Pfizer 2005 Annual Report Download - page 25

24 2005 Financial Report
Financial Review
Pfizer Inc and Subsidiary Companies
The Adjusted income measure is an important internal
measurement for Pfizer. We measure the performance of the
overall Company on this basis. The following are examples of how
the Adjusted income measure is utilized.
•Senior management receives a monthly analysis of the
operating results of our Company that is prepared on an
Adjusted income basis;
•The annual budgets of our Company are prepared on an
Adjusted income basis; and
•Annual and long-term compensation, including annual cash
bonuses, merit-based salary adjustments and stock options,
for various levels of management, is based on financial measures
that include Adjusted income. The Adjusted income measure
currently represents a significant portion of target objectives
that are utilized to determine the annual compensation for
various levels of management, although the actual weighting
of the objective may vary by level of management and job
responsibility and may be considered in the determination of
certain long-term compensation plans. The portion of senior
management’s bonus, merit-based salary increase and stock
option awards based on the Adjusted income measure ranges
from 10% to 30%.
Despite the importance of this measure to management in goal
setting and performance measurement, we stress that Adjusted
income is a non-GAAP financial measure that has no standardized
meaning prescribed by U.S. GAAP and, therefore, has limits in its
usefulness to investors. Because of its non-standardized definition,
Adjusted income (unlike U.S. GAAP Net income) may not be
comparable with the calculation of similar measures for other
companies. Adjusted income is presented solely to permit investors
to more fully understand how management assesses the
performance of our Company.
We also recognize that, as an internal measure of performance,
the Adjusted income measure has limitations and we do not
restrict our performance-management process solely to this
metric. A limitation of the Adjusted income measure is that it
provides a view of our Company’s operations without including
all events during a period such as the effects of an acquisition,
merger-related costs or amortization of purchased intangibles and
does not provide a comparable view of our performance to other
companies in the pharmaceutical industry. We also use other
specifically tailored tools designed to ensure the highest levels of
performance in our Company. For example, our R&D organization
has productivity targets, upon which its effectiveness is measured.
In addition, for senior levels of management, a portion of their
long-term compensation is based on U.S. GAAP Net income.
Purchase Accounting Adjustments
Adjusted income is calculated prior to considering certain
significant purchase-accounting impacts, such as those related to
our acquisitions of Pharmacia, Vicuron and Esperion as well as net-
asset acquisitions. These impacts can include charges for purchased
IPR&D, the incremental charge to cost of sales from the sale of
acquired inventory that was written up to fair value and the
incremental charges related to the amortization of finite-lived
intangible assets for the increase to fair value. Therefore, the
Adjusted income measure includes the revenues earned upon the
sale of the acquired products without considering the
aforementioned significant charges.
Certain of the purchase-accounting adjustments associated with
a business combination, such as the amortization of intangibles
acquired in connection with our acquisition of Pharmacia, can occur
for up to 40 years (these assets have a weighted-average useful life
of approximately nine years), but this presentation provides an
alternative view of our performance that is used by management
to internally assess business performance. We believe the
elimination of amortization 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 accurate comparison of internally
developed intangible assets and acquired intangible assets cannot
be achieved through Adjusted income. This component of
Adjusted income is derived solely with the impacts of the items
listed in the first paragraph of this section. We have not factored
in the impacts of any other differences in experience that might
have occurred if Pfizer had discovered and developed those
intangible assets on its own and this approach does not intend
to be representative of the results that would have occurred in
those circumstances. For example, our research and development
costs in total, and in the periods presented, may have been
different; our speed to commercialization and resulting sales, if
any, may have been different; or our costs to manufacture may
have been different. In addition, our marketing efforts may have
been received differently by our customers. As such, in total,
there can be no assurance that our Adjusted income amounts
would have been the same as presented had Pfizer discovered and
developed the acquired intangible assets.
Merger-Related Costs
Adjusted income is calculated prior to considering integration and
restructuring costs associated with business combinations because
these costs are unique to each transaction and represent costs that
were incurred to restructure and integrate two businesses as a
result of the acquisition decision. For additional clarity, only
restructuring and integration activities that are associated with
a purchase business combination or a net-asset acquisition are
included in merger-related costs. We have not factored in the
impacts of synergies that would have resulted had these costs not
been incurred.
We believe that viewing income prior to considering these charges
provides investors with a useful additional perspective because the
significant costs incurred in a business combination result primarily
from the need to eliminate duplicate assets, activities or
employees—a natural result of acquiring a fully integrated set of
activities. For this reason, we believe that the costs incurred to
convert disparate systems, to close duplicative facilities or to
eliminate duplicate positions (for example, in the context of a
business combination) can be viewed differently from those costs
incurred in other, more normal business contexts.
The integration and restructuring costs associated with a business
combination may occur over several years with the more
significant impacts ending within three years of the transaction.
Because of the need for certain external approvals for some
actions, the span of time needed to achieve certain restructuring
and integration activities can be lengthy. For example, due to the