Edgar Filing: PFIZER INC

a6022539.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 June 28, 2009

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) 573-2323

(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 August 4, 2009, 6,749,143,013 shares of the issuer’s voting common stock were outstanding

FORM 10-Q

For the Quarter Ended

June 28, 2009

Table of Contents

PART I. FINANCIAL INFORMATION	Page

Item 1.
Financial Statements

Condensed Consolidated Statements of Income for the three months and six months ended June 28, 2009, and June 29, 2008		3

Condensed Consolidated Balance Sheets as of June 28, 2009, and December 31, 2008		4

Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2009, and June 29, 2008		5

Notes to Condensed Consolidated Financial Statements		6

Review Report of Independent Registered Public Accounting Firm		23

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.
Quantitative and Qualitative Disclosures About Market Risk		54

Item 4.
Controls and Procedures		54

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings		54

Item 1A.
Risk Factors		57

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds		58

Item 3.
Defaults Upon Senior Securities		58

Item 4.
Submission of Matters to a Vote of Security Holders		58

Item 5.
Other Information		58

Item 6.
Exhibits		58

Signature		59

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended					Six Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)	June 28, 2009		June 29, 2008			June 28, 2009		June 29, 2008

Revenues	$	10,984	$	12,129		$	21,851	$	23,977

Costs and expenses:
Cost of sales(a)		1,756		2,289			3,164		4,275
Selling, informational and administrative expenses(a)		3,350		3,863			6,226		7,355
Research and development expenses(a)		1,695		1,966			3,400		3,757
Amortization of intangible assets		583		663			1,161		1,442
Acquisition-related in-process research and development charges		20		156			20		554
Restructuring charges and acquisition-related costs		459		569			1,013		747
Other (income)/deductions – net		72		(167	)		15		(500	)

Income from continuing operations before provision for taxes on income		3,049		2,790			6,852		6,347

Provision for taxes on income		786		25			1,860		788

Income from continuing operations		2,263		2,765			4,992		5,559

Discontinued operations - net of tax		3		17			4		13

Net income before allocation to noncontrolling interests		2,266		2,782			4,996		5,572

Less: Net income attributable to noncontrolling interests		5		6			6		12

Net income attributable to Pfizer Inc.	$	2,261	$	2,776		$	4,990	$	5,560

Earnings per share – basic:
Income from continuing operations attributable to Pfizer Inc. common shareholders	$	0.34	$	0.41		$	0.74	$	0.82
Discontinued operations - net of tax		––		—			—		0.01
Net income attributable to Pfizer Inc. common shareholders	$	0.34	$	0.41		$	0.74	$	0.83

Earnings per share – diluted:
Income from continuing operations attributable to Pfizer Inc. common shareholders	$	0.34	$	0.41		$	0.74	$	0.82
Discontinued operations - net of tax		––		—			—		—
Net income attributable to Pfizer Inc. common shareholders	$	0.34	$	0.41		$	0.74	$	0.82

Weighted-average shares used to calculate earnings per common share:
Basic		6,728		6,732			6,726		6,736
Diluted		6,752		6,748			6,752		6,754

Cash dividends paid per common share	$	0.16	$	0.32		$	0.48	$	0.64

(a)	Exclusive of amortization of intangible assets, except as disclosed in Note 10B. Goodwill and Other Intangible Assets:Other Intangible Assets.

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(millions of dollars)	June 28, 2009*			Dec. 31, 2008**
Assets
Cash and cash equivalents	$	2,244		$	2,122
Short-term investments		47,403			21,609
Accounts receivable, less allowance for doubtful accounts		10,446			8,958
Short-term loans		935			824
Inventories		4,993			4,381
Taxes and other current assets		5,310			5,034
Assets held for sale		219			148
Total current assets		71,550			43,076
Long-term investments and loans		12,576			11,478
Property, plant and equipment, less accumulated depreciation		13,194			13,287
Goodwill		21,794			21,464
Identifiable intangible assets, less accumulated amortization		16,611			17,721
Other non-current assets, deferred taxes and deferred charges		3,614			4,122
Total assets	$	139,339		$	111,148

Liabilities and Shareholders’ Equity
Short-term borrowings, including current portion of long-term debt	$	7,645		$	9,320
Accounts payable		2,595			1,751
Dividends payable		1,081			2,159
Income taxes payable		607			656
Accrued compensation and related items		1,549			1,667
Other current liabilities		12,632			11,456
Total current liabilities		26,109			27,009

Long-term debt		31,864			7,963
Pension benefit obligations		4,159			4,235
Postretirement benefit obligations		1,602			1,604
Deferred taxes		2,356			2,959
Other taxes payable		7,029			6,568
Other non-current liabilities		2,985			3,070
Total liabilities		76,104			53,408

Preferred stock		66			73
Common stock		443			443
Additional paid-in capital		70,314			70,283
Employee benefit trust, at fair value		(304	)		(425	)
Treasury stock		(57,364	)		(57,391	)
Retained earnings		51,965			49,142
Accumulated other comprehensive expense		(2,079	)		(4,569	)
Total Pfizer Inc. shareholders’ equity		63,041			57,556
Equity attributable to noncontrolling interests		194			184
Total shareholders’ equity		63,235			57,740
Total liabilities and shareholders’ equity	$	139,339		$	111,148

*	Unaudited.

