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 September 27, 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 October 31, 1998, 1,297,794,059 shares of the issuer's common stock were outstanding. PFIZER INC. FORM 10-Q For the Quarter Ended September 27, 1998 Table of Contents <TABLE> PART I. FINANCIAL INFORMATION <CAPTION> Item 1. Page <S> <C> Financial Statements: Condensed Consolidated Statement of Income for the three months and nine months ended September 27, 1998 and September 28, 1997 3 Condensed Consolidated Balance Sheet at September 27, 1998, December 31, 1997 and September 28, 1997 4 Condensed Consolidated Statement of Cash Flows for the nine months ended September 27, 1998 and September 28, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Independent Auditors' Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 30 </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 Nine Months Ended Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 <S> <C> <C> <C> <C> (millions, except per share data) Net sales . . . . . . . . . . . . . . . $3,110 $2,652 $9,110 $7,830 Alliance revenue . . . . . . . . . . . 220 95 568 153 Total revenues. . . . . . . . . . . . . 3,330 2,747 9,678 7,983 Costs and expenses: Cost of sales . . . . . . . . . . . . 474 423 1,401 1,245 Selling, informational and administrative expenses . . . . . . . 1,323 1,051 3,889 3,138 Research and development expenses . . 550 447 1,581 1,265 Other deductions--net. . . . . . . . . 281 47 519 161 Income from continuing operations before provision for taxes on income and minority interests . . . 702 779 2,288 2,174 Provision for taxes on income . . . . . 186 194 641 587 Minority interests. . . . . . . . . . . 1 3 3 8 Income from continuing operations . . . 515 582 1,644 1,579 Income from discontinued operations--net of tax. . . . . . . . 882 14 1,073 76 Net income. . . . . . . . . . . . . . . $1,397 $ 596 $2,717 $1,655 Earnings per common share--Basic Income from continuing operations. . . $ .40 $ .47 $ 1.30 $ 1.26 Income from discontinued operations. . .70 .01 .85 .06 Net income . . . . . . . . . . . . . . $ 1.10 $ .48 $ 2.15 $ 1.32 Earnings per common share--Diluted Income from continuing operations. . . $ .39 $ .45 $ 1.25 $ 1.21 Income from discontinued operations. . .67 .01 .81 .06 Net income . . . . . . . . . . . . . . $ 1.06 $ .46 $ 2.06 $ 1.27 Weighted average shares used to calculate earnings per common share amounts Basic . . . . . . . . . . . . . . 1,265 1,256 1,264 1,257 Diluted. . . . . . . . . . . . . . 1,317 1,303 1,317 1,301 Cash dividends per common share . . . . $ .19 $ .17 $ .57 $ .51 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. <TABLE> <CAPTION> PFIZER INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEET (millions of dollars) Sept. 27, Dec. 31, Sept. 28, 1998* 1997** 1997* ASSETS <S> <C> <C> <C> Current Assets Cash and cash equivalents . . . . . . . . . $ 2,723 $ 877 $ 1,190 Short-term investments . . . . . . . . . . 930 712 727 Accounts receivable, less allowances of $54, $35 and $42. . . . . . . . . . . . . 2,860 2,220 2,330 Short-term loans . . . . . . . . . . . . . 150 115 269 Inventories Finished goods. . . . . . . . . . . . . . 610 442 438 Work in process . . . . . . . . . . . . . 826 808 833 Raw materials and supplies . . . . . . . 245 211 210 Total inventories . . . . . . . . . . . 1,681 1,461 1,481 Prepaid expenses, taxes and other assets. . 716 651 583 Net assets of discontinued operations . . . 814 1,418 1,357 Total current assets . . . . . . . . . 9,874 7,454 7,937 Long-term loans and investments . . . . . . . 1,717 1,329 1,166 Property, plant and equipment, less accumulated depreciation of $2,271, $2,074 and $2,063 . . . . . . . . 4,115 3,793 3,636 Goodwill, less accumulated amortization of $163, $90 and $82 . . . . . . . . . . . . . 883 989 982 Other assets, deferred taxes and deferred charges . . . . . . . . . . . . . 1,588 1,437 1,289 Total assets . . . . . . . . . . . . . $18,177 $15,002 $15,010 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings, including current portion of long-term debt of $4, $6 and $4 . . . . . . . . . . . . $ 3,350 $ 2,251 $ 2,827 Accounts payable . . . . . . . . . . . . . 817 660 613 Income taxes payable . . . . . . . . . . . 1,147 759 700 Accrued compensation and related items . . 550 456 391 Other current liabilities . . . . . . . . . 1,395 898 963 Total current liabilities . . . . . . . 7,259 5,024 5,494 Long-term debt . . . . . . . . . . . . . . . 528 725 723 Postretirement benefit obligation other than pension plans . . . . . . . . . . . . 389 394 406 Deferred taxes on income . . . . . . . . . . 441 109 235 Other noncurrent liabilities . . . . . . . . 915 817 747 Total liabilities . . . . . . . . . . . 9,532 7,069 7,605 Shareholders' Equity Preferred stock . . . . . . . . . . . . . . -- -- -- Common stock . . . . . . . . . . . . . . . 70 69 69 Additional paid-in capital . . . . . . . . 4,694 3,239 2,570 Retained earnings . . . . . . . . . . . . . 