EX-13 3 c52104_ex13.htm

Exhibit 13










P f i z e r  I n c .

2 0 0 7  F i n a n c i a l  R e p o r t





















(LOGO)



 

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 2007 performance; our operating environment and response to key opportunities and challenges; our cost-reduction initiatives; our strategic initiatives, such as significant licensing and new business development transactions, as well as the disposition of our Consumer Healthcare business in December 2006; and our expectations for 2008.

 

 

Accounting Policies. This section, beginning on page 11, discusses those accounting policies that we consider important in understanding Pfizer’s consolidated financial statements. For additional 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 14, provides an analysis of our revenues and products for the three years ended December 31, 2007, 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 29, provides an analysis of our balance sheet as of December 31, 2007 and 2006, and cash flows for each of the three years ended December 31, 2007, 2006 and 2005, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2007. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer’s future activities.

 

 

New Accounting Standards. This section, beginning on page 32, 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 33, 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 applying innovative science to improve world health. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of safe and effective 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 prevent and treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems and their related costs. 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 approximately 92% of our total revenues in 2007 and, therefore, developments relating to the pharmaceutical industry can have a significant impact on our operations.

Our 2007 Performance

We delivered a solid performance in 2007, reflecting the favorable impact of foreign exchange, the important contributions of many of our products launched since 2005 and our in-line products in the aggregate performing well in a tough operating environment, largely offset by revenue declines from the loss of U.S. exclusivity of Zoloft in August 2006 and Norvasc in March 2007, and other factors.

Specifically, in 2007:

 

 

Revenues of $48.4 billion were flat compared to 2006, due primarily to the favorable impact of foreign exchange, an aggregate year-over-year increase in revenues from products launched since 2005 and the solid aggregate performance of the balance of our broad portfolio of patent-protected medicines, offset by the impact of loss of U.S. exclusivity on Zoloft in August 2006 and Norvasc in March 2007. Zoloft and Norvasc collectively experienced a decline in revenues of about $3.5 billion in 2007 compared to 2006. These declines were offset by an aggregate revenue increase in new products and the balance of our portfolio of patent-protected products and alliance revenues, such as:


 

 

 

 

 

 

 

 

 

 

 


 

 

YEAR ENDED DEC 31,

 

 

 

 

 

 


 

 

 

 

(MILLIONS OF DOLLARS)

 

2007

 

2006

 

% CHANGE

 


Chantix/Champix

 

$

883

 

$

101

 

 

773

 

Caduet

 

 

568

 

 

370

 

 

54

 

Lyrica

 

 

1,829

 

 

1,156

 

 

58

 

Celebrex

 

 

2,290

 

 

2,039

 

 

12

 

Zyvox

 

 

944

 

 

782

 

 

21

 

Vfend

 

 

632

 

 

515

 

 

23

 

Sutent

 

 

581

 

 

219

 

 

166

 

Xalatan/Xalacom

 

 

1,604

 

 

1,453

 

 

10

 

Alliance revenue

 

 

1,789

 

 

1,374

 

 

30

 












As of November 2007, our portfolio of medicines included three of the world’s 25 best-selling medicines, with seven



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medicines that led their therapeutic areas based on revenues. (See further discussion in the “Analysis of the Consolidated Statement of Income” section of this Financial Review.)

 

 

Decision to Exit Exubera:

 

 

 

Exubera was the first inhaled insulin therapy for the treatment of diabetes, and since May 2006, had been launched in Germany, Ireland, the U.K. and the U.S. In the third quarter of 2007, after an assessment of the financial performance of Exubera, as well as its lack of acceptance by patients, physicians and payers, we decided to exit the product.

 

 

 

Our Exubera-related exit plans included working with physicians over a three-month period to transition patients to other treatment options, evaluating redeployment options for colleagues, working with our partners and vendors with respect to transition and exit activities, working with regulators on concluding outstanding clinical trials, implementing an extended transition program for those patients unable to

 

 

 

transition to other medications within the three-month period, and exploring asset disposal or redeployment opportunities, as appropriate, among other activities.

 

 

 

As part of this exit plan, in 2007, we paid $135 million to one of our partners in satisfaction of all remaining obligations under existing agreements relating to Exubera and a next generation insulin (NGI) under development. In addition, in the event that a new partner is selected, we have agreed to transfer our remaining rights and all economic benefits for Exubera and NGI. This transfer of our interests would include the transfer of the Exubera New Drug Application and Investigational New Drug Applications and all non-U.S. regulatory filings and applications, continuation of ongoing Exubera clinical trials and certain supply chain transition activities.

 

 

 

Total pre-tax charges for 2007 were $2.8 billion, virtually all of which were recorded in the third quarter. The financial statement line items in which the various charges are recorded and related activity are as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(MILLIONS OF DOLLARS)

 

CUSTOMER
RETURNS-
REVENUES

 

COST OF
SALES

 

SELLING
INFORMATIONAL &
ADMINISTRATIVE
EXPENSES

 

RESEARCH &
DEVELOPMENT
EXPENSES

 

TOTAL

 

ACTIVITY
THROUGH
DEC. 31, 2007(a)

 

ACCRUAL AS
OF DEC. 31,
2007

 


Intangible asset impairment charges(b)

 

$

 

$

1,064

 

$

41

 

$

 

$

1,105

 

$

1,105

 

$

 

Inventory write-offs

 

 

 

 

661

 

 

 

 

 

 

661

 

 

661

 

 

 

Fixed assets impairment charges and other

 

 

 

 

451

 

 

 

 

3

 

 

454

 

 

454

 

 

 

Other exit costs

 

 

10

 

 

427

 

 

44

 

 

97

 

 

578

 

 

164

 

 

414

(c)
























Total

 

$

10

 

$

2,603

 

$

85

 

$

100

 

$

2,798

 

$

2,384

 

$

414

 

























 

 

 

 

 

(a)

Includes adjustments for foreign currency translation.

 

 

 

 

 

 

(b)

Amortization of these assets had previously been recorded in Cost of sales and Selling, informational and administrative expenses.

 

 

 

 

 

(c)

Included in Other current liabilities ($375 million) and Other noncurrent liabilities ($39 million).


 

 

 

The asset write-offs (intangibles, inventory and fixed assets) represent non-cash charges. The other exit costs, primarily severance, contract and other termination costs, as well as other liabilities, are associated with marketing and research programs, and manufacturing operations related to Exubera. These exit costs resulted in cash expenditures in 2007 (such as the $135 million settlement referred to above) and will result in additional cash expenditures in 2008. We expect that substantially all of the cash spending will be completed within the next year. During the exit of this product, certain additional cash costs will be incurred and reported in future periods, such as maintenance-level operating costs. However, those future costs are not expected to be significant. We expect that substantially all exit activities will be completed within the next year.

 

 

Income from continuing operations before cumulative effect of a change in accounting principles was $8.2 billion compared to $11.0 billion in 2006. The decrease was primarily due to event-driven expenses, such as:


 

 

 

 

o

higher asset impairment charges. In 2007, we expensed $2.8 billion, pre-tax, related to our decision to exit Exubera, compared to $320 million, pre-tax, in 2006, related to the impairment of our Depo-Provera intangible asset; and

 

 

 

 

o

higher restructuring charges and acquisition-related costs associated with our expanded cost-reduction initiatives,

 

 

 

 

partially offset by:

 

 

 

o

lower Acquisition-related in-process research and development charges (IPR&D). In 2007, we incurred IPR&D expenses of $283 million, pre-tax, primarily related to our acquisitions of BioRexis Pharmaceutical Corp. (BioRexis) and Embrex, Inc. (Embrex), compared with IPR&D of $835 million, pre-tax, in 2006, primarily related to our acquisitions of PowderMed Ltd. (PowderMed), and Rinat Neuroscience Corp. (Rinat);

 

 

 

 

o

higher interest income compared to 2006, due primarily to higher net financial assets during 2007 compared to 2006, reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business, and higher interest rates; and

 

 

 

 

o

a lower effective income tax rate. In 2007, our effective tax rate on continuing operations of 11.0% was lower than the 15.3% rate in 2006, which largely reflects the tax impact of our decision to exit Exubera in 2007, the tax impact of higher cost-reduction expenditures in 2007 compared to 2006 and the volume and geographic mix of product sales in 2007 compared to 2006.

 

 

 

Discontinued operations—net of tax were losses of $69 million in 2007, compared with income of $8.3 billion in 2006. The results in 2006 relate primarily to our former Consumer Healthcare business, which was sold on December 20, 2006. The 2006 amount includes the gain on the sale of this business of



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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.)

 

 

Acquisitions—We completed a number of strategic acquisitions that we believe will strengthen and broaden our existing pharmaceutical capabilities. In 2007, we acquired BioRexis, a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

 

 

Cost-reduction initiatives—We made significant progress with our cost-reduction initiatives, which are a broad-based, company-wide effort to improve performance and efficiency. We incurred related costs of approximately $3.9 billion in 2007, $2.1 billion in 2006 and $763 million in 2005. Building on what had already been accomplished, in January 2007, we announced additional plans to 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 are generating cost reductions through site rationalizations in Research and Development (R&D) and manufacturing, streamlining organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. (See further discussion in the “Cost-Reduction Initiatives” section of this Financial Review.)

On January 23, 2008, we filed a Current Report on Form 8-K, which included a press release announcing our fourth-quarter and full-year 2007 financial results. In completing our final analysis, we determined that our accruals related to U.S. rebate liabilities were understated by $195 million, pre-tax, and $154 million, after-tax. While not material to understanding fourth quarter and full year 2007 financial results contained in our January 23, 2008, press release, the amounts disclosed above have been recorded in our actual results for the fourth quarter and full year 2007. We believe noting this change is beneficial to understanding our actual results for the fourth quarter and full year 2007 contained in this financial report. The impact of this change was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

FOURTH QUARTER 2007

 

FULL YEAR 2007

 

(MILLIONS,
EXCEPT PER
COMMON
SHARE DATA)

 


 


 

 

PER
JANUARY
FORM 8-K

 

ACTUAL

 

PER
JANUARY
FORM 8-K

 

ACTUAL

 


Revenues

 

$

13,065

 

$

12,870

 

$

48,613

 

$  

48,418

 

Net income

 

 

2,878

 

 

2,724

 

 

8,298

 

 

8,144

 

Diluted earnings per share

 

 

0.42

 

 

0.40

 

 

1.20

 

 

1.17

 

Adjusted income*

 

 

3,556

 

 

3,402

 

 

15,267

 

 

15,113

 

Adjusted diluted earnings per share*

 

 

0.52

 

 

0.50

 

 

2.20

 

 

2.18

 
















 

 

 

 

*

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 continue to face significant challenges in a profoundly changing business environment, and we are taking steps to fundamentally change the way we run our businesses to meet these challenges, as well as to take advantage of the diverse and attractive opportunities that we see in the marketplace. In response to these challenges and opportunities, we announced five priorities in January 2007:

 

 

Maximize our near and long-term revenues;

 

 

Establish a lower and more flexible cost base;

 

 

Create smaller, more focused and more accountable operating areas;

 

 

Engage more productively with customers, patients, physicians and other collaborators; and

 

 

Make Pfizer a great place to work.

We believe that we have made progress on all of these goals. For details about our strategic initiatives, see the “Our Strategic Initiatives—Strategy and Recent Transactions” section of this Financial Review, and for details about our cost-reduction initiatives, see the “Cost-Reduction Initiatives” section of this Financial Review.

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, 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 various forms of price controls. The growing power of managed care organizations in the U.S. has similarly increased the pressure on pharmaceutical prices and access.

 

 

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. This program has been successfully implemented, with high levels of beneficiary satisfaction and lower-than-expected costs to the government due to the enhanced purchasing power of medical plans in the private sector to negotiate on behalf of Medicare beneficiaries. Despite this success, the exclusive role of medical plans in the private sector in negotiating prices for the Medicare drug benefit



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remains controversial and legislative changes to allow the federal government to directly negotiate prices with pharmaceutical manufacturers have been proposed. While expanded access under the Medicare Act has resulted in increased sales of our products, the substantial purchasing power of medical plans that negotiate on behalf of Medicare beneficiaries has increased the pressure on prices.

 

 

In response to cost concerns by payers, utilization of generics is increasing as a percentage of total pharmaceutical use, especially in the U.S. Payers are also selectively sponsoring campaigns designed to interchange generic products for molecularly dissimilar branded products within a therapeutic category.

 

 

Consumers have become aware of global price differences that result from price controls imposed by certain governments and some have become more vocal about their desire that governments allow the sourcing of medicines across national borders. In the U.S., there have been several proposals advanced by federal legislators to allow easier importation of medicines, despite the increased risk of receiving inferior or counterfeit products.

 

 

Pharmaceutical promotion is highly regulated in most markets around the world. In the U.S., there is growing interest at both the federal and state level in further restricting marketing communications and increasing the level of disclosure of marketing activities.

 

 

A growing number of health systems in markets around the world are employing comparable effectiveness evaluations and using their findings to inform pricing and access decisions, especially for newly introduced pharmaceutical products. In the U.S., there is growing interest by government and private payers in adopting comparable effectiveness methodologies. While adoption may enhance the industry’s ability to demonstrate the relative value of its products, it is also possible that implemented comparative effectiveness conventions may be designed by payers to minimize product differences.

 

 

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 patients, physicians and payers in dialogues about the value of our products and how we can best work with them to prevent and treat 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 patent protection has expired or been lost prior to the expiration date as the result of a legal challenge, 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 in a very short period in the U.S. in the first year after patent expiration. Revenues in many international markets do not have the same sharp decline compared to the U.S. in the first year after loss of exclusivity, due to less restrictive policies on generic substitution, different competitive dynamics, and less intervention by government/payers in physician decision-making, among other factors.

