UNITED STATES X QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended July 2, 2006 OR TRANSITION REPORT
PURSUANT TO SECTION 13 For the transition period from________to_______ COMMISSION FILE NUMBER 1-3619 ---- |
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PFIZER INC. |
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DELAWARE |
13-5315170 |
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235
East 42nd Street, New York, New York 10017 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 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer X Accelerated Filer Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X At July 31, 2006, 7,291,451,351 shares of the issuer's voting common stock were outstanding. |
FORM 10-Q
For the Quarter
Ended
July 2, 2006
Table of Contents
PART I. FINANCIAL INFORMATION |
Page |
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Item 1. |
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Financial Statements: |
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Condensed Consolidated Statements of Income for the three months and six months ended July 2, 2006 and July 3, 2005 |
3 |
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Condensed Consolidated Balance Sheets at July 2, 2006 and December 31, 2005 |
4 |
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Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2006 and July 3, 2005 |
5 |
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Notes to Condensed Consolidated Financial Statements |
6 |
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Review Report of Independent Registered Public Accounting Firm |
23 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
52 |
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Item 4. |
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Controls and Procedures |
52 |
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PART II. OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
53 |
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Item 1A. |
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Risk Factors |
54 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
54 |
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Item 3. |
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Defaults Upon Senior Securities |
55 |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
55 |
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Item 5. |
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Other Information |
55 |
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Item 6. |
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Exhibits |
55 |
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Signature |
56 |
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 of dollars, except per common share data) |
July 2, |
July 3, |
July 2, |
July 3, |
||||
|
||||||||
Revenues |
$ |
11,741 |
$ |
11,452 |
$ |
23,488 |
$ |
23,595 |
|
||||||||
Costs and expenses: |
||||||||
Cost of sales(a) |
1,790 |
1,762 |
3,461 |
3,639 |
||||
Selling, informational and administrative expenses(a) |
3,881 |
3,766 |
7,276 |
7,431 |
||||
Research and development expenses(a) |
1,742 |
1,830 |
3,285 |
3,547 |
||||
Amortization of intangible assets |
823 |
856 |
1,648 |
1,736 |
||||
Merger-related in-process research and development charges |
513 |
260 |
513 |
262 |
||||
Restructuring charges and merger-related costs |
268 |
264 |
567 |
480 |
||||
Other (income)/deductions - net |
(359) |
(198) |
(615) |
854 |
||||
|
||||||||
Income from continuing operations before provision/(benefit) for taxes on income and minority interests |
3,083 |
2,912 |
7,353 |
5,646 |
||||
|
||||||||
Provision/(benefit) for taxes on income |
790 |
(464) |
1,052 |
2,111 |
||||
|
||||||||
Minority interests |
3 |
1 |
5 |
4 |
||||
|
||||||||
Income from continuing operations |
2,290 |
3,375 |
6,296 |
3,531 |
||||
|
||||||||
Discontinued operations: |
||||||||
Income from discontinued operations - net of tax |
108 |
88 |
210 |
191 |
||||
Gains on sales of discontinued operations - net of tax |
17 |
-- |
20 |
41 |
||||
|
||||||||
Discontinued operations - net of tax |
125 |
88 |
230 |
232 |
||||
Net income |
$ |
2,415 |
$ |
3,463 |
$ |
6,526 |
$ |
3,763 |
|
||||||||
Earnings per common share - basic: |
||||||||
Income from continuing operations |
$ |
0.31 |
$ |
0.46 |
$ |
0.86 |
$ |
0.48 |
Discontinued operations - net of tax |
0.02 |
0.01 |
0.03 |
0.03 |
||||
Net income |
$ |
0.33 |
$ |
0.47 |
$ |
0.89 |
$ |
0.51 |
|
||||||||
Earnings per common share - diluted: |
||||||||
Income from continuing operations |
$ |
0.31 |
$ |
0.46 |
$ |
0.86 |
$ |
0.48 |
Discontinued operations - net of tax |
0.02 |
0.01 |
0.03 |
0.03 |
||||
Net income |
$ |
0.33 |
$ |
0.47 |
$ |
0.89 |
$ |
0.51 |
|
||||||||
Weighted-average shares used to calculate earnings per common share: |
||||||||
Basic |
7,282 |
7,366 |
7,298 |
7,391 |
||||
|
||||||||
Diluted |
7,305 |
7,418 |
7,330 |
7,445 |
||||
|
||||||||
Cash dividends paid per common share |
$ |
0.24 |
$ |
0.19 |
$ |
0.48 |
$ |
0.38 |
(a) |
Exclusive of amortization of intangible assets, except as disclosed in Note 12B, 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) |
July 2, |
Dec. 31, |
||
ASSETS |
||||
Current Assets |
||||
Cash and cash equivalents |
$ |
1,921 |
$ |
2,247 |
Short-term investments |
12,829 |
19,979 |
||
Accounts receivable, less allowance for doubtful accounts |
9,275 |
9,103 |
||
Short-term loans |
511 |
510 |
||
Inventories |
6,392 |
5,478 |
||
Prepaid expenses and taxes |
3,262 |
2,903 |
||
Assets of discontinued operations and other assets held for sale |
6,804 |
6,659 |
||
Total current assets |
40,994 |
46,879 |
||
Long-term investments and loans |
2,387 |
2,497 |
||
Property, plant and equipment, less accumulated depreciation |
16,483 |
16,233 |
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Goodwill |
21,057 |
20,985 |
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Identifiable intangible assets, less accumulated amortization |
26,134 |
26,244 |
||
Other assets, deferred taxes and deferred charges |
4,495 |
4,860 |
||
Total assets |
$ |
111,550 |
$ |
117,698 |
|
||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||
Current Liabilities |
||||
Short-term borrowings, including current portion of long-term debt |
$ |
3,779 |
$ |
11,589 |
Accounts payable |
1,740 |
2,073 |
||
Dividends payable |
1,757 |
1,772 |
||
Income taxes payable |
4,356 |
3,618 |
||
Accrued compensation and related items |
1,399 |
1,602 |
||
Other current liabilities |
5,655 |
6,564 |
||
Liabilities of discontinued operations and other liabilities held for sale |
1,369 |
1,237 |
||
Total current liabilities |
20,055 |
28,455 |
||
|
||||
Long-term debt |
5,450 |
6,347 |
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Pension benefit obligations |
2,721 |
2,681 |
||
Postretirement benefit obligations |
1,447 |
1,424 |
||
Deferred taxes |
10,369 |
10,392 |
||
Other noncurrent liabilities |
3,019 |
2,635 |
||
Total liabilities |
43,061 |
51,934 |
||
|
||||
Shareholders' Equity |
||||
Preferred stock |
152 |
169 |
||
Common stock |
440 |
439 |
||
Additional paid-in capital |
68,217 |
67,759 |
||
Employee benefit trust, at fair value |
(700) |
(923) |
||
Treasury stock |
(41,755) |
(39,767) |
||
Retained earnings |
40,627 |
37,608 |
||
Accumulated other comprehensive income |
1,508 |
479 |
||
|
||||
Total shareholders' equity |
68,489 |
65,764 |
||
Total liabilities and shareholders' equity |
$ |
111,550 |
$ |
117,698 |
* 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) |
July 2, |
July 3, |
||
|
||||
Operating Activities: |
||||
Net income |
$ |
6,526 |
$ |
3,763 |
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Depreciation and amortization |
2,694 |
2,776 |
||
Share-based compensation expense |
326 |
79 |
||
Merger-related in-process research and development charges |
513 |
262 |
||
Intangible asset impairments and other associated non-cash charges |
-- |
1,213 |
||
Gains on disposal of investments, products and product lines |
(114) |
(53) |
||
Gains on sales of discontinued operations |
(31) |
(65) |
||
Deferred taxes from continuing operations |
(438) |
(931) |
||
Other deferred taxes |
45 |
93 |
||
Other non-cash adjustments |
219 |
215 |
||
Changes in assets and liabilities (net of businesses acquired and divested) |
(636) |
(369) |
||
|
||||
Net cash provided by operating activities |
9,104 |
6,983 |
||
|
||||
Investing Activities: |
||||
Purchases of property, plant and equipment |
(887) |
(997) |
||
Purchases of short-term investments |
(5,663) |
(7,441) |
||
Proceeds from redemptions of short-term investments |
13,239 |
12,570 |
||
Purchases of long-term investments |
(248) |
(560) |
||
Proceeds from sales of long-term investments |
47 |
568 |
||
Purchases of other assets |
(78) |
(99) |
||
Proceeds from sales of other assets |
3 |
6 |
||
Proceeds from the sales of businesses, products and product lines |
14 |
101 |
||
Acquisitions, net of cash acquired |
(1,989) |
(255) |
||
Other investing activities |
(116) |
276 |
||
|
||||
Net cash provided by investing activities |
4,322 |
4,169 |
||
|
||||
Financing Activities: |
||||
Increase in short-term borrowings, net |
938 |
90 |
||
Principal payments on short-term borrowings |
(10,583) |
(5,800) |
||
Proceeds from issuances of long-term debt |
1,054 |
2 |
||
Principal payments on long-term debt |
(2) |
(22) |
||
Purchases of common stock |
(2,000) |
(3,304) |
||
Cash dividends paid |
(3,468) |
(2,930) |
||
Stock option transactions and other |
318 |
278 |
||
|
||||
Net cash used in financing activities |
(13,743) |
(11,686) |
||
Effect of exchange-rate changes on cash and cash equivalents |
(9) |
2 |
||
Net decrease in cash and cash equivalents |
(326) |
(532) |
||
Cash and cash equivalents at beginning of period |
2,247 |
1,808 |
||
|
||||
Cash and cash equivalents at end of period |
$ |
1,921 |
$ |
1,276 |
|
||||
Supplemental Cash Flow Information: |
||||
Cash paid during the period for: |
||||
Income taxes |
$ |
921 |
$ |
1,296 |
Interest |
414 |
329 |
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 (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 28, 2006 and May 29, 2005.
We made certain reclassifications to the 2005 condensed consolidated financial statements to conform to the 2006 presentation. These reclassifications are primarily related to discontinued operations (see Note 3, Discontinued Operations) as well as to better reflect jurisdictional netting of deferred taxes.
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, 2005.
Note 2. Acquisitions
On May 16, 2006, we completed the acquisition of all of the outstanding shares of Rinat Neuroscience Corp., a biologics company with several new central-nervous-system product candidates. In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded $478 million, pre-tax, in Merger-related in-process research and development charges.
On February 28, 2006, we completed the acquisition of the sanofi-aventis world-wide rights, including patent rights and production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.4 billion (including transaction costs). In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded an intangible asset for developed technology rights of approximately $1.0 billion, inventory valued at $218 million and goodwill of approximately $166 million, all of which have been allocated to our Human Health segment. The amortization of the developed technology rights will be primarily included in Cost of Sales. Given the size and complexity of the acquisition, the fair valuation and allocation work is still being finalized and is expected to be completed in the third quarter. To the extent that our estimates need to be adjusted, we will do so. Prior to the acquisition, in connection with our collaboration agreement with sanofi-aventis, we recorded a research and development milestone due to us from sanofi-aventis of approximately $118 million ($71 million, after tax) in the first quarter of 2006 in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).
Note 3. Discontinued Operations
We evaluate our businesses and product lines periodically for strategic fit within our operations. As a result of our evaluation, we decided to sell a number of businesses and product lines, certain of which qualified for Discontinued operations treatment:
|
In June 2006, we entered into an agreement to sell our Consumer Healthcare business for approximately $16.6 billion in cash. This business comprises substantially all of our former Consumer Healthcare segment and other associated amounts, such as purchase-accounting impacts and merger-related costs, and restructuring and implementation costs related to our Adapting to Scale (AtS) productivity initiative, previously reported in the Corporate/Other segment. In addition, certain manufacturing facility assets and liabilities, which were previously part of our Human Health or Corporate/Other segment, are included in the planned sale of the Consumer Healthcare business. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business that will be discontinued 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 that will be sold have been reclassified into Assets/Liabilities of discontinued operations and other assets/liabilities held for sale, as appropriate, on the condensed consolidated balance sheets. The divestiture of the Consumer Healthcare business is expected to close in late 2006 and is subject to customary closing conditions, including receipt of regulatory approvals. |
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In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses, which had been included in our Human Health segment, for 70 million euros (approximately $93 million) and recorded a gain of $57 million ($36 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income. In addition, we recorded an impairment charge of $9 million ($6 million, net of tax) related to the third European generic business in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the six months ended July 3, 2005. |
The following amounts, primarily related to our Consumer Healthcare business, have been segregated from continuing operations and included in Discontinued operations - net of tax in the condensed consolidated statements of income:
Three Months Ended |
Six Months Ended |
||||||||
(in millions) |
July 2, |
July
3, |
|
July 2, |
July
3, |
||||
|
|||||||||
Revenues |
$ |
1,027 |
$ |
987 |
$ |
1,946 |
$ |
1,951 |
|
|
|||||||||
Pre-tax income |
$ |
160 |
$ |
134 |
$ |
315 |
$ |
290 |
|
Provision for taxes on income |
(52) |
(46) |
(105) |
(99) |
|||||
Income from operations of discontinued businesses - net of tax |
108 |
88 |
210 |
191 |
|||||
Pre-tax gains on sales of discontinued businesses |
26 |
-- |
31 |
65 |
|||||
Provision for taxes on gains |
(9) |
-- |
(11) |
(24) |
|||||
Gains on sales of discontinued businesses - net of tax |
17 |
-- |
20 |
41 |
|||||
Discontinued operations-net of tax |
$ |
125 |
$ |
88 |
$ |
230 |
$ |
232 |
The following assets and liabilities, primarily related to our Consumer Healthcare business, have been segregated and included in Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations and other liabilities held for sale, as appropriate, in the condensed consolidated balance sheets:
(in millions) |
July 2, |
Dec. 31, |
||
|
||||
Accounts receivable, less allowance for doubtful accounts |
$ |
742 |
$ |
661 |
Inventories |
567 |
561 |
||
Prepaid expenses and taxes |
81 |
71 |
||
Property, plant and equipment - net |
986 |
1,002 |
||
Goodwill |
2,756 |
2,789 |
||
Identifiable intangible assets, less accumulated amortization |
1,643 |
1,557 |
||
Other assets, deferred taxes and deferred charges |
29 |
18 |
||
Assets of discontinued operations and other assets held for sale |
$ |
6,804 |
$ |
6,659 |
|
||||
Current liabilities |
$ |
610 |
$ |
538 |
Other |
759 |
699 |
||
Liabilities of discontinued operations and other liabilities held for sale |
$ |
1,369 |
$ |
1,237 |
Net cash flows of our discontinued operations from each of the categories of operating, investing and financing activities were not significant for the six months ended July 2, 2006 and July 3, 2005.
