PFIZER INC, 10-Q filed on 5/10/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Apr. 01, 2018
May 07, 2018
Document and Entity Information [Abstract]    
Entity Registrant Name PFIZER INC  
Entity Central Index Key 0000078003  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Apr. 01, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Trading Symbol PFE  
Entity Common Stock, Shares Outstanding   5,849,571,048
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Apr. 01, 2018
Apr. 02, 2017
Income Statement [Abstract]    
Revenues [1] $ 12,906 $ 12,779
Costs and expenses:    
Cost of sales [1],[2] 2,563 2,468
Selling, informational and administrative expenses [1],[2] 3,412 3,315
Research and development expenses [1],[2] 1,743 1,716
Amortization of intangible assets [1] 1,196 1,186
Restructuring charges and certain acquisition-related costs [1] 43 84
Other (income)/deductions––net [1] (178) 60
Income from continuing operations before provision for taxes on income [1],[3] 4,127 3,951
Provision for taxes on income [1] 556 821
Income from continuing operations [1] 3,571 3,130
Discontinued operations––net of tax [1] (1) 0
Net income before allocation to noncontrolling interests [1],[4],[5] 3,570 3,130
Less: Net income attributable to noncontrolling interests [1] 9 9
Net income attributable to Pfizer Inc. [1] $ 3,561 $ 3,121
Earnings per common share––basic:    
Income from continuing operations attributable to Pfizer Inc. common shareholders (in dollars per share) [1] $ 0.60 $ 0.52
Discontinued operations––net of tax (in dollars per share) [1] 0.00 0.00
Net income attributable to Pfizer Inc. common shareholders (in dollars per share) [1] 0.60 0.52
Earnings per common share––diluted:    
Income from continuing operations attributable to Pfizer Inc. common shareholders (in dollars per share) [1] 0.59 0.51
Discontinued operations––net of tax (in dollars per share) [1] 0.00 0.00
Net income attributable to Pfizer Inc. common shareholders (in dollars per share) [1] $ 0.59 $ 0.51
Weighted-average shares––basic [1] 5,957 6,006
Weighted-average shares––diluted [1] 6,057 6,092
Cash dividends paid per common share (in dollars per share) [1] $ 0.34 $ 0.32
[1] Amounts may not add due to rounding.
[2] Excludes amortization of intangible assets, except as disclosed in Note 9A. Identifiable Intangible Assets and Goodwill: Identifiable Intangible Assets.
[3] Income from continuing operations before provision for taxes on income. IH’s earnings in the first quarter of 2018 and 2017 include dividend income of $59 million and $43 million, respectively, from our investment in ViiV. For additional information, see Note 4.
[4] Amounts may not add due to rounding.
[5] Amounts may not add due to rounding.
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended
Apr. 01, 2018
Apr. 02, 2017
Statement of Comprehensive Income [Abstract]    
Net income before allocation to noncontrolling interests [1],[2],[3] $ 3,570 $ 3,130
Foreign currency translation adjustments, net [2] 758 228
Reclassification adjustments [2] 15 0
Other comprehensive income (loss), foreign currency transaction and translation adjustment, before tax [2] 773 228
Unrealized holding losses on derivative financial instruments, net [2] (114) (9)
Reclassification adjustments for (gains)/losses included in net income [2],[4] 44 (241)
Other comprehensive income (loss), derivatives qualifying as hedges, before tax, total [2] (69) (251)
Unrealized holding gains on available-for-sale securities, net [2] 160 150
Reclassification adjustments for (gains)/losses included in net income [2],[4] (174) 137
Reclassification adjustments for unrealized gains included in Retained Earnings [2],[5] (462) 0
Other comprehensive income (loss), available-for-sale securities, before tax, total [2] (476) 287
Benefit plans: actuarial gains, net [2] 163 1
Reclassification adjustments related to amortization [2] 62 163
Reclassification adjustments related to settlements, net [2] 37 52
Other [2] (86) 45
Defined benefit plan, amounts recognized in other comprehensive income (loss), net gain (loss), before tax, total [2] 175 261
Benefit plans: prior service (costs)/credits and other, net [2] 0 0
Reclassification adjustments related to amortization [2] (46) (45)
Reclassification adjustments related to curtailments, net [2] (7) (7)
Other [2] 2 1
Defined benefit plan, amounts recognized in other comprehensive income (loss), net prior service cost, before tax [2] (51) (52)
Other comprehensive income, before tax [2] 352 474
Tax provision on other comprehensive (loss)/income [2] 432 25
Other comprehensive (loss)/income before allocation to noncontrolling interests [2] (80) 449
Comprehensive income before allocation to noncontrolling interests [2] 3,490 3,579
Less: Comprehensive income attributable to noncontrolling interests [2] 10 15
Comprehensive income attributable to Pfizer Inc. [2] $ 3,480 $ 3,563
[1] Amounts may not add due to rounding.
[2] Amounts may not add due to rounding.
[3] Amounts may not add due to rounding.
[4] Reclassified into Other (income)/deductions—net and Cost of sales in the condensed consolidated statements of income. For additional information on amounts reclassified into Cost of sales, see Note 7F. Financial Instruments: Derivative Financial Instruments and Hedging Activities.
[5] For additional information, see Note 1B. Basis of Presentation and Significant Accounting Policies: Adoption of New Accounting Standards.
v3.8.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Apr. 01, 2018
Dec. 31, 2017
Assets    
Cash and cash equivalents [1] $ 2,302 $ 1,342 [2]
Short-term investments [1] 9,119 18,650
Trade accounts receivable, less allowance for doubtful accounts: 2018—$597; 2017—$584 [1] 9,452 8,221
Inventories [1],[3] 8,148 7,578
Current tax assets [1] 3,624 3,050
Other current assets [1] 2,126 2,289
Assets held for sale [1] 64 12
Total current assets [1] 34,835 41,141
Long-term investments [1] 6,945 7,015
Property, plant and equipment, less accumulated depreciation: 2018—$16,665; 2017—$16,172 [1] 13,971 13,865
Identifiable intangible assets, less accumulated amortization [1],[4] 47,690 48,741
Goodwill [1] 56,393 55,952
Noncurrent deferred tax assets and other noncurrent tax assets [1] 1,883 1,855
Other noncurrent assets [1] 2,896 3,227
Total assets [1] 164,612 171,797
Liabilities and Equity    
Short-term borrowings, including current portion of long-term debt: 2018—$4,763; 2017—$3,546 [1] 9,010 9,953
Trade accounts payable [1] 3,879 4,656
Dividends payable [1] 0 2,029
Income taxes payable [1] 1,614 477
Accrued compensation and related items [1] 1,911 2,196
Other current liabilities [1] 10,950 11,115
Total current liabilities [1] 27,365 30,427
Long-term debt [1] 31,831 33,538
Pension benefit obligations, net [1] 5,171 5,926
Postretirement benefit obligations, net [1] 1,488 1,504
Noncurrent deferred tax liabilities [1] 5,967 3,900
Other taxes payable [1] 16,605 18,697
Other noncurrent liabilities [1] 5,644 6,149
Total liabilities [1] 94,071 100,141
Commitments and Contingencies [1]
Preferred stock [1] 21 21
Common stock [1] 465 464
Additional paid-in capital [1] 84,599 84,278
