FORM 10-Q

For the Quarter Ended
October 1, 2006

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PFIZER INC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Three Months Ended				Nine Months Ended
(millions, except per common share data)		Oct. 1,  2006		Oct. 2,  2005		Oct. 1,  2006		Oct.  2,  2005
Revenues	$	12,280	$	11,263	$	35,768	$	34,858
Costs and expenses:
Cost of sales(a)		1,962		1,611		5,423		5,250
Selling, informational and administrative expenses(a)		3,751		3,526		11,027		10,958
Research and development expenses(a)		1,902		1,739		5,187		5,287
Amortization of intangible assets		798		833		2,446		2,569
Merger-related in-process research and development charges		-		1,390		513		1,652
Restructuring charges and merger-related costs		249		303		816		782
Other (income)/deductions - net		(343)		(151)		(958)		703
Income from continuing operations before provision for taxes on income and minority interests		3,961		2,012		11,314		7,657
Provision for taxes on income		717		530		1,769		2,642
Minority interests		5		3		10		6
Income from continuing operations		3,239		1,479		9,535		5,009
Discontinued operations:
Income from discontinued operations - net of tax		120		107		330		299
Gains on sales of discontinued operations - net of tax		3		3		23		44
Discontinued operations - net of tax		123		110		353		343
Net income	$	3,362	$	1,589	$	9,888	$	5,352
Earnings per common share - basic:
Income from continuing operations	$	0.45	$	0.20	$	1.31	$	0.68
Discontinued operations - net of tax		0.02		0.02		0.05		0.05
Net income	$	0.47	$	0.22	$	1.36	$	0.73
Earnings per common share - diluted:
Income from continuing operations	$	0.44	$	0.20	$	1.30	$	0.67
Discontinued operations - net of tax		0.02		0.02		0.05		0.05
Net income	$	0.46	$	0.22	$	1.35	$	0.72
Weighted-average shares used to calculate earnings per common share:
Basic		7,228		7,333		7,275		7,372
Diluted		7,251		7,382		7,306		7,424
Cash dividends paid per common share	$	0.24	$	0.19	$	0.72	$	0.57

   

(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)		Oct. 1,  2006*		Dec. 31,  2005**
ASSETS
Current Assets
Cash and cash equivalents	$	1,177	$	2,247
Short-term investments		11,654		19,979
Accounts receivable, less allowance for doubtful accounts		9,177		9,103
Short-term loans		460		510
Inventories		6,167		5,478
Prepaid expenses and taxes		3,281		2,859
Assets of discontinued operations and other assets held for sale		6,805		6,659
Total current assets		38,721		46,835
Long-term investments and loans		2,845		2,497
Property, plant and equipment, less accumulated depreciation		16,417		16,233
Goodwill		21,051		20,985
Identifiable intangible assets, less accumulated amortization		25,323		26,244
Other assets, deferred taxes and deferred charges		4,228		4,176
Total assets	$	108,585	$	116,970
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings, including current portion of long-term debt	$	2,508	$	11,589
Accounts payable		1,742		2,073
Dividends payable		2		1,772
Income taxes payable		5,209		3,618
Accrued compensation and related items		1,533		1,602
Other current liabilities		5,271		6,521
Liabilities of discontinued operations and other liabilities held for sale		1,423		1,237
Total current liabilities		17,688		28,412
Long-term debt		5,561		6,347
Pension benefit obligations		2,636		2,681
Postretirement benefit obligations		1,368		1,424
Deferred taxes		8,838		9,707
Other noncurrent liabilities		2,782		2,635
Total liabilities		38,873		51,206
Shareholders' Equity
Preferred stock		146		169
Common stock		441		439
Additional paid-in capital		68,865		67,759
Employee benefit trust, at fair value		(845)		(923)
Treasury stock		(44,256)		(39,767)
Retained earnings		43,991		37,608
Accumulated other comprehensive income		1,370		479
Total shareholders' equity		69,712		65,764
Total liabilities and shareholders' equity	$	108,585	$	116,970

*    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)

		Nine Months Ended
(millions of dollars)		Oct.  1,  2006		Oct. 2,  2005
Operating Activities:
Net income	$	9,888	$	5,352
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,026		4,143
Share-based compensation expense		506		121
Merger-related in-process research and development charges		513		1,652
Intangible asset impairments and other associated non-cash charges		--		1,216
Gains on disposal of investments, products and product lines		(201)		(58)
Gains on sales of discontinued operations		(37)		(72)
Deferred taxes from continuing operations		(1,333)		(1,088)
Other deferred taxes		67		(33)
Other non-cash adjustments		180		290
Changes in assets and liabilities (net of businesses acquired and divested)		(491)		(1,527)
Net cash provided by operating activities		13,118		9,996
Investing Activities:
Purchases of property, plant and equipment		(1,438)		(1,493)
Purchases of short-term investments		(8,472)		(16,840)
Proceeds from redemptions of short-term investments		17,346		23,179
Purchases of long-term investments		(835)		(650)
Proceeds from redemptions of long-term investments		229		655
Purchases of other assets		(118)		(392)
Proceeds from sales of other assets		3		6
Proceeds from the sales of businesses, products and product lines		22		108
Acquisitions, net of cash acquired		(1,989)		(2,104)
Other investing activities		(82)		238
Net cash provided by investing activities		4,666		2,707
Financing Activities:
Increase in short-term borrowings, net		993		9
Principal payments on short-term borrowings		(11,721)		(5,274)
Proceeds from issuances of long-term debt		1,051		5
Principal payments on long-term debt		(55)		(1,042)
Purchases of common stock		(4,496)		(3,415)
Cash dividends paid		(5,211)		(4,177)
Stock option transactions and other		593		346
Net cash used in financing activities		(18,846)		(13,548)
Effect of exchange-rate changes on cash and cash equivalents		(8)		(4)
Net decrease in cash and cash equivalents		(1,070)		(849)
Cash and cash equivalents at beginning of period		2,247		1,808
Cash and cash equivalents at end of period	$	1,177	$	959
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes	$	2,031	$	3,738
Interest		579		485

 

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 nine-month periods ended August 27, 2006 and August 28, 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 worldwide 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 final 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 Pharmaceutical segment. The amortization of the developed technology rights is primarily included in Cost of Sales. 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).

On September 14, 2005, we completed the acquisition of all of the outstanding shares of Vicuron Pharmaceuticals, Inc. (Vicuron), a biopharmaceutical company focused on the development of novel anti-infectives, for approximately $1.9 billion in cash (including transaction costs). The allocation of the purchase price includes in-process research and development of approximately $1.4 billion, which was expensed and included in Merger-related in-process research and development charges, and goodwill of $243 million, which has been allocated to our Pharmaceutical segment. Neither of these items was deductible for tax purposes.

On April 12, 2005, we completed the acquisition of Idun Pharmaceuticals, Inc. (Idun), a biopharmaceutical company focused on the discovery and development of therapies to control apoptosis, and on August 15, 2005, we completed the acquisition of all outstanding shares of Bioren Inc. (Bioren), which focuses on technology for optimizing antibodies. The aggregate cost of these and other smaller acquisitions was approximately $340 million for the nine months ended October 2, 2005.

