Pfizer 2015 Annual Report Download - page 83

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
82
2015 Financial Report
Collaboration with Merck KGaA
In November 2014, we entered into a collaborative arrangement with Merck KGaA, to jointly develop and commercialize avelumab, the
proposed international non-proprietary name for the investigational anti-PD-L1 antibody (MSB0010718C), currently in development as a
potential treatment for multiple types of cancer. We and Merck KGaA are exploring the therapeutic potential of this novel anti-PD-L1 antibody
as a single agent as well as in various combinations with our and Merck KGaA’s broad portfolio of approved and investigational oncology
therapies. The collaboration with Merck KGaA has initiated 28 programs, monotherapy and combination trials, including seven pivotal trials in
Phase IB/2 or Phase 3 (two in lung cancer, two in gastric cancer, and one in each of bladder cancer, Merkel cell carcinoma and ovarian
cancer) and received FDA breakthrough therapy designation for avelumab in metastatic Merkel cell carcinoma. We and Merck KGaA are also
combining resources and expertise to advance our anti-PD-1 antibody into Phase 1 trials. Under the terms of the agreement, in the fourth
quarter of 2014, we made an upfront payment of $850 million to Merck KGaA and Merck KGaA is eligible to receive regulatory and commercial
milestone payments of up to approximately $2.0 billion. Both companies will jointly fund all development and commercialization costs, and split
equally any profits generated from selling any anti-PD-L1 or anti-PD-1 products from this collaboration. Also, as part of the agreement, we
gave Merck KGaA certain co-promotion rights for Xalkori in the U.S. and several other key markets, and co-promotion activities were initiated
in key select markets in 2015. In 2014, we recorded $1.2 billion of Research and development expenses associated with this collaborative
arrangement, composed of the $850 million upfront cash payment as well as an additional amount of $309 million, reflecting the estimated fair
value of the co-promotion rights given to Merck KGaA.
D. Divestitures
Animal Health Business—Zoetis Inc.
On June 24, 2013, we completed the full disposition of our Animal Health business. The full disposition was completed through a series of
steps, including, in the first quarter of 2013, the formation of Zoetis and an initial public offering (IPO) of an approximate 19.8% interest in
Zoetis and, in the second quarter of 2013, an exchange offer for the remaining 80.2% interest.
With respect to the formation and disposition of Zoetis, in 2013:
• Formation of Zoetis—On January 28, 2013, our then wholly owned subsidiary, Zoetis, issued $3.65 billion aggregate principal amount of
senior notes. Also, on January 28, 2013, we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business
in exchange for all of the Class A and Class B common stock of Zoetis, $1.0 billion of the $3.65 billion of Zoetis senior notes and an
amount of cash equal to substantially all of the cash proceeds received by Zoetis from the remaining $2.65 billion of senior notes issued.
The $1.0 billion of Zoetis senior notes received by Pfizer were exchanged by Pfizer for the retirement of Pfizer commercial paper issued in
2012, and the cash proceeds received by Pfizer of approximately $2.6 billion were used for dividends and stock buybacks.
• Initial Public Offering (19.8% Interest)—On February 6, 2013, an IPO of the Class A common stock of Zoetis was completed, pursuant to
which we sold 99.015 million shares of Class A common stock of Zoetis (all of the Class A common stock, including shares sold pursuant
to the underwriters’ option to purchase additional shares, which was exercised in full) in exchange for the retirement of approximately $2.5
billion of Pfizer commercial paper issued in 2013. The Class A common stock sold in the IPO represented approximately 19.8% of the total
outstanding Zoetis shares. The excess of the consideration received over the net book value of our divested interest was approximately
$2.3 billion and was recorded in Additional paid-in capital.
• Exchange Offer (80.2% Interest)—On June 24, 2013, we exchanged all of our remaining interest in Zoetis, 400.985 million shares of
Zoetis Class A common stock (after converting all of our Class B common stock into Class A common stock, representing approximately
80.2% of the total outstanding Zoetis shares), for approximately 405.117 million outstanding shares of Pfizer common stock on a tax-free
basis pursuant to an exchange offer made to Pfizer shareholders. The $11.4 billion of Pfizer common stock received in the exchange
transaction was recorded in Treasury stock and was valued using the opening price of Pfizer common stock on June 24, 2013, the date we
accepted the Zoetis shares for exchange. The gain on the sale of the remaining interest in Zoetis was approximately $10.3 billion, net of
income taxes resulting from certain legal entity reorganizations, and was recorded in Gain on disposal of discontinued operations––net of
tax in the consolidated statement of income for the year ended December 31, 2013.
In summary, as a result of the above transactions, we received cash and were relieved of debt obligations in the aggregate amount of
approximately $6.1 billion and received shares of Pfizer common stock (held in Treasury stock) valued at approximately $11.4 billion.
The operating results of the animal health business through June 24, 2013, the date of disposal, are reported as Income from discontinued
operations––net of tax in the consolidated statement of income for the year ended December 31, 2013.
In connection with the above transactions, we entered into a transitional services agreement (TSA) and manufacturing and supply agreements
(MSAs) with Zoetis that are designed to facilitate the orderly transfer of business operations to the standalone Zoetis entity. The TSA relates
primarily to administrative services, which are generally to be provided within 24 months. Services under the TSA are largely completed as of
December 31, 2015. Under the MSAs, we will manufacture and supply certain animal health products to Zoetis for a period of up to five years,
with an ability to extend, if necessary, upon mutual agreement of both parties. These agreements are not material and none confers upon us
the ability to influence the operating and/or financial policies of Zoetis subsequent to June 24, 2013, the date of disposal.