EX-13 5 y83976exv13.htm THE 2002 ANNUAL REPORT exv13
 

Exhibit 13

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

OVERVIEW OF CONSOLIDATED OPERATING RESULTS

In 2002, total revenues grew 12% to $32,373 million. Our human pharmaceutical business drove our performance, achieving revenue growth of 12% in 2002. We market or copromote ten human pharmaceutical products that each generated sales to third parties of $1 billion or more in 2002. Net income grew 17% to $9,126 million and diluted earnings per common share (EPS) grew 20% to $1.46 in 2002 as compared to the prior year. Net income was impacted by:

  non-cash charges for impairment provisions related to goodwill and identifiable intangible assets, which reduced net income by $410 million after tax as a result of the January 1, 2002 adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets — such charges are recorded as a cumulative effect of a change in accounting principle;
 
  costs related to our 2000 merger with Warner-Lambert Company (Warner-Lambert), which reduced net income by $331 million after tax in 2002 as compared to $505 million after tax in 2001 — such costs included integration costs and restructuring charges;
 
  pre-integration costs related to our proposed acquisition of Pharmacia Corporation (Pharmacia), which reduced 2002 net income by $59 million after tax; and
 
  certain significant items, which were a net increase to 2002 net income of $13 million after tax — such items included the gain on the sale of a discontinued business, gains on the sales of product lines, copromotion charges, asset impairment charges, charges to write-down equity investments, charges for various litigation matters, and merger-related costs of the confectionery, shaving, and fish-care products businesses, which were discontinued in 2002.

We sold or are in the process of selling the following businesses and product lines that do not fit our strategic goals:

  Tetra fish-care products business (sold in December 2002)
 
  Adams confectionery products business
 
  Schick-Wilkinson Sword shaving products business
 
  certain women’s health product lines — femhrt hormone replacement therapy and Loestrin and Estrostep contraceptives

The divestitures of the Adams and Schick-Wilkinson Sword businesses and the women’s health product lines are expected to close in the first half of 2003. These businesses and product lines are reflected as discontinued operations in 2002, 2001 and 2000.

In 2001, total revenues grew 11% to $29,024 million. Our human pharmaceutical business drove our performance, achieving revenue growth of 13% in 2001. Eight human pharmaceutical products that we marketed or copromoted each generated sales to third parties of $1 billion or more in 2001. Net income grew 109% to $7,788 million and diluted EPS grew 107% to $1.22 in 2001 as compared to the prior year. These results were impacted by:

  negative effects of foreign exchange, which reduced 2001 revenues by $742 million;
 
  costs related to our 2000 merger with Warner-Lambert, which reduced net income by $505 million after tax in 2001 as compared to $2,773 million after tax in 2000 — such costs included integration costs and restructuring charges; and
 
  certain significant items, which were a net reduction to net income of $58 million after tax — such items included an increase to revenues from an accounting harmonization for Medicaid discounts and contract rebate accruals, gains on the sales of equity investments, copromotion charges, and merger-related costs of the confectionery, shaving and fish-care products businesses, which were discontinued in 2002.

ACCOUNTING POLICIES

The following accounting policies are important to an understanding of our operating results and financial condition and should be considered an integral part of the financial review. For additional accounting policies, see note 1 to the consolidated financial statements, “Significant Accounting Policies.”

Estimates and Assumptions

In preparing our financial information, we use some estimates and assumptions that may affect reported amounts and disclosures. Estimates are used when accounting for sales discounts, allowances and incentives, depreciation, amortization, employee benefits, contingencies and asset valuations. For instance, in determining our annual pension and other post-employment benefit costs, we estimate the rate of return on plan assets and the cost of future health care benefits. We are also subject to risks and uncertainties that may cause actual results to differ from estimated results, such as changes in the health care environment, competition, foreign exchange, litigation, legislation and regulations. Certain of these risks, uncertainties and assumptions are discussed under the heading “Forward-Looking Information and Factors That May Affect Future Results.”

Sales Recognition

REVENUE RECOGNITION — We record revenue from product sales when the goods are shipped and title passes to the customer.

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

SALES DISCOUNTS AND REBATES — Provisions for discounts and rebates to customers are recorded based on the terms of sale in the same period the related sales are recorded. We determine the provision for Medicaid discounts and contract rebates based on an estimate of reimbursable prescriptions filled for individuals covered by Medicaid or a provider with whom we contract.

Alliances

We have agreements to promote pharmaceutical products discovered by other companies. Revenue is earned when our copromotion partners ship the related products and title passes to their customer. Our alliance revenue is primarily based upon a percentage of our copromotion partners’ net sales. Generally, expenses for selling and marketing these products are included in Selling, informational and administrative (SI&A) expenses.

Prior to the copromoted product receiving regulatory approval, we expense, as incurred, milestone payments made under these agreements and record them in Other (income)/deductions — net. Once the product receives regulatory approval, we record any subsequent milestone payments in Other assets, deferred taxes and deferred charges and amortize them over the remaining license term or the expected product life cycle, whichever is shorter. On an ongoing basis, we review for impairment those milestone payments that have been recorded as assets.

ANNUAL REPORT 2002

P28


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

Research and Development Expenses

Research and development (R&D) costs are expensed as incurred. These expenses include the cost of our proprietary R&D efforts as well as costs incurred in connection with our third-party collaboration efforts. Pre-approval milestone payments made by us to third parties under contracted R&D arrangements are expensed when the specific milestone has been achieved. We have no third-party R&D arrangements that result in the recognition of revenue.

Contingencies

We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, environmental, and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. We record accruals for such contingencies based upon our assessment that the occurrence is probable, and where determinable, an estimate of the liability amount. We consider many factors in making these assessments, including past history, scientific evidence and the specifics of each matter. However, litigation is inherently unpredictable and excessive verdicts do occur. We record anticipated recoveries under existing insurance contracts when assured of recovery. We also provide tax reserves when we believe that a taxing authority is likely to take a sustainable position on a matter contrary to the position taken by us or one of our subsidiaries when filing required tax returns.

Financial Instruments

We invest, borrow and offset or hedge through a variety of financial instruments.

Held-to-maturity debt securities are reported at cost, which reflects our intent and ability to hold the securities until maturity and to redeem the securities for their face value.

Available-for-sale debt securities are reported at estimated fair value, with changes in fair value reported as an increase or decrease in Shareholders’ equity. These are liquid investments and their fair values are based on a valuation model that uses observable market quotes and credit ratings of the securities.

Accounts receivable are reported at contract value, less our estimate for uncollectible amounts based on our experience relative to the total population of accounts receivable.

All derivative contracts are reported at estimated fair value, with changes in fair value reported in earnings or deferred until the offset or hedged item is recognized in earnings, depending on the nature and effectiveness of the offset or hedging relationship (where changes in the fair value of the hedged item are counterbalanced by changes in the fair value of the derivative hedging instrument). The fair values of these contracts are based on valuation models that use observable market quotes and our view of the creditworthiness of the derivative counterparty. Any ineffectiveness in a hedging relationship is recognized immediately into earnings. Ineffectiveness is minimized through the proper relationship of the hedging derivative contract with the hedged item.

Pension Plans

We maintain pension plans in the U.S. and abroad in accordance with local laws and regulations. In 2002, we made voluntary contributions in excess of minimum requirements of $610 million to our pension plans in major markets. In the U.S., we have established qualified defined benefit pension plans in accordance with the Employee Retirement Income Security Act of 1974, as amended. We have traditionally contributed the maximum allowed by the Internal Revenue Service — an amount significantly above government-mandated minimum funding requirements. Our U.S. qualified defined benefit pension plans have been well funded historically. The recent decline in the equity markets coupled with the decline in long-term interest rates has not caused our U.S. qualified defined benefit pension plans to require government-mandated funding. Given our strong cash flow generation, we fully expect to be able to meet any potential future pension funding obligations.

We also provide benefits through supplemental (non-qualified) retirement plans to certain employees. We provide for these plans out of our general assets since these plans are not generally funded.

Our assumption for the expected long-term rate of return on assets in our U.S. pension plans to determine net periodic benefit cost is 9% for 2003, which represents a 1% decline from our 2002 rate of return of 10%. The assumption for the expected return on assets reflects our long-term outlook for equity and fixed income returns, factoring in our pension plans’ historical annualized compound return in excess of 9% and our asset allocation and investment strategy as well as our financial modeling around long-term market expectations. The expected return is applied to the fair market value of plan assets at each year-end. As a sensitivity measure, the effect of a 1% decline in the return-on-assets assumption is an increase in our 2003 U.S. (pre-tax) pension expense of approximately $30 million.

The discount rate used in calculating our U.S. pension benefit obligations at December 31, 2002 is 6.9%, which represents a 0.4% decline from our December 31, 2001 rate of 7.3%. The December 31, 2002 discount rate represents the weighted average of the plans’ respective discount rates. The discount rate is largely based upon an index of high-quality fixed income investments (U.S. Moody’s AA Long-Term Corporate Bond Index ) at the plans’ respective measurement dates. As a sensitivity measure, the effect of a 0.4% decline in the discount rate assumption is an increase in our 2003 U.S. (pre-tax) pension expense of approximately $31 million and an increase in the U.S. pension plans’ projected benefit obligations at December 31, 2002 of approximately $240 million.

ANNUAL REPORT 2002

P29


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME

                                           
                              % CHANGE
                             
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Revenues
  $ 32,373     $ 29,024     $ 26,045       12       11  
Cost of sales
    4,045       3,823       3,755       6       2  
 
% of revenues
    12.5 %     13.2 %     14.4 %                
SI&A expenses
    10,846       9,717       9,566       12       2  
 
% of revenues
    33.5 %     33.5 %     36.7 %                
R&D expenses
    5,176       4,776       4,374       8       9  
 
% of revenues
    16.0 %     16.5 %     16.8 %                
Merger-related costs
    630       819       3,223       (23 )     (75 )
 
% of revenues
    1.9 %     2.8 %     12.4 %                
Other (income)/ deductions — net
    (120 )     (95 )     (374 )     27       (74 )
 
   
     
     
                 
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of a change in accounting principle
    11,796       9,984       5,501       18       81  
 
% of revenues
    36.4 %     34.4 %     21.1 %                
Provision for taxes on income
    2,609       2,433       1,946       7       25  
Effective tax rate
    22.1 %     24.4 %     35.4 %                
Income from continuing operations before cumulative effect of a change in accounting principle
    9,181       7,537       3,542       22       113  
 
% of revenues
    28.4 %     26.0 %     13.6 %                
Discontinued operations— net of tax
    355       251       184       41       36  
Income before cumulative effect of a change in accounting principle
    9,536       7,788       3,726       22       109  
 
% of revenues
    29.5 %     26.8 %     14.3 %                
Cumulative effect of a change in accounting principle — net of tax
    (410 )                 *        
 
   
     
     
                 
Net income
  $ 9,126     $ 7,788     $ 3,726       17       109  
 
% of revenues
    28.2 %     26.8 %     14.3 %                
 
   
     
     
     
     
 

    Certain reclassifications were made in 2001 and 2000 to conform to the 2002 presentation.
Percentages in this table and throughout the financial review may reflect rounding adjustments.
 
    * Calculation not meaningful.

REVENUES

Revenues increased 12% to $32,373 million in 2002 and 11% to $29,024 million in 2001. Revenue increases in both years were due to newly launched products, new indications for existing products and sales volume growth of our human pharmaceutical products.

Revenues in the U.S. grew 11% to $20,762 million in 2002 and 13% to $18,629 million in 2001. International revenues grew 12% to $11,611 million in 2002 and 8% to $10,395 million in 2001.

Revenues exceeded $500 million in each of seven countries outside the U.S. in 2002 and in each of six countries outside the U.S. in 2001. The U.S. was the only country to contribute more than 10% of total revenues in both years.

In the second quarter of 2001, we brought the accounting methodology pertaining to accruals for estimated liabilities related to Medicaid discounts and contract rebates of Warner-Lambert into conformity with our historical method. At Warner-Lambert, the amount of the liability was determined based on a historical percentage of sales. The adjustment reversed the cumulative effect of several years of applying different methodologies. The adjustment increased Revenues in 2001 by $175 million. There were no cash or operational changes, nor were our Medicaid or managed-care-contract partners affected as a result of this adjustment.

ELEMENTS OF TOTAL REVENUE GROWTH (PERCENTAGES)

       BARCHART

       * Currency impact was negligible in 2002.

REVENUES BY BUSINESS SEGMENT

We operate in the following two business segments:

  PHARMACEUTICAL — including:

     
  treatments for cardiovascular diseases, infectious diseases, central nervous system disorders, diabetes, arthritis, urogenital conditions and allergies, as well as the manufacture of empty soft-gelatin capsules
  products for livestock and companion animals

     •     CONSUMER PRODUCTS — including self-medications for:

     
  oral care, upper respiratory health, eye care, skin care and gastrointestinal health

TOTAL REVENUES BY BUSINESS SEGMENT

       PIECHART

ANNUAL REPORT 2002

P30


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

PERCENTAGE CHANGE IN REVENUES

                                   
              ANALYSIS OF % CHANGE
      TOTAL %  
      CHANGE   VOLUME*   PRICE**   CURRENCY
     
 
 
 
Pharmaceutical
                     
 
2002 vs. 2001
    11.9       12.4       (0.5 )      
 
2001 vs. 2000
    12.1       12.7       2.3       (2.9 )
Consumer Products
                       
 
2002 vs. 2001
    7.4       5.9       1.5        
 
2001 vs. 2000
    4.1       5.6       0.8       (2.3 )
Total
                       
 
2002 vs. 2001
    11.5       11.9       (0.4 )      
 
2001 vs. 2000
    11.4       12.1       2.1       (2.8 )
     
 
 
 

    * All alliance revenue changes are included in volume.
 
    ** Reflects impact of harmonization of accounting methodology in 2001 for Medicaid discounts and contract rebate accruals.

PERCENTAGE CHANGE IN GEOGRAPHIC REVENUES

                                 
    % CHANGE IN REVENUES
   
    U.S.   INTERNATIONAL
   
 
    02/01   01/00   02/01   01/00
   
 
 
 
Pharmaceutical
    12       14       12       9  
Consumer Products
    8       6       7       (1 )
Total
    11       13       12       8  
   
 
 
 

PHARMACEUTICAL

The pharmaceutical segment includes our human pharmaceutical and animal health businesses as well as Capsugel, a capsule manufacturing business. Revenues of our pharmaceutical segment were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Human pharmaceutical
  $ 28,288     $ 25,240     $ 22,328       12       13  
Animal health
    1,119       1,021       1,049       10       (3 )
Capsugel
    436       409       407       6       1  
   
 
 
Total pharmaceutical
  $ 29,843     $ 26,670     $ 23,784       12       12  
   
 
 

HUMAN PHARMACEUTICAL

In the U.S. market, human pharmaceutical revenue growth was 12% in 2002 and 14% in 2001. International growth was 12% in 2002 and 11% in 2001. Excluding the effect of the 2001 harmonization of an accounting methodology for Medicaid discounts and contract rebate accruals, human pharmaceutical revenue grew by 13% in 2002. On this same basis, but also excluding the impact of foreign exchange, human pharmaceutical revenue grew by 15% in 2001.

In 2002, ten human pharmaceutical products that we market or copromote each achieved sales to third parties of $1 billion or more. These products —Lipitor, Norvasc, Zoloft, Neurontin, Celebrex, Zithromax, Viagra, Diflucan, Zyrtec and Aricept — representing 85% of our human pharmaceutical revenues, grew at a combined rate of 15% in 2002.

REVENUES — MAJOR HUMAN PHARMACEUTICAL PRODUCTS

                                           
                              % CHANGE
                             
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Cardiovascular Diseases:
  $ 13,348     $ 11,586     $ 10,338       15       12  
 
Lipitor
    7,972       6,448       5,028       24       28  
 
Norvasc
    3,846       3,581       3,361       7       7  
 
Cardura
    531       551       794       (4 )     (31 )
 
Accupril/Accuretic
    668       604       552       11       9  
Infectious Diseases:
    3,615       3,638       3,523       (1 )     3  
 
Zithromax
    1,516       1,506       1,382       1       9  
 
Diflucan
    1,112       1,066       1,013       4       5  
 
Viracept
    336       364       436       (8 )     (16 )
Central Nervous System Disorders:
    5,726       4,740       3,882       21       22  
 
Zoloft
    2,742       2,365       2,139       16       11  
 
Neurontin
    2,269       1,751       1,334       30       31  
 
Geodon
    222       150             49       *  
 
Aricept**
    203       157       119       29       32  
Diabetes:
    316       308       416       2       (26 )
 
Glucotrol XL
    297       283       280       5       1  
Arthritis:
    363       365       360       (1 )     1  
 
Celebrex***
    100       76       36       31       115  
Urogenital Conditions:
    1,735       1,518       1,343       14       13  
 
Viagra
    1,735       1,518       1,343       14       13  
Allergy:
    1,116       993       703       12       41  
 
Zyrtec
    1,115       990       699       13       42  
Alliance Revenue
    1,596       1,379       1,158       16       19  
     
 
 
 
 
 

    * Calculation not meaningful.
 
    ** Represents direct sales under license agreement with Eisai Co., Ltd.
 
    *** Represents direct sales under license agreement with Pharmacia Corporation.

  Lipitor is the largest-selling statin medicine worldwide for the treatment of elevated cholesterol levels in the blood.
 
  Norvasc is the world’s most-prescribed branded medicine for treating hypertension.
 