Note 4. Adoption of New Accounting Standards
On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, as supplemented by the interpretation provided by SEC Staff Accounting Bulletin (SAB) No. 107, issued in March 2005. (SFAS 123R replaced SFAS 123, Stock-Based Compensation, issued in 1995.) We have elected the modified prospective application transition method of adoption and, as such, prior-period financial statements have not been restated. Under this method, the fair value of all stock options granted or modified after adoption must be recognized in the consolidated statement of income and total compensation cost related to nonvested awards not yet recognized, determined under the original provisions of SFAS 123, must also be recognized in the consolidated statement of income.
Prior to January 1, 2006, we accounted for stock options under Accounting Principle Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, an elective accounting policy permitted by SFAS 123. Under this standard, since the exercise price of our stock options granted is set equal to the market price on the date of the grant, we did not record any expense to the condensed consolidated statement of income related to stock options, unless certain original grant date terms were subsequently modified. However, as required, we disclosed, in the Notes to Consolidated Financial Statements, the pro forma expense impact of the stock option grants as if we had applied the fair-value-based recognition provisions of SFAS 123.
The adoption of SFAS 123R primarily impacted our accounting for stock options (see Note 14, Share-Based Payments).
Note 5. Asset Impairment Charge
In the first six months of 2005, we recorded charges totaling $1.2 billion ($761 million, net of tax) in connection with the decision to suspend sales of Bextra. The pre-tax charge included $1.1 billion related to the impairment of developed technology rights and $7 million related to the write-off of machinery and equipment, both of which were included in Other (income)/deductions - net (see Note 12, Goodwill and Other Intangible Assets).
Note 6. Adapting to Scale Productivity Initiative
We incurred the following costs in connection with our Adapting to Scale (AtS) productivity initiative, which was launched in early 2005:
Three Months Ended |
Six Months Ended |
||||||||||
(millions of dollars) |
July 2, |
July 3, |
July 2, |
July 3, |
|||||||
|
|
|
|
||||||||
Implementation costs(a) |
$ |
180 |
$ |
33 |
$ |
365 |
$ |
33 |
|||
Restructuring charges(b) |
262 |
21 |
556 |
21 |
|||||||
Total AtS costs |
$ |
442 |
$ |
54 |
$ |
921 |
$ |
54 |
(a) |
Included in Cost of sales ($104 million), Selling, informational and administrative expenses ($58 million), Research and development expenses ($40 million) and Other (income)/deductions - net ($22 million income) for the three months ended July 2, 2006 and included in Cost of sales ($228 million), Selling, informational and administrative expenses ($97 million), Research and development expenses ($62 million) and Other (income)/deductions - net ($22 million income) for the six months ended July 2, 2006. Included in Cost of sales ($1 million), Selling, informational and administrative expenses ($21 million), and Research and development expenses ($11 million) for the three months and six months ended July 3, 2005. |
(b) |
Included in Restructuring charges and merger-related costs. |
Included in Discontinued operations - net of tax are additional pre-tax AtS costs of $7 million and $15 million for the three months and six months ended July 2, 2006.
Through July 2, 2006, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our U.S. marketing and worldwide research and development operations, while the implementation costs primarily relate to system and process standardization, as well as the expansion of shared services.
The components of restructuring charges associated with AtS follow:
(millions of dollars) |
Costs |
Utilization |
|
Accrual |
(a) |
|||
|
|
|||||||
Employee termination costs |
$ |
635 |
$ |
528 |
$ |
107 |
||
Asset impairments |
299 |
299 |
-- |
|||||
Other |
61 |
22 |
39 |
|||||
|
$ |
995 |
$ |
849 |
$ |
146 |
(a) |
Included in Other current liabilities. |
During the three months and six months ended July 2, 2006, we expensed $166 million and $331 million for Employee termination costs, $58 million and $177 million for Asset impairments, and $38 million and $48 million in Other. Through July 2, 2006, Employee termination costs represent the approved reduction of the workforce by 5,096 employees, mainly in manufacturing, sales and research. We notified affected individuals and 4,714 employees were terminated as of July 2, 2006. Employee termination costs are recorded as incurred and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write off inventory and write down property, plant and equipment. Other primarily includes costs to exit certain activities.
Note 7. Merger-Related Costs
We incurred the following merger-related costs:
Three Months Ended |
Six Months Ended |
||||||||
(millions of dollars) |
July 2, |
July 3, |
July 2, |
July 3, |
|||||
|
|
||||||||
Integration costs |
$ |
3 |
$ |
191 |
$ |
5 |
$ |
293 |
|
Restructuring charges |
3 |
52 |
6 |
166 |
|||||
Total merger-related costs(a) |
$ |
6 |
$ |
243 |
$ |
11 |
$ |
459 |
(a) |
Included in Restructuring charges and merger-related costs. Amounts in 2005 primarily relate to our acquisition of Pharmacia Corporation (Pharmacia), which was completed on April 16, 2003. |
Included in Discontinued operations - net of tax are additional pre-tax merger-related costs of $4 million and $5 million for the three months and six months ended July 2, 2006 and $9 million and $16 million for the three months and six months ended July 3, 2005.
Restructuring charges included severance, costs of vacating duplicative facilities, contract termination and other exit costs.
Note 8. Taxes on Income
A. Taxes on Income
On January 23, 2006, the Internal Revenue Service (IRS) issued final regulations on Statutory Mergers and Consolidations, which impacted certain prior-period transactions. In the first quarter of 2006, we recorded a tax benefit of $217 million, reflecting the total impact of these regulations.
In the first six months of 2005, we recorded an income tax charge of $1.7 billion, included in Provision/(benefit) for taxes on income, in connection with our decision to repatriate about $37 billion of foreign earnings in accordance with the American Jobs Creation Act of 2004 (the Jobs Act). In the first quarter of 2005, we recorded an initial estimate of $2.2 billion based on the decision to repatriate $28.3 billion of foreign earnings; in the second quarter of 2005, we reduced our original estimate of the tax charge by $490 million, due primarily to guidance issued by the U.S. Treasury in the second quarter of 2005, partially offset by our decision to increase the amount of the repatriation.
B. Tax Contingencies
On January 25, 2006, the Company was notified by the IRS Appeals Division that a resolution had been reached on the matter that we were in the process of appealing related to the tax deductibility of a breakup fee paid by Warner-Lambert Company in 2000. As a result, in the first quarter of 2006 we recorded a tax benefit of approximately $441 million related to the resolution of this issue.
In the second quarter of 2005, we recorded a tax benefit of $586 million primarily related to the resolution of certain tax positions.
The IRS is currently conducting audits of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005 and 2006 tax years are also currently under audit under the IRS Compliance Assurance Process, a recently introduced real-time audit process.
With respect to Pharmacia Corporation, the IRS has completed audits of the tax returns for the years 2000 through 2002 and is currently conducting an audit for the 2003 tax year through the date of the merger with Pfizer (April 16, 2003).
We periodically reassess the likelihood of assessments resulting from audits of federal, state and foreign income tax filings. We believe that our accruals for tax liabilities are adequate for all open years.
Note 9. Comprehensive Income
The components of comprehensive income/(expense) follow:
Three Months Ended |
Six Months Ended |
|||||||||
(millions of dollars) |
July 2, |
July 3, |
July 2, |
July 3, |
||||||
|
|
|||||||||
Net income |
$ |
2,415 |
$ |
3,463 |
$ |
6,526 |
$ |
3,763 |
||
Other comprehensive income/(expense): |
||||||||||
Currency translation adjustment and other(a) |
688 |
(708) |
998 |
(985) |
||||||
Net unrealized gains/(losses) on derivative financial instruments(b) |
22 |
(8) |
93 |
(27) |
||||||
Net unrealized gains/(losses) on available-for-sale securities(b) |
(36) |
(48) |
(33) |
(119) |
||||||
Minimum pension liability(b) |
(17) |
16 |
(29) |
14 |
||||||
Total other comprehensive income/(expense) |
657 |
(748) |
1,029 |
(1,117) |
||||||
Total comprehensive income |
$ |
3,072 |
$ |
2,715 |
$ |
7,555 |
$ |
2,646 |
||
|
|
|||||||||
(a) |
Includes changes in currency translation adjustments of $19 million and $21 million for the three months and six months ended July 2, 2006, and ($17) million and ($25) million for the three months and six months ended July 2, 2005 related to discontinued operations. |
|
||||||||
(b) |
Amounts associated with discontinued operations are not significant. |
|
||||||||
Note 10. Financial Instruments
A. Long-Term Debt
On February 22, 2006, we issued the following Japanese yen fixed-rate bonds, to be used for general corporate purposes:
|
$508 million equivalent, senior unsecured notes, due February 2011, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.2%; and |
|
|
|
$466 million equivalent, senior unsecured notes, due February 2016, which pay interest semi-annually, beginning on August 22, 2006, at a rate of 1.8%. |
The notes were issued under a $5 billion debt shelf registration filed with the SEC in November 2002. As of July 2, 2006, we had the ability to borrow approximately $1 billion by issuing debt securities under that debt shelf registration statement.
In May 2006, we decided to exercise Pfizer's option to call, at par-value plus accrued interest, $1 billion of senior unsecured floating-rate notes, which were included in Long-term debt as of December 31, 2005 and included in Short-term debt as of July 2, 2006. Notice to call was given to the Trustees and the notes were redeemed early in the third quarter of 2006.
B. Derivative Financial Instruments and Hedging Activities
There was no material ineffectiveness in any hedging relationship reported in earnings in the first six months of 2006.
Foreign Exchange Risk
During the first six months of 2006, we entered into the following new or incremental hedging or offset activities:
Instrument(a) |
Primary |
(b) |
|
Hedge |
(c) |
|
Hedged or Offset Item |
Notional Amount as of |
Maturity Date |
|
Forward |
OCL |
-- |
Short-term foreign currency assets and liabilities(d) |
$1,074 |
2006 |
|||||
Forward |
Prepaid |
CF |
Euro intercompany loan |
|
792 |
2006 |
||||
LT yen debt |
LTD |
NI |
Yen net investments |
523 |
2011 |
|||||
LT yen debt |
LTD |
NI |
Yen net investments |
480 |
2016 |
(a) |
Forward = Forward-exchange contracts; LT yen debt = Long-term yen debt |
(b) |
The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge foreign exchange risk. OCL = Other current liabilities; Prepaid = Prepaid expenses and taxes; LTD = Long-term debt |
(c) |
CF = Cash flow hedge; NI = Net investment hedge |
(d) |
Forward-exchange contracts used to offset short-term foreign currency assets and liabilities were primarily for intercompany transactions in euros, Japanese yen, Canadian dollars, U.K. pounds and Australian dollars. |
These foreign exchange instruments serve to protect us against the impact of the translation into U.S. dollars of certain foreign exchange denominated transactions.
