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 28, 1998 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 of incorporation) (I.R.S. Employer Identification No.) 235 East 42nd Street, New York, New York 10017 (Address of principal executive offices) (212) 573-2323 (Registrant's telephone number) 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 the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO At July 31, 1998, 1,400,227,335 shares of the issuer's common stock were outstanding. PFIZER INC. FORM 10-Q For the Quarter Ended June 28, 1998 Table of Contents <TABLE> PART I. FINANCIAL INFORMATION Item 1. <CAPTION> Page <S> <C> Financial Statements: Condensed Consolidated Statement of Income for the three months and six months ended June 28, 1998 and June 29, 1997 3 Condensed Consolidated Balance Sheet at June 28, 1998, December 31, 1997 and June 29, 1997 4 Condensed Consolidated Statement of Cash Flows for the six months ended June 28, 1998 and June 29, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Independent Auditors' Report 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 29 </TABLE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <CAPTION> Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 (millions, except per share data) <S> <C> <C> <C> <C> Net sales . . . . . . . . . . . . . . . $3,435 $2,854 $6,624 $5,856 Alliance revenue . . . . . . . . . . . 198 59 348 58 Total revenues. . . . . . . . . . . . . 3,633 2,913 6,972 5,914 Costs and expenses: Cost of sales . . . . . . . . . . . . 586 510 1,131 1,055 Selling, informational and administrative expenses . . . . . . . 1,500 1,245 2,832 2,359 Research and development expenses . . 574 461 1,079 874 Other deductions--net. . . . . . . . . 73 61 68 128 Income before provision for taxes on income and minority interests . . . 900 636 1,862 1,498 Provision for taxes on income . . . . . 271 175 540 434 Minority interests. . . . . . . . . . . 1 4 2 5 Net income. . . . . . . . . . . . . . . $ 628 $ 457 $1,320 $1,059 Earnings per common share Basic . . . . . . . . . . . . . . $ .50 $ .36 $ 1.05 $ .84 Diluted. . . . . . . . . . . . . . $ .47 $ .35 $ 1.00 $ .81 Weighted average shares used to calculate earnings per common share amounts Basic . . . . . . . . . . . . . . 1,265 1,257 1,263 1,257 Diluted. . . . . . . . . . . . . . 1,320 1,301 1,317 1,300 Cash dividends per common share . . . . $ .19 $ .17 $ .38 $ .34 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. <TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> (millions of dollars) June 28, Dec. 31, June 29, 1998* 1997** 1997* ASSETS <S> <C> <C> <C> Current Assets Cash and cash equivalents . . . . . . . . . $ 1,089 $ 877 $ 1,514 Short-term investments . . . . . . . . . . 958 712 723 Accounts receivable, less allowances of $64, $51 and $61 . . . . . . . . . . . . 3,110 2,527 2,525 Short-term loans . . . . . . . . . . . . . 99 115 220 Inventories Finished goods. . . . . . . . . . . . . . 720 677 641 Work in process . . . . . . . . . . . . . 864 852 743 Raw materials and supplies . . . . . . . 258 244 280 Total inventories . . . . . . . . . . . 1,842 1,773 1,664 Prepaid expenses, taxes and other assets . . . . . . . . . . . . 1,161 816 697 Total current assets . . . . . . . . . 8,259 6,820 7,343 Long-term loans and investments . . . . . . . 1,315 1,340 1,224 Property, plant and equipment, less accumulated depreciation of $2,382, $2,321 and $2,260 . . . . . . . . 4,166 4,137 3,943 Goodwill, less accumulated amortization of $166, $152 and $129 . . . . . . . . . . . . 1,023 1,294 1,344 Other assets, deferred taxes and deferred charges . . . . . . . . . . . . . 1,745 1,745 1,878 Total assets . . . . . . . . . . . . . $16,508 $15,336 $15,732 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings, including current portion of long-term debt of $4, $6 and $1 . . . . . . . . . . . . $ 2,583 $ 2,255 $ 2,978 Accounts payable . . . . . . . . . . . . . 814 765 971 Income taxes payable . . . . . . . . . . . 752 785 789 Dividends payable . . . . . . . . . . . . . 251 -- 221 Accrued compensation and related items . . 601 511 424 Other current liabilities . . . . . . . . . 1,137 989 1,039 Total current liabilities . . . . . . . 6,138 5,305 6,422 Long-term debt . . . . . . . . . . . . . . . 724 729 731 Postretirement benefit obligation other than pension plans . . . . . . . . . . . . 391 394 407 Deferred taxes on income . . . . . . . . . . 98 156 263 Other noncurrent liabilities . . . . . . . . 852 819 735 Total liabilities . . . . . . . . . . . 8,203 7,403 8,558 Shareholders'Equity Preferred stock . . . . . . . . . . . . . . -- -- -- Common stock . . . . . . . . . . . . . . . 70 69 69 Additional paid-in capital . . . . . . . . 4,757 3,239 2,498 Retained earnings . . . . . . . . . . . . . 9,928 9,349 8,415 Accumulated other comprehensive income/(expense) . . . . . . . . . . . . (162) (85) 7 Employee benefit trusts . . . . . . . . . . (3,974) (2,646) (2,193) Treasury stock, at cost . . . . . . . . . . (2,314) (1,993) (1,622) Total shareholders' equity . . . . . . 8,305 7,933 7,174 Total liabilities and shareholders' equity . . . . . . . . $16,508 $15,336 $15,732 </TABLE> * Unaudited ** Condensed from audited financial statements. See accompanying Notes to Condensed Consolidated Financial Statements. <TABLE> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <CAPTION> (millions of dollars) Six Months Ended June 28, June 29, 1998 1997 <S> <C> <C> Operating Activities Net income . . . . . . . . . . . . . . . . . . . . $1,320 $1,059 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of business . . . . . . . . . . . . (194) -- Depreciation and amortization of intangibles . . 268 244 Changes in operating assets and liabilities, net of effect of business divested and other . . . . . . . . . . . . . . (668) (626) Net cash provided by operating activities . . . . . 726 677 Investing Activities Purchases of property, plant and equipment . . . . (487) (420) Purchases of short-term investments . . . . . . . (1,776) (918) Proceeds from redemptions of short-term investments . . . . . . . . . . . . . . . . . . . 1,659 759 Proceeds from sale of business . . . . . . . . . . 425 -- Purchases and redemptions of short-term investments by financial subsidiaries and other . . . . . . . . . . . . . (109) (1) Net cash used in investing activities . . . . . . . (288) (580) Financing Activities Repayment of long-term debt . . . . . . . . . . . (7) (269) Increase in short-term debt . . . . . . . . . . . 406 985 Purchases of common stock . . . . . . . . . . . . (323) (219) Cash dividends paid . . . . . . . . . . . . . . . (491) (440) Stock option transactions . . . . . . . . . . . . 168 159 Other financing activities . . . . . . . . . . . . 24 71 Net cash (used in)/provided by financing activities. . . . . . . . . . . . . . . . (223) 287 Effect of exchange-rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (3) (20) Net increase in cash and cash equivalents . . . . . 