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PFE > SEC Filings for PFE > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for PFIZER INC


10-May-2013

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 48 provides information about the following: our business; our performance during the first quarter of 2013 and 2012; our operating environment; our strategy; our business development initiatives, such as acquisitions, dispositions, licensing and collaborations; and our financial guidance for 2013.

• Analysis of the Condensed Consolidated Statements of Income. This section begins on page 56 and consists of the following sub-sections:

? Revenues. This sub-section, beginning on page 60, provides an analysis of our revenues and products for the first quarter of 2013 and 2012, as well as an overview of research and development (R&D) expenses and important biopharmaceutical product developments.

? Costs and Expenses. This sub-section, beginning on page 68, provides a discussion about our costs and expenses.

? Provision for Taxes on Income. This sub-section, on page 72, provides a discussion of items impacting our tax provisions.

? Discontinued Operations. This sub-section, beginning on page 73, provides an analysis of the financial statement impact of our discontinued operations.

? Adjusted Income. This sub-section, beginning on page 73, 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 78, provides a discussion of changes in certain components of other comprehensive income.

• Analysis of the Condensed Consolidated Balance Sheets. This section, on page 78, provides a discussion of changes in certain balance sheet accounts.

• Analysis of the Condensed Consolidated Statements of Cash Flows. This section, beginning on page 79, provides an analysis of our cash flows for the first quarter of 2013 and 2012.

• Analysis of Financial Condition, Liquidity and Capital Resources. This section, beginning on page 80, provides an analysis of selected measures of our liquidity and of our capital resources as of March 31, 2013 and December 31, 2012, as well as a discussion of our outstanding debt and other commitments that existed as of March 31, 2013 and December 31, 2012. 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 83, discusses accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.

• Forward-Looking Information and Factors That May Affect Future Results. This section, beginning on page 84, provides a description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements presented in this MD&A relating to, among other things, our anticipated financial and operating performance, business plans and prospects, in-line products and product candidates, strategic reviews, capital allocation, business-development plans, and plans relating to share repurchases and dividends. 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
                                                          March 31,      April 1,          %
(MILLIONS OF DOLLARS, EXCEPT PER COMMON SHARE DATA)            2013          2012     Change
Revenues                                                $    13,500     $  14,885         (9 )

Cost of sales                                                 2,652         2,745         (3 )
% of revenues                                                  19.6 %        18.4 %

Selling, informational and administrative expenses            3,585         3,968        (10 )
% of revenues                                                  26.6 %        26.7 %

Research and development expenses                             1,800         2,062        (13 )
% of revenues                                                  13.3 %        13.9 %

Amortization of intangible assets                             1,234         1,420        (13 )
% of revenues                                                   9.1 %         9.5 %

Restructuring charges and certain acquisition-related
costs                                                           138           597        (77 )
% of revenues                                                   1.0 %         4.0 %

Other deductions--net                                           170         1,658        (90 )
Income from continuing operations before provision
for taxes on income                                           3,921         2,435         61
% of revenues                                                  29.0 %        16.4 %

Provision for taxes on income                                 1,160           711         63
Effective tax rate                                             29.6 %        29.2 %

Income from continuing operations                             2,761         1,724         60
% of revenues                                                  20.5 %        11.6 %

Discontinued operations--net of tax                               4            79        (95 )

Net income before allocation to noncontrolling
interests                                                     2,765         1,803         53
% of revenues                                                  20.5 %        12.1 %

Less: Net income attributable to
noncontrolling interests                                         15             9         67
Net income attributable to Pfizer Inc.                  $     2,750     $   1,794         53
% of revenues                                                  20.4 %        12.1 %

Earnings per common share--basic:
Income from continuing operations attributable to
Pfizer Inc. common shareholders                         $      0.38     $    0.23         65
Discontinued operations--net of tax                               -          0.01       (100 )
Net income attributable to Pfizer Inc. common
shareholders                                            $      0.38     $    0.24         58

Earnings per common share--diluted:
Income from continuing operations attributable to
Pfizer Inc. common shareholders                         $      0.38     $    0.23         65
Discontinued operations--net of tax                               -          0.01       (100 )
Net income attributable to Pfizer Inc. common
shareholders                                            $      0.38     $    0.24         58

Cash dividends paid per common share                    $      0.24     $    0.22          9

Certain amounts and percentages may reflect rounding adjustments.


