Pfizer Inc., is a global pharmaceutical company headquartered in New York City, New York, United States. It was founded by Charles Pfizer from Ludwigsburg. Pfizer is the second largest pharmaceutical company in the world after Roche, followed by Novartis.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to_______ COMMISSION FILE NUMBER 1-3619 -- PFIZER INC. (Exact name of registrant as specified in its charter) DELAWARE 13-5315170 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 235 East 42nd Street, New York, New York 10017 (Address of principal executive offices, including zip code) (212) 573-2323 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At July 31, 1996 there were 642,410,060 shares par value $.05, of the issuer's common stock outstanding.
PFIZER INC. FORM 10-Q For the Quarter Ended June 30, 1996 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Page Condensed Consolidated Statement of Income for the three months and six months ended June 30, 1996 and July 2, 1995 3 Condensed Consolidated Balance Sheet at June 30, 1996, December 31, 1995 and July 2, 1995 4 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 1996 and July 2, 1995 5 Notes to Condensed Consolidated Financial Statements 6 Independent Auditors' Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 27
PART I. FINANCIAL INFORMATION Item 1. Financial Statements PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30, July 2, June 30, July 2, 1996 1995 1996 1995 (millions of dollars, except per share data) Net sales . . . . . . . . . . . . . . . $2,661 $2,401 $5,343 $4,739 Costs and expenses Cost of sales . . . . . . . . . . . . 521 552 1,034 1,061 Selling, informational and administrative expenses. . . . . . . 1,083 967 2,077 1,816 Research and development expenses . . 422 354 788 667 Other deductions--net. . . . . . . . . 61 60 118 99 Income from continuing operations before provision for taxes on income and minority interests . . . . 574 468 1,326 1,096 Provision for taxes on income . . . . . 178 155 411 362 Minority interests. . . . . . . . . . . 2 2 4 4 Income from continuing operations . . . 394 311 911 730 Discontinued operations, net of income taxes . . . . . . . . . . . . . -- 6 -- 7 Net income. . . . . . . . . . . . . . . $ 394 $ 317 $ 911 $ 737 Earnings per common share Income from continuing operations. . . . . . . . . . . . . . $ .61 $ .49 $ 1.42 $ 1.17 Discontinued operations, net of income taxes . . . . . . . . . . . . . -- .01 -- .01 Net income. . . . . . . . . . . . . . . $ .61 $ .50 $ 1.42 $ 1.18 Cash dividends per common share . . . . $ .30 $ .26 $ .60 $ .52 See accompanying Notes to Condensed Consolidated Financial Statements.
<TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> (millions of dollars) June 30, Dec. 31, July 2, 1996* 1995** 1995* ASSETS <S> <C> <C> <C> Current Assets Cash and cash equivalents . . . . . . . . . .$ 870 $ 403 $ 624 Short-term investments. . . . . . . . . . . . 1,106 1,109 1,018 Accounts receivable, less allowances June 30, 1996 - $62; Dec. 31, 1995 $61; July 2, 1995 - $52 . . . . . . . . . . 2,133 2,024 2,021 Short-term loans. . . . . . . . . . . . . . . 334 289 269 Inventories Finished goods. . . . . . . . . . . . . . . 538 564 585 Work in process . . . . . . . . . . . . . . 631 579 568 Raw materials and supplies. . . . . . . . . 272 241 234 Total inventories . . . . . . . . . . . . 1,441 1,384 1,387 Prepaid expenses, taxes, and other assets. . . . . . . . . . . . . . 607 943 851 Total current assets. . . . . . . . . . . 6,491 6,152 6,170 Long-term loans and investments . . . . . . . . 606 545 673 Property, plant and equipment, less accumulated depreciation June 30, 1996 - $2,068; Dec. 31, 1995 - $1,991; July 2, 1995 - $2,020. . . . . . . . . . . 3,571 3,473 3,438 Goodwill, less accumulated amortization June 30, 1996 - $95; Dec. 31, 1995 - $79; July 2, 1995 - $64 . . . . . . . . . . . 1,476 1,243 1,189 Other assets, deferred taxes and deferred charges. . . . . . . . . . . . . . . 1,475 1,316 1,458 Total assets. . . . . . . . . . . . . . .$13,619 $12,729 $12,928 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings, including current portion of long-term debt June 30, 1996 - $502; Dec. 31, 1995 $277; July 2, 1995 - $4 . . . . . . . . .$ 2,545 $ 2,036 $ 3,060 Accounts payable. . . . . . . . . . . . . . . 652 715 700 Income taxes payable. . . . . . . . . . . . . 726 822 722 Dividends payable . . . . . . . . . . . . . . 193 -- 164 Accrued compensation and related items. . . . 417 421 398 Other current liabilities . . . . . . . . . . 1,315 1,193 1,042 Total current liabilities . . . . . . . . 5,848 5,187 6,086 Long-term debt. . . . . . . . . . . . . . . . . 583 833 611 Postretirement benefit obligation other than pension plans. . . . . . . . . . . . . . 428 426 431 Deferred taxes on income. . . . . . . . . . . . 157 166 254 Other non-current liabilities . . . . . . . . . 570 564 672 Minority interests. . . . . . . . . . . . . . . 49 47 45 Total liabilities . . . . . . . . . . . . 7,635 7,223 8,099 Shareholders' Equity Preferred stock . . . . . . . . . . . . . . . -- -- -- Common stock. . . . . . . . . . . . . . . . . 34 34 34 Additional paid-in capital. . . . . . . . . . 1,480 1,235 840 Retained earnings . . . . . . . . . . . . . . 7,194 6,858 6,189 Currency translation adjustment and other . . 122 163 316 Employee benefit trust. . . . . . . . . . . . (1,308) (1,169) (874) Common stock in treasury, at cost . . . . . . (1,538) (1,615) (1,676) Total shareholders' equity. . . . . . . . 5,984 5,506 4,829 Total liabilities and shareholders' equity . . . . . . . . .$13,619 $12,729 $12,928 <FN> <F1>* Unaudited ** Condensed from audited financial statements. See accompanying Notes to Condensed Consolidated Financial Statements. </FN> </TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (millions of dollars) Six Months Ended June 30, July 2, 1996 1995 Operating Activities Net income . . . . . . . . . . . . . . . . . . . . .$ 911 $ 737 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangibles . . . 207 181 Changes in operating assets and liabilities, net of effect of businesses acquired and divested. . . . . . . . . . . . . . . . . . . (407) (155) Other. . . . . . . . . . . . . . . . . . . . . . . 12 (14) Net cash provided by operating activities. . . . . . . 723 749 Investing Activities Acquisitions, net of cash acquired . . . . . . . . . (371) (1,462) Proceeds from sale of business . . . . . . . . . . . 353 -- Purchases of property, plant and equipment . . . . . (313) (316) Purchases of short-term investments. . . . . . . . . (1,716) (1,274) Proceeds from redemptions of short-term investments. . . . . . . . . . . . . . . . . . . . 1,719 928 Net change in loans and long-term investments by financial subsidiaries. . . . . . . . . . . . . 26 206 Purchases and redemptions of short-term investments by financial subsidiaries. . . . . . . -- (35) Purchases of long-term investments . . . . . . . . . (65) (80) Other investing activities . . . . . . . . . . . . . 50 76 Net cash used in investing activities. . . . . . . . . (317) (1,957) Financing Activities Increase in short-term debt. . . . . . . . . . . . . 314 729 Purchases of common stock. . . . . . . . . . . . . . -- (109) Cash dividends paid. . . . . . . . . . . . . . . . . (384) (328) Stock option transactions. . . . . . . . . . . . . . 151 60 Other financing activities . . . . . . . . . . . . . (10) 21 Net cash provided by financing activities. . . . . . . 71 373 Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . (10) -- Net increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . 467 (835) Cash and cash equivalents balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . 403 1,459 Cash and cash equivalents balance at end of period. . . . . . . . . . . . . . . . . . . . . .$ 870 $ 624 See accompanying Notes to Condensed Consolidated Financial Statements.
