<PAGE> 1
EXHIBIT 99.1
FINANCIAL REVIEW
Merger with Warner-Lambert Company
On June 19, 2000 we completed our merger with Warner-Lambert Company
(Warner-Lambert). As a result of this merger, each share of Warner-Lambert
common stock issued and outstanding, other than shares owned directly or
indirectly by Warner-Lambert, was converted into the right to receive 2.75
shares of Pfizer common stock.
The merger qualified as a tax-free reorganization and was accounted for
as a pooling of interests. We restated all prior period consolidated financial
statements of Pfizer to include the results of operations, financial position
and cash flows of Warner-Lambert as if we had always been merged. Prior to the
merger, the only significant transactions between Pfizer and Warner-Lambert
occurred under the Lipitor marketing agreements. These transactions have been
excluded from the restated financial information. Certain reclassifications have
been made to conform the companies' financial statements.
Overview of Consolidated Operating Results
In 1999, revenues grew 18% to $27,376 million, reflecting the strong worldwide
demand for our in-line products, as well as our alliance products. Our operating
results in 1999 were impacted by:
- the recording of a charge to write off certain Trovan inventories
- transaction costs related to Warner-Lambert's merger with Agouron
Pharmaceuticals Inc.
Our 1998 operating results reflect:
- the sale of our Medical Technology Group (MTG)
- the recording of certain significant items associated with adjustments to
asset values, the exiting of certain product lines, plant
rationalizations, severance payments, co-promotion payments to G.D.Searle
& Co. (Searle), the sale of investments, a contribution to The Pfizer
Foundation and other miscellaneous charges.
<TABLE>
<CAPTION>
Analysis of the Consolidated Statement of Income
---------------------------------------------------------------------------------------------------------
% Change
--------------------
(millions of dollars) 1999 1998 1997 99/98 98/97
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 27,376 $ 23,231 $ 18,975 18 22
Cost of sales 5,464 4,907 4,261 11 15
% of revenues 20.0% 21.1% 22.5%
Selling, informational and
administrative expenses 10,810 9,563 7,870 13 22
% of revenues 39.5% 41.2% 41.5%
R&D expenses 4,036 3,305 2,536 22 30
% of revenues 14.7% 14.2% 13.4%
Other deductions--net 121 1,059 329 (89) 223
----------------------------------------------------------------------------
Income from continuing
operations before taxes $ 6,945 $ 4,397 $ 3,979 58 11
% of revenues 25.4% 18.9% 21.0%
Taxes on income $ 1,968 $ 1,163 $ 1,081 69 8
Effective tax rate 28.3% 26.4% 27.2%
Income from continuing
operations $ 4,972 $ 3,232 $ 2,888 54 12
% of revenues 18.2% 13.9% 15.2%
Discontinued
operations--net of tax (20) 1,401 131 -- 972
----------------------------------------------------------------------------
Net income $ 4,952 $ 4,633 $ 3,019 7 53
% of revenues 18.1% 19.9% 15.9%
---------------------------------------------------------------------------------------------------------
</TABLE>
Percentages in this table and throughout the financial review may reflect
rounding adjustments.
Revenues
Revenues increased 18% or $4,145 million in 1999 and 22% or $4,256 million in
1998. Revenue increases in both years were primarily due to sales volume growth
of our in-line products and revenue generated from product alliances. Excluding
the impact of foreign exchange, revenues grew by 19% in 1999 and 26% in 1998.
1
<PAGE> 2
Percentage Change in Revenues
<TABLE>
<CAPTION>
------------------------------------------------------
Analysis of % Change
Total% -------------------------
Change Volume Price Currency
------------------------------------------------------
<S> <C> <C> <C> <C>
Pharmaceuticals
1999 VS. 1998 20.8 20.3 1.2 (0.7)
1998 vs. 1997 30.8 34.0 0.1 (3.3)
Consumer Products
1999 VS. 1998 7.3 7.1 2.5 (2.3)
1998 vs. 1997 (0.2) 2.2 1.0 (3.4)
Total
1999 VS. 1998 17.8 17.4 1.4 (1.0)
1998 vs. 1997 22.4 25.4 0.3 (3.3)
------------------------------------------------------
</TABLE>
Revenues by Business Segment
<TABLE>
<CAPTION>
------------------------------------------------------------------------
% %
Change Change
(millions of dollars) 1999 99/98 1998 98/97 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pharmaceuticals $21,879 21 $18,106 31 $13,841
Consumer Products 5,497 7 5,125 -- 5,134
------------------------------ -------- -------
Total $27,376 18 $23,231 22 $18,975
-----------------------------------------------------------------------
</TABLE>
Pharmaceuticals
The pharmaceuticals segment includes our human pharmaceuticals and animal health
businesses as well as capsugel, a capsules manufacturing business.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
% Change
-----------------
(millions of dollars) 1999 1998 1997 99/98 98/97
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Human pharmaceuticals $20,155 $16,436 $12,177 23 35
Animal health 1,333 1,304 1,319 2 (1)
Capsugel 391 366 345 7 6
----------------------------------------------------------------------------------
Total pharmaceuticals $21,879 $18,106 $13,841 21 31
----------------------------------------------------------------------------------------------------------
</TABLE>
Pharmaceuticals revenue growth in 1999 was not significantly impacted by
foreign exchange. In 1998, pharmaceuticals revenues grew 34% excluding the
impact of foreign exchange. The currency impact on the 1998 revenue growth
reflects the strengthening of the dollar relative to the Japanese yen, as well
as several European and other Asian currencies.
Human pharmaceuticals revenues increased 23% or $3,719 million in 1999 to
$20,155 million and 35% or $4,259 million in 1998 to $16,436 million. In the
U.S. market, human pharmaceuticals revenue growth was 24% in 1999 and 49% in
1998, while international growth was 21% in 1999 and 16% in 1998.
In 1999, we had seven human pharmaceutical products, including an
alliance product, with sales to third parties of approximately $1 billion or
more each. The six Pfizer-discovered products in this group--Lipitor, Norvasc,
Zoloft, Zithromax, Viagra and Diflucan--grew at a combined annual rate of 31% in
1999 and are patent-protected well into this decade.
Revenues--Major Human Pharmaceutical Products
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
% Change
---------------
(millions of dollars) 1999 1998 1997 99/98 98/97
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CARDIOVASCULAR DISEASES: $8,825 $6,843 $5,173 29 32
Lipitor 3,795 2,208 859 72 157
Norvasc 2,991 2,541 2,188 18 16
Cardura 784 679 618 15 10
Accupril/Accuretic 514 454 378 13 20
INFECTIOUS DISEASES: 3,630 3,315 2,676 9 24
Zithromax 1,309 1,023 808 28 27
Diflucan 989 904 870 9 4
Viracept 530 530 228 -- 132
CENTRAL NERVOUS SYSTEM
DISORDERS: 3,271 2,694 2,066 21 30
Zoloft 1,997 1,803 1,479 11 22
Neurontin 913 514 292 78 76
VIAGRA 1,016 773 -- 31 --
ALLERGY: 546 413 267 32 55
Zyrtec/Reactine 541 407 260 33 57
------------------------------------------------------------------------------
</TABLE>
Certain prior year data have been reclassified to conform to the current year
presentation.
We sell Viracept in collaboration with F. Hoffmann-LaRoche Ltd. (Roche).
We sell the product in North America while Roche has the licensing rights in all
other markets. The sales for 1999 reflect the planned progression of our
agreement with Roche who has increased its level of manufacturing responsibility
for the product markets outside the U.S., as well as increasing competition
within the protease inhibitor class and from other AIDS medicines.
In June 1999, the European Union's Committee for Proprietary Medicinal
Products suspended the European Union (EU) licenses of the oral and intravenous
formulations of our antibiotic Trovan for 12 months. In the rest of the world,
including the U.S., the use of Trovan is limited to serious infections in
institutionalized patients. As a result of these limitations, Trovan net sales
declined to $86 million in 1999 from $160 million in 1998. See "Cost of sales"
for a discussion of a charge recorded in 1999 to write off certain Trovan
inventories.
On March 21, 2000, we announced that we were discontinuing the sale of
Rezulin. Since March 1997, we have marketed Rezulin in the U.S. with an
affiliate of Sankyo Company, Ltd., from whom we licensed the product for North
America and other areas. Rezulin sales, which were $625 million in 1999, $748
million in 1998 and $420 million in 1997, were adversely affected by two
competing drugs approved by the U.S. Food and Drug Administration (FDA) during
1999. After an unexpected request from the FDA to consider removing the drug
from the market, we decided to discontinue marketing Rezulin. We recorded a
charge of $103 million in the first quarter of 2000 for the one-time costs
associated with the withdrawal of Rezulin.
2
<PAGE> 3
Alliance revenue was $665 million in 1999, reflecting revenue associated
with the co-promotion of Aricept and Celebrex. In 1998, alliance revenue was $69
million, reflecting revenue associated with the co-promotion of Aricept.
In February 1999, we launched Celebrex with Searle, now a part of
Pharmacia Corporation, which discovered and developed the drug. Celebrex is used
for the relief of symptoms of adult rheumatoid arthritis and osteoarthritis.
During 1999, Celebrex achieved total global sales of approximately $1.5 billion.
These alliances allow us to co-promote or license these products for sale
in certain countries. Under the co-promotion agreements, these products are
marketed and promoted with our alliance partners. We provide cash, staff and
other resources to sell, market, promote and further develop these products.
Alliance revenue from co-promotion agreements is reported in the statement of
income as Revenues.
Certain alliance agreements include additional provisions that enable our
product alliance partners the right to negotiate to co-promote certain specified
Pfizer-discovered products.
Rebates under Medicaid and related state programs reduced revenues by
$296 million in 1999, $265 million in 1998 and $170 million in 1997. The 1998
increase in rebates reflects growth of in-line products and the introduction in
1998 of two products--Trovan and Viagra. We also provided to the federal
government legislatively mandated discounts of $176 million in 1999, $161
million in 1998 and $129 million in 1997. Performance-based contracts also
provide rebates to several customers as a result of the increasing influence of
managed care groups on the pricing of our products.
Animal Health revenues increased 2% to $1,333 million in 1999 and
decreased 1% to $1,304 million in 1998. Excluding the impact of foreign
exchange, revenues increased 6% in 1999 and 3% in 1998. The increase in revenues
in 1999 was due to:
- the performance of the companion animal business
partially offset by
- the continuing weakness in the livestock market in the U.S. and Europe
- the decision of the European Commission to ban certain antibiotic feed
additives, including Stafac (virginiamycin) in the EU after June 30, 1999
We do not expect the ban on sales of virginiamycin to have a material
effect on our future results of operations.
Sales of companion animal products increased by 30% in 1999 primarily due
to the launch of Revolution and the growth of Rimadyl. Revolution was approved
in the U.S. in July 1999 as the first and only topically applied medication for
dogs and cats that is effective against heartworm, fleas and many other
parasites. Rimadyl is a treatment for the relief of pain and inflammation
associated with osteoarthritis in dogs.
Revenues decreased 1% in 1998 due to a weak livestock market in the U.S.
and depressed Asian economies.
Consumer Products
Revenues of our Consumer Products businesses were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
% Change
----------------------------
(millions of dollars) 1999 1998 1997 99/98 98/97
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Health
Care products $2,551 $2,300 $2,329 11 (1)
Confectionery products 1,951 1,887 1,869 3 1
Shaving products 792 745 739 6 1
Tetra 203 193 197 5 (2)
-------------------------------------------------------
Total Consumer Products $5,497 $5,125 $5,134 7 --
---------------------------------------------------------------------------------------
</TABLE>
Consumer Health Care product revenues increased 11% to $2,551 million in
1999 and decreased 1% to $2,300 million in 1998. The increase in 1999 revenues
was due to U.S. sales of Zantac 75. Prior to 1999, Zantac 75 was marketed by a
joint venture we formed with Glaxo Wellcome plc in 1993 and sales were not
reflected in our reported revenues. Income from this joint venture was
previously reported in Other deductions-net. At the end of 1998, we acquired
exclusive rights to over-the-counter Zantac products in the U.S. and Canada as
part of the dissolution of our joint venture arrangements with Glaxo Wellcome
plc. Other factors contributing to revenue growth were:
- increased sales of Listerine mouthwash, due to the new product launch in
the U.S. of Tartar Control Listerine in January 1999
- increased sales of Lubriderm, due to the U.S. launch of Lubriderm
Advanced Therapy
The decrease in 1998 revenues reflected the impact of the overall
economic weakness in Asian markets, specifically Japan.
In the fourth quarter of 1999, we sold the Bain de Soleil sun care
product line for $26 million in cash to Schering-Plough HealthCare Products,
Inc. Proceeds from the sale approximated the total of the carrying value of net
assets associated with this product line and selling costs. The sale of Bain de
Soleil will not have a material impact on our future results of operations.
In June 2000, we sold the Rid line of lice-control products to Bayer
Corporation for approximately $89 million in cash. The sale resulted in a gain
of approximately $78 million which is recorded in our statement of income in the
second quarter of 2000. The sale of Rid will not have a material impact on our
future results of operations.
Confectionery revenues increased 3% to $1,951 million in 1999 and 1% to
$1,887 million in 1998. The increase in confectionery revenues in 1999 was due
to:
- U.S. sales growth of Trident Advantage, which was launched in the third
quarter of 1998
- the continued success of Dentyne Ice in the U.S.
- the third quarter 1999 U.S. launch of Halls Defense Vitamin C supplement
drops
- growth across all gum brands in Mexico
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<PAGE> 4
The increase in 1998 confectionery revenues was due to:
- U.S. sales of certain gum brands and breath fresheners
- growth across all gum brands in Mexico and product launches in Japan
Shaving product revenues increased 6% to $792 million in 1999 and 1% to
$745 million in 1998. The increase in 1999 revenues was due to sales of the Silk
Effects razor. The increase in 1998 revenues was due to sales of the Protector
shaving system and the newly designed Slim Twin disposable razor.
Revenues by Country
<TABLE>
<CAPTION>
======================================================================
% of % of %
(millions of dollars) 1999 Revenues 1998 Revenues Change
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $16,486 60 $13,656 59 21
Japan 1,716 6 1,365 6 26
All Other Countries 9,174 34 8,210 35 12
-----------------------------------------------------------
Total $27,376 100 $23,231 100 18
======================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================
% of % of %
(millions of dollars) 1998 Revenues 1997 Revenues Change
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States $13,656 59 $10,088 53 35
Japan 1,365 6 1,410 7 (3)
All Other Countries 8,210 35 7,477 40 10
-----------------------------------------------------------
Total $23,231 100 $18,975 100 22
======================================================================
</TABLE>
Revenues were in excess of $100 million in each of 21 countries outside
the U.S. in 1999. The U.S. was the only country to contribute more than 10% to
total revenues.
Percentage Change in Geographic Revenues
by Business Segment
<TABLE>
<CAPTION>
==========================================================
% Change in Total Revenues
-----------------------------------
U.S. International
-------------- -----------------
99/98 98/97 99/98 98/97
----------------------------------------------------------
<S> <C> <C> <C> <C>
Pharmaceuticals 23 45 18 12
Consumer Products 11 3 4 (2)
------------------------
Total 21 35 14 8
==========================================================
</TABLE>
Product Developments
We continue to invest in R&D to provide future sources of revenue through the
development of new products, as well as through additional uses for existing
in-line and alliance products.
Certain significant regulatory actions by, and filings pending with, the
FDA follow:
U.S. FDA Approvals
<TABLE>
<CAPTION>
==================================================================
Product Indications/Dosage Date Approved
------------------------------------------------------------------
<S> <C> <C>
Accuretic Ace inhibitor December 1999
Zoloft Posttraumatic stress disorder (PTSD) December 1999
Zoloft Oral liquid dosage form December 1999
Celebrex Familial adenomatous polyposis December 1999
(a rare and devastating hereditary
disease that, left untreated, almost
always leads to colorectal cancer)
Femhrt Hormone replacement therapy for October 1999
osteoporosis and menopausal
symptoms
Tikosyn Atrial fibrillation October 1999
Viracept Twice-daily dosing regimen October 1999
==================================================================
</TABLE>
Zoloft is the first and only medicine to receive FDA approval for the
treatment of PTSD.
In the first quarter of 2000, we launched Tikosyn for use in the
treatment of atrial fibrillation, a type of heart rhythm disorder. Tikosyn is
now available in the U.S. to prescribers and hospitals that have participated in
an educational program on treatment initiation and dosing. Regulatory review in
Europe is continuing.
Pending U.S. New Drug Applications
<TABLE>
<CAPTION>
=============================================================
Product Indications/Dosage Date Filed
-------------------------------------------------------------
<S> <C> <C>
Zoloft Long-term management of May 2000
anxiety disorders
Zithromax Mycobacterium avium complex January 2000
Zyrtec-D Combination anti-histamine January 2000
decongestant formulation
Relpax Migraine headaches October 1998
Zeldox Psychotic disorders-- December 1997
intramuscular dosage form
Zeldox Psychotic disorders-- March 1997
oral dosage form
=============================================================
</TABLE>
In October 1999, we received an approvable letter from the FDA for Relpax
for the treatment of migraines. We are currently in labeling discussions with
the FDA.
We received a non-approvable letter from the FDA for Zeldox in 1998. In
the first quarter of 2000, we refiled with the FDA the New Drug Application for
the oral dosage form of Zeldox, including new data requested by the FDA. An FDA
advisory committee reviewed Zeldox on July 19, 2000 and voted to recommend its
approval. Zeldox will now go through the FDA's final review and labeling stages.
We plan to launch Zeldox in Sweden in September 2000, where it has already been
approved. We are in the process of seeking mutual recognition in Europe.
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<PAGE> 5
Ongoing or planned clinical trials for additional uses and dosage forms
for our currently marketed products include:
<TABLE>
<S> <C>
====================================================================
Product Indications/Dosage
--------------------------------------------------------------------
Norvasc Pediatric hypertension
--------------------------------------------------------------------
Zithromax Cardiovascular risk in patients with atherosclerosis
(a process in which fatty substances are deposited
within blood vessels) caused by certain infections
Accelerated dosing regimen
--------------------------------------------------------------------
Viagra Female sexual arousal disorder
--------------------------------------------------------------------
Zoloft Pediatric depression
Social phobia
--------------------------------------------------------------------
Lipitor Broad cardiovascular-care clinical program
--------------------------------------------------------------------
Aricept Oral liquid dosage form
--------------------------------------------------------------------
Celebrex Sporadic adenomatous polyposis
Barrett's esophagus -- a precancerous condition caused by
repeated damage from stomach acid regurgitation
Actinic keratosis--a precancerous skin growth caused by
overexposure to sunlight
Bladder cancer
Pain
--------------------------------------------------------------------
Neurontin Pediatric use
Dispersible tablet
Combination with NSAID for pain
====================================================================
</TABLE>
We are developing a single product that combines the cholesterol-lowering
and antihypertensive medications in Lipitor and Norvasc--two of the world's most
widely prescribed medicines.
Ongoing or planned clinical trials for new product development programs
include:
<TABLE>
<CAPTION>
==========================================================================
Product Indications
--------------------------------------------------------------------------
<S> <C>
Vfend (voriconazole) Serious systemic fungal infections
--------------------------------------------------------------------------
inhaled insulin Diabetes
--------------------------------------------------------------------------
valdecoxib (under Osteoarthritis
co-development Rheumatoid arthritis
with Searle) Pain
--------------------------------------------------------------------------
pregabalin Pain
Epilepsy
Psychiatric disorder
==========================================================================
</TABLE>
Additional product-related programs are in various stages of discovery.
