P fi z e r I n c .
`2 0 0 5 F i n a n c i a l R e p o r t
`
`ARGENTUM Exhibit 1176
`Argentum Pharmaceuticals LLC v. Research Corporation Technologies, inc.
`IPR2016-00204
`
`Page 00001
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`
`Financial Review
`Pfizer Inc and Subsidiary Companies
`
`Introduction
`Our Financial Review is provided in addition to the accompanying
`consolidated financial statements and footnotes to assist readers
`in understanding Pfizer’s results of operations, financial condition
`and cash flows. The Financial Review is organized as follows:
`• Overview of Consolidated Operating Results. This section
`provides a general description of Pfizer’s business; an overview
`of our 2005 performance; a summary of our new productivity
`initiative; information about our operating environment; and
`a discussion of our expectations for 2006.
`• Accounting Policies. This section, beginning on page 5, discusses
`those accounting policies that are considered important in
`understanding Pfizer’s financial statements. For additional
`accounting policies, including those considered to be critical
`accounting policies, see Notes to Consolidated Financial
`Statements—Note 1, Significant Accounting Policies.
`• Acquisitions and Dispositions. This section, beginning on page
`9, discusses significant acquisitions and dispositions made by
`Pfizer during 2005, 2004 and 2003.
`• Analysis of the Consolidated Statement of Income. This section,
`beginning on page 11, provides an analysis of our products and
`revenues for the three years ended December 31, 2005; an
`overview of important product developments; a discussion
`about our costs and expenses; an analysis of the financial
`statement impact of our discontinued operations and
`dispositions during the period; and a discussion of Adjusted
`income, an alternative view of performance used by
`management.
`• Financial Condition, Liquidity and Capital Resources. This
`section, beginning on page 27, provides an analysis of our
`balance sheet as of December 31, 2005 and 2004, and cash flows
`for the three years ended December 31, 2005, as well as a
`discussion of our outstanding debt and commitments that
`existed as of December 31, 2005. Included in the discussion of
`outstanding debt is a discussion of the amount of financial
`capacity available to fund Pfizer’s future commitments.
`• Recently Issued Accounting Standards. This section, beginning
`on page 30, discusses accounting standards that we have not
`yet adopted and the expected impact to Pfizer upon adoption.
`• Forward-Looking Information and Factors That May Affect
`Future Results. This section, beginning on page 31, provides a
`description of the risks and uncertainties that could cause
`actual results to differ materially from those discussed in
`forward-looking statements set forth in this report relating to
`the financial results, operations and business prospects of the
`Company. Such forward-looking statements are based on
`management’s current expectations about future events, which
`are inherently susceptible to uncertainty and changes in
`circumstances. Also included in this section are discussions of
`Financial Risk Management, Foreign Exchange Risk, Interest
`Rate Risk and Legal Proceedings and Contingencies.
`
`Overview of Consolidated Operating Results
`Our Business
`We are a research-based, global pharmaceutical company that
`discovers, develops, manufactures and markets leading
`prescription medicines for humans and animals, as well as many
`of the world’s best known consumer healthcare products. Our
`longstanding value proposition has been to prove that our
`medicines cure or treat disease, including symptoms and suffering,
`and this remains our core mission. We have expanded our value
`proposition to also show that not only can our medicines cure or
`treat disease, but that they can also markedly improve health
`systems by reducing overall healthcare costs, improving societies’
`economic well-being and increasing effective prevention and
`treatment of disease. We generate revenue through the sale of
`our products, as well as through alliance agreements by co-
`promoting products discovered by other companies.
`
`Our Human Health segment represented 86% of our total
`revenues in 2005 and, therefore, developments relating to the
`pharmaceutical industry can have a significant impact on our
`operations.
`
`Our 2005 Performance
`Our performance in 2005 was impacted by the loss of exclusivity
`in the U.S. of certain key medicines (Diflucan, Neurontin,
`Accupril/Accuretic and Zithromax), uncertainty related to Celebrex
`and the suspension of Bextra sales, which collectively reduced our
`worldwide revenues by $5.7 billion compared with 2004. Partially
`offsetting these impacts was the solid aggregate performance of
`the balance of our portfolio of patent-protected medicines.
