Appendix A
`2014 Financial Report
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`

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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`INTRODUCTION
`
`Our Financial Review is provided to assist readers in understanding the results of operations, financial condition and cash flows of Pfizer Inc.
`(the Company). It should be read in conjunction with the consolidated financial statements and Notes to Consolidated Financial Statements.
`The discussion in this Financial Review contains forward-looking statements that involve substantial risks and uncertainties. Our actual results
`could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in
`Part 1, Item 1A, “Risk Factors” of our 2014 Annual Report on Form 10-K and in the “Forward-Looking Information and Factors That May Affect
`Future Results”, “Our Operating Environment” and “Our Strategy” sections of this Financial Review.
`
`The Financial Review is organized as follows:
`
`Overview of Our Performance, Operating Environment, Strategy and Outlook . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 2
`This section provides information about the following: our business; our 2014 performance; our operating
`environment; our strategy; our business development initiatives, such as acquisitions, dispositions,
`licensing and collaborations; and our financial guidance for 2015.
`Significant Accounting Policies and Application of Critical Accounting Estimates and Assumptions . . . . . . . . . Beginning on page 12
`This section discusses those accounting policies and estimates that we consider important in
`understanding our consolidated financial statements. For additional discussion of our accounting policies,
`see Notes to Consolidated Financial Statements—Note 1. Basis of Presentation and Significant
`Accounting Policies.
`Analysis of the Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 16
`This section consists of the following sub-sections:
` Revenues and Product Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 20
`This sub-section provides an analysis of our revenues and products for the three years ended
`December 31, 2014, including an overview of our important biopharmaceutical product developments.
` Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 26
`This sub-section provides a discussion about our costs and expenses.
` Provision for Taxes on Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 28
`This sub-section provides a discussion of items impacting our tax provisions.
` Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 29
`This sub-section provides an analysis of the financial statement impact of our discontinued operations.
` Adjusted Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 29
`This sub-section provides a discussion of an alternative view of performance used by management.
`Analysis of Operating Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 36
`This section provides a discussion of the performance of each of our operating segments. . . . . . . . . . . . . .
`Analysis of the Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 41
`This section provides a discussion of changes in certain components of other comprehensive income.
`Analysis of the Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 42
`This section provides a discussion of changes in certain balance sheet accounts.
`Analysis of the Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 43
`This section provides an analysis of our consolidated cash flows for the three years ended December 31,
`2014.
`Analysis of Financial Condition, Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 45
`This section provides an analysis of selected measures of our liquidity and of our capital resources as of
`December 31, 2014 and December 31, 2013, as well as a discussion of our outstanding debt and other
`commitments that existed as of December 31, 2014. Included in the discussion of outstanding debt is a
`discussion of the amount of financial capacity available to help fund Pfizer’s future activities.
`New Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 49
`This section discusses accounting standards that we have recently adopted, as well as those that recently
`have been issued, but not yet adopted.
`Forward-Looking Information and Factors That May Affect Future Results . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning on page 50
`This section provides a description of the risks and uncertainties that could cause actual results to differ
`materially from those discussed in forward-looking statements presented in this Financial Review relating
`to, among other things, our anticipated operating and financial performance, business plans and
`prospects, in-line products and product candidates, strategic reviews, capital allocation, plans relating to
`share repurchases and dividends and business development plans. 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 and Legal Proceedings and Contingencies, including tax matters.
`Certain amounts in our Financial Review may not add due to rounding. All percentages have been calculated using unrounded amounts.
`
`2014 Financial Report
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK
`
`Our Business
`
`We apply science and our global resources to bring therapies to people that extend and significantly improve their lives through the discovery,
`development and manufacture of healthcare products. Our global portfolio includes medicines and vaccines, as well as many of the world’s
`best-known consumer healthcare products. We work across developed and emerging markets to advance wellness, prevention, treatments
`and cures that challenge the most feared diseases of our time. We collaborate with healthcare providers, governments and local communities
`to support and expand access to reliable, affordable healthcare around the world. Our revenues are derived from the sale of our products and,
`to a much lesser extent, from alliance agreements, under which we co-promote products discovered by other companies (Alliance revenues).