 

 

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 2007 was significantly impacted by the loss of U.S. exclusivity of Zoloft in August 2006 and Norvasc in March 2007. Further, we face a substantial adverse impact on our 2008 performance from the loss of U.S. exclusivity and cessation of marketing for Zyrtec/Zyrtec D in January 2008, and the expiration of our U.S. basic patent for Camptosar in February 2008. These four products represented 12% of our total revenues for the year ended December 31, 2007, and 20% 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. Generic manufacturers are also advancing increasingly novel interpretations of patent law to establish grounds for legal challenges to branded patents.

 

 

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, activists have used both putative ethical arguments and technical loopholes to weaken the pharmaceutical industry’s position in developing markets.

 

 

The integrity of our products is subject to an increasingly predatory atmosphere, seen in the growing problem of counterfeit drugs, which can harm patients through a lack of active ingredients, the inclusion of harmful components or improper accompanying packaging. 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.



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Our response:

 

 

We will continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate. (See also Notes to Consolidated Financial Statements—Note 20. 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 generic drugs or new branded products, which treat similar diseases or indications. For example, we lost U.S. exclusivity for Zithromax in November 2005, Zoloft in August 2006 and Norvasc in March 2007 and, as expected, significant revenue declines followed. In addition, the U.S. basic patent for Camptosar expired in February 2008. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, in addition to other competitive pressures.

Our response:

 

 

We will continue to highlight the benefits of our products, in terms of cost, safety and efficacy, as appropriate, as we seek to serve significantly more patients around the world. (For detailed information about Lipitor and other significant products, see further discussion in the “Revenues—Pharmaceutical—Selected Product Descriptions” section of this Financial Review.)

 

 

We are committed to driving innovation in product life cycle management by taking a broader look at our business model and examining it from all angles. We believe there are opportunities to better manage our products’ growth and development throughout their entire time on the market and bring innovation to our “go to market” promotional and commercial strategies. We plan to develop ways to further enhance the value of mature products, as well as those close to losing their exclusivity, and to create product-line extensions where feasible. In connection with the production of these products, we are pursuing new ways to accelerate our high-quality, low-cost manufacturing initiatives.

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 strength of our businesses.

 

 

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.

 

 

Our product lines must be replenished over time in order to offset 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:

 

 

 

o

We will refocus our investments on disease areas of major unmet medical needs and advance new technologies. We expect to become an industry leader in biotherapeutics and build best-in-class vaccine capabilities.

 

 

 

 

o

During 2007, we continued to introduce new products, including Selzentry in the U.S. and, in Europe, Celsentri (the trade name for Selzentry in Europe), and Ecalta (the trade name for Eraxis in Europe).

 

 

 

 

o

During 2007, we or our development partners submitted two new drug applications (NDAs) to the U.S. Food and Drug Administration (FDA) for Fablyn (lasofoxifene) and Spiriva Respimat.

 

 

 

 

o

Several key medicines received approval for new indications in 2007, including approvals in the U.S. for Lyrica for the treatment of fibromyalgia, Lipitor for secondary prevention of cardiovascular events in patients with established coronary heart disease and Fragmin for the prevention of blood clots in patients with cancer. In the E.U., medicines that received approval for new indications in 2007 were Celebrex, for the treatment of ankylosing spondylitis, and Sutent, for metastatic renal cell carcinoma (mRCC) as a first-line treatment and for gastrointestinal stromal tumors (GIST) as a second-line treatment.

 

 

 

 

o

We continue to conduct research on a scale that can help redefine medical practice. Our R&D pipeline includes 213 projects in development: 151 new molecular entities and 62 product-line extensions. They span multiple therapeutic areas, and we are leveraging our status as the industry’s partner of choice to expand our licensing operations. In addition, we have more than 320 projects in discovery research. During 2007, 34 new compounds were advanced from discovery research into preclinical development, 22 preclinical development candidates progressed into Phase 1 human testing and 16 Phase 1 clinical development candidates advanced into Phase 2 proof-of-concept trials and safety studies.

 

 

 

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. Two new molecular entities and multiple new indication programs for in-line products advanced into Phase 3 development during 2007. We expect a significant number of new molecular entities and new indication programs to advance to Phase 3 by the end of 2009. With the progress we are seeing in our pipeline -- as well as our efforts in reducing our attrition rate – we are also continuing to target having a steady stream of new medicines from our internal R&D, four a year, starting in 2011.



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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 and acquisitions allow us to capitalize on these compounds to expand our pipeline of potential future products.

 

 

 

o

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 400 alliances across the entire spectrum of the discovery, development and commercialization process.

 

 

 

 

o

In the second quarter of 2007, we entered into a collaboration agreement with Bristol-Myers Squibb Company (BMS) to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS, and in a separate agreement, we are also collaborating with BMS on the research, development and commercialization of DGAT-1 inhibitors. (See further discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

 

 

 

 

o

We are building a major presence in biologics by recognizing that our core strength with small molecules must be complemented by large molecules, as they involve some of the most promising R&D technology and cutting-edge science in medical research, as well as integrating our investments, R&D and existing internal capabilities with disciplined business development. In 2007, we acquired BioRexis, a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates. In 2006, we acquired Rinat, a biologics company with several new central-nervous-system product candidates. In 2005, the acquisition of Vicuron Pharmaceuticals Inc. (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.

 

 

 

 

o

The acquisition of PowderMed in 2006 is enabling us to explore 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.)

     
  o 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.

As a result, we will:

 

 

Continue to streamline our company to reduce bureaucracy and enable us to move quickly.

 

 

Continue to restructure our cost base to drive efficiencies and enable greater agility and operating flexibility.

 

 

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

 

 

Revitalize our internal R&D approach by focusing our efforts to improve productivity and give discovery and development teams more flexibility and clearer goals, as well as committing considerable resources to promising therapeutic areas, including oncology, diabetes and neurological disorders, among others. Although we decided to exit Exubera, we remain committed to investing resources in the development of new and innovative medicines to manage diabetes.

 

 

Focus our business development by thoroughly assessing every therapeutic area, looking at gaps we have identified and accelerating programs we already have. We are also developing opportunistic strategies concerning the best products, product candidates and technologies.

 

 

Drive innovation in product life-cycle management by taking a broader look at our business model and examining it from all angles. We believe there are opportunities to better manage our products’ growth and development throughout their entire time on the market and bring innovation to our “go to market” promotional and commercial strategies. We plan to develop ways to further enhance the value of mature products, as well as those close to losing their exclusivity, and to create product-line extensions where feasible. In connection with the production of these products, we are pursuing new ways to accelerate our high-quality, low-cost manufacturing initiatives.

 

 

Seek complementary opportunities in products and technologies that have the potential to leverage our capabilities and are aligned with our goals of improving health.

 

 

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

See further discussion in the “Our Cost-Reduction Initiatives” 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:



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Current demographics of developed countries indicate that people are living longer and, therefore, have a growing demand for high-quality healthcare, and the most effective medicines.

 

 

Revising our sales model, where appropriate, to better engage physicians and customers.

 

 

The large number of patients within our various therapeutic categories that are untreated. 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.

 

 

Stepping up our focus and investments in emerging markets by developing strategies in areas, especially Eastern Europe and Asia, where changing demographics and economics will drive growing demand for high-quality healthcare and offer the best potential for our products.

 

 

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

 

 

Our Cost-Reduction Initiatives

 

During 2007, 2006 and 2005, we made significant progress with our cost-reduction initiatives, which were designed to increase efficiency and streamline decision-making across the company. These initiatives were launched in early 2005 and broadened in October 2006.

 

On January 22, 2007, we announced additional plans to 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 are generating net cost reductions through site rationalization in R&D and manufacturing, streamlining organizational structures, sales force and 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. 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 initiatives are discussed below.

 

Net of various cost increases and investments during 2007, we achieved, on a constant currency basis (the actual foreign exchange rates in effect in 2006), a reduction of about $560 million in the Selling, informational and administrative expenses (SI&A) pre-tax component of Adjusted income compared to 2006. By the end of 2008, we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion, compared to 2006 on a constant currency basis (the actual foreign exchange rates in effect in 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 to transform the research division. Many of the actions have been completed. We have exited two discovery therapeutic areas (Gastrointestinal & Hepatology and Dermatology), though we continue to develop compounds in those areas that are already in the pipeline. We have consolidated each research therapeutic area into a single site. In addition, of six sites that were identified for closure, two (Mumbai, India and Plymouth Township, Michigan) have been closed. Operations have been scaled back significantly in the other four sites (Ann Arbor and Kalamazoo, Michigan; Nagoya, Japan; and Amboise, France). The timing of final closure of the remaining sites is subject to business needs and, in the case of Nagoya and Amboise, to consultation with works councils and local labor law. As of December 31, 2007, all portfolio project transfers were completed with minimal progress development interruption and are now in their new sites. This reorganization has resulted in smaller, more agile research units designed to drive the growth of our bigger pipeline, while maintaining costs, and generating more products.

 

 

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 24 closures completed through December 31, 2007.

 

 

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. For this reason, PGRD has standardized and broadly 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.

 

 

 

Two new molecular entities and multiple new indication programs for in-line products advanced into Phase 3 development during 2007. We expect a significant number of new molecular entities and new indication programs to advance to Phase 3 by the end of 2009. We intend to increase resources dedicated to biotherapeutics, with the objectives of launching one product per year within 10 years, strengthening our antibody platform and building our vaccine business. In addition, we will enhance our

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capability to identify the right targets and pathways by harnessing new biologic techniques to allow identification and the pursuit of the most relevant pathways. We expect to fund a number of 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. We have focused on innovation and delivering value through a simplified supply network. Since 2005, 30 sites have been identified for rationalization. In addition, there have been extensive consolidations and realignments of operations resulting in streamlined operations and staff reductions.

 

 

 

We have reduced our network of plants from 93 four years ago to 57 today, which also reflects the acquisition of seven plants and the sites sold in 2006 as part of our Consumer Healthcare business. By the end of 2009, we plan to reduce our network of manufacturing plants around the world to 45. The cumulative impact will be a more focused, streamlined and competitive manufacturing operation, with less than 50% of our plants and a reduction of 35% of our manufacturing employees compared to 2003. Further, we currently outsource the manufacture of approximately 17% of our products on a cost basis and plan to increase this substantially by 2010 and beyond.

 

 

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. We completed the U.S. reorganization in December 2006, which included a 20% reduction in our U.S. field force. The restructured U.S. field force was operational starting in April 2007 and productivity per sales representative has returned to the levels before the reorganization, retaining our competitiveness and share of voice. Globally, we have reduced our field force by approximately 11%. Additional savings are being generated from de-layering, eliminating duplicative work and strategically realigning various functions.

 

 

 

We are in the process of transforming our field force operations in Europe to being more customer-centric by reorganizing and shifting resources. As of December 31, 2007, we had reduced our field force in Europe by approximately 17% and expect total reductions of 20% by the end of 2008, subject to consultation with works councils and local labor law, while allowing us to maintain a competitive voice for our medicines and a strong organization going forward.

 

 

Information Technology—

 

Reductions in Application Software—To achieve cost savings, we have pursued significant reductions in application software and data centers, as well as rationalization of service providers, while enhancing our ability to invest in innovative technology opportunities to further propel our growth. By consolidating 11 third-party providers and reducing labor costs, we expect to generate considerable annual savings and improve service quality.

 

 

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.

 

 

Global Sourcing—

 

Leveraging Purchasing Power—To achieve cost savings on purchased goods and services, we have focused on rationalizing suppliers, leveraging our substantial purchases of goods and services and improving demand 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 and maximizing the value of our in-line products, as well as through opportunistic licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, diabetes, Alzheimer’s disease, cardiovascular disease, vaccines and other products and services that seek to provide valuable healthcare solutions. Some of our most significant business-development transactions since 2005 are described below.

 

 

In December 2007, we entered into a license agreement with Scil Technology Gmbh (Scil) for worldwide collaboration on Scil cartilage specific growth factor CD-RAP. Under this agreement, Pfizer obtained a worldwide exclusive license to develop and commercialize CD-RAP. In 2007, we expensed a payment of $8 million, which was included in Research and development expenses. We may also make additional payments of up to $242 million based upon development and regulatory milestones.

 

 

In December 2007, we entered into a license and collaboration agreement with Adolor Corporation (Adolor) to develop and commercialize ADL5859 and ADL577, proprietary delta opioid receptor agonist compounds for the treatment of pain. In 2007, we expensed a payment of $32 million, which was included in Research and development expenses. We may also make additional payments of up to $233 million to Adolor, based on development and regulatory milestones.

 

 

In December 2007, we entered into a research collaboration and license agreement with Taisho Pharmaceutical Co., Ltd. (Taisho) to acquire worldwide rights outside of Japan for TS-032, a metabolic glutamate receptor agonist that may offer a new treatment option for central nervous system disorders, and is currently in pre-clinical development for the treatment of schizophrenia. In 2007, we expensed a payment of $22 million, which was included in Research and development expenses. We may also make additional payments of up to $265 million to Taisho based upon development and regulatory milestones.


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In the second quarter of 2007, we entered into a collaboration agreement with BMS to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS, that is being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions. We made an initial payment to BMS of $250 million and additional payments to BMS related to product development efforts, which are included in Research and development expenses in 2007. We may also make additional payments of up to $750 million to BMS, based on development and regulatory milestones. In a separate agreement, we are also collaborating with BMS on the research, development and commercialization of DGAT-1 inhibitors, a class of compounds that modify lipid metabolism.

 

 

In April 2007, we agreed with OSI Pharmaceuticals, Inc. (OSI) to terminate a 2002 collaboration agreement to co-promote Macugen, for the treatment of age-related macular degeneration (AMD), in the U.S. We also agreed to amend and restate a 2002 license agreement for Macugen, and to return to OSI all rights to develop and commercialize Macugen in the U.S. In return, OSI granted us an exclusive right to develop and commercialize Macugen in the rest of the world.

