EX-13 4 y94722exv13.htm PORTIONS OF THE 2003 FINANCIAL REPORT PORTIONS OF THE 2003 FINANCIAL REPORT
 

Exhibit 13

Dear Shareholders,

During the past four years, Pfizer has nearly tripled in size, adding some 80,000 new colleagues, many new products across a range of therapeutic areas and billions of dollars in sales and earnings. We have also broadened our efforts to expand access to medicines and healthcare, and to partner as a corporate citizen working to solve some of the world’s most pressing healthcare crises.

     We hope you share our pride in our growth and success. But with growth and success have come added complexity. Because of the need to fully explain the complexity of today’s Pfizer, we have chosen this year to divide our traditional Annual Report into two related but separate publications: an Annual Review, which tells the story of our people, products and businesses and the many stakeholders they have served in 2003; and this Financial Report, which contains the full financial accounting of our businesses for the year.

     At a time when a lack of transparency in financial reporting has cast a pall on many corporations, we want to be sure that Pfizer is doing the utmost to clearly present its performance results to you, our investors. We hope this Financial Report accomplishes that goal.

     
    -s- HANK MCKINELL
    Hank McKinnell
    Chairman of the Board and
    Chief Executive Officer
    February 26, 2004

2003 Financial Report 1

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

Overview of Consolidated Operating Results

We are a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines for humans and animals, as well as many of the world’s best known consumer healthcare products. We generate revenue, which totaled $45 billion in 2003, through the sale of our products as well as through alliance agreements by copromoting products discovered by other companies. Our pharmaceutical segment represented 88% of our revenues in 2003 and, therefore, developments relating to the pharmaceutical industry can impact our operations. In 2003, five products each achieved more than $2 billion in revenues and achieved double digit growth.

                         
                    % CHANGE
                   
(MILLIONS OF DOLLARS)   2003   2002   03/02

 
 
 
Lipitor
  $ 9,231     $ 7,972       16  
Norvasc
    4,336       3,846       13  
Zoloft
    3,118       2,742       14  
Neurontin
    2,702       2,269       19  
Zithromax
    2,010       1,516       33  
 
   
     
     
 

In addition, in 2003 we recorded revenues of $2,132 million for Celebrex, which included $249 million in alliance revenue under a copromotion agreement with Pharmacia Corporation prior to its acquisition by us in April 2003, as well as post-acquisition product sales.

Business Environment

There are a number of industry wide factors that may affect our business and should be considered along with the information presented in the section “Forward-Looking Information and Factors That May Affect Future Results.”

We believe that there are future opportunities for revenue generation of our products, including:

  Current demographics of developed countries which indicate that people are living longer and therefore have a great need for medicines;
 
  The large number of untreated patients within our various therapeutic categories. For example, of the tens of millions of Americans who are in need of medical therapy for high cholesterol, only one third are actually receiving treatment; and
 
  The promise of technology to improve upon existing therapies and to introduce treatments where none currently exist.

Both U.S. and international governmental regulations mandating prices or price controls can impact our revenues, and we continue to work within the current pricing structures to minimize the impact on our revenues. For example, the importation of medicines from Canada to the U.S. that were originally sold to Canadian parties has been actively managed by several initiatives including carefully managing our products with Canadian wholesalers. Managed care organizations, as well as government agencies, continue to seek discounts on our products and this has served to slow our revenue growth. Recent enactment of U.S. Medicare legislation regarding prescription drug benefits for Medicare beneficiaries expands access to medicines that patients need. While expanded access may potentially result in increased sales of our products, such increases may be offset by increased pricing pressures due to the enhanced purchasing power of the private sector providers that will negotiate on behalf of Medicare beneficiaries. We are currently evaluating the impacts of the legislation. We believe that our medicines provide significant value for both providers and patients not only from the improved treatment of diseases, but also from a reduction in other health care costs such as hospitalization or emergency room costs, increased patient productivity and a better quality of life.

Intellectual property legal protections and remedies are also a significant factor in our business. Many of our products have a composition-of-matter or compound patent and may also have secondary patents. Secondary patents can include additional composition-of-matter patents, processes for making the compound or additional indications or uses. As such, each of our products has varying patents expiring at varying dates thereby strengthening our patent protection. Our major products are patented. However, once the patent protection period is finished, generic pharmaceutical manufacturers generally produce similar products and sell those products for a lower price. This price competition can substantially decrease our revenues.

Patents covering our products are subject to challenges from time to time. Wherever appropriate, we aggressively defend our patent rights against such challenges (details of these matters are described in Note 20 to the consolidated financial statements — “Legal Proceedings and Contingencies”).

Some of our products face competition in the form of new competitor products or generic drugs, which treat similar diseases or indications. We have been able to limit the impact of product competition and, at times, generic competition by highlighting the proven track record of safety and efficacy of our products. For example, Lipitor has gained wide physician and patient acceptance based on its ability to bring the vast majority of patients to target cholesterol goals across the full dosage range. Further, the safety and efficacy of Viagra have been demonstrated in more than 120 clinical trials worldwide and in more than five years of real-world experience.

Discovery and development of new products, as well as the development of additional uses for existing products, are imperative for the continued strong operation of our businesses. We continue to successfully introduce new products, including Relpax and Somavert in the U.S. and Bextra, Vfend and Spiriva in various international markets. Our research and development pipeline has advanced with several New Drug Application filings and the initiation of five Phase III and twelve Phase II programs in 2003. While a significant portion of research and development is done internally, we do enter into agreements with other companies to co-develop promising compounds. These co-development and alliance agreements allow us to capitalize on promising compounds to expand our pipeline of potential future products. Our research and development covers a wide spectrum of therapeutic areas as discussed in the “Product Developments” section of this Financial Review.

Due to our strength in marketing and our global reach, we are able to attract other organizations who may have promising compounds and can benefit from our strength and skills. For example, the acquisition of Esperion Therapeutics for $1.3 billion in cash, which was completed on February 10, 2004, will add a new acute-care dimension to our cardiovascular portfolio.

Pharmacia Acquisition

On April 16, 2003, by acquiring Pharmacia Corporation (Pharmacia), we created the world’s largest pharmaceutical company, with the scientific depth, global marketing strength and financial resources to take greater advantage of new opportunities and to bring innovative new products to market faster. We acquired Pharmacia in a stock-for-stock transaction

2 2003 Financial Report

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

valued at approximately $56 billion. This non-cash transaction was accounted for as a purchase business combination under accounting principles generally accepted in the United States of America (GAAP). Under the purchase method of accounting, the assets acquired and liabilities assumed from Pharmacia are recorded as of the date of acquisition, at their respective fair values. We engaged independent valuation specialists to assist us in determining the fair values of assets acquired and liabilities assumed. Such a valuation requires us to make significant estimates and assumptions, especially with regard to the valuation of intangible assets. Our reported financial position and results of operations after April 16, 2003 reflect these values and were not restated to reflect the historical financial position or results of operations of Pharmacia. The impact of purchase accounting resulted in a number of significant non-cash charges to the 2003 income statement, such as Merger-Related In-Process Research and Development (IPR&D) (one-time $5.1 billion); incremental cost of sales (non-recurring $2.8 billion) from the sale of acquired inventory adjusted to fair value; and incremental amortization ($2.4 billion) of tangible and intangible assets adjusted to fair value.

The results of operations discussed below include Pharmacia’s product sales and expenses from the acquisition date. Therefore, our operating results for 2003 as compared to 2002 reflect the impact of the acquisition of Pharmacia.

In connection with the acquisition, we have taken actions to integrate and restructure the Pharmacia operations in order to increase our profitability through cost savings and operating efficiencies. In the U.S. and in more than thirty other countries, we have eliminated or are in the process of eliminating duplicative facilities, functions, organizations and systems. Reductions in cost of sales for the combined company are expected to be realized through the optimization of global manufacturing. To achieve the savings, we have incurred certain merger-related expenditures totaling $2.6 billion in 2003, which are discussed in more detail in the “Costs and Expenses” section. Cost synergies from the Pharmacia acquisition achieved in 2003 totaled more than $1.3 billion. As a result of these activities and the combining of operations, it is not possible to provide separate results of operations for Pharmacia for the period after the acquisition date.

In connection with our pending acquisition of Pharmacia and our merger with Warner-Lambert Company (Warner-Lambert) in June 2000, we incurred integration and restructuring costs that reduced net income by $390 million after tax in 2002 as compared to $505 million after tax in 2001.

Other Financial Impacts

In the fourth quarter of 2003, we recorded charges totaling $1.4 billion for the resolution of two legacy Warner-Lambert legal matters: Rezulin personal-injury claims and governmental investigations of marketing practices relating to Neurontin, which are included in Other (income)/ deductions — net.

We evaluate our businesses and products on an ongoing basis for strategic fit. As a result, in 2003 we sold the Adams confectionery business, the Schick-Wilkinson Sword shaving products business and certain women’s health product lines, which in the aggregate, increased net income by $2,285 million after tax. These divestitures are presented as discontinued operations in 2003, 2002 and 2001. The divestiture of the Tetra fish-care products business in December 2002, which increased 2002 net income by $77 million after tax, is presented as discontinued operations in 2002 and 2001.

In 2003, we incurred a non-cash charge, which reduced net income by $30 million after tax in connection with our January 1, 2003 adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. This charge is reported as a cumulative effect of a change in accounting principle.

In 2002, we incurred 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 SFAS No. 142, Goodwill and Other Intangible Assets. These charges were reported as a cumulative effect of a change in accounting principle.

Accounting Policies

We consider the following accounting policies important in understanding our operating results and financial condition. 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 certain 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 and liability 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. Our estimates of fair value of assets and liabilities are based on assumptions that we believe to be reasonable but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur. We are also subject to risks and uncertainties that may cause actual results to differ from estimated results, such as changes in the healthcare environment, competition, foreign exchange, litigation, legislation and regulations. Certain of these risks, uncertainties and assumptions are discussed in the section “Forward-Looking Information and Factors That May Affect Future Results.”

Business Acquisitions

We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items, we typically obtain assistance from independent valuation specialists.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, including acquired IPR&D, we typically utilize the “income method.” This method starts with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include: the projected future cash flows (including timing); the expected costs to develop IPR&D into commercially viable products and estimates of cash flows from the projects when completed; and the discount rate reflecting the risks inherent in the future cash flows.

2003 Financial Report   3

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

Determining the useful life of an intangible asset also requires judgment. For example, different products or types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. For example, the useful life of the right associated with a pharmaceutical product’s exclusive patent will be finite and will result in amortization expense being recorded in our results of operations over a determinable period. However, the useful life associated with a brand that has no patent protection but that retains, and is expected to retain, a distinct market identity could be considered to be indefinite.

All of these judgments and estimates can significantly impact net income.

Revenues

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

Sales Rebates — We record provisions for rebates based upon our actual experience ratio of rebates paid and actual prescriptions written within a respective period. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. Periodically, we adjust the accrual based upon actual payments made for rebates.

Alliances — We have agreements to copromote pharmaceutical products discovered by other companies. Revenue is earned when our copromotion partners ship the related product and title passes to their customer. Alliance revenue is primarily based upon a percentage of our copromotion partners’ net sales. 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 Identifiable intangible assets, less accumulated amortization and amortize them evenly over the remaining agreement term or the expected product life cycle, whichever is shorter. At least annually, we review for impairment those milestone payments which have been recorded as assets.

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 to the extent that we conclude their occurrence is both probable and estimable. 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 it is probable that a taxing authority will take a sustainable position on a matter contrary to the position taken by us or one of our subsidiaries when filing required tax returns.

Stock Options

We elect to account for our stock-based compensation under Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees which does not require compensation costs related to our stock options to be recorded in net income.

We believe that it is difficult to accurately measure the value of an employee stock option. The Black-Scholes model is a trading options-pricing model that neither considers the non-traded nature of employee stock options, nor the restrictions on such trading, the lack of transferability or the ability of employees to forfeit the options prior to expiry. If the model adequately permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different.

The pro forma effect on net income and diluted earnings per common share for the years ended 2003, 2002 and 2001 is set forth in Note 1 to the consolidated financial statements — “Significant Accounting Policies — Stock-Based Compensation.”

Pension 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 generally contributions to qualified plans are tax deductible. It typically provides benefits to a broad group of employees and may not discriminate in favor of highly compensated employees in its coverage, benefits or contributions. The funded status of our U.S. qualified plans in the aggregate exceeds both the Accumulated Benefit Obligation (ABO) measure as well as a Projected Benefit Obligation (PBO) measure of plan obligations. Outside of the U.S., we fund our plans to the extent that tax or other incentives exist and we have accrued liabilities on our consolidated balance sheet to reflect those plans that are not fully funded.

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 amounts that would have been payable under the defined benefit qualified pension plans, in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension benefits. In addition, we provide medical and life insurance benefits to retirees and their eligible dependents through our postretirement plans, which, in general, are also unfunded obligations.

In 2003, we made required U.S. contributions of $135 million and voluntary tax-deductible contributions in excess of minimum requirements of $1,394 million to our pension plans in major markets. These voluntary contributions, as well as higher-than-assumed investment returns in 2003, have moved our U.S. qualified pension plans, in the aggregate, to an overfunded status on both an ABO measurement basis and a PBO measurement basis.

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 2004, which is unchanged from 2003. The assumption for the expected return-on-assets reflects our long-term outlook for global capital market returns and our diversified investment strategy. The expected return is applied to the fair market value of plan assets at each year end. As a sensitivity measure, holding all other assumptions constant, the effect of a one-percentage-point decline in the return-on-assets assumption would be an increase in our 2004 U.S. qualified pension plan (pre-tax) expense of approximately $61 million.

4 2003 Financial Report

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

The discount rate used in calculating our U.S. pension benefit obligations at December 31, 2003 is 6.3%, which represents a 0.6 percentage-point decline from our December 31, 2002 rate of 6.9%. 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 plan’s respective measurement dates. Holding all other assumptions constant, the effect of this 0.6 percentage-point decrease in the discount rate assumption is an increase in our 2004 U.S. qualified pension plan (pre-tax) expense of approximately $57 million and an increase in the U.S. qualified pension plans’ projected benefit obligations at December 31, 2003 of approximately $485 million.

Pharmacia Acquisition

On April 16, 2003, Pfizer acquired Pharmacia for a purchase price of approximately $56 billion, which included the issuance of approximately 1.8 billion shares of Pfizer common stock, 180 million options on Pfizer common stock, six thousand shares of Pfizer Series A convertible perpetual preferred stock (convertible into 15.5 million shares of Pfizer common stock), and vested share awards, as well as transaction costs.

Commencing from the acquisition date, the Pharmacia assets acquired and liabilities assumed, as well as the results of Pharmacia’s operations, are included in our consolidated financial statements. About 7½ months of results of operations of Pharmacia’s international operations (which conforms to Pfizer’s international operations fiscal year end of November 30th) and about 8½ months of results of operations Pharmacia’s of U.S. operations are included in our consolidated financial statements for the year ended December 31, 2003.

The impact of purchase accounting results in a number of significant non-cash charges to the 2003 income statement, such as Merger-Related In-Process Research and Development (IPR&D) (one-time $5.1 billion); incremental cost of sales (non-recurring $2.8 billion) from the sale of acquired inventory adjusted to fair value; and incremental amortization ($2.4 billion) of tangible and intangible assets adjusted to fair value. See also the discussion under the headings “Merger-Related In-Process Research and Development Charge” and “Merger-Related Costs.”

The largest components of the purchase price recorded on the balance sheet are intangible assets (see Note 2 to the consolidated financial statements — “Pharmacia Acquisition”). The components of Pharmacia goodwill and identifiable intangible assets, by segment, at the acquisition date (determined in consultation with independent valuation specialists) follow:

                                         
    PHARMA-   CONSUMER   ANIMAL                
(MILLIONS OF DOLLARS)   CEUTICAL   HEALTHCARE   HEALTH   OTHER   TOTAL

 
 
 
 
 
Goodwill
  $ 18,548     $ 1,714     $ 77     $ 108     $ 20,447  
Finite-lived intangible assets
    30,945       168       52       431       31,596  
Indefinite-lived intangible assets
    4,284       1,076       236       29       5,625  

The $31.6 billion of purchased intangibles with finite lives includes $31.2 billion of developed technology rights and the $5.6 billion of purchased intangibles with indefinite lives includes $5.3 billion of brands.

Developed technology rights represent the value associated with developed technology to which Pfizer has rights. These rights can include the right to develop, use, market, sell and/or offer for sale the products, compounds and intellectual property that we acquired from Pharmacia with respect to products, compounds and/or processes that have been completed. The significant components of developed technology rights include fair values determined for Celebrex, Detrol, Xalatan, Genotropin, Zyvox, Camptosar and Bextra.

Brands represent tradenames, as the products themselves no longer receive patent protection. Significant brands include fair values determined for Depo Provera contraceptive, Xanax, Medrol and tobacco-dependence products.

The fair value of all of these identifiable intangible assets is determined using the “income approach” on a project-by-project basis. This method starts with a forecast of all of the expected future net cash flows associated with the developed technology (both approved and unapproved uses), the brands and other intangible assets. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams, some of which are more certain than others.