11,325 9,349 9,012 Accumulated other comprehensive expense . . (270) (85) (76) Employee benefit trusts . . . . . . . . . . (3,791) (2,646) (2,193) Treasury stock, at cost . . . . . . . . . . (3,383) (1,993) (1,977) Total shareholders' equity . . . . . . 8,645 7,933 7,405 Total liabilities and shareholders' equity . . . . . . . . $18,177 $15,002 $15,010 </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) Nine Months Ended Sept. 27, Sept. 28, 1998 1997 <S> <C> <C> Operating Activities Income from continuing operations. . . . . . . . . $1,644 $1,579 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . 444 319 Changes in operating assets and liabilities, net of effect of businesses divested and other . . . . . . . . . . . . . . (775) (942) Net cash provided by operating activities . . . . . 1,313 956 Investing Activities Purchases of property, plant and equipment . . . . (813) (604) Purchases of short-term investments . . . . . . . (2,653) (1,415) Proceeds from redemptions of short-term investments . . . . . . . . . . . . . . . . . . . 2,465 1,239 Proceeds from sales of businesses. . . . . . . . . 2,655 21 Purchases of long-term investments . . . . . . . . (495) (62) Purchases and redemptions of short-term investments by financial subsidiaries and other . 20 71 Net cash provided by/(used in)investing activities . 1,179 (750) Financing Activities Repayment of long-term debt . . . . . . . . . . . (199) (269) Increase in short-term debt . . . . . . . . . . . 1,161 899 Purchases of common stock . . . . . . . . . . . . (1,387) (571) Cash dividends paid . . . . . . . . . . . . . . . (741) (661) Stock option transactions . . . . . . . . . . . . 276 215 Other financing activities . . . . . . . . . . . . 28 87 Net cash used in financing activities. . . . . . . . (862) (300) Net cash provided by discontinued operations . . . . 221 159 Effect of exchange-rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (5) (25) Net increase in cash and cash equivalents . . . . . 1,846 40 Cash and cash equivalents balance at beginning of period . . . . . . . . . . . . . . . . . . . . . 877 1,150 Cash and cash equivalents balance at end of period . . . . . . . . . . . . . . . . . . . . . $2,723 $1,190 Supplemental Cash Flow Information Cash paid during the period for: Income taxes . . . . . . . . . . . . . . . . . . . $ 791 $ 603 Interest . . . . . . . . . . . . . . . . . . . . . 104 113 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. 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 August 23, 1998 and August 24, 1997. The operating results for these subsidiaries are for the three and nine month periods ending on the same dates. As discussed in Note 4, the Strato/Infusaid, Valleylab, Schneider, American Medical Systems and Howmedica businesses which comprise the Medical Technology Group are presented as discontinued operations. 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 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 the 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 9). 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: Discontinued Operations In February 1998, we announced that we were exploring strategic options for the Medical Technology Group (MTG). In the third quarter of 1998, a formal plan to dispose of the MTG segment was completed with our Board of Directors' approval to sell Howmedica. Accordingly, the operations of the MTG businesses, Valleylab, Schneider, American Medical Systems (AMS), Howmedica and Strato/Infusaid, have been reflected as discontinued operations in the accompanying condensed consolidated financial statements. In January 1998, we completed the sale of Valleylab to U.S. Surgical Corporation for $425 million in cash. In September 1998, we completed the sales of Schneider to Boston Scientific Corporation for $2.1 billion in cash and AMS to E.M. Warburg, Pincus & Co., LLC for $130 million in cash. In August 1998, we announced an agreement to sell Howmedica to Stryker Corporation for $1.9 billion in cash. Due to subsequent changes in the financial markets, we reduced the sale price for Howmedica from $1.9 billion to $1.65 billion in cash. The transaction, pending the usual regulatory approvals, is expected to close in the fourth quarter of 1998. The net assets identified for disposition in the sales contracts of Valleylab, Schneider, AMS, Howmedica and Strato/Infusaid have been recorded as "Net assets of discontinued operations" and the net cash flows of these businesses have been reported as "Net cash provided by discontinued operations." Net assets of discontinued operations consist of the following: <TABLE> <CAPTION> (millions of dollars) Sept. 27, Dec. 31, Sept. 28, 1998 1997 1997 <S> <C> <C> <C> Net current assets $300 $ 413 $ 373 Property, plant and equipment--net 223 383 362 Other net non-current assets and liabilities 291 622 622 Net assets of discontinued operations $814 $1,418 $1,357 </TABLE> Income from discontinued operations was as follows: <TABLE> <CAPTION> (millions