Pfizer 2008 Annual Report Download - page 33

Financial Review
Pfizer Inc and Subsidiary Companies
the Section 162(m) limitation, the bonuses are funded from a pool based on the achievement of three financial metrics, including
adjusted diluted earnings per share, which is derived from Adjusted income. These metrics derived from Adjusted income account for
(i) 17% of the target bonus for ELT members and (ii) 33% of the bonus pool made available to ELT members and other members of
senior management.
Despite the importance of this measure to management in goal setting and performance measurement, we stress that Adjusted
income is a non-U.S. GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has
limits in its usefulness to investors. Because of its non-standardized definition, Adjusted income (unlike U.S. GAAP Net income) may
not be comparable with the calculation of similar measures for other companies. Adjusted income is presented solely to permit
investors to more fully understand how management assesses our performance.
We also recognize that, as an internal measure of performance, the Adjusted income measure has limitations and we do not restrict
our performance-management process solely to this metric. A limitation of the Adjusted income measure is that it provides a view of
our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased
intangibles, and does not provide a comparable view of our performance to other companies in the pharmaceutical industry. We also
use other specifically tailored tools designed to ensure the highest levels of our performance. For example, our R&D organization
has productivity targets, upon which its effectiveness is measured. In addition, Performance Share Awards grants made in 2006,
2007, 2008 and future years will be paid based on a non-discretionary formula that measures our performance using relative total
shareholder return.
Purchase Accounting Adjustments
Adjusted income is calculated prior to considering certain significant purchase-accounting impacts, such as those related to
business combinations and net asset acquisitions (see Notes to Consolidated Financial Statements—Note 2. Acquisitions). These
impacts can include charges for purchased in-process R&D, the incremental charge to cost of sales from the sale of acquired
inventory that was written up to fair value and the incremental charges related to the amortization of finite-lived intangible assets for
the increase to fair value. Therefore, the Adjusted income measure includes the revenues earned upon the sale of the acquired
products without considering the aforementioned significant charges.
Certain of the purchase-accounting adjustments associated with a business combination, such as the amortization of intangibles
acquired in connection with our acquisition of Pharmacia in 2003, can occur for up to 40 years (these assets have a weighted-
average useful life of approximately nine years), but this presentation provides an alternative view of our performance that is used
by management to internally assess business performance. We believe the elimination of amortization attributable to acquired
intangible assets provides management and investors an alternative view of our business results by trying to provide a degree of
parity to internally developed intangible assets for which research and development costs have been previously expensed.
However, a completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be
achieved through Adjusted income. This component of Adjusted income is derived solely with the impacts of the items listed in the
first paragraph of this section. We have not factored in the impacts of any other differences in experience that might have occurred if
we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the
results that would have occurred in those circumstances. For example, our research and development costs in total, and in the
periods presented, may have been different; our speed to commercialization and resulting sales, if any, may have been different; or
our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our
customers. As such, in total, there can be no assurance that our Adjusted income amounts would have been the same as presented
had we discovered and developed the acquired intangible assets.
Acquisition-Related Costs
Adjusted income is calculated prior to considering integration and restructuring costs associated with business combinations
because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate two
businesses as a result of the acquisition decision. For additional clarity, only restructuring and integration activities that are
associated with a purchase business combination or a net-asset acquisition are included in acquisition-related costs. We have made
no adjustments for the resulting synergies.
We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because
the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or
employees—a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to
convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business
combination) can be viewed differently from those costs incurred in other, more normal business contexts.
The integration and restructuring costs associated with a business combination may occur over several years, with the more
significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions,
the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the highly
regulated nature of the pharmaceutical business, the closure of excess facilities can take several years, as all manufacturing
changes are subject to extensive validation and testing and must be approved by the FDA and/or other global regulatory authorities.
Discontinued Operations
Adjusted income is calculated prior to considering the results of operations included in discontinued operations, such as our
Consumer Healthcare business, which we sold in December 2006, as well as any related gains or losses on the sale of such
operations. We believe that this presentation is meaningful to investors because, while we review our businesses and product lines
periodically for strategic fit with our operations, we do not build or run our businesses with an intent to sell them.
2008 Financial Report 31