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Pfizer Inc.
2005 Financial Report

Table of contents

  • Page 1
    Pfizer Inc. 2005 Financial Report

  • Page 2
    ... Consolidated Operating Results Our Business We are a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines for humans and animals, as well as many of the world's best known consumer healthcare products. Our longstanding value...

  • Page 3
    ... procurement, operating expenses and facilities, among other sources. We plan to use the cost savings we generate, in part, to fund key investments, including new product launches and the development of the many promising new medicines in our pipeline. The Company expects that the aggregate cost of...

  • Page 4
    ... growing problem of counterfeit drugs; Addressing the wide array of patient populations through our innovative access and affordability programs; Aligning our research, development and marketing functions in search of new medical opportunities as part of a fully integrated portfolio-planning process...

  • Page 5
    ... integrated portfolio-planning approach that aligns our research, development, and marketing functions in the search for new medical opportunities. We have over 200 novel concepts in development across multiple therapeutic areas, and we are leveraging our status as the industry's partner of choice...

  • Page 6
    ... costs(b) Resolution of certain tax positions Forecasted reported Net income/diluted EPS (a) ~$15.0 (2.3) (1.4-1.7) 0.4 ~$11.4 - $11.7 ~$2.00 (0.31) (0.19-0.23) 0.06 ~$1.52 - $1.56 Acquisitions Our consolidated financial statements and results of operations reï¬,ect an acquired business after...

  • Page 7
    ...Alliance revenue is primarily based upon a percentage of our co-promotion partners' net sales. Generally, expenses for selling and marketing these products are included in Selling, informational and administrative expenses. Long-lived Asset Impairment Analysis We review all of our long-lived assets...

  • Page 8
    ... option values rely on estimates of factors we input into the model. The key factors involve an estimate of future uncertain 2005 Financial Report 7 The value of intangible assets is determined primarily using the "income method," which starts with a forecast of all the expected future net cash...

  • Page 9
    ... to the Consolidated Financial Statements-see Note 1P, Significant Accounting Policies: Share-Based Payments . Additionally, see our discussion in the "Recently Issued Accounting Standards" section of this Financial Review. Beginning in 2006, we will report the value of stock options in our income...

  • Page 10
    ... "Merger-Related In-Process Research and Development Charges" in the "Costs and Expenses" section of this Financial Review. In connection with the acquisition, we took actions to integrate and restructure the Pharmacia operations in order to increase our profitability through cost savings and...

  • Page 11
    ...) in Gains on sales of discontinued operations-net of tax in the consolidated statement of income for 2005. In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses which we had included in our Human Health segment and had become a part of Pfizer in April...

  • Page 12
    Financial Review Pfizer Inc and Subsidiary Companies Analysis of the Consolidated Statement of Income (MILLIONS OF DOLLARS) YEAR ENDED DEC. 31, % CHANGE 2005 2004 2003(a) 05/04 04/03 Revenues $51,298 $52,516 $44,736 Cost of sales 8,525 7,541 9,589 % of revenues 16.6% 14.4% 21.4% SI&A expenses ...

  • Page 13
    ... includes self-medications for oral care, upper-respiratory health, tobacco dependence, gastrointestinal health, skin care, eye care and hair growth. 2005 2004 2003 86.3% 87.8% 88.1% • HUMAN HEALTH CONSUMER HEALTHCARE ANIMAL HEALTH CORPORATE/OTHER Change in Geographic Revenues YEAR ENDED...

  • Page 14
    Financial Review Pfizer Inc and Subsidiary Companies Revenues - Major Human Health Products (MILLIONS OF DOLLARS) PRODUCT PRIMARY INDICATIONS YEAR ENDED DEC. 31, _____ 2005 2004 2003 % CHANGE _____ 05/04 04/03 Cardiovascular and metabolic diseases: Lipitor Norvasc Cardura Accupril/Accuretic ...

  • Page 15
    Financial Review Pfizer Inc and Subsidiary Companies Human Health - Selected Product Descriptions • Lipitor, for the treatment of elevated 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 ...

