SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report:
October 14, 2003
Date of earliest event reported:
October 14, 2003
PFIZER INC.
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(Exact name of registrant as specified in its charter)
Delaware 001-03619 13-5315170
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
235 East 42nd Street, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(212) 573-2323
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(Former name or former address, if changed since last report.)
Item 5. Other Events
(a) Pfizer Inc. historical non-GAAP financial measures
Certain statements in our Annual Report on Form 10-K for fiscal year ended
December 31, 2002 contain non-GAAP financial measures. Following are
reconciliations of these measures to the comparable GAAP financial measures.
All page references are to Pfizer's Annual Report that is included as Exhibit 13
to the Annual Report on Form 10-K for the year ended December 31, 2002.
Statements containing non-GAAP measures and reconciliations of the non-GAAP
financial measures to the comparable GAAP financial measures:
- Page 31, under the caption entitled "Human Pharmaceutical", the
statement: "Excluding the effect of the 2001 harmonization of an
accounting methodology for Medicaid discounts and contract rebate
accruals, human pharmaceutical revenue grew by 13% in 2002. On this
same basis, but also excluding the impact of foreign exchange, human
pharmaceutical revenue grew by 15% in 2001."
% Change
(millions of dollars) 2002 2001 02/01
---- ---- -----
Reported human pharmaceutical revenues $28,288 $25,240 12%
Harmonization of accounting methodology -- (175)
------- -------
Human pharmaceutical revenues excluding the
harmonization of accounting methodology $28,288 $25,065 13%
======= =======
% Change
(millions of dollars) 2001 2000 01/00
---- ---- -----
Reported human pharmaceutical revenues $25,240 $22,328 13%
Harmonization of accounting methodology (175) --
Impact of foreign exchange 627 --
------- -------
Human pharmaceutical revenues excluding the
harmonization of accounting methodology and
foreign exchange $25,692 $22,328 15%
======= =======
- Page 32, under the caption entitled "Human Pharmaceutical", the
reference to the reduction of revenue in 2001 of "($403 million
excluding the effect of harmonization of the Pfizer/Warner-Lambert
accounting methodology for Medicaid discount accruals)".
(millions of dollars) 2001
----
Reported rebates under Medicaid and related state programs $342
Harmonization of accounting methodology for Medicaid discounts 61
----
Rebates under Medicaid and related state programs excluding the
harmonization of accounting methodology for Medicaid discounts $403
====
2
- Page 35, under the caption entitled "Costs and Expenses", the
statement: "The effective tax rate for continuing operations,
excluding the cumulative effect of a change of accounting principle,
certain significant items and merger-related costs was 23.0% in 2002
and 25.1% in 2001."
(millions of dollars) 2002 2001
---- ----
Reported income from continuing operations before provision
for taxes on income, minority interests and cumulative effect
of a change in accounting principle $11,796 $ 9,984
Certain significant items and merger-related costs (pre-tax) -
continuing operations 716 833
------- -------
Income from continuing operations before provision for taxes
on income, minority interests and cumulative effect of a
change in accounting principle, excluding certain significant
items and merger-related costs $12,512 $10,817
======= =======
Reported taxes on income from continuing operations $ 2,609 $ 2,433
Provision for taxes on certain significant items and
merger-related costs - continuing operations 267 284
------- -------
Taxes on income excluding certain significant items and
merger-related costs - continuing operations $ 2,876 $ 2,717
======= =======
Reported effective tax rate for continuing operations 22.1% 24.4%
======= =======
Effective tax rate for continuing operations, excluding the
cumulative effect of a change in accounting principle, certain
significant items and merger-related costs 23.0% 25.1%
======= =======
3
(b) Pharmacia Corporation historical non-GAAP financial measures
Certain statements in the Pharmacia Form 10-K for fiscal year ended December 31,
2002 contain non-GAAP financial measures. Following are reconciliations of these
measures to the comparable GAAP financial measures.
All page references are to Pharmacia's Annual Report on Form 10-K for the year
ended December 31, 2002.
Statements containing non-GAAP measures and reconciliations of the non-GAAP
financial measures to the comparable GAAP financial measures:
- Page 14, under the caption "Net Sales", the statement: "The Company
continued to record strong sales results in 2001 with an overall
increase of 1 percent versus 2001, despite the loss of AMBIEN sales
in 2002. Excluding the impact of the return of product rights to
AMBIEN to Sanofi, sales of the remaining products increased 8
percent in the full year."
% Change
(millions of dollars) 2002 2001 02/01
---- ---- -----
Reported net sales $ 13,993 $ 13,835 1%
Exclusion of AMBIEN sales from 2001 data -- (902)
-------- --------
Net sales excluding the effect of loss
of AMBIEN sales in 2002 $ 13,993 $ 12,933 8%
======== ========
- Page 14, under the caption entitled "Net Sales", the statement: "The
1 percent sales growth in 2002 was attributed to fractional
increases in both price and foreign exchange effects. Excluding the
impact of AMBIEN, volume accounted for 7 percent of the 2002
increase in sales."
$ Change % Change
(millions of dollars) 2002 2001 02/01 02/01
---- ---- ----- -----
Reported net sales $13,993 $13,835
Exclusion of AMBIEN sales from 2001 data -- (902)
------- -------
Net sales excluding the effect of loss
of AMBIEN sales in 2002 $13,993 $12,933 $1,060 8%
======= ======= ======
AMBIEN sales 2001 $ 902
Other volume effects 13
------
Total volume effects $ 915 7%
Exchange effects 62 *
Price effects 83 *
------ --
Totals $1,060 8%
====== ==
* Represents less than one percent
4
- Page 16, under the caption entitled "Prescription Pharmaceuticals segment"
the statement: "Prescription pharmaceutical sales, which constitute 86
percent of overall sales, decreased 3 percent in the U.S. and increased 1
percent on a global basis in 2002, including the loss of AMBIEN sales.
Excluding AMBIEN from prior-year data, prescription sales increased 11
percent in the U.S. and 9 percent globally."