of dollars) Three Months Ended Nine Months Ended Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net sales $ 299 $347 $ 922 $1,025 Pre-tax income $ 34 $ 44 $ 116 $ 147 Provision for taxes on income 19 22 48 63 Income from operations of discontinued businesses--net of tax 15 22 68 84 Pre-tax gain/(loss) on disposal of discontinued businesses 1,685 (11) 1,879 (11) Provision/(benefit) for taxes on gain/(loss) 818 (3) 874 (3) Gain/(loss) on disposal of discontinued businesses-- net of tax 867 (8) 1,005 (8) Income from discontinued operations $ 882 $ 14 $1,073 $ 76 </TABLE> Note 5: Asset Impairment As a result of significant changes in the marketplace and a revision of our strategies related to the Consumer Health Care business, the projected undiscounted cash flows of several of our Consumer Health Care business product lines were less than the carrying value of their related assets. In accordance with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", we adjusted the carrying value of the related long-lived assets, primarily goodwill, to their estimated fair value. The estimated fair value is the present value of the expected associated cash flows. This adjustment resulted in a non-cash impairment charge of $72 million for the three and nine months ended September 27, 1998. This charge affects the operating results of the Pharmaceutical segment. Note 6: Long-term Debt During the third quarter of 1998, we repaid $195 million of our outstanding floating-rate unsecured notes with original maturities of 2001 through 2005. Short-term commercial paper was used to fund the repayment. Note 7: Derivative Financial Instruments During the second quarter of 1998, we entered into cross-currency interest rate swaps as an additional method for hedging our net investments 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. The swaps 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 at 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 which previously served as a hedge of our net investment in Japan and related interest rate swaps. 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 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 at a fixed rate of 1.3% and 1.4% and - - Maturity in 2003 In connection with the sale of the Schneider Swiss subsidiary, we terminated Swiss franc interest rate swap contracts and ceased borrowing Swiss francs. Note 8: Stock Performance Awards During the third quarter of 1998, we entered into a forward purchase contract for 1 million shares of our stock for $99 million to offset the potential impact on income of our liability under the Performance-Contingent Share Award Program. This contract matures within one year. At settlement date we will, at the option of the counterparty to the contract, either receive our own stock or settle the contract for cash. We report this contract at fair value and it is included in "Prepaid expenses, taxes and other assets." Changes in the fair value of this contract are reported in "Other deductions--net." Note 9: Comprehensive Income <TABLE> <CAPTION> (millions of dollars) Three Months Ended Nine Months Ended Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net income $1,397 $596 $2,717 $1,655 Other comprehensive expense*: Currency translation adjustment (96) (100) (161) (254) Net unrealized gain/(loss) on investment securities (12) 17 (24) 31 Adjustments to minimum pension liability -- -- -- 2 (108) (83) (185) (221) Total comprehensive income $1,289 $513 $2,532 $1,434 </TABLE> * Components of other comprehensive 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 expense" for the first nine months of 1998 and 1997 were: <TABLE> <CAPTION> (millions of dollars) 1998 1997 <S> <C> <C> Opening balance $ (79) $ 174 Translation adjustments and hedges (161) (254) Ending balance $(240) $ (80) </TABLE> Note 10: 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 Celebrex (celecoxib) which is initially being developed for the treatment of rheumatoid arthritis, osteoarthritis and pain. Payments to Searle of $140 million in the third quarter and $240 million in the first nine months were expensed and are included in "Other deductions--net" in the 1998 Condensed Consolidated Statements of Income. 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 September 27, 1998 and September 28, 1997, and the related condensed consolidated statements of income for each of the three month and nine month periods then ended and cash flows for the nine 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 November 10, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The results of the Medical Technology group (MTG) are presented in "Discontinued operations--net of tax" in the table below. Components of the Statement of Income follow: <TABLE> <CAPTION> (millions of dollars, except per share data) Third Quarter Nine Months % % 1998 1997 Change* 1998 1997 Change* <S> <C> <C> <C> <C> <C> Net sales $3,110 $2,652 17 $9,110 $7,830 16 Alliance revenue 220 