`
`The majority of our revenues come from the manufacture and sale of biopharmaceutical products. The biopharmaceutical industry is highly
`competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges which can significantly impact our
`results. These factors include, among others: the loss or expiration of intellectual property rights and the expiration of co-promotion and
`licensing rights, healthcare legislation, pipeline productivity, the regulatory environment and pricing and access pressures, and competition
`among branded products. We also face challenges as a result of the global economic environment. For additional information about these
`factors and challenges, see the “Our Operating Environment” section of this Financial Review.
`
`The financial information included in our consolidated financial statements for our subsidiaries operating outside the United States (U.S.) is as
`of and for the year ended November 30 for each year presented.
`
`References to developed markets in this Financial Review include the U.S., Western Europe, Japan, Canada, Australia, Scandinavia, South
`Korea, Finland and New Zealand; and references to Emerging Markets in this Financial Review include the rest of the world, including, among
`other countries, China, Brazil, Mexico, Russia, India and Turkey.
`
`On February 5, 2015, we announced that we have entered into a definitive merger agreement under which we agreed to acquire Hospira, Inc.
`(Hospira), the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars, for $90 per share in
`cash, for a total enterprise value of approximately $17 billion. We expect to finance the transaction through a combination of existing cash and
`new debt, with approximately two-thirds of the value financed from cash and one-third from debt. The transaction is subject to customary
`closing conditions, including regulatory approvals in several jurisdictions and the approval of Hospira's shareholders, and is expected to close
`in the second half of 2015.
`
`On June 24, 2013, we completed the full disposition of our Animal Health business, Zoetis Inc.(Zoetis), and recognized a gain of approximately
`$10.3 billion, net of tax, in Gain on disposal of discontinued operations––net of tax in our consolidated statement of income for the year ended
`December 31, 2013. The operating results of this business through June 24, 2013, the date of disposal, are reported as Income from
`discontinued operations––net of tax in our consolidated statements of income.
`
`On November 30, 2012, we completed the sale of our Nutrition business to Nestlé and recognized a gain of approximately $4.8 billion, net of
`tax, in Gain on disposal of discontinued operations––net of tax in our consolidated statement of income for the year ended December 31,
`2012. The operating results of this business through November 30, 2012, the date of disposal, are reported as Income from discontinued
`operations––net of tax in our consolidated statements of income.
`
`For additional information about our divestitures, see Notes to Consolidated Financial Statements––Note 2D. Acquisitions, Licensing
`Agreements, Collaborative Arrangements, Divestitures, and Equity-Method Investments: Divestitures and see the “Our Business Development
`Initiatives”, “Discontinued Operations” and “Analysis of Financial Condition, Liquidity and Capital Resources” sections of this Financial Review.
`
`Our 2014 Performance
`
`Revenues––2014
`
`Revenues in 2014 were $49.6 billion, a decrease of 4% compared to 2013, which reflects an operational decrease of $1.1 billion, or 2%, and
`the unfavorable impact of foreign exchange of $912 million, or 2%. See the "Analysis of the Consolidated Statements of Income––
`Revenues––Overview" section below for more information, including a discussion of key drivers of our revenue performance.