**	Condensed from audited financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
(millions of dollars)	June 28, 2009			June 29, 2008

Operating Activities
Net income before allocation to noncontrolling interests	$	4,996		$	5,572
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		2,014			2,716
Share-based compensation expense		169			166
Acquisition-related in-process research and development charges		20			554
Deferred taxes from continuing operations		731			439
Other non-cash adjustments		(22	)		497
Changes in assets and liabilities (net of businesses acquired and divested)		(247	)		(1,631	)

Net cash provided by operating activities		7,661			8,313

Investing Activities
Purchases of property, plant and equipment		(522	)		(868	)
Purchases of short-term investments		(38,900	)		(16,106	)
Proceeds from sales and redemptions of short-term investments		14,251			12,463
Purchases of long-term investments		(5,266	)		(3,856	)
Proceeds from sales and redemptions of long-term investments		3,484			632
Acquisitions, net of cash acquired		––			(962	)
Other investing activities		346			(251	)

Net cash used in investing activities		(26,607	)		(8,948	)

Financing Activities
Increase in short-term borrowings, net		21,754			16,310
Principal payments on other short-term borrowings, net		(22,493	)		(14,097	)
Proceeds from issuances of long-term debt		23,996			602
Principal payments on long-term debt		(908	)		—
Purchases of common stock		––			(500	)
Cash dividends paid		(3,200	)		(4,277	)
Stock option transactions and other		(106	)		33

Net cash provided by/(used in) financing activities		19,043			(1,929	)

Effect of exchange-rate changes on cash and cash equivalents		25			(22	)

Net increase/(decrease) in cash and cash equivalents		122			(2,586	)
Cash and cash equivalents at beginning of period		2,122			3,406

Cash and cash equivalents at end of period	$	2,244		$	820

Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes	$	1,109		$	1,056
Interest		299			446

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

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 and six-month periods ended May 24, 2009, and May 25, 2008. Subsequent events have been evaluated through August 6, 2009.

We made certain reclassifications to prior-period amounts to conform to the second-quarter and six-month 2009 presentations related to the presentation of noncontrolling interests as a result of adopting a new accounting standard (see Note 2. Adoption of New Accounting Policies).

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 Pfizer’s Annual Report on Form 10-K for the year ended December 31, 2008.

On January 26, 2009, we announced that we entered into a definitive merger agreement under which we will acquire Wyeth in a cash-and-stock transaction valued on that date at $50.19 per share, or a total of $68 billion. While we have taken actions and incurred costs associated with the pending transaction that are reflected in our financial statements, the pending acquisition of Wyeth will not be reflected in our financial statements until consummation. (See Note 14. Pending Acquisition of Wyeth.)

Included in Other current liabilities at June 28, 2009 are $1.5 billion of deferred income taxes.

Note 2. Adoption of New Accounting Policies

As of March 30, 2009, we adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) No. Statement of Financial Accounting Standards (SFAS) 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP SFAS 115-2 and SFAS 124-2 amend the guidance for evaluating and measuring “other-than-temporary” impairments for available-for-sale or held-to-maturity debt securities. The adoption of FSP SFAS 115-2 and SFAS 124-2 did not have a significant impact on our consolidated financial statements.

As of March 30, 2009, we adopted FSP No. SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP SFAS 157-4 provides additional guidance for estimating fair value in inactive markets and the identification of disorderly transactions. FSP SFAS 157-4 was adopted prospectively and did not have a significant impact on our consolidated financial statements, but could impact the accounting for acquisitions after adoption, including our pending acquisition of Wyeth, and other events, balances and transactions measured at fair value.

As of January 1, 2009, we adopted SFAS No. 141R, Business Combinations, as amended. SFAS 141R, as amended, retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development costs at fair value and requires the expensing of acquisition-related costs as incurred. The adoption of SFAS 141R, as amended, did not impact our consolidated financial statements upon adoption, but will impact the accounting for acquisitions after adoption, including our pending acquisition of Wyeth.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of January 1, 2009, we adopted FSP No. SFAS 142-3, Determination of the Useful Life of Intangible Assets. FSP SFAS 142-3 amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. Among other things, in the absence of historical experience, an entity will be required to consider assumptions used by market participants. The adoption of FSP SFAS 142-3 did not impact our consolidated financial statements upon adoption, but could impact the accounting for acquisitions after adoption, including our pending acquisition of Wyeth.