% Change
(millions of dollars) 2002 2001 02/01
---- ---- -----
Reported consolidated net sales - U.S. $ 7,627 $ 7,815
Non-prescription product sales (e.g., animal health and
consumer health care) - U.S. 834 810
-------- --------
Prescription pharmaceuticals sales - U.S. $ 6,793 $ 7,005 (3)%
Exclusion of AMBIEN sales from 2001 data -- (896)
-------- --------
Prescription pharmaceuticals sales excluding the effect
of loss of AMBIEN sales - U.S. $ 6,793 $ 6,109 11%
======== ========
Reported prescription pharmaceuticals sales - global $ 12,037 $ 11,968 1%
Exclusion of AMBIEN sales from 2001 data -- (902)
-------- --------
Prescription pharmaceuticals sales excluding the effect
of loss of AMBIEN sales $ 12,037 $ 11,066 9%
======== ========
- Page 23, under the caption entitled "Income Taxes", the statement: "The
noteworthy items and fluctuations in pretax earnings cited above (gains
reported in "All other, net related to the return of AMBIEN to Sanofi, the
settlement of an intellectual property legal suit in the ophthalmology
field and merger and higher restructuring charges) and the tax
jurisdictions in which they arose had a significant effect on the overall
effective tax rate. Absent such items, the annual effective tax rate would
have been 24 percent, 25 percent and 27 percent for 2002, 2001 and 2000,
respectively."
(millions of dollars) 2002 2001 2000
---- ---- ----
Reported income from continuing operations before
provision for income taxes, extraordinary items and
cumulative effect of a change in accounting principle $ 3,306 $ 1,591 $ 1,044
------- ------- -------
Certain significant items and merger-related costs
(pre-tax) - continuing operations
Merger and restructuring charges $ 68 $ 673 $ 975
Gain on return of AMBIEN to Sanofi (661) -- --
Gain from settlement of intellectual property
litigation (100) -- --
Charitable contribution 75 -- --
In-licensing/acquisition of R&D -- 147 --
Portfolio rationalization/regulatory delay -- 65 --
Write-down of equity investment -- 62 --
Other 2 (3) (8)
------- ------- -------
$ (616) $ 944 $ 967
------- ------- -------
Income from continuing operations before provision for
taxes on income, extraordinary items and cumulative
effect of a change in accounting principle, excluding
certain significant items and merger-related costs $ 2,690 $ 2,535 $ 2,011
======= ======= =======
Reported taxes on income from continuing operations $ 869 $ 298 $ 238
Provision (benefit) for taxes on certain significant
items and merger-related costs - continuing operations (223) 336 311
------- ------- -------
Taxes on income excluding certain significant items and
merger-related costs - continuing operations $ 646 $ 634 $ 549
======= ======= =======
Reported effective tax rate for continuing operations 26.3% 18.7% 22.7%
======= ======= =======
Effective tax rate for continuing operations, excluding
extraordinary items, the cumulative effect of a
change in accounting principle, certain significant
items and merger-related costs 24.0% 25.0% 27.3%
======= ======= =======
5
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The following represents the historical consolidated financial statements
of Pharmacia Corporation, including Pharmacia's consolidated balance sheet
at March 31, 2003 and December 31, 2002 and the consolidated statements of
earnings and cash flows for each of the three months in the periods ended
March 31, 2003 and 2002.
Reference is made to Pfizer Inc's Quarterly Reports on Form 10-Q for the
quarters ended March 30, 2003 and June 29, 2003 for more recent
information, including without limitation information relating to
litigation matters.
6
PHARMACIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
---- ----
Net sales $ 3,373 $ 3,120
Cost of products sold 863 695
Research and development 589 548
Selling, general and administrative 1,401 1,395
Merger and restructuring 18 20
Interest expense 35 44
Interest income (14) (8)
All other, net 14 (93)
-------- -------
Earnings from continuing operations before income taxes 467 519
Provision for income taxes 102 125
-------- -------
Earnings from continuing operations 365 394
Gain (loss) on disposal of discontinued
operations, net of tax (30) 63
-------- -------
Earnings before extraordinary item and
cumulative effect of accounting change 335 457
Extraordinary item, net of tax -- 649
Cumulative effect of accounting
change, net of tax (50) (1,541)
-------- -------
Net earnings (loss) $ 285 $ (435)
======== =======
Net earnings per common share:
Basic
Earnings from continuing operations $ .28 $ .30
Net earnings (loss) .22 (.34)
Diluted
Earnings from continuing operations $ .27 $ .30
Net earnings (loss) .21 (.33)
======== =======
See accompanying notes.
7
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
Net cash provided (required) by continuing operations $ 164 $ (94)
Net cash provided by discontinued operations -- 26
------- -------
Net cash provided (required) by operations 164 (68)
------- -------
Cash flows provided (required) by investment activities:
Purchases of property, plant and equipment (155) (182)
Other acquisitions and investments (517) (141)
Investment and property disposal proceeds 30 30
Proceeds from sale of equity investment -- 1,000
Discontinued operations, net -- (358)
------- -------
Net cash provided (required) by investment activities (642) 349
------- -------
Cash flows provided (required) by financing activities:
Repayment of long-term debt -- (23)
Net increase in short-term borrowings 73 869
Issuance of stock 73 48
Treasury stock purchases -- (254)
Dividend payments (178) (179)
Other financing activities (58) (43)
------- -------
Net cash provided (required) by financing activities (90) 418
------- -------
Effect of exchange rate changes on cash 50 17
------- -------
Increase (decrease) in cash and cash equivalents (518) 716
------- -------
Cash and cash equivalents, beginning of year 2,241 1,276
------- -------
Cash and cash equivalents, end of period $ 1,723 $ 1,992
======= =======
See accompanying notes.
8
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
MARCH 31, DECEMBER 31,
2003* 2002
----- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1,723 $ 2,241
Short-term investments 985 469
Trade accounts receivable, less allowance of $127 (2002: $136) 2,423 2,457
Inventories 2,223 2,177
Deferred income taxes 731 717
Other current assets 1,142 1,219
-------- --------
Total Current Assets 9,227 9,280
Long-term investments 282 287
Properties, net 5,763 5,683
Goodwill, net of accumulated amortization of $694 (2002: $682) 1,172 1,150
Other intangible assets, net of accumulated amortization
of $640 (2002: $641) 383 393
Other noncurrent assets 1,700 1,724
-------- --------
Total Assets $ 18,527 $ 18,517
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 940 $ 854
Trade accounts payable 664 780
Income taxes payable 765 740
Other accrued liabilities 2,043 2,606
-------- --------
Total Current Liabilities 4,412 4,980
Long-term debt and guarantee of ESOP debt 2,575 2,649
Other noncurrent liabilities 3,059 2,905
-------- --------
Total Liabilities 10,046 10,534
-------- --------
Shareholders' Equity:
Preferred stock, one cent par value; at
stated value; authorized 10 million shares;
issued 6,050 shares (2002: 6,130 shares) 244 247
Common stock, two dollar par value; authorized
3 billion shares; issued 1.485 billion shares 2,970 2,970
Capital in excess of par value 3,672 3,656
Retained earnings 7,235 6,950
ESOP-related accounts (164) (216)
Treasury stock, at cost (3,199) (3,257)
Accumulated other comprehensive loss (2,277) (2,367)
-------- --------
Total Shareholders' Equity 8,481 7,983
-------- --------
Total Liabilities and Shareholders' Equity $ 18,527 $ 18,517
======== ========
*Unaudited.