212 364 Cash and cash equivalents balance at beginning of period . . . . . . . . . . . . . . . . . . . . . 877 1,150 Cash and cash equivalents balance at end of period . . . . . . . . . . . . . . . . . . . . . $1,089 $1,514 Supplemental Cash Flow Information Cash paid during the period for: Income taxes . . . . . . . . . . . . . . . . . . . $ 604 $ 584 Interest . . . . . . . . . . . . . . . . . . . . . 67 78 </TABLE> 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 We prepared the condensed financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP (generally accepted accounting principles) can be condensed or omitted. Certain prior year data have been reclassified to conform to the 1998 presentation. The financial statements include the assets and liabilities and the operating results of subsidiaries operating outside the U.S. Balance sheet amounts for these subsidiaries are as of May 24, 1998 and May 25, 1997. The operating results for these subsidiaries are for the three and six month periods ending on the same dates. Note 2: Responsibility for Interim Financial Statements We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes in our company's latest Form 10-K. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Note 3: New Accounting Pronouncements Effective January 1, 1998, we adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income, which consists of all changes in equity from nonshareholder sources. Prior year financial statements have been conformed to the requirements of SFAS No. 130 (see Note 5). Effective January 1, 1998, we adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This Statement requires us to report information about our operating segments on the same basis as our internal management reporting. As a result of adopting SFAS No. 131, we split the previously reported Health Care unit into two segments, Pharmaceuticals and Medical Technology and combined Consumer Health Care with Pharmaceuticals. In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which becomes effective for our financial statements for the year ended December 31, 1998. SFAS No. 132 requires revised disclosures about pension and other postretirement benefit plans. We are currently assessing the impact of this Statement on our annual financial reporting disclosures. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which becomes effective for our financial statements beginning January 1, 2000. SFAS No. 133 requires a company to recognize all derivative instruments as assets or liabilities in its balance sheet and measure them at fair value. We are currently evaluating this Statement and its impact on our existing accounting policies and financial reporting disclosures. The American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-up Activities" which are effective for our 1999 financial statements. We do not expect the adoption of these SOPs to have a material impact on our financial statements. Note 4: Derivative Financial Instruments During the quarter, we added cross-currency interest rate swaps as an additional method for hedging our net investment in Japan and also extended the term of the hedge through 2003. Specifically, we entered into an aggregate of $625 million notional amount of cross-currency interest rate swaps to hedge our net investment in Japan. They commit us at maturity to sell Japanese yen for U.S. dollars, essentially a yen payable and a U.S. dollar receivable. We will also make interim payments of a fixed rate of 1.1% on the Japanese yen payable and have interim receipts of a variable rate based on a commercial paper rate on the U.S. dollar receivable. These cross-currency interest rate swaps replaced $625 million of Japanese yen debt and related interest rate swaps which previously served as a hedge of our net investment in Japan. Accordingly, we terminated $625 million of interest rate swap contracts. Cross-currency swaps are reported net in our balance sheet in "Other noncurrent liabilities." Changes in the foreign exchange translation of the Japanese yen payable are reported in "Accumulated other comprehensive income/(expense)". Interim receipts and payments under these currency swaps are allocated primarily to interest, with the remaining amount to foreign exchange in "Other deductions--net." We also entered into Japanese yen interest rate swaps to adjust from floating to fixed rate $267 million of Japanese yen debt also serving as hedges of our net investment in Japan. They require: - - Interim payments of a fixed rate of 1.3% to 1.4% and - - Maturity in 2003 Note 5: Comprehensive Income <TABLE> <CAPTION> Three Months Ended Six Months Ended (millions of dollars) June 28, June 29, June 28, June 29, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net income $ 628 $457 $1,320 $1,059 Other comprehensive (income)/expense*: Currency translation adjustment 27 (19) (65) (154) Net unrealized gain/(loss) on investment securities (17) 12 (12) 14 Adjustments to minimum pension liability -- -- -- 2 10 (7) (77) (138) Total comprehensive income $638 $450 $1,243 $ 921 </TABLE> * Components of other comprehensive income/(expense) were reported separately in shareholders' equity prior to adoption of SFAS No. 130, "Reporting Comprehensive Income." Changes in the currency translation adjustment included in "Accumulated other comprehensive income/(expense)" for the first six months of 1998 and 1997 were: <TABLE> <CAPTION> (millions of dollars) 1998 1997 <S> <C> <C> Opening balance $ (79) $ 174 Translation adjustments and hedges (65) (154) Ending balance $(144) $ 20 </TABLE> Note 6: Product Alliance In the first quarter, we entered into a product arrangement with G.D. Searle & Co., the pharmaceutical division of Monsanto Company. Under the worldwide agreements, which exclude only Japan, we are working with Searle to codevelop and copromote Searle's Celebra (celecoxib) which is initially being developed for the treatment of rheumatoid arthritis and osteoarthritis. Initial payments to Searle of $100 million were expensed in the first quarter of 1998 and are included in "Other deductions--net" for the six months ended June 28, 1998. Note 7: Divestitures and Other In January 1998, we completed the sale of the Valleylab business--a part of the Medical Technology Group. In connection with this transaction, we received $425 million and recorded a $194 million gain included in "Other deductions-- net" for the six months ended June 28, 1998. In February 1998, we announced that we are exploring strategic options for the Medical Technology Group (MTG). We have reached agreements to divest the Schneider Worldwide and American Medical System businesses as outlined below. We are continuing to explore strategic options, including divestiture in public or private transactions, for Howmedica, the remaining MTG business. We have not yet made any decisions about this business. In June 1998, we announced an agreement to sell Schneider Worldwide--a part of the Medical Technology Group--to Boston Scientific Corporation for $2.1 billion in cash. The transaction is anticipated to close in the third quarter of 1998. Schneider manufactures and sells stents for a variety of applications, angioplasty devices and accessories. In July 1998, we announced an agreement to sell the American Medical Systems (AMS) business--a part of the Medical Technology Group--to E.M. Warburg, Pincus & Co., LLC for $130 million. The transaction, pending the usual regulatory approvals, is expected to close in 1998. AMS manufactures and sells urological devices for the treatment of erectile dysfunction, urinary incontinence and benign prostatic hyperplasia (enlarged prostate). The net assets of Schneider Worldwide and AMS have been recorded at their net carrying value as net assets held for sale of $438 million (excluding direct costs to sell) included in "Prepaid expenses, taxes and other current assets" at June 28, 1998. 