a5959163.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

__X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2009

OR

TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-3619

----
 
PFIZER INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State of Incorporation)
13-5315170
(I.R.S. Employer Identification No.)
 
235 East 42nd Street, New York, New York  10017
(Address of principal executive offices)  (zip code)
(212) 573-2323
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
YES
X
 
NO
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES
 
 
NO
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large Accelerated filer
X
 
Accelerated filer
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES
 
 
NO
X
 
 
At May 5, 2009, 6,747,979,039 shares of the issuer’s voting common stock were outstanding.
 

 
FORM 10-Q
 
For the Quarter Ended
March 29, 2009
 
Table of Contents
 
Page
   
 
 
 
   
 
3
   
 
4
   
 
5
   
 
6
   
 
21
   
 
 
22
   
 
 
51
   
 
 
51
   
 
 
   
 
 
52
   
 
 
54
   
 
 
55
   
 
 
55
   
 
 
55
   
 
 
57
   
 
 
57
   
 
58
 
2

 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
       
   
Three Months Ended
 
 
(millions, except per common share data) 
 
Mar. 29,
2009
   
Mar. 30,
2008
 
             
Revenues 
  $ 10,867     $ 11,848  
                 
Costs and expenses:
               
Cost of sales(a)
    1,408       1,986  
Selling, informational and administrative expenses(a) 
    2,876       3,492  
Research and development expenses(a)
    1,705       1,791  
Amortization of intangible assets 
    578       779  
Acquisition-related in-process research and development charges
          398  
Restructuring charges and acquisition-related costs
    554       178  
Other (income)/deductions – net
    (57 )     (333 )
                 
Income from continuing operations before provision for taxes on income
    3,803       3,557  
                 
Provision for taxes on income
    1,074       763  
                 
Income from continuing operations
    2,729       2,794  
                 
Discontinued operations - net of tax
    1       (4 )
                 
Net income before allocation to noncontrolling interests
    2,730       2,790  
                 
Less:  Net income attributable to noncontrolling interests
    1       6  
                 
Net income attributable to Pfizer Inc.    
  $ 2,729     $ 2,784  
                 
Earnings per share – basic:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.41     $ 0.41  
Discontinued operations - net of tax
     –        
Net income attributable to Pfizer Inc. common shareholders
  $ 0.41     $ 0.41  
                 
Earnings per share – diluted:
               
Income from continuing operations attributable to Pfizer Inc. common shareholders
  $ 0.40     $ 0.41  
Discontinued operations - net of tax
           
Net income attributable to Pfizer Inc. common shareholders
  $ 0.40     $ 0.41  
                 
Weighted-average shares used to calculate earnings per common share:
               
Basic  
    6,723       6,739  
Diluted   
    6,753       6,762  
                 
Cash dividends paid per common share
  $ 0.32     $ 0.32  

(a) Exclusive of amortization of intangible assets, except as disclosed in Note 10B. Goodwill and Other Intangible Assets:Other Intangible Assets.

See accompanying Notes to Condensed Consolidated Financial Statements.
 
3

 
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

             
(millions of dollars)
 
Mar. 29,
2009*
   
Dec. 31,
2008**
 
ASSETS
           
Cash and cash equivalents 
  $ 1,247     $ 2,122  
Short-term investments 
    32,805       21,609  
Accounts receivable, less allowance for doubtful accounts
    9,596       8,958  
Short-term loans 
    793       824  
Inventories 
    4,458       4,381  
Taxes and other current assets
    5,055       5,034  
Assets held for sale
    299       148  
Total current assets 
    54,253       43,076  
Long-term investments and loans
    13,536       11,478  
Property, plant and equipment, less accumulated depreciation
    12,936       13,287  
Goodwill
    21,482       21,464  
Identifiable intangible assets, less accumulated amortization 
    16,923       17,721  
Other assets, deferred taxes and deferred charges 
    3,802       4,122  
Total assets 
  $ 122,932     $ 111,148  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Short-term borrowings, including current portion of long-term debt
  $ 7,613     $ 9,320  
Accounts payable 
    1,573       1,751  
Dividends payable
    1       2,159  
Income taxes payable   
    542       656  
Accrued compensation and related items
    1,565       1,667  
Other current liabilities
    12,046       11,456  
Total current liabilities 
    23,340       27,009  
                 
Long-term debt                 
    21,064       7,963  
Pension benefit obligations                              
    4,038       4,235  
Postretirement benefit obligations 
    1,604       1,604  
Deferred taxes   
    2,849       2,959  
Other taxes payable
    6,770       6,568  
Other noncurrent liabilities 
    2,826       3,070  
Total liabilities 
    62,491       53,408  
                 
Preferred stock
    69       73  
Common stock
    443       443  
Additional paid-in capital     
    70,201       70,283  
Employee benefit trust, at fair value                
    (285 )     (425 )
Treasury stock  
    (57,363 )     (57,391 )
Retained earnings
    51,863       49,142  
Accumulated other comprehensive expense
    (4,673 )     (4,569 )
Total Pfizer Inc. shareholders’ equity 
    60,255       57,556  
Equity attributable to noncontrolling interests 
    186       184  
Total shareholders’ equity  
    60,441       57,740  
Total liabilities and shareholders’ equity
  $ 122,932     $ 111,148  
 
Unaudited. 
**   Condensed from audited financial statements. 
      