See accompanying notes.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
The term "the Company" or "Pharmacia" is used to refer to Pharmacia Corporation
or to Pharmacia Corporation and its subsidiaries, as appropriate to the context.
The term "former Monsanto" is used to refer to operations of the Monsanto
Company before the merger with Pharmacia & Upjohn on March 31, 2000 and
"Monsanto" refers to the agricultural subsidiary, which was spun off by
Pharmacia to its shareholders on August 13, 2002 as further discussed in Note F.
As outlined in Note B, Pharmacia merged with Pfizer Inc. (Pfizer) on April 16,
2003. These financial statements are presented on a standalone, going-concern
basis. Trademarks owned by, or licensed to, Pharmacia are indicated in all upper
case letters. In the notes that follow, per-share amounts are presented on a
diluted, after-tax basis, unless otherwise indicated.
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited, other than
the condensed balance sheet at December 31, 2002, which is derived from audited
financial statements. The interim financial statements and notes thereto do not
include all disclosures required by U.S. generally accepted accounting
principles and should be read in conjunction with the financial statements and
notes thereto included in Pharmacia Corporation's annual report filed on Form
10-K for the year ended December 31, 2002.
Management believes that the interim consolidated financial statements reflect
all adjustments of a normal recurring nature necessary for a fair statement of
the results for the interim periods presented. The current period's results of
operations are not necessarily indicative of results that ultimately may be
achieved for the year.
Certain reclassifications were made to conform prior period data to the current
presentation.
B - SUBSEQUENT EVENT - MERGER WITH PFIZER
Effective April 16, 2003, the Company merged with Pfizer pursuant to a July 13,
2002 merger agreement. In accordance with the agreement, each Pharmacia
shareholder on the closing date received 1.4 shares of Pfizer stock for each
share of Pharmacia stock. Outstanding options on Pharmacia's common stock were
exchanged for 1.4 options on Pfizer's common stock and outstanding restricted
share awards became fully vested in connection with the acquisition based on the
same exchange ratio as the common stock. In addition, each share of Pharmacia's
Series C convertible perpetual preferred stock was exchanged for one share of
Pfizer Series A convertible perpetual preferred stock with rights substantially
identical to the rights of the Pharmacia Series C convertible perpetual
preferred stock. The conversion ratio of the convertible preferred stock has
been increased to reflect the 1.4 exchange ratio contained in the Merger. Until
the closing date, Pharmacia operated independently of Pfizer.
C - NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING PRINCIPLE
GUARANTOR'S ACCOUNTING
In November of 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an Interpretation of SFAS Nos. 5,
57, and 107 and rescission of FASB Interpretation No. 34)." FIN 45 requires
interim and annual disclosure about each guarantee or group of similar
guarantees. The Interpretation applies to various indemnification agreements and
other contracts that contingently require the guarantor to
10
make payments based on the changes in an underlying or based on another entity's
failure to perform. It also incorporates several indirect guarantees of the
indebtedness of others. The disclosure requirements became effective for the
year ended December 31, 2002 and subsequent interim disclosures have been
included accordingly within the contingent liabilities discussion in Note K
"Commitments, Contingent Liabilities and Litigation."
In addition to disclosure requirements, FIN 45 requires guarantors to recognize
the fair value of a liability at the inception of a guarantee. The initial
recognition and initial measurement provisions are to be applied on a
prospective basis to guarantees issued or modified effective January 1, 2003.
There was no material impact on the Company's consolidated financial statements
due to the adoption of these rules.
EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". The new rules amend existing accounting for these
costs by requiring that a liability be recorded at fair value when incurred. The
liability would be reviewed regularly for changes in fair value with adjustments
recorded in the consolidated financial statements. Previous rules permitted
certain types of costs to be recognized at time of management commitment. SFAS
No. 146 also provides specific guidance for lease termination costs and one-time
employee termination benefits when incurred as part of an exit or disposal
activity. SFAS No. 146 became effective on January 1, 2003, and there was no
effect on the Company's consolidated financial statements due to the adoption of
these rules.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial
accounting requirements for retirement obligations associated with tangible
long-lived assets. This statement requires companies to recognize the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred, and subsequently allocate the cost to expense over its
useful life. As a result of adopting SFAS No. 143, the Company recorded a
non-cash pre-tax charge of $83 ($50 net of tax) for the change in accounting for
costs associated with the eventual retirement of certain manufacturing, research
and lease facilities. This charge represents cumulative accretion and
accumulated depreciation that resulted from initially recording any existing
asset retirement obligations on January 1, 2003. This charge is reported as a
one-time cumulative effect of a change in accounting principle.
D - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31, 2003 and 2002
was $375 and $(483), respectively. Other comprehensive income (loss) which is a
component of comprehensive income (loss) includes Monsanto activity for the
three months ended March 31, 2002.
E - EXTRAORDINARY ITEM
During the first quarter of 2002, the Company sold its 45 percent minority
interest in Amersham Biosciences to Amersham plc for $1,000. The investment
basis as of March 2002 was $223. The sale resulted in an initial gain of $649
(net of taxes of $124). This was later adjusted to a net gain of $653. The gain
on the sale has been classified as an extraordinary item in the accompanying
consolidated statements of earnings in accordance with Accounting Principles
Board Opinion No. 16 "Business Combinations" because the sale of this investment
took place within the two-year period following the merger of Pharmacia & Upjohn
and former Monsanto, which was accounted for under the pooling of interests
accounting method. The sale of this investment was not contemplated at the time
of the transaction.
11
F - DISCONTINUED OPERATIONS
MONSANTO
On July 18, 2002, the Pharmacia board of directors approved the completion of a
tax-free spin-off of Monsanto through the distribution of shares of Monsanto
common stock to Pharmacia shareholders of record on July 29, 2002. In order to
effect the distribution, the Pharmacia board of directors declared a special
dividend of the 220 million shares of Monsanto common stock held by the Company
which, as of July 29, 2002, represented approximately 84% of Monsanto's
outstanding stock. Each Pharmacia shareholder received .170593 shares of
Monsanto common stock for each share of Pharmacia stock owned on the record
date. The shares were distributed at the close of business on August 13, 2002.
