated with these transactions was approximately $430 million in cash (including transaction costs). In connection with these transactions, we recorded $151 million in Acquisition-related in-process research and development charges, and $206 million in intangible assets, primarily brands (indefinite-lived) and developed technology rights, all of which have been allocated to our Pharmaceutical segment.

 

 

In early 2007, we acquired Embrex, Inc., which possesses a unique vaccine delivery system known as Inovoject, which enables baby chicks to be vaccinated while inside their eggs, and BioRexis Pharmaceutical Corp., a privately-held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates. These transactions are not reflected in our consolidated financial statements as of December 31, 2006.

 

 

Dispositions

 

 

We evaluate our businesses and product lines periodically for strategic fit within our operations. As of December 31, 2006, we sold the following businesses:

 

 

In the fourth quarter of 2006, we sold our Consumer Healthcare business for $16.6 billion, and recorded a gain of approximately $10.2 billion ($7.9 billion, net of tax) in Gains on sales of discontinued operations—net of tax in the consolidated statement of income for 2006. This business was composed of:


 

 

 

 

o

substantially all of our former Consumer Healthcare segment;

 

 

 

 

o

other associated amounts, such as purchase-accounting impacts, acquisition-related costs and restructuring and implementation costs related to our Adapting to Scale (AtS) productivity initiative that were previously reported in the Corporate/Other segment; and

 

 

 

 

o

certain manufacturing facility assets and liabilities, which were previously part of our Pharmaceutical or Corporate/ Other segment but were included in the sale of the Consumer Healthcare business. The net impact to the Pharmaceutical segment was not significant.


 

 

 

The results of this business are included in Income from discontinued operations—net of tax for all periods presented. See Notes to Consolidated Financial Statements—Note 3. Discontinued operations.

 

 

In the third quarter of 2005, we sold the last of three European generic pharmaceutical businesses, which we had included in our Pharmaceutical segment, for 4.7 million euro (approximately $5.6 million). This business became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded a loss of $3 million ($2 million, net of tax) in Gains on sales of discontinued operations—net of tax in the consolidated statement of income for 2005.

 

 

In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses, which we had included in our Pharmaceutical segment, for 70 million euro (approximately $93 million). This business became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded a gain of $57 million ($36 million, net of tax) in Gains on sales of discontinued operations—net of tax in the consolidated statement of income for 2005. In addition, we recorded an impairment charge of $9 million ($6 million, net of tax) related to the third European generic business in Income from discontinued operations—net of tax in the consolidated statement of income for 2005.

 

 

In the fourth quarter of 2004, we sold the first of three European generic pharmaceutical businesses, which we had included in our Pharmaceutical segment, for 53 million euro (approximately $65 million). This business became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. In addition, we recorded an impairment charge of $61 million ($37 million, net of tax), relating to a European generic business which was later sold in 2005, and is included in Income from discontinued operations—net of tax in the consolidated statement of income for 2004.

 

 

In the third quarter of 2004, we sold certain non-core consumer product lines marketed in Europe by our former Consumer Healthcare business for 135 million euro (approximately $163 million) in cash. The majority of these products were small brands sold in single markets only and included certain products that became a part of Pfizer in April 2003 in connection with the acquisition of Pharmacia. We recorded a gain of $58 million ($41 million, net of tax) in Gains on sales of discontinued operations—net of tax in the consolidated statement of income for 2004.

 

 

 

In the second quarter of 2004, we sold our surgical ophthalmic business, which we had included in our Pharmaceutical segment, for $450 million in cash. This business became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. The results of this business were included in Income from discontinued operations—net of tax.

 

 

In the second quarter of 2004, we sold our in-vitro allergy and autoimmune diagnostics testing (Diagnostics) business, which we had included in the Corporate/Other segment, for $575 million in cash. This business became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. The results of this business were included in Income from discontinued operations—net of tax.

 

 

Our Expectations for 2007 and 2008

 

 

While our revenue and income will likely continue to be tempered in the near term due to patent expirations and other factors, we will

8 | 2006 Financial Report


 

Financial Review

Pfizer Inc and Subsidiary Companies

 


continue to make the investments necessary to sustain long-term growth. We remain confident that Pfizer has the organizational strength and resilience, as well as the financial depth and flexibility, to succeed in the long term. However, no assurance can be given that the industry-wide factors described above under “Our Operating Environment and Response to Key Opportunities and Challenges” or other significant factors will not have a material adverse effect on our business and financial results.

At current exchange rates, we expect revenues in 2007 and 2008 to be comparable to 2006 with the impact of loss of exclusivity offset by new and major in-line product growth.

We expect cash flow from operations of $12.5 billion to $13.5 billion in 2007. We expect to purchase up to $10 billion of our stock in 2007 under our expanded share-purchase program. At current exchange rates, our expanded AtS productivity initiative is expected to lower the 2007 SI&A pre-tax component of Adjusted income by $500 million, compared to 2006, and to further reduce operating expenses as a pre-tax component of Adjusted income in 2008. By the end of 2008, we expect to achieve an absolute net reduction of the pre-tax expense component of Adjusted income of between $1.5 billion and $2.0 billion compared to 2006. At current exchange rates, we expect to generate annual growth in Adjusted diluted EPS of 6% to 9% in each of 2007 and 2008. (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

Given these and other factors, a reconciliation, at current exchange rates and reflecting management’s current assessment for 2007 and 2008, of forecasted 2007 and 2008 Adjusted income and Adjusted diluted EPS to forecasted 2007 and 2008 reported Net income and reported diluted EPS, follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FULL-YEAR 2007 FORECAST

 

FULL-YEAR 2008 FORECAST

 

 

 





(BILLIONS OF DOLLARS,
EXCEPT PER-SHARE
AMOUNTS)

 

 

NET INCOME(a)

 

 

DILUTED EPS(a)

 

 

NET INCOME(a)

 

 

DILUTED EPS(a)

 















Forecasted Adjusted income/diluted EPS(b)

 

 

~$15.1-$15.6

 

~$2.18-$2.25

 

~$15.6-$16.6

 

~$2.31-$2.45

 

Purchase accounting impacts, net of tax

 

 

(2.4)

 

 

(0.35)

 

 

(2.0)

 

 

(0.30)

 

Adapting to scale costs, net of tax

 

 

(2.4-2.7)

 

 

(0.35-0.38)

 

 

(1.5-1.8)

 

 

(0.22-0.26)

 















Forecasted reported Net income/diluted EPS

 

~$10.0-$10.8

 

~$1.45-$1.55

 

~$11.8-$13.1

 

~$1.75-$1.93

 
















 

 

(a)

Excludes the effects of business-development transactions not completed as of December 31, 2006.

 

 

(b)

For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.

Our forecasted financial performance in 2007 and 2008 is subject to a number of factors and uncertainties—as described in the “Forward-Looking Information and Factors That May Affect Future Results” section below.

Accounting Policies

We consider the following accounting policies important in understanding our operating results and financial condition. For additional accounting policies, see Notes to Consolidated Financial Statements—Note 1. Significant Accounting Policies.

Estimates and Assumptions

In preparing the consolidated financial statements, we use certain estimates and assumptions that affect reported amounts and disclosures. For example, estimates are used when accounting for deductions from revenues (such as rebates, discounts, incentives and product returns), depreciation, amortization, employee benefits, contingencies and asset and liability valuations. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may later prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates or assumptions. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in the healthcare environment, competition, foreign exchange, litigation, legislation and regulations. These and other risks and uncertainties are discussed throughout this Financial Review, particularly in the section “Forward-Looking Information and Factors That May Affect Future Results.”

Contingencies

We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, securities, environmental and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. We record accruals for such contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable. We consider many factors in making these assessments. Because litigation and other contingencies are inherently unpredictable and excessive verdicts do occur, these assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions (see Notes to Consolidated Financial Statements—Note 1B. Significant Accounting Policies: Estimates and Assumptions). We record anticipated recoveries under existing insurance contracts when assured of recovery.

Acquisitions

Our consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition and are not restated. We account for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired IPR&D are expensed at the date of acquisition. When we acquire net assets that do not constitute a business under generally accepted accounting principles in the U.S. (GAAP), no goodwill is recognized.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed,

2006 Financial Report | 9


 

Financial Review

Pfizer Inc and Subsidiary Companies

 


as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, we typically obtain assistance from third-party valuation specialists. The valuations are based on information available near the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, including IPR&D, we typically use the “income method.” This method starts with our forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include: the amount and timing of projected future cash flows; the amount and timing of projected costs to develop the IPR&D into commercially viable products; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry, as well as expected changes in standards of practice for indications addressed by the asset.

Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. For example, the useful life of the right associated with a pharmaceutical product’s exclusive patent will be finite and will result in amortization expense being recorded in our results of operations over a determinable period. However, the useful life associated with a brand that has no patent protection but that retains, and is expected to retain, a distinct market identity could be considered to be indefinite and the asset would not be amortized.

Revenues

Revenue Recognition—We record revenues from product sales when the goods are shipped and title passes to the customer. At the time of sale, we also record estimates for a variety of sales deductions, such as rebates, discounts and incentives, and product returns. When we cannot reasonably estimate the amount of future product returns, we record revenue when the risk of product return has been substantially eliminated.

Deductions from Revenues—Our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations for our pharmaceutical products. These deductions represent estimates of the related obligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period.

Specifically:

 

 

In the U.S., we record provisions for pharmaceutical Medicaid, Medicare and contract rebates based upon our actual experience ratio of rebates paid and actual prescriptions written during prior quarters. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. As appropriate, we will adjust the ratio to better match our current experience or our expected future experience. In assessing this ratio, we consider current contract terms, such as changes in formulary status and discount rates. If our ratio is not indicative of future experience, our results could be materially affected.

 

 

Provisions for pharmaceutical chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties) closely approximate actual as we settle these deductions generally within two to three weeks of incurring the liability.

 

 

Outside of the U.S., the majority of our pharmaceutical rebates are contractual or legislatively mandated, and our estimates are based on actual invoiced sales within each period; both of these elements help to reduce the risk of variations in the estimation process. Some European countries base their rebates on the government’s unbudgeted pharmaceutical spending and we use an estimated allocation factor against our actual invoiced sales to project the expected level of reimbursement. We obtain third-party information that helps us monitor the adequacy of these accruals. If our estimates are not indicative of actual unbudgeted spending, our results could be materially affected.

 

 

We record sales incentives as a reduction of revenues at the time the related revenues are recorded or when the incentive is offered, whichever is later. We estimate the cost of our sales incentives based on our historical experience with similar incentives programs.

Historically, our adjustments to actual have not been material; on a quarterly basis, they generally have been less than 1.0% of Pharmaceutical net sales and can result in a net increase to income or a net decrease to income. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with U.S. Medicaid and 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 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.

Alliances—We have agreements to co-promote pharmaceutical products discovered by other companies. Alliance revenues are earned when our co-promotion partners ship the related product and title passes to their customer. These revenues are primarily based upon a percentage of our co-promotion partners’ net sales. Expenses for selling and marketing these products are included in Selling, informational and administrative expenses.

Long-Lived Assets

We review all of our long-lived assets, including goodwill and other intangible assets, for impairment indicators at least annually and we perform detailed impairment testing for goodwill and indefinite-lived assets annually and for all other long-lived assets whenever impairment indicators are present. Examples of those events or circumstances that may be indicative of impairment include:

10 | 2006 Financial Report


 

Financial Review

Pfizer Inc and Subsidiary Companies

 



 

 

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 resulting 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 that affect our ability to manufacture or sell a product.

 

 

A projection or forecast that demonstrates losses associated with an asset. This could include, for example, a change in a government reimbursement program that results in an inability to sustain projected product revenues and profitability. This also could include the introduction of a competitor’s product that results in a significant loss of market share.

 

 

Our impairment review process is as follows:

 

For finite-lived intangible assets, such as developed technology rights, whenever impairment indicators are present, we perform an in-depth review for impairment. We calculate the undiscounted value of the projected cash flows associated with the asset and compare this estimated amount to the carrying amount of the asset. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over the asset’s fair value. Fair value is generally calculated by applying an appropriate discount rate to the undiscounted cash flow projections to arrive at net present value. In addition, in all cases of an impairment review, we reevaluate the remaining useful life of the asset and modify it, as appropriate.

 

 

For indefinite-lived intangible assets, such as brands, each year and whenever impairment indicators are present, we calculate the fair value of the asset and record an impairment loss for the excess of book value over fair value, if any. Fair value is generally measured as the net present value of projected cash flows. In addition, in all cases of an impairment review, we reevaluate the remaining useful life of the asset and determine whether continuing to characterize the asset as indefinite-lived is appropriate.

 

 

For Goodwill, which includes amounts related to our Pharmaceutical and Animal Health segments each year and whenever impairment indicators are present, we calculate the fair value of each business segment and calculate the implied fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill and record an impairment loss for the excess of book value of goodwill over the implied fair value, if any.

 

 

For other long-lived assets, such as property, plant and equipment, we apply procedures similar to those for finite-lived intangible assets to determine if an asset is impaired. Long-term investments and loans are subject to periodic impairment reviews and whenever impairment indicators are present. For these assets, fair value is typically determined by observable market quotes or the expected present value of future cash flows. 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.

 

 

For non-current deferred tax assets, we provide a valuation allowance when we believe that the assets are not probable of recovery based on an assessment of estimated future taxable income that incorporates ongoing, prudent, feasible tax-planning strategies.

The value of intangible assets is determined primarily using the “income method,” which starts with a forecast of all the expected future net cash flows (see the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations,” section of this Financial Review above). Accordingly, the potential for impairment for these intangible assets may exist if actual revenues are significantly less than those initially forecasted or actual expenses are significantly more than those initially forecasted. Some of the more significant estimates and assumptions inherent in the intangible asset impairment estimation process include: the amount and timing of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry as well as expected changes in standards of practice for indications addressed by the asset.

The implied fair value of goodwill is determined by first estimating the fair value of the associated business segment. To estimate the fair value of each business segment, we generally use the “market approach,” where we compare the segment to similar businesses or “guideline” companies whose securities are actively traded in public markets or which have recently been sold in a private transaction. We may also use the “income approach,” where we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the “market approach” include: the selection of appropriate guideline companies; the determination of market value multiples for the guideline companies and the subsequent selection of an appropriate market value multiple for the business segment based on a comparison of the business segment to the guideline companies; and the determination of applicable premiums and discounts based on any differences in ownership percentages, ownership rights, business ownership forms, or marketability between the segment and the guideline companies; and/or knowledge of the terms and conditions of comparable transactions. When considering the “income approach,” we include: the required rate of return used in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business segment. Other estimates inherent in the “income approach” include long-term growth rates and cash flow forecasts for the business segment.

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions (see “Estimates and Assumptions” above). The judgments made in determining an estimate of fair value can materially impact our results of operations. As such, for significant items, we often obtain assistance from third-party valuation specialists. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management.

2006 Financial Report | 11


 

Financial Review

Pfizer Inc and Subsidiary Companies

 


Pension and Postretirement Benefit Plans and Defined Contribution Plans

We provide defined benefit pension plans and defined contribution plans for the majority of our employees worldwide. In the U.S., we have both qualified and supplemental (non-qualified) defined benefit plans and defined contribution plans, as well as other postretirement benefit plans, consisting primarily of healthcare and life insurance for retirees.

A U.S. qualified plan meets the requirements of certain sections of the Internal Revenue Code and, generally, contributions to qualified plans are tax-deductible. It typically provides benefits to a broad group of employees and may not discriminate in favor of highly compensated employees in its coverage, benefits or contributions.

We also provide benefits through non-qualified U.S. retirement plans to certain employees. These supplemental plans, which generally are not funded, will provide, out of our general assets, an amount substantially equal to the amounts that would have been payable under the defined benefit qualified pension plans, in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension benefits. In addition, we provide medical and life insurance benefits to certain retirees and their eligible dependents through our postretirement plans, which, in general, are also unfunded obligations.