See accompanying Notes to Condensed Consolidated Financial Statements.
 
4

 
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
       
   
Three Months Ended
 
(millions of dollars) 
 
Mar. 29,
2009
   
Mar. 30,
2008
 
             
Operating Activities:
           
Net income before allocation to noncontrolling interests  
  $ 2,730     $ 2,790  
Adjustments to reconcile net income before allocation to noncontrolling interests to net
cash provided by operating activities:
               
Depreciation and amortization 
    1,008       1,487  
Share-based compensation expense
    71       101  
Acquisition-related in-process research and development charges
          398  
Deferred taxes from continuing operations
    533       544  
Other non-cash adjustments 
    (296 )     213  
Changes in assets and liabilities (net of businesses acquired and divested)
    (899 )     (2,262 )
                 
Net cash provided by operating activities
    3,147       3,271  
                 
Investing Activities:
               
Purchases of property, plant and equipment 
    (253 )     (483 )
Purchases of short-term investments 
    (17,724 )     (10,648 )
Proceeds from redemptions and sales of short-term investments
    6,711       6,817  
Purchases of long-term investments  
    (3,442 )     (498 )
Proceeds from redemptions and sales of long-term investments
    889       42  
Acquisitions, net of cash acquired 
          (610 )
Other
    185       (104 )
                 
Net cash used in investing activities
    (13,634 )     (5,484 )
                 
Financing Activities:
               
Increase in short-term borrowings, net
    10,774       4,899  
Principal payments on short-term borrowings
    (12,100 )     (1,955 )
Proceeds from issuances of long-term debt, net
    13,392       602  
Principal payments on long-term debt
    (303 )     (561 )
Cash dividends paid
    (2,133 )     (2,138 )
Stock option transactions and other
    5       1  
                 
Net cash provided by financing activities
    9,635       848  
Effect of exchange-rate changes on cash and cash equivalents
    (23 )     (28 )
Net decrease in cash and cash equivalents
    (875 )     (1,393 )
Cash and cash equivalents at beginning of period 
    2,122       3,406  
                 
Cash and cash equivalents at end of period 
  $ 1,247     $ 2,013  
                 
Supplemental Cash Flow Information:
               
Cash paid during the period for:
               
Income taxes
  $ 454     $ 640  
Interest
    84       166  

See accompanying Notes to Condensed Consolidated Financial Statements.
 
5


PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 1. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month periods ended February 22, 2009, and February 24, 2008.

We made certain reclassifications to prior-period amounts to conform to the first-quarter 2009 presentation related to the presentation of noncontrolling interests as a result of adopting a new accounting standard (See Note 2. Adoption of New Accounting Policies.)

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited financial statements included in this document.  The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in Pfizer’s Annual Report on Form 10-K for the year ended December 31, 2008.

On January 26, 2009, we announced that we entered into a definitive merger agreement under which we will acquire Wyeth in a cash-and-stock transaction valued on that date at $50.19 per share, or a total of $68 billion. While we have taken actions and incurred costs associated with the pending transaction that are reflected in our financial statements, the pending acquisition of Wyeth will not be reflected in our financial statements until consummation. (See Note 14. Pending Acquisition of Wyeth.)

Note 2. Adoption of New Accounting Policies

As of January 1, 2009, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 141R, Business Combinations, as amended. SFAS 141R, as amended, retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development costs at fair value and requires the expensing of acquisition-related costs as incurred. The adoption of SFAS 141R, as amended, did not impact our consolidated financial statements upon adoption, but does impact the accounting for future acquisitions, including our pending acquisition of Wyeth.

As of January 1, 2009, we adopted FASB Financial Staff Position (FSP) SFAS No. 142-3, Determination of the Useful Life of Intangible Assets. FSP SFAS 142-3 amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. Among other things, in the absence of historical experience, an entity will be required to consider assumptions used by market participants. The adoption of FSP SFAS 142-3 did not impact our consolidated financial statements upon adoption, but could impact the accounting for future acquisitions.

As of January 1, 2009, we adopted the provisions of FASB SFAS No. 157, Fair Value Measurements, as amended, that we did not adopt as of January 1, 2008. SFAS 157, as amended, defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. The adoption of the remaining provisions of SFAS 157, as amended, did not have a significant impact on our consolidated financial statements upon adoption, but will impact the accounting for future acquisitions, including our pending acquisition of Wyeth, and other events and transactions measured at fair value.
 