`
`Specifically, in 2005,
`• Our total revenues decreased 2% to $51.3 billion from 2004.
`Revenues of major products with lost exclusivity in the U.S.
`(Diflucan, Neurontin and Accupril/Accuretic during 2004 and
`Zithromax in November 2005) declined by 44% from 2004.
`These four products represented 8% of our Human Health
`revenues and 7% of our total revenues for the year ended
`December 31, 2005 compared to 13% of our Human Health
`revenues and 12% of our total revenues for the year ended
`December 31, 2004. Uncertainty related to Celebrex and the
`suspension of Bextra sales have resulted in a significant decline
`in prescription volume in the arthritis and pain market, resulting
`in a 63% decline in revenues in those products from 2004.
`These declines were partially offset by an aggregate revenue
`increase of 11% in the balance of our portfolio of our patent-
`protected products. Our portfolio of medicines includes four of
`the world’s 25 best-selling medicines, with six medicines that
`lead their therapeutic areas (see further discussion in the
`“Human Health-Selected Product Descriptions” section of this
`Financial Review).
`• Our net income was $8.1 billion compared with $11.4 billion in
`2004. Our 2005 results reflect in-process research and
`development (IPR&D) charges of $1.7 billion, primarily related
`to our acquisitions of Vicuron Pharmaceuticals, Inc. (Vicuron)
`and Idun Pharmaceuticals, Inc. (Idun); asset impairment and
`other charges of $1.2 billion associated with the suspension of
`sales of Bextra; restructuring charges and merger-related costs
`
`2005 Financial Report
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`Financial Review
`Pfizer Inc and Subsidiary Companies
`
`of $943 million associated with our integration of Pharmacia
`Corporation (Pharmacia), an acquisition in 2003; restructuring
`and implementation costs of $780 million associated with our
`new productivity initiative; increased pressure on our cost of
`sales; and an effective tax rate of 29.7%, reflecting our
`repatriation of foreign earnings; partially offset by $800 million
`in cost savings from our new productivity initiative. Our 2004
`results reflect IPR&D charges of $1.1 billion, primarily related
`to our acquisition of Esperion Therapeutics, Inc. (Esperion); an
`asset impairment charge of $691 million related to the Depo-
`Provera brand; restructuring charges and merger-related costs
`of $1.2 billion associated with the integration of Pharmacia;
`$369 million in connection with certain litigation-related
`charges; and an effective tax rate of 19%. Both years benefited
`from the cost savings associated with the Pharmacia acquisition.
`• We launched a company-wide productivity initiative, called
`Adapting to Scale (AtS), which involves a comprehensive review
`of our processes, organizations, systems and decision-making.
`We achieved annual cost savings under the AtS productivity
`initiative of approximately $800 million in 2005 and expect this
`program to yield annual cost savings of about $4 billion by 2008.
`We also achieved approximately $4.2 billion in annual cost
`savings as a result of our integration of Pharmacia. See further
`discussion in the “Our Adapting to Scale Productivity Initiative
`and Merger-Related Synergies” section of this Financial Review.
`• We acquired Vicuron, a biopharmaceutical company focused on
`the development of novel anti-infectives, for approximately $1.9
`billion in cash and Idun, a biopharmaceutical company focused
`on the discovery and development of therapies to control
`apoptosis (cell death), for approximately $298 million in cash.
`We expect that these strategic acquisitions will strengthen
`and broaden our existing pharmaceutical capabilities.
`
`Our Adapting to Scale Productivity Initiative and
`Merger-Related Synergies
`Our multi-year productivity initiative, called Adapting to Scale
`(AtS), to increase efficiency and streamline decision-making across
`the Company, was launched in the first quarter of 2005. It follows
`the integration of Warner-Lambert and Pharmacia, which resulted
`in the tripling of Pfizer’s revenues over the past six years. The
`integration of those two companies resulted in a combined expense
`reduction of approximately $6 billion, inclusive of $4.2 billion in
`Pharmacia-related synergies that were achieved through 2005.
