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EX-32.2 - CERTIFICATION BY THE CFO - SECTION 1350 - PFIZER INCpfe-10022016x10qexhibit322.htm
EX-32.1 - CERTIFICATION BY THE CEO - SECTION 1350 - PFIZER INCpfe-10022016x10qexhibit321.htm
EX-31.2 - CERTIFICATION BY THE CFO - SECTION 302 - PFIZER INCpfe-10022016x10qexhibit312.htm
EX-31.1 - CERTIFICATION BY THE CEO - SECTION 302 - PFIZER INCpfe-10022016x10qexhibit311.htm
EX-15 - ACCOUNTANTS' ACKNOWLEDGEMENT - PFIZER INCpfe-10022016x10qexhibit15.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - PFIZER INCpfe-10022016x10qexhibit12.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 October 2, 2016

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) 733-2323
(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   X 
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 November 7, 20166,068,355,132 shares of the issuer’s voting common stock were outstanding.



Table of Contents
Page
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the three and nine months ended October 2, 2016 and September 27, 2015
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2016 and September 27, 2015
 
 
Condensed Consolidated Balance Sheets as of October 2, 2016 and December 31, 2015
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended October 2, 2016 and September 27, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


GLOSSARY OF DEFINED TERMS

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q (defined below) refer to Pfizer Inc. and its subsidiaries. We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:
2015 Financial Report
Financial Report for the fiscal year ended December 31, 2015, which was filed as Exhibit 13 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2015
2015 Form 10-K
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
AAV
Adeno-Associated Virus
ACA
U.S. Patient Protection and Affordable Care Act, as amended by the Health Care Reconciliation Act
ACIP
Advisory Committee on Immunization Practices
ALK
anaplastic lymphoma kinase
Allergan
Allergan plc
Alliance revenues
revenues from alliance agreements under which we co-promote products discovered or developed by other companies or us
AM-Pharma
AM-Pharma B.V.
Anacor
Anacor Pharmaceuticals, Inc.
Astellas
Astellas Pharma Inc.
ASU
Accounting Standards Update
ATM-AVI
aztreonam-avibactam
Bamboo
Bamboo Therapeutics, Inc.
Baxter
Baxter International Inc.
BMS
Bristol-Myers Squibb Company
CDC
U.S. Centers for Disease Control and Prevention
Celltrion
Celltrion Inc. and Celltrion Healthcare, Co., Ltd. (collectively)
Developed Markets
U.S., Western Europe, Japan, Canada, Australia, Scandinavia, South Korea, Finland and New Zealand
DEUs
Dividend Equivalent Units
DVT
deep vein thrombosis
EEA
European Economic Area
EH
Essential Health
EMA
European Medicines Agency
Emerging Markets
Includes, but is not limited to, the following markets: Asia (excluding Japan and South Korea), Latin America, Africa, Eastern Europe, Central Europe, the Middle East and Turkey
EPS
earnings per share
EU
European Union
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDA
U.S. Food and Drug Administration
GAAP
Generally Accepted Accounting Principles
GHD
growth hormone deficiency
GIST
gastrointestinal stromal tumors
GIP
Global Innovative Pharmaceutical segment
GPD
Global Product Development organization
GS&Co.
Goldman, Sachs & Co.
HER2-
human epidermal growth factor receptor 2-negative
hGH-CTP
human growth hormone
HIS
Hospira Infusion Systems
Hisun Pfizer
Hisun Pfizer Pharmaceuticals Company Limited
Hospira
Hospira, Inc.
HR+
hormone receptor-positive
ICU Medical
ICU Medical Inc.
IH
Innovative Health
InnoPharma
InnoPharma, Inc.
IPR&D
in-process research and development

3


IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
Janssen
Janssen Biotech Inc.
King
King Pharmaceuticals, Inc.
LDL
low density lipoprotein
Lilly
Eli Lilly & Company
LOE
loss of exclusivity
MCO
managed care organization
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDV
multi-dose vial
Medivation
Medivation, Inc.
Moody’s
Moody’s Investors Service
mRCC
metastatic renal cell carcinoma
NDA
new drug application
NOAC
Novel Oral Anticoagulant
NovaQuest
NovaQuest Co-Investment Fund II, L.P. or NovaQuest Co-Investment Fund V, L.P., as applicable
NSCLC
non-small cell lung cancer
NYSE
New York Stock Exchange
OPKO
OPKO Health, Inc.
OTC
over-the-counter
PBM
Pharmacy Benefit Manager
PCS
Pfizer CenterOne (previously known as Pfizer CentreSource)
PDUFA
Prescription Drug User Fee Act
PE
pulmonary embolism
PGS
Pfizer Global Supply
Pharmacia
Pharmacia Corporation
PP&E
Property, plant & equipment
PTUs
Profit Units
Quarterly Report on Form 10-Q
Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2016
RAR
Revenue Agent’s Report
RCC
renal cell carcinoma
recAP
recombinant human Alkaline Phosphatase
R&D
research and development
RPI
RPI Finance Trust
Sandoz
Sandoz, Inc., a division of Novartis AG
SEC
U.S. Securities and Exchange Commission
SGA
small for gestational age
S&P
Standard and Poor’s
Teuto
Laboratório Teuto Brasileiro S.A.
TSRUs
Total Shareholder Return Units
U.K.
United Kingdom
U.S.
United States
VAT
value added tax
VOC
Global Vaccines, Oncology and Consumer Healthcare segment
WRD
Worldwide Research and Development
Zoetis
Zoetis Inc.

4


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)
 
October 2,
2016

 
September 27,
2015

 
October 2,
2016

 
September 27,
2015

Revenues
 
$
13,045

 
$
12,087

 
$
39,196

 
$
34,804

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales(a)
 
3,085

 
2,219

 
9,111

 
6,238

Selling, informational and administrative expenses(a)
 
3,559

 
3,270

 
10,414

 
9,761

Research and development expenses(a)
 
1,881

 
1,722

 
5,360

 
5,342

Amortization of intangible assets
 
968

 
937

 
2,934

 
2,748

Restructuring charges and certain acquisition-related costs
 
531

 
581

 
988

 
727

Other (income)/deductions––net
 
1,417

 
661

 
2,815

 
670

Income from continuing operations before provision for taxes on income
 
1,604

 
2,697

 
7,575

 
9,319

Provision for taxes on income
 
284

 
567

 
1,194

 
2,178

Income from continuing operations
 
1,320

 
2,130

 
6,380

 
7,141

Discontinued operations––net of tax
 

 
8

 

 
14

Net income before allocation to noncontrolling interests
 
1,319

 
2,139

 
6,380

 
7,155

Less: Net income attributable to noncontrolling interests
 

 
9

 
25

 
23

Net income attributable to Pfizer Inc.
 
$
1,320

 
$
2,130

 
$
6,355

 
$
7,132

 
 
 
 
 
 
 
 
 
Earnings per common share––basic:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.22

 
$
0.34

 
$
1.04

 
$
1.15

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.22

 
$
0.35

 
$
1.04

 
$
1.15

 
 
 
 
 
 
 
 
 
Earnings per common share––diluted:
 
 

 
 

 
 

 
 

Income from continuing operations attributable to Pfizer Inc. common shareholders
 
$
0.22

 
$
0.34

 
$
1.03

 
$
1.14

Discontinued operations––net of tax
 

 

 

 

Net income attributable to Pfizer Inc. common shareholders
 
$
0.21

 
$
0.34

 
$
1.03

 
$
1.14

 
 
 
 
 
 
 
 
 
Weighted-average shares––basic
 
6,066

 
6,168

 
6,095

 
6,176

Weighted-average shares––diluted
 
6,138

 
6,243

 
6,164

 
6,259

Cash dividends paid per common share
 
$
0.30

 
$
0.28

 
$
0.90

 
$
0.84

(a) 
Excludes amortization of intangible assets, except as disclosed in Note 9A. Identifiable Intangible Assets and Goodwill: Identifiable Intangible Assets.
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

5


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
September 27,
2015

 
October 2,
2016

 
September 27,
2015

Net income before allocation to noncontrolling interests
 
$
1,319

 
$
2,139

 
$
6,380

 
$
7,155

 
 
 
 
 
 
 

 
 

Foreign currency translation adjustments, net
 
418

 
(535
)
 
999

 
(2,170
)
 
 
418

 
(535
)
 
999

 
(2,170
)
Unrealized holding losses on derivative financial instruments, net
 
(126
)
 
(217
)
 
(970
)
 