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OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK

Our Business

We apply science and our global resources to bring therapies to people that extend and significantly improve their lives. We strive to set the standard for quality, safety and value in the discovery, development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world's best-known consumer healthcare 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 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 (Alliance revenues).

On February 6, 2013, an initial public offering (IPO) of the Class A common stock of our subsidiary, Zoetis Inc. (Zoetis), was completed, pursuant to which we sold 99.015 million shares of Class A common stock of Zoetis in exchange for the retirement of approximately $2.5 billion of Pfizer commercial paper issued in 2013. The shares of Class A common stock sold in the IPO represented approximately 19.8% of the total outstanding Zoetis shares. On February 1, 2013, Zoetis shares began trading on the New York Stock Exchange under the symbol "ZTS." Prior to and in connection with the IPO, Zoetis completed a $3.65 billion senior notes offering, and we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business. For additional information, see Notes to Condensed Consolidated Financial Statements--Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures, and see the "Our Business Development Initiatives" and "Analysis of Financial Condition, Liquidity and Capital Resources" sections of this MD&A.

On November 30, 2012, we completed the sale of our Nutrition business to Nestlι for $11.85 billion in cash. The operating results of this business are reported as Discontinued operations--net of tax in our condensed consolidated statements of income for the three months ended April 1, 2012. For additional information, see Notes to Condensed Consolidated Financial Statements--Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment:
Divestitures and see the "Our Business Development Initiatives" and "Discontinued Operations" sections of this MD&A.

Our First Quarter 2013 Performance

Revenues in the first quarter of 2013 were $13.5 billion, a decrease of 9% compared to the same period in 2012, which reflects an operational decline of $1.3 billion, or 8%, and the unfavorable impact of foreign exchange of $118 million, or 1%. The operational decrease was primarily the result of the loss of exclusivity of Lipitor during the second quarter of 2012 in developed Europe and Geodon in March 2012 in the U.S., and the timing of government purchases of Prevnar 13/Prevenar 13 in various markets, slightly offset by growth in the Emerging Markets business unit. Lipitor and other product losses of exclusivity negatively impacted revenues by approximately $1.3 billion, or 9%, in the first quarter of 2013 compared to the same period in 2012.


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The following table provides the significant impacts on revenues for the first quarter of 2013, compared to the same period in 2012:

                                                                Three Months Ended
                                        March 31, 2013
                                                    v.
                                         April 1, 2012
                                             Worldwide           % Change         % Change         % Change
(MILLIONS OF DOLLARS)                           Change          Worldwide             U.S.    International

Lipitor(a)                            $           (769 )              (55 )            (55 )            (55 )
Prevnar 13/Prevenar 13                             (99 )              (10 )            (19 )              2
Xalatan/Xalacom(a)                                 (80 )              (35 )            (27 )            (36 )
Revatio(a)                                         (64 )              (47 )            (84 )             14
Prevnar/Prevenar (7-valent)                        (57 )              (41 )              -              (41 )
Detrol/Detrol LA(a)                                (44 )              (23 )            (16 )            (33 )
Zosyn/Tazocin                                      (41 )              (32 )            (44 )            (20 )
Viagra                                             (35 )               (7 )             (9 )             (5 )
Norvasc                                            (33 )              (10 )            (29 )             (9 )
Aricept(b)                                         (32 )              (34 )              -              (34 )
Xalkori                                             36                212              100                *
Inlyta                                              56                  *                *                *
Lyrica                                             111                 12               11               12
Alliance revenues(a)                               (89 )              (11 )              9              (56 )
All other biopharmaceutical
products(a), (c)                                  (348 )              (16 )            (35 )              1
Animal Health (Zoetis) products                     50                  5                8                3
Consumer Healthcare products                        84                 12               16                8

(a) Lipitor lost exclusivity in the U.S. in November 2011, in the majority of developed European markets in March and May 2012 and in Australia in April 2012. Xalatan/Xalacom lost exclusivity in the majority of European markets in January 2012 and in Australia in July 2012. Revatio tablet lost exclusivity in the U.S. in September 2012. Detrol immediate release (Detrol IR) lost exclusivity in the U.S. in June 2012. Detrol IR and Detrol LA lost exclusivity in most European markets in September 2012. Adversely impacting Alliance revenues were the loss of exclusivity for Aricept 5mg and 10mg tablets in the majority of European markets in February 2012 and April 2012 and the return of our rights to Aricept in Japan to Eisai Co., Ltd. in December 2012; in addition, lower revenues for Spiriva in certain European countries, Canada and Australia reflect final-year terms in 2012 of our collaboration agreements in those markets. Geodon, which is included in All other biopharmaceutical products, lost exclusivity in the U.S. in March 2012.