`The new AtS productivity initiative is expected to yield $4 billion
`in cost savings on an annual basis by 2008, based on a top-to-bottom
`business review completed during the first half of 2005.
`
`During 2005, cost savings from our AtS productivity initiative
`were approximately $800 million, mainly attributable to the
`Human Health business. We expect annual cost savings to
`accelerate over the next three years, with about $2 billion in
`savings targeted for 2006, about $3.5 billion in 2007 and about
`$4 billion upon completion in 2008. These savings are expected
`to be realized in procurement, operating expenses and facilities,
`among other sources. We plan to use the cost savings we generate,
`in part, to fund key investments, including new product launches
`and the development of the many promising new medicines in
`our pipeline. The Company expects that the aggregate cost of
`implementing this initiative through 2008 will be approximately
`$4 billion to $5 billion on a pre-tax basis.
`
`2
`
`2005 Financial Report
`
`Projects in various stages of implementation include:
`• Reorganizing Pfizer Global Research & Development (PGRD) to
`increase efficiency and effectiveness in bringing new therapies
`to patients-in-need while reducing the cost of research and
`development. PGRD is being reorganized into eleven
`therapeutic areas—cardiovascular, metabolic, and endocrine;
`central nervous system; inflammation; allergy and respiratory;
`infectious diseases; pain; gastrointestinal and hepatitis;
`oncology; urology and sexual health; ophthalmology; and
`dermatology. Each therapeutic area will have three co-leaders:
`a Research leader whose expertise is in preclinical compounds;
`a Development leader whose expertise is in clinical studies; and
`a Commercial leader whose expertise is in marketing. Discovery
`Research will retain its existing structure of six drug-candidate-
`discovery sites. Development will move toward single sites for
`most therapeutic areas.
`• The continuation of our optimization of Pfizer Global
`Manufacturing’s plant network, which began with the
`acquisition of Pharmacia, to ensure that the Company’s
`manufacturing facilities are aligned with current and future
`product needs. During 2005, 14 sites were identified for
`rationalization (Angers and Val de Reuil, France; Arecibo and
`Cruce Davila, Puerto Rico; Augusta, Georgia; Corby and
`Morpeth, U.K.; Holland, Michigan; Jakarta, Indonesia;
`Orangeville, Canada; Parsippany, New Jersey; Tsukuba, Japan;
`Stockholm and Uppsala-Fyrislund, Sweden).
`In addition, there
`have been extensive reductions in site operations in Sandwich,
`U.K. (the planned closure of drug product, distribution and
`fermentation operations); Lincoln and Omaha, Nebraska sites;
`and Puerto Rico sites (staff reductions), with smaller staff
`reductions in Groton, Connecticut and Lititz, Pennsylvania.
`• Realigning our European marketing teams and implementing
`initiatives designed to improve the effectiveness of our field
`force in Japan. During the third quarter of 2005, we completed
`a major reorganization of the U.S. field force, reshaping the
`management structure to be more responsive to commercial
`trends as the Medicare Modernization Act takes effect and
`driving greater sales-force accountability in preparation for
`the upcoming launch of new medicines.
`• Pursuing savings in information technology resulting from
`significant reductions in application software (already reduced
`from over 8,000 at the time of the Pharmacia acquisition in 2003
`to fewer than 3,000) and data centers (to be reduced from 17
`to 4), as well as rationalization of service providers, while
`enhancing our ability to invest in innovative technology
`opportunities to further propel our growth.
`• Reducing costs in purchased goods and services. Purchasing
`initiatives will focus on rationalizing suppliers, leveraging the
`approximately $16 billion of goods and services that Pfizer
`purchases annually, improving demand management to
`optimize levels of outside services needed and strategic sourcing
`from lower-cost sources. For example, savings from demand
`management will be derived in part from reductions in travel,
`entertainment, consulting and other external service expenses.
`Facilities savings are being found in site rationalization, energy
`conservation, and renegotiated service contracts.