In 2006, we made required U.S. qualified plan contributions of $3 million and voluntary tax-deductible contributions in excess of minimum requirements of $450 million to certain of our U.S. qualified pension plans. In 2005, we made required U.S. qualified plan contributions of $3 million and voluntary tax-deductible contributions in excess of minimum requirements of $49 million to certain of our U.S. qualified pension plans. In the aggregate, the U.S. qualified pension plans are overfunded on a projected benefit measurement basis as of December 31, 2006, and on an accumulated benefit obligation measurement basis as of December 31, 2006 and 2005.

In 2006, we made voluntary tax-deductible contributions of $90 million to certain of our U.S. postretirement plans via the establishment of sections 401(h) accounts.

Outside the U.S., in general, we fund our defined benefit plans to the extent that tax or other incentives exist and we have accrued liabilities on our consolidated balance sheets to reflect those plans that are not fully funded.

The accounting for benefit plans is highly dependent on actuarial estimates, assumptions and calculations which result from a complex series of judgments about future events and uncertainties (see “Estimates and Assumptions” above). The assumptions and actuarial estimates required to estimate the employee benefit obligations for the defined benefit and postretirement plans, include discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality (life expectancy); expected return on assets; and healthcare cost trend rates. Our assumptions reflect our historical experiences and our best 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. As such, we often obtain assistance from actuarial experts to aid in developing reasonable assumptions and cost estimates.

Our assumption for the expected long-term rate of return-on-assets in our U.S. pension plans, which impacts net periodic benefit cost, is 9% for 2007 and 2006. The assumption for the expected return-on-assets for our U.S. and international plans reflects 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 return for our U.S. plans and the majority of our international plans is applied to the fair market value of plan assets at each year end. For our international plans that use a market-related value of plan assets to calculate net periodic benefit cost, shifting to fair market value of plan assets would serve to decrease our 2007 international pension plans’ pre-tax expense by approximately $58 million. As a sensitivity measure, holding all other assumptions constant, the effect of a one-percentage-point decline in the return-on-assets assumption would be an increase in our 2007 U.S. qualified pension plan pre-tax expense of approximately $74 million.

The following table shows the expected versus actual rate of return on plan assets for the U.S. qualified pension plans:

 

 

 

 

 

 

 

 

 

 

 












 

 

2006

 

2005

 

2004

 









Expected annual rate of return

 

 

9.0

%

 

9.0

%

 

9.0

%

Actual annual rate of return

 

 

15.2

 

 

10.1

 

 

11.5

 












The discount rate used in calculating our U.S. pension benefit obligations as of December 31, 2006, is 5.9%, which represents a 0.1 percentage-point increase from our December 31, 2005, rate of 5.8%. The discount rate for our U.S. defined benefit and postretirement plans is based on a yield curve constructed from a portfolio of high quality corporate bonds rated AA or better for which the timing and amount of cash flows approximate the estimated payouts of the plans. For our international plans, the discount rates are set by benchmarking against investment grade corporate bonds rated AA or better. Holding all other assumptions constant, the effect of a 0.1 percentage-point increase in the discount rate assumption is a decrease in our 2007 U.S. qualified pension plans’ pre-tax expense of approximately $10 million and a decrease in the U.S. qualified pension plans’ projected benefit obligations as of December 31, 2006, of approximately $100 million.

12 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 


Analysis of the Consolidated Statement of Income


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 

06/05

 

05/04

 













Revenues

 

$

48,371

 

$

47,405

 

$

48,988

 

 

2

 

 

 

(3

)

 

Cost of sales

 

 

7,640

 

 

7,232

 

 

6,391

 

 

6

 

 

 

13

 

 

% of revenues

 

 

15.8

%

 

15.3

%

 

13.0

%

 

 

 

 

 

 

 

 

SI&A expenses

 

 

15,589

 

 

15,313

 

 

15,304

 

 

2

 

 

 

 

 

% of revenues

 

 

32.2

%

 

32.3

%

 

31.2

%

 

 

 

 

 

 

 

 

R&D expenses

 

 

7,599

 

 

7,256

 

 

7,513

 

 

5

 

 

 

(3

)

 

% of revenues

 

 

15.7

%

 

15.3

%

 

15.3

%

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

3,261

 

 

3,399

 

 

3,352

 

 

(4

)

 

 

1

 

 

% of revenues

 

 

6.7

%

 

7.2

%

 

6.8

%

 

 

 

 

 

 

 

 

Acquisition-related IPR&D charges

 

 

835

 

 

1,652

 

 

1,071

 

 

(49

)

 

 

54

 

 

% of revenues

 

 

1.7

%

 

3.5

%

 

2.2

%

 

 

 

 

 

 

 

 

Restructuring charges and acquisition-related costs

 

 

1,323

 

 

1,356

 

 

1,151

 

 

(2

)

 

 

18

 

 

% of revenues

 

 

2.7

%

 

2.9

%

 

2.3

%

 

 

 

 

 

 

 

 

Other (income)/deductions—net

 

 

(904

)

 

397

 

 

803

 

 

*

 

 

 

(51

)

 











 

 

 

 

 

 

 

 

 

Income from continuing operations(a)

 

 

13,028

 

 

10,800

 

 

13,403

 

 

21

 

 

 

(19

)

 

% of revenues

 

 

26.9

%

 

22.8

%

 

27.4

%

 

 

 

 

 

 

 

 

Provision for taxes on income

 

 

1,992

 

 

3,178

 

 

2,460

 

 

(37

)

 

 

29

 

 

Effective tax rate

 

 

15.3

%

 

29.4

%

 

18.4

%

 

 

 

 

 

 

 

 

Minority interest

 

 

12

 

 

12

 

 

7

 

 

4

 

 

 

66

 

 

Discontinued operations—net of tax

 

 

8,313

 

 

498

 

 

425

 

 

M+

 

 

 

17

 

 

Cumulative effect of a change in accounting principles—net of tax

 

 

 

 

(23

)

 

 

 

*

 

 

 

*

 

 











 

 

 

 

 

 

 

 

 

Net income

 

$

19,337

 

$

8,085

 

$

11,361

 

 

139

 

 

 

(29

)

 

% of revenues

 

 

40.0

%

 

17.1

%

 

23.2

%

 

 

 

 

 

 

 

 




















 

 

(a)

Represents income from continuing operations before provision for taxes on income, minority interests, discontinued operations and cumulative effect of a change in accounting principles.

 

 

*

Calculation not meaningful.

 

 

M+ Change greater than 1,000%.

 

Percentages in this table and throughout the Financial Review may reflect rounding adjustments.

Revenues

Total revenues increased 2% to $48.4 billion in 2006, primarily due to the solid aggregate performance in our broad portfolio of patent-protected medicines and the revenues from new products launched over the past three years. These increases were mostly offset by the loss of U.S. exclusivity on Zithromax in November 2005 and Zoloft in June 2006, which resulted in a collective decline in revenues of about $2.5 billion for these two products. In 2006, Lipitor, Norvasc, Zoloft and Celebrex each delivered at least $2 billion in revenues, while Lyrica, Viagra, Detrol/Detrol LA, Xalatan/Xalacom and Zyrtec each surpassed $1 billion.

Total revenues decreased 3% to $47.4 billion in 2005, primarily due to the loss of U.S. exclusivity of certain key products, the suspension of the sales of Bextra and the uncertainty related to Celebrex. These decreases were partially offset by the solid aggregate performance in the balance of our broad portfolio of patent-protected medicines. In 2005, Lipitor, Norvasc, Zoloft and Zithromax each delivered at least $2 billion in revenues, while Celebrex, Viagra, Xalatan/Xalacom and Zyrtec each surpassed $1 billion.

Changes in foreign exchange rates decreased total revenues in 2006 by $279 million, or 0.6%, compared to 2005, and increased total revenues in 2005 by $869 million, or 1.8%, compared to 2004. The foreign exchange impact on 2006 revenue growth was due to the strengthening of the U.S. dollar relative to many foreign currencies, especially the Japanese yen and the euro, partially offset by the weakening of the U.S. dollar relative to the Canadian dollar, the total of which accounted for about 96% of the impact in 2006. The favorable impact of foreign exchange on 2005 revenue growth was due to the weakening of the U.S. dollar relative to many foreign currencies, especially the euro which accounted for about 36% of the impact in 2005. The revenues of legacy Pharmacia products, recorded from the acquisition date of April 16, 2003, until the anniversary date of the transaction in 2004, were treated as incremental volume and did not have a significant foreign exchange impact.

Revenues exceeded $500 million in each of 10 countries outside the U.S. in 2006 and in 2005. The U.S. was the only country to contribute more than 10% of total revenues in each year.

Our policy relating to the supply of pharmaceutical inventory at domestic wholesalers, and in major international markets, is to maintain stocking levels under one month on average and to keep monthly levels consistent from year to year based on patterns of utilization. We have historically 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.

 

Rebates reduced revenues, as follows:

 


 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(BILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 









Medicaid and related state program rebates

 

$

0.5

 

$

1.3

 

$

1.4

 

Medicare rebates

 

 

0.6

 

 

0.0

 

 

0.0

 

Performance-based contract rebates

 

 

1.8

 

 

2.3

 

 

2.2

 












Total

 

$

2.9

 

$

3.6

 

$

3.6

 












The decline in total rebates for 2006 reflects:

 

 

The implementation of the Medicare Act, effective January 1, 2006, which caused a shift from Medicaid rebates to Medicare rebates. The shift is a result of patients who are eligible for Medicare and Medicaid and who now receive their prescription drug benefits through Medicare instead of Medicaid, as well as shifts to managed care.


2006 Financial Report | 13


Financial Review
Pfizer Inc and Subsidiary Companies

 


 

 

Lower rebates for Medicaid, Medicare and performance-based contracts due to lower sales of Zithromax, which lost exclusivity in the U.S. in November 2005, and Zoloft, which lost exclusivity in the U.S. in June 2006.

 

 

Lower performance-based contract rebates due to the expiration of our contract with Express Scripts Inc. in December 2005.

Performance-based contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold. Chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties) reduced revenues by $1.4 billion in 2006 and $1.3 billion in both 2005 and 2004. In addition, chargebacks were impacted by the launch of certain generic products in 2006, 2005 and 2004 by our Greenstone subsidiary.

Our accruals for Medicaid rebates, Medicare rebates, performance-based contract rebates and chargebacks totaled $1.5 billion as of December 31, 2006.

Revenues by Business Segment

We operate in the following business segments:

 

 

 

Pharmaceutical

 

 

 

The Pharmaceutical segment includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies.

 

 

Animal Health

 

 

 

The Animal Health segment includes products that prevent and treat diseases in livestock and companion animals.


14 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 


 

Total Revenues by Business Segment

(PIE CHARTS)

Change in Revenues by Segment and Geographic Area

Worldwide revenues by segment and geographic area follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















































 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 



 

 

WORLDWIDE

 

U.S.

 

INTERNATIONAL

 

WORLDWIDE

 

U.S.

 

INTERNATIONAL

 

 

 


 


 


 


 


 



(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

 

06/05

 

05/04

 

06/05

 

05/04

 

06/05

 

05/04

 

































Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical

 

$

45,083

 

$

44,269

 

$

46,121

 

$

24,503

 

$

23,465

 

$

26,606

 

$

20,580

 

$

20,804

 

$

19,515

 

 

2

 

 

(4

)

 

4

 

 

(12

)

 

(1

)

 

7

 

Animal Health

 

 

2,311

 

 

2,206

 

 

1,953

 

 

1,032

 

 

993

 

 

878

 

 

1,279

 

 

1,213

 

 

1,075

 

 

5

 

 

13

 

 

4

 

 

13

 

 

5

 

 

13

 

Corporate/Other

 

 

977

 

 

930

 

 

914

 

 

287

 

 

287

 

 

298

 

 

690

 

 

643

 

 

616

 

 

5

 

 

2

 

 

 

 

(4

)

 

7

 

 

4

 





























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

48,371

 

$

47,405

 

$

48,988

 

$

25,822

 

$

24,745

 

$

27,782

 

$

22,549

 

$

22,660

 

$

21,206

 

 

2

 

 

(3

)

 

4

 

 

(11

)

 

 

 

7

 
















































Pharmaceutical Revenues

Our pharmaceutical business is the largest in the world. Revenues from this segment contributed 93% of our total revenues in 2006, 93% in 2005 and 94% in 2004. As of October 2006, seven of our pharmaceutical products were number one in their respective therapeutic categories based on revenues.

We recorded product sales of more than $1 billion for each of nine products in 2006, each of eight products in 2005 and each of ten products in 2004. These products represented 64% of our Pharmaceutical revenues in 2006 and 2005 and 69% in 2004.

Worldwide Pharmaceutical revenues increased 2% in 2006, compared to 2005, primarily due to:

 

 

the solid aggregate performance of our broad portfolio of patent-protected medicines, including an aggregate increase in revenues from new products launched in 2004, 2005 and 2006 of approximately $1.5 billion;

 

 

the one-time reversal of a sales deduction accrual related to a favorable development in a pricing dispute in the U.S. of about $170 million; and

 

 

the favorable impact of pricing changes in the U.S.,

 

 

partially offset by:

 

a decrease in revenues of $1.4 billion in 2006 from the loss of U.S. exclusivity on Zithromax in November 2005;

 

 

a decrease by $1.1 billion in revenues for Zoloft in 2006, primarily due to the launch of generic competition in mid-July 2006 after Zoloft lost exclusivity in the U.S. in June 2006 and also due to the earlier loss of exclusivity in many European markets; and

 

 

the strengthening of the U.S. dollar relative to many foreign currencies, primarily the Japanese yen and the euro, which decreased revenues by $277 million for 2006.

 

 

Geographically:

 

in the U.S., Pharmaceutical revenues increased 4% in 2006, compared to 2005, primarily due to revenues from new products, as well as growth in several of our major products, including Lipitor and Celebrex, and the one-time reversal of a sales deduction accrual related to favorable development in a pricing dispute, partially offset by the loss of U.S. exclusivity of Zithromax in November 2005 and Zoloft in June 2006; and

 

 

in our international markets, Pharmaceutical revenues declined in 2006, compared to 2005, by 1%, primarily due to the unfavorable impact of foreign exchange on revenues of $277 million (0.6%) and lower revenues from Zoloft due to the loss of exclusivity in many key international markets. While we experienced higher product volumes in our international markets, continued pricing pressures more than offset those positive effects.

Effective January 1, 2007, January 1, 2006 and January 1, 2005, we increased the published prices for certain U.S. pharmaceutical products. These price increases had no material effect on wholesaler inventory levels in comparison to the prior year.