  • Page 16
    ... disease or at high risk of heart disease. In June 2005, the Committee for Human Medicinal Products (CHMP) concluded its COX-2 referral process and recommended that both Celebrex and Dynastat (parecoxib) remain available to patients. The European Medicines Evaluation Agency (EMEA) has required new...

  • Page 17
    Financial Review Pfizer Inc and Subsidiary Companies (income)/deductions-net; $73 million in write-offs of inventory and exit costs, included in Cost of sales; $8 million related to the costs of administering the suspension of sales, included in Selling, informational and administrative expenses; ...

  • Page 18
    ...for sale in certain countries. Under the co-promotion agreements, these products are marketed and promoted with our alliance partners. We provide funding through cash, staff and other resources to sell, market, promote and further develop these products. The increase in Consumer Healthcare revenues...

  • Page 19
    ... PRODUCT INDICATION DATE SUBMITTED Champix Product Developments We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. We have a broad and deep pipeline of medicines...

  • Page 20
    Financial Review Pfizer Inc and Subsidiary Companies Other Regulatory Approvals and Filings: PRODUCT DESCRIPTION OF EVENT DATE APPROVED DATE SUBMITTED Exubera Macugen Approved in the E.U. as an inhaled form of insulin for use in adults with type 1 and type 2 diabetes Approved in the E.U. for AMD...

  • Page 21
    ... Syk tyrosine kinase inhibitors for the use in diagnosis, treatment and prevention of certain allergy and respiratory conditions. Under the terms of the agreement we expensed a payment of $10 million made in the first quarter of 2005, which was included in Research and development expenses, and...

  • Page 22
    ...in write-offs of inventory and exit costs related to suspension of sales and marketing of Bextra. • • Cost of sales in 2004 (which includes legacy Pharmacia's product portfolio for the entire period) compared to 2003 decreased as a result of: Merger-Related In-Process Research and Development...

  • Page 23
    ... price of Pharmacia and have been recorded as an increase to goodwill (see Notes to Consolidated Financial Statements-Note 2A, Acquisitions: Pharmacia Corporation). At December 31, 2005, liabilities for restructuring costs incurred but not paid totaled $132 million and are included in Other current...

  • Page 24
    .... The Company reports Adjusted income in order to portray the results of our major operations-the discovery, development, manufacture, marketing and sale of prescription medicines for humans and animals, as well as our over-the-counter products- prior to considering certain income statement elements...

  • Page 25
    ... attributable to acquired intangible assets provides management and investors an alternative view of our business results by trying to provide a degree of parity to internally developed intangible assets for which research and development costs have been previously expensed. However, a completely...

  • Page 26
    Financial Review Pfizer Inc and Subsidiary Companies highly regulated nature of the pharmaceutical business, the closure of excess facilities can take several years as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDA. In other situations, we...

  • Page 27
    ... Goodwill and Other Intangible Assets: Other Intangible Assets.) Included in Cost of Sales ($124 million), Selling, informational and administrative expenses ($156 million), and Research and development expenses ($50 million) for 2005. (See Notes to Consolidated Financial Statements-Note 4, Adapting...

  • Page 28
    ...-sale debt securities. Our long-term investments include debt securities that totaled $906 million as of December 31, 2005, which have maturities ranging substantially from 1 to 10 years. Wherever possible, cash management is centralized and intercompany financing is used to provide working capital...

  • Page 29
    ... HUMAN CONSUMER HEALTH HEALTHCARE ANIMAL HEALTH OTHER TOTAL Goodwill $20,919 Finite-lived intangible assets, net 22,883 Indefinitelived intangible assets 2,834 $2,789 $ 56 $ 10 $23,774 Cash and cash equivalents and short-term investments and loans Working capital(a) Ratio of current assets...

  • Page 30
    ... from operations, net of noncash items, which reï¬,ects the increased revenues attributable to Pharmacia products for the full-year 2004 compared to recording sales of Pharmacia products in 2003 from the April 16, 2003 acquisition date; lower voluntary pension plan contributions; and timing of tax...