Treasury stock [1] (95,460) (89,425)
Retained earnings [1] 89,961 85,291
Accumulated other comprehensive loss [1] (9,402) (9,321)
Total Pfizer Inc. shareholders’ equity [1] 70,184 71,308
Equity attributable to noncontrolling interests [1] 358 348
Total equity [1] 70,541 71,656
Total liabilities and equity [1] $ 164,612 $ 171,797
[1] Amounts may not add due to rounding.
[2] Amounts may not add due to rounding.
[3] The change from December 31, 2017 reflects increases for certain products to meet targeted levels in the normal course of business, including supply recovery and inventory build for new product launches, as well as an increase due to foreign exchange.
[4] The decrease in Identifiable intangible assets, less accumulated amortization, is primarily due to amortization, partially offset by an increase due to foreign exchange.Our identifiable intangible assets are associated with the following, as a percentage of total identifiable intangible assets, less accumulated amortization: April 1, 2018 IH EH WRDDeveloped technology rights 68% 32% —%Brands, finite-lived 75% 25% —%Brands, indefinite-lived 71% 29% —%IPR&D 82% 11% 7%
v3.8.0.1
CONDENSED CONSOLIDATED BALANCE SHEETS (PARENTHETICAL) - USD ($)
$ in Millions
Apr. 01, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts [1] $ 597 $ 584
Property, plant and equipment, accumulated depreciation [1] 16,665 16,172
Current portion of long-term debt [1] $ 4,763 $ 3,546
[1] Amounts may not add due to rounding.
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
3 Months Ended
Apr. 01, 2018
Apr. 02, 2017
Operating Activities    
Net income before allocation to noncontrolling interests [1],[2],[3] $ 3,570 $ 3,130
Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:    
Depreciation and amortization [1] 1,567 1,555
Asset write-offs and impairments [1] 7 35
Loss on sale of HIS net assets [1],[4] 3 37
TCJA impact [1],[5] (68) 0
Deferred taxes from continuing operations [1] 294 38
Share-based compensation expense [1] 182 218
Benefit plan contributions in excess of expense [1] (692) (986)
Other adjustments, net [1] (164) (225)
Other changes in assets and liabilities, net of acquisitions and divestitures [1] (2,715) (2,217)
Net cash provided by operating activities [1] 1,983 1,584
Investing Activities    
Purchases of property, plant and equipment [1] (386) (358)
Purchases of short-term investments [1] (913) (701)
Proceeds from redemptions/sales of short-term investments [1] 6,463 2,232
Net proceeds from redemptions/sales of short-term investments with original maturities of three months or less [1] 4,507 3,778
Purchases of long-term investments [1] (605) (740)
Proceeds from redemptions/sales of long-term investments [1] 576 844
Acquisitions of businesses, net of cash acquired [1] 0 (585)
Other investing activities, net [1] 25 297
Net cash provided by investing activities [1] 9,667 4,768
Financing Activities    
Proceeds from short-term borrowings [1] 428 2,554
Principal payments on short-term borrowings [1] (2,493) (2,519)
Net payments on short-term borrowings with original maturities of three months or less [1] (83) (2,110)
Proceeds from issuance of long-term debt [1] 0 5,273
Principal payments on long-term debt [1] (355) (1,253)
Purchases of common stock [1] (6,063) (5,000)
Cash dividends paid [1] (2,032) (1,945)
Proceeds from exercise of stock options [1] 372 313
Other financing activities, net [1] (495) (220)
Net cash used in financing activities [1] (10,720) (4,907)
Effect of exchange-rate changes on cash and cash equivalents and restricted cash and cash equivalents [1] 55 21
Net increase in cash and cash equivalents and restricted cash and cash equivalents [1] 985 1,465
Cash and cash equivalents, and restricted cash and cash equivalents, beginning [1] 1,431 2,666
Cash and cash equivalents and restricted cash and cash equivalents, end [1] 2,416 4,131
Non-cash transactions:    
Receipt of ICU Medical common stock [1],[6] 0 428
Promissory note from ICU Medical [1],[6] 0 75
Cash paid during the period for:    
Income taxes [1] 257 195
Interest [1] 259 216
Interest rate hedges [1] $ 20 $ 32
[1] Amounts may not add due to rounding.
[2] Amounts may not add due to rounding.
[3] Amounts may not add due to rounding.
[4] In the first quarter of 2018 and 2017, represents an incremental charge to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell related to the sale of HIS net assets to ICU Medical on February 3, 2017. For additional information, see Note 2B.
[5] As a result of the enactment of the TCJA in December 2017, Pfizer’s 2018 Provision for taxes on income was favorably impacted by approximately $68 million, primarily related to certain tax initiatives associated with the lower U.S. tax rate as a result of the TCJA.
[6] In connection with the sale of the HIS net assets to ICU Medical, on February 3, 2017, Pfizer received 3.2 million newly issued shares of ICU Medical common stock initially valued at $428 million and a promissory note in the amount of $75 million, which was repaid in full as of December 31, 2017. For additional information, see Note 2B. Acquisition, Sale of Hospira Infusion Systems Net Assets, Licensing Arrangement and Collaborative Arrangements: Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH).
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (PARENTHETICAL) - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Apr. 01, 2018
Apr. 02, 2017
Feb. 03, 2017
TCJA impact [1],[2] $ 68 $ 0  
Disposed of by Sale [Member] | ICU Medical [Member] | HIS [Member]      
Number of shares received in disposition     3.2
Value of shares received from disposition     $ 428
Promissory note     $ 75
[1] Amounts may not add due to rounding.
[2] As a result of the enactment of the TCJA in December 2017, Pfizer’s 2018 Provision for taxes on income was favorably impacted by approximately $68 million, primarily related to certain tax initiatives associated with the lower U.S. tax rate as a result of the TCJA.
v3.8.0.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTRICTED CASH PARENTHETICAL) - USD ($)
$ in Millions
Apr. 01, 2018
Dec. 31, 2017
Cash and cash equivalents [1] $ 2,302 $ 1,342 [2]
Total cash and cash equivalents and restricted cash and cash equivalents shown in the condensed consolidated balance sheets [2] 2,416 1,431
Short-term Investments [Member]    
Restricted cash and cash equivalents 41 0
Long-term Investments [Member]    
Restricted cash and cash equivalents 73 0
Other Current Assets [Member]    
Restricted cash and cash equivalents 0 14
Other Noncurrent Assets [Member]    
Restricted cash and cash equivalents $ 0 $ 75
[1] Amounts may not add due to rounding.
[2] Amounts may not add due to rounding.
v3.8.0.1
Basis of Presentation and Significant Accounting Policies
3 Months Ended
Apr. 01, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Significant Accounting Policies
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 months ended February 25, 2018 and February 26, 2017. The financial information included in our condensed consolidated financial statements for U.S. subsidiaries is as of and for the three months ended April 1, 2018 and April 2, 2017.

