FORM 10-Q

For the Quarter Ended
September 30, 2007

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)		Sept. 30,  2007		Oct. 1,  2006		Sept. 30, 2007		Oct. 1, 2006
Revenues	$	11,990	$	12,280	$	35,548	$	35,768
Costs and expenses:
Cost of sales(a)		4,618		1,962		8,614		5,423
Selling, informational and administrative expenses(a)		3,768		3,751		10,973		11,027
Research and development expenses(a)		1,999		1,902		5,829		5,187
Amortization of intangible assets		774		798		2,372		2,446
Acquisition-related in-process research and development charges		--		--		283		513
Restructuring charges and acquisition-related costs		455		249		2,318		816
Other (income)/deductions - net		(260)		(343)		(1,149)		(958)
Income from continuing operations before (benefit)/provision for taxes on income and minority interests		636		3,961		6,308		11,314
(Benefit)/provision for taxes on income		(161)		717		800		1,769
Minority interests		1		5		6		10
Income from continuing operations		796		3,239		5,502		9,535
Discontinued operations:
Income from discontinued operations - net of tax		--		120		--		330
Gains/(losses) on sales of discontinued operations - net of tax		(35)		3		(82)		23
Discontinued operations - net of tax		(35)		123		(82)		353
Net income	$	761	$	3,362	$	5,420	$	9,888
Earnings per common share - basic:
Income from continuing operations	$	0.12	$	0.45	$	0.79	$	1.31
Discontinued operations - net of tax		(0.01)		0.02		(0.01)		0.05
Net income	$	0.11	$	0.47	$	0.78	$	1.36
Earnings per common share - diluted:
Income from continuing operations	$	0.12	$	0.44	$	0.79	$	1.30
Discontinued operations - net of tax		(0.01)		0.02		(0.01)		0.05
Net income	$	0.11	$	0.46	$	0.78	$	1.35
Weighted-average shares used to calculate earnings per common share:
Basic		6,875		7,228		6,964		7,275
Diluted		6,894		7,251		6,986		7,306
Cash dividends paid per common share	$	0.29	$	0.24	$	0.87	$	0.72

   

(a)	Exclusive of amortization of intangible assets, except as disclosed in Note 11B. 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)		Sept. 30,  2007*		Dec. 31,  2006**
ASSETS
Cash and cash equivalents	$	2,611	$	1,827
Short-term investments		19,687		25,886
Accounts receivable, less allowance for doubtful accounts		9,942		9,392
Short-term loans		526		514
Inventories		5,210		6,111
Prepaid expenses and taxes		3,749		3,157
Assets held for sale		115		62
Total current assets		41,840		46,949
Long-term investments and loans		4,922		3,892
Property, plant and equipment, less accumulated depreciation		15,714		16,632
Goodwill		21,210		20,876
Identifiable intangible assets, less accumulated amortization		20,998		24,350
Other assets, deferred taxes and deferred charges		4,346		2,138
Total assets	$	109,030	$	114,837
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings, including current portion of long-term debt	$	2,645	$	2,434
Accounts payable		2,298		2,019
Dividends payable		2		2,055
Income taxes payable		266		6,466
Accrued compensation and related items		1,628		1,903
Other current liabilities		7,489		6,510
Liabilities held for sale		--		2
Total current liabilities		14,328		21,389
Long-term debt		6,041		5,546
Pension benefit obligations		3,319		3,632
Postretirement benefit obligations		1,957		1,970
Deferred taxes		7,544		8,015
Other taxes payable		5,816		--
Other noncurrent liabilities		3,415		2,927
Total liabilities		42,420		43,479
Shareholders' equity
Preferred stock		103		141
Common stock		442		441
Additional paid-in capital		69,832		69,104
Employee benefit trust, at fair value		(577)		(788)
Treasury stock		(54,346)		(46,740)
Retained earnings		51,063		49,669
Accumulated other comprehensive income/(expense)		93		(469)
Total shareholders' equity		66,610		71,358
Total liabilities and shareholders' equity	$	109,030	$	114,837

*    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)		Sept. 30,  2007		Oct. 1,  2006
Operating Activities:
Net income	$	5,420	$	9,888
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,084		4,026
Share-based compensation expense		335		506
Acquisition-related in-process research and development charges		283		513
Asset write-offs associated with exiting Exubera		2,220		--
Gains on disposal of investments, products and product lines		(89)		(201)
(Gains)/losses on sales of discontinued operations		139		(37)
Deferred taxes from continuing operations		(1,969)		(1,333)
Other deferred taxes		--		67
Other non-cash adjustments		343		180
Changes in assets and liabilities (net of businesses acquired and divested)		(1,180)		(491)
Net cash provided by operating activities		9,586		13,118
Investing Activities:
Purchases of property, plant and equipment		(1,218)		(1,438)
Purchases of short-term investments		(16,606)		(8,472)
Proceeds from redemptions of short-term investments		23,426		17,346
Purchases of long-term investments		(1,406)		(835)
Proceeds from redemptions of long-term investments		173		229
Purchases of other assets		(93)		(118)
Proceeds from sales of other assets		29		3
Proceeds from the sales of businesses, products and product lines		21		22
Acquisitions, net of cash acquired		(464)		(1,989)
Other investing activities		(268)		(82)
Net cash provided by investing activities		3,594		4,666
Financing Activities:
Increase in short-term borrowings, net		130		993
Principal payments on short-term borrowings		(744)		(11,721)
Proceeds from issuances of long-term debt		1,243		1,051
Principal payments on long-term debt		(61)		(55)
Purchases of common stock		(7,494)		(4,496)
Cash dividends paid		(6,021)		(5,211)
Stock option transactions and other		537		593
Net cash used in financing activities		(12,410)		(18,846)
Effect of exchange-rate changes on cash and cash equivalents		14		(8)
Net increase/(decrease) in cash and cash equivalents		784		(1,070)
Cash and cash equivalents at beginning of period		1,827		2,247
Cash and cash equivalents at end of period	$	2,611	$	1,177
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes	$	4,207	$	2,031
Interest		465		579

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 26, 2007, and August 27, 2006.

We made certain minor reclassifications to prior period amounts to conform to the third-quarter 2007 presentation.

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, 2006.

Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera

In the third quarter of 2007, after an assessment of the financial performance of Exubera, an inhalable form of insulin for the treatment of diabetes, as well as its lack of acceptance by patients, physicians and payers, we decided to exit the product and recorded charges totaling $2.8 billion ($2.1 billion net of tax).

Total pre-tax charges for the three months and nine months ended September 30, 2007, as well as the income statement line items in which the various charges are recorded, are as follows:

(millions of dollars)		Customer Returns - Revenues		Cost of Sales		Selling Informational & Administrative Expenses		Research & Development		Total
Intangible asset impairment charges	$	--	$	1,064	$	41	$	--	$	1,105
Inventory write-offs		--		661		--		--		661
Fixed assets impairment charges		--		451		--		3		454
Other exit costs(a)		10		404		42		128		584
Total	$	10	$	2,580	$	83	$	131	$	2,804

   

(a)	On the balance sheet primarily included in Other current liabilities.

   

The asset write-offs of $2.2 billion (intangibles, inventory and fixed assets) represent non-cash charges. The other exit costs, primarily contract and other termination costs, among other liabilities, will result in future cash expenditures and are associated with marketing and research programs, as well as manufacturing operations related to Exubera. We expect that substantially all of the cash spending will occur within the next year. During the implementation of the exit strategy, certain additional cash costs will be incurred and reported in future periods, such as maintenance-level operating costs. However, those future costs are not expected to be significant. We expect that substantially all exit activities will be completed within the next year.

 

Note 3.  Adoption of New Accounting Policy

As of January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, and supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007, and changed our policy related to the accounting for income tax contingencies. To understand the cumulative effect of these accounting changes, see Note 7A. Taxes on Income: Adoption of New Accounting Standard.

We continue to account for income tax contingencies using a benefit recognition model. Beginning January 1, 2007, if we consider that a tax position is 'more likely than not' of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and we often obtain assistance from external advisors.

Under the benefit recognition model, if our initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit: (i) if there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly reevaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax law that would either increase or decrease the technical merits of a position relative to the more likely than not standard.

Liabilities associated with uncertain tax positions are now classified as current only when we expect to pay cash within the next 12 months. Interest and penalties, if any, continue to be recorded in (Benefit)/provision for taxes on income and are classified on the balance sheet with the related tax liability.

Prior to 2007, our policy had been to account for income tax contingencies based on whether we determined our tax position to be 'probable' under current tax law of being sustained, as well as an analysis of potential outcomes under a given set of facts and circumstances. In addition, we previously considered all tax liabilities as current once the associated tax year was under audit.

Note 4.  Acquisitions

In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp., a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, Inc., an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still in the egg. In connection with these and other smaller acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges in the first quarter of 2007.

In the second quarter of 2006, we completed the acquisition of all the outstanding shares of Rinat Neuroscience Corp., a biologics company with several new central-nervous-system product candidates. In connection with this and other smaller acquisitions, we recorded $513 million in Acquisition-related in-process research and development charges in the second quarter of 2006.

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 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). All assets recorded in connection with this acquisition (other than the $166 million allocated to Pharmaceutical goodwill) have now been written off. See Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera. 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 $118 million ($71 million, after tax) in the first quarter of 2006 in Research and development expenses upon the approval of Exubera in January 2006 by the Food and Drug Administration (FDA).

Note 5.  Discontinued Operations

The following amounts, primarily related to our Consumer Healthcare business which was sold in December 2006 for $16.6 billion, 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
(millions of dollars)		Sept. 30,  2007		Oct. 1,  2006			Sept. 30,  2007		Oct. 1,  2006
Revenues	$	--	$	974		$	--	$	2,920
Pre-tax income	$	--	$	178		$	--	$	493
Provision for taxes on income		--		(58)			--		(163)
Income from operations of discontinued businesses - net of tax		--		120			--		330
Pre-tax gains/(losses) on sales of discontinued businesses		(99)		6			(138)		37
Benefit/(provision) for taxes on gains		64		(3)			56		(14)
Gains/(losses) on sales of discontinued operations - net of tax		(35)		3			(82)		23
Discontinued operations - net of tax	$	(35)	$	123		$	(82)	$	353

   

The 2007 activity includes the resolution of contingencies, such as purchase price adjustments and product warranty obligations, as well as pension settlements.

For a period of time, we will continue to generate cash flows and to report income statement activity in continuing operations that are associated with our former Consumer Healthcare business. The activities that give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business operations to the new owner. Included in continuing operations for the third quarter of 2007 were the following amounts associated with these transition service agreements that will no longer occur after the full transfer of activities to the new owner: Revenues of $50 million; Cost of sales of $41 million; Selling, informational and administrative expenses of $5 million; and Other (income)/deductions-net of $4 million in income, and for the first nine months of 2007: Revenues of $144 million; Cost of sales of $121 million; Selling, informational and administrative expenses of $12 million; and Other (income)/deductions-net of $13 million in income.