  • Page 31
    ... the Company to pay current and future dividends. $26.79 34.14 $1,696 4,963 $6,659 Contractual Obligations Payments due under contractual obligations at December 31, 2005 mature as follows: YEARS _____ OVER 1 OVER 3 TOTAL WITHIN 1 TO 3 TO 5 AFTER 5 (MILLIONS OF DOLLARS) Long-term debt(a) $6,347...

  • Page 32
    ... sale or spin-off of our Consumer Healthcare business and our ability to realize the projected benefits of our Adapting to Scale multi-year productivity initiative. Forward-Looking Information and Factors That May Affect Future Results The Securities and Exchange Commission encourages companies...

  • Page 33
    ... 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. Foreign exchange risk is also...

  • Page 34
    ... because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria...

  • Page 35
    Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements To the Board of Directors and Shareholders of Pfizer Inc: We have audited the accompanying consolidated balance sheets of Pfizer Inc and Subsidiary Companies as of December 31, 2005 and 2004, and the ...

  • Page 36
    ... and Subsidiary Companies (MILLIONS, EXCEPT PER COMMON SHARE DATA) YEAR ENDED DECEMBER 31, _____ 2005 2004 2003 Revenues Costs and expenses: Cost of sales(a) Selling, informational and administrative expenses(a) Research and development expenses(a) Amortization of intangible assets Merger-related...

  • Page 37
    ... for doubtful accounts: 2005-$183; 2004-$205 Short-term loans Inventories Prepaid expenses and taxes Assets held for sale Total current assets Long-term investments and loans Property, plant and equipment, less accumulated depreciation Goodwill Identifiable intangible assets, less accumulated...

  • Page 38
    Consolidated Statements of Shareholders' Equity Pfizer Inc and Subsidiary Companies PREFERRED STOCK COMMON STOCK (MILLIONS, EXCEPT PREFERRED SHARES) SHARES STATED VALUE ADDITIONAL PAID-IN SHARES PAR VALUE CAPITAL EMPLOYEE BENEFIT TRUST TREASURY STOCK SHARES FAIR VALUE SHARES COST RETAINED ...

  • Page 39
    ...long-term debt Principal payments on long-term debt Purchases of common stock Cash dividends paid Stock option transactions and other Net cash used in financing activities Effect of exchange-rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents Cash and cash...

  • Page 40
    ... tangible long-lived assets. As a result of adopting SFAS 143, we recorded a non-cash pre-tax charge of $47 million ($30 million, net of tax) for the change in accounting for costs associated with the eventual retirement of certain manufacturing and research facilities. This charge was reported in...

  • Page 41
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies net. We translate functional currency assets and liabilities to their U.S. dollar equivalents at rates in effect at the balance sheet date and record these translation adjustments in Shareholders' equity-Accumulated ...

  • Page 42
    ... to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies intangible assets that are associated with a single function and depreciation of property, plant and equipment are included in Cost of sales, Selling, informational and administrative expenses and Research and development...

  • Page 43
    ... at the end of a vesting period, are recorded at fair value at the date of grant and are generally amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expenses, and Research and development expenses, as appropriate. 42 2005 Financial Report

  • Page 44
    ..., plant and equipment to fair value Record in-process research and development charge Record identifiable intangible assets(a) Increase long-term debt to fair value Increase benefit plan liabilities to fair value Decrease other net assets to fair value Restructuring costs(b) Tax adjustments...

  • Page 45
    ... on sales of discontinued operations-net of tax in the consolidated statement of income for 2005. In the first quarter of 2005, we sold the second of three European generic pharmaceutical businesses which we had included in our Human Health segment and had become a part • • 44 2005 Financial...

  • Page 46
    ...and product lines included intangible assets; goodwill; property, plant and equipment; inventory; accounts receivable; accrued liabilities and deferred taxes. The following amounts have been segregated from continuing operations and reported as discontinued operations: YEAR ENDED DEC. 31, _____ 2005...