The valuation of developed technology rights is derived from multiple cash flow streams, some of which are more certain than others. For example, the valuation of Pharmacia’s second-generation COX-2 inhibitor, valdecoxib, includes the cash flows associated with the sale of Bextra, the product line approved by regulators for the treatment of osteoarthritis and rheumatoid arthritis, as well as the value associated with using the developed technology (valdecoxib) in current R&D projects. In this situation, the projected cash flows of the approved indications are more likely to be achieved than the potential cash flows associated with the R&D projects for the currently unapproved indications. The unequal probability of realizing these cash flow streams reflects the uncertainty associated with the future benefits of individual R&D projects, even those that leverage the benefits of developed technology. Of the value allocated to developed technology rights, approximately 96% is derived from regulatory-approved uses and indications.

The valuations are based on information that is available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual results may vary from the projected results.

At least annually, we review all of our intangible assets, including goodwill, for impairment.

Due to the continuing analyses relating to the determination of the fair values of the assets acquired and liabilities assumed in connection with our acquisition of Pharmacia (U.S. GAAP permits up to one year from the acquisition date to complete such analyses), any changes to the fair value of net assets acquired from Pharmacia, based on information as of the acquisition date, will result in an adjustment to the intangible asset’s fair value and a corresponding adjustment to goodwill.

As a result of the acquisition of Pharmacia, regulatory authorities required us to divest several products and a product candidate. In April 2003, we sold Cortaid, an anti-itch cream, for $35.8 million in cash. Also in April 2003, we sold the product candidate for overactive bladder, darifenacin, for $225 million. We received $50 million in cash upon closing and will receive the remaining $175 million when, and if, darifenacin receives regulatory approvals.

2003 Financial Report 5

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

Analysis of the Consolidated Statement of Income

The results of operations in 2003 discussed below include Pharmacia’s product sales and expenses from the acquisition date as well as certain non-cash charges relating to purchase accounting for the Pharmacia acquisition.

                                           
                              % CHANGE
                             
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Revenues
  $ 45,188     $ 32,373     $ 29,024       40       12  
Cost of sales
    9,832       4,045       3,823       143       6  
 
% of revenues
    21.8 %     12.5 %     13.2 %                
SI&A expenses
    15,242       10,846       9,717       41       12  
 
% of revenues
    33.7 %     33.5 %     33.5 %                
R&D expenses
    7,131       5,176       4,776       38       8  
 
% of revenues
    15.8 %     16.0 %     16.5 %                
Merger-related IPR&D charge
    5,052                          
 
% of revenues
    11.2 %                            
Merger-related costs
    1,058       630       819       68       (23 )
 
% of revenues
    2.3 %     1.9 %     2.8 %                
Other (income)/ deductions – net
    3,610       (120 )     (95 )     *       27  
 
   
     
     
                 
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles
    3,263       11,796       9,984       (72 )     18  
 
% of revenues
    7.2 %     36.4 %     34.4 %                
Provision for taxes on income
    1,621       2,609       2,433       (38 )     7  
Effective tax rate
    49.7 %     22.1 %     24.4 %                
Income from continuing operations before cumulative effect of change in accounting principles
    1,639       9,181       7,537       (82 )     22  
 
% of revenues
    3.6 %     28.4 %     26.0 %                
Discontinued operations — net of tax
    2,301       355       251       548       41  
Income before cumulative effect of change in accounting principles
    3,940       9,536       7,788       (59 )     22  
 
% of revenues
    8.7 %     29.5 %     26.8 %                
Cumulative effect of change in accounting principles — net of tax
    (30 )     (410 )           *        
 
   
     
     
                 
Net income
  $ 3,910     $ 9,126     $ 7,788       (57 )     17  
 
% of revenues
    8.7 %     28.2 %     26.8 %                
 
   
     
     
     
     
 

*   Calculation not meaningful.
 
    Certain reclassifications were made in 2002 and 2001 to conform to the 2003 presentation.
 
    Percentages in this table and throughout the Financial Review may reflect rounding adjustments.

Revenues

Revenues increased 40% to $45,188 million in 2003 and 12% to $32,373 million in 2002. Revenue increases in 2003 were primarily due to the inclusion of Pharmacia products, strong performances by our in-line and newly launched products across businesses and regions and the weakening of the U. S. dollar relative to other currencies.

Effective January 2, 2004 and July 10, 2003, we increased the published prices for certain U. S. pharmaceutical products. These price increases had no material effect on 2003 wholesaler inventory levels. Pfizer’s policy relating to supply of pharmaceutical inventory at domestic wholesalers is to maintain stocking levels under one month on average and to keep monthly levels consistent from year to year based on patterns of utilization. Pharmacia stocking levels began the second quarter of 2003 at a little over two months on average and have been reduced to Pfizer’s levels. We completed the harmonization of Pharmacia’s trade-inventory practices in 2003, however, such harmonization of trade-inventory practices with those of legacy Pfizer negatively impacted revenues by approximately $500 million in 2003.

Revenue increases in 2002 were due primarily to newly launched products, new indications for existing products and sales volume growth of our pharmaceutical products.

Revenues in the U. S. grew 30% to $26,844 million in 2003 and 12% to $20,613 million in 2002. International revenues grew 56% to $18,344 million in 2003 and 12% to $11,760 million in 2002.

Revenues exceeded $500 million in each of ten countries outside the U. S. in 2003 and in each of seven countries outside the U. S. in 2002. The U. S. was the only country to contribute more than 10% of total revenues in both years.

Elements of Total Revenue Growth (percentages)

(ELEMENTS OF TOTAL REVENUE GROWTH BAR CHART)

Revenues by Business Segment

We operate in the following business segments:

  Pharmaceutical

      – The pharmaceutical segment includes treatments for cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies.

  Consumer Healthcare

      – The consumer healthcare segment includes self medications for oral care, upper respiratory health, tobacco dependence, gastrointestinal health, skin care, eye care and hair growth.

  Animal Health

      – The animal health segment includes treatments for diseases in livestock and companion animals.

We operate several other businesses including the manufacture of empty soft-gelatin capsules, contract manufacturing, bulk pharmaceutical chemicals and diagnostics. Due to the size of these businesses, they are grouped into our “Corporate/Other” segment.

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Financial Review
Pfizer Inc and Subsidiary Companies

Total Revenues by Business Segment

(BUSINESS SEGMENT PIE CHART)

Percentage Change in Revenues

                                   
              ANALYSIS OF % CHANGE
      TOTAL %  
      CHANGE   VOLUME*   PRICE**   CURRENCY
     
 
 
 
Pharmaceutical
                               
 
2003 vs. 2002 ***
    40.1       32.8       3.0       4.3  
 
2002 vs. 2001
    12.1       12.7       (0.7 )     0.1  
Consumer Healthcare
                               
 
2003 vs. 2002 ***
    20.0       15.8       1.2       3.0  
 
2002 vs. 2001
    7.7       6.2       1.5        
Animal Health
                               
 
2003 vs. 2002 ***
    42.8       35.1       2.5       5.2  
 
2002 vs. 2001
    9.6       8.3       3.0       (1.7 )
Total
                               
 
2003 vs. 2002 ***
    39.6       32.5       2.8       4.3  
 
2002 vs. 2001
    11.5       11.9       (0.4 )      

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

Percentage Change in Geographic Revenues

                                 
    % CHANGE IN REVENUES
   
    U. S.   INTERNATIONAL
   
 
    03/02   02/01   03/02   02/01
   
 
 
 
Pharmaceutical *
    32       12       55       12  
Consumer Healthcare *
    1       8       54       7  
Animal Health
    47       12       40       7  
Total
    30       12       56       12  

    * Certain reclassifications were made in 2002 and 2001 to conform to the 2003 presentation.

Pharmaceutical

Revenues of our pharmaceutical segment were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Pharmaceutical *
  $ 39,631     $ 28,283     $ 25,240       40       12  

    * Certain reclassifications were made in 2002 and 2001 to conform to the 2003 presentation.

Our Pharmaceutical business is the largest in the world. Revenues from this segment contributed 88% of our total revenues in 2003 and 87% in each of 2002 and 2001. At the end of 2003, fourteen of our pharmaceutical products remained number one in their respective therapeutic category.

In the U.S. market, pharmaceutical revenue growth was 32% in 2003 and 12% in 2002. International growth was 55% in 2003 and 12% in 2002. The growth in our Pharmaceutical business was driven by strong performances across a broad range of products, the inclusion of post-acquisition results of legacy Pharmacia products (including recording product sales instead of alliance revenue for Celebrex and Bextra) and the favorable impact of the U.S. dollar against major currencies.

We recorded product sales of more than $1 billion for each of nine products in 2003 and eight products in 2002. These products represented 70% in 2003 and 79% in 2002 of our pharmaceutical business.

Revenues — Major Pharmaceutical Products

                                           
                              % CHANGE
                             
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Cardiovascular Metabolic Diseases:
  $ 16,171     $ 13,664     $ 11,894       18       15  
 
Lipitor
    9,231       7,972       6,448       16       24  
 
Norvasc
    4,336       3,846       3,581       13       7  
 
Accupril/Accuretic
    706       668       604       6       11  
 
Cardura
    594       531       551       12       (4 )
 
Glucotrol XL
    331       297       283       11       5  
Central Nervous System Disorders:
    7,378       5,726       4,740       29       21  
 
Zoloft
    3,118       2,742       2,365       14       16  
 
Neurontin
    2,702       2,269       1,751       19       30  
 
Geodon
    353       222       150       59       49  
 
Aricept *
    254       203       157       25       29  
 
Xanax/Xanax XR
    238                          
 
Relpax
    85       16       1       435       M+  
Arthritis and Pain:
    3,046       363       365       740       (1 )
 
Celebrex **
    1,883       100       76       M+       31  
 
Bextra
    687                          
Infectious and Respiratory Diseases:
    4,677       3,615       3,638       29       (1 )
 
Zithromax
    2,010       1,516       1,506       33       1  
 
Diflucan
    1,176       1,112       1,066       6       4  
 
Viracept
    259       336       364       (23 )     (8 )
 
Vfend
    200       42             379        
 
Zyvox
    181                          
Urology:
    2,457       1,735       1,518       42       14  
 
Viagra
    1,879       1,735       1,518       8       14  
 
Detrol/Detrol LA
    544                          
Oncology:
    713                          
 
Camptosar
    299                          
 
Ellence
    216                          
Ophthalmology:
    770                          
 
Xalatan/Xalcom
    623                          
Endocrine Disorders:
    550                          
 
Genotropin
    481                          
All Other:
    3,110       1,584       1,531       96       3  
 
Zyrtec
    1,338       1,115       990       20       13  
 
Medrol
    241                          
Alliance Revenue ***
    759       1,596       1,379       (52 )     16  


    M+ Change greater than one thousand percent.
 
*   Represents direct sales under license agreement with Eisai Co. , Ltd.
 
**   Includes direct sales under license agreement with Pharmacia prior to the acquisition.
 
***   Includes alliance revenue for Celebrex and Bextra under copromotion agreements with Pharmacia prior to the acquisition.

2003 Financial Report 7

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

  Lipitor, for the treatment of elevated cholesterol levels in the blood, is the most widely prescribed statin for lowering cholesterol and the most widely prescribed pharmaceutical product in the world. Despite the challenges of multiple new competitors both in the U.S. and in international markets, we expect that Lipitor’s unsurpassed record of cholesterol reduction and patient safety at all doses make it the powerful cholesterol treatment patients and physicians choose, and trust, most. With 45% of total prescriptions in the U.S. lipid-lowering market in 2003, Lipitor has gained wide physician and patient acceptance based on its ability to bring the vast majority of patients to target cholesterol goals across the full dosing range. There continues to be an opportunity for further growth of the cholesterol-lowering market. We believe, worldwide, millions of people with high cholesterol are either not diagnosed or not meeting their cholesterol goals with treatment. Evolving treatment guidelines will likely continue to encourage the use of statin therapy.
 
  Norvasc is the world’s most-prescribed branded medicine for treating hypertension and the fourth-largest selling pharmaceutical product in the world.
 
  Zoloft, for the treatment of depression, panic disorder, obsessive-compulsive disorder in adults and children, post-traumatic stress disorder (PTSD), premenstrual dysphoric disorder (PMDD) and social anxiety disorder (SAD), is the most-prescribed selective serotonin re-uptake inhibitor (SSRI) in the U.S. Zoloft is approved for acute and long-term use in all of these indications with the exception of PMDD and is the only approved agent for the long-term treatment of PTSD and SAD, an important differentiating feature as these disorders tend to be chronic.
 
  Neurontin, for use in adjunctive therapy for epilepsy, is also approved in more than 60 markets for the treatment of a range of neuropathic pain conditions. Neurontin has also been approved for the management of post-herpetic neuralgia, which is described as pain in the area affected by a viral infection commonly known as shingles. Neurontin is the first oral medication approved in the U.S. for this condition.
 
  Geodon, for the treatment of symptoms associated with schizophrenia, has been approved in 64 countries and launched in the U.S., Germany, Spain, Brazil, and other major markets. Geodon remains the first and only atypical antipsychotic available in both an oral and a rapid-acting intramuscular dosage form. In 2003, Pfizer received a U.S. Food and Drug Administration (FDA) request for a diabetes class warning. Pfizer responded to this request by stating that Geodon has not been associated with increased risk for diabetes. Evidence from clinical trials has consistently demonstrated that Geodon has a weight-neutral profile overall. Data also show that Geodon did not adversely affect patients’ fasting insulin levels, total cholesterol and triglycerides, and blood sugar levels. In addition, Pfizer submitted a full response to the FDA’s request for class labeling that contained a summary of the relevant data and a proposal for Geodon labeling that did not include the class warning, but instead focused on metabolic advantages.
 
  Celebrex, for relief of the pain and inflammation of osteoarthritis (OA), rheumatoid arthritis (RA), acute pain and primary dysmenorrhea (menstrual pain) in adults, is the leading selective COX-2 inhibitor in the world having the broadest range of approved indications. In addition, Celebrex is approved in the U.S. and E.U. to reduce the number of adenomatous colorectal polyps in familial adenomatous polyposis (FAP), a rare genetic disease that may result in colorectal cancer, as an adjunct to usual care. Celebrex is the most prescribed arthritis brand in the U.S. market. We copromoted Celebrex with Pharmacia prior to our acquisition of Pharmacia. Revenue associated with the copromotion of Celebrex was recorded by Pfizer as alliance revenue prior to the acquisition date.
 
  Bextra is used for relief of the pain and inflammation of OA, RA and primary dysmenorrhea and offers a once-daily dosing for OA and RA patients. We copromoted Bextra with Pharmacia prior to our acquisition of Pharmacia. Revenue associated with our copromotion of Bextra was recorded by Pfizer as alliance revenue prior to the acquisition date.
 
  Zithromax is the largest-selling antibiotic worldwide. Zithromax continues to revolutionize antibiotic treatment in the U.S. with the only available single dose treatment for otitis media (middle ear infection). The Zithromax Tri-Pak provides the only three-day regimen for the treatment of acute bacterial exacerbations of chronic obstructive pulmonary disease (COPD). Zithromax is also recommended for the first-line treatment of community-acquired pneumonia and sinusitis.
 
  Diflucan remains the leading systemic antifungal in the world. Diflucan’s sales volume after 14 years on the market reflects the product’s continuing acceptance as the therapy of choice for a wide range of fungal infections. Diflucan lost patent protection in much of Europe in 2003 as well as Japan, the U.K. and Germany. Our basic product patent for fluconazole (Diflucan) expired in the U.S. in January 2004. The FDA has granted us pediatric exclusivity with respect to Diflucan, which extends our marketing exclusivity for six months, through July 29, 2004, but the grant of pediatric exclusivity is subject to a pending legal challenge by a generic manufacturer.
 
  Viagra, a treatment for erectile dysfunction (ED), is the world’s most recognized pharmaceutical brand and among the most widely prescribed medications. We expect Viagra to continue to lead the erectile dysfunction market due to its unsurpassed medical profile. Future Viagra sales growth is expected to come from increased patient presentation and physician diagnosis. Direct-to-consumer advertising has been effective in encouraging more men to see a physician about ED.
 
  Detrol is the world’s leading product for the treatment of overactive bladder. Detrol LA is an extended release formulation taken once a day.
 
  Xalatan is the most prescribed glaucoma medicine in the U.S., Europe and Japan. It is the first and only prostaglandin with a first-line indication for the treatment of elevated eye pressure. Xalcom consists of Xalatan with the beta-blocker timolol.
 
  Zyrtec provides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec is the leading branded antihistamine in the U.S. in new prescriptions and the only prescription antihistamine with a syrup formulation. Zyrtec-D 12 Hour is the only prescription oral antihistamine/decongestant combination medicine approved to treat both year-round indoor and outdoor allergies, as well as nasal congestion. Revenue and prescription gains were achieved despite multiple over-the-counter (OTC) branded and private-label loratadine (Claritin) product introductions since December 2002. Zyrtec’s growth in this declining market can be attributed in part to strong performance in a broad range of formulations — tablets, syrup, and the 12-hour decongestant formulation — and for both adult and pediatric patients.