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 Pharmaceutical 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 third quarter of 2005, we sold the last of three European generic pharmaceutical businesses, which we had included in our Pharmaceutical segment, for 4.7 million euros (approximately $5.6 million) and recorded a loss of $3 million ($2 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income for the three months and nine months ended October 2, 2005.
•	In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses, which had been included in our Pharmaceutical 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 last of the three European generic pharmaceutical businesses in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the nine months ended October 2, 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					Nine Months Ended
(in millions)		Oct. 1,  2006		Oct. 2,  2005			Oct. 1,  2006		Oct. 2,  2005
Revenues	$	974	$	932		$	2,920	$	2,883
Pre-tax income of discontinued businesses	$	178	$	174		$	493	$	465
Provision for taxes on income		(58)		(67)			(163)		(166)
Income from discontinued operations - net of tax		120		107			330		299
Pre-tax gains on sales of discontinued businesses		6		7			37		72
Provision for taxes on gains		(3)		(4)			(14)		(28)
Gains on sales of discontinued operations - net of tax		3		3			23		44
Discontinued operations-net of tax	$	123	$	110		$	353	$	343

 

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)		Oct. 1, 2006		Dec. 31, 2005
Accounts receivable, less allowance for doubtful accounts	$	778	$	661
Inventories		518		561
Prepaid expenses and taxes		64		71
Property, plant and equipment, less accumulated depreciation		1,023		1,002
Goodwill		2,751		2,789
Identifiable intangible assets, less accumulated amortization		1,651		1,557
Other assets, deferred taxes and deferred charges		20		18
Assets of discontinued operations and other assets held for sale	$	6,805	$	6,659
Current liabilities	$	681	$	538
Other		742		699
Liabilities of discontinued operations and other liabilities held for sale	$	1,423	$	1,237

 

Net cash flows of our discontinued operations estimated from each of the categories of operating, investing and financing activities were not significant for the nine months ended October 1, 2006 and October 2, 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 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 Condensed 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 and Other Costs Associated with the Suspension of Bextra Sales

In the first nine months of 2005, we recorded charges totaling $1.2 billion ($762 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. In addition, in connection with the suspension, we recorded $56 million in write-offs of inventory and exit costs, included in Cost of sales; $8 million related to the cost of administering the suspension of sales, included in Selling, informational and administrative expenses; and $212 million for an estimate of customer returns, primarily included against Revenues. Substantially all of these charges were recorded in the first quarter of 2005.

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						Nine Months Ended
(millions of dollars)		Oct. 1, 2006			Oct. 2, 2005			Oct. 1, 2006			Oct. 2, 2005
Implementation costs(a)	$	182		$	100		$	547		$	133
Restructuring charges(b)		245			151			801			172
Total AtS costs	$	427		$	251		$	1,348		$	305

   

(a)

Included in Cost of sales ($50 million), Selling, informational and administrative expenses ($63 million), Research and development expenses ($70 million) and in Other (income)/deductions - net ($1 million income) for the three months ended October 1, 2006 and included in Cost of sales ($278 million), Selling, informational and administrative expenses ($160 million), Research and development expenses ($132 million) and in Other (income)/deductions - net ($23 million income) for the nine months ended October 1, 2006. Included in Cost of sales ($36 million), Selling, informational and administrative expenses ($56 million) and Research and development expenses ($8 million) for the three months ended October 2, 2005 and included in Cost of sales ($37 million), Selling, informational and administrative expenses ($76 million), Research and development expenses ($20 million) for the nine months ended October 2, 2005.

(b)

Included in Restructuring charges and merger-related costs.

 

Included in Discontinued operations - net of tax are additional pre-tax AtS costs of $2 million and $17 million for the three months and nine months ended October 1, 2006 and $7 million for the three months and nine months ended October 2, 2005.

Through October 1, 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 Incurred Through Oct. 1, 2006		Utilization Through Oct. 1, 2006			Accrual as of Oct. 1, 2006	(a)
Employee termination costs	$	751	$	626		$	125
Asset impairments		386		386			--
Other		102		50			52
Total	$	1,239	$	1,062		$	177

  

(a)	Included in Other current liabilities.

 

During the three months and nine months ended October 1, 2006, we expensed $118 million and $449 million for Employee termination costs, $86 million and $263 million for Asset impairments, and $41 million and $89 million in Other. Through October 1, 2006, Employee termination costs represent the approved reduction of the workforce by 5,728 employees, mainly in manufacturing, sales and research. We notified affected individuals and 5,325 employees were terminated as of October 1, 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					Nine Months Ended
(millions of dollars)		Oct. 1, 2006		Oct. 2, 2005			Oct. 1, 2006		Oct. 2, 2005
Integration costs	$	3	$	91		$	8	$	384
Restructuring charges		1		61			7		226
Total merger-related costs(a)	$	4	$	152		$	15	$	610

   

(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 is a downward adjustment of additional pre-tax merger-related costs of  $(2) million for the three months ended October 1, 2006 and additional pre-tax merger-related costs of $3 million for the nine months ended October 1, 2006. Included in Discontinued operations - net of tax were additional pre-tax merger-related costs of $9 million and $25 million for the three months and nine months ended October 2, 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

In the third quarter of 2006, we recorded a decrease to the 2005 estimated U.S. tax provision related to the repatriation of foreign earnings, due primarily to the receipt of information that raised our assessment of the likelihood of prevailing on the technical merits of a certain position and we recognized a tax benefit of $124 million.

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 nine months of 2005, we recorded an income tax charge of $1.7 billion, included in Provision  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.

As of October 1, 2006, we intend to permanently reinvest the earnings of our international subsidiaries and, therefore, we have not recorded a U.S. tax provision on unremitted earnings.

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					Nine Months Ended
(millions of dollars)		Oct. 1,  2006		Oct. 2,  2005			Oct. 1,  2006		Oct. 2,  2005
Net income	$	3,362	$	1,589		$	9,888	$	5,352
Other comprehensive income/(expense):
Currency translation adjustment and other(a)		(125)		(174)			873		(1,159)
Net unrealized gains/(losses) on derivative financial instruments(b)		(19)		(13)			74		(40)
Net unrealized gains/(losses) on available-for-sale securities(b)		(2)		5			(35)		(114)
Minimum pension liability(b)		8		6			(21)		20
Total other comprehensive income/(expense)		(138)		(176)			891		(1,293)
Total comprehensive income	$	3,224	$	1,413		$	10,779	$	4,059

    

(a)	Includes changes in currency translation adjustments of nil and $21 million for the three months and nine months ended October 1, 2006, and ($12) million and ($37) million for the three months and nine months ended October 2, 2005, related to discontinued operations.
(b)	Amounts associated with discontinued operations are not significant.

 

Note 10.  Financial Instruments

A.  Long-Term Debt

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. Notice to call was given to the Trustees and the notes were redeemed in the third quarter of 2006.

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 October 1, 2006, we had the ability to borrow approximately $1 billion by issuing debt securities under that debt shelf registration statement.

B.  Derivative Financial Instruments and Hedging Activities

There was no material ineffectiveness in any hedging relationship reported in earnings in the first nine months of 2006.

Foreign Exchange Risk

During the first nine months of 2006, we entered into the following new or incremental hedging or offset activities:

Instrument(a)	Primary Balance Sheet Caption	(b)		Hedge Type	(c)		Hedged or Offset Item		Notional Amount as of October 1, 2006 (millions of dollars)	Maturity Date
Forward	OCL			--			Short-term foreign currency assets and liabilities(d)		$ 1,521	2006
Swaps	OCL			NI			Euro net investments		1,318	2007
Forward	OCL			CF			Yen available-for-sale investments		822	2006
LT yen debt	LTD			NI			Yen net investments		508	2011
Forward	Prepaid			CF			Euro intercompany loan		493	2006
LT yen debt	LTD			NI			Yen net investments		466	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)	NI = Net investment hedge; CF = Cash flow hedge
(d)	Forward-exchange contracts used to offset short-term foreign currency assets and liabilities were primarily for intercompany transactions in euros, Japanese yen, U.K. pounds, Canadian dollars 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)			Oct. 1, 2006		Dec. 31, 2005
Finished goods		$	2,160	$	1,756
Work-in-process			2,993		2,373
Raw materials and supplies			1,014		1,349
Total inventories(a)		$	6,167	$	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, partially offset by the impact of our inventory-reduction initiative.

 

Note 12.  Goodwill and Other Intangible Assets

A.  Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended October 1, 2006 follow:

(millions of dollars)		Pharmaceutical		Animal  Health		Other		Total
Balance, December 31, 2005	$	20,919	$	56	$	10	$	20,985
Additions(a)		166		--		--		166
Other(b)		(112)		5		7		(100)
Balance, October 1, 2006	$	20,973	$	61	$	17	$	21,051

  

(a)	Primarily related to Exubera.
(b)	Includes a reduction to goodwill related to the resolution of certain tax positions and the impact of foreign exchange.