2006 Financial Report | 15


Financial Review
Pfizer Inc and Subsidiary Companies

 


 

Revenues—Major Pharmaceutical Products

 

Revenue information for several of our major Pharmaceutical products follow:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

(MILLIONS OF DOLLARS)

 

 

 


 



PRODUCT

 

PRIMARY INDICATIONS

 

 

2006

 

 

2005

 

 

2004

 

 

06/05

 

 

05/04

 




















Cardiovascular and metabolic diseases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lipitor

 

Reduction of LDL cholesterol

 

$

12,886

 

$

12,187

 

$

10,862

 

 

6

 

 

12

 

Norvasc

 

Hypertension

 

 

4,866

 

 

4,706

 

 

4,463

 

 

3

 

 

5

 

Cardura

 

Hypertension/Benign prostatic hyperplasia

 

 

538

 

 

586

 

 

628

 

 

(8

)

 

(7

)

Caduet

 

Reduction of LDL cholesterol and hypertension

 

 

370

 

 

185

 

 

50

 

 

99

 

 

272

 

Accupril/Accuretic

 

Hypertension/Congestive heart failure

 

 

266

 

 

294

 

 

665

 

 

(10

)

 

(56

)

Chantix/Champix

 

Smoking cessation

 

 

101

 

 

 

 

 

 

*

 

 

 

Central nervous system disorders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zoloft

 

Depression and certain anxiety disorders

 

 

2,110

 

 

3,256

 

 

3,361

 

 

(35

)

 

(3

)

Lyrica

 

Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy

 

 

1,156

 

 

291

 

 

13

 

 

297

 

 

M+

 

Geodon/Zeldox

 

Schizophrenia and acute manic or mixed episodes associated with bipolar disorder

 

 

758

 

 

589

 

 

467

 

 

29

 

 

26

 

Neurontin

 

Epilepsy and post-herpetic neuralgia

 

 

496

 

 

639

 

 

2,723

 

 

(22

)

 

(77

)

Aricept(a)

 

Alzheimer’s disease

 

 

358

 

 

346

 

 

308

 

 

4

 

 

12

 

Xanax/Xanax XR

 

Anxiety/Panic disorders

 

 

316

 

 

409

 

 

378

 

 

(23

)

 

8

 

Relpax

 

Migraine headaches

 

 

286

 

 

233

 

 

169

 

 

23

 

 

38

 

Arthritis and pain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Celebrex

 

Arthritis pain and inflammation, acute pain

 

 

2,039

 

 

1,730

 

 

3,302

 

 

18

 

 

(48

)

Infectious and respiratory diseases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zyvox

 

Bacterial infections

 

 

782

 

 

618

 

 

463

 

 

27

 

 

33

 

Zithromax/Zmax

 

Bacterial infections

 

 

638

 

 

2,025

 

 

1,851

 

 

(69

)

 

9

 

Vfend

 

Fungal infections

 

 

515

 

 

397

 

 

287

 

 

30

 

 

38

 

Diflucan

 

Fungal infections

 

 

435

 

 

498

 

 

945

 

 

(13

)

 

(47

)

Urology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Viagra

 

Erectile dysfunction

 

 

1,657

 

 

1,645

 

 

1,678

 

 

1

 

 

(2

)

Detrol/Detrol LA

 

Overactive bladder

 

 

1,100

 

 

988

 

 

904

 

 

11

 

 

9

 

Oncology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Camptosar

 

Metastatic colorectal cancer

 

 

903

 

 

910

 

 

554

 

 

 

 

64

 

Aromasin

 

Breast cancer

 

 

320

 

 

247

 

 

143

 

 

30

 

 

73

 

Ellence

 

Breast cancer

 

 

312

 

 

367

 

 

344

 

 

(15

)

 

7

 

Sutent

 

Advanced and/or metastatic renal cell carcinoma (mRCC) and refractory gastrointestinal stromal tumors (GIST)

 

 

219

 

 

 

 

 

 

*

 

 

 

Ophthalmology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Xalatan/Xalacom

 

Glaucoma and ocular hypertension

 

 

1,453

 

 

1,372

 

 

1,227

 

 

6

 

 

12

 

Endocrine disorders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genotropin

 

Replacement of human growth hormone

 

 

795

 

 

808

 

 

736

 

 

(2

)

 

10

 

All other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zyrtec/Zyrtec-D

 

Allergies

 

 

1,569

 

 

1,362

 

 

1,287

 

 

15

 

 

6

 

Alliance revenue

 

Alzheimer’s disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson’s disease (Mirapex), hypertension (Olmetec), multiple sclerosis (Rebif) and chronic obstructive pulmonary disease (Spiriva)

 

 

1,374

 

 

1,065

 

 

721

 

 

29

 

 

48

 





















 

 

(a)

Represents direct sales under license agreement with Eisai Co., Ltd.

 

 

M+

Change greater than 1,000%.

 

*

Calculation not meaningful.

16 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 



Pharmaceutical—Selected Product Descriptions


 

 

Lipitor, for the treatment of elevated LDL-cholesterol levels in the blood, is the most widely used treatment for lowering cholesterol and the best-selling pharmaceutical product of any kind in the world, reaching about $12.9 billion in worldwide sales in 2006, an increase of 6% compared to 2005. In the U.S., sales of $7.8 billion represent growth of 6% over 2005. Internationally, Lipitor sales in 2006 increased 5% compared to 2005.

 

 

 

The growth in Lipitor revenues was driven by a combination of factors, including dosage-form escalation and pricing (including a favorable development in a pricing dispute in the U.S.), as well as changes in rebate patterns. We continue to see aggressive competition from branded and generic agents, particularly when additional generic agents became available in the U.S. near the end of 2006. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, as well as other competitive pressures. These launches have impacted the dynamics of the statin market and increased pressure on Lipitor. In October 2006, we launched a new advertising campaign for Lipitor that highlights its strong benefit profile, particularly its benefit in reducing the risk of heart attack and stroke in patients with multiple risk factors for heart disease. This builds on the consumer advertising that was implemented in April 2006. Scientific data continue to reinforce the trend toward the use of higher dosages of statins for greater cholesterol reduction.

 

 

 

See Notes to Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Lipitor.

 

 

Norvasc is the world’s most-prescribed branded medicine for treating hypertension. Norvasc maintains exclusivity in many major markets globally, including the U.S., Japan, Canada and Australia, but has experienced patent expirations in many E.U. countries. Norvasc sales in 2006 increased 3% compared to 2005. See Notes to Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Norvasc.

 

 

Caduet, single-pill therapy combining Norvasc and Lipitor, recorded worldwide revenues of $370 million with a growth rate of 99% in 2006 compared to 2005. Caduet was launched in the U.S. in May 2004 and continues to grow at significantly higher rates than the overall U.S. cardiovascular market. This was largely driven by a more focused message platform and a highly targeted consumer campaign. Caduet is available in more than 15 other countries. Caduet has now received approvals in 58 markets with drug applications pending in nine additional markets and applications planned in 13 other countries. In early 2007, Caduet is expected to be launched in Spain and Taiwan.

 

 

 

See Notes to Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Caduet.

 

 

Chantix/Champix, the first new prescription treatment for smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006. In September 2006, the European Commission approved Champix in Europe for smoking cessation and it was launched in select E.U. markets in December 2006. Chantix/Champix is available with a patient support plan, which smokers can customize to address their individual behavioral triggers as they try to quit smoking. We are pricing Chantix/Champix for a cash market, given the low coverage for smoking-cessation products in medical plans.

 

 

Exubera, the first inhaled human insulin therapy for glycemic control received approvals from both the FDA and the European Commission for the treatment of adults with type 1 and type 2 diabetes in early 2006. Millions of people with diabetes are not achieving or maintaining acceptable blood sugar levels, despite the availability of current therapies. Exubera represents a medical advance that offers to patients a novel method of introducing insulin into their systems through the lungs. Since May 2006, Exubera has been launched in Germany, Ireland, the U.K. and in the U.S. Within the U.S., a comprehensive education and training program for physicians was completed at the end of 2006. During this time, we increased our understanding of the fundamental drivers of the market. To further support patients and healthcare professionals, Pfizer also provides a 24-hour-a-day, 7-day-a-week call center staffed by healthcare professionals. Similar programs are also in place in European markets where the product has been launched. An expanded roll-out of Exubera to primary-care physicians in the U.S began in January 2007. The manufacturing process for Exubera is complex, involving novel technology. Initial supplies of Exubera were available across the U.S. beginning in September 2006. Sales to date have been minimal, reflecting a phased roll-out of this product in connection with our education and training programs for healthcare specialists.

 

 

Zoloft, which lost exclusivity in the U.S. in June 2006 and earlier in many European markets, experienced a 35% revenue decline in 2006 compared to 2005. It is indicated for the treatment of major depressive disorder, panic disorder, obsessive-compulsive disorder (OCD) in adults and children, post-traumatic stress disorder (PTSD), premenstrual dysphoric disorder (PMDD) and social anxiety disorder (SAD). Zoloft is approved for acute and long-term use in all of these indications, with the exception of PMDD. Zoloft was launched in Japan in July 2006 for the indications of depression/depressed state and panic disorder.

 

 

Geodon/Zeldox, a psychotropic agent, is a dopamine and serotonin receptor antagonist indicated for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder. It is available in both an oral capsule and rapid-acting intramuscular formulation. In the U.S., Geodon had a new prescription share of 6.8% for December 2006. Geodon has become the fastest growing anti-psychotic medication in the U.S. In 2006, total Geodon worldwide sales grew 29% compared to 2005. Geodon growth was driven by the recognition of its efficacy by prescribers as clinical experience increased, and by a favorable metabolic profile.

2006 Financial Report | 17


Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

 

The U.S. Patent and Trademark Office granted a five-year extension to the Geodon U.S. patent, extending its exclusivity to 2012.

 

 

Lyrica achieved $1.2 billion in worldwide revenues in 2006, continuing its performance as one of Pfizer’s most successful pharmaceutical launches. In September 2006, Lyrica was approved by the European Commission to treat central nerve pain, which is associated with conditions such as spinal injury, stroke and multiple sclerosis. In addition, in March 2006, it was approved by the European Commission to treat generalized anxiety disorder (GAD) in adults, thereby providing a new treatment option for the approximately 12 million Europeans living with GAD.

 

 

 

Lyrica was approved by the FDA in June 2005 for adjunctive therapy for adults with partial onset epileptic seizures. This indication built on the earlier FDA approval of Lyrica for two of the most common forms of neuropathic pain; painful diabetic peripheral neuropathy, a chronic neurologic condition affecting about three million Americans, and post-herpetic neuralgia. Lyrica was launched in the U.S., Canada and Italy in September 2005 and is now approved in 77 countries and available in 59 markets. As of December 2006, more than four million patients have been prescribed Lyrica since its introduction. Lyrica gained a 9.6% new prescription share of the total U.S. anti-epileptic market in December 2006.

 

 

Celebrex achieved an 18% increase in worldwide sales in 2006 compared to 2005. In the U.S., Celebrex had a monthly new prescription share of 11.1% in December 2006. Pfizer is continuing its efforts to address physicians’ and patients’ questions by clearly communicating the risks and benefits of Celebrex. In addition, the Prospective Randomized Evaluation of Celecoxib Integrated Safety vs. Ibuprofen or Naproxen (PRECISION) study, which began enrolling patients in October 2006, will provide further understanding of the comparative cardiovascular safety of Celebrex and some common non-specific non-steroidal anti-inflammatory drugs (NSAIDs) in arthritis patients at risk for, or already suffering from, heart disease.

 

 

 

Pfizer began to reintroduce branded advertising in the U.S. in April 2006 in alignment with our new direct-to-consumer (DTC) advertising principles, highlighting Celebrex’s strong clinical profile and benefits. In August 2006, Celebrex was granted pediatric exclusivity in the U.S., extending its patent protection until May 2014. Celebrex was approved by the FDA for juvenile rheumatoid arthritis in December 2006. In January 2007, Celebrex was approved in Japan for the treatment of osteoarthritis and rheumatoid arthritis. In February 2007, Celebrex was approved in Europe for the treatment of ankylosing spondylitis.

 

 

 

In 2005, in accordance with decisions by applicable regulatory authorities, we implemented label changes for Celebrex in the U.S. and the E.U. The revised U.S. label for Celebrex contains a boxed warning of potential serious cardiovascular and gastrointestinal risks that is consistent with warnings for all other prescription NSAIDS. The revised E.U. labels for Celebrex and all other COX-2 medicines include a restriction on use by patients with established heart disease or stroke and additional warnings to physicians regarding use by patients with cardiovascular risk factors.

 

 

 

See Notes to Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Celebrex.

 

 

Zithromax experienced a 69% decline in worldwide sales in 2006 compared to 2005, reflecting the expiration of its composition-of-matter patent in the U.S. in November 2005 and the end of Pfizer’s active sales promotion in July 2005. During the fourth quarter of 2005, four generic versions of oral solid azithromycin were launched, including an authorized generic by Pfizer’s Greenstone subsidiary. Additional generic formulations of azithromycin were launched during 2006, including three oral suspensions and two intravenous versions, and a third intravenous version is expected to be launched in 2007.

 

 

Eraxis, an antifungal approved to treat candidemia and other forms of Candida infections (intra-abdominal abscesses and peritonitis), as well as esophageal candidiasis, was launched mid-June 2006 in the U.S. Candidemia is the most deadly of the common hospital-acquired bloodstream infections with a mortality rate of approximately 40%.

 

 

Viagra remains the leading treatment for erectile dysfunction and one of the world’s most recognized pharmaceutical brands, with more than 58% of U.S. total prescriptions in the erectile dysfunction market through December 2006. Viagra sales grew 1% worldwide in 2006 compared to 2005. We expect to see continued pressure on sales in the U.S. More than 45 states have either eliminated erectile-dysfunction coverage or have enacted “preferred drug lists” that have the potential to limit Pfizer sales to state Medicaid programs. Effective January 1, 2006, federal funds may not be used for reimbursement of erectile-dysfunction medications by the Medicaid program. Medicare coverage of Viagra will end in 2007.

 

 

 

Pfizer has introduced new branded and unbranded advertising to encourage men with erectile dysfunction to talk to their physicians about their condition.

 

 

Detrol/Detrol LA, a muscarinic receptor antagonist, is the most prescribed medicine for overactive bladder, a condition that affects up to 100 million people around the world. Detrol/Detrol LA is an extended-release formulation taken once daily. Worldwide Detrol/Detrol LA sales grew 11% to $1.1 billion in 2006. Detrol/Detrol LA continues to lead the overactive bladder market and perform well in an increasingly competitive marketplace. In the U.S., Detrol/Detrol LA’s new prescription share grew 2% to a 43.2% share for the full year 2006. A strong clinical database, unparalleled access in managed care and Medicare, and a history of delivering positive patient outcomes have enabled Detrol/Detrol LA to maintain market share, and remain the clear first-line antimuscarinic agent among both primary care physicians and urologists. See Notes to Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Detrol/Detrol LA.

18 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

 

Camptosar is indicated as first-line therapy for metastatic colorectal cancer in combination with 5-fluorouracil and leucovorin. It is also indicated for patients in whom metastatic colorectal cancer has recurred or progressed despite following initial fluorouracil-based therapy. Camptosar is for intravenous use only. Revenues of $903 million in 2006 were comparable to 2005. The National Comprehensive Cancer Network (NCCN), an alliance of 20 of the world’s leading cancer centers, has issued guidelines recommending Camptosar as an option across all lines of treatment for advanced colorectal cancer.

 

 

 

Sutent is an oral multi-kinase inhibitor that combines anti-angiogenic and anti-tumor activity to inhibit the blood supply to tumors and has direct anti-tumor effects. Sutent was approved by the FDA and launched in the U.S. in January 2006 for advanced renal cell carcinoma, including metastatic renal cell carcinoma, and gastrointestinal stromal tumors (GIST) after disease progression on or intolerance to imatinib mesylate. Since approval, Sutent has been used to treat more than 7,500 patients in the U.S. In January 2007, Sutent received full marketing authorization and extension of the indication to first-line treatment of advanced and/or metastatic renal cell carcinoma (mRCC), as well as approval as a second-line treatment for GIST, in the E.U.

 

 

 

 

Data from a first-line Phase 3 trial was published in the January 11, 2007, New England Journal of Medicine, in which Sutent doubled progression-free survival versus interferon-alpha (11 months vs. 5 months). In November 2006, the NCCN published updated kidney cancer guidelines, confirming Sutent as an appropriate first-line therapy. In its other core indication, Sutent is the first approved agent to show a clinical benefit after imatinib failure in GIST. As reported in the October 10, 2006, issue of The Lancet, Sutent treatment produced a four fold increase in median time to tumor progression vs. placebo (27.3 weeks vs. 6.4 weeks). Sutent has received approvals or registration in several countries in Asia and Latin America and is expected to launch in many more markets worldwide in 2007. Sutent recorded $219 million in sales worldwide in 2006 and had been used to treat more than 15,000 patients as of December 2006.

 

 

 

Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is the most-prescribed branded glaucoma medicine in the world. Clinical data showing its advantages in treating intraocular pressure compared with beta blockers should support the continued growth of this important medicine. Xalacom, the only fixed combination prostaglandin (Xalatan) and beta blocker, is available primarily in European markets. Xalatan/Xalacom sales grew 6% in 2006 compared to 2005.

 

 

 

Zyrtec provides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec continues to be the most-prescribed antihistamine in the U.S. in a challenging market. Sales increased 15% in 2006 compared to 2005. In February 2006, we began a new DTC advertising campaign featuring new insight that allergy symptoms can worsen over time due to exposure to new allergens. We will lose U.S. exclusivity for Zyrtec in December 2007. Since we sold our rights to market Zyrtec over-the-counter in connection with the sale of our Consumer Healthcare business, we expect no revenue from Zyrtec after the expiration of the U.S. patent in December.