In 1998, we entered into worldwide agreements with Aventis Pharma to
manufacture insulin and co-develop and co-promote inhaled insulin. Under the
agreements, Aventis Pharma and Pfizer will contribute expertise in the
development and production of insulin products, as well as selling and marketing
resources. We bring to the alliance our development of inhaled insulin from our
collaboration with Inhale Therapeutic Systems, Inc. Together with Aventis Pharma
we are building a new insulin manufacturing plant in Frankfurt, Germany, to
support the product currently in development.
We have decided not to pursue further development of ezlopitant for the
treatment of chemotherapy-induced nausea and vomiting in cancer patients, as
well as Alond for the treatment of the progressive nerve damage that results as
a complication of diabetes over time.
Costs and Expenses
In 1999, we substantially completed the actions under the restructuring plans
announced in 1998.
In 1998, we recorded restructuring charges in addition to charges for
certain asset impairments. These pre-tax charges were recorded in the 1998
statement of income as follows:
<TABLE>
<CAPTION>
=====================================================
(millions of dollars) Total COS* SI&A* R&D* OD*
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charges $270 $68 $17 $1 $184
Asset impairments 213 18 -- -- 195
=====================================================
</TABLE>
*COS--Cost of sales; SI&A--Selling, informational and administrative expenses;
R&D --Research and development expenses; OD--Other deductions--net.
The components of the 1998 restructuring charges follow:
<TABLE>
<CAPTION>
==============================================================
Utilization
--------------------
(millions of dollars) Charges in 1998 1998 1999 Beyond
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Property, plant
and equipment $ 79 $ 79 $ -- $ --
Write-down of intangibles 44 44 -- --
Employee termination costs 87 12 62 13
Other 60 16 22 22
--------------------------------------------------------------
Total $270 $151 $84 $35
==============================================================
</TABLE>
As a result of the restructuring, the workforce was reduced by
approximately 950 manufacturing, sales and corporate personnel. In 1998,
restructuring charges of $166 million are included in the pharmaceuticals
segment, $11 million are included in the consumer products segment and $93
million are included in corporate.
In 1998, we recorded impairment charges of $139 million in the
pharmaceuticals segment and $74 million in the consumer products segment. These
impairment charges were to adjust intangible asset values, primarily goodwill
and trademarks, and the carrying value of machinery and equipment related to our
animal health antibiotic feed additive Stafac and certain consumer health care
product lines. These charges resulted from the ban on Stafac throughout the EU,
significant changes in the marketplace and a revision of our strategies.
As of December 31, 1999, we have not expended severance amounts of $13
million, which are reflected in Other current liabilities and other amounts of
$22 million, which are reflected in Other noncurrent liabilities.
In 1999, revenues declined approximately $41 million as a result of
exiting certain product lines. In 1999, as a result of the restructuring
activities and the asset impairments, we realized cost savings of approximately
$39 million and a reduction in amortization and depreciation expense of
approximately $12 million.
COST OF SALES increased 11% in 1999 and 15% in 1998. Based on our
evaluation of the actions noted in our discussion of revenues, we determined
that it was unlikely that certain
5
<PAGE> 6
Trovan inventories of finished goods, bulk, work-in-process and raw materials
will be used. Accordingly, in the third quarter of 1999, we recorded a charge of
$310 million in Cost of sales to write off Trovan inventories in excess of the
amount required to support expected sales. Also included in Cost of sales for
1999 is a benefit of $6.6 million related to the change in accounting for the
cost of inventories from the "Last-in, first-out" method to the "First-in,
first-out" method. Excluding the Trovan inventory charge and the benefit related
to the accounting change for inventories in 1999 and the asset impairments and
restructuring charges in 1998, cost of sales increased 7%.
Excluding the 1998 asset impairments and restructuring charges, cost of
sales increased 13% in 1998.
SI&A increased 13% in 1999 and 22% in 1998. These increases reflect
support for previously introduced products and new products. Such support
included substantial global investments, begun in 1998, in our pharmaceutical
sales force, including the creation of a new U.S. primary-care sales force and a
new U.S. specialty sales force dedicated to rheumatology. In addition, personnel
increases in other specialty sales forces in the U.S. and the expansion of
international sales forces contributed to the increase in SI&A. Our past
investments in SI&A are enabling us to maximize the financial return realized
from our products.
R&D increased 22% in 1999 and 30% in 1998. These expenditures were
necessary to support the advancement of potential drug candidates in all stages
of development (from initial discovery through final regulatory approval). In
2000, we have a total R&D budget of about $4.7 billion.
OTHER DEDUCTIONS--NET decreased 89% in 1999 due to the absence of certain
significant charges recorded in 1998 of $885 million. Other deductions--net
increased substantially in 1998 primarily due to:
- asset impairments--$195 million
- restructuring charges--$184 million
- co-promotion payments to Searle for rights to Celebrex--$240 million
- a contribution to The Pfizer Foundation-- $300 million
- legal settlements involving the brand-name prescription drug antitrust
litigation--$57 million
partially offset by
- a gain on the sale of a manufacturing plant and certain minor
prescription products -- $67 million
- a gain on the sale of investment securities-- $24 million
- an increase in interest income on the investment of cash generated from
operations and the divestiture of MTG
- foreign exchange effects
Our overall EFFECTIVE TAX RATE was 28.4% in 1999 and 33.7% in 1998. This
decrease was due mainly to the 1998 gain on the disposal of MTG being recognized
in jurisdictions with higher tax rates.
The effective tax rate for continuing operations was 28.3% in 1999 and
26.4% in 1998. Significant charges in both 1999 and 1998 were recorded in
jurisdictions with higher tax rates. However, the level of these charges was
greater in 1998 than in 1999. Excluding these charges in 1999 and 1998, the
effective tax rate was 28.5% in 1999 and 28.3% in 1998. This increase in 1999
was primarily due to the mix of income by country.
We have received and are protesting assessments from the Belgian tax
authorities. For additional details, see note 10 to the consolidated financial
statements, "Taxes on Income."
Discontinued Operations
In 1999, we agreed to pay a fine of $20 million to settle antitrust charges
involving our former Food Science Group. This charge is reflected in
Discontinued operations--net of tax. For additional details, see note 19 to the
consolidated financial statements, "Litigation."
During 1998, we exited the medical devices business with the sale of our
remaining MTG businesses:
- Howmedica to Stryker Corporation in December for $1.65 billion in cash
- Schneider to Boston Scientific Corporation in September for $2.1 billion
in cash
- American Medical Systems to E.M. Warburg, Pincus & Co., LLC, in September
for $130 million in cash
- Valleylab to U.S. Surgical Corporation in January for $425 million in
cash
The net proceeds from these divestitures were used for general corporate
purposes, including the repayment of commercial paper borrowings. Net income of
these businesses up to the date of their divestiture and divestiture gains are
included in Discontinued operations--net of tax.
Net Income
Net income for 1999 increased 7% from 1998. Diluted earnings per share for 1999
were $.78, an increase of 7% from 1998. A reconciliation between reported net
income and net income excluding certain significant items and 1998 and 1997
discontinued operations follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
% Change
-------------------
(millions of dollars) 1999 1998 1997 99/98 98/97
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income as reported $ 4,952 $ 4,633 $ 3,019 7 53
Certain significant items 234 682 -- (66) --
Discontinued operations -- (1,401) (131) -- 972
---------------------------------------------------------------
Net income excluding
certain significant items and
discontinued operations $ 5,186 $ 3,914 $ 2,888 32 36
---------------------------------------------------------------
Diluted earnings per share
excluding certain significant
items and discontinued
operations $ .82 $ .62 $ .46 32 35
---------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
Certain significant items in 1999 and 1998 follow:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(millions of dollars) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Trovan inventory charge $ 310 $ --
Transaction costs related to acquisition
of Agouron 33 --
Asset impairments -- 213
Restructuring charges -- 270
Co-promotion payments to Searle -- 240
Contribution to The Pfizer Foundation -- 300
Other charges, which are primarily related to
legal settlements -- 126
Gain on the sale of a manufacturing plant and
certain prescription products -- (67)
Gain on the sale of investments -- (24)
---------------------------------------------------------------------------------------
Total significant items, pre-tax 343 1,058
Income taxes (109) (376)
---------------------------------------------------------------------------------------
Total significant items, after tax $ 234 $ 682
---------------------------------------------------------------------------------------
</TABLE>
Financial Condition, Liquidity and
Capital Resources
Our net financial asset position as of December 31 was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(millions of dollars) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets* $8,423 $6,927
Short- and long-term debt 7,073 4,787
---------------------------------------------------------------------------------------
Net financial assets $1,350 $2,140
---------------------------------------------------------------------------------------
</TABLE>
*Consists of cash and cash equivalents, short-term loans and investments, and
long-term loans and investments.
Selected Measures of Liquidity and
Capital Resources
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents and
short-term loans and
investments (millions of dollars)* $6,659 $5,067
Working capital (millions of dollars) 4,084 3,806
Current ratio 1.33:1 1.38:1
Shareholders' equity per
common share** $ 2.28 $ 2.06
---------------------------------------------------------------------------------------
</TABLE>
* Cash is managed by country or region and is not always available to be used
in every location throughout the world. When necessary, we utilize
short-term borrowings for various corporate purposes.
** Represents shareholders' equity divided by the actual number of common
shares outstanding (which excludes treasury shares and those held by the
employee benefit trusts).
The increase in working capital from 1998 to 1999 was primarily due to
the following:
- income from continuing operations resulting from growth in sales volume
and higher alliance revenue receivables due to the launch of Celebrex in
February 1999
- cash received from stock option exercises
partially offset by
- purchases of property, plant and equipment
- short term borrowings primarily to fund common stock purchases of
approximately $2.5 billion
- dividends on common stock
Summary of Cash Flows
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(millions of dollars) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by/(used in):
Operating activities $ 5,465 $ 5,199 $ 3,149
Investing activities (3,878) (790) (1,651)
Financing activities (1,627) (3,641) (1,490)
Discontinued operations (20) 4 118
Effect of exchange-rate changes on
cash and cash equivalents 11 21 (59)
--------------------------------------------------------------------------------
Net increase/(decrease) in cash and
cash equivalents $ (49) $ 793 $ 67
--------------------------------------------------------------------------------
</TABLE>
Net cash provided by operating activities increased in 1999 primarily due
to:
- an increase in income from continuing operations in 1999
partially offset by
- higher taxes paid
- the timing of collections of accounts receivable
- a decrease in deferred tax liabilities and other noncurrent liabilities
Net cash provided by operating activities increased in 1998 primarily due
to:
- an increase in income from continuing operations in 1998
- higher taxes payable associated with sales growth of existing and new
products as well as the MTG divestitures, partially offset by tax
benefits associated with charges for asset impairment, restructuring,
co-promotion payments to Searle and the contribution to The Pfizer
Foundation
Net cash used in investing activities in 1999 changed primarily due to:
- the absence of proceeds from the sale of MTG which occurred in 1998
- increased purchases of property, plant and equipment
partially offset by
- lower purchases of long-term investments
Net cash used in investing activities decreased in 1998 primarily due to:
- proceeds from the sale of the MTG businesses
partially offset by
- increased net purchases of short-term investments
- increased purchases of property, plant and equipment
Net cash used in financing activities decreased in 1999 primarily due to
the net increase in short-term borrowings.
7
<PAGE> 8
Net cash used in financing activities increased in 1998 primarily due to:
- the increase in common stock purchases
- increased net repayments of short-term borrowings
- higher cash dividends
Under the current share-purchase program begun in September 1998, we are
authorized to purchase up to $5 billion of our common stock. In 1999, we
purchased approximately 65.6 million shares of our common stock in the open
market for approximately $2.5 billion. Since the beginning of this program, we
have purchased 80.4 million shares of our common stock for approximately $3
billion. In April 2000, the Board of Directors voted to continue this share
purchase program up to limits of the remaining $2 billion in cost with a maximum
of 140 million additional shares. In September 1998, we completed a program
under which we purchased 79.2 million shares of our common stock at a total cost
of $2 billion. Purchased shares are available for general corporate purposes.
We have available lines of credit and revolving-credit agreements with a
select group of banks and other financial intermediaries. At December 31, 1999,
major unused lines of credit totaled approximately $1.5 billion for pre-merger
Pfizer and $800 million for pre-merger Warner-Lambert. Upon a change in control
of Warner-Lambert, $500 million of Warner-Lambert's lines of credit terminated.
Our short-term debt has been rated P1 by Moody's Investors Services
(Moody's) and A-1+ by Standard and Poor's (S&P). Pfizer's pre-merger long-term
debt has been rated Aaa by Moody's and AAA by S&P for the past 14 years. Moody's
and S&P are the major corporate debt-rating organizations and these are their
highest ratings. Warner-Lambert's pre-merger long-term debt has been rated AAA
by S&P and Aa3 by Moody's.
As a result of merging Warner-Lambert's businesses into our operations, we
expect the combined company to have (excluding any impact of anticipated
restructuring charges and transaction fees of $1.7 billion to $2.2 billion):
- a compounded annual revenue growth of 13% and earnings growth of at least
25% through 2002
- anticipated annual cost savings and efficiencies of $1.6 billion by 2002
($200 million of these savings are expected to be achieved in 2000, $1
billion in 2001 and $1.6 billion in 2002)
- diluted earnings per share of up to $1.00 for 2000, $1.27 for 2001 and
$1.56 for 2002 (these numbers include the $1.6 billion of cost savings
phased in over this time period, but do not include any increased sales
from collaborative activities, the $1.8 billion termination fee paid by
Warner-Lambert to American Home Products Corporation, other
merger-related costs, and certain significant items)
Dividends on Common Stock
Our dividend payout ratio was approximately 39% in 1999, 34% in 1998 and 44% in
1997. In 1998, excluding the effects on net income of discontinued operations
and the 1998 significant items of $682 million after-tax, the dividend payout
ratio was 39%. In December 1999, pre-merger Pfizer's Board of Directors declared
a first-quarter 2000 dividend of $.09. In April 2000, pre-merger Pfizer's Board
of Directors declared a $.09 per share second quarter 2000 dividend. The 2000
cash dividends mark the 33rd consecutive year of quarterly dividend increases of
pre-merger Pfizer. Prior to the merger, Warner-Lambert's Board of Directors
declared a $.24 per share dividend in both the first and second quarters of
2000.
Banking Operation
Our international banking operation, Pfizer International Bank Europe (PIBE),
operates under a full banking license from the Central Bank of Ireland. The
results of its operations are included in Other deductions--net.
PIBE extends credit to financially strong borrowers, largely through U.S.
dollar loans made primarily for short and medium terms, with floating interest
rates. Generally, loans are made on an unsecured basis. When deemed appropriate,
guarantees and certain covenants may be obtained as a condition to the extension
of credit.
To reduce credit risk, PIBE has established credit approval guidelines,
borrowing limits and monitoring procedures. Credit risk is further reduced
through an active policy of diversification with respect to borrower, industry
and geographic location. PIBE continues to have S&P's highest short-term rating
of A-1+.
The net income of PIBE is affected by changes in market interest rates
because of repricing and maturity mismatches between its interest-sensitive
assets and liabilities. PIBE is currently asset sensitive (more assets than
liabilities repricing in a given period) and, therefore, we expect that in an
environment of increasing interest rates, net income would increase. PIBE's
asset and liability management reflects its liquidity, interest-rate outlook and
general market conditions.
For additional details regarding our banking operation, see note 4 to the
consolidated financial statements, "Financial Subsidiaries."
Forward-Looking Information and
Factors That May Affect Future Results
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This annual report and
other written and oral statements that we make from time to time contain such
forward-looking statements that set out anticipated results based on
management's plans and assumptions. We have tried, wherever possible, to
identify such statements by using words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance in connection with any discussion of future operating or
financial performance.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in
8
<PAGE> 9
our plans and assumptions. Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate,
actual results could vary materially from those anticipated, estimated or
projected. Investors should bear this in mind as they consider forward-looking
statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise.
Certain risks, uncertainties and assumptions are discussed here and under
the heading entitled "Cautionary Factors That May Affect Future Results" in Item
1 of Pfizer's pre-merger annual report on Form 10-K for the year ended December
31, 1999 and in Exhibit 99 to Warner-Lambert's pre-merger annual report on Form
10-K for the year ended December 31, 1999.
This discussion of potential risks and uncertainties is by no means
complete but is designed to highlight important factors that may impact our
outlook.
COMPETITION AND THE HEALTH CARE ENVIRONMENT
In the U.S., many pharmaceutical products are subject to increasing pricing
pressures, which could be significantly impacted by the current national debate
over Medicare reform. If the Medicare program provided outpatient pharmaceutical
coverage for its beneficiaries, the federal government, through its enormous
purchasing power under the program, could demand discounts from pharmaceutical
companies that may implicitly create price controls on prescription drugs. On
the other hand, a Medicare drug reimbursement provision may increase the volume
of pharmaceutical drug purchases, offsetting at least in part these potential
price discounts. In addition, managed care organizations, institutions and other
government agencies continue to seek price discounts. Government efforts to
reduce Medicare and Medicaid expenses are expected to increase the use of
managed care organizations. This may result in managed care influencing
prescription decisions for a larger segment of the population. International
operations are also subject to price and market regulations. As a result, it is
expected that pressures on pricing and operating results will continue.
FINANCIAL RISK MANAGEMENT
The overall objective of our financial risk management program is to seek a
reduction in the potential negative earnings effects from changes in foreign
exchange and interest rates arising in our business activities. We manage these
financial exposures through operational means and by using various financial
instruments. These practices may change as economic conditions change.
Foreign Exchange Risk
A significant portion of our revenues and earnings are exposed to changes in
foreign exchange rates. Where practical, we seek to manage expected local
currency revenues in relation to local currency costs and manage local currency
assets in relation to local currency liabilities. Generally, we do not use
financial instruments for trading activities.
Foreign exchange risk is also managed through the use of foreign currency
forward-exchange contracts. These contracts are used to offset the potential
earnings effects from short-term foreign currency assets and liabilities that
arise during operations. For additional details on foreign exchange exposures,
see note 5-D to the consolidated financial statements, "Derivative Financial
Instruments--Instruments Outstanding."
In addition, foreign currency put options are purchased to reduce a
portion of the potential negative effects on earnings related to certain of our
significant anticipated intercompany inventory purchases for up to one year.
These purchased options hedge Japanese yen versus the U.S. dollar.
Also, under certain market conditions, we protect against possible
declines in the reported net assets of our subsidiaries in Japan and in
countries that are a member of the European Monetary Union. We do this through
currency swaps and borrowing in Japanese yen and borrowing in euros.
Our financial instrument holdings at year-end were analyzed to determine
their sensitivity to foreign exchange rate changes. The fair values of these
instruments were determined as follows:
- forward-exchange contracts and currency swaps--net present values
- purchased foreign currency options--foreign exchange option pricing model
- foreign receivables, payables, debt and loans--changes in exchange rates
In our sensitivity analysis, we assumed that the change in one currency's
rate relative to the U.S. dollar would not have an effect on other currencies'
rates relative to the U.S. dollar. All other factors were held constant.