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 interim financial statements include all normal and recurring adjustments that are considered necessary for the fair statement 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 2017 Form 10-K.

We manage our commercial operations through two distinct business segments: Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). For additional information, see Note 13 and Notes to Consolidated Financial Statements––Note 18. Segment, Geographic and Other Revenue Information in Pfizer’s 2017 Financial Report.

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.

In the first quarter of 2018, as of January 1, 2018, we adopted eleven new accounting standards. See Note 1B for further information.

Our recent significant business development activities include:
On February 3, 2017, we completed the sale of our global infusion systems net assets, HIS, to ICU Medical. The operating results of HIS are included in our condensed consolidated statement of income and EH’s operating results through February 2, 2017 and, therefore, our financial results, and EH’s operating results, for the first quarter of 2017 reflect approximately one month of HIS domestic operations and approximately two months of HIS international operations, while our financial results, and EH’s operating results, for the first quarter of 2018 do not reflect any contribution from HIS global operations.
On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S. Commencing from the acquisition date, our financial statements reflect the assets, liabilities, operating results and cash flows of this business, and, in accordance with our international reporting period, our financial results, EH’s operating results, and cash flows for the first quarter of 2017 reflect approximately two months of the small molecule anti-infectives business acquired from AstraZeneca and our financial results, EH’s operating results, and cash flows for the first quarter of 2018 reflect three months of the small molecule anti-infective business acquired from AstraZeneca.
For additional information, see Note 2 and Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment in Pfizer’s 2017 Financial Report.
B. Adoption of New Accounting Standards
On January 1, 2018, we adopted eleven new accounting standards. The quantitative impacts on our prior period condensed consolidated financial statements of adopting the following new standards are summarized in the tables within the section titled Impacts to our Condensed Consolidated Financial Statements, further below.
Revenues––We adopted a new accounting standard for revenue recognition and changed our revenue recognition policies accordingly. Generally, the previous revenue recognition standards permitted recognition when persuasive evidence of a contract existed, delivery had occurred, and the seller's price to the buyer was fixed or determinable. Under the new standard, revenue is recognized upon transfer of control of the product to our customer in an amount that reflects the consideration we expect to receive in exchange. We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $584 million on a pre-tax basis ($450 million after-tax). This amount includes $500 million (pre-tax) related to the timing of recognizing Other (income)/deductions––net primarily for upfront and milestone payments on our collaboration arrangements ($394 million, pre-tax) and, to a lesser extent, product rights and out-licensing arrangements, and $84 million (pre-tax) related to the timing of recognizing Revenues and Cost of sales on product shipments. The impact of adoption did not have a material impact to our condensed consolidated statement of income for the three months ended April 1, 2018 or our condensed consolidated balance sheet as of April 1, 2018. For additional information, see Note 1C.
Financial Assets and Liabilities––The new accounting standard related to the recognition and measurement of financial assets and liabilities makes the following changes to prior guidance and requires:
certain equity investments to be measured at fair value with changes in fair value now recognized in net income. However, equity investments that do not have readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer;
a qualitative assessment of equity investments without readily determinable fair values to identify impairment; and
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
We adopted the new accounting standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $462 million on a pre-tax basis ($419 million after-tax) related to the net impact of unrealized gains and losses primarily on available-for-sale equity securities, restricted stock and private equity securities. In the first quarter of 2018, we recorded net unrealized gains on equity securities of $111 million. For additional information, see Note 4 and Note 7.

Presentation of Net Periodic Pension and Postretirement Benefit Cost––We adopted a new accounting standard that requires the net periodic pension and postretirement benefit costs other than the service costs be presented in Other (income)/deductions––net, and that the presentation be applied retrospectively. We adopted the presentation of the net periodic benefit costs other than service costs by reclassifying these costs from Cost of sales, Selling, informational and administrative expenses, Research and development expenses and Restructuring charges and certain acquisition-related costs to Other (income)/deductions––net. We elected to apply the practical expedient as it is impracticable to determine the disaggregation of the cost components for amounts capitalized within Inventories and property, plant and equipment and amortized in each of those periods. We have therefore reclassified the prior period net periodic benefit costs/(credits) disclosed in Note 10 to apply the retrospective presentation for comparative periods.
As of January 1, 2018, only service costs will be included in amounts capitalized in Inventories or property, plant and equipment, while the other components of net periodic benefit costs will be included in Other (income)/deductions––net. For additional information, see Note 4 and Note 10.
Income Tax Accounting––The new guidance removes the prohibition against recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to a third party, unless the asset transferred is inventory. We adopted the standard utilizing the modified retrospective method, and, therefore, no adjustments were made to amounts in our prior period financial statements. We recorded the cumulative effect of adopting the standard as an adjustment to decrease the opening balance of Retained earnings by $189 million.
Accounting for Hedging Activities––The standard makes the following changes:
Permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk;
Changes the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk;
No longer requires the separate measurement and reporting of hedge ineffectiveness, but requires the income statement presentation of the earnings effect of the hedging instrument with the earnings effect of the hedged item;
Permits us to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness; and
Simplifies hedge effectiveness testing.
We early adopted the new accounting standard on January 1, 2018 on a prospective basis. In the first quarter of 2018, we recorded income of $29 million in Other (income)/deductions––net, whereas this item would have been classified in interest income in prior periods. For additional information, see Note 7F.
Reclassification of Certain Tax Effects from AOCI––We early adopted a new accounting standard that provides guidance on the reclassification of certain tax effects from AOCI. Under the new guidance, we elected to reclassify the stranded tax amounts related to the TCJA from AOCI to Retained earnings. We adopted the new accounting standard utilizing the modified retrospective method, and recorded the cumulative effect of adopting the standard as an adjustment to increase the opening balance of Retained earnings by $495 million, primarily due to the effect of the change in the U.S. Federal corporate tax rate. The impact on other stranded tax amounts related to the application of the TCJA was not material to our condensed consolidated financial statements.
Classification of Certain Transactions in the Statement of Cash Flows––We retrospectively adopted an accounting standard that changed the presentation of certain information in the condensed consolidated statements of cash flows, including the classification of:
debt prepayment and extinguishment costs, resulting in an increase in Operating activities––Other adjustments, net and a decrease in Financing activities––Other financing activities, net of $5 million for the three months ended April 1, 2018; and
accreted interest on the settlement of commercial paper debt instruments, resulting in a decrease in Operating activities––Other adjustments, net, and an increase in Financing activities––Other financing activities, net of $24 million for the three months ended April 1, 2018.
The new standard also establishes guidance on the classification of certain cash flows related to contingent consideration in a business acquisition. Cash payments made soon after a business acquisition date will be classified as Investing activities, while payments made thereafter will be classified as Financing activities. Payments made in excess of the amount of the original contingent consideration liability will be classified as Operating activities. The adoption of this guidance will not have a material impact to our condensed consolidated financial statements.
Presentation of Restricted Cash in the Statement of Cash Flows––We adopted, on a retrospective basis, the new accounting standard, which requires that Restricted cash and restricted cash equivalents be included with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the consolidated statements of cash flows. As a result, for the three months ended April 1, 2018, $25 million is presented as an increase in Cash, cash equivalents, restricted cash and restricted cash equivalents.
Definition of a Business––We prospectively adopted the standard for determining whether business development transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, the transaction will not qualify for treatment as a business. To be considered a business, a set of integrated activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs, without regard as to whether a purchaser could replace missing elements. In addition, the definition of the term “output” has been narrowed to make it consistent with the updated revenue recognition guidance. In the first quarter of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Derecognition of Nonfinancial Assets––We prospectively adopted the standard, which applies to the full or partial sale or transfer of nonfinancial assets, including intangible assets, real estate and inventory. The standard provides that the gain or loss is determined by the difference between the consideration received and the carrying value of the asset. In the first quarter of 2018, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Accounting for Modifications of Share-Based Payment Awards––We prospectively adopted the standard, which clarifies that certain changes in the terms or conditions of a share-based payment award be accounted for as a modification. There was no impact to our condensed consolidated financial statements from the adoption of this new standard.
Impacts to our Condensed Consolidated Financial Statements––The impacts on our prior period condensed consolidated financial statements of adopting the new standards described above are summarized in the following tables:
Adoption of the standard related to pension and postretirement benefit costs impacted our prior period condensed consolidated statement of income as follows:
 
 
Three months ended April 2, 2017
(MILLIONS OF DOLLARS)
 
As Previously Reported

 
Effect of Change
Higher/(Lower)

 
As Restated

Cost of sales
 
$
2,470

 
$
(3
)
 
$
2,468

Selling, informational and administrative expenses
 
3,308

 
7

 
3,315

Research and development expenses
 
1,708

 
8

 
1,716

Restructuring charges and certain acquisition-related costs
 
157

 
(74
)
 
84

Other (income)/deductions––net
 
(1
)
 
62

 
60

Income from continuing operations before provision for taxes on income
 
3,951

 

 
3,951

Adoption of the standards impacted our condensed consolidated balance sheet as follows:
 
 
 
 
Effect of New Accounting Standards Higher/(Lower)

 
 
(MILLIONS OF DOLLARS)
 
As Previously Reported Balance at December 31, 2017

 
Revenues

 
Financial Assets and Liabilities

 
Income
Tax Accounting

 
Reclassification of Certain Tax Effects from AOCI

 
Balance at January 1, 2018

Trade accounts receivable
 
$
8,221

 
$
13

 
$

 
$

 
$

 
$
8,234

Inventories
 
7,578

 
(11
)
 

