`2012 Financial Report
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 1 of 121
`
`
`
`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 2012 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. This section, beginning on page 2, provides information
`about the following: our business; our 2012 performance; our operating environment; our strategy; our business development initiatives,
`such as acquisitions, dispositions, licensing and collaborations; and our financial guidance for 2013.
`Significant Accounting Policies and Application of Critical Accounting Estimates. This section, beginning on page 10, 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 15, and consists of the following sections:
`Revenues. This sub-section, beginning on page 15, provides an analysis of our revenues and products for the three years ended
`December 31, 2012, including an overview of research and development expenses and important biopharmaceutical product
`developments.
`Costs and Expenses. This sub-section, beginning on page 28, provides a discussion about our costs and expenses.
`Provision for Taxes on Income. This sub-section, beginning on page 33, provides a discussion of items impacting our tax provisions.
`Discontinued Operations. This sub-section, on page 34, provides an analysis of the financial statement impact of our discontinued
`operations.
`Adjusted Income. This sub-section, beginning on page 34, provides a discussion of an alternative view of performance used by
`management.
`Analysis of the Consolidated Statements of Comprehensive Income. This section, on page 38, provides a discussion of changes in certain
`components of other comprehensive income.
`Analysis of the Consolidated Balance Sheets. This section, beginning on page 38, provides a discussion of changes in certain balance
`sheet accounts.
`Analysis of the Consolidated Statements of Cash Flows. This section, beginning on page 39, provides an analysis of our consolidated
`cash flows for the three years ended December 31, 2012.
`Analysis of Financial Condition, Liquidity and Capital Resources. This section, beginning on page 40, provides an analysis of selected
`measures of our liquidity and of our capital resources as of December 31, 2012 and December 31, 2011, as well as a discussion of our
`outstanding debt and other commitments that existed as of December 31, 2012. 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 44, 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 44, 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 financial and operating 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.
`
`•
`
`•
`
`•
`
`•
`
`•
`
`•
`
`2012 Financial Report
`
`
`1
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 2 of 121
`
`
`
`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`OVERVIEW OF OUR PERFORMANCE, OPERATING ENVIRONMENT, STRATEGY AND OUTLOOK
`
`Our Business
`
`Our mission is to apply science and our global resources to improve health and well-being at every stage of life. We strive to set the standard
`for quality, safety and value in the discovery, development and manufacturing of medicines for people and animals. Our diversified global
`healthcare portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as many of the world’s best-
`known consumer products. Every day, we work across developed and emerging markets to advance wellness, prevention, treatments and
`cures that challenge the most feared diseases of our time. We also 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, as
`well as through 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 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, the regulatory environment and pipeline productivity, pricing and access pressures,
`and increasing competition among branded products. (For more 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, Turkey,
`Russia and India.
`
`On February 6, 2013, an initial public offering (IPO) of our subsidiary, Zoetis Inc. (Zoetis), was completed, pursuant to which we sold 99.015
`million shares of Zoetis in exchange for the retirement of approximately $2.5 billion of Pfizer commercial paper issued on January 10, 2013.
`The IPO represented approximately 19.8% of the total outstanding Zoetis shares. On February 1, 2013, Zoetis shares began trading on the
`New York Stock Exchange under the symbol "ZTS." Prior to and in connection with the IPO, Zoetis completed a $3.65 billion senior notes
`offering and we transferred to Zoetis substantially all of the assets and liabilities of our Animal Health business. (For additional information, see
`Notes to Consolidated Financial Statements––Note 19A. Subsequent Events: Zoetis Debt Offering and Initial Public Offering.)
`
`On November 30, 2012, we completed the sale of our Nutrition business to Nestlé for $11.85 billion in cash and recognized a gain of
`approximately $4.8 billion, net of tax, in Gain/(loss) on sale of discontinued operations––net of tax. The operating results of this business are
`reported as Income/(loss) from discontinued operations––net of tax in our consolidated statements of income for all periods presented. In
`addition, in our consolidated balance sheet as of December 31, 2011, the assets and liabilities associated with this discontinued operation 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” and “Discontinued Operations” sections of this
`Financial Review.)
`
`On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash and recognized a gain of
`approximately $1.3 billion, net of tax, in Gain/(loss) on sale of discontinued operations––net of tax. The operating results of this business are
`reported as Income/(loss) from discontinued operations––net of tax in our consolidated statements of income for the years ended December
`31, 2011 and December 31, 2010. (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 2012 Performance
`
`Revenues decreased 10% in 2012 to $59.0 billion, compared to $65.3 billion in 2011, which reflects an operational decline of $4.8 billion or
`8%, primarily the result of the loss of exclusivity of Lipitor in most major markets, including the U.S. on November 30, 2011 and most of
`developed Europe in March and May 2012, and the unfavorable impact of foreign exchange of $1.5 billion, or 2%. Lipitor and other product
`losses of exclusivity, as well as the final-year terms of our collaboration agreements in certain markets for Spiriva, negatively impacted
`revenues by approximately $7.7 billion, or 12%, in 2012 compared to 2011.