 

 

In the first quarter of 2007, we acquired BioRexis, a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. In connection with these and other smaller acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges.

 

 

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 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. for exclusive worldwide rights to a compound for the treatment of neovascular (wet) 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 inResearch 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 to acquire exclusive worldwide rights to DGAT-1 inhibitors. The lead compound in the class, BAY 74-4113, is a potential treatment for obesity, type 2 diabetes and other related disorders.

 

 

In June 2006, we acquired the worldwide rights to fesoterodine, a drug candidate for treating overactive bladder which was approved in the E.U. in April 2007 and is under regulatory review in the U.S., from Schwarz Pharma AG.

 

 

In March 2006, we entered into research collaborations with NicOX SA in ophthalmic disorders and NOXXON Pharma AG in obesity.

 

 

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, 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). Substantially all assets recorded in connection with this acquisition have now been written off. See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review. 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 approximately $118 million ($71 million, after tax) in 2006 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, 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, 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, we 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, 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

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in cash (including transaction costs). In connection with these transactions, we recorded $262 million in Acquisition-related in-process research and development charges.

 

 

The following acquisitions, completed in 2008, are not reflected in our consolidated financial statements as of December 31, 2007:

 

In February 2008, we signed an agreement to acquire all issued and outstanding shares of Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company with a product (Thelin) for the treatment of pulmonary arterial hypertension, which is commercially available in much of the E.U. and is approved in other markets, as well as other pipeline candidates. Upon completion of the tender offer, representing an equity value of approximately $195 million, we will also assume Encysive’s change of control repurchase obligations under its 2.5% convertible notes.

 

 

In January 2008, we completed the acquisition of all the outstanding shares of Coley Pharmaceutical Group, Inc. (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In March 2005, we entered into a license agreement with 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. In June 2007, we announced the discontinuation of the development program associated with this compound.

 

 

In January 2008, we also acquired CovX, a privately-held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform that we expect will enhance our biologic portfolio.

 

 

Dispositions

 

 

We evaluate our businesses and product lines periodically for strategic fit within our operations. Since January 1, 2005, we have 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. In 2007, we recorded a loss of approximately $70 million, after-tax, primarily related to the resolution of contingencies, such as purchase price adjustments and product warranty obligations, as well as pension settlements. 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 cost-reduction initiatives 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.

 

 

 

 

 

We continued during 2007, and will continue for a period of time, to generate cash flows and to report income statement activity in continuing operations that are associated with our former Consumer Healthcare business. The activities that give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business operations to the new owner. Included in continuing operations for 2007 were the following amounts associated with these transition service agreements that will no longer occur after the full transfer of activities to the new owner: Revenues of $219 million; Cost of sales of $194 million; Selling, informational and administrative expenses of $15 million; and Other (income)/deductions—net of $16 million in income.

 

 

 

 

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.

 

 

Our Expectations for 2008

 

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

 

 

Our 2008 guidance reflects the projected impact of the loss of exclusivity in the U.S. of Norvasc (March 2007) and Zyrtec/Zyrtec D (January 2008), and the expiration of the U.S. basic patent for Camptosar (February 2008).

 

 

At current exchange rates, we forecast 2008 revenues of $47.0 billion to $49.0 billion, reported diluted earnings per common share (EPS) of $1.78 to $1.93, Adjusted diluted EPS of $2.35 to $2.45, and cash flow from operations of $17 billion to $18 billion.



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In addition, on a constant currency basis, we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion, compared to 2006. (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

As referenced in this section: (i) “current exchange rates” is defined as rates approximating foreign currency spot rates in January 2008 and (ii) “constant currency basis” is defined as the actual foreign currency exchange rates in effect during 2006.

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

 

 

 

 

 

 

 

 

(BILLIONS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)

 

FULL-YEAR 2008 GUIDANCE

 

 



 

NET INCOME(a)

DILUTED EPS(a) 







Adjusted income/diluted EPS(b) guidance

 

~$15.8-$16.6

~$2.35-$2.45

Purchase accounting impacts, net of tax

 

(2.1)

(0.31)

Costs related to cost-reduction initiatives, net of tax

 

(1.4-1.7)

(0.21- 0.26)









Reported Net income/diluted EPS guidance

 

~$12.0-$13.1

~$1.78-$1.93









 

 

 

 

(a)

Excludes the effects of major business-development transactions not completed as of December 31, 2007.

 

 

 

 

(b)

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

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

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. Except for income tax contingencies, we record accruals for contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable, and we record anticipated recoveries under existing insurance contracts when assured of recovery. For tax matters, beginning in 2007 upon the adoption of a new accounting standard, we record accruals for income tax contingencies to the extent that we conclude that a tax position is not sustainable under a ‘more likely than not’ standard and we record our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction when we conclude that the potential recovery is more likely than not. (See Notes to Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards and Note 8E. Taxes on Income: Tax Contingencies.) 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).

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. (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, as well as asset lives, can materially impact our results of operations.

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


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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 with respect to 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.

 

 

Outside 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.

 

 

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.

 

 

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:

 

 

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 likely would result in generic competition earlier than expected.

 

 

A significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the FDA or other regulatory authorities could affect our ability to manufacture or sell a product.

 

 

A projection or forecast that 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 or the lack of acceptance of a product by patients, physicians and payers.

 

 

Our impairment review process is as follows:

 

For finite-lived intangible assets, such as developed technology rights, whenever impairment indicators are present, we perform



12  |  2007 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

 

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 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). 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. Further, an asset’s expected useful life can increase estimation risk and, thus, impairment risk, as longer-lived intangibles necessarily require longer-term forecasts—it should be noted that for some assets these time spans can range up to 20 years or longer. 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.

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. (See Notes to Consolidated Financial Statements—Note 14. Pension and Postretirement Benefit Plans and Defined Contribution Plans.)

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,



2007 Financial Report  |  13


Financial Review
Pfizer Inc and Subsidiary Companies

 



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.

The following table shows the expected versus actual rate of return on plan assets and the discount rate used to determine the benefit obligations for the U.S. qualified pension plans:

 

 

 

 

 

 

 

 

 










 

 

2007

 

2006  

2005










Expected annual rate of return

 

9.0

%

 

9.0

%

9.0

%

Actual annual rate of return

 

7.9

 

 

15.2

 

10.1

 

Discount rate

 

6.5

 

 

5.9

 

5.8

 










Our assumption for the expected long-term rate of return-on-assets in our U.S. pension plans, which impacts net periodic benefit cost, was reduced from 9.0% for 2007 to 8.5% for 2008 to reflect that our strategic asset target allocation was modified in late 2007 to reduce the volatility of our plan funded status and the probability of future contribution requirements. Our target allocations have been revised to increase the debt securities allocation by 10% and to reduce the global equity securities allocation by a corresponding amount. 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 the fair market value of plan assets would serve to decrease our 2008 international pension plans’ pre-tax expense by approximately $27 million. Holding all other assumptions constant, the effect of a 0.5 percentage-point decline in the return-on-assets assumption is an increase in our 2008 U.S. qualified pension plan pre-tax expense of approximately $38 million.

The discount rate used in calculating our U.S. pension benefit obligations as of December 31, 2007, is 6.5%, which represents a 0.6 percentage-point increase from our December 31, 2006 rate of 5.9%. 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 0.6 percentage-point increase in the discount rate assumption is a decrease in our 2008 U.S. qualified pension plans’ pre-tax expense of approximately $77 million and a decrease in the U.S. qualified pension plans’ projected benefit obligations as of December 31, 2007, of approximately $696 million.

Analysis of the Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 


 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 

07/06

 

 

06/05

 















Revenues

 

$

48,418

 

 

$

48,371

 

$

47,405

 

 

 

 

 

2

 

Cost of sales

 

 

11,239

 

 

 

7,640

 

 

7,232

 

 

47

 

 

 

6

 

% of revenues

 

 

23.2

%

 

 

15.8

%

 

15.3

%

 

 

 

 

 

 

 

SI&A expenses

 

 

15,626

 

 

 

15,589

 

 

15,313

 

 

 

 

 

2

 

% of revenues

 

 

32.3

%

 

 

32.2

%

 

32.3

%

 

 

 

 

 

 

 

R&D expenses

 

 

8,089

 

 

 

7,599

 

 

7,256

 

 

6

 

 

 

5

 

% of revenues

 

 

16.7

%

 

 

15.7

%

 

15.3

%

 

 

 

 

 

 

 

Amortization of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

intangible assets

 

 

3,128

 

 

 

3,261

 

 

3,399

 

 

(4

)

 

 

(4

)

% of revenues

 

 

6.5

%

 

 

6.7

%

 

7.2

%

 

 

 

 

 

 

 

Acquisition-related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IPR&D charges

 

 

283

 

 

 

835

 

 

1,652

 

 

(66

)

 

 

(49

)

% of revenues

 

 

0.6

%

 

 

1.7

%

 

3.5

%

 

 

 

 

 

 

 

Restructuring charges and acquisition-related costs

 

 

2,534

 

 

 

1,323

 

 

1,356

 

 

92

 

 

 

(2

)

% of revenues

 

 

5.2

%

 

 

2.7

%

 

2.9

%

 

 

 

 

 

 

 

Other (income)/ deductions—net

 

 

(1,759

)

 

 

(904

)

 

397

 

 

95

 

 

 

*

 












 

 

 

 

 

 

 

 

Income from continuing operations(a)

 

 

9,278

 

 

 

13,028

 

 

10,800

 

 

(29

)

 

 

21

 

% of revenues

 

 

19.2

%

 

 

26.9

%

 

22.8

%

 

 

 

 

 

 

 

Provision for taxes on income

 

 

1,023

 

 

 

1,992

 

 

3,178

 

 

(49

)

 

 

(37

)

Effective tax rate

 

 

11.0

%

 

 

15.3

%

 

29.4

%

 

 

 

 

 

 

 

Minority interest

 

 

42

 

 

 

12

 

 

12

 

 

235

 

 

 

4

 

Discontinued operations—net of tax

 

 

(69

)

 

 

8,313

 

 

498

 

 

*

 

 

 

M+

 

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

 

 

 

 

 

 

 

(23

)

 

*

 

 

 

*

 












 

 

 

 

 

 

 

 

Net income

 

$

8,144

 

 

$

19,337

 

$

8,085

 

 

(58

)

 

 

139

 

% of revenues

 

 

16.8

%

 

 

40.0

%

 

17.1

%

 

 

 

 

 

 

 





















 

 

 

 

(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 were $48.4 billion in 2007, flat compared to 2006, primarily due to:

 

 

an aggregate increase in revenues from Pharmaceutical products launched in the U.S. since 2005 of $2.0 billion and from many in-line products in 2007;

 

 

the weakening of the U.S. dollar relative to many foreign currencies, especially the euro, U.K. pound and Canadian dollar, which increased revenues by $1.5 billion, or 3.0%, in 2007; and

 

 

increased revenues in our Animal Health segment and other businesses of $706 million in 2007,



14  |  2007 Financial Report



 

Financial Review

Pfizer Inc and Subsidiary Companies

 



offset by:

 

 

a decrease in revenues for Norvasc of $1.9 billion in 2007, primarily due to the loss of U.S. exclusivity in March 2007;

 

 

a decrease in revenues for Zoloft, primarily due to the loss of U.S. exclusivity in August 2006, of $1.6 billion in 2007;

 

 

a decrease in revenues for Lipitor in the U.S. of $654 million in 2007, primarily due to competitive pressures from generics among other factors; and

 

 

the one-time reversal of a sales deduction accrual in 2006 related to a favorable development in a pricing dispute in the U.S. of about $170 million.

 

 

In 2007, Lipitor, Norvasc (which lost U.S. exclusivity in March 2007) and Celebrex each delivered at least $2 billion in revenues, while Lyrica, Viagra, Detrol/Detrol LA, Xalatan/Xalacom and Zyrtec/Zyrtec D (which lost U.S. exclusivity in January 2008) each surpassed $1 billion.

 

Total revenues were $48.4 billion in 2006, an increase of 2% compared to 2005, primarily due to:

 

 

the solid aggregate performance in our broad portfolio of patent-protected medicines; and

 

 

the revenues from products launched over the previous three years,

 

 

mostly offset by:

 

 

the loss of U.S. exclusivity on Zithromax in November 2005 and Zoloft in August 2006, which resulted in a collective decline in revenues of about $2.5 billion for these two products; and

 

 

a decrease in revenues in 2006 by $279 million, or 0.6%, compared to 2005, due primarily 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 foreign exchange impact in 2006.

 

 

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.

 

 

Revenues exceeded $500 million in each of 12 countries outside the U.S. in 2007 and in each of 10 countries outside the U.S. in 2006. 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)

 

2007

 

2006

 

2005

 








 

Medicaid and related state program rebates

 

$

0.6

 

$

0.5

 

$

1.3

 

Medicare rebates

 

 

0.4

 

 

0.6

 

 

0.0

 

Performance-based contract rebates

 

 

1.9

 

 

1.8

 

 

2.3

 











 

Total

 

$

2.9

 

$

2.9

 

$

3.6

 











 


 

 

 

The above rebates for 2007 were comparable to 2006 and reflect:

 

changes in product mix, such as lower sales of Zoloft and Norvasc, both of which lost exclusivity in the U.S.,

 

 

offset by:

 

the impact of our contracting strategies with both government and non-government entities, among other factors.

 

 

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 $1.6 billion in 2007, $1.4 billion in 2006 and $1.3 billion in 2005. Chargebacks were impacted by the launch of certain generic products in 2007, 2006 and 2005 by our Greenstone subsidiary.

 

Our accruals for Medicaid rebates, Medicare rebates, performance-based contract rebates and chargebacks totaled $1.2 billion as of December 31, 2007.

 

 

 

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.