 

B.  Other Intangible Assets

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

		Oct. 1, 2006				Dec. 31, 2005
(millions of dollars)		Gross  Carrying  Amount		Accumulated  Amortization		Gross  Carrying  Amount		Accumulated  Amortization
Finite-lived intangible assets:
Developed technology rights	$	32,440	$	(11,459)	$	30,729	$	(8,810)
Brands		887		(85)		885		(51)
License agreements		191		(38)		152		(27)
Trademarks		111		(71)		106		(65)
Other(a)		517		(255)		446		(203)
Total amortized finite-lived intangible assets		34,146		(11,908)		32,318		(9,156)
Indefinite-lived intangible assets:
Brands		2,989		--		2,990		--
Trademarks		79		--		79		--
Other(b)		17		--		13		--
Total indefinite-lived intangible assets		3,085		--		3,082		--
Total identifiable intangible assets	$	37,231	$	(11,908)	$	35,400	$	(9,156)

  

Total identifiable intangible assets, less accumulated amortization

$

25,323

$

26,244

  

(a)	Includes patents, non-compete agreements, customer contracts and other intangible assets.
(b)	Includes pension-related intangible assets.

 

In the first nine 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 are primarily included in Cost of sales.

In the first nine 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 Pharmaceutical segment) in connection with the decision to suspend sales of Bextra (see Note 5, Asset Impairment Charge and Other Costs Associated with the Suspension of Bextra Sales).

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 $851 million and $856 million for the three months ended October 1, 2006 and October 2, 2005, and $2.6 billion for the nine months ended October 1, 2006 and October 2, 2005.

Included in Discontinued operations - net of tax is additional pre-tax amortization expense for finite-lived intangible assets of nil and $3 million for the three months ended October 1, 2006 and October 2, 2005 and $7 million for the nine months ended October 1, 2006 and October 2, 2005.

The annual amortization expense expected for the fiscal years 2006 through 2011 is $3.4 billion in 2006; $3.3 billion in 2007; $2.8 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 October 1, 2006 and October 2, 2005 follow:

		Pension Plans
		U.S. Qualified				U.S. Supplemental (Non-Qualified)				International				Postretirement Plans
(millions of dollars)		2006		2005		2006		2005		2006		2005		2006		2005
Service cost	$	91	$	80	$	10	$	9	$	78	$	71	$	11	$	10
Interest cost		110		104		15		15		79		76		32		28
Expected return on plan assets		(157)		(148)		--		--		(82)		(77)		(7)		(6)
Amortization of:
Prior service costs/(credits)		2		4		(1)		--		(1)		(1)		--		1
Net transition obligation		--		--		--		--		1		1		--		--
Actuarial losses		31		26		13		10		28		23		11		4
Curtailments and settlements - net		12		3		--		--		--		1		2		--
Special termination benefits		1		1		--		--		7		1		2		1
Less: amounts included in discontinued operations		(4)		(3)		(1)		(1)		6		5		(1)		(1)
Net periodic benefit costs	$	86	$	67	$	36	$	33	$	116	$	100	$	50	$	37

 

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 nine months ended October 1, 2006 and October 2, 2005 follow:

		Pension Plans
		U.S. Qualified				U.S. Supplemental (Non-Qualified)				International				Postretirement Plans
(millions of dollars)		2006		2005		2006		2005		2006		2005		2006		2005
Service cost	$	277	$	239	$	32	$	28	$	227	$	224	$	35	$	29
Interest cost		334		310		45		44		229		234		95		84
Expected return on plan assets		(472)		(445)		--		--		(238)		(238)		(21)		(17)
Amortization of:
Prior service costs/(credits)		6		11		(2)		1		(1)		(2)		1		1
Net transition obligation		--		--		--		--		2		2		--		--
Actuarial losses		90		77		34		29		79		71		28		14
Curtailments and settlements - net		37		3		--		--		9		11		17		--
Special termination benefits		11		1		--		--		18		11		7		1
Less: amounts included in discontinued operations		(12)		(11)		(2)		(2)		(2)		(2)		(3)		(3)
Net periodic benefit costs	$	271	$	185	$	107	$	100	$	323	$	311	$	159	$	109

 

For the first nine months of 2006, we contributed from the Company's general assets $450 million to our U.S. qualified pension plans, $70 million to our U.S. supplemental (non-qualified) pension plans, $401 million to our international pension plans and $218 million to our postretirement plans.

During 2006, we expect to contribute, from the Company's general assets, a total of $454 million to our U.S. qualified pension plans, $77 million to our U.S. supplemental (non-qualified) pension plans, $483 million to our international pension plans and $260 million to our postretirement plans. Contributions expected to be made for 2006 are inclusive of amounts contributed during the first nine months of 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 October 1, 2006, 313 million shares were available for award, which include 31 million shares available for award under the legacy Pharmacia Long-Term Incentive Plan, that reflect 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						Nine Months Ended
(millions of dollars)		Oct. 1,  2006			Oct. 2,  2005			Oct. 1,  2006			Oct. 2,  2005
Stock option expense	$	93		$	--		$	314		$	--
Restricted stock unit expense		53			34			142			85
Performance share awards and performance-contingent share awards expense		34			8			50			36
Share-based payment expense(a)		180			42			506			121
Tax benefit for share-based compensation expense		(57)			(14)			(150)			(41)
Share-based payment expense, net of tax	$	123		$	28		$	356		$	80

     

(a)	Included in Cost of sales, Selling, informational and administrative expense and Research and development expense, as appropriate, generally according to the expense classification of the employees' payroll costs.

 

Included in Discontinued operations - net of tax is share-based compensation expense as shown in the following table:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Oct. 1,  2006			Oct. 2,  2005			Oct. 1,  2006			Oct. 2,  2005
Share-based compensation expense	$	8		$	2		$	23		$	5
Tax benefit for share-based compensation expense		(3)			(1)			(7)			(2)
Share-based compensation expense, net of tax	$	5		$	1		$	16		$	3

 

Amounts capitalized as part of inventory cost were not significant. In the three months and nine months ended October 1, 2006, the impact of modifications under the AtS productivity initiative to share-based awards was not significant and, in the three months and nine months ended October 2, 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, for virtually all grants, the Black-Scholes-Merton option-pricing model. These fair values incorporate a number of valuation assumptions noted in the following table, shown at their weighted-average values:

	Three Months Ended				Nine Months Ended
	Oct. 1, 2006		Oct. 2, 2005		Oct. 1, 2006		Oct. 2, 2005
Expected dividend yield (a)	3.65%		2.76%		3.66%		2.90%
Risk-free interest rate (b)	4.87%		3.81%		4.59%		3.96%
Expected stock price volatility (c)	22.85%		20.00%		24.50%		21.93%
Expected term (d) (years)	10		5.59		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 third quarter of 2006, the use of historical patterns was deemed inappropriate as virtually all of the option-grant activity related to a single individual; instead, the contractual term of the options was used.

 

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 nine months ended October 1, 2006:

	Shares (thousands)		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value(a) (millions)
Outstanding, January 1, 2006	627,404		$33.51
Granted	69,202		26.20
Exercised	(33,451)		15.56
Forfeited	(7,600)		30.95
Cancelled	(53,720)		32.38
Outstanding, October 1, 2006	601,835		33.81		5.4		$589
Vested and expected to vest(b), October 1, 2006	593,273		33.85		5.3		578
Exercisable, October 1, 2006	405,054		35.32		4.0		339

   

(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						Nine Months Ended
(millions of dollars, except per stock option amounts and years)			Oct. 1, 2006			Oct. 2, 2005			Oct. 1, 2006			Oct. 2, 2005
Weighted-average grant date fair value per stock option		$	5.70		$	5.00		$	5.42		$	5.15
Aggregate intrinsic value on exercise		$	165		$	101		$	336		$	397
Cash received upon exercise		$	230		$	64		$	497		$	326
Tax benefits realized related to exercise		$	45		$	21		$	98		$	124
Total compensation cost related to nonvested stock options not yet recognized, pre-tax (a)		$	457			N/A		$	457			N/A
Weighted-average period in years over which stock option compensation cost is expected to be recognized (b)			1.3			N/A			1.3			N/A
(a)	The total compensation cost related to our Consumer Healthcare business is $22 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 nine months ended October 1, 2006:

(thousands of shares)	Shares		Weighted-Average Grant Date Fair Value Per Share
Nonvested, January 1, 2006	12,803		$26.89
Granted	12,682		26.15
Vested	(3,338)		27.32
Reinvested dividend equivalents	502		25.30
Forfeited	(1,215)		26.19
Nonvested, October 1, 2006	21,434		26.58

 

The following table provides data related to all RSU activity:

