10-Q 1 a6715256.htm PFIZER INC. 10-Q a6715256.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
   x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 3, 2011
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
COMMISSION FILE NUMBER 1-3619
 
----
 
PFIZER INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)
 
235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 733-2323
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
YES   x                                     NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES   x                                     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large Accelerated filer  x Accelerated filer  o Non-accelerated filer o Smaller reporting company o
                                                                                                        
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES  o                                      NO   x  
 
At May 9, 2011, 7,901,130,426 shares of the issuer’s voting common stock were outstanding.
 
 
 

 
 
FORM 10-Q
 
For the Quarter Ended
 
April 3, 2011
 
Table of Contents
 
Page
   
 
 
 
   
 
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59
   
 
 
59
   
 
 
59
   
 
 
59
   
 
 
60
   
 
61
 
 
2

 
 


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 

   
Three Months Ended
 
(millions, except per common share data)
 
April 3,
2011
   
April 4,
2010
 
             
Revenues
  $ 16,502     $ 16,576  
                 
Costs and expenses:
               
Cost of sales(a)
    3,693       4,202  
Selling, informational and administrative expenses(a)
    4,503       4,403  
Research and development expenses(a)
    2,091       2,221  
Amortization of intangible assets
    1,376       1,409  
Acquisition-related in-process research and development charges
    -       74  
Restructuring charges and certain acquisition-related costs
    894       706  
Other deductions––net
    827       412  
                 
Income from continuing operations before provision for taxes on income
    3,118       3,149  
                 
Provision for taxes on income
    894       1,135  
                 
Income from continuing operations
    2,224       2,014  
                 
Discontinued operations:
               
Income from operations––net of tax
    10       19  
Gain on sale of discontinued operations––net of tax
    -       2  
Discontinued operations––net of tax
    10       21  
                 
Net income before allocation to noncontrolling interests
    2,234       2,035  
                 
Less:  Net income attributable to noncontrolling interests
    12       9  
                 
Net income attributable to Pfizer Inc.
  $ 2,222     $ 2,026  
                 
Earnings per common share––basic:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.28     $ 0.25  
Discontinued operations––net of tax
     ––        ––  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.28     $ 0.25  
                 
Earnings per common share––diluted:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.28     $ 0.25  
Discontinued operations––net of tax
     ––        ––  
Net income attributable to Pfizer Inc. common shareholders
  $ 0.28     $ 0.25  
                 
Weighted-average shares used to calculate earnings per common share:
               
Basic
    7,982       8,061  
Diluted
    8,035       8,101  
                 
Cash dividends paid per common share
  $ 0.20     $ 0.18  
(a)
Exclusive of amortization of intangible assets, except as disclosed in Note 11.B Goodwill and Other Intangible Assets: Other Intangible Assets.

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
3

 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 

(millions of dollars)
 
April 3,
2011
   
Dec. 31,
2010
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 730     $ 1,735  
Short-term investments
    23,279       26,277  
Accounts receivable, less allowance for doubtful accounts
    15,182       14,426  
Short-term loans
    406       467  
Inventories
    8,467       8,275  
Taxes and other current assets
    8,755       8,394  
Assets of discontinued operations and other assets held for sale
    1,425       1,439  
Total current assets
    58,244       61,013  
Long-term investments and loans
    9,811       9,747  
Property, plant and equipment, less accumulated depreciation
    18,833       18,645  
Goodwill
    44,853       43,928  
Identifiable intangible assets, less accumulated amortization
    58,497       57,555  
Taxes and other noncurrent assets
    4,718       4,126  
Total assets
  $ 194,956     $ 195,014  
                 
Liabilities and Shareholders’ Equity
               
Short-term borrowings, including current portion of long-term debt
  $ 6,093     $ 5,603  
Accounts payable
    3,750       3,994  
Dividends payable
    1       1,601  
Income taxes payable
    1,958       951  
Accrued compensation and related items
    1,849       2,080  
Other current liabilities
    15,338       14,256  
Liabilities of discontinued operations
    182       151  
Total current liabilities
    29,171       28,636  
                 
Long-term debt
    35,308       38,410  
Pension benefit obligations
    5,929       6,194  
Postretirement benefit obligations
    3,041       3,035  
Noncurrent deferred tax liabilities
    19,414       18,628  
Other taxes payable
    6,590       6,245  
Other noncurrent liabilities
    4,970       5,601  
Total liabilities
    104,423       106,749  
                 
Preferred stock
    49       52  
Common stock
    444       444  
Additional paid-in capital
    70,925       70,760  
Employee benefit trusts
    (6 )     (7 )
Treasury stock
    (24,215 )     (22,712 )
Retained earnings
    44,926       42,716  
Accumulated other comprehensive loss
    (2,056 )     (3,440 )
Total Pfizer Inc. shareholders’ equity
    90,067       87,813  
Equity attributable to noncontrolling interests
    466       452  
Total shareholders’ equity
    90,533       88,265  
Total liabilities and shareholders’ equity
  $ 194,956     $ 195,014  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
4

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
             
Operating Activities:
           
Net income before allocation to noncontrolling interests
  $ 2,234     $ 2,035  
Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by/(used in) operating activities:
               
Depreciation and amortization
    2,104       2,051  
Share-based compensation expense
    122       138  
     Asset write-offs and impairment charges
    165       59  
     Acquisition-related in-process research and development charges
    -       74  
     Deferred taxes from continuing operations
    (120 )     840  
Other non-cash adjustments
    (2 )     260  
Benefit plan contributions (in excess of)/less than expense
    (383 )     163  
Other changes in assets and liabilities, net of acquisitions and divestitures
    522       (11,980 )
                 
Net cash provided by/(used in) operating activities
    4,642       (6,360 )
                 
Investing Activities:
               
Purchases of property, plant and equipment
    (250 )     (305 )
Purchases of short-term investments
    (3,352 )     (2,178 )
Proceeds from redemptions and sales of short-term investments, net
    8,406       11,388  
Purchases of long-term investments
    (1,932 )     (858 )
Proceeds from redemptions and sales of long-term investments
    888       1,127  
Acquisitions, net of cash acquired
    (3,169 )     -  
Other investing activities
    134       220  
                 
Net cash provided by investing activities
    725       9,394  
                 
Financing Activities:
               