(80
)
Reclassification adjustments for realized (gains)/losses(a)
 
150

 
(35
)
 
280

 
(545
)
 
 
24

 
(251
)
 
(690
)
 
(625
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
261

 
25

 
740

 
(502
)
Reclassification adjustments for realized (gains)/losses(a)
 
(112
)
 
69

 
(129
)
 
815

 
 
149

 
94

 
611

 
312

Benefit plans: actuarial losses, net
 
(82
)
 
(144
)
 
(101
)
 
(122
)
Reclassification adjustments related to amortization(b)
 
140

 
140

 
418

 
409

Reclassification adjustments related to settlements, net(b)
 
28

 
36

 
76

 
98

Other
 
69

 
(10
)
 
51

 
120

 
 
155

 
23

 
444

 
506

Benefit plans: prior service credits and other, net
 
95

 

 
182

 
506

Reclassification adjustments related to amortization(b)
 
(45
)
 
(46
)
 
(127
)
 
(115
)
Reclassification adjustments related to curtailments, net(b)
 
(8
)
 
(4
)
 
(14
)
 
(21
)
Other
 
6

 
(1
)
 
12

 
(3
)
 
 
48

 
(51
)
 
54

 
366

Other comprehensive income/(loss), before tax
 
794

 
(721
)
 
1,418

 
(1,611
)
Tax provision/(benefit) on other comprehensive income/(loss)(c)
 
116

 
(65
)
 
111

 
267

Other comprehensive income/(loss) before allocation to noncontrolling interests
 
$
678

 
$
(656
)
 
$
1,307

 
$
(1,878
)
 
 
 
 
 
 
 
 
 
Comprehensive income before allocation to noncontrolling interests
 
$
1,997

 
$
1,483

 
$
7,687

 
$
5,277

Less: Comprehensive income/(loss) attributable to noncontrolling interests
 

 
2

 
24

 
(1
)
Comprehensive income attributable to Pfizer Inc.
 
$
1,997

 
$
1,481

 
$
7,664

 
$
5,278

(a) 
Reclassified into Other (income)/deductions—net in the condensed consolidated statements of income.
(b) 
Generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income. For additional information, see Note 10. Pension and Postretirement Benefit Plans.
(c) 
See Note 5C. Tax Matters: Tax Provision/(Benefit) on Other Comprehensive Income/(Loss).
Amounts may not add due to rounding.



See Notes to Condensed Consolidated Financial Statements.

6


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
December 31,
2015

 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,094

 
$
3,641

Short-term investments
 
12,277

 
19,649

Trade accounts receivable, less allowance for doubtful accounts: 2016—$672; 2015—$384
 
9,836

 
8,176

Inventories
 
7,507

 
7,513

Current tax assets
 
2,825

 
2,662

Other current assets
 
2,843

 
2,154

Assets held for sale
 
1,119

 
9

Total current assets
 
38,501

 
43,804

Long-term investments
 
9,507

 
15,999

Property, plant and equipment, less accumulated depreciation: 2016—$14,838; 2015—$13,502
 
13,284

 
13,766

Identifiable intangible assets, less accumulated amortization
 
54,238

 
40,356

Goodwill
 
56,281

 
48,242

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,859

 
1,794

Other noncurrent assets
 
4,759

 
3,420

Total assets
 
$
178,430

 
$
167,381

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
13,633

 
$
10,159

Trade accounts payable
 
3,476

 
3,620

Dividends payable
 
1,821

 
1,852

Income taxes payable
 
1,158

 
418

Accrued compensation and related items
 
2,048

 
2,359

Other current liabilities
 
12,623

 
10,990

Total current liabilities
 
34,759

 
29,399

 
 
 
 
 
Long-term debt
 
30,437

 
28,740

Pension benefit obligations, net
 
5,312

 
6,310

Postretirement benefit obligations, net
 
1,808

 
1,809

Noncurrent deferred tax liabilities
 
31,687

 
26,877

Other taxes payable
 
4,767

 
3,992

Other noncurrent liabilities
 
6,059

 
5,257

Total liabilities
 
114,829

 
102,384

 
 
 
 
 
Commitments and Contingencies
 


 


 
 
 
 
 
Preferred stock
 
25

 
26

Common stock
 
461

 
459

Additional paid-in capital
 
82,534

 
81,016

Treasury stock
 
(84,346
)
 
(79,252
)
Retained earnings
 
72,846

 
71,993

Accumulated other comprehensive loss
 
(8,214
)
 
(9,522
)
Total Pfizer Inc. shareholders’ equity
 
63,306

 
64,720

Equity attributable to noncontrolling interests
 
294

 
278

Total equity
 
63,601

 
64,998

Total liabilities and equity
 
$
178,430

 
$
167,381

Amounts may not add due to rounding.
See Notes to Condensed Consolidated Financial Statements.

7


PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
September 27,
2015

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
6,380

 
$
7,155

Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
4,208

 
3,733

Asset write-offs and impairments
 
1,146

 
864

Write-down of HIS net assets to fair value less estimated costs to sell
 
1,422

 

Deferred taxes from continuing operations
 
(1,335
)
 
(165
)
Share-based compensation expense
 
532

 
488

Benefit plan contributions in excess of expense
 
(775
)
 
(804
)
Other adjustments, net
 
68

 
(184
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(1,718
)
 
(1,297
)
Net cash provided by operating activities
 
9,929

 
9,790

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant and equipment
 
(1,134
)
 
(786
)
Purchases of short-term investments
 
(15,170
)
 
(21,068
)
Proceeds from redemptions/sales of short-term investments
 
20,685

 
33,609

Net proceeds from redemptions/sales of short-term investments with original maturities of three months or less
 
6,485

 
5,557

Purchases of long-term investments
 
(4,771
)
 
(6,578
)
Proceeds from redemptions/sales of long-term investments
 
6,915

 
4,535

Acquisitions of businesses, net of cash acquired
 
(17,679
)
 
(16,322
)
Acquisitions of intangible assets
 
(96
)
 
(48
)
Other investing activities, net
 
60

 
346

Net cash used in investing activities
 
(4,704
)
 
(756
)
 
 
 
 
 
Financing Activities
 
 

 
 

Proceeds from short-term borrowings
 
6,397

 
2,022

Principal payments on short-term borrowings
 
(3,321
)
 
(16
)
Net proceeds from/(payments on) short-term borrowings with original maturities of three months or less
 
(963
)
 
1,907

Proceeds from issuance of long-term debt
 
5,031

 

Principal payments on long-term debt
 
(4,317
)
 
(2,994
)
Purchases of common stock
 
(5,000
)
 
(6,160
)
Cash dividends paid
 
(5,496
)
 
(5,211
)
Proceeds from exercise of stock options
 
946

 
1,165

Other financing activities, net
 
29

 
171

Net cash used in financing activities
 
(6,693
)
 
(9,115
)
Effect of exchange-rate changes on cash and cash equivalents
 
(79
)
 
(162
)
Net decrease in cash and cash equivalents
 
(1,547
)
 
(244
)
Cash and cash equivalents, beginning
 
3,641

 
3,343

Cash and cash equivalents, end
 
$
2,094

 
$
3,099

 
 
 

 
 

Supplemental Cash Flow Information
 
 
 
 
Cash paid during the period for:
 
 

 
 

Income taxes
 
$
1,430

 
$
1,414

Interest
 
1,177

 
1,162

Amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

8


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


Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

See the Glossary of Defined Terms at the beginning of this Quarterly Report on Form 10-Q for terms used throughout the condensed consolidated financial statements and related notes of this Quarterly Report on Form 10-Q.

We prepared the condensed consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted.

The financial information included in our condensed consolidated financial statements for subsidiaries operating outside the U.S. is as of and for the three and nine months ended August 28, 2016 and August 23, 2015. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three and nine months ended October 2, 2016 and September 27, 2015.

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 Quarterly Report on Form 10-Q. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our condensed consolidated balance sheets and condensed consolidated statements of income. 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 our 2015 Form 10-K.

Unless the context requires otherwise, references to “Pfizer,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to Pfizer Inc. and its subsidiaries.

Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts.