`
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`Financial Review
`Pfizer Inc and Subsidiary Companies
`
`Our Business Environment
`There are a number of industry-wide factors that may affect our
`business and should be considered along with the information
`presented in the section “Forward-Looking Information and
`Factors That May Affect Future Results.” Such industry-wide
`factors include continuing pricing pressures both in the U.S. and
`internationally, pressures on selective COX-2 inhibitor products,
`the increasing regulatory scrutiny of drug safety, the adoption of
`new direct-to-consumer (DTC) advertising guidelines, lower
`prescription growth rates and increased branded and generic
`competition in certain therapeutic areas. It is important to
`recognize that our near-term future products reflect investments
`we made approximately ten years ago through our in-house
`research and development operations or reflect more recent
`investments in development and acquisitions or collaborations.
`Looking beyond our portfolio of leading medicines, we are
`positioning Pfizer to fulfill our vision to serve the public’s health
`needs more fully, not just through the treatment of diseases,
`but also through the promotion of health.
`
`We believe that there are future opportunities for revenue
`generation for our products, including:
`• Current demographics of developed countries that indicate
`that people are living longer and, therefore, will have a greater
`need for the most effective medicines;
`• The large number of untreated patients within our various
`therapeutic categories. For example, of the tens of millions of
`Americans who need medical therapy for high cholesterol, we
`estimate only about one-fourth are actually receiving treatment;
`• Refocusing the debate on health policy to address the cost of
`disease that remains untreated and the benefits of investing
`in prevention and wellness to not only improve health, but save
`money;
`• The promise of technology to improve upon existing therapies
`and to introduce treatments where none currently exist;
`• Developments and growth in Pfizer’s presence in emerging
`markets worldwide; and
`• Worldwide emphasis on the need to find solutions to difficult
`problems in healthcare systems.
`
`We have known that we would face loss of exclusivity in the U.S.
`of several key products in a very short period of time. As a result,
`we have been remaking our Company to meet changing times and
`we are addressing our challenges through the following actions:
`• Enhancing a product portfolio intended to transcend the
`volatility of individual products or markets;
`• Pursuing a large number of new product launches, indications
`and completed clinical trials;
`• Increasing our research and development (R&D) productivity;
`• Emphasizing the clinical benefits of our medicines;
`• Launching new global positionings of our products, where
`necessary;
`• Acquiring the rights to promising medicines;
`• Defending our patents aggressively;
`
`• Marketing generic versions of certain of our products after our
`compounds face generic competition;
`• Guarding the integrity of our products in an increasingly
`predatory atmosphere evidenced by the growing problem of
`counterfeit drugs;
`• Addressing the wide array of patient populations through our
`innovative access and affordability programs;
`• Aligning our research, development and marketing functions
`in search of new medical opportunities as part of a fully
`integrated portfolio-planning process; and
`• Streamlining many of our basic functions to capitalize on our
`unmatched size and reach.
`Continuing Pricing Pressures
`A rise in Consumer Directed Health Plans has increased consumer
`sensitization to the cost of healthcare. Consumers are aware of
`global price differences resulting from price controls imposed
`by foreign governments and have become more willing to seek
`less expensive alternatives, such as switching to generics and
`sourcing medicines across national borders. Both U.S. and
`international governmental regulations mandating prices or price
`controls can impact our revenues, and we continue to work
`within the current legal and pricing structures to minimize the
`impact on our revenues. For example, we have taken steps to
`assure that medicines intended for Canadian consumption are in
`fact used for that purpose. Managed care organizations, as well
`as government agencies, with their significant purchasing power,
`continue to seek discounts on our products which has served to
`slow our revenue growth.
`
`The enactment of the Medicare Prescription Drug Improvement
`and Modernization Act of 2003 (which went into effect in 2006)
`regarding prescription drug benefits for Medicare beneficiaries
`expands access to medicines that patients need. While expanded
`access may potentially result in increased sales of our products,
`such increases may be offset by increased pricing pressures due
`to the enhanced purchasing power of the private sector providers
`that will negotiate on behalf of Medicare beneficiaries in the
`future. We believe that our medicines provide significant value
`for both providers and patients not only from the improved
`treatment of diseases, but also from a reduction in other
`healthcare costs such as hospitalization or emergency room costs,
`increased patient productivity and a better quality of life.
