Pfizer 2010 Annual Report Download - page 49

Financial Review
Pfizer Inc. and Subsidiary Companies
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or
otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and
10-K reports and our other filings with the SEC.
Certain risks, uncertainties and assumptions are discussed here and under the heading entitled “Risk Factors” in Item 1A. of our
Annual Report on Form 10-K for the year ended December 31, 2010, which will be filed in February 2011. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or
uncertainties.
This report includes discussion of certain clinical studies relating to various in-line products and/or product candidates. These
studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein
should be considered in the context of the larger body of data. In addition, clinical trial data are subject to differing interpretations,
and, even when we view data as sufficient to support the safety and/or effectiveness of a product candidate or a new indication for
an in-line product, regulatory authorities may not share our views and may require additional data or may deny approval altogether.
Financial Risk Management
The overall objective of our financial risk management program is to seek to minimize the impact of foreign exchange rate
movements and interest rate movements on our earnings. We manage these financial exposures through operational means and by
using various financial instruments. These practices may change as economic conditions change.
Foreign Exchange Risk—A significant portion of our revenues and earnings is exposed to changes in foreign exchange rates. We
seek to manage our foreign exchange risk in part through operational means, including managing same-currency revenues in
relation to same-currency costs and same-currency assets in relation to same-currency liabilities.
Foreign exchange risk is also managed through the use of foreign currency forward-exchange contracts. These contracts are used
to offset the potential earnings effects from mostly intercompany short-term foreign currency assets and liabilities that arise from
operations. Foreign currency swaps are used to offset the potential earnings effects from foreign currency debt. We also use foreign
currency forward-exchange contracts and foreign currency swaps to hedge the potential earnings effects from short-term and long-
term foreign currency investments, third-party loans and intercompany loans.
In addition, under certain market conditions, we protect against possible declines in the reported net investments of our Japanese
yen and, prior to 2009, Swedish krona and certain euro functional-currency subsidiaries. In these cases, we use currency swaps or
foreign currency debt.
Our financial instrument holdings at year-end were analyzed to determine their sensitivity to foreign exchange rate changes. The fair
values of these instruments were determined using various methodologies. For additional details, see Notes to Consolidated
Financial Statements—Note 9A. Financial Instruments: Selected Financial Assets and Liabilities. In this sensitivity analysis, we
assumed that the change in one currency’s rate relative to the U.S. dollar would not have an effect on other currencies’ rates relative
to the U.S. dollar; all other factors were held constant.
If the dollar were to devalue against all other currencies by 10%, the expected adverse impact on net income related to our financial
instruments would be immaterial. For additional details, see Notes to Consolidated Financial Statements—Note 9E. Financial
Instruments: Derivative Financial Instruments and Hedging Activities.
Interest Rate Risk—Our U.S. dollar interest-bearing investments, loans and borrowings are subject to interest rate risk. We also are
subject to interest rate risk on euro debt, investments and currency swaps, U.K. debt and currency swaps, Japanese yen short and
long-term borrowings and currency swaps, and, prior to 2009, Swedish krona currency swaps. We seek to invest, loan and borrow
primarily on a short-term or variable-rate basis. From time to time, depending on market conditions, we will fix interest rates either
through entering into fixed-rate investments and borrowings or through the use of derivative financial instruments such as interest
rate swaps. In light of current market conditions, our current borrowings are primarily on a long-term, fixed-rate basis. We may
change this practice as market conditions change.
Our financial instrument holdings at year-end were analyzed to determine their sensitivity to interest rate changes. The fair values of
these instruments were determined using various methodologies. For additional details, see Notes to Consolidated Financial
Statements—Note 9A. Financial Instruments: Selected Financial Assets and Liabilities. In this sensitivity analysis, we used a one
hundred basis point parallel shift in the interest rate curve for all maturities and for all instruments; all other factors were held
constant. If there were a one hundred basis point decrease in interest rates, the expected adverse impact on net income related to
our financial instruments would be immaterial.
Legal Proceedings and Contingencies
We and certain of our subsidiaries are involved in various patent, product liability, consumer, commercial, securities, environmental
and tax litigations and claims; government investigations; and other legal proceedings that arise from time to time in the ordinary
course of our business. We do not believe any of them will have a material adverse effect on our financial position (see Notes to
Consolidated Financial Statements—Note 19. Legal Proceedings and Contingencies).
We record accruals for income tax contingencies to the extent that we conclude that a tax position is not sustainable under a “more
likely than not” standard and we record our estimate of the potential tax benefits in one tax jurisdiction that could result from the
payment of income taxes in another tax jurisdiction when we conclude that the potential recovery is more likely than not (see Notes
to Consolidated Financial Statements—Note 1P. Significant Accounting Policies: Deferred Tax Assets and Income Tax
2010 Financial Report 47