 

 

 
7,567

Current tax assets
 
3,050

 
(11
)
 

 
(3
)
 

 
3,036

Noncurrent deferred tax assets and other noncurrent tax assets
 
1,855

 
(17
)
 

 

 

 
1,838

Other noncurrent assets
 
3,227

 

 

 
(204
)
 

 
3,023

Other current liabilities
 
11,115

 
(123
)
 

 

 

 
10,992

Noncurrent deferred tax liabilities
 
3,900

 
106

 

 
(18
)
 

 
3,988

Other noncurrent liabilities
 
6,149

 
(459
)
 

 

 

 
5,690

Retained earnings
 
85,291

 
450

 
419

 
(189
)
 
495

 
86,466

Accumulated other comprehensive loss
 
(9,321
)
 

 
(419
)
 

 
(495
)
 
(10,235
)
Adoption of the standards related to the classification of certain transactions in the statement of cash flows and the presentation of restricted cash in the statement of cash flows impacted our condensed consolidated statement of cash flows as follows:
 
 
Three months ended April 2, 2017
 
 
 
 
Effect of New Accounting Standards Inflow/(Outflow)
 
 
(MILLIONS OF DOLLARS)
 
As Previously Reported

 
Cash Flow Classification

 
Restricted Cash

 
As Restated

Operating Activities
 
 
 
 
 
 
 
 
Other adjustments, net
 
$
(211
)
 
(14
)
 
$

 
$
(225
)
Other changes in assets and liabilities, net of acquisitions and divestitures
 
(2,225
)
 

 
8

 
(2,217
)
Investing Activities
 
 
 
 
 
 
 
 
Proceeds from redemptions and sales of short-term investments
 
2,235

 

 
(3
)
 
2,232

Proceeds from redemptions/sales of long-term investments
 
846

 

 
(2
)
 
844

Financing Activities
 
 
 
 
 
 
 
 
Principal payments on short-term borrowings
 
(2,530
)
 
11

 

 
(2,519
)
Net proceeds from/(payments on) short-term borrowings with original maturities of three months or less
 
(2,113
)
 
3

 

 
(2,110
)
Net increase/(decrease) in cash and cash equivalents and restricted cash and cash equivalents
 
1,461

 

 
4

 
1,465

Cash and cash equivalents and restricted cash and cash equivalents, beginning
 
2,595

 

 
70

 
2,666

Cash and cash equivalents and restricted cash and cash equivalents, ending
 
4,057

 

 
74

 
4,131



C. Revenues

On January 1, 2018, we adopted a new accounting standard for revenue recognition. For further information, see Note 1B.
We recorded direct product and/or alliance revenues of more than $1 billion for each of nine products in 2017. These direct products sales and/or alliance product revenues represented 46% of our revenues in 2017. The loss or expiration of intellectual property rights can have a significant adverse effect on our revenues as our contracts with customers will generally be at lower selling prices due to added competition and we generally provide for higher sales returns during the period in which individual markets begin to near the loss or expiration of intellectual property rights. Our Consumer Healthcare business includes OTC brands with a focus on dietary supplements, pain management, gastrointestinal and respiratory and personal care. According to Euromonitor International’s retail sales data, in 2017, our Consumer Healthcare business was the fifth-largest branded multi-national, OTC consumer healthcare business in the world and produced two of the ten largest selling consumer healthcare brands (Centrum and Advil) in the world. We sell biopharmaceutical products after patent expiration, and under patent, and, to a much lesser extent, consumer healthcare products worldwide to developed and emerging market countries.
Revenue Recognition––We record revenues from product sales when there is a transfer of control of the product from us to the customer. We determine transfer of control based on when the product is shipped or delivered and title passes to the customer.
Customers––Our biopharmaceutical products are sold principally to wholesalers but we also sell directly to retailers, hospitals, clinics, government agencies and pharmacies, and, in the case of our vaccine products in the U.S., we primarily sell directly to the CDC, wholesalers and individual provider offices. Our consumer healthcare customers include retailers and, to a lesser extent, wholesalers and distributors.
Biopharmaceutical products that ultimately are used by patients are generally covered under governmental programs, managed care programs, insurance programs, including those managed through pharmacy benefit managers, and are subject to sales allowances and/or rebates payable directly to those programs. Those sales allowances and rebates are generally negotiated, but government programs may have legislated amounts by type of product (e.g., patented or unpatented).
Our Sales Contracts––Sales on credit are typically under short-term contracts. Collections are based on market payment cycles common in various markets, with shorter cycles in the U.S. Sales are adjusted for sales allowances, chargebacks, rebates and sales returns and cash discounts. Sales returns occur due to loss of exclusivity, product recalls or a changing competitive environment.
Deductions from Revenues––Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions on gross sales for a reporting period.
Specifically:
In the U.S., we sell our products to distributors and hospitals under our sales contracts. However, we also have contracts with managed care or pharmacy benefit managers and legislatively mandated contracts with the federal and state governments under which we provide rebates to them based on medicines utilized by the lives they cover. We record provisions for Medicare, Medicaid, and performance-based contract pharmaceutical rebates based upon our experience ratio of rebates paid and actual prescriptions written during prior quarters. We apply the experience ratio to the respective period’s sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical trends are as current as practicable. We estimate discounts on branded prescription drug sales to Medicare Part D participants in the Medicare “coverage gap,” also known as the “doughnut hole,” based on the historical experience of beneficiary prescriptions and consideration of the utilization that is expected to result from the discount in the coverage gap. We evaluate this estimate regularly to ensure that the historical trends and future expectations are as current as practicable. For performance-based contract rebates, we also consider current contract terms, such as changes in formulary status and rebate rates.
Outside the U.S., the majority of our pharmaceutical sales allowances are contractual or legislatively mandated and our estimates are based on actual invoiced sales within each period, which reduces the risk of variations in the estimation process. In certain European countries, rebates are calculated on the government’s total unbudgeted pharmaceutical spending or on specific product sales thresholds and we apply an estimated allocation factor against our actual invoiced sales to project the expected level of reimbursement. We obtain third-party information that helps us to monitor the adequacy of these accruals.
Provisions for pharmaceutical chargebacks (primarily reimbursements to U.S. wholesalers for honoring contracted prices to third parties) closely approximate actual as we settle these deductions generally within two to five weeks of incurring the liability.
Provisions for pharmaceutical sales returns are based on a calculation for each market that incorporates the following, as appropriate: local returns policies and practices; historical returns as a percentage of sales; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, such as loss of exclusivity, product recalls or a changing competitive environment. Generally, returned products are destroyed, and customers are refunded the sales price in the form of a credit.
We record sales incentives as a reduction of revenues at the time the related revenues are recorded or when the incentive is offered, whichever is later. We estimate the cost of our sales incentives based on our historical experience with similar incentives programs to predict customer behavior.
Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $5.4 billion and $4.9 billion as of April 1, 2018 and December 31, 2017, respectively.
The following table provides information about the balance sheet classification of these accruals:
(MILLIONS OF DOLLARS)
 
April 1, 2018

 
December 31, 2017

Reserve against Trade accounts receivable, less allowance for doubtful accounts
 
$
1,363

 
$
1,352

 
 
 
 
 
Other current liabilities:
 
 
 
 
Accrued rebates
 
2,932

 
2,674

Other accruals
 
725

 
512

 
 
 
 
