Appendix A
`2013 Financial Report
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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 2013 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.
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`The Financial Review is organized as follows:
`•
`Overview of Our Performance, Operating Environment, Strategy and Outlook. This section, beginning on page 2, provides information
`about the following: our business; our 2013 performance; our operating environment; our strategy; our business development initiatives,
`such as acquisitions, dispositions, licensing and collaborations; and our financial guidance for 2014.
`Significant Accounting Policies and Application of Critical Accounting Estimates. This section, beginning on page 12, discusses those
`accounting policies and estimates that we consider important in understanding Pfizer’s 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. This section begins on page 17, and consists of the following sub-sections:
`Revenues. This sub-section, beginning on page 17, provides an analysis of our revenues and products for the three years ended
`December 31, 2013, including an overview of our important biopharmaceutical product developments.
`Costs and Expenses. This sub-section, beginning on page 29, provides a discussion about our costs and expenses.
`Provision for Taxes on Income. This sub-section, beginning on page 34, provides a discussion of items impacting our tax provisions.
`Discontinued Operations. This sub-section, on page 35, provides an analysis of the financial statement impact of our discontinued
`operations.
`Adjusted Income. This sub-section, beginning on page 35, provides a discussion of an alternative view of performance used by
`management.
`Analysis of the Consolidated Statements of Comprehensive Income. This section, on page 40, provides a discussion of changes in certain
`components of other comprehensive income.
`Analysis of the Consolidated Balance Sheets. This section, beginning on page 41, provides a discussion of changes in certain balance
`sheet accounts.
`Analysis of the Consolidated Statements of Cash Flows. This section, beginning on page 42, provides an analysis of our consolidated
`cash flows for the three years ended December 31, 2013.
`Analysis of Financial Condition, Liquidity and Capital Resources. This section, beginning on page 43, provides an analysis of selected
`measures of our liquidity and of our capital resources as of December 31, 2013 and December 31, 2012, as well as a discussion of our
`outstanding debt and other commitments that existed as of December 31, 2013. 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. This section, on page 47, 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. This section, beginning on page 47, 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, business-development plans, and plans
`relating to share repurchases and dividends. 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.
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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 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, regulatory environment and pricing and access pressures, pipeline productivity and competition among branded
`products. We also face challenges as a result of the global economic environment. For additional information about these 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 include the U.S., Western Europe, Japan, Canada, Australia, Scandinavia, South Korea, Finland and New
`Zealand; and references to Emerging Markets include the rest of the world, including, among other countries, China, Brazil, Mexico, Russia,
`Turkey and India.
`
`On June 24, 2013, we completed the full disposition of our Animal Health business (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 are reported as Income from discontinued operations––net of tax in our
`consolidated statements of income through June 24, 2013, the date of disposal. In addition, in the consolidated balance sheet as of December
`31, 2012, the assets and liabilities associated with this business are classified as Assets of discontinued operations and other assets held for
`sale and Liabilities of discontinued operations, as appropriate. For additional information, see Notes to Consolidated Financial Statements––
`Note 2B. Acquisitions, Divestitures, Collaborative Arrangements 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.
`
`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 are reported as Income from discontinued operations––net of tax in our consolidated statements
`of income through November 30, 2012, the date of disposal. For additional information, see Notes to Consolidated Financial Statements––
`Note 2B. Acquisitions, Divestitures, Collaborative Arrangements and Equity-Method Investments: Divestitures and see the “Our Business
`Development Initiatives” and “Discontinued Operations” sections of this Financial Review.
`
`On August 1, 2011, we completed the sale of our Capsugel business and recognized a gain of approximately $1.3 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, 2011. The operating
`results of this business are reported as Income from discontinued operations––net of tax in our consolidated statements of income through
`August 1, 2011, the date of disposal. For additional information, see Notes to Consolidated Financial Statements––Note 2B. Acquisitions,
`Divestitures, Collaborative Arrangements and Equity-Method Investments: Divestitures and see the “Our Business Development Initiatives”
`and “Discontinued Operations” sections of this Financial Review.
`
`The assets, liabilities, operating results and cash flows of acquired businesses, such as King Pharmaceuticals, Inc. (King) (acquired on
`January 31, 2011), are included in our results on a prospective basis only commencing from the acquisition date. As such, our consolidated
`financial statements for the year ended December 31, 2011 reflect approximately 11 months of King’s U.S. operations and approximately 10
`months of King’s international operations. For additional information about these acquisitions, see Notes to Consolidated Financial
`Statements––Note 2A. Acquisitions, Divestitures, Collaborative Arrangements and Equity-Method Investments: Acquisitions and see the “Our
`Business Development Initiatives” section of this Financial Review.