On September 1, 2000, the Company entered into a Transition Services Agreement
with Monsanto. Under the agreement, Pharmacia primarily provides information
technology support for Monsanto while Monsanto provides certain administrative
support services for Pharmacia. Pharmacia and Monsanto also lease research and
office space from each other. Since the initiation of the agreement, each party
has charged the other entity rent based on a percentage of occupancy multiplied
by the cost to operate the facilities. These services are continuing beyond
August 13, 2002. In addition, the two companies have paid various payroll
charges, taxes and travel costs that are associated with the business activities
of the other.
OTHER
In 2003, a review of the adequacy of accruals related to discontinued operations
at North Haven, CT was performed with the result that an increase of $45 was
recorded ($30 net of income taxes). The increased accrual relates to
environmental remediation efforts on-going at the site and revised approaches
being contemplated for accomplishing the objective.
During the fourth quarter of 2002, the Company committed to a plan of disposal
of its majority-owned pharmaceutical subsidiary in Russia. Accounted for as a
discontinued operation, prior period results of operations have been
reclassified. For the quarter ended March 31, 2002, the Russia operation had
sales of $1 and reported a loss of $1.
For the first three months of 2002, a gain on disposal of discontinued
operations was recorded in the amount of $63, comprised as follows:
FOR THE THREE MONTHS ENDED MARCH 31, 2002
-----------------------------------------
MONSANTO OTHER TOTAL
-------- ----- -----
Net sales $1,221 $ 1 $1,222
------ ------ ------
Income (loss) from discontinued
operations, before tax 93 (1) 92
Income tax expense 29 -- 29
------ ------ ------
Income (loss) from discontinued operations $ 64 $ (1) $ 63
====== ====== ======
G - MERGER AND RESTRUCTURING CHARGES
The Company recorded $18 of merger and restructuring charges during the first
quarter of 2003. Approximately $3 of restructuring reversals were recorded in
connection with the merger and integration of former Monsanto and Pharmacia &
Upjohn companies into Pharmacia Corporation. These charges are part of the
comprehensive integration plan approved by the board of directors during 2000.
The Company also recorded $21 of merger costs relating to the Pfizer
12
transaction. During the first quarter of 2002, the Company recorded $20 in
merger and restructuring costs made up of $10 in merger costs and $10 in
restructuring charges relating to the integration of former Monsanto and
Pharmacia & Upjohn companies into Pharmacia Corporation.
Merger Costs
The $21 of merger costs for the quarter includes costs necessary to facilitate
the completion of the merger with Pfizer. These costs include $14 for a contract
termination fee relating to a product divestiture, and $7 relating to travel
expenses and other merger related costs. The $10 of merger costs in the first
quarter of 2002 relates to information technology integration costs that were
necessary to complete the Monsanto merger.
Restructuring Costs
The $3 of reversals during the first quarter of 2003 related to lower actual
severance costs than originally estimated. The $10 of total restructuring
charges during the first quarter of 2002 is comprised of $7 associated with
prescription pharmaceuticals and $3 in connection with other pharmaceuticals.
The $7 relating to prescription pharmaceuticals consists of $5 associated with
the involuntary separation of approximately 45 employees and $2 relating to
other restructuring costs. The $3 associated with other pharmaceuticals relates
to the involuntary separation of approximately 35 employees.
As of March 31, 2003, the Company had paid a total of $450 relating to the
separation of approximately 2,740 employees associated with integration of the
former Monsanto and Pharmacia & Upjohn companies.
H - EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings measure by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed assuming the exercise of stock options, conversion of
preferred stock, and the issuance of stock as incentive compensation to certain
employees. Also in the diluted computation, earnings from continuing operations
and net earnings are reduced by an incremental contribution to the Employee
Stock Ownership Plan (ESOP). This contribution is the after-tax difference
between the income that the ESOP would have received in preferred stock
dividends and the dividend on the common shares assumed to have been
outstanding.
13
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2003 2002 2002
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
EPS numerator:
Earnings from continuing operations $ 365 $ 365 $ 394 $ 394
Less: Preferred stock dividends, net of tax (3) -- (3) --
Less: ESOP contribution, net of tax -- (3) -- (2)
------- ------- --------- -------
Earnings from continuing operations
available to common shareholders $ 362 $ 362 $ 391 $ 392
======= ======= ========= =======
EPS denominator:
Average common shares outstanding 1,295 1,295 1,297 1,297
Effect of dilutive securities:
Stock options and stock warrants -- 8 -- 8
Convertible instruments and
incentive compensation -- 13 -- 12
------- ------- --------- -------
Total shares (in millions) 1,295 1,316 1,297 1,317
======= ======= ========= =======
Earnings (loss) per share:
Continuing operations $ .28 $ .27 $ .30 $ .30
Discontinued operations (.02) (.02) .05 .05
Extraordinary item -- -- .50 .49
Cumulative effect of accounting change (.04) (.04) (1.19) (1.17)
------- ------- --------- -------
Net earnings (loss) $ .22 $ .21 $ (.34) $ (.33)
======= ======= ========= =======
I - INVENTORIES
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Estimated replacement cost (FIFO basis):
Finished products $ 281 $ 182
Raw materials, supplies and work-in-process 2,211 2,224
------- -------
Inventories (FIFO basis) 2,492 2,406
Less reduction to LIFO cost (269) (229)
------- -------
Total $ 2,223 $ 2,177
======= =======
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,743 at March 31, 2003, and $1,421 at December 31, 2002.
14
J - BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLES
The following tables reflect information pertaining to other intangible assets
relating to the continuing operations of the Company.
March 31, 2003
--------------
Amortized
---------
Not Subject to Accumulated
Amortization Gross Amortization Net
------------ ----- ------------ ---
Patents and trademarks $57 $428 $(310) $175
Rights and licenses -- 517 (320) 197
Other -- 21 (10) 11
--- ---- ----- ----
Total $57 $966 $(640) $383
==== ==== ===== ====
December 31, 2002
-----------------
Amortized
---------
Not Subject to Accumulated
Amortization Gross Amortization Net
------------ ----- ------------ ---
Patents and trademarks $57 $425 $(301) $181
Rights and licenses -- 514 (312) 202
Other -- 38 (28) 10
--- ---- ----- ----
Total $57 $977 $(641) $393
==== ==== ===== ====
Intangible assets acquired during the three months ended March 31, 2003 totaled
$2, and consisted of product rights and licenses.
Intangible Assets Amortization Expense
Year ended December 31, 2002 $ 69
Three months ended March 31, 2003 $ 17
Annual amortization expense for the years ending 2003 through 2007 is estimated
to be $70, $61, $56, $36 and $27, respectively.