Note 11. Inventories
The components of inventories follow:
(millions of dollars) |
July 2, |
Dec. 31, |
||||
|
||||||
Finished goods |
$ |
2,223 |
$ |
1,742 |
||
Work-in-process |
3,153 |
2,379 |
||||
Raw materials and supplies |
1,016 |
1,357 |
||||
Total inventories(a) |
$ |
6,392 |
$ |
5,478 |
||
|
|
|||||
(a) |
Increase primarily due to the acquisition of sanofi-aventis' Exubera inventory, the build-up of inventory in advance of product launches and the impact of foreign exchange. |
|
||||
Note 12. Goodwill and Other Intangible Assets
A. Goodwill
The changes in the carrying amount of goodwill by segment for the six months ended July 2, 2006 follow:
(millions of dollars) |
Human |
Animal |
Other |
Total |
||||
|
||||||||
Balance, December 31, 2005 |
$ |
20,919 |
$ |
56 |
$ |
10 |
$ |
20,985 |
Additions(a) |
166 |
-- |
-- |
166 |
||||
Other(b) |
(99) |
5 |
-- |
(94) |
||||
Balance, July 2, 2006 |
$ |
20,986 |
$ |
61 |
$ |
10 |
$ |
21,057 |
(a) |
Primarily related to Exubera. |
(b) |
Includes a reduction to goodwill related to the resolution of certain tax positions, partially offset by the impact of foreign exchange. |
B. Other Intangible Assets
The components of identifiable intangible assets, primarily included in our Human Health segment, follow:
July 2, 2006 |
Dec. 31, 2005 |
|||||||
(millions of dollars) |
Gross |
Accumulated |
Gross |
Accumulated |
||||
Finite-lived intangible assets: |
||||||||
Developed technology rights |
$ |
32,426 |
$ |
(10,637) |
$ |
30,729 |
$ |
(8,810) |
Brands |
887 |
(73) |
885 |
(51) |
||||
License agreements |
155 |
(34) |
152 |
(27) |
||||
Trademarks |
109 |
(69) |
106 |
(65) |
||||
Other(a) |
518 |
(247) |
446 |
(203) |
||||
Total amortized finite-lived intangible assets |
34,095 |
(11,060) |
32,318 |
(9,156) |
||||
Indefinite-lived intangible assets: |
||||||||
Brands |
2,990 |
-- |
2,990 |
-- |
||||
Trademarks |
79 |
-- |
79 |
-- |
||||
Other(b) |
30 |
-- |
13 |
-- |
||||
Total indefinite-lived intangible assets |
3,099 |
-- |
3,082 |
-- |
||||
Total identifiable intangible assets |
$ |
37,194 |
$ |
(11,060) |
$ |
35,400 |
$ |
(9,156) |
Total identifiable intangible assets, less accumulated amortization |
$ |
26,134 |
|
$ |
26,244 |
(a) |
Includes patents, non-compete agreements, customer contracts and other intangible assets. |
(b) |
Includes pension-related intangible assets. |
In the first six months of 2006, we acquired the sanofi-aventis worldwide rights, including patent rights and production technology, to manufacture and sell Exubera. In connection with the acquisition, we recorded an intangible asset for developed technology rights of approximately $1.0 billion. The amortization of these developed technology rights will be primarily included in Cost of Sales.
In the first six months of 2005, we recorded an impairment charge of $1.1 billion in Other (income)/deductions - net related to the developed technology rights for Bextra, a selective COX-2 inhibitor (included in our Human Health segment) in connection with the decision to suspend sales of Bextra. In addition, in connection with the suspension, we recorded $7 million related to the write-off of machinery and equipment included in Other (income)/deductions - net; $56 million in write-offs of inventory and exit costs, included in Cost of sales; $5 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; and $173 million for an estimate of customer returns, primarily included against Revenues. Substantially all of these charges were recorded in the first quarter of 2005.
Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute our products are included in Amortization of intangible assets as they benefit multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function are included in Cost of sales, Selling, informational and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $848 million and $874 million for the three months ended July 2, 2006 and July 3, 2005, and $1.7 billion and $1.8 billion for the six months ended July 2, 2006 and July 3, 2005.
Included in Discontinued operations - net of tax is additional pre-tax amortization expense for finite-lived intangible assets of $4 million and $3 million for the three months ended July 2, 2006 and July 3, 2005 and $7 million and $5 million for the six months ended July 2, 2006 and July 3, 2005.
The annual amortization expense expected for the fiscal years 2006 through 2011 is $3.4 billion in 2006; $3.3 billion in 2007; $2.7 billion in 2008; and $2.5 billion in 2009, 2010 and 2011.
Note 13. Benefit Plans
The components of net periodic benefit cost 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, for the three months ended July 2, 2006 and July 3, 2005 follow:
Pension Plans |
||||||||||||||||
U.S. Qualified |
U.S. Supplemental |
International |
Postretirement Plans |
|||||||||||||
(millions of dollars) |
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
||||||||
|
||||||||||||||||
Service cost |
$ |
92 |
$ |
80 |
$ |
11 |
$ |
10 |
$ |
75 |
$ |
76 |
$ |
12 |
$ |
10 |
Interest cost |
112 |
102 |
15 |
14 |
76 |
78 |
31 |
28 |
||||||||
Expected return on plan assets |
(154) |
(149) |
-- |
-- |
(79) |
(80) |
(6) |
(5) |
||||||||
Amortization of: |
||||||||||||||||
Prior service costs/(credits) |
2 |
3 |
(1) |
1 |
-- |
-- |
1 |
(1) |
||||||||
Net transition obligation |
-- |
-- |
-- |
-- |
1 |
1 |
-- |
-- |
||||||||
Actuarial losses |
28 |
25 |
10 |
9 |
25 |
23 |
8 |
5 |
||||||||
Curtailments and settlements - net |
21 |
-- |
1 |
-- |
7 |
10 |
12 |
-- |
||||||||
Special termination benefits |
4 |
-- |
-- |
-- |
7 |
3 |
2 |
-- |
||||||||
Less: amounts included in discontinued operations |
(4) |
(4) |
(1) |
(1) |
(4) |
(4) |
(1) |
(1) |
||||||||
Net periodic benefit costs |
$ |
101 |
$ |
57 |
$ |
35 |
$ |
33 |
$ |
108 |
$ |
107 |
$ |
59 |
$ |
36 |
The components of net periodic benefit cost 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, for the six months ended July 2, 2006 and July 3, 2005 follow:
Pension Plans |
||||||||||||||||
U.S. Qualified |
U.S. Supplemental |
International |
Postretirement Plans |
|||||||||||||
(millions of dollars) |
2006 |
2005 |
2005 |
2005 |
2006 |
2005 |
2006 |
2005 |
||||||||
Service cost |
$ |
186 |
$ |
159 |
$ |
22 |
$ |
19 |
$ |
149 |
$ |
153 |
$ |
24 |
$ |
19 |
Interest cost |
224 |
206 |
30 |
29 |
150 |
158 |
63 |
56 |
||||||||
Expected return on plan assets |
(315) |
(297) |
-- |
-- |
(156) |
(161) |
(14) |
(11) |
||||||||
Amortization of: |
||||||||||||||||
Prior service costs/(credits) |
4 |
7 |
(1) |
1 |
-- |
(1) |
1 |
-- |
||||||||
Net transition obligation |
-- |
-- |
-- |
-- |
1 |
1 |
-- |
-- |
||||||||
Actuarial losses |
59 |
51 |
21 |
19 |
51 |
48 |
17 |
10 |
||||||||
Curtailments and settlements - net |
25 |
-- |
-- |
-- |
9 |
10 |
15 |
-- |
||||||||
Special termination benefits |
10 |
-- |
-- |
-- |
11 |
10 |
5 |
-- |
||||||||
Less: amounts included in discontinued operations |
(8) |
(8) |
(1) |
(1) |
(8) |
(7) |
(2) |
(2) |
||||||||
Net periodic benefit costs |
$ |
185 |
$ |
118 |
$ |
71 |
$ |
67 |
$ |
207 |
$ |
211 |
$ |
109 |
$ |
72 |
For the first six months of 2006, we contributed from the Company's general assets, $59 million to our U.S. supplemental (non-qualified) pension plans, $294 million to our international pension plans, and $88 million to our postretirement plans. In July 2006, we made voluntary tax-deductible contributions in excess of minimum funding requirements of $450 million to certain of our U.S. qualified pension plans and voluntary tax-deductible contributions of $90 million to certain of our postretirement plans.
During 2006, we expect to contribute, from the Company's general assets, a total of $453 million to our U.S. qualified pension plans, $76 million to our U.S. supplemental (non-qualified) pension plans, $449 million to our international pension plans and $253 million to our postretirement plans. Contributions expected to be made for 2006 are inclusive of amounts contributed during the first six months of 2006 and voluntary contributions made in July 2006. The contributions from the Company's general assets include direct employer benefit payments. Amounts associated with discontinued operations are not significant.
Note 14. Share-Based Payments
Our compensation programs can include share-based payments. In 2006 and 2005, the primary share-based awards and their general terms and conditions are as follows:
|
Stock options, which entitle the holder to purchase, at the end of a vesting term, a specified number of shares of Pfizer common stock at a price per share set equal to the market price of Pfizer common stock on the date of grant. |
|
|
|
Restricted stock units (RSUs), which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs. |
|
|
|
Performance share awards (PSAs) and performance-contingent share awards (PCSAs), which entitle the holder to receive, at the end of a vesting term, a number of shares of Pfizer common stock, within a range of shares from zero to a specified maximum, calculated using a non-discretionary formula that measures Pfizer's performance relative to an industry peer group. |
|
|
|
Restricted stock grants, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, and which also entitle the holder to receive dividends paid on such grants. |
The Company's shareholders approved the Pfizer Inc. 2004 Stock Plan (the 2004 Plan) at the Annual Meeting of Shareholders held on April 22, 2004 and, effective upon that approval, new stock option and other share-based awards may be granted only under the 2004 Plan. The 2004 Plan allows a maximum of 3 million shares to be awarded to any employee per year and 475 million shares in total. RSUs, PSAs, PCSAs and restricted stock grants count as three shares while stock options count as one share under the 2004 Plan toward the maximums.
In the past, we had various employee stock and incentive plans under which stock options and other share-based awards were granted. Stock options and other share-based awards that were granted under prior plans and were outstanding on April 22, 2004 continue in accordance with the terms of the respective plans.
As of July 2, 2006, 305 million shares were available for award, which include 26 million shares available for award under the legacy Pharmacia Long-Term Incentive Plan, which reflects award cancellations returned to the pool of available shares for legacy Pharmacia commitments.
Although not required to do so, historically, we have used authorized and unissued shares and, to a lesser extent, shares held in our Employee Benefit Trust to satisfy our obligations under these programs.
A. Impact on Net Income
The components of share-based compensation expense and the associated tax benefit follow:
Three Months Ended |
Six Months Ended |
||||||||||
(millions of dollars) |
July 2, |
July 3, |
July 2, |
July 3, |
|||||||
|
|
|
|
||||||||
Stock option expense |
$ |
100 |
$ |
-- |
$ |
221 |
$ |
-- |
|||
Restricted stock unit expense |
50 |
37 |
90 |
51 |
|||||||
Performance share awards and performance-contingent share awards expense |
4 |
20 |
15 |
28 |
|||||||
Share-based payment expense |
154 |
57 |
326 |
79 |
|||||||
Tax benefit for share-based compensation expense |
(45) |
(20) |
(93) |
(27) |
|||||||
Share-based payment expense, net of tax |
$ |
109 |
$ |
37 |
$ |
233 |
$ |
52 |
Included in Discontinued operations - net of tax is additional share-based compensation expense as shown in the following table:
Three Months Ended |
Six Months Ended |
||||||||||
(millions of dollars) |
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
||||
|
|||||||||||
Share-based payment expense |
$ |
7 |
$ |
2 |
$ |
15 |
$ |
3 |
|||
Tax benefit for share-based compensation expense |
(2) |
(1) |
(5) |
(1) |
|||||||
Share-based payment expense, net of tax |
$ |
5 |
$ |
1 |
$ |
10 |
$ |
2 |
Amounts capitalized as part of inventory cost were not significant. In the three months and six months ended July 2, 2006, the impact of modifications under the AtS productivity initiative to share-based awards was not significant and, in the three months and six months ended July 3, 2005, the impact of modifications under the Pharmacia restructuring program was not significant. Generally, these modifications resulted in an acceleration of vesting either in accordance with plan terms or at management's discretion.
B. Stock Options
Stock options, which entitle the holder to purchase, at the end of a vesting term, a specified number of shares of Pfizer common stock at a price per share set equal to the market price of Pfizer common stock on the date of grant, are accounted for at fair value at the date of grant in the income statement beginning in 2006. These fair values are generally amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate.
In 2005 and earlier years, stock options were accounted for under APB No. 25 using the intrinsic value method in the income statement and fair value information was disclosed. In these disclosures of fair value, we allocated stock option compensation expense based on the nominal vesting period, rather than the expected time to achieve retirement eligibility. In 2006, we changed our method of allocating stock option compensation expense to a method based on the substantive vesting period for all new awards, while continuing to allocate outstanding nonvested awards not yet recognized as of December 31, 2005 under the nominal vesting period method. Specifically, under this prospective change in accounting policy, compensation expense related to stock options granted prior to 2006 that are subject to accelerated vesting upon retirement eligibility is being recognized over the vesting term of the grant, even though the service period after retirement eligibility is not considered to be a substantive vesting requirement. The impact of this change was not significant.