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 28, 1998 and June 29, 1997, 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, 1997, 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 26, 1998, 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, 1997, 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 11, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Net income increased 38% for the second quarter and 25% for the first six months of 1998 over the comparable 1997 periods. Components of the Statement of Income follow: <TABLE> <CAPTION> (millions of dollars, except per share data) Second Quarter Six Months % % 1998 1997 Change* 1998 1997 Change* <S> <C> <C> <C> <C> <C> <C> Net sales $3,435 $2,854 20 $6,624 $5,856 13 Alliance revenue 198 59 236 348 58 499 Total revenues $3,633 $2,913 25 $6,972 $5,914 18 Cost of sales $ 586 $ 510 15 $1,131 $1,055 7 % of total revenues 16.1% 17.5% 16.2% 17.8% Selling, informational and administrative expenses $1,500 $1,245 20 $2,832 $2,359 20 % of total revenues 41.3% 42.8% 40.6% 39.9% R&D expenses $ 574 $ 461 25 $1,079 $ 874 24 % of total revenues 15.8% 15.8% 15.5% 14.8% Other deductions--net $ 73 $ 61 20 $ 68 $ 128 (48) % of total revenues 2.0% 2.1% 1.0% 2.2% Income before taxes $ 900 $ 636 42 $1,862 $1,498 24 % of total revenues 24.8% 21.8% 26.7% 25.3% Taxes on income $ 271 $ 175 54 $ 540 $ 434 24 Effective tax rate 30.0% 27.5% 29.0% 29.0% Net income $ 628 $ 457 38 $1,320 $1,059 25 % of total revenues 17.3% 15.7% 18.9% 17.9% Earnings per common share Basic $ .50 $ .36 39 $ 1.05 $ .84 25 Diluted $ .47 $ .35 34 $ 1.00 $ .81 23 Cash dividends per common share $ .19 $ .17 12 $ .38 $ .34 12 </TABLE> *Percentages may reflect rounding adjustments. TOTAL REVENUES The components of the total revenue increase were as follows: <TABLE> <CAPTION> % Change from 1997 Second Quarter Six Months <S> <C> <C> Volume 26.5% 20.1% Price 1.6 1.7 Currency (3.4) (3.9) Total revenue increase 24.7% 17.9% </TABLE> Wider acceptance of our major pharmaceutical products and our copromotion products as well as the introduction of Viagra in April contributed to the volume increases. Total revenues for the second quarter of 1998 by segment and the changes from last year were as follows: <TABLE> <CAPTION> % of % of Total Total % (millions of dollars) 1998 Revenues 1997* Revenues** Change** <S> <C> <C> <C> <C> <C> Pharmaceuticals U.S. $1,888 52.0 $1,187 40.8 59 International 1,104 30.4 1,050 36.0 5 Worldwide 2,992 82.4 2,237 76.8 34 Medical Technology 321 8.8 362 12.4 (12)~ Animal Health 320 8.8 314 10.8 2 Total $3,633 100.0 $2,913 100.0 25 * Certain 1997 data have been reclassified to agree to the 1998 presentation. **Percentages may reflect rounding adjustments. ~ Decline is attributable to the divestitures of the Valleylab and Strato/Infusaid businesses. </TABLE> Total revenues for the first six months of 1998 by segment and the changes from last year were as follows: <TABLE> <CAPTION> % of % of Total Total % (millions of dollars) 1998 Revenues** 1997* Revenues** Change** <S> <C> <C> <C> <C> <C> Pharmaceuticals U.S. $3,620 51.9 $2,582 43.7 40 International 2,119 30.4 2,045 34.5 4 Worldwide 5,739 82.3 4,627 78.2 24 Medical Technology 623 8.9 678 11.5 (8)~ Animal Health 610 8.8 609 10.3 0 Total $6,972 100.0 $5,914 100.0 18 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. **Percentages may reflect rounding adjustments. ~ Decline is attributable to the divestitures of the Valleylab and Strato/Infusaid businesses. The following is a discussion of total revenues by business segment: Pharmaceuticals Worldwide pharmaceutical revenues were as follows: <TABLE> <CAPTION> Second Quarter Six Months (millions of dollars) 1998 1997* % Change 1998 1997* % Change** <S> <C> <C> <C> <C> <C> <C> Cardiovascular $ 983 $ 873 13 $1,953 $1,795 9 Infectious diseases 567 567 0 1,324 1,249 6 Central nervous system 417 333 25 893 737 21 Viagra 411 -- -- 411 -- -- Alliance revenue 198 59 236 348 58 499 Consumer health care 120 135 (11) 240 267 (10) Other 296 270 10 570 521 9 Total $2,992 $2,237 34 $5,739 $4,627 24 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. **Percentages may reflect rounding adjustments. Sales of our eight major pharmaceutical products accounted for 74% of pharmaceutical revenues and 61% of total revenues in the second quarter of 1998. Individual product sales in the second quarter of 1998 and a brief discussion of each follow: <TABLE> <CAPTION> % Change from 1997 Excluding Effects Product Category (millions) Actual of Foreign Exchange <S> <C> <C> <C> <C> Norvasc Cardiovascular $618 18 23 Procardia XL Cardiovascular 157 (6) (6) Cardura Cardiovascular 159 7 11 Zithromax Infectious Diseases 163 3 6 Diflucan Infectious Diseases 211 (3) 0 Viagra Impotence 411 -- -- Zoloft Central Nervous System 398 23 25 Zyrtec Allergy 105 51 51 </TABLE> - - Norvasc continues to benefit from the increased acceptance by the worldwide medical community. - - Sales of Procardia XL have declined due in part to the increased emphasis on and broad medical acceptance of Norvasc. - - Cardura's sales continue to grow as alpha blockers are recognized as effective therapy for the treatment of hypertension and enlarged prostate. Cardura XL, a dosage form that uses the GITS delivery system, was launched for hypertension in Germany in the first quarter. - - Sales of Zithromax in the quarter were tempered by changes in wholesaler stocking patterns in the U.S. and a weaker than usual flu season in Europe. - - Sales growth of Diflucan continues to be impacted by the lower incidence of fungal infections in AIDS patients being treated with protease inhibitors. - - Viagra, the first effective oral treatment for erectile dysfunction, was introduced in April. In the second quarter, Viagra was our second-largest selling product worldwide and our largest selling U.S. product with U.S. sales of $409 million. The initial rate of sales reflects prescriptions and substantial trade stocking, which we expect will adjust to be consistent with underlying demand over the remainder of the year. Viagra has been filed with