PFIZER INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Subsidiaries operating outside the United States generally are included on the basis of interim periods ended May 26, 1996 and May 28, 1995. Certain reclassifications have been made to the second quarter and first six months of 1995 financial statements to conform to the 1996 presentation, including classification of the food science business as a discontinued operation. For further details, see Note 7, "Discontinued Operations," on page 8. Note 2: Responsibility for Interim Financial Statements Pfizer Inc. (the "Company") is responsible for the accompanying unaudited interim financial statements which reflect all normal and recurring adjustments considered necessary for a fair statement of the results for the periods presented. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. The results of operations for the interim periods ended June 30, 1996 are not necessarily indicative of the results which ultimately might be expected for the current year. Note 3: Earnings Per Common Share Earnings per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents consist of shares issuable upon exercise of stock options. The weighted average number of common shares and common share equivalents totaled 642 million and 625 million for the first six months of 1996 and 1995, respectively. Note 4: Currency Impact An analysis of the changes in the currency translation adjustment for the six months ended June 30, 1996 is as follows: (millions of dollars) Currency translation adjustment December 31, 1995 $207 Translation adjustments and hedges (59) Currency translation adjustment June 30, 1996 $148
PFIZER INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As of June 30, 1996, the balance sheet caption "Currency translation adjustment and other" also includes a $42 million net unrealized gain on investment securities available for sale and a $68 million net unrealized charge for the minimum pension liability of partially funded international plans. Exchange (losses)/gains in "Other deductions--net" were as follows: (millions of dollars) 1996 1995 Second Quarter $(4) $4 Six Months $(8) $6 Note 5: Interest and Income Tax Payments The Company made interest payments of approximately $64 million and $96 million and income tax payments of approximately $429 million and $372 million during the first six months of 1996 and 1995, respectively. Note 6: Acquisitions In January 1996, the Company's hospital products business completed the acquisition of the Leibinger Companies, a leader in the manufacture of specialty instruments and implantable devices used in skull, jaw, facial, hand and foot surgery. In February 1996, the Company acquired Bioindustria Farmaceutici S.p.A., an Italian company engaged in the production and distribution of prescription and over-the-counter pharmaceutical products. In April 1996, the Company's Consumer Health Care segment completed the acquisition of Cortizone, an anti-itching product, and Hemorid, a hemorrhoid treatment, from Thompson Medical Co., Inc. In June 1996, the Company acquired substantially all of Corvita Corporation's outstanding shares of common stock. Corvita Corporation is a Florida-based company which develops, manufactures and markets synthetic vascular grafts used in the treatment of severely diseased arteries. In January 1995, the Company acquired the capital stock of certain subsidiaries of SmithKline Beecham plc operating solely in the animal health business and certain net assets used in the animal health business from other SmithKline subsidiaries for approximately $1.5 billion, including direct costs of the acquisition. In March 1995, the Company's hospital products business acquired NAMIC U.S.A. Corporation, a cardiovascular products company, for approximately 4.4 million of the Company's common shares in a stock transaction valued at approximately $170 million, including direct costs of the acquisition. These acquisitions were recorded under the purchase method of accounting. The results of operations of these acquired businesses have been included subsequent to the respective dates of acquisition. Pro forma results of operations that reflect these acquisitions as if they had occurred at the beginning of the periods presented would not be materially different from the reported amounts.
PFIZER INC. AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Note 7: Discontinued Operations In January 1996, the Company sold substantially all of the assets of its food science business to Cultor Ltd., a publicly held international nutrition company based in Finland, for approximately $353 million in cash. The food science business has been reported as a discontinued operation. Note 8: Subsequent Events In July 1996, the Company acquired Vesta Medical Inc., a development- stage company, which has designed a proprietary system to treat abnormal uterine bleeding. On completion of the acquisition, Vesta Medical's products will be manufactured and marketed by the Company's hospital products business. In the third quarter of 1996, the Company purchased certain cosmetic, dietetic and other over-the-counter products from the Formenti group through the acquisition of three Italian companies: Ircafarm S.r.l., Farkemo S.r.l. and Blue Cross S.r.l.
INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Pfizer Inc.: We have reviewed the condensed consolidated balance sheet of Pfizer Inc. and subsidiary companies as of June 30, 1996 and July 2, 1995, and the related condensed consolidated statements of income for each of the three month and six month periods then ended and cash flows for the six month periods then ended. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Pfizer Inc. and subsidiary companies as of December 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 22, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG Peat Marwick LLP New York, New York August 13, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations <TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE PERIODS ENDED JUNE 30, 1996 AND JULY 2, 1995 <CAPTION> Percent Percent (millions of dollars, Incr./(Dec.) Incr./(Dec.) except per share data) Comparison* Comparison* Second Quarter Six Months 2nd Quarter Six Months 1996 1995 1996 1995 1996/1995 1996/1995 <S> <C> <C> <C> <C> <C> <C> Net sales $2,661 $2,401 $5,343 $4,739 11 13 Cost of sales $ 521 $ 552 $1,034 $1,061 (6) (3) % of net sales 19.6% 23.0% 19.4% 22.4% Selling, informational and administrative expenses $1,083 $ 967 $2,077 $1,816 12 14 % of net sales 40.7% 40.3% 38.9% 38.3% Research and development expenses $ 422 $ 354 $ 788 $ 667 19 18 % of net sales 15.8% 14.7% 14.7% 14.1% Other deductions--net $ 61 $ 60 $ 118 $ 99 1 19 % of net sales 2.3% 2.5% 2.2% 2.1% Income from con- tinuing operations before taxes and minority interests $ 574 $ 468 $1,326 $1,096 23 21 % of net sales 21.6% 19.5% 24.8% 23.1% Taxes on income $ 178 $ 155 $ 411 $ 362 15 14 Effective tax rate 31.0% 33.1% 31.0% 33.0% Minority interests $ 2 $ 2 $ 4 $ 4 -- -- Income from con- tinuing operations $ 394 $ 311 $ 911 $ 730 27 25 % of net sales 14.8% 13.0% 17.1% 15.4% Discontinued operations, net $ -- $ 6 $ -- $ 7 -- -- % of net sales -- .2% -- .2% Net income $ 394 $ 317 $ 911 $ 737 25 24 % of net sales 14.8% 13.2% 17.1% 15.6% Earnings per common share: Income from con- tinuing operations $ .61 $ .49 $ 1.42 $ 1.17 24 21 Discontinued operations, net -- $ .01 -- .01 -- -- Net income $ .61 $ .50 $ 1.42 $ 1.18 22 20 Cash dividends per common share $ .30 $ .26 $ .60 $ .52 15 15 <FN> <F1>*Percentages may not compute due to rounding. For explanation of percent changes, see discussion beginning on page 13. </FN> </TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED NET SALES BY BUSINESS SEGMENT FOR THE PERIODS ENDED JUNE 30, 1996 AND JULY 2, 1995 (millions of dollars) Percent Increase Second Quarter Comparison* % of % of 2nd Qtr. 1996 Net Net from 1996 Sales 1995 Sales 2nd Qtr. 1995 $2,244 84.3 $2,016 84.0 Health Care 11 291 11.0 285 11.9 Animal Health 2 126 4.7 100 4.1 Consumer Health Care 25 $2,661 100.0 $2,401 100.0 Consolidated 11 Percent Increase Six Months Comparison* % of % of Six Months 1996 Net Net from 1996 Sales 1995 Sales Six Months 1995 $4,543 85.0 $3,983 84.0 Health Care 14 558 10.5 558 11.8 Animal Health -- 242 4.5 198 4.2 Consumer Health Care 22 $5,343 100.0 $4,739 100.0 Consolidated 13 * Percentages may not compute due to rounding. For additional explanation of percent changes, see discussion beginning on page 13.
