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PFE > SEC Filings for PFE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for PFIZER INC


9-Nov-2012

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, Strategy and Outlook. This section, beginning on page 53 provides information about the following: our business; our performance during the third quarter and first nine months of 2012 and 2011; our operating environment; our strategy; our business development initiatives; and our financial guidance for 2012.

• Analysis of the Condensed Consolidated Statements of Income. This section begins on page 61, and consists of the following sub-sections:

?            Revenues. This sub-section, beginning on page 61, provides an
             analysis of our products and revenues for the third quarter and
             first nine months of 2012 and 2011, as well as an overview of
             research and development expenses and important biopharmaceutical
             product developments.


?            Costs and Expenses. This sub-section, beginning on page 77, provides
             a discussion about our costs and expenses.


?            Provision for Taxes on Income. This sub-section, on page 82,
             provides a discussion of items impacting our tax provisions.


?            Discontinued Operations. This sub-section, beginning on page 83,
             provides an analysis of the financial statement impact of our
             discontinued operations.


?            Adjusted Income. This sub-section, beginning on page 83, provides a
             discussion of an alternative view of performance used by management.


•      Analysis of the Condensed Consolidated Statements of Comprehensive Income.
       This section, on page 88, provides a discussion of changes in certain
       components of other comprehensive income.


•      Analysis of the Condensed Consolidated Balance Sheets. This section, on
       page 88, provides a discussion of changes in certain balance sheet
       accounts.


•      Analysis of the Condensed Consolidated Statements of Cash Flows. This
       section, beginning on page 89, provides an analysis of our cash flows for
       the first nine months of 2012 and 2011.


•      Analysis of Financial Condition, Liquidity and Capital Resources. This
       section, beginning on page 90, provides an analysis of selected measures
       of our liquidity and of our capital resources as of September 30, 2012 and
       December 31, 2011 and a discussion of our outstanding debt and commitments
       that existed as of September 30, 2012 and December 31, 2011. 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 93, discusses
       recently adopted and recently issued accounting standards.


•      Forward-Looking Information and Factors That May Affect Future Results.
       This section, beginning on page 94 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, strategic review,
       capital allocation, business-development plans, and share-repurchase and
       dividend-rate plans. Such forward-looking statements are based on
       management's current expectations about future events, which are
       inherently susceptible to uncertainty and changes in circumstances.


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The following table provides the components of the condensed consolidated statements of income:

                                                  Three Months Ended                               Nine Months Ended
(MILLIONS OF DOLLARS, EXCEPT PER      September 30,        October 2,          %       September 30,       October 2,          %
COMMON SHARE DATA)                             2012              2011     Change                2012             2011     Change
Revenues                            $        13,976      $     16,609        (16 )   $        43,918     $     49,118        (11 )

Cost of sales                                 2,665             3,409        (22 )             8,162           10,449        (22 )
% of revenues                                  19.1  %           20.5 %                         18.6 %           21.3 %

Selling, informational and
administrative expenses                       3,847             4,457        (14 )            11,801           13,635        (13 )
% of revenues                                  27.5  %           26.8 %                         26.9 %           27.8 %

Research and development expenses             1,981             2,176         (9 )             5,734            6,487        (12 )
% of revenues                                  14.2  %           13.1 %                         13.1 %           13.2 %

Amortization of intangible assets             1,228             1,389        (12 )             3,939            4,138         (5 )
% of revenues                                   8.8  %            8.4 %                          9.0 %            8.4 %

Restructuring charges and certain
acquisition-related costs                       302             1,090        (72 )             1,089            2,458        (56 )
% of revenues                                   2.2  %            6.6 %                          2.5 %            5.0 %

Other deductions--net                           962               547         76               3,283            1,802         82
Income from continuing operations
before provision for taxes on
income                                        2,991             3,541        (16 )             9,910           10,149         (2 )
% of revenues                                  21.4  %           21.3 %                         22.6 %           20.7 %

Provision/(benefit) for taxes on
income                                         (119 )           1,216       (110 )             1,882            3,167        (41 )
Effective tax rate                             (4.0 )%           34.3 %                         19.0 %           31.2 %

Income from continuing operations             3,110             2,325         34               8,028            6,982         15
% of revenues                                  22.3  %           14.0 %                         18.3 %           14.2 %

Discontinued operations--net of
tax                                             104             1,424        (93 )               249            1,619        (85 )