 

 

 

Alliance revenues reflect revenues primarily associated with our co-promotion of Aricept, Macugen, Rebif and Spiriva.

 

 

 

 

Aricept, discovered and developed by our alliance partner Eisai Co., Ltd, is the world’s leading medicine to treat symptoms of Alzheimer’s disease.

 

 

 

 

Macugen, discovered and developed by our alliance partner OSI Pharmaceuticals, Inc. (OSI), is for the treatment of AMD.

 

 

We are in negotiations with OSI to return the U.S. rights to Macugen to OSI in exchange for a royalty-free license to market Macugen outside the U.S.

 

 

 

 

Rebif, discovered and developed by Serono S.A. (Serono), is used to treat symptoms of relapsing forms of multiple sclerosis. Pfizer co-promotes Rebif with Serono in the U.S.

 

 

 

 

Spiriva, discovered and developed by our alliance partner Boehringer Ingelheim (BI), is used to treat chronic obstructive pulmonary disease, a chronic respiratory disorder that includes chronic bronchitis and emphysema.

 

 

 

 

Alliances allow us to co-promote or license these products for sale in certain countries. Under the co-promotion agreements, these products are marketed and promoted with our alliance partners. We provide funding through cash, staff and other resources to sell, market, promote and further develop these products.

Product Developments

We continue to invest in R&D to provide future sources of revenues through the development of new products, as well as through additional uses for existing in-line and alliance products. We have a broad and deep pipeline of medicines in development. However, there are no assurances as to when, or if, we will receive regulatory approval for additional indications for existing products or any of our other products in development. Below are significant regulatory actions by, and filings pending with, the FDA and other regulatory authorities.

2006 Financial Report | 19


Financial Review
Pfizer Inc and Subsidiary Companies

 

 

 

 

 






 

 

 

 

 






Recent FDA approvals follow:






PRODUCT

 

INDICATION

 

DATE APPROVED






Celebrex

 

Juvenile rheumatoid arthritis

 

December 2006






Aricept

 

Treatment of severe Alzheimer’s disease

 

October 2006






Chantix

 

Nicotine-receptor partial agonist for smoking cessation

 

May 2006






Genotropin

 

Treatment of long-term growth failure associated with Turner’s syndrome

 

April 2006






Geodon

 

Treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder—liquid oral suspension

 

March 2006






Eraxis

 

Treatment of candidemia and invasive candidiasis

 

February 2006

 

 

Treatment of esophageal candidiasis

 

February 2006






Exubera

 

Inhaled form of insulin for use in adults with type 1 and type 2 diabetes

 

January 2006






Sutent

 

Treatment of mRCC and refractory GIST

 

January 2006






 

 

 

 

 


Pending U.S. new drug applications (NDAs) and supplemental filings follow:






PRODUCT

 

INDICATION

 

DATE SUBMITTED






Lyrica

 

Treatment of fibromyalgia

 

December 2006






Maraviroc(a)

 

Treatment of human immuno-deficiency virus/acquired immune deficiency (HIV) in treatment-experienced patients

 

December 2006






Zithromax

 

Bacterial infections—sustained release—Pediatric filing

 

November 2006






Lipitor

 

Secondary prevention of cardiovascular (CV) events in patients with established coronary heart disease (CHD)

 

May 2006






Fesoterodine(b)

 

Treatment of overactive bladder

 

March 2006






Vfend

 

Fungal infections—Pediatric filing

 

June 2005






dalbavancin

 

Treatment of Gram-positive bacterial infections

 

December 2004







 

 

(a)

The FDA granted priority review status to maraviroc in February 2007.

 

 

(b)

We received an “approvable” letter from the FDA for fesoterodine for the treatment of overactive bladder in January 2007.

We received “not-approvable” letters from the FDA for Oporia for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We expect to meet with the FDA in the first quarter of 2007 in order to review the viability of the lasofoxifene treatment program using 3-year interim Postmenopausal Evaluation And Risk-reduction with Lasofoxifene data and to address the FDA’s concerns. In March 2006, we received a “not-approvable” letter for use of Fragmin in oncology patients for the extended treatment of symptomatic venous thromboembolism (VTE) to prevent VTE in patients with cancer. We are currently in discussions with the FDA regarding this letter. In September 2006, the Oncologic Drugs Advisory Committee recommended that the FDA approve Fragmin for the prevention of blood clots in patients with cancer. In September 2005, we received a “not-approvable” letter for Dynastat (parecoxib), an injectable prodrug for valdecoxib for the treatment of acute pain. We have had discussions with the FDA regarding this letter, and we are considering plans to address the FDA’s concerns.

In June 2006, after certain decisions by the FDA, we notified Neurocrine Biosciences, Inc. (Neurocrine) that we are returning the development and marketing rights for indiplon, a product candidate to treat insomnia, to Neurocrine. This includes both the collaboration to develop and co-promote indiplon in the U.S., as well as Pfizer’s exclusive license to develop and market indiplon outside of the U.S.

In June 2006, the FDA designated as approvable the NDA for dalbavancin. We now anticipate a successful resolution of outstanding issues to allow final FDA approval and launch in 2007.

 

 

 

 

 

 

 

Other regulatory approvals and filings follow:








PRODUCT

 

DESCRIPTION OF EVENT

 

DATE APPROVED

 

DATE SUBMITTED








Celebrex

 

Approval in the E.U. for the treatment of ankylosing spondylitis

 

February 2007

 

 

 

Approval in Japan for treatment of rheumatoid arthritis

 

January 2007

 








Sutent

 

Approval in the E.U. for mRCC as a first-line treatment

 

January 2007

 

 

 

Approval in the E.U. for GIST as a second-line treatment

 

January 2007

 

 

 

Approval in Canada for second-line treatment of mRCC

 

August 2006

 

 

 

Approval in Canada for second-line treatment of GIST

 

May 2006

 

 

 

Application submitted in Japan for mRCC

 

 

December 2006

 

 

Application submitted in Japan for GIST

 

 

December 2006

 

 

Application submitted in Canada for first-line treatment of mRCC

 

 

October 2006








Chantix/Champix

 

Approval in Canada for smoking cessation

 

January 2007

 

 

 

Approval in the E.U. for smoking cessation

 

September 2006

 

 

 

Application submitted in Japan for smoking cessation

 

 

June 2006








Somavert

 

Approval in Japan for acromegaly

 

January 2007

 








Maraviroc(a)

 

Application submitted in the E.U. for treatment of HIV

 

 

December 2006








Lyrica

 

Approval in the E.U. for the treatment of central neuropathic pain

 

September 2006

 

 

 

Approval in the E.U. for treatment of GAD in adults

 

March 2006

 








Spiriva

 

Application submitted in the E.U.—Respimat device for chronic obstructive pulmonary disease

 

 

September 2006









 

 

(a)

Maraviroc has been granted accelerated review status in the E.U.


20 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

Other regulatory approvals and filings follow: (continued)


PRODUCT

 

DESCRIPTION OF EVENT

 

DATE APPROVED

 

DATE SUBMITTED








Eraxis

 

Application submitted in the E.U. for

 

 

September 2006

 

 

treatment of candidemia and candidiasis

 

 

 

 








Fragmin

 

Approval in Canada for treatment of medical thrombo-prophylaxis

 

July 2006

 








Neurontin

 

Approval in Japan for treatment of epilepsy

 

July 2006

 








Genotropin

 

Approval in Japan for hormone deficiency long-term replacement therapy in adults

 

July 2006

 








Aricept

 

Application submitted in Canada for treatment of severe Alzheimer’s disease

 

 

July 2006








Lipitor

 

Approval in the E.U. for primary prevention of CV events in high coronary heart disease risk patients without established CHD

 

May 2006

 








Aromasin

 

Approval in Canada for early breast cancer

 

May 2006

 








Vfend

 

Approval in Canada for the powder form oral suspension

 

May 2006

 








Zyvox

 

Approval in Japan for methicillin-resistant Staphylococcus aureus

 

April 2006

 








Zoloft

 

Approval in Japan for treatment of depression and panic disorder

 

April 2006

 








Detrol/
Detrol LA/
Detrusitol

 

Approval in Japan for treatment of overactive bladder

 

April 2006

 








Exubera

 

Application submitted in Canada as an inhaled form of insulin for use in adults with type 1 and 2 diabetes

 

 

April 2006

 

 

Approval in the E.U. as an inhaled form of insulin for use in adults with type 1 and 2 diabetes

 

January 2006

 








Fesoterodine (b)

 

Application submitted in the E.U. for treatment of over-active bladder

 

 

March 2006








Macugen

 

Approval in E.U. for AMD

 

January 2006

 








Inspra

 

Application submitted in Japan for hypertension

 

 

May 2002

 








 (b)    On February 23, 2007, the Committee for Medicinal Products for Human Use issued a positive opinion recommending that the European Commission grant marketing authorization
           for fesoterodine in Europe.








Ongoing or planned clinical trials for additional uses and dosage forms for our products include:








PRODUCT

 

INDICATION




Geodon/
Zeldox

 

Bipolar relapse prevention; bipolar pediatric




Lyrica

 

Generalized anxiety disorder; epilepsy monotherapy




Revatio

 

Pediatric pulmonary arterial hypertension




Macugen

 

Diabetic macular edema




Drug candidates in late-stage development include CP-945,598 a cannabinoid-1 receptor antagonist for treatment of obesity; axitinib, a multi-targeted receptor kinase for treatment of thyroid cancer; Zithromax/chloroquine for treatment of malaria; PF-3,512,676, a toll-like receptor 9 agonist for non-small cell lung cancer developed in partnership with Coley; CP-675,206, an anti-CTLA4 monoclonal antibody for melanoma; and Sutent for treatment of metastatic breast cancer.

On December 2, 2006, we announced that in the interests of public safety, we were stopping all torcetrapib clinical trials and had informed the FDA. Based on the recommendation of the independent Data Safety Monitoring Board, we have terminated the ILLUMINATE morbidity and mortality study for torcetrapib due to an imbalance of mortality and cardiovascular events and asked all clinical investigators to inform patient participants to stop taking the study medication immediately. In addition, we have ended the development program for this compound.

On November 28, 2006, we announced that we and Akzo Nobel’s Organon healthcare unit agreed to discontinue our collaboration in the further development of asenapine, a drug candidate for the treatment for schizophrenia and bipolar disorder. Our decision to discontinue participation in the asenapine development program was an outcome of a commercial analysis of the compound as part of our overall portfolio. We will return all product rights, intellectual property and data to Organon in 2007.

Additional product-related programs are in various stages of discovery and development. Also, see our discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.

Animal Health

Revenues of our Animal Health business follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 



(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 

06/05

 

05/04

 













Livestock products

 

$

1,458

 

$

1,379

 

$

1,200

 

 

6

 

 

15

 

Companion animal products

 

 

853

 

 

827

 

 

753

 

 

3

 

 

10

 











 

 

 

 

 

 

 

Total Animal Health

 

$

2,311

 

$

2,206

 

$

1,953

 

 

5

 

 

13

 


















Our Animal Health business is one of the largest in the world.

The increase in Animal Health revenues in 2006, as compared to 2005, was primarily attributable to:

 

 

for livestock products, the continued good performance of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe and in the U.S.; and

2006 Financial Report | 21


Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

for companion animal products, the continued good performance of Revolution (a parasiticide for dogs and cats);

 

 

partially offset by:

 

 

a decline in U.S. Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery) revenues due to intense branded competition, as well as increased generic competition in the European companion animal market.

 

 

The increase in Animal Health revenues in 2005, as compared to 2004, was attributable to:

 

 

for livestock products, the good performance of Excede (long acting anti-infective) in the U.S. and Draxxin in Europe and in the U.S., as well as Spectramast (antibiotic formulated to treat clinical mastitis), which was launched in the U.S. in May 2005;

 

 

for companion animal products, increased promotional activities throughout our markets resulted in Revolution and Clavamox (an antibiotic for dogs and cats) growing at double-digit rates in 2005, and the launch of Simplicef (small animal anti-infective) in the U.S. in the fourth quarter of 2004; and

 

 

the favorable impact of the weakening of the U.S. dollar relative to many foreign currencies.

 

 

Costs and Expenses

 

 

Cost of Sales

 

 

Cost of sales increased 6% in 2006 and increased 13% in 2005, while revenues increased 2% in 2006 and decreased 3% in 2005. Cost of sales as a percentage of revenues increased in 2006 compared to 2005 and in 2005 compared to 2004.

 

Cost of sales in 2006, compared to 2005, increased as a result of:

 

 

higher costs of $268 million related to our AtS productivity initiative;

 

 

the timing of implementation of inventory management initiatives;

 

 

the unfavorable impact on expenses of foreign exchange; and

 

 

charges related to certain inventory and manufacturing equipment write-downs,

 

 

partially offset by:

 

 

changes in sales mix;

 

 

operational efficiencies, reflecting savings related to our AtS productivity initiative; and

 

 

$73 million in write-offs of inventory and exit costs in 2005 related to suspension of sales and marketing of Bextra.

 

 

Cost of sales in 2005, compared to 2004, increased as a result of:

 

 

unfavorable geographic, segment and product mix, and adverse changes in production volume, among other factors, which reflected the loss of U.S. exclusivity for certain of our pharmaceutical products and the uncertainty regarding the selective COX-2 inhibitors;

 

 

$124 million related to our AtS productivity initiative; and

 

 

$73 million in write-offs of inventory and exit costs related to suspension of sales and marketing of Bextra.

 

 

Selling, Informational and Administrative (SI&A) Expenses

 

 

SI&A expenses increased 2% in 2006, which reflects:

 

 

higher promotional investments in new product launches and in-line product promotional programs;

 

 

expenses related to share-based payments; and

 

 

higher costs of $92 million related to our AtS productivity,

 

 

partially offset by:

 

 

the favorable impact on expenses of foreign exchange; and

 

 

savings related to our AtS productivity initiative.

 

 

SI&A expenses were flat in 2005 compared to 2004, which reflects:

 

 

the unfavorable impact on expenses of foreign exchange; and

 

 

$151 million in expenses related to our AtS productivity initiative,

 

 

offset by:

 

 

an increase in acquisition-related synergies;

 

 

savings from our AtS productivity initiative; and

 

 

lower marketing expenses for our pharmaceutical products compared to 2004, due primarily to lower spending on products which have lost exclusivity and the withdrawal of Bextra.

 

 

Research and Development (R&D) Expenses

 

 

R&D expenses increased 5% in 2006, which reflects:

 

 

higher costs of $126 million related to our AtS productivity initiative;

 

 

expenses related to share-based payments;

 

 

timing considerations associated with the advancement of development programs for pipeline products; and

 

 

higher payments for intellectual property rights, discussed below, among other factors,

 

 

partially offset by:

 

 

an R&D milestone due to us from sanofi-aventis (approximately $118 million); and

 

 

savings related to our AtS productivity initiative.

 

 

R&D expenses decreased 3% in 2005, which reflects:

 

 

the initial benefits associated with the AtS productivity initiative,

 

 

partially offset by:

 

 

increased portfolio support; and

 

 

$50 million in expenses related to our AtS productivity inititive.

22 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 


R&D expense also includes payments for intellectual property rights of $292 million in 2006, $156 million in 2005 and $160 million in 2004. (For further discussion, see the “Product Developments” section of this Financial Review.)

Acquisition-Related In-Process Research and Development Charges

The estimated value of acquisition-related IPR&D is expensed at the acquisition date. In 2006, we expensed $835 million of IPR&D, primarily related to our acquisitions of Rinat and PowderMed. In 2005, we expensed $1.7 billion of IPR&D, primarily related to our acquisitions of Vicuron and Idun. In 2004, we expensed $1.1 billion of IPR&D, related primarily to our acquisition of Esperion.