			Three Months Ended						Nine Months Ended
(millions of dollars, except per RSU amounts and years)			Oct. 1, 2006			Oct. 2, 2005			Oct. 1, 2006			Oct. 2, 2005
Weighted-average grant date fair value per RSU		$	26.16		$	26.66		$	26.35		$	26.25
Total fair value of shares vested		$	1		$	1		$	91		$	2
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax(a)		$	335			N/A		$	335			N/A
Weighted-average period in years over which RSU cost is expected to be recognized(b)			4.0			N/A			4.0			N/A
(a)	The total compensation cost related to our Consumer Healthcare business is $17 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 PSA and PCSA 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 nine months ended October 1, 2006, with the shares granted representing the maximum award that could be achieved:

(thousands of shares)	Shares		Weighted-Average Grant Date Value Per Share
Nonvested, January 1, 2006	13,366		$23.32
Granted	1,563		26.18
Vested	(1,583)		26.20
Reinvested dividend equivalents	29		25.17
Forfeited(a)	(1,646)		26.12
Nonvested, October 1, 2006	11,729		28.07

(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 prorated 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						Nine Months Ended
(millions of dollars, except per PCSA amounts and years)			Oct. 1, 2006			Oct. 2, 2005			Oct. 1, 2006			Oct. 2, 2005
Weighted-average grant date intrinsic value per PCSA		$	28.36		$	24.97		$	28.36		$	24.97
Total intrinsic value of vested PCSA shares		$	--		$	--		$	50		$	56
Total compensation cost related to nonvested PSA grants not yet recognized, pre-tax(a)		$	15			N/A		$	15			N/A
Weighted-average period in years over which PSA cost is expected to be recognized(b)			2.3			N/A			2. 3			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 Maturity (years)
(thousands of shares)	Purchase Price		Oct. 1, 2006		Dec. 31, 2005
3,051	$33.85		0.6		--
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 nine months ended October 2, 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  Ended  Oct. 2, 2005		Nine Months  Ended  Oct. 2, 2005
Net income available to common shareholders used in the calculation of basic earnings per common share:
As reported under GAAP(a)	$	1,588	$	5,348
Compensation expense - net of tax(b)		(104)		(356)
Pro forma	$	1,484	$	4,992
Basic earnings per common share:
As reported under GAAP(a)	$	0.22	$	0.73
Compensation expense - net of tax(b)		(0.02)		(0.05)
Pro forma	$	0.20	$	0.68
Net income available to common shareholders used in the calculation of diluted earnings per common share:
As reported under GAAP(a)	$	1,588	$	5,349
Compensation expense - net of tax(b)		(104)		(356)
Pro forma	$	1,484	$	4,993
Diluted earnings per common share:
As reported under GAAP(a)	$	0.22	$	0.72
Compensation expense - net of tax(b)		(0.02)		(0.05)
Pro forma	$	0.20	$	0.67

   

(a)	Includes stock-based compensation expense, net of related tax effects, of $28 million and $81 million for the three months and nine months ended October 2, 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				Nine Months Ended
(millions)		Oct. 1,  2006		Oct. 2,  2005		Oct. 1, 2006		Oct. 2, 2005
EPS Numerator - Basic:
Income from continuing operations	$	3,239	$	1,479	$	9,535	$	5,009
Less:  Preferred stock dividends - net of tax		1		1		4		4
Income available to common shareholders from continuing operations		3,238		1,478		9,531		5,005
Discontinued operations - net of tax		123		110		353		343
Net income available to common shareholders	$	3,361	$	1,588	$	9,884	$	5,348
EPS Denominator - Basic:
Weighted-average number of common shares outstanding		7,228		7,333		7,275		7,372
EPS Numerator - Diluted:
Income from continuing operations	$	3,239	$	1,479	$	9,535	$	5,009
Less:  ESOP contribution - net of tax		1		1		3		3
Income available to common shareholders from continuing operations		3,238		1,478		9,532		5,006
Discontinued operations - net of tax		123		110		353		343
Net income available to common shareholders	$	3,361	$	1,588	$	9,885	$	5,349
EPS Denominator - Diluted:
Weighted-average number of common shares outstanding		7,228		7,333		7,275		7,372
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock		23		49		31		52
Weighted-average number of common shares outstanding and common share equivalents		7,251		7,382		7,306		7,424

 

Outstanding stock options, representing about 563 million shares and 564 million shares of common stock during the three-month and nine-month periods ended October 1, 2006 and about 563 million shares and 513 million shares of common stock during the three-month and nine-month periods ended October 2, 2005, had exercise prices greater than the average market price of our common stock. Such options are 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:

Pharmaceutical
•	The Pharmaceutical segment, which represents our pharmaceutical business, includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, infectious and respiratory diseases, urogenital conditions, cancer, eye disease, endocrine disorders and allergies.
Animal Health
•	The Animal Health segment includes products that prevent and treat 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 nine months ended October 1, 2006 and October 2, 2005, follow:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Oct. 1,  2006			Oct. 2,  2005			Oct. 1,  2006			Oct. 2,  2005
Revenues:
Pharmaceutical	$	11,485		$	10,547		$	33,417		$	32,617
Animal Health		562			503			1,656			1,576
Corporate/Other(a)		233			213			695			665
Total revenues	$	12,280		$	11,263		$	35,768		$	34,858
Segment profit/(loss)(b)
Pharmaceutical	$	5,492		$	4,869		$	16,253		$	14,799
Animal Health		100			85			315			288
Corporate/Other(a)		(1,631)	(c)		(2,942)	(d)		(5,254)	(c)		(7,430)	(d)
Total profit/(loss)	$	3,961		$	2,012		$	11,314		$	7,657

  

(a)	Corporate/Other includes our gelatin capsules business, our contract manufacturing business and a bulk pharmaceutical chemicals business. 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 nine months ended October 1, 2006, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $803 million and $2.9 billion, including acquired in-process research and development charges and incremental intangible asset amortization and other charges, (ii) merger-related costs of $4 million and $15 million, (iii) restructuring charges and implementation costs associated with our AtS productivity initiative of $427 million and $1.3 billion, (iv) gain on disposals of investments and other of $86 million and $160 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 nine months ended October 2, 2005, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $2.2 billion and $4.1 billion, including acquired in-process research and development charges, incremental intangible asset amortization and other charges, (ii) merger-related costs of $152 million and $610 million, (iii) restructuring charges and implementation costs associated with our AtS productivity initiative of $251 million and $305 million, and (iv) costs associated with the suspension of Bextra's sales of $3 million and $1.2 billion.

 

Revenues for each group of similar products follow:

		Three Months Ended							Nine Months Ended
(millions of dollars)		Oct. 1, 2006		Oct. 2, 2005		%  Change			Oct. 1, 2006		Oct. 2, 2005		%  Change
PHARMACEUTICAL
Cardiovascular and metabolic diseases	$	5,111	$	4,467		14%		$	14,628	$	13,664		7%
Central nervous system disorders		1,500		1,590		(6)			4,787		4,718		1
Arthritis and pain		706		548		29			1,974		1,736		14
Infectious and respiratory diseases		836		1,074		(22)			2,608		3,659		(29)
Urology		732		629		16			2,055		1,958		5
Oncology		540		507		7			1,550		1,499		3
Ophthalmology		376		338		11			1,065		1,011		5
Endocrine disorders		246		262		(6)			724		783		(7)
All other		1,102		865		26			3,042		2,832		7
Alliance revenue		336		267		26			984		757		30
Total Pharmaceutical		11,485		10,547		9			33,417		32,617		2
ANIMAL HEALTH		562		503		12			1,656		1,576		5
OTHER		233		213		9			695		665		5
Total revenues	$	12,280	$	11,263		9		$	35,768	$	34,858		3

 

