Acquisition of King Pharmaceuticals, Inc.

6 Months Ended

Jul. 03, 2011

Acquisition of King Pharmaceuticals, Inc.

Note 3. Acquisition of King Pharmaceuticals, Inc.

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.

The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date.

(millions of dollars)	Amounts Recognized as of Acquisition Date (Provisional)
Working capital, excluding inventories	$	190
Inventories		338
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		(373	)
All other long-term assets and liabilities, net		114
Total identifiable net assets		2,764
Goodwill		791
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 and inventory and the confirmation of the physical existence and condition of certain inventory and 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.

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 second-quarter 2011 domestic and international quarter-ends:

(millions of dollars)	King’s Operations Included in Pfizer’s Second-Quarter 2011 Results			King’s Operations Included in Pfizer’s Six-Month 2011 Results
Revenues	$	357		$	581
Loss from continuing operations attributable to Pfizer Inc. common shareholders(a)		(5	)		(74	)

(a) Includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory estimated to have been sold ($61 million pre-tax in the second quarter of 2011 and $119 million pre-tax in the first six months of 2011), amortization of identifiable intangible assets acquired from King ($43 million pre-tax in the second quarter of 2011 and $71 million pre-tax in the first six months of 2011) and restructuring and integration costs ($63 million pre-tax in the second quarter of 2011 and $159 million pre-tax in the first six months of 2011).

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		Six Months Ended
(millions of dollars, except per share  data)	July 4, 2010		July 3, 2011		July 4, 2010
Revenues	$	17,465	$	33,595	$	34,414
Income from continuing operations attributable to Pfizer Inc. common shareholders		2,408		5,008		4,314
Diluted earnings per share attributable to Pfizer Inc. common shareholders		0.30		0.63		0.53

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 pre-tax amounts:

● Elimination of King’s historical intangible asset amortization expense (approximately $38 million in the second quarter of 2010, $6 million in the first six months of 2011 and $79 million in the first six months of 2010).

● Additional amortization expense (approximately $43 million in the second quarter of 2010 and $86 million in the first six months of 2010) related to the fair value of identifiable intangible assets acquired.

● Additional depreciation expense (approximately $9 million in the second quarter of 2010, $3 million in the first six months of 2011 and $17 million in the first six months of 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 (addition of $61 million charge in the second quarter of 2010, elimination of $119 million charge in the first six months of 2011 and addition of $119 million charge in the first six months of 2010).

● Adjustment for acquisition-related costs directly attributable to the acquisition (addition of $63 million of charges in the second quarter of 2010, elimination of $181 million of charges in the first six months of 2011 and addition of $181 million of charges in the first six months of 2010, reflecting charges incurred by both King and Pfizer).