Adapting to Scale Productivity Initiative

In connection with the AtS productivity initiative, which was launched in early 2005 and broadened in October 2006, our management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures in a company-wide effort to improve performance and efficiency. On January 22, 2007, we announced additional plans to fundamentally change the way we run our business to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We intend to generate cost savings through site rationalization in research and manufacturing, streamlined organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. Compared to 2006, we plan to achieve a decrease in the SI&A pre-tax component of Adjusted income of $500 million by the end of 2007, and an absolute net reduction of the pre-tax expense component of Adjusted income of between $1.5 billion and $2.0 billion by the end of 2008. (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.) Savings realized during 2006 totaled approximately $2.6 billion. The actions associated with the expanded AtS productivity initiative include restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated implementation costs, such as accelerated depreciation charges, primarily associated with plant network optimization efforts, and expenses associated with system and process standardization and the expansion of shared services (see Notes to Consolidated Financial Statements—Note 4. Adapting to Scale Productivity Initiative).

We incurred the following costs in connection with our AtS productivity initiative:

 

 

 

 

 

 

 

 








 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 






 

Implementation costs(a)

 

$

788

 

$

325

 

Restructuring charges(b)

 

 

1,296

 

 

438

 








 

Total AtS costs

 

$

2,084

 

$

763

 








 


 

 

(a)

For 2006, included in Cost of sales ($392 million), Selling, informational and administrative expenses ($243 million), Research and development expenses ($176 million) and in Other (income)/deductions—net ($23 million income). For 2005, included in Cost of sales ($124 million), Selling, informational and administrative expenses ($151 million), and Research and development expenses ($50 million).

 

 

(b)

Included in Restructuring charges and acquisition-related costs.

Through December 31, 2006, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our U.S. marketing and worldwide research and development operations, and the implementation costs primarily relate to system and process standardization, as well as the expansion of shared services.

The components of restructuring charges associated with AtS follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

 

 

 

 

UTILIZATION
THROUGH
DEC. 31,
2006

 

ACCRUAL
AS OF
DEC. 31,
2006

 

 

 

COSTS INCURRED

 

 

 

 

 


 

 

 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

TOTAL

 

 

(a)

















 

Employee termination costs

 

$

809

 

$

303

 

$

1,112

 

$

749

 

$

363

 

Asset impairments

 

 

368

 

 

122

 

 

490

 

 

490

 

 

 

Other

 

 

119

 

 

13

 

 

132

 

 

93

 

 

39

 

















 

 

 

$

1,296

 

$

438

 

$

1,734

 

$

1,332

 

$

402

 

















 


 

 

(a)

Included in Other current liabilities.

Through December 31, 2006, Employee termination costs represent the approved reduction of the workforce by 8,274 employees, mainly in manufacturing, sales and research. We notified affected individuals and 5,732 employees were terminated as of December 31, 2006. Employee termination costs are recorded as incurred and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

Acquisition-Related Costs

We incurred the following acquisition-related costs, primarily in connection with our acquisition of Pharmacia on April 16, 2003:

 

 

 

 

 

 

 

 

 

 

 











 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 








 

Integration costs(a):

 

 

 

 

 

 

 

 

 

 

Pharmacia

 

$

 

$

532

 

$

454

 

Other

 

 

21

 

 

11

 

 

24

 

Restructuring charges(a):

 

 

 

 

 

 

 

 

 

 

Pharmacia

 

 

(3

)

 

372

 

 

680

 

Other

 

 

9

 

 

3

 

 

(7

)











 

Total acquisition-related costs

 

$

27

 

$

918

 

$

1,151

 











 


 

 

(a)

Included in Restructuring charges and acquisition-related costs.

In connection with the acquisition of Pharmacia, Pfizer management approved plans to restructure and integrate the operations of both legacy Pfizer and legacy Pharmacia to combine operations, eliminate duplicative facilities and reduce costs. As of December 31, 2005, the restructuring of our operations as a result of our acquisition of Pharmacia was substantially complete. Restructuring charges included severance, costs of vacating duplicative facilities, contract termination and other exit costs. Total acquisition-related expenditures (income statement and balance sheet) incurred during 2002 through 2006 to achieve these synergies were $5.2 billion, on a pre-tax basis.

Cost synergies from the Pharmacia acquisition were $4.2 billion in 2005 and $3.6 billion in 2004. Synergies come from a broad range of sources, including a streamlined organization, reduced operating expenses, and procurement savings.

2006 Financial Report | 23


Financial Review
Pfizer Inc and Subsidiary Companies

 


Substantially all of our restructuring charges in connection with the Pharmacia acquisition were completed through December 31, 2005 and we recorded, in total, $1.2 billion by that date into the income statement. These restructuring charges were associated with exiting certain activities of legacy Pfizer and legacy Pharmacia (from April 16, 2004), including severance, costs of vacating duplicative facilities, contract termination and other exit costs. As of December 31, 2006, liabilities for these restructuring charges incurred but not paid totaled $77 million and are included in Other current liabilities.

The majority of the restructuring charges related to employee terminations (see Notes to Consolidated Financial Statements—Note 5B. Acquisition-Related Costs: Restructuring Charges—Pharmacia). Through December 31, 2006, employee termination costs totaling $592 million represent the approved reduction of the legacy Pfizer and legacy Pharmacia (from April 16, 2004) work force by 4,255 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 4,005 employees were terminated as of December 31, 2006. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Pharmacia employment contracts.

Other (Income)/Deductions—Net

In 2006, Pfizer recorded a charge of $320 million related to the impairment of our Depo-Provera intangible asset. In 2005, Pfizer recorded impairment charges of $1.1 billion related to the impairment of our Bextra intangible asset. In 2004, we recorded an impairment charge of $691 million related to the Depo-Provera brand and a litigation-related charge of $369 million related to Quigley Company, Inc., a wholly-owned subsidiary of Pfizer. See also Notes to Consolidated Financial Statements—Note 6. Other (Income)/Deductions—Net.

Provision/(Benefit) for Taxes on Income

Our overall effective tax rate for continuing operations was 15.3% in 2006, 29.4% in 2005 and 18.4% in 2004. The lower tax rate in 2006 is primarily due to tax benefits related to the resolution of a tax matter, a change in tax regulations and a decrease in the 2005 estimated U.S. tax provision related to the repatriation of foreign earnings, all as discussed below, and the impact of the sale of our Consumer Healthcare business. The higher tax rate in 2005 was attributable to the previously mentioned tax charge associated with the repatriation of foreign earnings and higher non-deductible charges for acquisition-related IPR&D, primarily relating to our acquisition of Vicuron and Idun in 2005, partially offset by the tax benefit of $586 million related to the resolution of certain tax positions.

In the first quarter of 2006, we were notified by the Internal Revenue Service (IRS) Appeals Division that a resolution had been reached on the matter that we were in the process of appealing, related to the tax deductibility of an acquisition-related breakup fee paid by the Warner-Lambert Company in 2000. As a result, we recorded a tax benefit of approximately $441 million related to the resolution of this issue.

On January 23, 2006, the IRS issued final regulations on Statutory Mergers and Consolidations, which impacted certain prior-period transactions. In the first quarter of 2006, we recorded a tax benefit of $217 million, reflecting the total impact of these regulations.

In the third quarter of 2006, we recorded a decrease to the 2005 estimated U.S. tax provision related to the repatriation of foreign earnings, due primarily to the receipt of information that raised our assessment of the likelihood of prevailing on the technical merits of a certain position, and we recognized a tax benefit of $124 million.

In 2005, we recorded an income tax charge of $1.7 billion, included in Provision for taxes on income, in connection with our decision to repatriate approximately $37 billion of foreign earnings in accordance with the American Jobs Creation Act of 2004 (the Jobs Act). The Jobs Act created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend-received deduction for certain dividends from controlled foreign corporations in 2005. In addition, during 2005, we recorded a tax benefit of $586 million, primarily related to the resolution of certain tax positions.

Discontinued Operations—Net of Tax

For further discussion about our dispositions, see the “Our Strategic Initiatives—Strategy and Recent Transactions: Dispositions” section of this Financial Review. The following amounts, primarily related to our Consumer Healthcare business, have been segregated from continuing operations and included in Discontinued operations—net of tax in the consolidated statements of income:

 

 

 

 

 

 

 

 

 

 

 












 

 

YEAR ENDED DEC. 31,

 

 

 



(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 









Revenues

 

$

4,044

 

$

3,948

 

$

3,933

 












Pre-tax income

 

 

643

 

 

695

 

 

563

 

Provision for taxes on income(a)

 

 

(210

)

 

(244

)

 

(189

)












Income from operations of discontinued businesses—net of tax

 

 

433

 

 

451

 

 

374

 












Pre-tax gains on sales of discontinued businesses

 

 

10,243

 

 

77

 

 

75

 

Provision for taxes on gains(b)

 

 

(2,363

)

 

(30

)

 

(24

)












Gains on sales of discontinued businesses—net of tax

 

 

7,880

 

 

47

 

 

51

 












Discontinued operations—net of tax

 

$

8,313

 

$

498

 

$

425

 













 

 

(a)

Includes a deferred tax expense of $24 million in 2006 and $25 million in 2005, and a deferred tax benefit of $15 million in 2004.

 

 

(b)

Includes a deferred tax benefit of $444 million in 2006, and nil in 2005 and 2004.

24 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 


Adjusted Income

General Description of Adjusted Income Measure

Adjusted income is an alternative view of performance used by management and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report Adjusted income in order to portray the results of our major operations—the discovery, development, manufacture, marketing and sale of prescription medicines for humans and animals—prior to considering certain income statement elements. We have defined Adjusted income as Net income before significant impact of purchase accounting for acquisitions, acquisition-related costs, discontinued operations, the cumulative effect of a change in accounting principles and certain significant items. The Adjusted income measure is not, and should not be viewed as, a substitute for U.S. GAAP Net income.

The Adjusted income measure is an important internal measurement for Pfizer. We measure the performance of the overall Company on this basis. The following are examples of how the Adjusted income measure is utilized.

 

 

Senior management receives a monthly analysis of our operating results that is prepared on an Adjusted income basis;

 

 

Our annual budgets are prepared on an Adjusted income basis; and

 

 

Annual and long-term compensation, including annual cash bonuses, merit-based salary adjustments and stock options, for various levels of management, is based on financial measures that include Adjusted income. The Adjusted income measure currently represents a significant portion of target objectives that are utilized to determine the annual compensation for various levels of management, although the actual weighting of the objective may vary by level of management and job responsibility and may be considered in the determination of certain long-term compensation plans. The portion of senior management’s bonus, merit-based salary increase and stock option awards based on the Adjusted income measure ranges from 10% to 30%.

Despite the importance of this measure to management in goal setting and performance measurement, we stress that Adjusted income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, Adjusted income (unlike U.S. GAAP Net income) may not be comparable with the calculation of similar measures for other companies. Adjusted income is presented solely to permit investors to more fully understand how management assesses our performance.

We also recognize that, as an internal measure of performance, the Adjusted income measure has limitations and we do not restrict our performance-management process solely to this metric. A limitation of the Adjusted income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles and does not provide a comparable view of our performance to other companies in the pharmaceutical industry. We also use other specifically tailored tools designed to ensure the highest levels of our performance. For example, our R&D organization has productivity targets, upon which its effectiveness is measured. In addition, for all periods presented, Performance-Contingent Share Awards made to our senior executives are based on a non-discretionary formula, which measures our performance using relative total shareholder return, and relative change in diluted earnings per common share, the latter being a U.S. GAAP Net income measure. Performance Share Awards grants made in 2006 and future years will be paid based on a non-discretionary formula that measures our performance using relative total shareholder return. For additional information, see Notes to Consolidated Financial Statements—Note 15. Share-Based Payments.

Purchase Accounting Adjustments

Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to our acquisitions of Pharmacia, PowderMed Ltd., Rinat, Idun, Vicuron and sanofi-aventis’ rights to Exubera, as well as net-asset acquisitions. These impacts can include charges for purchased IPR&D, the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value and the incremental charges related to the amortization of finite-lived intangible assets for the increase to fair value. Therefore, the Adjusted income measure includes the revenues earned upon the sale of the acquired products, without considering the aforementioned significant charges.

Certain of the purchase-accounting adjustments associated with a business combination, such as the amortization of intangibles acquired in connection with our acquisition of Pharmacia in 2003, can occur for up to 40 years (these assets have a weighted-average useful life of approximately nine years), but this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors with an alternative view of our business results by trying to provide a degree of parity to internally developed intangible assets for which research and development costs have been previously expensed.

However, a completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through Adjusted income. This component of Adjusted income is derived solely from the impacts of the items listed in the first paragraph of this section. We have not factored in the impacts of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our research and development costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting sales, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our Adjusted income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.

Acquisition-Related Costs

Adjusted income is calculated prior to considering integration and restructuring charges associated with business combinations because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate two businesses as a result of the acquisition decision. For additional clarity, only restructuring and integration activities that are associated with a purchase business combination or a net-asset acquisition are included in acquisition-related costs. We have not

2006 Financial Report | 25


Financial Review
Pfizer Inc and Subsidiary Companies


factored in the impacts of synergies that would have resulted had these costs not been incurred.

We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees—a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in other, more normal business contexts.

The integration and restructuring charges associated with a business combination may occur over several years, with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the highly regulated nature of the pharmaceutical business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA. In other situations, we may be required by local laws to obtain approvals prior to terminating certain employees. This approval process can delay the termination action.

Discontinued Operations

Adjusted income is calculated prior to considering the results of operations included in discontinued operations, such as our Consumer Healthcare business, which we sold in December 2006, as well as any related gains or losses on the sale of such operations. We believe that this presentation is meaningful to investors because, while we review our businesses and product lines periodically for strategic fit with our operations, we do not build or run our businesses with an intent to sell them.

Cumulative Effect of a Change in Accounting Principles

Adjusted income is calculated prior to considering the cumulative effect of a change in accounting principles. The cumulative effect of a change in accounting principles is generally one time in nature and not expected to occur as part of our normal business on a regular basis.

Certain Significant Items

Adjusted income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program which is specific in nature with a defined term, such as those related to our AtS initiative; costs associated with a significant recall of one of our products; charges related to sales or disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; the impact of adopting certain significant, event-driven tax legislation, such as charges attributable to the repatriation of foreign earnings in accordance with the Jobs Act; or possible charges related to legal matters, such as certain of those discussed in Legal Proceedings in our Form 10-K and in Part II: Other Information; Item 1, Legal Proceedings included in our Form 10-Q filings. Normal, ongoing defense costs of the Company or settlements and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

Reconciliation

A reconciliation between Net income, as reported under U.S. GAAP, and Adjusted income follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 

 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 

06/05

 

05/04

 












 

Reported net income

 

$

19,337

 

$

8,085

 

$

11,361

 

 

139

 

 

(29

)

Purchase accounting adjustments—net of tax

 

 

3,131

 

 

3,967

 

 

3,389

 

 

(21

)

 

17

 

Acquisition-related costs—net of tax

 

 

14

 

 

599

 

 

744

 

 

(98

)

 

(19

)

Discontinued operations—net of tax

 

 

(8,313

)

 

(498

)

 

(425

)

 

M+

 

 

17

 

Cumulative effect of a change in accounting principles—net of tax

 

 

 

 

23

 

 

 

 

*

 

 

*

 

Certain significant items—net of tax

 

 

813

 

 

2,293

 

 

629

 

 

(65

)

 

265

 











 

 

 

 

 

 

 

Adjusted income

 

$

14,982

 

$

14,469

 

$

15,698

 

 

4

 

 

(8

)

















 


 

 

*

Calculation not meaningful.

 

 

M+ Change greater than 1,000%.

 

 

Certain amounts and percentages may reflect rounding adjustments.