If there were an adverse change in foreign exchange rates of 10%, the
expected effect on net income related to our financial instruments would be
immaterial. For additional details, see note 5-D to the consolidated financial
statements, "Derivative Financial Instruments--Accounting Policies."
Interest Rate Risk
Our U.S. dollar interest-bearing investments, loans and borrowings are subject
to interest rate risk. We invest and borrow primarily on a short-term or
variable-rate basis. We are also subject to interest rate risk on Japanese yen
and on euro short-term borrowings. Under certain market conditions, interest
rate swap contracts are used to adjust interest-sensitive assets and
liabilities.
Our financial instrument holdings at year-end were analyzed to determine
their sensitivity to interest rate changes. The fair values of these instruments
were determined by net present values.
In our sensitivity analysis, we used the same change in interest rate for
all maturities. All other factors were held constant. If interest rates
increased by 10%, the expected effect on net income related to our financial
instruments would be immaterial.
9
<PAGE> 10
INTERNATIONAL MARKETS
Forty percent of our 1999 revenues arise from international operations and we
expect revenue and net income growth in 2000 to be impacted by changes in
foreign exchange rates.
European Currency
A new European currency (euro) was introduced in January 1999 to replace the
separate currencies of 11 individual countries. The major changes during its
first year of existence have occurred in the banking and financial sectors. The
impact at the commercial and retail level has been limited but is expected to
increase during the next two years through December 31, 2001, when the separate
currencies will cease to exist. We are modifying systems and commercial
arrangements to deal with the new currency, including the availability of dual
currency processes to permit transactions to be denominated in the separate
currencies, as well as the euro. The cost of this effort is not expected to have
a material effect on our businesses or results of operations. We continue to
evaluate the economic and operational impact of the euro, including its impact
on competition, pricing and foreign currency exchange risks. There is no
guarantee, however, that all problems have been foreseen and corrected, or that
no material disruption will occur in our businesses.
TAX LEGISLATION
Pursuant to the Small Jobs Protection Act of 1996 (the Act), Section 936 of the
Internal Revenue Code (the U.S. possessions corporation income tax credit) was
repealed for tax years beginning after December 31, 1995. The Act allows us to
continue using the credit against the tax arising from manufacturing income
earned in a U.S. possession for an additional 10-year period. The amount of
manufacturing income eligible for the credit during this additional period is
subject to a cap based on income earned prior to 1996 in the U.S. possession.
This 10-year extension period does not apply to investment income earned in a
U.S. possession, the credit on which expired as of July 1, 1996. The Act does
not affect the amendments made to Section 936 by the 1993 Omnibus Budget
Reconciliation Act, which provided for a five-year phase-down of the U.S.
possession tax credit from 100% to 40%. In addition, the Act permitted the
extension of the R&D tax credit through June 30, 1998. In 1998, this credit was
again extended to June 30, 1999, and in 1999, it was further extended to June
30, 2004.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of SFAS No.
133. SFAS No. 138 amends the accounting and reporting standards of SFAS No 133,
Accounting for Derivative Instruments and Hedging Activities, for certain
derivative instruments and certain hedging activities. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 which
delayed the effective date of SFAS No. 133. We will adopt the provisions of SFAS
No. 133 and SFAS No. 138 on January 1, 2001. SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value.
We do not expect the adoption of these statements to have a material
impact on our financial position, results of operations or cash flows.
YEAR 2000
We did not experience any operational problems as a result of Year 2000 issues,
and Year 2000 had no material effect on our revenues. Although the transition
from 1999 to 2000 did not adversely impact our company, there can be no
assurances that we will not experience any negative effects or disruptions in
our businesses in the future as a result of Year 2000 issues.
The total cost of our Year 2000 Program was $253 million, of which we
incurred $168 million in 1999, $78 million in 1998 and $7 million in 1997. These
costs were expensed as incurred, except for capitalizable hardware of
approximately $18 million in 1999, $13 million in 1998 and $1 million in 1997
and were funded through operating cash flows. Such costs did not include normal
system upgrades and replacements. Immaterial costs may be incurred in 2000 to
address remaining non-critical Year 2000 issues.
LITIGATION, TAX AND ENVIRONMENTAL MATTERS
Claims have been brought against us and our subsidiaries for various legal and
tax matters. In addition, our operations are subject to international, federal,
state and local environmental laws and regulations. It is possible that our cash
flows and results of operations could be affected by the one-time impact of the
resolution of these contingencies. We believe that the ultimate disposition of
these matters to the extent not previously provided for will not have a material
impact on our financial condition, results of operations or cash flows, except
where specifically commented on in note 19 to the consolidated financial
statements, "Litigation" and note 10 to the consolidated financial statements,
"Taxes on Income."
10
<PAGE> 11
Management's Report
We prepared and are responsible for the financial statements that appear on
pages 13 to 38. These financial statements are in conformity with generally
accepted accounting principles and, therefore, include amounts based on informed
judgments and estimates. We also accept responsibility for the preparation of
other financial information that is included in this document.
We have designed a system of internal control to:
- safeguard the Company's assets,
- ensure that transactions are properly authorized, and
- provide reasonable assurance, at reasonable cost, of the integrity,
objectivity and reliability of the financial information.
An effective internal control system has inherent limitations no matter
how well designed and, therefore, can provide only reasonable assurance with
respect to financial statement preparation. The system is built on a business
ethics policy that requires all employees to maintain the highest ethical
standards in conducting Company affairs. Our system of internal control
includes:
- careful selection, training and development of financial managers,
- an organizational structure that segregates responsibilities,
- a communications program which ensures that the Company's policies and
procedures are well understood throughout the organization, and
- an extensive program of internal audits, with prompt follow-up,
including reviews of separate operations and functions around the world.
Our independent certified public accountants, KPMG LLP, have audited the
annual financial statements in accordance with generally accepted auditing
standards. The independent auditors' report expresses an informed judgment as to
the fair presentation of the Company's reported operating results, financial
position and cash flows. Their judgment is based on the results of auditing
procedures performed, the report of pre-merger Warner-Lambert Company's
independent certified public accountants, PricewaterhouseCoopers LLP and such
other tests that they deemed necessary, including their consideration of our
internal control structure.
We consider and take appropriate action on recommendations made by KPMG
LLP and our internal auditors. We believe that our system of internal control is
effective and adequate to accomplish the objectives discussed above.
/s/ William C. Steere
W. C. Steere, Jr., Principal Executive Officer
/s/ David L. Shedlarz
D. L. Shedlarz, Principal Financial Officer
/s/ Loretta V. Cangialosi
L. V. Cangialosi, Principal Accounting Officer
September 1, 2000
Independent Auditors' Report
To the Shareholders and Board of Directors of Pfizer Inc.:
We have audited the accompanying consolidated balance sheets of Pfizer Inc. and
Subsidiary Companies as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated balance sheets
of Warner-Lambert Company and its subsidiaries as of December 31, 1999 and 1998,
or the related consolidated statements of income and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1999,
which consolidated statements reflect total assets of approximately
$11,442,000,000 and $9,520,000,000 as of December 31, 1999 and 1998,
respectively, and net sales of approximately $12,929,000,000, $10,744,000,000,
and $8,408,000,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. Those consolidated financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts of Warner-Lambert Company and its subsidiaries for such
periods, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
The consolidated financial statements give retroactive effect to the
merger of Pfizer Inc. and Warner-Lambert Company on June 19, 2000, which has
been accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pfizer Inc. and Subsidiary
Companies as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, NY
February 14, 2000, except as to the pooling of interests of Pfizer Inc. and
Warner-Lambert Company which is as of June 19, 2000 and except for Note 19 as to
which the date is March 24, 2000.
11
<PAGE> 12
Report of Independent Accountants
To the Board of Directors and Shareholders of Warner-Lambert Company:
In our opinion, the consolidated balance sheets as of December 31, 1999 and
1998, and the related consolidated statements of income and comprehensive income
and of cash flows for each of the three years in the period ended December 31,
1999 of Warner-Lambert Company and its subsidiaries (not presented separately
herein) present fairly, in all material respects, the financial position of
Warner-Lambert Company and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Warner-Lambert Company for any
period subsequent to December 31, 1999.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
January 24, 2000, except for Note 6,
as to which the date is February 7, 2000
12
<PAGE> 13
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Year ended December 31
--------------------------
(millions, except per share data) 1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $27,376 $23,231 $18,975
Costs and expenses:
Cost of sales 5,464 4,907 4,261
Selling, informational and administrative expenses 10,810 9,563 7,870
Research and development expenses 4,036 3,305 2,536
Other deductions--net 121 1,059 329
---------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for taxes on income and minority interests 6,945 4,397 3,979
Provision for taxes on income 1,968 1,163 1,081
Minority interests 5 2 10
---------------------------------------------------------------------------------------------------------
Income from continuing operations 4,972 3,232 2,888
Discontinued operations--net of tax (20) 1,401 131
---------------------------------------------------------------------------------------------------------
Net income $ 4,952 $ 4,633 $ 3,019
---------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE--BASIC
Income from continuing operations $ .81 $ .53 $ .48
Discontinued operations--net of tax -- .23 .02
---------------------------------------------------------------------------------------------------------
Net income $ .81 $ .76 $ .50
---------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE--DILUTED
Income from continuing operations $ .79 $ .51 $ .46
Discontinued operations--net of tax (.01) .22 .02
---------------------------------------------------------------------------------------------------------
Net income $ .78 $ .73 $ .48
---------------------------------------------------------------------------------------------------------
Weighted average shares -- basic 6,126 6,120 6,084
Weighted average shares -- diluted 6,317 6,362 6,297
=========================================================================================================
</TABLE>
We have restated all periods presented to reflect the merger with Warner-Lambert
Company on June 19, 2000, which was accounted for as a pooling of interests.
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
13
<PAGE> 14
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
December 31
---------------
(millions, except per share data) 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $2,358 $ 2,407
Short-term investments 4,028 2,510
Accounts receivable, less allowance for doubtful accounts:
1999--$230; 1998--$199 5,368 4,201
Short-term loans 273 150
Inventories
Finished goods 1,147 1,123
Work in process 977 1,198
Raw materials and supplies 464 455
---------------------------------------------------------------------------------------------------------
Total inventories 2,588 2,776
---------------------------------------------------------------------------------------------------------
Prepaid expenses and taxes 1,696 1,649
---------------------------------------------------------------------------------------------------------
Total current assets 16,311 13,693
Long-term loans and investments 1,764 1,860
Property, plant and equipment, less accumulated depreciation 8,685 7,237
Goodwill, less accumulated amortization:
1999--$256; 1998--$210 1,870 2,010
Other assets, deferred taxes and deferred charges 2,742 2,427
---------------------------------------------------------------------------------------------------------
Total assets $31,372 $27,227
---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings, including current portion of long-term debt $5,299 $ 2,993
Accounts payable 1,889 1,892
Dividends payable 349 285
Income taxes payable 1,079 1,327
Accrued compensation and related items 905 848
Other current liabilities 2,706 2,542
---------------------------------------------------------------------------------------------------------
Total current liabilities 12,227 9,887
Long-term debt 1,774 1,794
Postretirement benefit obligation other than pension plans 515 505
Deferred taxes on income 485 393
Other noncurrent liabilities 2,421 2,032
---------------------------------------------------------------------------------------------------------
Total liabilities 17,422 14,611
---------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock, without par value; 12 shares authorized, none issued -- --
Common stock, $.05 par value; 9,000 shares authorized;
issued: 1999--6,631; 1998--6,559 332 328
Additional paid-in capital 5,943 5,629
Retained earnings 18,459 15,403
Accumulated other comprehensive expense (1,045) (633)
Employee benefit trusts (2,888) (4,200)
Treasury stock, shares at cost:
1999--413; 1998--339 (6,851) (3,911)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,950 12,616
Total liabilities and shareholders' equity $31,372 $27,227
=========================================================================================================
</TABLE>
We have restated all periods presented to reflect the merger with Warner-Lambert
Company on June 19, 2000, which was accounted for as a pooling of interests.
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
14
<PAGE> 15
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Employee
Common Stock Additional Benefit Trusts Treasury Stock
-------------------- Paid-in ------------------- --------------- Retained
(millions) Shares Par Value Capital Shares Fair Value Shares Cost Earnings
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 2,146 $107 $1,735 (36) $ (1,488) (87) $(1,482) $10,835
Restatement for the 1999
stock split 4,292 215 (215) (72) -- (175) -- --
--------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1997,
as restated 6,438 322 1,520 (108) (1,488) (262) (1,482) 10,835
Comprehensive income:
Net income 3,019
Other comprehensive
expense-- net of tax:
Currency translation
adjustment
Net unrealized gain on
available- for-sale
securities
Minimum pension liability
Total other
comprehensive expense
Total comprehensive income
Cash dividends declared (1,294)
Stock option transactions 55 2 503 13 68
Purchases of common stock (34) (586)
Employee benefit trusts
transactions-- net 1,177 1 (1,158) -- 7
Other (7) -- (20)
--------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 6,486 324 3,180 (107) (2,646) (283) (1,993) 12,560
Comprehensive income:
Net income 4,633
Other comprehensive
expense-- net of tax:
Currency translation
adjustment
Net unrealized loss on
available-
for-sale
securities
Minimum pension
liability
Total other comprehensive
expense
Total comprehensive
income
Cash dividends declared (1,786)
Stock option transactions 82 4 1,011 -- (18)
Purchases of common stock (58) (1,912)
Employee benefit trusts
transactions--net 1,633 5 (1,554) 2 12
Other (9) -- (195) (4)
--------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 6,559 328 5,629 (102) (4,200) (339) (3,911) 15,403
Comprehensive income:
Net income 4,952
Other comprehensive
expense-- net of tax:
Currency translation
adjustment
Net unrealized gain on
available- for-sale
securities
Minimum pension liability
Total other comprehensive
expense
Total comprehensive
income
Cash dividends declared (1,894)
Stock option transactions 70 4 903 -- (16)
Purchases of common stock (66) (2,500)
Employee benefit trusts
transactions--net (735) 13 1,312 (8) (424)
Other 2 -- 146 (2)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 6,631 $332 $5,943 (89) $(2,888) (413) $(6,851) $18,459
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accum.
Other Com-
prehensive
(millions) Inc./(Exp.) Total
-------------------------------------------------------------
<S> <C> <C>
Balance January 1, 1997 $ (85) $ 9,622
Restatement for the 1999
stock split -- --
-------------------------------------------------------------
Balance January 1, 1997,
as restated (85) 9,622
Comprehensive income:
Net income 3,019
Other comprehensive
expense-- net of tax:
Currency translation
adjustment (447) (447)
Net unrealized gain on
available- for-sale
securities 9 9
Minimum pension liability (1) (1)
-------------------------------------------------------------
Total other
comprehensive expense (439) (439)
------- -------
Total comprehensive income 2,580
Cash dividends declared (1,294)
Stock option transactions 573
Purchases of common stock (586)
Employee benefit trusts
transactions-- net 26
Other (20)
-------------------------------------------------------------
Balance December 31, 1997 (524) 10,901
Comprehensive income:
Net income 4,633
Other comprehensive
expense-- net of tax:
Currency translation (16) (16)
adjustment
Net unrealized loss on
available-
for-sale
securities (16) (16)
Minimum pension
liability (77) (77)
------- -------
Total other comprehensive
expense (109) (109)
------- -------
Total comprehensive
income 4,524
Cash dividends declared (1,786)
Stock option transactions 997
Purchases of common stock (1,912)
Employee benefit trusts
transactions--net 91
Other (199)
-------------------------------------------------------------
Balance December 31, 1998 (633) 12,616
Comprehensive income:
Net income 4,952
Other comprehensive
expense-- net of tax:
Currency translation
adjustment (503) (503)
Net unrealized gain on
available- for-sale
securities 111 111
Minimum pension liability (20) (20)
------- -------
Total other comprehensive
expense (412) (412)
------- -------
Total comprehensive
income 4,540
Cash dividends declared (1,894)
Stock option transactions 891
Purchases of common stock (2,500)
Employee benefit trusts
transactions--net 153
Other 144
-------------------------------------------------------------
BALANCE DECEMBER 31, 1999 $(1,045) $13,950
=============================================================
</TABLE>
We have restated all periods presented to reflect the merger with
Warner-Lambert Company on June 19, 2000, which was accounted for as a
pooling of interests.
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
15
<PAGE> 16
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Year ended December 31
--------------------------
(millions of dollars) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 4,972 $3,232 $ 2,888
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 905 797 710
Trovan inventory write-off 310 -- --
Asset impairments and restructuring charges -- 358 --
Deferred taxes and other 185 (142) 122
Changes in assets and liabilities, net of effect of businesses divested:
Accounts receivable (1,274) (902) (466)
Inventories (278) (566) (505)
Prepaid and other assets (127) (486) (178)
Accounts payable and accrued liabilities 378 970 415
Income taxes payable 144 1,143 16
Other deferred items 250 795 147
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,465 5,199 3,149
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,493) (1,951) (1,391)
Proceeds from disposals of property, plant and equipment 83 118 64
Purchases of short-term investments, net of maturities (9,270) (5,965) (385)
Proceeds from redemptions of short-term investments 7,785 4,328 232
Proceeds from sales of businesses--net 26 3,184 21
Acquisitions of businesses -- -- (228)
Purchases of long-term investments (351) (782) (112)
Other investing activities 342 278 148
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,878) (790) (1,651)
----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuances of long-term debt 14,025 4,295 15,040
Repayments of long-term debt (14,046) (4,786) (15,291)
Increase in short-term debt 2,134 458 435
Repayments of short-term debt (14) (456) (116)
Proceeds from stock issuances 62 -- --
Purchases of common stock (2,542) (2,177) (721)
Cash dividends paid (1,820) (1,501) (1,294)
Stock option transactions and other 574 526 457
----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,627) (3,641) (1,490)
----------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by discontinued operations (20) 4 118
----------------------------------------------------------------------------------------------------------
Effect of exchange-rate changes on cash and cash equivalents 11 21 (59)
----------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (49) 793 67
Cash and cash equivalents at beginning of year 2,407 1,614 1,547
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,358 $ 2,407 $ 1,614
==========================================================================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes $ 1,573 $ 1,361 $ 1,056
Interest 379 259 301
==========================================================================================================
</TABLE>
We have restated all periods presented to reflect the merger with Warner-Lambert
Company on June 19, 2000, which was accounted for as a pooling of interests.
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Significant Accounting Policies
A--CONSOLIDATION AND BASIS OF PRESENTATION
On June 19, 2000 we completed our merger with Warner-Lambert Company
(Warner-Lambert). A wholly owned subsidiary of Pfizer merged with and into
Warner-Lambert, which survived the merger as a wholly owned subsidiary of
Pfizer. The merger qualified as a tax-free reorganization and was accounted for
as a pooling of interests. As a result, we restated all prior period
consolidated financial statements presented to reflect the combined results of
operations, financial position and cash flows of both companies as if they had
always been merged (see note 2, "Merger of Pfizer and Warner-Lambert").
The consolidated financial statements include our parent company and all
significant subsidiaries, including those operating outside the U.S. For
certain subsidiaries operating outside the U.S., balance sheet amounts are as
of November 30 of each year and income statement amounts are for the full-year
period ending on the same date. Substantially all unremitted earnings of
international subsidiaries are free of legal and contractual restrictions. All
significant transactions among our businesses have been eliminated. We made
certain reclassifications to the 1998 and 1997 financial statements to conform
to the 1999 presentation.