PFIZER INC. AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED NET SALES BY GEOGRAPHIC AREA FOR THE PERIODS ENDED JUNE 30, 1996 AND JULY 2, 1995 (millions of dollars) Percent Increase Second Quarter Comparison % of % of 2nd Qtr. 1996 Net Net from 1996 Sales 1995 Sales 2nd Qtr. 1995 $1,321 49.6 $1,158 48.2 United States 14 689 25.9 618 25.7 Europe 11 396 14.9 395 16.5 Asia -- 192 7.2 172 7.2 Canada/Latin America 12 63 2.4 58 2.4 Africa/Middle East 9 $2,661 100.0 $2,401 100.0 Consolidated 11 Percent Increase Six Months Comparison % of % of Six Months 1996 Net Net from 1996 Sales 1995 Sales Six Months 1995 $2,770 51.8 $2,421 51.1 United States 14 1,339 25.1 1,146 24.2 Europe 17 772 14.4 726 15.3 Asia 6 345 6.5 331 7.0 Canada/Latin America 4 117 2.2 115 2.4 Africa/Middle East 2 $5,343 100.0 $4,739 100.0 Consolidated 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NET SALES The following statistical data are provided to assist the reader in understanding the composition of changes affecting the increase in net sales. Sales Growth Analysis % Increase/(Decrease) Comparison 2nd Qtr. 1996 Six Months 1996 from from 2nd Qtr. 1995 Six Months 1995 Volume 12.9 13.7 Price 0.5 0.6 Currency (2.5) (1.5) Total net sales increase 10.9 12.8 Consolidated net sales increased 11% in the second quarter of 1996 to $2,661 million and 13% in the first six months of 1996 to $5,343 million. Worldwide sales volume growth for the second quarter of 12.9% was partially offset by a 2.5% reduction due to the strengthening of the dollar versus foreign currencies, particularly the Japanese yen. Price changes had a favorable impact on revenue growth of one-half of 1% in the quarter. The Company's increased sales volume reflects the strength of its new products and its commitment to a research based, product- driven growth strategy. The health care sales performance in the second quarter versus last year reflects a 13% increase in worldwide sales of pharmaceuticals and a 6% increase in hospital products, while for the first half, worldwide sales of pharmaceuticals and hospital products were up 15% and 9%, respectively. For the second quarter, U.S. pharmaceuticals increased 17% and International pharmaceutical sales increased 8%. International pharmaceutical sales increased by 13% without the negative effect of foreign exchange. In the second quarter, the combined worldwide sales of the seven pharmaceuticals launched in the U.S. in the 1990's--Norvasc, Zoloft, Zithromax, Cardura, Diflucan, Glucotrol XL and Zyrtec--increased by 30% and made up 67% of total pharmaceutical sales for the quarter. The following table shows the worldwide net sales and percentage sales growths of the Company's major pharmaceuticals for the second quarter and first six months of 1996: (millions of dollars) 2nd Qtr. 1996 Six Months 1996 % Incr./ % Incr./ Amount (Dec.) Amount (Dec.) Cardiovascular Diseases: $780 14 $1,632 16 Norvasc 420 40 808 43 Procardia XL 196 (19) 501 (12) Cardura 126 24 248 31 Infectious Diseases: 555 5 1,129 8 Diflucan 224 4 439 6 Zithromax 137 43 296 48 Central Nervous System Disorders: 308 22 637 26 Zoloft 298 24 615 29 Second quarter sales of cardiovascular products increased by 14% to $780 million. Sales of Norvasc, the Company's intrinsically once-a-day calcium channel blocker for the treatment of angina and hypertension, increased by 40% to $420 million--the largest quarterly sales of any product in the Company's history. It continues to grow rapidly in the U.S., Japan and Germany. In June 1996, the U.S. Food and Drug Administration (FDA) approved new drug labeling that permitted the use of Norvasc in treating angina or hypertension in patients who also have congestive heart failure. Worldwide sales of Cardura, a once-a-day treatment for hypertension and more recently, benign prostatic hyperplasia (enlarged prostate), increased by 24% to $126 million. This sales growth was reduced by 7% due to currency fluctuations. The quarterly sales of Procardia XL, the Company's sustained-release calcium channel blocker for the treatment of angina and hypertension, declined by 19% to $196 million due, in part, to year-to-year changes in wholesaler stocking patterns and lower prescription levels. Global sales of the anti-depressant Zoloft increased by 24% to $298 million in the second quarter, compared with the same period of 1995. Zoloft has benefited from broad clinical acceptance and its continuing international rollout. In August, the Company received a warning letter from the FDA alleging that promotional material for Zoloft promotes unapproved uses and contains statements, suggestions or implications that are false, lacking in fair balance or otherwise misleading. The letter requests the Company to propose an action plan to deal with these allegations. The Company makes every effort to ensure that all its communications are consistent with the labeling of its products and believes its Zoloft communications conformed to this policy. The Company will be interacting with the FDA and attempt to work out a resolution to the issues raised by the Warning Letter. Worldwide sales of Zithromax, a broad-spectrum antibiotic, increased by 43% to $137 million in the quarter due, in part, to the U.S. launch of a pediatric dosage form in November 1995. Zithromax recently received FDA approval for use in the prevention of disseminated Mycobacterium avium complex, a disease often found in persons with advanced HIV infection. Sales of Diflucan, the Company's prescription antifungal, increased by 4% to $224 million as the product continues to be the therapy of choice for a wide range of fungal infections. Excluding adverse currency fluctuations, Diflucan sales for the quarter increased 9%. Zyrtec, a new medication for seasonal and perennial allergies and hives, is achieving fast acceptance in the U.S. medical community five months after its introduction with U.S. sales of $58 million during the first six months of 1996. Hospital Products worldwide sales grew 6% in the second quarter to $360 million and 9% to $676 million in the first half reflecting the strength of new product rollouts and the Leibinger acquisition. In January 1996, the Company completed the acquisition of the Leibinger Companies, a leader in the manufacture of specialty surgical instruments and implantable devices used in skull, jaw, facial, hand and foot surgery. This acquisition contributed 3 percentage points to the Hospital Products sales growth for the quarter. Sales increased 47% in the second quarter for both peripheral and coronary stents, which are devices used to maintain flow through obstructed vessels. In June 1996, the FDA approved the Wallstent endoprosthesis, which offers a minimally invasive procedure for patients whose iliac arteries are narrowed due to atherosclerosis. Animal health sales increased by 2% in the second quarter to $291 million. Adverse market conditions for food animals in both Europe and the U.S. affected performance. Sales of Dectomax, the livestock antiparasitic discovered and developed by the Company, increased 14% to $23 million as new product launches continued around the world, including Japan. In August 1996, the FDA approved Dectomax, the Company's treatment for internal and external parasites in cattle. Dectomax, the Company's largest-selling animal health product in 1995, will be available in the U.S. in September 1996. Consumer health care sales increased 25% in the second quarter and 22% in the first half of 1996 to $126 million and $242 million, respectively, with growth driven by recently acquired brands such as the Bain de Soleil line of sun care products, Cortizone, an anti-itching product, and Hemorid, a hemorrhoid treatment. COSTS AND EXPENSES As a percentage of net sales, cost of sales decreased in the second quarter and first half versus last year's comparable periods due to a favorable product sales mix, the impact of purchase accounting relating to SmithKline Beecham Animal Health (SBAH) inventories in 1995, the favorable impact of the Company's foreign exchange hedging program, improvements in manufacturing efficiencies and a reduction in the first half royalty expenses accrual for Procardia XL. Selling, informational and administrative expense increased 12% and 14% in the second quarter and first six months of 1996, respectively, compared with the same periods of 1995 as both previously introduced products and new product launches, such as Zyrtec in the U.S., were well supported. Research and development expenditures were up 19% in the second quarter and 18% in the first half relative to last year's comparable periods due to the advancement of an unprecedented number of drug candidates in the late stages of development. In 1996, the Company plans to spend approximately $1.7 billion on R&D. Health care R&D expenses, expressed as a percentage of health care net sales, were 16.4% and 15.1% in the first six months of 1996 and 1995, respectively. Income from continuing operations before taxes, minority interests and other deductions--net, expressed as a percentage of net sales, was 1.9 percentage points higher in the second quarter and 1.8 percentage points higher in the first half of 1996 versus the comparable 1995 periods.