(b) Represents direct sales under license agreement with Eisai Co., Ltd.

(c) Includes the "All other" category included in the Revenues-Major Biopharmaceutical Products table presented in this MD&A, which includes sales of generic atorvastatin, which declined due to multi-source generic competition in the U.S. beginning in late May 2012.

* Calculation not meaningful.

Income from continuing operations for the first quarter of 2013 was $2.8 billion, compared to $1.7 billion in the first quarter of 2012, primarily reflecting, among other items:
• charges for legal matters that changed favorably by approximately $897 billion (pre-tax) in the first quarter of 2013 compared to the same period in 2012 (see also the "Costs and Expenses--Other Deductions--Net" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 4. Other Deductions--Net);

• additional benefits generated from our global cost-reduction/productivity initiatives;

• charges related to our non-acquisition related cost-reduction and productivity initiatives that were approximately $600 million (pre-tax) lower in the first quarter of 2013 than in the same period in 2012;

• a $490 million (pre-tax) gain associated with the transfer of certain product rights to our equity-method investment in China, Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer) (see also the "Our Business Development Initiatives" section of this MD&A and Notes to Condensed Consolidated Financial Statements--Note 2B. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investment: Divestitures);

• purchase accounting charges that were approximately $214 million (pre-tax) lower in the first quarter of 2013 than in the same period in 2012; and


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• acquisition-related costs that were approximately $88 million (pre-tax) lower in the first quarter of 2013 than in the same period in 2012,

partially offset by:
• lower revenues, primarily due to the loss of exclusivity of Lipitor, as well as certain other products (see also "Industry-Specific Challenges" section of this MD&A).

See also the "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, and also known as the Affordable Care Act), was enacted in the U.S. As explained more fully in our 2012 Annual Report on Form 10-K/A, this legislation has resulted in both current and longer-term impacts on us.

We recorded the following amounts as a result of the U.S. Healthcare Legislation:
• $128 million in the first quarter of 2013 and $123 million in the first quarter of 2012 recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare "coverage gap" discount provision; and

• $55 million in the first quarter of 2013 and $103 million in the first quarter of 2012 recorded in Selling, informational and administrative expenses, related to the 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.

Industry-Specific Challenges

The majority of our revenues come from the manufacture and sale of biopharmaceutical products. As explained more fully in our 2012 Annual Report on Form 10-K/A, 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 2012 Annual Report on Form 10-K/A, 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 2013 financial guidance reflects the anticipated impact in 2013 of the loss of such rights as described below (see the "Our Financial Guidance for 2013" section of this MD&A for additional information).

Our 2013 results have been and/or will be adversely impacted by the following:
• Lipitor in the U.S.--We lost exclusivity for Lipitor 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.

Lipitor in international markets--Lipitor lost exclusivity in Australia in April 2012 and most of developed Europe in March 2012 and May 2012, and now faces multi-source generic competition in those markets. Lipitor has lost exclusivity in all major markets.
• Other recent loss of exclusivity impacts--In the U.S., we lost exclusivity for Geodon in March 2012 and Revatio tablet in September 2012. We lost exclusivity for Xalatan and Xalacom in the majority of European markets in January 2012 and Australia in July 2012. We lost exclusivity for Aricept in the majority of European markets in February 2012 and April 2012. Caduet lost exclusivity in the majority of European markets in March and May 2012. We lost exclusivity in the U.S. for Detrol IR in June 2012. Detrol IR and Detrol LA lost exclusivity in most European markets in September 2012.

• Aricept-Our rights to Aricept in Japan returned to Eisai Co., Ltd. in December 2012. We expect to lose exclusivity for the Aricept 23mg tablet in the U.S. in July 2013.