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 October 1, 2006, the related condensed consolidated statements of income for the three-month and nine-month periods ended October 1, 2006 and October 2, 2005, and the related condensed consolidated statements of cash flows for the nine-month periods ended October 1, 2006 and October 2, 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
November 3, 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 Our  Consolidated Operating Results. This section, beginning on page 28, provides a general description of Pfizer's business; provides information about our operating environment and our response to key challenges; discusses significant licensing and new business development transactions, as well as the planned disposition of our Consumer Healthcare business; and summarizes our productivity initiatives.
•	Revenues. This section, beginning on page 32, provides an analysis of our products and revenues for the three months and nine months ended October 1, 2006 and October 2, 2005, as well as an overview of important product developments.
•	Costs and Expenses. This section, beginning on page 43, provides a discussion about our costs and expenses.
•	Provision for Taxes on Income. This section, beginning on page 45, provides a discussion of items impacting our tax provision for the periods presented.
•	Adjusted Income. This section, beginning on page 45, provides a discussion of an alternative view of performance used by management.
•	Financial Condition, Liquidity and Capital Resources. This section, beginning on page 50, provides an analysis of our balance sheets as of October 1, 2006 and December 31, 2005, and cash flows for the nine months ended October 1, 2006 and October 2, 2005, as well as a discussion of our outstanding debt and commitments that existed as of October 1, 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 54, provides a discussion of forecasted financial performance.
•	Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 55 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							Nine Months Ended
(millions of dollars, except per common share data)		Oct. 1,  2006			Oct. 2,  2005		% Change		Oct. 1,  2006			Oct. 2,  2005		% Change
Revenues	$	12,280		$	11,263		9%	$	35,768		$	34,858		3%
Cost of sales		1,962			1,611		22		5,423			5,250		3
% of revenues		16.0	%		14.3	%			15.2	%		15.1	%
Selling, informational and administrative expenses		3,751			3,526		6		11,027			10,958		--
% of revenues		30.5	%		31.3	%			30.8	%		31.4	%
Research and development expenses		1,902			1,739		9		5,187			5,287		(2)
% of revenues		15.5	%		15.4	%			14.5	%		15.2	%
Amortization of intangible assets		798			833		(4)		2,446			2,569		(5)
% of revenues		6.5	%		7.4	%			6.8	%		7.4	%
Merger-related in-process research and development charges		-			1,390		(100)		513			1,652		(69)
% of revenues		*			12.3	%			1.4	%		4.7	%
Restructuring charges and merger-related costs		249			303		(18)		816			782		4
% of revenues		2.0	%		2.7	%			2.3	%		2.2	%
Other (income)/deductions - net		(343)			(151)		127		(958)			703		*
Income from continuing operations before provision for taxes on income, and minority interests		3,961			2,012		97		11,314			7,657		48
% of revenues		32.3	%		17.9	%			31.6	%		22.0	%
Provision for taxes on income		717			530		35		1,769			2,642		(33)
Effective tax rate		18.1	%		26.4	%			15.6	%		34.5	%
Minority interests		5			3		69		10			6		68
Income from continuing operations		3,239			1,479		119		9,535			5,009		90
% of revenues		26.4	%		13.1	%			26.7	%		14.4	%
Discontinued operations - net of tax		123			110		11		353			343		3
Net income	$	3,362		$	1,589		112	$	9,888		$	5,352		85
% of revenues		27.4	%		14.1	%			27.6	%		15.4	%
Earnings per common share - basic:
Income from continuing operations	$	0.45		$	0.20		125	$	1.31		$	0.68		93
Discontinued operations - net of tax		0.02			0.02		--		0.05			0.05		--
Net income	$	0.47		$	0.22		114	$	1.36		$	0.73		86
Earnings per common share - diluted:
Income from continuing operations	$	0.44		$	0.20		120	$	1.30		$	0.67		94
Discontinued operations - net of tax		0.02			0.02		--		0.05			0.05		--
Net income	$	0.46		$	0.22		109	$	1.35		$	0.72		88
Cash dividends paid per common share	$	0.24		$	0.19			$	0.72		$	0.57
*  Calculation not meaningful

 

OVERVIEW OF OUR CONSOLIDATED OPERATING RESULTS

Our Business

We are a global, research-based company that is dedicated to better health and greater access to healthcare for people and their valued animals. Our purpose is to help people live longer, healthier, happier and more productive lives. Our efforts in support of that purpose include the discovery, development, manufacture and marketing of breakthrough medicines; the exploration of ideas that advance the frontiers of science and medicine; and the support of programs dedicated to illness prevention, health and wellness and increased access to quality healthcare. Our value proposition is to demonstrate that our medicines can effectively treat disease, including the associated symptoms and suffering, and can form the basis for an overall improvement in healthcare systems by increasing effective prevention and treatment and by reducing the need for hospitalization. Our revenues are derived from the sale of our products as well as through alliance agreements, under which we co-promote products discovered by other companies.

Our Operating Environment and Response to Key Challenges

Our company and our industry continue to face a number of significant challenges, including a rapidly changing healthcare environment. Our performance has been and will continue to be adversely impacted by the loss of U.S. exclusivity for several of our major products, and many of our other products continue to face strong competition, including from generics, in key markets. Nine products, comprising 31% of our Pharmaceutical revenues and 29% of our total revenues for the year ended December 31, 2005, have been, or in the near term will be, affected by loss of U.S. exclusivity: Neurontin, Diflucan and Accupril/Accuretic in 2004; Zithromax in November 2005; Zoloft at the end of June 2006; Norvasc and Zyrtec in 2007; and Camptosar and Inspra in 2008. Further, in accordance with requests from applicable regulatory authorities, we suspended sales of Bextra in the U.S., E.U., Canada and many other countries in early 2005.

Industry-wide, regulatory and pricing environments have created added challenges. We are confronted by increasing regulatory scrutiny of drug safety and efficacy; the adoption of new direct-to-consumer advertising guidelines; and lower prescription growth rates. In addition, we have recently seen a strengthening of the U.S. dollar (as of October 19, 2006), as well as restrictive actions on access and pricing taken by influential decision makers in several large European markets.

As a result, at current exchange rates, we now expect revenues in 2007 and 2008 to be comparable to 2006.

Notwithstanding the challenges, we also see great opportunities for future growth. There is enormous promise in the science and technology of pharmaceutical research. Further, with an aging population expecting to live longer, healthier lives, we expect that there will be growing demand for our products and services.

We recognize that the world around us is changing dramatically and that we need to accelerate the scope and speed of change to transform Pfizer. Investments in research and development (R&D), enhancements in R&D productivity, focused business development efforts and aggressive cost reductions will continue to help us to manage these challenges, to capitalize on the best opportunities presented to us and to return our company to top-line growth over time.

Our in-line product portfolio and the potential of our new-product pipeline demonstrate our ability to generate new revenues. Our total revenues increased 9% in the three months ended October 1, 2006 and increased 3% in the nine months ended October 1, 2006 as compared to the same periods in 2005, in spite of the fact that the loss of U.S. exclusivity for Accupril/Accuretic, Diflucan, Neurontin, Zithromax and Zoloft and the voluntary withdrawal of Bextra accounted for about a 6% and 5% reduction in those period revenues - - demonstrating the solid aggregate performance in the balance of our broad portfolio of patent-protected medicines, a portfolio that includes three of the world's 25 best selling medicines, with seven medicines that lead their therapeutic areas. Importantly, we have also recognized an aggregate year-over-year increase in revenues from new products launched in 2004, 2005 and within the first nine months of 2006 of approximately $450 million for the third quarter of 2006 and $1.1 billion for the first nine months of 2006 and are advancing a number of internally developed, in-licensed and co-promoted product candidates. We have launched four new medicines in the U.S. in 2006 --Sutent, Eraxis, Chantix and Exubera. In June 2006, we received an approvable letter from the FDA for Zeven (dalbavancin) and 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. (See further discussion in the section "Revenues - Pharmaceutical Revenues.")

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 and development capabilities through acquisitions and collaborations. Through targeted acquisitions, licensing opportunities and internal development, we are augmenting our commercial portfolio. Given the time requirements attendant to and uncertainties inherent in the research and development process, as well as the commercial risk, the timing and magnitude of revenues from these investments are highly uncertain. (See further discussions in the sections "Revenues - Product Developments" and "Overview of Our Consolidated Operating Results - Licensing and New Business Development - Strategy and Recent Transactions.")

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 "Overview of Our Consolidated Operating Results - Productivity Initiatives and Merger-Related Synergies.") We now plan to broaden this initiative in 2007 and 2008 in a bold way to transform our cost structure, resulting in, at current exchange rates, the reduction of 2007 operating expenses to a level below that in 2006, as well as a further reduction in 2008 operating expenses. Our goal is to create a more flexible cost structure, so that it will be easier and less disruptive to adjust expenditures in light of changing market conditions and needs. These savings will be over and above the $4 billion currently projected annual cost savings by 2008 for our Adapting to Scale productivity initiative.