 

 

 

Total Revenues by Business Segment

GRAPH


2007 Financial Report   |  15



 

Financial Review

Pfizer Inc and Subsidiary Companies

 


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)

 

2007

 

2006

 

2005

 

2007

 

2006

 

2005

 

2007

 

2006

 

2005

 

07/06

 

 

06/05

 

07/06

 

 

06/05

 

07/06

 

06/05

 


































 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical

 

$

44,424

 

$

45,083

 

$

44,269

 

$

21,548

 

$

24,503

 

$

23,465

 

$

22,876

 

$

20,580

 

$

20,804

 

(1

)

 

2

 

(12

)

 

4

 

11

 

(1

)

Animal Health

 

 

2,639

 

 

2,311

 

 

2,206

 

 

1,132

 

 

1,032

 

 

993

 

 

1,507

 

 

1,279

 

 

1,213

 

14

 

 

5

 

10

 

 

4

 

18

 

5

 

Corporate/Other

 

 

1,355

 

 

977

 

 

930

 

 

473

 

 

287

 

 

287

 

 

882

 

 

690

 

 

643

 

39

 

 

5

 

65

 

 

 

28

 

7

 





























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$

48,418

 

$

48,371

 

$

47,405

 

$

23,153

 

$

25,822

 

$

24,745

 

$

25,265

 

$

22,549

 

$

22,660

 

 

 

2

 

(10

)

 

4

 

12

 

 












































 

 

Pharmaceutical Revenues

 

Our pharmaceutical business is the largest in the world. Revenues from this segment contributed approximately 92% of our total revenues in 2007 and 93% of our total revenues in both 2006 and 2005. As of November 2007, 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 eight products in 2007, each of nine products in 2006 and each of eight products in 2005. These products represented 58% of our Pharmaceutical revenues in 2007 and 64% of our Pharmaceutical revenues in both 2006 and 2005.

 

Worldwide Pharmaceutical revenues in 2007 decreased 1% compared to 2006, primarily due to:

 

a decrease in revenues for Norvasc of $1.9 billion in 2007, primarily due to the loss of U.S. exclusivity in March 2007;

 

 

a decrease in revenues for Zoloft of $1.6 billion in 2007, primarily due to the loss of U.S. exclusivity in August 2006;

 

 

a decrease in revenues for Lipitor in the U.S. of $654 million in 2007, primarily resulting from competitive pressures from generics, among other factors;

 

 

a decrease in revenues for Zithromax of $187 million in 2007, primarily due to the loss of U.S. exclusivity in November 2005; and

 

 

the one-time reversal of a sales deduction accrual in 2006 related to a favorable development in a pricing dispute in the U.S. of about $170 million,

 

 

partially offset by:

 

an aggregate increase in revenues from products launched in the U.S. since 2005 of $2.0 billion and from many in-line products in 2007; and

 

 

the weakening of the U.S. dollar relative to many foreign currencies, especially the euro, U.K. pound and Canadian dollar, which increased Pharmaceutical revenues by approximately $1.3 billion, or 3%, in 2007.

 

 

Geographically:

 

 

in the U.S., Pharmaceutical revenues in 2007 decreased 12% compared to 2006, primarily due to the effect of the loss of exclusivity on Zoloft and Norvasc, and lower sales of Lipitor, partially offset by the aggregate increase in revenues from products launched since 2005 and from many in-line products; and

 

 

in our international markets, Pharmaceutical revenues in 2007 increased 11% compared to 2006, primarily due to the favorable impact of foreign exchange on international revenues of approximately $1.3 billion (6.4%) in 2007, revenues from products launched since 2005, as well as growth of certain in-line products.

 

 

During 2007, international Pharmaceutical revenues grew to represent 51.5% of total Pharmaceutical revenues, compared to 45.6% in 2006. This increase has been fueled by higher volumes and the favorable impact of foreign exchange, despite pricing pressures in international markets.

 

Effective January 1, 2008, July 13, 2007, January 1, 2007, and January 1, 2006, 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.



16  |  2007 Financial Report



 

Financial Review

Pfizer Inc and Subsidiary Companies

 


 

Revenues—Major Pharmaceutical Products

 

Revenue information for several of our major Pharmaceutical products follow:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MILLIONS OF DOLLARS)

 

 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 

 

 


 


 

PRODUCT

 

PRIMARY INDICATIONS

 

2007

 

2006

 

2005

 

07/06

 

 

06/05

 















 

Cardiovascular and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

metabolic diseases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lipitor

 

Reduction of LDL cholesterol

 

$

12,675

 

$

12,886

 

$

12,187

 

 

(2

)

 

 

6

 

Norvasc

 

Hypertension

 

 

3,001

 

 

4,866

 

 

4,706

 

 

(38

)

 

 

3

 

Chantix/Champix

 

An aid to smoking cessation

 

 

883

 

 

101

 

 

 

 

773

 

 

 

*

 

Caduet

 

Reduction of LDL cholesterol and hypertension

 

 

568

 

 

370

 

 

185

 

 

54

 

 

 

99

 

Cardura

 

Hypertension/Benign prostatic hyperplasia

 

 

506

 

 

538

 

 

586

 

 

(6

)

 

 

(8

)

Central nervous system

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

disorders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lyrica

 

Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia

 

 

1,829

 

 

1,156

 

 

291

 

 

58

 

 

 

297

 

Geodon/Zeldox

 

Schizophrenia and acute manic or mixed episodes associated with bipolar disorder

 

 

854

 

 

758

 

 

589

 

 

13

 

 

 

29

 

Zoloft

 

Depression and certain anxiety disorders

 

 

531

 

 

2,110

 

 

3,256

 

 

(75

)

 

 

(35

)

Neurontin

 

Epilepsy and post-herpetic neuralgia

 

 

431

 

 

496

 

 

639

 

 

(13

)

 

 

(22

)

Aricept(a)

 

Alzheimer’s disease

 

 

401

 

 

358

 

 

346

 

 

12

 

 

 

4

 

Xanax/Xanax XR

 

Anxiety/Panic disorders

 

 

325

 

 

316

 

 

409

 

 

3

 

 

 

(23

)

Relpax

 

Migraine headaches

 

 

315

 

 

286

 

 

233

 

 

10

 

 

 

23

 

Arthritis and pain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Celebrex

 

Arthritis pain and inflammation, acute pain

 

 

2,290

 

 

2,039

 

 

1,730

 

 

12

 

 

 

18

 

Infectious and respiratory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

diseases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zyvox

 

Bacterial infections

 

 

944

 

 

782

 

 

618

 

 

21

 

 

 

27

 

Vfend

 

Fungal infections

 

 

632

 

 

515

 

 

397

 

 

23

 

 

 

30

 

Zithromax/Zmax

 

Bacterial infections

 

 

438

 

 

638

 

 

2,025

 

 

(31

)

 

 

(69

)

Diflucan

 

Fungal infections

 

 

415

 

 

435

 

 

498

 

 

(5

)

 

 

(13

)

Urology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Viagra

 

Erectile dysfunction

 

 

1,764

 

 

1,657

 

 

1,645

 

 

6

 

 

 

1

 

Detrol/Detrol LA

 

Overactive bladder

 

 

1,190

 

 

1,100

 

 

988

 

 

8

 

 

 

11

 

Oncology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Camptosar

 

Metastatic colorectal cancer

 

 

969

 

 

903

 

 

910

 

 

7

 

 

 

 

Sutent

 

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

 

 

581

 

 

219

 

 

 

 

166

 

 

 

*

 

Aromasin

 

Breast cancer

 

 

401

 

 

320

 

 

247

 

 

25

 

 

 

30

 

Ophthalmology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Xalatan/Xalacom

 

Glaucoma and ocular hypertension

 

 

1,604

 

 

1,453

 

 

1,372

 

 

10

 

 

 

6

 

Endocrine disorders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genotropin

 

Replacement of human growth hormone

 

 

843

 

 

795

 

 

808

 

 

6

 

 

 

(2

)

All other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zyrtec/Zyrtec D

 

Allergies

 

 

1,541

 

 

1,569

 

 

1,362

 

 

(2

)

 

 

15

 

Alliance revenue

 

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

 

 

1,789

 

 

1,374

 

 

1,065

 

 

30

 

 

 

29

 




















 

 

 

(a)

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

 

 

*

Calculation not meaningful.

 

 

Certain amounts and percentages may reflect rounding adjustments.

2007 Financial Report  |  17



 

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, with $12.7 billion in worldwide revenues in 2007, a decrease of 2% compared to 2006 despite the favorable impact of foreign exchange, which increased revenues by $360 million, or 3%. In the U.S., revenues of $7.2 billion in 2007 declined 8% compared to 2006. Internationally, Lipitor revenues in 2007 increased 9% compared to 2006, with 7% due to the favorable impact of foreign exchange.

 

 

 

The decline in Lipitor revenues in 2007 compared to 2006 is driven by a combination of factors, including the following:

 

 

 

the impact of an intensely competitive statin market, with competition from multi-source generic simvastatin and branded products;

 

 

 

increased payer pressure in the U.S.; and

 

 

 

a favorable development in a pricing dispute in the U.S. recorded in 2006,

 

 

 

partially offset by:

 

 

the favorable impact of foreign exchange; and

 

 

 

a positive U.S. pricing impact, net of rebates, notwithstanding a more flexible contracting strategy.

 

 

 

On May 30, 2007, we announced the return of Lipitor to Express Scripts Inc.’s preferred list of drugs as of June 1, 2007, following our rebate agreement.

 

 

On March 5, 2007, Lipitor was approved by the FDA for five new indications in patients with clinically evident heart disease, thereby expanding the U.S. label from primary prevention in moderate-risk patients to include secondary prevention in high-risk patients. Lipitor is now the only cholesterol-lowering medicine approved for the reduction in risk of hospitalization due to heart failure. These new indications have been incorporated into promotional materials, including a new direct-to-consumer (DTC) advertising campaign, and support the incremental benefit and overall safety of using higher doses of Lipitor.

 

  See Notes to Consolidated Financial Statements—Note 20. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Lipitor.
   

Norvasc, for treating hypertension, lost exclusivity in the U.S. in March 2007, six months earlier than expected, due to an appellate court decision that was counter to three previous trial court rulings in Pfizer’s favor. Norvasc has also experienced patent expirations in many E.U. countries, but maintains exclusivity in certain other major markets, including Japan (where the Norvasc patent will expire in March 2008), and Canada (where the Norvasc patent will expire in August 2010). Norvasc worldwide revenues in 2007 decreased 38% compared to 2006.

 

 

 

See Notes to Consolidated Financial Statements—Note 20. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Norvasc.

 

 

Caduet, a single pill therapy combining Norvasc and Lipitor, recorded worldwide revenues of $568 million, an increase of 54% for 2007, compared to 2006. This was largely driven by a more focused message platform and a highly targeted consumer campaign in the U.S. 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. However, with the introduction of generic amlodipine besylate, in addition to increased competition, growth has begun to slow. During 2007, Caduet was launched in France, Australia and Taiwan.

 

 

 

See Notes to Consolidated Financial Statements—Note 20. 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 to aid smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006 and in select E.U. markets in December 2006. Chantix/Champix continues to demonstrate strong uptake, with more than 5 million patients globally having been prescribed Chantix since its launch. In the U.S., an unbranded advertising campaign introduced in early 2007 is working to effectively develop the market, and branded advertising was introduced in the third quarter of 2007. We continue to focus on increasing adherence and have introduced appropriate tools to physicians. In addition, we are conducting several pilot programs to reach patients in their first month of therapy through pharmacy programs, as well as through our GetQuit behavior modification program. Champix has secured final approval from the National Institute for Health and Clinical Excellence (NICE) for use in the state-funded National Health Service in the U.K., following a positive appraisal decision in May 2007. Our strategy for this innovative medicine is to build a sustainable, medically supported market over time and to seek to secure reimbursement—initiatives that we believe will drive future growth. Chantix/Champix recorded worldwide revenues of $883 million in 2007.

 

 

 

In January 2008, we added a warning to Chantix’s label in the U.S. that patients who are attempting to quit smoking by taking Chantix should be observed by a physician for neuropsychiatric symptoms like changes in behavior, agitation, depressed mood, suicidal ideation and suicidal behavior. A causal relationship between Chantix and these reported symptoms has not been established. In some reports, however, an association could not be excluded.

 

 

Exubera, see the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review.

 

 

Zoloft, which lost exclusivity in the U.S. in August 2006 and earlier in many European markets, experienced a 75% worldwide revenue decline in 2007, compared to 2006. 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



18  |  2007 Financial Report



 

Financial Review

Pfizer Inc and Subsidiary Companies

 



 

 

 

in Japan in July 2006 for the indications of depression/depressed state and panic disorder.

 

 

 

On May 2, 2007, the FDA proposed that the existing blackbox warning on the labels of all antidepressants, including Zoloft, which describes an increased risk of suicidal thoughts and behavior in some children and adolescents, be expanded to include young adults to age 24, particularly during the first two months of treatment. The proposed label change also states that studies have not shown this increased risk in adults older than 24, that adults age 65 and older who are treated with antidepressants have a decreased risk of suicidal thoughts and behavior, and that depression and certain other psychiatric disorders are themselves the most important causes of suicide. We have implemented this label change in accordance with the FDA’s proposal.

 

 

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 6.7% for 2007. In 2007, Geodon worldwide revenues grew 13%, compared to 2006. Geodon growth was driven by recognition of its efficacy by prescribers as clinical experience increased, and by a favorable metabolic profile.

 

 

Lyrica grew to a 10.9% new prescription share of the total U.S. anti-epileptic market in 2007, fueled by strong efficacy, as well as high physician and patient satisfaction. In June 2007, Lyrica was approved in the U.S. for the management of fibromyalgia, one of the most common chronic, widespread pain conditions. This approval represents a breakthrough for the more than six million Americans who suffer from this debilitating condition who previously had no FDA-approved treatment.