Other Deductions--net, for the second quarters and first six months of 1996 and 1995 are summarized in the following tables: (millions of dollars) % Incr./ Second Quarter 1996 1995 (Dec.)* Interest income $(31) $(38) (18) Interest expense 42 56 (25) Amortization of goodwill and other intangibles 14 13 8 Foreign exchange losses/(gains) 4 (4) -- Other, net 32 33 (3) Other deductions--net $ 61 $ 60 1 *Percentages may not compute due to rounding. (millions of dollars) % Incr./ Six Months 1996 1995 (Dec.) Interest income $(60) $(86) (30) Interest expense 80 106 (25) Amortization of goodwill and other intangibles 28 22 27 Foreign exchange losses/(gains) 8 (6) -- Other, net 62 63 (2) Other deductions--net $118 $ 99 19 The decrease in interest income in the second quarter and first six months of 1996 versus last year's prior periods was largely due to lower average levels of investments in interest earning assets. The decrease in interest expense in the second quarter and first six months of 1996 was primarily due to lower average levels of borrowings. The increase in amortization of goodwill and other intangibles in the first six months of 1996 versus last year was primarily attributable to the acquisition of the SmithKline Beecham animal health business in the first quarter of 1995. Other, net for the second quarter and first six months of 1996 included income of $48 million related to revised royalty arrangements covering sales of Procardia XL, an $18 million write-off of in-process R&D in connection with the Corvita acquisition and a $25 million payment relating to certain worldwide product licensing rights. PRE-TAX AND NET INCOME The decrease in the Company's effective tax rate from 32% for the full year of 1995 (33% for the second quarter and first six months of 1995) to 31% this year is mainly due to changes in the mix of income by country, partially offset by the continuing reduction of the tax benefit from the Company's operations in Puerto Rico as a result of the enact- ment of the Omnibus Budget Reconciliation Act of 1993 and the expiration of the R&D tax credit during 1995. OTHER Tenidap, the Company's cytokine and prostaglandin inhibitor for the treatment of arthritis, has now received medical approval from regulatory authorities in several countries for the treatment of rheumatoid arthritis. Discussions are ongoing with government authorities in these countries seeking appropriate reimbursement classification. In the U.S., based on the advice of its Advisory Committee, the FDA did not approve tenidap for either osteo-arthritis or rheumatoid arthritis pending further evaluation of the drug's safety profile. The Company will continue its interaction with the FDA.
In March 1996, a New Drug Application was filed in the U.S. by The Eisai Company, the company that discovered the compound, for Aricept (donepezil, E2020). This drug candidate is a once-daily selective acetylcholinesterase inhibitor for Alzheimer's disease that the Company will co-promote with Eisai. In the first six months of 1995, approximately 2.6 million shares were purchased in the open market at an average cost of approximately $43 per share. On June 27, 1996, the Board of Directors of the Company declared a 30- cent third quarter dividend on its common stock, payable September 12, 1996, to shareholders of record on August 2, 1996. In 1993, the Company initiated a worldwide restructuring program which included the consolidation of manufacturing facilities, the demolition of buildings resulting from the consolidation, reconfiguration and rehabilitation of remaining facilities and the consolidation of distri- bution and administrative organizations and infrastructures. It is expected that the 1993 program will be substantially completed in 1996. Through June 30, 1996, completed restructuring initiatives reduced the workforce by approximately 1,750 people and resulted in the closing of 18 facilities. The annualized benefit of efficiencies resulting from completed efforts was approximately $90 million. The full implementa- tion of such plans is still anticipated to lower annual operating costs by $130 million. To date, there have been no significant changes in estimates of the cost of the plan. The following table indicates the status of the restructuring charges by component: Utilization Reserves (millions of dollars) 1993 Through Remaining Restructuring Dec. 31, 1st Half at June 30, Charges 1995 1996 1996 Employee severance payments $220 $102 $36 $ 82 Operating assets to be sold/disposed of 212 134 18 60 Other charges 247 216 31 -- $679 $452 $85 $142 There have been no reclassifications between the components of the reserve presented in the preceding table. Other charges consist primarily of provisions for closed facilities' costs, currency transla- tion adjustments related to the liquidation or disposal of businesses, administrative infrastructures and lease and third-party contract termination costs which were previously presented as separate captions. Write-downs of operating assets, which primarily involve manufacturing rationalizations, are considered utilized and the reserve charged when the asset is sold or otherwise disposed of by the Company. ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments totaled $1,976 million at June 30, 1996 as compared to $1,512 million at December 31, 1995. Total borrowings were $3,128 million at June 30, 1996 compared with $2,869 million at December 31, 1995. Working capital at June 30, 1996 decreased versus December 31, 1995 and increased versus July 2, 1995. The decrease in working capital from December 31, 1995 was mainly attributable to increased short-term borrowings primarily related to the 6 1/2% Notes due 1997 being reclassified from Long-term debt to Short- term borrowings in the first half of 1996 and a reduction in Prepaid expenses, taxes and other assets which included the assets held for sale of the food science business at year end 1995 that was sold in January 1996. The increase in working capital from July 2, 1995 was primarily attributable to a reduction in the short-term borrowings used to finance the SBAH acquisition, partially offset by the reclassification in 1996 of the 6 1/2% Notes due 1997 and, in the third quarter of 1995, of the 7 1/8% Notes due October 1996 from Long-term debt to Short-term borrowings. June 30, Dec. 31, July 2, 1996 1995 1995 Working capital (millions of dollars) $ 643 $ 965 $ 84 Current ratio 1.11:1 1.19:1 1.01:1 Debt to total capitalization (percentage)* 34% 34% 43% Shareholders' equity per common share** $ 9.60 $ 8.90 $ 7.86 Days of sales outstanding - trade accounts receivable 66 60 77 Months of inventory on hand 8.6 9.2 9.0 * Represents total short and long-term borrowings divided by the sum of total short and long-term borrowings and total shareholders' equity. ** Represents total shareholders' equity divided by the actual number of common shares outstanding. SUBSEQUENT EVENTS For a description of the subsequent events, see Note 8, "Subsequent Events," on page 8. CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION Management's discussion and analysis set forth above contains certain forward looking statements, including statements regarding its financial position, results of operations and product development. These forward looking statements are based on current expectations. Certain factors have been identified by the Company in Exhibit 99 to the Company's 1995 Annual Report on Form 10-K which could cause the Company's actual results to differ materially from expected and historical results. Exhibit 99 is incorporated by reference herein and is filed as an exhibit to the Form 10-Q.