8 2003 Financial Report

 


 

     Financial Review
     Pfizer Inc and Subsidiary Companies

  Alliance revenue reflects revenue associated with our copromotion of Aricept, Spiriva and Rebif and for Celebrex and Bextra prior to the acquisition of Pharmacia on April 16, 2003.

    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 (BI), is used to treat COPD, a chronic respiratory disorder that includes chronic bronchitis and emphysema. BI received an approval letter from the FDA in January 2004 to market Spiriva in the U.S.
 
    Rebif, discovered and developed by Serono S.A. (Serono), is used to treat symptoms of relapsing forms of multiple sclerosis.

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 funding through cash, staff and other resources to sell, market, promote and further develop these products.

Rebates under Medicaid and related state programs reduced revenues by $800 million in 2003, $570 million in 2002 and $342 million in 2001. We also provided legislatively mandated discounts to the U.S. government of $566 million in 2003, $420 million in 2002 and $343 million in 2001. 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.

Consumer Healthcare

Revenues of our consumer healthcare business were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Consumer healthcare*
  $ 3,042     $ 2,535     $ 2,354       20       8  

*   Certain reclassifications were made in 2002 and 2001 to conform to the 2003 presentation.

Our consumer healthcare business is one of the largest consumer health-care companies in the world. The increase in consumer healthcare revenues in 2003, as compared to the prior-year periods, was primarily due to the inclusion of Pharmacia products as well as:

  the 12% increase in 2003 in sales of Listerine mouthwash, which benefited from the recent U.S. launch of Natural Citrus flavor
 
  the favorable impact of the weakening of the U.S. dollar against major currencies

partially offset by:

  the 13% decline in 2003 in sales of Listerine PocketPaks, reflecting the 2002 initial trade stocking as well as a change in demand from initial trial to a more normalized consumption pattern, which has been partially offset by the roll-out to international markets
 
  the 1% and 2% decline in 2003 of Benadryl and Sudafed as a result of the loratadine switch from prescription to OTC.
 
  the divestitures of the Nix and Bonine franchises in North America during the first half of 2003

The 8% increase in consumer healthcare revenues in 2002 was primarily due to:

  the success of Listerine PocketPaks representing 5% of the 8% over-all increase in consumer healthcare revenues
 
  the 10% increase in sales of Listerine mouthwash

Animal Health

Revenues of our animal health business were as follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Livestock products
  $ 970     $ 595     $ 562       63       6  
Companion animal products
    628       524       459       20       14  
Total animal health products
  $ 1,598     $ 1,119     $ 1,021       43       10  

Our animal health business is the largest in the world. The increase in animal health revenues in 2003, as compared to the prior-year periods, was primarily due to the inclusion of Pharmacia products, which are reflected in both product categories.

Livestock product revenues increased 63% in 2003, as compared with the prior year, with key performance as follows:

  swine vaccine sales grew 9% in 2003, as compared with prior year, due to the second quarter 2002 launches of Flusure (a swine influenza vaccine) in the U.S. and RespiSure One/Stellamune One (a single-dose swine vaccine to prevent pneumonia) in our international markets during 2002
 
  Advocin 180 (an antibiotic used to treat respiratory and internal infections in cattle and swine) was launched in the U.S. during the fourth quarter of 2002
 
  Spirovac (a reproductive cattle vaccine) was launched in the U.S. during the first quarter of 2003
 
  Dectomax (a treatment for internal and external parasites in cattle and swine) sales grew 1% despite increasing generic competition throughout our markets

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

  swine vaccine sales grew 18% due to the 2002 launch of Flusure in the U.S., as well as the launch of RespiSure One/Stellamune One 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 sales, which remained flat, as the product faced increased generic competition and price erosion throughout our markets

Companion animal product revenues increased 20% in 2003, as compared with the prior year, with key brand performance as follows:

  Revolution (a parasiticide for dogs and cats) sales grew 26% in 2003 due to increased promotional efforts and the weakening of the U.S. dollar against major currencies

2003 Financial Report 9

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

  Rimadyl (for relief of arthritis pain in dogs and for post-operative pain treatment) sales grew 13% due to increased field and marketing emphasis on the brand throughout our markets, the launch of Rimadyl Injectable in the U.S. and the weakening of the U.S. dollar against major currencies
 
  Clavamox/Synulox (an antibiotic for dogs and cats) sales grew 16% in 2003 due to increased promotional activities in the U.S. and the weakening of the U.S. dollar against major currencies

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

  Revolution 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
 
  Rimadyl 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 FDA approval for a post-operative pain indication
 
  Clavamox/Synulox 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

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 possess a broad and deep pipeline of medicines in development. We intend to submit New Drug Applications (NDA) to the FDA for twenty products in the five-year interval ending in 2006, of which six (Relpax, Inspra, Somavert, Spiriva, Caduet and pregabalin) have been submitted through December 31, 2003. We have three new products that were recently approved or are undergoing regulatory review in the U.S. and/or E.U. (Inspra, Caduet, pregabalin). We intend to launch all three of these 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

 
 
Caduet  
Single product that combines cholesterol-lowering and anti-hypertensive medications in Lipitor and Norvasc
  January 2004
         
Spiriva   COPD   January 2004
         
Zithromax   Acute bacterial sinusitis   January 2004
         
Vfend   Oral suspension dosage form
Antifungal — esophageal infections
caused by candida ssp.
  December 2003
November 2003
         
Detrol  
Pediatric patients with neurogenic bladder (loss of control of urination)
  December 2003
         
Inspra   Post-heart-attack heart failure   October 2003
         
Zyvox   Diabetic foot infections   July 2003
         
Viracept   HIV — new dosage form   April 2003
         
Somavert   Acromegaly (a growth disorder)   March 2003
         
Zoloft   Social anxiety disorder   February 2003

Pending U.S. NDAs and Supplemental NDAs

         
PRODUCT   INDICATION/DOSAGE   DATE SUBMITTED

 
 
Depo-
Provera
 
Injectable formulation to treat endometriosis
  December 2003
         
   
Subcutaneous formulation for
contraception
  June 2003
         
Zyvox  
Use in penicillin-resistant
streptococcus pneumonia
infections in patients with
pneumonia
  December 2003
         
Bextra   Migraine   November 2003
         
pregabalin  
Neuropathic pain, add-on epilepsy, and generalized anxiety disorder
  October 2003
         
Geodon   Acute mania in bipolar disorder
Oral suspension dosage form
  October 2003 September 2002
         
Diflucan   Use in children   October 2003
         
Zyrtec   Chewable tablets   May 2003
         
Fragmin  
Use to prevent the formation of venous blood clots
  February 2003
         
Viracept   Use in children with HIV   June 2003
         
Cardura XL  
Benign prostatic hyperplasia
(enlarged prostate)
  April 2001

10 2003 Financial Report

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

  In February 2004, a filing for Exubera, for the treatment of Type 1 and Type 2 diabetes, was submitted in the E. U.
 
  In December 2003, the FDA issued an approvable letter for Zoloft for use with depressed hospital patients with acute myocardial infarction or unstable angina.
 
  In December 2003, the European regulatory submission for Caduet, the Lipitor-Norvasc one-pill combination was completed.
 
  In October 2003, the E. U. approved Onscenal (Celebrex) for familial adenomatous polyposis.
 
  In October 2003, fosfluconazole, the injectable pro-drug of leading antifungal agent Diflucan, was approved for marketing in Japan.
 
  In September 2003, the FDA issued an approvable letter for Zoloft to add safety information regarding the treatment of depression in children and adolescents providing positive labeling on weight gain.
 
  In July 2003, Inspra was filed in the E. U. for the treatment of post- myocardial-infarction heart failure.
 
  In July 2003, the FDA issued a non-approvable letter for the liquid oral suspension dosage form of Geodon. We have responded to the FDA’s questions and are working with the FDA to resolve the issues identified.
 
  In June 2003, the FDA issued an approvable letter to include the safety information from two trials in pediatric depression in the Zoloft package insert.
 
  In June 2003, the E. U. approved Genotropin for treating children born small for gestational age.
 
  In June 2003, we submitted a filing in Japan for the use of Vfend in the treatment of serious fungal infections, including apsergillus, candida ssp. and cryptococcus.
 
  In May 2003, Bextra received marketing approval in the E. U. for treatment of OA, RA and primary dysmenorrhea.
 
  In March 2003, a filing for pregabalin, for the treatment of neuropathic pain and as adjunctive therapy in epilepsy, was submitted 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  
Pulmonary arterial hypertension in both children and adults
     
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   Cystic fibrosis
     
   
Drug resistant malaria
(combination with chloroquine)
     
   
Sustained release Zithromax
(bacterial infections)
     
Vfend   Candidemia in non-neutropenic patients
     
   
Fungal infections in immuno-compromised
patients
     
Bextra   Acute pain, including gout
     
    Perioperative oral surgery pain
     
Camptosar IV   Use in children
     
    Adjuvant colorectal cancer
     
    Gastric cancer
     
Fragmin  
Use in oncology to reduce cardiac toxicity associated with chemotherapy
     
Xalatan (new
formulation)
  Ocular hypertension

It is our current intention to submit applications for the following new chemical compounds in 2004 subject to ongoing negotiations and discussions with various regulatory agencies:

             
        ANTICIPATED
COMPOUND   INDICATION   SUBMISSION DATE

 
 
Dynastat  
Injectable COX-2 inhibitor for pain and inflammation (powder)
    2004  
             
Indiplon   Insomnia (tablet)     2004  

2003 Financial Report 11

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

Advanced-stage clinical studies are continuing for Exubera, an inhalable form of insulin for Type 1 and Type 2 diabetes under co-development, co-manufacture, and co-marketing with Aventis Pharma (Aventis), with the participation of Nektar Therapeutics; varenicline for smoking cessation; Lipitor-torcetrapib for cholesterol disorders; lasofoxifene for osteoporosis and other indications; Macugen for macular degeneration and macular edema, under co-development with Eyetech Pharmaceuticals, Inc. (Eyetech); Daxas (roflumilast)  for COPD and asthma, under co-development with Altana Pharma; capravirine for HIV/AIDS; a Zithromax/chloroquine combination for malaria; sumanirole for Parkinson’s disease; asenapine for neurological disorders, under co-development with Akzo Nobel’s Organon healthcare unit; edotecarin for Glioma and colorectal cancer; and SU-11, 248, an angiogenesis inhibitor for treatment of gastrointestinal and other cancers.

Together with Aventis, we are completing 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 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 the U.S.

On October 20, 2003, Pfizer announced a global agreement to collaborate with Organon for the exclusive worldwide development and commercialization of asenapine, a 5HT2/D2 antagonist beginning Phase III trials for schizophrenia and bipolar disorder. Under terms of the agreement, the companies will collaborate on the clinical development and manufacturing of asenapine and copromote the product in the U.S., E.U., Japan, and other markets. The government cleared the transaction in December 2003 and we expensed a payment of $100 million, included in Other (income)/deductions — net, to Organon in the fourth quarter of 2003. Additional milestone payments of $270 million could potentially be made to Organon based upon regulatory approvals and launch of asenapine in the U.S., E.U., and Japan as well as the attainment of certain agreed upon sales levels. If approved, we will copromote asenapine with Organon and we will record alliance revenue for copromotion services provided to Organon.

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 obtained 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 expensed a payment of $100 million, included in Other (income)/deductions — net, to Neurocrine in the first quarter of 2003. Additional milestone payments of $300 million could potentially 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. 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 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 cleared the transaction in February 2003 at which time we expensed a payment of $100 million which is included in Other (income)/deductions — net to Eyetech. Additional milestone payments up to $195.5 million could potentially 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.

Costs and Expenses

Cost of Sales

Cost of sales increased 143% in 2003 and 6% in 2002 while revenues increased 40% in 2003 and 12% in 2002. In accordance with purchase accounting, Pharmacia’s inventory was recorded on Pfizer’s balance sheet at fair value (an amount higher than Pharmacia’s cost to manufacture). As the inventory was sold, cost of sales was charged for the fair market value of the acquired inventory. Sales of this inventory were completed by the end of 2003. Overall, our 2003 cost of sales was impacted by:

  incremental cost of sales ($2,820 million in 2003) from the sale of inventory acquired from Pharmacia adjusted to fair value
 
  change in product mix, given the addition of legacy Pharmacia’s product portfolio, which has a higher product cost relative to legacy Pfizer’s product portfolio
 
  the impact of reflecting cost of sales for Celebrex and Bextra after the acquisition date compared to reflecting alliance revenue for the co-promotion of Celebrex and Bextra prior to April 16, 2003
 
  the unfavorable impact of foreign exchange

partially offset by:

  merger-related cost savings

The change in 2002 reflects favorable business and product mix, the benefit of integration synergies resulting from our merger with Warner-Lambert 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 also unfavorably impacted by foreign exchange.

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Financial Review
Pfizer Inc and Subsidiary Companies

Selling, Informational and Administrative Expenses (SI&A)

SI&A expenses increased 41% in 2003 and 12% in 2002. Overall, both years reflect increases due to strong marketing and sales support for our broad portfolio of pharmaceutical products. In 2003, these increases are mainly due to the inclusion of expenses related to Pharmacia SI&A activities from the acquisition date and product support in light of new product competition partially offset by initial cost synergies from Pharmacia-related restructuring activities. Marketing expenses of our pharmaceutical products included 2003 costs associated with the first quarter 2003 U.S. launch of the migraine product Relpax and continued commercial support for products recently launched in the U.S. including the anti-arthritic product Bextra (copromoted with Pharmacia in the U.S. prior to the acquisition date), the U.S. launch in the third quarter 2002 of the antifungal agent Vfend, and initial commercial support of the multiple sclerosis product Rebif (copromoted with Serono in the U.S. ) launched in the fourth quarter 2002. In Europe, the launch of Spiriva (copromoted with BI) for COPD in the fourth quarter 2002 and the migraine product Relpax in the second quarter 2002 also contributed to the period over period increase in marketing expenses.

During 2002, marketing expenses included costs associated with the U.S. launch of the anti-arthritic product Bextra (launched in the second quarter 2002), the U.S. launch of the anti-fungal agent Vfend, and initial commercial support of the multiple sclerosis product Rebif in Europe. The launch of Spiriva for COPD and the migraine product Relpax also contributed to the year-over-year increase in marketing expenses.

Research and Development Expenses (R&D)

R&D expenses increased 38% in 2003 and 8% in 2002. In 2003, year-over-year growth for R&D spending is attributable to the incremental expenditures associated with the consolidation of Pharmacia-related activity subsequent to the acquisition date and increased support of the advanced-stage development portfolio, partially offset by initial cost synergies from Pharmacia-related restructuring activities. In 2002, growth is attributable to increased support of the advanced-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.

Merger-Related In-Process Research and Development Charge

We recorded a merger-related in-process research and development charge in 2003 in the amount of $5,052 million for the preliminary estimate of the portion of the purchase price of Pharmacia allocated to in-process research and development. The components of the IPR&D charge include projects related to multiple therapeutic areas in Pharmacia’s portfolio, such as arthritis and pain.

Our valuation is being performed in consultation with independent valuation specialists to determine the fair value of research and development projects of Pharmacia that were in-process, but not yet completed. The fair value is determined using the “income approach”on a project-by-project basis. This method starts with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the project’s stage of completion and other risk factors, including the nature of the product, the scientific data associated with the technology, the current patent situation and market competition (see Note 2 to the consolidated financial statements — “Pharmacia Acquisition”).

The final valuation is expected to be completed as soon as possible, but no later than one year from the acquisition date. To the extent that our estimates need to be adjusted, we will do so.

Merger-Related Costs

We incurred the following merger-related costs in connection with our acquisition of Pharmacia which was completed on April 16, 2003. and our merger with Warner-Lambert which was completed on June 19, 2000:

                         
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Integration costs:
                       
Pharmacia
  $ 838     $ 98     $  
Warner-Lambert
    33       345       456  
Restructuring costs:
                       
Pharmacia
    177              
Warner-Lambert
    10       187       363  
 
   
     
     
 
Total merger-related costs — expensed
  $ 1,058     $ 630     $ 819  
 
   
     
     
 
Total merger-related costs — capitalized
  $ 1,578              
 
   
     
     
 

Integration costs represent external, incremental costs directly related to integrating Warner-Lambert and Pharmacia, including expenditures for consulting and systems integration.

Restructuring costs represent costs associated with asset write-offs, exit activities, employee termination costs and certain relocation costs.

The restructuring of our operations resulting from our merger with Warner-Lambert was substantially complete as of December 31, 2003. Accordingly, we do not expect to incur significant integration or restructuring charges directly related to our merger with Warner-Lambert in 2004.

Cost synergies from the Pharmacia acquisition achieved in 2003 totaled $1.3 billion. Cumulative cost synergies resulting from the acquisition of Pharmacia are expected to be about $3.4 billion in 2004 and about $4 billion in 2005. Synergies will come from a broad range of sources, including a streamlined organization, reduced operating expenses, and procurement savings.