All employees may receive stock option grants. In virtually all instances, stock options vest after three years of continuous service from the grant date and have a contractual term of ten years; for certain members of management, vesting typically occurs in equal annual installments after three, four and five years from the grant date. In all cases, even for stock options that are subject to accelerated vesting upon voluntary retirement, stock options must be held for at least one year from grant date before any vesting may occur. In the event of a divestiture, options held by employees of the divested business are immediately vested and are exercisable from three months to their remaining term, depending on various conditions.
The fair value of each stock option grant is estimated on the grant date using the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:
Three Months Ended |
Six Months Ended |
||||||
July 2, |
July 3, |
July 2, |
July 3, |
||||
|
|
||||||
Expected dividend yield (a) |
3.66% |
|
2.72% |
|
3.66% |
|
2.90% |
Risk-free interest rate (b) |
4.59% |
|
3.75% |
4.59% |
3.96% |
||
Expected stock price volatility (c) |
24.50% |
|
16.90% |
24.50% |
21.93% |
||
Expected term (d) (years) |
6 |
|
2.75 |
6 |
5.75 |
(a) |
Determined using a constant dividend yield during the expected term of the option. |
(b) |
Determined using the extrapolated yield on U.S. Treasury zero-coupon issues. |
(c) |
Determined using implied volatility, after consideration of historical volatility. |
(d) |
Determined using historical exercise and post-vesting termination patterns. |
In the first quarter of 2006, we changed our method of estimating expected stock price volatility to reflect market-based inputs under emerging stock option valuation considerations. We use the implied volatility in a long-term traded option, after consideration of historical volatility. In 2005, we used an average term structure of volatility quoted to us by financial institutions, after consideration of historical volatility.
The following table summarizes all stock option activity during the six months ended July 2, 2006:
Shares (thousands) |
Weighted- |
Weighted- |
Aggregate |
||||
Outstanding, January 1, 2006 |
627,404 |
$33.51 |
|||||
Granted |
68,699 |
26.20 |
|||||
Exercised |
(17,764) |
15.52 |
|||||
Forfeited |
(4,987) |
31.37 |
|||||
Cancelled |
(36,909) |
32.43 |
|||||
Outstanding, July 2, 2006 |
636,443 |
33.31 |
5.5 |
$286 |
|||
Vested and expected to vest(b), July 2, 2006 |
627,736 |
33.34 |
5.5 |
286 |
|||
Exercisable, July 2, 2006 |
436,636 |
34.50 |
4.1 |
286 |
(a) |
Market price of underlying stock less exercise price. |
(b) |
The number of options expected to vest takes into account an estimate of expected forfeitures. |
The following table provides data related to all stock option activity:
Three Months Ended |
Six Months Ended |
||||||||||||
(millions of dollars, except per stock option amounts and years) |
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
||||||
|
|||||||||||||
Weighted-average grant date fair value per stock option |
$ |
5.42 |
$ |
3.23 |
$ |
5.42 |
$ |
5.15 |
|||||
Aggregate intrinsic value on exercise |
$ |
66 |
$ |
210 |
$ |
171 |
$ |
296 |
|||||
Cash received upon exercise |
$ |
109 |
$ |
160 |
$ |
267 |
$ |
262 |
|||||
Tax benefits realized related to exercise |
$ |
20 |
$ |
80 |
$ |
53 |
$ |
103 |
|||||
Total compensation cost related to nonvested stock options not yet recognized, pre-tax(a) |
$ |
567 |
N/A |
$ |
567 |
N/A |
|||||||
Weighted-average period in years over which stock option compensation cost is expected to be recognized(b) |
1.6 |
N/A |
1.6 |
N/A |
|||||||||
|
|
|
|||||||||||
(a) |
The total compensation cost related to our Consumer Healthcare business is $27 million. |
|
|||||||||||
(b) |
The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
|
|||||||||||
C. Restricted Stock Units
RSUs, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, including shares resulting from dividend equivalents paid on such RSUs, are accounted for at fair value at the date of grant. Most RSUs vest in substantially equal portions each year over five years of continuous service; the fair value related to each year's portion is then amortized evenly into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. For certain members of senior and key management, vesting may occur after three years of continuous service.
The fair value of each RSU grant is estimated on the grant date using the average price of Pfizer common stock on the date of grant.
The following table summarizes all RSU activity during the six months ended July 2, 2006:
(thousands of shares) |
Shares |
|
Weighted-Average |
|
|||
Nonvested, January 1, 2006 |
12,803 |
$26.89 |
|
Granted |
12,682 |
26.15 |
|
Vested |
(3,300) |
27.31 |
|
Reinvested dividend equivalents |
307 |
25.01 |
|
Forfeited |
(782) |
26.06 |
|
Nonvested, July 2, 2006 |
21,710 |
26.36 |
The following table provides data related to all RSU activity:
Three Months Ended |
Six Months Ended |
||||||||||||
(millions of dollars, except per RSU amounts and years) |
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
||||||
|
|||||||||||||
Weighted-average grant date fair value per RSU |
$ |
25.75 |
$ |
27.53 |
$ |
26.35 |
$ |
26.24 |
|||||
Total fair value of shares vested |
$ |
1 |
$ |
1 |
$ |
90 |
$ |
1 |
|||||
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax(a) |
$ |
388 |
N/A |
$ |
388 |
N/A |
|||||||
Weighted-average period in years over which RSU cost is expected to be recognized(b) |
4.3 |
N/A |
4.3 |
N/A |
|||||||||
|
|
|
|||||||||||
(a) |
The total compensation cost related to our Consumer Healthcare business is $20 million. |
|
|||||||||||
(b) |
The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
|
|||||||||||
D. Performance Share Awards (PSAs) and Performance-Contingent Share Awards (PCSAs)
PSAs in 2006 and PCSAs prior to 2006 entitle the holder to receive, at the end of a vesting term, a number of shares of Pfizer common stock, within a specified range of shares, calculated using a non-discretionary formula that measures Pfizer's performance relative to an industry peer group. PSAs are accounted for at fair value at the date of grant in the income statement beginning with grants in 2006. Further, PSAs are generally amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. For grants in 2005 and earlier years, PCSA grants are accounted for using the intrinsic value method in the income statement.
Senior and other key members of management may receive PSA and PCSA grants. In most instances, PSA grants vest after three years and PCSA grants vest after five years of continuous service from the grant date. In certain instances, PCSA grants vest over two to four years of continuous service from the grant date. The vesting terms are equal to the contractual terms.
The 2004 Plan limitations on the maximum amount of share-based awards apply to all awards including PCSA and PSA grants. In 2001, our shareholders approved the 2001 Performance-Contingent Share Award Plan (the 2001 Plan), allowing a maximum of 12.5 million shares to be awarded to all participants. This maximum was applied to awards for performance periods beginning after January 1, 2002 through 2004. The 2004 Plan is the only plan under which share-based awards may be granted in the future.
PSA grants made in 2006 will vest and be paid based on a non-discretionary formula that measures our performance using relative total shareholder return over a performance period relative to an industry peer group. If our minimum performance in the measure is below the threshold level relative to the peer group, then no shares will be paid. PCSA grants made prior to 2006 will vest and be paid based on a non-discretionary formula, which measures our performance using relative total shareholder return and relative change in diluted earnings per common share (EPS) over a performance period relative to an industry peer group. If our minimum performance in the measures is below the threshold level relative to the peer group, then no shares will be paid.
As of January 1, 2006, we measure PSA grants at fair value using the average price of Pfizer common stock on the date of grant times the target number of shares. The target number of shares is determined by reference to the fair value of share-based awards to similar employees in the industry peer group. We measure PCSA grants at intrinsic value whereby the probable award was allocated over the term of the award, then the resultant shares are adjusted to the fair value of our common stock at each accounting period until the date of payment.
The following table summarizes all PSA and PCSA activity during the six months ended July 2, 2006, with the shares granted representing the maximum award that could be achieved:
(thousands of shares) |
Shares |
|
Weighted-Average |
|
|||
Nonvested, January 1, 2006 |
13,366 |
$23.32 |
|
Granted |
1,539 |
26.19 |
|
Vested |
(1,583) |
26.20 |
|
Forfeited(a) |
(1,513) |
26.20 |
|
Nonvested, July 2, 2006 |
11,809 |
23.82 |
|
|
(a) |
Forfeited includes 345 thousand shares that were forfeited by retirees. At the discretion of the Compensation Committee of the Company's Board of Directors, $9 million in cash was paid to such retirees, which amount was equivalent to the fair value of the forfeited shares pro rated for the portion of the performance period that was completed prior to retirement. |
The following table provides data related to all PSA and PCSA activity:
Three Months Ended |
Six Months Ended |
||||||||||||
(millions of dollars, except per PCSA amounts and years) |
July 2, |
|
July 3, |
|
July 2, |
|
July 3, |
||||||
|
|||||||||||||
Weighted-average grant date intrinsic value per PCSA |
$ |
23.47 |
$ |
27.10 |
$ |
23.47 |
$ |
27.10 |
|||||
Total intrinsic value of vested PCSA shares |
$ |
-- |
$ |
-- |
$ |
50 |
$ |
56 |
|||||
Total compensation cost related to nonvested PSA grants not yet recognized, pre-tax(a) |
$ |
17 |
N/A |
$ |
17 |
N/A |
|||||||
Weighted-average period in years over which PSA cost is expected to be recognized(b) |
2.5 |
N/A |
2.5 |
N/A |
|||||||||
|
|||||||||||||
(a) |
The total compensation cost related to our Consumer Healthcare business is nominal. |
|
|||||||||||
(b) |
The planned divestiture of our Consumer Healthcare business does not have a significant impact on this weighted-average period. |
|
|||||||||||
We entered into forward-purchase contracts that partially offset the potential impact on net income of our obligation under the pre-2006 PCSAs. At settlement date we will, at the option of the counterparty to each of the contracts, either receive our own stock or settle the contracts for cash. Other contract terms are as follows:
Per Share |
Maximum |
||||
(thousands of shares) |
Purchase |
|
July 2, |
|
Dec. 31, |
|
|||||
3,051 |
$33.85 |
0.4 |
-- |
||
3,051 |
33.84 |
-- |
0.4 |
The financial statements include the following items related to these contracts:
Prepaid expenses and taxes includes:
|
fair value of these contracts |
Other (income)/deductions - net includes:
|
changes in the fair value of these contracts |
E. Restricted Stock
Restricted stock grants, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of Pfizer common stock, and which also entitle the holder to receive dividends paid on such grants, are accounted for at fair value at the date of grant.
Senior and key members of management received restricted stock awards prior to 2005. In most instances, restricted stock grants vest after three years of continuous service from the grant date. The vesting terms are equal to the contractual terms.
These awards have not been significant.
F. Transition Information
The following table shows the effect on results for the three months and six months ended July 3, 2005 as if we had applied the fair-value-based recognition provisions of SFAS 123R to measure stock-based compensation expense for the option grants:
(millions of dollars, except per common share data) |
|
Three Months |
|
Six Months |
|
||||
Net income available to common shareholders used in the calculation of basic earnings per common share: |
||||
As reported under GAAP(a) |
$ |
3,461 |
$ |
3,761 |
Compensation expense - net of tax(b) |
(104) |
(252) |
||
Pro forma |
$ |
3,357 |
$ |
3,509 |
Basic earnings per common share: |
||||
As reported under GAAP(a) |
$ |
0.47 |
$ |
0.51 |
Compensation expense - net of tax(b) |
(0.01) |
(0.04) |
||
Pro forma |
$ |
0.46 |
$ |
0.47 |
Net income available to common shareholders used in the calculation of diluted earnings per common share: |
||||
As reported under GAAP(a) |
$ |
3,461 |
$ |
3,761 |
Compensation expense - net of tax(b) |
(104) |
(252) |
||
Pro forma |
$ |
3,357 |
$ |
3,509 |
Diluted earnings per common share: |
||||
As reported under GAAP(a) |
$ |
0.47 |
$ |
0.51 |
Compensation expense - net of tax(b) |
(0.02) |
(0.04) |
||
Pro forma |
$ |
0.45 |
$ |
0.47 |
(a) |
Includes stock-based compensation expense, net of related tax effects, of $38 million and $53 million for the three months and six months ended July 3, 2005. |
(b) |
Pro forma compensation expense related to stock options that are subject to accelerated vesting upon retirement is recognized over the period of employment up to the vesting date of the grant. |
Note 15. Earnings Per Common Share
Basic and diluted EPS were computed using the following common share data:
Three Months Ended |
Six Months Ended |
|||||||
(millions) |
July 2, |
July 3, |
July 2, |
July 3, |
||||
|
||||||||
EPS Numerator - Basic: |
||||||||
Income from continuing operations |
$ |
2,290 |
$ |
3,375 |
$ |
6,296 |
$ |
3,531 |
Less: Preferred stock dividends - net of tax |
2 |
2 |
3 |
2 |
||||
Income available to common shareholders from continuing operations |
2,288 |
3,373 |
6,293 |
3,529 |
||||
Discontinued operations - net of tax |
125 |
88 |
230 |
232 |
||||
Net income available to common shareholders |
$ |
2,413 |
$ |
3,461 |
$ |
6,523 |
$ |
3,761 |
|
||||||||
EPS Denominator - Basic: |
||||||||
Weighted-average number of common shares outstanding |
7,282 |
7,366 |
7,298 |
7,391 |
||||
|
||||||||
EPS Numerator - Diluted: |
||||||||
Income from continuing operations |
$ |
2,290 |
$ |
3,375 |
$ |
6,296 |
$ |
3,531 |
Less: ESOP contribution - net of tax |
1 |
2 |
2 |
2 |
||||
Income available to common shareholders from continuing operations |
2,289 |
3,373 |
6,294 |
3,529 |
||||
Discontinued operations - net of tax |
125 |
88 |
230 |
232 |
||||
Net income available to common shareholders |
$ |
2,414 |
$ |
3,461 |
$ |
6,524 |
$ |
3,761 |
|
||||||||
EPS Denominator - Diluted: |
||||||||
Weighted-average number of common shares outstanding |
7,282 |
7,366 |
7,298 |
7,391 |
||||
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock |
23 |
52 |
32 |
54 |
||||
Weighted-average number of common shares outstanding and common share equivalents |
7,305 |
7,418 |
7,330 |
7,445 |
Outstanding stock options, representing about 592 million shares and 591 million shares of common stock during the three-month and six-month periods ended July 2, 2006 and about 513 million shares and 519 million shares of common stock during the three-month and six-month periods ended July 3, 2005, had exercise prices greater than the average market price of our common stock. These options were excluded from the computation of diluted EPS for these periods because their inclusion would have had an anti-dilutive effect.