Effective in the second quarter of 2016, our segments were reorganized to reflect that we now manage our innovative pharmaceutical and consumer healthcare operations as one business segment, Pfizer Innovative Health (IH) (previously these businesses were managed as two segments: the GIP segment and the VOC segment). Also, in the second quarter of 2016, we changed the name of our Established Products business to Pfizer Essential Health (EH). We have revised prior-period segment information to reflect the reorganization. For additional information, see Note 13.
In the condensed consolidated balance sheet as of December 31, 2015, we performed certain reclassifications to conform to the current period presentation of Other current assets, Other noncurrent assets, Short-term borrowings, including current portion of long-term debt and Long-term debt, and in the condensed consolidated statement of cash flows for the nine months ended September 27, 2015, we performed certain reclassifications to conform to the current presentation of Other changes in assets and liabilities, net of acquisitions and divestitures, Principal payments on short-term borrowings, and Principal payments on long-term debt, for debt issuance costs in accordance with the adoption of a new accounting standard. For additional information, see Note 1B.
On October 6, 2016, we announced that we entered into a definitive agreement under which ICU Medical will acquire all of Pfizer’s global infusion therapy net assets, HIS, for approximately $1 billion in cash and ICU Medical stock. HIS includes IV pumps, solutions, and devices. Pfizer has also agreed to certain restrictions on transfer of its ICU Medical shares for at least 18 months. Assets and liabilities associated with HIS were reclassified as held for sale in the condensed consolidated balance sheet as of October 2, 2016. The companies expect to complete the transaction in the first quarter of 2017, subject to customary closing conditions, including required regulatory approvals. For additional information, see Note 2B.

On September 28, 2016 (the acquisition date), we acquired Medivation for $81.50 per share. The total fair value of consideration transferred for Medivation was approximately $14.3 billion in cash ($13.9 billion, net of cash acquired). Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Medivation, and, in accordance with our domestic and international reporting periods, our consolidated financial statements for the three and nine months ended October 2, 2016 reflect three business days of legacy Medivation operations, which were immaterial. See Note 2A for additional information.

9


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

On June 24, 2016 (the acquisition date), we completed our acquisition of Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion, net of cash acquired), plus $698 million debt assumed. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Anacor, and, in accordance with our domestic reporting period, our consolidated financial statements for the three and nine months ended October 2, 2016 reflect approximately three months of legacy Anacor operations, which were immaterial. See Note 2A for additional information.

On April 6, 2016, we announced that the merger agreement between Pfizer and Allergan entered into on November 22, 2015 was terminated by mutual agreement of the companies. The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an “Adverse Tax Law Change” under the merger agreement. In connection with the termination of the merger agreement, on April 8, 2016 (which fell into Pfizer’s second fiscal quarter), Pfizer paid Allergan $150 million (pre-tax) for reimbursement of Allergan’s expenses associated with the terminated transaction (see Note 4). Pfizer and Allergan also released each other from any and all claims in connection with the merger agreement.
On September 3, 2015, we acquired Hospira and, commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of Hospira. As a result, legacy Hospira operations are reflected in our results of operations, EH’s operating results, and cash flows for the third quarter and first nine months of 2016. In accordance with our domestic and international reporting periods, our consolidated statements of income for the third quarter and first nine months of 2015 reflect only one month of legacy Hospira U.S. operations but no financial results from legacy Hospira international operations. Legacy Hospira assets and liabilities are reflected in our balance sheets as of October 2, 2016 and December 31, 2015. See Note 2A for additional information.
B. Adoption of New Accounting Standards

We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. The update does not impact the measurement or recognition of debt issuance costs. As of October 2, 2016, debt issuance costs were $89 million and are presented as contra-liabilities to Short-term borrowings, including current portion of long-term debt ($1 million) and Long-term debt ($88 million). In the December 31, 2015 condensed consolidated balance sheet, we have reclassified debt issuance costs of $79 million ($1 million from Other current assets and $79 million from Other noncurrent assets) and have presented them as contra-liabilities to Short-term borrowings, including current portion of long-term debt ($1 million) and Long-term debt ($79 million) to conform to the current period presentation. For additional information, see Note 7A.

We adopted a new standard as of January 1, 2016 that requires an acquirer to recognize adjustments made in the measurement period to provisional amounts of assets acquired and liabilities assumed in a business combination in the reporting period in which the adjustment amounts are determined. There was no material impact to our condensed consolidated financial statements in the third quarter and first nine months of 2016 from adopting this standard. For additional information, see Note 2A.

We adopted a new standard as of January 1, 2016 related to the accounting for hybrid financial instruments issued or held as investments and there was no material impact to our condensed consolidated financial statements from adopting this standard.

C. Fair Value

Our fair value methodologies depend on the following types of inputs:
Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs).
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.

10


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

Note 2. Acquisitions, Assets and Liabilities Held for Sale, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment

A. Acquisitions
Medivation, Inc.
On September 28, 2016 (the acquisition date), we acquired Medivation for $81.50 per share. The total fair value of consideration transferred for Medivation was approximately $14.3 billion in cash ($13.9 billion, net of cash acquired). Of this consideration, $1.0 billion was not paid as of October 2, 2016, and was recorded in Other current liabilities. Medivation is now a wholly-owned subsidiary of Pfizer. Medivation is a biopharmaceutical company focused on developing and commercializing small molecules for oncology. Medivation’s portfolio includes Xtandi (enzalutamide), an androgen receptor inhibitor that blocks multiple steps in the androgen receptor signaling pathway within the tumor cell. Xtandi is being developed and commercialized through a collaboration between Pfizer and Astellas. Astellas has exclusive commercialization rights for Xtandi outside the U.S. In addition, Medivation has two development-stage oncology assets in its pipeline: talazoparib, which is currently in a Phase 3 study for the treatment of BRCA-mutated breast cancer, and pidilizumab, an immuno-oncology asset being developed for diffuse large B-cell lymphoma and other hematologic malignancies. In connection with this acquisition, we provisionally recorded $13.2 billion in Identifiable intangible assets, primarily consisting of $8.5 billion of Developed technology rights with an average useful life of approximately 12 years and $4.8 billion of In-process research and development, and provisionally recorded $5.5 billion of Goodwill, $4.4 billion of net deferred tax liabilities, and $374 million of assumed contingent consideration. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not yet been finalized.
Bamboo Therapeutics, Inc.
On August 1, 2016 (the acquisition date), we acquired all the remaining equity in Bamboo, a privately held biotechnology company focused on developing gene therapies for the potential treatment of patients with certain rare diseases relating to neuromuscular conditions and those affecting the central nervous system, for $150 million, plus potential milestone payments of up to $495 million contingent upon the progression of key assets through development, regulatory approval and commercialization. The total fair value of the consideration transferred for Bamboo was approximately $331 million, including cash of $130 million ($101 million, net of cash acquired), contingent consideration of $157 million, consisting of milestone payments, and the fair value of Pfizer’s previously held equity interest in Bamboo of $44 million. We previously purchased a minority stake in Bamboo in the first quarter of 2016 for a payment of approximately $43 million. Upon acquiring the remaining interest in Bamboo, we recognized a gain of $1 million on our existing investment in Other (income)/deductions––net. This acquisition provides us with several clinical and pre-clinical assets that complement our rare disease portfolio, an advanced recombinant AAV vector design and production technology, and a fully functional Phase I/II gene therapy manufacturing facility. Bamboo is now a wholly-owned subsidiary of Pfizer. In connection with this acquisition, we provisionally recorded $325 million of Identifiable intangible assets, consisting entirely of In-process research and development. We also provisionally recorded $130 million of Goodwill and $94 million of net deferred tax liabilities. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not yet been finalized.

Anacor Pharmaceuticals, Inc.

On June 24, 2016 (the acquisition date), we acquired Anacor for $99.25 per share. The total fair value of consideration transferred for Anacor was approximately $4.9 billion in cash ($4.5 billion net of cash acquired), plus $698 million debt assumed. Anacor is now a wholly-owned subsidiary of Pfizer. Anacor is a biopharmaceutical company focused on novel small-molecule therapeutics derived from its boron chemistry platform. Included within Anacor’s pipeline is crisaborole, a non-steroidal topical PDE-4 inhibitor with anti-inflammatory properties. In connection with this acquisition, we recorded $698 million as the fair value of notes payable in cash, and provisionally recorded $5.0 billion in Identifiable intangible assets, primarily consisting of $4.8 billion of In-process research and development, and provisionally recorded $1.8 billion of Goodwill and $1.6 billion of net deferred tax liabilities. The allocation of the consideration transferred to the assets acquired and the liabilities assumed has not yet been finalized.


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

Hospira, Inc.