As of January 1, 2009, we adopted the provisions of SFAS No. 157, Fair Value Measurements, as amended, that we did not adopt as of January 1, 2008. SFAS 157, as amended, defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. The adoption of the remaining provisions of SFAS 157, as amended, did not have a significant impact on our consolidated financial statements upon adoption, but will impact the accounting for acquisitions after adoption, including our pending acquisition of Wyeth, and other events, balances and transactions measured at fair value.

As of January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS 160 provides guidance for the accounting, reporting and disclosure of noncontrolling interests, previously referred to as minority interests. A noncontrolling interest represents the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The adoption of SFAS 160 resulted in a number of changes to the presentation of our consolidated financial statements, but the amounts associated with noncontrolling interests are not significant. SFAS 160 could impact our accounting for acquisitions after adoption, where we do not acquire 100% of the entity, and our accounting for the deconsolidations of subsidiaries.

As of January 1, 2009, we adopted Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements. EITF 07-1 provides guidance on determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. The adoption of EITF 07-1 did not have a significant impact on our consolidated financial statements, and additional disclosures have been provided. (See Note 4. Collaborative Arrangements.)

As of January 1, 2009, we adopted EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits. EITF 08-3 provides guidance that maintenance deposits paid by a lessee and subsequently refunded only if a lessee fulfills a maintenance obligation will be accounted for as a deposit asset. The adoption of EITF 08-3 did not have a significant impact on our consolidated financial statements.

As of January 1, 2009, we adopted EITF Issue No. 08-6, Equity Method Investment Accounting Considerations. EITF 08-6 clarifies how to account for certain transactions involving equity method investments in areas such as: how to determine the initial carrying value of the investment; how to allocate the difference between the investor’s carrying value and the investor’s share of the underlying equity of the investment; how to perform an impairment assessment of underlying intangibles held by the investee; how to account for the investee’s issuance of additional shares; and how to account for an investment on the cost method when it had been previously accounted for under the equity method. The adoption of EITF 08-6 did not have a significant impact on our consolidated financial statements, but could impact the accounting for equity method investments after adoption.

As of January 1, 2009, we adopted EITF Issue No. 08-7, Accounting for Defensive Intangible Assets. EITF 08-7 clarifies the accounting for certain separately identifiable assets, which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer to account for a defensive intangible asset as a separate unit of accounting, which should be amortized to expense over the period the asset diminishes in value. The adoption of EITF 08-7 did not have a significant impact on our consolidated financial statements, but could impact the accounting for acquisitions after adoption.

Note 3. Acquisitions

In the second quarter of 2008, we acquired Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company whose main asset is Thelin, which is used for the treatment of pulmonary arterial hypertension. The cost of acquiring Encysive, through a tender offer and subsequent merger, was approximately $200 million, including transaction costs. Upon our acquisition of Encysive, Encysive's change of control repurchase obligations under its outstanding $130 million 2.5% convertible notes were triggered and, as a result, Encysive repurchased the convertible notes in consideration for their par value plus accrued interest in June 2008. In addition, in the second quarter of 2008, we acquired Serenex, Inc. (Serenex), a privately held biotechnology company, whose main asset is SNX-5422, an oral Heat Shock Protein 90 (Hsp90) for the potential treatment of solid tumors and hematological malignancies and an extensive Hsp90 inhibitor compound library, which has potential uses in treating cancer, inflammatory and neurodegenerative diseases. In connection with these acquisitions, through the second quarter of 2008, we recorded $156 million in Acquisition-related in-process research and development charges and approximately $450 million in intangible assets.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In the first quarter of 2008, we acquired CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform. Also in the first quarter of 2008, we acquired all the outstanding shares of Coley Pharmaceutical Group, Inc., (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight certain cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In connection with these and two smaller acquisitions related to Animal Health, we recorded approximately $398 million in Acquisition-related in-process research and development charges during the first quarter of 2008. In the second quarter of 2009, we resolved a contingency associated with CovX and recognized $20 million in Acquisition-related in-process research and development charges.

Note 4. Collaborative Arrangements

In the normal course of business, we enter into collaborative arrangements with respect to in-line medicines, as well as medicines in development that require completion of research and regulatory approval. Collaborative arrangements are contractual agreements with third parties that involve a joint operating activity, typically a research and/or commercialization effort, where both we and our partner are active participants in the activity and are exposed to the significant risks and rewards of the activity. Our rights and obligations under our collaborative arrangements vary. For example, we have agreements to co-promote pharmaceutical products discovered by other companies, and we have agreements where we partner to co-develop and/or participate together in commercializing, marketing, promoting, manufacturing, and/or distributing a drug product.