regulatory authorities in Europe, Japan and many other parts of the world. - - Zoloft continues to benefit from introductions in international markets, new indications and increased field-force support. - - Zyrtec was approved for a new use by the FDA in the second quarter as the first once-daily prescription antihistamine for the treatment of seasonal and perennial allergic rhinitis and hives in children age 2 to 5. We started shipping Trovan, a broad spectrum quinolone antibiotic, to customers in the U.S. in January 1998 with second quarter sales reaching $22 million. Trovan received European approval in July. "Alliance revenue" reflects copromotion contractual revenues we earned from sales of Lipitor and Aricept. Product launches of Lipitor, the cholesterol-lowering medication, have taken place in most major world markets, including the U.S., the United Kingdom, Germany, Italy, Canada, Spain, Australia and Brazil and generated strong revenue in the second quarter. Worldwide sales of Lipitor are primarily recorded by the Parke-Davis Research Division of Warner-Lambert Company, the company that discovered and developed the compound. In July, the FDA expanded the approved indications for Lipitor to include use with diet changes by patients with high triglyceride levels. Lipitor was also indicated as a treatment for patients who have not responded adequately to dietary changes in treating a condition which causes people to have extremely high amounts of cholesterol and other fats in their blood streams. Product launches of Aricept have taken place in 17 countries, including the U.S., the United Kingdom, Canada, Germany, Italy, Spain, France and Australia. Worldwide sales of Aricept totaled $79 million in the second quarter of 1998. These sales are primarily recorded by Eisai Co., Ltd., the company that discovered and developed the compound. Global prescriptions for the treatment of Alzheimer's disease have increased roughly sixfold since the introduction of Aricept. Aricept accounts for about 97% of all Alzheimer's disease prescription drug sales in the U.S. In the first quarter, we entered into a product arrangement with G.D. Searle & Co., the pharmaceutical division of Monsanto Company. Under the worldwide agreements, which exclude only Japan, we are working with Searle to codevelop and copromote Searle's Celebra (celecoxib) which is initially being developed for the treatment of rheumatoid arthritis and osteoarthritis. Initial payments to Searle of $100 million were expensed in the first quarter of 1998 and are included in "Other deductions--net" for the six months ended June 28, 1998. Medical Technology Second quarter sales decreased 12% from last year's level. Excluding sales of the divested Valleylab and Strato/Infusaid businesses, sales increased by 3% (6% excluding the impact of foreign exchange). Sales of musculoskeletal products increased by 2% in the second quarter to $210 million; interventional products increased 13% to $91 million; and urological products continued to decline (14% to $19 million). In June, we announced that we had agreed to sell Schneider Worldwide to Boston Scientific Corporation for $2.1 billion. The transaction is anticipated to close in the third quarter of 1998. In July 1998, we announced an agreement to sell the American Medical Systems (AMS) business--a part of the Medical Technology Group (MTG)--to E.M. Warburg, Pincus & Co., LLC for $130 million. The transaction, pending the usual regulatory approvals, is expected to close in 1998. Total net sales and income before taxes for Strato/Infusaid, Valleylab, Schneider Worldwide and AMS were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended Full Year June 28, June 29, June 28, June 29, (millions of dollars) 1997 1998 1997 1998 1997 <S> <C> <C> <C> <C> <C> Net sales: Strato/Infusaid $ 8 $-- $ 4 $ -- $ 8 Valleylab 198 -- 48 20 88 Schneider Worldwide 331 91 81 166 150 AMS 92 19 22 37 41 Income/(loss)before taxes: Strato/Infusaid $(14) $-- $(2) $ -- $ (3) Valleylab 32 -- 8 2 13 Schneider Worldwide 86 29 19 48 34 AMS 20 (2) 3 (1) 5 </TABLE> We are continuing to explore strategic options, including divestiture in public or private transactions, for Howmedica, the remaining MTG business. We have not yet made any decisions about this business. Total net sales of Howmedica were $821 million for the full year 1997. Total income before taxes for MTG was $221 million for the full year 1997. Animal Health Animal Health sales for the second quarter increased 2%. Animal Health was particularly affected by foreign exchange as more than 58% of the segment's sales in the quarter were made abroad. Excluding the impact of foreign exchange, sales increased 7%. Sales of Dectomax grew 58% over last year, reaching $46 million in the quarter. Rimadyl, a non-steroidal anti-inflammatory medicine for osteoarthritis in dogs, and RespiSure, a vaccine for respiratory infections in swine, continued to grow in the second quarter. Revenues by Geographic Area Total revenues in the U.S. increased largely due to the introduction of Viagra and sales growth of our other pharmaceutical products, particularly Norvasc, Zyrtec and Zoloft, as previously described, as well as alliance revenue. Total revenues by geographic area were as follows: <TABLE> <CAPTION> (millions of dollars) Second Quarter % of % of Total Total 1998 Revenues 1997* Revenues % Change <C> <C> <C> <C> <S> <C> $2,181 60.0 $1,497 51.4 United States 46 279 7.7 278 9.5 Japan -- 1,173 32.3 1,138 39.1 All Other 3 $3,633 100.0 $2,913 100.0 Consolidated 25 </TABLE> <TABLE> <CAPTION> (millions of dollars) Six Months % of % of Total Total 1998 Revenues** 1997* Revenues % Change <C> <C> <C> <C> <S> <C> $4,186 60.0 $3,165 53.5 United States 32 538 7.7 532 9.0 Japan 1 2,248 32.3 2,217 37.5 All Other 1 $6,972 100.0 $5,914 100.0 Consolidated 18 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. **Percentages may reflect rounding adjustments. Exchange rates affect the revenues we record in foreign markets. The U.S. dollar's strength against foreign currencies decreases total revenues when translated into their U.S. dollar equivalent. For example, international pharmaceutical revenues increased 13% in the second quarter excluding the impact of foreign exchange as compared with 6% reported. The currency impact was most pronounced in Japan, Germany, France and Italy as the value of the U.S. dollar strengthened relative to the prior year. The Japanese yen has weakened substantially year-over-year versus the U.S. dollar, and declines in the values of various Southeast Asian currencies relative to the dollar added to this adverse effect. The Asian countries most impacted by recent economic events--Korea, Indonesia, Thailand, Malaysia, the Philippines, and Taiwan--combine to account for approximately 1% of total company revenues. COSTS AND EXPENSES Cost of Sales Cost of sales for the second quarter and first six months of 1998 declined as a percentage of net sales mainly due to favorable