26 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies


Adjusted income as shown above excludes the following items:

 

 

 

 

 

 

 

 

 

 

 




 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 








 

Purchase accounting adjustments:

 

 

 

 

 

 

 

 

 

 

In-process research and development charges(a)

 

$

835

 

$

1,652

 

$

1,071

 

Intangible amortization and other(b)

 

 

3,220

 

 

3,289

 

 

3,318

 











 

Total purchase accounting adjustments, pre-tax

 

 

4,055

 

 

4,941

 

 

4,389

 

Income taxes

 

 

(924

)

 

(974

)

 

(1,000

)











 

Total purchase accounting adjustments—net of tax

 

 

3,131

 

 

3,967

 

 

3,389

 











 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

Integration costs(c)

 

 

21

 

 

543

 

 

478

 

Restructuring charges(c)

 

 

6

 

 

375

 

 

673

 











 

Total acquisition-related costs, pre-tax

 

 

27

 

 

918

 

 

1,151

 

Income taxes

 

 

(13

)

 

(319

)

 

(407

)











 

Total acquisition-related costs—net of tax

 

 

14

 

 

599

 

 

744

 











 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations(d)

 

 

(643

)

 

(695

)

 

(563

)

Gains on sales of discontinued operations(d)

 

 

(10,243

)

 

(77

)

 

(75

)











 

Total discontinued operations, pre-tax

 

 

(10,886

)

 

(772

)

 

(638

)

Income taxes

 

 

2,573

 

 

274

 

 

213

 











 

Total discontinued operations—net of tax

 

 

(8,313

)

 

(498

)

 

(425

)











 

Cumulative effect of a change in accounting principles—net of tax

 

 

 

 

23

 

 

 











 

Certain significant items:

 

 

 

 

 

 

 

 

 

 

Asset impairment charges and other associated costs(e)

 

 

320

 

 

1,240

 

 

702

 

Sanofi-aventis research and development milestone(f)

 

 

(118

)

 

 

 

 

Restructuring charges—Adapting to Scale(c)

 

 

1,296

 

 

438

 

 

 

Implementation costs—Adapting to Scale(g)

 

 

788

 

 

325

 

 

 

Gain on disposals of investments and other(h)

 

 

(158

)

 

(134

)

 

 

Litigation-related(h)

 

 

(15

)

 

 

 

369

 

Contingent income earned from the prior year sale of a product-in-development(h)

 

 

 

 

 

 

(100

)

Operating results of divested legacy Pharmacia research facility(f)

 

 

 

 

 

 

64

 











 

Total certain significant items, pre-tax

 

 

2,113

 

 

1,869

 

 

1,035

 

Income taxes

 

 

(735

)

 

(654

)

 

(406

)

Resolution of certain tax positions(i)

 

 

(441

)

 

(586

)

 

 

Tax impact of the repatriation of foreign earnings(i)

 

 

(124

)

 

1,664

 

 

 











 

Total certain significant items—net of tax

 

 

813

 

 

2,293

 

 

629

 











 

Total purchase accounting adjustments, acquisition-related costs, discontinued operations, cumulative effect of a change in accounting principles and certain significant items—net of tax

 

$

(4,355

)

$

6,384

 

$

4,337

 











 


 

 

(a)

Included in Acquisition-related in-process research and development charges. (See Notes to Consolidated Financial Statements—Note 2. Acquisitions.)

 

 

(b)

Included primarily in Amortization of intangible assets. (See Notes to Consolidated Financial Statements—Note 12. Goodwill and Other Intangible Assets.)

 

 

(c)

Included in Restructuring charges and acquisition-related costs. (See Notes to Consolidated Financial Statements—Note 4. Adapting to Scale Productivity Initiative and Note 5. Acquisition-Related Costs.)

 

 

(d)

Discontinued operations—net of tax is primarily related to our Consumer Healthcare business. (See Notes to Consolidated Financial Statements—Note 3. Discontinued Operations.)

 

 

(e)

Included primarily in Other (income)/deductions—net. For 2006 and 2004, includes $320 million and $691 million related to the impairment of the Depo-Provera intangible asset, and for 2005, includes $1.2 billion related to the impairment of the Bextra intangible asset. (See Notes to the Consolidated Financial Statements—Note 12B. Goodwill and Other Intangible Assets: Other Intangible Assets.)

 

 

(f)

Included in Research and development expenses.

 

 

(g)

Included in Cost of sales ($392 million), Selling, informational and administrative expenses ($243 million), Research and development expenses ($176 million) and in Other (income)/deductions-net ($23 million income) for 2006. Included in Cost of sales ($124 million), Selling, informational and administrative expenses ($151 million), Research and development expenses ($50 million) for 2005. (See Notes to the Consolidated Financial Statements—Note 4. Adapting to Scale Productivity Initiative.)

 

 

(h)

Included in Other (income)/deductions—net. (See Notes to Consolidated Financial Statements—Note 6. Other (Income)/Deductions—Net.)

 

 

(i)

Included in Provision for taxes on income. (See Notes to Consolidated Financial Statements—Note 7. Taxes on Income.)

2006 Financial Report | 27


Financial Review
Pfizer Inc and Subsidiary Companies


Financial Condition, Liquidity and Capital Resources

Net Financial Assets

Our net financial asset position as of December 31 follows:

 

 

 

 

 

 

 

 








 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 






 

Financial assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,827

 

$

2,247

 

Short-term investments

 

 

25,886

 

 

19,979

 

Short-term loans

 

 

514

 

 

510

 

Long-term investments and loans

 

 

3,892

 

 

2,497

 








 

Total financial assets

 

 

32,119

 

 

25,233

 








 

Debt:

 

 

 

 

 

 

 

Short-term borrowings, including current portion of long-term debt

 

 

2,434

 

 

11,589

 

Long-term debt

 

 

5,546

 

 

6,347

 








 

Total debt

 

 

7,980

 

 

17,936

 








 

Net financial assets

 

$

24,139

 

$

7,297

 








 

The increase in net financial assets reflects the proceeds from the sale of our Consumer Healthcare business for $16.6 billion. The change in the composition of our net financial assets also reflects the use of redemptions of short-term investments to pay down short-term borrowings.

We rely largely on operating cash flow, long-term debt and short-term commercial paper borrowings to provide for the working capital needs of our operations, including our R&D activities. We believe that we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future.

Impact of Repatriation of Foreign Earnings

In 2005, under the Jobs Act, we repatriated to the U.S. approximately $37 billion in cash from foreign earnings (see the “Provision/(Benefit) for Taxes on Income” section of this Financial Review). This cash is being used for domestic expenditures relating to advertising and marketing activities, research and development activities, capital assets and other asset acquisitions and non-executive compensation in accordance with the provisions of the Jobs Act. The repatriation resulted in a decrease in short-term and long-term investments held overseas as the cash was repatriated and an increase in short-term borrowings overseas was used to fund the repatriation.

Investments

Our short-term and long-term investments consist primarily of mutual funds invested in debt financial instruments and high quality, liquid investment-grade available-for-sale debt securities. Our long-term investments include debt securities that totaled $2.1 billion as of December 31, 2006, which have maturities ranging substantially from one to ten years. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to our operations. Where local restrictions prevent intercompany financing, working capital needs are met through operating cash flows and/or external borrowings. Our portfolio of short-term investments was reduced in the first quarter of 2006 by about $7 billion and the proceeds were primarily used to pay down short-term borrowings. In late December 2006, our portfolio of short-term investments increased by $16.6 billion, reflecting the receipt of proceeds from the sale of our Consumer Healthcare business.

Long-Term Debt Issuance

On February 22, 2006, we issued the following Japanese yen fixed-rate bonds, to be used for general corporate purposes:

 

 

$508 million equivalent, senior unsecured notes, due February 2011, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.2%; and

 

 

$466 million equivalent, senior unsecured notes, due February 2016, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.8%.

The notes were issued under a $5 billion debt shelf registration filed with the SEC in November 2002.

Long-Term Debt Redemption

In May 2006, we decided to exercise our option to call, at par-value plus accrued interest, $1 billion of senior unsecured floating-rate notes, which were included in Long-term debt as of December 31, 2005. Notice to call was given to the Trustees and the notes were redeemed in the third quarter of 2006.

Credit Ratings

Two major corporate debt-rating organizations, Moody’s Investors Services (Moody’s) and Standard & Poor’s (S&P), assign ratings to our short-term and long-term debt. The following chart reflects the current ratings assigned to our senior unsecured non-credit enhanced long-term debt and commercial paper issued directly by us by each of these agencies:

 

 

 

 

 

 

 

 

 








NAME OF
RATING AGENCY

 

COMMERCIAL
PAPER

 

LONG-TERM DEBT

 

DATE OF LAST
ACTION

 

 


 

 

 

RATING

 

OUTLOOK

 










Moody’s

 

P-1

 

Aa1

 

Stable

 

December 2006

S&P

 

A1+

 

AAA

 

Negative

 

December 2006










On December 19, 2006, Moody’s downgraded our long-term debt rating to Aa1, its second highest investment grade rating, following a review initiated on December 4, 2006, citing our announcement on December 2, 2006, that we were ceasing development of torcetrapib. The downgrade reflects Moody’s assessment that the relationship between our patent exposures and our pipeline strength is no longer consistent with a Moody’s Aaa rating.

Following our December 2, 2006 announcement of our cessation of development of torcetrapib, S&P changed our rating outlook from stable to negative, noting a slowdown in sales and earnings growth as a result of major patent expirations and increased competition. S&P continues to rate our long-term debt at AAA, its highest investment grade rating, relying on our excellent position in the worldwide pharmaceutical market, highlighted by our diverse drug portfolio and large scale R&D program, together with our superior financial profile and cash-generating ability.

Our access to financing at favorable rates would be affected by a substantial downgrade in our credit ratings.

Debt Capacity

We have available lines of credit and revolving-credit agreements with a group of banks and other financial intermediaries. We maintain cash balances and short-term investments in excess of our commercial paper and other short-term borrowings. As of December 31, 2006, we had access to $3.6 billion of lines of

28 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies


credit, of which $1.2 billion expire within one year. Of these lines of credit, $3.4 billion are unused, of which our lenders have committed to loan us $2.2 billion at our request. $2 billion of the unused lines of credit, which expire in 2011, may be used to support our commercial paper borrowings.

As of February 27, 2007, we had the ability to borrow approximately $1 billion by issuing debt securities under our existing debt shelf registration statement filed with the SEC in November 2002.

Goodwill and Other Intangible Assets

As of December 31, 2006, Goodwill totaled $20.9 billion (17% of our total assets) and other intangible assets, net of accumulated amortization, totaled $24.3 billion (20% of our total assets).

The components of goodwill and other identifiable intangible assets, by segment, as of December 31, 2006, follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 














 

(MILLIONS OF DOLLARS)

 

PHARMACEUTICAL

 

ANIMAL
HEALTH

 

OTHER

 

TOTAL

 










 

Goodwill

 

$

20,798

 

$

61

 

$

17

 

$

20,876

 

Finite-lived intangible assets, net(a)

 

 

20,995

 

 

169

 

 

84

 

 

21,248

 

Indefinite-lived intangible assets(b)

 

 

2,857

 

 

244

 

 

1

 

 

3,102

 














 


 

 

(a)

Includes $20.3 billion related to developed technology rights and $471 million related to brands.

 

 

(b)

Includes $3.0 billion related to brands.

Developed Technology Rights—Developed technology rights represent the amortized value associated with developed technology, which has been acquired from third parties, and which can include the right to develop, use, market, sell and/or offer for sale the product, compounds and intellectual property that we have acquired with respect to products, compounds and/or processes that have been completed. We possess a well-diversified portfolio of hundreds of developed technology rights across therapeutic categories primarily representing the amortized value of the commercialized products included in our Pharmaceutical segment that we acquired in connection with our Pharmacia acquisition in 2003. While the Arthritis and Pain therapeutic category represents about 28% of the total amortized value of developed technology rights as of December 31, 2006, the balance of the amortized value is evenly distributed across the following Pharmaceutical therapeutic product categories: Ophthalmology; Oncology; Urology; Infectious and Respiratory Diseases; Endocrine Disorders categories; and, as a group, Cardiovascular and Metabolic Diseases; Central Nervous System Disorders and All Other categories. The significant components include values determined for Celebrex, Detrol, Xalatan, Genotropin, Zyvox, Campto/Camptosar and Exubera. Also included in this category are the post-approval milestone payments made under our alliance agreements for certain Pharmaceutical products, such as Rebif, Spiriva, Celebrex (prior to our acquisition of Pharmacia) and Macugen. These rights are all subject to our impairment review process explained in the “Accounting Policies: Long-Lived Assets” section of this Financial Review.

In 2005, we recorded an impairment charge of $1.1 billion related to the developed technology rights for Bextra, a selective COX- 2 inhibitor (see Notes to Consolidated Financial Statements—Note 6. Other (Income)/Deductions—Net).

Brands—Significant components of brands include values determined for Depo-Provera contraceptive, Xanax and Medrol.

In 2006 and 2004, we recorded impairment charges of approximately $320 million and approximately $691 million related to the Depo-Provera brand (see Notes to Consolidated Financial Statements—Note 6. Other (Income)/Deductions—Net).

Selected Measures of Liquidity and Capital Resources

The following table sets forth certain relevant measures of our liquidity and capital resources as of December 31:

 

 

 

 

 

 

 

 




 

 

 

AS OF DECEMBER 31,

 

 

 


 

(MILLIONS OF DOLLARS, EXCEPT RATIOS AND PER COMMON
SHARE DATA)

 

2006

 

2005

 






 

Cash and cash equivalents and short-term investments and loans

 

$

28,227

 

$

22,736

 

Working capital(a)

 

$

25,560

 

$

18,433

 

Ratio of current assets to current liabilities

 

 

2.20:1

 

 

1.65:1

 

Shareholders’ equity per common share(b)

 

$

10.05

 

$

8.98

 










 

 

(a)

Working capital includes assets of discontinued operations and other assets held for sale of $62 million and $6.7 billion and liabilities of discontinued operations and other liabilities held for sale of $2 million and $1.2 billion, as of December 31, 2006 and December 31, 2005.

 

 

(b)

Represents total shareholders’ equity divided by the actual number of common shares outstanding (which excludes treasury shares, and those held by our employee benefit trust).

The increase in working capital in 2006, as compared to 2005, was primarily due to:

 

 

an increase in net current financial assets of $14.6 billion, primarily due to the receipt of proceeds from the sale of our Consumer Healthcare business; and

 

 

an increase in inventories of $633 million, which is primarily due to the acquisition of sanofi-aventis’ Exubera inventory, the build-up of inventory to support new product launches and the impact of foreign exchange, partially offset by the impact of our inventory reduction initiative,

 

 

partially offset by:

 

 

the change in net assets and liabilities held for sale of about $5.4 billion, primarily reflecting the sale of our Consumer Healthcare business; and

 

 

the expected timing of tax obligations of about $2.5 billion.

2006 Financial Report | 29


Financial Review
Pfizer Inc and Subsidiary Companies


Summary of Cash Flows

 

 

 

 

 

 

 

 

 

 

 




 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 








 

Cash provided by/(used in):

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

17,594

 

$

14,733

 

$

16,340

 

Investing activities

 

 

5,101

 

 

(5,072

)

 

(9,422

)

Financing activities

 

 

(23,100

)

 

(9,222

)

 

(6,629

)

Effect of exchange-rate changes on cash and cash equivalents

 

 

(15

)

 

 

 

(1

)











 

Net increase/(decrease) in cash and cash equivalents

 

$

(420

)

$

439

 

$

288

 











 

Operating Activities

Our net cash provided by continuing operating activities was $17.6 billion in 2006, as compared to $14.7 billion in 2005. The increase in net cash provided by operating activities was primarily attributable to:

 

 

the payment of $1.7 billion in taxes in 2005 associated with the repatriation of approximately $37 billion of foreign earnings under the Jobs Act in 2005; and

 

 

the timing of other receipts and payments in the ordinary course of business.

 

 

Our net cash provided by continuing operating activities was $14.7 billion in 2005, as compared to $16.3 billion in 2004. The decrease in net cash provided by operating activities was primarily attributable to:

 

the payment of $1.7 billion in taxes associated with the repatriation of approximately $37 billion of foreign earnings under the Jobs Act; and

 

 

the timing of other receipts and payments in the ordinary course of business.

 

 

The estimated net cash flows provided by operating activities associated with discontinued operations were not significant.

 

In 2006, the cash flow line item called Income taxes payable of $2.9 billion, primarily reflects the taxes provided on the gain on the sale of our Consumer Healthcare business that have not yet been paid.