Net income before allocation to
noncontrolling interests                      3,214             3,749        (14 )             8,277            8,601         (4 )
% of revenues                                  23.0  %           22.6 %                         18.8 %           17.5 %

Less: Net income attributable to
noncontrolling interests                          6                11        (45 )                22               31        (29 )
Net income attributable to Pfizer
Inc.                                $         3,208      $      3,738        (14 )   $         8,255     $      8,570         (4 )
% of revenues                                  23.0  %           22.5 %                         18.8 %           17.4 %

Earnings per common
share--basic:(a)
Income from continuing operations
attributable to Pfizer Inc.
common shareholders                 $          0.42      $       0.30         40     $          1.07     $       0.88         22
Discontinued operations--net of
tax                                            0.01              0.18        (94 )              0.03             0.21        (86 )
Net income attributable to Pfizer
Inc. common shareholders            $          0.43      $       0.48        (10 )   $          1.10     $       1.09          1

Earnings per common
share--diluted:(a)
Income from continuing operations
attributable to Pfizer Inc.
common shareholders                 $          0.41      $       0.30         37                1.06             0.88         20
Discontinued operations--net of
tax                                            0.01              0.18        (94 )              0.03             0.20        (85 )
Net income attributable to Pfizer
Inc. common shareholders            $          0.43      $       0.48        (10 )   $          1.09     $       1.08          1

Cash dividends paid per common
share                               $          0.22      $       0.20         10     $          0.66     $       0.60         10

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

Certain amounts and percentages may reflect rounding adjustments.


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OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY 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 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 August 13, 2012, we filed a registration statement with the U.S. Securities and Exchange Commission (SEC) for a potential initial public offering (IPO) of up to a 20% ownership stake in our Animal Health business, Zoetis Inc. (Zoetis). If the IPO is successfully completed, which we are targeting for the first half of 2013, we will have a variety of options to achieve a potential full separation of Zoetis. As we continue to work toward a potential IPO and a potential full separation of Zoetis, we remain open to all alternatives to maximize the after-tax return for our shareholders. The Animal Health business continues to be presented as a continuing operation in the condensed consolidated financial statements.

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlι for $11.85 billion in cash. The transaction is expected to close in the next few months, assuming the receipt of the required regulatory clearances and satisfaction of other closing conditions. Beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations--net of tax in the condensed consolidated statements of income for all periods presented. The transaction also includes the sale of certain prenatal multivitamins currently commercialized by the Pfizer Consumer Healthcare business unit. The operating results of this product line are also included in Discontinued operations--net of tax for all periods presented. In addition, the assets and liabilities associated with this discontinued operation are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets.

On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash. The operating results associated with this business and the gain on the sale of Capsugel are reported as Discontinued operations--net of tax in our condensed consolidated statements of income for the three and nine months ended October 2, 2011.

On January 31, 2011, we completed a tender offer for 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. Commencing from January 31, 2011, our financial statements include the assets, liabilities, operating results and cash flows of King. As a result, 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.

Our 2012 Performance

Revenues in the third quarter of 2012 were $14.0 billion, a decrease of 16% compared to the same period in 2011, due to an operational decline of $1.9 billion, or 12%, primarily as the result of the impact of the loss of exclusivity of Lipitor in all major markets, including the U.S. on November 30, 2011 and the majority of developed European markets in March and May 2012, and the unfavorable impact of foreign exchange of $699 million, or 4%.

Revenues in the first nine months of 2012 were $43.9 billion, a decrease of 11% compared to the same period in 2011, due to an operational decline of $4.0 billion, or 9%, primarily as the result of the aforementioned loss of exclusivity of Lipitor, and the unfavorable impact of foreign exchange of $1.2 billion, or 2%.