  Zithromax is the most-prescribed brand-name oral antibiotic in the U.S. and the second-largest-selling antibiotic worldwide.
 
  Diflucan’s sales growth after 14 years on the market reflects the product’s continuing acceptance as the therapy of choice for a wide range of fungal infections.
 
  Zoloft is the most-prescribed selective serotonin re-uptake inhibitor in the U.S. for the treatment of depression, obsessive-compulsive disorder (in adults and children), panic disorder, post-traumatic stress disorder (in adults) and premenstrual dysphoric disorder.
 
  Neurontin is the world’s top-selling anticonvulsant for use in adjunctive therapy for epilepsy. Neurontin is also approved in more than 60 markets for the treatment of neuropathic pain conditions. Neurontin is the first oral medication approved in the U.S. to treat post-herpetic neuralgia (pain caused by a viral infection and producing a condition commonly known as shingles).
 
  Viagra, for the treatment of erectile dysfunction, is among the most widely prescribed medications in the world.
 
  Zyrtec provides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec-D 12 Hour prescription oral antihistamine decongestant combination

ANNUAL REPORT 2002

P31


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

medicine that treats both indoor and outdoor allergies, as well as nasal congestion.

  Alliance revenue reflects revenue associated with our copromotion of Celebrex, Bextra, Aricept, Spiriva and Rebif.

     
-   Celebrex, the first Cox 2 specific inhibitor to enter the market and currently the best-selling arthritis treatment worldwide was discovered and developed by our alliance partner Pharmacia.
-   Bextra, the latest entry to the Cox 2 specific inhibitor market was also discovered and developed by our alliance partner Pharmacia. With Celebrex and Bextra, we can offer physicians a broad, extensive portfolio enabling them to treat a wide range of conditions from rheumatoid arthritis, to osteoarthritis, to primary dysmenorrhea (menstrual pain in adults).
-   Aricept, discovered and developed by our alliance partner Eisai Co., Ltd., is the world’s leading medicine to treat symptoms of Alzheimer’s disease.
-   Spiriva, discovered and developed by our alliance partner Boehringer Ingelheim, is used to treat chronic obstructive pulmonary disease — a chronic respiratory disorder that includes chronic bronchitis and emphysema.
-   Rebif, discovered and developed by Serono S. A. (Serono), is used to treat symptoms of relapsing forms of multiple sclerosis.

    Pharmacia’s worldwide sales of Celebrex decreased 2% to $3,050 million in 2002 and increased 19% to $3,114 million in 2001. Pharmacia’s worldwide sales of Bextra were $470 million in 2002.
 
    Alliances allow us to copromote or license these products for sale in certain countries. Under the copromotion agreements, these products are marketed and promoted with our alliance partners. We provide cash, staff and other resources to sell, market, promote and further develop these products.

Rebates under Medicaid and related state programs reduced revenues by $570 million in 2002, $342 million in 2001 ($403 million excluding the effect of the harmonization of the Pfizer/Warner-Lambert accounting methodology for Medicaid discount accruals) and $349 million in 2000. We also provided legislatively mandated discounts to the U.S. federal government of $420 million in 2002, $343 million in 2001 and $237 million in 2000. Performance-based contracts also provide for rebates to several customers. These 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 can be impacted by the mix of products sold.

ANIMAL HEALTH

Revenues of our animal health business were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Companion animal products
  $ 524     $ 459     $ 379       14       21  
Livestock products
    595       562       670       6       (16 )
     
     
     
 
Total animal health products
  $ 1,119     $ 1,021     $ 1,049       10       (3 )
     
     
     
     
     

Companion animal product revenues increased 14% in 2002 driven by strong global performance that was well-balanced across key brand performance as follows:

  Rimadyl (for relief of arthritis pain in dogs) sales grew 14% due to increased field and marketing emphasis on the brand throughout our international markets and increased veterinary demand in the U.S. based on a new U.S. Food and Drug Administration (FDA) approval for a postoperative pain indication
 
  Revolution (for protection against fleas and heartworm) sales grew 35% largely due to benefits generated from increased promotional efforts in Europe and a change from distributorship to direct customer sales in one of our Asian markets
 
  Clavamox/Synulox (an antibiotic for dogs and cats) sales grew 21% due to field and marketing emphasis on the brand throughout our markets

partially offset by:
 
  our companion animal vaccine line, which showed growth of 5%, reflective of a mature market segment in which our commitment to customer service enables us to maintain our customer base

Livestock product revenues increased 6% in 2002 with key performance as follows:

  swine vaccine sales grew 18% due to the 2002 launch of Flusure (a swine influenza vaccine) in the U.S., as well as the launch of RespiSure One/ Stellamune One (a single-dose swine vaccine to prevent pneumonia) in our international markets
 
  cattle vaccine sales grew 12% due to growth in our European markets, where the livestock market has shown signs of recovery, and in Latin America, resulting from higher sales of vaccines for foot-and-mouth disease

partially offset by:

  Dectomax (a treatment for internal and external parasites in cattle and swine) sales, which remained flat, as the product faced increased generic competition and price erosion throughout our markets

ANNUAL REPORT 2002

P32


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

Animal health revenues decreased 3% in 2001 primarily due to:

  the impact of mad-cow disease and foot-and-mouth disease in Europe
 
  the negative effects of foreign exchange (animal health revenues increased 2% in 2001 excluding the impact of foreign exchange)

partially offset by:

  increased sales of Revolution
 
  new promotional and distribution practices as well as various restructuring initiatives

Excluding the impact of foreign exchange and the feed-additive product lines which were sold in November 2000, animal health revenues increased 13% in 2001.

In November 2000, we sold animal health’s feed-additive product lines to Phibro Animal Health, a wholly owned subsidiary of Philipp Brothers Chemicals, Inc., for cash of $45 million and a promissory note for $23 million due March 1, 2004. The sale resulted in a loss of $85 million, which was recorded in Other (income)/deductions — net.

CONSUMER PRODUCTS

The consumer products segment consists of our consumer healthcare business, a supplier of over-the-counter medicines.

CONSUMER HEALTHCARE

Revenues of our consumer healthcare business were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Total consumer healthcare products
  $ 2,530     $ 2,354     $ 2,261       7       4  
     
     
     
     
     

The 7% increase in consumer healthcare revenues in 2002 was primarily due to:

  the success of Listerine PocketPaks representing 5% of the 7% overall increase in consumer healthcare revenues
 
  the 10% increase in sales of Listerine mouthwash

The 4% increase in consumer healthcare revenues in 2001 was primarily due to:

  the sales growth of Sudafed, Benadryl and Listerine mouthwash
 
  the U.S. launch of Listerine PocketPaks in September 2001

PRODUCT DEVELOPMENTS

We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. We have six new products that were recently approved or are undergoing regulatory review in the U.S. and/or European Union (E.U.): Bextra (discovered and developed by Pharmacia), Spiriva (discovered and developed by Boehringer Ingelheim), Vfend, Geodon, Relpax and Rebif (discovered and developed by Serono).We intend to launch all six products in new markets once regulatory approvals are received. However, there are no assurances as to when, or if, we will receive regulatory approval for these or any of our other new products.

Certain significant regulatory actions by, and filings pending with, the FDA follow:

U.S. FDA Approvals

         
PRODUCT   INDICATION/DOSAGE   DATE APPROVED

 
 
Zoloft   Social anxiety disorder   February 2003
         
Relpax   Migraine headaches   December 2002
         
Zyrtec   For use in children 6 months to 2 years of age   November 2002
         
Lipitor   Familial hypercholesterolemia— use in children 10 to 17 years of age   November 2002
         
Geodon   Psychotic disorders —
Intramuscular dosage form
  June 2002
         
Zoloft   Premenstrual dysphoric
disorder
  May 2002
         
Zithromax   Three-day treatment regimen for severe acute bacterial symptoms of chronic obstructive pulmonary disease (COPD) (respiratory disorders that include chronic bronchitis and emphysema)   May 2002
         
Vfend   Antifungal — oral and intravenous dosage forms   May 2002
         
Neurontin   Management of post-herpetic neuralgia (pain caused by a viral infection and producing a condition commonly known as shingles)   May 2002
         
Rebif   Multiple sclerosis   March 2002
 
Pending U.S. New Drug Applications (NDA)
         
PRODUCT   INDICATION/DOSAGE   DATE SUBMITTED

 
 
Darifenacin   Overactive bladder   December 2002
         
Geodon   Liquid oral suspension dosage
form
  September 2002
         
Viracept   HIV — new dosage form   June 2002
         
Zoloft   Pediatric depression   December 2001
         
Spiriva   COPD   December 2001
         
Norvasc   Pediatric   September 2001
         
Cardura XL   Benign prostatic
hyperplasia
(enlarged prostate)
  April 2001

  In December 2002, Spiriva received an approvable letter from the FDA for the long-term once-daily maintenance treatment of bronchospasm associated with COPD. The E.U. Mutual Recognition procedure was completed in April 2002. Spiriva is commercially available in 13 countries, including Germany, Canada and the United Kingdom.
 
  In November 2002, the FDA approved revised labeling for Bextra to include a contraindication for use in patients who have demonstrated allergic-type reactions to sulfonamides, statements in the “warnings” section regarding serious skin and anaphylactoid reactions and information in the post-marketing experience section about hypersensitivity and skin reactions.
 
  In October 2002 and September 2002, the intravenous formulations of Zithromax were approved in Spain and Italy.

ANNUAL REPORT 2002

P33


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

  In September 2002, our co-marketing partner Eisai submitted a supplemental NDA with the FDA for the use of Aricept in the treatment of vascular dementia.
 
  In August 2002, Zoloft received labeling in the U.S. featuring the results of the first and only studies assessing the utility of a selective serotonin re-uptake inhibitor in the maintenance treatment of panic disorder and obsessive-compulsive disorder.
 
  In July 2002, the regulatory authorities in the E.U. recommended Bextra for approval.
 
  In June 2002, the FDA approved revised labeling for Celebrex. The new prescribing information includes additional gastrointestinal safety data and data indicating that there was no increased risk for serious cardiovascular adverse events observed, including heart attack, stroke and unstable angina.
 
  In March 2002, Vfend was approved in both oral and intravenous forms in the E.U.

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

     
PRODUCT   INDICATION/DOSAGE

 
Viagra   Female sexual arousal disorder
Pulmonary arterial hypertension in both children and adults
     
Lipitor/Norvasc   Single product that combines cholesterol-lowering and antihypertensive medications in Lipitor and Norvasc
     
Celebrex   Sporadic adenomatous polyposis — a precancerous condition caused by growths in the intestines
Barrett’s esophagus — a precancerous condition caused by repeated damage from stomach acid regurgitation
Actinic keratosis — a precancerous skin growth caused by overexposure to sunlight
Bladder cancer
Ankylosing spondylitis — an inflammation of the spine Chronic lower back pain
     
Zithromax   Sinusitis
Sustained release Zithromax (bacterial
infections)
     
Geodon   Mania

It is our current intention to submit applications for the following new chemical compounds subject to ongoing negotiations and discussions with various regulatory agencies:

             
        ANTICIPATED
COMPOUND   INDICATION   SUBMISSION DATE

 
 
Lipitor/Norvasc   Dual therapy     2003  
             
pregabalin   Neuropathic pain
Epilepsy
Generalized anxiety disorder
    2003  

Advanced-stage clinical studies are continuing for several agents, including indiplon for insomnia, Macugen for macular degeneration, capravirine for HIV/AIDS, lasofoxifene for osteoporosis and other indications, varenicline for smoking cessation and Exubera, an inhalable form of insulin under co-development, co-manufacture, and co-marketing with Aventis Pharma (Aventis), with the participation of Nektar Therapeutics (formerly known as Inhale Therapeutic Systems).

Together with Aventis, we will complete additional long-term studies for the Exubera development program. These trials are well under way and involve patients with Type 1 and Type 2 diabetes. Because of the potential widespread use of Exubera among diabetes patients, additional rigorous testing and assessment of all pulmonary function measures are appropriate to deepen the medical understanding of diabetes and Exubera’s role in the future management of diabetes. Based on interim data from one-year controlled safety studies, we are confident that Exubera will be an important medication to treat this devastating disease. We are continuing our discussions with regulatory agencies regarding the timing of the submission.

In December 2002, we announced an agreement with Neurocrine Biosciences, Inc. (Neurocrine) for the exclusive worldwide development and commercialization of indiplon, Neurocrine’s Phase III compound for the potential treatment of insomnia. Under terms of the agreement, we will obtain an exclusive, worldwide license for indiplon. We will record all sales of indiplon and Neurocrine will have exclusive rights to copromote, but not to sell, indiplon in the U.S. Following filing of an NDA for indiplon, Neurocrine will also have rights to detail, but not to sell, our antidepressant, Zoloft, in the U.S. The government approved the transaction in February 2003 and we expect to expense a payment of $100 million to Neurocrine in March 2003. Additional milestone payments of $300 million potentially could be made to Neurocrine based on worldwide regulatory submissions and approvals. We will fund the ongoing development of indiplon and pay royalties on worldwide sales and copromotion commissions in the U.S. Neurocrine may submit the indiplon NDA as early as year-end 2003. Following the U.S. launch of indiplon, we will provide a $175 million secured credit facility for a period of three years.

Also in December 2002, we announced an agreement with Eyetech Pharmaceuticals, Inc. (Eyetech) to jointly develop and commercialize Eyetech’s Macugen™ (pegaptanib sodium), a potential treatment for age-related macular degeneration (AMD) and diabetic macular edema (DME), both leading causes of blindness. The government approved the transaction in February 2003 at which time we expensed our $100 million payment to Eyetech. Additional milestone payments up to $195.5 million potentially could be made to Eyetech based on worldwide regulatory submission and approvals. Eyetech also has the potential to receive up to an additional $450 million in milestone payments, which are contingent upon successful commercialization of Macugen™ and attainment of agreed-upon sales levels. We will also fund the majority of the ongoing development costs for both the AMD and DME indications. If approved, we will copromote Macugen™ with Eyetech in the U.S. and we will record alliance revenue for copromotion services provided to Eyetech. Outside the U.S., we will market the product exclusively under a royalty-bearing license and we will directly record sales of the product.

Additional product-related programs are in various stages of discovery and development.

ANNUAL REPORT 2002

P34


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

COSTS AND EXPENSES

Cost of sales increased 6% in 2002 and 2% in 2001 while revenues increased 12% in 2002 and 11% in 2001. The change in both years reflects favorable business and product mix, the benefit of integration synergies and improvements in manufacturing efficiencies. Manufacturing efficiencies stem from greater volume and cost reductions attributable to procurement initiatives, as well as plant operating efficiencies. Cost of sales in 2002 was unfavorably impacted by foreign exchange versus a favorable impact in 2001.

SI&A expenses increased 12% in 2002 and 2% in 2001. These increases are mainly due to strong marketing and sales support for our broad portfolio of human pharmaceutical products. During 2002, marketing expenses included costs associated with the U.S. launch of the anti-arthritic product Bextra, copromoted with Pharmacia, the U.S. launch of the anti-fungal agent Vfend, and initial commercial support of the multiple sclerosis product Rebif, copromoted in the U.S. with Serono. In Europe, the launch of Spiriva for COPD, copromoted with Boehringer Ingelheim and the migraine product Relpax also contributed to the year-over-year increase in marketing expenses.

R&D expenses increased 8% in 2002 and 9% in 2001. In both years, growth is attributable to increased support of the late-stage R&D portfolio, higher costs as a result of the recent expansion of facilities and increased information technology costs due to the continued implementation of enterprise-wide resource management systems.

We incurred the following merger-related costs in continuing operations in connection with our merger with Warner-Lambert and our proposed acquisition of Pharmacia:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Transaction costs
  $     $     $ 226  
Transaction costs related to Warner-Lambert’s termination of the Warner-Lambert/American Home Products merger
                1,838  
Integration costs—Warner-Lambert
    345       456       242  
Pre-integration costs — Pharmacia
    98              
Restructuring charges — Warner-Lambert
    187       363       917  
 
   
     
     
 
Total merger-related costs
  $ 630     $ 819     $ 3,223  
 
   
     
     
 

  Transaction costs include banking, legal, accounting and other costs directly related to our merger with Warner-Lambert.
 
  Integration costs represent external, incremental costs directly related to our merger with Warner-Lambert, including expenditures for consulting and systems integration.
 
  Pre-integration costs represent external, incremental costs directly related to our proposed acquisition of Pharmacia.

The components of the restructuring charges associated with the merger of the Warner-Lambert operations follow:

                                                 
                                    UTILIZATION        
                                    THROUGH   RESERVE*
    PROVISIONS   DEC. 31,   DEC. 31,
   
 
 
(MILLIONS OF DOLLARS)   2002   2001   2000   TOTAL   2002   2002

 
 
 
 
 
 
Employee termination costs
  $ 170     $ 249     $ 850     $ 1,269     $ (1,237 )   $ 32  
Property, plant and equipment
    4       84       46       134       (134 )      
Other
    13       30       21       64       (64 )      
 
   
     
     
     
     
     
 
Total
  $ 187     $ 363     $ 917     $ 1,467     $ (1,435 )   $ 32  
 
   
     
     
     
     
     
 

*Included in Other current liabilities.