• Spiriva-Our collaboration with Boehringer Ingelheim (BI) for Spiriva expires on a country-by-country basis between 2012 and 2016, including the expiration in certain EU markets and Canada and Australia in 2012, which is adversely impacting our 2013 results. We expect to experience a graduated decline in revenues from Spiriva through 2016.


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• Enbrel-Our U.S. and Canada collaboration agreement with Amgen Inc. for Enbrel will expire in October 2013. While we are entitled to royalties for 36 months thereafter, we expect that those royalties will be significantly less than our current share of Enbrel profits from U.S. and Canada sales. Outside the U.S. and Canada, our exclusive rights to Enbrel continue in perpetuity.

• Rebif-Our collaboration agreement with EMD Serono Inc. (Serono) to co-promote Rebif in the U.S. will expire either at the end of 2013 or the end of 2015, depending on the outcome of pending litigation between Pfizer and Serono concerning the interpretation of the agreement. We believe that we are entitled to a 24-month extension of the agreement to the end of 2015. Serono believes that we are not entitled to the extension and that the agreement will expire at the end of 2013. In October 2011, the Philadelphia Court of Common Pleas sustained our preliminary objections and dismissed Serono's complaint. In March 2013, the Superior Court of Pennsylvania affirmed that decision. In April 2013, Serono filed a petition with the Superior Court of Pennsylvania seeking reconsideration of the decision. For additional information, see Notes to Condensed Consolidated Financial Statements--Note 12. Commitments and Contingencies.

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 2013 and subsequent years, see the "Patents and Intellectual Property Rights" section of our 2012 Annual Report on Form 10-K/A and the "The Loss or Expiration of Intellectual Property Rights" section of our 2012 Financial Report, which was filed as Exhibit 13 to our 2012 Annual Report on Form 10-K/A.

We will continue to aggressively defend our patent rights 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 Quarterly Report on 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 Budget Control Act) was enacted in the U.S. The Budget Control 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 prohibited by law from exceeding 2% of the originally budgeted amount. Additionally, certain payments to Medicare Part D plans, such as low-income subsidy payments, are exempt from reduction. While we do not know the specific nature of the spending reductions under the Budget Control Act that will affect Medicare, we do not expect that those reductions will have a material adverse impact on our results of operations. However, any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health programs that may be implemented, and/or any significant additional taxes or fees that may be imposed on us, as part of any broader deficit-reduction effort or legislative replacement for the Budget Control Act, could have an adverse impact on our results of operations.

Enforcement of the U.S. federal debt ceiling has been suspended through May 18, 2013. If the U.S. federal government fails to suspend enforcement of the debt ceiling beyond May 18, 2013 or to increase the debt ceiling and, as a result, is unable to satisfy its financial obligations, including under Medicare, Medicaid and other publicly funded or subsidized health programs, our results of operations could be adversely impacted.

In March 2013, we received a warning letter from the FDA with respect to our manufacturing facility in Catania, Italy. The letter raises certain issues related to the inspection of that facility that was conducted by the FDA in 2012 in connection with our application to transfer to Catania the manufacture of Tygacil and the packaging of the 40-gram dosage of Zosyn, both for the U.S. market. We currently manufacture penicillin and non-penicillin antibiotics, as well as methotrexate and diluent for Torisel at Catania. We continue to work with the FDA to address the issues raised in the warning letter.

The Global Economic Environment

In addition to the industry-specific factors discussed above, we, like other businesses, continue to face the effects of the challenging economic environment, which have impacted our biopharmaceutical operations in the U.S. and Europe, including the countries that use the euro, and in a number of emerging markets. We believe that patients, experiencing the effects of the challenging economic environment, including high unemployment levels, and increases in co-pays, sometimes switch to generic products, delay treatments, skip doses or use less effective treatments to reduce their costs. Challenging economic


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conditions in the U.S. also have increased the number of patients in the Medicaid program, under which sales of pharmaceuticals are subject to substantial rebates and, in many states, to formulary restrictions limiting access to brand-name drugs, including ours. In addition, we continue to experience pricing pressure in various markets around the world, including in developed European markets, Japan and in a number of emerging markets, with government-mandated reductions in prices for certain biopharmaceutical products and government-imposed access restrictions in certain countries.

Significant portions of our revenues and earnings are exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk also is managed through the use of derivative financial instruments and foreign currency debt. As we operate in multiple foreign currencies, including the euro, the . . .

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