FORM 10-Q PART II - OTHER INFORMATION Item 1: Legal Proceedings The Company is involved in a number of claims and litigations, including product liability claims and litigations considered normal in the nature of its businesses. These include suits involving various pharmaceutical and hospital products that allege either reaction to or injury from use of the product. As previously disclosed, numerous claims have been brought against the Company and Shiley Incorporated, a wholly owned subsidiary, alleging either personal injury from fracture of 60 (degree) or 70 (degree) Shiley Convexo-Concave (C/C) heart valves, or anxiety that properly functioning implanted valves might fracture in the future or personal injury from a prophylactic replacement of a functioning valve. In an attempt to resolve all claims alleging anxiety that properly functioning valves might fracture in the future, the Company entered into a settlement agreement in January 1992 in Bowling v. Shiley, et al., a case brought in the United States District Court for the Southern District of Ohio, that establishes a worldwide settlement class of people with C/C heart valves and their spouses, except those who elect to exclude themselves. The settlement provides for a Consultation Fund of $90 million to $140 million (depending on the number of claims filed) from which valve recipients who make claims will receive payments that are intended to cover their cost of consultation with cardiologists or other health care providers with respect to their valves. The settlement agreement establishes a second fund of at least $75 million to support C/C valve-related research, including the development of techniques to identify valve recipients who may have significant risk of fracture, and to cover the unreimbursed medical expenses that valve recipients may incur for certain procedures related to the valves. The Company's obligation as to coverage of these unreimbursed medical expenses is not subject to any dollar limitation. Following a hearing on the fairness of the settlement, it was approved by the court on August 19, 1992. An appeal of the court's approval of the settlement was dismissed on December 21, 1993 by the United States Court of Appeals for the Sixth Circuit. A motion for rehearing en banc was denied on March 4, 1994, and the U.S. Supreme Court denied a writ of certiorari on October 3, 1994. On August 8, 1994, the Sixth Circuit dismissed an appeal from the denial of a motion by the same appellants to vacate the judgment approving the settlement, and the U.S. Supreme Court denied a writ of certiorari on January 9, 1995. Another appeal to the Sixth Circuit by the same appellants regarding the denial of their earlier motion to intervene will be argued August 13, 1996. It is expected that most of the costs arising from the Bowling class settlement will be covered by insurance and the proceeds of the sale of certain product lines of the Shiley businesses in 1992. Of approximately 900 implantees (and spouses of some of them) who opted out of the Bowling settlement class, nine have cases pending; approximately 792 have been resolved; and approximately 100 have never filed a case or claim. Several claims relating to elective reoperations of valve recipi- ents are currently pending. Some of these claims relate to elective reoperations covered by the Bowling class settlement described above, and, therefore, the claimants are entitled to certain benefits in accordance with the settlement. Such claimants, if they irrevocably waive all of the benefits of the settlement, may pursue separate litigation to recover damages in spite of the class settlement. The Company is defending these claims. Generally, the plaintiffs in all of the pending heart valve litigations discussed above seek money damages. Based on the experience of the Company in defending these claims to date, including available insurance and reserves, the Company is of the opinion that these actions should not have a material adverse effect on the financial position or the results of operations of the Company. On September 30, 1993, Dairyland Insurance Co., a carrier provid- ing excess liability coverage ("excess carrier") in the early 1980s, commenced an action in the California Superior Court in Orange County, seeking a declaratory judgment that it was not obligated to provide insurance coverage for Shiley heart valve liability claims. On October 8, 1993, the Company filed cross-complaints against Dairyland and filed third-party complaints against 73 other excess carriers who sold excess liability policies covering periods from 1979 to 1985, seeking damages and declaratory judgments that they are obligated to pay for defense and indemnity to the extent not paid by other carriers. Several such claims have been resolved and the remainder are involved in pretrial discovery. On April 26, 1996, the trial court entered an order stating that implanting an allegedly defective heart valve is not an appropriate trigger of insurance coverage in at least one and perhaps all working valve lawsuits. This decision, even if it is applied to all claims alleging anxiety that properly functioning valves might fracture in the future, does not deal with fracture claims, which are also part of the Company's claims. The Company's operations are subject to federal, state, local and foreign environmental laws and regulations. Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), the Company has been designated as a potentially responsible party by the United States Environmental Protection Agency with respect to certain waste sites with which the Company may have had direct or indirect involvement. Similar designa- tions have been made by some state environmental agencies under applica- ble state superfund laws. Such designations are made regardless of the extent of the Company's involvement. There are also claims that the Company may be a responsible party or participant with respect to several waste site matters in foreign jurisdictions. Such claims have been made by the filing of a complaint, the issuance of an administra- tive directive or order, or the issuance of a notice or demand letter. These claims are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigative or remedial actions. In many cases, the dollar amount of the claim is not specified. In most cases, claims have been asserted against a number of other entities for the same recovery or other relief as was asserted against the Company. The Company is currently participating in remedial action at a number of sites under federal, state, local and foreign laws. To the extent possible with the limited amount of information available at this time, the Company has evaluated its responsibility for costs and related liability with respect to the above sites and is of the opinion that the Company's liability with respect to these sites should not have a material adverse effect on the financial position or the results of operations of the Company. In arriving at this conclu- sion, the Company has considered, among other things, the payments that have been made with respect to the sites in the past; the factors, such as volume and relative toxicity, ordinarily applied to allocate defense and remedial costs at such sites; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs for a site, if known; existing technology; and the currently enacted laws and regulations. The Company anticipates that a portion of these costs and related liability will be covered by available insurance. Through the early 1970s, Pfizer Inc. Minerals Division and Quigley Company, Inc. (Quigley), a wholly owned subsidiary, sold a minimal amount of one construction product and several refractory products containing some asbestos. These sales were discontinued thereafter. Although these sales represented a minor market share, the Company has been named as one of a number of defendants in numerous lawsuits. These actions, and actions related to the Company's sale of talc products in the past, claim personal injury resulting from exposure to asbestos- containing products, and nearly all seek general and punitive damages. In these actions, the Company or Quigley is typically one of a number of defendants, and both are members of the Center for Claims Resolution (the "CCR"), a joint defense organization of twenty defendants that is defending these claims. The Company and Quigley are responsible for varying percentages of defense and liability payments for all members of the CCR. Prior to September 1990, the cases involving talc products were defended by the CCR, but the Company is now overseeing its own defense of these actions. A number of cases alleging property damage from asbestos-containing products installed in buildings have also been brought against the Company. On January 15, 1993, a class action complaint and settlement agreement were filed in the United States District Court for the Eastern District of Pennsylvania involving all personal injury claims by persons who have been exposed to asbestos-containing products but who have not yet filed a personal injury action against the members