 

 

Celebrex was approved in Japan in January 2007, for the treatment of osteoarthritis and rheumatoid arthritis. In February 2007, Celebrex was approved in Europe for the treatment of ankylosing spondylitis. From April 2007 through July 2007, we ran an innovative Celebrex direct-to-consumer (DTC) television advertising campaign in the U.S. about treatment options for arthritis. The 21/2-minute television advertisement opened by addressing cardiovascular (CV) safety first and clarifying misperceptions among arthritis sufferers about the risks and benefits of Celebrex and other prescription non-steroidal anti-inflammatory drugs. This DTC ad campaign helped to generate patient interest and initiate a productive dialogue between physicians and patients. We resumed this television advertising campaign in November 2007.

 

 

 

See Notes to Consolidated Financial Statements—Note 20. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Celebrex.

 

 

Zyvox is the world’s best-selling branded medicine for serious gram-positive infections in adults and children, which increasingly are caused by drug-resistant bacteria in hospitals and more recently, in the community setting. Zyvox is an

 

 

 

appropriate first-line therapy for patients with serious complicated skin and skin structure infections or nosocomial pneumonia known or suspected to be caused by gram-positive pathogens, including Methicillin-resistant Staphylococcus aureus (MSRA) infection, with the flexibility of an intravenous and oral regimen. Zyvox works with a unique mechanism of action, which minimizes the potential for cross-resistance with other antibiotic classes and thus has the potential to effectively treat MRSA infection despite growing resistance to other important antibiotics. Worldwide sales of Zyvox grew 21% to $944 million in 2007.

 

 

Zithromax/Zmax, for the treatment of bacterial infections, experienced a 31% decline in worldwide revenues in 2007 compared to 2006, reflecting the expiration of Zithromax’s composition-of-matter patent in the U.S. in November 2005 and the end of Pfizer’s active sales promotion in July 2005.

 

 

Selzentry/Celsentri (maraviroc) is the first in a new class of oral HIV medicines in more than a decade known as CCR5 antagonists. CCR5 antagonists work by blocking the CCR5 co-receptor, the virus’ predominant entry route into T-cells. Selzentry/Celsentri stops the R5 virus on the outside surface of the cells before it enters, rather than fighting the virus inside, as do all other classes of oral HIV medicines. Selzentry/Celsentri was approved in the U.S. in August 2007 and in Europe in September 2007, and is indicated for combination anti-retroviral treatment of treatment-experienced adults infected with only CCR5-tropic HIV-1 detectable, who have evidence of viral replication and have HIV-1 strains resistant to multiple anti-retroviral agents. A diagnostic test confirms whether a patient is infected with CCR5-tropic HIV-1, which is also known as “R5-virus.”

 

 

Viagra remains the leading treatment for erectile dysfunction and one of the world’s most recognized pharmaceutical brands. Viagra revenues grew 6% worldwide, with U.S. revenues flat and international revenues increasing 13% in 2007, compared to 2006. The growth in Viagra international revenues was driven by foreign exchange, as well as a combination of other factors, including our focus on strengthening its value proposition to key customers and growth in the erectile dysfunction market. In July 2007, we launched a television ad campaign in the U.S. for Viagra aimed at educating and motivating men with erectile dysfunction to seek treatment.

 

 

Detrol/Detrol LA, a muscarinic receptor antagonist, is the most prescribed medicine worldwide 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 revenues grew 8% to $1.2 billion in 2007, compared to 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 declined 3.4% to a 39.5% share for 2007.

 

 

 

See Notes to Consolidated Financial Statements—Note 20. Legal Proceedings and Contingencies for a discussion of recent developments with respect to certain patent litigation relating to Detrol/Detrol LA.



2007 Financial Report  |  19


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. Worldwide revenues in 2007 increased 7% to $969 million, compared to 2006. The National Comprehensive Cancer Network (NCCN), an alliance of 21 of the world’s leading cancer centers, has issued guidelines recommending Camptosar as an option across all lines of treatment for advanced colorectal cancer. The U.S. basic patent for Camptosar expired in February 2008.

 

 

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. In the first quarter of 2007, the U.S. label was revised to include new first-line advanced renal cell carcinoma data. 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. We believe that future growth of Sutent will be fueled by emerging new data in a range of potential new indications. Sutent recorded $581 million in worldwide revenues in 2007.

 

 

Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is one of the world’s leading branded glaucoma medicines. 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 worldwide revenues grew 10% in 2007, compared to 2006.

 

 

Genotropin, for the treatment of short stature in children with growth hormone deficiency, Prader-Willi Syndrome, Turner Syndrome, Small for Gestational Age Syndrome and in adults with growth hormone deficiency, is the world’s leading human growth hormone. Genotropin revenues grew 6% worldwide, driven by its broad platform of innovative injection delivery devices.

 

 

Zyrtec/Zyrtec D, allergy medicines, experienced a 2% decline in worldwide revenues compared to 2006. We lost U.S. exclusivity for Zyrtec/Zyrtec D in January 2008. Since we sold our rights to market Zyrtec/Zyrtec D over-the-counter in connection with the sale of our Consumer Healthcare business, we ceased selling this product in late January 2008.

 

 

Alliance revenues reflect revenues primarily associated with our co-promotion of Aricept, 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. See Notes to Consolidated

 

 

 

 

 

Financial Statements—Note 20. Legal Proceedings and Contingencies for a discussion of certain patent litigation relating to Aricept.

 

 

 

 

Rebif, discovered and developed by EMD Serono, Inc. (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 regulatory authorities in the E.U. and Japan.

 

 

 

 

 


Recent FDA approvals:

 


PRODUCT

 

INDICATION

 

DATE APPROVED


Selzentry (maraviroc)

 

Treatment of human immuno- deficiency virus/acquired immune deficiency (HIV) in CCR5-tropic treatment-experienced patients

 

August 2007


Lyrica

 

Treatment of fibromyalgia

 

June 2007


Fragmin

 

Prevention of blood clots in patients with cancer

 

May 2007


Lipitor

 

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

 

March 2007



 

 

 

 

 


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

 

 


PRODUCT

 

INDICATION

 

DATE SUBMITTED


Fablyn (lasofoxifene)

 

Treatment of osteoporosis

 

December 2007


Spiriva

 

Respimat device for chronic obstructive pulmonary disease

 

November 2007


Zmax

 

Treatment of bacterial infections— sustained release—Pediatric acute otitis media (AOM) filing

 

November 2006


fesoterodine

 

Treatment of overactive bladder

 

March 2006


Vfend

 

Treatment of fungal infections— Pediatric filing

 

June 2005


dalbavancin

 

Treatment of complicated skin/skin structure gram-positive bacterial infections

 

December 2004



On September 28, 2007, we received an “approvable” letter from the FDA for Zmax that sets forth requirements to obtain approval for the AOM indication based on pharmacokinetic data. We plan to discuss these requirements with the FDA and seek an agreement on actions to address the FDA’s comments.


20  |  2007 Financial Report



Financial Review
Pfizer Inc and Subsidiary Companies

 



We received an “approvable” letter from the FDA for fesoterodine for the treatment of overactive bladder in January 2007. Regulatory review of fesoterodine is progressing in the U.S. and fesoterodine was approved in the E.U. in April 2007. We are working with Schwarz Pharma, the licensor, to scale up manufacturing and identify manufacturing site alternatives. Launch is planned for mid-2008 in Europe and, subject to FDA approval, early 2009 in the U.S.

In December 2007, we received a third “approvable” letter from the FDA for dalbavancin. We and the third-party manufacturer are working with the FDA to respond to the requirements set forth in that letter.

We received “not-approvable” letters from the FDA for Fablyn (lasofoxifene) for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We submitted a new NDA for the treatment of osteoporosis in post-menopausal women in December 2007, including the three-year interim data from the Postmenopausal Evaluation And Risk-reduction with Lasofoxifene (PEARL) study in support of the new NDA.

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.

 

 

 

 

 

 

 


Regulatory approvals and filings in the E.U. and Japan:


PRODUCT

 

DESCRIPTION OF EVENT

 

DATE APPROVED

 

DATE SUBMITTED


Fablyn/(lasofoxifene)

 

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

 

 

January 2008


Chantix/ Champix

 

Approval in Japan as an aid to smoking cessation

 

January 2008

 


Spiriva

 

Approval in the E.U. for Respimat device for chronic obstructive pulmonary disease

 

November 2007

 


Caduet

 

Application submitted in Japan for hypertension

 

 

November 2007


Celsentri (maraviroc)

 

Approval in the E.U. for the treatment of HIV in CCR5- tropic treatment- experienced patients

 

September 2007

 


Eraxis/Ecalta

 

Approval in the E.U. for the treatment of invasive candidiasis in adult non- neutropenic patients

 

September 2007

 


Selera (Inspra)

 

Approval in Japan for treatment of hypertension

 

September 2007

 


dalbavancin

 

Application submitted in the E.U. for the treatment of skin and skin structure infections

 

 

July 2007


 

 

 

 

 

 

 


Regulatory approvals and filings in the E.U. and Japan: (continued)


PRODUCT

 

DESCRIPTION OF EVENT

 

DATE APPROVED

 

DATE SUBMITTED


rifabutin

 

Application submitted in Japan for Mycobacterium infection

 

 

June 2007


fesoterodine

 

Approval in the E.U. for treatment of overactive bladder

 

April 2007

 


Macugen

 

Application submitted in Japan for treatment of age-related macular degeneration

 

 

March 2007


Celebrex

 

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

 

February 2007

 

 

 

Application submitted in Japan for treatment of lower- back pain

 

 

February 2007

 

 

Approval in Japan for treatment of osteoarthritis and rheumatoid arthritis

 

January 2007

 


sildenafil

 

Application submitted in Japan for treatment of pulmonary arterial hypertension

 

 

February 2007


Somavert

 

Approval in Japan for treatment of acromegaly

 

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

 

 

 

Application submitted in Japan for treatment of mRCC

 

 

December 2006

 

 

Application submitted in Japan for treatment of GIST

 

 

December 2006



 

 

 


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


PRODUCT

 

INDICATION


Celebrex

 

Acute gouty arthritis


Eraxis/Vfend Combination

 

Aspergillosis fungal infections


Geodon/ Zeldox

 

Bipolar relapse prevention; pediatric bipolar mania; adjunctive use in bipolar depression


Lyrica

 

Epilepsy monotherapy


Macugen

 

Diabetic macular edema


Revatio

 

Pediatric pulmonary arterial hypertension


Selzentry/ Celsentri

 

HIV in CCR5-tropic treatment-naive patients


Sutent

 

Breast cancer; colorectal cancer; non-small cell lung cancer; liver cancer


Zithromax/ chloroquine

 

Malaria




2007 Financial Report  |  21



Financial Review
Pfizer Inc and Subsidiary Companies

 



New drug candidates in late-stage development include CP-945,598, a cannibinoid-1 receptor antagonist for treatment of obesity; axitinib, a multi-targeted kinase for treatment of pancreatic cancer; CP-675,206, an anti-CTLA4 monoclonal antibody for melanoma; PD-332334, an alpha2delta compound for the treatment of generalized anxiety disorder; reboxetine, for the treatment of fibromyalgia; and apixaban for the prevention and treatment of venous thromboembolism and the prevention of stroke in patients with atrial fibrillation, which is being developed in collaboration with Bristol-Myers Squibb Company.

In June 2007, we announced the discontinuation of a development program in non-small cell lung cancer for PF-3,512,676 in combination with cytotoxic chemotherapy. We licensed PF-3,512,676 from Coley in 2005.

Additional product-related programs are in various stages of discovery and development. Also, see the 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)

 

 

2007

 

 

2006

 

2005

 

 

07/06

 

 

06/05

 




















Livestock products

 

$

1,654

 

 

$

1,458

 

$

1,379

 

 

13

 

 

 

6

 

Companion animal products

 

 

985

 

 

 

853

 

 

827

 

 

15

 

 

 

3

 












 

 

 

 

 

 

 

 

Total Animal Health

 

$

2,639

 

 

$

2,311

 

$

2,206

 

 

14

 

 

 

5

 




















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

The increase in Animal Health revenues in 2007, compared to 2006, was primarily attributable to:

 

 

for livestock products, the continued good performance of our premium anti-infectives for cattle and swine, and intramammaries in 2007, as well as revenues from Embrex, which we acquired in the first quarter of 2007;

 

 

for companion animal products, the good performances of Revolution (a parasiticide for dogs and cats); Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery); and new product launches, such as Convenia (first-in-class single-dose treatment antibiotic therapy for dogs and cats), Slentrol (weight management for dogs) and Cerenia (treatment and prevention of vomiting in dogs); and

 

 

the favorable impact of foreign exchange, which increased revenues by 5%.

 

 

The increase in Animal Health revenues in 2006, 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

 

 

for companion animal products, the continued good performance of Revolution;

 

 

partially offset by:

 

 

a decline in U.S. Rimadyl revenues due to intense branded competition, as well as increased generic competition in the European companion animal market.

 

 

Costs and Expenses

 

 

Cost of Sales

Cost of sales increased 47% in 2007 and increased 6% in 2006, while revenues were flat in 2007 and increased 2% in 2006. Cost of sales as a percentage of revenues increased in 2007 compared to 2006 and in 2006 compared to 2005.

 

 

Cost of sales in 2007, compared to 2006, increased as a result of:

 

 

asset impairment charges, write-offs and other exit costs associated with Exubera of $2.6 billion (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review);

 

 

the unfavorable impact of foreign exchange on expenses;

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $700 million in 2007, compared to $392 million in 2006; and

 

 

costs of $194 million for 2007, related to business transition activities associated with the sale of our Consumer Healthcare business, completed in December 2006,

 

 

partially offset by:

 

 

savings related to our cost-reduction initiatives.