Restructuring Costs — Pharmacia

Throughout 2003, in connection with the acquisition of Pharmacia, Pfizer management approved and initiated plans to restructure the operations of both legacy Pfizer and legacy Pharmacia to eliminate duplicative facilities and reduce costs. The restructuring of our operations as a result of our acquisition of Pharmacia is expected to continue through 2005 and is expected to include severance, costs of vacating duplicative facilities and contract termination and other exit costs. Total merger-related expenditures incurred during 2003-2005 are expected to be in the range of $5.0 billion to $5. 5 billion, pre-tax.

Restructuring Costs Associated with Legacy Pfizer — Expensed

We recorded $177 million of restructuring costs associated primarily with exiting certain activities of legacy Pfizer, including severance, costs of vacating duplicative facilities and contract termination and other exit costs. At December 31, 2003, liabilities for restructuring costs incurred, but not paid, totaled $67 million and are included in Other current liabilities.

The majority of the restructuring costs are related to employee terminations. Through December 31, 2003, employee termination costs totaling $140 million represent the approved reduction of the legacy Pfizer work force by 1,477 employees, mainly in corporate, manufacturing,

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Financial Review
Pfizer Inc and Subsidiary Companies

distribution, sales and research. We notified affected individuals and 1,281 employees were terminated as of December 31, 2003.

Restructuring Costs Associated with Legacy Pharmacia — Capitalized

We recorded $1,578 million of restructuring costs associated primarily with employee terminations and exiting certain activities of legacy Pharmacia. These costs were recognized as liabilities assumed in the purchase business combination. Accordingly, these costs are considered part of the purchase price of Pharmacia and have been recorded as an increase to goodwill. At December 31, 2003, liabilities for restructuring costs incurred, but not paid, totaled $376 million and are included in Other current liabilities.

The majority of the restructuring costs are related to employee terminations. Through December 31, 2003, employee termination costs totaling $1,289 million represent the approved reduction of the legacy Pharmacia work force by 11,249 employees mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 10,174 employees were terminated as of December 31, 2003. Employee termination costs include accrued severance benefits and costs associated with change in control provisions of certain Pharmacia employment contracts.

Changes to the estimates of completing the currently approved restructuring plans and additional restructuring costs relating to legacy Pharmacia will be recorded in goodwill for up to one year following the acquisition date of April 16, 2003.

Restructuring charges are recorded when specific decisions to exit activities are approved and incurred. Reductions to our accruals for restructuring charges relating to legacy Pharmacia that were originally recorded as goodwill will be recorded as an adjustment to goodwill. Changes to the estimates of completing the currently approved restructuring plans or costs related to new restructuring initiatives relating to legacy Pharmacia subsequent to April 15, 2004 will be recorded in our results of operations.

Other (Income)/Deductions — Net

In the fourth quarter of 2003, we recorded charges totaling $1,402 million to cover the resolution of two legacy Warner-Lambert legal matters: Rezulin personal injury claims and a government investigation of marketing practices relating to Neurontin (see our discussions in Note 20 to the consolidated financial statements — “Legal Proceedings and Contingencies”).

Income Taxes

Our overall effective tax rate for continuing operations was 49.7% in 2003 and 22.1% in 2002. The higher tax rate in 2003 was primarily due to the impact of purchase accounting for the Pharmacia acquisition as well as the significantly low benefit attributable to our charges for litigation settlements.

Discontinued Operations

We sold the following businesses and products that did not fit within our strategic plans:

  In April 2003, we completed the sale of the hormone replacement therapy femhrt, formerly part of our Pharmaceutical segment, to Galen Holdings plc for $160 million in cash with a right to receive up to $63.8 million contingent on femhrt retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of this product of $139 million ($83 million net of tax) in 2003.
 
  In March 2003, we sold the Adams confectionery products business, formerly part of our Consumer Healthcare segment, to Cadbury Schweppes plc for $4.2 billion in cash. We recognized a gain on the sale of this business of $3,091 million ($1,824 million net of tax) in 2003.
 
  In March 2003, we sold the Schick-Wilkinson Sword shaving products business, formerly part of our Consumer Healthcare segment, to Energizer Holdings, Inc., for $930 million in cash. We recognized a gain on the sale of this business of $462 million ($262 million net of tax) in 2003.
 
  In March 2003, we sold the oral contraceptives Estrostep and Loestrin, formerly part of our Pharmaceutical segment, to Galen Holdings plc for $197 million in cash with a right to receive up to $47.3 million contingent on Estrostep retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of these two products of $193 million ($116 million net of tax) in 2003.
 
  In December 2002, we sold the Tetra fish-care products business, formerly part of our Consumer Healthcare segment, to the Triton Fund for $238.5 million in cash. We recognized a gain on the sale of this business of $117 million ($77 million net of tax) in 2002.

These businesses and women’s health product lines are reflected as discontinued operations in all periods presented.

The following amounts related to the Adams, Schick-Wilkinson Sword and Tetra (in 2002 and 2001) businesses and women’s health product lines have been segregated from continuing operations and reflected as discontinued operations:

                         
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Revenues
  $ 762     $ 2,908     $ 2,958  
 
   
     
     
 
Pre-tax income
  $ 26     $ 447     $ 405  
Provision for taxes on income
    10       169       154  
 
   
     
     
 
Income from operations of discontinued businesses — net of tax
    16       278       251  
 
   
     
     
 
Pre-tax gains on sales of discontinued businesses
    3,885       117        
Provision for taxes on gains
    1,600       40        
 
   
     
     
 
Gains on sales of discontinued businesses — net of tax
    2,285       77        
 
   
     
     
 
Discontinued operations — net of tax
  $ 2,301     $ 355     $ 251  
 
   
     
     
 

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Pfizer Inc and Subsidiary Companies

On January 19, 2004, we announced that we agreed to sell our in-vitro allergy and diagnostics testing business for $575 million in cash. This business is included in our “Corporate/Other” segment and became a part of Pfizer in April 2003 with our acquisition of Pharmacia. We recorded approximately $153 million in revenues from this business in 2003.

On January 13, 2004, we announced that we are exploring strategic options for approximately 60 non-core consumer products, including the possible sale of these products, currently marketed in Europe by our Consumer Healthcare segment. The majority of these products are small brands, sold in single markets only and include certain products that became a part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded approximately $100 million in revenues for all of these products in 2003.

On July 24, 2003, we announced that we are exploring strategic options for our surgical ophthalmology business, including its possible sale. The surgical ophthalmology business is included in our Pharmaceutical segment and became a part of Pfizer in April 2003 with our acquisition of Pharmacia. We recorded approximately $102 million in revenues from this business in 2003.

Adjusted Income

We believe investors’ understanding of our performance is enhanced by disclosing adjusted income, defined as net income excluding the impact of purchase accounting for the Pharmacia acquisition, certain significant items, merger-related costs and the cumulative effect of change in accounting principles. Management analyzes the company’s performance on this basis.

We have excluded significant purchase accounting impacts related to our acquisition of Pharmacia. These impacts primarily relate to the one-time charge for purchased in-process research and development; the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value; and the incremental charges related to the amortization of Pharmacia finite-lived intangible assets and depreciation of fixed assets for the increase to fair value. We believe that excluding these non-cash charges provides a better view of our economic performance.

The Company also excludes “certain significant items” from adjusted income in order to better portray its major operations—the discovery, development, manufacture, marketing, and sale of market-leading prescription medicines for humans and animals, as well as many of the world’s best known consumer healthcare products. For example, we exclude gains or losses on the sale of product lines or discontinued businesses. While we review our businesses and product lines on an ongoing basis for strategic fit with our operations, we do not build or run our businesses with an intent to sell them and, therefore, we have excluded such gains or losses on sales of businesses or product lines from adjusted income. Another example of an excluded “certain significant item” is copromotion charges and payments for intellectual property rights for unapproved products being developed by third parties, which are immediately expensed rather than amortized over the life of the agreement. Since such payments are expensed immediately, excluding such payments from our performance provides us with a better view of our operations. We exclude charges related to various litigation matters from adjusted income as they relate to settlement of legal matters. We also exclude gains and losses from the sale or write-down of equity investments from adjusted income. Generally, these investments are made in biotech companies on an opportunistic basis and are not part of our ongoing internal discovery and development programs.

While we continually look for improvement opportunities within our businesses and reorganize when necessary, at times we will perform a review for restructuring an area of our business. During 2003, our research division undertook such a review and began to initiate its restructuring plan in the second quarter of 2003. The last time that such a restructuring occurred in this division, with the exception of our acquisition-related restructurings, was in 1993. As such, we have excluded the charges of these activities from adjusted income.

In April 2003 we acquired Pharmacia and in June 2000 we merged with Warner-Lambert. These acquisitions have significant integration and restructuring costs attendant to them. We have excluded these costs from adjusted income, because integration and restructuring costs are unique to these transactions and generally occur over several years due to the global and highly regulated nature of our business.

A reconciliation between net income, as reported under GAAP, and adjusted income follows:

                                         
                            % CHANGE
                           
(MILLIONS OF DOLLARS)   2003   2002   2001   03/02   02/01

 
 
 
 
 
Reported net income
  $ 3,910     $ 9,126     $ 7,788       (57 )     17  
Purchase accounting
                                       
adjustments — net of tax
    8, 742                          
Total significant items and merger-related
                                       
costs — net of tax
    40       377       563       (89 )     (33 )
Cumulative effect of change in accounting principles — net of tax
    30       410             *        
 
   
     
     
                 
Adjusted income
  $ 12,722     $ 9,913     $ 8,351       28       19  
 
   
     
     
     
     
 

* Calculation not meaningful.

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Financial Review
Pfizer Inc and Subsidiary Companies

Adjusted income excludes the following items:

                           
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Significant items, pre-tax:
                       
 
Gains on sales of discontinued businesses/product lines(a)
  $ (3,885 )   $ (117 )   $  
 
Merger-related and exit costs of discontinued businesses(a)
    33       6       20  
 
Copromotion charges and intellectual property rights payments(b)
    380       32       206  
 
Gains on the sales of products(b)
    (87 )     (34 )      
 
Charges to write-down equity investments(b)
    16       45        
 
Gains on the sales of equity investments(b)
                (17 )
 
Asset impairment charges(b)
          18        
 
Various litigation matters(c)
    1,435       25        
 
Restructuring charges(d)
    61              
 
Harmonization of accounting methodology(e)
                (175 )
 
 
   
     
     
 
Total significant items, pre-tax
    (2,047 )     (25 )     34  
 
 
   
     
     
 
Total merger-related costs, pre-tax
    1,058       630       819  
 
 
   
     
     
 
Total significant items and merger-related costs, pre-tax
    (989 )     605       853  
Provision/(benefit) for taxes on income
    1,029       (228 )     (290 )
 
 
   
     
     
 
Total significant items and merger- related costs —net of tax
    40       377       563  
 
 
   
     
     
 
Purchase accounting adjustments, pre-tax:
                       
 
IPR&D(f)
    5,052              
 
Sale of acquired inventory written up to fair value(g)
    2,820              
 
Intangible amortization/fixed asset depreciation(h)
    2,373              
 
 
   
     
     
 
Total purchase accounting adjustments, pre-tax
    10,245              
Provision/(benefit) for taxes on income
    (1,503 )            
 
 
   
     
     
 
Total purchase accounting adjustments —net of tax
    8,742              
 
 
   
     
     
 
Cumulative effect of change in accounting principles —net of tax(i)
    30       410        
 
 
   
     
     
 
Total significant items, merger-related costs, purchase accounting adjustments and cumulative effect of change in accounting principles —net of tax
  $ 8,812     $ 787     $ 563  
 
 
   
     
     
 

(a)   Included in Discontinued operations– net of tax.
 
(b)   Included in Other (income)/deductions – net.
 
(c)   Included in Other (income)/deductions – net in 2003 (includes $1,402 million of legal provisions recorded in the fourth quarter of 2003) and in Selling, informational and administrative expenses ($10 million) and in Other (income)/deductions – net ($15 million) in 2002.
 
(d)   Included in Research and development expenses.
 
(e)   Represents an increase to Revenues from the harmonization of Pfizer/Warner-Lambert accounting methodology for Medicaid discounts and contract rebate accounts.
 
(f)   Included in Merger-related in-process research and development charge.
 
(g)   Included in Cost of sales.
 
(h)   Included in Cost of sales, ($80 million); Selling, informational and administrative expenses ($40 million); Research and development expenses ($106 million);and Other (income)/deductions – net ($2,147 million) for 2003.
 
(i)   Represents the non-cash charge recorded upon the adoption of SFAS No. 143, Accounting for Asset Retirement Obligations, in 2003 and upon the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, in 2002.

Financial Condition, Liquidity and Capital Resources

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

                   
(MILLIONS OF DOLLARS)   2003   2002

 
 
Financial assets:
               
 
Cash and cash equivalents
  $ 1,520     $ 1,878  
 
Short-term investments
    10,432       10,673  
 
Short-term loans
    391       399  
 
Long-term investments and loans
    6,142       5,161  
 
 
   
     
 
 
Total financial assets
  $ 18,485     $ 18,111  
 
 
   
     
 
Debt:
               
 
Short-term borrowings
  $ 8,818     $ 8,669  
 
Long-term debt
    5,755       3,140  
 
 
   
     
 
 
Total debt
  $ 14,573     $ 11,809  
 
 
   
     
 
Net financial assets
  $ 3,912     $ 6,302  
 
 
   
     
 

We rely largely on operating cash flow, short-term commercial paper borrowings and long-term debt to provide for the working capital needs of our operations, including our R&D activities. Our short-term and long-term investments consist primarily of high quality, liquid investment-grade debt securities. Our long-term investments include debt securities that totaled $4,400 million at December 31, 2003, which have maturities ranging substantially from two to ten years. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital to our operations. Where local restrictions prevent intercompany financing, working capital needs are met through operating cash flows and/or external borrowings.

Our short-term borrowings are rated P1 by Moody’s Investors Services (Moody’s) (and A-1+ by Standard & Poor’s (S&P). Also, our long-term debt has been rated Aaa by Moody’s and AAA by S&P for more than 17 years. Moody’s and S&P are the major corporate debt-rating organizations. Our superior credit ratings are primarily based on our diversified product portfolio, our strong operating cash flows and our substantial financial assets. Our access to short-term financing at favorable rates would be affected by a substantial downgrade in our credit ratings.

In connection with our acquisition of Pharmacia, we acquired cash and cash equivalents of $1,789 million, short-term investments of $657 million, long-term investments of $398 million and assumed $245 million in short-term borrowings and $2,999 million in long-term debt.

We have available lines of credit and revolving-credit agreements with a group of banks and other financial intermediaries. We maintain cash balances and short-term investments in excess of our commercial paper borrowings and have access to $2.7 billion of lines of credit of which $2.2 billion expire within one year. Of these lines of credit, $2.3 billion are unused, of which our lenders have committed to loan us $1.0 billion at our request.

At December 31, 2003, we had the ability to borrow approximately $4.4 billion by issuing debt securities under our $5 billion debt shelf registration statement filed with the SEC in November 2002.

In February 2003, we issued the following debt under our debt shelf registration which was used for general corporate purposes:

  $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

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Financial Review
Pfizer Inc and Subsidiary Companies

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

In February 2004, we issued the following debt under our debt shelf registration which will be used for current general corporate purposes, including the refinancing of existing debt:

  $750 million senior unsecured notes due February 2014, which pay interest semi-annually, beginning on August 15, 2004, at a rate of 4.5%; and
 
  $700 million senior unsecured notes due March 2007, which pay interest semi-annually, beginning on September 15, 2004, at a rate of 2.5%

Selected Measures of Liquidity and Capital Resources

We use the following measures to manage our business:

                 
(MILLIONS OF DOLLARS, EXCEPT RATIOS)   2003   2002

 
 
Cash and cash equivalents and short-term investments and loans
  $ 12,343     $ 12,950  
Working capital*
    6,084       6,226  
Current ratio**
    1.26:1       1.34:1  
Shareholders’equity Per Common share***
  $ 8.63     $ 3.27  

*   Working capital includes assets and liabilities of our discontinued businesses held for sale at December 31, 2002.
 
**   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, including those held by our employee benefit trusts).

The decrease in working capital in 2003 compared to 2002 was primarily due to the following:

  purchases of property, plant and equipment– $2,641 million
 
  purchases of common stock– $13,037 million
 
  cash dividends on our common and preferred stock– $4,353 million
 
  accrual for litigation settlements of $1,402 million

partially offset by:

  positive working capital of Pharmacia acquired on April 16, 2003
 
  cash from current period operations
 
  proceeds from the sales of businesses and product lines– $5,602 million

The increase in shareholders’ equity per common share in 2003 is primarily due to the acquisition of Pharmacia.