In preparing the financial statements, we must use some estimates and
assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, employee benefits and
asset valuation allowances. We are also subject to risks and uncertainties that
may cause actual results to differ from estimated results, such as changes in
the health care environment, competition, foreign exchange and legislation.
"Forward-Looking Information and Factors That May Affect Future Results"
discusses these and other uncertainties.
B--CASH EQUIVALENTS
Cash equivalents include items almost as liquid as cash, such as certificates
of deposit and time deposits with maturity periods of three months or less when
purchased. If items meeting this definition are part of a larger investment
pool, we classify them as Short-term investments.
C--INVENTORIES
We value inventories at cost or fair value, if lower. Cost is determined as
follows:
- finished goods and work-in-process at first-in, first-out (FIFO) or average
actual cost
- raw materials and supplies at FIFO, average or latest actual cost
In 1999, we changed the method of determining the cost of all of our
remaining inventories previously on the last-in, first-out (LIFO) method to the
FIFO method. Those inventories consisted of certain U.S.-sourced
pharmaceuticals and part of the animal health inventories. We believe that the
change in accounting for inventories from LIFO to FIFO is preferable because
inventory costs are stable and substantially unaffected by inflation. The
change in the method of inventory costing resulted in a pre-tax benefit of $6.6
million included in Cost of sales for 1999.
D--LONG-LIVED ASSETS
Long-lived assets include:
- property, plant and equipment--These assets are recorded at original cost
and increased by the cost of any significant improvements after purchase.
We depreciate the cost evenly over the assets' estimated useful lives. For
tax purposes, accelerated depreciation methods are used as allowed by tax
laws.
- goodwill--Goodwill represents the difference between the purchase price of
acquired businesses and the fair value of their net assets when accounted
for by the purchase method. We amortize goodwill evenly over periods not
exceeding 40 years. The average amortization period is 37 years.
- other intangible assets--Other intangible assets are included in Other
assets, deferred taxes and deferred charges. We amortize these assets
evenly over their estimated useful lives.
We review long-lived assets to assess recoverability from future operations
using undiscounted cash flows. When necessary, we record charges for
impairments of long-lived assets for the amount by which the present value of
future cash flows is less than the carrying value of these assets.
E--FOREIGN CURRENCY TRANSLATION
For most international operations, local currencies are considered their
functional currencies. We translate assets and liabilities to their U.S. dollar
equivalents at rates in effect at the balance sheet date and record translation
adjustments in Shareholders' Equity. We translate statement of income accounts
at average rates for the period. Transaction adjustments are recorded in Other
deductions--net.
For operations in highly inflationary economies, we translate the balance
sheet items as follows:
- monetary items (that is, assets and liabilities that will be settled for
cash) at rates in effect at the balance sheet date, with translation
adjustments recorded in Other deductions--net
17
<PAGE> 18
- non-monetary items at historical rates (that is, those rates in effect when
the items were first recorded)
F--PRODUCT ALLIANCES
We have agreements to promote pharmaceutical products developed by other
companies. Alliance revenue recorded under these co-promotion agreements is
derived from the sale of products. The revenue is earned when our co-promotion
partners ship the related goods and the sale is consummated with a third party.
Such revenue is primarily based upon a percentage of our co-promotion partners'
net sales. Selling, informational and administrative expenses in most cases
includes other expenses for selling and marketing these products.
We have license agreements in certain foreign countries for these products.
When products are sold under license agreements, we record Net sales instead of
Alliance revenue and record related costs and expenses in the appropriate
captions in the statement of income. Net sales and alliance revenue are
included in Revenues in the statement of income.
G--STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, we elected to account for our
stock-based compensation under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
The exercise price of stock options granted equals the market price on the
date of grant. In general, there is no recorded expense related to stock
options.
H--ADVERTISING EXPENSE
We record advertising expense as follows:
- production costs as incurred
- costs of radio time, television time and space in publications are deferred
until the advertising first occurs Advertising expense totaled $2,366
million in 1999, $2,066 million in 1998, and $1,738 million in 1997.
2 Merger of Pfizer and Warner-Lambert
On June 19, 2000, we completed our merger with Warner-Lambert. Under an
Agreement and Plan of Merger dated February 6, 2000, a wholly owned subsidiary
of Pfizer merged with and into Warner-Lambert. Warner-Lambert survived the
merger as a wholly owned subsidiary of Pfizer. Warner-Lambert develops,
manufactures and markets a diversified line of health care and consumer
products.
Under the terms of the merger, each share of Warner-Lambert common stock,
par value $1.00 per share, issued and outstanding, other than shares owned
directly or indirectly by Warner-Lambert, was converted into the right to
receive 2.75 shares of Pfizer common stock, par value $.05 per share. We issued
approximately 2,440 million shares of our common stock for all the outstanding
common stock of Warner-Lambert.
The merger qualified as a tax-free reorganization and was accounted for as
a pooling of interests under Accounting Principles Board Opinion No. 16
"Business Combinations". As a result, we restated all prior period consolidated
financial statements presented to include the results of operations, financial
position and cash flows of Warner-Lambert. Prior to the merger, the only
significant transactions between Pfizer and Warner-Lambert occurred under the
Lipitor marketing agreements. We have eliminated these transactions from the
restated combined financial statements. Certain reclassifications were made to
conform the presentation of the restated financial statements.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements for the most recent
quarter prior to the merger and the years presented follow:
<TABLE>
<CAPTION>
================================================================================
Three Months
Ended April 2, Year Ended December 31,
-------------- --------------------------------
(millions of dollars) 2000 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Pfizer $4,315 $16,204 $13,544 $11,055
Warner-Lambert 3,407 12,929 10,744 8,408
Adjustments (1) (447) (1,532) (874) (337)
Reclassifications (2) (53) (225) (183) (151)
--------------------------------------------------------------------------------
Combined $7,222 $27,376 $23,231 $18,975
--------------------------------------------------------------------------------
Income from
continuing operations:
Pfizer $1,180 $ 3,199 $ 1,950 $ 2,082
Warner-Lambert (1,398) 1,733 1,273 862
Adjustments (1)(3) 14 40 9 (56)
--------------------------------------------------------------------------------
Combined $ (204) $ 4,972 $ 3,232 $ 2,888
================================================================================
</TABLE>
The net assets of the separate companies and the combined amounts presented
in the financial statements for the periods prior to the merger follow:
<TABLE>
<CAPTION>
======================================================
December 31,
-------------------
(millions of dollars) 1999 1998
------------------------------------------------------
<S> <C> <C>
Pfizer $ 8,887 $ 8,810
Warner-Lambert 5,098 3,880
Adjustments (1)(3) (35) (74)
------------------------------------------------------
Combined $13,950 $12,616
======================================================
</TABLE>
(1) Represents the elimination of transactions and balances between the
companies under the Lipitor marketing agreements.
(2) Reclassifications made to conform to the post-merger presentation.
(3) As of, and for each of the three years ended, December 31, 1999, 1998 and
1997, we adjusted for the impact of a change in the calculation of
Warner-Lambert's pension asset to conform to our method of calculating fair
value. In the three months ended April 2, 2000, we adjusted income tax
expense as a result of assuming the companies had always been combined.
In the first quarter of 2000, we incurred $1,838 million of transaction
costs related to the termination of the proposed Warner-Lambert/American Home
Products Corporation merger.
In May 1999, Warner-Lambert acquired Agouron Pharmaceuticals, Inc.
(Agouron), an integrated pharmaceutical company committed to the discovery and
development of innovative therapeutic products for treatment of cancer, AIDS
and other serious diseases. Warner-Lambert exchanged 28.8
18
<PAGE> 19
million shares of its common stock for all of the common stock of Agouron. Each
outstanding share of Agouron common stock was exchanged for .8934 shares of
Warner-Lambert common stock. In addition, Agouron's employee stock options
outstanding were converted at the same rate and resulted in options to purchase
7.5 million shares of Warner-Lambert common stock.
The transaction was accounted for as a pooling of interests and qualified
as a tax-free exchange. Accordingly, all consolidated financial statements
presented have been restated to include combined results of operations,
financial position and cash flows of Agouron as though it had always been a
part of Warner-Lambert. Prior to the merger, Agouron's fiscal year ended on
June 30. As a result, Agouron's financial statements have been restated to
conform with Warner-Lambert's December 31 year end. No adjustments were
necessary to conform Agouron's accounting policies. Certain reclassifications
were made to the Agouron financial statements to conform to Warner-Lambert's
presentation.
The results of operations for the separate companies and the combined
amounts for the most recent quarter prior to the merger and the prior years
presented in the consolidated financial statements are shown below:
<TABLE>
<CAPTION>
=====================================================================
Three Months Year Ended
Ended March 31, December 31,
------------------ -------------------
(millions of dollars) 1999 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Warner-Lambert $2,860 $10,214 $8,180
Agouron 146 530 228
---------------------------------------------------------------------
Combined $3,006 $10,744 $8,408
---------------------------------------------------------------------
Net income:
Warner-Lambert $ 381 $ 1,254 $ 869
Agouron 1 19 (7)
---------------------------------------------------------------------
Combined $ 382 $ 1,273 $ 862
=====================================================================
</TABLE>
3 Discontinued Operations
In 1999, we agreed to pay a fine of $20 million to settle antitrust charges
involving our former Food Science Group, divested in 1996. For additional
details, see note 19, "Litigation."
In 1998, we completed the sale of the Medical Technology Group (MTG)
segment. Accordingly, the consolidated financial statements and related notes
reflect the results of operations and net assets of the MTG
businesses--Valleylab, Schneider, American Medical Systems (AMS), Howmedica and
Strato/Infusaid--as discontinued operations. We completed the sales of:
- Howmedica to Stryker Corporation in December for $1.65 billion in cash
- Schneider to Boston Scientific Corporation in September for $2.1
billion in cash
- AMS to E.M. Warburg, Pincus & Co., LLC in September for $130 million in
cash
- Valleylab to U.S. Surgical Corporation in January for $425 million in
cash
In 1997, we sold Strato/Infusaid to Horizon Medical Products and Arrow
International for $21 million in cash.
Discontinued operations--net of tax were as follows:
<TABLE>
<CAPTION>
=======================================================================================
(millions of dollars) 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $-- $1,160 $1,449
---------------------------------------------------------------------------------------
Pre-tax income/(loss) $(20) $ 92 $ 232
Provision for taxes on income -- 57 93
---------------------------------------------------------------------------------------
Income/(loss) from operations of
discontinued businesses--net of tax (20) 35 139
---------------------------------------------------------------------------------------
Pre-tax gain/(loss) on disposal of
discontinued businesses -- 2,504 (11)
Provision/(benefit) for taxes on
gain/(loss) -- 1,138 (3)
---------------------------------------------------------------------------------------
Gain/(loss) on disposal of discontinued
businesses--net of tax -- 1,366 (8)
---------------------------------------------------------------------------------------
Discontinued operations--net of tax $(20) $1,401 $ 131
=======================================================================================
</TABLE>
4 Financial Subsidiaries
Our financial subsidiaries include Pfizer International Bank Europe (PIBE) and
a small captive insurance company. PIBE periodically adjusts its loan portfolio
to meet its business needs. Information about these subsidiaries follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
===============================================================================
(millions of dollars) 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Cash and interest-bearing deposits $114 $103
Loans--net 380 433
Other assets 13 15
-------------------------------------------------------------------------------
Total assets $507 $551
-------------------------------------------------------------------------------
Certificates of deposit and
other liabilities $ 24 $ 97
Shareholders' equity 483 454
-------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $507 $551
===============================================================================
<CAPTION>
CONDENSED STATEMENT OF INCOME
===============================================================================
(millions of dollars) 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Interest income $27 $30
Interest expense (2) (2)
Other income--net 8 1
-------------------------------------------------------------------------------
Net income $33 $29
===============================================================================
</TABLE>
19
<PAGE> 20
5 Financial Instruments
Most of our financial instruments are recorded in the balance sheet. Several
"derivative" financial instruments are "off-balance-sheet" items.
A--INVESTMENTS IN DEBT AND EQUITY SECURITIES
Information about our investments follows:
<TABLE>
<CAPTION>
=======================================================================================
(millions of dollars) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Trading securities $ 113 $ 99
---------------------------------------------------------------------------------------
Amortized cost and fair value of held-to-maturity
debt securities:*
Corporate debt 3,689 2,407
Certificates of deposit 1,846 1,479
---------------------------------------------------------------------------------------
Total held-to-maturity debt securities 5,535 3,886
---------------------------------------------------------------------------------------
Cost and fair value of available-for-sale
debt securities* 686 686
---------------------------------------------------------------------------------------
Cost of available-for-sale equity
securities 87 98
Gross unrealized gains 261 106
Gross unrealized losses (4) (28)
---------------------------------------------------------------------------------------
Fair value of available-for-sale equity securities 344 176
---------------------------------------------------------------------------------------
Total investments $ 6,678 $4,847
=======================================================================================
</TABLE>
*Gross unrealized gains and losses are not significant.
These investments are in the following captions in the balance sheet:
<TABLE>
<CAPTION>
=======================================================================================
(millions of dollars) 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $1,828 $1,448
Short-term investments 3,754 2,409
Long-term loans and investments 1,096 990
---------------------------------------------------------------------------------------
Total investments $6,678 $4,847
=======================================================================================
</TABLE>
The contractual maturities of the held-to-maturity and available-for-sale
debt securities as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
=======================================================================================
Years
------------------------------------------
Over 1 Over 5
(millions of dollars) Within 1 to 5 to 10 Over 10 Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held-to-maturity
debt securities:
Corporate debt $3,625 $ 41 $ 11 $12 $3,689
Certificates of deposit 1,844 2 -- -- 1,846
Available-for-sale
debt securities:
Certificates of deposit -- 370 75 -- 445
Corporate debt -- 91 150 -- 241
---------------------------------------------------------------------------------------
Total debt securities $5,469 $504 $236 $12 $6,221
Available-for-sale
equity securities 344
Trading securities 113
---------------------------------------------------------------------------------------
Total investments $6,678
=======================================================================================
</TABLE>
B--SHORT-TERM BORROWINGS
The weighted average effective interest rate on short-term borrowings
outstanding at December 31 was 4.3% in 1999 and 4.0% in 1998. Pre-merger Pfizer
had approximately $1.5 billion available to borrow under lines of credit at
December 31, 1999. Pre-merger Warner-Lambert had approximately $800 million
available to borrow under lines of credit at December 31, 1999. Upon a change in
control of Warner-Lambert, $500 million of Warner-Lambert's lines of credit
terminated.
C--LONG-TERM DEBT
<TABLE>
<CAPTION>
============================================================================
(millions of dollars) 1999 1998
----------------------------------------------------------------------------
<S> <C> <C>
Floating-rate unsecured notes $ 491 $ 491
Commercial paper, expected to be refinanced on
a long-term basis 408 383
5.8% notes 250 250
6% notes 250 250
6.6% notes 200 200
Floating-rate unsecured notes, expected to be
refinanced on a long-term basis 100 100
Other borrowings and mortgages 75 120
----------------------------------------------------------------------------
Total long-term debt $1,774 $1,794
----------------------------------------------------------------------------
Current portion not included above $ 24 $ 22
============================================================================
</TABLE>
The floating-rate unsecured notes mature on various dates from 2001 to
2005 and bear interest at a defined variable rate based on the commercial paper
borrowing rate. The weighted average interest rate was 6.1% at December 31,
1999. These notes minimize credit risk on certain available-for-sale debt
securities that may be used to satisfy the notes at maturity. In September
1998, we repaid $195 million of the outstanding floating-rate unsecured notes
prior to their scheduled maturity by using the proceeds from the issuance of
short-term commercial paper.
The commercial paper and floating-rate unsecured notes, expected to be
refinanced, bear interest at our commercial paper borrowing rate. The weighted
average interest rates for both the commercial paper and floating-rate
unsecured notes were 5.8% at December 31, 1999.
Long-term debt, excluding commercial paper and floating-rate unsecured
notes, expected to be refinanced, outstanding at December 31, 1999, matures as
follows:
<TABLE>
<CAPTION>
=============================================================================
After
(millions of dollars) 2001 2002 2003 2004 2004
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturities $151 $368 $258 $1 $488
=============================================================================
</TABLE>
D--DERIVATIVE FINANCIAL INSTRUMENTS
PURPOSE
"Forward-exchange contracts," "currency swaps" and "purchased currency options"
are used to reduce exposure to foreign exchange risks. Also, "interest rate
swap" contracts are used to adjust interest rate exposures.
ACCOUNTING POLICIES
We consider derivative financial instruments to be "hedges" (that is, an offset
of foreign exchange and interest rate risks) when certain criteria are met.
Under hedge accounting for a purchased currency option, its impact on earnings
is deferred until the recognition of the underlying hedged item (inventory) in
earnings. We recognize the earnings impact
20
<PAGE> 21
of the other instruments during the terms of the contracts, along with the
earnings impact of the items they offset.
Purchased currency options are recorded at cost and amortized evenly to
operations through the expected inventory delivery date. Gains at the
transaction date are included in the cost of the related inventory purchased.
As interest rates change, we accrue the difference between the interest
rates on debt recognized in the statement of income and the amounts payable to
or receivable from counterparties under interest rate swap contracts. Likewise,
amounts arising from currency swap contracts are accrued as exchange rates
change.
The financial statements include the following items related to
derivative and other financial instruments serving as hedges or offsets:
Prepaid expenses and taxes includes:
- purchased currency options
Other current liabilities includes:
- fair value of forward-exchange contracts
- net amounts payable related to interest rate swap contracts
Other noncurrent liabilities includes:
- net amounts payable related to currency swap contracts
Accumulated other comprehensive expense includes changes in the:
- foreign exchange translation of currency swaps and foreign debt
Other deductions--net includes:
- changes in the fair value of foreign exchange contracts and changes
in foreign currency assets and liabilities
- payments under swap contracts to offset, primarily, interest expense
or, to a lesser extent, net foreign exchange losses
- amortization of discounts or premiums on currencies sold under
forward-exchange contracts
Our criteria to qualify for hedge accounting are:
Foreign currency instruments must:
- relate to a foreign currency asset, liability or an anticipated
transaction that is probable and whose characteristics and terms
have been identified
- involve the same currency as the hedged item
- reduce the risk of foreign currency exchange movements on our
operations
Interest rate instruments must:
- relate to an asset or a liability
- change the character of the interest rate by converting a variable
rate to a fixed rate or vice versa
The following table summarizes the exposures hedged or offset by the
various instruments we use:
<TABLE>
<CAPTION>
======================================================================
Maximum Maturity in Years
-------------------------
Instrument Exposure 1999 1998 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forward-exchange Foreign currency
contracts assets and liabilities .5 .5 .5
----------------------------------------------------------------------
Currency swaps Net investments 4 5 --
Loans .3 1 2
----------------------------------------------------------------------
Purchased Inventory purchases
currency options and sales .9 1 1
----------------------------------------------------------------------
Interest rate swaps Debt interest 4 5 1
======================================================================
</TABLE>
INSTRUMENTS OUTSTANDING
The notional amounts of derivative financial instruments, except for currency
swaps, do not represent actual amounts exchanged by the parties, but instead
represent the amount of the item on which the contracts are based.