 

 

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

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $392 million in 2006, compared to $124 million in 2005;

 

 

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;

 

 

savings related to our cost-reduction initiatives; and

 

 

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

 

 

Selling, Informational and Administrative (SI&A) Expenses


SI&A expenses in 2007 were comparable to 2006, which reflects:

 

 

savings related to our cost-reduction initiatives,

 

 

offset by:

 

 

the unfavorable impact on expenses of foreign exchange;

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $334 million in 2007, compared to $243 million in 2006; and

 

 

charges associated with Exubera of $85 million (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review).



22  |  2007 Financial Report



Financial Review
Pfizer Inc and Subsidiary Companies

 



 

 

SI&A expenses increased 2% in 2006, compared to 2005, which reflects:

 

 

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

 

 

expenses related to share-based payments; and

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $243 million in 2006, compared to $151 million in 2005,

 

 

partially offset by:

 

 

the favorable impact on expenses of foreign exchange; and

 

 

savings related to our cost-reduction initiatives.

 

 

Research and Development (R&D) Expenses

 

 

R&D expenses increased 6% in 2007, compared to 2006, which reflects:

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $416 million in 2007, compared to $176 million in 2006;

 

 

an initial payment to BMS of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in 2007;

 

 

the unfavorable impact on expenses of foreign exchange;

 

 

a one-time R&D milestone due to us from sanofi-aventis (approximately $118 million) recorded in 2006; and

 

 

exit costs, such as contract termination costs, associated with Exubera of $100 million (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review),

 

 

partially offset by:

 

 

savings related to our cost-reduction initiatives.

 

 

R&D expenses increased 5% in 2006, compared to 2005, which reflects:

 

 

the impact of higher implementation costs associated with our cost-reduction initiatives of $176 million in 2006, compared to $50 million in 2005;

 

 

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:

 

 

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

 

 

savings related to our cost-reduction initiatives.

R&D expenses also include payments for intellectual property rights of $603 million in 2007, $292 million in 2006 and $156 million in 2005. (For further discussion, see the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” 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 2007, we expensed $283 million of IPR&D, primarily related to our acquisitions of BioRexis and Embrex. 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.

Cost-Reduction Initiatives

In connection with our cost-reduction initiatives, which were 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 change the way we run our businesses to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We are generating net cost reductions through site rationalization in R&D and manufacturing, streamlined organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. Compared to 2006, we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion by the end of 2008 on a constant currency basis (the actual foreign exchange rates in effect in 2006). (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

The actions associated with the expanded cost-reduction initiatives 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 worldwide. (See Notes to Consolidated Financial Statements—Note 5. Cost-Reduction Initiatives.) The strengthening of the euro and other currencies relative to the dollar, while favorable on Revenues, has had an adverse impact on our total expenses (Cost of sales, Selling, administrative and informational expenses, and Research and development expenses), including the reported impact of these cost-reduction efforts.



2007 Financial Report  |  23



Financial Review
Pfizer Inc and Subsidiary Companies

 



We incurred the following costs in connection with our cost-reduction initiatives:

 

 

 

 

 

 

 

 

 

 

 

 


 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 













Implementation costs(a)

 

$

1,389

 

 

$

788

 

$

325

 

Restructuring charges(b)

 

 

2,523

 

 

 

1,296

 

 

438

 













Total costs related to our cost-reduction initiatives

 

$

3,912

 

 

$

2,084

 

$

763

 














 

 

(a)

For 2007, included in Cost of sales ($700 million), Selling, informational and administrative expenses ($334 million), Research and development expenses ($416 million) and in Other (income)/deductions—net ($61 million income). 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, 2007, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our worldwide marketing and research and development operations, and the implementation costs primarily relate to accelerated depreciation of certain assets, as well as system and process standardization and the expansion of shared services.

The components of restructuring charges associated with our cost-reduction initiatives follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






















 

 

COSTS INCURRED

 

ACTIVITY
THROUGH
DEC. 31,
2007(a)

 

ACCRUAL
AS OF
DEC. 31,
2007

 

 

 











 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 

TOTAL

 

 






















Employee termination costs

 

$

2,034

 

 

$

809

 

$

303

 

$

3,146

 

  

$1,957

 

  

$1,189

 

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impairments

 

 

260

 

 

 

368

 

 

122

 

 

750

 

 

750

 

 

 

Other

 

 

229

 

 

 

119

 

 

13

 

 

361

 

 

261

 

 

100

 






















Total

 

$

2,523

 

 

$

1,296

 

$

438

 

$

4,257

 

  

$2,968

 

  

$1,289

(b)























 

 

 

 

(a)

Includes adjustments for foreign currency translation.

 

 

 

 

(b)

Included in Other current liabilities ($1.1 billion) and Other noncurrent liabilities ($186 million).

From the beginning of the cost-reduction initiatives in 2005 through December 31, 2007, Employee termination costs represent the expected reduction of the workforce by 20,800 employees, mainly in research, manufacturing and sales. As of December 31, 2007, approximately 13,000 of these employees have been formally terminated. Employee termination costs are recorded when the actions are probable and estimable 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 recorded in Restructuring charges and acquisition-related costs $11 million in 2007, $27 million in 2006 and $918 million in 2005, for acquisition-related costs. Amounts in 2005 were primarily related to our acquisition of Pharmacia on April 16, 2003 and

included integration costs of $543 million and restructuring charges of $375 million. As of December 31, 2007, virtually all restructuring charges incurred have been utilized.

Integration costs represent external, incremental costs directly related to an acquisition, including expenditures for consulting and systems integration. Restructuring charges can include severance, costs of vacating duplicative facilities, contract termination and other exit costs.

Other (Income)/Deductions—Net

In 2007, we recorded higher net interest income compared to 2006, due primarily to higher net financial assets during 2007 compared to 2006, reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business in late December 2006, and higher interest rates. Also in 2007, we recorded a gain of $211 million related to the sale of a building in Korea. In 2006, we recorded a charge of $320 million related to the impairment of our Depo-Provera intangible asset. In 2005, we recorded charges of $1.2 billion primarily related to the impairment of our Bextra intangible asset. See also Notes to Consolidated Financial Statements—Note 7. Other (Income)/Deductions—Net.

Provision for Taxes on Income

Our overall effective tax rate for continuing operations was 11.0% in 2007, 15.3% in 2006 and 29.4% in 2005. The lower tax rate in 2007 is primarily due to the impact of charges associated with our decision to exit Exubera (see the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review), higher charges related to our cost-reduction initiatives in 2007, lower non-deductible charges for acquisition-related IPR&D, and the volume and geographic mix of product sales and restructuring charges in 2007 compared to 2006, partially offset by certain one-time tax benefits in 2006, all discussed below.

The lower tax rate in 2006 compared to 2005 is primarily due to certain one-time tax benefits associated with favorable tax legislation and the resolution of certain tax positions, 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.

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 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, in the first quarter of 2006, 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.



24  |  2007 Financial Report


 

Financial Review

Pfizer Inc and Subsidiary Companies

 



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 former 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)

 

2007

 

 

2006

 

2005

 









 

Revenues

 

$

 

 

$

4,044

 

$

3,948

 












 

Pre-tax income/loss

 

 

(5

)

 

 

643

 

 

695

 

(Benefit)/provision for taxes on income(a)

 

 

2

 

 

 

(210

)

 

(244

)












 

Income/loss from operations of discontinued businesses—net of tax

 

 

(3

)

 

 

433

 

 

451

 












 

Pre-tax gains/(losses) on sales of discontinued businesses

 

 

(168

)

 

 

10,243

 

 

77

 

(Benefit)/provision for taxes on
gains(b)

 

 

102

 

 

 

(2,363

)

 

(30

)












 

Gains/(losses) on sales of discontinued businesses—net of tax

 

 

(66

)

 

 

7,880

 

 

47

 












 

Discontinued operations—net of tax

 

$

(69

)

 

$

8,313

 

$

498

 












 


 

 

 

 

(a)

Includes a deferred tax expense of nil in 2007, $24 million in 2006 and $25 million in 2005.

 

 

 

 

(b)

Includes a deferred tax benefit of nil in 2007, $444 million in 2006, and nil in 2005.

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 the 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 share-based payments 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 share-based 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-U.S. 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, Performance Share Awards grants made in 2006, 2007 and future years will be paid based on a non-discretionary formula that measures our performance using relative total shareholder return.

Purchase Accounting Adjustments

Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to our acquisitions of BioRexis, Embrex, Rinat, sanofi-aventis’ rights to Exubera, PowderMed, Idun and Vicuron, as well as net asset acquisitions. These impacts can include charges for purchased in-process R&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



2007 Financial Report  |  25



 

Financial Review

Pfizer Inc and Subsidiary Companies

 



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 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 with 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 is not intended 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 costs 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 made no adjustments for the resulting synergies.

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 costs 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.

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 cost-reduction initiatives; charges related to sales or disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; amounts associated with transition service agreements in support of discontinued operations after sale; 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 adjustments associated with charges attributable to the repatriation of foreign earnings in accordance with the American Jobs Creation Act of 2004; 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 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.



26  |  2007 Financial Report



 

Financial Review

Pfizer Inc and Subsidiary Companies

 



Reconciliation

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

 

 

YEAR ENDED DEC. 31,

 

% CHANGE

 

 

 


 


 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 

07/06

 

 

06/05

 














 

Reported net income

 

$

8,144

 

 

$

19,337

 

$

8,085

 

 

(58

)

 

 

139

 

Purchase accounting adjustments—net of tax

 

 

2,511

 

 

 

3,131

 

 

3,967

 

 

(20

)

 

 

(21

)

Acquisition-related costs—net of tax

 

 

10

 

 

 

14

 

 

599

 

 

(30

)

 

 

(98

)

Discontinued operations—net of tax

 

 

69

 

 

 

(8,313

)

 

(498

)

 

*

 

 

 

M+

 

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

 

 

 

 

 

 

 

23

 

 

 

 

 

*

 

Certain significant items—net of tax

 

 

4,379

 

 

 

813

 

 

2,293

 

 

438

 

 

 

(65

)












 

 

 

 

 

 

 

 

Adjusted income

 

$

15,113

 

 

$

14,982

 

$

14,469

 

 

1

 

 

 

4

 



















 


 

 

 

 

*

Calculation not meaningful.

 

 

 

 

M+ Change greater than 1,000%.

 

 

 

 

Certain amounts and percentages may reflect rounding adjustments.



2007 Financial Report  |  27



 

Financial Review

Pfizer Inc and Subsidiary Companies

 


 

Adjusted income as shown above excludes the following items:

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 









 

Purchase accounting adjustments:

 

 

 

 

 

 

 

 

 

 

 

Intangible amortization and other(a)

 

$

3,101

 

 

$

3,220

 

$

3,289

 

In-process research and development charges(b)

 

 

283

 

 

 

835

 

 

1,652

 












 

Total purchase accounting adjustments, pre-tax

 

 

3,384

 

 

 

4,055

 

 

4,941

 

Income taxes

 

 

(873

)

 

 

(924

)

 

(974

)












 

Total purchase accounting adjustments—net of tax

 

 

2,511

 

 

 

3,131

 

 

3,967

 












 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

Integration costs(c)

 

 

17

 

 

 

21

 

 

543

 

Restructuring charges(c)

 

 

(6

)

 

 

6

 

 

375

 












 

Total acquisition-related costs, pre-tax

 

 

11

 

 

 

27

 

 

918

 

Income taxes

 

 

(1

)

 

 

(13

)

 

(319

)












 

Total acquisition-related costs—net of tax

 

 

10

 

 

 

14

 

 

599

 












 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

(Income)/loss from discontinued operations(d)

 

 

5

 

 

 

(643

)

 

(695

)

(Gains)/losses on sales of discontinued operations(d)

 

 

168

 

 

 

(10,243

)

 

(77

)












 

Total discontinued operations, pre-tax

 

 

173

 

 

 

(10,886

)

 

(772

)

Income taxes

 

 

(104

)

 

 

2,573

 

 

274

 












 

Total discontinued operations—net of tax

 

 

69

 

 

 

(8,313

)

 

(498

)












 

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

 

 

 

 

 

 

 

23

 












 

Certain significant items:

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges—cost-reduction initiatives(c)

 

 

2,523

 

 

 

1,296

 

 

438

 

Implementation costs—cost-reduction initiatives(e)

 

 

1,389

 

 

 

788

 

 

325

 

Asset impairment charges and other associated costs(f)

 

 

2,798

 

 

 

320

 

 

1,240

 

Consumer Healthcare business transition activity(g)

 

 

(26

)

 

 

 

 

 

sanofi-aventis research and development milestone(h)

 

 

 

 

 

(118

)

 

 

Other(i)

 

 

(174

)

 

 

(173

)

 

(134

)












 

Total certain significant items, pre-tax

 

 

6,510

 

 

 

2,113

 

 

1,869

 

Income taxes

 

 

(2,131

)

 

 

(735

)

 

(654

)

Resolution of certain tax positions(j)

 

 

 

 

 

(441

)

 

(586

)

Tax impact of the repatriation of foreign earnings(j)

 

 

 

 

 

(124

)

 

1,664

 












 

Total certain significant items—net of tax

 

 

4,379

 

 

 

813

 

 

2,293

 












 

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

 

$

6,969

 

 

$

(4,355

)

$

6,384

 












 


 

 

 

 

(a)

Included primarily in Amortization of intangible assets. (See Notes to Consolidated Financial Statements—Note 13. Goodwill and Other Intangible Assets.)

 

 

 

 

(b)

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

 

 

 

 

(c)

Included in Restructuring charges and acquisition-related costs. (See Notes to Consolidated Financial Statements—Note 5. Cost-Reduction Initiatives and Note 6. 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 in Cost of sales ($700 million), Selling, informational and administrative expenses ($334 million), Research and development expenses ($416 million) and in Other (income)/deductions—net ($61 million income) for 2007. 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 Consolidated Financial Statements—Note 5. Cost-Reduction Initiatives.)