Summary of Cash Flows

                           
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Cash provided by/(used in):
                       
 
Operating activities
  $ 11,725     $ 9,864     $ 8,861  
 
Investing activities
    4,838       (4,338 )     (7,135 )
 
Financing activities
    (16,909 )     (4,999 )     (2,096 )
 
Discontinued operations
    14       319       313  
Effect of exchange-rate changes on cash and cash equivalents
    (26 )     (4 )     (6 )
 
 
   
     
     
 
Net increase/(decrease) in cash and cash equivalents
  $ (358 )   $ 842     $ (63 )
 
 
   
     
     
 

Operating Activities

Net cash provided by continuing operating activities increased $1,861 million to $11, 725 million primarily due to:

  current period income from continuing operations, net of non-cash items, which included the operating cash flows of Pharmacia from April 16, 2003, the acquisition date

partially offset by:

  timing of tax payments

Our net cash provided by continuing operating activities increased $1,003 million in 2002 to $9,864 million primarily due to:

  current period income from continuing operations, net of non-cash items

partially offset by:

  timing of collections of accounts receivable

Investing Activities

Our net cash provided by investing activities increased $9,176 million in 2003 to $4,838 million primarily due to:

  proceeds received from the sale of the Adams and Schick-Wilkinson Sword businesses, the women’s health product lines and other products in the aggregate amount of $5,602 million
 
  cash and cash equivalents acquired in the Pharmacia acquisition of $1,789 million
 
  a decline in long-term and short-term investment purchases of $3,715 million

partially offset by:

  increases in purchases of property, plant and equipment of $883 million which included worldwide renovations to certain properties, the purchase of an additional building for our corporate headquarters and the construction of a new manufacturing plant in Singapore
 
  a decline in proceeds from long-term and short-term investments of $842 million

Our net cash used in investing activities decreased $2,797 million in 2002 to $4,338 million 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

partially offset by:

  an increase in product rights acquired of $360 million

2003 Financial Report 17

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

Financing Activities

Our net cash used in financing activities, funded by the cash generated by operating and investing activities, increased $11, 910 million in 2003 to $16, 909 million primarily due to:

  an increase in cash dividends paid on our common stock of $1,178 million primarily as a result of a 15% increase in our quarterly dividends
 
  an increase in common stock purchases under our share-purchase programs of $8, 041 million
 
  a decrease in net proceeds from borrowings of $3, 096 million

Our net cash used in financing activities increased $2, 903 million in 2002 to $4, 999 million primarily due to:

  a decrease in net proceeds from borrowings of $1, 006 million
 
  an increase in common stock purchases under our share-purchase 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

We continue to purchase our common stock via open market purchases or in privately negotiated transactions, as circumstances and prices war-rant. Purchased shares under each of the share-purchase programs are available for general corporate purposes.

In December 2003, we announced a new $5 billion share-purchase program which we expect to be completed by the end of 2004 and will be funded from operating cash flows.

In July 2002, we announced a $16 billion share-purchase program, increased from the initial $10 billion authorized by our board of directors on June 27, 2002 which we completed in November 2003. In total under the June 2002 program, we purchased approximately 508 million shares.

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.

A summary of common stock purchases follows:

                                 
    SHARES OF   AVERAGE   TOTAL COST OF
(MILLIONS OF SHARES AND   COMMON STOCK   PER-SHARE   COMMON STOCK
DOLLARS EXCEPT PER-SHARE DATA)   PURCHASED   PRICE PAID   PURCHASED

 
 
 
2003:
                               
December 2003 program
    1             $ 34.57     $ 37  
June 2002 program
    406             $ 31.99       13,000  
 
   
             
     
 
Total
    407                     $ 13,037  
 
   
                     
 
2002:
                               
June 2002 program
    102             $ 29.41     $ 3,000  
June 2001 program
    51             $ 38.87       1,996  
 
   
             
     
 
Total
    153                     $ 4,996  
 
   
                     
 

Payments due under contractual obligations at December 31, 2003 mature as follows:

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

 
 
 
 
 
Long-term debt*
  $ 5,755     $     $ 1,721     $ 1,108     $ 2,926  
Lease commitments
    2,052       290       507       400       855  
Purchase obligations
    3,684       2,481       958       245        

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

In 2004, we expect to spend approximately $2. 9 billion on property, plant and equipment.

On February 10, 2004 we completed the acquisition of Esperion Therapeutics, Inc., a biopharmaceutical company focused on the development of high density lipoprotein (HDL) targeted therapies for the treatment of cardiovascular disease, for $1. 3 billion in cash, which we paid from operating cash flows in the U. S. and borrowings.

Off-Balance Sheet Arrangements

Legacy Pharmacia guaranteed certain transactions in which Monsanto, its former agricultural subsidiary, is involved. These guarantees continued after Pfizer’s acquisition of Pharmacia and at December 31, 2003 included approximately $250 million of bank notes with maturities not later than 2004 and $5 million of environmental guarantees, which are required until Monsanto can obtain certain approvals.

Dividends on Common Stock

Our dividend payout ratios were approximately 111.1% in 2003 and 35.6% in 2002. The significant change in the ratio in 2003 compared to 2002 is primarily a result of the impact that certain non-cash charges relating to purchase accounting had on our 2003 net income combined with increasing our dividend payments in 2003.

In December 2003, our Board of Directors declared a first-quarter 2004 dividend of $.17 per share. The 2004 cash dividend marks the 37th consecutive year of dividend increases.

Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. FIN 46R replaces the same titled FIN 46 that was issued in January 2003. FIN 46R identifies when entities must be consolidated with the financial statements of a company where the investors in an entity do not have the characteristics of a controlling financial interest or the entity does not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Application of this Interpretation applies to our financial statements beginning January 1, 2004. We do not expect the adoption of FIN 46R to have a material impact on our consolidated financial statements.

18 2003 Financial Report

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

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,” “will” and similar expressions 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 or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare and involuntary approval of prescription medicines for over-the-counter use
 
  the potential impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003
 
  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 or settlement related to product liability, patent protection, government investigations, and other legal proceedings
 
  the company’s ability to protect its patents and other intellectual property both domestically and internationally
 
  interest rate and foreign currency exchange rate fluctuations
 
  governmental laws and regulations affecting domestic and foreign operations, including tax obligations
 
  changes in 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
 
  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 integrate and obtain the anticipated results and synergies from our acquisition of Pharmacia

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of 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, 2003, which will be filed in March 2004.

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

Financial Risk Management

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

Foreign Exchange Risk— A significant portion of our revenues and earnings 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 2003 and 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.

For additional details on foreign exchange exposures, see Note 5-D to the consolidated financial statements — “Financial Instruments —Derivative Financial Instruments and Hedging Activities.”

2003 Financial Report 19

 


 

Financial Review
Pfizer Inc and Subsidiary Companies

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 5-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 are also subject to interest rate risk on Japanese yen short-and long-term borrowings. We invest and borrow primarily on a short-term or variable-rate basis. From time-to-time, depending on market conditions, we will fix interest rates either through entering into fixed rate instruments and borrowings or through the use of derivative financial instruments like interest rate swaps.

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

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

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

Legal Proceedings and Contingencies

We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, 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

Our expectations for strong financial performance in 2004 remain substantially unchanged. We are comfortable with targets for 2004 revenue of about $54 billion, for 2004 adjusted income of $16. 3 billion, and for 2004 adjusted diluted EPS of $2. 13. We now project 2004 reported net income of $12. 8 billion and 2004 reported diluted EPS of $1.68. The difference between reported and adjusted diluted EPS is attributable to projected incremental purchase-accounting-related intangible amortization/fixed asset depreciation of $2. 3 billion, or $. 30 per share, and merger-related costs of $1. 2 billion, or $. 15 per share. We plan to spend about $7.9 billion on R&D during 2004.

Our estimates for both reported and adjusted income for 2004 exclude the results and any gains or losses in connection with the divestiture of non-strategic businesses and minor product lines that may be divested in 2004 and for which we are exploring strategic options. However, our estimates for both reported and adjusted income for 2004 include milestone payments associated with existing copromotion agreements. These estimates are based on January 2004 exchange rates and assume that Pfizer will maintain U. S. marketing exclusivity for the full year for Norvasc and Neurontin.

20 2003 Financial Report

 


 

Management’s Report

We prepared and are responsible for the financial statements that appear on pages 23 to 55. 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.

-s- HENRY A. MCKINNELL
Henry A. McKinnell
Chairman and
Chief Executive Officer

-s- DAVID L. SHEDLARZ
David L. Shedlarz
Principal Financial Officer

-s- LORETTA V. CANGIALOSI
Loretta V. Cangialosi
Principal Accounting Officer

February 26, 2004

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 auditor regarding the fair and complete presentation of the Company’s results. 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 auditor. The Committee discussed with the independent auditor 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 auditor the auditor’s 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 also has considered whether the independent auditor’s provision of non-audit services to the Company is compatible with the auditor’s independence. The Committee has concluded that the independent auditor is independent from the Company and its management.

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, 2003, 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 auditor.

-s- ROBERT BURT
Robert Burt
Chair, Audit Committee

February 26, 2004

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

2003 Financial Report 21

 


 

\

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, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2003. 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 mis-statements. 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.

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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 8 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.

-s- KPMG LLP
KPMG LLP
New York, NY

February 26, 2004

22 2003 Financial Report

 


 

Consolidated Statement of Income
Pfizer Inc and Subsidiary Companies

                             
        YEAR ENDED DECEMBER 31
       
(MILLIONS, EXCEPT PER COMMON SHARE DATA)   2003   2002   2001

 
 
 
Revenues
  $ 45,188     $ 32,373     $ 29,024  
Costs and expenses:
                       
 
Cost of sales
    9,832       4,045       3,823  
 
Selling, informational and administrative expenses
    15,242       10,846       9,717  
 
Research and development expenses
    7,131       5,176       4,776  
 
Merger-related in-process research and development charge
    5,052              
 
Merger-related costs
    1,058       630       819  
 
Other (income)/deductions — net
    3,610       (120 )     (95 )
 
   
     
     
 
Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles
    3,263       11,796       9,984  
Provision for taxes on income
    1,621       2,609       2,433  
Minority interests
    3       6       14  
 
   
     
     
 
Income from continuing operations before cumulative effect of change in accounting principles
    1,639       9,181       7,537  
 
   
     
     
 
Discontinued operations:
                       
 
Income from operations of discontinued businesses and product lines — net of tax
    16       278       251  
 
Gains on sales of discontinued businesses and product lines — net of tax
    2,285       77        
 
   
     
     
 
Discontinued operations — net of tax
    2,301       355       251  
 
   
     
     
 
Income before cumulative effect of change in accounting principles
    3,940       9,536       7,788  
Cumulative effect of change in accounting principles — net of tax
    (30 )     (410 )      
 
   
     
     
 
Net income
  $ 3,910     $ 9,126     $ 7,788  
 
   
     
     
 
Earnings per common share — basic
                       
 
Income from continuing operations before cumulative effect of change in accounting principles
  $ .22     $ 1.49     $ 1.21  
 
   
     
     
 
 
Discontinued operations:
                       
   
Income from operations of discontinued businesses and product lines —net of tax
          .05       .04  
   
Gains on sales of discontinued businesses and product lines — net of tax
    .32       .01        
 
   
     
     
 
 
Discontinued operations — net of tax
    .32       .06       .04  
 
   
     
     
 
 
Income before cumulative effect of change in accounting principles
    .54       1.55       1.25  
 
Cumulative effect of change in accounting principles — net of tax
          (.07 )      
 
   
     
     
 
 
Net income
  $ .54     $ 1.48     $ 1.25  
 
   
     
     
 
Earnings per common share — diluted
                       
 
Income from continuing operations before cumulative effect of change in accounting principles
  $ .22     $ 1.47     $ 1.18  
 
   
     
     
 
 
Discontinued operations:
                       
   
Income from operations of discontinued businesses and product lines — net of tax
          .05       .04  
   
Gains on sales of discontinued businesses and product lines — net of tax
    .32       .01        
 
   
     
     
 
 
Discontinued operations — net of tax
    .32       .06       .04  
 
   
     
     
 
 
Income before cumulative effect of change in accounting principles
    .54       1.53       1.22  
 
Cumulative effect of change in accounting principles — net of tax
          (.07 )      
 
   
     
     
 
 
Net income
  $ .54     $ 1.46     $ 1.22  
 
   
     
     
 
Weighted average shares — basic
    7,213       6,156       6,239  
Weighted average shares — diluted
    7,286       6,241       6,361  
 
   
     
     
 

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

2003 Financial Report 23

 


 

Consolidated Balance Sheet
Pfizer Inc and Subsidiary Companies

                     
        YEAR ENDED DECEMBER 31
       
(MILLIONS, EXCEPT PREFERRED STOCK ISSUED AND PER COMMON SHARE DATA)   2003   2002

 
 
Assets
               
Current Assets
               
Cash and cash equivalents
  $ 1,520     $ 1,878  
Short-term investments
    10,432       10,673  
Accounts receivable, less allowance for doubtful accounts:
               
2003 — $186; 2002 — $122
    8,775       5,785  
Short-term loans
    391       399  
Inventories
               
 
Finished goods
    2,308       1,133  
 
Work in process
    2,219       1,142  
 
Raw materials and supplies
    1,310       403  
 
   
     
 
   
Total inventories
    5,837       2,678  
 
   
     
 
Prepaid expenses and taxes
    2,786       1,797  
Assets of discontinued businesses held for sale
          1,571  
 
   
     
 
   
Total current assets
    29,741       24,781  
Long-term investments and loans
    6,142       5,161  
Property, plant and equipment, less accumulated depreciation
    18,287       10,712  
Goodwill
    22,306       1,200  
Identifiable intangible assets, less accumulated amortization
    36,350       921  
Other assets, deferred taxes and deferred charges
    3,949       3,581  
 
   
     
 
   
Total assets
  $ 116,775     $ 46,356  
 
   
     
 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Short-term borrowings, including current portion of long-term debt
  $ 8,818     $ 8,669  
Accounts payable
    2,601       1,620  
Dividends payable
    1,300       926  
Income taxes payable
    1,919       2,231  
Accrued compensation and related items
    1,753       1,084  
Accrued litigation settlements
    1,402        
Other current liabilities
    5,864       3,448  
Liabilities of discontinued businesses held for sale
          577  
 
   
     
 
   
Total current liabilities
    23,657       18,555  
Long-term debt
    5,755       3,140  
Pension benefit obligations
    2,861       1,327  
Postretirement benefit obligations
    1,451       623  
Deferred taxes
    13,238       364  
Other noncurrent liabilities
    4,436       2,397  
 
   
     
 
   
Total liabilities
    51,398       26,406  
 
   
     
 
Shareholders’ Equity
               
Preferred stock, without par value, at stated value; 27 shares authorized; 5, 445 issued in 2003
    219        
Common stock, $ .05 par value; 12,000 shares authorized;
               
issued: 2003 — 8,702; 2002 — 6,829
    435       341  
Additional paid-in capital
    66,396       9,368  
Employee benefit trust
    (1,898 )     (1,786 )
Treasury stock, shares at cost:
               
issued: 2003 —1, 073; 2002 — 667
    (29,352 )     (16,341 )
Retained earnings
    29,382       30,243  
Accumulated other comprehensive income/(expense)
    195       (1,875 )
 
   
     
 
   
Total shareholders’ equity
    65,377       19,950  
 
   
     
 
   
Total liabilities and shareholders’ equity
  $ 116,775     $ 46,356  
 
   
     
 

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

24 2003 Financial Report

 


 

Consolidated Statement of Shareholders’ Equity
Pfizer Inc and Subsidiary Companies

                                                                                     
                                                EMPLOYEE                        
        PREFERRED STOCK   COMMON STOCK   ADDITIONAL   BENEFIT TRUST   TREASURY STOCK        
(MILLIONS, EXCEPT  
 
  PAID-IN  
 
  RETAINED
PREFERRED SHARES)   SHARES   STATED VALUE   SHARES   PAR VALUE   CAPITAL   SHARES   FAIR VALUE   SHARES   COST   EARNINGS

 
 
 
 
 
 
 
 
 
 
Balance January 1, 2001
        $       6,749     $ 337     $ 8,895       (74 )   $ (3,382 )     (435 )   $ (7,858 )   $ 19,599  
Comprehensive income:
                                                                               
 
Net income
                                                                            7,788  
 
Other comprehensive expense — net of tax:
                                                                               
   
Currency translation adjustment
                                                                               
   
Net unrealized loss on available-for-sale securities
                                                                               
   
Minimum pension liability
                                                                               
 
Total other comprehensive expense
                                                                               
Total comprehensive income
                                                                               
Cash dividends declared — common stock
                                                                            (2,869 )
Stock option transactions
                    40       2       981       8       337       6       104          
Purchases of common stock
                                                            (89 )     (3,665 )        
Employee benefit trust transactions — net
                                    (724 )     (1 )     395       2       25          
Other
                    3       1       148                       1       16       (88 )
 
   
     
     
     
     
     
     
     
     
     
 
Balance December 31, 2001
                6,792       340       9,300       (67 )     (2,650 )     (515 )     (11,378 )     24,430  
Comprehensive income:
                                                                               
 
Net income
                                                                            9,126  
 
Other comprehensive expense — net of tax:
                                                                               
   
Currency translation adjustment
                                                                               
   
Net unrealized loss on available-for-sale securities
                                                                               
   
Minimum pension liability
                                                                               
 
Total other comprehensive expense
                                                                               
Total comprehensive income
                                                                               
Cash dividends declared — common stock
                                                                            (3,313 )
Stock option transactions
                    34       1       789       9       366             (8 )        
Purchases of common stock
                                                            (153 )     (4,996 )        
Employee benefit trust transactions — net
                                    (863 )           498       1       28          
Other
                    3             142                             13        
 