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The following table provides the significant impacts on revenues for the three and nine months ended September 30, 2012 compared to the same periods ended October 2, 2011:

                                           September 30, 2012
                                                          vs.
                                              October 2, 2011
                                                    Worldwide    % Change   % Change        % Change
(MILLIONS OF DOLLARS)                                  Change   Worldwide       U.S.   International
Three Months Ended
Lipitor(a)                               $             (1,853 )       (71 )      (87 )           (51 )
Geodon/Zeldox(a)                                         (206 )       (78 )      (88 )           (33 )
Prevnar 13/Prevenar 13                                   (138 )       (14 )       (3 )           (22 )
Xalatan/Xalacom(a)                                        (96 )       (35 )        -             (36 )
Caduet(a)                                                 (82 )       (55 )      (84 )           (21 )
Effexor                                                   (58 )       (35 )      (29 )           (38 )
Zosyn/Tazocin                                             (40 )       (27 )      (48 )            (5 )
Aromasin(a)                                               (34 )       (40 )      (63 )           (38 )
Prevnar/Prevenar (7-valent)                               (17 )       (17 )        -             (17 )
Celebrex                                                   33           5          8               -
Lyrica                                                     75           8         13               4
Alliance Revenue(a)                                       (40 )        (4 )       20             (45 )
All other biopharmaceutical products(b)                    32           2         18              (5 )
Animal Health products                                    (24 )        (2 )        4              (7 )
Consumer Healthcare products                               13           2         (5 )             9

Nine Months Ended
Lipitor(a)                               $             (4,214 )       (56 )      (79 )           (26 )
Geodon/Zeldox(a)                                         (431 )       (57 )      (65 )           (17 )
Xalatan/Xalacom(a)                                       (343 )       (36 )      (81 )           (27 )
Caduet(a)                                                (244 )       (56 )      (89 )           (18 )
Effexor                                                  (195 )       (36 )      (51 )           (27 )
Aromasin(a)                                              (132 )       (45 )      (81 )           (37 )
Zosyn/Tazocin                                            (112 )       (23 )      (34 )            (9 )
Prevnar/Prevenar (7-valent)                              (103 )       (25 )        -             (25 )
Prevnar 13/Prevenar 13                                    (98 )        (3 )       (7 )             1
Celebrex                                                  113           6          7               4
Lyrica                                                    331          12         10              14
Alliance revenue(a)                                      (101 )        (4 )       17             (36 )
All other biopharmaceutical products(b)                   360           7         25              (1 )
Animal Health products                                     50           2          7              (2 )
Consumer Healthcare products                               58           3         (3 )             8

(a) Lipitor and Caduet lost exclusivity in the U.S. in November 2011 and various other major markets in 2011 and 2012. Xalatan lost exclusivity in the U.S. in March 2011 and in the majority of European markets in January 2012. Aromasin lost exclusivity in the U.S. in April 2011, in the majority of European markets in July 2011 and in Japan in November 2011. Geodon lost exclusivity in the U. S. in March 2012. We lost exclusivity for Aricept 5mg and 10mg tablets, which are included in Alliance revenues, in the U.S. in November 2010 and in the majority of European markets in February and April 2012.

(b) Includes the "All other" category included in the Revenues-Major Biopharmaceutical Products table presented in this MD&A, which includes sales of generic atorvastatin.


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Income from continuing operations for the third quarter of 2012 was $3.1 billion, compared to $2.3 billion in the third quarter of 2011, and $8.0 billion in the first nine months of 2012, compared to $7.0 billion in the first nine months of 2011, primarily reflecting, among other items:
• the favorable impacts of a settlement with the U.S. Internal Revenue Service and the resolution of certain foreign tax audits, in the third quarter of 2012, all of which related to multiple tax years;

• purchase accounting charges that were approximately $439 million lower in the third quarter and $1.1 billion lower in first nine months of 2012 than in the same periods in 2011;

• acquisition-related costs that were approximately $50 million lower in the third quarter and $647 million lower in first nine months of 2012 than in the same periods in 2011;

• asset impairment charges that were approximately $96 million lower in the third quarter of 2012 and $64 million lower in the first nine months of 2012 than in the same periods in 2011 (see further discussion in the "Costs and Expenses--Other Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other Deductions--net); and

• charges related to our non-acquisition related cost-reduction and productivity initiatives that were approximately $807 million lower in the third quarter of 2012 and $747 million lower in the first nine months of 2012 than in the same periods in 2011;

partially offset by:
• the loss of exclusivity of Lipitor, as well as certain other products, resulting in lower revenues and associated expenses (see also the "Industry-Specific Challenges" section of this MD&A); and

• charges for certain legal matters that were approximately $594 million higher in the third quarter and $1.4 billion higher in the first nine months of 2012 than in the same periods in 2011 (see further discussion in the "Costs and Expenses--Other Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other Deductions--net).

Also, see "Discontinued Operations" section of this MD&A.