product mix and improvements in manufacturing efficiencies. Selling, Informational and Administrative Expenses Selling, informational and administrative expenses in both the second quarter and first six months of 1998 increased 20% over the 1997 levels. Support for previously introduced products and launches of new products contributed to the increase. Research and Development Expenses Research and development expenses increased 25% in the second quarter over the prior year period. In the first six months, Pharmaceutical R&D expenses, expressed as a percentage of Pharmaceutical net sales, were 17% in 1998 and 18% in 1997. We expect total spending to be about $2.3 billion in 1998 to discover new chemical compounds and advance others in development which include: - - Tikosyn (dofetilide), for treatment of a heart rhythm disorder. U.S. and European regulatory filings for this product were submitted in the first quarter of 1998; - - eletriptan, for treatment of migraine headaches. European and U.S. regulatory filings for this product are planned in the third and fourth quarters of 1998; - - Alond (zopolrestat), for treatment of nervous system, kidney and cardiovascular disorders related to diabetes; - - voriconazole, for the treatment of fungal infections; - - an inhalable form of insulin under development with Inhale Therapeutics; and - - darifenacin, for the treatment of irritable bowel syndrome and urinary urge incontinence. We are also developing new uses or dosages for Norvasc, Zyrtec, Zoloft, Cardura, Zithromax, Trovan and Viagra. During the second quarter, we announced that we had received a non-approvable letter from the FDA for the antipsychotic Zeldox. We are planning to discuss the parameters of a new clinical study with the FDA and we anticipate the New Drug Application would be able to be refiled in late 1999. We do not plan to launch Zeldox elsewhere in the world until the new clinical study is completed. We have decided not to pursue the development of candoxatril, a drug candidate for the treatment of congestive heart failure. In the second quarter of 1998, we expensed candoxatril inventory of $5.5 million. Other Deductions--Net The following components were included in "Other deductions--net" in the second quarter and first six months of 1998 and 1997. <TABLE> <CAPTION> Second Quarter % Six Months % (millions of dollars) 1998 1997 Change 1998 1997 Change* <S> <C> <C> <C> <C> <C> <C> Interest income $(40) $(38) 5 $(76) $(72) 6 Interest expense 34 37 (8) 61 74 (18) Gain on sale of Valleylab -- -- -- (194) -- -- Copromotion payments to Searle -- -- -- 100 -- -- Amortization of goodwill and other intangibles 16 16 0 32 34 (6) Foreign exchange 5 3 67 -- 9 -- Other, net 58 43 35 145 83 75 Other deductions--net $ 73 $ 61 20 $ 68 $128 (48) </TABLE> *Percentages may reflect rounding adjustments. TAXES ON INCOME We now project a 1998 effective tax rate of 29%. The tax rate recorded in the second quarter of approximately 30% also reflects an adjustment of first quarter results, which were previously recorded using a 28% rate. The rate increase from 28% to 29% for the full year is mainly due to a greater portion of our company's taxable income being derived from the U.S. OUTLOOK Factoring in our major investments for the future and despite our increased effective tax rate and the unfavorable impact of foreign exchange on revenues and income, we are comfortable with the current range of the majority of analysts' diluted earnings-per-share estimates of $2.05 and $2.10 for the year. This assessment excludes impacts from acquisitions, divestitures, licensing fees, legal settlements and other unusual items. This estimate cannot be guaranteed. Actual results may differ materially. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The net financial assets/(debt) position was as follows: <TABLE> <CAPTION> June 28, Dec. 31, June 29, (millions of dollars) 1998 1997 1997 <S> <C> <C> <C> Financial assets* $3,461 $3,044 $3,681 Short-term borrowings and long-term debt 3,307 2,984 3,709 Net financial assets/(debt) $ 154 $ 60 $ (28) </TABLE> * Consists of cash and cash equivalents, short-term investments and loans and long-term loans and investments. To fund investing and financing activities, commercial paper and short-term borrowings are used to complement operating cash flows. In maintaining this financial flexibility, levels of debt and investments will vary depending on operating results. Selected measures of our financial strength are as follows: <TABLE> <CAPTION> June 28, Dec. 31, June 29, 1998 1997 1997 <S> <C> <C> <C> Working capital (millions of dollars) $ 2,121 $ 1,515 $ 921 Current ratio 1.35:1 1.29:1 1.14:1 Debt to total capitalization (percentage)* 28% 27% 34% Shareholders' equity per common share** $ 6.57 $ 6.30 $ 5.70 </TABLE> * Represents total short-term borrowings and long-term debt divided by the sum of total short-term borrowings, long-term debt and total shareholders' equity. ** Represents total shareholders' equity divided by the actual number of common shares outstanding which excludes treasury shares and those held by the employee benefit trusts. The increase in working capital from June 29, 1997 to June 28, 1998 was primarily due to the reclassification to current assets of the Schneider Worldwide and AMS assets held for sale as well as alliance revenue receivables and higher receivable and inventory levels related to new products. The increase from December 31, 1997 was due to the Schneider and AMS reclassifications mentioned above as well as higher receivables including those for new products. Net Cash Provided by Operating Activities During the first six months of 1998, operating activities provided net cash of $726 million, an increase of $49 million from the 1997 period. The change was primarily due to higher net income in the first six months of 1998 versus 1997. Net Cash Used in Investing Activities In the first six months of 1998, investing activities used net cash of $288 million, a decrease of $292 million from the 1997 period. This change was primarily attributable to proceeds from the sale of the Valleylab business. Net Cash Used in/Provided by Financing Activities In the first six months of 1998, net cash used in financing activities was $223 million. We received less cash from net borrowings, repurchased more common stock at a higher average price and paid higher cash dividends in the first six months of 1998. During the first six months of 1998, we repurchased approximately 3.5 million shares of common stock on the open market at an average price of about $92 per share. Dividends paid increased due to the increase in the dividend rate approved earlier this year. In September 1996, Pfizer's board authorized the repurchase of up to $2 billion of the company's common stock over 18-24 months. Between September 1996 and the end of June 1998, Pfizer purchased 15.6 million shares at a cost of about $936.5 million. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. We developed a Compliance Assurance Process to address this concern. A project team has performed a detailed assessment of all internal computer systems and, as discussed below, is developing and implementing plans to correct the problems. We expect these projects to be successfully completed during 1999. Year 2000 problems could affect many of our research and development, production, distribution, financial, administrative and communication operations. Systems critical to our business which have been identified as non-Year 2000 compliant are either being replaced or corrected through programming modifications. In addition, a separate team is looking at Year 2000 readiness from other aspects of our business, including customer order- taking, manufacturing, raw materials supply and plant process equipment. Our goal is to have our remediated and replaced systems operational by the first quarter of 1999 to allow time for testing and verification. In addition to our in-house efforts, we are asking vendors, major customers, service suppliers, communications providers and banks whose systems failures potentially could have a significant impact on our operations to verify their Year 2000 readiness. We are testing such systems where appropriate and possible. As part of our Contingency Plan, we are developing Business Continuity Plans for those areas that are critical to Pfizer's business. These Business Continuity Plans will be designed to mitigate serious disruptions to our business flow beyond the end of 1999, and will operate independent of our external providers' Year 2000 compliance. The major drive for contingency planning will be in the last quarter of 1998 and the first half of 1999, with the expectation that our business groups will have plans in place by the end of the second quarter of 1999. Based on our current plans and efforts to date, we do not anticipate that Year 2000 problems will have a material effect on our results of operations or financial condition. External and internal costs specifically associated with modifying internal use software for Year 2000 compliance are expensed as incurred. To date, we have spent $15 million on this project. Costs to be incurred in the remainder of 1998 and 1999 to fix Year 2000 problems are estimated at approximately $45 million. Such costs do not include normal system upgrades and replacements. We do not expect the costs relating to Year 2000 remediation to have a material effect on our results of operations or financial condition. The above expectations are subject to uncertainties. For example, if we are unsuccessful in identifying or fixing all Year 2000 problems in our critical operations, or if we are affected by the inability of suppliers or major customers (such as a large drug wholesaler or distributor) to continue operations due to such a problem, our results of operations or financial condition could be materially impacted. The total costs that we incur in connection with the Year 2000 problems will be influenced by our ability to successfully identify Year 2000 systems' flaws, the nature and amount of programming required to fix the affected programs, the related labor and/or consulting costs for such remediation, and the ability of third parties with whom we have business relationships to successfully address their own Year 2000 concerns. These and other unforeseen factors could have a material adverse effect on our results of operations or financial condition. NEW EUROPEAN CURRENCY A new European currency (Euro) is planned for introduction in January 1999 to replace the separate currency of several individual countries. This will entail changes in our operations as we modify systems and commercial arrangements to deal with the new currency. Modifications will be necessary in operations such as payroll, benefits and pension systems, contracts with suppliers and customers and internal financial reporting systems. Although a three-year transition period is expected during which transactions can be made in the old currencies, this may require dual currency processes for our operations. We have attempted to identify issues involved and are developing and implementing solutions. The cost of this effort is not expected to have a material effect on our business or results of operations. There is no guarantee, however, that all problems will be foreseen and corrected, or that no material disruption of our business will occur. The conversion to the Euro may have competitive implications on our pricing and marketing strategies; however, any such impact is not known at this time. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Our disclosure and analysis in this report contain some "forward-looking statements". Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be incorrect. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our 10-Q, 8-K and 10-K reports to the SEC. Our Form 10-K filing for the 1997 fiscal year listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I of that filing under the heading "Cautionary Factors That May Affect Future Results." We incorporate that section of that Form 10-K in this filing and investors should refer to it. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. In addition, we are continuing to explore strategic options, including divestiture in a public or private transactions, for Howmedica, the remaining MTG business. 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. In addition, from time to time the Company is involved in, or is the subject of, various governmental or agency inquiries or investigations relating to its businesses. On June 9, 1997, the Company received notice of the filing of an Abbreviated New Drug Application (ANDA) by Mylan Pharmaceuticals for a sustained release nifedipine product asserted to be bioequivalent to Procardia XL. Mylan's notice asserted that the proposed formulation does not infringe relevant licensed Alza and Bayer patents and thus that approval of their ANDA should be granted before patent expiration. On July 18, 1997, the Company, together with Bayer AG and Bayer Corporation, filed a patent infringement suit against Mylan Pharmaceuticals Inc. and Mylan Laboratories Inc. in the United States District Court for the Western District of Pennsylvania with respect to Mylan's ANDA. Suit was filed under Bayer AG's U.S. Patent No. 5,264,446, licensed to the Company, relating to nifedipine of a specified particle size range. Mylan has filed its answer denying infringement and a scheduling order has been entered. Discovery is in progress. On or about February 23, 1998, Bayer AG received notice that Biovail Laboratories Incorporated had filed an ANDA for a sustained release nifedipine product asserted to be bioequivalent to one dosage strength (60 mg) of Procardia XL. The notice was subsequently received by the Company as well. The notice asserts that the Biovail product does not infringe Bayer's U.S. Patent No. 5,264,446. On March 26, 1998 the Company