`
`Income from Continuing Operations––2014
`
`Income from continuing operations in 2014 was $9.1 billion, compared to $11.4 billion in 2013, primarily reflecting, among other items, in
`addition to the lower revenues described above:
`• higher research and development expenses (up $1.7 billion) (see also the “Costs and Expenses––Research and Development (R&D)
`Expenses” section of this Financial Review);
`the non-recurrence in 2014 of the patent litigation settlement income of $1.3 billion in 2013 (see also the “Costs and Expenses––Other
`(Income)/Deductions–Net” section of this Financial Review and Notes to Consolidated Financial Statements––Note 4. Other (Income)/
`Deductions––Net);
`• higher legal charges (up $958 million) (see the “Costs and Expenses––Other (Income)/Deductions––Net” section of this Financial Review
`and Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net); and
`
`•
`
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`•
`
`the non-recurrence in 2014 of the gain associated with the transfer of certain product rights to our joint venture with Zhejiang Hisun
`Pharmaceuticals Co., Ltd. (Hisun) in China in 2013 ($459 million) (see also the “Our Business Development Initiatives” and “Costs and
`Expenses––Other (Income)/Deductions––Net” sections of this Financial Review and Notes to Consolidated Financial Statements––Note
`2E. Acquisitions, Licensing Agreements, Collaborative Arrangements, Divestitures, and Equity-Method Investments: Equity-Method
`Investments, and Note 4. Other (Income)/Deductions––Net),
`partially offset by:
`• a lower effective tax rate (down 1.9 percentage points to 25.5%) (see also the “Provision for Taxes on Income” section of this Financial
`Review and Notes to Consolidated Financial Statements––Note 5. Tax Matters);
`lower restructuring charges and certain acquisition-related costs (down $932 million) (see also the “Costs and Expenses––Restructuring
`Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives” section of this Financial Review and
`Notes to Consolidated Financial Statements––Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-
`Reduction/Productivity Initiatives);
`• higher royalty-related income (up $479 million) (see also the “Costs and Expenses––Other (Income)/Deductions––Net” section of this
`Financial Review and Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net);
`lower asset impairments (down $409 million) (see also the “Costs and Expenses––Other (Income)/Deductions––Net” section of this
`Financial Review and Notes to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net);
`• an estimated loss recorded in 2013 associated with an option to acquire the remaining interest in Laboratório Teuto Brasileiro S.A. (Teuto)
`of approximately $223 million and income recorded in 2014 of approximately $55 million, reflecting a decline in the estimated loss from the
`aforementioned option (see also the “Costs and Expenses––Other (Income)/Deductions––Net” section of this Financial Review and Notes
`to Consolidated Financial Statements––Note 4. Other (Income)/Deductions––Net); and
`lower selling, informational and administrative expenses (see the “Costs and Expenses––Selling, Informational and Administrative (SI&A)
`Expenses" section of this Financial Review) .
`See also the “Discontinued Operations” section of this MD&A.
`
`•
`
`•
`
`•
`
`Our Operating Environment
`Industry-Specific Challenges
`
`Intellectual Property Rights and Collaboration/Licensing Rights
`
`The loss or expiration of intellectual property rights and the expiration of co-promotion and licensing rights can have a significant adverse
`effect on our revenues. Many of our products have multiple patents that expire at varying dates, thereby strengthening our overall patent
`protection. However, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, we lose
`exclusivity on these products, and generic pharmaceutical manufacturers generally produce similar products and sell them for a lower price.
`The date at which generic competition commences may be different from the date that the patent or regulatory exclusivity expires. However,
`when generic competition does commence, the resulting price competition can substantially decrease our revenues for the impacted products,
`often in a very short period of time.
`
`Our biotechnology products, including BeneFIX, ReFacto, Xyntha and Enbrel (we market Enbrel outside the U.S. and Canada), may face
`competition in the future from biosimilars (also referred to as follow-on biologics). If competitors are able to obtain marketing approval for
`biosimilars that reference our biotechnology products, our products may become subject to competition from these biosimilars, with attendant
`competitive pressure, and price reductions could follow. Expiration or successful challenge of applicable patent rights could trigger this
`competition, assuming any relevant exclusivity period has expired. However, biosimilar manufacturing is complex, and biosimilars are not
`generic versions of the reference products. Therefore, at least initially upon approval of a biosimilar competitor, biosimilar competition with
`respect to biologics may not be as significant as generic competition with respect to small molecule drugs.
`
`We have lost exclusivity for a number of our products in certain markets and have lost collaboration rights with respect to a number of our
`alliance products in certain markets, and we expect certain products and alliance products to face significantly increased generic competition
`over the next few years.