95 133 568 153 272 Total revenues 3,330 2,747 21 9,678 7,983 21 Cost of sales 474 423 12 1,401 1,245 12 % of total revenues 14.2 15.4 14.5 15.6 Selling, informational and administrative expenses 1,323 1,051 26 3,889 3,138 24 % of total revenues 39.7 38.2 40.2 39.3 R&D expenses 550 447 23 1,581 1,265 25 % of total revenues 16.5 16.3 16.3 15.9 Other deductions--net 281 47 500 519 161 222 % of total revenues 8.5 1.7 5.4 2.0 Income from continuing operations before taxes $ 702 $ 779 (10) $2,288 $2,174 5 % of total revenues 21.1 28.4 23.6 27.2 Taxes on income $ 186 $ 194 (4) $ 641 $ 587 9 Effective tax rate 26.5% 24.8% 28.0% 27.0% Income from continuing operations $ 515 $ 582 (12) $1,644 $1,579 4 % of total revenues 15.5 21.2 17.0 19.8 Discontinued operations--net of tax 882 14 M+ 1,073 76 M+ % of total revenues 26.5 .5 11.1 .9 Net income $1,397 $ 596 134 $2,717 $1,655 64 % of total revenues 42.0 21.7 28.1 20.7 Earnings per common share--Basic Income from continuing operations $ .40 $ .47 (15) $ 1.30 $ 1.26 3 Income from discontinued operations .70 .01 M+ .85 .06 M+ Net income $ 1.10 $ .48 129 $ 2.15 $ 1.32 63 Earnings per common share--Diluted Income from continuing operations $ .39 $ .45 (13) $ 1.25 $ 1.21 3 Income from discontinued operations .67 .01 M+ .81 .06 M+ Net income $ 1.06 $ .46 130 $ 2.06 $ 1.27 62 Cash dividends per common share $ .19 $ .17 12 $ .57 $ .51 12 </TABLE> * Percentages may reflect rounding adjustments. M+ Change greater than one thousand percent. TOTAL REVENUES The components of the total revenue increase were as follows: <TABLE> <CAPTION> % Change from 1997 Third Quarter Nine Months <S> <C> <C> Volume 24.6% 23.9% Price .5 1.3 Currency (3.9) (4.0) Total revenue increase 21.2% 21.2% </TABLE> Wider acceptance of our major pharmaceutical products and our copromotion products as well as the introductions of Trovan and Viagra contributed to the volume increases. Total revenues for the third 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. $1,927 57.9 $1,418 51.6 36 International 1,084 32.5 1,005 36.6 8 Worldwide 3,011 90.4 2,423 88.2 24 Animal Health 319 9.6 324 11.8 (1) Total $3,330 100.0 $2,747 100.0 21 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. **Percentages may reflect rounding adjustments. Total revenues for the first nine 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. $5,547 57.3 $3,999 50.1 39 International 3,202 33.1 3,051 38.2 5 Worldwide 8,749 90.4 7,050 88.3 24 Animal Health 929 9.6 933 11.7 0 Total $9,678 100.0 $7,983 100.0 21 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. The following is a discussion of total revenues by business segment: Pharmaceuticals Worldwide pharmaceutical revenues were as follows: <TABLE> <CAPTION> Third Quarter Nine Months (millions of dollars) 1998 1997* % Change** 1998** 1997* % Change** <S> <C> <C> <C> <C> <C> <C> Cardiovascular $1,090 $ 992 10 $3,043 $2,787 9 Infectious diseases 627 538 16 1,950 1,787 9 Central nervous system 512 405 26 1,405 1,142 23 Viagra 141 -- -- 551 -- -- Alliance revenue 220 95 133 568 153 272 Consumer health care 108 123 (12) 347 390 (11) Other 313 270 16 885 791 12 Total $3,011 $2,423 24 $8,749 $7,050 24 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. **May reflect rounding adjustments. Sales of our eight major pharmaceutical products accounted for 73% of pharmaceutical revenues and 66% of total company revenues in the third quarter of 1998. Individual product sales in the third 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 $671 17 22 Procardia XL Cardiovascular 191 (14) (14) Cardura Cardiovascular 174 9 14 Zithromax Infectious Diseases 193 46 48 Diflucan Infectious Diseases 228 4 9 Viagra Impotence 141 -- -- Zoloft Central Nervous System 489 24 25 Zyrtec Allergy 120 65 65 </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 medical acceptance of Norvasc. - - Cardura's sales continue to grow as alpha blockers are recognized as an effective therapy for the treatment of hypertension and enlarged prostate. Cardura XL, a dosage form that uses the GITS delivery system, was launched in Germany in March for hypertension. In August, it was launched in Norway for hypertension and enlarged prostate. - - Growth in sales of Zithromax resulted from increasing physician recognition of the product's efficacy, convenient dosage and favorable side-effect profile. Changes in wholesaler stocking patterns this year relative to the prior year also contributed to the third quarter 1998 sales growth. - - Sales growth of Diflucan reflects the product's continuing acceptance as the therapy of choice for a wide range of fungal infections, particularly in patients with compromised immune systems. - - Viagra, the first effective oral treatment for erectile dysfunction, was introduced in April with sales reaching $551 million year to date. Viagra sales in the third quarter were less than those in the second quarter due to wholesaler stocking in the U.S. in the second quarter and an expected reduction in prescription levels in the third quarter. Viagra has been launched in 27 countries, many of them quite recently. - - Zoloft continues to benefit from introductions in international markets, new indications and increased field-force support. - - Zyrtec was approved by the FDA for a new use 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. Trovan sales were $41 and $105 million in the third quarter and first nine months of 1998. 