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Pfizer Inc.
2006 Financial Report

Table of contents

  • Page 1
    Pfizer Inc. 2006 Financial Report

  • Page 2
    [This Page Intentionally Left Blank]

  • Page 3
    ...performance; our operating environment and response to key opportunities and challenges; our productivity and cost-savings program; our strategic initiatives, such as significant licensing and new business development transactions, as well as the disposition of our Consumer Healthcare business; and...

  • Page 4
    ... include pricing and access, intellectual property rights, product competition, the regulatory environment and pipeline productivity and the changing business environment. Pricing and Access We believe that our medicines provide significant value for both healthcare providers and patients, not...

  • Page 5
    ... payers to work with us early in the development process to ensure that our approved products will deliver the value expected by those payers. We will continue to be a constructive force in helping to shape healthcare policy and regulation of our products. of Intellectual Property Rights (TRIPS...

  • Page 6
    ... on a scale that can help redefine medical practice. We have over 240 novel compounds in development, spanning multiple therapeutic areas, and we are leveraging our status as the industry's partner of choice to expand our licensing operations. Our research and development (R&D) pipeline includes 249...

  • Page 7
    ... health policy to address the cost of disease that remains untreated and the benefits of investing in prevention and wellness to not only improve health, but save money. Developing medicines that meet medical need and that patients will take; that physicians will prescribe; that customers will pay...

  • Page 8
    ...developed, which leverages technology, standardizes processes, and focuses on colleague alignment and skill sets. This effort includes regionalization of tax operations for Europe and the U.S. Global Sourcing- • Leveraging Purchasing Power-To achieve cost savings on purchased goods and services...

  • Page 9
    ... to capitalizing on new growth opportunities by advancing our own new-product pipeline, as well as through licensing, co-promotion agreements and acquisitions. Our business development strategy targets a number of growth opportunities, including biologics, oncology, Alzheimer's disease, vaccines...

  • Page 10
    ... of tax), relating to a European generic business which was later sold in 2005, and is included in Income from discontinued operations-net of tax in the consolidated statement of income for 2004. In the third quarter of 2004, we sold certain non-core consumer product lines marketed in Europe by our...

  • Page 11
    ... Notes to Consolidated Financial Statements-Note 1B. Significant Accounting Policies: Estimates and Assumptions). We record anticipated recoveries under existing insurance contracts when assured of recovery. NET INCOME(a) FULL-YEAR 2007 FORECAST DILUTED EPS(a) FULL-YEAR 2008 FORECAST NET INCOME...

  • Page 12
    ...partners ship the related product and title passes to their customer. These revenues are primarily based upon a percentage of our co-promotion partners' net sales. Expenses for selling and marketing these products are included in Selling, informational and administrative expenses. Long-Lived Assets...

  • Page 13
    ... method, which reï¬,ects capital market conditions and the specific risks associated with the business segment. Other estimates inherent in the "income approach" include long-term growth rates and cash ï¬,ow forecasts for the business segment. A single estimate of fair value results from a complex...

  • Page 14
    ...-related factors, such as turnover, retirement age and mortality (life expectancy); expected return on assets; and healthcare cost trend rates. Our assumptions reï¬,ect our historical experiences and our best judgment regarding future expectations that have been deemed reasonable by management...

  • Page 15
    ...products. In 2006, Lipitor, Norvasc, Zoloft and Celebrex each delivered at least $2 billion in revenues, while Lyrica, Viagra, Detrol/Detrol LA, Xalatan/Xalacom and Zyrtec each surpassed $1 billion. Medicaid and related state program rebates Medicare rebates Performance-based contract rebates Total...

  • Page 16
    ... contract rebates and chargebacks totaled $1.5 billion as of December 31, 2006. Revenues by Business Segment We operate in the following business segments: • Pharmaceutical - The Pharmaceutical segment includes products that prevent and treat cardiovascular and metabolic diseases...

