Pfizer 2012 Annual Report Download - page 36

Financial Review
Pfizer Inc. and Subsidiary Companies
2012 Financial Report 35
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, primarily associated with Pharmacia (acquired in 2003), Wyeth (acquired in 2009) and King (acquired in
2011), 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, 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, 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 acquisition cost of those products.
Certain of the purchase accounting adjustments 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 connection with 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, and the sale of our Nutrition
business, which we sold in November 2012. 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.)
Certain Significant Items
Adjusted income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that
are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature.
Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we
would not expect to occur as part of our normal business on a regular basis; items that would be non-recurring; or items that relate to products