`
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`Specifically:
`
`Recent Losses and Expected Losses of Product Exclusivity
`
`The following table provides information about certain of our products recently experiencing, or expected to experience in 2015, patent
`expirations or loss of regulatory exclusivity, showing, by product, the key dates or expected key dates, the markets impacted and the
`revenues associated with those products in those markets:
`(MILLIONS OF DOLLARS)
`Products
`
`Key Dates(a)
`
`Markets Impacted
`
`$
`
`Xalatan and Xalacom
`Aricept
`Geodon
`Revatio tablet
`Detrol IR and Detrol LA(b)
`
`Lyrica
`Viagra
`
`Rapamune
`Inspra(c)
`Lyrica(d)
`Celebrex(e)
`
`Zyvox(f)
`Enbrel
`
`Product Revenues in Markets Impacted
`Year Ended December 31,
`2014
`2013
`127
`161
`28
`47
`24
`84
`51
`67
`87
`428
`
`$
`
`$
`
`2012
`275
`139
`214
`312
`605
`
`32
`146
`
`202
`160
`1,634
`1,872
`
`680
`2,832
`
`101
`354
`
`201
`150
`1,458
`2,084
`
`688
`2,776
`
`206
`472
`
`185
`131
`1,319
`1,906
`
`665
`2,727
`
`Major European markets
`January 2012
`Major European markets
`February 2012
`U.S.
`March 2012
`U.S.
`September 2012
`Major European markets
`September 2012
`U.S.
`January 2014
`Canada
`February 2013
`Major European markets
`June 2013 (Europe)
`Japan and Australia
`May 2014 (Japan/Australia)
`U.S.
`January 2014
`Major European markets
`March 2014
`Major European markets
`July 2014
`Major European markets
`November 2014 (Europe)
`U.S.
`December 2014 (U.S.)
`U.S.
`First half of 2015
`Major European markets
`August 2015 (Europe)
`Japan
`September 2015 (Japan)
`(a) Unless stated otherwise, "Key Dates" indicate patent-based expiration dates.
`(b) In January 2014, generic versions of Detrol LA became available in the U.S. pursuant to a settlement agreement.
`(c) In March 2014, regulatory exclusivity for Inspra expired in most major European markets, allowing generic companies to submit applications for marketing
`authorizations for their generic products.
`(d) In July 2014, regulatory exclusivity for Lyrica expired in the EU, allowing generic companies to submit applications for marketing authorizations for their generic
`products.
`(e) In December 2014, generic versions of Celebrex became available pursuant to settlement agreements licensing the reissue patent to several of the generic
`manufacturers involved in the ongoing litigation with respect to Celebrex.
`(f) Pursuant to terms of a settlement agreement, certain formulations of Zyvox became subject to generic competition in the U.S. in January 2015. We expect
`certain other formulations of Zyvox will become subject to generic competition in the U.S. in the first half of 2015.
`
`Recent and Expected Losses of Collaboration Rights
`
`The following table provides information about certain of our alliance revenue products that have experienced or that are expected to
`experience losses of collaboration rights, showing, by product, the date of the loss of the collaboration rights, the markets impacted and the
`alliance revenues associated with those products in those markets:
`(MILLIONS OF DOLLARS)
`
`Alliance Revenues in Markets Impacted
`
`Products
`
`Date of Loss of
`Collaboration Rights
`
`Markets Impacted
`
`U.S., Japan, certain European
`countries, Australia, Canada and
`South Korea
`
`$
`
`Year Ended December 31,
`2014
`2013
`168
`659
`
`$
`
`2012
`1,143
`
`$
`
`Japan and U.S.
`
`—
`
`47
`
`April 2014 (U.S.), between
`2012 and 2016 (Japan,
`certain European
`countries, Australia,
`Canada and South Korea)
`December 2012 (Japan),
`July 2013 (U.S.)
`Enbrel(c)
`3
`1,500
`1,400
`U.S. and Canada
`October 2013
`Rebif(d)
`415
`399
`401
`U.S.
`End of 2015
`(a) Spiriva—Our collaboration with Boehringer Ingelheim for Spiriva expires on a country-by-country basis between 2012 and 2016. On April 29, 2014, our alliance
`in the U.S. came to an end.
`(b) Aricept—Our rights to Aricept in Japan returned to Eisai Co., Ltd. in December 2012. Date shown for U.S. is the date the Aricept 23mg tablet lost exclusivity in
`the U.S., which was July 2013. 2012 alliance revenues for Aricept have not been approved for disclosure by Eisai Co., Ltd. and therefore are not reflected in the
`table above.
`(c) Enbrel—The U.S. and Canada co-promotion term of our collaboration agreement with Amgen Inc. for Enbrel expired on October 31, 2013. While we are entitled
`to royalties for 36 months thereafter, those royalties have been and are expected to continue to be significantly less than our share of Enbrel profits from U.S.