   
     
     
     
     
     
     
     
     
     
 
Balance December 31, 2002
                6,829       341       9,368       (58 )     (1,786 )     (667 )     (16,341 )     30,243  
Comprehensive income:
                                                                               
 
Net income
                                                                            3,910  
 
Other comprehensive income — net of tax:
                                                                               
   
Currency translation adjustment
                                                                               
   
Net unrealized gain on available-for-sale securities
                                                                               
   
Minimum pension liability
                                                                               
 
Total other comprehensive income
                                                                               
Total comprehensive income
                                                                               
Pharmacia acquisition
    6,019       242       1,817       91       55,402                                          
Cash dividends declared — common stock
                                                                            (4,764 )
 
preferred stock
                                                                            (7 )
Stock option transactions
                    52       3       1,374       5       175       (1 )     (20 )        
Purchases of common stock
                                                            (407 )     (13,037 )        
Employee benefit trust transactions — net
                                    112       (1 )     (287 )     1       10          
Preferred stock — conversions and redemptions
    (574 )     (23 )                     23                               6          
Other
                    4             117                       1       30        
Balance December 31, 2003
    5,445     $ 219       8,702     $ 435     $ 66,396       (54 )   $ (1,898 )     (1,073 )   $ (29,352 )   $ 29,382  
 
   
     
     
     
     
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                     
        ACCUM. OTHER        
        COMPREHENSIVE        
(MILLIONS, EXCEPT PREFERRED SHARES)   INC./(EXP.)   TOTAL

 
 
Balance January 1, 2001
  $ (1,515 )   $ 16,076  
Comprehensive income:
               
 
Net income
            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 — common stock
            (2,869 )
Stock option transactions
            1,424  
Purchases of common stock
            (3,665 )
Employee benefit trust transactions — net
            (304 )
Other
            77  
 
   
     
 
Balance December 31, 2001
    (1,749 )     18,293  
Comprehensive income:
               
 
Net income
            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 — common stock
            (3,313 )
Stock option transactions
            1,148  
Purchases of common stock
            (4,996 )
Employee benefit trust transactions — net
            (337 )
Other
            155  
 
   
     
 
Balance December 31, 2002
    (1,875 )     19,950  
Comprehensive income:
               
 
Net income
            3,910  
 
Other comprehensive income — net of tax:
               
   
Currency translation adjustment
    2,070       2,070  
   
Net unrealized gain on available-for-sale securities
    68       68  
   
Minimum pension liability
    (68 )     (68 )
 
   
     
 
 
Total other comprehensive income
    2,070       2,070  
 
   
     
 
Total comprehensive income
            5,980  
Pharmacia acquisition
            55,735  
Cash dividends declared — common stock
            (4,764 )
 
preferred stock
            (7 )
Stock option transactions
            1,532  
Purchases of common stock
            (13,037 )
Employee benefit trust transactions — net
            (165 )
Preferred stock — conversions and redemptions
            6  
Other
            147  
 
   
     
 
Balance December 31, 2003
  $ 195     $ 65,377  
 
   
     
 

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

2003 Financial Report 25

 


 

Consolidated Statement of Cash Flows
Pfizer Inc and Subsidiary Companies

                               
          YEAR ENDED DECEMBER 31
         
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Operating Activities
 
Net Income
$ 3,910     $ 9,126     $ 7,788  
 
Adjustments to reconcile net income to net cash provided by continuing operating activities:
                       
   
Cumulative effect of change in accounting principles
    30       410        
   
Income from operations of discontinued businesses and product lines
    (16 )     (278 )     (251 )
   
Harmonization of accounting methodology
                (175 )
   
Merger-related in-process research and development charge
    5,052              
   
Charge for fair value mark-up of acquired inventory sold
    2,820              
   
Deferred taxes
    (104 )     (285 )     1,092  
   
Charges to write-down equity investments
    16       45        
   
Gains on sales of discontinued businesses and product lines
    (3,885 )     (117 )      
   
Gains on sales of products
    (87 )     (34 )        
   
Depreciation and amortization
    4,078       1,036       972  
   
Other
    604       (367 )     176  
   
Changes in assets and liabilities, net of effect of businesses acquired and divested:
                       
     
Accounts receivable
    (904 )     (963 )     81  
     
Inventories
    (202 )     (129 )     (110 )
     
Prepaid and other assets
    (905 )     (1,009 )     (765 )
     
Accounts payable and accrued liabilities
    670       461       (412 )
     
Income taxes payable
    (550 )     1,591       209  
     
Other deferred items
    1,198       377       256  
 
   
     
     
 
Net cash provided by continuing operating activities
    11,725       9,864       8,861  
 
   
     
     
 
Investing Activities
 
Purchases of property, plant and equipment
  (2,641 )     (1,758 )     (2,105 )
 
Purchases of short-term investments, net of maturities
    (9,931 )     (12,652 )     (14,218 )
 
Proceeds from redemptions of short-term investments
    12,060       9,781       12,808  
 
Purchases of long-term investments
    (1,883 )     (2,877 )     (3,708 )
 
Proceeds from redemptions of long-term investments
    356       3,477       80  
 
Purchases of other assets
    (788 )     (528 )     (227 )
 
Proceeds from sales of other assets
    360       272       132  
 
Proceeds from sales of businesses, product lines and other products
    5,602       220       8  
 
Cash and cash equivalents acquired through acquisition of Pharmacia
    1,789              
 
Other investing activities
    (86 )     (273 )     95  
 
   
     
     
 
Net cash provided by/(used in) investing activities
    4,838       (4,338 )     (7,135 )
 
   
     
     
 
Financing Activities
 
Proceeds from issuances of long-term debt
  600       603       1,837  
 
Repayments of long-term debt
    (439 )     (374 )     (151 )
 
Increase in short-term borrowings, net
    194       2,815       2,344  
 
Decrease in short-term borrowings, net
    (946 )     (539 )     (519 )
 
Purchases of common stock
    (13,037 )     (4,996 )     (3,665 )
 
Cash dividends paid
    (4,353 )     (3,168 )     (2,715 )
 
Stock option transactions and other
    1,072       660       773  
 
   
     
     
 
Net cash used in financing activities
    (16,909 )     (4,999 )     (2,096 )
 
   
     
     
 
Net cash provided by discontinued operations
    14       319       313  
 
   
     
     
 
Effect of exchange-rate changes on cash and cash equivalents
    (26 )     (4 )     (6 )
 
   
     
     
 
Net increase/(decrease) in cash and cash equivalents
    (358 )     842       (63 )
Cash and cash equivalents at beginning of year
    1,878       1,036       1,099  
 
   
     
     
 
Cash and cash equivalents at end of year
  $ 1,520     $ 1,878     $ 1,036  
 
   
     
     
 
Supplemental Cash Flow Information
 
Non-cash transactions:
                     
   
Acquisition of Pharmacia, net of transaction costs
  $ 55,871     $     $  
 
   
     
     
 
 
Cash paid during the period for:
                       
   
Income taxes
  $ 2,905     $ 1,480     $ 957  
   
Interest
    350       256       291  
 
   
     
     
 

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

26 2003 Financial Report

 


 

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 have made certain reclassifications to the 2002 and 2001 financial statements to conform to the 2003 presentation.

On April 16, 2003, we completed our acquisition of Pharmacia Corporation (Pharmacia) in a stock-for-stock transaction accounted for under the purchase method of accounting (see Note 2, “Pharmacia Acquisition”). Commencing from the acquisition date, the Pharmacia assets acquired and liabilities assumed, as well as the results of Pharmacia’s operations, are included in our consolidated financial statements. Approximately 7 ½ months of results of operations of Pharmacia’s international operations and about 8 ½ months of results of operations of Pharmacia’s U.S. operations are included in our consolidated financial statements for the year ended December 31, 2003.

In preparing the consolidated financial statements, we use certain estimates and assumptions that 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 healthcare 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. ”

B.     New Accounting Standards

In January 2003, we adopted 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. As a result of adopting SFAS No. 143, we recorded a non-cash pre-tax charge of $47 million ($30 million net of tax) for the change in accounting for costs associated with the eventual retirement of certain manufacturing and research facilities. This charge is reported as a one-time cumulative effect of a change in accounting principle as of the beginning of 2003. Our asset retirement obligations primarily relate to remediation and land restoration requirements.

In January 2003, we adopted the provisions of 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. The adoption of FIN 46 did not have a material impact on our consolidated financial statements.

C.     Business Acquisitions

We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Our consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition and are not restated. The cost to acquire a business, including transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development are expensed at the date of acquisition.

D.     Foreign Currency Translation

For most international operations, local currencies have been determined to be the 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. Transaction adjustments are recorded 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)

E.     Revenues

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

Sales Rebates — We record provisions for rebates based upon our actual experience ratio of rebates paid and actual prescriptions written within a respective period. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. Periodically, we adjust the accrual based upon actual payments made for rebates. Other current liabilities include accruals for customer rebates of $1,107 million at December 31, 2003 and $1,003 million at December 31, 2002.

2003 Financial Report 27

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

Alliances — We have agreements to copromote pharmaceutical products discovered by other companies. Revenue is earned when our copromotion partners ship the related product and title passes to their customer. Alliance revenue is included in Revenues and is primarily based upon a percentage of our copromotion partners’ net sales. 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 Identifiable intangible assets, less accumulated amortization and amortize them evenly over the remaining agreement term or the expected product life cycle, whichever is shorter. At least annually, we review for impairment those milestone payments which have been recorded as assets.

F.     Cost of Sales and 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

G.     Selling, Informational and Administrative Expenses

Selling, informational and administrative costs are generally expensed as incurred. Among other things, these expenses include the costs of marketing, advertising, shipping and handling, information technology and non-plant employee compensation.

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 expenses totaled approximately $2,962 million in 2003, $2,307 million in 2002 and $2,157 million in 2001.

H.     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.

I.     Merger-Related Costs

In connection with an acquisition of a business, we may review the operations of the acquired business and implement plans to restructure and integrate its operations. For restructuring charges associated with the acquired company’s operations that are identified in the first year after the acquisition date, the related costs are recorded as additional goodwill as they are considered to be liabilities assumed in the acquisition. All subsequent restructuring charges, all integration costs and any charges related to our pre-existing businesses impacted by the acquisition are included in our results of operations.

J.     Depreciation, Amortization and 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. Goodwill is not amortized.
 
  identifiable intangible assets — These assets are recorded at original cost. Intangible assets with finite lives are amortized evenly over their estimated useful lives. Intangible assets with indefinite lives are not amortized.

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.

K.     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.

L.     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 (APB) Opinion 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.

28 2003 Financial Report

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

The following table summarizes our results as if we had recorded compensation expense for the 2003, 2002 and 2001 option grants:

                             
(MILLIONS OF DOLLARS,                        
EXCEPT PER COMMON SHARE DATA)   2003   2002   2001

 
 
 
Net income available to common shareholders used in the calculation of basic earnings per common share:
                       
   
As reported under GAAP*
  $ 3,906     $ 9,126     $ 7,788  
   
Compensation expense
    (541 )     (518 )     (560 )
   
 
   
     
     
 
 
Pro forma
  $ 3,365     $ 8,608     $ 7,228  
   
 
   
     
     
 
Basic earnings per common share:
                       
   
As reported under GAAP
  $ .54     $ 1.48     $ 1.25  
   
Compensation expense
    (.07 )     (.08 )     (.09 )
   
 
   
     
     
 
 
Pro forma
  $ .47     $ 1.40     $ 1.16  
   
 
   
     
     
 
Net income available to common shareholders used in the calculation of diluted earnings per common share:
                       
   
As reported under GAAP*
  $ 3,907     $ 9,126     $ 7,788  
   
Compensation expense
    (541 )     (518 )     (560 )
   
 
   
     
     
 
 
Pro forma
  $ 3,366     $ 8,608     $ 7,228  
   
 
   
     
     
 
Diluted earnings per common share:
                       
   
As reported under GAAP
  $ .54     $ 1.46     $ 1.22  
   
Compensation expense
    (.08 )     (.08 )     (.08 )
   
 
   
     
     
 
 
Pro forma
  $ .46     $ 1.38     $ 1.14  
   
 
   
     
     
 

  *   Includes stock-based compensation expense net of related tax effects of $34 million in 2003, $23 million in 2002 and $66 million in 2001.

2. Pharmacia Acquisition

A. Description of Acquisition

On April 16, 2003, Pfizer acquired Pharmacia for a purchase price of approximately $56 billion, which includes Pfizer common stock, options on Pfizer common stock, Pfizer convertible perpetual preferred stock, and vested share awards, as well as transaction costs.

The fair value of Pfizer equity items was derived using an average market price per share of Pfizer common stock of $29.81, which was based on Pfizer’s average stock price for the period two days before through two days after the terms of the acquisition were agreed to and announced on July 15, 2002.

Under the terms of the merger agreement, each outstanding share of Pharmacia common stock was exchanged for 1.4 shares of Pfizer common stock in a tax-free transaction. Each share of Pharmacia Series C convertible perpetual preferred stock was exchanged for a newly created class of Pfizer Series A convertible perpetual preferred stock with rights substantially similar to the rights of the Pharmacia Series C convertible perpetual preferred stock.

Pharmacia’s core business, much like that of Pfizer, was the development, manufacture and sale of prescription pharmaceutical products. Other businesses of Pharmacia included production and distribution of consumer healthcare products (primarily those available over-the-counter without a prescription) and animal healthcare products (primarily pharmaceuticals and feed additives for livestock and companion animals). The acquisition expands our global pharmaceutical leadership, broadens our product base and bolsters our research and development capacity.

The acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed from Pharmacia are recorded at the date of acquisition, at their respective fair values. The consolidated financial statements and reported results of operations of Pfizer issued after completion of the acquisition reflect these values.

                 
(MILLIONS OF DOLLARS, EXCEPT                
COMMON STOCK ISSUED (in thousands) AND                
PREFERRED STOCK, COMMON STOCK ISSUABLE   CONVERSION   FAIR
AND PER SHARE DATA)   CALCULATION   VALUE

 
 
Common Stock
               
Pharmacia common stock outstanding as of April 16, 2003
    1,298,157          
Exchange ratio
    1.4          
 
   
         
Pfizer common stock issued
    1,817,420          
Value of Pfizer’s common stock
  $ 29.81     $ 54, 177  
 
   
         
Preferred Stock
               
Pharmacia Series C perpetual preferred stock outstanding and convertible into common stock as of April 16, 2003(a)
    6,018.86          
Conversion feature
    1,839.19          
 
   
         
Pharmacia common stock issuable upon conversion
    11,069,827          
Exchange ratio
    1.4          
 
   
         
 
    15,497,758          
Value of Pfizer’s common stock
  $ 29.81       462  
 
   
         
Stock Options
               
Value of Pfizer stock options issued in exchange for Pharmacia stock options as of April 16, 2003 (b)
            1,102  
Vested Share Award Programs
               
Value of Pharmacia share awards that became fully vested in connection with the acquisition (c)
            130  
Other transaction costs
            101  
 
           
 
Total estimated purchase price
          $ 55,972  
 
           
 

(a)   Pharmacia Series B perpetual preferred stock was exchanged for substantially similar Pharmacia Series C perpetual preferred stock as of April 16, 2003.
 
(b)   Estimated fair value of 180,068 Pfizer stock options (in thousands) issued as of April 16, 2003 in exchange for 128,906 Pharmacia outstanding stock options (in thousands), calculated using the Black-Scholes option pricing model, modified for dividends, with model assumptions estimated as of April 16, 2003 and a Pfizer stock price of $29.81.
 
(c)   The fair value of unissued shares of fully vested awards is based on the same exchange ratio as for the Pharmacia common stock and a Pfizer stock price of $29.81. Awards can be settled in cash or shares, at the election of the program participant.

2003 Financial Report 29

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

B. Allocation of Purchase Price

The above purchase price has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed as soon as possible, but no later than one year from the acquisition date in accordance with GAAP. Given the size and complexity of the acquisition, the fair valuation of certain net assets is still being finalized. To the extent that our estimates need to be adjusted, we will do so.

           
(MILLIONS OF DOLLARS)        
Estimated book value of net assets acquired
  $ 8,795  
Less: existing goodwill and other intangible assets
    1,559  
 
   
 
Tangible book value of net assets acquired
    7,236  
 
   
 
Remaining allocation:
       
 
Increase inventory to fair value(a)
    2,979  
 
Increase long-term investments to fair value(b)
    40  
 
Increase property, plant and equipment to fair value(c)
    439  
 
Record in-process research and development charge(d)
    5,052  
 
Record identifiable intangible assets(d)
    37,221  
 
Increase long-term debt to fair value
    (370 )
 
Increase benefit plan liabilities to fair value(e)
    (1,471 )
 
Increase other net assets to fair value(f)
    (431 )
 
Restructuring costs incurred through December 31, 2003(g)
    (1,578 )
 
Tax adjustments(h)
    (13,592 )
 
Goodwill(i)
    20,447  
 
   
 
Estimated purchase price
  $ 55,972  
 
   
 

Since our initial allocation of the purchase price in the second quarter of 2003, our estimates have been revised for inventory ($1,371 million increase), fixed assets ($372 million decrease) and identifiable intangible assets ($715 million increase). These revisions reflect our greater understanding of Pharmacia net assets since the acquisition date.