Increase in short-term borrowings
    2,682       1,892  
Principal payments on short-term borrowings, net
    (2,220 )     (3,663 )
Principal payments on long-term debt
    (3,878 )     (9 )
Purchases of common stock
    (1,430 )     -  
Cash dividends paid
    (1,591 )     (1,441 )
Other financing activities
    33       10  
                 
Net cash used in financing activities
    (6,404 )     (3,211 )
Effect of exchange-rate changes on cash and cash equivalents
    32       (42 )
Net decrease in cash and cash equivalents
    (1,005 )     (219 )
Cash and cash equivalents at beginning of period
    1,735       1,978  
                 
Cash and cash equivalents at end of period
  $ 730     $ 1,759  
                 
Supplemental Cash Flow Information:
               
Cash (refunded)/paid for income taxes
  $ (134 )   $ 10,547  
Cash paid for interest
    687       792  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
5

 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month periods ended February 27, 2011, and February 28, 2010. We have made certain reclassification adjustments to conform prior-period amounts to the current presentation, primarily related to discontinued operations (see Note 4. Discontinued Operations) and segment reporting (see Note 15. Segment, Product and Geographic Area Information).

On January 31, 2011, we completed the tender offer for all of the outstanding shares of common stock of King Pharmaceuticals, Inc. (King) and acquired approximately 92.5% of the outstanding shares for approximately $3.3 billion in cash. On February 28, 2011, we acquired the remaining outstanding shares of King for approximately $300 million in cash (for additional information, see Note 3. Acquisition of King Pharmaceuticals, Inc.). Commencing from January 31, 2011, our financial statements include the assets, liabilities, operating results and cash flows of King. As a result, and in accordance with our domestic and international reporting periods, our condensed consolidated financial statements for the quarter ended April 3, 2011 reflect approximately two months of King’s U.S. operations and approximately one month of King’s international operations.

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

We are responsible for the unaudited financial statements included in this document.  The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

 
The provisions of the following new accounting standards were adopted as of January 1, 2011 and did not have a significant impact on our condensed consolidated financial statements:

New guidelines that address the recognition and presentation of the annual fee paid by pharmaceutical companies beginning on January 1, 2011 to the U.S. Treasury as a result of U.S. Healthcare Legislation. As a result of adopting this new standard, we are recording the annual fee ratably throughout the year in the Selling, informational and administrative expenses line item in our condensed consolidated statement of income.

An amendment to the guidelines that address the accounting for multiple-deliverable arrangements to enable companies to account for certain products or services separately rather than as a combined unit.


On January 31, 2011 (the acquisition date), we completed our tender offer for all of the outstanding shares of common stock of King at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, we acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired).

King’s principal businesses consist of a prescription pharmaceutical business focused on delivering new formulations of pain treatments designed to discourage common methods of misuse and abuse; the Meridian auto-injector business for emergency drug delivery, which develops and manufactures the EpiPen; an established products portfolio; and an animal health business that offers a variety of feed-additive products for a wide range of species.

 
6

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The following table summarizes the provisional recording, primarily at fair value, of the assets acquired and liabilities assumed as of the acquisition date: 

(millions of dollars)
 
Amounts
Recognized as of
Acquisition Date
(Provisional)
 
       
Working capital, excluding inventories
  $ 210  
Inventories
    340  
Property, plant and equipment
    413  
Identifiable intangible assets, excluding in-process research and development
    1,781  
In-process research and development
    301  
Net tax accounts
    (384 )
All other long-term assets and liabilities, net
    114  
Total identifiable net assets
    2,775  
Goodwill
    780  
Net assets acquired/total consideration transferred
  $ 3,555  

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $200 million, virtually all of which is expected to be collected.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of King includes the following:

the expected synergies and other benefits that we believe will result from combining the operations of King with the operations of Pfizer;

any intangible assets that do not qualify for separate recognition, as well as future, yet unidentified projects and products; and

the value of the going-concern element of King’s existing businesses (the higher rate of return on the assembled collection of net assets versus if Pfizer had acquired all of the net assets separately).

Goodwill is not amortized and is not deductible for tax purposes. While the allocation of goodwill among reporting units is not complete, we expect that substantially all of the goodwill will be related to our biopharmaceutical reporting units (see Note 11. Goodwill and Other Intangible Assets for additional information).

The assets and liabilities arising from contingencies recognized at acquisition date, which are subject to change, are not significant to Pfizer’s financial statements.

The recorded amounts are provisional and subject to change. Specifically, the following items are subject to change:

Amounts for intangibles, inventory and property, plant and equipment (PP&E), pending finalization of valuation efforts for acquired intangible assets as well as the completion of certain physical inventory counts and the confirmation of the physical existence and condition of certain PP&E assets.

Amounts for environmental contingencies, pending the finalization of our assessment and valuation of environmental matters.

Amounts for legal contingencies, pending the finalization of our examination and evaluation of the portfolio of filed cases.

Amounts for income tax assets, receivables and liabilities pending the filing of King’s pre-acquisition tax returns and the receipt of information from taxing authorities, which may change certain estimates and assumptions used.

The allocation of goodwill among reporting units.
 
 
7

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The following table presents information for King that is included in Pfizer’s condensed consolidated statement of income from the acquisition date, January 31, 2011, through Pfizer’s first-quarter 2011 domestic and international quarter-ends: 

(millions of dollars)
 
King’s Operations
Included in Pfizer’s First
Quarter 2011 Results
 
       
Revenues
  $ 224  
Loss from continuing operations attributable to Pfizer Inc. common shareholders(a)
    (69 )
(a)
Includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory estimated to have been sold ($57 million pre-tax), amortization of identifiable intangible assets acquired from King ($29 million pre-tax) and restructuring and integration costs ($95 million pre-tax).
 
The following table presents supplemental pro forma information as if the acquisition of King had occurred on January 1, 2010:

   
Pro Forma Consolidated Results
 
   
Three Months Ended
 
(millions of dollars, except per share  data)
 
April 3,
2011
   
April 4,
2010
 
             
Revenues
  $ 16,611     $ 16,949  
Income from continuing operations attributable to Pfizer Inc. common shareholders
    2,313       1,910  
Diluted earnings per share attributable to Pfizer Inc. common shareholders
    0.29       0.24  
 
The unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition. The unaudited pro forma consolidated results reflect the historical financial information of Pfizer and King, adjusted for the following pro forma pre-tax amounts:

Elimination of King’s historical intangible asset amortization expense ($6 million in 2011 and $41 million in 2010).