Also, in the diluted computation, income from continuing operations and net income are reduced by the incremental contribution to the ESOPs, which were acquired as part of our Pharmacia acquisition. This contribution is the after-tax difference between the income that the ESOPs would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding.
Note 16. Segment Information
We operate in the following business segments:
Human Health |
|
|
|
|
The Human Health segment, which represents our pharmaceutical business, includes treatments for cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies. The Human Health segment also includes our contract manufacturing and bulk pharmaceutical chemicals business. |
|
|
Animal Health |
|
|
|
|
The Animal Health segment includes prevention and treatments for diseases in livestock and companion animals. |
Segment profit/(loss) is measured based on income from continuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, merger-related costs and costs related to our AtS productivity initiative, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.
Revenues and profit/(loss) by segment for the three months and six months ended July 2, 2006 and July 3, 2005, follow:
Three Months Ended |
Six Months Ended |
|||||||||||
(millions of dollars) |
July 2, |
July 3, |
|
July 2, |
|
July 3, |
||||||
|
||||||||||||
Revenues: |
||||||||||||
Human Health |
$ |
10,999 |
$ |
10,723 |
$ |
22,099 |
$ |
22,236 |
||||
Animal Health |
583 |
578 |
1,094 |
1,073 |
||||||||
Corporate/Other(a) |
159 |
151 |
295 |
286 |
||||||||
Total revenues |
$ |
11,741 |
$ |
11,452 |
$ |
23,488 |
$ |
23,595 |
||||
|
||||||||||||
Segment profit/(loss)(b) |
||||||||||||
Human Health |
$ |
5,046 |
$ |
4,581 |
$ |
10,794 |
$ |
9,966 |
||||
Animal Health |
117 |
123 |
215 |
203 |
||||||||
Corporate/Other(a) |
(2,080) |
(c) |
(1,792) |
(d) |
(3,656) |
(c) |
(4,523) |
(d) |
||||
Total profit/(loss) |
$ |
3,083 |
$ |
2,912 |
$ |
7,353 |
$ |
5,646 |
(a) |
Corporate/Other includes the manufacturing of empty two-piece gelatin capsules. Corporate/Other also includes interest income/(expense), corporate expenses (e.g., corporate administration costs), other income/(expense) (e.g., realized gains and losses attributable to our investments in debt and equity securities), certain performance-based compensation expenses not allocated to the business segments, share-based payments, significant impacts of purchase accounting for acquisitions, certain milestone payments, merger-related costs, intangible asset impairments and costs related to our AtS productivity initiative. |
|
|
(b) |
Segment profit/(loss) equals income from continuing operations before provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, merger-related costs and costs related to our AtS productivity initiative, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses. |
|
|
(c) |
For the three months and six months ended July 2, 2006, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $1.3 billion and $2.1 billion, including acquired in-process research and development charges and incremental intangible asset amortization and other charges, (ii) merger-related costs of $6 million and $11 million, (iii) restructuring charges and implementation costs associated with the AtS productivity initiative of $442 million and $921 million, (iv) gain on disposals of investments and other of $23 million and $74 million, and (v) a research and development milestone due to us from sanofi-aventis of approximately $118 million in the first quarter of 2006. |
|
|
(d) |
For the three months and six months ended July 3, 2005, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $1.1 billion and $1.9 billion, including acquired in-process R&D charges, incremental intangible asset amortization and other charges, (ii) merger-related costs of $243 million and $459 million, (iii) costs associated with the suspension of Bextra's sales in the first quarter of 2005 of $1.2 billion, and (iv) restructuring charges and implementation costs associated with the AtS productivity initiative of $54 million in the second quarter of 2005. |
Revenues for each group of similar products follow:
Three Months Ended |
Six Months Ended |
||||||||||||
(millions of dollars) |
July 2, |
July 3, |
|
% |
|
July 2, |
July 3, |
|
% |
||||
|
|||||||||||||
HUMAN HEALTH |
|||||||||||||
Cardiovascular and metabolic diseases |
$ |
4,769 |
$ |
4,471 |
7% |
$ |
9,517 |
$ |
9,197 |
3% |
|||
Central nervous system disorders |
1,643 |
1,537 |
7 |
3,287 |
3,129 |
5 |
|||||||
Arthritis and pain |
627 |
549 |
14 |
1,268 |
1,188 |
7 |
|||||||
Infectious and respiratory diseases |
835 |
1,102 |
(24) |
1,772 |
2,585 |
(31) |
|||||||
Urology |
660 |
626 |
6 |
1,323 |
1,328 |
-- |
|||||||
Oncology |
540 |
513 |
5 |
1,010 |
992 |
2 |
|||||||
Ophthalmology |
352 |
341 |
3 |
689 |
674 |
2 |
|||||||
Endocrine disorders |
232 |
263 |
(12) |
478 |
521 |
(8) |
|||||||
All other |
1,017 |
1,073 |
(5) |
2,107 |
2,132 |
(1) |
|||||||
Alliance revenue |
324 |
248 |
31 |
648 |
490 |
32 |
|||||||
Total Human Health |
10,999 |
10,723 |
3 |
22,099 |
22,236 |
(1) |
|||||||
ANIMAL HEALTH |
583 |
578 |
1 |
1,094 |
1,073 |
2 |
|||||||
OTHER |
159 |
151 |
6 |
295 |
286 |
4 |
|||||||
Total revenues |
$ |
11,741 |
$ |
11,452 |
3 |
$ |
23,488 |
$ |
23,595 |
-- |
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Pfizer Inc:
We have reviewed the condensed consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of July 2, 2006, the related condensed consolidated statements of income for the three-month and six-month periods ended July 2, 2006 and July 3, 2005, and the related condensed consolidated statements of cash flows for the six-month periods ended July 2, 2006 and July 3, 2005. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pfizer Inc and Subsidiary Companies as of December 31, 2005, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
New York, New York
August 11, 2006
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Introduction
Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding Pfizer's results of operations, financial condition and cash flows. The MD&A is organized as follows:
|
Overview of Consolidated Operating Results. This section, beginning on page 26, provides a general description of Pfizer's business; discusses significant acquisitions made during the first six months of 2006, as well as the planned disposition of the Consumer Healthcare business; provides information about our operating environment; and summarizes our productivity initiative. |
|
|
|
Revenues. This section, beginning on page 29, provides an analysis of our products and revenues for the three months and six months ended July 2, 2006 and July 3, 2005, as well as an overview of important product developments. |
|
|
|
Costs and Expenses. This section, beginning on page 39, provides a discussion about our costs and expenses. |
|
|
|
Provision/(Benefit) for Taxes on Income. This section, beginning on page 40, provides a discussion of items impacting our tax provision for the periods presented. |
|
|
|
Adjusted Income. This section, beginning on page 41, provides a discussion of an alternative view of performance used by management. |
|
|
|
Financial Condition, Liquidity and Capital Resources. This section, beginning on page 45, provides an analysis of our balance sheets as of July 2, 2006 and December 31, 2005, and cash flows for the six months ended July 2, 2006 and July 3, 2005, as well as a discussion of our outstanding debt and commitments that existed as of July 2, 2006 and December 31, 2005. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future commitments. |
|
|
|
Outlook. This section, beginning on page 49, provides a discussion of forecasted financial performance. |
|
|
|
Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 50, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this report relating to the financial results, operations and business prospects of the Company. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Also included in this section is a discussion of Legal Proceedings and Contingencies. |
Components of the Condensed Consolidated Statement of Income follow:
Three Months Ended |
Six Months Ended |
|||||||||||||
(millions of dollars, except per common share data) |
July 2, |
July 3, |
% Change |
July 2, |
July 3, |
% Change |
||||||||
|
||||||||||||||
Revenues |
$ |
11,741 |
$ |
11,452 |
3% |
$ |
23,488 |
$ |
23,595 |
--% |
||||
|
||||||||||||||
Cost of sales |
1,790 |
1,762 |
2 |
3,461 |
3,639 |
(5) |
||||||||
% of revenues |
15.2 |
% |
15.4 |
% |
14.7 |
% |
15.4 |
% |
||||||
|
||||||||||||||
Selling, informational and administrative expenses |
3,881 |
3,766 |
3 |
7,276 |
7,431 |
(2) |
||||||||
% of revenues |
33.1 |
% |
32.9 |
% |
31.0 |
% |
31.5 |
% |
||||||
|
||||||||||||||
Research and development expenses |
1,742 |
1,830 |
(5) |
3,285 |
3,547 |
(7) |
||||||||
% of revenues |
14.8 |
% |
16.0 |
% |
14.0 |
% |
15.0 |
% |
||||||
|
||||||||||||||
Amortization of intangible assets |
823 |
856 |
(4) |
1,648 |
1,736 |
(5) |
||||||||
% of revenues |
7.0 |
% |
7.5 |
% |
7.0 |
% |
7.4 |
% |
||||||
|
||||||||||||||
Merger-related in-process research and development charges |
513 |
260 |
97 |
513 |
262 |
96 |
||||||||
% of revenues |
4.4 |
% |
2.3 |
% |
2.2 |
% |
1.1 |
% |
||||||
|
||||||||||||||
Restructuring charges and merger-related costs |
268 |
264 |
2 |
567 |
480 |
18 |
||||||||
% of revenues |
2.3 |
% |
2.3 |
% |
2.4 |
% |
2.0 |
% |
||||||
|
||||||||||||||
Other (income)/deductions - net |
(359) |
(198) |
81 |
(615) |
854 |
(172) |
||||||||
|
||||||||||||||
Income from continuing operations before provision/(benefit) for taxes on income, and minority interests |
3,083 |
2,912 |
6 |
7,353 |
5,646 |
30 |
||||||||
% of revenues |
26.3 |
% |
25.4 |
% |
31.3 |
% |
23.9 |
% |
||||||
|
||||||||||||||
Provision/(benefit) for taxes on income |
790 |
(464) |
* |
1,052 |
2,111 |
(50) |
||||||||
|
||||||||||||||
Effective tax rate |
25.6 |
% |
(15.9) |
% |
14.3 |
% |
37.4 |
% |
||||||
|
||||||||||||||
Minority interests |
3 |
1 |
154 |
5 |
4 |
67 |
||||||||
|
||||||||||||||
Income from continuing operations |
2,290 |
3,375 |
(32) |
6,296 |
3,531 |
78 |
||||||||
% of revenues |
19.5 |
% |
29.5 |
% |
26.8 |
% |
15.0 |
% |
||||||
|
||||||||||||||
Discontinued operations - net of tax |
125 |
88 |
43 |
230 |
232 |
-- |
||||||||
|
||||||||||||||
Net income |
$ |
2,415 |
$ |
3,463 |
(30) |
$ |
6,526 |
$ |
3,763 |
73 |
||||
% of revenues |
20.6 |
% |
30.2 |
% |
27.8 |
% |
15.9 |
% |
||||||
|
||||||||||||||
Earnings per common share - basic: |
||||||||||||||
Income from continuing operations |
$ |
0.31 |
$ |
0.46 |
(33) |
$ |
0.86 |
$ |
0.48 |
79 |
||||
Discontinued operations - net of tax |
0.02 |
0.01 |
100 |
0.03 |
0.03 |
-- |
||||||||
Net income |
$ |
0.33 |
$ |
0.47 |
(30) |
$ |
0.89 |
$ |
0.51 |
75 |
||||
|
||||||||||||||
Earnings per common share - diluted: |
||||||||||||||
Income from continuing operations |
$ |
0.31 |
$ |
0.46 |
(33) |
$ |
0.86 |
$ |
0.48 |
79 |
||||
Discontinued operations - net of tax |
0.02 |
0.01 |
100 |
0.03 |
0.03 |
-- |
||||||||
Net income |
$ |
0.33 |
$ |
0.47 |
(30) |
$ |
0.89 |
$ |
0.51 |
75 |
||||
|
||||||||||||||
Cash dividends paid per common share |
$ |
0.24 |
$ |
0.19 |
$ |
0.48 |
$ |
0.38 |
||||||
|
||||||||||||||
|
||||||||||||||
* Calculation not meaningful |
OVERVIEW OF OUR CONSOLIDATED OPERATING RESULTS
Our Business
We are a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines for humans and animals. Our longstanding value proposition has been to prove that our medicines treat disease, including symptoms and suffering, and this remains our core mission. We have expanded our value proposition to also show that not only can our medicines treat disease, but that they can also markedly improve health systems by reducing overall healthcare costs, improving societies' economic well-being and increasing effective prevention and treatment of disease. We generate revenue through the sale of our products, as well as through alliance agreements by co-promoting products discovered by other companies.