Payments to or from our collaboration partners are presented in the statement of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our partners as alliance revenues, a component of Revenues, when our co-promotion partners are the principal in the transaction and we receive a share in their net sales or profits. Alliance revenues are recorded when our co-promotion partners ship the product and title passes to their customer. Expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In arrangements where we manufacture a product for our partner, we record revenues when our partner sells the product and title passes to their customer. All royalty payments to collaboration partners are recorded as part of Cost of sales.

The amounts and classifications of payments (income/(expense)) between us and our collaboration partners follow:

	Three Months Ended						Six Months Ended
(millions of dollars)	June 28, 2009			June 29, 2008			June 28, 2009			June 29, 2008
Revenues – Revenues(a)	$	146		$	126		$	278		$	226
Revenues – Alliance revenues (b)		598			563			1,180			1,051
Total Revenues from collaborative arrangements		744			689			1,458			1,277
Cost of sales (c)		(35	)		(36	)		(91	)		(67	)
Selling, informational and administrative expenses(d)		14			26			(3	)		19
Research and development expenses(e)		(50	)		(46	)		(244	)		(96	)

(a)	Represents sales to our partners of products manufactured by us.

(b)	Substantially all related to amounts earned from our partners under co-promotion agreements.

(c)	Primarily related to royalties earned by our partners and cost of sales associated with inventory purchased from our partners.

(d)	Represents net reimbursements from our partners and reimbursements to our partners for Selling, informational and administrative expenses incurred.

(e)	Primarily related to net reimbursements earned by our partners, except that the first quarter of 2009 also includes a $150 million milestone payment to one of our partners.

The amounts disclosed in the above table do not include transactions with third parties other than our collaboration partners, or other costs associated with the products under the collaboration arrangements.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5. Cost-Reduction Initiatives

We incurred the following costs in connection with all of our cost-reduction initiatives, which began in 2005:

	Three Months Ended				Six Months Ended
(millions of dollars)		June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Implementation costs(a)	$	156	$	405	$	330	$	762
Restructuring charges(b)		174		562		331		739
Total costs related to our cost-reduction initiatives	$	330	$	967	$	661	$	1,501

(a)

For the second quarter of 2009, included in Cost of sales ($45 million), Selling, informational and administrative expenses ($85 million), Research and development expenses ($32 million), and Other (income)/deductions - net ($6 million income). For the second quarter of 2008, included in Cost of sales ($210 million), Selling, informational and administrative expenses ($100 million), Research and development expenses ($94 million) and Other (income)/deductions - net ($1 million). For the first six months of 2009, included in Cost of sales ($121 million), Selling, informational and administrative expenses ($131 million), Research and development expenses ($73 million), and Other (income)/deductions - net ($5 million). For the first six months of 2008, included in Cost of sales ($348 million), Selling, informational and administrative expenses ($175 million), Research and development expenses ($240 million) and Other (income)/deductions - net ($1 million income).

(b)	Included in Restructuring charges and acquisition-related costs.

From the beginning of the cost-reduction initiatives in 2005 through June 28, 2009, the restructuring charges primarily relate to our supply network transformation efforts and the restructuring of our worldwide marketing and research and development operations, and the implementation costs primarily relate to depreciation arising from the shortening of the useful lives of certain assets, as well as system and process standardization and the expansion of shared services.

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

(millions of dollars)	Costs Incurred Through June 28, 2009		Activity Through June 28, 2009(a)		Accrual as of June 28, 2009(b)

Employee termination costs	$	5,314	$	3,947	$	1,367
Asset impairments		1,384		1,384		—
Other		516		420		96
Total restructuring charges	$	7,214	$	5,751	$	1,463

(a)	Includes adjustments for foreign currency translation.

(b)	Included in Other current liabilities ($954 million) and Other noncurrent liabilities ($509 million).