Additional amortization expense (approximately $14 million in 2011 and $43 million in 2010) related to the fair value of identifiable intangible assets acquired.

Additional depreciation expense (approximately $1 million in 2011 and $3 million in 2010) related to the fair value adjustment to property, plant and equipment acquired.

Adjustment related to the fair value adjustments to acquisition-date inventory estimated to have been sold (elimination of $57 million charge in 2011 and addition of $57 million charge in 2010).

Adjustment for acquisition-related costs directly attributable to the acquisition (elimination of $117 million of charges in 2011 and addition of $117 million of charges in 2010, reflecting charges incurred by both King and Pfizer).

 
We evaluate our businesses and product lines periodically for their strategic fit within our operations. In the first quarter of 2011, we decided to sell our Capsugel business. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business have been reclassified into Discontinued operations–– net of tax in the Condensed Consolidated Statements of Income, and the assets and liabilities associated with this business have been adjusted to fair value, less costs to sell, and reclassified into Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the Condensed Consolidated Balance Sheets.
 
On April 4, 2011, we announced that we had entered into an agreement to sell Capsugel to an affiliate of Kohlberg Kravis Roberts & Co. L.P. for $2.375 billion in cash. The sale is subject to customary closing conditions, including regulatory approval in certain jurisdictions, such as the U.S. and the European Union, among others. We expect the transaction to be completed in the third quarter of 2011, assuming receipt of the required regulatory clearances and the satisfaction of other closing conditions.
 
 
8

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The following amounts, substantially all of which relate to our Capsugel business, have been segregated from continuing operations and included in Discontinued operations—net of tax in our Condensed Consolidated Statements of Income:

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
             
Revenues
  $ 177     $ 174  
Pre-tax income from discontinued operations
  $ 28     $ 30  
Provision for taxes
    (18 )     (11 )
Income from discontinued operations––net of tax
    10       19  
Pre-tax gain on sale of discontinued operations
    ––       3  
Provision for income taxes
    ––       (1 )
Discontinued operations––net of tax
  $ 10     $ 21  

The following assets and liabilities, which include assets and liabilities held for sale related to our Capsugel business, and other assets held for sale, have been segregated and included in Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in our Condensed Consolidated Balance Sheets:

(millions of dollars)
 
April 3,
2011
   
Dec. 31,
2010
 
             
Accounts receivable
  $ 179     $ 186  
Inventories
    144       130  
Taxes and other current assets
    39       47  
Property, plant and equipment
    993       1,009  
Goodwill
    19       19  
Identifiable intangible assets
    6       3  
Taxes and other noncurrent assets
    45       45  
Assets of discontinued operations and other assets held for sale
  $ 1,425     $ 1,439  
                 
Current liabilities
  $ 133     $ 124  
Other liabilities
    49       27  
Liabilities of discontinued operations
  $ 182     $ 151  

Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant.


We often incur significant costs in connection with acquiring, restructuring and integrating acquired businesses and in connection with our global cost-reduction initiatives. For example:
 
for our cost-reduction initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and
 
for our acquisition activity, we typically incur costs that can include transaction costs, integration costs (such as expenditures for consulting and systems integration) and restructuring charges, related to employees, assets and activities that will not continue in the combined company.
 
On February 1, 2011, we announced a new research and productivity initiative to accelerate our strategies to improve innovation and overall productivity in R&D by prioritizing areas with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

 
9

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
We incurred the following costs in connection with our cost-reduction initiatives and acquisition activity, such as King (acquired in 2011) and Wyeth (acquired in 2009):

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
             
Transaction costs(a)
  $ 10     $ 9  
Integration costs(b)
    179       208  
Restructuring charges(c):
               
Employee termination costs
    667       458  
Asset impairments
    25       6  
Other
    13       25  
Restructuring charges and certain acquisition-related costs
    894       706  
 
Additional depreciation––asset restructuring (d)
               
Cost of sales
    172       13  
Selling, informational and administrative expenses
    7       60  
Research and development expenses
    64       20  
Total additional depreciation––asset restructuring
    243       93  
 
Implementation costs(e)
               
Research and development expenses
    10       ––  
Total implementation costs
    10       ––  
Total costs associated with cost-reduction initiatives and acquisition activity
  $ 1,147     $ 799  
(a)
Transaction costs represent external costs directly related to business combinations and primarily include expenditures for banking, legal, accounting and other similar services.
(b)
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and systems integration.
(c)
From the beginning of our cost-reduction and transformation initiatives in 2005 through April 3, 2011, Employee termination costs represent the expected reduction of the workforce by approximately 53,500 employees, mainly in manufacturing and sales and research of which approximately 37,900 employees have been terminated as of April 3, 2011. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits, many of which may be paid out during periods after termination. Asset impairments primarily include charges to write down property, plant and equipment to fair value. Other primarily includes costs to exit certain assets and activities. These restructuring charges in 2011 are associated with the following: Primary Care operating segment ($46 million), Specialty Care and Oncology operating segment ($35 million), Established Products and Emerging Markets operating segment ($3 million), Animal Health and Consumer Healthcare operating segment ($10 million), Nutrition operating segment ($2 million), Worldwide Research and Development ($422 million) and Corporate ($187 million).
(d)
Additional depreciation – asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions related to acquisitions.
(e)
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction initiatives.

The components of restructuring charges associated with all of our cost-reduction initiatives and acquisition activity follow:

   
Costs Incurred
   
Activity
   
Accrual
 
(millions of dollars)
    2005-2011    
Through
April 3,
2011(a)
   
As of
April 3,
2011(b)
 
                     
Employee termination costs
  $ 9,478     $ 7,160     $ 2,318  
Asset impairments
    2,333       2,333       ––  
Other
    914       822       92  
Total restructuring charges
  $ 12,725     $ 10,315     $ 2,410  
(a)
Includes adjustments for foreign currency translation.
(b)
Included in Other current liabilities ($1.7 billion) and Other noncurrent liabilities ($700 million).