6

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
As of January 1, 2009, we adopted FASB SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS 160 provides guidance for the accounting, reporting and disclosure of noncontrolling interests, previously referred to as minority interests. A noncontrolling interest represents the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The adoption of SFAS 160 resulted in a number of changes to the presentation of our consolidated financial statements, but the amounts associated with noncontrolling interests are not significant. SFAS 160 could impact our accounting for future acquisitions where we do not acquire 100% of the entity and our accounting for the deconsolidations of subsidiaries.

As of January 1, 2009, we adopted Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements. EITF 07-1 provides guidance on: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. The adoption of EITF 07-1 did not have a significant impact on our consolidated financial statements, and additional disclosures have been provided. (See Note 4. Collaborative Arrangements.)

As of January 1, 2009, we adopted EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits. EITF 08-3 provides guidance that maintenance deposits paid by a lessee and subsequently refunded only if a lessee fulfills a maintenance obligation will be accounted for as a deposit asset. The adoption of EITF 08-3 did not have a significant impact on our consolidated financial statements.

As of January 1, 2009, we adopted EITF Issue No. 08-6, Equity Method Investment Accounting Considerations. EITF 08-6 clarifies how to account for certain transactions involving equity method investments in areas such as how to determine the initial carrying value of the investment; how to allocate the difference between the investor’s carrying value and the investor’s share of the underlying equity of the investment; how to perform an impairment assessment of underlying intangibles held by the investee; how to account for the investee’s issuance of additional shares; and how to account for an investment on the cost method when it had been previously accounted for under the equity method. The adoption of EITF 08-6 did not have a significant impact on our consolidated financial statements, but could impact the accounting for future equity method investments.

As of January 1, 2009, we adopted EITF Issue No. 08-7, Accounting for Defensive Intangible Assets. EITF 08-7 clarifies the accounting for certain separately identifiable assets, which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer to account for a defensive intangible asset as a separate unit of accounting, which should be amortized to expense over the period the asset diminishes in value. The adoption of EITF 08-7 did not have a significant impact on our consolidated financial statements, but could impact the accounting for future acquisitions.

Note 3. Acquisitions

In the first quarter of 2008, we acquired CovX, a privately held biotherapeutics company specializing in preclinical oncology and metabolic research and the developer of a biotherapeutics technology platform that we expect will enhance our biologic portfolio. Also in the first quarter of 2008, we acquired all the outstanding shares of Coley Pharmaceutical Group, Inc., (Coley), a biopharmaceutical company specializing in vaccines and drug candidates designed to fight certain cancers, allergy and asthma disorders, and autoimmune diseases, for approximately $230 million. In connection with these and two smaller acquisitions related to Animal Health, we recorded approximately $398 million in Acquisition-related in-process research and development charges.

Note 4. Collaborative Arrangements

In the normal course of business, we enter into collaborative arrangements with respect to in-line medicines as well as medicines in development that require completion of research and regulatory approval. Collaborative arrangements are contractual agreements with third parties that involve a joint operating activity, typically a research and/or commercialization effort, where both we and our partner are active participants in the activity and are exposed to the significant risks and rewards of the activity.  Our rights and obligations under each collaborative arrangement can vary. For example, we have agreements to co-promote pharmaceutical products discovered by other companies, and we have agreements where we partner to co-develop and/or participate together in commercializing, marketing, promoting, manufacturing, or distributing a drug product.
 
7

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Payments to or from our collaboration partners are presented in the statement of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our partners as alliance revenues, a component of Revenues, when our co-promotion partners are the principal in the transaction and we receive a share in their net sales or profits. Alliance revenues are recorded when our co-promotion partners ship the related product and title passes to their customer. Expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In arrangements where we manufacture product for our partner, we record revenues when our partner sells the product and title passes to their customer. All royalty payments to collaboration partners are recorded as part of Cost of sales.

The amounts and classifications of payments (income/(expense)) between us and our collaboration partners follow:
 
(millions of dollars)
 
First Quarter
   
   
Mar. 29,
 2009
   
Mar. 30,
2008
   
Revenues – Revenues(a)
  $ 132     $ 100    
Revenues – Alliance revenues (b)
    582       488    
Total Revenues
    714       588    
Cost of sales (c)
    (56 )     (31 )  
Selling, informational and administrative expenses
    (17 )     (7 )  
Research and development expenses(d)
    (194 )     (50 )  

(a)  
Represents sales to our partners of products manufactured by us.
(b)  
Substantially all related to amounts earned from our partners under co-promotion agreements.
(c)  
Primarily related to royalties earned by our partners and cost of sales associated with inventory purchased from our partners.
(d)  
Primarily related to net reimbursements earned by our partners except that the first quarter of 2009 also includes a $150 million milestone payment to one of our partners.
 