  (a)   Components of the increase to fair value for acquired inventory are as follows:

         
(MILLIONS OF DOLLARS)        
Finished goods
  $ 958  
Work in process
    1,862  
Reversal of LIFO Reserve
    269  
Additional valuation adjustments
    (110 )
 
   
 
Total
  $ 2,979  
 
   
 

    The fair value of acquired inventory, developed in consultation with independent valuation specialists, was determined as follows:

    Finished goods — the estimated selling price less the cost of disposal and a reasonable profit for the selling effort.
 
    Work in process — the estimated selling price of finished goods less the cost to complete, cost of disposal and reasonable profit on the selling and remaining manufacturing efforts.
 
    Raw materials — estimated current replacement cost, which equaled Pharmacia’s historical cost.

    We have conformed Pharmacia’s inventory valuation methods to Pfizer’s methodology and ceased using LIFO method of inventory valuation for these inventories.
 
    In addition, we performed detailed inventory counts around the world to assess the need for additional adjustments.
 
(b)   Primarily related to one publicly traded, equity-method investment adjusted to fair value. The basis for the valuation was the quoted market price from the Stockholm Exchange.
 
(c)   Components of the increase to fair value for acquired property, plant and equipment are as follows:

         
(MILLIONS OF DOLLARS)        
Land
  $ (26 )
Buildings
    743  
Machinery and equipment
    (177 )
Furniture and fixtures
    (38 )
Construction in progress
    (63 )
 
   
 
Total
  $ 439  
 
   
 

    The fair value of acquired property, plant and equipment, developed in consultation with independent valuation specialists, was valued at its value-in-use, unless there was a known plan to dispose of an asset. Assets to be disposed of were valued at prevailing market rates, less costs to sell, or nil, if to be abandoned.
 
    In addition, we performed detailed fixed asset reviews around the world to assess the need for additional adjustments.
 
(d)   We are working with independent valuation specialists to determine the following:

    the fair value of research and development projects of Pharmacia which were in-process, but not yet completed (collectively, In-Process Research and Development, or IPR&D); and
 
    the fair value of identifiable intangible assets

    As required, we recorded a charge of $5, 052 million for the preliminary estimate of the portion of the purchase price allocated to acquired IPR&D.
 
    Components of the fair value of acquired identifiable intangible assets are as follows:

                         
            WEIGHTED   USEFUL
    FAIR   AVERAGE   LIFE
(MILLIONS OF DOLLARS)   VALUE   LIFE (YEARS)   (YEARS)

 
 
 
Developed technology rights
  $ 31,208       11       3-20  
Brands (indefinite-lived assets)
    5,308                  
Brands (finite-lived assets)
    117       40       40  
Other (indefinite-lived assets)
    317                  
Other (finite-lived assets)
    271       9       2-20  
 
   
                 
Total
  $ 37,221                  
 
   
                 

The total weighted average life of identifiable intangible assets acquired from Pharmacia that are subject to amortization is 11 years.

Developed technology rights represent the value associated with developed technology from Pharmacia to which Pfizer has rights. These rights can include the right to develop, use, market, sell and/or offer for sale the products, compounds and intellectual property that we acquired from Pharmacia with respect to products, compounds and/or processes that have been completed. Most of these assets are related to our Pharmaceutical segment.

Brands with indefinite-life treatment represent the value associated with tradenames, as the products themselves no longer receive patent protection. The valuation of these brands include all cash flows

30 2003 Financial Report

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

    associated with the use of the tradenames. Most of these assets are related to our Pharmaceutical and Consumer Healthcare segments.
 
    The fair value of both IPR&D and identifiable intangible assets is determined using the “income approach”on a project-by-project basis. This method starts with a forecast of all of the expected future net cash flows. These net cash flow projections do not anticipate any revenue or cost synergies. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams, some of which are more certain than others. For IPR&D, the discount rate also reflects the project’s stage of completion and other risk factors which include the nature of the product, the scientific data associated with the technology, the current patent situation and market competition. Of the value allocated to developed technology rights, approximately 96% is derived from regulatory-approved uses and indications.
 
    The forecast of future cash flows for IPR&D and identifiable intangible assets requires the following assumptions to be made:

    Revenue that is reasonably likely to result from the approved and unapproved, potential uses of identifiable intangible assets that includes the estimated number of units to be sold, estimated selling prices, estimated market penetration and estimated market share and year-over-year growth rates over the product life cycles
 
    Cost of sales using historical data, industry data or other sources of market data
 
    Sales and marketing expense using historical data, industry data or other sources of market data
 
    General and administrative expenses
 
    R&D expenses
 
    The estimated life of the product or potential product

    In addition, for IPR&D projects we also considered the project’s stage of completion, the costs incurred to date, the projected costs to complete, the contribution, if any, of developed technology and the projected launch date of the potential product.
 
    To the extent that the IPR&D project is expected to utilize developed technology, the value of the in-process research and development project has been reduced to reflect this contribution. The value of this contribution has been capitalized as additional value associated with developed technology. Developed technology represents the technical processes, intellectual property, and institutional understanding that were acquired from Pharmacia with respect to products, compounds and/or processes that have been completed.
 
    The valuations are based on the information that is available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual results may vary from the projected results.
 
(e)   Components of the increase to fair value for acquired benefit plans are $1,148 million for pension benefit obligations and $323 million for postretirement benefit obligations.
 
    The fair value of the pension and postretirement obligations, determined in consultation with independent actuarial specialists, includes assumptions relating to economic factors such as interest rates of high quality fixed income investments, demographic factors such as salary growth projection and other data, such as expected employee terminations.The underlying assets of the plans were measured using market rates as of the acquisition date.
 
(f)   Includes accruals for legal and environmental matters that we intend to resolve in a manner different from the manner Pharmacia had planned ($260 million). Also, includes adjustments to accruals for unfavorable leases ($193 million); adjustments to accruals for sales allowances ($144 million); adjusted to accruals for award programs that became fully vested in connection with the acquisition ($68 million); and adjustments to other accounts based on detailed reviews of the assets and liabilities acquired ($110 million); partially offset by the reversal of Pharmacia deferred income that no longer represents a performance obligation to third parties ($344 million).
 
(g)   Included in Other current liabilities are restructuring costs that impacted goodwill. These exit costs are associated with Pharmacia employees, assets or activities and were recorded as a liability in conjunction with recording the initial purchase of Pharmacia.
 
(h)   Reflects the estimated tax effects of the acquisition, including a provision for taxes on unremitted earnings of international Pharmacia subsidiaries that are not expected to be permanently reinvested overseas.
 
(i)   In accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill and the acquired indefinite-lived intangibles assets associated with the merger will not be amortized. None of the goodwill is deductible for tax purposes.

C.     PRO FORMA RESULTS

The following unaudited pro forma financial information presents the combined results of operations of Pfizer and Pharmacia as if the acquisition had occurred as of the beginning of the years presented. The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.

                   
(MILLIONS OF DOLLARS, EXCEPT PER                
COMMON SHARE DATA) (UNAUDITED)   2003   2002

 
 
Revenues:
  $ 48,894     $ 44,998  
Income from continuing operations before cumulative effect of change in accounting principles
    8,344       9,268  
Net income
    10,536       7,373  
Per share amounts:
               
 
Income from continuing operations before cumulative effect of change in accounting principles per common share— basic
    1.07       1.16  
 
Net income per common share— basic
    1.36       .92  
 
Income from continuing operations before cumulative effect of change in accounting principles per common share— diluted
    1.06       1.15  
 
Net income per common share— diluted
    1.34       .91  
 
   
     
 

2003 Financial Report 31

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

The unaudited pro forma financial information above reflects the following:

a.   The elimination of transactions between Pfizer and Pharmacia, which upon completion of the merger would be considered inter-company. The majority of these transactions occurred under the Celebrex and Bextra marketing agreements. This reflects:

    the elimination of certain sales, alliance revenue and certain copromotion expenses, and
 
    the elimination of certain impacts of milestone payments made by Pfizer to Pharmacia.

b.   A decrease in interest expense of $11 million in 2003 and $38 million in 2002 related to the estimated fair value adjustment of long-term debt from the purchase price allocation.
 
c.   Additional amortization and depreciation expense of approximately $993 million in 2003 and $3,311 million in 2002 related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation. Identifiable intangible assets are being amortized over their estimated useful lives over a range of 2 to 40 years and property, plant and equipment is being depreciated over the estimated useful lives of the underlying assets.

The unaudited pro forma financial information above excludes the following material, non-recurring charges incurred in the year ended December 31, 2003:

  purchase accounting adjustments related to purchased IPR&D charge of $5,052 million and the incremental charge of $2,820 million reported in Cost of sales for the sale of acquired inventory that was written up to fair value.

3.     Merger-Related Costs

We incurred the following merger-related costs in connection with our acquisition of Pharmacia which was completed on April 16, 2003 and our merger with Warner-Lambert Company (Warner-Lambert) which was completed on June 19, 2000:

                           
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Integration costs:
                       
 
Pharmacia
  $ 838     $ 98     $  
 
Warner-Lambert
    33       345       456  
Restructuring costs:
                       
 
Pharmacia
    177              
 
Warner-Lambert
    10       187       363  
 
 
   
     
     
 
Total merger-related costs — expensed
  $ 1,058     $ 630     $ 819  
 
 
   
     
     
 
Total merger-related costs — capitalized
  $ 1,578     $     $  
 
 
   
     
     
 

A.     Integration Costs

Integration costs represent external, incremental costs directly related to our merger with Warner-Lambert and our acquisition of Pharmacia, including expenditures for consulting and systems integration.

B.     Restructuring Costs — Pharmacia

Throughout 2003, in connection with the acquisition of Pharmacia, Pfizer management approved and initiated plans to restructure the operations of both legacy Pfizer and legacy Pharmacia to eliminate duplicative facilities and reduce costs. The restructuring of our operations as a result of our acquisition of Pharmacia is expected to continue through 2005 and include severance, costs of vacating duplicative facilities and contract termination and other exit costs. Total merger-related expenditures incurred during 2003-2005 are expected to be in the range of $5.0 billion to $5.5 billion, pre-tax.

Restructuring Costs Associated with Legacy Pfizer — Expensed

We recorded $177 million of restructuring costs associated primarily with exiting certain activities of legacy Pfizer, including severance, costs of vacating duplicative facilities and contract termination and other exit costs. These costs have been recorded as a charge to the results of operations through the year ended December 31, 2003 and are included in Merger-related costs. The components of the restructuring charges associated with the acquisition of Pharmacia which were expensed in 2003 follow:

                         
            UTILIZATION        
            THROUGH   RESERVE*
    PROVISIONS   DEC. 31,   DEC. 31,
(MILLIONS OF DOLLARS)   2003   2003   2003

 
 
 
Employee termination costs
  $ 140     $ (79 )   $ 61  
Asset impairments
    21       (21 )      
Other
    16       (10 )     6  
 
   
     
     
 
 
  $ 177     $ (110 )   $ 67  
 
   
     
     
 

    Included in Other current liabilities.

Through December 31, 2003, the employee termination costs represent the approved reduction of the legacy Pfizer work force by 1,477 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 1,281 employees were terminated as of December 31, 2003. Asset impairments primarily include charges to write-down property, plant and equipment. Other primarily includes costs to exit certain assets and activities of legacy Pfizer.

Restructuring charges are recorded when specific decisions to exit activities are approved and incurred. Changes to the estimates of completing the currently approved restructuring plans or costs related to new restructuring initiatives for legacy Pfizer will be recorded in our results of operations.

Restructuring Costs Associated with Legacy Pharmacia — Capitalized

We recorded $1,578 million of restructuring costs associated primarily with employee terminations and exiting certain activities of legacy Pharmacia. These costs were recognized as liabilities assumed in the purchase business combination. Accordingly, these costs are considered part of the purchase price of Pharmacia and have been recorded as an increase to goodwill. These restructuring costs also include costs associated with relocation. The components of the restructuring charges capitalized in 2003 as a cost of the acquisition of Pharmacia follow:

                         
            UTILIZATION        
    COSTS   THROUGH   RESERVE*
    INCURRED   DEC. 31,   DEC. 31,
(MILLIONS OF DOLLARS)   2003   2003   2003

 
 
 
Employee termination costs
  $ 1,289     $ (1,083 )   $ 206  
Other
    289       (119 )     170  
 
   
     
     
 
 
  $ 1,578     $ (1,202 )   $ 376  
 
   
     
     
 

  *   Included in Other current liabilities.

Through December 31, 2003, the employee termination costs represent the approved reduction of the legacy Pharmacia work force by 11,249 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 10,174 employees were terminated as of December 31, 2003. Employee termination costs include accrued severance benefits and costs associated with change in control provisions of certain Pharmacia employment contracts. Other includes costs to exit certain assets and activities of legacy Pharmacia.

32 2003 Financial Report

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

Changes to the estimates of completing the currently approved restructuring plans or costs related to new restructuring initiatives for legacy Pharmacia will be recorded in goodwill for up to one year following the acquisition date of April 16, 2003 and in our results of operations after that date.

C.     Restructuring Costs — Warner-Lambert

The restructuring of our operations resulting from our merger with Warner-Lambert was substantially complete as of December 31, 2003. Accordingly, we do not expect to incur significant integration or restructuring charges directly related to our merger with Warner-Lambert in 2004.

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

                                                 
                            CUMULATIVE                
                            PROVISIONS   UTILIZATION        
                            THROUGH   THROUGH   RESERVE*
    PROVISIONS   DEC. 31,   DEC. 31,   DEC. 31,
   
 
 
 
(MILLIONS OF DOLLARS)   2003   2002   2001   2003   2003   2003

 
 
 
 
 
 
Employee termination costs
  $ 10     $ 170     $ 249     $ 1,279     $ (1,270 )   $ 9  
Asset impairments
          4       84       134       (134 )      
Other
          13       30       64       (64 )      
 
   
     
     
     
     
     
 
Total
  $ 10     $ 187     $ 363     $ 1,477     $ (1,468 )   $ 9  
 
   
     
     
     
     
     
 

    Included in Other current liabilities.

Through December 31, 2003, the employee termination costs represent the approved reduction of the work force of our continuing businesses by 8,095 employees, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and 7,817 employees had been terminated as of December 31, 2003. 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 $230 million at December 31, 2003 and $218 million at December 31, 2002. The deferred severance benefits are considered utilized charges and are included in Other noncurrent liabilities in the consolidated balance sheet.

4. Discontinued Operations

We sold the following businesses and products that did not fit within our strategic plans:

  In April 2003, we completed the sale of the hormone replacement therapy femhrt, formerly part of our Pharmaceutical segment and a component of the women’s health product line, to Galen Holdings plc for $160 million in cash with a right to receive up to $63.8 million contingent on femhrt retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of this product of $139 million ($83 million net of tax) in 2003.
 
  In March 2003, we sold the oral contraceptives Estrostep and Loestrin, formerly part of our Pharmaceutical segment and a component of the women’s health product line, to Galen Holdings plc for $197 million in cash with a right to receive up to $47.3 million contingent on Estrostep retaining market exclusivity until the expiration of its patent. We recognized a gain on the sale of these two products of $193 million ($116 million net of tax) in 2003.
 
  In March 2003, we sold the Adams confectionery products business, formerly part of our Consumer Healthcare segment, to Cadbury Schweppes plc for $4.2 billion in cash. We recognized a gain on the sale of this business of $3,091 million ($1,824 million net of tax) in 2003.
 
  In March 2003, we sold the Schick-Wilkinson Sword shaving products business, formerly part of our Consumer Healthcare segment, to Energizer Holdings, Inc., for $930 million in cash. We recognized a gain on the sale of this business of $462 million ($262 million net of tax) in 2003.
 
  In December 2002, we sold our Tetra fish-care products business, formerly part of our Consumer Healthcare segment to the Triton Fund, for $238.5 million in cash. We recognized a gain on the sale of this business of $117 million ($77 million net of tax) in 2002.

The divestitures of the Adams and Schick-Wilkinson Sword businesses and the women’s health product lines are presented as discontinued operations in 2003, 2002, and 2001. The divestiture of the Tetra business is reflected in discontinued operations in 2002 and 2001.

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)   2003   2002   2001

 
 
 
Revenues
  $ 762     $ 2,908     $ 2,958  
 
   
     
     
 
Pre-tax income
  $ 26     $ 447     $ 405  
Provision for taxes on income
    10       169       154  
 
   
     
     
 
Income from operations of discontinued businesses — net of tax
    16       278       251  
 
   
     
     
 
Pre-tax gains on sales of discontinued businesses
    3,885       117        
Provision for taxes on gains
    1,600       40        
 
   
     
     
 
Gains on sales of discontinued businesses — net of tax
    2,285       77        
 
   
     
     
 
Discontinued operations — net of tax
  $ 2,301     $ 355     $ 251  
 
   
     
     
 

On January 19, 2004, we announced that we agreed to sell our in-vitro allergy and diagnostics testing business for $575 million in cash. This business is included in our Corporate/Other segment and became a part of Pfizer in April 2003 with our acquisition of Pharmacia. We recorded approximately $153 million in revenues from this business in 2003.