of the CCR ("Future Claims Settlement"). The Future Claims Settlement agreement establishes a claims-processing mechanism that will provide historic settlement values upon proof of impaired medical condition as well as claims-processing rates over ten years. In addition, the shares allocat- ed to the CCR members eliminate joint and several liability. The court has determined that the Future Claims Settlement is fair and reasonable. Subsequently, the court entered an injunction enforcing its determina- tion. Plaintiffs filed an appeal from that injunction in the United States Court of Appeals for the Third Circuit and on May 10, 1996, a panel of the Third Circuit reversed the order of the District Court and directed that the preliminary injunction be vacated. Although the Third Circuit subsequently denied the motion of the CCR members, including the Company and Quigley, for rehearing of that determination, it agreed to stay its mandate while review is sought in the United States Supreme Court. In the event that the Future Claims Settlement is not upheld, it is not expected to have a material impact on the Company's exposure or on the availability of insurance for the vast majority of such cases. It is expected, too, that the CCR will attempt to resolve such cases outside of the Future Claims Settlement in the same manner as heretofore. At approximately the time it filed the Future Claims Settlement class action, the CCR settled approximately 16,360 personal injury cases on behalf of its members including the Company and Quigley. The CCR has continued to settle remaining and opt-out cases and claims on a similar basis to past settlements. The total pending number of personal injury claims, exclusive of those covered by the Future Claims Settlement preliminary injunction and those which are inactive as of July 2, 1996, is 10,249 asbestos cases against Quigley; 3,825 asbestos cases against the Company; and 68 talc cases against the Company. Costs incurred by the Company in defending the asbestos personal injury claims and the property damage claims, as well as settlements and damage awards in connection therewith, are largely insured against under policies issued by several primary insurance carriers and a number of excess carriers. The Company believes that its costs incurred in defending and ultimately disposing of the asbestos personal injury claims, whether or not the Future Claims Settlement is eventually upheld, as well as the property damage claims, will be largely covered by insurance policies issued by carriers that have agreed to provide coverage, subject to deductibles, exclusions, retentions and policy limits. In connection with the Future Claims Settlement, the defendants commenced a third- party action against their respective excess insurance carriers that have not agreed to provide coverage seeking a declaratory judgment that (a) the Future Claims Settlement is fair and reasonable as to the carriers; (b) the carriers had adequate notice of the Future Claims Settlement; and (c) the carriers are obligated to provide coverage for asbestos personal injury claims. Even if the Future Claims Settlement is not eventually upheld, it is expected that the insurance coverage action against the insurance carriers that have not agreed to provide coverage for asbestos personal injury claims will be pursued. Based on the Company's experience in defending the claims to date and the amount of insurance coverage available, the Company is of the opinion that the actions should not ultimately have a material adverse effect on the financial position or the results of operations of the Company. The United States Environmental Protection Agency - Region 1 and the Department of Justice have informed the Company that the federal government is contemplating an enforcement action arising primarily out of a December 1993 multimedia environmental inspection, as well as certain state inspections, of the Company's Groton, Connecticut facili- ty. The Company is engaged in discussions with the governmental agencies and does not believe that an enforcement action, if brought, will have a material adverse effect on the financial position or the results of operations of the Company. The Company has been named, together with numerous other manufac- turers of brand name prescription drugs and certain companies that distribute brand name prescription drugs, in suits in federal and state courts brought by various groups of retail pharmacy companies. The federal cases consist principally of a class action by retail pharmacies (including approximately 30 named plaintiffs)(the Federal Class Action), as well as additional actions by approximately 3,500 individual retail pharmacies and a group of chain and supermarket pharmacies (the "indi- vidual actions"). These cases, which have been transferred to the United States District Court for the Northern District of Illinois and coordi- nated for pretrial purposes, allege that the defendant drug manufactur- ers violated the Sherman Act by unlawfully agreeing with each other (and, as alleged in some cases, with wholesalers) not to extend to retail pharmacy companies the same discounts allegedly extended to mail order pharmacies, managed care companies and certain other customers, and by unlawfully discriminating against retail pharmacy companies by not extending them such discounts. On November 15, 1994, the federal court certified a class (the Federal Class Action) consisting of all persons or entities who, since October 15, 1989, bought brand name prescription drugs from any manufacturer or wholesaler defendant, but specifically excluding government entities, mail order pharmacies, HMOs, hospitals, clinics and nursing homes. Fifteen manufacturer defendants, including the Company, agreed to settle the Federal Class Action subject to court approval. The Company's share, pursuant to an Agreement as of January 31, 1996, was $31.25 million, payable in four annual install- ments without interest. The Company continues to believe that there was no conspiracy, and specifically denied liability in the Settlement Agreement, but had agreed to settle to avoid the monetary and other costs of litigation. The settlement was filed with the Court on Febru- ary 9, 1996 and went through preliminary and final fairness hearings. By orders of April 4, 1996 the Court: (1) rejected the settlement; (2) denied the motions of the manufacturers (including the Company) for summary judgment; (3) granted the motions of the wholesalers for summary judgment; and (4) denied the motion to exclude purchases by other than direct purchasers. The decision on the wholesalers has been made final, and been appealed. The decision on the indirect purchasers has been certified, and accepted, for appeal. The Court has put off the trial date while these matters are pending. In May 1996, thirteen manufacturer defendants, including the Company, entered into an Amendment to the Settlement Agreement which was filed with the Court on May 6, 1996. The Company's financial obligations under the Settlement Agreement will not be increased. The Settlement Agreement, as amended, received final approval June 21, 1996. In addition, consumer class actions have been filed in state courts and the District of Columbia, alleging injury to consumers as well as retail pharmacies from the failure to give discounts to retail pharmacy companies. Both a consumer class and a retailer class have been certified in separate California actions. Consumer class actions filed in Colorado and Washington have been dismissed; Washington is now on appeal. The Company was dismissed from a consumer class action in Wisconsin. Consumer class actions are also pending in Alabama, Arizona, Maine, Michigan, Minnesota and New York. Retailer class actions are also pending in Alabama and Minnesota. The Company believes that these brand name prescription drug antitrust cases, which generally seek damages and certain injunctive relief, are without merit, and has moved to have them dismissed. Schneider (USA) Inc. and Schneider (Europe) AG have been named, together with Advanced Cardiovascular Systems, Inc., in a federal antitrust action brought on January 2, 1996, by Boston Scientific Corporation and SciMed Life Systems, Inc. (a subsidiary of Boston Scientific) in the U.S. District Court, District of Massachusetts. The suit alleges that the defendants unlawfully obtained and enforced certain patents covering rapid exchange angioplasty catheters, and conspired against the plaintiffs by, among other allegations, their settlement of patent infringement litigation in December of 1991. The suit seeks unspecified treble damages and injunctive relief. The Company believes that the case is without merit. FDA administrative proceedings relating to Plax are pending, principally an industry-wide call for data on all anti-plaque products by the FDA. The call for data notice specified that products that have been marketed for a material time and to a material extent may remain on the market pending FDA review of the data, provided the manufacturer has a good faith belief that the product is generally