The amounts disclosed in the above table do not include transactions with third parties other than our collaboration partners, or other costs associated with the products under the collaboration arrangements.
 
Note 5. Cost-Reduction Initiatives

We incurred the following costs in connection with all of our cost-reduction initiatives which began in 2005:
 
   
First Quarter
   
(millions of dollars) 
 
Mar. 29,
2009
   
Mar. 30,
2008
   
               
Implementation costs(a)
  $ 174     $ 357    
Restructuring charges(b)
    157       178    
Total costs related to our cost-reduction initiatives
  $ 331     $ 535    
 
(a)  
For the first quarter of 2009, included in Cost of sales ($76 million), Selling, informational and administrative expenses ($46 million), Research and development expenses ($41 million), and Other (income)/deductions – net ($11 million). For the first quarter of 2008, included in Cost of sales ($138 million), Selling, informational and administrative expenses ($75 million), Research and development expenses ($146 million), and Other (income)/deductions-net ($2 million income).
(b)
Included in Restructuring charges and acquisition-related costs.
 
From the beginning of the cost-reduction initiatives in 2005 through March 29, 2009, the restructuring charges primarily relate to our supply network transformation efforts and the restructuring of our worldwide marketing and research and development operations, and the implementation costs primarily relate to depreciation arising from the shortening of the useful lives of certain assets, as well as system and process standardization and the expansion of shared services.
 
8

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The components of restructuring charges associated with all of our cost-reduction initiatives follow:
                     
(millions of dollars)
 
Costs
Incurred
Through
Mar. 29,
2009 
   
Activity
Through
Mar. 29,
2009(a)
    Accrual
as of
Mar. 29,
2009(b)
   
                     
Employee termination costs
  $ 5,285     $ 3,500     $ 1,785    
Asset impairments
    1,311       1,311          
Other
    444       412       32    
Total restructuring charges
  $ 7,040     $ 5,223     $ 1,817    
 
(a)  
Includes adjustments for foreign currency translation.
(b)
Included in Other current liabilities ($1.240 billion) and Other noncurrent liabilities ($577 million).

During the first quarter of 2009, we expensed $135 million for Employee termination costs, $18 million for Asset impairments and $4 million for Other. Through March 29, 2009, Employee termination costs represent the expected reduction of the workforce by approximately 31,000 employees, mainly in manufacturing, sales and research; and approximately 21,400 of these employees have been terminated. Employee termination costs are recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits. Asset impairments primarily include charges to write down property, plant and equipment. Other primarily includes costs to exit certain activities.

Note 6. Acquisition-Related Costs

We incurred the following acquisition-related costs in connection with our pending acquisition of Wyeth:
 
   
First Quarter
   
 
(millions of dollars) 
 
Mar. 29,
2009 
   
         
Transaction costs (a)
  $ 369    
Pre-integration costs and other(b)
    28    
Total acquisition-related costs(c)
  $ 397    
 
 
(a)  
Transaction costs include banking, legal, accounting and other costs directly related to our pending acquisition of Wyeth. Substantially all of the costs incurred to date are fees related to our $22.5 billion bridge term loan credit agreement entered into with financial institutions on March 12, 2009 (see Note 8C. Financial Instruments: Long-Term Debt) to partially fund our pending acquisition of Wyeth. Upon our issuance of $13.5 billion of senior unsecured notes on March 24, 2009, the commitment under the bridge term loan credit agreement was reduced by an amount equal to the net proceeds we received from such issuance, to a current balance of $9.1 billion, and, accordingly, we expensed the portion of the bridge term loan credit agreement fees associated with the $13.5 billion reduction.
(b)
Pre-integration costs represent external, incremental costs directly related to our pending acquisition of Wyeth and include costs associated with preparing for systems and other integration activities.
(c)
Included in Restructuring charges and acquisition-related costs.
 
9

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Comprehensive Income/(Loss)

The components of comprehensive income/(loss) follow:

   
First Quarter
   
 
(millions of dollars)
 
Mar. 29,
2009
   
Mar. 30,
2008
   
               
Net income before allocation to noncontrolling interests
  $ 2,730     $ 2,790    
Other comprehensive loss:
                 
Currency translation adjustment and other
  $ (384 )   $ (575 )  
Net unrealized gains/(losses) on derivative financial instruments
    (23 )     1    
Net unrealized gains/(losses) on available-for-sale securities
    145       (14 )  
Benefit plan adjustments
    159       84    
Total other comprehensive loss
    (103 )     (504 )  
Total comprehensive income before allocation to noncontrolling interests
    2,627       2,286    
Less: Comprehensive income attributable to noncontrolling interests
    2       8    
Comprehensive income attributable to Pfizer Inc.
  $ 2,625     $ 2,278    

Note 8. Financial Instruments

A. Investments in Debt and Equity Securities

Investments in debt securities reflect the investment of proceeds on March 24, 2009, when Pfizer issued $13.5 billion of senior unsecured notes in anticipation of the acquisition of Wyeth (see Note 8C. Financial Instruments: Long-Term Debt). The note proceeds were generally invested in short-term available-for-sale investments such as money market funds, U.S. Treasury notes, and to a lesser extent, corporate debt.

B. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $6.1 billion as of March 29, 2009.

As of March 29, 2009, we had access to $8.2 billion of lines of credit, of which $6.0 billion expire within one year. Of these lines of credit, $8.1 billion are unused, of which our lenders have committed to loan us $7.1 billion at our request. $7.0 billion of the unused lines of credit, of which $5.0 billion expire in the first quarter of 2010 and $2.0 billion expire in 2013, may be used to support our commercial paper borrowings. The $5.0 billion of lines of credit expiring in the first quarter of 2010 are subject to substantially the same credit covenants as the bridge term loan credit agreement noted below. (See Note 8G. Financial Instruments: Credit Covenants.)

On March 12, 2009, we entered into a $22.5 billion bridge term loan credit agreement (bridge credit agreement) in connection with the pending acquisition of Wyeth. Upon our issuance of $13.5 billion of senior unsecured notes in March 2009 (see Note 8C. Financial Instruments: Long-Term Debt), the commitment under the bridge credit agreement was reduced by an amount equal to the net proceeds we received from such issuance, to a current balance of $9.1 billion. As of March 29, 2009, no amounts have been drawn down under the bridge credit agreement, and borrowings under the bridge credit agreement can only occur on the consummation date of the Wyeth transaction. Amounts drawn under the bridge credit agreement must be used to fund a portion of the Wyeth merger consideration and certain fees and expenses incurred in connection with the merger and would mature 364 days after the merger consummation date but may be extended under certain conditions. The loan interest rate is to be calculated at the highest of specified common base rates, plus specified fixed-rates. The bridge credit agreement will terminate upon the earliest to occur of the following: (i) the consummation of merger, (ii) December 31, 2009, (iii) the abandonment of the merger, (iv) the termination of the merger agreement or (v) the date on which the commitments under the bridge credit agreement are cancelled in full. The pending acquisition of Wyeth is expected to occur at the end of the third quarter or during the fourth quarter of 2009.

Certain bridge credit agreement fees have been expensed as Acquisition-related costs in the income statement caption Restructuring charges and acquisition-related costs (see Note 6. Acquisition-related costs), while other bridge credit agreement fees have been deferred and are included in Other assets, deferred taxes and deferred charges.

 
10 

 

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The bridge credit agreement subjects us to certain covenants until the commitment expires and all loans under the agreement, if any, have been paid. (See Note 8G. Financial Instruments: Credit Covenants.)

C. Long-Term Debt

On March 24, 2009, as part of our financing of the pending acquisition of Wyeth, we issued $13.5 billion of senior unsecured notes. Information as of March 29, 2009 is as follows:
 
(millions of dollars)
 
Maturity Date
 
2009
   
Senior unsecured notes:
           
Floating rate notes at the three-month London Interbank
Offering Rate (LIBOR), plus 1.95%
 
March 2011
  $ 1,250    
 
4.45%(a)
 
March 2012
    3,500    
 
5.35%(a)
 
March 2015
    3,000    
 
6.20%(a)
 
March 2019
    3,250    
 
7.20%(a)
 
March 2039
    2,500    
Total long-term debt issued in connection with the pending acquisition of Wyeth
      $ 13,500    
 
(a)  
The fixed-rate debt is callable at any time at the greater of 100% of the principal amount or the sum of the present values of principal and interest discounted at the U.S. Treasury rate, plus 0.50%.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk - A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to protect net income and net investments against the impact of the translation into U.S. dollars of certain foreign-exchange-denominated transactions. The aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $35 billion. The derivative financial instruments primarily hedge or offset exposures in euro, Japanese yen, and Swedish kroner.

All derivative contracts used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings or deferred, depending on the nature and purpose of the financial instrument (offset or hedge relationship) and the effectiveness of the hedge relationships, as follows:

·  
We defer on the balance sheet the effective portion of the gains or losses on foreign currency forward-exchange contracts and foreign currency swaps that are designated as cash flow hedges and reclassify those amounts, as appropriate, into earnings in the same period or periods during which the hedged transaction affects earnings.

·  
We recognize the gains and losses on forward-exchange contracts and foreign currency swaps that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.