`and Canada sales prior to the expiration. In addition, while our share of the profits from this co-promotion agreement previously was included in Revenues, our
`royalties after October 31, 2013 are and will be included in Other (income)/deductions––net, in our consolidated statements of income. Outside the U.S. and
`Canada, we continue to have the exclusive rights to market Enbrel.
`(d) Rebif—Our collaboration agreement with EMD Serono Inc. to co-promote Rebif in the U.S. will expire at the end of 2015.
`
`Spiriva(a)
`
`Aricept(b)
`
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`In addition, we expect to lose exclusivity for various other products in various markets over the next few years. For additional information, see
`the “Patents and Other Intellectual Property Rights” section in Part I, Item 1, “Business”, of our 2014 Annual Report on Form 10-K.
`
`Our financial results in 2014 and our 2015 financial guidance, respectively, reflect the impact and projected impact of the loss of exclusivity of
`various products and the expiration of certain alliance product contract rights discussed above. For additional information about our 2015
`financial guidance, see the “Our Financial Guidance for 2015” section of this Financial Review.
`
`We will continue to aggressively defend our patent rights whenever we deem appropriate. For more detailed information about our significant
`products, see the discussion in the “Revenues––Major Biopharmaceutical Products” and “Revenues––Selected Product Descriptions” sections
`of this Financial Review. For a discussion of certain recent developments with respect to patent litigation, see Notes to Consolidated Financial
`Statements––Note 17A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation.
`
`Regulatory Environment/Pricing and Access––U.S. Healthcare Legislation
`
`In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (together,
`the U.S. Healthcare Legislation, and also known as the Affordable Care Act or ACA), was enacted in the U.S. For additional information, see
`the “Government Regulation and Price Constraints” section in Part I, Item 1, "Business", of our 2014 Annual Report on Form 10-K.
`
`Impacts on our 2014 Results
`
`We recorded the following amounts in 2014 as a result of the U.S. Healthcare Legislation:
`• $631 million recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare
`“coverage gap” discount provision; and
`• $362 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government. 2014
`includes a $215 million charge to account for an additional year of the non-tax deductible Branded Prescription Drug Fee in accordance
`with final regulations issued in the third quarter of 2014 by the U.S. Internal Revenue Service (IRS). The charge in 2014 also reflected a
`favorable true-up associated with the final 2013 invoice received from the federal government, which reflected a lower share than that of
`the initial 2013 invoice.
`The final regulations did not change the payment schedule for the Branded Prescription Drug Fee; accordingly there was no cash flow
`impact in 2014 from the $215 million charge.
`
`Impacts on our 2013 Results
`
`We recorded the following amounts in 2013 as a result of the U.S. Healthcare Legislation:
`• $458 million recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare
`“coverage gap” discount provision; and
`• $280 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government.
`
`Impacts on our 2012 Results
`
`We recorded the following amounts in 2012 as a result of the U.S. Healthcare Legislation:
`• $593 million recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare
`“coverage gap” discount provision; and
`• $336 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government.
`
`Other Impacts
`• Expansion of Healthcare Coverage— The ACA included a coverage expansion that took effect in 2014. For additional information on the
`coverage expansion under the ACA and its impact on Pfizer's revenues, see the “Government Regulation and Price Constraints—In the
`United States—Healthcare Reform” section in Part I, Item 1 "Business", of our 2014 Annual Report on Form 10-K.
`• Biotechnology Products—The U.S. Healthcare Legislation also created a framework for the approval of biosimilars (also known as follow-
`on biologics) following the expiration of 12 years of exclusivity for the innovator biologic, with a potential six-month pediatric extension. For
`additional information on the biosimilar approval pathway, the FDA's guidance documents and competition from biosimilar manufacturers,
`see the "Patents and Intellectual Property—Biotechnology Products“ and "Government Regulation and Price Constraints—In the United
`States—Biosimilars” sections in Part I, Item 1 "Business", of our 2014 Annual Report on Form 10-K.