During the second quarter of 2009, we expensed $29 million for Employee termination costs, $73 million for Asset impairments and $72 million for Other. During the first six months of 2009, we expensed $164 million for Employee termination costs, $91 million for Asset impairments and $76 million for Other. From June 2005 through June 28, 2009, Employee termination costs, net of the impact of a change in estimate, represent the expected reduction of the workforce by approximately 31,100 employees, mainly in manufacturing, sales and research, and approximately 25,500 of these employees have been terminated. Employee termination costs are recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 6. Acquisition-Related Costs

We incurred the following acquisition-related costs primarily in connection with our pending acquisition of Wyeth:

		Three Months Ended				Six Months Ended
(millions of dollars)		June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Transaction costs (a)	$	184	$	––	$	553	$	––
Pre-integration costs and other(b)		101		7		129		8
Total acquisition-related costs(c)	$	285	$	7	$	682	$	8

(a)

Transaction costs include banking, legal, accounting and other costs directly related to our pending acquisition of Wyeth. Substantially all of the costs incurred to date are fees related to a $22.5 billion bridge term loan credit agreement entered into with certain financial institutions on March 12, 2009, to partially fund our pending acquisition of Wyeth. The bridge term loan credit agreement was terminated in June 2009 as a result of our issuance of approximately $24.0 billion of senior unsecured notes during the first six months of 2009. All bridge term loan commitment fees have been expensed, and we are no longer subject to the covenants under that agreement (see Note 8D: Financial Instruments: Long-Term Debt).

(b)	Pre-integration costs and other primarily represent external, incremental costs of integration planning that are directly related to our pending acquisition of Wyeth and include costs associated with preparing for systems and other integration activities.

(c)	Included in Restructuring charges and acquisition-related costs.

Note 7. Comprehensive Income/(Expense)

The components of comprehensive income/(expense) follow:

	Three Months Ended					Six Months Ended
(millions of dollars)	June 28, 2009			June 29, 2008		June 28, 2009			June 29, 2008
Net income before allocation to noncontrolling interests	$	2,266		$	2,782	$	4,996		$	5,572
Other comprehensive expense:
Currency translation adjustment and other		2,638			1,109		2,254			534
Net unrealized gains/(losses) on derivative financial instruments		(144	)		27		(167	)		28
Net unrealized gains/(losses) on available-for-sale securities		81			—		226			(14	)
Benefit plan adjustments		18			1		177			85
Total other comprehensive loss		2,593			1,137		2,490			633
Total comprehensive income before allocation to noncontrolling interests		4,859			3,919		7,486			6,205
Less: Comprehensive income attributable to noncontrolling interests		12			15		14			23
Comprehensive income attributable to Pfizer Inc.	$	4,847		$	3,904	$	7,472		$	6,182

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8. Financial Instruments

A. Selected Financial Assets and Liabilities

Information about certain of our financial assets and liabilities follows:

(millions of dollars)	June 28, 2009		Dec. 31, 2008
Selected financial assets measured at fair value on a recurring basis (a) :
Trading securities (b)	$	172	$	190
Available-for-sale debt securities (c)		50,592		30,061
Available-for-sale money market funds		7,543		398
Available-for-sale equity securities, excluding money market funds (c)		182		319
Derivative financial instruments in receivable positions (d) :
Interest rate swaps		283		732
Foreign currency swaps		85		128
Foreign currency forward-exchange contracts		640		399
Total		59,497		32,227
Other selected financial assets (e):
Held-to-maturity debt securities, carried at amortized cost (c)		953		2,349
Short-term loans, carried at cost		935		824
Long-term loans, carried at cost		1,181		1,568
Private equity securities, carried at cost		168		182
Total		3,237		4,923
Total selected financial assets	$	62,734	$	37,150
Financial liabilities measured at fair value on a recurring basis (a):
Derivative financial instruments in a liability position (f):
Interest rate swaps	$	8	$	7
Foreign currency swaps		352		153
Foreign currency forward-exchange contracts		1,381		1,083
Total		1,741		1,243
Other financial liabilities (e) , (g):
Short-term borrowings, carried at historical proceeds, as adjusted (h)		7,645		9,320
Long-term debt, carried at historical proceeds, as adjusted (i)		31,864		7,963
Total		39,509		17,283
Total selected financial liabilities	$	41,250	$	18,526

(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. Virtually 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 $101 million as of June 28, 2009 and $87 million as of December 31, 2008 of investments that use Level 1 inputs in the calculation of fair value. None of our financial assets and liabilities measured at fair value on a recurring basis are valued based on Level 3 inputs at June 28, 2009 or December 31, 2008.

(b)	Trading securities are held in trust for legacy Pharmacia severance benefits.

(c)	Gross unrealized gains and losses are not significant.

(d)

Designated as hedging instruments except for certain foreign currency contracts used as offsets, namely, foreign currency forward-exchange contracts with fair values of $6 million and foreign currency swaps with fair values of $77 million at June 28, 2009; and foreign currency forward-exchange contracts with fair values of $175 million and foreign currency swaps with fair values of $32 million at December 31, 2008.

(e)	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 as of June 28, 2009 or December 31, 2008.

(f)

Designated as hedging instruments except for certain foreign currency contracts used as offsets, namely, foreign currency forward-exchange contracts with fair values of $515 million and foreign currency swaps with fair values of $32 million at June 28, 2009; and foreign currency forward-exchange contracts with fair values of $836 million and foreign currency swaps with fair values of $76 million at December 31, 2008.