On September 3, 2015 (the acquisition date), we acquired Hospira, a leading provider of sterile injectable drugs and infusion technologies as well as a provider of biosimilars, for $90 per share in cash. The total fair value of consideration transferred for Hospira was approximately $16.1 billion in cash ($15.7 billion, net of cash acquired). Hospira is now a subsidiary of Pfizer. The combination of local Pfizer and Hospira entities may be pending in various jurisdictions and integration is subject to completion of various local legal and regulatory steps.

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date, as well as adjustments made in the first nine months of 2016 to the amounts initially recorded in 2015 (measurement period adjustments) with a corresponding change to goodwill. The measurement period adjustments did not have a material impact on our earnings in any period. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.
(MILLIONS OF DOLLARS)
 
Amounts Recognized
as of Acquisition Date (as previously reported as of December 31, 2015)

 
Measurement Period Adjustments(a)

 
Amounts Recognized as of Acquisition Date (as adjusted) Final

Working capital, excluding inventories
 
$
274

 
$
68

 
$
342

Inventories
 
1,924

 
(23
)
 
1,901

PP&E
 
2,410

 
(57
)
 
2,352

Identifiable intangible assets, excluding IPR&D
 
8,270

 
20

 
8,290

IPR&D
 
995

 
35

 
1,030

Other noncurrent assets
 
408

 
(46
)
 
362

Long-term debt
 
(1,928
)
 

 
(1,928
)
Benefit obligations
 
(117
)
 

 
(117
)
Net income tax accounts
 
(3,394
)
 
14

 
(3,380
)
Other noncurrent liabilities
 
(39
)
 
(23
)
 
(61
)
Total identifiable net assets
 
8,803

 
(12
)
 
8,791

Goodwill
 
7,284

 
12

 
7,295

Net assets acquired/total consideration transferred
 
$
16,087

 
$

 
$
16,087

(a) 
The changes in the estimated fair values are primarily to better reflect market participant assumptions about facts and circumstances existing as of the acquisition date. The measurement period adjustments did not result from intervening events subsequent to the acquisition date.
Environmental Matters—In the ordinary course of business, Hospira incurs liabilities for environmental matters such as remediation work, asset retirement obligations and environmental guarantees and indemnifications. The contingencies for environmental matters are not significant to Pfizer’s financial statements.
Legal Matters—Hospira is involved in various legal proceedings, including product liability, patent, commercial, antitrust and environmental matters and government investigations, of a nature considered normal to its business. The contingencies arising from legal matters are not significant to Pfizer’s financial statements.
Tax Matters—In the ordinary course of business, Hospira incurs liabilities for income taxes. Income taxes are exceptions to both the recognition and fair value measurement principles associated with the accounting for business combinations. Reserves for income tax contingencies continue to be measured under the benefit recognition model as previously used by Hospira. Net liabilities for income taxes approximate $3.4 billion as of the acquisition date, which includes $109 million for uncertain tax positions. The net tax liability includes the recording of additional adjustments of approximately $3.2 billion for the tax impact of fair value adjustments and approximately $719 million for income tax matters that we intend to resolve in a manner different from what Hospira had planned or intended. For example, because we plan to repatriate certain overseas funds, we provided deferred taxes on Hospira’s unremitted earnings for which no taxes have been previously provided by Hospira as it was Hospira’s intention to indefinitely reinvest those earnings.

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

The following table provides supplemental pro forma information as if the acquisition of Hospira had occurred on January 1, 2014:
 
 
Unaudited Supplemental
Pro Forma Consolidated Results
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
 
September 27,
2015

 
September 27,
2015

Revenues
 
$
12,957

 
$
38,034

Net income attributable to Pfizer Inc. common shareholders
 
2,513

 
7,577

Diluted EPS attributable to Pfizer Inc. common shareholders
 
0.40

 
1.21

The unaudited supplemental pro forma consolidated results were prepared using the acquisition method of accounting and do not purport to reflect what the combined company’s results of operations would have been had the acquisition occurred on January 1, 2014, nor do they project the future results of operations of the combined company or reflect the expected realization of any cost savings associated with the acquisition. The actual results of operations of the combined company may differ significantly from the pro forma adjustments reflected here due to many factors.
The unaudited supplemental pro forma consolidated results reflect the historical financial information of Pfizer and Hospira, adjusted to give effect to the acquisition of Hospira as if it had occurred on January 1, 2014, primarily for the following pre-tax adjustments:
Elimination of Hospira’s historical intangible asset amortization expense (approximately $9 million in the third quarter of 2015 and $33 million in the first nine months of 2015).
Additional amortization expense (approximately $70 million in the third quarter of 2015 and $321 million in the first nine months of 2015) related to the fair value of identifiable intangible assets acquired.
Additional depreciation expense (approximately $14 million in the third quarter of 2015 and $57 million in the first nine months of 2015) related to the fair value adjustment to PP&E acquired.
Adjustment related to the non-recurring fair value adjustment to acquisition-date inventory estimated to have been sold (the elimination of $75 million of charges in the third quarter of 2015 and $66 million of charges in the first nine months of 2015).
Adjustment to decrease interest expense (approximately $3 million in the third quarter of 2015 and $23 million in the first nine months of 2015) related to the fair value adjustment of Hospira debt.
Adjustment for non-recurring acquisition-related costs directly attributable to the acquisition (the elimination of $680 million of charges in the third quarter of 2015 and $724 million of charges in the first nine months of 2015), reflecting non-recurring charges incurred by both Hospira and Pfizer, which would have been recorded in 2014 under the pro forma assumption that the Hospira acquisition was completed on January 1, 2014.

The above adjustments were adjusted for the applicable tax impact. The taxes associated with the adjustments related to the fair value adjustment for acquired intangible assets, PP&E, inventory and debt reflect the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred. The taxes associated with the elimination of Hospira’s historical intangible asset amortization expense and the adjustment for the acquisition-related costs directly attributable to the acquisition were based on the tax rate in the jurisdiction in which the related deductible costs were incurred.
Marketed Vaccines Business of Baxter International Inc.
On December 1, 2014 (which fell in the first fiscal quarter of 2015 for our international operations), we acquired Baxters portfolio of marketed vaccines for a final purchase price of $648 million. The portfolio that was acquired consists of NeisVac-C and FSME-IMMUN/TicoVac. NeisVac-C is a vaccine that helps protect against meningitis caused by group C meningococcal meningitis and FSME-IMMUN/TicoVac is a vaccine that helps protect against tick-borne encephalitis. In connection with this acquisition, we recorded $376 million in Identifiable intangible assets, primarily consisting of $371 million in Developed technology rights. We also recorded $194 million of Inventories and $12 million in Goodwill. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.
B. Assets and Liabilities Held for Sale
On October 6, 2016, we announced that we entered into a definitive agreement under which ICU Medical will acquire all of Pfizer’s global infusion therapy net assets, HIS, for approximately $1 billion in cash and ICU Medical stock. HIS includes IV pumps, solutions, and devices. Under the terms of the agreement, Pfizer will receive approximately $400 million in newly issued shares of ICU Medical common stock and $600 million in cash from ICU Medical, subject to customary adjustment for

13


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

net working capital. Upon completion of the transaction, which the companies expect to occur in the first quarter of 2017, subject to customary closing conditions, including required regulatory approvals, Pfizer will own approximately 16.6% of ICU Medical. Pfizer has also agreed to certain restrictions on transfer of its ICU Medical shares for at least 18 months. At October 2, 2016, we determined that the carrying value of the HIS net assets held for sale exceeded their fair value less estimated costs to sell, resulting in a pre-tax impairment charge of $1.4 billion, which is included in Other (income)/deductions––net (see Note 4).
Assets and liabilities associated with HIS were reclassified as held for sale in the condensed consolidated balance sheet as of October 2, 2016. The HIS assets held for sale are reported in Assets held for sale and HIS liabilities held for sale are reported in Other current liabilities. The amounts associated with HIS, as well as other assets classified as held for sale as of October 2, 2016 and December 31, 2015, consisted of the following:
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
December 31,
2015

Assets Held for Sale
 
 
 
 
Inventories
 
$
369

 
$

Property, plant and equipment
 
441

 

Identifiable intangible assets
 
1,322

 

Goodwill
 
243

 

Other assets
 
60

 

Less: adjustment to HIS assets for net realizable value(a)
 
(1,394
)
 

Total HIS assets held for sale
 
1,042

 

Other assets held for sale(b)
 
77

 
9

Assets held for sale
 
$
1,119

 
$
9

 
 
 
 
 
Liabilities Held for Sale
 
 
 
 
Accrued compensation and related items
 
$
42

 
$

Other liabilities
 
68

 