Acquisitions
An area where we are expanding aggressively is in biologics, large-molecule approaches to treating disease where small molecules are not available or effective. On May 16, 2006, we completed the acquisition of all of the outstanding shares of Rinat Neuroscience Corp., a biologics company with several new central-nervous-system product candidates. In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded $478 million, pre-tax, in Merger-related in-process research and development charges.
On February 28, 2006, we completed the acquisition of the sanofi-aventis world-wide rights, including patent rights and production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.4 billion (including transaction costs). In connection with the acquisition, as part of our preliminary purchase price allocation, we recorded an intangible asset for developed technology rights of approximately $1.0 billion, inventory valued at $218 million and goodwill of approximately $166 million, all of which have been allocated to our Human Health segment. The amortization of the developed technology rights will be primarily included in Cost of Sales. Given the size and complexity of the acquisition, the fair valuation and allocation work is still being finalized and is expected to be completed in the third quarter. To the extent that our estimates need to be adjusted, we will do so. Prior to the acquisition, in connection with our collaboration agreement with sanofi-aventis, we recorded a research and development milestone due to us from sanofi-aventis of approximately $118 million ($71 million, after tax) in the first quarter of 2006 in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).
Discontinued Operations
We evaluate our businesses and product lines periodically for strategic fit within our operations. We sold or are in the process of selling the following businesses that do not fit our strategic goals:
|
In June 2006, we entered into an agreement to sell our Consumer Healthcare business to Johnson & Johnson for approximately $16.6 billion in cash. This business comprises substantially all of our former Consumer Healthcare segment and other associated amounts, such as purchase-accounting impacts and merger-related costs, and restructuring and implementation costs related to our Adapting to Scale (AtS) productivity initiative, previously reported in the Corporate/Other segment. In addition, certain manufacturing facility assets and liabilities, which were previously part of our Human Health or Corporate/Other segment, are included in the planned sale of the Consumer Healthcare business. In connection with the decision to sell this business, for all periods presented, the operating results associated with this business that will be discontinued 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 that will be sold have been reclassified into Assets/Liabilities of discontinued operations and other assets/liabilities held for sale, as appropriate, on the condensed consolidated balance sheets. The divestiture of the Consumer Healthcare business is expected to close in late 2006 and is subject to customary closing conditions, including receipt of regulatory approvals. |
|
|
|
In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses which had been included in our Human Health segment for 70 million euros (approximately $93 million) and recorded a gain of $57 million ($36 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income. In addition, we recorded an impairment charge of $9 million ($6 million, net of tax) related to the third European generic business in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the six months ended July 3, 2005. |
Our Operating Environment
We are navigating a period of significant change for the Company. Aggressive cost-cutting efforts, coupled with investments in business development and significantly improved research and development (R&D) productivity, are preparing us to transition to the next-generation Pfizer. Our strategy is to drive growth in our in-line medicines and to invest in promising new medicines.
We have a broad presence in the healthcare industry, with important medicines in many major therapeutic areas. While we continue to look for the most innovative products to fill gaps in our portfolio, we also continue to face a challenging and dynamically changing environment in our pharmaceutical business. This includes the loss of exclusivity of major products, uncertainty concerning selective COX-2 inhibitor products, increasing regulatory scrutiny of drug safety, the adoption of new direct-to-consumer advertising guidelines and lower prescription growth rates and increased competition in certain therapeutic areas.
We believe that the strong aggregate performance of our in-line product portfolio and the potential of our new-product pipeline demonstrate our ability to generate new revenues. Our performance in 2006 has been, and will continue to be, substantially adversely impacted by loss of U.S. exclusivity of Neurontin, Diflucan and Accupril/Accuretic in 2004, Zithromax in November 2005 and Zoloft at the end of June 2006. In addition, we face a substantial adverse impact on our performance from the loss of U.S. exclusivity for Norvasc and Zyrtec during 2007 and Camptosar and Inspra in 2008. These nine products represented 31% of our Human Health revenues and 29% of our total revenues for the year ended December 31, 2005. In addition, some of our products face competition in the form of new branded products or generic drugs, which treat similar diseases or indications. Revenues in 2006 have also been, and may continue to be, impacted by uncertainty regarding selective COX-2 inhibitor products (see further discussion in the section "Human Health--Selected Product Descriptions"). Our total revenues increased 3% in the three months ended July 2, 2006 and were flat in the six months ended July 2, 2006 as compared to the same periods in 2005.
Partially offsetting these impacts in the three months and six months ended July 2, 2006 was the solid aggregate performance in the balance of our broad portfolio of patent-protected medicines. Our portfolio of medicines includes three of the world's 25 best-selling medicines, with four medicines that lead their therapeutic areas. Our results reflect two underlying forces. First, Pfizer markets the broadest array of in-line and recently launched products in the industry; and second, Pfizer is a business going through a process of transformation. We are addressing the loss of exclusivity of a number of products by advancing a number of internally developed, in-licensed and co-promoted product candidates. So far this year, we have launched three new medicines in the U.S.--Sutent, Eraxis and Chantix, and initial supplies of Exubera will be available in the U.S. in September 2006. In June 2006, we received an approvable letter from the FDA for Zeven (dalbavancin) and now expect approval and launch in 2007. In June 2006, after certain decisions by the FDA, we notified Neurocrine Biosciences, Inc. (Neurocrine) that we are returning the development and marketing rights for indiplon to Neurocrine.
We believe we have important competitive advantages that will serve us well and distinguish us from others in our industry. Our product portfolio and pipeline demonstrate the benefits of Pfizer's scale and our skill at leveraging the opportunities it provides us. Scale also enhances our status as 'partner of choice' with other companies who have promising product candidates and technologies, as well as giving us influence as a global purchaser of goods and services. We continue to build on and enhance our Research & Development capabilities through acquisitions and collaborations. Through targeted acquisitions, licensing opportunities and internal development, we are augmenting our commercial portfolio. We have also made progress with our Adapting to Scale productivity initiative, which is a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the section "Adapting to Scale Productivity Initiative and Merger-Related Synergies.")
Adapting to Scale Productivity Initiative and Merger-Related Synergies
During 2005 and the first six months of 2006, we made progress with our multi-year productivity initiative, called Adapting to Scale (AtS), designed to increase efficiency and streamline decision-making across the Company. This initiative, launched in early 2005, follows the integration of Warner-Lambert and Pharmacia Corporation (Pharmacia), which resulted in the tripling of Pfizer's revenues over the past six years. The integration of those two companies resulted in a combined annual expense reduction of approximately $6 billion.
We continue to expect that cost savings from our AtS productivity initiative will be in excess of $2 billion in 2006, growing to about $4 billion annually upon completion in 2008, notwithstanding the planned divestiture of our Consumer Healthcare business and the expense reductions associated with that business. These savings are expected to be realized in procurement, operating expenses and facilities, among other sources. Savings realized during the second quarter and first six months of 2006 total approximately $500 million and $1 billion. We plan to use the cost savings we generate, in part, to fund key investments, including new product launches and the development of the many promising new medicines in our pipeline. The Company expects that the aggregate cost of implementing this initiative through 2008 will be approximately $4 billion to $5 billion on a pre-tax basis.
Projects in various stages of implementation include:
|
Reorganizing Pfizer Global Research & Development (PGRD) to increase efficiency and effectiveness in bringing new therapies to patients-in-need while reducing the cost of research and development. PGRD has been reorganized into eleven therapeutic areas: cardiovascular, metabolic, and endocrine; central nervous system; inflammation; allergy and respiratory; infectious diseases; pain; gastrointestinal and hepatitis; oncology; urology and sexual health; ophthalmology; and dermatology. Discovery Research will retain its existing structure of six drug-candidate discovery sites. Development will move toward single sites for most therapeutic areas. |
|
|
|
Continuing our optimization of Pfizer's network of plants, which began with the acquisition of Pharmacia, to ensure that the Company's manufacturing facilities are aligned with current and future product needs. We have focused on innovation and delivering value through a simplified supply network. During 2005 and through the first six months of 2006, 18 sites were identified for rationalization (Angers and Val de Reuil, France; Arecibo and Cruce Davila, Puerto Rico; Augusta, Georgia; Bangkok, Thailand; Corby and Morpeth, U.K.; Groton, Connecticut; Holland, Michigan; Jakarta, Indonesia; Seoul, Korea; Orangeville, Canada; Parsippany, New Jersey; Tlalpan, Mexico; Tsukuba, Japan; and Stockholm and Uppsala-Fyrislund, Sweden). In addition, there have been extensive consolidations and realignments of operations resulting in streamlined operations and staff reductions. In particular, Sandwich, U.K.; Lincoln and Omaha, Nebraska sites; Puerto Rico sites; Lititz, Pennsylvania; and Brooklyn, N.Y. have undergone notable staff reductions. |
|
|
|
Realigning our European marketing teams and implementing initiatives designed to improve the effectiveness of our field force in Japan. During 2005, we completed a major reorganization of the U.S. field force, reshaping the management structure to be more responsive to commercial trends as the Medicare Modernization Act takes effect and driving greater sales-force accountability in preparation for the launch of new medicines. |
|
|
|
Pursuing savings in information technology resulting from significant reductions in application software (already significantly reduced from over 8,000 applications at the time of the Pharmacia acquisition in 2003) and data centers (to be reduced from 17 to 4), as well as rationalization of service providers, while enhancing our ability to invest in innovative technology opportunities to further propel our growth. |
|
|
|
Reducing costs in purchased goods and services. Purchasing initiatives are focusing on rationalizing suppliers, leveraging the approximately $16 billion of goods and services that Pfizer purchases annually and improving demand management to optimize levels of outside services needed and strategic sourcing from lower-cost sources. For example, savings from demand management are being derived in part from reductions in travel, entertainment, consulting and other external service expenses. Facilities savings are being found in site rationalization, energy conservation and renegotiated service contracts. |
REVENUES
Worldwide revenues by segment and geographic area for the three months and six months ended July 2, 2006 and July 3, 2005 follow:
Three Months Ended |
||||||||||||||||||||||
Worldwide |
U.S. |
International |
% Change in Revenues |
|||||||||||||||||||
July 2, |
July 3, |
July 2, |
July 2, |
July 2, |
July 3, |
Worldwide |
U.S. |
International |
||||||||||||||
(millions of dollars) |
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
06/05 |
06/05 |
06/05 |
|||||||||||||
|
||||||||||||||||||||||
Human Health |
$ |
10,999 |
$ |
10,723 |
$ |
5,781 |
$ |
5,419 |
$ |
5,218 |
$ |
5,304 |
3 |
7 |
(2) |
|||||||
Animal Health |
583 |
578 |
262 |
263 |
321 |
315 |
1 |
-- |
2 |
|||||||||||||
Other |
159 |
151 |
51 |
46 |
108 |
105 |
6 |
9 |
4 |
|||||||||||||
Total Revenues |
$ |
11,741 |
$ |
11,452 |
$ |
6,094 |
$ |
5,728 |
$ |
5,647 |
(a) |
$ |
5,724 |
(a) |
3 |
6 |
(1) |
(a) |
Includes revenue from Japan of $852 million (7.3% of total revenues) and $877 million (7.7% of total revenues) for the three months ended July 2, 2006 and July 3, 2005. |
Six Months Ended |
||||||||||||||||||||||
Worldwide |
U.S. |
International |
% Change in Revenues |
|||||||||||||||||||
July 2, |
July 3, |
July 2, |
July 2, |
July 2, |
July 3, |
Worldwide |
U.S. |
International |
||||||||||||||
(millions of dollars) |
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
06/05 |
06/05 |
06/05 |
|||||||||||||
|
||||||||||||||||||||||
Human Health |
$ |
22,099 |
$ |
22,236 |
$ |
12,121 |
$ |
11,656 |
$ |
9,978 |
$ |
10,580 |
(1) |
4 |
(6) |
|||||||
Animal Health |
1,094 |
1,073 |
491 |
482 |
603 |
591 |
2 |
2 |
2 |
|||||||||||||
Other |
295 |
286 |
98 |
90 |
197 |
196 |
4 |
9 |
1 |
|||||||||||||
Total Revenues |
$ |
23,488 |
$ |
23,595 |
$ |
12,710 |
$ |
12,228 |
$ |
10,778 |
(b) |
$ |
11,367 |
(b) |
-- |
4 |
(5) |
(b) |
Includes revenue from Japan of $1.6 billion (6.7% of total revenues) and $1.7 billion (7.4% of total revenues) for the six months ended July 2, 2006 and July 3, 2005. |
Human Health Revenues
Pfizer's Human Health business continued to show solid performance in many of our products, although revenue declines from loss of exclusivity on major products and other challenges tempered our growth in the three months ended July 2, 2006 and more than offset that performance for the six months ended July 2, 2006, as shown in the following table:
Human Health Revenues |
|
|||||||||
(millions of dollars, except % growth) |
Three |
|
Impact on |
Six Months |
|
Impact on |
||||
|
||||||||||
In-Line Products(a) and New Products(b) |
$ |
9,827 |
6 |
% |
$ |
$19,596 |
4 |
% |
||
Loss-of-exclusivity products and Bextra(c) |
1,172 |
(3) |
2,503 |
(5) |
||||||
Total Human Health revenues |
$ |
10,999 |
3 |
% |
$ |
$22,099 |
|
(1) |
% |
(a) |
In-Line Products is defined as worldwide revenues for the three months and six months ended July 2, 2006 of all Human Health products other than those referred to in notes (b) and (c). |
(b) |
New Products is defined as worldwide revenues for the three months and six months ended July 2, 2006 of products launched since the beginning of 2004--Caduet, Eraxis, Exubera, Inspra, Lyrica, Macugen, Olmetec, Onsenal, Revatio, Sutent and Zmax. |
(c) |
Loss-of-Exclusivity Products and Bextra is defined as worldwide revenues for the three months and six months ended July 2, 2006 of products that have lost U.S. exclusivity since the beginning of 2004--Accupril/Accuretic, Diflucan, Neurontin, Zithromax and Zoloft--and of Bextra, sales of which were suspended in 2005. |
Total Human Health revenues increased 3% in the second quarter and were down 1% in the first six months of 2006, as compared to the same periods in 2005, primarily due to:
|
the solid aggregate performance of our broad portfolio of patent-protected medicines; |
|
|
|
an aggregate increase in revenues from new products launched in 2005 and within the first six months of 2006 of approximately $294 million for the second quarter of 2006 and $507 million for the first six months of 2006; and |
|
|
|
an increase in revenues due to price changes of about 3.7% and 3.6% in the second quarter and first six months of 2006; |
|
|
partially offset in the second quarter of 2006 and more than offset in the first six months of 2006 by: |
|
|
|
|
a decrease in revenue from the loss of U.S. exclusivity of Zithromax in November 2005 of $260 million for the second quarter of 2006 and $807 million for the first six months of 2006; |
|
|
|
the continued decline in revenue by $61 million for the second quarter of 2006 and $179 million for the first six months of 2006 of Neurontin, Diflucan and Accupril/Accuretic, which lost U.S. exclusivity in 2004; |
|
|
|
the strengthening of the U.S. dollar relative to many foreign currencies, especially the euro, which decreased revenue by $195 million for the second quarter of 2006 and $534 million for the first six months of 2006; and |
|
|
|
lower revenue for Zoloft, which has lost exclusivity in many European markets, by $90 million for the second quarter of 2006 and $156 million for the first six months of 2006. |
The three months and six months ended July 2, 2006 were also impacted by increased competition and the overall market decline, as branded prescriptions in the U.S. declined 2% and 3% compared to the three months and six months ended July 3, 2005.