(g)	The carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.

(h)	Includes foreign currency borrowings with fair values of $1.0 billion at June 28, 2009 and $1.6 billion at December 31, 2008, which are used as hedging instruments.

(i)	Includes foreign currency debt with fair values of $2.0 billion at June 28, 2009 and $2.1 billion at December 31, 2008, which is used as a hedging instrument.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following methods and assumptions were used to estimate the fair value of our financial assets and liabilities:

·	Trading equity securities - quoted market prices.

·	Trading debt securities - observable market interest rates.

·	Available-for-sale debt securities - matrix-pricing model using observable market quotes and credit ratings.

·	Available-for-sale money market funds - observable prices.

·	Available-for-sale equity securities, excluding money market funds - pricing services that principally use a composite of observable prices.

·	Derivative financial instruments (assets and liabilities) - matrix-pricing model using observable market quotes and credit ratings.

·	Held-to-maturity debt securities - matrix-pricing model using observable market quotes and credit ratings.

·	Short-term and long-term loans - discounted future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

·	Private equity securities – application of the implied volatility associated with an observable biotech index to the carrying amount of our portfolio.

·	Short-term borrowings and long-term debt - matrix-pricing model using observable market quotes and our own credit rating.

In addition, we have long-term receivables where fair value uses discounted future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

These selected financial assets and liabilities are classified in our Condensed Consolidated Balance Sheets as follows:

(millions of dollars)	June 28, 2009		Dec. 31, 2008
Assets
Cash and cash equivalents	$	812	$	1,980
Short-term investments		47,403		21,609
Short-term loans		935		824
Long-term investments and loans		12,576		11,478
Other current assets (a)		641		404
Other non-current assets (b)		367		855
Total	$	62,734	$	37,150
Liabilities
Short-term borrowings		7,645		9,320
Other current liabilities (c)		1,416		1,119
Long-term debt		31,864		7,963
Other noncurrent liabilities (d)		325		124
Total	$	41,250	$	18,526

(a)

At June 28, 2009, derivative instruments at fair value comprised of interest rate swaps ($1 million) and foreign currency forward-exchange contracts ($640 million) and, at December 31, 2008, comprised of interest rate swaps ($4 million), foreign currency swaps ($2 million), and foreign currency forward-exchange contracts ($398 million).

(b)	At June 28, 2009, derivative instruments at fair value comprised of interest rate swaps ($282 million) and foreign currency swaps ($85 million) and, at December 31, 2008, comprised of interest rate swaps ($729 million) and foreign currency swaps ($126 million).

(c)

At June 28, 2009, derivative instruments at fair value comprised of foreign currency swaps ($35 million) and foreign currency forward-exchange contracts ($1.4 billion) and, at December 31, 2008, comprised of foreign currency swaps ($36 million) and foreign currency forward-exchange contracts ($1.1 billion).

(d)	At June 28, 2009, derivative instruments at fair value comprised of interest rate swaps ($8 million) and foreign currency swaps ($317 million) and, at December 31, 2008, comprised of interest rate swaps ($7 million) and foreign currency swaps ($117 million).

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We regularly evaluate all of our financial assets for impairment. For investments in debt and equity securities, when a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. For loans, an impairment charge is recorded if it is probable that we will not be able to collect all amounts due according to the loan agreement. There were no significant impairments recognized in 2009 or 2008.

B. Investments in Debt and Equity Securities

Investments in debt securities reflect the investment of proceeds obtained through the issuance of $13.5 billion of senior unsecured notes on March 24, 2009 and approximately $10.5 billion of senior unsecured notes on June 3, 2009, virtually all of which will be used to partially fund the pending acquisition of Wyeth (see Note 8D. Financial Instruments: Long-Term Debt).

Details of our investments follow:

	Contractual Maturity (in years)
(millions of dollars)	Within 1		Over 1 to 5		Over 5 to 10		Over 10		Total as of June 28, 2009
Available-for-sale debt securities:
U.S. government Federal Deposit Insurance Corporation guaranteed debt	$	—	$	1,717	$	—	$	—	$	1,717
Western European and other government debt		22,892		2,579		—		—		25,471
Corporate debt		1,815		2,076		—		—		3,891
Western European and other government agency debt		13,922		802		—		—		14,724
Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Government National Mortgage Association asset-backed securities		200		3,208		—		—		3,408
Supranational debt		648		381		—		—		1,029
Other asset-backed securities		226		125		—		—		351
Certificates of deposit		1		—		—		—		1
Held-to-maturity debt securities:
Certificates of deposit and other		949		4		—		—		953
Total debt securities	$	40,653	$	10,892	$	—	$	—	$	51,545
Trading securities										172
Available-for-sale money market funds (a)										7,543
Available-for-sale equity securities, excluding money market funds										182
Total									$	59,442