Note 6.  Cost-Reduction Initiatives

We incurred the following costs in connection with our cost-reduction initiatives, which were launched in early 2005 and broadened in October 2006:

		Three Months Ended							Nine Months Ended
(millions of dollars)		Sept. 30, 2007			Oct. 1, 2006				Sept. 30, 2007		Oct. 1, 2006
Implementation costs(a)	$	373		$	182		$		864	$	547
Restructuring charges(b)		437			245				2,267		801
Total costs related to our cost-reduction initiatives	$	810		$	427		$		3,131	$	1,348

   

(a)

For the third quarter of 2007, included in Cost of sales ($173 million), Selling, informational and administrative expenses ($70 million), and Research and development expenses ($130 million). For the third quarter of 2006, included in Cost of sales ($50 million), Selling, informational and administrative expenses ($63 million), Research and development expenses ($70 million) and Other (income)/deductions - net ($1 million income).For the first nine months of 2007, included in Cost of sales ($437 million), Selling, informational and administrative expenses ($198 million), Research and development expenses ($292 million) and Other (income)/deductions - net ($63 million income). For the first nine months of 2006, included in Cost of sales ($278 million), Selling, informational and administrative expenses ($160 million), Research and development expenses ($132 million) and Other (income)/deductions - net ($23 million income).

(b)

Included in Restructuring charges and acquisition-related costs.

   

Costs related to our cost-reduction initiatives associated with Discontinued operations in 2006 were not significant.

Through September 30, 2007, the restructuring charges primarily relate to our plant network optimization efforts and the restructuring of our worldwide marketing and research and development operations, while the implementation costs primarily relate to accelerated depreciation of certain assets, as well as system and process standardization and the expansion of shared services.

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

(millions of dollars)		Costs Incurred Through Sept. 30, 2007	(a)		Utilization Through Sept. 30, 2007			Accrual as of Sept. 30, 2007	(b)
Employee termination costs	$	3,054		$	1,645		$	1,409
Asset impairments		637			637			--
Other		311			234			77
Total	$	4,002		$	2,516		$	1,486

  

(a)	Costs incurred in 2005, 2006 and the nine months ended September 30, 2007,
(b)	Included in Other current liabilities ($1.3 billion) and Other noncurrent liabilities ($203 million).

   

During the third quarter of 2007, in connection with our cost-reduction initiatives, we expensed $390 million for Employee termination costs, $31 million for Asset impairments and $16 million in Other. During the first nine months of 2007, in connection with our cost-reduction initiatives, we expensed $1.9 billion for Employee termination costs, $147 million for Asset impairments and $178 million in Other. Through September 30, 2007, costs incurred for Employee termination costs represent the expected reduction of the workforce by approximately 20,400 employees, mainly in research, manufacturing and sales. As of September 30, 2007, approximately 11,600 of these employees have been formally terminated. Employee termination costs are recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

Note 7.  Taxes on Income

A.  Adoption of New Accounting Standard

As of January 1, 2007, we adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, as supplemented by FASB Financial Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, issued May 2, 2007. See Note 3. Adoption of New Accounting Policy, for a full description of our accounting policy related to the accounting for income tax contingencies. As a result of the implementation of FIN 48, at the date of adoption, we reduced our existing liabilities for uncertain tax positions by approximately $11 million, which has been recorded as a direct adjustment to the opening balance of Retained earnings and changed the classification of virtually all amounts associated with uncertain tax positions, approximating $4.0 billion, including the associated accrued interest of approximately $780 million, from current to non-current. For details, see section C. Tax Contingencies below.

B.  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.

On January 25, 2006, we were 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 an acquisition-related 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.  

As of September 30, 2007, 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.

C.  Tax Contingencies

We are subject to income tax in many jurisdictions and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. For a description of our accounting policy associated with accounting for income tax contingencies, see Note 3. Adoption of New Accounting Policy. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. Tax audits can involve complex issues and the resolution of issues may span multiple years, particularly if subject to negotiation or litigation.

The United States is one of our major tax jurisdictions and the IRS is currently conducting audits of the Pfizer Inc. tax returns for the years 2002, 2003 and 2004. The 2005, 2006 and 2007 tax years are also currently under audit as part of the IRS Compliance Assurance Process (CAP), a real-time audit process. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations. With respect to Pharmacia Corporation, the IRS is currently conducting an audit for the year 2003 through the date of merger with Pfizer (April 16, 2003). In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (1998-2006), Japan (2004-2006), Europe (1996-2006, primarily reflecting Ireland, the U.K., France, Italy, Spain and Germany), and Puerto Rico (2002-2006).

We regularly reevaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax law that would either increase or decrease the technical merits of a position relative to the more likely than not standard. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Our evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.

Because tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. The amounts associated with uncertain tax positions in 2007 are as follows:

(millions of dollars)		Sept. 30, 2007		January 1, 2007
Non-current deferred tax assets(a)	$	479	$	395
Other tax assets(a)		782		647
Income taxes payable(b)		(135)		(47)
Other taxes payable(b)		(5,816)		(4,962)
Total amounts associated with uncertain tax positions	$	(4,690)	$	(3,967)

   

(a)	Included in Other assets, deferred taxes and deferred charges.
(b)	Includes gross accrued interest. Accrued penalties are not significant.

   

Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.

Tax assets associated with uncertain tax positions represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities to minimize double taxation. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction.

If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our financial statements could be materially affected in the period of settlement as we treat settlements as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings. As a result, except for the amounts reflected in Income taxes payable, we are unable to estimate the range of reasonably possible change related to our uncertain tax positions within the next 12 months. However, any settlements would likely result in a significant decrease in our uncertain tax positions.

Note 8.  Comprehensive Income

The components of comprehensive income/(expense) follow:

		Three Months Ended					Nine Months Ended
(millions of dollars)		Sept. 30,  2007		Oct. 1,  2006			Sept. 30,  2007		Oct. 1,  2006
Net income	$	761	$	3,362		$	5,420	$	9,888
Other comprehensive income/(expense):
Currency translation adjustment and other		(72)		(125)			300		873
Net unrealized gains/(losses) on derivative financial instruments		(5)		(19)			13		74
Net unrealized gains/(losses) on available-for-sale securities		(6)		(2)			(1)		(35)
Benefit plan adjustments(a)		56		8			250		(21)
Total other comprehensive income/(expense)		(27)		(138)			562		891
Total comprehensive income	$	734	$	3,224		$	5,982	$	10,779

   

(a)	2007 activity reflects the adoption of a new accounting standard for pensions on December 31, 2006.

   

Amounts of comprehensive income associated with discontinued operations in 2006 were not significant.

Note 9.  Financial Instruments

A.  Long-Term Debt

On May 11, 2007, we issued the following notes to be used for general corporate purposes:

•	$1.2 billion equivalent, senior, unsecured, euro-denominated notes, due May 15, 2017, which pay interest annually, beginning on May 15, 2008, at a fixed rate of 4.55%.

  

The notes were issued under a securities registration statement filed with the SEC in March 2007.

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 2007.

Foreign Exchange Risk

During the first nine months of 2007, 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 September 30, 2007 (millions of dollars)	Maturity Date
Forwards	OCL			--			Short-term foreign currency assets and liabilities(d)		$2,727	2007
Forwards	OCL			CF			Yen available-for-sale investments		2,355	2007
Forwards	Prepaid			CF			Euro available-for-sale investments		1,606	2007
Swap	Other assets			--			Euro fixed rate debt		1,276	2017
Forwards	OCL			CF			Euro available-for-sale investments		939	2007
Forwards	OCL			CF			Swedish krona available-for-sale investments		436	2007

   

(a)	Forwards = Forward-exchange contracts.
(b)	The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge or offset foreign exchange risk. The abbreviations used are defined as follows: Prepaid = Prepaid expenses and taxes; Other assets = Other assets, deferred taxes and deferred charges; and OCL = Other current liabilities.
(c)	CF = Cash flow hedge.
(d)	Forward-exchange contracts used to offset short-term foreign currency assets and liabilities are primarily for intercompany transactions in euros, Japanese yen, U.K. pounds, Swedish krona and Canadian dollars.

   

These foreign-exchange instruments serve to protect us against the impact of the translation into U.S. dollars of certain foreign currency denominated transactions.

 

Interest Rate Risk

During the first nine months of 2007, we entered into the following new hedging activities:

Instrument	Primary Balance Sheet Caption	(a)		Hedge Type	(b)		Hedged Item		Notional Amount as of September 30, 2007 (millions of dollars)	Maturity Date
Swap	ONCL			FV			Euro fixed rate debt		$1,276	2017

   

(a)	The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial instrument used to hedge interest rate risk. The abbreviation used is defined as follows: ONCL = Other noncurrent liabilities.
(b)	FV = Fair value hedge.

   

The interest rate instrument serves to hedge the fixed interest rate on the hedged item, matching the amount and timing of the hedged item.

Note 10.  Inventories

The components of inventories follow:

(millions of dollars)			Sept. 30, 2007		Dec. 31, 2006
Finished goods		$	1,693	$	1,651
Work-in-process			2,495		3,198
Raw materials and supplies			1,022		1,262
Total inventories(a)		$	5,210	$	6,111

   

(a)	Decrease was primarily due to write-off of inventories related to Exubera (See Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera) and inventory-reduction initiatives.

Note 11.  Goodwill and Other Intangible Assets

A.  Goodwill

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2007, follow:

(millions of dollars)		Pharmaceutical		Animal  Health		Other		Total
Balance, December 31, 2006	$	20,798	$	61	$	17	$	20,876
Additions(a)		--		39		--		39
Other(b)		293		1		1		295
Balance, September 30, 2007	$	21,091	$	101	$	18	$	21,210

  

(a)	Primarily related to Embrex, Inc.
(b)	Primarily related to the impact of foreign exchange.

B.  Other Intangible Assets

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

		September 30, 2007				Dec. 31, 2006
(millions of dollars)		Gross  Carrying  Amount		Accumulated  Amortization		Gross  Carrying  Amount		Accumulated  Amortization
Finite-lived intangible assets:
Developed technology rights	$	31,859	$	(14,793)	$	32,769	$	(12,423)
Brands		1,016		(443)		888		(417)
License agreements		206		(54)		189		(41)
Trademarks		118		(77)		113		(73)
Other(a)		474		(283)		508		(266)
Total amortized finite-lived intangible assets		33,673		(15,650)		34,467		(13,220)
Indefinite-lived intangible assets:
Brands		2,863		--		2,991		--
Trademarks		77		--		77		--
Other		35		--		35		--
Total indefinite-lived intangible assets		2,975		--		3,103		--
Total identifiable intangible assets	$	36,648	$	(15,650)	$	37,570	$	(13,220)

  

Total identifiable intangible assets, less accumulated amortization(b)

$

20,998

$

24,350

  

(a)	Includes patents, non-compete agreements, customer contracts and other intangible assets.
(b)	Decrease was primarily due to amortization, as well as the impairment of intangible assets associated with Exubera. See Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera.