recognized as safe and effective and is not misbranded. The Company believes that Plax satis- fied these requirements and prepared a response to the FDA's request, which was filed on June 17, 1991. This filing, as well as the filings of other manufacturers, is still under review and is currently being considered by an FDA Advisory Committee. A consolidated class action on behalf of persons who allegedly purchased Pfizer common stock during the March 24, 1989 through Febru- ary 26, 1990 period is pending in the United States District Court for the Southern District of New York. This lawsuit, which commenced on July 13, 1990, alleges that the Company and certain officers and former directors and officers violated federal securities law by failing to disclose potential liability arising out of personal injury suits involving Shiley heart valves and seeks damages in an unspecified amount. The defendants in this action believe that the suit is without merit. A derivative action commenced on April 2, 1990, against certain directors and officers and former directors and officers alleging breaches of fiduciary duty and other common law violations in connection with the manufacture and distribution of Shiley heart valves is pending in the Superior Court, Orange County, California. The complaint seeks, among other forms of relief, damages in an unspecified amount. The defendants in the action believe that the suit is without merit. A purported class action entitled Bradshaw v. Pfizer Inc. and Howmedica Inc. is pending in the U.S. District Court, Northern District of Ohio. The action seeks monetary and injunctive relief, including medical monitoring, on behalf of patients implanted with the Howmedica P.C.A. one-piece acetabular hip component, which was manufactured by Howmedica from 1983 to 1990. The complaint alleges that the prostheses were defectively designed and manufactured and posed undisclosed risks to implantees. The federal magistrate judge has recommended that the district court deny the plaintiffs' motion to certify the case as a class action. The Company believes that the suit is without merit. The Company and/or Howmedica, along with other device manufactur- ers and numerous orthopedic surgeons, have been named as defendants in approximately 700 cases (among over 1600 pending) in numerous state and federal courts seeking damages relating to alleged improper design, manufacture, and/or promotion of bone screws for unapproved use in spinal pedicles. Neither Howmedica nor the Company manufactured or sold pedicle screws in the U.S., but the claims allege a conspiracy among all of the defendants to over-promote the devices. The federal cases have been consolidated by the Multidistrict Panel in the U.S. District Court in Philadelphia, which ruled on April 8, 1996 that all claims against the manufacturers except express warranty and improper promotion, are preempted. The recent decisions of the United States Supreme Court in Lohr v. Medtronic may impact the availability of the pre-emption defense in this case (and in other medical device cases). The Company believes the cases are without merit. From 1994 to 1995, seven purported class actions were filed against American Medical Systems ("AMS") in federal courts in South Carolina (subsequently transferred to Minnesota), California, Minnesota (2), Indiana, Ohio and Louisiana. The California, Ohio and Indiana suits and one Minnesota suit also name Pfizer Inc. as a defendant, based on its ownership of AMS. The suits seek monetary and injunctive relief on the basis of allegations that implantable penile prostheses are prone to unreasonably high rates of mechanical failure and/or various autoimmune diseases as a result of silicone materials. On September 30, 1994, the federal Judicial Panel on Multidistrict Litigation denied the various plaintiffs' motions to consolidate or coordinate the cases for pretrial proceedings. On February 28, 1995, the Court in the Ohio suit condition- ally granted plaintiffs' motion for class certification; on March 3, 1995, the Court in the California suit denied plaintiffs' motion for class certification; and on October 25, 1995, the Court in the Indiana suit denied plaintiffs' motion for class certification; on February 15, 1996 the United States Court of Appeals for the Sixth Circuit reversed the Ohio Court's conditional certification; on May 15, 1996, the purported Minnesota class actions were dismissed without prejudice (following which plaintiffs' counsel filed 6 actions in Minnesota State Court on behalf of 192 individuals); and a motion to strike the class allegations in the Louisiana case was granted by the Court on July 23, 1996. The Company believes the suits are without merit. In June, 1993, the Ministry of Justice of the State of Sao Paulo, Brazil commenced a civil public action against the Company's Brazilian subsidiary, Laboratorios Pfizer Ltda. (Pfizer Brazil) asserting that during a period in 1991, Pfizer Brazil withheld sale of the pharmaceutical product Diabinese in violation of antitrust and consumer protection laws. The action seeks the award of moral, economic and personal damages to individuals and the payment to a public reserve fund. On February 8, 1996, the trial court issued a decision holding Pfizer Brazil liable. The award of damages to individuals and the payment into the public reserve fund will be determined in a subsequent phase of the proceedings. The trial court's opinion sets out a formula for calculating the payment into the public reserve fund which could result in a sum of approximately $88 million. The total amount of damages payable to eligible individuals under the decision would depend on the number of persons eventually making claims. Pfizer Brazil is appealing this decision. The Company believes that this action is without merit and should not have a material adverse effect on the financial position or the results of operations of the Company. Tax Matters The Internal Revenue Service ("IRS") has completed its examination of the Company's federal income tax returns for the years 1987 through 1989. As part of this process, the Company received an examination report from the IRS in August 1995, requesting a response within 30 days, which sets forth the adjustments the IRS is proposing for those years. The Company has filed a response protesting the proposed adjustments and has begun interacting with the IRS Appeals office. The proposed adjustments relate primarily to the tax accounting treatment of certain swaps and related transactions undertaken by the Company in 1987 and 1988. These transactions resulted in the receipt of cash in those years, which the Company duly reported as income for tax purposes. In 1989 (in Notice 89-21), the IRS announced that it believed cash received in certain swap transactions should be reported as income for tax purposes over the life of the swaps, rather than when received. In the case of the Company, this would cause some of the income to be reported in years subject to the Tax Reform Act of 1986. The IRS proposed adjustment involves approximately $72 million in federal taxes for the years 1987 through 1989, plus interest. If the proposed adjustment is carried through to the maturity of the transactions in 1992, an additional tax deficiency of approximately $86 million, plus interest, would result. The Company disagrees with the proposed adjustment and continues to believe that its tax accounting treatment for the transactions in question was proper. The Company is protesting and appealing the proposed adjustments. While it is impossible to determine the final disposition, the Company is of the opinion that the ultimate resolution of this matter should not have a material adverse effect on the financial position or the results of operations of the Company. In November 1994, Belgian tax authorities notified Pfizer Research and Development Company N.V./S.A. ("PRDCO"), an indirect wholly owned subsidiary of the Company, of a proposed adjustment to the taxable income of PRDCO for fiscal year 1992. The proposed adjustment arises from an assertion by the Belgian tax authorities of jurisdiction with respect to income resulting primarily from certain transfers of property by non-Belgian subsidiaries of the Company to the Irish branch of PRDCO. In January 1995, PRDCO received an assessment from the tax authorities for additional taxes and interest of approximately $432 million and $97 million, respectively, relating to these matters. In January 1996, PRDCO received an assessment from the tax authorities, for fiscal year 1993, for additional taxes and interest of approximately $86 million and $18 million, respectively. The new assessment arises from the same assertion by the Belgian tax authorities of jurisdiction with respect to all income of the Irish branch of PRDCO. Based upon the relevant facts regarding the Irish branch of PRDCO and the provisions of Belgium tax laws and the written opinions of outside legal counsel, the Company believes that the assessments are wholly without merit. The Company believes that its accrued tax liabilities are adequate for all open years.
