Pfizer 2013 Annual Report Download - page 73

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
72
2013 Financial Report
D. Equity-Method Investments
Investment in Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer)
On September 6, 2012, we and Zhejiang Hisun Pharmaceuticals Co., Ltd., a leading pharmaceutical company in China, formed a new
company, Hisun Pfizer, to develop, manufacture, market and sell pharmaceutical products, primarily branded generic products, predominately
in China. Hisun Pfizer was established with registered capital of $250 million, of which our portion was $122.5 million. On January 1, 2013,
both parties transferred selected employees to Hisun Pfizer and contributed, among other things, certain rights to commercialized products
and products in development, intellectual property rights, and facilities, equipment and distribution/customer contracts. Our contributions in
2013 constituted a business, as defined by U.S. GAAP, and included, among other things, the China rights to certain commercialized products
and other products not yet commercialized and all associated intellectual property rights. As a result of the contributions from both parties,
Hisun Pfizer holds a broad portfolio of branded generics covering cardiovascular disease, infectious disease, oncology, mental health, and
other therapeutic areas. We hold a 49% equity interest in Hisun Pfizer.
We also entered into certain transition agreements designed to ensure and facilitate the orderly transfer of the business operations to Hisun
Pfizer, primarily the Pfizer Products Transition Period Agreement and a related supply and promotional services agreement. These
agreements provide for a profit margin on the manufacturing services provided by Pfizer to Hisun Pfizer and govern the supply, promotion and
distribution of Pfizer products until Hisun Pfizer begins its own manufacturing and distribution. While intended to be transitional, these
agreements may be extended by mutual agreement of the parties for several years and, possibly, indefinitely. These agreements are not
material to Pfizer, and none confers upon us any additional ability to influence the operating and/or financial policies of Hisun Pfizer.
In connection with our contributions in the first quarter of 2013, we recognized a pre-tax gain of approximately $459 million in Other (income)/
deductions––net, reflecting the transfer of the business to Hisun Pfizer (including an allocation of goodwill from our Emerging Markets
reporting unit as part of the carrying amount of the business transferred). Since we hold a 49% interest in Hisun Pfizer, we have an indirect
retained interest in the contributed assets; as such, 49% of the gain, or $225 million, represents the portion of the gain associated with that
indirect retained interest.
In valuing our investment in Hisun Pfizer (which includes the indirect retained interest in the contributed assets), we used discounted cash flow
techniques, utilizing a 11.5% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal
terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing
of the projected net cash flows, which include the expected impact of competitive, legal and/or regulatory forces on the products; the long-term
growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various
risks inherent in the projected cash flows, including country risk.
We are accounting for our interest in Hisun Pfizer as an equity-method investment, due to the significant influence we have over the
operations of Hisun Pfizer through our board representation, minority veto rights and 49% voting interest. Our investment in Hisun Pfizer is
reported as a private equity investment in Long-term investments, and our share of Hisun Pfizer's net income is recorded in Other (income)/
deductions––net. As of December 31, 2013, the carrying value of our investment in Hisun Pfizer is approximately $1.4 billion, and the amount
of our underlying equity in the net assets of Hisun Pfizer is approximately $770 million. The excess of the carrying value of our investment over
our underlying equity in the net assets of Hisun Pfizer has been allocated, within the investment account, to goodwill and other intangible
assets. The amount allocated to other intangible assets is being amortized into Other (income)/deductions––net over an average estimated
useful life of 25 years.
Investment in ViiV Healthcare Limited
In 2009, we and GlaxoSmithKline plc created ViiV Healthcare Limited (ViiV), which is focused solely on research, development and
commercialization of human immunodeficiency virus (HIV) medicines.
• On August 12, 2013, the FDA approved Tivicay (dolutegravir), a product for the treatment of HIV-1 infection, developed by ViiV, an equity-
method investee. This approval, in accordance with the agreement between GlaxoSmithKline plc and Pfizer, triggered a reduction in our
interest in ViiV from 13.5% to 12.6% and an increase in GlaxoSmithKline plc's equity interest in ViiV from 76.5% to 77.4% effective
October 1, 2013. As a result, in 2013, we recognized a loss of approximately $32 million in Other (income)/ deductions––net.
• On October 31, 2012, ViiV acquired the remaining 50% of Shionogi-ViiV Healthcare LLC, its equity-method investee, from Shionogi & Co.,
Ltd. (Shionogi) in consideration for a 10% interest in ViiV (newly issued shares) and contingent consideration in the form of future royalties.
As a result of this transaction, ViiV recorded a gain associated with the step-up on the 50% interest previously held by ViiV. Also, Pfizer's
equity interest in ViiV was reduced from 15% to 13.5% and GlaxoSmithKline plc's equity interest was reduced from 85% to 76.5%. As a
result of the above, in 2012 we recognized a gain of $44 million, which was recorded in Other (income)/deductions––net.
Investment in Laboratório Teuto Brasileiro
On November 8, 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% equity stake in Teuto, and entered into a
series of commercial agreements. The partnership is enhancing our position in Brazil, a key emerging market, by providing access to Teuto’s
portfolio of products. Under the terms of our purchase agreement with Teuto, we made an upfront payment at the closing of approximately
$230 million. We have an option to acquire the remaining 60% of Teuto’s shares beginning in 2014, and Teuto’s shareholders have an option
to sell their 60% stake to us beginning in 2015. The portion of the total arrangement consideration that was allocated to the net call/put option,
based on relative fair values of the 40% equity investment and the net option, is being accounted for at cost less any impairment losses. Our
investment in Teuto is accounted for under the equity method due to the significant influence we have over the operations of Teuto through our
board representation, minority veto rights and 40% voting interest.