Licensing and New Business Development - Strategy and Recent Transactions

We are committed to capitalizing on new growth opportunities by advancing our own new-product pipeline, as well as through licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, Alzheimer's disease, vaccines and other products and services that seek to provide innovative healthcare solutions.

On August 14, 2006, we entered into a license agreement with Bayer Pharmaceuticals Corporation to acquire exclusive worldwide rights to DGAT-1 inhibitors, an innovative class of compounds that modify lipid metabolism. The lead compound in the class, BAY 74-4113, is a potential treatment for obesity, type 2 diabetes and other related disorders. In June 2006, we acquired the worldwide rights to fesoterodine, a new drug candidate for treating overactive bladder, from Schwarz Pharma AG. In March 2006, we entered into research collaborations with NicOX SA in ophthalmic disorders and NOXXON Pharma AG in obesity. In addition, in November 2005, we entered into a research collaboration with Incyte for CCR2 antagonists for use in a broad range of diseases.

On May 16, 2006, we completed the acquisition of all of the outstanding shares of Rinat Neuroscience Corp. (Rinat), 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 worldwide 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 final 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 Pharmaceutical segment. The amortization of the developed technology rights is primarily included in Cost of Sales. 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).

On September 14, 2005, we completed the acquisition of all of the outstanding shares of Vicuron Pharmaceuticals, Inc. (Vicuron), a biopharmaceutical company focused on the development of novel anti-infectives, for approximately $1.9 billion in cash (including transaction costs). The allocation of the purchase price includes in-process research and development of approximately $1.4 billion, which was expensed and included in Merger-related in-process research and development charges, and goodwill of $243 million, which has been allocated to our Pharmaceutical segment. Neither of these items was deductible for tax purposes.

On April 12, 2005, we completed the acquisition of Idun Pharmaceuticals, Inc. (Idun), a biopharmaceutical company focused on the discovery and development of therapies to control apoptosis, and on August 15, 2005, we completed the acquisition of all outstanding shares of Bioren Inc. (Bioren), which focuses on technology for optimizing antibodies. The aggregate cost of these and other smaller acquisitions was approximately $340 million for the nine months ended October 2, 2005.

Although not yet reflected in these financial statements, as the transactions have not yet been finalized, on September 18, 2006, we entered into a license agreement with TransTech Pharma Inc. to develop and commercialize small- and large- molecule compounds for treatment of Alzheimer's disease and diabetes, and on September 26, 2006, we entered into a license agreement with Quark Biotech Inc. for exclusive worldwide rights to its novel human gene and to molecules for the treatment of age-related macular degeneration (AMD). In addition, on October 6, 2006, we entered into an agreement to acquire PowderMed Ltd., a U.K. company specializing in the emerging science of DNA-based vaccines for the treatment of influenza and chronic viral diseases.

 

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 Pharmaceutical 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 third quarter of 2005, we sold the last of three European generic pharmaceutical businesses, which we had included in our Pharmaceutical segment, for 4.7 million euros (approximately $5.6 million) and recorded a loss of $3 million ($2 million, net of tax) in Gains on sales of discontinued operations - net of tax in the condensed consolidated statement of income for the three months and nine months ended October 2, 2005.
•	In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses which had been included in our Pharmaceutical 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 last of the three European generic pharmaceutical businesses in Income from discontinued operations - net of tax in the condensed consolidated statement of income for the nine months ended October 2, 2005.

 

Productivity Initiatives and Merger-Related Synergies

During 2005 and the first nine 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 a combined annual expense reduction of approximately $6 billion.

We now expect that cost savings from our AtS productivity initiative will be about $2.5 billion in 2006, substantially ahead of our original guidance of about $2 billion and, without giving effect to any additional initiatives to transform our cost structure, 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 third quarter and first nine months of 2006 total approximately $600 million and $1.8 billion. Without giving effect to any additional initiatives to transform our cost structure, the Company continues to expect that the aggregate cost of implementing the AtS productivity 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. Development will move toward single sites for most therapeutic areas.
•	Enhanced Clinical Trial Design is a key Pfizer initiative aimed at reducing the frequency and cost of clinical trial failures, which is a common issue across the industry. The standardization and broad application of advanced improvements in quantitative techniques, such as pharmacokinetic/pharmacodynamic modeling and computer-based clinical trial simulation, along with use of leading edge statistical techniques including adaptive learning and confirming approaches, have transformed the way we design clinical trials today. Benefits achieved include improvements in positive predictive capacity, efficiency, risk management and knowledge management. Once fully implemented, the Enhanced Clinical Trial Design initiative is expected to yield significant savings and enhance research productivity.
•	Standardization of practices across Research and Development is driving costs down and increasing efficiencies in our research facilities, resulting in significant savings. Centers of emphasis have been built to take advantage of special skill sets, reduce waste and enhance asset utilization. We substantially reduced the number of pilot plants which manufacture the active ingredients for our clinical supplies, making more efficient use of the capacity retained. Clinical supply depots across the globe are being realigned with future needs. For example, across Europe and Canada 26 out of 37 depots have been identified for rationalization, with 15 closures completed through October 1, 2006. A wide range of continuous improvement practices is being applied to enable further productivity improvements in all areas of R&D.
•	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 nine 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, sites in Sandwich, U.K.; Lincoln and Omaha, Nebraska; Puerto Rico; 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 Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act) takes effect and driving greater sales-force accountability in preparation for the launch of new medicines.
•	Continuing to pursue 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. Two of the 17 corporate data centers have now been reduced to local computing facilities, managed remotely from a global operations center. Vendor analysis and selection are currently underway to select a list of global infrastructure service providers. Vendor selection will be completed in the fourth quarter of 2006, with transition to the new service providers occurring in 2007 and 2008.
•	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.

 

Given the challenging operating environment, we plan to expand our AtS initiative by undertaking a further transformation of how we invest in our business and manage our costs. As a result of additional initiatives to transform our cost structure, at current exchange rates, we will reduce 2007 operating expenses to a level below that in 2006, and further reduce 2008 operating expenses. Our goal is to create a more flexible cost structure, so that it will be easier and less disruptive to adjust expenditures in consideration of changing market conditions and needs. Specific goals and actions are under development.

REVENUES

Worldwide revenues by segment and geographic area for the three months and nine months ended October 1, 2006 and October 2, 2005 follow:

		Three Months Ended
		Worldwide					U.S.					International						% Change in Revenues
		Oct. 1,		Oct. 2,			Oct. 1,		Oct. 2,			Oct. 1,			Oct. 2,			Worldwide		U.S.		International
(millions of dollars)		2006		2005			2006		2005			2006			2005			06/05		06/05		06/05
Pharmaceutical	$	11,485	$	10,547		$	6,380	$	5,615		$	5,105		$	4,932			9		14		3
Animal Health		562		503			260		228			302			275			12		14		10
Other		233		213			68		64			165			149			9		6		11
Total Revenues	$	12,280	$	11,263		$	6,708	$	5,907		$	5,572	(a)	$	5,356	(a)		9		14		4

  

(a)	Includes revenue from Japan of $801 million (7% of total revenues) and $826 million (7% of total revenues) for the three months ended October 1, 2006 and October 2, 2005.

   

		Nine Months Ended
		Worldwide					U.S.					International						% Change in Revenues
		Oct. 1,		Oct. 2,			Oct. 1,		Oct. 2,			Oct. 1,			Oct. 2,			Worldwide		U.S.		International
(millions of dollars)		2006		2005			2006		2005			2006			2005			06/05		06/05		06/05
Pharmaceutical	$	33,417	$	32,617		$	18,448	$	17,219		$	14,969		$	15,398			2		7		(3)
Animal Health		1,656		1,576			751		710			905			866			5		6		5
Other		695		665			219		206			476			459			5		6		4
Total Revenues	$	35,768	$	34,858		$	19,418	$	18,135		$	16,350	(b)	$	16,723	(b)		3		7		(2)

  

(b)	Includes revenue from Japan of $2.4 billion (7% of total revenues) and $2.6 billion (7% of total revenues) for the nine months ended October 1, 2006 and October 2, 2005.