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 our 2011 Annual Report on Form 10-K, this legislation has resulted in both current and longer-term impacts on us. Our 2012 financial guidance (see the "Our Financial Guidance for 2012" section of this MD&A for additional information) reflects the expected full-year impact of the U.S. Healthcare Legislation.

In each of 2012 and 2011, we recorded the following amounts as a result of the U.S. Healthcare Legislation:
• approximately $179 million in the third quarter of 2012 and $215 million in the third quarter of 2011, and approximately $413 million in the first nine months of 2012 and $539 million in the first nine months of 2011 recorded as a reduction to Revenues, related to the extended and expanded rebate provisions and the Medicare "coverage gap" discount provision; and

• approximately $75 million in the third quarter of 2012 and $45 million in the third quarter of 2011, and approximately $256 million in the first nine months of 2012 and $183 million in the first nine months of 2011 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.

In June 2012, the U.S. Supreme Court upheld the constitutionality of the requirement in the U.S. Healthcare Legislation for Americans to have insurance (called the individual mandate). Separately, it is possible that Congress may withhold all or a portion of the funding necessary to implement the U.S. Healthcare Legislation or may attempt to amend or repeal it. Given the extent of the possible changes and the uncertainties concerning the interpretation, implementation and timing of any such


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changes, the U.S. Healthcare Legislation and any amendments thereto or repeal of all or portions thereof could impact our business and results of operations in the near term and over the next several years.

Industry-Specific Challenges

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. As explained more fully in our 2011 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 and the expiration of co-promotion and licensing rights, pipeline productivity and the regulatory environment, pricing and access pressures and competition among branded products.

As more fully explained in our 2011 Annual Report on Form 10-K, the loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights can have a significant adverse effect on our revenues. Our 2012 financial guidance reflects the anticipated impact in 2012 of the loss of such rights as described below (see the "Our Financial Guidance for 2012" section of this MD&A for additional information).

Our 2012 results have been and/or will be adversely impacted by the following:
• Lipitor in the U.S.--Lipitor lost exclusivity in the U.S. in November 2011. The entry of multi-source generic competition in the U.S. began in May 2012, with attendant increased competitive pressures. Beginning in 2012, sales of Lipitor in the U.S. are reported in our Established Products business unit.

Lipitor in international markets--Lipitor lost exclusivity in Japan in June 2011 (with generic competition occurring in November 2011), Australia in April 2012 and the majority of developed European markets in March 2012 and May 2012.
• Other recent loss of exclusivity impacts--In the U.S., we lost exclusivity for Vfend tablets in February 2011, for Xalatan in March 2011 and for Geodon in March 2012. The basic U.S. patent (including the six-month pediatric exclusivity period) for Protonix expired in January 2011. The basic patent for Vfend tablets in Brazil expired in January 2011. We lost exclusivity for Aromasin in the U.S. in April 2011, in the majority of European markets in July 2011 and in Japan in November 2011. We lost exclusivity for Xalatan and Xalacom in the majority of European markets in January 2012. We lost exclusivity for Aricept in the majority of European markets in February 2012 and April 2012. Caduet lost exclusivity in the U.S. in November 2011 and in the majority of European markets in March and May 2012. We lost exclusivity in the U.S. in September 2012 for Revatio tablet and for Detrol IR.

• Aricept--Our rights to Aricept in Japan will return to Eisai Co., Ltd. in December 2012.

• Spiriva--Our collaboration with Boehringer Ingelheim (BI) for Spiriva will expire on a country-by-country basis between 2012 and 2016, including the expiration in certain European Union (EU) markets in 2012.

For additional information, including with regard to the expiration of the patents and of co-promotion and licensing rights for various products in the U.S., EU and Japan in 2012 and subsequent years, see the "Patents and Intellectual Property Rights" section of our 2011 Annual Report on Form 10-K and the "The Loss or Expiration of Intellectual Property Rights" section of our 2011 Financial Report, which is filed as Exhibit 13 to our 2011 Annual Report on Form 10-K.

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. The Office of Management and Budget (OMB) is responsible for identifying the remaining $1.5 trillion of deficit reductions, which will be divided evenly between defense and non-defense spending. Under this OMB review process, Social Security, Medicaid, Veteran Benefits and certain other spending categories are excluded from consideration, but reductions in payments to Medicare providers may be made, although any such reductions are . . .

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