Through December 31, 2002, the charges for employee termination costs represent the approved reduction of our work force of our continuing businesses by 7,961 people, mainly in administrative functions for corporate, manufacturing, distribution, sales and research. We notified affected individuals, and as of December 31, 2002, 7,321 employees had been terminated. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Warner-Lambert employment contracts. Under the terms of these contracts, certain terminated employees may elect to defer receipt of severance benefits. Severance benefits deferred for future payments were $218 million at December 31, 2002 and $215 million at December 31, 2001. The deferred severance benefits are considered utilized charges and are included in Other noncurrent liabilities.

The impairment and disposal charges through December 31, 2002 for property, plant and equipment include the consolidation of facilities and related fixed assets and the termination of certain software installation projects.

Merger-related synergies of about $1.8 billion were achieved in 2002 related to the Warner-Lambert acquisition. Total merger-related costs (excluding the transaction costs related to Warner-Lambert’s termination of the Warner-Lambert/American Home Products merger) were about $2.8 billion from the close of the transaction through the end of 2002. Costs associated with the Warner-Lambert transaction are essentially complete, and the total is consistent with previous estimates.

The components of other (income)/deductions — net follow:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Interest income
  $ (382 )   $ (539 )   $ (558 )
Interest expense
    279       322       427  
Interest expense capitalized
    (28 )     (56 )     (46 )
 
   
     
     
 
Net interest income
    (131 )     (273 )     (177 )
Various litigation matters
    15              
Gains on the sales of product lines
    (34 )           (117 )
Asset impairment charges
    63              
Gains on sales of equity investments
          (17 )     (216 )
Copromotion charges for fees paid prior to regulatory approval
    32       206        
Loss on sale of animal health feed-additive products
                85  
Rezulin withdrawal provision
                136  
Amortization of goodwill and other intangibles
    28       94       110  
Net exchange (gains)/losses
    40       33       (59 )
Other, net
    (133 )     (138 )     (136 )
 
   
     
     
 
Other (income)/deductions — net
  $ (120 )   $ (95 )   $ (374 )
 
   
     
     
 

Our overall effective tax rate for continuing operations was 22.1% in 2002 and 24.4% in 2001. The lower tax rate in 2002 was primarily due to changes in product mix and tax-planning initiatives.

The effective tax rate for continuing operations, excluding the cumulative effect of a change in accounting principle, certain significant items and merger-related costs was 23.0% in 2002 and 25.1% in 2001.

ANNUAL REPORT 2002

P35


 

Financial Review
PFIZER AND SUBSIDIARY COMPANIES

DISCONTINUED OPERATIONS

We sold or are in the process of selling the following businesses and product lines that do not fit our strategic goals:

  In December 2002, we sold the Tetra fish-care products business, formerly part of our Consumer Products segment, to the Triton Fund for $238.5 million in cash. We recognized a gain of $117 million ($77 million net of tax) on the sale in 2002.
 
  In December 2002, we entered into an agreement to sell the Adams confectionery products business, formerly part of our Consumer Products segment, to Cadbury Schweppes plc for $4.2 billion in cash.
 
  In January 2003, we entered into an agreement to sell the Schick-Wilkinson Sword shaving products business, formerly part of our Consumer Products segment, to Energizer Holdings Inc. for $930 million in cash.
 
  We decided to sell certain of our women’s health product lines (femhrt, Loestrin and Estrostep), formerly part of our Pharmaceutical segment.

The divestitures of the Adams and Schick-Wilkinson Sword businesses and the women’s health product lines are expected to close in the first half of 2003 and are subject to the usual regulatory approvals. These businesses and product lines are reflected as discontinued operations in 2002, 2001 and 2000.

The following amounts related to the Tetra, Adams and Schick-Wilkinson Sword businesses and women’s health product lines have been segregated from continuing operations and reflected as discontinued operations:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Revenues
  $ 2,908     $ 2,958     $ 3,055  
 
   
     
     
 
Pre-tax income
  $ 447     $ 405     $ 262  
Provision for taxes on income
    169       154       97  
 
   
     
     
 
Income from operations of discontinued businesses — net of tax
    278       251       165  
 
   
     
     
 
Pre-tax gain on sale of discontinued business
    117             32  
Provision for taxes on gain
    40             13  
 
   
     
     
 
Gain on sale of discontinued business — net of tax*
    77             19  
 
   
     
     
 
Discontinued operations — net of tax
  $ 355     $ 251     $ 184  
 
   
     
     
 


*   Reflects working capital settlement amounts in 2000 for certain of our previously discontinued businesses.

INCOME FROM OPERATIONS

Income before the cumulative effect of a change in accounting principle, excluding certain significant items and merger-related costs, increased 19% in 2002 and 29% in 2001. We believe that investors’ understanding of our performance is enhanced by disclosing net income excluding the impact of the cumulative effect of a change in accounting principle; costs related to merger activities; gains or losses on the sale of businesses, product lines and equity investments; copromotion charges; and other items. Management analyzes the company’s performance based on operating results excluding certain significant items and merger-related costs. We believe that this basis better portrays the core operations of the company. A reconciliation between income before the cumulative effect of a change in accounting principle, as reported under accounting principles generally accepted in the United States of America (GAAP), and income before the cumulative effect of a change in accounting principle, excluding certain significant items and merger-related costs follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2002   2001   2000   02/01   01/00

 
 
 
 
 
Income before cumulative effect of a change in accounting principle, as reported under GAAP
  $ 9,536     $ 7,788     $ 3,726       22       109  
Certain significant items and merger-related costs
    377       563       2,769       (33 )     (80 )
 
   
     
     
     
     
 
Income before cumulative effect of a change in accounting principle, excluding certain significant items and merger-related costs
  $ 9,913     $ 8,351     $ 6,495       19       29  
 
   
     
     
     
     
 

Certain significant items and merger-related costs follow:

                           
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Significant items, pre-tax:
                       
 
Harmonization of accounting methodology*
  $     $ (175 )   $  
 
Copromotion charges**
    32       206        
 
Asset impairment charges**
    18              
 
Gains on the sales of equity investments**
          (17 )     (216 )
 
Gain on the sale of discontinued business***
    (117 )            
 
Gains on the sales of product lines**
    (34 )           (117 )
 
Charges to write-down equity investments**
    45              
 
Various litigation matters†
    25              
 
Warner-Lambert merger-related costs of discontinued businesses***
    6       20       34  
 
Costs associated with the withdrawal of Rezulin**
                136  
 
Loss on the sale of feed-additive products**
                85  
 
 
   
     
     
 
Total significant items, pre-tax
    (25 )     34       (78 )
Total merger-related costs, pre-tax
    630       819       3,223  
 
 
   
     
     
 
Total significant items and merger-related costs, pre-tax
    605       853       3,145  
Provision for taxes on income
    (228 )     (290 )     (376 )
 
 
   
     
     
 
Total significant items and merger-related costs, after tax
  $ 377     $ 563     $ 2,769  
 
 
   
     
     
 


*   Represents an increase to Revenues from the harmonization of Pfizer/Warner-Lambert accounting methodology for Medicaid discounts and contract rebate accruals.
 
**   Included in Other (income)/deductions — net.
 
***   Included in Discontinued operations — net of tax.
 
  $15 million included in Other (income)/deductions — net and $10 million in Selling, informational and administrative expenses.

ANNUAL REPORT 2002

P36


 

Financial Review
PFIZER AND SUBSIDIARY COMPANIES

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Our net financial asset position as of December 31 was as follows:

                 
(MILLIONS OF DOLLARS)   2002   2001

 
 
Financial assets*
  $ 18,111     $ 14,608  
Short-term borrowings and long-term debt
    11,809       8,872  
 
   
     
 
Net financial assets
  $ 6,302     $ 5,736  
 
   
     
 


*   Consists of cash and cash equivalents, short-term loans and investments and long-term loans and investments.

SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES

                 
    2002   2001
   
 
Cash and cash equivalents and short-term loans and investments (millions of dollars)*
  $ 12,950     $ 8,884  
Working capital (millions of dollars)**
    6,226       5,483  
Current ratio***
    1.34:1       1.40:1  
Shareholders’ equity per common share †
  $ 3.27     $ 2.95  
 
   
     
 


*   Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to subsidiaries as needed. Where local restrictions prevent intercompany financing, subsidiaries’ working capital needs would be met through ongoing cash flows and/or external borrowings.
 
**   We rely largely on operating cash flow, short-term commercial paper borrowings and long-term debt to provide for working capital needs. Working capital includes assets and liabilities of our discontinued businesses held for sale.
 
***   Current ratio is the proportion of current assets to current liabilities.
 
  Represents total shareholders’ equity divided by the actual number of common shares outstanding (which excludes treasury shares and those held by our employee benefit trust).

The increase in working capital in 2002 was primarily due to the following:

  cash from current period operations
 
  long-term debt issuances — $603 million

partially offset by:

  purchases of property, plant and equipment — $1,758 million
 
  purchases of our common stock — $4,996 million
 
  cash dividends on common stock — $3,168 million

The increase in shareholders’ equity per common share in 2002 is primarily due to net income, partially offset by dividends declared.

SUMMARY OF CASH FLOWS

                           
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Cash provided by/(used in):
                       
 
Operating activities
  $ 9,864     $ 8,861     $ 5,912  
 
Investing activities
    (4,338 )     (7,135 )     (3,635 )
 
Financing activities
    (4,999 )     (2,096 )     (3,728 )
 
Discontinued operations
    319       313       188  
Effect of exchange-rate changes on cash and cash equivalents
    (4 )     (6 )     4  
 
 
   
     
     
 
Net increase/(decrease) in cash and cash equivalents
  $ 842     $ (63 )   $ (1,259 )
 
 
   
     
     
 

Net cash provided by continuing operating activities increased $1,003 million in 2002 primarily due to:

  current period continuing operations net of non-cash items

partially offset by:

  timing of collections of accounts receivable

Net cash provided by operating activities increased $2,949 million in 2001 primarily due to:

  current period operations, excluding merger-related costs
 
  timing of collections of accounts receivable

partially offset by:

  payments of merger-related costs

Net cash used in investing activities decreased $2,797 million in 2002 primarily due to:

  a decline in property, plant and equipment purchases of $347 million
 
  a decline in long-term and short-term investment purchases of $2,397 million
 
  proceeds from the sale of the Tetra business of $198 million

partially offset by:

  an increase in product rights acquired of $360 million

Net cash used in investing activities increased $3,500 million in 2001 primarily due to:

  an increase in purchases of short- and long-term investments of $9,326 million

partially offset by:

  an increase in redemptions of short-term investments of $6,216 million

Net cash used in financing activities increased $2,903 million in 2002 primarily due to:

  a decrease in net proceeds from borrowings of $1,006 million
 
  an increase in common share purchases under our stock buyback programs of $1,331 million
 
  an increase in cash dividends paid of $453 million as a result of an 18% increase in our quarterly dividends

Net cash used in financing activities decreased $1,632 million in 2001 primarily due to:

  an increase in net proceeds from borrowings of $5,225 million

partially offset by:

  an increase in common share purchases of $2,660 million
 
  an increase in cash dividends paid of $518 million
 
  less cash received from exercises of employee stock options of approximately $400 million

In July 2002, we announced a new $16 billion share-purchase program, increased from the initial $10 billion authorized by our board of directors on June 27, 2002. We will buy back our common stock via open market purchases or in privately negotiated transactions, as circumstances and prices warrant, with the anticipation of completing the share-purchase program in 2003. Under this share-purchase program, we purchased approximately 102 million shares of common stock at an average price

ANNUAL REPORT 2002

P37


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

of $29.41 per share, at a total cost of approximately $3 billion, in 2002. In May 2002, we completed the share-purchase program authorized in June 2001. In total under the June 2001 program, we purchased 120 million shares at a total cost of approximately $4.8 billion. During 2002, under both the 2002 and the 2001 programs, we purchased approximately 153 million shares of common stock at a total cost of approximately $5 billion. Purchased shares are available for general corporate purposes.

PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS AT DECEMBER 31, 2002 MATURE AS FOLLOWS:

                                         
    TOTAL   YEARS
   
 
                    OVER 1   OVER 3        
(MILLIONS OF DOLLARS)           WITHIN 1   TO 3   TO 5   AFTER 5

 
 
 
 
Short-term borrowings
  $ 8,669     $ 8,669     $     $     $  
Lease commitments
    1,399       171       314       239       675  
Purchase commitments of our manufacturing and research operations
    675       582       41       30       22  
Clinical development commitments
    303       181       89       29       4  
Strategic alliance commitments
    808       264       343       201        
Long-term debt*
    3,140             831       820       1,489  
 
   
     
     
     
     
 


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

In 2003, for Pfizer on a stand-alone basis, we expect to spend approximately $1.8 billion on property, plant and equipment.

Our short-term borrowings have been rated P1 by Moody’s Investors Service (Moody’s) and A-1+ by Standard and Poor’s (S&P). Also, our long-term debt has been rated Aaa by Moody’s and AAA by S&P for the past 17 years. Moody’s and S&P are the major corporate debt-rating organizations, and these are their highest ratings. Both agencies have confirmed our ratings following the announcement of our intent to acquire Pharmacia. We rely largely on operating cash flow, short-term commercial paper borrowings and long-term debt to provide for working capital needs. Our access to short-term financing at favorable rates would be materially affected by a substantial downgrade in our credit ratings. Our superior credit ratings are primarily based on our diversified product portfolio, our strong operating cash flows and our substantial cash balances.

In April 2002, we issued $600 million of senior unsubordinated dollar-denominated debt. The notes mature on April 15, 2009, with interest payable annually, in arrears, beginning on April 15, 2003, at a rate of 5.625%. The proceeds from the debt were used for general corporate purposes.

In 2001, we issued $1,350 million and 60 billion yen ($489 million at date of issuance) of senior unsecured notes — $600 million of the notes mature November 1, 2004, with interest payable semi-annually at a rate of 3.625%. The remaining $750 million of the notes mature on February 1, 2006, with interest payable semi-annually at a rate of 5.625%. The 60 billion yen notes mature on March 18, 2008, with interest payable semi-annually, at a rate of .80%. The proceeds from the note issuances were used for general corporate purposes.

We have available lines of credit and revolving-credit agreements with a group of banks and other financial intermediaries. We utilize short-term commercial paper to provide working capital. We maintain cash balances in excess of our commercial paper borrowings and have access to $2.9 billion of lines of credit that expire within one year. Of these lines of credit, $2.5 billion are unused, of which our lenders have committed to loan us $500 million at our request.

In February 2003, we issued:

  $300 million senior unsecured notes, due March 2009, which pay interest semi-annually, beginning on September 2, 2003, at a rate of 3.3%; and
 
  $300 million senior unsecured notes, due March 2018, which pay interest semi-annually, beginning on September 1, 2003, at a rate of 4.65%.

The notes were issued under a $5 billion debt shelf registration statement filed with the Securities and Exchange Commission in November 2002.

In connection with these debt issuances, we entered into:

  $300 million notional amount of interest rate swaps maturing in 2009; and
 
  $300 million notional amount of interest rate swaps maturing in 2018.

We designated these interest rate swaps as fair value hedges of the changes in the fair value of fixed rate debt. These swaps serve to reduce our exposure to long-term U.S. interest rates by effectively converting the fixed rates associated with the long-term debt to floating rates.

We have approximately $6.9 billion in available borrowings between unused lines of credit and debt securities under a shelf registration statement filed with the SEC.

Certain of our copromotion agreements include additional provisions that give our alliance partners the right to negotiate the copromotion of certain specified Pfizer-discovered products or to receive cash payments beginning after 2005.

DIVIDENDS ON COMMON STOCK

Our dividend payout ratio was approximately 36% in both 2002 and 2001. In December 2002, our Board of Directors declared a first-quarter 2003 dividend of $.15 per share. The 2003 cash dividend marks the 36th consecutive year of dividend increases.

BANKING OPERATION

Our international banking operation, Pfizer International Bank Europe (PIBE), operates under a full banking license from the Central Bank of Ireland. The results of its operations are included in Other (income)/deductions — net.

PIBE extends credit to financially strong borrowers, largely through U.S. dollar loans made primarily for short and medium terms, with floating interest rates. Generally, loans are made on an unsecured basis. When deemed appropriate, guarantees and certain covenants may be obtained as a condition to the extension of credit.

To reduce credit risk, PIBE has established credit approval guidelines, borrowing limits and monitoring procedures. Credit risk is further reduced through an active policy of diversification with respect to borrower,

ANNUAL REPORT 2002  

P38


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

industry and geographic location. PIBE continues to enjoy S&P’s highest short-term rating of A-1+.

The net income of PIBE is affected by changes in market interest rates because of repricing and maturity mismatches between its interest-sensitive assets and liabilities. PIBE is currently asset sensitive (more assets than liabilities repricing in a given period) and, therefore, we expect that in an environment of decreasing interest rates, net income would decrease. PIBE’s asset and liability management reflects its liquidity position and general market conditions.

For additional details regarding our banking operation, see note 5 to the consolidated financial statements, “Banking and Insurance Subsidiaries.”

RECENTLY ISSUED ACCOUNTING STANDARDS

As of January 1, 2003, we will adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. We do not expect the provisions of SFAS No. 143 to have a material impact on our consolidated financial statements.