Goodwill
The changes in the carrying amount of goodwill relating to continuing operations
for the three months ended March 31, 2003, are as follows:
PRESCRIPTION
TOTAL PHARMACEUTICALS ALL OTHER
----- --------------- ---------
Balance December 31, 2002 $1,150 $ 1,029 $ 121
Foreign exchange 22 20 2
------ ------- ------
Balance March 31, 2003 $1,172 $ 1,049 $ 123
====== ======= ======
15
K - COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites that, under the
Comprehensive Environmental Response, Compensation and Liability Act, are
commonly known as Superfund sites. The Company's ultimate liability in
connection with Superfund sites depends on many factors, including the number of
other responsible parties and their financial viability and the remediation
methods and technology to be used. Actual costs to be incurred may vary from the
estimates, given the inherent uncertainties in evaluating environmental
exposures.
ENVIRONMENTAL MATTERS
With regard to the Company's discontinued industrial chemical facility in North
Haven, Connecticut, the Company will be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency. It is reasonably
possible that a material increase in accrued liabilities will be required. It is
not possible, however, to estimate a reasonable range of potential losses.
Accordingly, it is not possible to determine what, if any, additional exposure
exists at this time.
LITIGATION MATTERS
The Company has been a defendant, along with a number of other manufacturers and
wholesalers, in several civil antitrust lawsuits, including a federal class
action, brought by retail pharmacies alleging that the defendants violated the
law by providing discounts to hospitals, nursing homes, mail-order pharmacies
and health maintenance organizations that were not offered on equal terms to
retail pharmacies. Pharmacia & Upjohn, a subsidiary of the Company, settled the
federal class action for $103, and G.D. Searle & Co. (Searle), another
subsidiary of the Company, received a favorable verdict in the federal class
action in 1999. State class action lawsuits seeking damages based on the same
alleged conduct were filed in 14 states and the District of Columbia, all but
one of which have been settled or dismissed. A number of the federal cases
brought by plaintiffs who opted out of the federal class action are still
pending.
The Company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
Company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the Company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The Company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the Company who were transferred to
CP Kelco. The Company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint.
Discovery has been completed in the lawsuit. A September 2002 Report and
Recommendation (September Report) issued by the magistrate judge in the case
granted Lehman's and Hercules' motion for judgment on the pleadings. The Company
has filed objections to the September Report and those objections have not been
ruled upon. An October 2002 Report and Recommendation (October Report) granted
in part and denied in part the Company's motion for summary judgment. The
Company has filed objections to that portion of the October Report that denied
its motion. Those objections have not been ruled upon. Trial is scheduled for
April 28, 2003.
The Company, Searle and Pfizer are defendants in four purported class action
complaints filed in Federal and State Court in New Jersey seeking damages based
on the claim that the defendants misrepresented and over-promoted CELEBREX in
violation of state law and misled and defrauded the U.S. Food and Drug
Administration during the CELEBREX approval process. These complaints seek
economic damages only and claim no specific medical injury. Two cases were
recently dismissed without payment and two remain.
16
The Company, Pfizer and Merck & Co., Inc. are defendants in a purported class
action complaint filed in Federal Court in New York alleging medical concerns
related to VIOXX and CELEBREX and seeking reimbursement of the purchase price
for the VIOXX and CELEBREX used by the plaintiffs, medical expenses and
attorneys' fees. The complaint also seeks revised labeling for the products,
emergency notice to the class and a medical monitoring program funded by
defendants. In September 2002, defendants' motion to dismiss plaintiffs' claim
for injunctive relief was granted.
The States of New York, Nevada, Montana, Minnesota and Connecticut have sued the
Company, in their respective state courts, alleging that the Company manipulated
the "average wholesale price" ("AWP") of Medicare Part B and Medicaid "Covered
Drugs," causing the states' respective Medicaid agencies, and their respective
Medicare and Medicaid beneficiaries, among others, to pay artificially inflated
prices for "Covered Drugs." In addition, the Nevada and Montana suits allege
that the Company did not report to the states its "best price" as is required
under the Medicaid Program. Each of the suits alleges various causes of action,
including, but not limited to, deceptive trade practices and Medicaid fraud. The
suits seek injunctive, monetary and other relief, including civil penalties and
treble damages.
The Montana, Minnesota and Nevada suits have been removed to those states'
respective federal courts and transferred to MDL 1456 pending in the United
States District Court for the District of Massachusetts in Boston. The MDL judge
has been presented with the states' respective motions to remand the cases back
to their original state courts and heard oral argument on the motions on March
7, 2003. The parties are awaiting a ruling on those motions.
The actions by the states of Connecticut and New York have been removed to
federal court. The New York action has been conditionally transferred to MDL
1456, and the Attorney General has filed a notice of objection to that transfer.
The Company has filed motions to stay these proceedings pending the outcome of
the Judicial Panel on Multidistrict Litigation's decision whether to transfer
these cases to MDL 1456. Also, the states have filed motions to remand these
cases to the original state courts.
An action by the County of Suffolk (NY) has also been filed against the Company,
County of Suffolk v. Abbott Laboratories, Inc. et al., Civ. A. No. CV-03-229
(E.D.N.Y.). That case alleges that the defendants fraudulently inflated their
prices causing the County to overpay for its portion of the State of New York's
Medicaid coverage. This action has been consolidated with MDL 1456. The
complaint alleges that the defendants engaged in the Racketeer Influenced and
Corrupt Organizations Act ("RICO") violations, Medicaid fraud, common law fraud,
breach of contract and state unfair trade practices.
In addition, the Company has been named as a defendant in the following
self-styled class action lawsuits, brought by private individuals, public
interest groups and employee welfare benefit plans in which similar allegations
of AWP manipulation have been made: Board of Trustees of Carpenters and
Millwrights of Houston and Vicinity Welfare Trust Fund v. Abbott Laboratories,
Inc. et al., Civ. A. No. 5:01CV339 (E.D. Tex.); Citizens for Consumer Justice,
et al. v. Abbott Laboratories, Inc. et al., Civ. A. No. 01-12257 (D. Mass.);
Congress of California Seniors v. Abbott Laboratories, Inc. et al., Civ. A. No.
028179 (C.D. Cal.); Geller v. Abbott Laboratories, Inc. et al., Civ. A. No. CV
02-00553 (C.D. Cal.); Rice v. Abbott Laboratories, Inc. et al., Civ. A. No.
02-3925 (N.D. Cal.); Robinson et al. v. Abbott Laboratories, Inc. et al., Civ.
A. No. CV02-0493-S (W.D. La.); Swanston v. TAP Pharmaceutical Products, Inc. et
al., Civ. A. No. 03-0062-PHX-SMM (D. Ariz.); Thompson v. Abbott Laboratories,
Inc. et al., Civ. A. No. C-02-4450 (N.D. Cal.); Teamsters Health & Welfare Fund
of Philadelphia and Vicinity v. Abbott Laboratories, Inc. et al., Civ. A. No.