received notice of the filing of an ANDA by Biovail Laboratory of a 30 mg dosage formulation of nifedipine alleged to be bioequivalent to Procardia XL. On April 2, 1998 Bayer and Pfizer filed a patent infringement action against Biovail, relating to their 60 mg nifedipine product, in the United States District Court for the District of Puerto Rico. On May 6, 1998 Bayer and Pfizer filed a second patent infringement action in Puerto Rico against Biovail under the same patent with respect to Biovail's 30 mg. nifedipine product. These actions have been consolidated for discovery and trial. On April 24 Biovail Laboratories Inc. brought suit in the United States District Court for the Western District of Pennsylvania against the Company and Bayer seeking a declaratory judgment of invalidity of and/or non-infringement of the 5,264,446 nifedipine patent as well as a finding of violation of the antitrust laws. Biovail has also moved to transfer the patent infringement actions from Puerto Rico to the Western District of Pennsylvania. Pfizer has opposed this motion to transfer and on June 19, 1998 moved to dismiss Biovail's declaratory judgment action and antitrust action in the Western District of Pennsylvania, or in the alternative to stay the action pending the outcome of the infringement actions in Puerto Rico. On April 2, 1998 the Company received notice from Lek U.S.A Inc. of its filing of an ANDA for a 60 mg formulation of nifedipine alleged to be bioequivalent to Procardia XL. On May 14, 1998 Bayer and Pfizer commenced suit against Lek for infringement of Bayer's U.S. Patent No. 5,264,446, as well as for infringement of a second Bayer patent, No. 4,412,986 relating to combinations of nifedipine with certain polymeric materials. Pfizer filed suit on July 8, 1997, against the FDA in the United States District Court for the District of Columbia, seeking a declaratory judgment and injunctive relief enjoining the FDA from processing Mylan's ANDA or any other ANDA submission referencing Procardia XL that uses a different extended release mechanism. Pfizer's suit alleges that extended release mechanisms that are not identical to the osmotic pump mechanism of Procardia XL constitute different dosage forms requiring the filing and approval of suitability petitions under the Food Drug and Cosmetics Act before the FDA can accept an ANDA for filing. Mylan intervened in Pfizer's suit. On March 31, 1998 the U.S. District Judge granted the government's motion for summary judgment against the Company. Pfizer has appealed that decision to the D.C. Court of Appeals. As previously disclosed, a number of lawsuits and claims have been brought against the Company and Shiley Incorporated, a wholly owned subsidiary, alleging either personal injury from fracture of 60 degrees or 70 degrees 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 established a worldwide settlement class of people with C/C heart valves and their spouses, except those who elect to exclude themselves. The settlement provided for a Consultation Fund of $90 million, which was fixed by the number of claims filed, from which valve recipients are receiving 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 established 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 and all appeals have been exhausted. Generally, the plaintiffs in all of the pending heart valve litigations seek money damages. Based on the experience of the Company in defending these claims to date, including insurance proceeds 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. Litigation involving insurance coverage for the Company's heart valve liabilities has been resolved. 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 designations have been made by some state environmental agencies under applicable 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 administrative 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 conclusion, 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. The United States Environmental Protection Agency_Region I 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 facility. 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. 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. A number of cases alleging property damage from asbestos- containing products installed in buildings have also been brought against the Company, but most have been resolved. 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 District Court determined that the Future Claims Settlement was fair and reasonable. Subsequently, the United States Court of Appeals for the Third Circuit reversed the order of the District Court and on June 27, 1997, the U.S. Supreme Court affirmed the Third Circuit's order and decertified the class. The overturning of the settlement 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 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. As of June 27, 1998, there were 62,756 personal injury claims pending against Quigley (excluding those which are inactive or have been settled in principle), 27,572 such claims against the Company, and 69 talc cases against the Company. The Company believes that its costs incurred in defending and ultimately disposing of the asbestos personal injury claims, as well as the property damage and talc claims, will be largely covered by insurance policies issued by several primary insurance carriers and a number of excess carriers that have agreed to provide coverage, subject to deductibles, exclusions, retentions and policy limits. Litigation is pending against several excess insurance carriers seeking damages and/or declaratory relief to secure their coverage obligations. 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 Company has been named, together with numerous other manufacturers 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 "individual actions"). These cases, which have been transferred to the United States District Court for the Northern District of Illinois and coordinated for pretrial purposes, allege that the defendant drug manufacturers 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 installments 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 February 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. On August 15, 1997, the Court of Appeals (1) reversed the denial of summary judgment for the manufacturers excluding purchases by other than direct purchasers; (2) reversed the grant of summary judgment dismissing the wholesalers; and (3) took action regarding Alabama state cases, and DuPont Merck. The District Court has now set a trial date of September 1998 for the trial of the class case against the non-settlers, and has permitted the opt-out plaintiffs to add the wholesalers as named defendants in their cases. 