 
10

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table sets forth details related to amounts recorded in Other deductions––net:

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
             
Interest income(a)
  $ (105 )   $ (112 )
Interest expense(a)
    458       522  
Net interest expense
    353       410  
Royalty-related income
    (171 )     (142 )
Net gain on asset disposals
    (12 )     (45 )
Certain legal matters, net(b)
    501       137  
Certain asset impairment charges(c)
    157       ––  
Other, net
    (1 )     52  
Other deductions––net
  $ 827     $ 412  
(a)
Interest income decreased in 2011 due to lower interest rates. Interest expense decreased in 2011 due to lower long- and short-term debt balances and the conversion of some fixed-rate liabilities to floating-rate liabilities.
(b)
In 2011, primarily relates to a charge for hormone-replacement therapy litigation (see Note 14. Legal Proceedings and Contingencies).
(c)
In 2011, relates to an IPR&D compound acquired as part of our acquisition of Wyeth.


Our effective tax rate for continuing operations was 28.7% for the first quarter of 2011, compared to 36.0% for the first quarter of 2010. The lower tax rate for the first quarter of 2011 is primarily the result of:

the extension of the U.S. research and development credit, which was signed into law on December 17, 2010;

the change in the jurisdictional mix of earnings; and

the tax impact of the charges incurred for certain legal matters (see Note 14. Legal Proceedings and Contingencies).


The components of comprehensive income/(loss) follow:

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
             
Net income before allocation to noncontrolling interests
  $ 2,234     $ 2,035  
Other comprehensive income/(loss):
               
Currency translation adjustment and other
    1,541       (2,749 )
Net unrealized (losses)/gains on derivative financial instruments
    (135 )     134  
Net unrealized losses on available-for-sale securities
    (24 )     (15 )
Benefit plan adjustments
    2       117  
Total other comprehensive income/(loss)
    1,384       (2,513 )
Total comprehensive income/(loss) before allocation to noncontrolling interests
    3,618       (478 )
Less: Comprehensive income/(loss) attributable to noncontrolling interests
    16       (10 )
Comprehensive income/(loss) attributable to Pfizer Inc.
  $ 3,602     $ (468 )

 
11

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


A. Selected Financial Assets and Liabilities

Information about certain of our financial assets and liabilities follows:

(millions of dollars)
 
April 3,
2011
   
Dec. 31,
2010
 
Selected financial assets measured at fair value on a recurring basis (a) :
           
Trading securities
  $ 155     $ 173  
Available-for-sale debt securities(b)
    29,482       32,699  
Available-for-sale money market funds
    1,396       1,217  
Available-for-sale equity securities, excluding money market funds(b)
    343       230  
Derivative financial instruments in receivable positions(c):
               
Interest rate swaps
    339       603  
Foreign currency swaps
    268       128  
Foreign currency forward-exchange contracts
    134       494  
Total
    32,117       35,544  
Other selected financial assets(d):
               
Held-to-maturity debt securities, carried at amortized cost(b)
    848       1,178  
Private equity securities, carried at cost or equity method
    1,156       1,134  
Short-term loans, carried at cost
    406       467  
Long-term loans, carried at cost
    237       299  
Total
    2,647       3,078  
Total selected financial assets (e)
  $ 34,764     $ 38,622  
Financial liabilities measured at fair value on a recurring basis(a):
               
Derivative financial instruments in a liability position(f):
               
Foreign currency swaps
  $ 572     $ 623  
Foreign currency forward-exchange contracts
    304       257  
Interest rate swaps
    7       4  
Total
    883       884  
Other financial liabilities:
               
Short-term borrowings, carried at historical proceeds, as adjusted(d), (g)
    6,093       5,603  
Long-term debt, carried at historical proceeds, as adjusted(h), (i)
    35,308       38,410  
Total
    41,401       44,013  
Total selected financial liabilities
  $ 42,284     $ 44,897  
(a)
Fair values are determined based on valuation techniques categorized as follows: Level 1 means the use of quoted prices for identical instruments in active markets; Level 2 means the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; Level 3 means the use of unobservable inputs. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except that included in available-for-sale equity securities, excluding money market funds, are $109 million as of April 3, 2011 and $105 million as of December 31, 2010 of investments that use Level 1 inputs in the calculation of fair value, and $125 million that use Level 3 inputs as of April 3, 2011.
(b)
Gross unrealized gains and losses are not significant.
(c)
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $70 million and foreign currency forward-exchange contracts with fair values of $69 million at April 3, 2011; and foreign currency forward-exchange contracts with fair values of $326 million and foreign currency swaps with fair values of $17 million at December 31, 2010.
(d)
The differences between the estimated fair values and carrying values of our financial assets and liabilities not measured at fair value on a recurring basis were not significant at April 3, 2011 or December 31, 2010.
(e)
The decrease in selected financial assets is primarily due to sales of investments, the proceeds from which were used to fund our acquisition of King (see Note 3. Acquisition of King Pharmaceuticals, Inc.).
(f)
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $107 million and foreign currency swaps with fair values of $37 million at April 3, 2011; and foreign currency forward-exchange contracts with fair values of $186 million and foreign currency swaps with fair values of $93 million at December 31, 2010.
(g)
Includes foreign currency borrowings with fair values of $920 million at April 3, 2011 and $2.0 billion at December 31, 2010, which are used to hedge the exposure of certain foreign currency denominated net investments.
(h)
Includes foreign currency debt with fair values of $838 million at April 3, 2011 and $880 million at December 31, 2010, which are used to hedge the exposure of certain foreign currency denominated net investments.
(i)
The fair value of our long-term debt is $38.7 billion at April 3, 2011 and $42.3 billion at December 31, 2010.
 
 
12

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
These selected financial assets and liabilities are presented in the Condensed Consolidated Balance Sheets as follows:

(millions of dollars)
 
April 3,
2011
   
Dec. 31,
2010
 
Assets
           
Cash and cash equivalents
  $ 527     $ 906  
Short-term investments
    23,279       26,277  
Short-term loans
    406       467  
Long-term investments and loans
    9,811       9,747  
Taxes and other current assets(a)
    324       515  
Taxes and other noncurrent assets(b)
    417       710  
Total selected financial assets
  $ 34,764     $ 38,622  
Liabilities
               
Short-term borrowings, including current portion of long-term debt
  $ 6,093     $ 5,603  
Other current liabilities(c)
    435       339  
Long-term debt
    35,308       38,410  
Other noncurrent liabilities(d)
    448       545  
Total selected financial liabilities
  $ 42,284     $ 44,897  
(a)
At April 3, 2011, derivative instruments at fair value include foreign currency swaps ($153 million), foreign currency forward-exchange contracts ($134 million) and interest rate swaps ($37 million) and at December 31, 2010, include foreign currency forward-exchange contracts ($494 million) and foreign currency swaps ($21 million).
(b)
At April 3, 2011, derivative instruments at fair value include foreign currency swaps ($115 million) and interest rate swaps ($302 million) and at December 31, 2010, include interest rate swaps ($603 million) and foreign currency swaps ($107 million).
(c)
At April 3, 2011, derivative instruments at fair value include foreign currency forward-exchange contracts ($304 million), foreign currency swaps ($129 million) and interest rate swaps ($2 million) and at December 31, 2010, include foreign currency forward-exchange contracts ($257 million), foreign currency swaps ($79 million) and interest rate swaps ($3 million).
(d)
At April 3, 2011, derivative instruments at fair value include foreign currency swaps ($443 million) and interest rate swaps ($5 million) and at December 31, 2010, include foreign currency swaps ($544 million) and interest rate swaps ($1 million).