Also on January 1, 2003, we will adopt the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 amends existing accounting rules for these costs by requiring that a liability be recorded at fair value when incurred. The liability would be reviewed regularly for changes in fair value with adjustments recorded in the consolidated financial statements. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. SFAS No. 146 will change the measurement and timing of costs associated with exit and disposal activities initiated after December 31, 2002. The provisions of SFAS No. 146 will be applied prospectively to all such costs.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 provides guidance on the identification of variable interest entities, entities for which control is achieved through means other than through voting rights, and how to determine whether a variable interest holder should consolidate the variable interest entities. This interpretation applies immediately to all variable interest entities created after January 31, 2003. The effective date for applying FIN 46’s consolidation requirements to variable interest entities acquired before February 1, 2003 is the beginning of our third quarter 2003. We do not expect the adoption of FIN 46 to have a material impact on our consolidated 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 annual report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:

  the success of research and development activities and the speed with which regulatory authorizations, pricing approvals, and product launches may be achieved
 
  competitive developments affecting our current growth products
 
  the ability to successfully market both new and existing products domestically and internationally
 
  difficulties or delays in manufacturing
 
  trade buying patterns
 
  the ability to meet generic and branded competition after the loss of patent protection for our products
 
  trends toward managed care and health care cost containment
 
  possible U.S. legislation affecting, among other things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare
 
  legislation or regulations in markets outside the U.S. affecting product pricing, reimbursement or access
 
  contingencies related to actual or alleged environmental contamination
 
  legal defense costs, insurance expense, settlement costs, and the risk of an adverse decision related to product liability, patent protection and other lawsuits
 
  the company’s ability to protect its patents and other intellectual property both domestically and internationally
 
  interest rate and foreign currency exchange rate fluctuations
 
  governmental laws and regulations affecting domestic and foreign operations, including tax obligations
 
  changes in generally accepted accounting principles
 
  any changes in business, political and economic conditions due to the threat of future terrorist activity in the U.S. and other parts of the world, and related U.S. military action overseas
 
  the ability to divest and the timing of the divestitures of the discontinued businesses
 
  growth in costs and expenses
 
  changes in our product mix
 
  the impact of acquisitions, divestitures, restructurings, product withdrawals and other unusual items, including our ability to obtain the anticipated results and synergies from our announced proposed acquisition of Pharmacia and the increased uncertainty created by the integration of the two businesses, as well as our sale of the Tetra business, our proposed sale of the Adams and Schick-Wilkinson Sword businesses and the timing and success of the sale of the women’s health product lines

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions.

ANNUAL REPORT 2002

P39


 

Financial Review
PFIZER INC AND SUBSIDIARY COMPANIES

Achievement of future results is subject to risks, uncertainties and potentially 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.

Certain risks, uncertainties and assumptions are discussed here and under the heading entitled “Cautionary Factors That May Affect Future Results” in Item 1 of our annual report on Form 10-K for the year ended December 31, 2002, which will be filed at the end of March 2003.

This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact our outlook.

Proposed Acquisition of Pharmacia Corporation

On July 15, 2002, we announced that we signed a definitive agreement to merge with Pharmacia Corporation (Pharmacia) in a stock-for-stock transaction valued on that date at approximately $60 billion. In December 2002, both Pfizer and Pharmacia shareholders approved the acquisition. The European Commission has approved our proposed acquisition of Pharmacia. We are awaiting approval by U.S. regulatory authorities. We expect the acquisition will close in the first quarter of 2003. Under terms of the merger agreement, upon close of the transaction we will exchange 1.4 shares of Pfizer common stock for each outstanding share of Pharmacia common stock in a tax-free transaction resulting in the issuance of approximately 2 billion shares of Pfizer common stock. We also will exchange options on 1.4 shares of Pfizer common stock for each outstanding Pharmacia option at the merger date. In addition, each share of Pharmacia convertible perpetual preferred stock will be exchanged for a share of a newly created class of Pfizer convertible perpetual preferred stock with rights substantially identical to the rights of the Pharmacia convertible perpetual preferred stock. The perpetual preferred stock will be convertible into approximately 16 million shares of Pfizer common stock.

In 2002, we have incurred approximately $33 million in transaction costs, including banking, legal, accounting and other costs directly related to our proposed acquisition of Pharmacia. At December 31, 2002, these costs are included in Other assets, deferred taxes and deferred charges. However, upon close of the acquisition, these amounts will become a part of the purchase price of Pharmacia. We have also incurred and expensed approximately $98 million of pre-integration costs associated with the proposed acquisition of Pharmacia. These costs are included in Merger-related costs.

The acquisition of Pharmacia could result in the divestiture of certain assets and operations, as required by regulatory agencies.

Competition and the Health Care Environment

In the U.S., many pharmaceutical products are subject to increasing pricing pressures, which could be significantly impacted by the current national debate over Medicare reform. If the Medicare program provided outpatient pharmaceutical coverage for its beneficiaries, the federal government, through its enormous purchasing power under the program, could demand discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs. On the other hand, a Medicare drug reimbursement provision may increase the volume of pharmaceutical drug purchases, offsetting at least in part these potential price discounts. In addition, managed care organizations, institutions, Medicaid and other government agencies continue to seek price discounts. Government efforts to reduce Medicare and Medicaid expenses may continue to increase the use of managed care organizations. This may result in managed care’s influencing prescription decisions for a larger segment of the population.

We encounter similar regulatory and legislative issues in most other countries. In Europe and some other international markets, the government provides health care at low direct costs to consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored health care system. This international patchwork of price regulation has led to different prices and some third-party trade in our products from markets with low prices. Such trade exploiting price differences between countries can undermine our sales in markets with higher prices. As a result, it is expected that pressures on the pricing component of operating results will continue.

As part of our commitment to improving health care for low-income seniors, we have expanded our Pfizer For Living program to include three new elements: a Pfizer Share Card; a help line to assist low-income seniors in learning about other services and benefits available in the healthcare system; and new easy-to-read health information on medical conditions. The Pfizer Share Card enables individual Medicare-eligible Americans with annual gross incomes of less than $18,000 ($24,000 for couples who file joint returns) who lack prescription drug coverage to buy a 30-day supply of any Pfizer prescription medicine for a flat fee of $15 per product. The Pfizer Share Card builds upon our longstanding commitment to ensure that patients have access to innovative pharmaceuticals, regardless of their ability to pay. Through Sharing the Care — a partnership with the National Governors Association and the National Association for Community Health Centers — we provide many of our leading medicines to low-income, uninsured patients through a network of 380 community health centers. Through a complementary program, Connection to Care, we donate medicines through individual physicians treating indigent patients. Internationally, we have two innovative access programs: the International Trachoma Initiative (ITI) and the Diflucan Partnership Program (DPP). Through the ITI, we donate the antibiotic Zithromax to combat blinding trachoma in developing countries. Through the DPP, we donate our antifungal Diflucan to treat two opportunistic fungal infections that often strike patients with HIV/AIDS in the world’s least developed countries where the disease is most prevalent. The DPP is currently active in 13 countries.

Operating Environment

Operations could be affected by changes in intellectual property legal protections and remedies, trade regulations and procedures and actions affecting approval, production, pricing, reimbursement and marketing of products, as well as by unstable governments and legal systems, intergovernmental disputes and possible nationalization.

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.

ANNUAL REPORT 2002 

P40


 

FINANCIAL REVIEW
PFIZER INC AND SUBSIDIARY COMPANIES

We manage these financial exposures through operational means and by using various financial instruments. These practices may change as economic conditions change. Generally, we do not use financial instruments for trading activities.

FOREIGN EXCHANGE RISK — A significant portion of our revenues and earnings are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities.

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

Foreign currency put options are sometimes purchased to reduce a portion of the potential negative effects on earnings related to certain of our significant anticipated intercompany inventory purchases for up to one year. In 2002, these purchased options hedge Japanese yen versus the U.S. dollar.

In addition, under certain market conditions, we protect against possible declines in the reported net assets of our subsidiaries in Japan and in countries that are members of the European Economic and Monetary Union. Early in the first quarter of 2001, we ceased all borrowings in euros.

For additional details on foreign exchange exposures, see note 6-D to the consolidated financial statements, “Financial Instruments — Derivative Financial Instruments and Hedging Activities.”

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, currency swaps and foreign currency put options — 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 note 6-D to the consolidated financial statements, “Financial Instruments — Derivative Financial Instruments and Hedging Activities: Accounting Policies.”

INTEREST RATE RISK — Our U.S. dollar interest-bearing investments, loans and borrowings are subject to interest rate risk. We invest and borrow primarily on a short-term or variable-rate basis. We are also subject to interest rate risk on Japanese yen short- and long-term borrowings. Under certain market conditions, interest rate swap contracts are used to adjust interest-sensitive assets and liabilities and forecasted assets and liabilities.

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

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

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

Legal Proceedings and Contingencies

We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, 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. Litigation is inherently unpredictable, and excessive verdicts do occur. Although we believe we have valid 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 that we have valid 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.

Outlook

We sold, or are in the process of selling, several businesses that do not fit our strategic goals. We expect to complete the remaining divestitures in the first half of 2003. Due to the partial-year loss of contribution of these businesses to our consolidated results — in part offset by interest income on the proceeds from their sale — we forecast 2003 diluted EPS, excluding certain significant items and merger-related costs, for Pfizer on a stand-alone basis, of approximately $1.80. We do not forecast reported 2003 diluted EPS in large part because the exact timing of the Pharmacia acquisition and the exact terms of the divestitures have not yet been determined and therefore related merger-related costs cannot yet be forecasted nor can any gains from sales of businesses.

ANNUAL REPORT 2002

P41


 

Management’s Report

We prepared and are responsible for the financial statements that appear on pages 44 to 68. 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.

We have designed a system of internal controls to:

  safeguard the Company’s assets,
 
  ensure that transactions are properly authorized,
 
  provide reasonable assurance, at reasonable cost, of the integrity, objectivity and reliability of the financial information, and
 
  include procedures for appropriate disclosure.

An effective internal control system has inherent limitations no matter how well designed, and therefore, can provide only reasonable assurance with respect to financial statement preparation. The system is built on a business ethics policy that requires all employees to maintain the highest ethical standards in conducting Company affairs. Our system of internal control includes:

  careful selection, training and development of financial managers,
 
  an organizational structure that segregates responsibilities,
 
  a communications program that ensures that the Company’s policies and procedures are well understood throughout the organization,
 
  an extensive program of internal audits, with prompt follow-up, including reviews of separate operations and functions around the world, and
 
  the periodic evaluation of disclosure controls and procedures.

Our independent certified public accountants, KPMG LLP, have audited the annual financial statements in accordance with auditing standards generally accepted in the United States of America. The independent auditors’ report expresses an informed judgment as to the fair presentation of the Company’s reported operating results, financial position and cash flows. Their judgment is based on the results of auditing procedures performed and such other tests that they deemed necessary, including their consideration of our internal control system.

We consider, and take appropriate action on, recommendations made by KPMG LLP and our internal auditors. We believe that our system of internal control is effective and adequate to accomplish the objectives discussed above.

 
(HENRY A. MCKINNELL SIGNATURE)
Henry A. Mckinnell, Chairman and Chief Executive Officer
 
 (DAVID L. SHEDLARZ SIGNATURE)
David L. Shedlarz, Principal Financial Officer
 
 (LORETTA V. CANGIALOSI)
Loretta V. Cangialosi, Principal Accounting Officer
FEBRUARY 27, 2003

Audit Committee’s Report

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. In this context, the Committee has met and held discussions with management and the independent auditors. 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 auditors. The Committee discussed with the independent auditors matters required to be discussed by Statement of Auditing Standards No. 61, Communication With Audit Committees. In addition, the Committee has discussed with the independent auditors the auditors’ independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. The Committee has also considered whether the independent auditors’ non-audit services to the Company are compatible with the auditors’ independence. The Committee discussed with the Company’s internal and independent auditors the overall scope and plans for their respective audits. The Committee meets with the internal and independent auditors 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, 2002, for filing with the Securities and Exchange Commission. The Committee has selected and the Board of Directors has ratified, subject to shareholder approval, the selection of the Company’s independent auditors.

 
(ROBERT BURT SIGNATURE)
Robert Burt, Chair, Audit Committee
FEBRUARY 27, 2003

ANNUAL REPORT 2002

P42


 

Independent Auditors’ Report

To the Shareholders and Board of Directors of Pfizer Inc:

We have audited the accompanying consolidated balance sheets of Pfizer Inc and Subsidiary Companies as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The consolidated financial statements give retroactive effect to the merger of Pfizer Inc and Warner-Lambert Company on June 19, 2000, which has been accounted for as a pooling of interests as described in Notes 1 and 2 to the consolidated financial statements.

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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, Pfizer Inc adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.

 
(KPMG LLP)
KPMG LLP
 
New York, NY
FEBRUARY 27, 2003

P43


 

Consolidated Statement of Income
PFIZER INC AND SUBSIDIARY COMPANIES

                             
        YEAR ENDED DECEMBER 31
       
(MILLIONS, EXCEPT PER COMMON SHARE DATA)   2002   2001   2000

 
 
 
Revenues
  $ 32,373     $ 29,024     $ 26,045  
Costs and expenses:
                       
Cost of sales
    4,045       3,823       3,755  
 
Selling, informational and administrative expenses
    10,846       9,717       9,566  
 
Research and development expenses
    5,176       4,776       4,374  
 
Merger-related costs
    630       819       3,223  
 
Other (income)/deductions — net
    (120 )     (95 )     (374 )
 
   
     
     
 
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of a change in accounting principle
    11,796       9,984       5,501  
Provision for taxes on income
    2,609       2,433       1,946  
Minority interests
    6       14       13  
 
   
     
     
 
Income from continuing operations before cumulative effect of a change in accounting principle
    9,181       7,537       3,542  
 
   
     
     
 
Discontinued operations:
                       
 
Income from operations of discontinued businesses — net of tax
    278       251       165  
 
Gain on sale of discontinued business — net of tax
    77             19  
 
   
     
     
 
Discontinued operations — net of tax
    355       251       184  
 
   
     
     
 
Income before cumulative effect of a change in accounting principle
    9,536       7,788       3,726  
Cumulative effect of a change in accounting principle — net of tax
    (410 )            
 
   
     
     
 
Net income
  $ 9,126     $ 7,788     $ 3,726  
 
   
     
     
 
Earnings per common share — basic
                       
 
Income from continuing operations before cumulative effect of a change in accounting principle
  $ 1.49     $ 1.21     $ .57  
 
   
     
     
 
 
Discontinued operations:
                       
 
Income from operations of discontinued businesses — net of tax
    .05       .04       .03  
 
Gain on sale of discontinued business — net of tax
    .01              
 
   
     
     
 
 
Discontinued operations — net of tax
    .06       .04       .03  
 
   
     
     
 
 
Income before cumulative effect of a change in accounting principle
    1.55       1.25       .60  
 
Cumulative effect of a change in accounting principle — net of tax
    (.07 )            
 
   
     
     
 
 
Net income
  $ 1.48     $ 1.25     $ .60  
 
   
     
     
 
Earnings per common share — diluted
                       
 
Income from continuing operations before cumulative effect of a change in accounting principle
  $ 1.47     $ 1.18     $ .56  
 
   
     
     
 
 
Discontinued operations:
                       
   
Income from operations of discontinued businesses — net of tax
    .05       .04       .03  
   
Gain on sale of discontinued business — net of tax
    .01              
 
   
     
     
 
 
Discontinued operations — net of tax
    .06       .04       .03  
 
   
     
     
 
 
Income before cumulative effect of a change in accounting principle
    1.53       1.22       .59  
 
Cumulative effect of a change in accounting principle — net of tax
    (.07 )            
 
   
     
     
 
 
Net income
  $ 1.46     $ 1.22     $ .59  
 
   
     
     
 
Weighted average shares — basic
    6,156       6,239       6,210  
Weighted average shares — diluted
    6,241       6,361       6,368  
 
   
     
     
 

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

ANNUAL REPORT 2002

P 44


 

Consolidated Balance Sheet
PFIZER INC AND SUBSIDIARY COMPANIES

                     
        YEAR ENDED DECEMBER 31
       
(MILLIONS EXCEPT PER COMMON SHARE DATA)   2002   2001

 
 
Assets
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 1,878     $ 1,036  
Short-term investments
    10,673       7,579  
Accounts receivable, less allowance for doubtful accounts:
               
 
2002 — $122; 2001 — $129
    5,785       4,798  
Short-term loans
    399       269  
Inventories
Finished goods
    1,133       1,011  
 
Work in process
    1,142       1,062  
 
Raw materials and supplies
    403       412  
 
   
     
 
   
Total inventories
    2,678       2,485  
 
   
     
 
Prepaid expenses and taxes
    1,797       1,418  
Assets of discontinued businesses held for sale
    1,571       1,627  
 
   
     
 
   
Total current assets
    24,781       19,212  
Long-term loans and investments
    5,161       5,724  
Property, plant and equipment, less accumulated depreciation
    10,712       9,783  
Goodwill
    1,200       1,689  
Other assets, deferred taxes and deferred charges
    4,502       2,745  
 
   
     
 
Total assets
  $ 46,356     $ 39,153  
 
   
     
 
Liabilities and Shareholders’ Equity
               
CURRENT LIABILITIES
               
Short-term borrowings, including current portion of long-term debt
  $ 8,669     $ 6,263  
Accounts payable
    1,620       1,411  
Dividends payable
    926       819  
Income taxes payable
    2,231       775  
Accrued compensation and related items
    1,084       1,026  
Other current liabilities
    3,448       2,866  
Liabilities of discontinued businesses held for sale
    577       569  
 
   
     
 
   