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 third quarter. Worldwide sales of Lipitor are primarily recorded by the Parke-Davis Research Division of Warner-Lambert Company, the company that discovered the compound. Aricept is now available in the U.S., the United Kingdom, Canada, Germany, Italy, Spain, France, Australia and other major markets. Total worldwide third party trade sales of Aricept totaled $106 million in the third quarter and $263 million in the first nine months of 1998. These sales are primarily recorded by Eisai Co., Ltd., the company that discovered the compound. Aricept accounts for about 97% of all Alzheimer's disease prescription drug sales in the U.S. and has increased the number of new prescriptions in this category more than fivefold. Animal Health Animal Health sales for the third quarter decreased 1%. Overall performance was negatively affected by a poor Asian economy, a weak livestock market in the U.S. and unfavorable climate conditions in Australia. Excluding the impact of foreign exchange, sales increased 2%. Sales of Dectomax grew 30% over last year, reaching $38 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 perform very well. Revenues by Geographic Area Total revenues in the U.S. increased largely due to 1) the introduction of Viagra; 2) sales growth of our other pharmaceutical products, particularly Norvasc, Zyrtec, Zithromax and Zoloft and 3) alliance revenue. Total revenues by geographic area were as follows: <TABLE> <CAPTION> (millions of dollars) Third Quarter % of % of Total Total 1998 Revenues 1997* Revenues % Change <C> <C> <C> <C> <S> <C> $2,082 62.5 $1,565 57.0 United States 33 212 6.4 233 8.5 Japan (9) 1,036 31.1 949 34.5 All Other 9 $3,330 100.0 $2,747 100.0 Consolidated 21 </TABLE> <TABLE> <CAPTION> (millions of dollars) Nine Months % of % of Total Total 1998 Revenues 1997* Revenues % Change <C> <C> <C> <C> <S> <C> $5,949 61.5 $4,371 54.8 United States 36 686 7.1 703 8.8 Japan (2) 3,043 31.4 2,909 36.4 All Other 5 $9,678 100.0 $7,983 100.0 Consolidated 21 </TABLE> * Certain 1997 data have been reclassified to agree to the 1998 presentation. 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 17% in the third quarter excluding the impact of foreign exchange as compared with 8% 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. In the third quarter, the Japanese yen has weakened 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 impact. 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 both the third quarter and first nine months of 1998, as a percentage of net sales, was 15% as opposed to 16% for both 1997 periods. This percentage decrease was mainly due to favorable business and product mix. Selling, Informational and Administrative Expenses Selling, informational and administrative expenses increased 26% in the third quarter over the prior year period. Support for previously introduced products and launches of new products contributed to the increase. Because of the success of our portfolio of in-line and newly-launched products and the commercial potential of our pipeline of new-product candidates, we have decided to continue an expansion that has already increased the size of our worldwide pharmaceutical sales force by about 50% in the past four years. In the third quarter, we began a further expansion of our U.S. sales force by about 1,100 people. International sales forces are also being expanded to allow recently launched products as well as important late-stage candidates to reach their full potential. Research and Development Expenses Research and development expenses increased 23% in the third quarter over the prior year period. We expect total spending to be about $2.2 billion in 1998 (excluding the Medical Technology Group) 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; - - Relpax (eletriptan), for treatment of migraine headaches. We filed with regulatory authorities in Europe in September and the U.S. FDA in October; - - Alond (zopolrestat), for treatment of nervous system, kidney and cardiovascular disorders related to diabetes; - - voriconazole and UK-292,663, for the treatment of fungal infections; - - darifenacin, for the treatment of irritable bowel syndrome and urinary urge incontinence; - - droloxifene and CP 336,156 for the prevention and treatment of osteoporosis and treatment of atherosclerosis; - - ezlopitant, for the treatment of emesis in cancer patients related to chemotherapy; - - Zeldox, for the treatment of erratic thought processes and social withdrawal symptoms of