 

Pharmaceutical Revenues

 

Pfizer's pharmaceutical business continued to show solid performance, with our in-line products in the aggregate performing well in a tough operating environment and many of our new products making important contributions as well, partially offset by revenue declines from the loss of exclusivity on major products and other factors.

Worldwide pharmaceutical revenues for the third quarter and first nine months of 2006 were $11.5 billion, an increase of 9%, and $33.4 billion, an increase of 2%, compared to the same periods in 2005, due primarily to:

•	the solid aggregate performance of our broad portfolio of patent-protected medicines;
•	an aggregate year-over-year increase in revenues from new products launched in 2004, 2005 and within the first nine months of 2006 of approximately $450 million for the third quarter of 2006 and $1.1 billion for the first nine months of 2006;
•	the one-time reversal of a sales deduction accrual related to a favorable development in a pricing dispute in the U.S. of about $170 million;
•	higher U.S. wholesaler inventories in the third quarter of 2006 by about two days compared to the end of the second quarter of 2006, with levels at the end of the third quarter of 2006 at normal levels and comparable to those at the end of the third quarter of 2005; and
•	the favorable impact of changes in the mix of sales rebates in the U.S.,

partially offset by:
•	a decrease in revenue for Zoloft, primarily due to the launch of generic competition in mid-July 2006 after Zoloft lost exclusivity in the U.S. in June 2006 and also due to the earlier loss of exclusivity in many European markets, by $348 million for the third quarter of 2006 and $504 million for the first nine months of 2006;
•	a decrease in revenue from the loss of exclusivity of Zithromax in November 2005 of $302 million for the third quarter of 2006 and $1.1 billion for the first nine months of 2006; and
•	the continued decline in revenue by $39 million for the third quarter of 2006 and $218 million for the first nine months of 2006 of Neurontin, Diflucan and Accupril/Accuretic, which lost U.S. exclusivity in 2004.

 

Pharmaceutical revenues for the three months ended October 1, 2006, were also impacted by the weakening of the U.S. dollar relative to many foreign currencies, especially the euro, which increased revenue by $118 million, while Pharmaceutical revenues for the nine months ended October 1, 2006, were impacted by the strengthening of the U.S. dollar relative to many foreign currencies, especially the euro and the Japanese yen, which decreased revenue by $443 million. Finally, the three months and nine months ended October 1, 2006 were also impacted by increased competition and the overall market decline, as branded prescriptions in the U.S. declined 4% and 3% compared to the three months and nine months ended October 2, 2005.

Geographically:

•	in the U.S., Pharmaceutical revenues increased 14% and 7% in the three months and nine months ended October 1, 2006 compared to the same periods in 2005, primarily due to revenues from new products, as well as growth in Lipitor and Celebrex sales, the one-time reversal of a sales deduction accrual related to a favorable development in a pricing dispute and higher U.S. wholesaler inventories in the third quarter of 2006 by about two days compared to the end of the second quarter of 2006, partially offset by the loss of exclusivity of Zithromax in November 2005 and Zoloft in June 2006; and
•	in our international markets, Pharmaceutical revenues increased 3% in the three months ended October 1, 2006 compared to the same period in 2005, primarily due to revenues from our new products, as well as growth in Lipitor and Celebrex sales, and the favorable impact of foreign exchange on revenue of $107 million (1%), partially offset by lower revenues from Zoloft due to the loss of exclusivity in many key international markets. Our international Pharmaceutical revenues decreased 3% in the nine months ended October 1, 2006, compared to the same period in 2005, primarily due to the unfavorable impact of foreign exchange on revenue of $422 million (1%) and lower revenues from 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. In the third quarter of 2006, we recorded a reversal of a sales deduction accrual related to a favorable development in a pricing dispute in the U.S. of about $170 million. Historically, our adjustments to actual have not been material; on a quarterly basis, not including the adjustment mentioned above, they generally have been less than 1% of Pharmaceutical 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 $40 million and $414 million in the three months and nine months ended October 1, 2006 and $257 million and $956 million in the three months and nine months ended October 2, 2005. Rebates under Medicare reduced revenues by $253 million and $436 million for the three months and nine months ended October 1, 2006 and $23 million and $37 million in the three months and nine months ended October 2, 2005. The decrease in Medicaid and related state program rebates and the increase in Medicare rebates are due primarily to the impact of the Medicare Act, effective January 1, 2006. Performance-based contract rebates reduced revenues by $393 million and $1.3 billion in the three months and nine months ended October 1, 2006 and $482 million and $1.6 billion in the three months and nine months ended October 2, 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 reimbursements to wholesalers for honoring contracted prices to third parties) reduced revenues by $382 million and $1.1 billion in the three months and nine months ended October 1, 2006 and $324 million and $916 million in the three months and nine months ended October 2, 2005.

Our accruals for Medicaid rebates, Medicare rebates, contract rebates and chargebacks totaled $1.5 billion as of October 1, 2006, a decrease from $1.8 billion as of December 31, 2005, due primarily to the impact of the Medicare Act.

Pharmaceutical--Selected Product Revenues

 

Revenue information for several of our major Pharmaceutical products follow:

 

		Three Months Ended				Nine Months Ended
(millions of dollars) Product	Primary Indications	Oct. 1,  2006		% Change from 2005		Oct. 1,  2006		% Change from 2005
Cardiovascular and metabolic diseases:
Lipitor	Reduction of LDL cholesterol	$3,321		15%		$9,551		8%
Norvasc	Hypertension	1,208		7		3,549		3
Cardura	Hypertension/Benign prostatic hyperplasia	133		1		398		(10)
Caduet	Reduction of LDL cholesterol and hypertension	98		104		255		111
Accupril/Accuretic	Hypertension/Congestive heart failure	61		(21)		198		(21)
Chantix/Champix	Smoking cessation	33		*		33		*
Central nervous system disorders:
Zoloft	Depression and certain anxiety disorders	459		(43)		1,944		(21)
Lyrica	Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy	340		324		803		480
Geodon/Zeldox	Schizophrenia and acute manic or mixed episodes associated with bipolar disorder	201		36		548		28
Neurontin	Epilepsy and post-herpetic neuralgia	126		(18)		376		(24)
Aricept(a)	Alzheimer's disease	90		6		260		2
Xanax/Xanax XR	Anxiety/Panic disorders	74		(26)		235		(23)
Relpax	Migraine headaches	72		8		205		21
Arthritis and pain:
Celebrex	Arthritis pain and inflammation, acute pain	537		20		1,499		19
Infectious and respiratory diseases:
Zyvox	Bacterial infections	206		31		559		23
Zithromax/Zmax	Bacterial infections	104		(74)		529		(67)
Vfend	Fungal infections	132		25		367		29
Diflucan	Fungal infections	109		5		326		(12)
Urology:
Viagra	Erectile dysfunction	423		10		1,207		(1)
Detrol/Detrol LA	Overactive bladder	295		28		810		15
Oncology:
Camptosar	Metastatic colorectal cancer	218		(5)		668		(1)
Ellence	Breast cancer	77		(11)		236		(13)
Aromasin	Breast cancer	84		32		229		30
Sutent	Metastatic renal cell carcinoma (mRCC) and malignant gastrointestinal stromal tumors (GIST)	63		*		115		*
Ophthalmology:
Xalatan/Xalacom	Glaucoma and ocular hypertension	374		11		1,062		5
Endocrine disorders:
Genotropin	Replacement of human growth hormone	198		(1)		586		(3)
All other:
Zyrtec/Zyrtec-D	Allergies	397		17		1,195		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)	336		26		984		30

     

(a)	Represents direct sales under license agreement with Eisai Co., Ltd.
*	Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.