Item 4: Submission of Matters to a Vote of Security Holders The shareholders of the Company voted on three matters at the Company's Annual Meeting of Shareholders held on April 25, 1996. Matter (1) related to the election of three director nominees: Ms. Constance J. Horner, Mr. Thomas G. Labrecque and Dr. Jean-Paul Valles to three- year terms. 568,301,860 votes were cast for Ms. Horner and 5,332,394 were withheld. 563,795,146 votes were cast for Mr. Labrecque and 9,839,108 were withheld. 567,292,567 votes were cast for Dr. Valles and 6,341,687 were withheld. Matter (2) related to the approval of the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the year 1996. 570,076,764 votes were cast for approval, 1,474,578 were cast against and there were 2,082,912 abstentions. Matter (3) related to the approval of an amendment to the Company's Stock and Incentive Plan. 471,600,829 votes were cast for approval, 36,419,807 were cast against. There were 7,152,644 abstentions and there were 58,460,974 shares for which brokers were precluded from voting. These latter shares, along with abstentions, have the effect of a vote against with respect to Matter (3). Based on these voting results, each of the directors nominated was elected and matters (2) and (3) were passed. As previously stated in the Company's proxy statement, the election of a director required a plurality of the votes present and entitled to vote at the meeting. Passage of matter (2) required a majority of the votes cast, and passage of matter (3) required the approval of a majority of the outstanding Common Stock. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 1) Exhibit 11 - Computation of Earnings Per Common Share 2) Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 3) Exhibit 15 - Accountants' Acknowledgment 4) Exhibit 27 - Financial Data Schedule 5) Exhibit 99 - Exhibit 99 to the Annual Report Form 10-K for the fiscal year ended December 31, 1995 (b) Reports on Form 8-K No reports on Form 8-K were filed during the second quarter ended June 30, 1996.
PFIZER INC. AND SUBSIDIARY COMPANIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Pfizer Inc. (Registrant) Date: August 13, 1996 H. V. Ryan, Controller (Principal Accounting Officer and Duly Authorized Officer)
Exhibit 11 PFIZER INC. AND SUBSIDIARY COMPANIES COMPUTATION OF EARNINGS PER COMMON SHARE (millions, except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, July 2, June 30, July 2, 1996 1995 1996 1995 Primary: Net income $394 $317 $ 911 $ 737 Weighted average number of common shares outstanding 623 614 622 612 Common share equivalents (a) 20 13 20 13 Weighted average number of common shares and common share equivalents 643 627 642 625 Net income per common share $.61 $.50 $1.42 $1.18 Fully Diluted:(b) Net income $394 $317 $ 911 $ 737 Weighted average number of common shares outstanding 623 614 622 612 Common share equivalents and other dilutive securities 20 15 20 14 Weighted average number of common shares and common share equivalents 643 629 642 626 Net income per common share $.61 $.50 $1.42 $1.18 (a) Includes common share equivalents applicable to stock option plans. (b) This calculation is submitted in accordance with Regulation S-K item 601(b) (11) although the fully diluted earnings per share amount is not required to be disclosed in the financial statements because it results in dilution of less than 3% (footnote 2 to paragraph 14 of APB Opinion No. 15).
<TABLE> Exhibit 12 PFIZER INC. AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (millions of dollars) (Unaudited) <CAPTION> Six Months Ended June 30, Year Ended December 31, 1996 1995 1994 1993 1992 1991 <S> <C> <C> <C> <C> <C> <C> Determination of earnings: Income from continuing operations before provision for taxes on income, minority interests, and cumulative effect of accounting changes $1,326 $2,299 $1,830 $835 $1,541 $ 913 Less: Minority interests 4 7 4 2 3 3 Undistributed earnings/(losses) of unconsolidated subsidiaries 0 0 (1) 1 8 1 Adjusted income 1,322 2,292 1,827 832 1,530 909 Fixed charges 100 232 158 136 130 155 Total earnings as defined $1,422 $2,524 $1,985 $968 $1,660 $1,064 Fixed charges and other: Interest expense (a) $ 80 $ 193 $ 127 $107 $ 103 $ 130 Rents (b) 20 39 31 29 27 25 Fixed charges 100 232 158 136 130 155 Capitalized interest 2 12 15 14 12 8 Total fixed charges $ 102 $ 244 $ 173 $150 $ 142 $ 163 Ratio of earnings to fixed charges 13.9 10.3 11.5 6.5 11.7 6.5 <FN> <F1>(a) Interest expense includes amortization of debt discount and expenses. (b) Rents included in the computation consist of one-third of rental expense. Note: In January 1996, the Company sold substantially all the net assets of the food science business. As a result, the food science business has been reported as a discontinued operation. </FN> </TABLE>
Exhibit 15 ACCOUNTANTS' ACKNOWLEDGMENT Board of Directors Pfizer Inc.: We hereby acknowledge the incorporation by reference of our report dated August 13, 1996, included within the Quarterly Report on Form 10-Q of Pfizer Inc. for the quarter ended June 30, 1996, in the Prospectus dated December 27, 1972, as supplemented February 6, 1973, of Pfizer Inc., filed under the Securities Act of 1933 in Registration Statement on Form S-16 dated October 27, 1972 (File No. 2-46157), as amended, in the Prospectus dated June 14, 1979, of Pfizer Inc., in the Registration Statement on Form S-16 dated April 26, 1979 (File No. 2-64610), as amended, in the Registration Statement on Form S-15 dated December 13, 1982 (File No. 2-80884), as amended, in the Registra- tion Statement on Form S-8 dated October 27, 1983 (File No. 2-87473), as amended, in the Registration Statement on Form S-8 dated March 22, 1990 (File No. 33-34139), in the Registration Statement on Form S-8 dated January 24, 1991 (File No. 33-38708), in the Registration Statement on Form S-3 dated June 26, 1991 (File No. 33-41367), as amended, in the Registration Statement on Form S-8 dated November 18, 1991 (File No. 33-44053), in the Registration Statement on Form S-3 dated May 27, 1993 (File No. 33-49629), in the Registra- tion Statement on Form S-8 dated May 27, 1993 (File No. 33-49631), in the Registration Statement on Form S-8 dated May 19, 1994 (File No. 33-53713), in the Registration Statement on Form S-8 dated October 5, 1994 (File No. 33- 55771), in the Registration Statement on Form S-3 dated November 14, 1994 (File No. 33-56435), in the Registration Statement on Form S-8 dated December 20, 1994 (File No 33-56979), in the Registration Statement on Form S-4 dated February 14, 1995 (File No. 33-57709) and in the Registration Statement on Form S-8 dated March 29, 1996 (File No. 33-02061). Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. KPMG Peat Marwick LLP New York, New York August 13, 1996