The notional amounts of our foreign currency and interest rate contracts
follow:
<TABLE>
<CAPTION>
================================================================================
(millions of dollars) 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY CONTRACTS:
Commitments to sell foreign currencies, primarily
in exchange for U.S. dollars:
Euro* $1,050 $ --
U.K. pounds 851 482
Japanese yen 587 389
Australian dollars 96 110
Irish punt* 91 61
Canadian dollars 82 70
Netherlands guilders* -- 316
French francs* -- 216
Other currencies 296 312
Commitments to purchase foreign currencies,
primarily in exchange for U.S. dollars:
Euro* 521 --
U.K. pounds 101 53
Irish punt* 50 532
German marks* 47 385
Netherlands guilders* -- 156
Other currencies 197 152
--------------------------------------------------------------------------------
Total forward-exchange contracts $3,969 $3,234
================================================================================
Currency swaps:
Japanese yen $ 829 $ 754
U.K. pounds 40 40
--------------------------------------------------------------------------------
Total currency swaps $ 869 $ 794
--------------------------------------------------------------------------------
Purchased currency options, primarily for
U.S. dollars:
Japanese yen $ 393 $ 364
Other currencies 30 25
--------------------------------------------------------------------------------
Total purchased currency options $ 423 $ 389
================================================================================
Interest rate swap contracts--Japanese yen $ 353 $ 321
================================================================================
</TABLE>
*On January 1, 1999, members of the European Monetary Union were permitted to
use the new currency, the euro, or their old currency.
21
<PAGE> 22
The Japanese yen for U.S. dollar currency swaps require that we make
interim payments of a fixed rate of 1.1% on the Japanese yen payable and have
interim receipts of a variable rate based on a commercial paper rate on the U.S.
dollar receivable. These currency swaps replaced $625 million of Japanese yen
debt, which previously served as a hedge of our net investments in Japan, as
well as related interest rate swaps.
The Japanese yen interest rate swaps effectively fixed the interest rate
on floating-rate Japanese yen debt at 1.4% in 1999 and 1998. The floating
interest rates were based on "LIBOR" rates related to the contract currency.
E--FAIR VALUE
The following methods and assumptions were used to estimate the fair value of
derivative and other financial instruments at the balance sheet date:
- short-term financial instruments (cash equivalents, accounts receivable
and payable, forward-exchange contracts, short-term investments and
borrowings)--cost approximates fair value because of the short maturity
period
- loans--cost approximates fair value because of the short interest-reset
period
- long-term investments, long-term debt, forward-exchange contracts and
purchased currency options--fair value is based on market or dealer
quotes
- interest rate and currency swap agreements--fair value is based on
estimated cost to terminate the agreements (taking into account broker
quotes, current interest rates and the counterparties' creditworthiness)
The differences between fair and carrying values of our derivative and
other financial instruments were not material at December 31, 1999 and 1998,
except for a net difference of $257 million at December 31, 1999 for
available-for-sale equity securities.
F--CREDIT RISK
We periodically review the creditworthiness of counterparties to foreign
exchange and interest rate agreements and do not expect to incur a loss from
failure of any counterparties to perform under the agreements. In general, there
is no requirement for collateral from customers. There are no significant
concentrations of credit risk related to our financial instruments. No
individual counterparty credit exposure exceeded 10% of our consolidated
Shareholders' Equity at December 31, 1999.
6 COMPREHENSIVE INCOME
Changes in accumulated other comprehensive expense follow:
<TABLE>
<CAPTION>
===========================================================================================
Net
Unrealized Accumulated
Currency Gain/(Loss) on Minimum Other Com-
Translation Available-For- Pension prehensive
(millions of dollars) Adjustment Sale Securities Liability Expense*
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance
January 1, 1997 $ (62) $ 52 $ (75) $ (85)
Period change (447) 9 (1) (439)
-------------------------------------------------------------------------------------------
Balance
December 31,
1997 (509) 61 (76) (524)
Period change (16) (16) (77) (109)
-------------------------------------------------------------------------------------------
Balance
December 31,
1998 (525) 45 (153) (633)
Period change (503) 111 (20) (412)
-------------------------------------------------------------------------------------------
BALANCE
DECEMBER 31,
1999 $(1,028) $ 156 $(173) $(1,045)
===========================================================================================
</TABLE>
*Income tax benefit for other comprehensive expense was $186 million in 1997,
$103 million in 1998 and $163 million in 1999.
7 INVENTORIES
In June 1999, the European Union's Committee for Proprietary Medicinal Products
suspended the European Union licenses of the oral and intravenous formulations
of Trovan for 12 months. Based on our evaluation of these events and related
matters, we determined that it was unlikely that certain Trovan inventories of
finished goods, bulk, work-in-process, and raw materials will be used.
Accordingly, in the third quarter of 1999, we recorded a charge of $310 million
($205 million after-tax, or $.03 after-tax per diluted share) in Cost of sales
to write off Trovan inventories in excess of the amount required to support
expected sales.
8 Property, Plant and Equipment
The major categories of property, plant and equipment follow:
<TABLE>
<CAPTION>
=========================================================================
Useful
Lives
(millions of dollars) (years) 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C>
Land -- $ 224 $ 196
Buildings 33 1/3-50 3,329 2,841
Machinery, furniture and fixtures 3-20 7,675 6,718
Construction in progress -- 1,963 1,631
-------------------------------------------------------------------------
13,191 11,386
Less: accumulated depreciation 4,506 4,149
-------------------------------------------------------------------------
Total property, plant and equipment $ 8,685 $ 7,237
=========================================================================
</TABLE>
22
<PAGE> 23
9 OTHER DEDUCTIONS--NET
The components of other deductions--net follow:
<TABLE>
<CAPTION>
=============================================================================
(millions of dollars) 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $(427) $ (241) $(203)
Interest expense 403 276 325
Interest expense capitalized (40) (26) (11)
-----------------------------------------------------------------------------
Net interest (income)/expense (64) 9 111
Co-promotion payments to Searle -- 240 --
Merger expenses--Agouron 33 -- --
Contribution to The
Pfizer Foundation -- 300 --
Legal settlements involving the
brand-name prescription drug
antitrust litigation 2 57 --
Amortization of goodwill and other
intangibles 104 105 106
Net exchange (gains)/losses (11) (2) 8
Other, net 57 350 104
-----------------------------------------------------------------------------
Other deductions--net $ 121 $ 1,059 $ 329
=============================================================================
</TABLE>
In 1999, we substantially completed the actions under the restructuring
plans announced in 1998.
In 1998, we recorded charges for the restructuring in addition to charges
for certain asset impairments. The components of these pre-tax charges follow:
<TABLE>
<CAPTION>
=============================================================
(millions of dollars) Total COS* SI&A* R&D* OD*
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charges $270 $68 $17 $ 1 $184
Asset impairments 213 18 -- -- 195
=============================================================
</TABLE>
*COS--Cost of sales; SI&A--Selling, informational and administrative expenses;
R&D--Research and development expenses; OD--Other deductions-net.
The components of the 1998 restructuring charges follow:
<TABLE>
<CAPTION>
============================================================================
Utilization
-------------------------
(millions of dollars) Charges in 1998 1998 1999 Beyond
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property, plant
and equipment $ 79 $ 79 $-- $--
Write-down of intangibles 44 44 -- --
Employee termination costs 87 12 62 13
Other 60 16 22 22
----------------------------------------------------------------------------
Total $270 $151 $84 $35
============================================================================
</TABLE>
These charges resulted from a review of our global operations to increase
efficiencies and return on assets, thereby resulting in plant and product line
rationalizations. In addition to the disposition of our MTG businesses, we
exited certain product lines including certain lines associated with our animal
health business and certain of our fermentation operations.
We wrote off assets related to the product lines we exited, including
inventory, intangible assets--primarily goodwill--as well as certain buildings,
machinery and equipment that we do not plan to use or sell.
As a result of the restructuring, our workforce was reduced by
approximately 950 manufacturing, sales and corporate personnel. Employee
termination costs represent payments for severance, outplacement counseling
fees, medical and other benefits and a $5 million noncash charge for the
acceleration of nonvested employee stock options.
Other restructuring charges consist of charges for inventory for product
lines we have exited--$17 million, contract termination payments--$9 million,
facility closure costs--$12 million and environmental remediation costs
associated with the disposal of certain facilities--$22 million.
In 1998, we recorded impairment charges of $139 million in the
pharmaceuticals segment and $74 million in the consumer products segment. These
impairment charges were to adjust intangible asset values, primarily goodwill
and trademarks, and the carrying value of machinery and equipment related to our
animal health antibiotic feed additive, Stafac, and certain consumer health care
product lines. These charges resulted from the ban on Stafac throughout the
European Union, significant changes in the marketplace and a revision of our
strategies, including:
- the decision to redeploy resources from personal care and minor brands to
over-the-counter switches of prescription products
- the withdrawal of one of our major over-the-counter products in Italy
- an acquired product line which experienced declines in market share
10 TAXES ON INCOME
Income from continuing operations before taxes consisted of the following:
<TABLE>
<CAPTION>
=============================================================
(millions of dollars) 1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C>
United States $3,098 $1,702 $1,799
International 3,847 2,695 2,180
-------------------------------------------------------------
Total income from continuing
operations before taxes $6,945 $4,397 $3,979
=============================================================
</TABLE>
The provision for taxes on income from continuing operations consisted of
the following:
<TABLE>
<CAPTION>
==============================================================
(millions of dollars) 1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
United States:
Taxes currently payable:
Federal $1,099 $ 685 $ 465
State and local 72 74 48
Deferred income taxes (237) (261) (83)
--------------------------------------------------------------
Total U.S. tax provision 934 498 430
--------------------------------------------------------------
International:
Taxes currently payable 1,020 840 670
Deferred income taxes 14 (175) (19)
--------------------------------------------------------------
Total international tax provision 1,034 665 651
--------------------------------------------------------------
Total provision for taxes on income $1,968 $1,163 $1,081
==============================================================
</TABLE>
23
<PAGE> 24
Amounts are reflected in the preceding tables based on the location of
the taxing authorities. As of December 31, 1999, we have not made a U.S. tax
provision on approximately $10.7 billion of unremitted earnings of our
international subsidiaries. These earnings are expected, for the most part, to
be reinvested overseas. It is not practical to compute the estimated deferred
tax liability on these earnings.
We operate manufacturing subsidiaries in Puerto Rico that benefit from
two Puerto Rican incentive grants. One grant expires at the end of 2002 and the
other expires at the end of 2012. Under the grants, we are partially exempt from
income, property and municipal taxes. For further information on U.S. taxation
of Puerto Rican operations, see "Tax Legislation" on page 10.
Reconciliation of the U.S. statutory income tax rate to our effective tax
rate for continuing operations follows:
<TABLE>
<CAPTION>
================================================================
(percentages) 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory income tax rate 35.0 35.0 35.0
Effect of partially tax-exempt
operations in Puerto Rico (1.5) (2.0) (2.3)
U.S. research tax credit (1.2) (1.8) (1.3)
Effect of international operations (4.6) (4.7) (3.3)
All other--net 0.6 (0.1) (0.9)
----------------------------------------------------------------
Effective tax rate for continuing
operations 28.3 26.4 27.2
================================================================
</TABLE>
Deferred taxes arise because of different treatment between financial
statement accounting and tax accounting, known as "temporary differences." We
record the tax effect of these temporary differences as "deferred tax assets"
(generally items that can be used as a tax deduction or credit in future
periods) and "deferred tax liabilities" (generally items that we received a tax
deduction for, but have not yet been recorded in the statement of income).
The tax effects of the major items recorded as deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
===========================================================================================
1999 1998
Deferred Tax Deferred Tax
-------------------- --------------------
(millions of dollars) Assets Liabs. Assets Liabs.
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid/deferred items $ 463 $ 288 $ 493 $ 263
Inventories 625 123 447 85
Property, plant and equipment 50 694 78 644
Employee benefits 771 226 592 169
Restructurings and
special charge* 244 -- 331 --
Foreign tax credit carryforwards 270 -- 117 --
Other carryforwards 455 -- 257 --
Unremitted earnings -- 335 -- 335
All other 296 265 384 158
-------------------------------------------------------------------------------------------
Subtotal 3,174 1,931 2,699 1,654
Valuation allowance (73) -- (65) --
-------------------------------------------------------------------------------------------
Total deferred taxes $ 3,101 $1,931 $ 2,634 $1,654
-------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,170 $ 980
===========================================================================================
</TABLE>
*Includes tax effect of the 1991 charge for potential future Shiley C/C heart
valve fracture claims.
These amounts, netted by taxing location, are in the following captions
in the balance sheet:
<TABLE>
<CAPTION>
==============================================================
(millions of dollars) 1999 1998
--------------------------------------------------------------
<S> <C> <C>
Prepaid expenses and taxes $1,157 $1,099
Other assets, deferred taxes and
deferred charges 498 274
Deferred taxes on income (485) (393)
--------------------------------------------------------------
Net deferred tax asset $1,170 $ 980
==============================================================
</TABLE>
A valuation allowance is recorded because some items recorded as foreign
deferred tax assets may not be deductible or creditable. The 1999 increase in
the valuation allowance was primarily due to the increase in tax loss
carryforwards of foreign affiliates in certain jurisdictions that have limited
carryforward periods. The foreign tax credit carryforwards were generated from
dividends paid or deemed to be paid by subsidiaries to the parent company
between 1997 and 1999. We can carry these credits forward for five years from
the year of actual payment and apply them to certain U.S. tax liabilities.
24
<PAGE> 25
At December 31, 1999, for income tax purposes, Agouron had approximately
$224 million of net operating loss carryforwards. Due to the acquisition of
Agouron, there will be limitations on the amount of those net operating losses
that can be utilized in any given year against certain future taxable income.
The carryforwards expire in 2000 through 2018.
The Internal Revenue Service (IRS) has completed and closed its audits of
our tax returns through 1992. The IRS is scheduled to complete its audits in
September 2000 of our tax returns for 1993 through 1995. We do not expect any
material adjustments to be proposed. Agouron's U.S. federal income tax returns
are open from 1986 to the present.
In November 1994, Belgian tax authorities notified Pfizer Research and
Development Company N.V./S.A. (PRDCO), an indirect, wholly owned subsidiary of
our company, of a proposed adjustment to the taxable income of PRDCO for fiscal
year 1992. The proposed adjustment arises from an assertion by the Belgian tax
authorities of jurisdiction with respect to income resulting primarily from
certain transfers of property by our non-Belgian subsidiaries to the Irish
branch of PRDCO. In January 1995, PRDCO received an assessment from the tax
authorities for additional taxes and interest of approximately $432 million and
$97 million, respectively, relating to these matters. In January 1996, PRDCO
received an assessment from the tax authorities, for fiscal year 1993, for
additional taxes and interest of approximately $86 million and $18 million,
respectively. The additional assessment arises from the same assertion by the
Belgian tax authorities of jurisdiction with respect to all income of the Irish
branch of PRDCO. Based upon the relevant facts regarding the Irish branch of
PRDCO and the provisions of the Belgian tax laws and the written opinions of
outside counsel, we believe that the assessments are without merit.
We believe that our accrued tax liabilities are adequate for all years.
11 BENEFIT PLANS
Our pension plans cover most employees worldwide. Our postretirement plans
provide medical and life insurance benefits to retirees and their eligible
dependents.
Information regarding our pension and postretirement benefit obligation
follows:
<TABLE>
<CAPTION>
================================================================
Pension Postretirement
------------------ --------------------
(percentages) 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average
assumptions:
Discount rate:
U.S. plans 7.8 7.0 7.4 7.8 7.0 7.4
International plans 5.3 5.6 6.6
Rate of compensation
increase:
U.S. plans 4.4 4.2 4.2
International plans 3.7 3.5 4.1
================================================================
</TABLE>
The following tables present reconciliations of the benefit obligation of
the plans; the plan assets of the pension plans and the funded status of the
plans:
<TABLE>
<CAPTION>
=====================================================================================
Pension Postretirement
------------------------ ---------------------
(millions of dollars) 1999 1998 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at
beginning of year $ 5,771 $ 4,951 $ 570 $ 560
Service cost 240 211 14 16
Interest cost 360 341 37 40
Employee contributions 12 8
Plan amendments 15 27 2 (3)
Plan net (gains)/losses 84 554 (36) 8
Foreign exchange impact (18) 58 -- --
Divestitures (42) (26) -- --
Curtailments -- (26) -- (10)
Settlements (1) (10) -- --
Benefits paid (376) (317) (47) (41)
=====================================================================================
Benefit obligation at
end of year $ 6,045 $ 5,771 $ 540 $ 570
-------------------------------------------------------------------------------------
CHANGE IN
PLAN ASSETS
Fair value of plan
assets at beginning
of year $ 5,641 $ 5,078
Actual return on plan assets 832 763
Company contributions 143 117
Employee contributions 12 8
Foreign exchange impact (18) 15
Divestitures (34) (23)
Settlements (1) (13)
Benefits paid (361) (304)
-------------------------------------------------------------------------------------
Fair value of plan
assets at end of year $ 6,214 $ 5,641
-------------------------------------------------------------------------------------
Funded status:
Plan assets in excess
of/(less than) benefit
obligation $ 169 $ (130) $(540) $(570)
Unrecognized:
Net transition asset (6) (5) -- --
Net (gains)/losses (42) 198 (11) 34
Prior service costs 275 289 36 31
-------------------------------------------------------------------------------------
Net amount recognized $ 396 $ 352 $(515) $(505)
=====================================================================================
</TABLE>
25
<PAGE> 26
The components in the balance sheet consist of:
<TABLE>
<CAPTION>
==============================================================================
Pension Postretirement
-------------------- ---------------------
(millions of dollars) 1999 1998 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost $ 798 $ 725 $ -- $ --
Accrued benefit liability (816) (717) (515) (505)
Intangible asset 82 73 -- --
Accumulated other
comprehensive
income 332 271 -- --
------------------------------------------------------------------------------
Net amount recognized $ 396 $ 352 $(515) $(505)
==============================================================================
</TABLE>
Information related primarily to International plans follows:
<TABLE>
<CAPTION>
======================================================================
Pension
----------------------
(millions of dollars) 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Pension plans with an accumulated benefit
obligation in excess of plan assets:
Fair value of plan assets $ 435 $ 349
Accumulated benefit obligation 924 854
Pension plans with a benefit obligation in
excess of plan assets:
Fair value of plan assets $ 934 $2,312
Benefit obligation 1,599 3,027
======================================================================
</TABLE>
At December 31, 1999, the major U.S. pension plans held approximately 7.0
million shares of our common stock with a fair value of approximately $226
million. The plans received approximately $2 million in dividends on these
shares in 1999.