  • Page 47
    ... statement and balance sheet) incurred during 2002-2005 to achieve these synergies were $5.4 billion, on a pre-tax basis. (b) Includes insignificant adjustments to original amounts established. Included in Other current liabilities. The majority of the restructuring costs related to employee...

  • Page 48
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies Through December 31, 2005, Employee termination costs represent the approved reduction of the legacy Pfizer and legacy Pharmacia (from April 16, 2004) work force by 4,476 employees, mainly in corporate, manufacturing, ...

  • Page 49
    ... treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) or "deferred tax liabilities...

  • Page 50
    ... returns for the years 1999 through 2001 and the Warner-Lambert Company tax returns for the years 1999 through the date of the merger with Pfizer (June19, 2000). In connection with those audits, 8. Other Comprehensive Income Changes, net of tax, in accumulated other comprehensive income/(expense...

  • Page 51
    ... the consolidated balance sheet as of December 31: (MILLIONS OF DOLLARS) 2005 2004 Cash and cash equivalents Short-term investments Long-term investments and loans Total investments $ 1,203 19,979 1,639 $22,821 $ 881 18,085 3,135 $22,101 On an ongoing basis, we evaluate our investments in debt...

  • Page 52
    ...to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected same currency revenues in relation to same currency costs and same currency assets in relation to same currency liabilities. Depending on market conditions...

  • Page 53
    ... 31, 2005 and, euros, U.K. pounds, Swedish krona, Japanese yen and Australian dollars for the year ended December 31, 2004. All derivative contracts used to manage foreign currency risk are measured at fair value and reported as assets or liabilities on the balance sheet. Changes in fair value are...

  • Page 54
    ...: Long-Term Debt for details of maturity dates). Serve to reduce variability by effectively fixing the maximum rates on short-term debt at 0.8%. All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the balance sheet. Changes...

  • Page 55
    ... 12. Goodwill and Other Intangible Assets A. Goodwill The changes in the carrying amount of goodwill by segment for the years ended December 31, 2005 and 2004 follow: (MILLIONS OF DOLLARS) 32,567 (9,207) 34,856 (6,274) HUMAN CONSUMER ANIMAL HEALTH HEALTHCARE HEALTH OTHER TOTAL 3,864 296 227...

  • Page 56
    ... related to the developed technology rights for Bextra, a selective COX-2 inhibitor (included in our Human Health segment) in connection with the decision to suspend sales and marketing of Bextra. This decision resulted from an April 7, 2005 request from the FDA, as part of its safety review of all...

  • Page 57
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies The increase in the 2005 international pension plans' net periodic benefit cost was largely driven by changes in assumptions used, such as the decline in the discount rate and the expected return on plan assets. The ...

  • Page 58
    ...Divestitures Settlements Benefits paid Fair value of plan assets at end of year Funded status (plan assets less than benefit obligation) Unrecognized: Net transition obligation Actuarial losses Prior service costs/(benefits) Net asset/(liability) recorded in consolidated balance sheet (a) $7,108...

  • Page 59
    ...Consolidated Financial Statements Pfizer Inc and Subsidiary Companies The components of the net asset/(liability) recorded in the consolidated balance sheet as of December 31 follow: PENSION PLANS U.S. QUALIFIED INTERNATIONAL 2005 2004 2005 2004 In the aggregate, our U.S. qualified pension plans...

  • Page 60
    ... tax laws. Liabilities for amounts in excess of these funding levels are included in our consolidated balance sheet, to the extent required by GAAP. The following table presents expected cash ï¬,ow information: FOR THE YEAR ENDED DECEMBER 31 (MILLIONS OF DOLLARS) A summary of common stock purchases...

  • Page 61
    ... our common stock at the market price on the date we granted the option. Former Pharmacia and Warner-Lambert plans provided that, in the event of a change in control, stock options already granted became immediately exercisable. Expected dividend yield 2.90% 2.90% 3.15% Risk-free interest rate 3.96...