Total HIS liabilities held for sale
 
$
110

 
$

(a) 
For the quarter ending October 2, 2016, we recorded an adjustment to HIS assets for net realizable value of $1,394 million plus estimated costs to sell of $28 million for a total impairment on HIS net assets of $1,422 million.
(b) 
Other assets held for sale consist primarily of property, plant and equipment and other assets.
C. Research and Development and Collaborative Arrangements

Research and Development Arrangement with NovaQuest Co-Investment Fund II, L.P.
On November 1, 2016, we announced the discontinuation of the global clinical development program for bococizumab. Except for a refund to NovaQuest of development cost amounts prepaid by NovaQuest to the extent such amounts were not used for program expenses, no additional payments are expected to be received from or paid to NovaQuest under this agreement.
In May 2016, our agreement with NovaQuest became effective, under which NovaQuest agreed to fund up to $250 million in development costs related to certain Phase III clinical trials of Pfizer’s bococizumab compound and Pfizer agreed to use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. NovaQuest’s development funding was expected to cover up to 40% of the development costs and was to be received over five quarters during 2016 and 2017. As there was a substantive and genuine transfer of risk to NovaQuest, the development funding applicable to program expenses through the third quarter of 2016 has been recognized by us as an obligation to perform contractual services and therefore has been recognized as a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the third quarter of 2016 totaled $67.6 million and for the first nine months of 2016 totaled $136.9 million.
Research and Development Arrangement with NovaQuest Co-Investment Fund V, L.P.
In April 2016, Pfizer entered into an agreement with NovaQuest under which NovaQuest will fund up to $200 million in development costs related to certain Phase III clinical trials of Pfizer’s rivipansel compound and Pfizer will use commercially reasonable efforts to develop and obtain regulatory approvals for such compound. Following potential regulatory approval, NovaQuest will be eligible to receive a combination of fixed milestone payments of up to approximately $267 million in total based on achievement of first commercial sale and certain levels of cumulative net sales as well as royalties on rivipansel net sales over approximately eight years. NovaQuest’s development funding is expected to cover up to 100% of the development

14


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

costs and will be received over approximately twelve quarters from 2016 to 2019. As there is a substantive and genuine transfer of risk to NovaQuest, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the third quarter of 2016 totaled $14.5 million and for the first nine months of 2016 totaled $29.5 million. Fixed sales-based milestone payments will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the rivipansel product and royalties on net sales will be recorded as Cost of sales when incurred.

Research and Development Arrangement with RPI Finance Trust

In January 2016, Pfizer entered into an agreement with RPI, a subsidiary of Royalty Pharma, under which RPI will fund up to $300 million in development costs related to certain Phase III clinical trials of Pfizer’s Ibrance (palbociclib) product primarily for adjuvant treatment of hormone receptor positive early breast cancer (the Indication). If successful and upon approval of Ibrance in the U.S. or certain major markets in the EU for the Indication based on the applicable clinical trials, RPI will be eligible to receive a combination of approval-based fixed milestone payments of up to $250 million dependent upon results of the clinical trials and royalties on certain Ibrance sales over approximately seven years. RPI’s development funding is expected to cover up to 100% of the costs primarily for the applicable clinical trials through 2021. As there is a substantive and genuine transfer of risk to RPI, the development funding is recognized by us as an obligation to perform contractual services and therefore is a reduction of Research and development expenses as incurred. The reduction to Research and development expenses for the third quarter of 2016 totaled $11.0 million and for the first nine months of 2016 totaled $32.7 million. Fixed milestone payments due upon approval will be recorded as intangible assets and amortized to Amortization of intangible assets over the estimated commercial life of the Ibrance product and sales-based royalties will be recorded as Cost of sales when incurred.
Collaboration with Eli Lilly & Company

In October 2013, we entered into a collaboration agreement with Lilly to jointly develop and globally commercialize Pfizer’s tanezumab, which provides that Pfizer and Lilly will equally share product-development expenses as well as potential revenues and certain product-related costs. Following the decision by the FDA in March 2015 to lift the partial clinical hold on the tanezumab development program, we received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which is recorded as deferred income in our condensed consolidated balance sheet and is being recognized into Other (income)/deductions––net over a multi-year period beginning in the second quarter of 2015. Pfizer and Lilly resumed the Phase 3 chronic pain program for tanezumab in July 2015, which will consist of six studies in approximately 7,000 patients across osteoarthritis, chronic low back pain and cancer pain. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.

Collaboration with OPKO Health, Inc.
We entered into a collaborative agreement with OPKO, which closed in January 2015, to develop and commercialize OPKO’s long-acting hGH-CTP for the treatment of GHD in adults and children, as well as for the treatment of growth failure in children born SGA who fail to show catch-up growth by two years of age. hGH-CTP has the potential to reduce the required dosing frequency of human growth hormone to a single weekly injection from the current standard of one injection per day. We have received the exclusive license to commercialize hGH-CTP worldwide. OPKO will lead the clinical activities and will be responsible for funding the development programs for the key indications, which include Adult and Pediatric GHD and Pediatric SGA. We will be responsible for all development costs for additional indications, all postmarketing studies, manufacturing and commercialization activities for all indications, and we will lead the manufacturing activities related to product development. In February 2015, we made an upfront payment of $295 million to OPKO, which was recorded in Research and development expenses, and OPKO is eligible to receive up to an additional $275 million upon the achievement of certain regulatory milestones. OPKO is also eligible to receive royalty payments associated with the commercialization of hGH-CTP for Adult GHD, which is subject to regulatory approval. Upon the launch of hGH-CTP for Pediatric GHD, which is subject to regulatory approval, the royalties will transition to tiered gross profit sharing for both hGH-CTP and our product, Genotropin.

15


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

D. Equity-Method Investments

Investment in Hisun Pfizer Pharmaceuticals Company Limited

In 2016, we determined that we had other-than-temporary declines in the value of Hisun Pfizer, our 49%-owned equity-method investment in China, and, therefore, we recognized a loss of $211 million for the first nine months of 2016 in Other (income)/deductions––net (see Note 4). The declines in value resulted from lower expectations as to the future cash flows to be generated by Hisun Pfizer, primarily as a result of an increase in risk due to the continued slowdown in the Chinese economy and changes in the expected timing and number of new product introductions by Hisun Pfizer. As of October 2, 2016, the carrying value of our investment in Hisun Pfizer is $529 million, which is included in Long-term investments.
In valuing our investment in Hisun Pfizer, we used discounted cash flow techniques, utilizing a 13.0% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal, economic and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk. Changes in economic conditions or other factors underlying these assumptions could negatively impact the value of our investment in Hisun Pfizer in future periods.

Investment in Laboratório Teuto Brasileiro S.A.

In 2016, we determined that we had an other-than-temporary decline in the value of Teuto, a 40%-owned generics company in Brazil, and, therefore, we recognized a loss of $50 million for the first nine months of 2016 in Other (income)/deductions––net (see Note 4) related to our equity-method investment. The decline in value resulted from lower expectations as to the future cash flows to be generated by Teuto, primarily due to a slowdown in Brazilian economic conditions, which have been impacted by political risk, higher inflation, and the depreciation of the Brazilian real.

In valuing our investment in Teuto, we used discounted cash flow techniques, utilizing a 17.5% discount rate, reflecting our best estimate of the various risks inherent in the projected cash flows, and a nominal terminal year growth factor. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which include the expected impact of competitive, legal, economic and/or regulatory forces on the products; the long-term growth rate, which seeks to project the sustainable growth rate over the long-term; and the discount rate, which seeks to reflect the various risks inherent in the projected cash flows, including country risk.

We have an option to acquire the remaining 60% of Teuto, and Teuto’s shareholders have an option to sell their 60% stake in the company to us. Under the terms of our agreement with Teuto’s other shareholders, 2016 is the final year in which the call and put options may be exercised. Our investment in Teuto is accounted for under the equity method due to the significant influence we have over the operations of Teuto through our board representation, minority veto rights and 40% voting interest.

E. Cost-Method Investment

AM-Pharma B.V.

In April 2015, we acquired a minority equity interest in AM-Pharma, a privately-held Dutch biopharmaceutical company focused on the development of recAP for inflammatory diseases, and secured an exclusive option to acquire the remaining equity in the company. The option becomes exercisable upon delivery of the clinical trial report after completion of a Phase II trial of recAP in the treatment of Acute Kidney Injury related to sepsis, which is expected to read out in 2017. Under the terms of the agreement, we paid $87.5 million for both the exclusive option and the minority equity interest, which was recorded as a cost-method investment in Long-term investments, and we may make additional payments of up to $512.5 million upon exercise of the option and potential launch of any product that may result from this investment.
Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction/productivity initiatives. For example:
In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and

16


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

restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company); and
In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems.