 

Investing Activities

 

Our net cash provided by investing activities was $5.1 billion in 2006, as compared to net cash used by investing activities of $5.1 billion in 2005. The increase in net cash provided by investing activities was primarily attributable to:

 

higher net redemptions of short-term investments in 2006 (an increased source of cash of $12.4 billion), primarily used to pay down short-term borrowings,

 

 

partially offset by:

 

an increase in net purchases of long-term investments (an increased use of cash of $2.3 billion); and

 

 

the acquisition of PowderMed Ltd., Rinat and sanofi-aventis’ rights to Exubera in 2006 compared to the acquisition of Vicuron and Idun in 2005 (an increased use of cash of $216 million).

 

 

Our net cash used by investing activities was $5.1 billion in 2005, as compared to $9.4 billion in 2004. The decrease in net cash used by investing activities was primarily attributable to:

 

a decrease in net purchases of investments (a decreased use of $4.9 billion), due primarily to higher redemptions of investments in 2005 to provide funds for the repatriation of foreign earnings in accordance with the Jobs Act; and

 

 

lower purchases of plant, property and equipment (a decreased use of $495 million),

 

 

partially offset by:

 

lower proceeds from the sales of businesses, product lines and other products (a decreased source of cash of $1.1 billion).

 

 

The estimated net cash flows used in investing activities associated with discontinued operations were not significant.

 

Financing Activities

 

Our net cash used in financing activities increased to $23.1 billion in 2006, as compared to $9.2 billion in 2005. The increase in net cash used in financing activities was primarily attributable to:

 

net repayments of $9.9 billion on total borrowings in 2006, as compared to $321 million in 2005;

 

 

an increase in cash dividends paid of $1.4 billion in 2006, as compared to 2005, primarily due to an increase in the dividend rate; and

 

 

higher purchases of common stock in 2006 of $7.0 billion, as compared to $3.8 billion in 2005,

 

 

partially offset by:

 

higher proceeds of $243 million from the exercise of employee stock options.

 

 

Our net cash used in financing activities increased to $9.2 billion in 2005, as compared to $6.6 billion in 2004. The increase in net cash used in financing activities was primarily attributable to:

 

net repayments of $321 million on total borrowings in 2005, as compared to total net borrowings of $4.1 billion in 2004, as funds from the repatriation of foreign earnings in 2005 were used to finance domestic activities, thereby reducing our reliance on short-term borrowings;

 

 

an increase in cash dividends paid of $473 million, as compared to 2004, primarily due to an increase in the dividend rate; and

 

 

a decrease of $610 million in the proceeds from the exercise of employee stock options,

 

 

partially offset by:

 

lower purchases of common stock in 2005 of $3.8 billion, as compared to $6.7 billion in 2004.

 

 

The estimated net cash flows used in financing activities associated with discontinued operations were not significant.

 

In June 2005, we announced a $5 billion share-purchase program, which is being funded by operating cash flows. In June 2006, the Board of Directors increased our share-purchase authorization from $5 billion to $18 billion. In total, under the June 2005

30 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies


program, we purchased approximately 288 million shares for approximately $7.5 billion.

In October 2004, we announced a $5 billion share-purchase program, which we completed in the second quarter of 2005 and was funded from operating cash flows. In total, under the October 2004 program, we purchased approximately 185 million shares.

A summary of common stock purchases follows:

 

 

 

 

 

 

 

 

 

 

 








 

(MILLIONS OF SHARES AND DOLLARS,
EXCEPT PER-SHARE DATA)

 

SHARES OF
COMMON
STOCK
PURCHASED

 

AVERAGE
PER-SHARE
PRICE PAID

 

TOTAL COST OF
COMMON
STOCK
PURCHASED

 








 

2006:

 

 

 

 

 

 

 

 

 

 

June 2005 program

 

 

266

 

$

26.19

 

$

6,979

 











 

Total

 

 

266

 

 

 

 

$

6,979

 











 

2005:

 

 

 

 

 

 

 

 

 

 

June 2005 program

 

 

22

 

$

22.38

 

$

493

 

October 2004 program

 

 

122

 

 

27.20

 

 

3,304

 











 

Total

 

 

144

 

 

 

 

$

3,797

 











 

Contractual Obligations

Payments due under contractual obligations as of December 31, 2006, mature as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




 

 

 

YEARS

 

 

 

 

 

 


 

(MILLIONS OF DOLLARS)

 

TOTAL

 

WITHIN 1

 

OVER 1
TO 3

 

OVER 3
TO 5

 

AFTER 5

 












 

Long-term debt(a)

 

$

5,546

 

$

 

$

1,990

 

$

514

 

$

3,042

 

Other long-term liabilities reflected on our balance sheet under GAAP(b)

 

 

3,440

 

 

321

 

 

623

 

 

640

 

 

1,856

 

Lease commitments(c)

 

 

1,322

 

 

230

 

 

376

 

 

185

 

 

531

 

Purchase obligations(d)

 

 

912

 

 

629

 

 

186

 

 

91

 

 

6

 

















 


 

 

(a)

Long-term debt consists of senior unsecured notes, floating-rate unsecured notes, foreign currency denominated notes, and other borrowings and mortgages.

 

 

(b)

Includes expected payments relating to our unfunded U.S. supplemental (non-qualified) pension plans, postretirement plans and deferred compensation plans.

 

 

(c)

Includes operating and capital lease obligations.

 

 

(d)

Purchase obligations represent agreements to purchase goods and services that are enforceable and legally binding and include amounts relating to advertising, information technology services and employee benefit administration services.

In 2007, we expect to spend approximately $2.0 billion on property, plant and equipment.

Off-Balance Sheet Arrangements

In the ordinary course of business and in connection with the sale of assets and businesses, we often indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters, and patent infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and as of December 31, 2006, recorded amounts for the estimated fair value of these indemnifications are not material.

Certain of our co-promotion or license agreements give our licensors or partners the right to negotiate for, or in some cases to obtain, under certain financial conditions, co-promotion or other rights in specified countries with respect to certain of our products.

Dividends on Common Stock

We declared dividends of $7.3 billion in 2006 and $6.0 billion in 2005 on our common stock. In 2006, we increased our annual dividend to $0.96 per share from $0.76 per share in 2005. In December 2006, our Board of Directors declared a first-quarter 2007 dividend of $0.29 per share. The 2007 cash dividend marks the 40th consecutive year of dividend increases.

Our current dividend provides a return to shareholders while maintaining sufficient capital to invest in growing our businesses. Our dividends are funded from operating cash flows, our financial asset portfolio and short-term commercial paper borrowings and are not restricted by debt covenants. To the extent we have additional capital in excess of investment opportunities, we typically offer a return to our shareholders through a stock repurchase program. We believe that our profitability and access to financial markets provide sufficient capability for us to pay current and future dividends.

New Accounting Standards

Recently Adopted Accounting Standards

On December 31, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of Financial Accounting Standards Board (FASB) Statements No. 87, 88, 106 and 132R). (See Notes to Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards, and Note 13. Pension and Postretirement Benefit Plans and Defined Contribution Plans.)

On January 1, 2006, we adopted the provisions of SFAS No. 123R, Share-Based Payment, as supplemented by the guidance provided by Staff Accounting Bulletin (SAB) 107, issued in March 2005. (SFAS 123R replaced SFAS 123, Stock-Based Compensation, issued in 1995. See Notes to Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards, and Note 15. Share-Based Payments.)

Recently Issued Accounting Standards, Not Adopted as of December 31, 2006

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 provides guidance relative to the recognition, derecognition and measurement of tax positions for financial statement purposes. Historically, our

2006 Financial Report | 31


Financial Review
Pfizer Inc and Subsidiary Companies


policy has been to account for uncertainty in income taxes based on whether we determined that our tax position is “probable” under current tax law of being sustained, as well as an analysis of potential outcomes under a given set of facts and circumstances. FIN 48 requires that tax positions be sustainable based on a “more likely than not” standard under current tax law benefit recognition, and adjusted to reflect the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. While FIN 48 applies a lower level of certainty for tax positions evaluated under tax law, as compared to our current policy, we do not expect the adoption of FIN 48 to have a material impact on our consolidated financial statements. We will adopt the new standard as of January 1, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 provides guidance for, among other things, the definition of fair value and the methods used to measure fair value. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. We are currently in the process of evaluating the impact of the adoption of SFAS 157 on our financial statements.

Forward-Looking Information and Factors That May Affect Future Results

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report and other written or oral statements that we make from time to time contain such forward-looking statements that set forth anticipated results based on management’s plans and assumptions. Such forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans and prospects. In particular, these include statements relating to future actions, business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:

 

 

the success of research and development activities;

 

 

decisions by regulatory authorities regarding whether and when to approve our drug applications as well as their decisions regarding labeling and other matters that could affect the availability or commercial potential of our products;

 

 

the speed with which regulatory authorizations, pricing approvals, and product launches may be achieved;

 

 

the success of external business development activities;

 

 

competitive developments, including with respect to competitor drugs and drug candidates that treat diseases and conditions similar to those treated by our in-line drugs and drug candidates;

 

 

the ability to successfully market both new and existing products domestically and internationally;

 

 

difficulties or delays in manufacturing;

 

 

trade buying patterns;

 

 

the ability to meet generic and branded competition after the loss of patent protection for our products or for competitor products;

 

 

the impact of existing and future regulatory provisions on product exclusivity;

 

 

trends toward managed care and healthcare cost containment;

 

 

U.S. legislation or regulatory action affecting, among other things, pharmaceutical product pricing, reimbursement or access, including under Medicaid and Medicare, the importation of prescription drugs that are marketed from outside the U.S. at prices that are regulated by governments of various foreign countries, and the involuntary approval of prescription medicines for over-the-counter use;

 

 

the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003;

 

 

legislation or regulatory action in markets outside the U.S. affecting pharmaceutical product pricing, reimbursement or access;

 

 

contingencies related to actual or alleged environmental contamination;

 

 

claims and concerns that may arise regarding the safety or efficacy of in-line products and product candidates;

 

 

legal defense costs, insurance expenses, settlement costs and the risk of an adverse decision or settlement related to product liability, patent protection, governmental investigations, ongoing efforts to explore various means for resolving asbestos litigation and other legal proceedings;

 

 

the Company’s ability to protect its patents and other intellectual property both domestically and internationally;

 

 

interest rate and foreign currency exchange rate fluctuations;

 

 

governmental laws and regulations affecting domestic and foreign operations, including tax obligations;

 

 

changes in U.S. generally accepted accounting principles;

 

 

any changes in business, political and economic conditions due to the threat of terrorist activity in the U.S. and other parts of the world, and related U.S. military action overseas;

 

 

growth in costs and expenses;

 

 

changes in our product, segment and geographic mix; and

 

 

the impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual items, including our ability to realize the projected benefits of our Adapting to Scale multi-year productivity initiative, including the projected benefits of the broadening of this initiative over the next few years.

32 | 2006 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies


We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of anticipated results is subject to substantial risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission.

Certain risks, uncertainties and assumptions are discussed here and under the heading entitled “Risk Factors and Cautionary Factors That May Affect Future Results” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, which will be filed in February 2007. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

This report includes discussion of certain clinical studies relating to various in-line products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data.

Financial Risk Management

The overall objective of our financial risk management program is to seek a reduction in the potential negative earnings effects from changes in foreign exchange and interest rates arising in our business activities. We manage these financial exposures through operational means and by using various financial instruments. These practices may change as economic conditions change.

Foreign Exchange Risk—A significant portion of our revenues and earnings is 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.

Foreign exchange risk is also managed through the use of foreign currency forward-exchange contracts. These contracts are used to offset the potential earnings effects from mostly intercompany short-term foreign currency assets and liabilities that arise from operations. We also use foreign currency forward-exchange contracts and foreign currency swaps to hedge the potential earnings effects from short and long-term foreign currency investments, third-party loans and intercompany loans.

In addition, under certain market conditions, we protect against possible declines in the reported net assets of our Japanese yen, Swedish krona and certain euro functional-currency subsidiaries. In these cases, we use currency swaps or foreign currency debt.

Our financial instrument holdings at year-end were analyzed to determine their sensitivity to foreign exchange rate changes. The fair values of these instruments were determined as follows:

 

 

foreign currency forward-exchange contracts and currency swaps—net present values

 

 

foreign receivables, payables, debt and loans—changes in exchange rates

In this sensitivity analysis, we assumed that the change in one currency’s rate relative to the U.S. dollar would not have an effect on other currencies’ rates relative to the U.S. dollar. All other factors were held constant.

If there were an adverse change in foreign exchange rates of 10%, the expected effect on net income related to our financial instruments would be immaterial. For additional details, see Notes to Consolidated Financial Statements—Note 9D. Financial Instruments: Derivative Financial Instruments and Hedging Activities.

Interest Rate Risk—Our U.S. dollar interest-bearing investments, loans and borrowings are subject to interest rate risk. We are also subject to interest rate risk on euro investments and currency swaps, Swedish krona currency swaps, and on Japanese yen short and long-term borrowings and currency swaps. We invest and borrow primarily on a short-term or variable-rate basis. From time to time, depending on market conditions, we will fix interest rates either through entering into fixed-rate investments and borrowings or through the use of derivative financial instruments such as interest rate swaps.

Our financial instrument holdings at year-end were analyzed to determine their sensitivity to interest rate changes. The fair values of these instruments were determined by net present values.

In this sensitivity analysis, we used the same change in interest rate for all maturities. All other factors were held constant.

If there were an adverse change in interest rates of 10%, the expected effect on net income related to our financial instruments would be immaterial.

Legal Proceedings and Contingencies

We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, securities, environmental and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. We do not believe any of them will have a material adverse effect on our financial position.

We record accruals for such contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable. If a range of liability is probable and estimable and some amount within the range appears to be a better estimate than any other amount within the range, we accrue that amount. If a range of liability is probable and estimable and no amount within the range appears to be a better estimate than any other amount within the range, we accrue the minimum of such probable range. Many claims involve highly complex issues relating to causation, label warnings, scientific evidence, actual damages and other matters. Often these issues are subject to substantial

2006 Financial Report | 33


Financial Review
Pfizer Inc and Subsidiary Companies


uncertainties and, therefore, the probability of loss and an estimation of damages are difficult to ascertain. Consequently, we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for these contingencies. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions (see Notes to Consolidated Financial Statements—Note 1B. Significant Accounting Policies: Estimates and Assumptions). Our assessments are based on estimates and assumptions that have been deemed reasonable by management. Litigation is inherently unpredictable, and excessive verdicts do occur. Although we believe we have substantial defenses in these matters, we could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.

Patent claims include challenges to the coverage and/or validity of our patents on various products or processes. Although we believe we have substantial defenses to these challenges with respect to all our material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could result in a loss of patent protection for the drug at issue, which could lead to a significant loss of sales of that drug and could materially affect future results of operations.

34 | 2006 Financial Report


Management’s Report on Internal Control Over Financial Reporting


Management’s Report

We prepared and are responsible for the financial statements that appear in our 2006 Financial Report. These financial statements are in conformity with accounting principles generally accepted in the United States of America and, therefore, include amounts based on informed judgments and estimates. We also accept responsibility for the preparation of other financial information that is included in this document.

Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2006.

The Company’s independent auditors have issued their auditors’ report on management’s assessment of the Company’s internal control over financial reporting. That report appears in our 2006 Financial Report under the heading, Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.

-s- Jeffrey B. Kindler

Jeffrey B. Kindler
Chairman and Chief Executive Officer

 

 

-s- Alan G. Levin

-s- Loretta V. Cangialosi

 

 

Alan G. Levin

Loretta V. Cangialosi

Principal Financial Officer

Principal Accounting Officer

 

 

February 27, 2007

 

Audit Committee’s Report


The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls.

In this context, the Committee has met and held discussions with management and the independent registered public accounting firm regarding the fair and complete presentation of the Company’s results and the assessment of the Company’s internal control over financial reporting. The Committee has discussed significant accounting policies applied by the Company in its financial statements, as well as alternative treatments. Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement of Auditing Standards No. 61, Communication with Audit Committees.

In addition, the Committee has reviewed and discussed with the independent registered public accounting firm the auditors’ independence from the Company and its management. As part of that review, the Committee received the written disclosures and letter required by the Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees and by all relevant professional and regulatory standards relating to KPMG’s independence from the Company. The Committee also has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with the auditors’ independence. The Committee has concluded that the independent registered public accounting firm is independent from the Company and its management.