There were no significant impairments of financial assets recognized in the first quarter of 2011 or 2010.

B. Investments in Debt and Equity Securities

The contractual maturities of the available-for-sale and held-to-maturity debt securities as of April 3, 2011, follow:

   
Years
       
(millions of dollars)
 
Within 1
   
Over 1
to 5
   
Over 10
   
Total at
April 3,
2011
 
Available-for-sale debt securities:
                       
Western European and other government debt
  $ 17,725     $ 969     $ ––     $ 18,694  
Corporate debt
    1,372       2,447       ––       3,819  
Federal Home Loan Mortgage Corporation and Federal National Mortgage
Association asset-backed securities
    ––       2,627       ––       2,627  
Western European and other government agency debt
    1,487       168       62       1,717  
Supranational debt
    937       647       ––       1,584  
Reverse repurchase agreements
    759       ––       ––       759  
U.S. government Federal Deposit Insurance Corporation
guaranteed debt
    ––       155       ––       155  
Other asset-backed securities
    16       25       48       89  
Certificates of deposit
    38       ––       ––       38  
Held-to-maturity debt securities:
                               
Certificates of deposit and other
    712       136             848  
Total debt securities
  $ 23,046     $ 7,174     $ 110     $ 30,330  
Trading securities
                            155  
Available-for-sale money market funds
                            1,396  
Available-for-sale equity securities, excluding money market funds
                            343  
Total
                          $ 32,224  

 
13

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

C. Short-Term Borrowings
Short-term borrowings include amounts for commercial paper of $900 million as of April 3, 2011 and $1.2 billion as of December 31, 2010.

D. Derivative Financial Instruments and Hedging Activities
Foreign Exchange Risk—As of April 3, 2011, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $44.5 billion. The derivative financial instruments primarily hedge or offset exposures in euro, Japanese yen and U.K. pound.
 
Interest Rate Risk—As of April 3, 2011, the aggregate notional amount of interest rate derivative financial instruments is $13 billion. The derivative financial instruments hedge U.S. dollar and euro fixed-rate debt.

Information about gains/(losses) incurred to hedge or offset foreign exchange or interest rate risk is as follows:

   
Amount of
Gains/(Losses)
Recognized in OID(a) (b) (c)
   
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a) (d)
   
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a) (d)
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
 
Three Months Ended
                                   
Derivative Financial Instruments in Fair Value
  Hedge Relationships(b)
                                   
 Interest rate swaps
  $ ––     $ ––     $ ––     $ ––     $ ––     $ ––  
 Foreign currency swaps
    (1 )     ––       ––       ––       ––       ––  
                                                 
Derivative Financial Instruments in Cash Flow
  Hedge Relationships
                                               
 Foreign currency swaps
  $ ––     $ ––     $ 305     $ (438 )   $ 506     $ (628 )
 Foreign currency forward-exchange contracts
    ––       ––       2       ––       4       1  
                                                 
Derivative Financial Instruments in Net
  Investment Hedge Relationships
                                               
 Foreign currency swaps
  $ 2     $ 1     $ 33     $ 11     $ ––     $ ––  
                                                 
Derivative Financial Instruments Not
  Designated as Hedges
                                               
 Foreign currency swaps
  $ 30     $ 4     $ ––     $ ––     $ ––     $ ––  
 Foreign currency forward-exchange contracts
    (197 )     (890 )     ––       ––       ––       ––  
                                                 
Non-Derivative Financial Instruments in Net
  Investment Hedge Relationships
                                               
 Foreign currency short-term borrowings
  $ ––     $ ––     $ 43     $ 31     $ ––     $ ––  
 Foreign currency long-term debt
    ––       ––       28       16       ––       ––  
                                                 
 Total
  $ (166 )   $ (885 )   $ 411     $ (380 )   $ 510     $ (627 )
(a)
OID = Other (income)/deductions—net, included in the income statement account, Other deductions—net. OCI = Other comprehensive income/(loss), included in the balance sheet account Accumulated other comprehensive loss.
(b)
Also includes gains and losses attributable to the hedged risk in fair value hedge relationships.
(c)
There was no significant ineffectiveness in the first quarters of 2011 or 2010.
(d)
Amounts presented represent the effective portion of the gain or loss. For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive income/(loss)––Net unrealized (losses)/gains on derivative financial instruments. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––Currency translation adjustment and other.

For information about the fair value of our derivative financial instruments, and the impact on our Condensed Consolidated Balance Sheets, see Note 9A. Financial Instruments: Selected Financial Assets and Liabilities. Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. The aggregate fair value of these derivative instruments that are in a liability position is $297 million, for which we have posted collateral of $203.6 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a downgrade in our debt ratings. If there had been a downgrade to below an A rating by S&P or the equivalent rating by Moody’s Investors Service, on April 3, 2011, we would have been required to post an additional $93.9 million of collateral to our counterparties. The collateral advanced receivables are reported in Cash and cash equivalents.

 
14

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

E. Credit Risk
On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. As of April 3, 2011, we had $3.1 billion due from a well-diversified, highly rated group (S&P ratings of primarily A+ or better) of bank counterparties around the world. See Note 9B. Financial Instruments: Investments in Debt and Equity Securities for a distribution of our investments.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions. These agreements contain provisions that provide for the ability for collateral payments, depending on levels of exposure, our credit rating and the credit rating of the counterparty. As of April 3, 2011, we received cash collateral of $529.7 million against various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. The collateral received obligations are reported in Short-term borrowings, including current portion of long-term debt.