 

 

 

 

(f)

In 2007, these charges primarily related to the decision to exit Exubera and comprise approximately $1.1 billion of intangible asset impairments, $661 million of inventory write-offs, $454 million of fixed asset impairments and $578 million of other exit costs and are included in Cost of sales ($2.6 billion), Selling, informational and administrative expenses ($85 million), Research and development expenses ($100 million) and Revenues ($10 million for an estimate of customer returns) for 2007. See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review. In 2006, $320 million related to the impairment of the Depo-Provera intangible asset is included in Other (income)/deductions—net. In 2005, included primarily in Other (income)/deductions—net and includes $1.2 billion related to the impairment of the Bextra intangible asset. (See Notes to Consolidated Financial Statements—Note 13B. Goodwill and Other Intangible Assets: Other Intangible Assets.)

 

 

 

 

(g)

Included in Revenues ($219 million), Cost of sales ($194 million), Selling, informational and administrative expenses ($15 million) and Other (income)/deductions—net ($16 million income) for 2007.

 

 

 

 

(h)

Included in Research and development expenses.

 

 

 

 

(i)

Primarily included in Other (income)/deductions—net. (See Notes to Consolidated Financial Statements—Note 7. Other (Income)/Deductions—Net.)

 

 

 

 

(j)

Included in Provision for taxes on income. (See Notes to Consolidated Financial Statements—Note 8. Taxes on Income.)

28  |  2007 Financial Report



 

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)

 

2007

 

 

2006

 







 

Financial assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,406

 

 

$

1,827

 

Short-term investments

 

 

22,069

 

 

 

25,886

 

Short-term loans

 

 

617

 

 

 

514

 

Long-term investments and loans

 

 

4,856

 

 

 

3,892

 









 

Total financial assets

 

 

30,948

 

 

 

32,119

 









 

Debt:

 

 

 

 

 

 

 

 

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

 

 

5,825

 

 

 

2,434

 

Long-term debt

 

 

7,314

 

 

 

5,546

 









 

Total debt

 

 

13,139

 

 

 

7,980

 









 

Net financial assets

 

$

17,809

 

 

$

24,139

 









 


Short-term investments as of December 31, 2006, reflect the receipt of proceeds of $16.6 billion from the sale of our Consumer Healthcare business on December 20, 2006.

We rely largely on operating cash flow, short-term investments, 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.

Investments

Our short-term and long-term investments consist primarily of high-quality, investment-grade available-for-sale debt securities. Our long-term investments include debt securities that totaled $2.6 billion as of December 31, 2007, which have maturities ranging substantially from one to five 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 as of December 31, 2006, reflects the receipt of proceeds from the sale of our Consumer Healthcare business of $16.6 billion. Our portfolio of short-term investments was reduced in 2007 and the proceeds were used to fund items such as the taxes due on the gain from the sale of our Consumer Healthcare business, completed in December 2006, share repurchases, dividends and capital expenditures in 2007.

Long-Term Debt Issuance

On December 10, 2007, we issued the following notes to be used for general corporate purposes, including the payment of maturing debt:

 

 

$1.3 billion equivalent, senior, unsecured, euro-denominated notes, due December 15, 2014, which pay interest annually, beginning December 15, 2008, at a fixed rate of 4.75%.

 

 

On May 11, 2007, we issued the following notes to be used for general corporate purposes:

 

 

$1.2 billion equivalent, senior, unsecured, euro-denominated notes, due May 15, 2017, which pay interest annually, beginning May 15, 2008, at a fixed rate of 4.55%.

The notes were issued under a securities registration statement filed with the Securities and Exchange Commission (SEC) in March 2007.

Credit Ratings

Two major corporate debt-rating organizations, Moody’s Investors Service (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

 

Negative

 

October 2007

S&P

 

A1+

 

AAA

 

Negative

 

December 2006











On October 19, 2007, Moody’s affirmed our Aa1 rating, its second-highest investment grade rating, but revised our ratings outlook to negative from stable. Moody’s cited: (i) our announcement on October 18, 2007, related to recorded charges totaling $2.8 billion ($2.1 billion, net of tax), associated with the impairment of Exubera assets and other exit costs associated with Exubera (see the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review); (ii) continuing pressure on U.S. Lipitor sales and market share; and (iii) the loss of U.S. exclusivity for Lipitor in either 2010 or 2011. The negative outlook reflects Moody’s assessment of challenges we face as we head into the 2010-2012 period when the U.S. patents on certain key products expire.

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 and cash equivalent balances and short-term investments in excess of our commercial paper and other short-term borrowings. As of December 31, 2007, we had access to $3.7 billion of lines of credit, of which $1.5 billion expire within one year. Of these lines of credit, $3.6 billion are unused, of which our lenders have committed to loan us $2.1 billion at our request. $2.0 billion of the unused lines of credit, which expire in 2012, may be used to support our commercial paper borrowings.

In March 2007, we filed a securities registration statement with the SEC. This registration statement was filed under the automatic shelf registration process available to well-known seasoned issuers and is effective for three years. We can issue securities of various types under that registration statement at any time, subject to approval by our Board of Directors in certain circumstances.



2007 Financial Report  |  29



Financial Review
Pfizer Inc and Subsidiary Companies


 

Goodwill and Other Intangible Assets

As of December 31, 2007, Goodwill totaled $21.4 billion (19% of our total assets) and other identifiable intangible assets, net of accumulated amortization, totaled $20.5 billion (18% of our total assets).

The components of goodwill and other identifiable intangible assets, by segment, as of December 31, 2007, follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 










 

(MILLIONS OF
DOLLARS)

 

PHARMACEUTICAL

 

ANIMAL
HEALTH

 

OTHER

 

TOTAL

 










 

Goodwill

 

 

$       21,256

 

$

108

 

$

18

 

$

21,382

 

Finite-lived intangible assets, net(a)

 

 

17,188

 

 

322

 

 

52

 

 

17,562

 

Indefinite-lived intangible assets(b)

 

 

2,826

 

 

109

 

 

1

 

 

2,936

 














 


 

 

 

 

(a)

Includes $16.6 billion related to developed technology rights and $565 million related to brands.

 

 

 

 

(b)

Includes $2.9 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 30% of the total amortized value of developed technology rights as of December 31, 2007, 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/Detrol LA, Xalatan, Genotropin, Zyvox, and Campto/Camptosar. Also included in this category are the post-approval milestone payments made under our alliance agreements for certain Pharmaceutical products, such as Rebif and Spiriva. These rights are all subject to our impairment review process explained in the “Accounting Policies: Long-Lived Assets” section of this Financial Review.

In 2007, we recorded a charge of $1.1 billion for the impairment of intangible assets (primarily developed technology rights) associated with Exubera. See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review.

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

In 2006, we recorded impairment charges of approximately $320 million related to the Depo-Provera brand (see Notes to Consolidated Financial Statements—Note 7. Other (Income)/ DeductionsNet).

 

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)

 

2007

 

 

2006

 







 

Cash and cash equivalents and short-term investments and loans

 

$

26,092

 

 

$

28,227

 

Working capital(a)

 

$

25,014

 

 

$

25,559

 

Ratio of current assets to current liabilities

 

 

2.15:1

 

 

 

2.16:1

 

Shareholders’ equity per common share(b)

 

$

9.65

 

 

$

10.05

 









 


 

 

 

 

(a)

Working capital includes assets held for sale of $114 million as of December 31, 2007, and $62 million as of December 31, 2006. Working capital also includes liabilities held for sale of nil as of December 31, 2007, and $2 million as of December 31, 2006.

 

 

 

 

(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).

 

 

 

Working capital and the ratio of current assets to current liabilities in 2007 were comparable to 2006, primarily due to:

 

 

 

inventory write-offs ($661 million) related to Exubera (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review), as well as liabilities of $375 million accrued in connection with this decision;

 

 

 

an increase in Other current liabilities related to our cost-reduction initiatives of $702 million; and

 

 

 

the funding of share purchases, dividends and capital expenditures in part through the use of the proceeds from the redemption of short-term investments and the use of short-term borrowings,

 

 

 

offset by:

 

 

 

the reclassification to noncurrent of certain amounts associated with uncertain tax positions of about $3.6 billion ($4.0 billion upon adoption on January 1, 2007, of a new accounting standard, partially offset by $0.4 billion of activity in 2007).


Summary of Cash Flows

 

 

 

 

 

 

 

 

 

 

 











 

 

 

YEAR ENDED DEC. 31,

 

 

 


 

(MILLIONS OF DOLLARS)

 

2007

 

 

2006

 

2005

 












 

Cash provided by/(used in):

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

13,353

 

 

$

17,594

 

$

14,733

 

Investing activities

 

 

795

 

 

 

5,101

 

 

(5,072

)

Financing activities

 

 

(12,610

)

 

 

(23,100

)

 

(9,222

)

Effect of exchange-rate changes on cash and cash equivalents

 

 

41

 

 

 

(15

)

 

 












 

Net increase/(decrease) in cash and cash equivalents

 

$

1,579

 

 

$

(420

)

$

439

 












 


30  |  2007 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies



Operating Activities

Our net cash provided by continuing operating activities was $13.4 billion in 2007, compared to $17.6 billion in 2006. The decrease in net cash provided by operating activities was primarily attributable to:

 

 

higher tax payments ($2.2 billion) in 2007, related primarily to the gain on the sale of our Consumer Healthcare business in December 2006; and

 

 

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

 

 

Our net cash provided by continuing operating activities was $17.6 billion in 2006, 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.

In 2007 and 2006, the cash flow line item called Income taxes payable primarily reflects the taxes provided in 2006 on the gain on the sale of our Consumer Healthcare business that were paid in 2007.

Investing Activities

Our net cash provided by investing activities was $795 million in 2007, compared to $5.1 billion in 2006. The decrease in net cash provided by investing activities was primarily attributable to:

 

 

lower net sales and redemptions of investments in 2007 (a negative change in cash and cash equivalents of $6.1 billion),

 

 

partially offset by:

 

 

the acquisitions of BioRexis and Embrex in 2007, compared to the acquisitions of PowderMed, Rinat and sanofi-aventis’ rights associated with Exubera in 2006 (a decreased use of cash of $1.9 billion).

 

 

 

Our net cash provided by investing activities was $5.1 billion in 2006, 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 sales and 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 acquisitions of PowderMed, Rinat and sanofi-aventis’ rights to Exubera in 2006, compared to the acquisitions of Vicuron and Idun in 2005 (an increased use of cash of $216 million).

Financing Activities

Our net cash used in financing activities was $12.6 billion in 2007, compared to $23.1 billion in 2006. The decrease in net cash used in financing activities was primarily attributable to:

 

 

net borrowings of $4.9 billion in 2007, compared to net repayments of $9.9 billion on total borrowings in 2006,

 

 

partially offset by:

 

 

higher purchases of common stock in 2007 of $10.0 billion, compared to $7.0 billion in 2006; and

 

 

an increase in cash dividends paid of $1.1 billion, reflecting an increase in the dividend rate, partially offset by lower shares outstanding.

 

 

Our net cash used in financing activities was $23.1 billion in 2006, 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, compared to $321 million in 2005;

 

 

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

 

 

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

 

 

partially offset by:

 

 

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

In June 2005, we announced a $5 billion share-purchase program, which is primarily being funded by operating cash flows and a portion of the proceeds from the sale of our Consumer Healthcare business. In June 2006, the Board of Directors increased our share-purchase authorization from $5 billion to $18 billion. In total, under the June 2005 program, through December 31, 2007, we purchased approximately 683 million shares for approximately $17.5 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.

In January 2008, we announced a new $5 billion share-purchase program, which will be funded by operating cash flows as circumstances and prices warrant.

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

 











 

2007:

 

 

 

 

 

 

 

 

 

 

June 2005 program

 

 

395

 

$

25.27

 

$

9,994

 











 

Total

 

 

395

 

 

 

 

$

9,994

 











 

2006:

 

 

 

 

 

 

 

 

 

 

June 2005 program

 

 

266

 

$

26.19

 

$

6,979

 











 

Total

 

 

266

 

 

 

 

$

6,979

 











 


2007 Financial Report  |  31


Financial Review
Pfizer Inc and Subsidiary Companies



Contractual Obligations

Payments due under contractual obligations as of December 31, 2007, mature as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEARS

 

 


(MILLIONS OF DOLLARS)

 

TOTAL

 

WITHIN 1

 

OVER 1
TO 3

 

OVER 3
TO 5

 

AFTER 5

















Long-term debt(a)

 

$

11,203

 

$

1,358

 

$

1,498

 

$

1,061

 

$

7,286

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

 

 

3,407

 

 

480

 

 

615

 

 

635

 

 

1,677

Lease commitments(c)

 

 

1,518

 

 

212

 

 

343

 

 

175

 

 

788

Purchase obligations(d)

 

 

826

 

 

403

 

 

248

 

 

142

 

 

33

Uncertain tax positions(e)

 

 

408

 

 

408

 

 

 

 

 

 


















 

 

(a)

Our long-term debt obligations include both our expected principal and interest obligations. Our calculations of expected interest payments incorporates only current period assumptions for interest rates, foreign currency translations rates and hedging strategies. (See Note 10. Financial Instruments.) 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.

 

 

(e)

Reflects the adoption as of January 1, 2007, of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, and supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement of FASB Interpretation No. 48, issued May 2, 2007, (see Notes to Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards). Except for amounts reflected in Income taxes payable, we are unable to predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation.

In 2008, 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, 2007, recorded amounts for the estimated fair value of these indemnifications are not significant.