  • Page 62
    ...million shares. The 2004 Plan is the only plan under which any stock award may be given in the future. Performance-contingent share awards vest and are paid based on a non-discretionary formula, which measures our performance using relative total shareholder return and relative growth in diluted EPS...

  • Page 63
    ... Financial Statements Pfizer Inc and Subsidiary Companies 15. Earnings Per Common Share Basic and diluted earnings per common share were computed using the following common share data: (MILLIONS) YEAR ENDED DEC. 31, 2005 2004 2003 EPS Numerator-Basic: Income from continuing operations...

  • Page 64
    ... in 2004. In April 2001, Louisiana Health Service Indemnity Company and Eastern States Health and Welfare Fund filed a consolidated 2005 Financial Report 63 Lipitor (atorvastatin) The generic manufacturer Ranbaxy Laboratories Limited filed an abbreviated new drug application with the FDA for...

  • Page 65
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies complaint against Warner-Lambert in the U.S. District Court for the Southern District of New York purportedly on behalf of a class consisting of all health benefit providers that paid for or reimbursed patients for the...

  • Page 66
    ...AWP). The AWP is used to determine reimbursement levels under Medicare Part B and under many private-sector insurance policies and medical plans. Several of the suits also allege that Pharmacia and/or Pfizer did not report to the states its best price for certain products under the Medicaid program...

  • Page 67
    ...'s chemical businesses, Solutia manages the litigation and is responsible for all costs and expenses and any judgment or settlement amounts. In addition, in connection with its spin-off that was completed in 2002, New Monsanto assumed, and agreed to indemnify Pharmacia for, any liabilities primarily...

  • Page 68
    ... by New Monsanto to indemnify Pharmacia for all liabilities that Solutia originally assumed in connection with the 1997 spin-off. In 2005, the Department of Justice informed us that it is investigating Pharmacia's former contractual relationship with a health care intermediary. The Company has...

  • Page 69
    ... accounting for acquisitions, certain milestone payments, merger-related costs, intangible asset impairments and costs related to our new productivity initiative. Each segment is managed separately and offers different products requiring different marketing and distribution strategies. We sell...

  • Page 70
    ... Financial Statements Pfizer Inc and Subsidiary Companies The following tables present segment, geographic and revenue information: Segment FOR/AS OF THE YEAR ENDED DEC. 31, (MILLIONS OF DOLLARS) 2005 2004 2003 Revenues Human Health Consumer Healthcare Animal Health Corporate/Other(a) Total...

  • Page 71
    ... operations in Puerto Rico. Long-lived assets include identifiable intangible assets (excluding goodwill) and property, plant and equipment. Revenues by Therapeutic Area FOR/AS OF THE YEAR ENDED DEC. 31, (MILLIONS OF DOLLARS) 2005 2004 2003 Human Health Cardiovascular and metabolic diseases...

  • Page 72
    ...from continuing operations Discontinued operations-net of tax Cumulative effect of a change in accounting principles Net income Cash dividends paid per common share Stock prices High Low Merger-related in-process research and development charges primarily includes amounts incurred in connection with...

  • Page 73
    ... Cash dividends paid per common share Stock prices High Low All financial information reï¬,ects the following as discontinued operations: our in-vitro allergy and autoimmune diagnostics testing, surgical ophthalmics, certain European generics, as well as certain non-core consumer healthcare product...

  • Page 74
    ... of a change in accounting principles-net of tax(e) Net income Effective tax rate-continuing operations Depreciation and amortization Property, plant and equipment additions Cash dividends paid Working capital(f) Property, plant and equipment-net Total assets(f) Long-term debt Long-term capital...

  • Page 75
    ... business in 2001 and 2000) as well as certain non-core consumer healthcare products (primarily marketed in Europe) and the femhrt, Loestrin and Estrostep women's health product lines. Defined as long-term debt, deferred taxes, minority interests and shareholders' equity. 74 2005 Financial Report