  • Page 17
    Financial Review Pfizer Inc and Subsidiary Companies Total Revenues by Business Segment 4.8% 2.0% 4.6% 2.0% 4.0% 1.9% 2006 2005 2004 93.2% 93.4% 94.1% PHARMACEUTICAL ANIMAL HEALTH CORPORATE/OTHER Change in Revenues by Segment and Geographic Area Worldwide revenues by segment and ...

  • Page 18
    ... hypertension Replacement of human growth hormone Allergies Alzheimer's disease (Aricept), neovascular (wet) age-related macular degeneration (Macugen), Parkinson's disease (Mirapex), hypertension (Olmetec), multiple sclerosis (Rebif) and chronic obstructive pulmonary disease (Spiriva) 782 638...

  • Page 19
    ... with a patient support plan, which smokers can customize to address their individual behavioral triggers as they try to quit smoking. We are pricing Chantix/Champix for a cash market, given the low coverage for smoking-cessation products in medical plans. Exubera, the first inhaled human insulin...

  • Page 20
    ...medications by the Medicaid program. Medicare coverage of Viagra will end in 2007. Pfizer has introduced new branded and unbranded advertising to encourage men with erectile dysfunction to talk to their physicians about their condition. • • • Celebrex achieved an 18% increase in worldwide...

  • Page 21
    .... Alliances allow us to co-promote or license these products 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...

  • Page 22
    ... Pfizer Inc and Subsidiary Companies Recent FDA approvals follow: PRODUCT Celebrex Aricept Chantix Genotropin INDICATION Juvenile rheumatoid arthritis Treatment of severe Alzheimer's disease Nicotine-receptor partial agonist for smoking cessation Treatment of long-term growth failure associated...

  • Page 23
    ...analysis of the compound as part of our overall portfolio. We will return all product rights, intellectual property and data to Organon in 2007. Additional product-related programs are in various stages of discovery and development. Also, see our discussion in the "Our Strategic Initiatives-Strategy...

  • Page 24
    ... in the European companion animal market. Selling, Informational and Administrative (SI&A) Expenses SI&A expenses increased 2% in 2006, which reï¬,ects: • • • higher promotional investments in new product launches and in-line product promotional programs; expenses related to share-based...

  • Page 25
    ..., see the "Product Developments" section of this Financial Review.) restructuring of our U.S. marketing and worldwide research and development operations, and the implementation costs primarily relate to system and process standardization, as well as the expansion of shared services. The components...

  • Page 26
    ... Charges- Pharmacia). Through December 31, 2006, employee termination costs totaling $592 million represent the approved reduction of the legacy Pfizer and legacy Pharmacia (from April 16, 2004) work force by 4,255 employees, mainly in corporate, manufacturing, distribution, sales and research. We...

  • Page 27
    ...we discovered and developed the acquired intangible assets. • • • Senior management receives a monthly analysis of our operating results that is prepared on an Adjusted income basis; Our annual budgets are prepared on an Adjusted income basis; and Annual and long-term compensation, including...

  • Page 28
    ... as our Consumer Healthcare business, which we sold in December 2006, as well as any related gains or losses on the sale of such operations. We believe that this presentation is meaningful to investors because, while we review our businesses and product lines periodically for strategic fit with our...

  • Page 29
    ...-related costs. (See Notes to Consolidated Financial Statements-Note 4. Adapting to Scale Productivity Initiative and Note 5. Acquisition-Related Costs.) Discontinued operations-net of tax is primarily related to our Consumer Healthcare business. (See Notes to Consolidated Financial Statements...

  • Page 30
    ...Subsidiary Companies Financial Condition, Liquidity and Capital Resources Net Financial Assets Our net financial asset position as of December 31 follows: (MILLIONS OF DOLLARS) by $16.6 billion, reï¬,ecting the receipt of proceeds from the sale of our Consumer Healthcare business. Long-Term Debt...