02-2002 (E.D. Pa.); Turner v. Abbott Laboratories, Inc. et al., Civ. A. No.
02-5006 (N.D. Cal.); United Food and Commercial Workers Unions and Employers
Midwest Health Benefits Fund et al. v. Pharmacia Corporation et al., Civ. A. No.
3:01CV5427 (D.N.J.); and Digel v. Abbott Laboratories, Inc. et al., Civ. A. No.
03-2109 (W.D. Tenn.). One action, Virag v. Allergan, Inc. et al., Civ. A. No.
02-8417 (C.D. Cal.), was filed against the Company and then was voluntarily
dismissed. Typical claims asserted in these suits include fraud, unfair
competition and unfair trade practices. Some of the suits assert claims under
RICO. Some suits assert antitrust claims. The suits seek various measures of
injunctive, monetary and other relief, including civil penalties and treble
damages.
17
Ten of the twelve private plaintiff lawsuits referred to in the preceding
paragraph, with the exception of the Swanston suit in Arizona and the Thompson
suit in California, have been consolidated for pretrial purposes and transferred
to the federal District Court for the District of Massachusetts, in the
multidistrict litigation captioned In re Pharmaceutical Industry Average
Wholesale Price Litigation, MDL No. 1456, Master File No. 01-CV-12257-PBS (D.
Mass.). On September 6, 2002, the plaintiffs who had been consolidated in MDL
1456 at that time filed a master consolidated class action complaint alleging
claims under the RICO statute and state unfair trade practices statutes. The
plaintiffs seek to represent two classes -- a class of Medicare beneficiaries
and a class of third-party payors. On November 4, 2002, the Company joined the
other defendants in MDL 1456 in moving to dismiss all claims asserted against
defendants in the master consolidated class action complaint. Oral argument of
the motion was held on January 13, 2003.
On April 19, 2002, NeoPharm filed a Demand for Arbitration with the Company
pursuant to the terms of the February 19, 1999 License Agreement. A contractual
dispute has arisen between NeoPharm and Pharmacia involving our partnership to
develop LEP (Liposomal Encapsulated Paclitaxel) and LED (Liposomal Encapsulated
Doxorubicin). NeoPharm claims that Pharmacia failed to use "reasonable efforts"
to develop, market and sell LEP/LED. NeoPharm is seeking specific performance
and monetary damages. In May 2002, the Company filed its response and a
counter-claim for rescission and the return of certain payments on the ground
that NeoPharm misrepresented the technology. The arbitration proceeding is
scheduled to begin in May 2003.
On April 11, 2000, the University of Rochester filed suit in U.S. District Court
for the Western District of New York, asserting patent infringement against the
Company and certain of its subsidiaries as well as Pfizer. The University
asserts that its U.S. patent has claims directed to a method of treating human
patients by administering a selective COX-2 inhibitor. The University sought
injunctive relief, as well as monetary compensation for infringement of the
patent. On March 5, 2003, a trial judge in the U.S. District Court for the
Western District of New York dismissed the claims on summary judgment, holding
the University patent to be invalid for lack of written description and lack of
enablement of the alleged invention. The University has appealed this decision.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended
(the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia
for liabilities related to the agricultural business. In the proceedings where
the Company is the defendant, Monsanto will indemnify the Company for costs,
expenses and any judgments or settlements; and in the proceedings where the
Company is the plaintiff, Monsanto will pay the fees and costs of, and receive
any benefits from, the litigation. Therefore, Pharmacia may remain the named
party in certain legal proceedings, but Monsanto will manage the litigation
including indemnifying Pharmacia for costs, expenses and any judgments or
settlements.
In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997,
Solutia assumed from Pharmacia liabilities related to the former Monsanto
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings but Solutia manages the litigation and pays all costs,
expenses and any judgments or settlements.
Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and
agreed to indemnify Pharmacia for, any liabilities primarily related to former
Monsanto's former chemical businesses, including any liabilities that Solutia
has assumed from Pharmacia in connection with the spin-off of Solutia, to the
extent Solutia fails to pay, perform or discharge these liabilities. This
indemnification obligation applies to litigation, environmental, retiree and all
other liabilities assumed by Solutia pursuant to the spin-off.
For example, Solutia assumed responsibility for litigation currently pending in
state and federal court in Alabama brought by several thousand plaintiffs,
alleging property damage, anxiety and emotional distress and personal injury
arising from exposure to polychlorinated biphenyls (PCBs), which were discharged
from an Anniston, Alabama plant site that was owned by former Monsanto and that
was transferred to Solutia as part of the spin-off. This litigation includes,
but is not limited to, the Abernathy litigation referred to below. Pursuant to
the terms of the Distribution Agreement, Solutia is required to indemnify
Pharmacia for liabilities that Pharmacia incurs in connection with this
litigation.
18
Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy,
et al. v. Monsanto Company, et al., currently pending in state court in Alabama.
The jury has found Solutia and Pharmacia (former Monsanto) liable with respect
to certain claims in this litigation, and proceedings have commenced to
determine damages. Solutia requested that Pharmacia commit to posting any appeal
bond that may be required to stay execution of any judgment in this litigation
pending an appeal. Pursuant to a Protocol Agreement dated as of July 1, 2002,
Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not post a
bond sufficient to stay the execution of any judgment in the litigation pending
an appeal, Pharmacia will post such a bond if it is able to do so on
commercially reasonable terms. Solutia shall pay the expenses incurred in
connection with obtaining any such bond. The agreement also specifies which
party or parties would control any decisions regarding settlement of the
Abernathy litigation, depending upon whether or not collateral must be provided
to secure the bond and, if so, which party provides it. Under the agreement, the
continued defense of the Abernathy litigation and the prosecution of any appeal
will continue to be managed by Solutia, at Solutia's expense.
With respect to the matters described above, the Company cannot estimate a range
of potential losses or what, if any, additional exposure exists at this time.
The Company believes it has valid defenses to these matters and intends to
vigorously contest them.
The Company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the Company's consolidated financial position,
profitability or liquidity.
GUARANTEES
In connection with the spin-off of Monsanto, Pharmacia has agreed to continue to
guarantee certain transactions in which Monsanto is involved. As of March 31,
2003, these guarantees include $330 of bank notes with maturities not later than
2004, $5 of environmental guarantees, which are required until Monsanto can
obtain certain approvals, and a derivative guarantee in which there is no
existing financial obligation as a result of the current economic conditions
surrounding the interest rate swap.