The Committee reviewed and discussed Company policies with respect to risk assessment and risk management.

The Committee discussed with the Company’s internal auditors and the independent registered public accounting firm the overall scope and plans for their respective audits. The Committee met with the internal auditors and the independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the Securities and Exchange Commission. The Committee has selected and the Board of Directors has ratified, subject to shareholder ratification, the selection of the Company’s independent registered public accounting firm.

-s- W .R. Howell

W.R. Howell
Chair, Audit Committee

February 27, 2007

The Audit Committee’s Report shall not be deemed to be filed or incorporated by reference into any Company filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the Audit Committee’s Report by reference therein.

2006 Financial Report | 35


Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements


The Board of Directors and Shareholders of Pfizer Inc:

We have audited the accompanying consolidated balance sheets of Pfizer Inc and Subsidiary Companies as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pfizer Inc and Subsidiary Companies as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pfizer Inc and Subsidiary Companies’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

As discussed, in the Notes to the Consolidated Financial Statements—Note 1. Significant Accounting Policies, effective January 1, 2006, Pfizer Inc adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment.

As discussed, in the Notes to the Consolidated Financial Statements —Note 1. Significant Accounting Policies, effective December 31, 2006, Pfizer Inc adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of Financial Accounting Standards Board Statements No. 87, 88, 106 and 132R).

KPMG LLP
New York, New York

February 27, 2007

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting


The Board of Directors and Shareholders of Pfizer Inc:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Pfizer Inc and Subsidiary Companies maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pfizer Inc and Subsidiary Companies’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Pfizer Inc and Subsidiary Companies maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Pfizer Inc and Subsidiary Companies maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pfizer Inc and Subsidiary Companies as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated February 27, 2007 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP
New York, New York

February 27, 2007

36 | 2006 Financial Report


Consolidated Statements of Income
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 




 

 




 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

(MILLIONS, EXCEPT PER COMMON SHARE DATA)

 

2006

 

2005

 

2004

 











 

Revenues

 

$

48,371

 

$

47,405

 

$

48,988

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Cost of sales(a)

 

 

7,640

 

 

7,232

 

 

6,391

 

Selling, informational and administrative expenses(a)

 

 

15,589

 

 

15,313

 

 

15,304

 

Research and development expenses(a)

 

 

7,599

 

 

7,256

 

 

7,513

 

Amortization of intangible assets

 

 

3,261

 

 

3,399

 

 

3,352

 

Acquisition-related in-process research and development charges

 

 

835

 

 

1,652

 

 

1,071

 

Restructuring charges and acquisition-related costs

 

 

1,323

 

 

1,356

 

 

1,151

 

Other (income)/deductions—net

 

 

(904

)

 

397

 

 

803

 











 

Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of a change in accounting principles

 

 

13,028

 

 

10,800

 

 

13,403

 

Provision for taxes on income

 

 

1,992

 

 

3,178

 

 

2,460

 

Minority interests

 

 

12

 

 

12

 

 

7

 











 

Income from continuing operations before cumulative effect of a change in accounting principles

 

 

11,024

 

 

7,610

 

 

10,936

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations—net of tax

 

 

433

 

 

451

 

 

374

 

Gains on sales of discontinued operations—net of tax

 

 

7,880

 

 

47

 

 

51

 











 

Discontinued operations—net of tax

 

 

8,313

 

 

498

 

 

425

 











 

Income before cumulative effect of a change in accounting principles

 

 

19,337

 

 

8,108

 

 

11,361

 

Cumulative effect of a change in accounting principles—net of tax

 

 

 

 

(23

)

 

 











 

Net income

 

$

19,337

 

$

8,085

 

$

11,361

 











 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share—basic

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of a change in accounting principles

 

$

1.52

 

$

1.03

 

$

1.45

 

Discontinued operations

 

 

1.15

 

 

0.07

 

 

0.06

 











 

Income before cumulative effect of a change in accounting principles

 

 

2.67

 

 

1.10

 

 

1.51

 

Cumulative effect of a change in accounting principles

 

 

 

 

 

 

 











 

Net income

 

$

2.67

 

$

1.10

 

$

1.51

 











 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share—diluted

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of a change in accounting principles

 

$

1.52

 

$

1.02

 

$

1.43

 

Discontinued operations

 

 

1.14

 

 

0.07

 

 

0.06

 











 

Income before cumulative effect of a change in accounting principles

 

 

2.66

 

 

1.09

 

 

1.49

 

Cumulative effect of a change in accounting principles

 

 

 

 

 

 

 











 

Net income

 

$

2.66

 

$

1.09

 

$

1.49

 











 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares—basic

 

 

7,242

 

 

7,361

 

 

7,531

 

Weighted-average shares—diluted

 

 

7,274

 

 

7,411

 

 

7,614

 











 


 

 

(a)

Exclusive of amortization of intangible assets, except as disclosed in Note 1K. Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

2006 Financial Report | 37


Consolidated Balance Sheets
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 




 

 




 

 

 

AS OF DECEMBER 31,

 

 

 


 

(MILLIONS, EXCEPT PREFERRED STOCK ISSUED AND PER COMMON SHARE DATA)

 

2006

 

2005

 








Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,827

 

$

2,247

 

Short-term investments

 

 

25,886

 

 

19,979

 

Accounts receivable, less allowance for doubtful accounts: 2006—$204; 2005—$174

 

 

9,392

 

 

9,103

 

Short-term loans

 

 

514

 

 

510

 

Inventories

 

 

6,111

 

 

5,478

 

Prepaid expenses and taxes

 

 

3,157

 

 

2,859

 

Assets of discontinued operations and other assets held for sale

 

 

62

 

 

6,659

 








 

Total current assets

 

 

46,949

 

 

46,835

 

Long-term investments and loans

 

 

3,892

 

 

2,497

 

Property, plant and equipment, less accumulated depreciation

 

 

16,632

 

 

16,233

 

Goodwill

 

 

20,876

 

 

20,985

 

Identifiable intangible assets, less accumulated amortization

 

 

24,350

 

 

26,244

 

Other assets, deferred taxes and deferred charges

 

 

2,138

 

 

4,176

 








 

Total assets

 

$

114,837

 

$

116,970

 








 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Short-term borrowings, including current portion of long-term debt: 2006—$712; 2005—$778

 

$

2,434

 

$

11,589

 

Accounts payable

 

 

2,019

 

 

2,073

 

Dividends payable

 

 

2,055

 

 

1,772

 

Income taxes payable

 

 

6,466

 

 

3,618

 

Accrued compensation and related items

 

 

1,903

 

 

1,602

 

Other current liabilities

 

 

6,510

 

 

6,521

 

Liabilities of discontinued operations and other liabilities held for sale

 

 

2

 

 

1,227

 








 

Total current liabilities

 

 

21,389

 

 

28,402

 

Long-term debt

 

 

5,546

 

 

6,347

 

Pension benefit obligations

 

 

3,632

 

 

2,681

 

Postretirement benefit obligations

 

 

1,970

 

 

1,424

 

Deferred taxes

 

 

8,015

 

 

9,707

 

Other noncurrent liabilities

 

 

2,927

 

 

2,645

 








 

Total liabilities

 

 

43,479

 

 

51,206

 








 

Shareholders’ Equity

 

 

 

 

 

 

 

Preferred stock, without par value, at stated value; 27 shares authorized; issued: 2006—3,497; 2005—4,193

 

 

141

 

 

169

 

Common stock, $0.05 par value; 12,000 shares authorized; issued: 2006—8,819; 2005—8,784

 

 

441

 

 

439

 

Additional paid-in capital

 

 

69,104

 

 

67,759

 

Employee benefit trust

 

 

(788

)

 

(923

)

Treasury stock, shares at cost; 2006—1,695; 2005—1,423

 

 

(46,740

)

 

(39,767

)

Retained earnings

 

 

49,669

 

 

37,608

 

Accumulated other comprehensive income/(expense)

 

 

(469

)

 

479

 








 

Total shareholders’ equity

 

 

71,358

 

 

65,764

 








 

Total liabilities and shareholders’ equity

 

$

114,837

 

$

116,970

 








 

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

38 | 2006 Financial Report


Consolidated Statements of Shareholders’ Equity
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


























 

 






































 

(MILLIONS, EXCEPT PREFERRED SHARES)

 

PREFERRED STOCK

 

COMMON STOCK

 

ADDITIONAL
PAID-IN
CAPITAL

 

EMPLOYEE
BENEFIT TRUST

 

TREASURY STOCK

 

RETAINED
EARNINGS

 

ACCUM. OTHER COMPRE-
HENSIVE
INC./(EXP.)

 

 

 

 


 


 

 


 


 

 

 

 

 

 

SHARES

 

STATED VALUE

 

SHARES

 

PAR VALUE

 

 

SHARES

 

FAIR VALUE

 

SHARES

 

COST

 

 

 

TOTAL

 


























 

 

Balance, January 1, 2004

 

 

5,445

  

$

219

  

 

8,702

  

$

435

  

$

66,571

  

 

(54

)  

$

(1,898

)  

 

(1,073

)  

$

(29,352

)  

$

29,382

  

$

195

  

$

65,552

  

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,361

 

 

 

 

 

11,361

 

Total other comprehensive income—net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,083

 

 

2,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Cash dividends declared—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,243

)

 

 

 

 

(5,243

)

preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

(8

)

Stock option transactions

 

 

 

 

 

 

 

 

47

 

 

3

 

 

886

 

 

9

 

 

323

 

 

 

 

(16

)

 

 

 

 

 

 

 

1,196

 

Purchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(208

)

 

(6,659

)

 

 

 

 

 

 

 

(6,659

)

Employee benefit trust transactions—net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(346

)

 

(1

)

 

346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock conversions and redemptions

 

 

(666

)

 

(26

)

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

10

 

Other

 

 

 

 

 

 

 

 

5

 

 

 

 

115

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

141

 






































 

Balance, December 31, 2004

 

 

4,779

 

 

193

 

 

8,754

 

 

438

 

 

67,253

 

 

(46

)

 

(1,229

)

 

(1,281

)

 

(35,992

)

 

35,492

 

 

2,278

 

 

68,433

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,085

 

 

 

 

 

8,085

 

Total other comprehensive expense—net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,799

)

 

(1,799

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Cash dividends declared—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,960

)

 

 

 

 

(5,960

)

preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

(9

)

Stock option transactions

 

 

 

 

 

 

 

 

24

 

 

1

 

 

342

 

 

7

 

 

193

 

 

 

 

(6

)

 

 

 

 

 

 

 

530

 

Purchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143

)

 

(3,797

)

 

 

 

 

 

 

 

(3,797

)

Employee benefit trust transactions—net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

(1

)

 

113

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Preferred stock conversions and redemptions

 

 

(586

)

 

(24

)

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

19

 

Other

 

 

 

 

 

 

 

 

6

 

 

 

 

240

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

262

 






































 

Balance, December 31, 2005

 

 

4,193

 

 

169

 

 

8,784

 

 

439

 

 

67,759

 

 

(40

)

 

(923

)

 

(1,423

)

 

(39,767

)

 

37,608

 

 

479

 

 

65,764

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,337

 

 

 

 

 

19,337

 

Total other comprehensive income—net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,192

 

 

1,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Adoption of new accounting standard—net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,140

)

 

(2,140

)

Cash dividends declared—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,268

)

 

 

 

 

(7,268

)

preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

(8

)

Stock option transactions

 

 

 

 

 

 

 

 

28

 

 

1

 

 

896

 

 

11

 

 

286

 

 

(6

)

 

(8

)

 

 

 

 

 

 

 

1,175

 

Purchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(266

)

 

(6,979

)

 

 

 

 

 

 

 

(6,979

)

Employee benefit trust transactions—net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152

 

 

(1

)

 

(151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Preferred stock conversions and redemptions

 

 

(696

)

 

(28

)

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

(10

)

Other

 

 

 

 

 

 

 

 

7

 

 

1

 

 

285

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

294

 






































 

Balance, December 31, 2006

 

 

3,497

 

$

141

 

 

8,819

 

$

441

 

$

69,104

 

 

(30

)

$

(788

)

 

(1,695

)

$

(46,740

)

$

49,669

 

$

(469

)

$

71,358

 







































See Notes to Consolidated Financial Statements, which are an integral part of these statements.

2006 Financial Report | 39


Consolidated Statements of Cash Flows
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 


 

 


 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2006

 

2005

 

2004

 


 

Operating Activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,337

 

$

8,085

 

$

11,361

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,293

 

 

5,576

 

 

5,093

 

Share-based compensation expense

 

 

655

 

 

157

 

 

60

 

Acquisition-related in-process research and development charges

 

 

835

 

 

1,652

 

 

1,071

 

Intangible asset impairments and other associated non-cash charges

 

 

320

 

 

1,240

 

 

702

 

Gains on disposal of investments, products and product lines

 

 

(233

)

 

(172

)

 

(6

)

Gains on sales of discontinued operations

 

 

(10,243

)

 

(77

)

 

(75

)

Cumulative effect of a change in accounting principles

 

 

 

 

40

 

 

 

Deferred taxes from continuing operations

 

 

(1,525

)

 

(1,465

)

 

(1,752

)

Other deferred taxes

 

 

(420

)

 

8

 

 

(15

)

Other non-cash adjustments

 

 

559

 

 

486

 

 

501

 

Changes in assets and liabilities, net of effect of businesses acquired and divested:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(172

)

 

(803

)

 

(465

)

Inventories

 

 

118

 

 

72

 

 

(542

)

Prepaid and other assets

 

 

314

 

 

615

 

 

(600

)

Accounts payable and accrued liabilities

 

 

(450

)

 

(1,054

)

 

(667

)

Income taxes payable

 

 

2,909

 

 

254

 

 

999

 

Other liabilities

 

 

297

 

 

119

 

 

675

 











 

Net cash provided by operating activities

 

 

17,594

 

 

14,733

 

 

16,340

 











 

Investing Activities

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,050

)

 

(2,106

)

 

(2,601

)

Purchases of short-term investments

 

 

(9,597

)

 

(28,040

)

 

(17,499

)

Proceeds from redemptions of short-term investments

 

 

20,771

 

 

26,779

 

 

11,723

 

Purchases of long-term investments

 

 

(1,925

)

 

(687

)

 

(1,329

)

Proceeds from redemptions of long-term investments

 

 

233

 

 

1,309

 

 

1,570

 

Purchases of other assets

 

 

(153

)

 

(431

)

 

(327

)

Proceeds from sales of other assets

 

 

3

 

 

12

 

 

6

 

Proceeds from the sales of businesses, products and product lines

 

 

200

 

 

127

 

 

1,276

 

Acquisitions, net of cash acquired

 

 

(2,320

)

 

(2,104

)

 

(2,263

)

Other investing activities

 

 

(61

)

 

69

 

 

22

 











 

Net cash provided by/(used in) investing activities

 

 

5,101

 

 

(5,072

)

 

(9,422

)











 

Financing Activities

 

 

 

 

 

 

 

 

 

 

Increase in short-term borrowings, net

 

 

1,040

 

 

1,124

 

 

2,466

 

Principal payments on short-term borrowings

 

 

(11,969

)

 

(1,427

)

 

(288

)

Proceeds from issuances of long-term debt

 

 

1,050

 

 

1,021

 

 

2,586

 

Principal payments on long-term debt

 

 

(55

)

 

(1,039

)

 

(664

)

Purchases of common stock

 

 

(6,979

)

 

(3,797

)

 

(6,659

)

Cash dividends paid

 

 

(6,919

)

 

(5,555

)

 

(5,082

)

Stock option transactions and other

 

 

732

 

 

451

 

 

1,012

 











 

Net cash used in financing activities

 

 

(23,100

)

 

(9,222

)

 

(6,629

)











 

Effect of exchange-rate changes on cash and cash equivalents

 

 

(15

)

 

 

 

(1

)











 

Net increase/(decrease) in cash and cash equivalents

 

 

(420

)

 

439

 

 

288

 

Cash and cash equivalents at beginning of year

 

 

2,247

 

 

1,808

 

 

1,520

 











 

Cash and cash equivalents at end of year

 

$

1,827

 

$

2,247

 

$

1,808