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. Appeals from this decision were dismissed by the U.S. Court of Appeals for the Seventh Circuit in May 1997. Retail pharmacy cases have also been filed in state courts in Alabama, California, Minnesota, Mississippi and Wisconsin. Pharmacy classes have been certified in California. The Company's motion to dismiss was granted in the Wisconsin case, and that dismissal is under appeal. Consumer class actions have been filed in Alabama, Arizona, California, the District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, New York, North Carolina, Tennessee, Washington and Wisconsin alleging injury to consumers from the failure to give discounts to retail pharmacy companies. The New York and Washington state cases were dismissed, and an appeal is pending in New York. A case filed in Colorado state court was dismissed without appeal. A consumer class has been certified in California, and a limited consumer class has been certified in the District of Columbia. Class certification was denied in the Michigan state case, and plaintiffs' subsequent petition for review was denied. Class certification also was denied in the Maine case. In addition to its settlement of the retailer Federal Class Action (see above), the Company has also settled several major opt-out retail cases, and along with other manufacturers, has entered into an agreement to settle all outstanding consumer class actions (except Alabama and California). That overall settlement is awaiting approval in the various courts in which the actions are pending. The Company believes that these brand name prescription drug antitrust cases, which generally seek damages and certain injunctive relief, are without merit. The Federal Trade Commission is conducting an investigation focusing on the pricing practices at issue in the above pharmacy antitrust litigation. In July 1996, the Commission issued a subpoena for documents to the Company, among others, to which the Company has responded. A second subpoena was issued to the Company for documents in May 1997 and the Company has responded. This investigation continues. 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 satisfied 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. On January 15, 1997, an action was filed in Circuit Court, Chambers County, Alabama, purportedly on behalf of a class of consumers, variously defined by the laws or types of laws governing their rights and encompassing residents of up to 47 states. The complaint alleges that the Company's claims for Plax were untrue, entitling them to a refund of their purchase price for purchases since 1988. A hearing on Plaintiff's motion to certify the class was held on June 2, 1998. We are awaiting the Court's decision. The Company believes the complaint is without merit. In April 1996, the Company received a Warning Letter from the FDA relating to the timeliness and completeness of required post marketing reports for pharmaceutical products. The letter did not raise any safety issue about Pfizer drugs. The Company has been implementing remedial actions designed to remedy the issues raised in the letter. During 1997, the Company met with the FDA to apprise them of the scope and status of these activities. In July 1997, the Company resolved all issues with the FDA related to an August 1996 Warning Letter from the FDA relating to certain promotional materials used in the marketing of Zoloft. Consumer class actions were filed in 1996 and 1997 in San Diego and in Dallas and Brownsville, Texas. The complaints alleged that Pfizer's promotional materials improperly implied that the FDA had approved Zoloft as safe and effective for certain indications, and that patients for whom Zoloft was prescribed as a result of the promotion were entitled to a refund of their purchase price. These actions have been voluntarily discontinued. A number of cases against Howmedica Inc. (some of which also name the Company) allege that P.C.A. one-piece acetabular hip prostheses sold from 1983 through 1990 were defectively designed and manufactured and pose undisclosed risks to implantees. The Company believes that most if not all of these cases are without merit. Between 1994 and 1996, seven class actions alleging various injuries arising from implantable penile prostheses manufactured by American Medical Systems were filed and ultimately dismissed or discontinued. Thereafter, in late 1996 and 1997, approximately 600 former members of one or more of the purported classes, represented by some of the same lawyers who filed the class actions, filed individual suits in Circuit Court in Minneapolis alleging damages from their use of implantable penile prostheses. The Company believes that most if not all of these cases 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, Laboratories Pfizer Ltd. ("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 through 1992. 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 our non-Belgian subsidiaries 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 Belgian tax laws and the written opinions of outside legal counsel, the Company believes that the assessments are without merit. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 1) Exhibit 10 - Stock and Asset Purchase Agreement dated as of June 15, 1998 among Pfizer Inc., Pfizer Holdings Ireland, the Asset Selling Corporation (named therein) and Boston Scientific Corporation. 2) Exhibit 15 - Accountants' Acknowledgment 2) Exhibit 27 - Financial Data Schedule 3) Exhibit 27.1 - Financial Data Schedule restated for period ended June 29, 1997 (b) Reports on Form 8-K A report on Form 8-K was filed on June 17, 1998 during the second quarter ended June 28, 1998 concerning the agreement to sell Schneider Worldwide to Boston Scientific Corporation. 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 11, 1998 /s/H. V. Ryan H. V. Ryan, Vice President; Controller (Principal Accounting Officer and Duly Authorized Officer) Exhibit 15 ACCOUNTANTS' ACKNOWLEDGMENT To the Shareholders and Board of Directors of Pfizer Inc.: We hereby acknowledge the incorporation by reference of our report dated August 11, 1998, included within the Quarterly Report on Form 10Q of Pfizer Inc. for the quarter ended June 28, 1998, in the following Registration Statements: - - Form S-15 dated December 13, 1982 (File No. 2-80884), - - Form S-8 dated October 27, 1983 (File No. 2-87473), - - Form S-8 dated March 22, 1990 (File No. 33-34139), - - Form S-8 dated January 24, 1991 (File No. 33-38708), - - Form S-8 dated November 18, 1991 (File No. 33-44053), - - Form S-3 dated May 27, 1993 (File No. 33-49629), - - Form S-8 dated May 27, 1993 (File No. 33-49631), - - Form S-8 dated May 19, 1994 (File No. 33-53713), - - Form S-8 dated October 5, 1994 (File No. 33-55771), - - Form S-3 dated November 14, 1994 (File No. 33-56435), - - Form S-8 dated December 20, 1994 (File No. 33-56979), - - Form S-4 dated February 14, 1995 (File No. 33-57709), - - Form S-8 dated March 29, 1996 (File No. 33-02061), - - Form S-8 dated September 25, 1997 (File No. 333-36371), and - - Form S-8 dated April 23, 1998 (File No. 333-50899). 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 11, 1998