The Company has also guaranteed certain subsidiary obligations in the aggregate
amount of $11, which mature in January 2004 and September of 2011. In addition,
the Company has standby letters of credit, which expire in 2004. The outstanding
guarantee relating to these letters is $35 as of March 31, 2003 and become
payable to a third party bank in the event of a default with payment to
suppliers.
19
L - STOCK-BASED EMPLOYEE COMPENSATION
The Company has six stock option plans all having similar terms. The Company
accounts for these plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No compensation cost is reflected in
net income for employee stock options, as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Restricted stock awards granted to certain employees do
result in an expense charge based upon the market value of the shares at grant
date. The following table is required under SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," and illustrates the effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation. The pro forma earnings
shown below for 2003 is not indicative of recurring grants of stock options. In
2002, the December Pharmacia shareholder vote in favor of the proposed merger
with Pfizer resulted in accelerated vesting of outstanding stock options
pursuant to the terms of the awards.
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
---- ----
Net earnings (loss), as reported $ 285 $ (435)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 1 3
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1) (28)
------- --------
Pro forma net earnings (loss) $ 285 $ (460)
======= ========
Earnings (loss) per share:
Basic-as reported $ .22 $ (.34)
Basic-pro forma .22 (.36)
------- --------
Diluted-as reported $ .21 $ (.33)
Diluted-pro forma .21 (.35)
======= ========
Pro forma information regarding net earnings (loss) and earnings (loss) per
share, presented above, has been determined as if the Company had accounted for
its employee stock options under the fair value method as defined in SFAS No.
123. The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option valuation model with the following
weighted-average assumptions:
2003 2002
---- ----
Expected dividend yield 1.38% 1.38%
Expected volatility 30.8% 30.8%
Risk-free interest rate 3.82% 4.35%
Expected option lives (years) 5.0 5.0
20
M - SEGMENT INFORMATION
The Company's core business is the development, manufacture and sale of
pharmaceutical products. Prescription pharmaceuticals is the Company's only
reportable segment and includes primary care, hospital care, cancer care,
ophthalmology and endocrine care products.
The Company also operates several business units that do not constitute
reportable business segments. These operating units include consumer health
care, animal health, diagnostics, contract manufacturing and bulk pharmaceutical
chemicals. Due to the size of these operating units, they have been grouped into
the other pharmaceuticals category.
Corporate amounts represent general and administrative expenses of corporate
support functions, restructuring charges and other corporate items such as
litigation accruals, merger costs and non-operating income and expense. Certain
intangible assets and associated amortization are not allocated to categories.
The following table shows revenues and earnings by category and reconciling
items necessary to total to the amounts reported in the consolidated financial
statements. Information about interest income and expense, and income taxes are
not provided on a segment level as the segments are reviewed based on earnings
before interest and income taxes. There are no inter-category revenues.
Long-lived assets are not allocated to categories and, accordingly, depreciation
is not available at that level.
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
SALES EARNINGS
----- --------
2003 2002 2003 2002
---- ---- ---- ----
Prescription pharmaceuticals $ 2,905 $ 2,652 $ 628 $ 558
Other pharmaceuticals 468 468 108 119
Corporate -- -- (248) (122)
------- -------
Total Pharmacia - Sales $ 3,373 $ 3,120
======= =======
Interest expense, net (21) (36)
Income tax provision (102) (125)
------ ------
Earnings from continuing operations $ 365 $ 394
====== ======
21
(b) Pro Forma Financial Information
(1) Unaudited Pro Forma Condensed Combined Statement of Income for the six
months ended June 29, 2003
PFIZER INC
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
On April 16, 2003, Pfizer Inc ("Pfizer") completed its acquisition of Pharmacia
Corporation ("Pharmacia") and Pfizer and Pharmacia combined operations. The
acquisition is being accounted for as a purchase business combination.
Accordingly, Pfizer has recorded the fair value of the assets acquired and
liabilities assumed from Pharmacia.
The following unaudited pro forma condensed combined statement of income
combines the historical consolidated statements of income of Pfizer and
Pharmacia, giving effect to the merger as if it had occurred on January 1, 2003.
We have adjusted the historical consolidated financial information to give
effect to pro forma events that are (1) directly attributable to the
acquisition, (2) factually supportable, and (3) expected to have a continuing
impact on the combined results. You should read this information in conjunction
with the:
o accompanying Notes to the Unaudited Pro Forma Condensed Combined Statement
of Income;
o Pfizer's Quarterly Report on Form 10-Q for six months ended June 29, 2003;
o separate historical Unaudited Pro Forma Condensed Combined Financial
Statements of Pfizer and Pharmacia as of and for the year ended December
31, 2002 included in Pfizer's Form 8-K/A dated June 30, 2003;
o separate historical financial statements of Pfizer as of and for the year
ended December 31, 2002 included in Pfizer's Annual Report on Form 10-K for
the year ended December 31, 2002; and
o separate historical financial statements of Pharmacia as of and for the
year ended December 31, 2002 included in Pharmacia's Annual Report on Form
10-K for the year ended December 31, 2002.
PFIZER INC
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
We present the unaudited pro forma condensed combined statement of income for
informational purposes only. The pro forma data is not necessarily indicative of
what our results of operations actually would have been had we completed the
merger at the dates indicated. In addition, the unaudited pro forma condensed
combined statement of income does not purport to project the future operating
results of the combined company.
22
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 29, 2003
(IN MILLIONS, EXCEPT PER SHARE DATA)
Pharmacia Pro Forma Pro Forma
Pfizer Inc Corporation Adjustments Note 4 Combined
---------- ----------- ----------- ------------- ---------
Revenues $ 18,518 $ 4,046 $ (340) $ (a) $ 22,224
Costs and expenses:
Cost of sales 3,093 1,029 (389) (a),(c),(e) 3,733
Selling, informational and
administrative expenses 6,518 1,716 (288) (a),(c) 7,946
Research and development expenses 2,935 705 18 (a),(c) 3,658
Merger-related in-process research and
development charge 5,130 -- (5,130) (e) --
Merger-related costs 377 55 432
-- (a),(b),
Other (income)/deductions - net 647 26 870 (c) 1,543
--------- ---------- ---------- ---------
Income/(loss) from continuing operations
before cumulative for taxes on income,
minority interests and cumulative effect
of a change in accounting principle (182) 515 4,579 4,912
Provision for taxes 1,035 113 (165) (d) 983
Minority interests (2) -- -- (2)
--------- ---------- ---------- ---------
Income/(loss) from continuing operations
before cumulative effect of a change in
accounting principle $ (1,215) $ 402 $ 4,744 $ 3,931
========= ========== ========== =========
Income/(loss) from continuing operations
before cumulative effect of a change in
accounting principle per common share-basic $ (.18) $ .31 $ .50
========= ========== =========
Income/(loss) from continuing operations
before cumulative effect of a change in
accounting principle per common $ $
share-diluted $ (.18) .30 .50
========= ========== =========
Weighted average shares used to calculate
earnings per common share amounts:
Basic 6,777 1,295 (204) (f) 7,868
========= ========== ========== =========
Diluted 6,777 1,317 (148) (f) 7,946
========= ========== ========== =========
Cash dividends paid per common share $ .30 $ --
========= ==========
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Income, which are an integral part of the statement.