Total current liabilities
    18,555       13,729  
Long-term debt
    3,140       2,609  
Postretirement benefit obligation other than pension plans
    623       587  
Deferred taxes on income
    364       398  
Other noncurrent liabilities
    3,724       3,537  
 
   
     
 
   
Total liabilities
    26,406       20,860  
 
   
     
 
SHAREHOLDERS’ EQUITY
               
Preferred stock, without par value; 12 shares authorized, none issued
           
Common stock, $.05 par value; 9,000 shares authorized; issued: 2002 — 6,829; 2001 — 6,792
    341       340  
Additional paid-in capital
    9,368       9,300  
Employee benefit trust
    (1,786 )     (2,650 )
Treasury stock, shares at cost:
               
 
2002 — 667; 2001 — 515
    (16,341 )     (11,378 )
Retained earnings
    30,243       24,430  
Accumulated other comprehensive expense
    (1,875 )     (1,749 )
 
   
     
 
 
Total shareholders’ equity
    19,950       18,293  
 
   
     
 
 
Total liabilities and shareholders’ equity
  $ 46,356     $ 39,153  
 
   
     
 

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

ANNUAL REPORT 2002

P 45


 

Consolidated Statement of Shareholders’ Equity
PFIZER INC AND SUBSIDIARY COMPANIES

                                                                                     
                                                                                 
                            EMPLOYEE                           ACCUM. OTHER        
        COMMON STOCK   ADDITIONAL   BENEFIT TRUST   TREASURY STOCK       COMPRE-        
       
  PAID-IN  
 
  RETAINED   HENSIVE        
(MILLIONS)   SHARES   PAR VALUE   CAPITAL   SHARES   FAIR VALUE   SHARES   COST   EARNINGS   INC./(EXP.)   TOTAL

 
 
 
 
 
 
 
 
 
 
Balance January 1, 2000
    6,631     $ 332       $5,943       (89 )   $ (2,888 )     (413 )   $ (6,851 )   $ 18,459     $ (1,045 )   $ 13,950  
Comprehensive income:
                                                                               
 
Net income
                                                            3,726               3,726  
 
Other comprehensive expense — net of tax:
                                                                               
   
Currency translation adjustment
                                                                    (458 )     (458 )
   
Net unrealized gain on available- for-sale securities
                                                                    37       37  
   
Minimum pension liability
                                                                    (49 )     (49 )
 
                                                                   
     
 
 
Total other comprehensive expense
                                                                    (470 )     (470 )
 
                                                                   
     
 
Total comprehensive income
                                                                            3,256  
Cash dividends declared
                                                            (2,569 )             (2,569 )
Stock option transactions
    115       5       2,322       16       573             (15 )                     2,885  
Purchases of common stock
                                            (23 )     (1,003 )                     (1,003 )
Employee benefit trust transactions — net
                    494       (1 )     (1,067 )     1       11                       (562 )
Other
    3             136                                       (17 )             119  
 
   
     
     
     
     
     
     
     
     
     
 
Balance December 31, 2000
    6,749       337       8,895       (74 )     (3,382 )     (435 )     (7,858 )     19,599       (1,515 )     16,076  
Comprehensive income:
                                                                               
 
Net income
                                                            7,788               7,788  
 
Other comprehensive expense- net of tax:
                                                                               
   
Currency translation adjustment
                                                                    (37 )     (37 )
   
Net unrealized loss on available- for-sale securities
                                                                    (91 )     (91 )
   
Minimum pension liability
                                                                    (106 )     (106 )
 
                                                                   
     
 
 
Total other comprehensive expense
                                                                    (234 )     (234 )
 
                                                                   
     
 
Total comprehensive income
                                                                            7,554  
Cash dividends declared
                                                            (2,869 )             (2,869 )
Stock option transactions
    40       2       981       8       337       6       104                       1,424  
Purchases of common stock
                                            (89 )     (3,665 )                     (3,665 )
Employee benefit trust transactions — net
                    (724 )     (1 )     395       2       25                       (304 )
Other
    3       1       148                       1       16       (88 )             77  
 
   
     
     
     
     
     
     
     
     
     
 
Balance December 31, 2001
    6,792       340       9,300       (67 )     (2,650 )     (515 )     (11,378 )     24,430       (1,749 )     18,293  
Comprehensive income:
                                                                               
 
Net income
                                                            9,126               9,126  
 
Other comprehensive expense — net of tax:
                                                                               
   
Currency translation adjustment
                                                                    85       85  
   
Net unrealized loss on available- for-sale securities
                                                                    (32 )     (32 )
   
Minimum pension liability
                                                                    (179 )     (179 )
 
                                                                   
     
 
 
Total other comprehensive expense
                                                                    (126 )     (126 )
 
                                                                   
     
 
Total comprehensive income
                                                                            9,000  
Cash dividends declared
                                                            (3,313 )             (3,313 )
Stock option transactions
    34       1       789       9       366             (8 )                     1,148  
Purchases of common stock
                                            (153 )     (4,996 )                     (4,996 )
Employee benefit trust transactions — net
                    (863 )           498       1       28                       (337 )
Other
    3             142                             13                     155  
 
   
     
     
     
     
     
     
     
     
     
 
Balance December 31, 2002
    6,829     $ 341     $ 9,368       (58 )   $ (1,786 )     (667 )   $ (16,341 )   $ 30,243     $ (1,875 )   $ 19,950  
 
   
     
     
     
     
     
     
     
     
     
 

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

ANNUAL REPORT 2002

P 46


 

Consolidated Statement of Cash Flows
PFIZER INC AND SUBSIDIARY COMPANIES

                               
          YEAR ENDED DECEMBER 31
         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Operating Activities
                       
 
Net Income
  $ 9,126     $ 7,788     $ 3,726  
 
Adjustments to reconcile net income to net cash provided by continuing operating activities:
                       
   
Cumulative effect of a change in accounting principle
    410              
   
Discontinued operations
    (278 )     (251 )     (165 )
   
Harmonization of accounting methodology
          (175 )      
   
Loss on sale of animal health feed-additive products
                85  
   
Costs associated with the withdrawal of Rezulin
                102  
   
Gain on sale of business
    (77 )           (19 )
   
Gains on sales of product lines
    (34 )           (117 )
   
Gains on sales of equity investments
          (17 )     (216 )
   
Asset impairment charges
    63              
   
Depreciation and amortization
    1,036       972       879  
   
Deferred taxes and other
    (385 )     193       (208 )
   
Changes in assets and liabilities, net of effect of businesses divested:
                       
     
Accounts receivable
    (963 )     81       (502 )
     
Inventories
    (129 )     (110 )     (410 )
     
Prepaid and other assets
    (1,423 )     106       369  
     
Accounts payable and accrued liabilities
    461       (412 )     818  
     
Income taxes payable
    1,736       332       1,319  
     
Other deferred items
    321       354       251  
 
 
   
     
     
 
Net cash provided by continuing operating activities
    9,864       8,861       5,912  
 
 
   
     
     
 
Investing Activities
                       
 
Purchases of property, plant and equipment
    (1,758 )     (2,105 )     (2,073 )
 
Purchases of short-term investments, net of maturities
    (12,652 )     (14,218 )     (7,982 )
 
Proceeds from redemptions of short-term investments
    9,781       12,808       6,592  
 
Purchases of long-term investments
    (2,877 )     (3,708 )     (618 )
 
Proceeds from redemptions of long-term investments
    3,477       80       346  
 
Purchases of other assets
    (528 )     (227 )     (174 )
 
Proceeds from sales of other assets
    272       132       184  
 
Proceeds from sales of businesses or products
    220       8       193  
 
Other investing activities
    (273 )     95       (103 )
 
 
   
     
     
 
Net cash used in investing activities
    (4,338 )     (7,135 )     (3,635 )
 
 
   
     
     
 
Financing Activities
                       
 
Proceeds from issuances of long-term debt
    603       1,837       18  
 
Repayments of long-term debt
    (374 )     (151 )     (529 )
 
Increase in short-term borrowings
    2,815       2,344       1,224  
 
Decrease in short-term borrowings
    (539 )     (519 )     (2,427 )
 
Proceeds from common stock issuances
    66       62       59  
 
Purchases of common stock
    (4,996 )     (3,665 )     (1,005 )
 
Cash dividends paid
    (3,168 )     (2,715 )     (2,197 )
 
Stock option transactions and other
    594       711       1,129  
 
 
   
     
     
 
Net cash used in financing activities
    (4,999 )     (2,096 )     (3,728 )
 
 
   
     
     
 
Net cash provided by discontinued operations
    319       313       188  
 
 
   
     
     
 
Effect of exchange-rate changes on cash and cash equivalents
    (4 )     (6 )     4  
 
 
   
     
     
 
Net increase/(decrease) in cash and cash equivalents
    842       (63 )     (1,259 )
Cash and cash equivalents at beginning of year
    1,036       1,099       2,358  
 
 
   
     
     
 
Cash and cash equivalents at end of year
  $ 1,878     $ 1,036     $ 1,099  
 
 
   
     
     
 
Supplemental Cash Flow Information
                       
 
Cash paid during the period for:
                       
   
Income taxes
  $ 1,480     $ 957     $ 1,041  
   
Interest
    256       291       460  
 
 
   
     
     
 

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

ANNUAL REPORT 2002

P 47


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

1.     SIGNIFICANT ACCOUNTING POLICIES

A.     Consolidation and Basis of Presentation

The consolidated financial statements include our parent company and all subsidiaries, including those operating outside the U.S. For subsidiaries operating outside the U.S., the financial information is included as of and for the year ended November 30 for each year. Substantially all unremitted earnings of international subsidiaries are free of legal and contractual restrictions. All significant transactions among our businesses have been eliminated. We made certain reclassifications to the 2001 and 2000 financial statements to conform to the 2002 presentation.

In preparing the financial statements, we use some estimates and assumptions that may affect reported amounts and disclosures. Estimates are used when accounting for sales discounts, allowances and incentives, depreciation, amortization, employee benefits, contingencies and asset valuations. We are also subject to risks and uncertainties that may cause actual results to differ from estimated results, such as changes in the health care environment, competition, foreign exchange, litigation, legislation and regulations. These and other uncertainties are discussed in the accompanying financial review, which is unaudited, under the heading “Forward-Looking Information and Factors That May Affect Future Results.”

On June 19, 2000, we completed our merger with Warner-Lambert Company (Warner-Lambert). The merger was accounted for as a pooling of interests. As a result, we restated all prior period consolidated financial statements presented to reflect the combined results of operations, financial position and cash flows of both companies as if they had always been merged. Prior to the merger, the only significant transactions between Pfizer and Warner-Lambert occurred under the Lipitor marketing agreements. We have eliminated these transactions from the restated combined financial statements.

B.     New Accounting Standards

On January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not impact our financial position or results of operations.

Under the provisions of SFAS No. 142, intangible assets with indefinite lives and goodwill are no longer amortized but are subject to annual impairment tests. Separable intangible assets with finite lives continue to be amortized over their useful lives. Application of the non-amortization provisions of SFAS No. 142 did not have a material effect on our financial condition or results of operations. As a result of adopting SFAS No. 142, we recorded the following non-cash pre-tax charges totaling $565 million ($410 million net of tax) (see note 9, “Goodwill and Other Intangible Assets”):

  $536 million for the impairment provisions related to goodwill in our animal health business, which is included in the Pharmaceutical segment. This charge was determined in the second quarter of 2002 and reported as a one-time cumulative effect of a change in accounting principle as of the beginning of 2002.
 
  $29 million for the impairment provisions related to identifiable intangible assets in our consumer healthcare business ($5 million), which is included in the Consumer Products segment, our animal health business ($4 million), which is included in the Pharmaceutical segment and the Adams confectionery products business ($20 million), which is included as part of discontinued operations. This charge was determined in the first quarter of 2002 and reported as a one-time cumulative effect of a change in accounting principle as of the beginning of 2002.

On January 1, 2002, we adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction.

In 2002, we adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (an amendment to FASB Statement No. 123). SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

On January 1, 2002, we adopted the provisions of Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products which is codified within EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer. We reclassified our 2001 and 2000 consolidated statements of income to reflect the cost of certain sales incentives and other vendor consideration as a reduction in Revenue rather than Selling, informational and administrative expenses. These reclassifications have no effect on net income.

C.     Cash Equivalents

Cash equivalents include items almost as liquid as cash, such as certificates of deposit and time deposits with maturity periods of three months or less when purchased. If items meeting this definition are part of a larger investment pool, we classify them as Short-term investments.

D.     Inventories

We value inventories at cost or fair value, if lower. Cost is determined as follows:

  finished goods and work in process at average actual cost
 
  raw materials and supplies at average or latest actual cost

E.     Long-Lived Assets

Long-lived assets include:

  property, plant and equipment — These assets are recorded at original cost and increased by the cost of any significant improvements after purchase. We depreciate the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.
  goodwill — Goodwill represents the difference between the purchase price of acquired businesses and the fair value of their net assets.
  other intangible assets — Other intangible assets are included in Other assets, deferred taxes and deferred charges. Other intangible assets with finite lives are amortized evenly over their estimated useful lives.

ANNUAL REPORT 2002

P 48


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

At least annually, we review all long-lived assets for impairment. When necessary, we record charges for impairments of long-lived assets for the amount by which the present value of future cash flows, or some other fair value measure, is less than the carrying value of these assets.

F.     Foreign Currency Translation

For most international operations, local currencies have been determined to be their functional currencies. We translate assets and liabilities to their U.S. dollar equivalents at rates in effect at the balance sheet date and record translation adjustments in Shareholders’ equity. We translate statement of income accounts at average rates for the period and record these adjustments in Other (income)/deductions — net.

For operations in highly inflationary economies, we translate the balance sheet items as follows:

  monetary items (that is, assets and liabilities that will be settled for cash) at rates in effect at the balance sheet date, with translation adjustments recorded in Other (income)/deductions — net
 
  nonmonetary items at historical rates (that is, those rates in effect when the items were first recorded)

G.     Sales Recognition

Revenue Recognition — We record revenue from product sales when the goods are shipped and title passes to the customer.

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

Sales Discounts and Rebates — Provisions for discounts and rebates to customers are recorded based on the terms of sale in the same period the related sales are recorded. We determine the provision for Medicaid discounts and contract rebates based on an estimate of reimbursable prescriptions filled for individuals covered by Medicaid or a provider with whom we contract. Other current liabilities include accruals for customer rebates of $1,003 million at December 31, 2002 and $685 million at December 31, 2001.

H.     Alliances

We have agreements to promote pharmaceutical products discovered by other companies. Revenue is earned when our copromotion partners ship the related products and title passes to their customer. Our alliance revenue is included in Revenues and is primarily based upon a percentage of our copro-motion partners’ net sales. Generally, expenses for selling and marketing these products are included in Selling, informational and administrative expenses.

Prior to the copromoted product receiving regulatory approval, we expense, as incurred, milestone payments made under these agreements and record them in Other (income )/deductions — net. Once the product receives regulatory approval, we record any subsequent milestone payments in Other assets, deferred taxes and deferred charges and amortize them evenly over the remaining license term or the expected product life cycle, whichever is shorter. On an ongoing basis, we review for impairment those milestone payments which have been recorded as assets.

I.     Research and Development Expenses

Research and development (R&D) costs are expensed as incurred. These expenses include the costs of our proprietary R&D efforts as well as costs incurred in connection with our third-party collaboration efforts. Pre-approval milestone payments made by us to third parties under contracted R&D arrangements are expensed when the specific milestone has been achieved. We have no third-party R&D arrangements that result in the recognition of revenue.

J.     Stock-Based Compensation

In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, we elected to account for our stock-based compensation under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees.

The exercise price of stock options granted equals the market price on the date of grant. There is no recorded expense related to grants of stock options.

We estimated the fair value of employee stock options using the Black-Scholes option-pricing model, modified for dividends and using the assumptions as described in note 18, “Stock Option and Performance Unit Awards”, as required under accounting principles generally accepted in the United States of America (GAAP). The Black-Scholes model is a trading option-pricing model that neither considers the non-traded nature of employee stock options, nor considers the restrictions on trading, the lack of transferability or the ability of employees to forfeit the options prior to expiry. If the model adequately permitted considerations of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock option could be different.

The following table summarizes our results as if we had recorded compensation expense for the 2002, 2001 and 2000 option grants:

                             
(MILLIONS OF DOLLARS,                        
EXCEPT PER COMMON SHARE DATA)   2002   2001   2000

 
 
 
Net income:
                       
 
As reported under GAAP*
  $ 9,126     $ 7,788     $ 3,726  
 
Compensation expense
    (518 )     (560 )     (807 )
 
 
   
     
     
 
 
Pro forma
  $ 8,608     $ 7,228     $ 2,919  
 
 
   
     
     
 
Basic earnings per common share:
                       
 
As reported under GAAP
  $ 1.48     $ 1.25     $ .60  
 
Compensation expense
    (.08 )     (.09 )     (.13 )
 
 
   
     
     
 
 
Pro forma
  $ 1.40     $ 1.16     $ .47  
 
 
   
     
     
 
Diluted earnings per common share:
                       
 
As reported under GAAP
  $ 1.46     $ 1.22     $ .59  
 
Compensation expense
    (.08 )     (.08 )     (.13 )
 
 
   
     
     
 
 
Pro forma
  $ 1.38     $ 1.14     $ .46  
 
 
   
     
     
 


*   Includes stock-based compensation expense net of related tax effects of $23 million in 2002, $66 million in 2001 and $112 million in 2000.