 

Pharmaceutical --Selected Product Descriptions:

•	Lipitor, for the treatment of elevated LDL-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 about $9.6 billion in worldwide sales in the first nine months of 2006, an increase of 8% compared to the same period in 2005. In the U.S., sales of $5.9 billion represent growth of 11% over the previous year's first nine months. Internationally, Lipitor sales in the first nine months of 2006 increased 4% compared to the same period in 2005.
	The growth in Lipitor revenue was driven by a combination of factors, including the impact of the Medicare Act, dosage-form escalation, pricing (including a favorable development in a pricing dispute in the U.S.) and a return to normal wholesaler inventory levels. We continue to see aggressive competition from branded and generic agents, which will further intensify in the fourth quarter of 2006, particularly when additional generic agents become available in the U.S. near the end of the year. 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.
•	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 nine months of 2006 increased 3% over 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.
•	Exubera, the first 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 represents a medical advance that offers patients a novel method of introducing insulin into their systems through the lungs. Since May 2006, Exubera has been launched in Germany, Ireland, the U.K. and most recently, the U.S., where the Joslin Diabetes Clinic in Boston, widely recognized as one of the pre-eminent diabetes and research organizations in the world, has recognized Exubera in its diabetes treatment guidelines. Within the U.S., a comprehensive education and training program for physicians is underway. To further support patients and healthcare professionals, Pfizer also provides a 24-hour-a-day, 7-day-a-week call center staffed by healthcare professionals. Similar programs are also in place in European markets where the product has been launched. An expanded roll-out of Exubera to primary-care physicians in the U.S. previously targeted for November 2006, will begin in January 2007. The manufacturing process for Exubera is complex, involving novel technology. We are working at capacity to meet expected demand, while also expanding drug product capacity. Initial supplies of Exubera were available across the U.S. beginning in September 2006.
•	Zoloft, which lost exclusivity in the U.S. in June 2006 and earlier in many European markets, experienced a 21% revenue decline in the first nine months of 2006 compared to the same period in 2005. 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 was approved in Japan in April 2006 for the indications of depression/depressed state and panic disorder.
•	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 7.4% during September 2006. In the past six months, Geodon has become the fastest growing anti-psychotic medication in the U.S. In the first nine months of 2006, total Geodon worldwide sales grew 28% compared to the same period in 2005.
	The U.S. Patent and Trademark Office granted a five-year extension to the Geodon U.S. patent, extending its exclusivity to 2012.
•	Lyrica achieved $803 million in worldwide revenue in the first nine months of 2006. In September 2006, Lyrica was approved by the European Commission to treat central nerve pain, which is associated with conditions such as spinal injury, stroke and multiple sclerosis. In addition, in March 2006, it was approved by the European Commission to treat generalized anxiety disorder (GAD) in adults, thereby providing a new treatment option for the approximately 12 million Europeans living with GAD.
	Lyrica was approved by the FDA in June 2005 for adjunctive therapy for adults with partial onset epileptic seizures. This indication built on the earlier FDA approval of Lyrica for two of the most common forms of neuropathic pain; painful 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 available in more than 35 markets. More than one million patients have been prescribed Lyrica since its introduction. Lyrica gained a 9.7% new prescription share of the total U.S. anti-epileptic market in September 2006, continuing its performance as one of Pfizer's most successful pharmaceutical launches.
•	Celebrex and Bextra
	Celebrex achieved a 19% increase in worldwide sales in the first nine months of 2006 compared to the same period in 2005. In the first nine months of 2006, Celebrex delivered three consecutive quarters of double-digit sales growth and had a monthly new prescription share of 10.5% in September 2006. Pfizer is continuing its efforts to address physicians and patients' questions by clearly communicating the risks and benefits of Celebrex. In addition, the Prospective Randomized Evaluation of Celecoxib Integrated Safety vs. Ibuprofen or Naproxen (PRECISION) study, which began enrolling patients in October 2006, will provide further understanding of the comparative cardiovascular safety of Celebrex and some common non-specific non-steroidal anti-inflammatory drugs (NSAIDs) in arthritis patients at risk for, or already suffering from, heart disease.
	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. In August 2006, Celebrex was granted pediatric exclusivity in the U.S., extending its patent protection until May 2014. Strong clinical data continue to support Celebrex as an important medicine for patients with arthritis. The Successive Celecoxib Efficacy and Safety Study (SUCCESS-1), 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 NSAIDs.
	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. labels for Celebrex and all other COX-2 medicines include 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.
•	Zithromax experienced a 68% decline in worldwide sales in the first nine 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 an authorized generic by Pfizer's Greenstone subsidiary. Additional generic formulations of azithromycin were launched during 2006, including three oral suspensions and two intravenous versions.
•	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%.
•	Viagra remains the leading treatment for erectile dysfunction and one of the world's most recognized pharmaceutical brands, with more than 58% of U.S. total prescriptions in the erectile dysfunction market through September 2006. Viagra sales declined 1% worldwide in the first nine 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. Effective January 1, 2006, federal funds may not be used for reimbursement of erectile-dysfunction medications by the Medicaid program. Medicare coverage of Viagra will end in 2007.
	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.

•	Sutent is an oral multi-targeted tyrosine kinase inhibitor that combines anti-angiogenic and anti-tumor activity to inhibit the blood supply to tumors and has direct anti-tumor effects. Sutent was approved by the FDA in January 2006 for advanced renal cell carcinoma, including metastatic renal cell carcinoma (collectively, mRCC), and gastrointestinal stromal tumors (GIST) after disease progression on or intolerance to imatinib mesylate. Since approval, Sutent has been prescribed to more than 7,500 patients in the U.S. On July 27, 2006, Sutent received conditional marketing authorization from the European Commission for mRCC, after failure of interferon alfa or interleukin-2 therapy, and unresectable and/or metastatic malignant GIST, after failure of imatinib due to resistance or intolerance. This was the first time the European Commission granted a new oncology drug conditional marketing authorization in the European Union. Final approval is contingent on the provision of comprehensive data on Sutent's effect in terms of relevant clinical endpoints, such as progression-free survival in patients with mRCC. In October 2006, following evaluation of clinical data submitted by Pfizer, the Committee for Medicinal Products for Human Use (CHMP) recommended a switch from the conditional marketing authorization to a full marketing authorization. It also recommended to extend the indication to first-line treatment of mRCC. Sutent has received 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. Sutent has recorded $115 million in sales worldwide in the first nine months of 2006.
•	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 nine months of 2006 decreased 1% to $668 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.
•	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 intraocular 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 5% in the first nine months of 2006 compared to the same period in 2005.
•	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 nine 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.
•	Caduet, a multi-target single pill combining Norvasc and Lipitor, recorded worldwide revenues of $255 million with a growth rate of 111% for the first nine months of 2006 compared to the same period in 2005. Caduet was 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 available in more than 10 other countries. Caduet has now received approvals in 51 markets with drug applications pending in 14 additional markets and applications planned in 10 other countries. During 2006, Caduet is expected to be launched in France, Spain, Australia, Taiwan and Turkey.
•	Chantix/Champix, the first new prescription treatment for smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006. In September 2006, the European Commission approved Champix in Europe for smoking cessation. Chantix/Champix is available with a patient support plan which smokers can customize to address their individual behavioral triggers as they try to quit smoking.

 

Animal Health

Revenues of our Animal Health business in the three months and nine months ended October 1, 2006, compared to the three months and nine months ended October 2, 2005, follow:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Oct. 1, 2006		Oct. 2, 2005	% Change			Oct. 1, 2006		Oct. 2, 2005	% Change
Livestock products	$	340	$	301	13%		$	1,011	$	958	6 %
Companion animal products		222		202	10			645		618	4
Total Animal Health	$	562	$	503	12		$	1,656	$	1,576	5

 

The increase in Animal Health revenues in the three months and nine months ended October 1, 2006, as compared to the same periods in 2005, was primarily attributable to:

•	for livestock products, the continued performance of Draxxin (for treatment of respiratory disease in cattle and swine) in Europe and the U.S.; and
•	for companion animal products, the performance of Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery) for the three months ended October 1, 2006, the continued performance of Revolution (a parasiticide for dogs and cats) for both the three months and nine months ended October 1, 2006 and the favorable impact of the weakening of the U.S. dollar relative to many foreign currencies in the third quarter of 2006;
partially offset by:
•	a decline in U.S. Rimadyl revenues in the first half of 2006 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
•	the unfavorable impact of the strengthening of the U.S. dollar relative to many foreign currencies for the first nine months of 2006.

 

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		Date Approved
Aricept	Treatment of severe Alzheimer's disease		October 2006
Chantix	Nicotine-receptor partial agonist for smoking cessation		May 2006
Genotropin	Treatment of short stature and growth problems resulting from Turner's syndrome		April 2006
Geodon	Liquid oral suspension		March 2006
Eraxis	Treatment of candidemia and invasive candidiasis		February 2006