 
Other noncurrent liabilities
 
372

 
385

Total accrued rebates and other accruals
 
$
5,392

 
$
4,923


Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. On a quarterly basis, our adjustments of estimates to reflect actual results generally have been less than 1% of revenues, and have resulted in either a net increase or a net decrease in Revenues. Product-specific rebates, however, can have a significant impact on year-over-year individual product growth trends.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.
D. Collaborative Arrangements
Payments to and from our collaboration partners are presented in our condensed consolidated statements of income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-promotion agreements, we record the amounts received from our collaboration partners as alliance revenues, a component of Revenues, when our collaboration partners are the principal in the transaction and we receive a share of their net sales or profits. Alliance revenues are recorded as we perform co-promotion services for the collaboration and the collaboration partners sell the products to their customers within the applicable period. The related expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In collaborative arrangements where we manufacture a product for our collaboration partners, we record revenues when we transfer control of the product to our collaboration partners. All royalty payments to collaboration partners are included in Cost of sales. Royalty payments received from collaboration partners are included in Other (income)/deductions—net.
Reimbursements to or from our collaboration partners for development costs are recorded net in Research and development expenses. Upfront payments and pre-approval milestone payments due from us to our collaboration partners in development stage collaborations are recorded as Research and development expenses. Milestone payments due from us to our collaboration partners after regulatory approval has been attained for a medicine are recorded in Identifiable intangible assets—Developed technology rights. Upfront and pre-approval milestone payments earned from our collaboration partners by us are recognized in Other (income)/deductions—net over the development period for the collaboration products, when our performance obligations include providing R&D services to our collaboration partners. Upfront, pre-approval and post-approval milestone payments earned by us may be recognized in Other (income)/deductions—net immediately when earned or over other periods depending upon the nature of our performance obligations in the applicable collaboration. Where the milestone event is regulatory approval for a medicine, we generally recognize milestone payments due to us in the transaction price when regulatory approval in the applicable jurisdiction has been attained. We may recognize milestone payments due to us in the transaction price earlier than the milestone event in certain circumstances when recognition of the income would not be probable of a significant reversal.
On January 1, 2018, we adopted a new accounting standard on revenue recognition (see Note 1B). As a result of the adoption, we recognized the following cumulative effect adjustments related to collaboration arrangements to Retained earnings:
$394 million (pre-tax) for collaborative arrangements where the period over which upfront, pre-approval and regulatory approval milestone payments received from our collaboration partners are recognized in Other (income)/deductions—net over a reduced period. Under the new standard, the income from upfront and pre-approval milestone payments due to us is typically recognized over the development period for the collaboration when our performance obligation, in addition to granting a license, is to provide research and development services to our collaboration partners, and major regulatory approval milestones are typically recognized immediately when earned as the related development period has ended. The income from upfront and milestone payments is typically recognized immediately as earned if our performance obligation, in addition to granting a license, is only for commercialization activities. Under the old standard, this income was recognized over the combined development and estimated commercialization (including co-promotion) period for the collaboration products.
$82 million (pre-tax) for collaborative arrangements where we manufacture products for our collaboration partners and recognize Revenues and Cost of sales for product shipments at an earlier point in time. Under the new standard, revenue is recognized when we transfer control of the products to our collaboration partners. Under the old standard, revenue was recognized when our collaboration partners sell the products and transfer title to their third party customers.
v3.8.0.1
Acquisition, Sale of Hospira Infusion Systems Net Assets, Licensing Arrangement and Collaborative Arrangements
3 Months Ended
Apr. 01, 2018
Business Combinations, Discontinued Operations And Disposal Groups, Collaborative Arrangements And Equity Method Investments [Abstract]  
Acquisition, Sale of Hospira Infusion Systems Net Assets, Licensing Arrangement and Collaborative Arrangements
Acquisition, Sale of Hospira Infusion Systems Net Assets, Licensing Arrangement and Collaborative Arrangements

A. Acquisition
AstraZeneca’s Small Molecule Anti-Infectives Business (EH)
On December 22, 2016, which fell in the first fiscal quarter of 2017 for our international operations, we acquired the development and commercialization rights to AstraZeneca’s small molecule anti-infectives business, primarily outside the U.S., including the commercialization and development rights to the approved EU drug Zavicefta™ (ceftazidime-avibactam), the marketed agents Merrem™/Meronem™ (meropenem) and Zinforo™ (ceftaroline fosamil), and the clinical development assets ATM-AVI and CXL (ceftaroline fosamil-AVI). Under the terms of the agreement, we made an upfront payment of approximately $552 million to AstraZeneca upon the close of the transaction and an additional $3 million payment for a contractual purchase price adjustment in the second quarter of 2017. We also made a $50 million milestone payment in the second quarter of 2017, we made an additional milestone payment of $125 million in our first fiscal quarter of 2018 and we will make a deferred payment of $175 million to AstraZeneca in January 2019. In addition, AstraZeneca may be eligible to receive an additional milestone payment of $75 million if the related milestone is achieved prior to December 31, 2021, and up to $600 million if sales of Zavicefta™ exceed certain thresholds prior to January 1, 2026, as well as tiered royalties on sales of Zavicefta™ and ATM-AVI in certain markets for a period ending on the later of 10 years from first commercial sale or the loss of patent protection or loss of regulatory exclusivity. The total royalty payments are unlimited during the royalty term and the undiscounted payments are expected to be in the range of approximately $250 million to $430 million. The total fair value of consideration transferred for AstraZeneca’s small molecule anti-infectives business was approximately $1,040 million, which includes $555 million in cash, plus the fair value of contingent consideration of $485 million (which is composed of the deferred payment, the $50 million milestone payment made in the second quarter of 2017, the $125 million milestone payment made in our first fiscal quarter of 2018 and the future expected milestone and royalty payments). In connection with this acquisition, we recorded $894 million in Identifiable intangible assets, consisting of $728 million in Developed technology rights and $166 million in IPR&D. We also recorded $92 million in Other current assets related to the economic value of inventory which was retained by AstraZeneca for sale on our behalf, $73 million in Goodwill and $19 million of net deferred tax liabilities. The final allocation of the consideration transferred to the assets acquired and the liabilities assumed has been completed.

B. Sale of Hospira Infusion Systems Net Assets to ICU Medical, Inc. (EH)

On October 6, 2016, we announced that we entered into a definitive agreement under which ICU Medical agreed to acquire all of our global infusion systems net assets, HIS, for approximately $1 billion in cash and ICU Medical common stock. HIS includes IV pumps, solutions, and devices. As a result of the performance of HIS relative to ICU Medical’s expectations, on January 5, 2017, we entered into a revised agreement with ICU Medical under which ICU Medical would acquire HIS for up to approximately $900 million, composed of cash and contingent cash consideration, ICU Medical common stock and seller financing.
The revised transaction closed on February 3, 2017. At closing, under the terms of the revised agreement, we received 3.2 million newly issued shares of ICU Medical common stock (as originally agreed), which we initially valued at approximately $428 million (based upon the closing price of ICU Medical common stock on the closing date less a discount for lack of marketability) and which are reported as equity securities at fair value in Long-term investments on the condensed consolidated balance sheets as of April 1, 2018 and December 31, 2017, a promissory note in the amount of $75 million, which was repaid in full as of December 31, 2017, and net cash of approximately $200 million before customary adjustments for net working capital, which is reported in Other investing activities, net on the condensed consolidated statement of cash flows for the three months ended April 2, 2017. In addition, we are entitled to receive a contingent amount of up to an additional $225 million in cash based on ICU Medical’s achievement of certain cumulative performance targets for the combined company through December 31, 2019. After receipt of the ICU Medical shares, we own approximately 16% of ICU Medical. We have agreed to certain restrictions on transfer of our ICU Medical shares for 18 months after the closing date. We recognized pre-tax losses of approximately $3 million in the first quarter of 2018 in Other (income)/deductions––net, and pre-tax losses of approximately $37 million in the first quarter of 2017 upon the closing of the transaction in February 2017 in Other (income)/deductions––net, representing adjustments to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell. For additional information, see Note 4 and Notes to Consolidated Financial Statements––Note 2. Acquisitions, Sale of Hospira Infusion Systems Net Assets, Research and Development and Collaborative Arrangements, Equity-Method Investments and Cost-Method Investment in Pfizer’s 2017 Financial Report.
While we have received the full purchase price excluding the contingent amount as of the February 3, 2017 closing, the sale of the HIS net assets was not completed in certain non-U.S. jurisdictions due to temporary regulatory or operational constraints. In these jurisdictions, which represent a relatively small portion of the HIS net assets, we have continued to operate the net assets for the net economic benefit of ICU Medical, and we are indemnified by ICU Medical against risks associated with such operations during the interim period, subject to our obligations under the definitive transaction agreements. Sales of the HIS net assets have occurred in nearly all of these jurisdictions as of December 31, 2017 and we expect the sale of the HIS net assets in the remaining jurisdictions to be fully completed by the third quarter of 2018. As such, and as we have already received all of the non-contingent proceeds from the sale and ICU Medical is contractually obligated to complete the transaction, we have treated these jurisdictions as sold for accounting purposes.
In connection with the sale transaction, we entered into certain transitional agreements designed to facilitate the orderly transition of the HIS net assets to ICU Medical. These agreements primarily relate to administrative services, which are generally to be provided for a period of up to 24 months after the closing date. We will also manufacture and supply certain HIS products for ICU Medical and ICU Medical will manufacture and supply certain retained Pfizer products for us after closing, generally for a term of five years. These agreements are not material to Pfizer and none confers upon us the ability to influence the operating and/or financial policies of ICU Medical subsequent to the sale.
C. Licensing Arrangement
In 2016, we out-licensed PF-00547659, an investigational biologic being evaluated for the treatment of moderate-to-severe inflammatory bowel disease including ulcerative colitis and Crohn’s disease to Shire for an upfront payment of $90 million, up to $460 million in development and sales-based milestone payments and potential future royalty payments on commercialized products. The $90 million upfront payment was initially deferred and recognized in Other (income)/deductions––net ratably through December 2017. In the first quarter of 2018, we recognized $75 million in Other(income)/deductions––net for a milestone payment received from Shire related to their first dosing of a patient in a Phase III clinical trial of the compound for the treatment of ulcerative colitis (see Note 4).
D. Collaboration Arrangements