     K.     Advertising Expense

     We record advertising expenses as follows:

     •     production costs are expensed as incurred

     •     costs of radio time, television time and space in publications are expensed when the related advertising occurs

     Advertising expense totaled approximately $2,307 million in 2002, $2,157 million in 2001 and $2,455 million in 2000.

ANNUAL REPORT 2002

P 49


 

Notes to Consolidated Financial Statements

PFIZER INC AND SUBSIDIARY COMPANIES

L.     Shipping and Handling Costs

Shipping and handling costs are included in Selling, informational and administrative expenses. Shipping and handling costs totaled approximately $140 million in 2002, $146 million in 2001 and $133 million in 2000.

2.     MERGER ACTIVITIES

Merger of Pfizer and Warner-Lambert

On June 19, 2000, we completed our merger with Warner-Lambert. We issued approximately 2,440 million shares of our common stock for all the outstanding common stock of Warner-Lambert. The merger qualified as a tax-free reorganization and was accounted for as a pooling of interests under APB No. 16, Business Combinations.

Proposed Acquisition of Pharmacia Corporation

On July 15, 2002, we announced that we signed a definitive agreement to merge with Pharmacia Corporation (Pharmacia) in a stock-for-stock transaction valued on that date at approximately $60 billion. In December 2002, both Pfizer and Pharmacia shareholders approved the acquisition. The European Commission has approved our proposed acquisition of Pharmacia. We are awaiting approval by U.S. regulatory authorities. We expect the acquisition will close in the first quarter of 2003. Under terms of the merger agreement, upon close of the transaction we will exchange 1.4 shares of Pfizer common stock for each outstanding share of Pharmacia common stock in a tax-free transaction resulting in the issuance of approximately 2 billion shares of Pfizer common stock. We also will exchange options on 1.4 shares of Pfizer common stock for each outstanding Pharmacia option at the merger date. In addition, each share of Pharmacia convertible perpetual preferred stock will be exchanged for a share of a newly created class of Pfizer convertible perpetual preferred stock with rights substantially identical to the rights of the Pharmacia convertible perpetual preferred stock. The perpetual preferred stock will be convertible into approximately 16 million shares of Pfizer common stock.

In 2002, we have incurred approximately $33 million in transaction costs, including banking, legal, accounting and other costs directly related to our proposed acquisition of Pharmacia. At December 31, 2002, these costs are included in Other assets, deferred taxes and deferred charges. However, upon close of the acquisition, these amounts will become a part of the purchase price of Pharmacia. We have also incurred and expensed approximately $98 million of pre-integration costs associated with the proposed acquisition of Pharmacia. These costs are included in Merger-related costs.

The acquisition of Pharmacia could result in the divestiture of certain assets and operations, as required by regulatory agencies.

3.     MERGER-RELATED COSTS

We incurred the following merger-related costs in connection with our merger with Warner-Lambert in 2000 and our proposed acquisition of Pharmacia:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Transaction costs
  $     $     $ 226  
Transaction costs related to Warner-Lambert’s termination of the Warner-Lambert/ American Home Products merger
                1,838  
Integration costs —Warner-Lambert
    345       456       242  
Pre-integration costs — Pharmacia
    98              
Restructuring charges —Warner-Lambert
    187       363       917  
 
   
     
     
 
Total merger-related costs
  $ 630     $ 819     $ 3,223  
 
   
     
     
 

  Transaction costs include banking, legal, accounting and other costs directly related to our merger with Warner-Lambert.
 
  Integration costs represent external, incremental costs directly related to our merger with Warner-Lambert, including expenditures for consulting and systems integration.
 
  Pre-integration costs represent external, incremental costs directly related to our proposed acquisition of Pharmacia.

The components of the restructuring charges associated with the merger of the Warner-Lambert operations follow:

                                                 
                                    UTILIZATION THROUGH   RESERVE*
    PROVISIONS   DEC. 31,   DEC. 31,
   
 
 
(MILLIONS OF DOLLARS)   2002   2001   2000   TOTAL   2002   2002

 
 
 
 
 
 
Employee termination costs
  $ 170     $ 249     $ 850     $ 1,269     $ (1,237 )   $ 32  
Property, plant and equipment
    4       84       46       134       (134 )      
Other
    13       30       21       64       (64 )      
 
   
     
     
     
     
     
 
Total
  $ 187     $ 363     $ 917     $ 1,467     $ (1,435 )   $ 32  
 
   
     
     
     
     
     
 
*   Included in Other current liabilities.

Through December 31, 2002, the charges for employee termination costs represent the approved reduction of our work force of our continuing businesses by 7,961 people, mainly in administrative functions for corporate, manufacturing, distribution, sales and research. We notified affected individuals, and as of December 31, 2002, 7,321 employees had been terminated. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Warner-Lambert employment contracts. Under the terms of these contracts, certain terminated employees may elect to defer receipt of severance benefits. Severance benefits deferred for future payments were $218 million at December 31, 2002 and $215 million at December 31, 2001. The deferred severance benefits are considered utilized charges and are included in Other noncurrent liabilities.

The impairment and disposal charges through December 31, 2002 for property, plant and equipment include the consolidation of facilities and related fixed assets and the termination of certain software installation projects.

ANNUAL REPORT 2002

P 50


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

4.     DISCONTINUED OPERATIONS

We sold or are in the process of selling the following businesses and product lines that do not fit our strategic goals:

  In December 2002, we sold our Tetra fish-care products business, formerly part of our Consumer Products segment to the Triton Fund, for $238.5 million in cash. We recognized a gain of $117 million ($77 million net of tax) on the sale in 2002.
 
  In December 2002, we entered into an agreement to sell the Adams confectionery products business, formerly part of our Consumer Products segment, to Cadbury Schweppes plc for $4.2 billion in cash.
 
  In January 2003, we entered into an agreement to sell the Schick-Wilkinson Sword shaving products business, formerly part of our Consumer Products segment, to Energizer Holdings Inc. for $930 million in cash.
 
  We decided to sell certain of our women’s health product lines (femhrt, Loestrin and Estrostep), formerly part of our Pharmaceutical segment.

The divestitures of the Adams and Schick-Wilkinson Sword businesses and the women’s health product lines are expected to close in the first half of 2003 and are subject to the usual regulatory approvals. These businesses and product lines are reflected as discontinued operations in 2002, 2001 and 2000.

The assets and liabilities of the Adams and Schick-Wilkinson Sword businesses (and the Tetra business in 2001) and the women’s health product lines follow:

                 
(MILLIONS OF DOLLARS)   2002   2001

 
 
Assets of discontinued businesses held for sale:
               
Accounts receivable
  $ 426     $ 419  
Inventories
    250       256  
Property, plant and equipment — net
    601       632  
Goodwill
    90       120  
Other
    204       200  
 
   
     
 
Total assets of discontinued businesses held for sale
  $ 1,571     $ 1,627  
 
   
     
 
Liabilities of discontinued businesses held for sale:
               
Current liabilities
  $ 483     $ 480  
Other
    94       89  
 
   
     
 
Total liabilities of discontinued businesses held for sale
  $ 577     $ 569  
 
   
     
 

The following amounts related to the Tetra, Adams and Schick-Wilkinson Sword businesses, and women’s health product lines have been segregated from continuing operations and reflected as discontinued operations:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Revenues
  $ 2,908     $ 2,958     $ 3,055  
 
   
     
     
 
Pre-tax income
  $ 447     $ 405     $ 262  
Provision for taxes on income
    169       154       97  
 
   
     
     
 
Income from operations of discontinued businesses — net of tax
    278       251       165  
 
   
     
     
 
Pre-tax gain on sale of discontinued business
    117             32  
Provision for taxes on gain
    40             13  
 
   
     
     
 
Gain on sale of discontinued business — net of tax*
    77             19  
 
   
     
     
 
Discontinued operations — net of tax
  $ 355     $ 251     $ 184  
 
   
     
     
 

*   Reflects working capital settlement amounts in 2000 for certain of our previously discontinued businesses.

5.     BANKING AND INSURANCE SUBSIDIARIES

Our banking and insurance subsidiaries include Pfizer International Bank Europe (PIBE) and a small captive insurance company. PIBE periodically adjusts its loan portfolio to meet its business needs. Information about these subsidiaries follows:

Condensed Combined Balance Sheet

                   
(MILLIONS OF DOLLARS)   2002   2001

 
 
Cash and interest-bearing deposits
  $ 135     $ 73  
Short-term investments
          63  
Loans — net
    486       481  
Other assets
    4       5  
 
   
     
 
 
Total assets
  $ 625     $ 622  
 
   
     
 
Certificates of deposit and other liabilities
  $ 31     $ 40  
Shareholders’ equity
    594       582  
 
   
     
 
Total liabilities and shareholders’ equity
  $ 625     $ 622  
 
   
     
 

Condensed Combined Statement of Income

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Interest income
  $ 12     $ 29     $ 35  
Interest expense
          (2 )     (3 )
Other income/(expense) — net
    (1 )     1       8  
 
   
     
     
 
Net income
  $ 11     $ 28     $ 40  
 
   
     
     
 

6.     FINANCIAL INSTRUMENTS

A.     Investments in Debt and Equity Securities

In 2002, we reclassified substantially all of our held-to-maturity debt securities to available-for-sale debt securities. The amortized cost of the securities reclassified was $13,839 million and the unrealized gain on such securities was immaterial. We review the key characteristics of our debt securities portfolio on at least a quarterly basis. Upon completion of this review, we reclassified the securities because we no longer had the positive intent to hold such securities to maturity. As a result of this decision, any debt security that we may purchase over a two-year period, which began July 1, 2002, will not be classified as held-to-maturity.

P 51

ANNUAL REPORT 2002


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

Information about our investments follows:

                   
(MILLIONS OF DOLLARS)   2002   2001

 
 
Amortized cost and fair value of available-for-sale debt securities:*
               
 
Corporate debt
  $ 6,072     $ 641  
 
Foreign government and foreign government agency debt
    3,602        
 
Supranational debt
    3,090        
 
U.S. government agency debt
    2,217        
 
Certificates of deposit
    1,531       350  
 
 
   
     
 
Total available-for-sale debt securities
    16,512       991  
 
 
   
     
 
Amortized cost and fair value of held-to-maturity debt securities:*
               
 
Corporate debt
    15       6,459  
 
Foreign government and foreign government agency debt
          4,613  
 
Certificates of deposit
    59       487  
 
 
   
     
 
Total held-to-maturity debt securities
    74       11,559  
 
 
   
     
 
Cost of available-for-sale equity securities
    123       146  
Gross unrealized gains
    53       190  
Gross unrealized losses
    (16 )     (23 )
 
 
   
     
 
Fair value of available-for-sale equity securities
    160       313  
 
 
   
     
 
Total investments
  $ 16,746     $ 12,863  
 
 
   
     
 
*   Gross unrealized gains and losses are not material.

These investments were in the following captions in the consolidated balance sheet:

                 
(MILLIONS OF DOLLARS)   2002   2001

 
 
Cash and cash equivalents
  $ 1,380     $ 452  
Short-term investments
    10,673       7,579  
Long-term loans and investments
    4,693       4,832  
 
   
     
 
Total investments
  $ 16,746     $ 12,863  
 
   
     
 

The contractual maturities of the available-for-sale and held-to-maturity debt securities as of December 31, 2002 follow:

                                           
      YEARS        
     
       
              OVER 1   OVER 5   OVER        
(MILLIONS OF DOLLARS)   WITHIN 1   TO 5   TO 10   10   TOTAL

 
 
 
 
 
Available-for-sale debt securities:
                                       
 
Corporate debt
  $ 4,304     $ 1,768     $     $     $ 6,072  
 
Foreign government and foreign government agency debt
    3,001       601                   3,602  
 
Supranational debt
    2,197       893                   3,090  
 
U.S. government agency debt
    1,154       602       416       45       2,217  
 
Certificates of deposit
    1,342       189                   1,531  
Held-to-maturity debt securities:
                                       
 
Corporate debt
          7             8       15  
 
Certificates of deposit
    55       4                   59  
 
 
   
     
     
     
     
 
Total debt securities
  $ 12,053     $ 4,064     $ 416     $ 53     $ 16,586  
Available-for-sale equity securities
                                    160  
 
 
   
     
     
     
     
 
Total investments
                                  $ 16,746  
 
 
   
     
     
     
     
 

B.     Short-Term Borrowings

The weighted average effective interest rate on short-term borrowings outstanding at December 31 was 1.7% in 2002 and 2.4% in 2001. At December 31, 2002, we had approximately $2.9 billion of lines of credit that expire within one year. Of these lines of credit, $2.5 billion are unused, of which our lenders have committed to loan us $500 million at our request.

C.     Long-Term Debt

                 
(MILLIONS OF DOLLARS)   2002   2001

 
 
5.625% senior unsecured notes (due April 2009)*
  $ 665     $  
.80% Japanese yen notes (due March 2008)
    506       457  
6% notes (due January 2008)*
    281       258  
5.625% senior unsecured notes (due February 2006)*
    819       770  
Floating-rate unsecured notes (due March 2005)
    200       200  
3.625% senior unsecured notes (due November 2004)*
    619       589  
5.8% notes (due January 2003)
          250  
Other borrowings and mortgages
    50       85  
 
   
     
 
Total long-term debt
  $ 3,140     $ 2,609  
 
   
     
 
Current portion not included above
  $ 256     $ 368  
 
   
     
 


*   Includes unrealized gains and losses for debt with fair value hedges in 2002 and 2001 (see note 6-D, “Financial Instruments — Derivative Financial Instruments and Hedging Activities”).

The floating-rate unsecured notes bear interest at a defined variable rate based on the commercial paper borrowing rate. The weighted average interest rate of these notes was 1.5% at December 31, 2002 and 2.1% at December 31, 2001. These notes minimize credit risk on certain available-for-sale debt securities that may be used to satisfy the notes at maturity.

In 2002, we issued $600 million of senior unsecured notes, which pay interest annually, in arrears, beginning on April 15, 2003, at a rate of 5.625%.

In 2001, we issued the following unsecured notes under a $2.5 billion shelf registration statement filed with the Securities and Exchange Commission (SEC) in October 2000:

  In October, we issued $600 million senior unsecured notes, which pay interest semi-annually, beginning on May 1, 2002, at a rate of 3.625%.
 
  In May, we issued 60 billion yen ($489 million at date of issuance) unsecured notes, which pay interest semi-annually, beginning on September 18, 2001, at a rate of .80%.
 
  In January, we issued $750 million senior unsecured notes, which pay interest semi-annually, beginning on August 1, 2001, at a rate of 5.625%.

The proceeds from the note issuances were used for general corporate purposes.

Long-term debt outstanding at December 31, 2002 matures as follows:

                                         
                                    AFTER
(MILLIONS OF DOLLARS)   2004   2005   2006   2007   2007

 
 
 
 
 
Maturities
  $ 631     $ 200     $ 819     $ 1     $ 1,489  
 
   
     
     
     
     
 

ANNUAL REPORT 2002

P 52


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

In February 2003, we issued:

  $300 million senior unsecured notes, due March 2009, which pay interest semi-annually, beginning on September 2, 2003, at a rate of 3.3%; and
 
  $300 million senior unsecured notes, due March 2018, which pay interest semi-annually, beginning on September 1, 2003, at a rate of 4.65%.

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

In connection with these debt issuances, we entered into:

  $300 million notional amount of interest rate swaps maturing in 2009; and
 
  $300 million notional amount of interest rate swaps maturing in 2018.

We designated these interest rate swaps as fair value hedges of the changes in the fair value of fixed rate debt. These swaps serve to reduce our exposure to long-term U.S. interest rates by effectively converting the fixed rates associated with the long-term debt to floating rates.

We have approximately $6.9 billion in available borrowings between unused lines of credit and debt securities under a shelf registration statement filed with the SEC.

D.     Derivative Financial Instruments and Hedging Activities

PURPOSE

Foreign Exchange Risk

A significant portion of revenues, earnings and net investments in foreign affiliates are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities. Foreign exchange risk is also managed through the use of derivative financial instruments and foreign currency denominated debt. These financial instruments serve to protect net income against the impact of the translation into U.S. dollars of certain foreign exchange denominated transactions. At December 31, 2002 and 2001, the financial instruments employed to manage foreign exchange risk follow:

                     
            NOTIONAL AMOUNT    
            (MILLIONS OF DOLLARS)    
           
  MATURITY
FINANCIAL INSTRUMENT   HEDGE TYPE   HEDGED OR OFFSET ITEM   2002   2001   DATE

 
 
 
 
 
Forward Contracts     Short-term foreign currency assets and liabilities(1)   $1,928 $   Through 2003
Forward Contracts     Short-term foreign currency assets and liabilities(1)     3,627   Through 2002
Forward Contracts   Cash Flow   Euro available-for-sale instruments   1,802     Through 2003
Short-term borrowings   Net investment   Yen net investments   1,603     Through 2003
Short-term borrowings   Net investment   Yen net investments     1,155   Through 2002
Long-term yen debt   Net investment   Yen net investments   506   457   2008
Swaps   Cash flow   U.K. pound intercompany loan   645     2006
Swaps   Cash flow   U.K. pound intercompany loan   466   428   Late 2003
Put options   Cash flow   Forecasted intercompany inventory purchase   460     Through 2003
Swaps   Fair value   Euro debt investments   230   160   Mid-2003
Swaps   Fair value   U.K. pound debt investments     146   Mid-2002
Swaps   Fair value   Euro loans of a foreign subsidiary   104     Mid-2003
Swaps   Fair value   Euro loans of a foreign subsidiary     90   December 2001
(1)   Primarily from intercompany transactions in euros, Japanese yen and Australian dollars in 2002 and euros, U.K. pounds and Japanese yen in 2001. As these forward contracts mature, we usually enter into similar term forward contracts.