·  
We recognize the gains and losses impact on foreign currency swaps designated as hedges of our net investments in earnings in three ways: over time–for the periodic net swap payments; immediately–to the extent of any change in the difference between the foreign exchange spot rate and forward rate; and upon sale or substantial liquidation of our net investments–to the extent of change in the foreign exchange spot rates.

We defer on the balance sheet foreign exchange gains and losses related to foreign exchange-denominated debt designated as a hedge of our net investments and reclassify those amounts into earnings upon the sale or substantial liquidation of our net investments.

Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness in the first quarter of 2009 or the first quarter of 2008.

 
11 

 

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Interest Rate Risk - Our interest-bearing investments, loans and borrowings are subject to interest rate risk. We invest and loan primarily on a short-term or variable-rate basis; however, due to the pending acquisition of Wyeth and in light of current market conditions, we currently borrow primarily on a long-term, fixed-rate basis. From time to time, depending on market conditions, we will fix interest rates either through entering into fixed-rate investments or through the use of derivative financial instruments. The aggregate notional amount of interest rate derivative financial instruments is $4 billion. The derivative financial instruments primarily offset euro fixed-rate debt, and to a lesser extent, hedge U.S. fixed-rate debt.

All derivative contracts used to manage interest rate risk are measured at fair value and reported as assets or liabilities on the consolidated balance sheet. Changes in fair value are reported in earnings, as follows:

·  
We recognize the gains and losses on interest rate swaps that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. We recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk also in earnings.

Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness in the first quarter of 2009 or the first quarter of 2008.

Information about the fair values of our derivative financial instruments and debt designated as hedging instruments and the impact on our consolidated balance sheet follows:

 
March 29, 2009
 
 
Assets
 
Liabilities
 
(millions of dollars)
Balance
Sheet
Location(a)
 
Fair Value(b)
 
Balance
Sheet
Location(a)
 
Fair Value (b)
 
Derivative financial instruments designated as hedging instruments:
               
Interest rate swaps
OCA
  $ 1  
OCL
  $  
Interest rate swaps
ONCA
    314  
ONCL
    9  
Foreign currency swaps
OCA
    17  
OCL
    6  
Foreign currency swaps
ONCA
    143  
ONCL
    30  
Foreign currency forward-exchange contracts
OCA
    276  
OCL
    266  
                     
Total derivative financial instruments designated as hedging instruments:
      751         311  
                     
Derivative financial instruments not designated as hedging instruments:
                   
                     
Foreign currency swaps
ONCA
     
ONCL
    139  
Foreign currency forward-exchange contracts
OCA
    233  
OCL
    650  
                     
Total derivative financial instruments not designated as hedging instruments
      233         789  
                     
Total derivative financial instruments
    $  984       $ 1,100  
                     
Nonderivative financial instruments designated as hedging instruments:
                   
Foreign currency short-term borrowings
         
STB
  $ 1,273  
Foreign currency long-term debt
         
LTD
    1,927  
                     
Total nonderivative financial instruments designated as hedging instruments
              $ 3,200  
 
(a)  
The primary consolidated balance sheet caption indicates the financial statement classification of the amount associated with the financial instrument used to hedge or offset risk. The abbreviations used are defined as follows: OCA = Taxes and other current assets; ONCA = Other assets, deferred taxes and deferred charges; OCL = Other current liabilities; ONCL = Other noncurrent liabilities; STB = Short-term borrowings; and LTD = Long-term debt.
(b)
See Note 8E. Financial Instruments: Fair Value for a description of the valuation techniques used to determine fair values.
 
 
12 

 
 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Certain of our derivative instruments have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. The aggregate fair value of these derivative instruments that are in a liability position is $315 million, for which we have posted collateral of $230 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a debt-rating organization ratings downgrade. If there had been a downgrade to an A rating, or its equivalent, on March 29, 2009, we would have been required to post an additional $140 million of collateral to our counterparties. If there had been a downgrade to below an A rating, or its equivalent, on March 29, 2009, we would have been required to post an additional $168 million of collateral to our counterparties. (See Note 8F: Financial Instruments: Credit Risk.)

Information about gains and losses on our derivative financial instruments and debt designated as hedging instruments and the impact on our comprehensive income follows:

   
 
First Quarter 2009
 
(millions of dollars)
 
Amount of
Gains/(Losses) Recognized in
Earnings(b)
   
Amount of
Gains/(Losses) Recognized in
OCI (Effective
Portion)(a) (c)
   
Amount of
Gains/(Losses) Reclassified from
OCI into Earnings
(Effective
Portion)(a) (b)
 
Derivative financial instruments in fair value hedge relationships:
                 
Interest rate swaps
  $ (284 )            
Foreign currency swaps
    (1 )            
                     
Total derivative financial instruments in fair value hedge relationships
  $ (285 )            
Derivative financial instruments in cash flow
hedge relationships:
                   