The assumptions used and the annual cost related to these plans follow:
<TABLE>
<CAPTION>
============================================================================================================
Pension Postretirement
-------------------------------- ------------------------------
(percentages) 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average
assumptions:
Expected return on plan assets:
U.S. plans 10.2 10.2 10.2
International plans 7.4 7.8 7.9
============================================================================================================
(millions of dollars)
------------------------------------------------------------------------------------------------------------
Service cost $ 240 $ 211 $ 158 $14 $ 16 $ 7
Interest cost 360 341 301 37 40 33
Expected return on
plan assets (487) (448) (391)
Amortization of:
Prior service costs/
(gain) 27 32 41 3 (9) (23)
Net transition asset (5) (6) (5) -- -- --
Net losses/(gains) 18 10 3 3 2 2
Curtailments and
settlements--net* -- 33 -- -- (22) --
------------------------------------------------------------------------------------------------------------
Net periodic benefit
cost $ 153 $ 173 $ 107 $57 $ 27 $ 19
============================================================================================================
</TABLE>
*Includes approximately $17 million of special termination pension benefits for
certain employees of MTG and a divested manufacturing plant in Rochester,
Michigan.
An average increase of 6.5%-6.9% in the cost of health care benefits was
assumed for 2000 and is projected to decrease over the next five years to
5.2%-5.3% and to then remain at that level.
A 1% change in the medical trend rate assumed for postretirement benefits
would have the following effects at December 31, 1999:
<TABLE>
<CAPTION>
=================================================================
(millions of dollars) 1% Increase 1% Decrease
-----------------------------------------------------------------
<S> <C> <C>
Total of service and interest
cost components $ 3 $ (3)
Postretirement benefit obligation 27 (26)
=================================================================
</TABLE>
We have savings and investment plans for most employees in the U.S.,
Puerto Rico, the U.K. and Ireland. Employees may contribute a portion of their
salaries to the plans and we match a portion of the employee contributions. Our
contributions were $80 million in 1999, $74 million in 1998 and $64 million in
1997.
12 LEASE COMMITMENTS
We lease properties and equipment for use in our operations. In addition to
rent, the leases require us to pay directly for taxes, insurance, maintenance
and other operating expenses, or to pay higher rent when operating expenses
increase. Rental expense, net of sublease income, was $295 million in 1999, $250
million in 1998 and $223 million in 1997. This table shows future minimum rental
commitments under noncancellable operating leases at December 31, 1999:
<TABLE>
<CAPTION>
=============================================================
After
(millions of dollars) 2000 2001 2002 2003 2004 2004
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lease commitments $153 $123 $92 $57 $51 $438
=============================================================
</TABLE>
13 COMMON STOCK
We effected a three-for-one stock split of our common stock in the form of a
200% stock dividend in 1999 and a two-for-one split of our common stock in the
form of a 100% stock dividend in 1997. All share and per share information in
this report reflects both splits. Per share data may reflect rounding
adjustments as a result of the three-for-one split.
Under the current share-purchase program begun in September 1998, we are
authorized to purchase up to $5 billion of our common stock. In 1999, we
purchased approximately 65.6 million shares of our common stock in the open
market at an average price of $38 per share. Since the beginning of this
program, we have purchased 80.4 million shares of our common stock for
approximately $3 billion. In September 1998, we completed a program under which
we purchased 79.2 million shares of our common stock at a total cost of $2
billion. In 1998, we purchased approximately 57.8 million shares of our common
stock at an average price of $33 per share under these share-purchase programs.
Of the 57.8 million shares repurchased in 1998, 14.8 million shares were
repurchased under the share-purchase program which started in September 1998,
for a total cost of $525 million.
26
<PAGE> 27
14 PREFERRED STOCK PURCHASE RIGHTS
Preferred Stock Purchase Rights have a scheduled term through October 2007,
although the term may be extended or the Rights may be redeemed prior to
expiration. One right was issued for each share of common stock issued by our
company. These rights are not exercisable unless certain change-in-control
events transpire, such as a person acquiring or obtaining the right to acquire
beneficial ownership of 15% or more of our outstanding common stock or an
announcement of a tender offer for at least 30% of our stock. The rights are
evidenced by corresponding common stock certificates and automatically trade
with the common stock unless an event transpires that makes them exercisable. If
the rights become exercisable, separate certificates evidencing the rights will
be distributed and each right will entitle the holder to purchase a new series
of preferred stock at a defined price from our company. The preferred stock, in
addition to preferred dividend and liquidation rights, will entitle the holder
to vote with the company's common stock.
The rights are redeemable by us at a fixed price until 10 days, or longer
as determined by the Board, after certain defined events, or at any time prior
to the expiration of the rights.
We have reserved 3.0 million preferred shares to be issued pursuant to
these rights. No such shares have yet been issued. At the present time, the
rights have no dilutive effect on the earnings per common share calculation.
15 EMPLOYEE BENEFIT TRUSTS
In 1993, we sold 120 million shares of treasury stock to the Pfizer Inc. Grantor
Trust in exchange for a $600 million note. The Trust was established primarily
to fund our employee benefit plans. In February 1999, the Trust transferred 10
million shares to us to satisfy the balance due on its note and contributed its
remaining 90 million shares to the newly established Pfizer Inc. Employee
Benefit Trust (EBT). The Grantor Trust was then dissolved and the shares of the
EBT will now be used to fund employee benefit plans. The balance sheet reflects
the fair value of the shares owned by the EBT as a reduction of Shareholders'
Equity.
16 EARNINGS PER SHARE
Basic earnings per common share and diluted earnings per common share were
computed as follows:
<TABLE>
<CAPTION>
==================================================================================
(millions, except per share data) 1999 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings:
Income from continuing operations $ 4,972 $3,232 $2,888
Discontinued operations--net of tax (20) 1,401 131
----------------------------------------------------------------------------------
Net income $ 4,952 $4,633 $3,019
----------------------------------------------------------------------------------
Basic:
Weighted average number of
common shares outstanding 6,126 6,120 6,084
----------------------------------------------------------------------------------
Earnings per common share
Income from continuing operations $ .81 $ .53 $ .48
Discontinued operations--net of tax -- .23 .02
----------------------------------------------------------------------------------
Net income $ .81 $ .76 $ .50
----------------------------------------------------------------------------------
Diluted:
Weighted average number of
common shares outstanding 6,126 6,120 6,084
Common share equivalents--
stock options and stock issuable
under employee compensation plans 191 242 213
----------------------------------------------------------------------------------
Weighted average number of
common shares and common
share equivalents 6,317 6,362 6,297
----------------------------------------------------------------------------------
Earnings per common share
Income from continuing operations $ .79 $ .51 $ .46
Discontinued operations--net of tax (.01) .22 .02
----------------------------------------------------------------------------------
Net income $ .78 $ .73 $ .48
==================================================================================
</TABLE>
Options to purchase 115 million shares were outstanding during 1999 but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares.
17 STOCK OPTION AND PERFORMANCE AWARDS
We have stock and incentive plans related to employees which allow for stock
options, performance awards, stock appreciation rights and stock awards.
We may grant stock options to employees, including officers, under the
plans. Options are exercisable after five years or less, subject to continuous
employment and certain other conditions and expire 10 years after the grant
date. Once exercisable, the employee can purchase shares of our common stock at
the market price on the date we granted the option. The 1996 Stock Plan, a
former Warner-Lambert plan, provides that, in the event of a change in control
of Warner-Lambert, stock options become exercisable immediately.
Shares available for award (in thousands) at:
- December 31, 1997 109,214
- December 31, 1998 79,578
- December 31, 1999 198,423
27
<PAGE> 28
The table below summarizes information concerning options outstanding under the
plans at December 31, 1999.
<TABLE>
<CAPTION>
=============================================================================================================
(thousands
of shares) Options Outstanding Options Exercisable
------------------------------------------------------------------------ -----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Term (years) Price at 12/31/99 Price
------------------------------------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $ 5 55,732 3.2 $ 4.05 55,687 $ 4.05
5 - 10 134,995 4.8 6.52 127,420 6.47
10 - 15 75,798 6.9 11.55 55,028 11.79
15 - 20 58,255 7.8 17.88 28,720 18.03
20 - 30 26,618 9.0 24.91 1,899 24.83
30 - 40 48,678 8.7 35.21 14,078 35.21
over 40 66,904 9.2 42.07 -- --
=============================================================================================================
</TABLE>
The following table summarizes the activity for the plans:
<TABLE>
<CAPTION>
=================================================================
Under Option
----------------------------
Weighted
Average Exercise
(thousands of shares) Shares Price Per Share
-----------------------------------------------------------------
<S> <C> <C>
Balance January 1, 1997 450,184 $ 6.21
Granted 88,548 14.56
Exercised (71,147) 4.74
Cancelled (6,169) 9.28
-----------------------------------------------------------------
Balance December 31, 1997 461,416 8.00
Granted 79,524 29.07
Exercised (81,607) 6.17
Cancelled (5,008) 12.44
-----------------------------------------------------------------
Balance December 31, 1998 454,325 11.97
Granted 94,168 37.32
Exercised (75,872) 7.81
Cancelled (5,641) 25.63
-----------------------------------------------------------------
BALANCE DECEMBER 31, 1999 466,980 $17.59
=================================================================
</TABLE>
Options granted in 1999 include options for 450 shares granted to every
pre-merger Pfizer eligible employee worldwide in celebration of our 150th
Anniversary.
The tax benefits related to certain stock option transactions were $470 million
in 1999, $439 million in 1998 and $153 million in 1997.
The weighted-average fair value per stock option granted was $15.27 for
1999 options, $11.86 for 1998 options and $7.28 for 1997 options. We estimated
the fair values using the Black-Scholes option pricing model, modified for
dividends and using the following assumptions:
<TABLE>
<CAPTION>
=================================================================
1999 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.26% 1.47% 2.30%
Risk-free interest rate 5.06% 5.34% 6.22%
Expected stock price volatility 26.22% 25.59% 22.98%
Expected term until exercise (years) 5.75 5.80 5.80
=================================================================
</TABLE>
The following table summarizes results as if we had recorded compensation
expense for the 1999, 1998 and 1997 option grants:
<TABLE>
<CAPTION>
==============================================================================================
(millions of dollars, except per share data) 1999 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 4,952 $ 4,633 $ 3,019
Pro forma 4,433 4,361 2,847
Basic earnings per share:
As reported $ .81 $ .76 $ .50
Pro forma .72 .71 .47
Diluted earnings per share:
As reported $ .78 $ .73 $ .48
Pro forma .70 .69 .45
==============================================================================================
</TABLE>
The Performance-Contingent Share Award Program was established effective
in 1993 to provide executives and other key employees the right to earn common
stock awards. We determine the award payouts after the performance period ends,
based on specific performance criteria. Under the Program, up to 120 million
shares may be awarded. We awarded approximately 2.3 million shares in 1999,
approximately 2.0 million shares in 1998 and approximately 1.3 million shares in
1997. At December 31, 1999, program participants had the right to earn up to
12.3 million additional shares. Compensation expense related to the Program was
$64 million in 1999, $202 million in 1998 and $74 million in 1997.
We entered into two forward-purchase contracts in 1998 and on maturity
they were extended. These contracts offset the potential impact on net income of
our liability under the Program. At settlement date we will, at the option of
the counterparty to the contract, either receive our own stock or settle the
contracts for cash. Other contract terms are as follows:
<TABLE>
<CAPTION>
==============================================================
Maximum Maturity
in Years
------------------
Number of Shares (thousands) Per Share 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C>
3,000 $33.73 -- .9
3,017 33.75 .9 --
==============================================================
</TABLE>
The financial statements include the following items related to these
contracts:
Prepaid expenses and taxes includes:
- fair value of these contracts
Other deductions--net includes:
- changes in the fair value of these contracts
18 INSURANCE
We maintain insurance coverage adequate for our needs. Under our insurance
contracts, we usually accept self-insured retentions appropriate for our
specific business risks.
28
<PAGE> 29
19 LITIGATION
The Company is involved in a number of claims and litigations, including
product liability claims and litigations considered normal in the nature of its
businesses. These include suits involving various pharmaceutical and hospital
products that allege either reaction to or injury from use of the product. In
addition, from time to time the Company is involved in, or is the subject of,
various governmental or agency inquiries or investigations relating to its
businesses.
Former Food Science Division
In 1999, the Company pleaded guilty to one count of price fixing of sodium
erythorbate from July 1992 until December 1994, and one count of market
allocation of maltols from December 1989 until December 1995, and paid a total
fine of $20 million. The activities at issue involved the Company's former Food
Science Group, a division that manufactured food additives and that the Company
divested in 1996. The Department of Justice has stated that no further antitrust
charges will be brought against the Company relating to the former Food Science
Group, that no antitrust charges will be brought against any current director,
officer or employee of the Company for conduct related to the products of the
former Food Science Group, and that none of the Company's current directors,
officers or employees was aware of any aspect of the activity that gave rise to
the violations. Five purported class action suits involving these products have
been filed against the Company; two in California State Court, and three in New
York Federal Court. The Company does not believe that this plea and settlement,
or civil litigation involving these products, will have a material effect on its
business or results of operations.
Nifedipine Patents
On June 9, 1997, the Company received notice of the filing of an
Abbreviated New Drug Application (ANDA) by Mylan Pharmaceuticals for a
sustained-release nifedipine product asserted to be bioequivalent to Procardia
XL. Mylan's notice asserted that the proposed formulation does not infringe
relevant licensed Alza and Bayer patents and thus that approval of their ANDA
should be granted before patent expiration. On July 18, 1997, the Company,
together with Bayer AG and Bayer Corporation, filed a patent-infringement suit
against Mylan Pharmaceuticals Inc. and Mylan Laboratories Inc. in the United
States District Court for the Western District of Pennsylvania with respect to
Mylan's ANDA. Suit was filed under Bayer AG's U.S. Patent No. 5,264,446,
licensed to the Company, relating to nifedipine of a specified particle size
range. On March 16, 1999, the United States District Court granted Mylan's
motion to file an amended answer and antitrust counterclaims. On December 17,
1999, Mylan received final approval from the FDA for its 30 mg. extended-release
nifedipine tablet. On February 28, 2000, a settlement agreement was entered into
between Mylan and the Company under which the litigation was terminated and
Mylan will market a generic sustained-release nifedipine product manufactured by
the Company under its own trademark.
On or about February 23, 1998, Bayer AG received notice that Biovail
Laboratories Incorporated had filed an ANDA for a sustained-release nifedipine
product asserted to be bioequivalent to one dosage strength (60 mg.) of
Procardia XL. The notice was subsequently received by the Company as well. The
notice asserts that the Biovail product does not infringe Bayer's U.S. Patent
No. 5,264,446. On March 26, 1998, the Company received notice of the filing of
an ANDA by Biovail Laboratories of a 30 mg. dosage formulation of nifedipine
alleged to be bioequivalent to Procardia XL. On April 2, 1998, Bayer and Pfizer
filed a patent-infringement action against Biovail, relating to their 60 mg.
nifedipine product, in the United States District Court for the District of
Puerto Rico. On May 6, 1998, Bayer and Pfizer filed a second patent infringement
action in Puerto Rico against Biovail under the same patent with respect to
Biovail's 30 mg. nifedipine product. These actions have been consolidated for
discovery and trial. On April 24, 1998, Biovail Laboratories Inc. brought suit
in the United States District Court for the Western District of Pennsylvania
against the Company and Bayer seeking a declaratory judgment of invalidity of
and/or non-infringement of the 5,264,446 nifedipine patent as well as a finding
of violation of the antitrust laws. Biovail has also moved to transfer the
patent infringement actions from Puerto Rico to the Western District of
Pennsylvania. Pfizer has opposed this motion to transfer and on June 19, 1998,
moved to dismiss Biovail's declaratory judgment action and antitrust action in
the Western District of Pennsylvania, or in the alternative, to stay the action
pending the outcome of the infringement actions in Puerto Rico. On January 4,
1999, the District Court in Pennsylvania granted Pfizer's motion for a stay of
the antitrust action pending the outcome of the infringement actions in Puerto
Rico. On January 29, 1999, the District Court in Puerto Rico denied Biovail's
motion to transfer the patent infringement actions from Puerto Rico to the
Western District of Pennsylvania. On April 12, 1999, Biovail filed a motion for
summary judgment also based in part on the summary judgment motion granted to
Elan in the Bayer v. Elan litigation in the Northern District of Georgia. Pfizer
and Bayer's response was filed on April 26, 1999. On September 20, 1999, the
United States District Court in Puerto Rico denied Biovail's motion for summary
judgment without prejudice to their refiling after completion of discovery in
the Procardia XL patent-infringement litigation. The court set an expedited
discovery schedule with a deadline of December 30, 1999, to complete discovery
of parties and fact witnesses and February 29, 2000, to complete discovery of
expert witnesses. On December 20, 1999, the court extended the date to complete
fact discovery to January 28, 2000, and that of expert discovery to March 15,
2000. A status conference with the court scheduled for March 17, 2000, has been
postponed and a new date is awaited.
On April 2, 1998, the Company received notice from Lek U.S.A. Inc. of its
filing of an ANDA for a 60 mg. formulation of nifedipine alleged to be
bioequivalent to Procardia XL. On
29
<PAGE> 30
May 14, 1998, Bayer and Pfizer commenced suit against Lek for infringement of
Bayer's U.S. Patent No. 5,264,446, as well as for infringement of a second Bayer
patent, No. 4,412,986 relating to combinations of nifedipine with certain
polymeric materials. On September 14, 1998, Lek was served with the summons and
complaint. Plaintiffs amended the complaint on November 10, 1998, limiting the
action to infringement of U.S. Patent 4,412,986. On January 19, 1999, Lek filed
a motion to dismiss the complaint alleging infringement of U.S. Patent
4,412,986. Pfizer responded to this motion and oral argument has been held in
abeyance pending a settlement conference. In September 1999, a settlement
agreement was entered into among the parties staying this litigation until the
expiration of U.S. Patent No. 4,412,986 on November 2, 2000.
On February 10, 1999, the Company received a notice from Lek U.S.A. of
its filing of an ANDA for a 90 mg. formulation of nifedipine alleged to be
bioequivalent to Procardia XL. On March 25, 1999, Bayer and Pfizer commenced
suit against Lek for infringement of the same two Bayer patents originally
asserted against Lek's 60 mg. formulation. This case was also the subject of a
settlement conference. In September, 1999, a settlement agreement was entered
into among the parties staying this litigation until the expiration of U.S.
Patent No. 4,412,986 on November 2, 2000.
On November 9, 1998, Pfizer received an ANDA notice letter from Martec
Pharmaceutical, Inc. for generic versions (30 mg., 60 mg., 90 mg.) of Procardia
XL. On or about December 18, 1998, Pfizer received a new ANDA certification
letter stating that the ANDA had actually been filed in the name of Martec
Scientific, Inc. On December 23, 1998, Pfizer brought an action against Martec
Pharmaceutical, Inc. and Martec Scientific, Inc. in the Western District of
Missouri for infringement of Bayer's patent relating to nifedipine of a specific
particle size. On January 26, 1999, a second complaint was filed against Martec
Scientific in the Western District of Missouri based on Martec's new ANDA
certification letter. Martec filed its response to this complaint on February
26, 1999. A hearing to determine claim scope is scheduled for June 1, 2000.
Pfizer filed suit on July 8, 1997, against the FDA in the United States
District Court for the District of Columbia, seeking a declaratory judgment and
injunctive relief enjoining the FDA from processing Mylan's ANDA or any other
ANDA submission referencing Procardia XL that uses a different extended-release
mechanism. Pfizer's suit alleges that extended-release mechanisms that are not
identical to the osmotic pump mechanism of Procardia XL constitute different
dosage forms requiring the filing and approval of suitability petitions under
the Food Drug and Cosmetics Act before the FDA can accept an ANDA for filing.