Interest Rate Risk

Our interest-bearing investments, loans and borrowings are subject to interest rate risk. We invest and borrow primarily on a short-term or variable-rate basis. Interest rate risk is also managed through the use of derivative financial instruments. At December 31, 2002 and 2001, the derivative financial instruments employed to manage interest rate risk follow:

                         
            NOTIONAL AMOUNT    
            (MILLIONS OF DOLLARS)    
           
  MATURITY
FINANCIAL INSTRUMENT   HEDGE TYPE   HEDGED OR OFFSET ITEM   2002   2001   DATE

 
 
 
 
 
Swaps   Cash flow   Yen “LIBOR” interest rate related to forecasted issuances of short-term debt (1)   $1,022   $ 924     Late 2003
Forward-starting swaps   Cash flow   Yen “LIBOR” interest rate related to forecasted issuances of short-term debt(2)   1,022         2006
Swaps   Fair value   U.S. dollar fixed rate debt(3)   600     600     2004
Swaps   Fair value   U.S. dollar fixed rate debt(3)   750     750     2006
Swaps   Fair value   U.S. dollar fixed rate debt(3)   250     250     2008
Swaps   Fair value   U.S. dollar fixed rate debt(3)   600         2009
Swaps   Cash flow   “LIBOR” interest rate related to forecasted purchases of short-term fixed-rate debt(4)   95     95     2004


(1)   Serve to reduce variability by effectively fixing the maximum rates on short-term debt at 1.2%.
 
(2)   Serve to reduce variability by effectively fixing the maximum rates on short-term debt at .9%. These forward-starting swaps will effectively replace existing yen interest rate swaps upon maturity in 2003.
 
(3)   Serve to reduce exposure to long-term U.S. dollar interest rates by effectively converting fixed rates associated with long-term debt obligations to floating rates.
 
(4)   Serve to reduce the variability of LIBOR interest rates by effectively fixing the rates on short-term debt securities at 3.5%. Investments will be classified as “Available-for-Sale.”

ANNUAL REPORT 2002

P 53


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

ACCOUNTING POLICIES

All derivative contracts are reported at fair value, with changes in fair value reported in earnings or deferred, depending on the nature and effectiveness of the offset or hedging relationship, as follows:

Foreign Exchange Risk

  We recognize the earnings impact of foreign currency forward-exchange contracts during the terms of the contracts, along with the earnings impact of the items they generally offset.
 
  We recognize the earnings impact of foreign currency swaps designated as cash flow or fair value hedges upon the recognition of the foreign exchange gain or loss on the translation to U.S. dollars of the hedged item.
 
  We recognize the earnings impact of yen put options when the related inventory is sold to third-party customers.

Interest Rate Risk

  We recognize the earnings impact of interest rate swaps designated as cash flow hedges upon the recognition of the interest related to the hedged short-term debt and available-for-sale debt securities.
 
  We recognize the earnings impact of interest rate swaps designated as fair value hedges upon the recognition of the change in fair value for interest rate risk related to the hedged long-term debt.

Any ineffectiveness in a hedging relationship is recognized immediately into earnings. There was no significant ineffectiveness in 2002 or 2001.

The financial statements include the following items related to the derivatives and other financial instruments serving as offsets or hedges:

Prepaid expenses and taxes includes:

•     fair value of foreign currency put options

Other assets, deferred taxes and deferred charges includes:

  fair value of forward-starting interest rate swaps in 2002 and interest rate swaps

Other current liabilities includes:

  fair value of foreign currency forward-exchange contracts
 
  fair value of foreign currency swaps

Other noncurrent liabilities includes:

•     fair value of interest rate swaps designated as cash flow hedges and fair value of foreign currency swaps designated as cash flow hedges
      in 2001

     Long-term debt includes:

  changes in the fair value of fixed rate debt hedged by interest rate swaps

Accumulated other comprehensive expense includes:

  changes in the fair value of interest rate swaps and forward-starting swaps designated as cash flow hedges and changes in the foreign exchange translation of yen debt and foreign currency put options
 
  changes in the fair value of foreign currency forward-exchange contracts designated as cash flow hedges in 2002

Other (income)/deductions-net includes:

  changes in the fair value of foreign currency forward-exchange contracts
 
  changes in the fair value of foreign currency swap contracts that hedge foreign exchange
 
  changes in the fair value of interest rate swap contracts that hedge interest expense

E.     Fair Value

The following methods and assumptions were used to estimate the fair value of derivative and other financial instruments at the balance sheet date:

  short-term financial instruments (cash equivalents, accounts receivable and payable, held-to-maturity short-term investments and debt)-we use cost or contract value because of the short maturity period
 
  Available-for-sale debt securities — we use a valuation model that uses observable market quotes and credit ratings of the securities
 
  Derivative contracts — we use valuation models that use observable market quotes and our view of the creditworthiness of the derivative counterparty
 
  loans-we use cost because of the short interest-reset period
 
  held-to-maturity long-term investments and long-term debt — we use valuation models that use observable market quotes

     The differences between the estimated fair values and carrying values of our financial instruments were not material at December 31, 2002.

F.     Credit Risk

We periodically review the creditworthiness of counterparties to foreign exchange and interest rate agreements and do not expect to incur a loss from failure of any counterparties to perform under the agreements. In general, there is no requirement for collateral from customers. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. At December 31, 2002, we had $2,885 million due from a broad group of banks around the world.

7.     COMPREHENSIVE INCOME

Changes, net of tax, in accumulated other comprehensive expense follow:

                                 
            NET UNREALIZED                
            GAIN/(LOSS)           ACCUMULATED
    CURRENCY   ON AVAILABLE-   MINIMUM   OTHER COM-
    TRANSLATION   FOR-SALE   PENSION   PREHENSIVE
(MILLIONS OF DOLLARS)   ADJUSTMENT   SECURITIES   LIABILITY   EXPENSE*

 
 
 
 
Balance January 1, 2000
  $ (1,028 )   $ 156     $ (173 )   $ (1,045 )
Period change
    (458 )     37       (49 )     (470 )
 
   
     
     
     
 
Balance December 31, 2000
    (1,486 )     193       (222 )     (1,515 )
Period change
    (37 )     (91 )     (106 )     (234 )
 
   
     
     
     
 
Balance December 31, 2001
    (1,523 )     102       (328 )     (1,749 )
Period change
    85       (32 )     (179 )     (126 )
 
   
     
     
     
 
Balance December 31, 2002
  $ (1,438 )   $ 70     $ (507 )   $ (1,875 )
 
   
     
     
     
 

*   Income tax benefit for other comprehensive expense was $148 million in 2002, $146 million in 2001 and $232 million in 2000.

ANNUAL REPORT 2002

P54


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

The change in net unrealized gain/(loss) on available-for-sale securities includes:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Holding gain/(loss), net of tax
  $ (59 )   $ (86 )   $ 156  
Reclassification adjustment, net of tax
    27       (5 )     (119 )
Net unrealized gain/(loss) on available-for-sale securities
  $ (32 )   $ (91 )   $ 37  
   
 
 

8.     PROPERTY, PLANT AND EQUIPMENT

The major categories of property, plant and equipment follow:

                                 
    USEFUL                        
    LIVES                        
(MILLIONS OF DOLLARS)   (YEARS)   2002   2001        

 
 
 
       
Land
        $ 252   $ 201  
Buildings
    33 1/3- 50       5,407     4,490  
Machinery and equipment
    8 - 20       6,023     4,997  
Furniture, fixtures and other
    3 - 121/2       2,977     2,788  
Construction in progress
          1,484     1,896  
 
   
     
 
   
 
            16,143     14,372  
Less: accumulated depreciation
            5,431     4,589  
 
   
     
 
   
Total property, plant and equipment
          $ 10,712   $ 9,783  
 
   
     
 
 

9.     GOODWILL AND OTHER INTANGIBLE ASSETS

A.     Goodwill

The changes in the carrying amount of goodwill for the year ended December 31, 2002, by segment, follow:

                         
            CONSUMER        
(MILLIONS OF DOLLARS)   PHARMACEUTICAL   PRODUCTS   TOTAL

 
 
 
Balance, December 31, 2001
  $ 856     $ 833     $ 1,689  
Impairment losses*
    (536 )           (536 )
Other
    51       (4 )     47  
 
   
     
     
 
Balance, December 31, 2002
  $ 371     $ 829     $ 1,200  
 
   
     
     
 

*   As a result of adopting SFAS No. 142, we recorded a write-down of $536 million for the impairment provisions related to goodwill in our animal health business. The fair value of the animal health business was determined using discounted cash flows. The write-down is reported as a cumulative effect of a change in accounting principle as of the beginning of 2002.

B.     Intangibles

The components of identifiable intangible assets follow:

                                 
    GROSS   ACCUMULATED
    CARRYING AMOUNT   AMORTIZATION
   
 
(MILLIONS OF DOLLARS)   2002   2001   2002   2001
   
 
 
 
Amortized intangible assets:
                               
     Trademarks
  $ 133     $ 119     $ (72 )   $ (44 )
     License agreements
    42       49       (25 )     (24 )
     Patents
    33       30       (24 )     (21 )
     Product rights
    526       266       (72 )     (33 )
     Noncompete agreements
    48       52       (39 )     (35 )
     Other
    78       71       (31 )     (30 )
 
   
     
     
     
 
     Total amortized intangible assets
    860       587       (263 )     (187 )
 
   
     
     
     
 
     Unamortized identifiable intangible assets:
                               
     Trademarks
    240       258              
     Pension asset
    60       79              
     Other
    24       22              
 
   
     
     
     
 
Total unamortized intangible assets
    324       359              
 
   
     
     
     
 
Total identifiable intangible assets*
  $ 1,184     $ 946     $ (263 )   $ (187 )
 
   
     
     
     
 


*   Included in Other assets, deferred taxes and deferred charges.

Total amortization expense for finite-lived intangible assets was $60 million in 2002 and $54 million in 2001. Amortization expense for finite-lived intangible assets is recorded in various expenses, including Cost of sales, Research and development expenses and Other (income)/ deductions-net.

The annual amortization expense expected for the years 2003 through 2007 is as follows:

                                         
(MILLIONS OF DOLLARS)   2003   2004   2005   2006   2007

Amortization expense
  $ 71     $ 67     $ 62     $ 60     $ 59  
 
   
     
     
     
     
 

In 2002, product rights acquired primarily reflect post-approval milestone payments made under our alliance agreements for the human pharmaceutical products Rebif, Spiriva and Celebrex.

ANNUAL REPORT 2002

P55


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

C.     Amortization of Goodwill and Indefinite-lived Intangibles

Prior to the adoption of SFAS No. 142, amortization of goodwill and indefinite-lived intangibles had the following impact on net income and diluted earnings per common share:

                           
(MILLIONS OF DOLLARS,                        
EXCEPT PER COMMON SHARE DATA)   2002   2001   2000

 
 
 
Reported net income
  $ 9,126     $ 7,788     $ 3,726  
Addback:
                       
 
Amortization of goodwill— net of tax
          36       38  
 
Amortization of indefinite-lived intangible assets— net of tax
          8       9  
 
   
   
   
 
Adjusted net income
  $ 9,126     $ 7,832     $ 3,773  
 
   
   
   
 
Earnings per common share— basic:
                       
Reported net income
  $ 1.48     $ 1.25     $ .60  
Addback of amortization of goodwill and indefinite-lived intangible assets— net of tax
          .01       .01  
 
   
   
   
 
Adjusted net income
  $ 1.48     $ 1.26     $ .61  
 
   
   
   
 
Earnings per common share— diluted:
                       
Reported net income
  $ 1.46     $ 1.22     $ .59  
Addback of amortization of goodwill and indefinite-lived intangible assets— net of tax
          .01       .01  
 
   
   
   
 
Adjusted net income
  $ 1.46     $ 1.23     $ .60  
 
   
   
   
 

10.     OTHER (INCOME)/DEDUCTIONS — NET

                         
The components of Other (income)/deductions—net follow:                

(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Interest income
  $ (382 )   $ (539 )   $ (558 )
Interest expense
    279       322       427  
Interest expense capitalized
    (28 )     (56 )     (46 )
 
   
     
     
 
Net interest income
    (131 )     (273 )     (177 )
Various litigation matters
    15              
Gains on the sales of product lines
    (34 )           (117 )
Asset impairment charges
    63              
Gains on sales of equity investments
          (17 )     (216 )
Copromotion charges for fees paid prior to regulatory approval
    32       206        
Loss on sale of animal health feed-additive products
                85  
Rezulin withdrawal provision
                136  
Amortization of goodwill and other intangibles
    28       94       110  
Net exchange (gains)/losses
    40       33       (59 )
Other, net
    (133 )     (138 )     (136 )
 
   
     
     
 
Other (income)/deductions -net
  $ (120 )   $ (95 )   $ (374 )
 
   
     
     
 

11.     TAXES ON INCOME

Income from continuing operations before provision for taxes on income, minority interests and the cumulative effect of a change in accounting principle consisted of the following:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
United States
  $ 4,523     $ 4,193     $ 1,010  
International
    7,273       5,791       4,491  
 
   
     
     
 
Total income from continuing operations before provision for taxes on income, minority interests and cumulative effect of a change in accounting principle
  $ 11,796     $ 9,984     $ 5,501  
 
   
     
     
 

The provision for taxes on income from continuing operations before the cumulative effect of a change in accounting principle consisted of the following:

                         
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
United States:
                       
Taxes currently payable:
                       
Federal
  $ 1,403     $ 480     $ 1,499  
State and local
    226       51       321  
Deferred income taxes
    (88 )     974       (602 )
 
   
     
     
 
Total U.S. tax provision
    1,541       1,505       1,218  
 
   
     
     
 
International:
                       
Taxes currently payable
    1,265       810       601  
Deferred income taxes
    (197 )     118       127  
 
   
     
     
 
Total international tax provision
    1,068       928       728  
 
   
     
     
 
Total provision for taxes on income
  $ 2,609     $ 2,433     $ 1,946  
 
   
     
     
 

Amounts are reflected in the preceding tables based on the location of the taxing authorities. As of December 31, 2002, we have not made a U.S. tax provision on approximately $29 billion of unremitted earnings of our international subsidiaries. These earnings are expected, for the most part, to be reinvested overseas. It is not practical to compute the estimated deferred tax liability on these earnings.

We operate manufacturing subsidiaries in Puerto Rico that benefit from Puerto Rican incentive grants that expire at the end of 2015. Under the grants, we are partially exempt from income, property and municipal taxes. Under Section 936 of the U.S. Internal Revenue Code, Pfizer is a “grandfathered” entity and is entitled to the benefits under such statute until 2006.

ANNUAL REPORT 2002

P56


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations before the cumulative effect of a change in accounting principle follows:

                         
(PERCENTAGES)   2002   2001   2000

 
 
 
U.S. statutory income tax rate
    35.0       35.0       35.0  
Earnings taxed at other than U.S. statutory rate
    (12.6 )     (11.0 )     (10.3 )
U.S. research tax credit
    (1.1 )     (0.8 )     (1.9 )
Effect of certain merger-related costs
                12.7  
All other—net
    0.8       1.2       (0.1 )
 
   
     
     
 
Effective tax rate for income from continuing operations before cumulative effect of a change in accounting principle
    22.1       24.4       35.4  
 
   
     
     
 

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) or “deferred tax liabilities” (generally items for which we received a tax deduction but that have not yet been recorded in the consolidated statement of income).

The tax effects of the major items recorded as deferred tax assets and liabilities are:

                                 
    2002   2001
    DEFERRED TAX   DEFERRED TAX
   
 
(MILLIONS OF DOLLARS)   ASSETS   LIABS.   ASSETS   LIABS.

 
 
 
 
Prepaid/deferred items
  $ 944     $ 287     $ 685     $ 307  
Inventories
    726       137       636       258  
Property, plant and equipment
    55       813       50       773  
Employee benefits
    601       253       572        
Restructurings and special charge
    186       83       211       38  
Foreign tax credit carryforwards
    253             302        
Other carryforwards
    53             124        
Unremitted earnings
                      335  
All other
    385       174       299       231  
 
   
     
     
     
 
Subtotal
    3,203       1,747       2,879       1,942  
Valuation allowance
    (103 )           (150 )      
 
   
     
     
     
 
Total deferred taxes
  $ 3,100     $ 1,747     $ 2,729     $ 1,942  
 
   
     
     
     
 
Net deferred tax asset
  $ 1,353             $ 787          
 
   
     
     
     
 

A valuation allowance is recorded because some items recorded as deferred tax assets may ultimately not be deductible or creditable. The foreign tax credit carryforwards were generated from dividends paid or deemed to be paid by subsidiaries to the parent company between 1998 and 2001. We can carry these credits forward for five years from the year of actual payment and apply them to certain U.S. tax liabilities.