Collaboration with Merck & Co., Inc.
In 2013, we announced that we entered into a worldwide collaboration agreement, except for Japan, with Merck for the development and commercialization of ertugliflozin (PF-04971729), our oral sodium glucose cotransporter (SGLT2) inhibitor for the treatment of type 2 diabetes. Under the agreement, we collaborated with Merck on the clinical development of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and Januvia (sitagliptin) tablets, which were approved by the FDA in December 2017 and the European Commission in March 2018 as Steglatro, Segluromet and Steglujan, respectively. The Merck sales force will exclusively promote Steglatro and the two fixed-dose combination products and we will share revenues and certain costs with Merck on a 60%/40% basis, with Pfizer having the 40% share. Pfizer will record its share of the collaboration revenues as product sales as we supply the ertugliflozin active pharmaceutical ingredient to Merck for use in the alliance products.
In the first quarter of 2017, we received a $90 million milestone payment from Merck upon the FDA’s acceptance for review of the NDAs for ertugliflozin and two fixed-dose combinations (ertugliflozin plus Januvia (sitagliptin) and ertugliflozin plus metformin), which, as of December 31, 2017, was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in Other (income)/deductions––net over a multi-year period. As of December 31, 2017, we were due a $60 million milestone payment from Merck, which we received in the first quarter of 2018, in conjunction with the approval of ertugliflozin by the FDA. As of December 31, 2017, the $60 million due from Merck was deferred and primarily reported in Other noncurrent liabilities. As of April 1, 2018, we were due a $40 million milestone payment from Merck, which we subsequently received in April 2018, in conjunction with the approval of ertugliflozin in the EU. The $40 million milestone payment from Merck was recognized in Other (income)/deductions––net in the first quarter of 2018 (see Note 4). We are eligible for additional payments associated with the achievement of future regulatory and commercial milestones. In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, the $60 million of deferred income and approximately $85 million of the $90 million of deferred income associated with the above-mentioned milestone payments were recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information.
Collaboration with Eli Lilly & Company

In 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. We received a $200 million upfront payment from Lilly in accordance with the collaboration agreement between Pfizer and Lilly, which was deferred and primarily reported in Other noncurrent liabilities, and through December 31, 2017, was being recognized in 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. The FDA granted Fast Track designation for tanezumab for the treatment of chronic pain in patients with osteoarthritis and chronic low back pain in June 2017. Under the collaboration agreement with Lilly, we are eligible to receive additional payments from Lilly upon the achievement of specified regulatory and commercial milestones.

In the first quarter of 2018, in connection with the adoption of a new accounting standard, as of January 1, 2018, approximately $107 million of deferred income associated with the above-mentioned upfront payment was recorded to and included in the $584 million cumulative effect adjustment to Retained earnings. See Note 1B for additional information. Approximately $52 million of the upfront payment continues to be deferred of which approximately $33 million is reported in Other current liabilities and approximately $19 million is reported in Other noncurrent liabilities as of April 1, 2018. This amount is expected to be recognized in Other (income)/deductions––net over the remaining development period for the product between 2018 and 2020.
v3.8.0.1
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
3 Months Ended
Apr. 01, 2018
Restructuring and Related Activities [Abstract]  
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
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 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. We expect to incur costs of approximately $1 billion (not including costs of $215 million associated with the return of acquired IPR&D 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 2017 Financial Report) associated with the integration of Hospira. The majority of these costs are expected to be incurred within the three-year period post-acquisition.
As a result of the evaluation performed in connection with our decision in September 2016 to not pursue, at that time, splitting IH and EH into two separate publicly-traded companies, we identified new opportunities to potentially achieve greater optimization and efficiency to become more competitive in our business. Therefore, in early 2017, we initiated new enterprise-wide cost reduction/productivity initiatives, which we expect to substantially complete by the end of 2019. These initiatives encompass all areas of our cost base and include:
Optimization of our manufacturing plant network to support IH and EH products and pipelines. During 2017-2019, we expect to incur costs of approximately $800 million related to this initiative. Through April 1, 2018, we incurred approximately $237 million associated with this initiative.
Activities in non-manufacturing related areas, which include further centralization of our corporate and platform functions, as well as other activities where opportunities are identified. During 2017-2019, we expect to incur costs of approximately $300 million related to this initiative. Through April 1, 2018, we incurred approximately $195 million associated with this initiative.
The costs expected to be incurred during 2017-2019, of approximately $1.1 billion 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 20% of the total charges will be non-cash.
Current-Period Key Activities

For the three months ended April 1, 2018, we incurred costs of $83 million associated with the 2017-2019 program, $27 million associated with the integration of Hospira and $21 million associated with all other acquisition-related initiatives.
The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
April 1,
2018

 
April 2,
2017

Restructuring (credits)/charges:
 
 

 
 

Employee terminations
 
$
(8
)
 
$
(30
)
Asset impairments
 
2

 
24

Exit costs
 
(3
)
 
2

Restructuring credits(a)
 
(9
)
 
(5
)
Transaction costs(b)
 

 
12

Integration costs(c)
 
52

 
77

Restructuring charges and certain acquisition-related costs
 
43

 
84

Net periodic benefit costs recorded in Other (income)/deductions––net(d)
 
32

 
74

Additional depreciation––asset restructuring recorded in Cost of sales(e)

 
17

 
14

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

 
 

Cost of sales
 
16

 
15

Selling, informational and administrative expenses
 
17

 
9

Research and development expenses
 
6

 
7

Total implementation costs
 
39

 
31

Total costs associated with acquisitions and cost-reduction/productivity initiatives
 
