Pfizer 2007 Annual Report Download - page 25

SI&A expenses increased 2% in 2006, compared to 2005, which
reflects:
•higher promotional investments in new product launches and
in-line product promotional programs;
•expenses related to share-based payments; and
•the impact of higher implementation costs associated with
our cost-reduction initiatives of $243 million in 2006, compared
to $151 million in 2005,
partially offset by:
•the favorable impact on expenses of foreign exchange; and
•savings related to our cost-reduction initiatives.
Research and Development (R&D) Expenses
R&D expenses increased 6% in 2007, compared to 2006, which
reflects:
•the impact of higher implementation costs associated with
our cost-reduction initiatives of $416 million in 2007, compared
to $176 million in 2006;
•an initial payment to BMS of $250 million and additional
payments to BMS related to product development efforts, in
connection with our collaboration to develop and commercialize
apixaban, recorded in 2007;
•the unfavorable impact on expenses of foreign exchange;
•a one-time R&D milestone due to us from sanofi-aventis
(approximately $118 million) recorded in 2006; and
•exit costs, such as contract termination costs, associated with
Exubera of $100 million (See the “Our 2007 Performance:
Decision to Exit Exubera” section of this Financial Review),
partially offset by:
•savings related to our cost-reduction initiatives.
R&D expenses increased 5% in 2006, compared to 2005, which
reflects:
•the impact of higher implementation costs associated with
our cost-reduction initiatives of $176 million in 2006, compared
to $50 million in 2005;
•expenses related to share-based payments;
•timing considerations associated with the advancement of
development programs for pipeline products; and
•higher payments for intellectual property rights, discussed
below, among other factors,
partially offset by:
•a one-time R&D milestone due to us from sanofi-aventis
(approximately $118 million); and
•savings related to our cost-reduction initiatives.
R&D expenses also include payments for intellectual property
rights of $603 million in 2007, $292 million in 2006 and $156
million in 2005. (For further discussion, see the “Our Strategic
Initiatives—Strategy and Recent Transactions: Acquisitions,
Licensing and Collaborations” section of this Financial Review.)
Acquisition-Related In-Process Research and
Development Charges
The estimated value of acquisition-related IPR&D is expensed at
the acquisition date. In 2007, we expensed $283 million of IPR&D,
primarily related to our acquisitions of BioRexis and Embrex. In
2006, we expensed $835 million of IPR&D, primarily related to our
acquisitions of Rinat and PowderMed. In 2005, we expensed $1.7
billion of IPR&D, primarily related to our acquisitions of Vicuron
and Idun.
Cost-Reduction Initiatives
In connection with our cost-reduction initiatives, which were
launched in early 2005 and broadened in October 2006, our
management has performed a comprehensive review of our
processes, organizations, systems and decision-making procedures
in a company-wide effort to improve performance and efficiency.
On January 22, 2007, we announced additional plans to change
the way we run our businesses to meet the challenges of a
changing business environment and to take advantage of the
diverse opportunities in the marketplace. We are generating net
cost reductions through site rationalization in R&D and
manufacturing, streamlined organizational structures, sales force
and staff function reductions, and increased outsourcing and
procurement savings. Compared to 2006, we expect to achieve a
net reduction of the pre-tax total expense component of Adjusted
income of at least $1.5 billion to $2.0 billion by the end of 2008
on a constant currency basis (the actual foreign exchange rates
in effect in 2006). (For an understanding of Adjusted income, see
the “Adjusted Income” section of this Financial Review.)
The actions associated with the expanded cost-reduction initiatives
include restructuring charges, such as asset impairments, exit
costs and severance costs (including any related impacts to our
benefit plans, including settlements and curtailments) and
associated implementation costs, such as accelerated depreciation
charges, primarily associated with plant network optimization
efforts, and expenses associated with system and process
standardization and the expansion of shared services worldwide.
(See Notes to Consolidated Financial Statements—Note 5. Cost-
Reduction Initiatives.) The strengthening of the euro and other
currencies relative to the dollar, while favorable on Revenues, has
had an adverse impact on our total expenses (Cost of sales,
Selling, administrative and informational expenses, and Research
and development expenses), including the reported impact of
these cost-reduction efforts.
2007 Financial Report 23
Financial Review
Pfizer Inc and Subsidiary Companies