Geographically:
|
in the U.S., Human Health revenues increased 7% and 4% in the three months and six months ended July 2, 2006 compared to the same periods in 2005 primarily due to revenues from new products and growth in Lipitor and Celebrex sales, partially offset by the loss of exclusivity of Zithromax in November 2005; and |
|
|
|
in our international markets, Human Health revenues declined in the three months and six months ended July 2, 2006 compared to the same periods in 2005 by 2% and 6%, primarily due to the unfavorable impact of foreign exchange of $195 million (all of the decline) and $534 million (5 percentage points of the decline) and lower revenues of Zoloft due to the loss of exclusivity in many key international markets. |
As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations with respect to our pharmaceutical products. These deductions represent estimates of the related obligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual have not been material; on a quarterly basis, they generally have been less than 1% of Human Health net sales and can result in either a net increase or a net decrease to income.
Rebates under Medicaid and related state programs reduced revenues by $169 million and $374 million in the three months and six months ended July 2, 2006 and $324 million and $699 million in the three months and six months ended July 3, 2005. The decrease in Medicaid and related state program rebates is due primarily to the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act), effective January 1, 2006. Performance-based contract rebates reduced revenues by $368 million and $911 million in the three months and six months ended July 2, 2006 and $573 million and $1.2 billion in the three months and six months ended July 3, 2005. The decrease in performance-based contract rebates is due primarily to the expiration of our contract with Express Scripts Inc. on December 31, 2005 and reduced managed care rebates related to Zithromax, which lost exclusivity in the U.S in November 2005. These contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who receive rebates based on the achievement of contracted performance terms for products. Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold. Chargebacks (primarily discounts to U.S. federal government agencies) reduced revenues by $335 million and $688 million in the three months and six months ended July 2, 2006 and $298 million and $592 million in the three months and six months ended July 3, 2005.
Our accruals for Medicaid rebates, contract rebates and chargebacks totaled $1.6 billion as of July 2, 2006, a decrease from $1.8 billion as of December 31, 2005 due primarily to the impact of the Medicare Act.
Human Health--Selected Product Revenues
Revenue information for several of our major Human Health products follow:
Three Months Ended |
Six Months Ended |
|||||||
(millions
of dollars) |
Primary Indications |
July 2, |
|
%
Change |
|
July 2, |
|
% Change |
Cardiovascular
and |
||||||||
Lipitor |
Reduction of LDL cholesterol |
$3,123 |
9% |
$6,230 |
5% |
|||
Norvasc |
Hypertension |
1,158 |
-- |
2,341 |
-- |
|||
Cardura |
Hypertension/Benign prostatic hyperplasia |
139 |
(10) |
265 |
(14) |
|||
Caduet |
Reduction of LDL cholesterol and hypertension |
80 |
92 |
157 |
116 |
|||
Accupril/Accuretic |
Hypertension/Congestive heart failure |
69 |
(6) |
137 |
(21) |
|||
Central
nervous |
||||||||
Zoloft |
Depression and certain anxiety disorders |
706 |
(11) |
1,485 |
(9) |
|||
Lyrica |
Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy |
271 |
606 |
463 |
693 |
|||
Geodon/Zeldox |
Schizophrenia and acute manic or mixed episodes associated with bipolar disorder |
165 |
14 |
347 |
23 |
|||
Neurontin |
Epilepsy and post-herpetic neuralgia |
123 |
(23) |
250 |
(27) |
|||
Aricept(a) |
Alzheimer's disease |
88 |
3 |
170 |
-- |
|||
Xanax/Xanax XR |
Anxiety/Panic disorders |
79 |
(24) |
161 |
(22) |
|||
Relpax |
Migraine headaches |
67 |
35 |
133 |
29 |
|||
Arthritis and pain: |
||||||||
Celebrex |
Arthritis pain and inflammation, acute pain |
471 |
17 |
962 |
18 |
|||
Infectious
and |
||||||||
Zyvox |
Bacterial infections |
167 |
9 |
353 |
19 |
|||
Zithromax/Zmax |
Bacterial infections |
166 |
(61) |
425 |
(65) |
|||
Vfend |
Fungal infections |
118 |
30 |
235 |
32 |
|||
Diflucan |
Fungal infections |
110 |
(14) |
217 |
(19) |
|||
Urology: |
||||||||
Viagra |
Erectile dysfunction |
394 |
1 |
784 |
(5) |
|||
Detrol/Detrol LA |
Overactive bladder |
255 |
15 |
515 |
9 |
|||
Oncology: |
||||||||
Camptosar |
Metastatic colorectal cancer |
238 |
2 |
450 |
1 |
|||
Ellence |
Breast cancer |
86 |
(11) |
159 |
(15) |
|||
Aromasin |
Breast cancer |
75 |
31 |
145 |
29 |
|||
Sutent |
Metastatic renal cell carcinoma (mRCC) and malignant gastrointestinal stromal tumors (GIST) |
36 |
* |
52 |
* |
|||
Ophthalmology: |
||||||||
Xalatan/Xalacom |
Glaucoma and ocular hypertension |
351 |
3 |
688 |
2 |
|||
Endocrine disorders: |
||||||||
Genotropin |
Replacement of human growth hormone |
191 |
(5) |
388 |
(4) |
|||
All other: |
||||||||
Zyrtec/Zyrtec-D |
Allergies |
377 |
6 |
798 |
15 |
|||
Alliance revenue: |
||||||||
Aricept, Macugen, Mirapex, Olmetec, Rebif and Spiriva |
Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson's disease (Mirapex), hypertension (Olmetec), multiple sclerosis (Rebif), chronic obstructive pulmonary disease (Spiriva) |
324 |
31 |
648 |
32 |
(a) |
Represents direct sales under license agreement with Eisai Co., Ltd. |
* |
Calculation not meaningful. |
Certain amounts and percentages may reflect rounding adjustments. |
Human Health--Selected Product Descriptions:
|
Lipitor, for the treatment of elevated cholesterol levels in the blood, is the most widely used treatment for lowering cholesterol and the best-selling pharmaceutical product of any kind in the world, reaching over $6.2 billion in worldwide sales in the first six months of 2006, an increase of 5% compared to the same period in 2005. In the U.S., sales of $3.8 billion represent growth of 7% over the previous year's first six months. Internationally, Lipitor sales in the first six months of 2006 increased 3% compared to the same period in 2005. |
|
|
Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006 as well as other competitive pressures. In April 2006, we launched a new advertising campaign for Lipitor that highlights its strong benefit profile and advantageous formulary positioning. Scientific data continue to reinforce the trend toward the use of higher dosages of statins for greater cholesterol reduction. |
|
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New clinical findings continue to demonstrate the benefit of Lipitor on a wide range of endpoints, helping to support its differentiation versus the competition and maintain its rank as the world's top-selling medicine. Recently, data from the Stroke Prevention by Aggressive Reduction in Cholesterol Levels (SPARCL) clinical trial in stroke prevention were presented at the European Stroke Congress in Brussels and published in The New England Journal of Medicine. SPARCL assessed treatment with Lipitor 80 mg compared to placebo in a population of patients who have had a prior stroke but did not have coronary heart disease. SPARCL is the first major study designed to evaluate this patient population. In the trial, Lipitor was shown to significantly reduce the risk of an additional stroke by 16% and major coronary events such as heart attack, cardiac death or resuscitated cardiac arrest, by 35% compared to placebo. An analysis of the SPARCL data was designed and conducted after the study ended to explore the types of strokes, ischemic or hemorrhagic, that occurred among patients in the study. The vast majority of strokes in this trial were ischemic while the number who experienced hemorrhagic was very small. Patients taking Lipitor experienced a 22% reduction in the risk of ischemic stroke. There were more patients in the Lipitor group who experienced hemorrhagic stroke (2.3%) compared to patients taking placebo (1.4%). There was no difference in the number of deaths from hemorrhagic stroke between the two treatment groups. The SPARCL findings represent important information for physicians and patients as up to one in five Americans who survive a first stroke will have another stroke within five years, according to data from the National Stroke Association. |
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In addition, based on evolving clinical evidence, including landmark Lipitor studies (Anglo-Scandinavian Cardiac Outcomes Trial (ASCOT_LLA), Treating to New Targets (TNT) and IDEAL), the American Heart Association and the American College of Cardiology now state that it is reasonable to bring LDL-cholesterol levels to below 70 mg/dL for very high-risk patients, levels that Lipitor has been proven to achieve within a favorable safety profile along with providing incremental cardiovascular benefits for patients. In addition, a pre-specified pharmacoeconomic analysis of the IDEAL study showed that one out of every six heart attacks, strokes, or cardiovascular procedures could be avoided for heart-disease patients treated with intensive Lipitor therapy (80 mg) instead of standard doses of Zocor (20-40 mg). |
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In May 2006, the European Commission approved Lipitor for the prevention of cardiovascular events such as heart attacks and strokes in patients who are at a higher risk for experiencing a first cardiovascular event and have other risk factors such as diabetes or high blood pressure. This label change, based on data from ASCOT-LLA clinical trials and Collaborative Atorvastatin Diabetes Study, is already in effect in the U.S., Canada, U.K., and France and will impact 12 European Union (E.U.) markets. |
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See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of recent developments with respect to certain patent litigation relating to Lipitor. |
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Norvasc is the world's most-prescribed branded medicine for treating hypertension. Norvasc maintains exclusivity in many major markets globally, including the U.S., Japan, Canada and Australia, but has experienced patent expirations in many E.U. countries. Norvasc sales in the first six months of 2006 were even with those in the same period in 2005. See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent patent litigation relating to Norvasc. |
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Exubera, the first ever inhaled human insulin therapy for glycemic control received approvals from both the FDA and the European Commission for the treatment of adults with type 1 and type 2 diabetes in January 2006. Millions of people with diabetes are not achieving or maintaining acceptable blood sugar levels, despite the availability of current therapies. Exubera meets a critical medical need by offering a highly effective and needle-free alternative to diabetes pills and insulin injections to manage this complicated, debilitating disease. Exubera was launched in Germany and Ireland in May 2006. In the U.S., a comprehensive physician and patient education and training program began on July 24, 2006, and is being rolled out in phases. The manufacturing process for Exubera is extremely complex and we are continuing to build inventory while working at production capacity at the Exubera manufacturing facilities. Initial supplies of Exubera will be available across the U.S. beginning in September 2006. See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent patent litigation relating to Exubera. |
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Zoloft, which has lost exclusivity in many European markets, experienced a 9% revenue decline in the first six months of 2006 compared to the same period in 2005. It is the most-prescribed antidepressant in the U.S. It is indicated for the treatment of major depressive disorder, panic disorder, obsessive-compulsive disorder (OCD) in adults and children, post-traumatic stress disorder (PTSD), premenstrual dysphoric disorder (PMDD) and social anxiety disorder (SAD). Zoloft is approved for acute and long-term use in all of these indications, with the exception of PMDD. It is the only approved agent for the long-term treatment of PTSD and SAD, an important differentiating feature as these disorders tend to be chronic. Zoloft lost exclusivity in the U.S. at the end of June 2006. Zoloft was approved in Japan in April 2006 for the indications of depression/depressed state and panic disorder. |
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Geodon/Zeldox, a psychotropic agent, is a dopamine and serotonin receptor antagonist indicated for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder. It is available in both an oral capsule and rapid-acting intramuscular formulation. In the U.S., Geodon hit an all-time new prescription share weekly high of 7.3% during June 2006 and is the second-fastest-growing atypical anti-psychotic medication. In the first six months of 2006, total Geodon worldwide sales grew 23% compared to the same period in 2005. |
Geodon growth is due to the better understanding by clinicians of its efficacy, increased benefits from optimal dosing, and its favorable metabolic profile, as confirmed by the Clinical Antipsychotic Trials of Intervention Effectiveness (CATIE) trial. The CATIE schizophrenia study, supported by the National Institute of Mental Health and published in the New England Journal of Medicine, confirms that Geodon is an effective anti-psychotic and is less likely to worsen weight, lipids, and glucose metabolism than other agents. In fact, Geodon was associated with some improvement in these metabolic parameters. These findings are noteworthy because of the higher prevalence of metabolic issues among patients with schizophrenia and are consistent with previous Pfizer-sponsored clinical trials involving Geodon. |