schizophrenia and in preventing symptom relapse and - - an inhalable form of insulin under development with Inhale Therapeutics; on November 4, 1998 we announced our worldwide agreement with Hoechst Marion Roussel AG to manufacture insulin and to codevelop and copromote inhaled insulin. Under the agreements, each of us will contribute expertise in the development and production of insulin products as well as selling and marketing resources. Other Deductions--Net The following components were included in "Other deductions--net" in the third quarter and first nine months of 1998 and 1997. <TABLE> <CAPTION> Third Quarter % Nine Months % (millions of dollars) 1998 1997 Change* 1998 1997 Change <S> <C> <C> <C> <C> <C> <C> Interest income $(42) $(40) 5 $(118) $(111) 6 Interest expense 35 38 (8) 96 113 (15) Adjustments to intangible asset values 72 -- -- 72 -- -- Brand-name prescription drug antitrust litigation settlement 4 -- -- 57 -- -- Copromotion payments to Searle 140 -- -- 240 -- -- Amortization of goodwill and other intangibles 12 12 -- 36 37 (3) Foreign exchange 10 11 (9) 9 29 (69) Other, net 50 26 92 127 93 37 Other deductions--net $281 $ 47 500 $519 $161 222 </TABLE> *Percentages may reflect rounding adjustments. TAXES ON INCOME Our 1998 effective tax rates are higher than 1997 mainly due to the greater portion of our taxable income being derived from the U.S. The 1998 tax rate for the gain on disposal of discontinued businesses was 46.5%. Various transactions which occurred in connection with the divestitures were in higher tax markets, resulting in a higher tax rate on the gain than the 1998 effective tax rate of 28% for continuing operations. DISCONTINUED OPERATIONS During 1998, we sold or reached agreement to sell all of our remaining MTG businesses, Valleylab, Schneider, American Medical Systems (AMS) and Howmedica. In January 1998, we completed the sale of Valleylab to U.S. Surgical Corporation for $425 million in cash. In September we completed the sale of Schneider to Boston Scientific Corporation for $2.1 billion in cash and the sale of AMS to E.M. Warburg, Pincus & Co., LLC, for $130 million in cash. Net income of these businesses up to the date of their divestiture, and gains on their divestiture, are reflected in "Income from discontinued operations--net of tax" in our income statement. In August, we reached an agreement to sell Howmedica to Stryker Corporation for $1.9 billion in cash. Due to subsequent changes in the financial markets, we reduced the sale price for Howmedica from $1.9 billion to $1.65 billion in cash. The divestiture of Howmedica is expected to be completed in the fourth quarter and therefore no amount has been reflected in "Income from discontinued operations--net of tax" for the expected gain on disposal of Howmedica. Third quarter and year-to-date income from Howmedica is reflected in "Income from discontinued operations--net of tax." NET INCOME Net income for the third quarter of 1998 increased 134% from the third quarter of 1997. Diluted earnings per share were $1.06 and increased by 130% over the 1997 third quarter. These amounts include gains from the divestiture of the Schneider and AMS businesses and charges from certain unusual and non- recurring items. If the income from discontinued operations and the unusual and non-recurring items were excluded, the following would have been the net income and diluted earnings per share: <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Net income as reported $1,397 $596 Excluding effects of: Income from discontinued operations--net of tax (882) (14) Certain unusual and non-recurring items--net of tax* 152 (3) Net income from continuing operations excluding discontinued operations and unusual and non-recurring items $ 667 $579 Diluted earnings per share on the same basis $ .51 $.45 </TABLE> *Consists of payments to G.D. Searle & Co. for Celebrex (celocoxib), legal settlements involving the brand-name prescription drug antitrust litigation, adjustments to intangible asset values associated with prior acquisitions and other miscellaneous charges. OUTLOOK In the past, we noted that we were comfortable with the range of the majority of analysts' diluted earnings per share estimates of $2.05 to $2.10 for the year, excluding the impact of acquisitions, divestitures, licensing fees, legal settlements and other special items. However, with the divestiture of the MTG businesses whose earnings from operations had previously been included in our diluted earnings per share estimates at $.10, a range of $1.95 to $2.00 per diluted earnings per share is now indicated for the full year for continuing operations excluding the impact of the same items noted above. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The net financial assets/(debt) position was as follows: <TABLE> <CAPTION> Sept. 27, Dec. 31, Sept. 28, (millions of dollars) 1998 1997 1997 <S> <C> <C> <C> Financial assets* $5,520 $3,033 $3,352 Short-term borrowings and long-term debt 3,878 2,976 3,550 Net financial assets/(debt) $1,642 $ 57 $ (198) </TABLE> * Consists of cash and cash equivalents, short-term investments and loans and long-term loans and investments. Net financial assets at September 27, 1998 reflect the receipt of cash proceeds from the sales of Valleylab, Schneider and AMS. To fund investing and financing activities, commercial paper and short-term borrowings are used to supplement 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> Sept. 27, Dec. 31, Sept. 28, 1998 1997 1997 <S> <C> <C> <C> Working capital (millions of dollars) $ 2,615 $ 2,430 $ 2,443 Current ratio 1.36:1 1.48:1 1.44:1 Debt to total capitalization (percentage)* 31% 27% 32% Shareholders' equity per common share** $ 6.87 $ 6.30 $ 5.90 </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 December 31, 1997 to September 27, 1998 includes the receipt of cash net of related tax liabilities from the MTG divestitures and higher receivable and inventory levels related to new products. At September 27, 1998, working capital also reflects an increase in compensation accruals and accrued product alliance payments; the disposition of net assets related to the divestitures of Valleylab, Schneider and AMS and an increase in short-term borrowings. Net Cash Provided by Operating Activities During the first nine months of 1998, operating activities provided net cash of $1,313 million, an increase of $357 million from the 1997 period. This increase is primarily due to higher compensation accruals and accrued product alliance payments. Net Cash Provided by/Used in Investing Activities In the first nine months of 1998, investing activities provided net cash of $1,179 million, an increase of $1,929 million from the 1997 period. This change was primarily attributable to proceeds from the sale of the MTG businesses. Also, we purchased an additional long-term investment of $495 million. Net Cash Used in/Provided by Financing Activities In the first nine months of 1998, net cash used in financing activities was $862 million. We received more cash from net borrowings, repurchased more common stock at a higher average price and paid higher cash dividends in the first nine months of 1998. During the first nine months of 1998, we repurchased approximately 14.3 million shares of common stock on the open market at an average price of about $97 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 September 1998, Pfizer purchased 26.4 million shares at a cost of about $2 billion, thereby completing this share-purchase program. On September 24, 1998, the Board of Directors approved a new share-purchase program with authorization to purchase up to $5 billion of the company's stock during the next two years. 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 the Year 2000 issue in four phases: Inventory, Assessment and Planning, Implementation and Certification. No significant information technology projects have been deferred as a result of our efforts on Year 2000. The Inventory phase included preliminary problem determination, an inventory of IT and non-IT hardware and software and an inventory of our key business systems and material vendors and business processes. Such systems relate to our research and development, production, distribution, financial, administrative and communication operations. This phase will be completed by the end of 1998. We have asked our critical vendors, major customers, service suppliers, communication providers, product alliance partners and banks to verify their Year 2000 readiness and are currently evaluating their responses. We expect to complete this evaluation by December 31,1998. During our Assessment and Planning phase each inventoried item is assessed to evaluate its risk, to decide whether to remediate or replace, to identify its priority and to develop a plan for the system. Systems are prioritized based on their criticality to the business, risk of failure, time horizon to failure and dependency on other critical items. This phase is expected to be completed by December 31, 1998. The plans developed during the Assessment and Planning phase are being executed in the Implementation phase. Remediation and replacement of non-Year 2000 compliant systems is in process and we expect our critical systems to be replaced or remediated by March 31, 1999. The remaining systems, including embedded systems will be modified by March 31, 1999. While our Implementation efforts are approximately 50% complete, this phase will overlap with the Certification phase. During the Certification phase, we will be testing and certifying the results of our remediation efforts. Testing begins as systems are remediated and will continue throughout 1999. Testing attempts to verify that all systems function correctly and it extends to all interfaces with key business partners. We expect to substantially complete testing of critical systems by March 31, 1999 and the remaining systems and testing of key third party systems