`
` 2012 Financial Report
`
`2
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 3 of 121
`
`
`
`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`The following table provides the significant impacts on revenues for 2012 as compared to 2011:
`
`
`
`$
`
`2012 v. 2011
`Increase/
`(Decrease)
`(MILLIONS OF DOLLARS)
`Lipitor(a)
`(5,629)
`Geodon/Zeldox(a)
`(669)
`Xalatan/Xalacom(a)
`(444)
`Caduet(a)
`(280)
`(253)
`Effexor
`(152)
`Zosyn/Tazocin
`Aromasin(a)
`(151)
`Aricept(b)
`(124)
`Detrol/Detrol LA(a)
`(122)
`196
`Celebrex
`465
`Lyrica
`Alliance revenues(a)
`(138)
`All other biopharmaceutical products(c)
`525
`115
`Animal Health products
`184
`Consumer Healthcare products
`(a) Lipitor and Caduet lost exclusivity in the U.S. in November 2011 and various other major markets in 2011 and 2012. Xalatan lost exclusivity in the U.S. in March
`2011 and in the majority of European markets in January 2012. Aromasin lost exclusivity in the U.S. in April 2011, in the majority of European markets in July
`2011 and in Japan in November 2011. Geodon lost exclusivity in the U.S. in March 2012. Detrol immediate release (Detrol IR) lost exclusivity in the U.S. in June
`2012. Detrol lost exclusivity in most European markets in September 2012. We lost exclusivity for Aricept 5mg and 10mg tablets, which are included in Alliance
`revenues, in the U.S. in November 2010 and in the majority of European markets in February 2012 and April 2012. Lower revenues for Spiriva in certain
`European countries, Canada and Australia reflect final-year terms of our collaboration agreements in those markets.
`(b) Represents direct sales under license agreement with Eisai Co., Ltd.
`(c) Includes the “All other” category included in the Revenues—Major Biopharmaceutical Products table presented in this Financial Review, which includes sales of
`generic atorvastatin.
`
`%
`Change
`(59)
`(65)
`(36)
`(52)
`(37)
`(24)
`(42)
`(28)
`(14)
`8
`13
`(4)
`7
`3
`6
`
`•
`•
`•
`
`Income from continuing operations was $9.5 billion in 2012 compared to $8.4 billion in 2011, primarily reflecting, among other items:
`•
`a settlement with the U.S. Internal Revenue Service and the resolution of certain foreign tax audits in 2012, all of which related to
`multiple tax years, which resulted in a tax benefit of approximately $1.1 billion and $310 million, respectively, representing tax and
`interest (see further discussion in Notes to Consolidated Financial Statements––Note 5A. Tax Matters: Taxes on Income from
`Continuing Operations);
`purchase accounting charges that were approximately $1.8 billion (pre-tax) lower in 2012 than 2011;
`acquisition-related costs that were approximately $1.0 billion (pre-tax) lower in 2012 than 2011; and
`charges related to our non-acquisition related cost-reduction and productivity initiatives that were approximately $645 million (pre-
`tax) lower in 2012 than 2011,
`partially offset by:
`•
`the loss of exclusivity of Lipitor, as well as certain other products, resulting in lower revenues and associated expenses (see also
`"The Loss or Expiration of Intellectual Property Rights" section of this Financial Review);
`charges for certain legal matters that were approximately $1.4 billion (pre-tax) higher in 2012 than 2011 (see further discussion in
`the “Costs and Expenses––Other Deductions––Net” section of this Financial Review and Notes to Consolidated Financial
`Statements––Note 4. Other Deductions––Net); and
`charges in 2012 associated with the separation of Zoetis of $325 million (pre-tax) (see further discussion in the “Costs and
`Expenses––Selling, Informational and Administrative (SI&A) Expenses" and "Other Deductions––Net” sections of this Financial
`Review and Notes to Consolidated Financial Statements––Note 4. Other Deductions––Net).
`
`•
`
`•
`
`Also, see the “Discontinued Operations” section of this Financial Review.