The components of inventories follow:

(millions of dollars)
 
April 3,
2011
   
Dec. 31,
2010
 
             
Finished goods
  $ 3,739     $ 3,665  
Work-in-process
    3,909       3,727  
Raw materials and supplies
    819       883  
Total inventories(a)
  $ 8,467     $ 8,275  
(a)
Certain amounts of inventories are in excess of one year’s supply. There are no recoverability issues associated with these quantities.


A. Goodwill

The changes in the carrying amount of goodwill for the three months ended April 3, 2011, follow:

(millions of dollars)
 
Primary
Care
   
Specialty
Care and
Oncology
   
Established
Products and
Emerging
Markets
   
Animal
Health and
Consumer
Healthcare
   
Nutrition
   
To be
Allocated(a)
   
Total
 
                                           
Balance, December 31, 2010
  $       $       $       $ 2,449     $ 496     $ 40,983     $ 43,928  
Additions(b)
                            ––       ––       780       780  
Other(c)
                            12       5       128       145  
Balance, April 3, 2011
  $       $       $       $ 2,461     $ 501     $ 41,891     $ 44,853  
(a)
The amount to be allocated includes the former Biopharmaceutical goodwill (see below), as well as newly acquired goodwill from our acquisition of King, for which the allocation to reporting units is pending (see Note 3. Acquisition of King Pharmaceuticals, Inc. for additional information).
(b)
Relates to our acquisition of King and is subject to change until we complete the recording of the assets acquired and liabilities assumed from King (see Note 3. Acquisition of King Pharmaceuticals, Inc.). The allocation of King goodwill among our reporting units has not yet been completed, but will be completed within one year of the acquisition date.
(c)
Primarily reflects the impact of foreign exchange.

Our company was previously managed through two operating segments (Biopharmaceutical and Diversified), and is now managed through five operating segments (see Note 15. Segment, Product and Geographic Area Information for further information). As a result of this change, the goodwill previously associated with our Biopharmaceutical operating segment is required to be allocated among the Primary Care, Specialty Care and Oncology, and Established Products and Emerging Markets operating segments. The allocation of goodwill is a complex process that requires, among other things, that we determine the fair value of each reporting unit. Therefore, we have not yet completed the allocation, but we expect that it will be completed in the current year.

 
15

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Other Intangible Assets

The components of identifiable intangible assets follow:

   
April 3, 2011
   
December 31, 2010
 
(millions of dollars)
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Identifiable
Intangible
Assets, less
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Identifiable
Intangible
Assets, less
Accumulated
Amortization
 
                                     
Finite-lived intangible assets:
                                   
Developed technology rights
  $ 71,003     $ (28,029 )   $ 42,974     $ 68,432     $ (26,223 )   $ 42,209  
Brands
    1,635       (628 )     1,007       1,626       (607 )     1,019  
License agreements
    637       (277 )     360       637       (248 )     389  
Trademarks and other
    541       (337 )     204       533       (324 )     209  
Total amortized finite-lived intangible assets
    73,816       (29,271 )     44,545       71,228       (27,402 )     43,826  
Indefinite-lived intangible assets:
                                               
Brands
    10,287       ––       10,287       10,219             10,219  
In-process research and development
    3,593       ––       3,593       3,438             3,438  
Trademarks
    72       ––       72       72             72  
Total indefinite-lived intangible assets
    13,952       ––       13,952       13,729             13,729  
Total identifiable intangible assets(a)
  $ 87,768     $ (29,271 )   $ 58,497     $ 84,957     $ (27,402 )   $ 57,555  
(a)
The increase is primarily related to the assets acquired as part of the acquisition of King (see Note 3. Acquisition of King Pharmaceuticals, Inc.) and the impact of foreign exchange, partially offset by amortization of intangible assets.

At April 3, 2011, our identifiable intangible assets are associated with the following, as a percentage of net book value:
 
Developed Technology Rights: Specialty Care (62%); Primary Care (17%); Established Products (17%); Animal Health (2%); Oncology (1%) and Nutrition (1%)

Finite-Lived Brands: Consumer Healthcare (56%); Established Products (30%); and Animal Health (14%)

Indefinite-Lived Brands: Consumer Healthcare (51%); Established Products (27%); and Nutrition (22%)

IPR&D: Specialty Care (70%); Worldwide Research and Development (18%); Primary Care (6%); Oncology (3%); Established Products (2%); and Consumer Healthcare (1%)

For IPR&D assets, the risk of failure is significant and there can be no certainty that these assets ultimately will yield a successful product. The nature of the biopharmaceutical business is high-risk and requires that we invest in a large number of projects as a mechanism for achieving a successful portfolio of approved products. As such, it is likely that many of these IPR&D assets will become impaired and be written-off at some time in the future.

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $1.4 billion for both the first quarter of 2011 and 2010.

 
16

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, follow:

   
Pension Plans
       
   
U.S.
Qualified
   
U.S.
Supplemental
(Non-Qualified)
   
International
   
Postretirement
Plans
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
 
                                                 
For the Three Months Ended:
                                               
Service cost
  $ 90     $ 94     $ 9     $ 8     $ 62     $ 60     $ 17     $ 22  
Interest cost
    185       191       19       19       111       111       49       54  
Expected return on plan assets
    (221 )     (202 )     ––       ––       (109 )     (112 )     (9 )     (8 )
Amortization of:
                                                               
   Actuarial losses
    35       38       9       7       21       17       4       ––  
   Prior service credits
    (2 )     ––       (1 )     (1 )     (1 )     (1 )     (14 )     (4 )
Curtailments and settlements––net
    17       (33 )     12       (1 )     (2 )     1       (6 )     ––  
Special termination benefits
    5       14       7       90       3       1       ––       6  
Net periodic benefit costs
  $ 109     $ 102     $ 55     $ 122     $ 85     $ 77     $ 41     $ 70  

The increase in net periodic benefit costs in the first three months of 2011, compared to the first three months of 2010, for our U.S. qualified plans was primarily driven by curtailment gains recognized in the prior year associated with Wyeth-related restructuring initiatives partially offset by higher expected return on plan assets.

The decrease in net periodic benefit costs in the first three months of 2011, compared to the first three months of 2010, for our U.S. supplemental (non-qualified) pension plans was primarily driven by special termination benefits recognized in the prior-year period for certain executives as part of Wyeth-related restructuring initiatives.