`
`Defending Our Intellectual Property Rights
`The loss of patent protection with respect to any of our major
`products can have a material adverse effect on future revenues
`and our results of operations. Our performance in 2005 was
`impacted by loss of U.S. exclusivity of four major products—
`Diflucan, Neurontin, and Accupril/Accuretic during 2004 and
`Zithromax in November 2005. In addition, we face the loss of U.S.
`exclusivity for Zoloft during 2006 and Norvasc and Zyrtec during
`2007. These seven products represented 33% of our Human
`Health revenues and 29% of our total revenues for the year
`ended December 31, 2004. Zithromax, Zoloft, Norvasc and Zyrtec
`represented 26% of our Human Health revenues and 22% of our
`total company revenues for the year ended December 31, 2005.
`
`Intellectual property legal protections and remedies are a
`significant factor in our business. Many of our products have a
`2005 Financial Report
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`composition-of-matter or compound patent and may also have
`additional patents. Additional patents can include additional
`composition-of-matter patents, processes for making the
`compound or additional indications or uses. As such, each of our
`products has varying patents expiring at varying dates, thereby
`strengthening our patent protection. However, once the patent
`protection period has expired, generic pharmaceutical
`manufacturers generally produce similar products and sell those
`products for a lower price. This price competition can substantially
`decrease our revenues.
`
`Patents covering our products are subject to challenges from
`time to time. Increasingly, generic pharmaceutical manufacturers
`are launching their products “at-risk”—before the final resolution
`of legal proceedings challenging their generic products. Wherever
`appropriate, we aggressively defend our patent rights against
`such challenges (details of these matters are described in Notes
`to the Consolidated Financial Statements—Note 18, Legal
`Proceedings and Contingencies).
`
`Product Competition
`We face the loss of U.S. exclusivity for Zoloft during 2006 and
`Norvasc and Zyrtec during 2007. In addition, some of our products
`face competition in the form of new branded products or generic
`drugs, which treat similar diseases or indications. We have been
`able to limit the impact on revenues by highlighting the proven
`track record of safety and efficacy of our products. For example,
`the success of Lipitor is the result of an unprecedented array of
`clinical data supporting both efficacy and safety.
`
`Expansion and Productivity of Development Pipeline
`Discovery and development of new products, as well as the
`development of additional uses for existing products, are
`imperative for the continued strong operation of our businesses.
`The numerous filings, approvals and launches of new Pfizer
`products and product enhancements during 2005 and in early 2006
`evidenced a productive period of R&D. The opportunities for
`improving human health remain abundant. As the world’s largest
`privately funded biomedical operation, and through our global
`scale, we are developing and delivering innovative medicines
`that will benefit patients around the world. We will continue to
`make the investments necessary to serve patients’ needs and to
`generate long-term growth. A good example of this is our
`torcetrapib/atorvastatin (Lipitor) development program whose
`objective is to provide clear evidence that substantially raising HDL-
`cholesterol and further lowering LDL-cholesterol can reduce
`cardiovascular risk beyond what can be currently achieved with
`existing treatments.
`
`During 2005, we continued to successfully introduce new products,
`including Macugen, Revatio, Zmax and Lyrica in the U.S. In
`December 2004 and during 2005, we or our development partners
`submitted six New Drug Applications (NDAs) to the U.S. Food and
`Drug Administration (FDA) for important new drug candidates:
`Exubera, indiplon, Sutent (Sunitinib Malate), Zeven (dalbavancin),
`Eraxis (anidulafungin) and Champix (varenicline). We continue to
`make progress toward our goal of filing 20 major new medicines
`in the U.S. in the five-year period ending in 2006. However, we
`now believe we will achieve 19 of those filings by the end of 2006.
`Even so, we believe that our track record of 19 NDA filings in five
`years evidences one of the highest levels of productivity in our
`industry. In February 2006, the FDA approved Eraxis for treatment
`
`of candidemia and invasive candidiasis, and for treatment of
`esophageal candidiasis. In January 2006, the FDA and the
`European Commission approved Exubera (inhaled human insulin)
`for treatment of type 1 and type 2 diabetes in adults, and the FDA
`approved Sutent for advanced kidney cancer and gastrointestinal
`stromal tumors.