(a)	Securities issued by the U.S. government and its agencies or instrumentalities and reverse repurchase agreements involving the same investments held.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $7.1 billion as of June 28, 2009. As of June 28, 2009, we had access to $8.3 billion of lines of credit, of which $6.1 billion expire within one year. Of these lines of credit, $8.1 billion are unused, of which our lenders have committed to loan us $7.0 billion at our request. Unused lines of credit of $7.0 billion, of which $5.0 billion expire in 2010 and $2.0 billion expire in 2013, may be used to support our commercial paper borrowings.

As a result of the issuances of senior unsecured notes in March and June 2009, the $22.5 billion bridge term loan credit agreement, which we entered into on March 12, 2009 to partially finance our pending acquisition of Wyeth, was terminated, and we are no longer subject to the covenants under that agreement.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

D. Long-Term Debt

We issued long-term debt in the first six months of 2009, virtually all of the proceeds of which will be used to partially finance our pending acquisition of Wyeth. The following table sets forth the amounts outstanding related to those issuances:

(millions of dollars)	Maturity Date	Outstanding on June 28, 2009
Senior unsecured notes:
Issued on March 24, 2009:
Floating rate notes at the three-month London Interbank Offering Rate (LIBOR), plus 1.95%	March 2011	$	1,250
4.45%(a)	March 2012		3,498
5.35%(a)	March 2015		2,996
6.20%(a)	March 2019		3,247
7.20%(a)	March 2039		2,529
Issued on June 3, 2009:
3.625% euro (b)	June 2013		2,597
4.75% euro (b)	June 2016		2,808
5.75% euro (b)	June 2021		2,806
6.50% U.K. pound (b)	June 2038		2,455
Total long-term debt issued in the first six months of 2009		$	24,186

(a)	Instrument is callable at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate, plus 0.50% plus, in each case, accrued and unpaid interest.

(b)	Instrument is callable at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at a comparable government bond rate, plus 0.20%, plus accrued and unpaid interest.

Long-term debt outstanding as of June 28, 2009, excluding the current portion of $54 million, matures in the following years:

(millions of dollars)	Total		2010		2011		2012		2013		After 2013

Long-term debt	$	31,864	$	––	$	2,525	$	3,517	$	2,610	$	23,212

E. Derivative Financial Instruments and Hedging Activities

On a regular basis, we seek to minimize the impact of foreign exchange rate movements and interest rate movements on our earnings. We manage these exposures through operational means and through the use of various financial instruments.

Foreign Exchange Risk

A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-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 and net investments against the impact of the translation into U.S. dollars of certain foreign-exchange-denominated transactions. The aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $55.0 billion. The derivative financial instruments primarily hedge or offset exposures in euro, Swedish kroner, U.K. pound and Japanese yen.

All derivative contracts used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings or deferred, depending on the nature and purpose of the financial instrument (offset or hedge relationship) and the effectiveness of the hedge relationships, as follows:

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We defer on the balance sheet the effective portion of the gains or losses on foreign currency forward-exchange contracts and foreign currency swaps that are designated as cash flow hedges and reclassify those amounts, as appropriate, into earnings in the same period or periods during which the hedged transaction affects earnings.

We recognize the gains and losses on forward-exchange contracts and foreign currency swaps that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.

We recognize the gain and loss impact on foreign currency swaps designated as hedges of our net investments in earnings in three ways: over time–for the periodic net swap payments; immediately–to the extent of any change in the difference between the foreign exchange spot rate and forward rate; and upon sale or substantial liquidation of our net investments–to the extent of change in the foreign exchange spot rates.

We defer on the balance sheet foreign exchange gains and losses related to foreign-exchange-denominated debt designated as a hedge of our net investments and reclassify those amounts into earnings upon the sale or substantial liquidation of our net investments.

Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness in the second quarter and the first six months of 2009 or the second quarter and the first six months of 2008.

Interest Rate Risk

Our interest-bearing investments, loans and borrowings are subject to interest rate risk. We invest and loan primarily on a short-term or variable-rate basis; however, due to the pending acquisition of Wyeth and in light of current market conditions, we currently borrow primarily on a long-term, fixed-rate basis. From time to time, depending on market conditions, we will change the profile of our outstanding debt by entering into derivative financial instruments like interest rate swaps. The aggregate notional amount of interest rate derivative financial instruments is $5.4 billion. The derivative financial instruments hedge U.S. fixed-rate debt and euro fixed-rate debt.