`
`2012 Financial Report
`
`
`3
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 4 of 121
`
`
`
`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`Our Operating Environment
`
`U.S. Healthcare Legislation
`
`Principal Provisions Affecting Us
`
`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), was enacted in the U.S. In June 2012, the U.S. Supreme Court
`upheld the constitutionality of the requirement in the U.S. Healthcare Legislation for Americans to have insurance (called the individual
`mandate) (for additional information, see the “Government Regulation and Price Constraints” section of our 2012 Annual Report on
`Form 10-K). This legislation has resulted in both current and longer-term impacts on us, as discussed below.
`
`•
`
`•
`
`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 us 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).
`
`•
`
`•
`
`Impacts to 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.
`
`•
`
`Impacts to 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
`$248 million recorded in Selling, informational and administrative expenses, related to the fee payable to the federal government referred
`to above.
`
`•
`
`Other Impacts
`
`Individual Mandate—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. In
`addition, the U.S. Healthcare Legislation requires that, except in certain circumstances, individuals obtain health insurance beginning in
`2014, and it also provides for an expansion of Medicaid coverage in 2014. It is expected that, as a result of these provisions, there will be
`a substantial increase in the number of Americans with health insurance beginning in 2014, a significant portion of whom will be eligible
`for Medicaid. We anticipate that this will increase demand for pharmaceutical products overall. However, because of the substantial
`mandatory rebates we pay under the Medicaid program and because a significant percentage of the Americans who will be included in
`the coverage expansion are expected to be young, we do not anticipate that implementation of the coverage expansion will generate
`significant additional revenues for Pfizer. In June 2012, the U.S. Supreme Court upheld the constitutionality of all provisions of the U.S.
`Healthcare Legislation, with the exception of the provisions concerning Medicaid expansion; as a result of the Court's ruling regarding
`Medicaid, states can choose not to expand their Medicaid populations without losing federal funding for their existing Medicaid
`populations. The Congressional Budget Office estimates that the new state flexibility is likely to result in six million fewer new Medicaid
`enrollees than were initially expected to enroll as a result of the eligibility expansion and that half of these people are expected to gain
`coverage through Health Insurance Exchanges, and the remaining three million are likely to remain uninsured.
`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.
`Under the U.S. Healthcare Legislation, biosimilars applications may not be submitted until four years after the approval of the reference,
`
` 2012 Financial Report
`
`•
`
`•
`
`4
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 5 of 121
`
`
`
`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`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. 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. As part of our business strategy, we are developing
`biosimilar medicines using our expertise in biologics and our regulatory, commercial and manufacturing strengths. As such, a better-
`defined biosimilars approval pathway will assist us in pursuing approval of our own biosimilar products in the U.S.
`
`The Loss or Expiration of Intellectual Property Rights
`
`As is inherent in the biopharmaceutical industry, the loss or expiration of intellectual property 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 products that lose exclusivity, often in a very short period of time. While small
`molecule products are impacted in such a manner, biologics currently have additional barriers to entry related to the manufacture of such
`products and, unlike small molecule generics, biosimilars are not necessarily identical to the reference products. Therefore, generic
`competition with respect to biologics may not be as significant. A number of our current products are expected to face significantly increased
`generic competition over the next few years.
`
`•
`
`Our financial results in 2012 and our financial guidance for 2013, as applicable, reflect the impact of the loss of exclusivity of various products
`and the expiration of certain alliance product contract rights discussed below (see the “Our Financial Guidance for 2013” section of this
`Financial Review). Specifically:
`Lipitor in the U.S.––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. Through the end of 2011, sales of Lipitor in the U.S. were reported
`in our Primary Care business unit. Beginning in 2012, sales of Lipitor in the U.S. were reported in our Established Products business unit.
`Lipitor in international markets—Lipitor lost exclusivity in Japan in June 2011 (with generic competition occurring in November 2011),
`Australia in April 2012 and most of developed Europe in March 2012 and May 2012. In Europe, Japan and Australia, Lipitor now faces
`multi-source generic competition. In other international markets, Lipitor has lost exclusivity in certain countries and will lose exclusivity at
`various times in other countries.
`Prior to loss of exclusivity, sales of Lipitor in each market except for those in Emerging Markets, are 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, are 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 began to be
`reported in our Established Products business unit on January 1, 2013.
`Other recent loss of exclusivity impacts—In the U.S., we lost exclusivity for Vfend tablets in February 2011, for Xalatan in March 2011 and
`for Geodon in March 2012. The basic U.S. patent (including the six-month pediatric exclusivity period) for Protonix expired in January
`2011. The basic patent for Vfend tablets in Brazil expired in January 2011. We lost exclusivity for Aromasin in the U.S. in April 2011, in the
`majority of European markets in July 2011 and in Japan in November 2011. We lost exclusivity for Xalatan and Xalacom in the majority of
`European markets in January 2012. We lost exclusivity for Aricept in the majority of European markets in February 2012 and April 2012.