The decrease in net periodic benefit costs in the first three months of 2011, compared to the first three months of 2010, for our postretirement plans was primarily driven by the harmonization of the legacy Wyeth postretirement plans during 2010.

For the first quarter of 2011, we contributed from our general assets: $400 million to our U.S. qualified pension plans, $121 million to our international pension plans, $92 million to our U.S. supplemental (non-qualified) pension plans and $60 million to our postretirement plans.

During 2011, we expect to contribute from our general assets: a total of $454 million to our international pension plans, $406 million to our U.S. qualified pension plans, $252 million to our postretirement plans and $155 million to our U.S. supplemental (non-qualified) pension plans. Contributions expected to be made for 2011 are inclusive of amounts contributed during the first quarter of 2011. The international pension plan, postretirement plan and U.S. supplemental (non-qualified) pension plan contributions from our general assets include direct employer benefit payments.

 
17

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Basic and diluted earnings per share (EPS) were computed using the following data:

   
Three Months Ended
 
(millions)
 
April 3,
2011
   
April 4,
2010
 
             
EPS Numerator––Basic:
           
Income from continuing operations
  $ 2,224     $ 2,014  
Less: Net income attributable to noncontrolling interests
    12       9  
Income from continuing operations attributable to Pfizer Inc.
    2,212       2,005  
Less: Preferred stock dividends––net of tax
    ––       1  
Income from continuing operations attributable to Pfizer Inc. common shareholders
    2,212       2,004  
Discontinued operations––net of tax
    10       21  
Net income attributable to Pfizer Inc. common shareholders
  $ 2,222     $ 2,025  
                 
EPS Numerator––Diluted:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders and
 assumed conversions
  $ 2,212     $ 2,005  
Discontinued operations––net of tax
    10       21  
Net income attributable to Pfizer Inc. common shareholders and assumed conversions
  $ 2,222     $ 2,026  
                 
EPS Denominator:
               
Weighted-average number of common shares outstanding––Basic
    7,982       8,061  
Common-share equivalents: stock options, stock issuable under employee
 compensation plans and convertible preferred stock
    53       40  
Weighted-average number of common shares outstanding––Diluted
    8,035       8,101  
                 
Stock options that had exercise prices greater than the average market price of our
 common stock issuable under employee compensation plans(a)
    290       366  
(a)
These common stock equivalents were outstanding during the first quarters of 2011 and 2010, but were not included in the computation of diluted EPS for those periods because their inclusion would have had an anti-dilutive effect.


As of March 31, 2011, Pfizer and its affiliated companies had settled, or entered into definitive agreements or agreements-in-principle to settle, approximately one-third of the hormone-replacement therapy actions pending against us and our affiliated companies. We have recorded aggregate charges with respect to those actions, as well as with respect to the actions that have resulted in verdicts against us or our affiliated companies, of $172 million in the first quarter of 2011 and $300 million in previous quarters. In addition, we have recorded a charge of $300 million in the first quarter of 2011 that provides for the minimum expected costs to resolve all of the other outstanding hormone-replacement therapy actions against Pfizer and its affiliated companies, consistent with our current ability to quantify such future costs. The foregoing charges are estimates and, while we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for these contingencies given the uncertainties inherent in product liability litigation, additional charges may be required in the future.

In January 2011, in a Multi-District Litigation (In re Neurontin Antitrust Litigation) that consolidates three actions, the U.S. District Court for the District of New Jersey certified a nationwide class consisting of wholesalers and other entities who purchased Neurontin directly from Pfizer and Warner-Lambert during the period from December 11, 2002 to August 31, 2008 and who also purchased generic gabapentin after it became available.  The complaints allege that Pfizer and Warner-Lambert engaged in anticompetitive conduct in violation of the Sherman Act that included, among other things, submitting applications for listing in the Orange Book and prosecuting and enforcing certain patents relating to Neurontin, as well as engaging in off-label marketing of Neurontin.  Plaintiffs seek compensatory damages, which may be subject to trebling.

 
18

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


A. Segment Information

We manage our operations through five operating segments––Primary Care (PC), Specialty Care and Oncology (SC&O), Established Products and Emerging Markets (EP&EM), Animal Health and Consumer Healthcare (AH&CH) and Nutrition (Nutri). Each operating segment has responsibility for its commercial activities and for certain research, development and medical safety activities.

Previously, we managed our operations through two operating segments––Biopharmaceutical and Diversified.

We regularly review our segments and the approach used by management to evaluate performance and allocate resources.

A description of each of our five operating segments follows:

Primary Care operating segment (PC)––includes revenues and earnings, as defined by management, from human pharmaceutical products primarily prescribed by primary-care physicians, and may include products in the following therapeutic and disease areas: Alzheimer’s disease, diabetes, cardiovascular (excluding pulmonary arterial hypertension), major depressive disorder, genitourinary, osteoporosis, pain and respiratory. Examples of products in this unit include Celebrex, Lipitor, Lyrica, Premarin, Pristiq and Viagra. All revenues and earnings for such products are allocated to the Primary Care unit, except those generated in emerging markets and those that are managed by the Established Products unit.

Specialty Care and Oncology operating segment (SC&O)––comprises the Specialty Care business unit and the Oncology business unit.

 
Specialty Care––includes revenues and earnings, as defined by management, from human pharmaceutical products primarily prescribed by physicians who are specialists, and may include products in the following therapeutic and disease areas: antibacterials, antifungals, antivirals, bone, inflammation, growth hormones, multiple sclerosis, ophthalmology, pulmonary arterial hypertension, psychosis and vaccines. Examples of products in this unit include, Enbrel, Genotropin, Geodon, the Prevnar/Prevenar franchise, Xalatan and Zyvox. All revenues and earnings for such products are allocated to the Specialty Care unit, except those generated in emerging markets and those that are managed by the Established Products unit.

 
Oncology––includes revenues and earnings, as defined by management, from human pharmaceutical products addressing oncology and oncology-related illnesses. Examples of products in this unit include Aromasin, Sutent and Torisel. All revenues and earnings for such products are allocated to the Oncology unit, except those generated in emerging markets and those that are managed by the Established Products unit.

Established Products and Emerging Markets operating segment (EP&EM)––comprises the Established Products business unit and the Emerging Markets business unit.