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as groups such as information technology, shared services and corporate operations.

In connection with our acquisition of Hospira, we are focusing our efforts on achieving an appropriate cost structure for the combined company. For up to a three-year period post-acquisition, we expect to incur costs of approximately $1 billion (not including costs of $215 million for full-year 2015 associated with the return of acquired in-process research and development rights as described in the Current-Period Key Activities section of Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives in our 2015 Financial Report) associated with the integration of Hospira.

In early 2014, we announced that we would be incurring costs in 2014-2016 related to new programs: our new global commercial structure reorganization and additional cost-reduction/productivity initiatives. We have the following initiatives underway associated with these programs:
Manufacturing plant network rationalization and optimization, where execution timelines are necessarily long. Our plant network strategy is expected to result in the exit of seven sites over the next several years. In connection with these activities, during 2014-2016, we expect to incur costs of approximately $400 million associated with prior acquisition activity and costs of approximately $1.1 billion associated with new non-acquisition-related cost-reduction initiatives. Through October 2, 2016, we incurred approximately $365 million and $828 million, respectively, associated with these initiatives.
The 2014 global commercial structure reorganization, which primarily includes the streamlining of certain functions, the realignment of regional locations and colleagues to support the businesses, as well as implementing the necessary system changes to support different reporting requirements. Through October 2, 2016, we incurred costs of approximately $219 million and have completed this initiative.
Other new cost-reduction/productivity initiatives, primarily related to commercial property rationalization and other consolidation and savings opportunities. In connection with these cost-reduction activities, during 2014-2016, we expect to incur costs of approximately $1.3 billion. Through October 2, 2016, we incurred approximately $895 million associated with these initiatives.
The costs expected to be incurred during 2014-2016, of approximately $3 billion in total for the above-mentioned programs (but not including expected costs associated with the Hospira integration), include restructuring charges, implementation costs and additional depreciation––asset restructuring. Of this amount, we expect that about a quarter of the charges will be non-cash.
Current-Period Key Activities

In the first nine months of 2016, we incurred approximately $1.2 billion in cost-reduction and acquisition-related costs (excluding transaction costs) primarily in connection with the integration of Hospira and the aforementioned programs.

17


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

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
September 27,
2015

 
October 2,
2016

 
September 27,
2015

Restructuring charges(a):
 
 

 
 

 
 

 
 

Employee terminations
 
$
347

 
$
241

 
$
464

 
$
306

Asset impairments
 
27

 
198

 
45

 
209

Exit costs
 
29

 
30

 
64

 
40

Total restructuring charges
 
404

 
469

 
574

 
555

Transaction costs(b)
 
54

 
64

 
114

 
70

Integration costs(c)
 
74

 
48

 
300

 
102

Restructuring charges and certain acquisition-related costs
 
531

 
581

 
988

 
727

Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
 
 

 
 

 
 

 
 

Cost of sales
 
46

 
23

 
145

 
67

Research and development expenses
 
1

 
1

 
5

 
3

Total additional depreciation––asset restructuring
 
47

 
24

 
151

 
71

Implementation costs recorded in our condensed consolidated statements of income as follows(e):
 
 

 
 

 
 

 
 

Cost of sales
 
46

 
23

 
127

 
64

Selling, informational and administrative expenses
 
23

 
16

 
56

 
55

Research and development expenses
 
8

 
2

 
17

 
13

Other (income)/deductions––net
 
1

 
2

 
2

 
3

Total implementation costs
 
78

 
42

 
202

 
135

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
655

 
$
647

 
$
1,341

 
$
933

(a) 
In the nine months ended October 2, 2016, Employee terminations represent the expected reduction of the workforce by approximately 2,100 employees, mainly in manufacturing, sales, research and corporate. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, pension and postretirement benefits, many of which may be paid out during periods after termination.
The restructuring charges for 2016 are associated with the following:
For the third quarter of 2016, the IH segment ($148 million); the EH segment ($28 million); WRD, GPD and Medical (M) (WRD/GPD/M) ($52 million); manufacturing operations ($108 million); and Corporate ($67 million).
For the first nine months of 2016, IH ($162 million); EH ($19 million); WRD/GPD/M ($104 million); manufacturing operations ($181 million); and Corporate ($107 million).
The restructuring charges for 2015 are associated with the following:
For the third quarter of 2015, IH ($9 million); EH ($280 million); WRD/GPD/M ($50 million); manufacturing operations ($26 million); and Corporate ($104 million).
For the first nine months of 2015, IH ($55 million); EH ($288 million); WRD/GPD/M ($66 million); manufacturing operations ($18 million); and Corporate ($127 million).
In September 2015, in order to eliminate certain redundancies in Pfizer’s biosimilar drug products pipeline created as a result of the acquisition of Hospira, Pfizer opted to return rights to Celltrion that Hospira had previously acquired to potential biosimilars to Rituxan® (rituximab) and Herceptin® (trastuzumab). As such, upon return of the acquired rights, in the third quarter and first nine months of 2015, we incurred charges of $205 million, which are comprised of (i) a write-off of the applicable IPR&D assets, totaling $160 million, which is included in Asset impairments; (ii) a write-off of amounts prepaid to Celltrion in the amount of $25 million, which is included in Asset impairments; and (iii) a payment to Celltrion of $20 million, which is included in Exit costs.
(b) 
Transaction costs represent external costs for banking, legal, accounting and other similar services, most of which in the third quarter of 2016 are directly related to our acquisition of Medivation, and most of which in the first nine months of 2016 are directly related to our acquisitions of Medivation and Anacor, and the terminated transaction with Allergan. Transaction costs in 2015 represent external costs directly related to the acquisition of Hospira and primarily include expenditures for banking, legal, accounting and other similar services.
(c) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes. In the third quarter of 2016, integration costs mostly relate to our acquisition of Hospira and for the first nine months of 2016, integration costs mostly relate to our acquisition of Hospira and the terminated transaction with Allergan. Integration costs in 2015 represent external incremental costs directly related to our acquisition of Hospira.

18


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

(d) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(e) 
Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction/productivity initiatives.
The following table provides the components of and changes in our restructuring accruals:
(MILLIONS OF DOLLARS)
 
Employee
Termination Costs

 
Asset
Impairment Charges

 
Exit Costs

 
Accrual

Balance, December 31, 2015(a)
 
$
1,109

 
$

 
$
48

 
$
1,157

Provision
 
464

 
45

 
64

 
574

Utilization and other(b)
 
(360
)
 
(45
)
 
(50
)
 
(455
)
Balance, October 2, 2016(c)
 
$
1,213

 
$

 
$
62

 
$
1,275

(a) 
Included in Other current liabilities ($776 million) and Other noncurrent liabilities ($381 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($714 million) and Other noncurrent liabilities ($561 million).

Note 4. Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
September 27,
2015

 
October 2,
2016

 
September 27,
2015

Interest income(a)
 
$
(123
)
 
$
(121
)
 
$
(357
)
 
$
(332
)
Interest expense(a)
 
291

 
278

 
889

 
864

Net interest expense
 
168

 
157

 
532

 
533

Royalty-related income
 
(233
)
 
(204
)
 
(695
)
 
(683
)
Certain legal matters, net(b)
 
(40
)
 

 
494

 
99

Net gains on asset disposals(c)
 
(47
)
 
(35
)
 
(81
)
 
(230
)
Impairment on remeasurement of HIS net assets(d)
 
1,422

 

 
1,422

 

Certain asset impairments(e)
 
133

 
633

 
1,080

 
658

Business and legal entity alignment costs(f)
 
69

 
60

 
180

 
224

Other, net(g)
 
(55
)
 
50

 
(117
)
 
