Pfizer 2008 Annual Report Download - page 5

Financial Review
Pfizer Inc and Subsidiary Companies
OAdjustment of Prior Years’ Liabilities for Product Returns
Revenues in 2008 include a reduction 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 actually longer than we had previously assumed.
Although fully recorded in the third quarter of 2008, virtually all of the adjustment relates back several years. We have also
reviewed our expense calculations for the prior years and determined that the expense recorded in those years was not
materially different from what would have been recorded under our revised approach.
OExubera
In the third quarter of 2007, we exited Exubera, an inhalable form of insulin for the treatment of diabetes. Total pre-tax charges
in 2007 were $2.8 billion and were included primarily in Cost of sales ($2.6 billion), Selling, informational and administrative
expenses ($85 million), and Research and development expenses ($100 million). The charges comprised asset write-offs of
$2.2 billion (intangibles, inventory and fixed assets) and other exit costs, primarily severance, contract and other termination
costs. As of December 31, 2008, the remaining accrual for other exit costs is approximately $152 million. Substantially all of
this cash spending is expected to be completed in 2009. See Notes to Consolidated Financial Statements—Note 4D. Certain
Charges: Exubera.
•Acquisitions—We completed a number of strategic acquisitions that we believe will strengthen and broaden our existing pharmaceutical
capabilities. In 2008, we acquired Serenex Inc. (Serenex), a privately held biotechnology company with SNX-5422 and an extensive
Hsp90 inhibitor compound library; Encysive Pharmaceuticals Inc. (Encysive), a biopharmaceutical company with the pulmonary arterial
hypertension product, Thelin; CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic
research; Coley Pharmaceuticals, Inc. (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to
fight cancers, allergy and asthma disorders, and autoimmune diseases; a number of animal health product lines in Europe from
Schering-Plough Corporation (Schering-Plough); and two smaller acquisitions also related to Animal Health. (See further discussion in
the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial
Review.)
•Cost-reduction initiatives—We made significant progress with our cost-reduction and transformation initiatives, launched in early 2005,
which are a broad-based, company-wide effort to improve performance and efficiency. In 2008, we exceeded our cost-reduction goal
by reducing adjusted total costs by $2.8 billion, compared to 2006, on a constant currency basis (the actual foreign exchange rates in
effect during 2006). In January 2009, we announced a new cost-reduction initiative that we anticipate will drive a lower, more variable
cost structure to achieve a reduction in adjusted total costs of approximately $3 billion, based on the actual foreign exchange rates in
effect during 2008, by the end of 2011, compared with our 2008 adjusted total costs. We plan to reinvest approximately $1 billion of
these savings in the business, resulting in an expected $2 billion net decrease. Reductions will span sales, manufacturing, research
and development, and administrative organizations. (See further discussion in the “Our Cost-Reduction Initiatives” section of this
Financial Review.) We incurred related costs of approximately $4.2 billion in 2008, $3.9 billion in 2007 and $2.1 billion in 2006. (For an
understanding of Adjusted income, see the “Adjusted income” section of this Financial Review).
•Income from continuing operations was $8.0 billion compared to $8.2 billion in 2007. The decrease reflected the following:
Oa $2.3 billion, pre-tax and after-tax, charge resulting from an agreement in principle with the U.S. Department of Justice to resolve the
previously reported investigation regarding allegations of past off-label promotional practices concerning Bextra, as well as certain
other open investigations, and a $640 million after-tax charge related to agreements and agreements in principle to resolve certain
non-steroidal anti-inflammatory drugs (NSAID) litigation and claims;
Ohigher Acquisition-related in-process research and development charges (IPR&D). In 2008, we incurred IPR&D of $633 million,
pre-tax, primarily related to our acquisitions of Serenex, Encysive, CovX, Coley, and a number of animal health product lines from
Schering-Plough, as well as two smaller acquisitions also related to Animal Health, compared with IPR&D of $283 million, pre-tax, in
2007, primarily related to our acquisitions of BioRexis Pharmaceutical Corp. (BioRexis) and Embrex, Inc. (Embrex);
Othe up-front payment of $225 million to Medivation, Inc. (Medivation) in connection with our collaboration to develop and
commercialize Dimebon and the up-front payment of $75 million to Auxilium Pharmaceuticals, Inc. (Auxilium) in connection with our
collaboration to develop and commercialize Xiaflex;
Oa higher effective income tax rate, despite the tax benefits in 2008 related to favorable effectively settled tax issues and the sale of
one of our biopharmaceutical companies (Esperion Therapeutics, Inc.); and
Olower interest income compared to 2007, due primarily to lower average net financial assets during 2008 as compared to 2007,
reflecting proceeds of $16.6 billion from the sale of our Consumer Healthcare business in December 2006, and lower interest rates,
partially offset by:
Olower asset impairment charges, primarily due to $1.8 billion, after-tax, in 2007 related to our decision to exit Exubera;
Othe favorable impact of foreign exchange;
Osavings related to our cost-reduction initiatives; and
Oa payment recorded in 2007 to Bristol-Myers Squibb Company (BMS) in connection with our collaboration to develop and
commercialize apixaban.
•Discontinued operations—net of tax were a gain of $78 million in 2008, compared with a loss of $69 million in 2007. (See further
discussion in the “Our Strategic Initiatives—Strategy and Recent Transactions: Dispositions” section of this Financial Review.)
2008 Financial Report 3