$
131

 
$
202


(a) 
In the three months ended April 1, 2018, restructuring credits are primarily associated with our acquisition of Hospira, as well as cost-reduction and productivity initiatives not associated with acquisitions. In the three months ended April 2, 2017, restructuring credits are largely associated with cost-reduction and productivity initiatives not associated with acquisitions, partially offset by charges related to our acquisitions of Medivation and Anacor. In the three months ended April 1, 2018, Employee terminations primarily include revisions of our estimates of severance benefits. Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits, many of which may be paid out during periods after termination.
The restructuring activities for the three months ended April 1, 2018 are associated with the following:
EH ($14 million income); WRD/GPD ($2 million income); manufacturing operations ($2 million); and Corporate ($4 million).
The restructuring activities for the three months ended April 2, 2017 are associated with the following:
IH ($7 million); EH ($18 million income); WRD/GPD ($13 million income); manufacturing operations ($17 million); and Corporate ($2 million).
(b) 
Transaction costs represent external costs for banking, legal, accounting and other similar services, virtually all of which in the first quarter of 2017 were directly related to our acquisition of Medivation.
(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 first quarters of 2018 and 2017, integration costs primarily relate to our acquisition of Hospira.
(d) 
In the three months ended April 1, 2018, represents the net pension curtailments and settlements other than service costs reclassified from employee terminations and integration costs to Other (income)/deductions––net upon the adoption of a new accounting standard in the first quarter of 2018. In the three months ended April 2, 2017, composed of (i) $48 million, representing the net pension curtailments and settlements other than service costs reclassified to Other (income)/deductions––net upon the retrospective adoption of a new accounting standard in the first quarter of 2018 and (ii) $25 million, representing the net periodic benefit costs, excluding service costs, reclassified to Other (income)/deductions––net as a result of the retrospective adoption of a new accounting standard in the first quarter of 2018. These costs represent accelerated amortization of actuarial losses and prior service costs upon the settlement of the remaining obligation associated with the Hospira U.S. qualified defined benefit pension plan. For additional information, see Note 1B.
(e) 
Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.
(f) 
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, 2017(a)
 
$
1,039

 
$

 
$
66

 
$
1,105

Provision/(credit)
 
(8
)
 
2

 
(3
)
 
(9
)
Utilization and other(b)
 
(85
)
 
(2
)
 
(14
)
 
(100
)
Balance, April 1, 2018(c)
 
$
946

 
$

 
$
49

 
$
995


(a) 
Included in Other current liabilities ($643 million) and Other noncurrent liabilities ($462 million).
(b) 
Includes adjustments for foreign currency translation.
(c) 
Included in Other current liabilities ($565 million) and Other noncurrent liabilities ($431 million).
v3.8.0.1
Other (Income)/Deductions - Net
3 Months Ended
Apr. 01, 2018
Other Income and Expenses [Abstract]  
Other (Income)/Deductions - Net
Other (Income)/Deductions—Net
The following table provides components of Other (income)/deductions––net:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
April 1,
2018


April 2,
2017

Interest income
 
$
(77
)
 
$
(81
)
Interest expense
 
310

 
309

Net interest expense
 
233

 
228

Royalty-related income
 
(96
)
 
(86
)
Net gains on asset disposals(a)
 
(19
)
 
(90
)
Income from collaborations, out-licensing arrangements and sales of compound/product rights(b)
 
(142
)
 
(47
)
Net unrealized gains on equity securities(c)
 
(111
)
 

Net periodic benefit costs/(credits) other than service costs(d)
 
(82
)
 
62

Certain legal matters, net
 
(19
)
 
8

Certain asset impairments
 

 
12

Loss on sale of HIS net assets(e)
 
3

 
37

Business and legal entity alignment costs(f)
 
3

 
21

Other, net(g)
 
51

 
(84
)
Other (income)/deductions––net
 
$
(178
)
 
$
60


(a) 
In the first quarter of 2018, primarily includes net gains on sales of investments in equity and debt securities (approximately $12 million). In the first quarter of 2017, primarily includes net gains on sales of investments in equity and debt securities (approximately $42 million) and a gain on sale of property (approximately $48 million).
(b) 
Includes income from upfront and milestone payments from our collaboration partners and income from out-licensing arrangements and sales of compound/product rights. In the first quarter of 2018, primarily includes, among other things, a $75 million milestone payment received from Shire related to their first dosing of a patient in a Phase III clinical trial of a compound out-licensed by Pfizer to Shire for the treatment of ulcerative colitis, and a $40 million milestone payment from Merck in conjunction with the approval of ertugliflozin in the EU. For additional information, see Note 2C and Note 2D.
(c) 
Represents the unrealized net gains on equity securities reflecting the adoption of a new accounting standard in the first quarter of 2018. Approximately $61 million of this unrealized gain relates to our investment in ICU Medical stock, which is held by an international entity and therefore valued as of February 23, 2018, the international quarter end. Prior to the adoption of the new standard, net unrealized gains and losses on virtually all readily tradeable equity securities were reported in Accumulated other comprehensive income. For additional information, see Note 1B and Note 7B.
(d) 
Represents the net periodic benefit costs/(credits), excluding service costs, as a result of the adoption of a new accounting standard in the first quarter of 2018. Effective January 1, 2018, the U.S. Pfizer Consolidated Pension Plan was frozen to future benefit accruals and for the first quarter of 2018, resulted in the recognition of lower net periodic benefit costs due to the extension of the amortization period for the actuarial losses and the elimination of service costs. There was also a greater than expected gain on plan assets due to a higher plan asset base compared to the first quarter of 2017. For additional information, see Note 1B and Note 10.
(e)  
In the first quarter of 2018 and 2017, represents an incremental charge to amounts previously recorded in 2016 to write down the HIS net assets to fair value less costs to sell related to the sale of HIS net assets to ICU Medical on February 3, 2017. For additional information, see Note 2B.
(f) 
In the first quarter of 2018 and 2017, 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 quarter of 2018, primarily includes, among other things, charges of $102 million, reflecting the change in the fair value of contingent consideration, partially offset by dividend income of $59 million from our investment in ViiV. In the first quarter of 2017, primarily includes, among other things, dividend income of $43 million from our investment in ViiV.
v3.8.0.1
Tax Matters
3 Months Ended
Apr. 01, 2018
Income Tax Disclosure [Abstract]  
Tax Matters
Tax Matters

A. Taxes on Income from Continuing Operations
In the fourth quarter of 2017, we recorded an estimate of certain tax effects of the TCJA, including the impact on deferred tax assets and liabilities from the reduction in the U.S. Federal corporate tax rate from 35% to 21%, the impact on valuation allowances and other state income tax considerations, the $15.2 billion repatriation tax liability on accumulated post-1986 foreign earnings for which we plan to elect payment over eight years through 2026 (with the first of eight installments due in April 2019) that is reported primarily in Other taxes payable, and deferred taxes on basis differences expected to give rise to future taxes on global intangible low-taxed income. In addition, we had provided deferred tax liabilities in the past on foreign earnings that were not indefinitely reinvested. As a result of the TCJA, we reversed an estimate of the deferred taxes that are no longer expected to be needed due to the change to the territorial tax system. The estimated amounts recorded may change in the future due to uncertain tax positions. With respect to the aforementioned repatriation tax liability related to the TCJA repatriation tax, our obligations may vary as a result of changes in our uncertain tax positions and/or availability of attributes such as foreign tax and other credit carryforwards.
The TCJA subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that we are permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-taxed income in future years or provide for the tax expense related to such income in the year the tax is incurred. We have elected to recognize deferred taxes for temporary differences expected to reverse as global intangible low-taxed income in future years. However, given the complexity of these provisions, we have not finalized our analysis. We were able to make a reasonable estimate of the deferred taxes on the temporary differences expected to reverse in the future and provided a provisional deferred tax liability of approximately $1 billion as of December 31, 2017. The provisional amount is based on the evaluation of certain temporary differences inside each of our foreign subsidiaries that are expected to reverse as global intangible low-taxed income. However, as we continue to evaluate the TCJA’s global intangible low-taxed income provisions during the measurement period, we may revise the methodology used for determining the deferred tax liability associated with such income.
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded are provisional as we have not completed our analysis of the complex and far reaching effects of the TCJA. Further, we continue to consider our assertions on any remaining outside basis differences in our foreign subsidiaries as of April 1, 2018 and have not completed our analysis. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the TCJA on deferred taxes, valuation allowances, state tax considerations, the repatriation tax liability, global intangible low-taxed income, and any remaining outside basis differences in our foreign subsidiaries during 2018 as we complete our analysis, computations and assertions. It is possible that others, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We will revise these estimates during 2018 as we gather additional information to complete our tax returns and as any interpretation or clarification of the TCJA occurs through legislation, U.S. Treasury actions or other means.
Our effective tax rate for continuing operations was 13.5% for the first quarter of 2018, compared to 20.8% for the first quarter of 2017.
The lower effective tax rate for the first quarter of 2018 in comparison with the same period in 2017 was primarily due to:
the December 2017 enactment of the TCJA;
a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, as well as
the non-recurrence of the tax impact on an incremental charge to amounts previously recorded to write down the HIS net assets to fair value less costs to sell related to the sale of HIS net assets to ICU Medical.
B. Deferred Taxes