   

Amortization expense related to acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, informational and administrative expenses, and Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $817 million for the third quarter of 2007 and $851 million for the third quarter of 2006, and $2.5 billion for the first nine months of 2007 and $2.6 billion for the first nine months of 2006.  Amounts of amortization expense associated with discontinued operations in 2006 were not significant.

The expected annual amortization expense is $3.3 billion in 2007; $2.7 billion in 2008; $2.5 billion in each of 2009 and 2010; $2.4 billion in 2011; and $2.2 billion in 2012.

Note 12.  Pension and Postretirement Benefit Plans

The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the three months ended September 30, 2007, and October 1, 2006, follow:

		Pension Plans
		U.S. Qualified				U.S. Supplemental (Non-Qualified)				International				Postretirement Plans
(millions of dollars)		2007		2006		2007		2006		2007		2006		2007		2006
Service cost	$	68	$	91	$	7	$	10	$	72	$	78	$	10	$	11
Interest cost		106		110		14		15		87		79		34		32
Expected return on plan assets		(167)		(157)		--		--		(96)		(82)		(9)		(7)
Amortization of:
Actuarial losses		15		31		11		13		25		28		10		11
Prior service costs/(credits)		1		2		(1)		(1)		(1)		--		1		--
Curtailments and settlements - net		39		12		--		--		6		--		3		2
Special termination benefits		4		1		--		--		2		7		5		2
Less: amounts included in discontinued operations		(27)		(4)		--		(1)		--		6		--		(1)
Net periodic benefit costs	$	39	$	86	$	31	$	36	$	95	$	116	$	54	$	50

   

The components of net periodic benefit costs of the U.S. and international pension plans and the postretirement plans, which provide medical and life insurance benefits to retirees and their eligible dependents, for the first nine months of 2007 and 2006, follow:

		Pension Plans
		U.S. Qualified				U.S. Supplemental (Non-Qualified)				International				Postretirement Plans
(millions of dollars)		2007		2006		2007		2006		2007		2006		2007		2006
Service cost	$	216	$	277	$	21	$	32	$	217	$	227	$	32	$	35
Interest cost		340		334		42		45		259		229		103		95
Expected return on plan assets		(527)		(472)		--		--		(284)		(238)		(27)		(21)
Amortization of:
Actuarial losses		50		90		34		34		72		79		31		28
Prior service costs/(credits)		6		6		(2)		(2)		(1)		1		1		1
Curtailments and settlements - net		52		37		5		--		(99)		9		3		17
Special termination benefits		10		11		--		--		7		18		13		7
Less: amounts included in discontinued operations		(27)		(12)		--		(2)		--		(2)		--		(3)
Net periodic benefit costs	$	120	$	271	$	100	$	107	$	171	$	323	$	156	$	159

   

Japanese pension regulations permit employers with certain pension obligations to separate the social security benefits portion of those obligations and transfer it, along with related plan assets, to the Japanese government. During the first quarter of 2007, our Japanese affiliate completed this transfer and effectively received a subsidy from the Japanese government of approximately $168 million. This subsidy was the result of the transfer of pension obligations of approximately $309 million (excluding the effect of any future salary increases of approximately $9 million) along with related plan assets of approximately $141 million. This transfer resulted in a settlement gain of approximately $106 million.

For the first nine months of 2007, we contributed from our general assets $106 million to our U.S. qualified pension plans, $58 million to our U.S. supplemental (non-qualified) pension plans, $320 million to our international pension plans and $117 million to our postretirement plans.

During 2007, we expect to contribute, from our general assets, a total of $106 million to our U.S. qualified pension plans, $69 million to our U.S. supplemental (non-qualified) pension plans, $386 million to our international pension plans and $162 million to our postretirement plans. Contributions expected to be made for 2007 are inclusive of amounts contributed during the first nine months of 2007. The contributions from our general assets include direct employer benefit payments.

Note 13.  Share-Based Payments

We make our major annual grant of stock options, restricted stock units and performance share awards in the first quarter of each year. Net income included the following share-based expense and the associated tax benefit:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Sept. 30,  2007			Oct. 1,  2006			Sept. 30,  2007			Oct. 1,  2006
Stock option expense	$	69		$	93		$	223		$	314
Restricted stock unit expense		33			53			129			142
Performance share awards and performance-contingent share awards expense		5			34			(17)			50
Share-based payment expense		107			180			335			506
Tax benefit for share-based compensation expense		(36)			(57)			(107)			(150)
Share-based payment expense, net of tax	$	71		$	123		$	228		$	356

   

Amounts capitalized as part of inventory cost were not significant. The impact of modifications under the cost-reduction initiatives to share-based awards was not significant in any period presented above. Generally, these modifications resulted in an acceleration of vesting, either in accordance with plan terms or at management's discretion. Share-based compensation expense associated with Discontinued operations in 2006 was not significant.

Note 14.  Earnings Per Common Share

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

		Three Months Ended				Nine Months Ended
(millions)		Sept. 30, 2007		Oct. 1, 2006		Sept. 30, 2007		Oct. 1, 2006
EPS Numerator - Basic:
Income from continuing operations	$	796	$	3,239	$	5,502	$	9,535
Less:  Preferred stock dividends - net of tax		1		1		3		4
Income available to common shareholders from continuing operations		795		3,238		5,499		9,531
Discontinued operations - net of tax		(35)		123		(82)		353
Net income available to common shareholders	$	760	$	3,361	$	5,417	$	9,884
EPS Denominator - Basic:
Weighted-average number of common shares outstanding		6,875		7,228		6,964		7,275
EPS Numerator - Diluted:
Income from continuing operations	$	796	$	3,239	$	5,502	$	9,535
Less:  ESOP contribution - net of tax		2		1		3		3
Income available to common shareholders from continuing operations		794		3,238		5,499		9,532
Discontinued operations - net of tax		(35)		123		(82)		353
Net income available to common shareholders	$	759	$	3,361	$	5,417	$	9,885
EPS Denominator - Diluted:
Weighted-average number of common shares outstanding		6,875		7,228		6,964		7,275
Common share equivalents: stock options, restricted stock units, stock issuable under employee compensation plans and convertible preferred stock		19		23		22		31
Weighted-average number of common shares outstanding and common share equivalents		6,894		7,251		6,986		7,306
Stock options that had exercise prices greater than the average market price of our common stock and stock issuable under employee compensation plans*		538		563		531		564

  

*	These common stock equivalents were outstanding during these periods but were not included in the computation of diluted EPS for these periods because their inclusion would have had an anti-dilutive effect.

  

In the computation of diluted EPS, 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 15.  Segment Information

We operate in the following business segments:

Pharmaceutical

•	The Pharmaceutical segment 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 (benefit)/provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, acquisition-related costs, costs related to our cost-reduction initiatives and transition activity associated with our former Consumer Healthcare business, 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 September 30, 2007, and October 1, 2006, follow:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Sept. 30,  2007			Oct. 1,  2006			Sept. 30,  2007			Oct. 1,  2006
Revenues:
Pharmaceutical	$	11,036		$	11,485		$	32,722		$	33,417
Animal Health		636			562			1,854			1,656
Corporate/Other(a)		318			233			972			695
Total revenues	$	11,990		$	12,280		$	35,548		$	35,768
Segment profit/(loss)(b)
Pharmaceutical	$	5,399		$	5,711		$	16,152		$	16,927
Animal Health		143			110			422			344
Corporate/Other(a)		(4,906)	(c)		(1,860)	(d)		(10,266)	(e)		(5,957)	(f)
Total profit/(loss)	$	636		$	3,961		$	6,308		$	11,314

  

(a)	Corporate/Other includes our gelatin capsules business, our contract manufacturing business and a bulk pharmaceutical chemicals business, and transition activity associated with our former Consumer Healthcare business (sold in December 2006). Corporate/Other under Segment profit/(loss) 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 and all share-based compensation expenses, significant impacts of purchase accounting for acquisitions, acquisition-related costs, intangible asset impairments and costs related to our cost-reduction initiatives.
(b)	Segment profit/(loss) equals income from continuing operations before (benefit)/provision for taxes on income and minority interests. Certain costs, such as significant impacts of purchase accounting for acquisitions, acquisition-related costs, costs related to our cost-reduction initiatives and transition activity associated with our former Consumer Healthcare business, are included in Corporate/Other only. This methodology is utilized by management to evaluate our businesses.
(c)	For the three months ended September 30, 2007, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $767 million, including intangible asset amortization and other charges, (ii) acquisition-related costs of $18 million, (iii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $810 million, (iv) all share-based compensation expense, (v) transition activity associated with our former Consumer Healthcare business of $8 million in income and (vi) $2.8 billion of charges associated with Exubera. See Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera.
(d)	For the three months ended October 1, 2006, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $803 million, including incremental intangible asset amortization and other charges, (ii) acquisition-related costs of $4 million, (iii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $427 million, (iv) all share-based compensation expense and (v) gain on disposals of investments and other of $86 million.
(e)	For the nine months ended September 30, 2007, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $2.7 billion, including acquired in-process research and development, intangible asset amortization and other charges, (ii) acquisition-related costs of $51 million, (iii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $3.1 billion, (iv) all share-based compensation expense, (v) transition activity associated with our former Consumer Healthcare business of $24 million in income and (vi) $2.8 billion of charges associated with Exubera. See Note 2. Asset Impairment Charges and Other Costs Associated with Exiting Exubera.
(f)	For the nine months ended October 1, 2006, Corporate/Other includes (i) significant impacts of purchase accounting for acquisitions of $2.9 billion, including acquired in-process research and development charges and incremental intangible asset amortization and other charges, (ii) acquisition-related costs of $15 million, (iii) restructuring charges and implementation costs associated with our cost-reduction initiatives of $1.3 billion, (iv) all share-based compensation expense, (v) gain on disposals of investments and other of $160 million, and (vi) a research and development milestone due to us from sanofi-aventis of approximately $118 million in the first quarter of 2006.

   

Revenues for each group of similar products follow:

		Three Months Ended							Nine Months Ended
(millions of dollars)		Sept. 30, 2007		Oct. 1, 2006		%  Change			Sept. 30, 2007		Oct. 1, 2006		%  Change
PHARMACEUTICAL
Cardiovascular and metabolic diseases	$	4,620	$	5,111		(10)%		$	13,858	$	14,628		(5)%
Central nervous system disorders		1,297		1,500		(14)			3,716		4,787		(22)
Arthritis and pain		735		706		4			2,110		1,974		7
Infectious and respiratory diseases		859		836		3			2,609		2,608		--
Urology		758		732		4			2,172		2,055		6
Oncology		664		540		23			1,911		1,550		23
Ophthalmology		413		376		10			1,179		1,065		11
Endocrine disorders		271		246		10			769		724		6
All other		962		1,102		(13)			3,151		3,042		4
Alliance revenue		457		336		36			1,247		984		27
Total Pharmaceutical		11,036		11,485		(4)			32,722		33,417		(2)
ANIMAL HEALTH		636		562		13			1,854		1,656		12
OTHER		318		233		36			972		695		40
Total revenues	$	11,990	$	12,280		(2)		$	35,548	$	35,768		(1)

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 September 30, 2007, the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2007 and October 1, 2006, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and October 1, 2006. 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, 2006, 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 27, 2007, 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, 2006, 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 5, 2007

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 Performance and Operating Environment. This section, beginning on page 23, provides information about the following: our business; our decision to exit Exubera; our performance during the three months and nine months ended September 30, 2007; our operating environment; our response to key opportunities and challenges; our strategic initiatives, such as acquisitions; and our cost-reduction initiatives.
•	Revenues. This section, beginning on page 28, provides an analysis of our products and revenues for the three months and nine months ended September 30, 2007, and October 1, 2006, as well as an overview of important product developments.
•	Costs and Expenses. This section, beginning on page 38, provides a discussion about our costs and expenses.
•	(Benefit)/Provision for Taxes on Income. This section, beginning on page 40, provides a discussion of items impacting our tax provision for the periods presented.
•	Adjusted Income. This section, beginning on page 41, provides a discussion of an alternative view of performance used by management.
•	Financial Condition, Liquidity and Capital Resources. This section, beginning on page 45, provides an analysis of our balance sheets as of  September 30, 2007, and December 31, 2006, and cash flows for the nine months ended September 30, 2007, and  October 1, 2006, as well as a discussion of our outstanding debt and commitments that existed as of September 30, 2007, and December 31, 2006. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.
•	Outlook. This section, beginning on page 49, provides a discussion and update of our expectations for full-year 2007 and 2008.
•	Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 50, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this MD&A relating to our financial results, operations and business plans and prospects. 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)		Sept. 30, 2007			Oct. 1,  2006		% Change		Sept. 30,  2007			Oct. 1,  2006		% Change
Revenues	$	11,990		$	12,280		(2)%	$	35,548		$	35,768		(1) %
Cost of sales		4,618			1,962		135		8,614			5,423		59
% of revenues		38.5	%		16.0	%			24.2	%		15.2	%
Selling, informational and administrative expenses		3,768			3,751		--		10,973			11,027		--
% of revenues		31.4	%		30.5	%			30.9	%		30.8	%
Research and development expenses		1,999			1,902		5		5,829			5,187		12
% of revenues		16.7	%		15.5	%			16.4	%		14.5	%
Amortization of intangible assets		774			798		(3)		2,372			2,446		(3)
% of revenues		6.5	%		6.5	%			6.7	%		6.8	%
Acquisition-related in-process research and development charges		--			--		*		283			513		(45)
% of revenues		*			*				0.8	%		1.4	%
Restructuring charges and acquisition-related costs		455			249		83		2,318			816		184
% of revenues		3.8	%		2.0	%			6.5	%		2.3	%
Other (income)/deductions - net		(260)			(343)		(24)		(1,149)			(958)		20
Income from continuing operations before (benefit)/provision for taxes on income, and minority interests		636			3,961		(84)		6,308			11,314		(44)
% of revenues		5.3	%		32.3	%			17.7	%		31.6	%
(Benefit)/provision for taxes on income		(161)			717		*		800			1,769		(55)
Effective tax rate		(25.4)	%		18.1	%			12.7	%		15.6	%
Minority interests		1			5		(72)		6			10		(41)
Income from continuing operations		796			3,239		(75)		5,502			9,535		(42)
% of revenues		6.6	%		26.4	%			15.5	%		26.7	%
Discontinued operations - net of tax		(35)			123		*		(82)			353		*
Net income	$	761		$	3,362		(77)	$	5,420		$	9,888		(45)
% of revenues		6.3	%		27.4	%			15.2	%		27.6	%
Earnings per common share - basic:
Income from continuing operations	$	0.12		$	0.45		(73)	$	0.79		$	1.31		(40)
Discontinued operations - net of tax		(0.01)			0.02		*		(0.01)			0.05		*
Net income	$	0.11		$	0.47		(77)	$	0.78		$	1.36		(43)
Earnings per common share - diluted:
Income from continuing operations	$	0.12		$	0.44		(73)	$	0.79		$	1.30		(39)
Discontinued operations - net of tax		(0.01)			0.02		*		(0.01)			0.05		*
Net income	$	0.11		$	0.46		(76)	$	0.78		$	1.35		(42)
Cash dividends paid per common share	$	0.29		$	0.24			$	0.87		$	0.72
*  Calculation not meaningful

 

OVERVIEW OF OUR PERFORMANCE AND OPERATING ENVIRONMENT

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 and their related costs. This improvement can be achieved 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.

Decision to Exit Exubera

In the third quarter of 2007, after an assessment of the financial performance of Exubera, an inhalable form of insulin for the treatment of diabetes, as well as its lack of acceptance by patients, physicians and payers, we decided to exit the product and recorded charges totaling $2.8 billion ($2.1 billion, net of tax).

Our Exubera-related exit plans include working with physicians over a three-month period to transition patients to other treatment options, evaluating redeployment options for colleagues, working with our partners and vendors with respect to transition and exit activities, and exploring asset disposal or redeployment opportunities, as appropriate, among other activities.

 

Total pre-tax charges for the three months and nine months ended September 30, 2007, as well as the income statement line items in which the various charges are recorded, are as follows:

(millions of dollars)		Customer Returns - Revenues		Cost of Sales		Selling Informational & Administrative Expenses		Research & Development		Total
Intangible asset impairment charges	$	--	$	1,064	$	41	$	--	$	1,105
Inventory write-offs		--		661		--		--		661
Fixed assets impairment charges		--		451		--		3		454
Other exit costs(a)		10		404		42		128		584
Total	$	10	$	2,580	$	83	$	131	$	2,804

   

(a)	On the balance sheet primarily included in Other current liabilities.

   

The asset write-offs of $2.2 billion (intangibles, inventory and fixed assets) represent non-cash charges. The other exit costs, primarily contract and other termination costs, among other liabilities, will result in future cash expenditures and are associated with marketing and research programs, as well as manufacturing operations related to Exubera. We expect that substantially all of the cash spending will occur within the next year. During the implementation of the exit strategy, certain additional cash costs will be incurred and reported in future periods, such as maintenance-level operating costs. However, those future costs are not expected to be significant. We expect that substantially all exit activities will be completed within the next year.

 

Our 2007 Performance

Revenues in the third quarter of 2007 decreased $290 million (2%), compared to the same period in 2006. Revenues in the first nine months of 2007 decreased $220 million (1%), compared to the same period in 2006. The significant product and alliance revenue impacts on revenues for the third quarter and first nine months of 2007, compared to the same periods in 2006, are as follows:

		Third Quarter				Nine Months
		Increase/				Increase/
		(decrease)		% Change		(decrease)		% Change
(millions of dollars)		07/06		07/06		07/06		07/06
Zoloft(a)	$	(335)		(73)	$	(1,547)		(80)
Norvasc(a)		(568)		(47)		(1,198)		(34)
Lipitor(b)		(151)		(5)		(304)		(3)
Chantix/Champix(c)		208		630		570		M+
Lyrica(c)		125		37		462		58
Sutent(c)		88		140		284		248
Caduet		51		52		159		62
Zyvox		26		13		133		24
Vfend		30		22		88		24
Aromasin		18		22		58		25
Geodon/Zeldox		27		13		74		14
Celebrex		40		8		154		10
Alliance revenue		121		36		263		27

   

(a)	Zoloft and Norvasc are products that have lost U.S. exclusivity since 2006.
(b)	Lipitor has been impacted by competitive pressures and other factors.
(c)	Chantix/Champix, Lyrica and Sutent are major new products that were launched since 2005.
M+	Change greater than one thousand percent.

   

Revenues benefited from favorable foreign exchange impacts of approximately $300 million in the third quarter of 2007 and approximately $860 million in the first nine months of 2007. The impact of rebates in the third quarter of 2007, compared to the third quarter of 2006, decreased overall revenues by $138 million. The increase in rebates was due primarily to:

•	the absence in 2007 of a one-time reversal of a sales deduction accrual of about $170 million recorded in the third quarter of 2006; and
•	the impact of our contracting strategies with both government and non-government entities,
partially offset by:
•	changes in product mix, among other factors

The impact of rebates in the first nine months of 2007, compared to the same period in 2006, increased overall revenues by $17 million. The decrease in rebates was primarily due to:

•	changes in product mix;
partially offset by:
•	the absence in 2007 of a one-time reversal of a sales deduction accrual of about $170 million recorded in the third quarter of 2006; and
•	the impact of our contracting strategies with both government and non-government entities, among other factors.

(See further discussion in the "Revenues - Pharmaceutical Revenues" section of this MD&A.)

Income from continuing operations for the third quarter of 2007 was $796 million compared to $3.2 billion in the third quarter of 2006 and $5.5 billion in the first nine months of 2007 compared to $9.5 billion in the first nine months of 2006.

The decreases were primarily due to:

•	asset impairment charges and other costs of $2.8 billion ($2.1 billion, net of tax) associated with Exubera (see the "Decision to Exit Exubera" section of this MD&A);
•	higher restructuring and implementation costs associated with our cost-reduction initiatives in 2007;
•	the decline in certain product revenues discussed above, including the impact of product mix of revenues on Cost of sales;
•	higher Research and development expenses in the first nine months of 2007, primarily due to the timing of our payments to Bristol-Myers Squibb Company (BMS) in connection with our collaboration to develop and commercialize apixaban; and
•	the absence of one-time tax benefits occurring in the first nine months of 2006,
partially offset by:
•	the decline in Acquisition-related in-process research and development charges from 2006;
•	the favorable impact of foreign exchange; and
•	savings related to our cost-reduction initiatives.

   

(See further discussion in the "Cost and Expenses" and "(Benefit)/Provision for Taxes on Income" sections of this MD&A.)

Discontinued Operations - net of tax, primarily related to our former Consumer Healthcare business, which was sold in December 2006, for the third quarter of 2007, was a $35 million loss compared to $123 million in income in the third quarter of 2006 and an $82 million loss in the first nine months of 2007 compared to $353 million in income in the first nine months of 2006. The 2007 activity includes the resolution of contingencies, such as purchase price adjustments and product warranty obligations, as well as pension settlements. For a period of time, we will continue to generate cash flows and to report income statement activity in continuing operations that are associated with our former Consumer Healthcare business. The activities that give rise to these impacts are transitional in nature and generally result from agreements that ensure and facilitate the orderly transfer of business operations to the new owner. Included in continuing operations for the third quarter of 2007, are the following amounts associated with these transition service agreements that will no longer occur after the full transfer of activities to the new owner: Revenues of $50 million, Cost of sales of $41 million, Selling, informational and administrative expenses of $5 million and Other (income)/deductions-net of $4 million in income, and for the first nine months of 2007, are: Revenues of $144 million, Cost of sales of $121 million, Selling, informational and administrative expenses of $12 million and Other (income)/deductions-net of $13 million in income. (See Notes to Condensed Consolidated Financial Statements-Note 5. Discontinued Operations.)

In the first quarter of 2007, we acquired  BioRexis Pharmaceutical Corp. and Embrex, Inc. (See further discussion in the "Our Strategic Initiatives - Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations" section of this MD&A.)

We have also made progress with our cost-reduction initiatives, which comprise a broad-based, company-wide effort to leverage our scale and strength more robustly and increase our productivity. (See further discussion in the "Our Cost-Reduction Initiatives" section of this MD&A.)

Our Operating Environment

We and our industry continue to face significant challenges in a profoundly changing business environment, as explained more fully in Pfizer's Annual Report on Form 10-K for the year ended December 31, 2006. Such industry-wide factors, including pricing and access, intellectual property rights, product competition, the regulatory environment, pipeline productivity and the changing business environment, can significantly impact our businesses. In order to meet these challenges and capitalize on opportunities in the marketplace, we are taking steps to change the way we run our businesses.

Generic competition significantly impacts our business. We lost U.S. exclusivity for Zoloft (sertraline) in June 2006 (with generic sertraline entering the market in August 2006) and Norvasc in March 2007 and, as expected, significant revenue declines followed. Lipitor began to face competition in the U.S. from generic pravastatin (Pravachol) in April 2006 and generic simvastatin (Zocor) in June 2006, in addition to other competitive pressures. While we anticipated the difficulty posed by these generic competitors, in the U.S., the volume of patients who switched from Lipitor to generic simvastatin following the entry of multi-source generic simvastatin was greater than we had predicted, particularly in the managed-care environment. During the third quarter of 2007, the volume of patients switching from Lipitor to simvastatin returned to the level before the entry of generic simvastatin into the market. Lipitor's new prescription share has recently shown evidence of stabilizing and we expect the decline in Lipitor's total prescription share to stabilize over the next few quarters. (For more detailed information about Lipitor, Norvasc, Zoloft and other significant products, see further discussion in the "Revenues - Pharmaceutical - Selected Product Descriptions" section of this MD&A.)

We will continue to aggressively defend our patent rights against increasingly aggressive infringement whenever appropriate.

(See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain recent developments with respect to patent litigation.)

These and other industry-wide factors that may affect our business should be considered along with the information presented in the "Forward-Looking Information and Factors that May Affect Future Results" section of this MD&A.

Response to Key Opportunities and Challenges

As announced on January 22, 2007, we are committed to changing the way we run our businesses in order to meet the challenges of the changing business environment and to take advantage of the diverse opportunities in the marketplace.

Our five priorities are to:

•	Maximize our near-and long-term revenues;
•	Establish a lower and more flexible cost base;
•	Create smaller, more focused and more accountable operating areas;
•	Engage more productively with customers, patients, physicians and other collaborators; and
•	Make Pfizer a great place to work.

   

We believe that we are making progress on all of these goals. For details about our strategic initiatives, see the "Our Strategic Initiatives - Strategy and Recent Transactions" section of this MD&A, and for details about our cost-reduction initiatives, see the "Our Cost-Reduction Initiatives" section of this MD&A.

We are examining a range of possibilities that will shape the company over the next five to 10 years. Some of the strategic elements that build on our priorities while providing a framework for our longer-term opportunities may include:

•	Revitalizing our internal Research & Development (R&D) approach by focusing our efforts to improve productivity and give discovery and development teams more flexibility and clearer goals, as well as committing considerable resources to promising therapeutic areas including oncology, diabetes, and neurological disorders, among others. Although we have decided to exit Exubera, we remain committed to investing resources in the development of new and innovative medicines to manage diabetes.
•	Focusing our business development by thoroughly assessing every therapeutic area, looking at gaps we have identified and accelerating programs we already have. We are also developing opportunistic strategies concerning the best products, product candidates and technologies.
•	Building a major presence in biologics by recognizing that our core strength with small molecules must be complemented by large molecules, as they involve some of the most promising R&D technology and cutting-edge science in medical research, as well as integrating our investments, R&D and existing internal capabilities with disciplined business development.
•	Driving innovation in product life cycle management by taking a broader look at our business model and examining it from all angles. We believe there are opportunities to better manage our products' growth and development throughout their entire time on the market and bring innovation to our "go to market" promotional and commercial strategies. We plan to develop ways to further enhance the value of mature products, as well as those close to losing their exclusivity, and to create product-line extensions where feasible. In connection with the production of these products, we are pursuing new ways to accelerate our high-quality, low-cost manufacturing initiatives.
•	Stepping up our focus and investments in emerging markets by developing strategies in areas, especially Eastern Europe and Asia, where changing demographics and economics will drive growing demand for high-quality healthcare and offer the best potential for our products.
•	Seeking complementary opportunities in products and technologies that have the potential to add value to our core pharmaceutical offerings as there are many possible ways for us to enhance our pharmaceutical products with the medical technologies of the future.

   

Our Strategic Initiatives - Strategy and Recent Transactions

Acquisitions, Licensing and Collaborations

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

•	In the second quarter of 2007, we entered into a collaboration agreement with BMS to further develop and commercialize apixaban, an oral anticoagulant compound discovered by BMS, that is being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions. We made an initial payment to BMS of $250 million and additional payments to BMS related to product development efforts, which are included in Research and development expenses for the nine months ended September 30, 2007. We may also make additional payments of up to $750 million to BMS based on development and regulatory milestones. In a separate agreement, we are also collaborating with BMS on the research, development and commercialization of DGAT-1 inhibitors.
•	In April 2007, we agreed with OSI Pharmaceuticals, Inc. (OSI) to terminate a 2002 collaboration agreement to co-promote Macugen, for the treatment of age-related macular degeneration (AMD), in the U.S. We also agreed to amend and restate a 2002 license agreement for Macugen, and to return to OSI all rights to develop and commercialize Macugen in the U.S. In return, OSI granted us an exclusive right to develop and commercialize Macugen in the rest of the world.
•	In the first quarter of 2007, we acquired BioRexis Pharmaceutical Corp., a privately held biopharmaceutical company with a number of diabetes candidates and a novel technology platform for developing new protein drug candidates, and Embrex, Inc., an animal health company that possesses a unique vaccine delivery system known as Inovoject that improves consistency and reliability by inoculating chicks while they are still inside the egg. In connection with these and other smaller acquisitions, we recorded $283 million in Acquisition-related in-process research and development charges.
•	In the third quarter of 2006, we entered into a license agreement with Quark Biotech Inc. for exclusive worldwide rights to a compound for the treatment of neovascular (wet) AMD.
•	In the third quarter of 2006, we entered into a license and collaboration agreement with TransTech Pharma Inc. (TransTech) to develop and commercialize small- and large-molecule compounds for treatment of Alzheimer's disease and diabetic neuropathy. Under the terms of the agreement, Pfizer received exclusive worldwide rights to TransTech's portfolio of compounds. In October 2006, we expensed a payment of $101 million, which was recorded in the fourth quarter of 2006 in Research and development expenses. Additional significant milestone payments may be made to TransTech based upon the successful development and commercialization of a product.
•	In the third quarter of 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 drug candidate for treating overactive bladder which was approved in the E.U. in April 2007 and is under regulatory review in the U.S., 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 the second quarter of 2006, we completed the acquisition of Rinat Neuroscience Corp. (Rinat), a biologics company with several new central-nervous-system product candidates. In connection with this and other smaller acquisitions, we recorded $513 million in Acquisition-related in-process research and development charges in the second quarter of 2006.
•	In February 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, and the insulin-production business and facilities located in Frankfurt, Germany, previously jointly owned by Pfizer and sanofi-aventis, for approximately $1.4 billion in cash (including transaction costs). All assets  recorded in connection with this acquisition (other than the $166 million allocated to Pharmaceutical goodwill) have now been written off. See the "Decision to Exit Exubera" section of this MD&A. 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).

  

Our Cost-Reduction Initiatives

We have made significant progress with our multi-year productivity initiatives, which are designed to increase efficiency and streamline decision-making across the company. These initiatives were launched in early 2005 and broadened in October 2006.

We are generating cost savings through site rationalization in R&D and manufacturing, reductions in our global sales force, streamlined organizational structures, staff function reductions, and increased outsourcing and procurement savings. Projects in various stages of completion include:

•	Reorganization of our Field Force - We completed the U.S. reorganization in December 2006, which included a 20% reduction in our U.S. field force. We are taking similar measures in many international markets. The restructured U.S. field force was operational starting in April 2007 and productivity per sales representative has returned to the levels before the reorganization, retaining our competitiveness and share of voice. Globally, we have reduced our field force by approximately 11% so far this year. Additional savings are being generated from de-layering, eliminating duplicative work, and strategically re-aligning various functions.
•	Strategic Outsourcing - As an example of this activity, we recently partnered with a single strategic service provider for certain information technology activities which have been previously performed by Pfizer and contractors. By consolidating 11 third-party providers and reducing labor cost, we expect to generate considerable annual savings and improve service quality.
•	Plant Network Optimization - We are transforming our global manufacturing network to improve efficiency and reduce overall cost. We have reduced our network of plants from 93 four years ago to 60 today, which includes the acquisition of seven plants. We have also announced significant additional closures and divestitures. The cumulative impact will be a more focused, streamlined and competitive manufacturing operation, with less than 50% of our plants and a reduction of 35% of our manufacturing employees compared to 2003. Further, we currently outsource the manufacture of approximately 17% of our products on a cost basis and plan to increase this substantially by 2010.
•	Enhanced R&D Productivity - We are actively balancing the actions required to achieve our cost savings targets with those required to promote enhanced R&D productivity. In 2007, we announced plans to close six R&D sites as part of our efforts to rationalize our facilities footprint. To date, over 90% of the portfolio projects that are moving between sites have been transferred and are in their new sites, with minimal interruption in the progress of development. The early-stage portfolio projects have all been successfully transferred and 85% of the late-stage project transfers have been completed with the remainder to be completed by the end of 2007.

  

In 2008, on a constant currency basis (the actual average foreign currency exchange rates in effect during 2006), we expect to achieve a net reduction of the pre-tax total expense component of Adjusted income of at least $1.5 billion to $2.0 billion, compared to 2006. (For an understanding of Adjusted income, see the "Adjusted Income" section of this MD&A.)

REVENUES

Worldwide revenues by segment and geographic area for the third quarter and first nine months of 2007 and 2006 follow:

		Three Months Ended																% Change in Revenues
		Worldwide					U.S.					International						World-				Inter-
		Sept. 30,		Oct. 1,			Sept. 30,		Oct. 1,			Sept. 30,			Oct. 1,			wide		U.S.		national
(millions of dollars)		2007		2006			2007		2006			2007			2006			07/06		07/06		07/06
Pharmaceutical	$	11,036	$	11,485		$	5,352	$	6,380		$	5,684		$	5,105			(4)		(16)		11
Animal Health		636		562			292		260			344			302			13		12		14
Other		318		233			103		68			215			165			36		51		30
Total Revenues	$	11,990	$	12,280		$	5, 747	$	6,708		$	6,243	(a)	$	5,572	(a)		(2)		(14)		12

(a)	Includes revenues from Japan of $815 million (6.8% of total revenues) for the three months ended September 30, 2007, and $801 million (6.5% of total revenues) for the three months ended October 1, 2006.

  

		Nine Months Ended																% Change in Revenues
		Worldwide					U.S.					International						World-				Inter-
		Sept. 30,		Oct. 1,			Sept. 30,		Oct. 1,			Sept. 30,			Oct. 1,			wide		U.S.		national
(millions of dollars)		2007		2006			2007		2006			2007			2006			07/06		07/06		07/06
Pharmaceutical	$	32,722	$	33,417		$	16,287	$	18,448		$	16,435		$	14,969			(2)		(12)		10
Animal Health		1,854		1,656			810		751			1,044			905			12		8		15
Other		972		695			341		219			631			476			40		56		33
Total Revenues	$	35,548	$	35,768		$	17,438	$	19,418		$	18,110	(b)	$	16,350	(b)		(1)		(10)		11

(b)	Includes revenues from Japan of $2.4 billion (6.8% of total revenues) for the nine-month period ended September 30, 2007, and $2.4 billion (6.8% of total revenues) for the nine-month period ended October 1, 2006.

  

Pharmaceutical Revenues

 

Worldwide pharmaceutical revenues for the third quarter of 2007 were $11.0 billion, a decrease of 4% compared to the third quarter of 2006, and for the first nine months of 2007 were $32.7 billion, a decrease of 2% compared to the first nine months of 2006, due primarily to:

•	a decrease in revenues for Norvasc of $568 million in the third quarter of 2007 and $1.2 billion in the first nine months of 2007, primarily due to the loss of U.S. exclusivity in the first quarter of 2007;
•	a decrease in revenues for Zoloft (sertraline), primarily due to the loss of U.S. exclusivity in June 2006 (with generic sertraline entering the market in August 2006), of $335 million in the third quarter of 2007 and $1.5 billion in the first nine months of 2007;
•	a decrease in revenues for Lipitor in the U.S. of $264 million in the third quarter of 2007 and $573 million in the first nine months of 2007, primarily resulting from competitive pressures from generics, among other factors; and
•	the one-time reversal of a sales deduction accrual in the third quarter of 2006 related to a favorable development in a pricing dispute in the U.S. of about $170 million,

  

partially offset by:

•	an aggregate year-over-year increase in revenues from new products launched in the U.S. since 2005 of approximately $431 million in the third quarter of 2007 and $1.4 billion in the first nine months of 2007;
•	a decrease in rebates in the first nine months of 2007 in both our government and non-government contracted businesses in the U.S., reflecting changes in our product mix, partially offset by the impact of our contracting strategies; and
•	the weakening of the U.S. dollar relative to many foreign currencies, especially the euro and U.K. pound, which increased Pharmaceutical revenues by approximately $275 million in the third quarter of 2007 and approximately $770 million in the first nine months of 2007.

     

Geographically:

•	in the U.S., Pharmaceutical revenues decreased 16% in the third quarter of 2007, compared to the third quarter of 2006, and 12% in the first nine months of 2007, compared to the first nine months of 2006, primarily due to the effect of the loss of exclusivity for Zoloft and Norvasc, and lower sales of Lipitor; and
•	in our international markets, Pharmaceutical revenues increased 11% in the third quarter of 2007, compared to the third quarter of 2006, and increased 10% in the first nine months of 2007, compared to the first nine months of 2006, primarily due to the favorable impact of foreign exchange on international revenues of approximately $275 million (5.4%) in the third quarter of 2007 and approximately $770 million (5.2%) in the first nine months of 2007, revenues from our new products, as well as growth in Celebrex sales.

   

During the third quarter of 2007, international Pharmaceutical revenues grew to represent 51.5% of total Pharmaceutical revenues, compared to 44.4% in the third quarter of 2006. For the first nine months of 2007, international Pharmaceutical revenues represented 50.2% of total Pharmaceutical revenues, compared to 44.8% of total Pharmaceutical revenues in the first nine months of 2006. These increases have been fueled by higher volumes and the favorable impact of foreign exchange, despite pricing pressures in international markets.

As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, primarily representing rebates and discounts to government agencies, wholesalers and managed care organizations, with respect to our pharmaceutical products. These deductions represent estimates of the related obligations and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual have not been material to our overall business. On a quarterly basis, our adjustments to actual generally have been less than 1% of Pharmaceutical net sales and can result in either a net increase or a net decrease in income. Product-specific rebate charges, however, can have a significant impact on year-over-year individual product growth trends.

Rebates under Medicaid and related state programs reduced revenues by $141 million in the third quarter of 2007, compared to $40 million in the third quarter of 2006, and $392 million in the first nine months of 2007, compared to $414 million in the first nine months of 2006. The increase in rebates under Medicaid and related state programs in the third quarter of 2007 was due primarily to adjustments to actual related to the impact of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act), effective January 1, 2006, recorded in the third quarter of 2006. The decrease in rebates under Medicaid and related state programs in the first nine months of 2007 was due primarily to changes in product mix, such as lower sales of Zithromax, Zoloft and Norvasc, all of which lost exclusivity in the U.S.

Rebates under Medicare reduced revenues by $121 million in the third quarter of 2007 compared to $253 million in the third quarter of 2006 and $321 million in the first nine months of 2007 compared to $436 million in the first nine months of 2006. The decreases in Medicare rebates were due primarily to:

•	adjustments to actual related to the impact of the Medicare Act, effective January 1, 2006, recorded in the third quarter of 2006; and
•	changes in product mix, such as lower sales of Zithromax, Zoloft and Norvasc, all of which lost exclusivity in the U.S.

 

Performance-based contract rebates reduced overall revenues by $383 million in the third quarter of 2007 compared to $393 million in the third quarter of 2006 and $1.2 billion in the first nine months of 2007, compared to $1.3 billion in the first nine months of 2006. The decreases in performance-based contract rebates were primarily due to lower sales of Zithromax, Zoloft and Norvasc, all of which lost exclusivity in the U.S., partially offset by the impact of our contracting strategies, primarily related to Lipitor. 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 $420 million in the third quarter of 2007, compared to $382 million in the third quarter of 2006, and $1.1 billion in the first nine months of 2007, comparable to the first nine months of 2006. Chargebacks were impacted by the launch of certain generic products, including amlodipine besylate after Norvasc lost U.S. exclusivity in March 2007.

Our accruals for Medicaid rebates, Medicare rebates, contract rebates and chargebacks totaled $1.2 billion as of September 30, 2007, a decrease from $1.5 billion as of December 31, 2006, due primarily to the impact of the Medicare Act and changes in product mix, partially offset by the impact of our contracting strategies.

Pharmaceutical--Selected Product Revenues

 

Revenue information for several of our major pharmaceutical products follows:

 

		Three Months Ended				Nine Months Ended
(millions of dollars) Product	Primary Indications	Sept. 30, 2007		% Change from 2006		Sept. 30,  2007		% Change from 2006
Cardiovascular and metabolic diseases:
Lipitor	Reduction of LDL cholesterol	$3,170		(5)%		$9,247		(3)%
Norvasc	Hypertension	640		(47)		2,351		(34)
Chantix/Champix	An aid to smoking cessation	241		630		603		M+
Caduet	Reduction of LDL cholesterol and hypertension	149		52		414		62
Cardura	Hypertension/Benign prostatic hyperplasia	119		(11)		378		(5)
Central nervous system disorders:
Lyrica	Epilepsy, post-herpetic neuralgia and diabetic peripheral neuropathy, fibromyalgia	465		37		1,265		58
Geodon/Zeldox	Schizophrenia and acute manic or mixed episodes associated with bipolar disorder	228		13		622		14
Zoloft	Depression and certain anxiety disorders	124		(73)		397		(80)
Neurontin	Epilepsy and post-herpetic neuralgia	106		(16)		321		(15)
Aricept(a)	Alzheimer's disease	100		12		285		10
Xanax/Xanax XR	Anxiety/Panic disorders	85		13		239		1
Relpax	Migraine headaches	81		13		230		12
Arthritis and pain:
Celebrex	Arthritis pain and inflammation, acute pain	577		8		1,653		10
Infectious and respiratory diseases:
Zyvox	Bacterial infections	232		13		692		24
Vfend	Fungal infections	162		22		455		24
Zithromax/Zmax	Bacterial infections	89		(14)		328		(38)
Diflucan	Fungal infections	96		(12)		311		(5)
Urology:
Viagra	Erectile dysfunction	450		6		1,266		5
Detrol/Detrol LA	Overactive bladder	294		--		866		7
Oncology:
Camptosar	Metastatic colorectal cancer	243		12		713		7
Sutent	Advanced and/or metastatic renal cell carcinoma (mRCC) and refractory gastrointestinal stromal tumors (GIST)	151		140		399		248
Aromasin	Breast cancer	102		22		287		25
Ophthalmology:
Xalatan/Xalacom	Glaucoma and ocular hypertension	402		7		1,151		8
Endocrine disorders:
Genotropin	Replacement of human growth hormone	216		8		619		6
All other:
Zyrtec/Zyrtec-D	Allergies	428		8		1,274		7
Alliance revenues:
Aricept, Exforge, Macugen, Mirapex, Olmetec, Rebif and Spiriva	Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson's disease (Mirapex), hypertension (Exforge and Olmetec), multiple sclerosis (Rebif), chronic obstructive pulmonary disease (Spiriva)	457		36		1,247		27

     

(a)	Represents direct sales under license agreement with Eisai Co., Ltd.
M+	Change greater than one thousand percent.
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, with $3.2 billion in worldwide revenues in the third quarter of 2007, a decrease of 5% compared to the same period in 2006, and $9.2 billion in worldwide revenues in the first nine months of 2007, a decrease of 3% compared to the same period in 2006. In the U.S., revenues of $1.8 billion in the third quarter of 2007 declined 13% compared to the same period in 2006 and in the first nine months of 2007, revenues of $5.3 billion declined 10% compared to the same period in 2006. Internationally, Lipitor revenues in the third quarter of 2007 increased 9% and in the first nine months of 2007 increased 7%, compared to the same periods in 2006, primarily due to the favorable impact of foreign exchange.
	The decline in Lipitor revenues is driven by a combination of factors. The decline in the third quarter of 2007 from the comparable 2006 period resulted from:
	•	the impact of an intensely competitive statin market with competition from multi-source generic simvastatin and branded products, which resulted in a decrease in prescription levels in the U.S.;
	•	increased payer pressure in the U.S.; and
	•	a favorable development in a pricing dispute in the U.S. recorded in 2006,
	partially offset by:
	•	growth in the statin market in the U. S.; and
	•	the favorable impact of foreign exchange.
	The decline in Lipitor revenues in the first nine months of 2007 from the comparable period in 2006 resulted from:
	•	the impact of an intensely competitive statin market with competition from multi-source generic simvastatin and branded products, which resulted in a decrease in prescription levels in the U.S.;
	•	increased payer pressure in the U.S.; and
	•	a favorable development in a pricing dispute in the U.S. recorded in 2006,
	partially offset by:
	•	a positive U.S. pricing impact, net of rebates, notwithstanding a more flexible contracting strategy; and
	•	the favorable impact of foreign exchange.
	On May 30, 2007, we announced the return of Lipitor to Express Scripts Inc.'s preferred list of drugs as of June 1, 2007, following our rebate agreement. We expect to see the positive impact of this agreement towards the end of 2007 and into 2008.
	On March 5, 2007, Lipitor was approved by the FDA for five new indications in patients with clinically evident heart disease, thereby expanding the U.S. label from primary prevention in moderate-risk patients to include secondary prevention in high-risk patients. Lipitor is now the only cholesterol-lowering medicine approved for the reduction in risk of hospitalization due to heart failure. These new indications have been incorporated into promotional materials, including a new direct-to-consumer (DTC) advertising campaign, and support the incremental benefit and overall safety of using higher doses of Lipitor.
	See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain patent litigation relating to Lipitor.
•	Norvasc, for treating hypertension, lost exclusivity in the U.S. in March 2007, six months earlier than expected, due to an appellate court decision that was counter to three previous trial court rulings in Pfizer's favor. Norvasc has also experienced patent expirations in many E.U. countries but maintains exclusivity in certain other major markets, including Japan and Canada. Norvasc worldwide revenues in the first nine months of 2007 decreased 34% from the same period in 2006.
•	Caduet, a single pill therapy combining Norvasc and Lipitor, recorded worldwide revenues of $414 million, an increase of 62% for the first nine months of 2007, compared to the same period in 2006. This was largely driven by a more focused message platform and a highly targeted consumer campaign in the U.S. 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. However, with the introduction of generic amlodipine besylate, in addition to increased competition, growth has begun to slow. During the first nine months of 2007, Caduet was launched in France, Australia and Taiwan. We now expect Caduet to launch in Spain in late 2008.
•	Chantix/Champix, the first new prescription treatment to aid smoking cessation in nearly a decade, became available to patients in the U.S. in August 2006 and in select E.U. markets in December 2006.  Chantix/Champix continues to demonstrate strong uptake, with nearly 3.5 million U.S. patients having been prescribed Chantix since its launch in August 2006, representing approximately 8% of adult smokers in the U.S. In the U.S., an unbranded advertising campaign introduced earlier in 2007 is working to effectively develop the market, and branded advertising was introduced in the third quarter of 2007. We continue to focus on increasing adherence and have introduced tools to physicians that provide data behind the benefit of a full 12-week course of therapy. In addition, we are conducting several pilot programs to reach patients in their first month of therapy through pharmacy programs, as well as through our GetQuit behavior modification program. Champix has secured final approval from the National Institute for Health and Clinical Excellence (NICE) for use in the state-funded National Health Service in the U.K., following a positive appraisal decision in May 2007. Our strategy for this innovative medicine is to build a sustainable, medically supported market over time and to seek to secure reimbursement--initiatives that we believe will drive future growth. Chantix/Champix recorded worldwide revenues of $603 million in the first nine months of 2007.
•	Exubera, see the "Decision to Exit Exubera" section of this MD&A.
•	Zoloft (sertraline), which lost exclusivity in the U.S. in June 2006 (with generic sertraline entering the market in August 2006) and earlier in many European markets, experienced an 80% worldwide revenue decline in the first nine months of 2007, compared to the same period in 2006. 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. Zoloft was launched in Japan in July 2006 for the indications of depression/depressed state and panic disorder.
	On May 2, 2007, the FDA proposed that the existing blackbox warning on the labels of all antidepressants, including Zoloft, which describes an increased risk of suicidal thoughts and behavior in some children and adolescents, be expanded to include young adults to age 24, particularly during the first two months of treatment. The proposed label change also states that studies have not shown this increased risk in adults older than 24, that adults age 65 and older who are treated with antidepressants have a decreased risk of suicidal thoughts and behavior, and that depression and certain other psychiatric disorders are themselves the most important causes of suicide. We have implemented this label change in accordance with the FDA's proposal.
•	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 had a new prescription share of 6.7% for September 2007. In the first nine months of 2007, Geodon worldwide revenues grew 14%, compared to the same period in 2006. Geodon growth was driven by recognition of its efficacy by prescribers as clinical experience increased, and by a favorable metabolic profile.
•	Lyrica gained an 11.8% new prescription share of the total U.S. anti-epileptic market in September 2007, fueled by strong efficacy, as well as high physician and patient satisfaction. In June 2007, Lyrica was approved in the U.S. for the management of fibromyalgia, one of the most common chronic, widespread pain conditions. This approval represents a breakthrough for the more than six million Americans who suffer from this debilitating condition who previously had no FDA-approved treatment.
•	Celebrex was approved in Japan in January 2007, for the treatment of osteoarthritis and rheumatoid arthritis. In February 2007, Celebrex was approved in Europe for the treatment of ankylosing spondylitis. From April 2007 through July 2007, we ran an innovative Celebrex DTC television advertising campaign in the U.S. about treatment options for arthritis. The 2½-minute television advertisement opened by addressing cardiovascular (CV) safety first and clarifying misperceptions among arthritis sufferers about the risks and benefits of Celebrex and other prescription non-steroidal anti-inflammatory drugs. This DTC ad campaign  helped to stimulate patient interest and initiate a productive dialogue between physicians and patients. The number of weekly visits to the Celebrex website doubled and the number of calls to the patient 800 number increased after the introduction of the ad. We intend to resume this television advertising campaign later this year.
•	Zithromax/Zmax experienced a 38% decline in worldwide revenues in the first nine months of 2007 compared to the same period of 2006, reflecting the expiration of Zithromax's composition-of-matter patent in the U.S. in November 2005 and the end of Pfizer's active sales promotion in July 2005.
•	Selzentry/Celsentri (maraviroc) is the first in a new class of oral HIV medicines in more than a decade known as CCR5 antagonists. CCR5 antagonists work by blocking the CCR5 co-receptor, the virus' predominant entry route into T-cells.  Selzentry/Celsentri stops the R5 virus on the outside surface of the cells before it enters, rather than fighting the virus inside, as do all other classes of oral HIV medicines. Selzentry was approved in the U.S. in August 2007, and is indicated for combination anti-retroviral treatment of treatment-experienced adults infected with only CCR5-tropic HIV-1 detectable, who have evidence of viral replication and have HIV-1 strains resistant to multiple anti-retroviral agents. A diagnostic test confirms whether a patient is infected with CCR5-tropic HIV-1, which is also known as "R5-virus." Celsentri was approved in the E.U. in September 2007 by the European Commission.
•	Viagra remains the leading treatment for erectile dysfunction and one of the world's most recognized pharmaceutical brands. Viagra revenues grew 5% worldwide--with U.S. revenues flat and international revenues increasing 10%--in the first nine months of 2007, compared to the same period in 2006. The growth in Viagra international revenues was driven by foreign exchange, as well as a combination of other factors, including our focus on strengthening its value proposition to key customers and growth in the erectile dysfunction market. In July 2007, we launched a television ad campaign in the U.S. for Viagra aimed at educating and motivating men with erectile dysfunction to seek treatment.
•	Detrol/Detrol LA, a muscarinic receptor antagonist, is the most prescribed medicine worldwide for overactive bladder, a condition that affects up to 100 million people around the world. Detrol/Detrol LA is an extended-release formulation taken once daily. Worldwide Detrol/Detrol LA revenues grew 7% to $866 million in the first nine months of 2007. Detrol/Detrol LA continues to lead the overactive bladder market and perform well in an increasingly competitive marketplace. In the U.S., Detrol/Detrol LA's new prescription share declined 3.0% to a 39.8% share for the first nine months of 2007. See Part II, Other Information; Item 1, Legal Proceedings, of this Form 10-Q for a discussion of certain patient litigation relating to Detrol and Detrol LA.
•	Camptosar is indicated as first-line therapy for metastatic colorectal cancer in combination with 5-fluorouracil and leucovorin. It is also indicated for patients in whom metastatic colorectal cancer has recurred or progressed despite following initial fluorouracil-based therapy. Camptosar is for intravenous use only. Worldwide revenues in the first nine months of 2007 increased 7% to $713 million, compared to the same period in 2006. The National Comprehensive Cancer Network (NCCN), an alliance of 21 of the world's leading cancer centers, has issued guidelines recommending Camptosar as an option across all lines of treatment for advanced colorectal cancer. We will lose U.S. exclusivity for Camptosar in 2008.
•	Sutent is an oral multi-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 and launched in the U.S. in January 2006 for advanced renal cell carcinoma, including metastatic renal cell carcinoma, and gastrointestinal stromal tumors (GIST) after disease progression on, or intolerance to, imatinib mesylate. In the first quarter of 2007, the U.S. label was revised to include new first-line advanced renal cell carcinoma data. In January 2007, Sutent received full marketing authorization and extension of the indication to first-line treatment of advanced and/or metastatic renal cell carcinoma (mRCC), as well as approval as a second-line treatment for GIST, in the E.U. We believe that future growth of Sutent will be fueled by emerging new data in a range of potential new indications. Sutent recorded $399 million in worldwide revenues in the first nine months of 2007.
•	Xalatan/Xalacom, a prostaglandin analogue used to lower the intraocular pressure associated with glaucoma and ocular hypertension, is one of the world's leading branded glaucoma medicines. 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 worldwide revenues grew 8% in the first nine months of 2007, compared to the same period in 2006.
•	Zyrtec/Zyrtec-D provides strong, rapid and long-lasting relief for seasonal and year-round allergies and hives with once-daily dosing. Zyrtec/Zyrtec-D continues to be the most-prescribed antihistamine in the U.S. in a challenging market. Worldwide revenues increased 7% in the first nine months of 2007, compared to the same period in 2006. We will lose U.S. exclusivity for Zyrtec/Zyrtec-D in December 2007. Since we sold our rights to market Zyrtec/Zyrtec-D over-the-counter in connection with the sale of our Consumer Healthcare business, we expect no revenues from Zyrtec/Zyrtec-D after the expiration of the U.S. patent in December.

   

Animal Health

Revenues of our Animal Health business follow:

		Three Months Ended						Nine Months Ended
(millions of dollars)		Sept. 30, 2007		Oct. 1, 2006	% Change			Sept. 30, 2007		Oct. 1, 2006	% Change
Livestock products	$	387	$	340	14%		$	1,122	$	1,011	11 %
Companion animal products		249		222	12			732		645	13
Total Animal Health	$	636	$	562	13		$	1,854	$	1,656	12

  

Our Animal Health business is one of the largest in the world.

The increase in Animal Health revenues in the third quarter and first nine months of 2007, compared to the same periods in 2006, was primarily attributable to:

•	for livestock products, the continued good performance of our premium anti-infectives for cattle and swine, and intramammaries in the first nine months of 2007, as well as revenues from Embrex, Inc., which we acquired in the first quarter of 2007;
•	for companion animal products, the good performances of Revolution (a parasiticide for dogs and cats); Rimadyl (for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery); and new product launches, such as Convenia (first-in-class single-dose treatment antibiotic therapy for dogs and cats), Slentrol (weight management for dogs) and Cerenia (treatment and prevention of vomiting in dogs); and
•	the favorable impact of foreign exchange.

   

Product Developments

We continue to invest in R&D to provide future sources of revenues 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. Below are significant regulatory actions by, and filings pending with, the FDA and regulatory authorities in the E.U. and Japan.

Recent FDA Approvals:

Product	Indication		Date Approved
Selzentry (maraviroc)	Treatment of human immuno-deficiency virus/acquired immune deficiency (HIV) in CCR5-tropic treatment-experienced patients		August 2007
Lyrica	Treatment of fibromyalgia		June 2007
Fragmin	Prevention of blood clots in patients with cancer		May 2007
Lipitor	Secondary prevention of cardiovascular (CV) events in patients with established coronary heart disease		March 2007

   

Pending U.S. New Drug Applications (NDAs) and Supplemental Filings:

Product	Indication		Date Submitted
Zmax	Treatment of bacterial infections-sustained release-Pediatric acute otitis media (AOM) filing		November 2006
Fesoterodine	Treatment of overactive bladder		March 2006
Vfend	Treatment of fungal infections-Pediatric filing		June 2005
dalbavancin	Treatment of complicated skin/skin structure gram-positive bacterial infections		December 2004

   

On September 28, 2007, we received an "approvable" letter from the FDA for Zmax  that sets forth requirements to obtain approval for the AOM indication based on pharmacokinetic data. We plan to discuss these requirements with the FDA and seek an agreement on actions to address the FDA's comments.

We received an "approvable" letter from the FDA for fesoterodine for the treatment of overactive bladder in January 2007. Regulatory review of fesoterodine is progressing in the U.S. and fesoterodine was approved in the E.U. in April 2007. We are working with Schwarz Pharma, the licensor, to scale up manufacturing and identify manufacturing site alternatives. Launch is planned for the latter half of 2008 in Europe and, subject to FDA approval, early 2009 in the U.S.

In June 2006, the FDA designated as approvable the NDA for dalbavancin. In June 2007, we re-submitted our NDA filing for dalbavancin and we anticipate FDA action in December 2007.

We received "not-approvable" letters from the FDA for lasofoxifene for the prevention of post-menopausal osteoporosis in September 2005 and for the treatment of vaginal atrophy in January 2006. We have reviewed the viability of the lasofoxifene treatment program using three-year interim data from the Postmenopausal Evaluation And Risk-reduction with Lasofoxifene (PEARL) study, and based on our assessment, we are planning to file a new NDA for the treatment of post-menopausal osteoporosis in the fourth quarter of 2007. In September 2005, we received a "not-approvable" letter for Dynastat (parecoxib), an injectable prodrug for valdecoxib for the treatment of acute pain. We have had discussions with the FDA regarding this letter, and we are considering plans to address the FDA's concerns.

Regulatory Approvals and Filings in the E.U. and Japan:

    

Product	Description of Event	Date Approved		Date Submitted
Celsentri (maraviroc)	Approval in the E.U. for the treatment of HIV in CCR5-tropic treatment-experienced patients	September 2007		--
Eraxis/Ecalta	Approval in the E.U. for the treatment of invasive candidiasis in adult non-neutropenic patients	September 2007		--
Selera (Inspra)	Approval in Japan for treatment of hypertension	September 2007		--
dalbavancin	Application submitted in the E.U. for the treatment of skin and skin structure infections	--		July 2007
Fesoterodine	Approval in the E.U. for treatment of overactive bladder	April 2007		--
Macugen	Application submitted in Japan for treatment of age-related macular degeneration	--		March 2007
Celebrex	Approval in the E.U. for the treatment of ankylosing spondylitis	February 2007		--
	Application submitted in Japan for treatment of lower-back pain	--		February 2007
	Approval in Japan for treatment of osteoarthritis and rheumatoid arthritis	January 2007		--
Sildenafil	Application submitted in Japan for treatment of pulmonary arterial hypertension	--		February 2007
Somavert	Approval in Japan for treatment of acromegaly	January 2007		--
Sutent	Approval in the E.U. for mRCC as a first-line treatment	January 2007		--
	Approval in the E.U. for GIST as a second-line treatment	January 2007		--
	Application submitted in Japan for treatment of mRCC	--		December 2006
	Application submitted in Japan for treatment of GIST	--		December 2006
Spiriva	Application submitted in the E.U. - Respimat device for chronic obstructive pulmonary disease	--		September 2006
Chantix/Champix	Application submitted in Japan as an aid to smoking cessation	--		June 2006

 

   

Ongoing or planned clinical trials for additional uses and dosage forms of our in-line products include:

Product	Indication
Celebrex	Acute gouty arthritis
Geodon/Zeldox	Bipolar relapse prevention; pediatric bipolar mania; adjunctive use in bipolar depression
Lyrica	Generalized anxiety disorder; epilepsy monotherapy
Macugen	Diabetic macular edema
Revatio	Pediatric pulmonary arterial hypertension
Selzentry/Celsentri	HIV in CCR5-tropic treatment-naive patients
Sutent	Breast cancer; colorectal cancer; non-small cell lung cancer; liver cancer
Zithromax/chloroquine	Malaria

   

New drug candidates in late-stage development include CP-945,598, a cannibinoid-1 receptor antagonist for treatment of obesity; axitinib, a multi-targeted receptor kinase for treatment of thyroid cancer and pancreatic cancer; CP-675,206, an anti-CTLA4 monoclonal antibody for melanoma; PD-332334, an alpha2delta compound for the treatment of generalized anxiety disorder; and apixaban for the prevention and treatment of venous thromboembolism and the prevention of stroke in patients with atrial fibrillation, which is being developed in collaboration with BMS.

In June 2007, we announced the discontinuation of a development program in non-small cell lung cancer for PF-3,512,676 in combination with cytotoxic chemotherapy. We licensed PF-3,512,676 from Coley Pharmaceutical Group, Inc. in 2005.

Additional product-related programs are in various stages of discovery and development. Also, see our discussion in the "Our Strategic Initiatives--Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations" section of this MD&A.

COSTS AND EXPENSES

Cost of Sales

Cost of sales increased 135% in the third quarter of 2007, compared to the third quarter of 2006, and 59% in the first nine months of 2007, compared to the first nine months of 2006. These increases reflect:

•	asset impairment charges, write-offs and other costs associated with Exubera of $2.6 billion (See the "Decision to Exit Exubera" section of this MD&A);
•	the unfavorable impact of product mix on our average cost of sales as a result of the loss of U.S. exclusivity for products (such as Zoloft and Norvasc) and lower sales of Lipitor;
•	the impact of higher implementation costs associated with our cost-reduction initiatives of $173 million in the third quarter of 2007, compared to $50 million in the third quarter of 2006, and $437 million in the first nine months of 2007, compared to $278 million in the first nine months of 2006;
•	costs of $41 million for the third quarter of 2007 and $121 million for the first nine months of 2007, related to business transition activities associated with the sale of our Consumer Healthcare business, completed in December 2006; and
•	the unfavorable impact of foreign exchange on expenses,

   

partially offset by:

•	savings related to our cost-reduction initiatives.

   

Selling, Informational and Administrative Expenses

Selling, informational and administrative (SI&A) expenses in the third quarter and first nine months of 2007 were comparable to the same periods in 2006, which reflects:

•	savings related to our cost-reduction initiatives,

   

offset by:

•	exit costs, such as contract termination costs, associated with Exubera of $83 million (See the "Decision to Exit Exubera" section of this MD&A);
•	the impact of higher implementation costs associated with our cost-reduction initiatives of $70 million in the third quarter of 2007, compared to $63 million in the third quarter of 2006, and $198 million in the first nine months of 2007, compared to $160 million for the first nine months of 2006; and
•	the unfavorable impact of foreign exchange on expenses.

   

Research and Development Expenses

Research and development (R&D) expenses increased 5% in the third quarter of 2007, compared to the third quarter of 2006, and 12% in the first nine months of 2007, compared to the first nine months of 2006, which reflects:

•	exit costs, such a contract termination costs, associated with Exubera of $131 million (See the "Decision to Exit Exubera" section of this MD&A);
•	an initial payment to BMS of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in the second quarter of 2007;
•	a one-time R&D milestone due to us from sanofi-aventis (approximately $118 million) recorded in the first quarter of 2006;
•	the impact of higher implementation costs associated with our cost-reduction initiatives of $130 million in the third quarter of 2007, compared to $70 million in the third quarter of 2006, and $292 million for the first nine months of 2007, compared to $132 million in the first nine months of 2006; and
•