Mylan intervened in Pfizer's suit. On March 31, 1998, the U.S. District Judge
granted the government's motion for summary judgment against the Company. On
July 16, 1999, the D.C. Court of Appeals dismissed the appeal on the ground that
since the FDA had not approved any ANDA referencing Procardia XL that uses a
different extended-release mechanism than the osmotic pump mechanism of
Procardia XL, it was premature to maintain this action, stating that Pfizer has
the right to bring such an action if, and when, the FDA approves such an ANDA.
Subsequent to FDA's final approval of Mylan's ANDA, on December 18, 1999 Pfizer
filed suit against FDA in the United States District Court for the District of
Delaware. The suit alleges that FDA unlawfully approved Mylan's 30 mg. extended
release product because FDA had not granted an ANDA suitability petition
reflecting a difference in dosage form from Procardia XL. As a result of the
settlement agreement with Mylan, Pfizer and the FDA have agreed to dismiss this
suit without prejudice.
Doxazosin Patent
On March 31, 1999, the Company received notice from TorPharm of its
filing, through its U.S. agent Apotex Corp., of an ANDA for 1 mg., 2 mg., 4 mg.
and 8 mg. tablets alleged to be bioequivalent to Cardura (doxazosin mesylate).
The notice letter alleges that Pfizer's patent on doxazosin is invalid in view
of certain prior art references. Following a review of these allegations, suit
was filed in the United States District Court for the Northern District of
Illinois against TorPharm and Apotex Corp. on May 14, 1999. The defendants
requested a 90-day period in which to file their answer. The request was granted
and TorPharm/Apotex's answer was filed by August 19, 1999. Discovery is in
progress. On June 2, 1999, FDA was notified that given the patent litigation and
pursuant to provisions of the Federal Food Drug and Cosmetic Act, the FDA may
not approve the TorPharm application for thirty months from filing or resolution
of the litigation.
Drug Screening Patents
On May 5, 1999, the Company filed an action against Sibia Neurosciences,
Inc. in the United States District Court for the District of Delaware seeking a
declaratory judgment that two Sibia patents claiming reporter gene drug
screening assays are invalid, not infringed by the Company, and unenforceable
due to Sibia's misuse of its patent rights in seeking certain license terms. On
May 27, 1999, Sibia Neurosciences, Inc. filed an answer to the Company's
declaratory judgment action in which Sibia denies that a prior case or
controversy existed, but admits that a case or controversy does now exist
regarding at least one patent in suit, denies the invalidity, unenforceability
and non-infringement of the patents in suit, and asserts various jurisdictional
and equitable defenses, affirmative defenses, and lack of standing by the
Company to assert patent misuse. Sibia Neurosciences also filed a counterclaim
alleging willful infringement by the Company of one of the patents in suit. A
reply to that counterclaim denying Sibia's allegation has been filed. The
parties submitted a joint status report to the court on December 14, 1999, in
which the parties agreed to complete fact discovery by August 21, 2000, and
commence trial on January 8, 2001.
Trovafloxacin Patent
On May 19, 1999, Abbott Laboratories filed an action against the Company
in the United States District Court of the
30
<PAGE> 31
Northern District of Illinois alleging that the Company's use, sale or
manufacture of trovafloxacin infringes Abbott's United States Patent No.
4,616,019 claiming naphthyriding antibiotics and seeking a permanent injunction
and damages. An answer denying these allegations was filed on June 9, 1999.
Discovery is in progress.
Zoloft Patents
On December 17, 1999, the Company received notice of the filing of an ANDA
by Zenith Goldline Pharmaceuticals for 50 mg. and 100 mg. tablets of sertraline
hydrochloride alleged to be bioequivalent to Zoloft. Zenith has certified to the
FDA that it will not engage in the manufacture, use or sale of sertraline
hydrochloride until the expiration of Pfizer's U.S. Patent 4,536,518, which
covers sertraline per se and expires December 30, 2005. Zenith has also alleged
in its certification to the FDA that the manufacture, use and sale of Zenith's
product will not infringe Pfizer's U.S. Patent 4,962,128, which covers methods
of treating an anxiety-related disorder or Pfizer's U.S. Patent 5,248,699, which
covers a crystalline polymorph of sertraline hydrochloride. These patents expire
in November 2009 and August 2012, respectively. On January 28, 2000 the Company
filed a patent infringement action against Zenith Goldline and its parent Ivax
Corporation in the United States District Court for the District of New Jersey
for infringement of the '128 and '699 patents.
Fluconazole Patent
On February 1, 2000 the Company received notice of the filing of an ANDA
by Novopharm Limited for 50 mg, 100 mg, 150 mg and 200 mg tablets of fluconazole
alleged to be bioequivalent to Diflucan. Novopharm has certified to the FDA its
position that the Company's U.S. Patent 4,404,216, which covers fluconazole, is
invalid. This patent expires in January 2004. On March 10, 2000, the Company
filed a patent infringement action under the '216 patent against Novopharm in
the United States District Court for the Northern District of Illinois.
Hybrid Corn Seed Litigation
In pre-existing litigation between Pioneer Hi-Bred International, Inc. and
DeKalb Genetics Corporation in the United States District Court for the Southern
District of Iowa, the court granted on October 8, 1999 Pioneer's motion to add
additional parties, including Pfizer Inc. and Monsanto Co. (the present owner of
DeKalb Genetics Corporation), as codefendant parties. The amended complaint,
which claims violations of the federal Lanham Act and Iowa state law stemming
from the codefendants' alleged use of Pioneer's corn seed germplasm in the
development of competitive corn seed products, was served on the Company on
October 19. The Company filed its answer on December 15, 1999.
Trovan Trademark
On September 22, 1999, the jury in a trademark-infringement litigation
brought against the Company by Trovan Ltd. and Electronic Identification
Devices, Ltd. relating to use of the Trovan mark for trovafloxacin issued a
verdict in favor of the plaintiffs with respect to liability, holding that the
Company had infringed Trovan Ltd.'s mark and had acted in bad faith. Following a
further damage trial, on October 12, 1999, the jury awarded Trovan Ltd. a total
of $143 million in damages, comprised of $5 million actual damages, $3 million
as a reasonable royalty and $135 million in punitive damages. The court held a
hearing on December 27, 1999, on whether to award the plaintiffs profits based
on the Company's sales of Trovan and, if so, the amount of same. On February 24,
2000, the court entered judgment on the jury verdict and enjoined the Company's
use of the Trovan mark effective October 16, 2000. The plaintiff's request to be
awarded the Company's profits from Trovan sales and for treble damages was
denied. The Company's motion for mistrial remains outstanding and will be
considered with additional post-trial motions to overturn the jury verdicts and
the damage award.
Shiley Incorporated
As previously disclosed, a number of lawsuits and claims have been brought
against the Company and Shiley Incorporated, a wholly owned subsidiary, alleging
either personal injury from fracture of 60 degree or 70 degree Shiley Convexo
Concave ("C/C") heart valves, or anxiety that properly functioning implanted
valves might fracture in the future, or personal injury from a prophylactic
replacement of a functioning valve.
In an attempt to resolve all claims alleging anxiety that properly
functioning valves might fracture in the future, the Company entered into a
settlement agreement in January 1992 in Bowling v. Shiley, et al., a case
brought in the United States District Court for the Southern District of Ohio,
that established a worldwide settlement class of people with C/C heart valves
and their spouses, except those who elected to exclude themselves. The
settlement provided for a Consultation Fund of $90 million, which was fixed by
the number of claims filed, from which valve recipients received payments that
are intended to cover their cost of consultation with cardiologists or other
health care providers with respect to their valves. The settlement agreement
established a second fund of at least $75 million to support C/C valve-related
research, including the development of techniques to identify valve recipients
who may have significant risk of fracture, and to cover the unreimbursed medical
expenses that valve recipients may incur for certain procedures related to the
valves. The Company's obligation as to coverage of these unreimbursed medical
expenses is not subject to any dollar limitation. Following a hearing on the
fairness of the settlement, it was approved by the court on August 19, 1992, and
all appeals have been exhausted.
Generally, the plaintiffs in all of the pending heart valve litigations
seek money damages. Based on the experience of the Company in defending these
claims to date, including insurance proceeds and reserves, the Company is of the
opinion that these actions should not have a material adverse effect on the
financial position or the results of operations of the Company. Litigation
involving insurance coverage for the Company's heart valve liabilities has been
resolved.
31
<PAGE> 32
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations. Under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended ("CERCLA" or
"Superfund"), the Company has been designated as a potentially responsible party
by the United States Environmental Protection Agency with respect to certain
waste sites with which the Company may have had direct or indirect involvement.
Similar designations have been made by some state environmental agencies under
applicable state Superfund laws. Such designations are made regardless of the
extent of the Company's involvement. There are also claims that the Company may
be a responsible party or participant with respect to several waste site matters
in foreign jurisdictions. Such claims have been made by the filing of a
complaint, the issuance of an administrative directive or order, or the issuance
of a notice or demand letter. These claims are in various stages of
administrative or judicial proceedings. They include demands for recovery of
past governmental costs and for future investigative or remedial actions. In
many cases, the dollar amount of the claim is not specified. In most cases,
claims have been asserted against a number of other entities for the same
recovery or other relief as was asserted against the Company. The Company is
currently participating in remedial action at a number of sites under federal,
state, local and foreign laws.
To the extent possible with the limited amount of information available at
this time, the Company has evaluated its responsibility for costs and related
liability with respect to the above sites and is of the opinion that the
Company's liability with respect to these sites should not have a material
adverse effect on the financial position or the results of operations of the
Company. In arriving at this conclusion, the Company has considered, among other
things, the payments that have been made with respect to the sites in the past;
the factors, such as volume and relative toxicity, ordinarily applied to
allocate defense and remedial costs at such sites; the probable costs to be paid
by the other potentially responsible parties; total projected remedial costs for
a site, if known; existing technology; and the currently enacted laws and
regulations. The Company anticipates that a portion of these costs and related
liability will be covered by available insurance.
Asbestos Matters
Through the early 1970s, Pfizer Inc. (Minerals Division) and Quigley
Company, Inc. ("Quigley"), a wholly owned subsidiary, sold a minimal amount of
one construction product and several refractory products containing some
asbestos. These sales were discontinued thereafter. Although these sales
represented a minor market share, the Company has been named as one of a number
of defendants in numerous lawsuits. These actions, and actions related to the
Company's sale of talc products in the past, claim personal injury resulting
from exposure to asbestos-containing products, and nearly all seek general and
punitive damages. In these actions, the Company or Quigley is typically one of a
number of defendants, and both are members of the Center for Claims Resolution
(the "CCR"), a joint defense organization of sixteen defendants that is
defending these claims. The Company and Quigley are responsible for varying
percentages of defense and liability payments for all members of the CCR. A
number of cases alleging property damage from asbestos-containing products
installed in buildings have also been brought against the Company, but most have
been resolved.
As of January 29, 2000, there were 57,328 personal injury claims pending
against Quigley and 26,890 such claims against the Company (excluding those that
are inactive or have been settled in principle), and 68 talc cases against the
Company.
The Company believes that its costs incurred in defending and ultimately
disposing of the asbestos personal injury claims, as well as the property damage
and talc claims, will be largely covered by insurance policies issued by several
primary insurance carriers and a number of excess carriers that have agreed to
provide coverage, subject to deductibles, exclusions, retentions and policy
limits. Litigation against excess insurance carriers seeking damages and/or
declaratory relief to secure their coverage obligations has now been largely
resolved, although claims against several of such insureds do remain pending.
Based on the Company's experience in defending the claims to date and the amount
of insurance coverage available, the Company is of the opinion that the actions
should not ultimately have a material adverse effect on the financial position
or the results of operations of the Company.
Brand-Name Prescription Drugs Antitrust Litigation
In 1993, the Company was named, together with numerous other manufacturers
of brand-name prescription drugs and certain companies that distribute
brand-name prescription drugs, in suits in federal and state courts brought by
various groups of retail pharmacy companies, alleging that the manufacturers
violated the Sherman Act by agreeing not to give retailers certain discounts and
that the failure to give such discounts violated the Robinson Patman Act. A
class action was brought on the Sherman Act claim, as well as additional actions
by approximately 3,500 individual retail pharmacies and a group of chain and
supermarket pharmacies (the "individual actions") on both the Sherman Act and
Robinson Patman Act claims. A retailer class was certified in 1994 (the "Federal
Class Action"). In 1996, fifteen manufacturer defendants, including the Company,
settled the Federal Class Action. The Company's share was $31.25 million,
payable in four annual installments without interest. Trial began in September
1998 for the class case against the non-settlers, and the District Court also
permitted the opt-out plaintiffs to add the wholesalers as named defendants in
their cases. The District Court dismissed the case at the close of the
plaintiffs' evidence. The plaintiffs appealed and, on July 13, 1999, the Court
of Appeals upheld most of the dismissal but remanded on one issue, while
expressing doubts that the plaintiffs could prove any damages. The District
Court has since opined that the plaintiffs cannot prove such damages.
32
<PAGE> 33
Retail pharmacy cases also have been filed in state courts in five states,
and consumer class actions were filed in state courts in fourteen states and the
District of Columbia alleging injury to consumers from the failure to give
discounts to retail pharmacy companies.
In addition to its settlement of the retailer Federal Class Action (see
above), the Company has also settled several major opt-out retail cases, and
along with other manufacturers: (1) has entered into an agreement to settle all
outstanding consumer class actions (except Alabama, California, New Mexico,
North Dakota, South Dakota and West Virginia), which settlement is going through
the approval process in the various courts in which the actions are pending; and
(2) has entered into an agreement to settle the California consumer case, which
has been approved by the Court there.
The Company believes that these brand-name prescription drug antitrust
cases, which generally seek damages and certain injunctive relief, are without
merit.
The Federal Trade Commission opened an investigation focusing on the
pricing practices at issue in the above pharmacy antitrust litigation. In July
1996, the Commission issued a subpoena for documents to the Company, among
others, to which the Company responded. A second subpoena was issued to the
Company for documents in May 1997 and the Company again responded. We are not
aware of any further activity.
Plax
FDA administrative proceedings relating to Plax are pending, principally
an industry-wide call for data on all anti-plaque products by the FDA. The
call-for-data notice specified that products that have been marketed for a
material time and to a material extent may remain on the market pending FDA
review of the data, provided the manufacturer has a good faith belief that the
product is generally recognized as safe and effective and is not misbranded. The
Company believes that Plax satisfied these requirements and prepared a response
to the FDA's request, which was filed on June 17, 1991. This filing, as well as
the filings of other manufacturers, is still under review and is currently being
considered by an FDA Advisory Committee. The Committee has issued a draft report
recommending that plaque removal claims should not be permitted in the absence
of data establishing efficacy against gingivitis. The process of incorporating
the Advisory Committee recommendations into a final monograph is expected to
take several years. If the draft recommendation is ultimately accepted in the
final monograph, although it would have a negative impact on sales of Plax, it
will not have a material adverse effect on the sales, financial position or
operations of the Company.
On January 15, 1997, an action was filed in Circuit Court, Chambers
County, Alabama, purportedly on behalf of a class of consumers, variously
defined by the laws or types of laws governing their rights and encompassing
residents of up to 47 states. The complaint alleges that the Company's claims
for Plax were untrue, entitling them to a refund of their purchase price for
purchases since 1988. A hearing on Plaintiffs' motion to certify the class was
held on June 2, 1998. We are awaiting the Court's decision. The Company believes
the complaint is without merit.
Rid
Since December 1998, four actions have been filed, in state courts in
Houston, San Francisco, Chicago and New Orleans, purportedly on behalf of
statewide (California) or nationwide (Houston, Chicago and New Orleans) classes
of consumers who allege that the Company's and other manufacturers' advertising
and promotional claims for Rid and other pediculicides were untrue, entitling
them to refunds, other damages and/or injunctive relief. The Houston case has
been voluntarily dismissed and proceedings in the San Francisco, Chicago and New
Orleans cases are still in early stages of the proceedings. The Company believes
the complaints are without merit.
Desitin
In December, 1999 and January, 2000, two suits were filed in California
state courts against the Company and other manufacturers of zinc
oxide-containing powders. The first suit was filed by the Center for
Environmental Health and the second was filed by an individual plaintiff on
behalf of a purported class of purchasers of baby powder products. The suits
generally allege that the label of Desitin powder violates California's
"Proposition 65" by failing to warn of the presence of lead, which is alleged to
be a carcinogen. In January, 2000, the Company received a notice from a
California environmental group alleging that the labeling of Desitin ointment
and powder violates Proposition 65 by failing to warn of the presence of
cadmium, which is alleged to be a carcinogen. Several other manufacturers of
zinc oxide-containing topical baby products have received similar notices. The
Company believes that the labeling for Desitin complies with applicable legal
requirements.
FDA Required Post-Marketing Reports
In April 1996, the Company received a Warning Letter from the FDA relating
to the timeliness and completeness of required post-marketing reports for
pharmaceutical products. The letter did not raise any safety issue about Pfizer
drugs. The Company has been implementing remedial actions designed to remedy the
issues raised in the letter. During 1997, the Company met with the FDA to
apprise them of the scope and status of these activities. A review of the
Company's new procedures was undertaken by FDA in 1999. The Company and Agency
met to review the findings of this review and agreed that commitments and
remedial measures undertaken by the Company related to the Warning Letter have
been accomplished. The Company agreed to keep the Agency informed of its
activities as it continues to modify its processes and procedures.
Trovan
During May and June, 1999, the FDA and the European Union's Committee for
Proprietary Medicinal Products (CPMP) reconsidered the approvals to market
Trovan, a broad-spectrum antibiotic, following post-market reports of severe
adverse liver reactions to the drug. On June 9, the Company
33
<PAGE> 34
announced that, regarding the marketing of Trovan in the United States, it had
agreed to restrict the indications, limit product distribution, make certain
other labeling changes and to communicate revised warnings to health care
professionals in the United States. On July 1, Pfizer received the opinion of
the CPMP recommending a one-year suspension of the licenses to market Trovan in
the European Union. The CPMP opinion has been finalized in a Final Decision by
the European Commission. Since June, 1999, three suits and several claims have
been received by the Company alleging liver injuries due to the ingestion of
Trovan. The majority of these claims have been resolved without litigation. In
June and July, 1999, two of the lawsuits were filed in the Circuit Court,
Hampton County, South Carolina on behalf of a purported class of all persons who
received Trovan, seeking compensatory and punitive damages and injunctive
relief. One of the suits, seeking injunctive relief, has been dismissed. No
substantive proceedings have yet occurred in the other suit and the Company
believes that it is not properly maintainable as a class action, and will defend
against it accordingly.
Rimadyl
In October 1999 the Company was sued in an action seeking unspecified
damages, costs and attorney's fees on behalf of a purported class of people
whose dogs had suffered injury or death after ingesting Rimadyl, an
antiarthritic medication for older dogs. The suit, which was filed in state
court in South Carolina, is in the early pretrial stages. The Company believes
it is without merit.