 
Established Products––generally includes revenues and earnings, as defined by management, from human pharmaceutical products that have lost patent protection or marketing exclusivity in certain countries and/or regions. Typically, products are transferred to this unit in the beginning of the fiscal year following losing patent protection or marketing exclusivity. In certain situations, products may be transferred to this unit at a different point than the beginning of the fiscal year following losing patent protection or marketing exclusivity in order to maximize their value. This unit also excludes revenues and earnings generated in emerging markets. Examples of products in this unit include Arthrotec, Effexor XR, Medrol, Norvasc, Protonix, Relpax and Zosyn/Tazocin.

 
Emerging Markets––includes revenues and earnings, as defined by management, from all human pharmaceutical products sold in emerging markets, including Asia (excluding Japan and South Korea), Latin America, Middle East, Africa, Central and Eastern Europe and Turkey.

Animal Health and Consumer Healthcare operating segment (AH&CH)—comprises the Animal Health business unit and the Consumer Healthcare business unit.

 
Animal Health––includes worldwide revenues and earnings, as defined by management, from products to prevent and treat disease in livestock and companion animals, including vaccines, paraciticides and anti-infectives.

 
Consumer Healthcare––generally includes worldwide revenues and earnings, as defined by management, from non-prescription medicines and vitamins, including products in the following therapeutic categories: GI-topicals, dietary supplements, pain management and respiratory. Examples of products in Consumer Healthcare are Advil, Caltrate, Centrum, ChapStick and Robitussin.

Nutrition operating segment (Nutri)––generally includes revenues and earnings, as defined by management, from a full line of infant and toddler nutritional products sold outside of North America.

 
19

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Our chief operating decision maker uses the revenues and earnings of the five operating segments, among other factors, for performance evaluation and resource allocation. For the operating segments that comprise more than one business unit, a single segment manager is responsible for target setting, performance evaluation and resource allocation among those business units.
 
Certain costs are not allocated to our operating segment results, such as costs associated with the following:

Worldwide Research and Development (WRD), which is generally responsible for human health research projects until proof-of-concept is achieved and then for transitioning those projects to the appropriate business unit for possible clinical and commercial development.  This organization also has responsibility for certain science-based platform services, which provide technical expertise and other services to the various research and development projects.

Pfizer Medical (Pfizer Medical), which is responsible for all human-health-related regulatory submissions and interactions with regulatory agencies.  This organization is also responsible for the collection, evaluation and reporting of all safety event information related to our human health products and for conducting clinical trial audits and readiness reviews and for providing Pfizer-related medical information to healthcare providers.

Corporate, which is responsible for platform functions such as finance, global real estate operations, human resources, legal, science and technology, worldwide procurement, worldwide public affairs and policy and worldwide technology. These costs include payroll charges and associated operating expenses, as well as interest income and expense.

Certain transactions and events such as  (1) purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (2) acquisition-related activities, where we incur costs for restructuring, integration, implementation and executing the transaction; and (3) certain significant items, which include non-acquisition-related restructuring costs, as well as costs incurred for legal settlements, asset impairments and sales of assets or businesses.

We manage our assets on a total company basis, not by operating segment, as many of our operating assets are shared (such as our plant network assets) or commingled (such as accounts receivable, as many of our customers are served by multiple operating segments). Therefore, our chief operating decision maker does not regularly review asset information by operating segment and accordingly, we do not report asset information by operating segment. Total assets were approximately $195 billion at April 3, 2011 and December 31, 2010.

Certain information by operating segment follows:

   
Revenues
   
Earnings(a)
 
   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
   
April 3,
2011
   
April 4,
2010
 
Primary Care
  $ 5,441     $ 5,866     $ 3,546     $ 4,083  
Specialty Care and Oncology
    4,238       3,882       2,873       2,661  
Established Products and Emerging Markets
    4,545       4,758       2,490       2,992  
Animal Health and Consumer Healthcare
    1,727       1,509       489       397  
Total reportable segments
    15,951       16,015       9,398       10,133  
Nutrition and other business activities(b)
    551       561       (722 )     (793 )
Reconciling Items:
                               
Corporate(c)
    ––       ––       (1,660 )     (1,879 )
Purchase accounting adjustments(d)
    ––       ––       (1,785 )     (2,839 )
Acquisition-related costs(e)
    ––       ––       (575 )     (799 )
    Certain significant items(f)
    ––       ––       (1,208 )     (183 )
    Other unallocated(g)
    ––       ––       (330 )     (491 )
    $ 16,502     $ 16,576     $ 3,118     $ 3,149  
(a)
Income from continuing operations before provision for taxes on income.
(b)
Other business activities includes the revenues and operating results of Pfizer CentreSource, our contract manufacturing and bulk pharmaceutical chemical sales operation, and the research and development costs managed by our Worldwide Research and Development organization and our Pfizer Medical organization.
(c)
Corporate includes, among other things, administration expenses, interest income/(expense), certain performance-based and all share-based compensation expenses.
(d)
Significant impacts of purchase accounting include charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment.
 
 
20

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
(e)
Acquisition-related costs can include costs associated with acquiring, integrating and restructuring newly acquired businesses, such as transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring (see Note 5. Costs Associated with Cost-Reduction Initiatives and Acquisition Activity for additional information).
(f)
Certain significant items are substantive, unusual items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our productivity initiatives that are not associated with an acquisition, the impact of certain tax and/or legal settlements and certain asset impairments.

 
For the first quarter of 2011, certain significant items includes: (i) restructuring charges and implementation costs associated with our cost-reduction initiatives that are not associated with an acquisition of $572 million, (ii) charges for certain legal matters of $472 million, (iii) certain asset impairment charges of $157 million and (iv) other charges of $7 million (see Note 5. Costs Associated with Cost-Reduction Initiatives and Acquisition Activity and Note 6. Other (Income)/Deductions––Net for additional information).

 
For the first quarter of 2010, certain significant items includes: (i) charges for certain legal matters of $142 million, and (ii) other charges of $41 million.

(g)
Includes overhead expenses associated with our manufacturing and commercial operations not directly attributable to an operating segment.


 
21

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

B. Product Information

Significant product revenues follow:

   
Three Months Ended
 
(millions of dollars)
 
April 3,
2011
   
April 4,
2010
 
Revenues from biopharmaceutical products:
           
Lipitor
  $ 2,385     $ 2,757  
Prevnar/Prevenar 13
    996       286  
Enbrel(a)
    870       802  
Lyrica
    826       723  
Celebrex
    591       570  
Viagra
    470       479  
Xalatan/Xalacom
    392       422  
Norvasc
    356       368