`Caduet lost exclusivity in the U.S. in November 2011 and in the majority of European markets in March and May 2012. We lost exclusivity
`in the U.S. in September 2012 for Revatio tablet, and in June 2012 for Detrol IR. Detrol lost exclusivity in most European markets in
`September 2012.
`In addition, we expect to lose exclusivity for various other products in various markets over the next few years. For additional information,
`including with regard to the expiration of the patents for various products in the U.S., European Union (EU) and Japan, see the “Patents and
`Intellectual Property Rights” section of our 2012 Annual Report on Form 10-K.
`We will continue to aggressively defend our patent rights whenever we deem appropriate. For a discussion of certain recent developments
`with respect to patent litigation, see Notes to Consolidated Financial Statements—Note 17. Commitments and Contingencies.
`
`•
`
`•
`
`In Alliance revenues, we expect to be negatively impacted by the following over the next few years:
`•
`Aricept—Our rights to Aricept in Japan returned to Eisai Co., Ltd. in December 2012. We expect to lose exclusivity for the Aricept 23mg
`tablet in the U.S. in July 2013.
`Spiriva—Our collaboration with Boehringer Ingelheim (BI) for Spiriva expires on a country-by-country basis between 2012 and 2016,
`including the expiration in certain EU markets and Canada and Australia in 2012, which adversely impacted our 2012 results. We expect
`to experience a graduated decline in revenues from Spiriva through 2016.
`Enbrel—Our U.S. and Canada collaboration agreement with Amgen Inc. for Enbrel will expire in October 2013. While we are entitled to
`royalties for 36 months thereafter, we expect that those royalties will be significantly less than our current share of Enbrel profits from
`U.S. and Canada sales. Outside the U.S. and Canada, our exclusive rights to Enbrel continue in perpetuity.
`
`•
`
`2012 Financial Report
`
`
`5
`
`WATSON LABORATORIES, INC. , IPR2017-01622, Ex. 1130 , p. 6 of 121
`
`
`
`Financial Review
`Pfizer Inc. and Subsidiary Companies
`
`•
`
`Rebif—Our collaboration agreement with EMD Serono Inc. (Serono) to co-promote Rebif in the U.S. will expire either at the end of 2013
`or the end of 2015, depending on the outcome of pending litigation between Pfizer and Serono concerning the interpretation of the
`agreement. We believe that we are entitled to a 24-month extension of the agreement to the end of 2015. Serono believes that we are
`not entitled to the extension and that the agreement will expire at the end of 2013. In October 2011, the Philadelphia Court of Common
`Pleas sustained our preliminary objections and dismissed Serono’s complaint, and Serono has appealed the decision to the Superior
`Court of Pennsylvania. For additional information, see Notes to Consolidated Financial Statements––Note 17. Commitments and
`Contingencies.
`
`Pipeline Productivity and Regulatory Environment
`
`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 are confronted by 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 revenue and earnings
`growth. We devote considerable resources to research and development (R&D) activities. These activities involve a high degree of risk and
`may take many years, and with respect to any specific research and development project, there can be no assurance that the development of
`any particular product candidate or new indication for an in-line product will achieve desired clinical endpoints and safety profile, will be
`approved by regulators or will be successful commercially. We continue to closely evaluate our global research and development function and
`pursue strategies intended to improve innovation and overall productivity in R&D by prioritizing areas that we believe have the greatest
`scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas that we believe have the highest potential to
`deliver value in the near term and over time.
`
`During the development of a product, we conduct clinical trials to provide data on the drug’s safety and efficacy to support the evaluation of its
`overall benefit-risk profile for a particular patient population. In addition, after a product has been approved and launched, we continue to
`monitor its safety as long as it is available to patients, and post-marketing trials may be conducted, including trials requested by regulators and
`trials that we do voluntarily to gain additional medical knowledge. For the entire life of the product, we collect safety data and report potential
`problems to the FDA. The FDA and regulatory authorities in other jurisdictions may evaluate potential safety concerns and take regulatory
`actions in response, such as updating a product’s labeling, restricting the use of a product, communicating new safety information to the
`public, or, in rare cases, removing a product from the market.
`
`Pricing and Access 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 2012 included measures to reduce pharmaceutical prices and expenditures in
`Spain, Italy, France, Greece, Ireland, Portugal and Japan. 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. There also continue to be legislative proposals to amend U.S. laws to allow the importation into the U.S. of
`prescription drugs