  • Page 31
    ... impairment review process explained in the "Accounting Policies: Long-Lived Assets" section of this Financial Review. In 2005, we recorded an impairment charge of $1.1 billion related to the developed technology rights for Bextra, a selective COX-2 Working capital includes assets of discontinued...

  • Page 32
    ... in the dividend rate; and a decrease of $610 million in the proceeds from the exercise of employee stock options, • • • higher net redemptions of short-term investments in 2006 (an increased source of cash of $12.4 billion), primarily used to pay down short-term borrowings, partially...

  • Page 33
    ... and include amounts relating to advertising, information technology services and employee benefit administration services. In 2007, we expect to spend approximately $2.0 billion on property, plant and equipment. Off-Balance Sheet Arrangements In the ordinary course of business and in connection...

  • Page 34
    ... particular, these include statements relating to future actions, business plans and prospects, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies...

  • Page 35
    ...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 managed through the...

  • Page 36
    ... future incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period. Patent claims include challenges to the coverage and/or validity of our patents on various products or processes. Although we believe we have...

  • Page 37
    ... policies applied by the Company in its financial statements, as well as alternative treatments. Management represented to the Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America...

  • Page 38
    ...have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pfizer Inc and Subsidiary Companies as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity, and cash...

  • Page 39
    ...Subsidiary Companies (MILLIONS, EXCEPT PER COMMON SHARE DATA) YEAR ENDED DECEMBER 31, _____ 2006 2005 2004 Revenues Costs and expenses: Cost of sales(a) Selling, informational and administrative expenses(a) Research and development expenses(a) Amortization of intangible assets Acquisition-related...

  • Page 40
    ...' Equity Short-term borrowings, including current portion of long-term debt: 2006-$712; 2005-$778 Accounts payable Dividends payable Income taxes payable Accrued compensation and related items Other current liabilities Liabilities of discontinued operations and other liabilities held for sale Total...

  • Page 41
    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 42
    ... by operating activities: Depreciation and amortization Share-based compensation expense Acquisition-related in-process research and development charges Intangible asset impairments and other associated non-cash charges Gains on disposal of investments, products and product lines Gains on sales of...

  • Page 43
    .... Total compensation cost related to nonvested awards not yet recognized, determined under the original provisions of SFAS 123, must also be recognized in the consolidated statement of income. The adoption of SFAS 123R primarily impacted our accounting for stock options (see Note 15. Share-Based...

  • Page 44
    ... on a net basis; that is, they are excluded from revenues. Alliances-We have agreements to co-promote pharmaceutical products discovered by other companies. Revenues are earned when our co-promotion partners ship the related product and title passes to their customer. Alliance revenues are primarily...

  • Page 45
    ... on an even basis over the vesting terms into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. In 2005 and earlier years, grants under stock option and performancecontingent share award programs were accounted for using the...

  • Page 46
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies production technology, to manufacture and sell Exubera, an inhaled form of insulin for use in adults with type 1 and type 2 diabetes, and the insulin-production business and facilities located in Frankfurt, Germany, ...

  • Page 47
    ...to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies of business operations. For example, we entered into a number of transition services agreements that will allow the buyer sufficient time to prepare for the transfer of activities and to limit the risk of business disruption...

  • Page 48
    ... charges primarily relate to our plant network optimization efforts and the restructuring of our U.S. marketing and worldwide research and development operations, while the implementation costs primarily relate to system and process standardization, as well as the expansion of shared services. The...

  • Page 49
    ... vacating duplicative facilities, contract termination and other exit costs. Total acquisition-related expenditures (income statement and balance sheet) incurred during 2002-2006 to achieve these synergies were $5.2 billion, on a pre-tax basis. We have recorded restructuring charges associated with...

  • Page 50
    ...936 of the U.S. Internal Revenue Code, Pfizer was a "grandfathered" entity and was entitled to the benefits under such statute until September 30, 2006. In Ireland, we benefit from an incentive tax rate effective through 2010 on income from manufacturing operations. The U.S. research tax credit is...

