Pfizer 2010 Annual Report Download - page 69

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
E. Equity-Method Investments
Investment in Laboratório Teuto Brasileiro, an Equity-Method Investment
In the fourth quarter of 2010, we consummated our partnership to develop and commercialize generic medicines with Laboratório
Teuto Brasileiro S.A. (Teuto) a leading generics company in Brazil. As part of the transaction, we acquired a 40 percent equity stake
in Teuto, and entered into a series of commercial agreements. The partnership is expected to enhance our position in Brazil, a key
emerging market, by providing access to Teuto’s portfolio of products. Through this partnership, we expect to also have access to
significant distribution networks in rural and suburban areas in Brazil and the opportunity to register and commercialize Teuto’s
products in various markets outside of Brazil. Under the terms of our purchase agreement with Teuto, we made an upfront payment
at the closing of approximately $230 million (subject to certain post-closing adjustments). In addition, Teuto will be eligible to receive
a performance-based milestone payment from us in 2012 of up to approximately $200 million. We have an option to acquire the
remaining 60 percent of Teuto’s shares beginning in 2014, and Teuto’s shareholders have an option to sell their 60 percent stake to
us beginning in 2015.
We are accounting for our interest in Teuto as an equity method investment due to the significant influence we have over the
operations of Teuto through our board representation, minority veto rights and 40% voting interest. Our investment in Teuto is
reported as a private equity investment in Long-term investments and loans in our consolidated balance sheet as of December 31,
2010. Our share of Teuto’s income and expenses is recorded in Other deductions—net.
Formation of ViiV, an Equity-Method Investment
In the fourth quarter of 2009, we and GlaxoSmithKline plc (GSK) created a new company, ViiV Healthcare Limited (ViiV), which is
focused solely on research, development and commercialization of human immunodeficiency virus (HIV) medicines. Under the
agreement, we and GSK have contributed certain existing HIV-related products, pipeline assets and research assets to ViiV and will
perform R&D and manufacturing services. The R&D Services Agreement provides that we will perform R&D services for pipeline
and marketed products contributed by us and that such services be billed at our internal cost plus a profit margin. After two and a
half years, either party may terminate this agreement with six months’ notice. The Contract Manufacturing Agreement provides that
we will manufacture and supply products to ViiV for four years at a price that incorporates a profit margin. Prior to the agreed
termination date, ViiV may terminate this agreement at any time with approximately one-year’s notice. Further, Pfizer and GSK have
entered into a 3-year Research Alliance Agreement with ViiV under which each party, at its sole discretion, may conduct research
programs in order to achieve Proof of Concept for an HIV Therapy Compound. ViiV will have a right of first negotiation on
compounds that reach Proof of Concept.
We recognized a gain of approximately $482 million in connection with the formation, which was recorded in Other deductions—net
in the fourth quarter of 2009. Since we currently hold a 15% equity interest in ViiV, we have an indirect retained interest in the
contributed assets; as such, 15% of the gain, or $72 million, is the portion of the gain associated with that indirect retained interest.
In valuing our investment in ViiV (which includes the indirect retained interest in the contributed assets), we used discounted cash
flow techniques, utilizing an 11% discount rate and a terminal year growth factor of 3%.
We currently hold a 15% equity interest and GSK holds an 85% equity interest in ViiV. The equity interests will be adjusted in the
event that specified sales and regulatory milestones are achieved. Our equity interest in ViiV could vary from 9% to 30.5%, and
GSK’s equity interest could vary from 69.5% to 91%, depending upon the milestones achieved with respect to the original assets
contributed to ViiV by us and by GSK. Each company also may be entitled to preferential dividend payments to the extent that
specific sales thresholds are met in respect of the marketed products and pipeline assets originally contributed.
We are accounting for our interest in ViiV as an equity method investment due to the significant influence we have over the
operations of ViiV through our board representation and minority veto rights. Our investment in ViiV is reported as a private equity
investment in Long-term investments and loans in our consolidated balance sheets as of December 31, 2010 and 2009. Our share
of ViiV’s income and expenses is recorded in Other deductions—net.
F. Adjustment of Prior Years’ Liabilities for Product Returns
Revenues in 2008 include a reduction recorded in the third quarter of 2008 of $217 million, pre-tax, to adjust our prior years'
liabilities for product returns. After a detailed review in 2008 of our returns experience, we determined that our previous accounting
methodology for product returns needed to be revised as the lag time between product sale and return was longer than we
previously had assumed. Although fully recorded in 2008, virtually all of the adjustment relates back several years.
2010 Financial Report 67