Pfizer 2005 Annual Report Download - page 22

2005 Financial Report 21
Financial Review
Pfizer Inc and Subsidiary Companies
capitalized as an intangible asset, a $90 million milestone payment
(all amounts were included in the $195.5 million).
Additional product-related programs are in various stages of
discovery and development.
Costs and Expenses
Cost of Sales
Cost of sales increased 13% in 2005 and decreased 21% in 2004
while revenues decreased 2% in 2005 and increased 17% in 2004.
Cost of sales in 2005 compared to 2004 increased as a result of:
•unfavorable geographic, segment and product mix, and adverse
changes in production volume, among other factors, which
reflect the loss of U.S. exclusivity for certain of our
pharmaceutical products and the uncertainty regarding the
selective COX-2 inhibitors;
•$124 million related to implementation costs of our new AtS
productivity initiative; and
•$73 million 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:
•impact of purchase accounting in 2003, which reflected the
incremental charge of $2.7 billion from the sale of inventory
acquired from Pharmacia, adjusted to fair value;
•merger-related cost savings; and
•favorable product mix,
partially offset by:
•higher product costs attributable to legacy Pharmacia products;
and
•the unfavorable impact of the weakening of the U.S. dollar
relative to many foreign currencies.
Selling, Informational and Administrative (SI&A)
Expenses
SI&A expenses increased 1% in 2005 which reflects the unfavorable
impact of foreign exchange and $156 million in AtS expenses,
partially offset by an increase in merger-related synergies and the
impact of the Company’s AtS productivity initiative. Marketing
expenses of our pharmaceutical products decreased compared to
2004, due primarily to lower spending on products which have lost
exclusivity and the withdrawal of Bextra.
In 2004, SI&A expenses increased 12%, mainly due to the full year
inclusion of Pharmacia SI&A-related activities, partially offset by
cost synergies from Pharmacia-related restructuring activities.
Marketing expenses of our pharmaceutical products included
costs in 2004 primarily for supporting new product introductions
such as Caduet, Lyrica, Inspra and Somavert and increased
promotion due to new product competition largely offset by the
realization of merger synergies.
Research and Development (R&D) Expenses
R&D expenses decreased 3% in 2005 and increased 3% in 2004.
The decline in 2005 reflects the initial benefits associated with the
AtS productivity initiative, partially offset by increased portfolio
support and $50 million in AtS expenses. We have consolidated
our infrastructure support systems into global centers of excellence
that now support the entire R&D enterprise. More importantly,
the mix of expenses has changed over the past three years. For
example, while our capital expenditures and information
technology expenses were approximately one-third of our budget
in 2002, our 2006 budget will be less than 17% of the R&D
budget. As a result, we are taking funds previously used to
support R&D and utilizing them in our development of
compounds. In 2004, year-over-year growth of R&D expenses is
attributable to the inclusion of Pharmacia-related activities and
increased support of the advanced-stage development portfolio,
partially offset by cost synergies from Pharmacia-related
restructuring activities.
R&D expense also includes payments for intellectual property
rights of $156 million in 2005, $160 million in 2004 and $380
million in 2003. Additionally, see our discussion in the “Product
Developments” section of this Financial Review.
Merger-Related In-Process Research and
Development Charges
The estimated value of merger-related IPR&D is expensed at the
acquisition date. In 2005, we expensed $1.7 billion of IPR&D,
primarily related to our acquisition of Vicuron on September 14,
2005 ($1.4 billion) and our acquisition of Idun on April 12, 2005
($250 million). In 2004, we expensed $1.1 billion of IPR&D,
primarily related to our acquisition of Esperion ($920 million). In
2003, we expensed $5.1 billion of IPR&D related to our acquisition
of Pharmacia.
Merger-Related Costs
We incurred the following merger-related costs, primarily in
connection with our acquisition of Pharmacia which was
completed on April 16, 2003:
YEAR ENDED DEC. 31,
________________________________________________
(MILLIONS OF DOLLARS) 2005 2004 2003
Integration costs(a):
Pharmacia $538 $475 $ 838
Other 12 21 33
Restructuring costs(a):
Pharmacia 390 704 177
Other 3(7) 10
Total merger-related
costs—expensed $943 $1,193 $1,058
Total merger-related
costs—capitalized $— $581 $1,578
(a) Included in Restructuring charges and merger-related costs.
Integration costs represent external, incremental costs directly
related to an acquisition, including expenditures for consulting
and systems integration.
In connection with the acquisition of Pharmacia, Pfizer
management approved plans to restructure and integrate the
operations of both legacy Pfizer and legacy Pharmacia to combine