70

Other (income)/deductions––net
 
$
1,417

 
$
661

 
$
2,815

 
$
670

(a) 
Interest income increased in the first nine months of 2016, primarily due to higher investment returns. Interest expense increased in the third quarter and first nine months of 2016, primarily due to interest on legacy Hospira debt acquired in September 2015 and the addition of new fixed rate debt in the second quarter of 2016, partially offset by the maturity of other fixed rate debt in the second quarter of 2016.
(b) 
In the first nine months of 2016, primarily includes amounts to resolve a Multi-District Litigation relating to Celebrex and Bextra pending against the Company in New York federal court for $486 million, which is subject to final court approval, partially offset by the reversal of a legal accrual where a loss is no longer deemed probable. In addition, the first nine months of 2016 includes a settlement related to a patent matter. See Note 12A2 for additional information.
(c) 
In the first nine months of 2016, includes gains on sales/out-licensing of product and compound rights (approximately $49 million). In the first nine months of 2015, primarily includes gains on sales/out-licensing of product and compound rights (approximately $76 million) and gains on sales of investments in equity securities (approximately $160 million).
(d) 
In the third quarter and first nine months of 2016, represents a charge related to the write-down of the HIS net assets to fair value less estimated costs to sell. In October 2016, ICU Medical and Pfizer announced that they entered into a definitive agreement under which ICU Medical will acquire all of Pfizer’s global infusion therapy net assets, HIS, for approximately $1 billion in cash and ICU Medical stock. HIS includes IV pumps, solutions and devices. See Note 2B for additional information.
(e) 
In the third quarter of 2016, primarily includes intangible asset impairment charges of $126 million, reflecting $97 million of sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma and $29 million of other IPR&D assets acquired in connection with our acquisition of King in 2011. The intangible asset impairment charges for the third quarter of 2016 are associated with the following: EH ($97 million) and IH ($29 million). In the first nine months of 2016, primarily includes intangible asset impairment charges of $767 million, reflecting (i) $331 million related to developed technology rights for a generic injectable antibiotic product for the treatment of bacterial infections; and (ii) $265 million related to an IPR&D compound for the treatment of anemia, both acquired in connection with our acquisition of Hospira; (iii) $97 million of sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma; and (iv) $74 million of other IPR&D assets, $45 million of which were acquired in connection with our acquisition of Hospira and $29 million of which were acquired in connection with our acquisition of King in 2011. The intangible asset impairment charges for the first nine months of 2016 are associated with the following: EH ($738 million) and IH ($29 million). In addition, the first nine months of 2016 includes an impairment loss of $211 million related to Pfizer’s

19


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

49%-owned equity-method investment with Zhejiang Hisun Pharmaceuticals Co., Ltd. in China, Hisun Pfizer, and an impairment loss of $50 million related to Pfizer's 40%-owned equity-method investment in Teuto. For additional information concerning Hisun Pfizer and Teuto, see Note 2D.
The intangible asset impairment charge for 2016 for the IPR&D compound for the treatment of anemia acquired in connection with our acquisition of Hospira reflects, among other things, the impact of regulatory delays, including delays resulting from a recent court ruling, requiring a 180-day waiting period after approval before a biosimilar product can be launched. The intangible asset impairment charges for 2016 for the sterile injectable IPR&D compounds acquired in connection with our acquisition of InnoPharma reflect, among other things, the impact of portfolio prioritization decisions and decreased commercial profiles of certain compounds. The intangible asset impairment charges for 2016 for developed technology rights and other IPR&D assets acquired in connection with our acquisition of Hospira reflect, among other things, the impact of new scientific findings, updated commercial forecasts, changes in pricing, and an increased competitive environment. The intangible asset impairment charges for 2016 for other IPR&D assets acquired in connection with our acquisition of King reflect changes in the competitive environment.
In the third quarter and first nine months of 2015, primarily includes an impairment loss of $470 million related to Pfizer's 49%-owned equity-method investment in Hisun Pfizer, and impairment charges for intangible assets of $163 million reflecting (i) $115 million related to developed technology rights for the treatment of attention deficit hyperactivity disorder; (ii) $28 million related to an IPR&D project for the treatment of attention deficit hyperactivity disorder; and (iii) $20 million related to an indefinite-lived Consumer Healthcare brand. The intangible asset impairment charges for the third quarter and first nine months of 2015 are associated with the following: IH ($20 million) and EH ($143 million). The intangible asset impairment charges for 2015 reflect, among other things, updated commercial forecasts due to increased competition.
(f) 
In the third quarter and first nine months of 2016 and 2015, represents expenses for changes to our infrastructure to align our commercial operations, including costs to internally separate our businesses into distinct legal entities, as well as to streamline our intercompany supply operations to better support each business.
(g) 
In the first nine months of 2016, includes among other things, $150 million paid to Allergan for reimbursement of Allergan’s expenses associated with the terminated transaction (see Note 1A). The first nine months of 2016, also includes income of $116 million from resolution of a contract disagreement.
The following table provides additional information about the intangible assets that were impaired during 2016 in Other (income)/deductions––net:
 
 
Fair Value(a)
 
Nine Months Ended
October 2, 2016
(MILLIONS OF DOLLARS)
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Impairment
Intangible assets––IPR&D(b)
 
$
50

 
$

 
$

 
$
50

 
$
436

Intangible assets––Developed technology rights (b)
 
66

 

 

 
66

 
331

Total
 
$
116

 
$

 
$

 
$
116

 
$
767

(a) 
The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C.
(b) 
Reflects intangible assets written down to fair value in the first nine months of 2016. Fair value was determined using the income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We started with a forecast of all the expected net cash flows associated with the asset and then applied an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the product and the impact of technological risk associated with IPR&D assets; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 17.7% for the third quarter of 2016, compared to 21.0% for the third quarter of 2015 and was 15.8% for the first nine months of 2016, compared to 23.4% for the first nine months of 2015.
The lower effective tax rate for the third quarter of 2016 in comparison with the same period in 2015 was primarily due to:
a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business; as well as
an increase in benefits associated with the U.S. R&D tax credit, which was not in effect in the prior year quarter but was permanently extended on December 18, 2015,
partially offset by:
a decrease in benefits associated with the resolution of certain tax positions pertaining to prior years primarily with various foreign tax authorities, and the expiration of certain statutes of limitations; as well as
the unfavorable tax effects of an impairment charge related to the write-down of HIS net assets to fair value less estimated costs to sell, mainly related to goodwill, which is not deductible for tax purposes, and the jurisdictional mix of intangible assets.

20


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

The lower effective tax rate for the first nine months of 2016 in comparison with the same period in 2015 was primarily due to:
a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business;
benefits related to the final resolution of an agreement in principle reached in February 2016 and finalized in April 2016 to resolve certain claims related to Protonix, which resulted in the receipt of information that raised our assessment of the likelihood of prevailing on the technical merits of our tax position;
benefits associated with our Venezuela operations; as well as
an increase in benefits associated with the U.S. R&D tax credit, which was not in effect in the first nine months of the prior year but was permanently extended on December 18, 2015,
partially offset by:
a decrease in benefits associated with the resolution of certain tax positions pertaining to prior years primarily with various foreign tax authorities, and the expiration of certain statutes of limitations; as well as
the unfavorable tax effects of an impairment charge related to the write-down of HIS net assets to fair value less estimated costs to sell, mainly related to goodwill, which is not deductible for tax purposes, and the jurisdictional mix of intangible assets.
B. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.
The U.S. is one of our major tax jurisdictions, and we are regularly audited by the IRS:
With respect to Pfizer, the IRS has issued a RAR for tax years 2009-2010. We are not in agreement with the RAR and are currently appealing certain disputed issues. Tax years 2011-2013 are currently under audit. Tax years 2014-2016 are open, but not under audit. All other tax years are closed.
With respect to Hospira, the federal income tax audit of tax years 2010-2011 was effectively settled in the second quarter of 2016. The IRS is currently auditing tax years 2012-2013 and 2014 through short-year 2015. All other tax years are closed. The tax years under audit for Hospira are not considered material to Pfizer.
With respect to Anacor and Medivation, the open tax years are not considered material to Pfizer.
In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2010-2016), Japan (2015-2016), Europe (2007-2016, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2016, primarily reflecting Brazil) and Puerto Rico (2010-2016).