  • Page 51
    ... liability position in 2006 compared to 2005 is primarily due to the adoption of a new accounting standard in 2006 (see Note 13. Pension and Postretirement Benefit Plans and Defined Contribution Plans) and the change in carryforwards. We have carryforwards primarily related to foreign tax credit...

  • Page 52
    ... $4.3 billion and Prior service costs and other of $27 million. See also Note 13. Pension and Postretirement Benefit Plans and Defined Contribution Plans. Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries. As of December...

  • Page 53
    ... losses Fair value of available-for-sale equity securities, excluding money market funds Total fair value of available-for-sale equity securities Total investments(c) (a) $ 273 $ 286 Cash and cash equivalents Short-term investments Long-term investments and loans Total investments $ 1,118 25...

  • Page 54
    ... 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, foreign exchange...

  • Page 55
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies 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 reported in earnings or deferred, depending ...

  • Page 56
    ... 9A. Investments in Debt and Equity Securities. These mutual funds are rated by two rating agencies, as follows: Aaa by Moody's Investors Services and AAAm by Standard & Poor's. These investments represent virtually all the proceeds from the sale of our Consumer Healthcare business that closed on...

  • Page 57
    ... intangible assets. Includes pension-related intangible assets. Developed technology rights represent the amortized value associated with developed technology, which has been acquired from third parties and which can include the right to develop, use, market, sell and/or offer for sale the product...

  • Page 58
    ... 2006, pursuant to the divestiture of our Consumer Healthcare business, certain defined benefit obligations and related plan assets, if applicable, were transferred to the purchaser of that business. prior service costs or credits and net transition amounts within Accumulated other comprehensive...

  • Page 59
    ... market conditions. The 2006 expected rates of return for these plans reï¬,ect our long-term outlook for a globally diversified portfolio, which is inï¬,uenced by a combination of return expectations for individual asset classes, actual historical experience and our diversified investment strategy...

  • Page 60
    ...on plan assets Company contributions Employee contributions Foreign exchange impact Acquisitions Settlements(b) Benefits paid Fair value of plan assets at end of year Funded status (plan assets greater than (less than) benefit obligation) Unrecognized: Actuarial losses Prior service costs/(credits...

  • Page 61
    ... Financial Statements Pfizer Inc and Subsidiary Companies Amounts recognized in the consolidated balance sheet as of December 31 follow: PENSION PLANS U.S. SUPPLEMENTAL (NON-QUALIFIED) 2006 2005 POSTRETIREMENT PLANS 2006 2005 (MILLIONS OF DOLLARS) U.S. QUALIFIED 2006 2005 INTERNATIONAL...

  • Page 62
    ... through 2016. Private equity, venture capital, private debt and real estate. Real estate, insurance contracts and other investments. Reï¬,ects postretirement plan assets, which support a portion of our U.S. retiree medical plans. G. Defined Contribution Plans We have savings and investment plans...

  • Page 63
    ...TOTAL COST OF COMMON STOCK PER-SHARE COMMON STOCK PURCHASED PRICE PAID PURCHASED D. Employee Benefit Trust The Pfizer Inc Employee Benefit Trust (EBT) was established in 1999 to fund our employee benefit plans through the use of its holdings of Pfizer Inc stock. The consolidated balance sheets...

  • Page 64

  • Page 65
    ... term into Cost of sales, Selling, informational and administrative expenses and Research and development expenses, as appropriate. For grants in 2005 and earlier years, PCSA grants are accounted for using the intrinsic value method in the income statement. Senior and other key members of management...

  • Page 66
    ... Financial Statements Pfizer Inc and Subsidiary Companies or settle the contracts for cash. Other contract terms are as follows: MAXIMUM MATURITY AS OF DEC. 31, (YEARS) F. Transition Information The following table shows the effect on results for 2005 and 2004 as if we had applied the fair-value...