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The U.S. Patent and Trademark Office granted a five-year extension to the Geodon U.S. patent, extending its exclusivity to 2012. |
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Lyrica achieved $463 million in worldwide revenue in the first six months of 2006. It was approved by the European Commission on March 27, 2006, to treat generalized anxiety disorder (GAD) in adults, thereby providing a new treatment option for the approximately 12 million Europeans living with GAD. |
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Lyrica was approved by the FDA in June 2005 for adjunctive therapy for adults with partial onset seizures. This indication built on the earlier FDA approval of Lyrica for two of the most common forms of neuropathic pain--diabetic peripheral neuropathy, a chronic neurologic condition affecting about three million Americans, and post-herpetic neuralgia. Lyrica was launched in the U.S., Canada, and Italy in September 2005 and is now approved in more than 60 countries and is currently available in more than 30 markets. More than 1 million patients have now been prescribed Lyrica since its introduction. Lyrica has already gained a 9.8% new prescription share of the total U.S. anti-epileptic market in June 2006, continuing its performance as one of Pfizer's most successful pharmaceutical launches. |
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Celebrex and Bextra |
Celebrex achieved an 18% increase in worldwide sales in the first six months of 2006 compared to the same period in 2005. In the first half of 2006, Celebrex delivered two consecutive quarters of double-digit sales growth and reached a monthly new prescription share high of 11.1% in June 2006. Strong clinical data continue to support Celebrex as an important medicine for patients with arthritis. The SUCCESS-1 study (Successive Celecoxib Efficacy and Safety Study), recently published in the American Journal of Medicine, showed that people with osteoarthritis who take Celebrex experience significantly fewer gastrointestinal problems than patients who take non-specific non-steroidal anti-inflammatory drugs (NSAIDs). |
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Pfizer began to reintroduce branded advertising in the U.S. in April 2006 in alignment with our new Direct-to-Consumer (DTC) advertising principles, highlighting Celebrex's strong clinical profile and benefits. In July 2005, the FDA approved a sixth indication for Celebrex--ankylosing spondylitis--a form of spinal arthritis that affects more than one million people in the U.S. |
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In 2005, in accordance with decisions by applicable regulatory authorities, we implemented label changes for Celebrex in the U.S. and the E.U., and we suspended sales of Bextra in the U.S., E.U., Canada and many other countries. The revised U.S. label for Celebrex contains a boxed warning of potential serious cardiovascular and gastrointestinal risks that is consistent with warnings for all other prescription NSAIDS. The revised E.U. label for Celebrex and all other COX-2 medicines includes a restriction on use by patients with established heart disease or stroke and additional warnings to physicians regarding use by patients with cardiovascular risk factors. Pfizer is continuing to conduct additional clinical studies evaluating the benefits and risks of Celebrex. Pfizer is supporting Cleveland Clinic's 20,000-patient prospective study to definitively evaluate the relative safety of Celebrex and two older pain medications in patients with heart disease or at high risk of heart disease. |
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Zithromax experienced a 66% decline in worldwide sales in the first six months of 2006 compared to the same period of 2005, reflecting the expiration of its composition-of-matter patent in the U.S. in November 2005 and the end of Pfizer's active sales promotion in July 2005. During the fourth quarter of 2005, four generic versions of oral solid azithromycin were launched, including one authorized generic by Pfizer's Greenstone subsidiary. Through the first six months of 2006, generic azithromycin constituted 97.6% of the total oral solid azithromycin adult prescription volume. |
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Eraxis, an antifungal approved to treat candidemia and other forms of Candida infections (intra-abdominal abscesses and peritonitis), as well as esophageal candidiasis, was launched mid-June 2006 in the U.S. Candidemia is the most deadly of the common hospital-acquired bloodstream infections with a mortality rate of approximately 40%. |
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Viagra remains the leading treatment for erectile dysfunction and one of the world's most recognized pharmaceutical brands, with more than 58.9% of U.S. total prescriptions in the erectile dysfunction market through June 2006. Viagra sales declined 5% worldwide in the first six months of 2006 compared to the same period in 2005. We expect to see continued pressure on sales in the U.S. More than 45 states have either eliminated erectile-dysfunction coverage or have enacted "Preferred Drug Lists" that have the potential to limit Pfizer sales to state Medicaid programs, and Medicare coverage will end in 2007. Effective January 1, 2006, federal funds may not be used for reimbursement of erectile-dysfunction medications by the Medicaid program. |
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Pfizer has introduced new branded and unbranded advertising to encourage men with erectile dysfunction to talk to their physicians about their condition and specifically about Viagra. |
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Sutent is a breakthrough oral multi-targeted tyrosine kinase inhibitor that combines anti-angiogenic and anti-tumor activity to simultaneously inhibit the blood supply to tumors and directly attack tumor cells. Sutent was approved by the FDA in January 2006 for metastatic renal cell carcinoma (mRCC) and gastrointestinal stromal tumors (GIST) and has recorded $52 million in sales worldwide in the first half of 2006. In the five months following approval, Sutent has been prescribed to more than 6,000 patients. Sutent has received accelerated regulatory reviews and earlier-than-anticipated approvals or registration in several countries in Asia and Latin America and is expected to launch in many more markets worldwide over the coming months. On July 27, 2006, Sutent received conditional marketing authorization for both the mRCC and GIST indications in Europe from the European Commission. The conditional approval process is designed to get treatments with favorable benefit/risk profiles for life-threatening indications to target patient populations earlier; final approval is contingent on the provision of additional supportive information. This is the first time the European Commission has approved a new oncology drug under the conditional approval process. |
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Camptosar is indicated as first-line therapy for metastatic colorectal cancer in combination with 5-fluorouracil and leucovorin. It is also indicated as second-line therapy for patients in whom metastatic colorectal cancer has recurred or progressed despite following initial fluorouracil-based therapy. Camptosar is for intravenous use only. Revenue in the first six months of 2006 increased 1% to $450 million compared to the same period in 2005. Among current oncology medications, the National Comprehensive Cancer Network, an alliance of 19 of the world's leading cancer centers, has issued guidelines recommending Camptosar as an option across all lines of treatment for advanced colorectal cancer. |
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Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is the most-prescribed branded glaucoma medicine in the world. Clinical data showing its advantages in treating intra-ocular pressure compared with beta blockers should support the continued growth of this important medicine. Xalacom, the only fixed combination prostaglandin (Xalatan) and beta blocker, is available primarily in European markets. Xalatan/Xalacom sales grew 2% in the first six months of 2006 compared to the same period in 2005. |
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Zyrtec provides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec continues to be the most-prescribed antihistamine in the U.S. in a challenging market. Sales increased 15% in the first six months of 2006 compared to the same period in 2005. In February 2006, we began a new DTC advertising campaign featuring new insight that allergy symptoms can worsen over time due to exposure to new allergens. |
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Caduet, the first multi-target single pill combining Norvasc and Lipitor, recorded worldwide revenues in the amount of $157 million with a growth rate of 116% for the first six months of 2006 compared to the same period in 2005. Caduet launched in the U.S. in May 2004 and continues to grow at significantly higher rates than the overall U.S. cardiovascular market. Caduet is also available in Mexico, Chile, Brazil, Philippines, Singapore, Malaysia, India, Korea, Canada and most recently, Caduet was launched in South Africa, Peru and Venezuela. In total, Caduet has now received approvals in 42 markets with drug applications pending in 19 additional markets. During 2006, Caduet is expected to launch in France, Spain, Austria and Turkey. |
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Chantix/Champix, the first new prescription treatment for smoking cessation in nearly a decade, became available to patients in the U.S. in late July 2006. On July 28, 2006, the Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion recommending that the European Commission grant marketing authorization for Champix in Europe. |
Animal Health
Revenues of our Animal Health business in the three months and six months ended July 2, 2006 compared to the three months and six months ended July 3, 2005 follow:
Three Months Ended |
Six Months Ended |
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(millions of dollars) |
July 2, |
July 3, |
% Change |
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July 2, |
July 3, |
% Change |
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Livestock products |
$ |
359 |
$ |
354 |
1% |
$ |
671 |
$ |
657 |
2 % |
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Companion animal products |
224 |
224 |
-- |
423 |
416 |
2 |
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Total Animal Health |
$ |
583 |
$ |
578 |
1 |
$ |
1,094 |
$ |
1,073 |
2 |
The increase in Animal Health revenues in the three months and six months ended July 2, 2006, as compared to the same periods in 2005, was primarily attributable to:
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in livestock, the continued performance of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe and in the U.S.; and |
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in companion animal, the continued good performance of Revolution (a parasiticide for dogs and cats), which had double-digit revenue growth in the U.S. for both the second quarter and first six months of 2006; |
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partially offset by: |
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a decline in U.S. Rimadyl revenues due to lower than anticipated NSAID market growth and intense branded competition, as well as increased generic competition in the European companion animal market; and |
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the unfavorable impact of the strengthening of the U.S. dollar relative to many foreign currencies. |
Product Developments
We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. We have a broad and deep pipeline of medicines in development. However, there are no assurances as to when, or if, we will receive regulatory approval for additional indications for existing products or any of our other products in development.
Certain significant regulatory actions by, and filings pending with, the FDA and other regulatory authorities follow:
Recent FDA Approvals:
Product |
Indication |
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Date Approved |
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Chantix |
Nicotine-receptor partial agonist for smoking cessation |
May 2006 |
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Genotropin |
Treatment of short stature and growth problems resulting from Turner's syndrome |
May 2006 |
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Geodon |
Liquid oral suspension |
March 2006 |
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Eraxis |
Treatment of candidemia and invasive candidiasis |
February 2006 |
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Treatment of esophageal candidiasis |
February 2006 |
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Exubera |
Inhaled form of insulin for use in adults with type 1 and type 2 diabetes |
January 2006 |
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Sutent |
Treatment of mRCC and GIST |
January 2006 |
Pending U.S. New Drug Applications (NDAs) and Supplemental Filings:
Product |
Indication |
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Date Submitted |
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Celebrex |
Juvenile rheumatoid arthritis |
June 2006 |
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Lipitor |
Secondary prevention of cardiovascular (CV) events in patients with established coronary artery disease (CAD) |
May 2006 |
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Fesoterodine |
Treatment of overactive bladder |