`
`Our 2013 Performance
`
`Revenues decreased 6% in 2013 to $51.6 billion, compared to $54.7 billion in 2012, which reflects an operational decline of $1.9 billion, or
`4%.
`The operational decrease was primarily the result of:
`•
`the continued erosion of branded Lipitor in the U.S., developed Europe and certain other developed markets (approximately $1.7 billion);
`•
`the loss of exclusivity for Geodon in March 2012 in the U.S. (approximately $130 million);
`• other product losses of exclusivity (approximately $1.3 billion);
`•
`the ongoing expiration of the Spiriva collaboration in certain countries (approximately $475 million);
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
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`•
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`•
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`• decreased government purchases of the Prevnar family of products and Enbrel in certain emerging markets (approximately $160 million);
`and
`lower revenues from generic atorvastatin (approximately $145 million),
`•
`partially offset by:
`•
`the growth of certain products, including Lyrica, Inlyta, Celebrex and Xalkori in developed markets and Xeljanz in the U.S. (approximately
`$1.1 billion);
`the overall growth in the rest of the Emerging Markets business unit (approximately $751 million), excluding the aforementioned decrease
`in the government purchases of the Prevnar family of products and Enbrel;
`the overall growth in the Consumer Healthcare business unit (approximately $153 million); and
`•
`revenues from the transitional manufacturing and supply agreements with Zoetis (approximately $132 million).
`•
`In addition, Revenues were unfavorably impacted by foreign exchange of approximately $1.2 billion, or 2%, in 2013 compared to 2012.
`Income from continuing operations was $11.4 billion in 2013 compared to $9.0 billion in 2012, primarily reflecting, among other items:
`• patent litigation settlement income recorded in 2013 (approximately $1.3 billion, pre-tax) (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 net charges for other legal matters (down approximately $2.2 billion, pre-tax) (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);
`• additional benefits generated from our global cost-reduction/productivity initiatives, partially offset by spending to support new product
`launches;
`• a gain recorded in 2013 (approximately $459 million, pre-tax) associated with the transfer of certain product rights to our equity-method
`investment in China, Hisun Pfizer Pharmaceuticals Company Limited (Hisun Pfizer) (see also the “Our Business Development Initiatives”
`section of this Financial Review and Notes to Consolidated Financial Statements––Note 2D. Acquisitions, Divestitures, Collaborative
`Arrangements and Equity-Method Investments: Equity-Method Investments); and
`lower amortization of intangible assets (down approximately $510 million, pre-tax),
`•
`partially offset by:
`•
`lower revenues, as discussed above;
`• higher asset impairments and related charges (up approximately $211 million, pre-tax) (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
`• a higher effective tax rate, primarily due to a decrease in tax benefits related to certain audit settlements in multiple jurisdictions covering
`various periods and a change in the jurisdictional mix of earnings (see also the “Provision for Taxes on Income” section of this Financial
`Review and Notes to Consolidated Financial Statements––Note 5. Tax Matters).
`
`Also, see the “Discontinued Operations” section of this Financial Review.
`
`Our Operating Environment
`
`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.
`This 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, Enbrel (we market Enbrel outside of the U.S. and Canada) and the Prevnar
`family, 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 biotechnology 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 necessarily identical to 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 we have lost collaboration rights with respect to a number of our
`alliance products in certain markets, and certain of our products and alliance products are expected to face significantly increased generic
`competition over the next few years.
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
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`Specifically:
`
`Recent Losses of Product Exclusivity Impacting Product Revenues
`
`• Lipitor has lost exclusivity in all major markets. Lipitor revenues were $2.3 billion in 2013, $3.9 billion in 2012 and $9.6 billion in 2011. We
`lost exclusivity for Lipitor in the U.S. in November 2011. The entry of multi-source generic competition in the U.S. began in May 2012, with
`attendant increased competitive pressures. Lipitor lost exclusivity in Japan in June 2011, Australia in April 2012 and most of developed
`Europe in March and May 2012 and now faces multi-source generic competition in those markets.
`
`Prior to loss of exclusivity, sales of Lipitor in each market, except for those in Emerging Markets, were reported in our Primary Care
`business unit. Typically, as of the beginning of the fiscal year following loss of exclusivity in a market, sales of Lipitor in that market, except
`for those in Emerging Markets, were reported in our Established Products business unit. Sales of Lipitor in the U.S. and Japan have been
`reported in our Established Products business unit since January 1, 2012, and sales of Lipitor in developed Europe have been reported in
`our Established Products business unit since January 1, 2013.