`
`Our financial strength enables us to conduct research on a scale that
`can help redefine medical practice. We have combined that ability
`with a fully integrated portfolio-planning approach that aligns
`our research, development, and marketing functions in the search
`for new medical opportunities. We have over 200 novel concepts
`in development across multiple therapeutic areas, and we are
`leveraging our status as the industry’s partner of choice to expand
`our licensing operations. This is enabling us to strengthen our core
`cardiovascular and neuroscience portfolios, as well as to expand
`other therapeutic areas, including oncology and ophthalmology.
`Our R&D pipeline included, as of February 10, 2006, 235 projects
`in development: 152 new molecular entities and 83 product-line
`extensions. In addition, we have more than 400 projects in
`discovery research. During 2005, 47 new compounds were
`advanced from discovery research into preclinical development,
`30 preclinical development candidates progressed into Phase 1
`human testing and 12 Phase 1 clinical development candidates
`advanced into Phase 2 proof-of-concept trials.
`
`Reducing attrition has been a key focus on our R&D productivity
`improvement effort. For several years, we have been revising the
`quality hurdles for candidates entering development and
`throughout the development process. As the quality of candidates
`has improved, the development attrition rate has begun to fall. At
`our current internal discovery output of chemical entities and at the
`attrition rates we are seeing for these high quality candidates, we
`believe we will improve our overall success rates to 1 in 11 versus
`the historical industry rate of 1 in 20 to 25. This would allow us to
`double our productivity without doubling our R&D investment.
`Given the multi-year nature of pharmaceutical R&D, it will take
`some time before the full impact of these changes is realized.
`
`While a significant portion of R&D is done internally, we do enter
`into agreements with other companies to co-develop promising
`compounds. These co-development and alliance agreements
`allow us to capitalize on these compounds to expand our pipeline
`of potential future products. We have more than 1,000 alliances
`across the entire spectrum of the discovery, development and
`commercialization process. Our R&D covers a wide spectrum of
`therapeutic areas as discussed in the “Product Developments”
`section of this Financial Review. Due to our strength in marketing
`and our global reach, we are able to attract other organizations
`that may have promising compounds and can benefit from our
`strength and skills. Over the past two years, we have invested $4.4
`billion in acquisitions for these purposes. For example, in 2005, the
`acquisition of Vicuron builds on Pfizer’s extensive experience in
`anti-infectives and demonstrates our commitment to strengthen
`and broaden our pharmaceutical business through strategic
`product acquisitions. By acquiring Vicuron, Pfizer looks forward
`to bringing to patients around the world two important new
`medicines that at the date of the acquisition were under review
`by the FDA. In February 2006, Eraxis was approved by the FDA.
`
`Our Expectations for 2006
`While our revenue and income will likely continue to be tempered
`in the near term due to patent expirations and other factors, we
`will continue to make the investments necessary to sustain long-
`
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`term growth. We remain confident that Pfizer has the
`organizational strength and resilience, as well as the financial
`depth and flexibility, to succeed in the long term. However, no
`assurance can be given that the industry-wide factors described
`above or other significant factors will not have a material adverse
`effect on our business and financial results.
`
`Given these and other factors, at current exchange rates and
`reflecting management’s current assessment, for 2006 we expect
`Adjusted income of approximately $15 billion, Adjusted diluted EPS
`of approximately $2.00, reported Net income of approximately
`$11.4 to $11.7 billion, reported diluted EPS of approximately
`$1.52 to $1.56 and over $16 billion in cash flow from operations,
`all of which do not reflect the purchase accounting impacts of a
`pending business-development transaction, as well as any potential
`impacts in connection with a business for which we are exploring
`strategic options. We expect 2006 revenues to be comparable to
`2005. The growth of three key products—Lipitor, Celebrex and
`Lyrica—is expected to contribute significantly to our 2006 revenues.
`Our forecasted financial performance in 2006 is subject to a
`number of factors and uncertainties—as described in the “Forward
`Looking Information and Factors That May Affect Future Results”
`section below. Some of these factors and uncertainties may persist
`over our planning horizon.