`
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`Regulatory Environment/Pricing and Access––Government and Other Payer Group Pressures
`
`Governments, managed care organizations and other payer groups continue to seek increasing discounts on our products through a variety of
`means, such as leveraging their purchasing power, implementing price controls, and demanding price cuts (directly or by rebate actions). We
`are exposed to negative pricing pressures in various markets around the world. The U.S. has highly competitive insurance markets. Europe,
`Japan, China, Canada, South Korea and some other international markets have governments that provide healthcare at low direct cost to
`consumers and regulate pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare
`system, and have government-mandated reductions in prices and access restrictions for certain biopharmaceutical products to control costs in
`those markets, particularly under recent global economic pressures. Also, health insurers and benefit plans continue to limit access to certain
`of our medicines by imposing formulary restrictions in favor of the increased use of generics. In prior years, Presidential advisory groups
`tasked with reducing healthcare spending have recommended legislative changes that would allow the U.S. government to directly negotiate
`prices with pharmaceutical manufacturers on behalf of Medicare beneficiaries, which we expect would restrict access to and reimbursement
`for our products.
`
`Specifically, in the U.S., the following government activities have potential impacts on our financial results:
`• Sustainable Growth Rate Replacement—The Medicare physician payment formula known as the Sustainable Growth Rate (SGR) is
`routinely overridden by Congressional action because it would lead to dramatic decreases in physician payment. The current legislative
`relief expires in March 2015. Congress issued a bi-partisan proposal to repeal the SGR and replace it with a new payment model. This
`form of SGR replacement is estimated by the Congressional Budget Office to cost the federal government approximately $144 billion over
`10 years. The source of those funds has yet to be determined, but could include additional taxes on and/or rebate requirements applicable
`to the pharmaceutical industry, including Pfizer.
`• Deficit Reduction—Any significant spending reductions affecting Medicare, Medicaid or other publicly funded or subsidized health
`programs that may be implemented, and/or any significant additional taxes or fees that may be imposed on us, as part of any broad deficit-
`reduction effort could have an adverse impact on our results of operations.
`The ACA, which expanded the role of the U.S. government as a healthcare payer, is accelerating changes in the U.S. healthcare marketplace,
`and the potential for additional pricing and access pressures continues to be significant. Many of these developments may impact drug
`utilization, in particular branded drug utilization. Some employers, seeking to avoid the tax on high-cost health insurance in the ACA to be
`imposed in 2018, are already scaling back healthcare benefits. Some health plans and pharmacy benefit managers are seeking greater pricing
`predictability from pharmaceutical manufacturers in contractual negotiations. Other health plans and pharmacy benefit managers are
`increasing their focus on spending on specialty medicines by implementing co-insurance in place of a flat co-payment. Because co-insurance
`passes on a percentage of a drug’s cost to the patient, this shift has the potential to significantly increase patient out-of-pocket costs.
`
`Overall, there is increasing pressure on U.S. providers to deliver healthcare at a lower cost and to ensure that those expenditures deliver
`demonstrated value in terms of health outcomes. Longer term, we are seeing a shift in focus away from fee-for-service payments towards
`outcomes-based payments and risk-sharing arrangements that reward providers for cost reductions. These new payment models can, at
`times, lead to lower prices for, and restricted access to, new medicines. At the same time, these models can also expand utilization by
`encouraging physicians to screen, diagnose and focus on outcomes.
`
`In response to the evolving U.S. and global healthcare spending landscape, we are continuing to work with health authorities, health
`technology assessment and quality measurement bodies and major U.S. payers throughout the product-development process to better
`understand how these entities value our compounds and products. Further, we are seeking to develop stronger internal capabilities focused on
`demonstrating the value of the medicines that we discover or develop, register and manufacture, by recognizing patterns of usage of our
`medicines and competitor medicines along with patterns of healthcare costs.
`
`Regulatory Environment––Pipeline Productivity
`
`The discovery and development of safe, effective new products, as well as the development of additional uses for existing products, are
`necessary for the continued strength of our businesses. We have encountered increasing regulatory scrutiny of drug safety and efficacy, even
`as we continue to gather safety and other data on our products, before and after the products have been launched. Our product lines must be
`replenished over time in order to offset revenue losses when products lose their exclusivity, as well as to provide for earnings growth. We
`devote considerable r