`
`The following table provides information about certain of our products impacted by losses of exclusivity (LOEs) in 2013 and 2012 (other
`than Lipitor), showing, by product, the LOE dates, the markets impacted and the revenues associated with those products in those LOE
`markets:
`(MILLIONS OF DOLLARS)
`Products
`
`LOE Dates
`
`Markets Impacted
`
`Xalatan and Xalacom
`Aricept
`Geodon
`Revatio tablet
`Detrol IR and Detrol LA
`Lyrica
`Viagra
`
`January 2012
`February and April 2012
`March 2012
`September 2012
`September 2012
`February 2013
`June 2013
`
`Majority of European markets
`Majority of European markets
`U.S.
`U.S.
`Majority of European markets
`Canada
`Majority of European markets
`
`$
`
`$
`
`$
`
`Revenues in Markets Impacted
`Year Ended December 31,
`2013
`2012
`161
`275
`47
`139
`84
`214
`67
`312
`53
`119
`101
`206
`265
`370
`
`2011
`509
`347
`859
`312
`157
`185
`400
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`Recent and Expected Losses of Collaboration Rights Impacting Alliance Revenues
`• Spiriva—Our collaboration with Boehringer Ingelheim (BI) for Spiriva expires on a country-by-country basis between 2012 and 2016. In the
`U.S. and certain European countries, the co-promotion agreements for Spiriva entered their final year in 2013, which resulted in a decline
`in Pfizer’s share of Spiriva revenues per the terms of those agreements. Additionally, in Australia, Canada and certain other European
`markets, the co-promotion agreements for Spiriva expired in 2013, which resulted in no additional revenues after the expiration date. We
`expect to experience a graduated decline in revenues from Spiriva through 2016 as agreements for other markets enter their final year
`and subsequently expire. Pfizer Alliance revenues related to Spiriva were $689 million in 2013, $1.2 billion in 2012 and $1.4 billion in 2011.
`• Aricept—Our rights to Aricept in Japan returned to Eisai Co., Ltd. in December 2012. The Aricept 23mg tablet lost exclusivity in the U.S. in
`July 2013.
`• Enbrel—Our U.S. and Canada co-promotion agreement with Amgen Inc. for Enbrel expired on October 31, 2013. While we are entitled to
`royalties for 36 months thereafter, we expect that those royalties will be significantly less than our previous share of Enbrel profits from
`U.S. and Canada sales. 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. Enbrel revenues in the U.S. and Canada were
`$1.4 billion in 2013, $1.5 billion in 2012 and $1.3 billion in 2011.
`• Rebif—Our collaboration agreement with EMD Serono Inc. to co-promote Rebif in the U.S. will expire at the end of 2015. Rebif revenues
`were $401 million in 2013, $399 million in 2012 and $320 million in 2011.
`
`Losses and Expected Losses of Product Exclusivity in 2014
`• We lost exclusivity for Detrol LA and Rapamune in the U.S. in January 2014. Revenues for Detrol/Detrol LA and Rapamune in the U.S.
`were $576 million in 2013, $671 million in 2012 and $745 million in 2011.
`• We expect to lose exclusivity for various other products in various markets in 2014, including Zyvox in Canada, Celebrex in developed
`Europe and Viagra in Japan and Australia. For Lyrica, regulatory exclusivity in the EU extends until 2014.
`
`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 of our 2013 Annual Report on Form 10-K.
`
`Our financial results in 2013 and our financial guidance for 2014, 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 2014
`financial guidance, see the “Our Financial Guidance for 2014” 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” section of this Financial Review. See Notes to
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
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`Consolidated Financial Statements––Note 17A1. Commitments and Contingencies: Legal Proceedings––Patent Litigation for a discussion of
`certain recent developments with respect to 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 of our 2013 Annual Report on Form 10-K. This legislation has resulted in both
`current and longer-term impacts on us, as discussed below.
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`Certain provisions of the U.S. Healthcare Legislation became effective in 2010 or in 2011, while other provisions will become effective on
`various dates. The principal provisions affecting the biopharmaceutical industry provide for the following:
`•
`an increase, from 15.1% to 23.1%, in the minimum rebate on branded prescription drugs sold to Medicaid beneficiaries (effective
`January 1, 2010);
`extension of Medicaid prescription drug rebates to drugs dispensed to enrollees in certain Medicaid managed care organizations
`(effective March 23, 2010);
`expansion of the types of institutions eligible for the “Section 340B discounts” for outpatient drugs provided to hospitals serving a
`disproportionate share of low-income individuals and meeting the qualification criteria under Section 340B of the Public Health Service
`Act of 1944 (effective January 1, 2010);
`discounts on branded prescription drug sales to Medicare Part D participants who are in the Medicare “coverage gap,” also known as the
`“doughnut hole” (effective January 1, 2011); and
`a fee payable to the federal government (which is not deductible for U.S. income tax purposes) based on our prior-calendar-year share
`relative to other companies of branded prescription drug sales to specified government programs (effective January 1, 2011, with the total
`fee to be paid each year by the pharmaceutical industry increasing annually through 2018).