23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
1. DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
On April 16, 2003, Pfizer acquired Pharmacia Corporation for an estimated
purchase price of approximately $56 billion, which includes Pfizer common stock
valued at $54.2 billion, options on Pfizer common stock valued at $1.1 billion,
Pfizer convertible perpetual preferred stock valued at $.5 billion, and vested
share awards valued at $.1 billion, as well as transaction costs of $90 million.
Under the terms of the Merger Agreement, each outstanding share of Pharmacia
common stock was exchanged for 1.4 shares of Pfizer common stock in a tax-free
transaction. Each share of Pharmacia Series C convertible perpetual preferred
stock was exchanged for a newly created class of Pfizer Series A convertible
perpetual preferred stock with rights substantially identical to the rights of
the Pharmacia Series C convertible perpetual preferred stock.
The acquisition has been accounted for as a purchase business combination by
Pfizer under accounting principles generally accepted in the United States of
America. Under the purchase method of accounting, the assets acquired and
liabilities assumed of Pharmacia have been recorded as of April 16, 2003, at
their respective fair values. Financial statements and reported results of
operations of Pfizer issued after April 16, 2003 reflect these values,
but will not be restated retroactively to reflect the historical financial
position or results of operations of Pharmacia.
2. ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATIONS
Pfizer is currently reviewing accounting policies and financial statement
classifications used by Pharmacia. As a result of this review, it may become
necessary to make certain reclassifications to the combined company's financial
statements to conform to those accounting policies and classifications of
Pfizer.
3. INTERCOMPANY TRANSACTIONS
Transactions between Pfizer and Pharmacia before the acquisition were primarily
limited to the Celebrex and Bextra marketing agreements. Upon completion of the
acquisition, transactions that occur in connection with these arrangements would
be considered intercompany transactions. All significant transactions related to
these arrangements have been eliminated from the Unaudited Pro Forma Condensed
Combined Statement of Income.
24
4. PRO FORMA ADJUSTMENTS
Adjustments included in the column under the heading "Pro Forma Adjustments"
primarily relate to the following:
(a) To eliminate transactions between Pfizer and Pharmacia occurring prior to
April 16, 2003. The majority of these transactions occurred under the
Celebrex and Bextra marketing agreements.
Increase/
(decrease)
----------
($ in millions)
Revenues............................................ $(340)
Cost of sales....................................... 7
Selling, informational and
administrative expenses.......................... (300)
Research and development expenses................... 12
Other (income)/deductions-net....................... 3
The entries include:
o the elimination of certain sales, alliance revenue and certain
co-promotion expenses; and
o the elimination of the impact of milestone payments made by Pfizer to
Pharmacia.
(b) To eliminate amortization expense recorded by Pharmacia related to
definite-lived intangible assets of approximately $21 million in 2003
included in "Other (income)/deductions-net".
(c) To record the incremental impact of certain purchase accounting adjustments
relating to the period January 1, 2003 through April 15, 2003:
o to decrease interest expense by $12 million ($19 million in total in
the first six months of 2003) related to the estimated fair value
step-up of long-term debt - amount included in "Other
(income)/deductions-net";
o additional amortization expense related to the estimated value of
identifiable intangible assets from the purchase price allocation
which are being amortized over their estimated useful lives over a
range of 2 to 40 years of approximately $900 million ($1,463 million
in total in the first six months of 2003) - amount is included in
"Other (income)/deductions-net"; and
o additional depreciation expense related to the estimated fair value
step-up of the property, plant and equipment from the purchase price
allocation, which is being depreciated over its estimated useful life,
of approximately $30 million ($38 million in total in the first six
months of 2003) in 2003 - amount is included in "Cost of sales"- $12
million; "Selling, informational and administrative expenses"- $12
million and "Research and development expenses" - $6 million.
(d) To adjust income taxes for pro forma adjustments.
(e) To eliminate certain non-recurring charges resulting from purchase
accounting adjustments related to purchased IPR&D charges of $5,130 million
and charges of $408 million reported in "Cost of Sales" for the workdown of
purchased inventory that was written up to fair value.
(f) The pro forma combined basic and diluted earnings per share for the period
presented are based on the combined basic and diluted weighted average
shares of Pfizer and Pharmacia. The historical basic and diluted weighted
average shares of Pharmacia were converted at the exchange ratio of 1.4
shares of Pfizer common stock for each Pharmacia common stock equivalent.
The pro forma condensed combined financial statements do not present a combined
dividend per share amount. Pfizer's quarterly common stock dividend in 2003 was
$.15 per share ($.30 per share for the six months ended June 29, 2003) and is
subject to future approval and declaration by Pfizer's board of directors.
Pharmacia did not declare a
25
dividend in 2003. The future dividend policy of the combined company will be
determined by Pfizer's board of directors.
Certain restructuring and integration charges will be recorded subsequent to
April 16, 2003 that, under purchase accounting, will not be treated as part of
the Pharmacia purchase price. These costs, estimated to range between $2.5 and
$3.0 billion (on a pre-tax basis), have not been reflected in the unaudited pro
forma condensed combined income statement because they are not expected to have
a continuing impact on the combined results.
The unaudited pro forma condensed combined financial statements do not reflect
the expected realization of annual cost savings of $4 billion by 2005. These
savings are expected to result from, among other things, the reduction of
overhead expenses, changes in corporate infrastructure, the elimination of
duplicative facilities and the leveraging of the combined annual external
purchases. Although management expects that cost savings will result from the
merger, there can be no assurance that these cost savings will be achieved.
As a result of the acquisition, regulatory authorities required us to divest
several products and a product candidate. These unaudited pro forma condensed
combined financial statements do not reflect the impact of these divestitures.
Such divestitures did not have a material impact on our operations.
26
SIGNATURE
Under the requirements of the Securities Exchange Act of 1934, the registrant
has caused this report to be signed on its behalf by the authorized undersigned.
PFIZER INC.
-------------------------------------------------
(Registrant)
/s/ Margaret M. Foran
Date: October 14, 2003 -------------------------------------------------
Name: Margaret M. Foran
Title: Vice President - Corporate Governance and
Secretary
27