Certain of our co-promotion or license agreements give our licensors or partners the rights 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 $8.2 billion in 2007 and $7.3 billion in 2006 on our common stock. In 2007, we increased our annual dividend to $1.16 per share from $0.96 per share in 2006. In December 2007, our Board of Directors declared a first-quarter 2008 dividend of $0.32 per share. The 2008 cash dividend marks the 41st 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-purchase 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

As of January 1, 2007, we adopted FIN 48, which provides guidance on the recognition, derecognition and measurement of tax positions for financial statement purposes. Prior to 2007, our policy had been to account for income tax contingencies based on whether we determined our tax position to be ‘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 of benefit recognition under current tax law, and adjusted to reflect the largest amount of benefit that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. As a result of the implementation of FIN 48, we reduced our existing liabilities for uncertain tax positions by approximately $11 million, which has been recorded as a direct adjustment to the opening balance of Retained earnings, and changed the classification of virtually all amounts associated with uncertain tax positions, including the associated accrued interest, from current to noncurrent, as of the date of adoption.

Recently Issued Accounting Standards, Not Adopted as of December 31, 2007

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 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. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2 Effective Date of FASB Statement No. 157. Under the terms of FSP 157-2, the provisions of SFAS 157 will be adopted for financial instruments in 2008 and, when required, for nonfinancial assets and nonfinancial liabilities in 2009 (except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis). We do not expect that the provisions to be adopted in 2008 will have a significant impact on our financial statements and we are in the process of evaluating the impact of provisions to be adopted in 2009.


32  |  2007 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies



In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. (SFAS 141(R) replaced SFAS No. 141, Business Combinations, originally issued in June 2001.) SFAS 141(R) retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. Generally, SFAS 141(R) is effective on a prospective basis for all business combinations completed on or after January 1, 2009. We are currently in the process of evaluating the extent of those potential impacts.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, Consolidated Financial Statements. SFAS 160 provides guidance for the accounting, reporting and disclosure of noncontrolling interests, also called minority interest. A minority interest represents the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The provisions of SFAS 160 will be adopted in 2009. The provisions of SFAS 160 will impact our current accounting for minority interests, which are not significant, and will impact our accounting for future acquisitions, if any, where we do not acquire 100% of the entity. We are currently in the process of evaluating the extent of those potential impacts.

In December 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. The provisions of EITF 07-1 will be adopted in 2009. We are in the process of evaluating the impact of adopting EITF 07-1 on our financial statements.

In June 2007, the EITF issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities. EITF Issue No. 07-3 provides guidance concerning the accounting for non-refundable advance payments for goods and services that will be used in future R&D activities and requires that they be expensed when the research and development activity has been performed and not at the time of payment. The provisions of EITF Issue No. 07-3 will be adopted in 2008. We do not expect that the adoption of EITF Issue No. 07-3 will have a significant impact 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:

 

 

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;

 

 

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

 

 

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;

 

 

Ability to successfully market both new and existing products domestically and internationally;

 

 

Difficulties or delays in manufacturing;

 

 

Trade buying patterns;

 

 

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

 

 

Impact of existing and future legislation and 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 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;

 

 

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;



2007 Financial Report  |  33


Financial Review
Pfizer Inc and Subsidiary Companies



 

 

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

 

 

Significant breakdown, infiltration or interruption of our information technology systems and infrastructure;

 

 

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;

 

 

Ability to protect our 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 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

 

 

Impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual items, including our ability to realize the projected benefits of our cost-reduction initiatives.

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, 2007, which will be filed in February 2008. 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. Foreign currency swaps are used to offset the potential earnings effects from foreign currency debt. 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 10D. 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 debt, investments and currency swaps, Swedish krona currency swaps, and on Japanese yen short and long-term borrowings and currency swaps. We invest, loan 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.




34  |  2007 Financial Report


Financial Review
Pfizer Inc and Subsidiary Companies



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 a one hundred basis point change (decreased 1% from the rate of the yield of the financial instrument) in interest rates for all maturities. All other factors were held constant. This represents a change in the key model characteristic from last year. The change was made to better reflect the potential impact of a significant change in interest rates. Applying this new model characteristic to our financial instruments last year had no material effect.

In 2007 and 2006, if there were an adverse change of one hundred basis points in interest rates, 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.

Beginning in 2007 upon the adoption of a new accounting standard, we record accruals for income tax contingencies to the extent that we conclude that a tax position is not sustainable under a ‘more likely than not’ standard and we record our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction when we conclude that the potential recovery is more likely than not. (See Notes to Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards and Note 8E. Taxes on Income: Tax Contingencies.) We record accruals for all other contingencies to the extent that we conclude their occurrence is probable and the related damages are estimable, and we record anticipated recoveries under existing insurance contracts when assured of recovery. 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 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.


2007 Financial Report  |  35



 

 

 

Management’s Report on Internal Control

 

Audit Committee’s Report

Over Financial Reporting

 

 


 

 




Management’s Report

We prepared and are responsible for the financial statements that appear in our 2007 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, 2007. 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, 2007.

The Company’s independent auditors have issued their auditors’ report on the Company’s internal control over financial reporting. That report appears in our 2007 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- Frank A. D'Amelio

 

-s- Loretta v. Cangialosi

 

 

 

Frank A. D’Amelio

 

Loretta V. Cangialosi

Principal Financial Officer

 

Principal Accounting Officer

 

 

 

February 29, 2008

 

 

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, 2007, 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. Don Cornwell

W. Don Cornwell
Chair, Audit Committee

February 29, 2008

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.



36  |  2007 Financial Report


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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, 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, 2007, 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 29, 2008 expressed an unqualified opinion on the effective operation of the Company’s internal control over financial reporting.

As discussed in the Notes to the Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards, effective January 1, 2007, Pfizer Inc adopted the provisions of Financial Accounting Standards Board Interpretation (FASB) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, and supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007.

As discussed in the Notes to the Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards, 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 1D. Significant Accounting Policies: New Accounting Standards, 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).

As discussed in the Notes to the Consolidated Financial Statements—Note 1D. Significant Accounting Policies: New Accounting Standards, effective December 31, 2005, Pfizer Inc adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations (an interpretation of FASB Statement No. 143).

(KPMG LLP LOGO)

KPMG LLP
New York, New York

February 29, 2008



2007 Financial Report  |  37


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 the internal control over financial reporting of Pfizer Inc and Subsidiary Companies as of December 31, 2007, 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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on risk assessment. Our audit also included 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, Pfizer Inc and Subsidiary Companies maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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, 2007 and 2006, 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, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statements.

(KPMG LLP LOGO)

KPMG LLP
New York, New York

February 29, 2008



38  |  2007 Financial Report


Consolidated Statements of Income
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 












 












 

 

 

YEAR ENDED DECEMBER 31,

 

 

 


 

(MILLIONS, EXCEPT PER COMMON SHARE DATA)

 

2007

 

 

2006

 

2005

 









 

Revenues

 

$

48,418

 

 

$

48,371

 

$

47,405

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales(a)

 

 

11,239

 

 

 

7,640

 

 

7,232

 

Selling, informational and administrative expenses(a)

 

 

15,626

 

 

 

15,589

 

 

15,313

 

Research and development expenses(a)

 

 

8,089

 

 

 

7,599

 

 

7,256

 

Amortization of intangible assets

 

 

3,128

 

 

 

3,261

 

 

3,399

 

Acquisition-related in-process research and development charges

 

 

283

 

 

 

835

 

 

1,652

 

Restructuring charges and acquisition-related costs

 

 

2,534

 

 

 

1,323

 

 

1,356

 

Other (income)/deductions—net

 

 

(1,759

)

 

 

(904

)

 

397

 












 

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

 

 

9,278

 

 

 

13,028

 

 

10,800

 

Provision for taxes on income

 

 

1,023

 

 

 

1,992

 

 

3,178

 

Minority interests

 

 

42

 

 

 

12

 

 

12

 












 

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

 

 

8,213

 

 

 

11,024

 

 

7,610

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from discontinued operations—net of tax

 

 

(3

)

 

 

433

 

 

451

 

Gains/(losses) on sales of discontinued operations—net of tax

 

 

(66

)

 

 

7,880

 

 

47

 












 

Discontinued operations—net of tax

 

 

(69

)

 

 

8,313

 

 

498

 












 

Income before cumulative effect of a change in accounting principles

 

 

8,144

 

 

 

19,337

 

 

8,108

 

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

 

 

 

 

 

 

 

(23

)












 

Net income

 

$

8,144

 

 

$

19,337

 

$

8,085

 












 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share—basic

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1.19

 

 

$

1.52

 

$

1.03

 

Discontinued operations

 

 

(0.01

)

 

 

1.15

 

 

0.07

 












 

Income before cumulative effect of a change in accounting principles

 

 

1.18

 

 

 

2.67

 

 

1.10

 

Cumulative effect of a change in accounting principles

 

 

 

 

 

 

 

 












 

Net income

 

$

1.18

 

 

$

2.67

 

$

1.10

 












 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share—diluted

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1.18

 

 

$

1.52

 

$

1.02

 

Discontinued operations

 

 

(0.01

)

 

 

1.14

 

 

0.07

 












 

Income before cumulative effect of a change in accounting principles

 

 

1.17

 

 

 

2.66

 

 

1.09

 

Cumulative effect of a change in accounting principles

 

 

 

 

 

 

 

 












 

Net income

 

$

1.17

 

 

$

2.66

 

$

1.09

 












 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares—basic

 

 

6,917

 

 

 

7,242

 

 

7,361

 

Weighted-average shares—diluted

 

 

6,939

 

 

 

7,274

 

 

7,411

 












 


 

 

 

 

(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.

2007 Financial Report  |  39


Consolidated Balance Sheets
Pfizer Inc and Subsidiary Companies

 

 

 

 

 

 

 

 

 









 









 

 

 

AS OF DECEMBER 31,

 

 

 


 

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

 

2007

 

 

2006

 







 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,406

 

 

$

1,827

 

Short-term investments

 

 

22,069

 

 

 

25,886

 

Accounts receivable, less allowance for doubtful accounts: 2007—$223; 2006—$204

 

 

9,843

 

 

 

9,392

 

Short-term loans

 

 

617

 

 

 

514

 

Inventories

 

 

5,302

 

 

 

6,111

 

Prepaid expenses and taxes

 

 

5,498

 

 

 

3,866

 

Assets held for sale

 

 

114

 

 

 

62

 









 

Total current assets

 

 

46,849

 

 

 

47,658

 

Long-term investments and loans

 

 

4,856

 

 

 

3,892

 

Property, plant and equipment, less accumulated depreciation

 

 

15,734

 

 

 

16,632

 

Goodwill

 

 

21,382

 

 

 

20,876

 

Identifiable intangible assets, less accumulated amortization

 

 

20,498

 

 

 

24,350

 

Other assets, deferred taxes and deferred charges

 

 

5,949

 

 

 

2,138

 









 

Total assets

 

$

115,268

 

 

$

115,546

 









 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Short-term borrowings, including current portion of long-term debt: 2007—$1,024; 2006—$712

 

$

5,825

 

 

$

2,434

 

Accounts payable

 

 

2,270

 

 

 

2,019

 

Dividends payable

 

 

2,163

 

 

 

2,055

 

Income taxes payable

 

 

1,380

 

 

 

7,176

 

Accrued compensation and related items

 

 

1,974

 

 

 

1,903

 

Other current liabilities

 

 

8,223

 

 

 

6,510

 

Liabilities held for sale

 

 

 

 

 

2

 









 

Total current liabilities

 

 

21,835

 

 

 

22,099

 

Long-term debt

 

 

7,314

 

 

 

5,546

 

Pension benefit obligations

 

 

2,599

 

 

 

3,632

 

Postretirement benefit obligations

 

 

1,708

 

 

 

1,970

 

Deferred taxes

 

 

7,696

 

 

 

8,015

 

Other taxes payable

 

 

6,246

 

 

 

 

Other noncurrent liabilities

 

 

2,746

 

 

 

2,852

 









 

Total liabilities

 

 

50,144

 

 

 

44,114

 









 

Minority interests

 

 

114

 

 

 

74

 









 

Preferred stock, without par value, at stated value; 27 shares authorized; issued: 2007—2,302; 2006—3,497

 

 

93

 

 

 

141

 

Common stock, $0.05 par value; 12,000 shares authorized; issued: 2007—8,850; 2006—8,819

 

 

442

 

 

 

441

 

Additional paid-in capital

 

 

69,913

 

 

 

69,104

 

Employee benefit trust

 

 

(550

)

 

 

(788

)

Treasury stock, shares at cost; 2007—2,089; 2006—1,695

 

 

(56,847

)

 

 

(46,740

)

Retained earnings

 

 

49,660

 

 

 

49,669

 

Accumulated other comprehensive income/(expense)

 

 

2,299

 

 

 

(469

)









 

Total shareholders’ equity

 

 

65,010

 

 

 

71,358

 









 

Total liabilities and shareholders’ equity

 

$

115,268

 

 

$

115,546

 









 

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

40  |  2007 Financial Report


Consolidated Statements of Shareholders’ Equity
Pfizer Inc and Subsidiary Companies



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

 

 

PREFERRED STOCK

 

COMMON STOCK

 

ADDITIONAL
PAID-IN
CAPITAL

 

EMPLOYEE
BENEFIT TRUST

 

TREASURY STOCK

 

 

 

 

 

 

 

 


 


 

 


 


 

RETAINED
EARNINGS

 

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

 

 

 

(MILLIONS, EXCEPT PREFERRED SHARES)

 

SHARES

 

STATED
VALUE

 

SHARES

 

PAR
VALUE

 

 

SHARES

 

FAIR
VALUE

 

SHARES

 

COST

 

 

 

TOTAL

 


























 

Balance, January 1, 2005

 

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

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,144

 

 

 

 

 

8,144

 

Total other comprehensive income—net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,768

 

 

2,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Adoption of new accounting standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

11

 

Cash dividends declared—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,156

)

 

 

 

 

(8,156

)

preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

(8

)

Stock option transactions

 

 

 

 

 

 

23

 

 

1

 

 

738

 

5

 

 

121

 

 

 

 

(7

)