We have not completed our analysis of the TCJA on our prior assertion of indefinitely reinvested earnings. Accordingly, we continue to evaluate our assertion with respect to our accumulated foreign earnings subject to the deemed repatriation tax and we also continue to evaluate the amount of earnings that are indefinitely reinvested. Additionally, we continue to evaluate our assertions on any remaining outside basis differences in our foreign subsidiaries as of April 1, 2018 as we have not finalized our analysis of the effects of all of the new provisions in the TCJA. As of April 1, 2018, it is not practicable to estimate the additional deferred tax liability that would be recorded if the earnings subject to the deemed repatriation tax and any remaining outside basis differences as of April 1, 2018 are not indefinitely reinvested. In accordance with the authoritative guidance issued by the SEC Staff Accounting Bulletin 118, we expect to complete our analysis within the measurement period.
C. 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 Revenue Agent’s Report (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 2014-2018 are open, but not under audit. All other tax years are closed.
With respect to Hospira, the IRS is currently auditing tax year 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 (2010-2018), Japan (2015-2018), Europe (2011-2018, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), Latin America (1998-2018, primarily reflecting Brazil) and Puerto Rico (2010-2018).
D. Tax Provision on Other Comprehensive (Loss)/Income
The following table provides the components of Tax provision on other comprehensive (loss)/income:
 
 
Three Months Ended
(MILLIONS OF DOLLARS)
 
April 1,
2018

 
April 2,
2017

Foreign currency translation adjustments, net(a)
 
$
(34
)
 
$
(21
)
Unrealized holding losses on derivative financial instruments, net
 
(4
)
 
3

Reclassification adjustments for (gains)/losses included in net income
 
(7
)
 
(52
)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
1

 

 
 
(9
)
 
(49
)
Unrealized holding gains on available-for-sale securities, net
 
20

 
38

Reclassification adjustments for (gains)/losses included in net income
 
(22
)
 
11

Reclassification adjustments for tax on unrealized gains from AOCI to Retained earnings(c)
 
(45
)
 

 
 
(47
)
 
48

Benefit plans: actuarial gains, net
 
38

 

Reclassification adjustments related to amortization
 
14

 
50

Reclassification adjustments related to settlements, net
 
9

 
12

Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
637

 

Other
 
(20
)
 
5

 
 
677

 
66

Benefit plans: prior service (costs)/credits and other, net
 

 

Reclassification adjustments related to amortization
 
(11
)
 
(17
)
Reclassification adjustments related to curtailments, net
 
(7
)
 
(3
)
Reclassification adjustments of certain tax effects from AOCI to Retained earnings(b)
 
(144
)
 

Other
 
6

 

 
 
(155
)
 
(19
)
Tax provision on other comprehensive (loss)/income
 
$
432

 
$
25


(a) 
Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.
(b) 
For additional information on the adoption of a new accounting standard related to reclassification of certain tax effects from AOCI, see Note 1B.
(c) 
For additional information on the adoption of a new accounting standard related to financial assets and liabilities, see Note 1B.
v3.8.0.1
Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
3 Months Ended
Apr. 01, 2018
Equity [Abstract]  
Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests
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 Income/(Loss)

Balance, December 31, 2017
 
$
(5,180
)
 
$
(30
)
 
$
401

 
$
(5,262
)
 
$
750

 
$
(9,321
)
Other comprehensive income/(loss) due to the adoption of new accounting standards(a)
 
(2
)
 
(1
)
 
(416
)
 
(637
)
 
144

 
(913
)
Other comprehensive income/(loss)(b)
 
808

 
(59
)
 
(12
)
 
135

 
(39
)
 
832

Balance, April 1, 2018
 
$
(4,375
)
 
$
(90
)
 
$
(28
)
 
$
(5,764
)
 
$
855

 
$
(9,402
)
(a) 
Amounts represent the cumulative effect adjustments as of January 1, 2018 from the adoption of new accounting standards related to (i) financial assets and liabilities and (ii) the reclassification of certain tax effects from AOCI. For additional information, see Note 1B.
(b) 
Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $1 million income for the first three months of 2018.

As of April 1, 2018, with respect to derivative financial instruments, the amount of unrealized pre-tax net losses on derivative financial instruments estimated to be reclassified into income within the next 12 months is approximately $222 million, which is expected to be offset primarily by net gains resulting from reclassification adjustments related to foreign currency exchange-denominated forecasted intercompany inventory sales and net gains related to available-for-sale debt securities.
v3.8.0.1
Financial Instruments
3 Months Ended
Apr. 01, 2018
Financial Instruments [Abstract]  
Financial Instruments
Financial Instruments

A. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

On January 1, 2018, we adopted a new accounting and disclosure standard related to accounting for the recognition of financial assets and liabilities. For additional information see Note 1B.
The following table presents the financial assets and liabilities measured at fair value using a market approach on a recurring basis by balance sheet categories and fair value hierarchy level as defined in Notes to Consolidated Financial Statements––Note 1E. Basis of Presentation and Significant Accounting Policies: Fair Value in Pfizer’s 2017 Financial Report, in valuing financial instruments on a recurring basis:
 
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
(MILLIONS OF DOLLARS)
 
April 1, 2018
 
December 31, 2017
Financial assets measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
Classified as equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
1,054

 
$

 
$
1,054

 
$
2,115

 
$

 
$
2,115

Equity(a)
 
31

 
20

 
11

 
35

 
16

 
19

 
 
1,085

 
20

 
1,065

 
2,150

 
16

 
2,134

Classified as available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government and agency—non-U.S.
 
3,370

 

 
3,370

 
12,242

 

 
12,242

Corporate
 
3,581

 

 
3,581

 
2,766

 

 
2,766

Government—U.S.
 

 

 

 
252

 

 
252

Agency asset-backed—U.S.
 
22

 

 
22

 
23

 

 
23

Other asset-backed
 
33

 

 
33

 
79

 

 
79

 
 
7,006

 

 
7,006

 
15,362

 

 
15,362

Total short-term investments
 
8,091

 
20

 
8,071

 
17,512

 
16

 
17,496

Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
93

 

 
93

 
104

 

 
104

Foreign exchange contracts
 
196

 

 
196

 
234

 

 
234

Total other current assets
 
289

 

 
289

 
337

 

 
337

Long-term investments
 
 
 
 
 
 
 
 
 
 
 
 
Classified as equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity(a)
 
1,497

 
1,465

 
32

 
1,440

 
1,398

 
42

Classified as trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt
 
60

 
60

 

 
73

 
73

 

 
 
1,557

 
1,525

 
32

 
1,514

 
1,472

 
42

Classified as available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government and agency—non-U.S.
 
247

 

 
247

 
387

 

 
387

Corporate
 
4,103

 
46

 
4,058

 
4,172

 
36

 
4,136

Government—U.S.
 
465

 

 
465

 
495

 

 
495

Other asset-backed
 
17

 

 
17

 
35

 

 
35

 
 
4,833