U.S. Treasury interest rate locks
  $ (11 )   $ (15 )   $  
Foreign currency swaps
          (19 )        
Foreign currency forward-exchange contracts
          2       10  
                         
Total derivative financial instruments in cash flow hedge relationships
  $ (11 )   $ (32 )   $ 10  
Derivative financial instruments in net investment hedge relationships:
                       
Foreign currency swaps
  $ (2 )   $ 53          
                         
Total derivative financial instruments in net investment hedge relationships
  $ (2 )   $ 53          
Derivative financial instruments not designated as hedge instruments:
                       
Foreign currency swaps
  $ (5 )                
Foreign currency forward-exchange contracts
    (255 )                
                         
Total derivative financial instruments not designated as hedge instruments
  $ (260 )                
                         
Nonderivative financial instruments designated as hedging instruments:
                       
Foreign currency short-term borrowings
  $     $ 110          
Foreign currency long-term debt
          158          
                         
Total nonderivative financial instruments designated as hedging instruments
  $     $ 268          
 
(a)
OCI = Other Comprehensive income/(expense).
(b)
Included in Other income/deductions, net.
(c)
For derivative financial instruments in cash flow hedge relationships, included in OCI – Derivative Financial Instruments. For derivative financial instruments in net investment hedge relationships and foreign currency debt designated as hedging instruments, included in OCI – Currency translation adjustment.

 
13 

 

PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

E. Fair Value

Information about certain of our financial assets and liabilities follows:

(millions of dollars)
 
As of
Mar. 29,
2009
   
As of
Dec. 31,
2008
   
Financial assets carried at fair value(a):
             
Trading securities(b)
  $ 164     $ 190    
Available-for-sale debt securities(c)
    40,257       30,061    
Available-for-sale money market funds(d)
    4,031       398    
Available-for-sale equity securities, excluding money market funds(e)
    148       319    
Derivative financial instruments(f)
    984       1,259    
Total
  $ 45,584     $ 32,227    
Other financial assets:
                 
Held-to-maturity debt securities carried at amortized cost(g)
  $ 840     $ 2,349    
Short-term loans carried at cost
    793       824    
Long-term loans carried at cost(b)
    1,404       1,568    
Non-traded equity securities carried at cost(b)
    181       182    
Total
  $ 3,218     $ 4,923    
Financial liabilities carried at fair value (a):
                 
Derivative financial instruments(h)
  $ 1,100     $ 1,243    
Total
  $ 1,100     $ 1,243    
Financial liabilities carried at historical proceeds:
                 
Short-term borrowings
  $ 7,613     $ 9,320    
Long-term debt, including adjustments for fair value hedges of interest rate risk
    21,064       7,963    
Total
  $ 28,677     $ 17,283    

(a)
Fair values are determined based on valuation techniques categorized as follows: Level 1 means the use of quoted prices for identical instruments in active markets; Level 2 means the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; Level 3 means the use of unobservable inputs. Virtually all of our financial assets and liabilities carried at fair value use Level 2 inputs in the calculation of fair value, except that included in available-for-sale equity securities, excluding money market funds, are $79 million as of March 29, 2009 and $87 million as of December 31, 2008 of investments that use Level 1 inputs in the calculation of fair value. None of our financial instruments are valued based on Level 3 inputs at March 29, 2009 or December 31, 2008.
(b)
Included in Long-term investments and loans.
(c)
As of March 29, 2009, included in Short-term investments ($28.633 billion) and Long-term investments and loans ($11.624 billion). As of December 31, 2008, included in Short-term investments ($20.856 billion) and Long-term investments and loans ($9.205 billion).
(d)
Included in Short-term investments.
(e)
As of March 29, 2009, included in Long-term investments and loans and includes gross unrealized gains ($8 million) and gross unrealized losses ($36 million). As of December 31, 2008, included in Long-term investments and loans and includes gross unrealized gains ($17 million) and gross unrealized losses ($39 million).
(f)
As of March 29, 2009, included in Taxes and other current assets ($527 million) and Other assets, deferred taxes and deferred charges ($457 million). As of December 31, 2008, included in Taxes and other current assets ($404 million) and Other assets, deferred taxes and deferred charges ($855 million).
(g)
As of March 29, 2009, included in Cash and cash equivalents ($684 million), Short-term investments ($141 million) and Long-term investments and loans ($15 million). As of December 31, 2008, included in Cash and cash equivalents ($1.980 billion), Short-term investments ($355 million) and Long-term investments and loans ($14 million).
(h)
As of March 29, 2009, included in Other current liabilities ($922 million) and Other noncurrent liabilities ($178 million). As of December 31, 2008, included in Other current liabilities ($1.1 billion) and Other noncurrent liabilities ($124 million).
 
14

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
F. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements.