All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings, as follows:

·	We recognize the gains and losses on interest rate swaps that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. We recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk also in earnings.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Gains / (Losses)
(millions of dollars)	Three Months Ended June 28, 2009			Six Months Ended June 28, 2009
Derivative Financial Instruments in Fair Value Hedge Relationships
Interest rate swaps
Recognized in OID (a)	$	(3	)	$	(7	)
Foreign currency swaps
Recognized in OID (a)		1			––
Derivative Financial Instruments in Cash Flow Hedge Relationships
U.S. Treasury interest rate locks
Recognized in OID (a)	$	––		$	(11	)
Recognized in OCI (a), (b)		––			(15	)
Reclassified from OCI to OID (a), (b)		––			––
Foreign currency swaps
Recognized in OID (a)		––			––
Recognized in OCI (a), (b)		(221	)		(240	)
Reclassified from OCI to OID (a), (b)		––			––
Foreign currency forward exchange contracts
Recognized in OID (a)		––			––
Recognized in OCI (a), (b)		5			8
Reclassified from OCI to OID (a), (b)		4			14
Derivative Financial Instruments in Net Investment Hedge Relationships
Foreign currency swaps
Recognized in OID (a)	$	––		$	(1	)
Recognized in OCI (a), (b)		(15	)		38
Derivative Financial Instruments Not Designated as Hedges
Foreign currency swaps
Recognized in OID (a)	$	18		$	13
Foreign currency forward-exchange contracts
Recognized in OID (a)		(185	)		(441	)
Non-Derivative Financial Instruments Designated as Hedges
Foreign currency short-term borrowings
Recognized in OID (a)	$	––		$	––
Recognized in OCI (a), (b)		(23	)		88
Foreign currency long-term debt
Recognized in OID (a)		––			––
Recognized in OCI (a), (b)		(46	)		111

(a)	OCI = Other comprehensive income / (expense), a balance sheet account. OID = Other (income)/deductions – net.

(b)

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/(expense) – Net unrealized gains/(losses) 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/(expense) – Currency translation adjustment.

For information about the fair value of our derivative financial instruments, and the impact on our consolidated balance sheet, see Note 8A. Financial Instruments: Selected Financial Assets and Liabilities.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 $1.0 billion, for which we have posted collateral of $353 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a debt-rating organization ratings downgrade. If there had been a downgrade to an A rating, or its equivalent, on June 28, 2009, we would have been required to post an additional $160 million of collateral to our counterparties. If there had been a downgrade to below an A rating, or its equivalent, on June 28, 2009, we would have been required to post an additional $192 million of collateral to our counterparties.

F. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to 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.

At June 28, 2009, we have $7.1 billion invested in a major money market fund rated Aaa by Moody’s Investors Service and AAA by Standard & Poor’s, which invests in securities issued by the U.S. government and its agencies or instrumentalities and reverse repurchase agreements involving the same investments held. This fund participates in the U.S. Treasury Department Temporary Guarantee Program for Money Market Funds, which guarantees $290 million of our investment.

Note 9. Inventories

The components of inventories follow:

(millions of dollars)	June 28, 2009		Dec. 31, 2008
Finished goods	$	2,237	$	2,024
Work-in-process		1,897		1,527
Raw materials and supplies		859		830
Total inventories(a)	$	4,993	$	4,381

(a)	Certain amounts of inventories are in excess of one year’s supply. There are no recoverability issues associated with these quantities, and the amounts are not significant.

Note 10. Goodwill and Other Intangible Assets

A. Goodwill

The changes in the carrying amount of goodwill by segment for the six months ended June 28, 2009, follow:

(millions of dollars)	Pharmaceutical		Animal Health		Other		Total
Balance, December 31, 2008	$	21,317	$	129	$	18	$	21,464
Additions		––		––		––		––
Other(a)		316		13		1		330
Balance, June 28, 2009	$	21,633	$	142	$	19	$	21,794

(a)	Primarily related to the impact of foreign exchange, except that Pharmaceutical also includes a reclassification of approximately $150 million to Assets held for sale.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

B. Other Intangible Assets

The components of identifiable intangible assets, primarily included in our Pharmaceutical segment, follow:

	June 28, 2009							Dec. 31, 2008
(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	$	31,974	$	(19,237	)	$	12,737	$	31,484	$	(17,673	)	$	13,811
Brands		1,016		(505	)		511		1,016		(487	)		529
License agreements		252		(90	)		162		246		(78	)		168
Trademarks		124		(84	)		40		118		(78	)		40
Other(a)		520		(292	)		228		531		(291	)		240
Total		33,886		(20,208	)		13,678		33,395		(18,607	)		14,788
Indefinite-lived intangible assets: