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PFE > SEC Filings for PFE > Form 10-Q on 10-Nov-2011All Recent SEC Filings

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Form 10-Q for PFIZER INC


10-Nov-2011

Quarterly Report


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, Operating Environment and Outlook. This section, beginning on page 43, provides information about the following: our business; our performance during the third quarter and first nine months of 2011; our operating environment; our business development initiatives; our financial guidance for 2011; and our financial targets for 2012.

? Analysis of Our Condensed Consolidated Statements of Income. This section begins on page 50, and consists of the following sub-sections:

o Revenues. This sub-section, beginning on page 50, provides an analysis of our products and revenues for the third quarter and first nine months of 2011 and 2010, as well as an overview of research and development expenses and important biopharmaceutical product developments.

o Costs and Expenses. This sub-section, beginning on page 65, provides a discussion about our costs and expenses.

o Provision for Taxes on Income. This sub-section, on page 68, provides a discussion of items impacting our tax provision for the periods presented.

o Discontinued Operations. This sub-section, beginning on page 69, provides an analysis of the financial statement impact of our discontinued operations during the periods presented.

o Adjusted Income. This sub-section, beginning on page 69, provides a discussion of an alternative view of performance used by management.

? Analysis of Our Condensed Consolidated Balance Sheets. This section, on page 73, provides a discussion of changes in certain balance sheet accounts.

? Analysis of Our Condensed Consolidated Statements of Cash Flows. This section, beginning on page 73, provides an analysis of our cash flows for the first nine months of 2011 and 2010.

? Financial Condition, Liquidity and Capital Resources. This section, beginning on page 74, provides an analysis of our financial assets and liabilities as of October 2, 2011 and December 31, 2010 and a discussion of our outstanding debt and commitments that existed as of October 2, 2011 and December 31, 2010. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to help fund Pfizer's future activities.

? New Accounting Standards. This section, beginning on page 76, discusses recently adopted and recently issued accounting standards.

? Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 77, 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 and operating performance, business plans and prospects, in-line products and product candidates, and share-repurchase and dividend-rate plans. Such forward-looking statements are inherently susceptible to uncertainty and changes in circumstances.


Components of the Condensed Consolidated Statements of Income follow:

                                           Three Months Ended                       Nine Months Ended
(MILLIONS OF DOLLARS, EXCEPT PER    Oct. 2,      Oct. 3,      % Incr./      Oct. 2,      Oct. 3,       % Incr./
COMMON SHARE DATA)                     2011         2010       (Decr.)         2011         2010        (Decr.)
Revenues                           $ 17,193     $ 15,995             7 %   $ 50,679     $ 49,703              2 %

Cost of sales                         3,679        3,790            (3 )     11,177       11,676             (4 )
% of revenues                          21.4 %       23.7 %                     22.1 %       23.5 %

Selling, informational and
administrative expenses               4,621        4,599             -       14,097       13,776              2
% of revenues                          26.9 %       28.8 %                     27.8 %       27.7 %

Research and development
expenses                              2,188        2,188             -        6,516        6,590             (1 )
% of revenues                          12.7 %       13.7 %                     12.9 %       13.3 %

Amortization of intangible
assets                                1,397        1,156            21        4,168        3,972              5
% of revenues                           8.1 %        7.2 %                      8.2 %        8.0 %

Acquisition-related in-process
research and development charges         --            -             -           --           74           (100 )
% of revenues                            -- %          - %                       -- %        0.1 %

Restructuring charges and
certain acquisition-related
costs                                 1,101          499           121        2,474        2,090             18
% of revenues                           6.4 %        3.1 %                      4.9 %        4.2 %

Other deductions--net                   538        2,349           (77 )      1,778        3,036            (41 )

Income from continuing
operations before provision for
taxes on income                       3,669        1,414           159       10,469        8,489             23
% of revenues                          21.3 %        8.8 %                     20.7 %       17.1 %

Provision for taxes on income         1,235          558           121        3,223        3,165              2

Effective tax rate                     33.7 %       39.5 %                     30.8 %       37.3 %

Income from continuing
operations                            2,434          856           184        7,246        5,324             36
% of revenues                          14.2 %        5.4 %                     14.3 %       10.7 %

Discontinued operations--net of
tax                                   1,315           15             *        1,355           67              *

Net income before allocation to
noncontrolling interests              3,749          871             *        8,601        5,391             60
% of revenues                          21.8 %        5.4 %                     17.0 %       10.8 %

Less: net income attributable to
noncontrolling interests                 11            5           120           31           24             29
Net income attributable to
Pfizer Inc.                        $  3,738     $    866             *     $  8,570     $  5,367             60

% of revenues                          21.7 %        5.4 %                     16.9 %       10.8 %

Earnings per common
share--basic: (a)
Income from continuing
operations attributable to
Pfizer Inc. common shareholders    $   0.31     $   0.11           182     $   0.92     $   0.66             39
Discontinued operations--net of
tax                                    0.17            -             *         0.17         0.01              *
Net income attributable to
Pfizer Inc. common shareholders    $   0.48     $   0.11             *     $   1.09     $   0.67             63

Earnings per common
share--diluted: (a)
Income from continuing
operations attributable to
Pfizer Inc. common shareholders    $   0.31     $   0.11           182     $   0.91     $   0.66             38
Discontinued operations--net of
tax                                    0.17            -             *         0.17         0.01              *
Net income attributable to
Pfizer Inc. common shareholders    $   0.48     $   0.11             *     $   1.08     $   0.66             64

Cash dividends paid per common
share                              $   0.20     $   0.18                   $   0.60     $   0.54

(a) EPS amounts may not add due to rounding.

* Calculation not meaningful.

Certain amounts and percentages may reflect rounding adjustments.


OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT and OUTLOOK

Our Business

Our mission is to apply science and our global resources to improve health and well-being at every stage of life. We strive to set the standard for quality, safety and value in the discovery, development and manufacturing of medicines for people and animals. Our diversified global healthcare portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as nutritional products and many of the world's best-known consumer products. Every day, we work across developed and emerging markets to advance wellness, prevention, treatments and cures that challenge the most feared diseases of our time. We also collaborate with other biopharmaceutical companies, healthcare providers, governments and local communities to support and expand access to reliable, affordable healthcare around the world. 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.

On January 31, 2011, we completed the tender offer for all of the outstanding shares of common stock of King Pharmaceuticals, Inc. (King) and acquired approximately 92.5% of the outstanding shares for approximately $3.3 billion in cash. On February 28, 2011, we acquired the remaining outstanding shares of King for approximately $300 million in cash (for additional information, see Notes to Condensed Consolidated Financial Statements--Note 3. Acquisition of King Pharmaceuticals, Inc.). Commencing from January 31, 2011, our financial statements include the assets, liabilities, operating results and cash flows of King. Therefore, in accordance with our domestic and international reporting periods, our condensed consolidated financial statements for the nine months ended October 2, 2011 reflect approximately eight months of King's U.S. operations and approximately seven months of King's international operations.

In July 2011, we announced our decision to explore strategic alternatives for our Animal Health and Nutrition businesses, which may include, among other things, a full or partial separation of each of these businesses from Pfizer through a spin-off, sale or other transaction (see the "Our Business Development Initiatives" section of this MD&A).

Our 2011 Performance

Revenues in the third quarter of 2011 were $17.2 billion, compared to $16.0 billion in the same period in 2010. The increase of 7% was due to:

? growth in certain key biopharmaceutical products, such as Lipitor in the U.S.
as well as Lyrica, the Prevenar franchise and Enbrel, and growth in our Animal Health, Consumer Healthcare and Nutrition businesses;

? the favorable impact of foreign exchange, which increased revenues by approximately $951 million, or 6%; and

? the inclusion of revenues from legacy King products of $357 million, which favorably impacted revenues by 2%,

partially offset by:

? lower revenues of approximately $950 million, or 6%, due to the impact of the loss of exclusivity for several biopharmaceutical products in certain geographies; and

? a reduction in revenues of $151 million, or 1%, due to U.S. healthcare reform.

Revenues in the first nine months of 2011 were $50.7 billion, compared to $49.7 billion in the same period in 2010. The increase of 2% was due to:

? growth in certain key biopharmaceutical products, such as Lipitor in the U.S.
as well as Lyrica, the Prevenar franchise and Enbrel, and growth in our Animal Health, Consumer Healthcare and Nutrition businesses;

? the favorable impact of foreign exchange, which increased revenues by approximately $1.8 billion, or 4%; and

? the inclusion of revenues from legacy King products of $938 million, which favorably impacted revenues by 2%,

partially offset by:

? lower revenues of $3.8 billion, or 8%, due to the impact of the loss of exclusivity for several biopharmaceutical products in certain geographies; and

? a reduction in revenues of $357 million, or 1%, due to U.S. healthcare reform.


The significant impacts on revenues for the third quarter and first nine months of 2011, compared to the same periods in 2010, are as follows:

                                              Oct. 2, 2011
                                                       vs.
                                              Oct. 3, 2010
                                                 Worldwide        % Change       % Change            % Change
(millions of dollars)                        Incr./(Decr.)       Worldwide           U.S.       International
For the Three Months Ended:
Prevnar/Prevenar 13                        $           271              37            (16 )               183
Lyrica                                                 204              27              6                  45
Enbrel (outside the U.S. and Canada)                   158              20              -                  20
EpiPen(a)                                               59               *              *                   *
Skelaxin(a)                                             58               *              *                   *
Celebrex                                                65              11              4                  27
Sutent                                                  41              16             16                  16
ReFacto AF/Xyntha                                       38              37             45                  35
Zyvox                                                   36              13              4                  22
Pristiq                                                 28              24             17                  69
Caduet                                                  23              18             (7 )                71
Norvasc                                                 20               6            100                   5
Aromasin(b)                                            (26 )           (23 )          (79 )                 7
Detrol/Detrol LA                                       (24 )           (10 )          (17 )                 4
Zosyn/Tazocin                                         (106 )           (42 )          (58 )                (5 )
Xalatan/Xalacom(b)                                    (139 )           (33 )          (94 )                 3
Protonix(b)                                           (138 )           (68 )          (68 )                 -
Lipitor(b)                                              68               3             13                  (8 )
Prevnar/Prevenar (7-valent)                            (81 )           (45 )            -                 (45 )
Effexor XR(b)                                          (10 )            (6 )          (10 )                (3 )
Alliance revenues(b)                                  (123 )           (12 )          (23 )                16
All other biopharmaceutical products(c)                301              21             56                  11
Animal Health products                                 181              21             17                  24
Consumer Healthcare products                           101              15              9                  22
Nutrition products                                     136              31              -                  31

For the Nine Months Ended:
Prevnar/Prevenar 13                        $         1,233              78             25                 259
Lyrica                                                 453              20              4                  35
Enbrel (outside the U.S. and Canada)                   332              14              -                  14
EpiPen(a)                                              160               *              *                   *
Skelaxin(a)                                            145               *              *                   *
Celebrex                                               104               6              -                  18
Sutent                                                  99              13             10                  14
ReFacto AF/Xyntha                                       90              31             23                  33
Zyvox                                                   89              10              5                  16
Pristiq                                                 81              24             16                  85
Caduet                                                  47              12             (8 )                52
Norvasc                                                (39 )            (3 )           (4 )                (3 )
Aromasin(b)                                            (67 )           (19 )          (57 )                 1
Detrol/Detrol LA                                       (90 )           (12 )          (18 )                 1
Zosyn/Tazocin                                         (259 )           (35 )          (47 )                (9 )
Xalatan/Xalacom(b)                                    (327 )           (25 )          (65 )                (4 )
Protonix(b)                                           (367 )           (69 )          (69 )                 -
Lipitor(b)                                            (526 )            (6 )            7                 (19 )
Prevnar/Prevenar (7-valent)                           (624 )           (61 )         (100 )               (50 )
Effexor XR(b)                                         (975 )           (64 )          (82 )               (11 )
Alliance revenues(b)                                  (429 )           (14 )          (26 )                17
All other biopharmaceutical products(c)                899              21             85                   5
Animal Health products                                 479              18             20                  18
Consumer Healthcare products                           226              11              7                  16
Nutrition products                                     165              12              -                  12

(a) Third quarter and first nine months of 2011 reflect the inclusion of revenues from legacy King products.
(b) Aromasin lost exclusivity in the U.S. in April 2011. Xalatan lost exclusivity in the U.S. in March 2011. The basic U.S. patent (including the six-month pediatric exclusivity period) for Protonix expired in January 2011. Lipitor lost exclusivity in Canada in May 2010, Spain in July 2010, Brazil in August 2010 and Mexico in December 2010. Effexor XR lost exclusivity in the U.S. in July 2010. We lost exclusivity for Aricept 5mg and 10mg tablets, which are included in Alliance revenues, in November 2010.
(c) Relates to "All other biopharmaceutical products" category included in the "Selected Revenues from Biopharmaceutical Products" table presented in this MD&A.
* Calculation not meaningful.


Income from continuing operations for the third quarter of 2011 was $2.4 billion, compared to $856 million in the third quarter of 2010, and $7.2 billion in the first nine months of 2011, compared to $5.3 billion in the first nine months of 2010, reflecting, in addition to the factors discussed above relating to Revenues:

? higher impairment charges of $1.5 billion (pre-tax) in the third quarter of 2010, and $1.7 billion (pre-tax) in the first nine months of 2010 related to certain intangible assets acquired as part of the Wyeth acquisition, and a $701 million (pre-tax) charge in the third quarter and first nine months of 2010 for asbestos litigation related to our wholly owned subsidiary, Quigley Company, Inc. (see further discussion in Notes to Condensed Consolidated Financial Statements--Note 6. Other(Income)/Deductions--Net); and

? a decrease in the effective tax rate to 33.7% in the third quarter of 2011 from 39.5% in the third quarter of 2010 and to 30.8% in first nine months of 2011 from 37.3% in the first nine months of 2010 (see discussion in the "Provision for Taxes on Income" section of this MD&A),

partially offset by:

? higher charges related to our non-acquisition related cost-reduction and productivity initiatives in the third quarter and first nine months of 2011 compared to the same periods in 2010.

Our Operating Environment

U.S. Healthcare Legislation

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (together, the U.S. Healthcare Legislation), was enacted in the U.S. As explained more fully in Pfizer's 2010 Annual Report on Form 10-K, this legislation has both current and longer-term impacts on us.

We recorded the following amounts as a result of the U.S. Healthcare Legislation:

? approximately $215 million in the third quarter of 2011 and approximately $539 million in the first nine months of 2011, recorded as a reduction to Revenues; and

? approximately $45 million in the third quarter of 2011 and approximately $183 million in the first nine months of 2011, recorded in Selling, informational and administrative expenses, related to the annual fee payable to the federal government (which is not deductible for U.S. income tax purposes) based on our prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs (the total fee to be paid each year by the pharmaceutical industry will increase annually through 2018). We are recording the annual fee ratably throughout the year.

Our 2011 financial guidance and 2012 financial targets (see the "Our Financial Guidance for 2011" and "Our Financial Targets for 2012" sections of this MD&A for additional information) reflect the expected full-year impact of the U.S. Healthcare Legislation.

Industry-Specific Challenges

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. As explained more fully in Pfizer's 2010 Annual Report on Form 10-K, the biopharmaceutical industry is highly competitive and we face a number of industry-specific challenges, which can significantly impact our results. These factors include, among others: the loss or expiration of intellectual property rights, the regulatory environment and pipeline productivity, pricing and access pressures and increasing competition among branded products.

In the U.S., we lost exclusivity for Effexor XR in July 2010, for Aricept 5mg and 10mg tablets in November 2010, for Vfend tablets in February 2011 and for Xalatan in March 2011. The basic U.S. patent (including the six-month pediatric exclusivity period) for Protonix expired in January 2011. We lost exclusivity for Lipitor in Canada in May 2010, Spain in July 2010, Brazil in August 2010 and Mexico in December 2010. In addition, the basic patent for Vfend tablets in Brazil expired in January 2011. We also lost exclusivity for Aromasin in the U.S. in April 2011 and in the European Union (EU) in July 2011, and the patent for Aromasin in Japan expired in July 2011.

In addition, we expect to lose exclusivity for various other products in various markets over the next few years, including the following through the end of 2012:

? Lipitor and Caduet in the U.S. on November 30, 2011 (see additional Lipitor discussion below);

? Xalatan and Xalacom in 15 major European markets in January 2012. The exclusivity period in these markets was extended from July 2011 to January 2012 as a result of pediatric extensions;


? Geodon in the U.S. in March 2012;

? Revatio (tablet) in the U.S. in March 2012. We are pursuing a pediatric extension for Revatio in the U.S. If we are successful, the exclusivity period for Revaio (tablet) in the U.S. will be extended by six months to September 2012; and

? Detrol IR in the U.S. in September 2012.

As a result of these anticipated losses of exclusivity, we will lose the substantial portion of our revenues from the aforementioned products in two specified markets shortly thereafter.

Pfizer announced in June 2008 that we entered into an agreement providing a license to Ranbaxy to sell generic versions of Lipitor and Caduet in the U.S effective November 30, 2011. In addition, the agreement provides a license for Ranbaxy to sell a generic version of Lipitor beginning on varying dates in several additional countries. (See Notes to Condensed Consolidated Financial Statements -- Note 14. Legal Proceedings and Contingencies of this Form 10-Q for discussion of certain litigation relating to this agreement.) We have also granted Watson Laboratories, Inc. (Watson) the exclusive right to sell the authorized generic version of Lipitor in the U.S. for a period of five years, which is expected to commence on November 30, 2011. As Watson's exclusive supplier, we will manufacture and sell generic atorvastatin tablets to Watson. In markets outside the U.S., Lipitor has lost exclusivity in certain countries and will lose exclusivity at various times in certain other countries. We expect to maintain a significant portion of the Lipitor revenues overall in developed markets outside the U.S. through 2011. In addition, the exclusivity period for Lipitor in the majority of major European markets has been extended by six months to May 2012 as a result of pediatric extensions. Although the loss of exclusivity for Lipitor in Brazil and Mexico in 2010 is adversely impacting Lipitor revenues in emerging markets in 2011, we do not expect that Lipitor revenues in emerging markets will be materially impacted by the loss of exclusivity over the next several years. In full-year 2010, revenues from Lipitor were approximately $5.3 billion in the U.S. (approximately 18% of our total full-year 2010 U.S. revenues) and approximately $5.4 billion in markets outside the U.S. (approximately 14% of our total full-year 2010 international revenues, of which approximately $900 million was attributable to emerging markets).

Our financial guidance for 2011 and our financial targets for 2012 reflect the anticipated impact in those years of the loss of exclusivity of various products (see the "Our Financial Guidance for 2011" and "Our Financial Targets for 2012" sections of this MD&A).

We will continue to aggressively defend our patent rights against increasing incidents of infringement whenever we deem appropriate. For more detailed information about our significant products, see the discussion in the "Revenues--Selected Revenues from Biopharmaceutical Products" section of this MD&A. 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.

In August 2011, the federal Budget Control Act of 2011 (the Act) was enacted in the U.S. The Act includes provisions to raise the U.S. Treasury Department's borrowing limit, known as the debt ceiling, and provisions to reduce the federal deficit by $2.4 trillion between 2012 and 2021. Deficit-reduction targets include $900 billion of discretionary spending reductions associated with the Department of Health and Human Services and various agencies charged with national security, but those discretionary spending reductions do not include programs such as Medicare and Medicaid or direct changes to pharmaceutical pricing, rebates or discounts. A Joint Select Committee of Congress (the Committee) has been appointed to identify the remaining $1.5 trillion of deficit reductions by November 23, 2011. The Committee may consider all elements of discretionary and non-discretionary spending, and its recommendations could result in reduced spending under Medicare and Medicaid for prescription drugs. In addition, the Committee may determine to recommend the imposition of additional taxes. If the Committee's recommendations identifying at least $1.2 . . .

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