Deferred tax assets and liabilities in the preceding table, netted by taxing location, are in the following captions in the consolidated balance sheet:

                 
(MILLIONS OF DOLLARS)   2002   2001

 
 
Prepaid expenses and taxes
  $ 1,185     $ 1,081  
Other assets, deferred taxes and deferred charges
    532       104  
Deferred taxes on income
    (364 )     (398 )
 
   
     
 
Net deferred tax asset
  $ 1,353     $ 787  
 
   
     
 

The Internal Revenue Service (IRS) has completed and closed its audits of our tax returns through 1998 and Warner-Lambert Company through 1995. The IRS is currently conducting audits of Pfizer Inc’s tax returns for the years 1999 and 2000 and Warner-Lambert Company for the years 1996 through 1998.

In November 1994, Belgian tax authorities notified Pfizer Research and Development Company N.V./S.A. (PRDCO), an indirect, wholly owned subsidiary of our company, of a proposed adjustment to the taxable income of PRDCO for fiscal year 1992 and, in January 1996, PRDCO received an assessment from the tax authorities for fiscal year 1993. On May 14, 2002, PRDCO reached an agreement with the Belgian authorities to settle this matter for an immaterial amount.

We believe that our accruals for tax liabilities are adequate for all open years.

12.     BENEFIT PLANS

We provide defined benefit pension plans and defined contribution plans for the majority of employees worldwide. In the U.S., we have both qualified and supplemental (non-qualified) defined benefit plans. A qualified plan meets the requirements of certain sections of the Internal Revenue Code and enjoys special tax advantages. It typically provides benefits to a broad group of employees and may not discriminate in favor of highly compensated employees in its coverage, benefits or contributions. We also provide benefits through supplemental (non-qualified) retirement plans to certain employees. These supplemental plans, which are not generally funded, provide out of our general assets an amount substantially equal to the difference between the amounts that would have been payable under the qualified defined benefit pension plans, in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension benefits, and the amounts actually payable under the qualified defined benefit pension plans. In addition, we provide medical and life insurance benefits to retirees and their eligible dependents through our postretirement plans.

It is our practice to fund amounts for our qualified pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities for amounts in excess of these funding levels are included in our consolidated balance sheet. Our U.S. qualified pension plans have been well-funded historically and the recent decline in the equity markets coupled with the decline in long-term interest rates has not caused our pension plans to require government-mandated funding. In 2002, we made voluntary contributions in excess of minimum requirements of $485 million to our U.S. qualified plans and $125 million to our U.K. pension plans.

Our plan assets comprise a diversified mix of investments consisting principally of stocks and fixed income securities. At December 31, 2002 and 2001, stocks represented 74% and 77% of the market value of

ANNUAL REPORT 2002

P57


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

pension assets in our U.S. qualified defined benefit pension plans. Certain international subsidiaries have plans where accruals are provided or annuities are purchased under group contracts.

The major U.S. pension plans held approximately 8.7 million shares (fair value of approximately $265 million) at December 31, 2002 and 7.7 million shares (fair value of approximately $307 million) at December 31, 2001 of our common stock. The plans received approximately $4 million in dividends on these shares in 2002 and approximately $3 million in dividends in 2001.

The following table provides the weighted average actuarial assumptions at December 31:

                                                   
      PENSION   POSTRETIREMENT
     
 
(PERCENTAGES)   2002   2001   2000   2002   2001   2000

 
 
 
 
 
 
Weighted-average assumptions:
                                               
 
Discount rate:
                                               
 
U.S. plans
    6.9       7.3       7.8       6.8       7.3       7.8  
 
International plans
    5.1       5.3       5.3                          
Expected return on plan assets:
                                               
 
U.S. plans*
    10.0       10.0       10.0                          
 
International plans
    7.3       7.8       7.6                          
Rate of compensation increase:
                                               
 
U.S. plans
    4.5       4.5       4.5                          
 
International plans
    3.6       3.4       3.7                          
 
 
   
     
     
                         

*   Reduced to 9% for 2003.

The net periodic benefit cost and the actuarial present value of projected benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. We revise these assumptions based on an annual evaluation of long-term trends, as well as market conditions, that may have an impact on the cost of providing retirement benefits and in accordance with the requirements of SFAS No. 87, Employers’ Accounting for Pensions.

     The annual cost of the U.S. and international pension plans follow:

                                                 
    U.S. PLANS   INTERNATIONAL PLANS
   
 
(MILLIONS OF DOLLARS)   2002   2001   2000   2002   2001   2000

 
 
 
 
 
 
Service cost
  $ 177     $ 139     $ 144     $ 140     $ 114     $ 115  
Interest cost
    299       286       265       148       130       127  
Expected return on plan assets
    (366 )     (400 )     (392 )     (150 )     (143 )     (134 )
Amortization of:
                                               
Prior service costs
    17       21       24       6       5       5  
Net transition asset
          (1 )     (3 )     (1 )     (3 )     (3 )
Actuarial (gains)/ losses
    58       (6 )     (10 )     24       22       19  
Curtailments and settlements — net*
                39       6       3       1  
 
   
     
     
     
     
     
 
Net periodic benefit cost**
  $ 185     $ 39     $ 67     $ 173     $ 128     $ 130  
 
   
     
     
     
     
     
 

*   Includes special termination benefits of $38 million in 2000.
 
**   U.S. plans include supplemental (non-qualified) retirement plans with benefit costs of $87 million in 2002, $86 million in 2001 and $106 million in 2000.

The following table presents an analysis of the changes in 2002 and 2001 in the benefit obligation, the plan assets and the funded status of the pension plans:

                                 
    U.S. PLANS   INTERNATIONAL PLANS
   
 
(MILLIONS OF DOLLARS)   2002   2001   2002   2001

 
 
 
 
Change in projected benefit obligation (PBO)
                               
Balance beginning of year
  $ 4,302     $ 3,859     $ 2,633     $ 2,450  
Service cost for benefits earned
    177       139       140       114  
Interest cost on benefit obligation
    299       286       148       130  
Employee contributions
                10       9  
Plan amendments
    23             (11 )     17  
Increases in PBO arising primarily from changes in actuarial assumptions
    514       320       168       146  
Foreign exchange impact
                176       (82 )
Acquisitions
                55       109  
Divestitures
                (55 )     (101 )
Curtailments
    5       7       (2 )     (2 )
Settlements
                (29 )     (19 )
Benefits paid
    (412 )     (309 )     (129 )     (138 )
 
   
     
     
     
 
Projected benefit obligation at end of year*
  $ 4,908     $ 4,302     $ 3,104     $ 2,633  
 
   
     
     
     
 
Change in plan assets
                               
Fair value of plan assets at beginning of year
  $ 3,862     $ 4,188     $ 1,786     $ 1,931  
Actual loss on plan assets
    (545 )     (441 )     (153 )     (132 )
Company contributions
    622       424       285       143  
Employee contributions
                9       21  
Foreign exchange impact
                138       (61 )
Acquisitions
                10       76  
Divestitures
                (10 )     (68 )
Settlements
                (21 )     (12 )
Benefits paid from plan assets
    (412 )     (309 )     (114 )     (112 )
 
   
     
     
     
 
Fair value of plan assets at end of year**
  $ 3,527     $ 3,862     $ 1,930     $ 1,786  
 
   
     
     
     
 
Funded status:
                               
Plan assets less than projected benefit obligation***
  $ (1,381 )   $ (440)     $ (1,174 )   $ (847 )
Unrecognized:
                               
Net transition asset
          1       2       30  
Actuarial losses
    2,392       1,024       1,230       731  
Prior service costs
    203       197       46       58  
 
   
     
     
     
 
Net asset/(liability) recorded in consolidated balance sheet
  $ 1,214     $ 782     $ 104     $ (28 )
 
   
     
     
     
 


*   U.S. plans include supplemental (non-qualified) retirement plans with PBO of $804 million in 2002 and $684 million in 2001.
 
**   U.S. supplemental (non-qualified) retirement plans have no assets, as the obligation is paid directly from company assets.
 
***   U.S. plans include supplemental (non-qualified) retirement plans with plan assets in 2002 and 2001 less than PBO of ($804) million in 2002 and ($684) million in 2001.

ANNUAL REPORT 2002

P58


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

The increase in the underfunded status of the pension plans in 2002 and 2001 results primarily from a continuing decrease in the discount rate used in calculating plan liabilities coupled with the effect on plan assets of the decline in global equity markets. The increase in unrecognized actuarial loss is largely reflective of this decline in global equity markets since the difference between the expected return and actual return in plan assets is largely deferred. A portion of the increase is also the result of using a lower discount rate to calculate the present value of our liabilities. In response to these developments, in 2002 we made voluntary contributions in excess of minimum requirements of $485 million to our U.S. qualified defined benefit pension plans and $125 million to our U.K. pension plans. In 2001, we made a voluntary contribution in excess of minimum requirements of $385 million to our U.S. qualified defined benefit pension plans.

The components of the net pension asset/(liability) recorded in the consolidated balance sheet consist of:

                                 
    U.S. PLANS   INTERNATIONAL PLANS
   
 
(MILLIONS OF DOLLARS)   2002   2001   2002   2001

 
 
 
 
Prepaid benefit cost
  $ 1,472     $ 1,087     $ 318     $ 156  
Accrued benefit liability
    (599 )     (541 )     (772 )     (592 )
Intangible asset
    27       42       33       37  
Accumulated other comprehensive income
    314       194       525       371  
 
   
     
     
     
 
Net asset/(liability) recorded in consolidated balance sheet*
  $ 1,214     $ 782     $ 104     $ (28 )
 
   
     
     
     
 
*   U.S. plans include supplemental (non-qualified) retirement plans with a net liability of $(258) million in 2002 and $(306) million in 2001.

Information related to both domestic and international pension plans follows:

                                 
    U.S. PLANS   INTERNATIONAL PLANS
   
 
(MILLIONS OF DOLLARS)   2002   2001   2002   2001

 
 
 
 
Pension plans with an accumulated benefit obligation in excess of plan assets:
                               
Fair value of plan assets
  $     $     $ 834     $ 840  
Accumulated benefit obligation (ABO)*
  $ 599     $ 541     $ 1,581     $ 1,405  
Pension plans with a projected benefit obligation in excess of plan assets:
                               
Fair value of plan assets
  $ 3,520     $ 1,878     $ 1,561     $ 1,458  
Projected benefit obligation**
  $ 4,905     $ 2,708     $ 2,754     $ 2,352  
 
   
     
     
     
 
*   U.S. plans represent supplemental (non-qualified) retirement plans with an ABO of $599 million in 2002 and $541 million in 2001.
 
**   U.S. plans include supplemental (non-qualified) retirement plans with a PBO of $804 million in 2002 and $684 million in 2001.

Plans with an ABO in excess of plan assets are primarily our U.S. supplemental retirement plans which are not funded, as well as our plans in the U.K, Japan and Germany, whose liabilities are included in our consolidated balance sheet. Our U.S. qualified defined benefit pension plans which provide benefits to substantially all of our U.S. employees, had assets greater than their ABO at December 31, 2002.

Plans with PBOs in excess of plan assets are primarily our U.S. qualified defined benefit pension plans; U.S. supplemental (non-qualified) retirement plans, which are not generally funded; and our plans in the U.K., Japan and Germany, whose liabilities are included in our consolidated balance sheet.

The annual costs of our postretirement health care plans follow:

                           
      POSTRETIREMENT
     
(MILLIONS OF DOLLARS)   2002   2001   2000

 
 
 
Service cost
  $ 17     $ 15     $ 14  
Interest cost
    57       50       41  
Amortization of:
                       
 
Prior service costs/(gains)
    14       5       (4 )
 
Actuarial losses
    14       5       2  
Curtailments and settlements — net
                35  
 
   
     
     
 
Net periodic benefit cost
  $ 102     $ 75     $ 88  
 
   
     
     
 

Our postretirement health care plans are not funded. The following table presents an analysis of the changes in 2002 and 2001 in the benefit obligation of the postretirement plans:

                       
          POSTRETIREMENT
         
(MILLIONS OF DOLLARS)   2002   2001

 
 
Change in accumulated postretirement benefit obligation (APBO)
               
Balance beginning of year
  $ 785     $ 604  
Service cost for benefits earned
    17       15  
Interest cost on benefit obligation
    57       50  
Employee contributions
    5       6  
Increases in APBO arising primarily from changes in actuarial assumptions
    113       168  
Foreign exchange impact
    (1 )     (3 )
Curtailments
    2       3  
Benefits paid
    (73 )     (58 )
 
 
   
     
 
Accumulated postretirement benefit obligation at end of year
  $ 905     $ 785  
 
 
   
     
 
Funded status:
               
   
Plan assets less than benefit obligation
  $ (905 )   $ (785 )
   
Unrecognized:
               
     
Net transition liability
    1       1  
     
Actuarial losses
    263       165  
     
Prior service costs
    18       32  
 
 
   
     
 
Net liability recorded in consolidated balance sheet
  $ (623 )   $ (587 )
 
 
   
     
 

An average increase of 9% in the cost of health care benefits was assumed for 2003 and is projected to decrease over the next six years to 5% and then remain at that level.

ANNUAL REPORT 2002

P59


 

Notes to Consolidated Financial Statements
PFIZER INC AND SUBSIDIARY COMPANIES

A 1% change in the medical trend rate assumed for postretirement benefits would have the following effects at December 31, 2002:

                 
(MILLIONS OF DOLLARS)   1%INCREASE   1% DECREASE

 
 
Total of service and interest cost components
  $ 9     $ (10 )
Postretirement benefit obligation
    92       (99 )
     
     

We have savings and investment plans in several countries including the U.S. and Puerto Rico. Employees may contribute a portion of their salaries to the plans, and we match, in company stock, a portion of the employee contributions. The contribution and match for U.S. participants are held in an employee stock ownership plan (ESOP) that was adopted in 2002. The value of our stock contributions were $139 million in 2002, $107 million in 2001 and $86 million in 2000.

13.     LEASE COMMITMENTS

We lease properties and equipment for use in our operations. In addition to rent, the leases may require us to pay directly for taxes, insurance, maintenance and other operating expenses, or to pay higher rent when operating expenses increase. Rental expense, net of sublease income, was $341 million in 2002, $280 million in 2001 and $292 million in 2000. This table shows future minimum rental commitments under noncancellable operating leases at December 31, 2002:

                                                 
                                            AFTER
(MILLIONS OF DOLLARS)   2003   2004   2005   2006   2007   2007

 
 
 
 
 
 
Lease commitments
  $ 171     $ 167     $ 147     $ 121     $ 118     $ 675  
     
     
     
     
     
     

14.     COMMON STOCK

In December 2002, our shareholders approved the issuance of up to 1.804 billion shares of our common stock to Pharmacia shareholders in connection with the proposed acquisition of Pharmacia. Also in 2002, we announced a new $16 billion share-purchase program (increased from the initial $10 billion) authorized by our board of directors. We will buy back our common stock via open market purchases or in privately negotiated transactions as circumstances and prices warrant, with the anticipation of completing the share-purchase program in 2003. Under this current share-purchase program, we purchased approximately 102 million shares of common stock at an average price of $29.41 per share, at a total cost of approximately $3 billion, in 2002. In May 2002, we completed the share-purchase program authorized in June 2001. In total, under the June 2001 program we purchased 120 million shares at a total cost of approximately $4.8 billion. In 2002, under both the 2002 and 2001 programs, we purchased approximately 153 million shares of common stock at a total cost of approximately $5 billion. Purchased shares are available for general corporate purposes.

In 2001, we purchased approximately 68.5 million shares of our common stock in the open market at an average price of $40.83 per share under the June 2001 share-purchase program and approximately 20.3 million shares of our common stock at an average price of $42.72 per share under the September 1998 share-purchase program. In 2000,we purchased approximately 23.1 million shares of our common stock in the open market at an average price of $43.46 per share.

15.     PREFERRED STOCK PURCHASE RIGHTS

Preferred Stock Purchase Rights have a scheduled term through October 2007, although the term may be extended or the rights may be redeemed prior to expiration. One right was issued for each share of common stock issued by our company. These rights are not exercisable unless certain change-in-control events transpire, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15% or more of our outstanding common stock or an announcement of a tender offer for at least 30% of our stock. The rights are evidenced by corresponding common stock certificates and automatically trade with the common stock unless an event transpires that makes them exercisable. If the rights become exercisable, separate certificates evidencing the rights will be distributed and each right will entitle the holder to purchase a new series of preferred stock at a defined price from our company. The preferred stock, in addition to preferred dividend and liquidation rights, will entitle the holder to vote with the company’s common stock.

The rights are redeemable by us at a fixed price until 10 days, or longer as determined by the board of directors, after certain defined events, or at any time prior to the expiration of the rights.

We have reserved 3.0 million preferred shares to be issued pursuant to these rights. No such shares have yet been issued. At the present time, the rights have no dilutive effect on the earnings per common share calculation.

16.     EMPLOYEE BENEFIT TRUST

The Pfizer Inc. Employee Benefit Trust (EBT) was established in 1999 to fund our employee benefit plans through the use of its holding of Pfizer Inc. stock. The consolidated balance sheet reflects the fair value of the shares owned by the EBT as a reduction of Shareholders’ equity.

17.     EARNINGS PER COMMON SHARE

Basic and diluted earnings per common share were computed using the following common share data:

                           
(MILLIONS OF SHARES)   2002   2001   2000

 
 
 
Basic:
                       
 
Weighted average number of common shares outstanding
    6,156       6,239       6,210  
 
 
   
     
     
 
Diluted:
                       
 
Weighted average number of common shares outstanding
    6,156       6,239       6,210  
 
Common share equivalents — stock options and stock issuable under employee compensation plans
    85       122       158  
 
 
   
     
     
 
 
Weighted average number of common shares and common share equivalents