Medical Technology Group
During 1998, the Company completed the sale of all of the businesses and
companies that were part of the Medical Technology Group. As part of the sale
provisions, the Company has retained responsibility for certain items, including
matters related to the sale of MTG products sold by the Company before the sale
of the MTG businesses. A number of cases have been brought against Howmedica
Inc. (some of which also name the Company) alleging that P.C.A. one-piece
acetabular hip prostheses sold from 1983 through 1990 were defectively designed
and manufactured and pose undisclosed risks to implantees. These cases have now
been resolved. Between 1994 and 1996, seven class actions alleging various
injuries arising from implantable penile prostheses manufactured by American
Medical Systems were filed and ultimately dismissed or discontinued. Thereafter,
between late 1996 and early 1998, approximately 700 former members of one or
more of the purported classes, represented by some of the same lawyers who filed
the class actions, filed individual suits in Circuit Court in Minneapolis
alleging damages from their use of implantable penile prostheses. Most of these
claims, along with a number of filed and unfiled claims from other
jurisdictions, have now been resolved. The Company believes that most if not all
of these cases are without merit.
Diabinese (Brazil)
In June, the Ministry of Justice of the State of Sao Paulo, Brazil,
commenced a civil public action against the Company's Brazilian subsidiary,
Laboratorios Pfizer Ltda. ("Pfizer Brazil") asserting that during a period in
1991 Pfizer Brazil withheld sale of the pharmaceutical product Diabinese in
violation of antitrust and consumer protection laws. The action sought the award
of moral, economic and personal damages to individuals and the payment to a
public reserve fund. In February 1996, the trial court issued a decision holding
Pfizer Brazil liable. The trial court's opinion also established the amount of
moral damages for individuals who might make claims later in the proceeding and
set out a formula for calculating the payment into the public reserve fund which
could have resulted in a sum of approximately $88 million. Pfizer Brazil
appealed this decision. In September 1999, the appeals court issued a ruling
upholding the trial court's decision as to liability. However, the appeals court
decision overturned the trial court's decision concerning damages, ruling that
criteria to apply in the calculation of damages, both as to individuals and as
to payment of any amounts to the reserve fund, should be established only in a
later stage of the proceeding. The Company believes that this action should not
have a material adverse effect on the financial position or the results of
operations of the Company.
Warner-Lambert Litigation
In November 1999, following the announcement by Warner-Lambert of its
execution of the AHP Merger Agreement, Pfizer filed suit against Warner-Lambert,
its board of directors and AHP, seeking to invalidate certain provisions in the
AHP Merger Agreement and enjoin their implementation. Pursuant to a settlement
agreement executed on February 6, 2000 in connection with the termination of the
AHP Merger Agreement and the execution of the Pfizer Merger Agreement,
Warner-Lambert, AHP and Pfizer entered into settlement agreements with respect
to this litigation. Shortly thereafter the litigation against AHP was dismissed
with prejudice and the litigation between Pfizer and Warner-Lambert was
dismissed without prejudice. Warner-Lambert, its Directors and AHP have been
named in approximately 40 lawsuits in Delaware Chancery Court, one lawsuit in
Morris County, New Jersey, and two lawsuits in federal court in New Jersey
brought on behalf of purported classes of Warner-Lambert's shareholders. These
lawsuits involve allegations similar to those contained in Pfizer's lawsuit,
referred to above, and contain additional allegations, including that the
consideration to be paid to Warner-Lambert's shareholders in the proposed merger
with AHP was inadequate. Warner-Lambert believes these lawsuits to be without
merit and is defending them vigorously. Following termination of the AHP Merger
Agreement, Warner-Lambert has begun to seek disposition of these claims.
On November 23, 1999, Pfizer filed suit against Warner-Lambert in the
Delaware Court of Chancery relating to certain contracts between Pfizer and
Warner-Lambert for the marketing and co-promotion of Lipitor. Pfizer alleged
that the execution of the AHP Merger Agreement violated certain provision in
those agreements. Warner-Lambert counterclaimed on November 29, 1999 and sought
a declaratory judgment that Warner-Lambert was entitled to terminate the Lipitor
agreements. Pursuant to a settlement agreement executed on February 6, 2000 in
connection with the termination of the AHP Merger Agreement and the execution of
the Pfizer
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<PAGE> 35
Merger Agreement, Warner-Lambert and Pfizer entered into a settlement agreement
with respect to the Lipitor litigation. The litigation was dismissed without
prejudice shortly thereafter.
Certain employees of Warner-Lambert were served with subpoenas in January,
2000, by the U.S. Attorney's office in Boston, Massachusetts, directing them to
provide testimony before a federal grand jury in Boston. The U.S. Attorney's
office is conducting an inquiry into Warner-Lambert's promotion of Neurontin.
Warner-Lambert is cooperating with the inquiry and cannot predict what the
outcome of the investigation will be.
Warner-Lambert is responsible for compliance with a number of
environmental laws and regulations. Warner-Lambert maintains control systems
designed to assure compliance in all material respects with environmental laws
and regulations, including environmental policies and maintenance of a worldwide
audit program. Warner-Lambert is involved in various administrative or judicial
proceedings related to environmental actions initiated by the Environmental
Protection Agency ('EPA') under the Comprehensive Environmental Response,
Compensation and Liability Act (also known as Superfund) or by state authorities
under similar state legislation, or by third parties. For 11 sites, generally
those which Warner-Lambert currently owns or previously owned, Warner-Lambert
may be the sole party responsible for clean-up costs. For other sites, other
parties (defined as potentially responsible parties) may be jointly and
severally responsible, along with Warner-Lambert, to pay remediation and other
related expenses. Warner Lambert's share of costs at a given site is determined
through an allocation process that takes into account many factors, including
volume and the nature of a company's waste. Once established, remediation costs
for a given site may be paid out over several years. While it is not possible to
predict with certainty the outcome of such matters or the total cost of
remediation, management of Warner-Lambert believes it is unlikely that their
ultimate disposition will have a material adverse effect on Warner-Lambert's
financial position, liquidity, cash flows or results of operations for any year.
A wholly-owned subsidiary of Warner-Lambert has been named as a defendant
in class actions filed in Puerto Rico Superior Court by current and former
employees from the Vega Baja, Carolina and Fajardo plants, as well as Kelly
Services temporary employees assigned to those plants. The lawsuits seek
monetary relief for alleged violations of local statutes and decrees relating to
meal period payments, minimum wage, overtime and vacation pay. Warner-Lambert
believes that these actions are without merit and will defend these actions
vigorously. Although it is too early to predict the outcome of these actions,
Warner-Lambert does not at present expect these lawsuits to have a material
adverse effect on its financial position, liquidity, cash flows or results of
operations.
In late 1993, Warner-Lambert, along with numerous other pharmaceutical
manufacturers and wholesalers, was sued in a number of state and federal
antitrust lawsuits seeking damages (including trebled and statutory damages,
where applicable) and injunctive relief. These actions arose from allegations
that the defendant drug companies, acting alone or in concert, engaged in
differential pricing whereby they favored institutions, managed care entities,
mail order pharmacies and other buyers with lower prices for brand name
prescription drugs than those afforded to retail pharmacies. The federal cases,
which were brought by retailers, were consolidated by the Judicial Panel on
Multidistrict Litigation and transferred to the U.S. District Court for the
Northern District of Illinois for pre-trial proceedings. In June 1996, the Court
approved Warner-Lambert's agreement to settle part of the consolidated federal
cases, specifically, the class action conspiracy lawsuit, for a total of $15.1
million. This settlement also contains certain commitments regarding
Warner-Lambert's pricing of brand name prescription drugs. Appeals of the
District Court's approval of this settlement were unsuccessful, and the
commitments have become effective. Certain other rulings of the judge presiding
in this case were also appealed, and the judge was reversed on all rulings. The
cases have been remanded to the District Court, and trial of the class action
conspiracy action against the non-settling defendant pharmaceutical
manufacturers and wholesalers was concluded in November, 1998 with a directed
verdict for the defendants and dismissal of the class plaintiffs' case. That
decision was affirmed in substantial part by the 7th Circuit Court of Appeals.
In April 1997, after execution of the federal class settlement referred to above
but prior to the formal effectiveness of its pricing commitments, the same
plaintiff-class members brought a new purported class action relating to the
time period subsequent to the execution of the settlement. This new class suit
sought only injunctive relief. At present, Warner-Lambert cannot predict the
outcome of this and the other remaining federal lawsuits in which it is a
defendant.
In addition, Warner-Lambert has settled the vast majority of the
Robinson-Patman Act lawsuits brought by those retail pharmacies which opted out
of the class action conspiracy lawsuit. The amount of these settlements is not
material.
The state cases pending in California, brought by classes of pharmacies
and consumers, have been coordinated in the Superior Court of California, County
of San Francisco. Warner-Lambert, with the majority of the other drug company
defendants, settled the California consumer class action and this settlement
received court approval. The amount of this settlement is not material.
Warner-Lambert has also been named as a defendant in actions in state courts
filed in Alabama, Minnesota, Mississippi and Wisconsin brought by classes of
pharmacies, each arising from the same allegations of differential pricing. With
its co-defendants, Warner-Lambert has settled the Minnesota and Wisconsin
actions. Warner-Lambert's share of these settlements, which have been approved,
are not material. In addition, Warner-Lambert was named in class action
complaints filed in Alabama, Arizona, Florida, Kansas, Maine, Michigan,
Minnesota, New York, North Carolina, Tennessee, Wisconsin and the District of
Columbia, brought by classes of consumers who purchased
35
<PAGE> 36
brand name prescription drugs at retail pharmacies. With its co-defendants,
Warner-Lambert has agreed to settle these state consumer class actions.
Warner-Lambert's share of these settlements, which have been approved by all of
the above courts, is not material.
Warner-Lambert has also been made a party to another class action in
Tennessee, purportedly on behalf of consumers in several states and to
additional class actions in New Mexico, North Dakota, South Dakota and West
Virginia, who purchased brand name prescription drugs from retail pharmacies.
Although it is not possible at this early stage to predict the outcome of these
lawsuits, it is unlikely that their ultimate disposition will have a material
adverse effect on Warner-Lambert's financial position, liquidity, cash flows or
results of operations.
The Federal Trade Commission (the 'FTC') is conducting an investigation to
determine whether Warner-Lambert and twenty-one other pharmaceutical
manufacturers have engaged in concerted activities to raise the prices of
pharmaceutical products in the United States. Warner-Lambert was served with and
responded to two subpoenas from the FTC in 1996 and 1997, respectively, and has
cooperated with this investigation. Warner-Lambert cannot at present predict the
outcome of this investigation.
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<PAGE> 37
20 SEGMENT INFORMATION AND GEOGRAPHIC DATA
We operate in the following two business segments:
- pharmaceuticals--including:
- treatments for heart diseases, infectious diseases, central nervous
system disorders, diabetes, arthritis, erectile dysfunction and
allergies, as well as the manufacture of empty hard-gelatin capsules
- products for food animals and companion animals, including food,
antibiotics, vaccines and other veterinary items
- consumer products--including self-medications, shaving and pet care
products, as well as confectionery products consisting of chewing gums,
breath mints and cough tablets
Each separately managed segment offers different products requiring
different marketing and distribution strategies.
We sell our products primarily to customers in the wholesale sector. In
1999, sales to our largest wholesaler accounted for 14% of total revenues.
These sales were concentrated in the pharmaceuticals segment.
Revenues were in excess of $100 million in each of 21 countries outside
the U.S. in 1999. The U.S. was the only country to contribute more than 10% to
total revenues. The following tables present segment and geographic information:
<TABLE>
<CAPTION>
Segment Information
====================================================================================================================================
Consumer Corporate/
(millions of dollars) Pharmaceuticals Products Other Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues 1999 $21,879 $5,497 $ -- $27,376
1998 18,106 5,125 -- 23,231
1997 13,841 5,134 -- 18,975
------------------------------------------------------------------------------------------------------------------------------------
Segment profit 1999 7,008(1) 783 (846)(3) 6,945(4)
1998 5,121(2) 606(2) (1,330)(3) 4,397(4)
1997 3,914 776 (711)(3) 3,979(4)
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets(5) 1999 14,719 3,929 12,724 31,372
1998 12,535 3,840 10,852 27,227
1997 10,608 3,777 8,579(6) 22,964
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment additions(5) 1999 2,099 234 160 2,493
1998 1,588 192 171 1,951
1997 1,007 205 179 1,391
------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization(5) 1999 658 170 77 905
1998 591 150 56 797
1997 514 152 44 710
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DATA
===============================================================================================================================
All
United Other
(millions of dollars) States (7) Japan Countries Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues 1999 $16,486 $1,716 $9,174 $27,376
1998 13,656 1,365 8,210 23,231
1997 10,088 1,410 7,477 18,975
-------------------------------------------------------------------------------------------------------------------------------
Long-lived assets 1999 6,247 535 4,944 11,726
1998 5,408 412 4,567 10,387
1997 5,257 319 3,985 9,561
===============================================================================================================================
</TABLE>
(1) Includes $310 million charge to write off Trovan inventories.
(2) In 1998, pharmaceuticals includes pre-tax restructuring charges of $166
million and pre-tax impairment charges of $139 million. In 1998, consumer
products includes pre-tax restructuring charges of $11 million and pre-tax
impairment charges of $74 million.
(3) Includes interest income/(expense) and corporate expenses. Corporate
also includes other income/(expense) of the financial subsidiaries (see
note 4, "Financial Subsidiaries") and certain performance-based
compensation expenses not allocated to the operating segments. In 1998,
corporate includes a pre-tax gain on the sale of our Rochester, Michigan
manufacturing plant and certain minor prescription products of $67 million
and costs of $93 million related to our plans to close certain foreign
manufacturing facilities.
(4) Consolidated total equals income from continuing operations before
provision for taxes on income and minority interests.
(5) Certain production facilities are shared by various segments. Property,
plant and equipment, as well as capital additions and depreciation, are
allocated based on physical production. Corporate assets are primarily cash,
short-term investments and long-term loans and investments.
(6) Includes net assets of discontinued operations.
(7) Includes operations in Puerto Rico.
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<PAGE> 38
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
============================================================================================================================
Quarter
---------------------------------------------------------------
(millions of dollars, except per share data) First Second Third Fourth
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues $6,580 $6,516 $6,746 $7,534
Costs and expenses 4,870 4,852 5,206 5,503
----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for taxes on income and minority interests 1,710 1,664 1,540 2,031
Provision for taxes on income 495 482 431 560
Minority interests 1 1 1 2
----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,214 1,181 1,108 1,469
Discontinued operations--net of tax -- (20) -- --
----------------------------------------------------------------------------------------------------------------------------
Net income $1,214 $1,161 $1,108 $1,469
----------------------------------------------------------------------------------------------------------------------------
Earnings per common share--basic
Income from continuing operations $ .20 $ .19 $ .18 $ .24
----------------------------------------------------------------------------------------------------------------------------
Net income $ .20 $ .19 $ .18 $ .24
----------------------------------------------------------------------------------------------------------------------------
Earnings per common share--diluted
Income from continuing operations $ .19 $ .19 $ .18 $ .23
Discontinued operations--net of tax -- (.01) -- --
----------------------------------------------------------------------------------------------------------------------------
Net income $ .19 $ .18 $ .18 $ .23
----------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share $ .07 1/3 $ .07 1/3 $ .08 $ .08
----------------------------------------------------------------------------------------------------------------------------
Stock prices
High $ 48 11/64 $ 50 3/64 $ 40 11/16 $ 42 1/4
Low $ 36 33/64 $ 31 35/64 $ 32 $ 32 3/16
============================================================================================================================
1998
Revenues $ 5,176 $ 5,751 $ 5,753 $ 6,551
Costs and expenses 4,021 4,434 4,619 5,760
----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for taxes on income and minority interests 1,155 1,317 1,134 791
Provision for taxes on income 328 384 310 141
Minority interests 1 1 1 (1)
----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 826 932 823 651
Discontinued operations--net of tax 157 34 882 328
----------------------------------------------------------------------------------------------------------------------------
Net income $ 983 $ 966 $ 1,705 $ 979
----------------------------------------------------------------------------------------------------------------------------
Earnings per common share--basic
Income from continuing operations $ .13 $ .16 $ .13 $ .11
Discontinued operations--net of tax .03 -- .15 .05
----------------------------------------------------------------------------------------------------------------------------
Net income $ .16 $ .16 $ .28 $ .16
----------------------------------------------------------------------------------------------------------------------------
Earnings per common share--diluted
Income from continuing operations $ .13 $ .15 $ .13 $ .10
Discontinued operations--net of tax .03 -- .14 .05
----------------------------------------------------------------------------------------------------------------------------
Net income $ .16 $ .15 $ .27 $ .15
----------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share $ .06 1/3 $ .06 1/3 $ .06 1/3 $ .06 1/3
----------------------------------------------------------------------------------------------------------------------------
Stock prices
High $ 32 1/2 $ 40 37/64 $ 40 13/64 $ 42 63/64
Low $ 23 11/16 $ 32 1/8 $ 30 43/64 $ 28 43/64
============================================================================================================================
</TABLE>
We have restated all financial information to reflect the merger with
Warner-Lambert Company on June 19, 2000, which was accounted for as a
pooling of interests.
All data reflects the 1999 three-for-one stock split.
Cash dividends paid per common share and stock prices are those of
pre-merger Pfizer.
As of January 31, 2000, there were approximately 198,000 record holders of our
common stock (symbol PFE).
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<PAGE> 39
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
=============================================================================================================================
Year Ended December 31
-------------------------------------------------------------
(millions, except per share data) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $27,376 $23,231 $18,975 $16,957 $15,606
Income from continuing operations $ 4,972 $ 3,232 $ 2,888 $ 2,489 $ 2,119
Discontinued operations--net of tax (20) 1,401 131 165 172
Net income $ 4,952 $ 4,633 $ 3,019 $ 2,654 $ 2,291
-----------------------------------------------------------------------------------------------------------------------------
As of December 31
-----------------------------------------------------------------------------------------------------------------------------
Total assets(1) $31,372 $27,227 $22,964 $21,429 $18,531
Long-term debt 1,774 1,794 2,561 2,402 1,463
Per common share data:
Basic:
Income from continuing operations $ .81 $ .53 $ .48 $ .41 $ .36
Discontinued operations--net of tax -- .23 .02 .03 .03
-----------------------------------------------------------------------------------------------------------------------------
Net income $ .81 $ .76 $ .50 $ .44 $ .39
-----------------------------------------------------------------------------------------------------------------------------
Diluted:
Income from continuing operations $ .79 $ .51 $ .46 $ .40 $ .35
Discontinued operations--net of tax (.01) .22 .02 .03 .03
-----------------------------------------------------------------------------------------------------------------------------
Net income $ .78 $ .73 $ .48 $ .43 $ .38
-----------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per share (2) $.30 2/3 $.25 1/3 $ .22 2/3 $ .20 $.17 1/3
-----------------------------------------------------------------------------------------------------------------------------
Weighted average shares used to calculate:
Basic earnings per share amounts 6,126 6,120 6,084 6,039 5,955
Diluted earnings per share amounts 6,317 6,362 6,297 6,202 6,070
=============================================================================================================================
</TABLE>
We have restated all financial information to reflect the merger with
Warner-Lambert Company on June 19, 2000, which was accounted for as a
pooling of interests.
All financial information reflects the divestitures of our MTG and food
science businesses as discontinued operations.
We have restated all common share and per share data for the 1999, 1997 and
1995 stock splits.
(1) Includes net assets of discontinued operations of our MTG businesses
through 1997.
(2) Cash dividends paid per share are those of pre-merger Pfizer.
39