On January 13, 2004, we announced that we are exploring strategic options, including possible sale, for approximately 60 non-core consumer products, currently marketed in Europe by our Consumer Healthcare segment. The majority of these products are small brands, sold in single markets only and include certain products that became a

2003 Financial Report 33

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

part of Pfizer in April 2003 in connection with our acquisition of Pharmacia. We recorded approximately $100 million in revenues for all of these products in 2003.

On July 24, 2003, we announced that we are exploring strategic options for our surgical ophthalmology business, including its possible sale. The surgical ophthalmology business is included in our Pharmaceutical segment and became a part of Pfizer in April 2003 with our acquisition of Pharmacia. We recorded approximately $102 million in revenues from this business in 2003.

5. 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.

On an ongoing basis, we evaluate our investment in debt and equity securities to determine if a decline in fair value is other-than-temporary. When a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Information about our investments follows:

                   
(MILLIONS OF DOLLARS)   2003   2002

 
 
Trading investments*
  $ 467     $  
Amortized cost and fair value of available-for-sale debt securities:**
               
 
Corporate debt
    9,524       5,471  
 
Foreign government and foreign government agency debt
    2,692       4,399  
 
Corporate asset-backed securities
    1,231       2,021  
 
Supranational debt
    1,142       3,090  
 
Certificates of deposit
    1,063       1,531  
 
   
     
 
Total available-for-sale debt securities
    15,652       16,512  
 
   
     
 
Amortized cost and fair value of held-to-maturity debt securities:**
               
 
Certificates of deposit and other
    44       74  
 
   
     
 
Total held-to-maturity debt securities
    44       74  
 
   
     
 
Cost of available-for-sale equity securities
    234       123  
Gross unrealized gains
    263       53  
Gross unrealized losses
    (6 )     (16 )
 
   
     
 
Fair value of available-for-sale equity securities
    491       160  
 
   
     
 
Total investments
  $ 16,654     $ 16,746  
 
   
     
 

  *   Trading investments are held in trust for legacy Pharmacia severance benefits.
 
  **   Gross unrealized gains and losses are not material.

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

                 
(MILLIONS OF DOLLARS)   2003   2002

 
 
Cash and cash equivalents
  $ 864     $ 1,380  
Short-term investments
    10,432       10,673  
Long-term investments and loans
    5,358       4,693  
 
   
     
 
Total investments
  $ 16,654     $ 16,746  
 
   
     
 

The contractual maturities of the available-for-sale and held-to-maturity debt securities as of December 31, 2003 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
  $ 7,766     $ 1,000     $ 677     $ 81     $ 9,524  
 
Foreign government and foreign government agency debt
    1,840       288       564             2,692  
 
Corporate asset-backed securities
    18       470       405       338       1,231  
 
Supranational debt
    657       328       157             1,142  
 
Certificates of deposit
    988       75                   1,063  
Held-to-maturity debt securities:
                                       
 
Certificates of deposit and other
    27       9             8       44  
 
   
     
     
     
     
 
Total debt securities
  $ 11,296     $ 2,170     $ 1,803     $ 427     $ 15,696  
Trading investments
                                    467  
Available-for-sale equity securities
                                    491  
 
                                   
 
Total investments
                                  $ 16,654  
 
                                   
 

B.     Short-Term Borrowings

The weighted average effective interest rate on short-term borrowings outstanding at December 31 was 1.7% in 2003 and 2002. At December 31, 2003, we had access to $2.7 billion of lines of credit of which $2.2 billion expire within one year. Of these lines of credit, $2.3 billion are unused, of which our lenders have committed to loan us $1.0 billion at our request.

34 2003 Financial Report

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

C. Long-Term Debt

                         
    MATURITY                
(MILLIONS OF DOLLARS)   DATE   2003   2002

 
 
 
5.625% senior unsecured notes*
  February 2006
  $ 804     $ 819  
6.6% senior unsecured notes*
  December 2028
    736        
5.625% senior unsecured notes*
  April 2009
    656       665  
5.75% senior unsecured notes*
  December 2005
    615        
.80% Japanese yen senior unsecured notes
  March 2008
    559       506  
6.5% senior unsecured notes*
  December 2018
    521        
4.65% senior unsecured notes*
  March 2018
    290        
3.3% senior unsecured notes*
  March 2009
    296        
6% senior unsecured notes*
  January 2008
    275       281  
Floating-rate unsecured notes
  March 2005
    200       200  
3.625% senior unsecured notes*
  November 2004
          619  
Other debentures, notes, borrowings and mortgages
            803       50  
 
           
     
 
Total long-term debt
          $ 5,755     $ 3,140  
 
           
     
 
Current portion not included above
          $ 726     $ 256  
 
           
     
 

  *   Includes unrealized gains and losses for debt with fair value hedges in 2003 and/or 2002 (see note 5D, “Financial Instruments — Derivative Financial Instruments and Hedging Activities”).

The floating-rate unsecured notes bear interest at a variable rate based on the commercial paper borrowing rate. The weighted average interest rates of these notes were 1.3% at December 31, 2003 and 1.5% at December 31, 2002.

In 2003, we issued:

  $300 million senior unsecured notes, which pay interest semi-annually, beginning on September 2, 2003, at a rate of 3.3%; and
 
  $300 million senior unsecured notes, 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 and were used for general corporate purposes.

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

Long-term debt outstanding at December 31, 2003 matures as follows:

                                         
                                    AFTER
(MILLIONS OF DOLLARS)   2005   2006   2007   2008   2008

 
 
 
 
 
Maturities
  $ 891     $ 830     $ 20     $ 1,088     $ 2,926  

At December 31, 2003, we had the ability to borrow $4.4 billion by issuing debt securities under our existing debt shelf registration statement filed with the SEC.

In February 2004, we issued the following debt under our debt shelf registrations which will be used for current general corporate purposes, including the refinancing of existing debt:

  $750 million senior unsecured notes due February 2014, which pay interest semi-annually, beginning on August 15, 2004, at a rate of 4.5%; and
 
  $700 million senior unsecured notes due March 2007, which pay interest semi-annually, beginning on September 15, 2004, at a rate of 2.5%,

In connection with these debt issues, we entered into:

  $750 million notional amount of interest rate swaps maturing in 2014; and
 
  $700 million notional amount of interest rate swaps maturing in 2007

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. Depending on market conditions, foreign exchange risk is also managed through the use of derivative financial instruments and foreign currency 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. We entered into financial instruments to hedge or offset by the same currency, an appropriate portion of the currency risk and the timing of the hedged or offset item. At December 31, 2003 and 2002, the financial instruments employed to manage foreign exchange risk follow:

2003 Financial Report 35

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

                                         
                    NOTIONAL AMOUNT        
                    (MILLIONS OF DOLLARS)        
    HEDGE          
  MATURITY
FINANCIAL INSTRUMENT   TYPE   HEDGED OR OFFSET ITEM   2003   2002   DATE

 
 
 
 
 
Forward Contracts
    Short-term foreign currency assets and liabilities(1)   $ 7,203     $     Through 2004
Forward Contracts
    Short-term foreign currency assets and liabilities(1)           1, 928     Through 2003
Forward Contracts
  Cash flow   Euro available-for-sale investments     2,388           Through 2004
Forward Contracts
  Cash flow   Euro available-for-sale investments           1, 802     Through 2003
Short-term yen borrowings
  Net investment   Yen net investments     1,539           Through 2004
Short-term yen borrowings
  Net investment   Yen net investments           1, 603     Through 2003
Swaps
  Cash flow   U. K. pound intercompany loan     714       645         2006
Long-term yen debt
  Net investment   Yen net investments     559       506         2008
Forward Contracts
  Cash flow   Japanese yen intercompany loan     266               2004
Swaps
  Cash flow   Japanese yen intercompany loan     260               2004
Swaps
  Cash flow   U. K. pound intercompany loan           466     Late 2003
Put options
  Cash flow   Yen forecasted intercompany inventory purchase           460     Through 2003
Swaps
  Fair value   Euro debt investments           230     Mid-2003
Swaps
  Fair value   Euro loans of a foreign subsidiary           104     Mid-2003

(1)   Primarily from intercompany transactions in euros, Japanese yen and Swedish krona in 2003, and in euros, Japanese yen and Australian dollars in 2002. 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. From time-to-time, depending on market conditions, we will fix interest rates either through entering into fixed rate investments and borrowings or through the use of derivative financial instruments. At December 31, 2003 and 2002, 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   2003   2002   DATE

 
 
 
 
 
Swaps
  Cash flow  
Yen “LIBOR” interest rate related to forecasted issuances of short-term debt(1)
  $ 1,129     $         2006
Swaps
  Cash flow  
Yen “LIBOR” interest rate related to forecasted issuances of short-term debt(1)
          1,022     Late 2003
Forward-starting swaps
  Cash flow   Yen “LIBOR” interest rate related to forecasted issuances of short-term debt(2)           1,022     Late 2003
Swaps
  Fair value   U.S. dollar fixed rate debt (3)     900       600         2009
Swaps
  Fair value   U.S. dollar fixed rate debt (3)     750       750         2006
Swaps
  Fair value   U.S. dollar fixed rate debt (3)     600       600         2004
Swaps
  Cash flow   U.S. dollar fixed rate investment (3)     590               2008
Swaps
  Fair value   U.S. dollar fixed rate debt (3)     250       250         2008
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 .9% in 2003 and 1.2% in 2002.
 
(2)   Serve to reduce variability by effectively fixing the maximum rates on short-term debt at .9%. These forward-starting swaps effectively replaced 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 or investments 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.”

36 2003 Financial Report

 


 

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 and foreign currency forwards 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 2003 or 2002.

Financial Statement Presentation

The consolidated 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 in 2002

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

Long-term debt includes:

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

Accumulated other comprehensive income /(expense) includes:

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

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, 2003.

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, 2003, we had $2,049 million due from a broad group of banks around the world.

6. Comprehensive Income

Changes, net of tax, in accumulated other comprehensive income/ (expense) follow:

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

 
 
 
 
Balance January 1, 2001
  $ (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 )
Period change
    2,070       68       (68 )     2,070  
 
   
     
     
     
 
Balance December 31, 2003
  $ 632     $ 138     $ (575 )   $ 195  
 
   
     
     
     
 

*   Income tax expense for other comprehensive income/(expense) was $530 million in 2003, $148 million in 2002 and $146 million in 2001.

2003 Financial Report 37

 


 

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)   2003   2002   2001

 
 
 
Holding gain/(loss), net of tax
  $ 74     $ (59 )   $ (86 )
Reclassification adjustment, net of tax
    (6 )     27       (5 )
 
   
     
     
 
Net unrealized gain/(loss) on available-for-sale securities
  $ 68     $ (32 )   $ (91 )
 
   
     
     
 

7. Property, Plant and Equipment

The major categories of property, plant and equipment follow:

                         
    USEFUL                
    LIVES                
(MILLIONS OF DOLLARS)   (YEARS)   2003   2002

 
 
 
Land
        $ 522     $ 252  
Buildings
    331/3-50       9,296       5,407  
Machinery and equipment
    8-20       9,435       6,023  
Furniture, fixtures and other
    3-12 1/2       3,642       2,977  
Construction in progress
          2,486       1,484  
 
           
     
 
 
            25,381       16,143  
Less:accumulated depreciation
            7,094       5,431  
 
           
     
 
Total property, plant and equipment
          $ 18,287     $ 10,712  
 
           
     
 

8. Goodwill and Other Intangible Assets

A. Goodwill

The changes in the carrying amount of goodwill by segment for the years ended December 31, 2003 and 2002 follow:

                                         
    PHARMA-   CONSUMER   ANIMAL                
(MILLIONS OF DOLLARS)   CEUTICAL   HEALTHCARE   HEALTH   OTHER   TOTAL

 
 
 
 
 
Balance December 31, 2001
  $ 311     $ 833     $ 536     $ 9     $ 1,689  
Impairment loss
                (536 )           (536 )
Other*
    51       (4 )                 47  
 
   
     
     
     
     
 
Balance December 31, 2002
    362       829             9       1,200  
Pharmacia acquisition (preliminary estimate)
    18,548       1,714       77       108       20,447  
Other*
    581       72       1       5       659  
 
   
     
     
     
     
 
Balance December 31, 2003
  $ 19,491     $ 2,615     $ 78     $ 122     $ 22,306  
 
   
     
     
     
     
 

*   Primarily reflects the impact of foreign exchange.

In 2002, as a result of adopting SFAS No. 142, Goodwill and Other Intangible Assets, 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. This write-down, along with $29 million for impairment provisions related to identifiable intangible assets, was reported as a cumulative effect of a change in accounting principle as of the beginning of 2002 totaling $565 million ($410 million net of tax).

B. Intangibles

The components of identifiable intangible assets follow:

                                   
      GROSS   ACCUMULATED
      CARRYING AMOUNT   AMORTIZATION
     
 
(MILLIONS OF DOLLARS)   2003   2002   2003   2002

 
 
 
 
Amortized identifiable intangible assets:
                               
 
Developed technology rights
  $ 32,289     $ 526     $ (2,400 )   $ (72 )
 
Trademarks
    147       133       (88 )     (72 )
 
License agreements
    48       42       (13 )     (25 )
 
Patents
    33       33       (27 )     (24 )
 
Noncompete agreements
    50       48       (46 )     (39 )
 
Customer contracts
    149             (25 )      
 
Other
    355       78       (77 )     (31 )
 
 
   
     
     
     
 
Total amortized identifiable intangible assets
    33,071       860       (2,676 )     (263 )
 
 
   
     
     
     
 
Unamortized identifiable intangible assets:
                               
 
Brands
    5,308                    
 
License agreements
    288                    
 
Trademarks
    266       240              
 
Pension asset
    41       60                
 
Other
    52       24              
 
 
   
     
     
     
 
Total unamortized intangible assets
    5,955       324              
 
 
   
     
     
     
 
Total identifiable intangible assets
  $ 39,026     $ 1,184     $ (2,676 )   $ (263 )
 
 
   
     
     
     
 

Post-approval milestone payments made under our alliance agreements for the human pharmaceutical products, such as Rebif, Spiriva and Celebrex (prior to our acquisition of Pharmacia), are included in developed technology rights.

Total amortization expense for finite-lived intangible assets was $2,405 million in 2003, $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, Selling, informational and administrative expenses, Research and development expenses and Other (income)/deductions — net.

The annual amortization expense expected for the years 2004 through 2008 is as follows:

                                         
(MILLIONS OF DOLLARS)   2004   2005   2006   2007   2008

 
 
 
 
 
Amortization expense
  $ 3,378     $ 3,372     $ 3,265     $ 3,113     $ 2,608  

C. Change in Accounting Principle

In 2001, we recorded amortization of goodwill, net of taxes, of $36 million and amortization of indefinite-lived intangible assets, net of taxes, of $8 million. If the provisions of SFAS No. 142, which were adopted beginning in 2002, were in effect in 2001, our reported net income of $7,788 million would have increased to $7,832 million. The addback of amortization of goodwill and indefinite-lived intangible assets, net of taxes, would have represented an increase in our basic and diluted earnings per common share of $.01. This would have resulted in our 2001 reported basic earnings per common share (EPS) increasing from $1.25 to $1.26 and our reported diluted EPS increasing from $1.22 to $1.23.

38 2003 Financial Report

 


 

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies

9. Other (Income)/Deductions — Net

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

                         
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
Interest income
  $ (346 )   $ (382 )   $ (539 )
Interest expense
    290       279       322  
Interest expense capitalized
    (20 )     (28 )     (56 )
 
   
     
     
 
Net interest income
    (76 )     (131 )     (273 )
Various litigation matters
    1,435       15        
Copromotion charges and intellectual property rights payments
    380       32       206  
Charges to write-down equity investments
    16       45        
Gains on the sales of products
    (87 )     (34 )      
Amortization of finite-lived intangibles
    2,183       28       45  
Net exchange losses
    1       40       33  
Other, net
    (242 )     (115 )     (106 )
 
   
     
     
 
Other (income)/deductions — net
  $ 3,610     $ (120 )   $ (95 )
 
   
     
     
 

In the fourth quarter of 2003, we recorded charges totaling $1, 402 million for the resolution of two legacy Warner-Lambert litigation matters (see our discussions in Note 20 — “ Legal Proceedings and Contingencies”). The increase in amortization of finite-lived intangibles in 2003 reflects the impact of the acquisition of Pharmacia.

10. Taxes on Income

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

                         
(MILLIONS OF DOLLARS)   2003   2002   2001

 
 
 
United States
  $ (209 )   $ 4,523     $ 4,193  
International
    3,472       7,273       5,791  
 
   
     
     
 
Total income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles
  $ 3,263     $ 11,796     $