21


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

C. Tax Provision/(Benefit) on Other Comprehensive Income/(Loss)
The following table provides the components of Tax provision/(benefit) on other comprehensive income/(loss):
 
 
Three Months Ended
 
Nine Months Ended
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
September 27,
2015

 
October 2,
2016

 
September 27,
2015

Foreign currency translation adjustments, net(a)
 
$

 
$
(7
)
 
$
(15
)
 
$
90

Unrealized holding losses on derivative financial instruments, net
 

 
(57
)
 
(192
)
 
(160
)
Reclassification adjustments for realized (gains)/losses
 
32

 
15

 
81

 
43

 
 
32

 
(42
)
 
(112
)
 
(117
)
Unrealized holding gains/(losses) on available-for-sale securities, net
 
40

 
6

 
106

 
(63
)
Reclassification adjustments for realized (gains)/losses
 
(14
)
 
1

 
(16
)
 
63

 
 
26

 
7

 
90

 

Benefit plans: actuarial losses, net
 
(31
)
 
(51
)
 
(39
)
 
(43
)
Reclassification adjustments related to amortization
 
47

 
43

 
140

 
133

Reclassification adjustments related to settlements, net
 
10

 
12

 
27

 
35

Other
 
14

 
(9
)
 
5

 
29

 
 
40

 
(4
)
 
133

 
154

Benefit plans: prior service credits and other, net
 
35

 
(4
)
 
66

 
188

Reclassification adjustments related to amortization
 
(17
)
 
(36
)
 
(47
)
 
(42
)
Reclassification adjustments related to curtailments, net
 
(3
)
 
18

 
(5
)
 
(8
)
Other
 
2

 
2

 
1

 
2

 
 
18

 
(19
)
 
15

 
139

Tax provision/(benefit) on other comprehensive income/(loss)
 
$
116

 
$
(65
)
 
$
111

 
$
267

(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
The following table provides the changes, net of tax, in Accumulated other comprehensive loss:
 
 
Net Unrealized Gains/(Losses)
 
Benefit Plans
 
 
(MILLIONS OF DOLLARS)
 
Foreign Currency Translation Adjustments

 
Derivative Financial Instruments

 
Available-For-Sale Securities

 
Actuarial Gains/(Losses)

 
Prior Service (Costs)/Credits and Other

 
Accumulated Other Comprehensive Loss

Balance, December 31, 2015
 
$
(5,863
)
 
$
421

 
$
(227
)
 
$
(4,733
)
 
$
880

 
$
(9,522
)
Other comprehensive income/(loss)(a)
 
1,016

 
(578
)
 
522

 
310

 
39

 
1,308

Balance, October 2, 2016
 
$
(4,847
)
 
$
(157
)
 
$
295

 
$
(4,423
)
 
$
919

 
$
(8,214
)
(a) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $1 million loss for the first nine months of 2016.

As of October 2, 2016, with respect to derivative financial instruments, the amount of unrealized pre-tax losses estimated to be reclassified into income within the next 12 months is $129 million (which is expected to be offset primarily by gains resulting from reclassification adjustments related to available-for-sale securities).

22


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

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities
The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
December 31,
2015

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading funds and securities(b)
 
$
304

 
$
287

Available-for-sale debt securities(c)
 
17,522

 
32,078

Money market funds
 
1,724

 
934

Available-for-sale equity securities(c)
 
590

 
603

Derivative financial instruments in a receivable position(d):
 
 

 
 

Interest rate swaps
 
1,923

 
837

Foreign currency swaps
 
90

 
135

Foreign currency forward-exchange contracts
 
186

 
559

 
 
22,340

 
35,433

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
1,270

 
1,388

Private equity securities, carried at equity-method or at cost(e), (f)
 
1,003

 
1,336

 
 
2,272

 
2,724

Total selected financial assets
 
$
24,613

 
$
38,157

Selected financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(g):
 
 

 
 

Interest rate swaps
 
$
3

 
$
139

Foreign currency swaps
 
1,349

 
1,489

Foreign currency forward-exchange contracts
 
503

 
81

 
 
1,855

 
1,709

Other selected financial liabilities
 
 

 
 

Short-term borrowings:
 
 
 
 
Principal amount
 
13,602

 
10,160

Net fair value adjustments related to hedging and purchase accounting
 
47

 
2

Net unamortized discounts, premiums and debt issuance costs(h)
 
(16
)
 
(3
)
Total short-term borrowings, carried at historical proceeds, as adjusted(e)
 
13,633

 
10,159

Long-term debt:
 
 
 
 
Principal amount
 
28,073

 
27,573

Net fair value adjustments related to hedging and purchase accounting
 
2,447

 
1,294

Net unamortized discounts, premiums and debt issuance costs(h)
 
(83
)
 
(127
)
Total long-term debt, carried at historical proceeds, as adjusted(i)
 
30,437

 
28,740

 
 
44,071

 
38,899

Total selected financial liabilities
 
$
45,926

 
$
40,608

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 2% that use Level 1 inputs and money market funds measured at net asset value.
(b) 
As of October 2, 2016, trading funds and securities are composed of $196 million of trading equity funds, $12 million of trading securities and $96 million of trading debt funds. As of December 31, 2015, trading funds and securities are composed of $185 million of trading equity funds and $102 million of trading debt funds. As of October 2, 2016 and December 31, 2015, trading equity funds of $69 million and $85 million, respectively, are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $91 million as of October 2, 2016; and foreign currency forward-exchange contracts with fair values of $136 million as of December 31, 2015.
(e) 
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities at cost and short-term borrowings not measured at fair value on a recurring basis were not significant as of October 2, 2016 or December 31, 2015. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities carried at cost are based on Level 3 inputs. Short-term borrowings include foreign currency short-term borrowings with fair values of $547 million as of December 31, 2015, which are used as hedging instruments.

23


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

(f) 
Our private equity securities represent investments in the life sciences sector.
(g) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $211 million and foreign currency forward-exchange contracts with fair values of $145 million as of October 2, 2016; and foreign currency swaps with fair values of $234 million and foreign currency forward-exchange contracts with fair values of $59 million as of December 31, 2015.
(h) 
We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. See Note 1B for additional information.
(i) 
The fair value of our long-term debt (not including the current portion of long-term debt) was $34.3 billion as of October 2, 2016 and $32.7 billion as of December 31, 2015. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach. Generally, the difference between the fair value of our long-term debt and the amount reported on the condensed consolidated balance sheet is due to a decline in relative market interest rates since the debt issuance.
The following table provides the classification of these selected financial assets and liabilities in our condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
October 2,
2016

 
December 31,
2015

Assets
 
 
 
 
Cash and cash equivalents
 
$
628

 
$
978

Short-term investments
 
12,277

 
19,649

Other current assets(a)
 
293

 
587

Long-term investments
 
9,507

 
15,999

Other noncurrent assets(b)
 
1,907

 
944

 
 
$
24,613

 
$
38,157

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt(c)
 
$
13,633

 
$
10,159

Other current liabilities(d)
 
805

 
645

Long-term debt(c)
 
30,437

 
28,740

Other noncurrent liabilities(e)
 
1,050

 
1,064

 
 
$
45,926

 
$
40,608

(a) 
As of October 2, 2016, derivative instruments at fair value include interest rate swaps ($49 million), foreign currency swaps ($67 million) and foreign currency forward-exchange contracts ($177 million) and, as of December 31, 2015, include interest rate swaps ($2 million), foreign currency swaps ($46 million) and foreign currency forward-exchange contracts ($538 million).
(b) 
As of October 2, 2016, derivative instruments at fair value include interest rate swaps ($1.9 billion), foreign currency swaps ($23 million) and foreign currency forward-exchange contracts ($9 million) and, as of December 31, 2015, include interest rate swaps ($835 million), foreign currency swaps ($89 million) and foreign currency forward-exchange contracts ($20 million).
(c) 
We adopted a new standard as of January 1, 2016 that changed the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that associated debt, consistent with the presentation of a debt discount. See Note 1B for additional information.
(d) 
As of October 2, 2016, derivative instruments at fair value include interest rate swaps ($1 million), foreign currency swaps ($320 million) and foreign currency forward-exchange contracts ($483 million) and, as of December 31, 2015, include interest rate swaps ($5 million), foreign currency swaps ($560 million) and foreign currency forward-exchange contracts ($80 million).
(e) 
As of October 2, 2016, derivative instruments at fair value include interest rate swaps ($2 million), foreign currency swaps ($1.0 billion) and foreign currency forward-exchange contracts ($20 million) and, as of December 31, 2015, include interest rate swaps ($134 million), foreign currency swaps ($928 million) and foreign currency forward-exchange contracts ($1 million).

There were no significant impairments of financial assets recognized in any period presented.


24


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

B. Investments in Debt Securities
The following table provides the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
October 2,
2016

(MILLIONS OF DOLLARS)
 
Within 1

 
Over 1
to 5

 
Over 5
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Corporate debt(a)
 
$
2,399

 
$
3,824

 
$
2,088

 
$
25

 
$
8,336

Western European, Asian, Scandinavian and other government debt(b)
 
4,247

 
661

 
8

 

 
4,916

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
3

 
56

 
1