`
`A reconciliation of forecasted 2006 Adjusted income and Adjusted
`diluted EPS to forecasted 2006 reported Net income and reported
`diluted EPS follows:
`
`($ BILLIONS, EXCEPT PER-SHARE AMOUNTS)
`Forecasted Adjusted
`income/diluted EPS
`Intangible amortization,
`net of tax
`Adapting to scale costs(b)
`Resolution of certain tax
`positions
`Forecasted reported Net
`income/diluted EPS
`
`NET INCOME(a)
`
`DILUTED EPS(a)
`
`~$15.0
`
`~$2.00
`
`(2.3)
`(1.4-1.7)
`
`(0.31)
`(0.19-0.23)
`
`0.4
`
`0.06
`
`~$11.4 – $11.7 ~$1.52 – $1.56
`
`(a) Does not reflect the purchase accounting impacts of a pending
`business-development transaction, as well as any potential
`impacts in connection with a business for which we are exploring
`strategic options.
`(b) About 15% is expected to be incurred in Selling, informational
`and administrative expense (SI&A), about 10% in Research and
`development expense and about 5% in Cost of sales with the
`balance in Restructuring charges and merger-related costs.
`Accounting Policies
`We consider the following accounting policies important in
`understanding our operating results and financial condition. For
`additional accounting policies, see Notes to the Consolidated
`Financial Statements—Note 1, Significant Accounting Policies.
`
`Estimates and Assumptions
`In preparing the consolidated financial statements, we use certain
`estimates and assumptions that affect reported amounts and
`disclosures. For example, estimates are used when accounting for
`deductions from revenues (such as rebates, discounts, incentives and
`product returns), depreciation, amortization, employee benefits,
`contingencies and asset and liability valuations. Our estimates are
`often based on complex judgments, probabilities and assumptions
`that we believe to be reasonable, but that are inherently uncertain
`
`and unpredictable. Assumptions may be incomplete or inaccurate
`and unanticipated events and circumstances may occur. It is also
`possible that other professionals, applying reasonable judgment to
`the same facts and circumstances, could develop and support a
`range of alternative estimated amounts. We are also subject to
`other risks and uncertainties that may cause actual results to
`differ from estimated amounts, such as changes in the healthcare
`environment, competition, foreign exchange, litigation, legislation
`and regulations. These and other risks and uncertainties are
`discussed throughout this Financial Review, particularly in the
`section “Forward-Looking Information and Factors That May
`Affect Future Results.”
`
`Contingencies
`We and certain of our subsidiaries are involved in various patent,
`product liability, consumer, commercial, securities, environmental
`and tax litigations and claims; government investigations; and
`other legal proceedings that arise from time to time in the
`ordinary course of our business. We record accruals for such
`contingencies to the extent that we conclude their occurrence is
`probable and the related damages are estimable. We consider
`many factors in making these assessments. Because litigation
`and other contingencies are inherently unpredictable and
`excessive verdicts do occur, these assessments can involve a series
`of complex judgments about future events and can rely heavily
`on estimates and assumptions (see Notes to the Consolidated
`Financial Statements—Note 1B, Significant Accounting Policies:
`Estimates and Assumptions). We record anticipated recoveries
`under existing insurance contracts when assured of recovery.
`
`Acquisitions
`Our consolidated financial statements and results of operations
`reflect an acquired business after the completion of the acquisition
`and are not restated. We account for acquired businesses using
`the purchase method of accounting which requires that the
`assets acquired and liabilities assumed be recorded at the date of
`acquisition at their respective fair values. Any excess of the
`purchase price over the estimated fair values of the net assets
`acquired is recorded as goodwill. Amounts allocated to acquired
`IPR&D are expensed at the date of acquisition. When we acquire
`net assets that do not constitute a business under generally
`accepted accounting principles in the U.S. (GAAP), no goodwill is
`recognized.
`
`The judgments made in determining the estimated fair value
`assigned to each class of assets acquired and liabilities assumed,
`as well as asset lives, can materially impact our results of
`operations. Accordingly, for significant items, we typically obtain
`assistance from third party valuation specialists.The valuations are
`based on information available near the acquis