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`Impacts on our 2013 Results
`
`We recorded the following amounts in 2013 as a result of the U.S. Healthcare Legislation:
`•
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`$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
`
`•
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`$280 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government referred
`to above.
`
`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 referred
`to above.
`
`•
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`Impacts on our 2011 Results
`
`We recorded the following amounts in 2011 as a result of the U.S. Healthcare Legislation:
`•
`
`$648 million recorded as a reduction to Revenues, related to the higher, extended and expanded rebate provisions and the Medicare
`“coverage gap” discount provision; and
`
`•
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`$248 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government referred
`to above.
`
`Other Impacts
`•
`
`Expansion of Healthcare Coverage—The financial impact of U.S. healthcare reform may be affected by certain additional developments
`over the next few years, including pending implementation guidance relating to the U.S. Healthcare Legislation and certain healthcare
`reform proposals. As of May 2013, the Congressional Budget Office estimates that the ACA will result in the coverage of 25 million
`previously uninsured individuals by 2017. Expanding insurance coverage is expected to result in a negligible change in overall
`pharmaceutical industry sales, as the uninsured are principally young and relatively healthy and it is expected that a significant
`percentage may be covered by Medicaid (under which sales of pharmaceutical products are subject to substantial rebates and, in many
`states, to formulary restrictions limiting access to brand-name drugs, including ours), and the restrictive benefit designs discourage the
`use of branded drugs. At the same time, the rebates, discounts, taxes and other costs associated with the ACA are a significant cost to
`the industry.
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`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.
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`Financial Review
`Pfizer Inc. and Subsidiary Companies
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`Under the U.S. Healthcare Legislation, biosimilar applications may not be submitted until four years after the approval of the reference,
`innovator biologic. The U.S. Food and Drug Administration (FDA) is responsible for implementation of the legislation, which will require
`the FDA to address such key topics as the type and extent of data needed to establish biosimilarity; the data required to achieve
`interchangeability compared to biosimilarity; the naming convention for biosimilars; the tracking and tracing of adverse events; and the
`acceptability of data using a non-U.S. licensed comparator to demonstrate biosimilarity and/or interchangeability with a U.S.-licensed
`reference product. The FDA has begun to address some of these issues with the February 2012 release of three draft guidance
`documents. Specifically, the FDA has clarified that biosimilar applicants may use a non-U.S.-licensed comparator in certain studies to
`support a demonstration of biosimilarity to a U.S.-licensed reference product. Over the next several years, the FDA is expected to finalize
`the guidance documents released in 2012 and issue new draft guidance on clinical pharmacology for biosimilars. If competitors are able
`to obtain marketing approval for biosimilars referencing our biotechnology products, our biotechnology products may become subject to
`competition from 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 necessarily identical to 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. As part of our business strategy, we are capitalizing on our expertise in biologics manufacturing, as well
`as our regulatory and commercial strengths, to develop biosimilar medicines. As such, a better-defined biosimilars approval pathway will
`assist us in pursuing approval of our own biosimilar products in the U.S.
`
`Regulatory Environment/Pricing and Access––U.S. 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). In
`particular, we continue to face widespread downward pressures on international pricing and reimbursement, particularly in developed
`European markets, Japan and in certain emerging markets, all of which have a large government share of pharmaceutical spending and are
`facing a difficult fiscal environment. Specific pricing pressures in 2013 included measures to reduce pharmaceutical prices and expenditures in
`Japan, France, Italy, Spain, Greece, Belgium, Ireland and Portugal. For additional information, see the “Government Regulation and Price
`Constraints––Outside the United States––Pricing and Reimbursement” section of our 2013 Annual Report on Form 10-K. 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 and legislative changes
`have been proposed 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:
`Budget Control Act of 2011—In August 2011, the federal Budget Control Act of 2011 (the Budget Control Act) was enacted in the U.S. The
`•
`Budget Control Act includes provisions to raise the U.S. Treasury Department's borrowing limit, known as the debt ceiling, and provisions
`to reduce the federal deficit by $2.4 trillion between 2012 and 2021. Deficit-reduction targets included $900 billion of discretionary
`spending reductions associated with the Department of Health and Human Services and various agencies charged with national security,
`but those discretionary spending reductions do not include programs such as Medicare and Medicaid or direct changes to
`pharmaceutical pricing, rebates or discounts. The Office of Management and Budget (OMB) was responsible for identifying the remaining
`$1.5 trillion of deficit reductions, which were divided evenly between defense and non-defense spending. The Budget Control Act
`spending reductions to date have not had a material adverse impact on our results of operations.
`In December 2013, Congress enacted minor amendments to the Budget Control Act, providing for greater discretionary spending in 2014
`and 2015 than originally budgeted. The amendm