by the second quarter 1999. Because the Company's Year 2000 compliance is dependent upon key third parties also being Year 2000 compliant on a timely basis, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its results of operations, financial conditions or cash flows. If our systems or those of key third parties are not fully Year 2000 functional, we estimate that a two-week disruption in operations could occur. Such a disruption could result in delays in the distribution of finished goods or receipt of raw materials, errors in customer-order taking, disruption of clinical activities or delays in product development. These consequences could have a material adverse impact on our results of operations, financial condition and cash flows if we are unable to conduct our business in the ordinary course. We believe that our efforts including the development of a contingency plan will significantly reduce the adverse impact that any such disruption in business might have. As part of the contingency plan being developed, Business Continuity Plans (the Plans) will address critical areas of our business. Plans will be designed to mitigate serious disruptions to our business flow beyond the end of 1999 and operate independent of our external providers' Year 2000 compliance. The Plans will likely provide for assuring adequate inventory to meet customer needs, protecting the integrity of ongoing activities, identifying and securing alternate sources of critical services, materials and utilities when possible and establishing crisis teams to address unexpected problems. We expect to complete the preliminary Plans by the end of the first quarter 1999 and the final Plans by the end of the second quarter 1999. We estimate that the total cost to identify and fix Year 2000 problems is approximately $100 million of which $23 million has been incurred to date. Costs for the remainder of 1998 and 1999 are estimated to be approximately $77 million which reflect changes in estimates and the inclusion of accelerated replacement costs as a result of a clarification in disclosure guidelines of the Securities and Exchange Commission. These costs are expensed as incurred, except for capitalizable hardware of $12 million and are being funded through operating cash flows. Such costs do not include normal system upgrades and replacements nor the cost of our internal resources dedicated to this project which we do not track separately. Both our cost estimates and completion timeframes will be influenced by our ability to successfully identify Year 2000 problems, the nature and amount of programming required to fix the programs, the availability and cost of personnel trained in this area and the Year 2000 compliance success that key third parties attain. While these and other unforeseen factors could have a material adverse impact on our results of operations or financial condition, we believe that our on-going, pro-active efforts to address the Year 2000 problems will minimize the possible negative consequences to the company. NEW EUROPEAN CURRENCY A new European currency (Euro) is planned for introduction in January 1999 to replace the separate currency of eleven 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. 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 identified 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. 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 has been extended until March 1, 1999. 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 and arguments in the case are scheduled for February 1999. 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 September 26, 1998, there were 52,284 personal injury claims pending against Quigley (excluding those which are inactive or have been settled in principle), 27,569 such claims against the Company, and 68 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. Trial began in September 1998 for the class case against the non-settlers, and the District Court also 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, between late 1996 and early 1998, approximately 700 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 between Pfizer Inc. and Stryker Corporation dated as of August 13, 1998 2) Exhibit 15 - Accountants' Acknowledgment 3) Exhibit 27 - Financial Data Schedule 4) Exhibit 27.1 - Financial Data Schedule restated for period ended September 28, 1997 (b) Reports on Form 8-K During the third quarter, reports on Form 8-K were filed on August 18, 1998 concerning the agreement to sell Howmedica to Stryker Corporation and on September 23, 1998 to report that the sale of Schneider to Boston Scientific Corporation had closed on September 10, 1998. 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: November 10, 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 November 10, 1998, included within the Quarterly Report on Form 10Q of Pfizer Inc. for the quarter ended September 27, 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 November 10, 1998