Pfizer 2011 Annual Report Download - page 38

Financial Review
Pfizer Inc. and Subsidiary Companies
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 operations without including all events during a period, such as the effects of an acquisition or amortization of purchased
intangibles, and does not provide a comparable view of our performance to other companies in the biopharmaceutical industry. We
also use other specifically tailored tools designed to achieve the highest levels of performance. For example, our R&D organization
has productivity targets, upon which its effectiveness is measured. In addition, the earn-out of Performance Share Award grants is
determined based on a formula that measures our performance using relative total shareholder return.
Purchase Accounting Adjustments
Adjusted income is calculated prior to considering certain significant purchase accounting impacts resulting from business
combinations and net asset acquisitions. These impacts can include the incremental charge to cost of sales from the sale of
acquired inventory that was written up to fair value, amortization related to the increase in fair value of the acquired finite-lived
intangible assets acquired from Pharmacia, Wyeth and King, depreciation related to the increase/decrease in fair value of the
acquired fixed assets, amortization related to the increase in fair value of acquired debt, charges for purchased IPR&D and the fair
value changes associated with contingent consideration. 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 as part of our acquisition of King in 2011, Wyeth in 2009 and Pharmacia in 2003, can occur through 20 or more 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 previously have been 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 from 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
we had discovered and developed those intangible assets on our 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 we discovered and developed the acquired intangible assets.
Acquisition-Related Costs
Adjusted income is calculated prior to considering transaction, integration, restructuring and additional depreciation 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 transaction costs,
additional depreciation and restructuring and integration activities that are associated with a business combination or a net-asset
acquisition are included in acquisition-related costs. We have made no adjustments for the resulting synergies.
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 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 and/or other global regulatory authorities.
Discontinued Operations
Adjusted income is calculated prior to considering the results of operations included in discontinued operations, as well as any
related gains or losses on the sale of such operations such as the sale of our Capsugel business, which we sold in August 2011. We
believe that this presentation is meaningful to investors because, while we review our businesses and product lines for strategic fit
with our operations, we do not build or run our businesses with the intent to sell them. (Restatements due to discontinued operations
do not impact compensation or change the adjusted income measure for the compensation of the restated periods but are presented
here on a restated basis for consistency across all periods.)
2011 Financial Report 37