At March 29, 2009, we have $3.4 billion invested in a major money market fund rated Aaa by Moody’s Investors Service and AAA by Standard & Poor’s, which invests in U.S. government and its agencies’ or instrumentalities’ securities and reverse repurchase agreements involving the same investments held. Also, we had $3 billion due from a well-diversified, highly-rated group (primarily Standard & Poor’s rating of AA or better) of bank counterparties around the world.

G. Credit Covenants

The bridge credit agreement (see Note 8B. Financial Instruments: Short-Term Borrowings) subjects us to certain covenants until the commitment expires or is terminated and all loans under the agreement, if any, have been paid. Such covenants require, among other things, that we:

·  
maintain a no more than 2.75:1 ratio of consolidated debt to “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA), as defined. EBITDA, as defined, permits add-backs of certain other charges such as acquisition-related costs, unusual costs or certain non-cash charges.

·  
reduce the bridge credit agreement commitment or repay any outstanding indebtedness under the bridge credit agreement as required in an amount equal to the net proceeds of certain transactions not in the ordinary course of business, such as specified asset sales or sales-leaseback transactions, property loss events, or certain equity or debt issuances;

·  
not declare or pay dividends on our common stock in excess of $0.32 per share per quarter;

·  
not incur certain types of debt;

·  
not purchase or redeem our common stock in excess of $250 million dollars in the aggregate; and

·  
not purchase U.S. businesses for cash consideration in excess of $500 million in the aggregate or international businesses for cash consideration in excess of $2.5 billion in the aggregate.

Also, if any loan under the bridge credit agreement is funded, we would be required to cause Wyeth to guarantee our obligation under the bridge facility. In addition, if the bridge loan is funded and Wyeth guarantees the bridge loan, we would be required to cause Wyeth to guarantee the $13.5 billion of senior unsecured notes that we issued on March 24, 2009 (see Note 8C: Financial Investments: Long-Term Debt) until all loans under the bridge credit agreement have been paid in full.

In addition, the bridge credit agreement contains the following conditions, among others, to any borrowing under the agreement.

·  
the absence of material adverse change in the business of Pfizer or Wyeth; and

·  
Pfizer must maintain an unsecured long-term obligations rating of at least “A2” (with stable or better outlook) and a commercial paper credit rating of at least “P-1” from Moody’s Investors Service, and maintain a long-term issuer credit rating of at least “A” (with stable or better outlook) and a short-term issuer credit rating of at least “A-1” from Standard & Poor’s.

At March 29, 2009, we are in compliance with all credit covenants under the bridge credit agreement.

 
15

 
PFIZER INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9. Inventories

The components of inventories follow:

(millions of dollars)
 
Mar. 29,
2009
   
Dec. 31,
2008
 
             
Finished goods
  $ 2,151     $ 2,024  
Work-in-process
    1,483       1,527  
Raw materials and supplies
    824       830  
Total inventories(a)
  $ 4,458     $ 4,381  

(a)
Certain amounts of inventories are in excess of one year’s supply. There are no recoverability issues associated with these quantities and the amounts are not significant.
 
Note 10. Goodwill and Other Intangible Assets
 
A. Goodwill

The changes in the carrying amount of goodwill by segment for the quarter ended March 29, 2009, follow:

(millions of dollars)
 
Pharmaceutical
   
Animal
Health
   
Other
   
Total
 
                         
Balance, December 31, 2008
  $ 21,317     $ 129     $ 18     $ 21,464  
Additions
                       
Other(a)
    22       (4 )           18  
Balance, March 29, 2009
  $ 21,339     $ 125     $ 18     $ 21,482  

(a)
Primarily related to the impact of foreign exchange, except that Pharmaceutical also includes a reclassification of about $150 million to Assets held for sale.
 
B. Other Intangible Assets
 
The components of identifiable intangible assets, primarily included in our Pharmaceutical segment, follow:
 
   
As of Mar. 29, 2009
   
As of Dec. 31, 2008
 
(millions of dollars)
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Identifiable Intangible
Assets, less Accumulated Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Identifiable
Intangible
Assets, less
Accumulated
Amortization
 
                                     
Finite-lived intangible assets:
                                   
Developed technology rights
  $ 31,101     $ (18,059 )   $ 13,042     $ 31,484     $ (17,673 )   $ 13,811  
Brands
    1,016       (496 )     520       1,016       (487 )     529  
License agreements
    246       (84 )     162       246       (78 )     168  
Trademarks
    119       (79 )     40       118       (78 )     40  
Other(a)
    524       (296 )     228       531       (291 )     240  
Total amortized finite-lived
                                               
intangible assets
    33,006       (19,014 )     13,992       33,395       (18,607 )     14,788  
Indefinite-lived intangible assets:
                                               
Brands
    2,860             2,860       2,860             2,860  
Trademarks
    68       <