  • Page 67
    ... accounting principles-net of tax Net income available to common shareholders EPS Denominator-Diluted: Weighted-average number of common shares outstanding Common share equivalents-stock options, stock issuable under employee compensation plans and convertible preferred stock Weighted-average number...

  • Page 68
    ..., we note that the patent rights to certain of our products, including without limitation Lipitor and Celebrex, are being challenged in various other countries. Lipitor (atorvastatin) The generic manufacturer Ranbaxy Laboratories Limited filed an abbreviated new drug application with the FDA for...

  • Page 69

  • Page 70
    ... a patent infringement action against that company in the U.S. District Court for the District of New Jersey. Celebrex (celecoxib) In January 2004, a generic manufacturer notified us that it had filed an abbreviated new drug application with the FDA seeking approval to market a product containing...

  • Page 71
    ... to a settlement related to certain insurance coverage which provides for payments to us over a tenyear period of amounts totaling $406 million. • Other Matters Asbestos • Quigley Quigley Company, Inc. (Quigley), a wholly owned subsidiary, was acquired by Pfizer in 1968 and sold small...

  • Page 72
    ... not report to the states its best price for certain products under the Medicaid program. In addition, Pharmacia, Pfizer and other pharmaceutical manufacturers are defendants in a number of purported class action suits in various federal and state courts brought by employee benefit plans and other...

  • Page 73
    ... to misrepresent the safety of Celebrex and, in certain of the cases, Bextra; and (iii) purported class actions filed by persons who claim to be participants in the Pfizer or Pharmacia Savings Plan alleging that Pfizer and certain current and former officers, directors and employees of Pfizer or...

  • Page 74
    Notes to Consolidated Financial Statements Pfizer Inc and Subsidiary Companies liabilities apply to pending actions and any future actions related to Former Monsanto's chemical businesses in which Pharmacia is named as a defendant, including, without limitation, actions asserting environmental ...

  • Page 75
    ... share-based compensation expenses not allocated to the business segments, significant impacts of purchase accounting for acquisitions, certain milestone payments, acquisition-related costs, intangible asset impairments and costs related to our AtS productivity initiative. Each segment is managed...

  • Page 76
    ... Pharmacia research facility of $64 million, and (vii) other legacy Pharmacia intangible asset impairments of $11 million. Corporate assets are primarily cash, short-term investments and long-term investments and loans. Certain production facilities are shared by various segments. Property, plant...

  • Page 77
    ... Consolidated Financial Statements Pfizer Inc and Subsidiary Companies Geographic FOR/AS OF THE YEAR ENDED DEC. 31, (MILLIONS OF DOLLARS) 2006 2005 2004 Revenues United States(a) Europe/Canada(b) Japan/Asia(c) Latin America/AFME(d) Consolidated Long-lived assets United States(a) Europe/Canada...

  • Page 78
    ... share Stock prices High Low Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year. All financial information reï¬,ects our Consumer Healthcare business as discontinued operations...

  • Page 79
    ... quarterly EPS amounts may not agree to the total for the year. All financial information reï¬,ects the following as discontinued operations: Consumer Healthcare and certain European generics businesses (see Note 3. Discontinued Operations). Acquisition-related in-process research and development...

  • Page 80
    ... Effective tax rate-continuing operations Depreciation and amortization(f) Property, plant and equipment additions(f) Cash dividends paid Working capital(g) Property, plant and equipment, less accumulated depreciation Total assets(g) Long-term debt Long-term capital(h) Shareholders' equity Earnings...

  • Page 81
    ..., we recorded pre-tax charges of $565 million ($410 million, net of tax). Includes discontinued operations, (see Notes to Consolidated Financial Statements-Note 20. Segment, Geographic and Revenue Information.) For 2005 through 2001, includes assets held for sale of our Consumer Healthcare business...

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