PARTS OF AN AUDITED FINANCIAL STATEMENTS/ANNUAL REPORT

1. Management’s Report (page 65)

- Mentions that management has the primary responsibility for the financial
statements (FS) and that the FS is prepared in conformity with the US GAAP
- This also mentions that the company has adequate internal control over financial
reporting (to assure that the FS is fairly and accurately prepared in accordance with
US GAAP)

2. Auditor’s Report (page 68)

- Unqualified Opinion: information in the company’s 2018 FS is fairly prepared in
conformity with the US GAAP
- Opinion date is February 28, 2019: meaning, the FS was completed and submitted
with the regulators on this date

3. Company background Commented [MOU1]: Angie, information about the

business model?

4. Other information – some background about the FS

a. Basis of preparation (page 76 item A) – the FS is prepared and is in accordance with
the US GAAP (Generally accepted accounting principles in the US).
b. Reporting date – as of December 31, 2018
c. Numbers are rounded off in million dollars
d. Currency – US dollar as the functional currency
e. Consolidated basis (page 81 item D) – FS is consolidated, meaning it includes all the
operations of its acquired businesses

5. Consolidated Balance Sheet (page 72)

a. Assets
- The company presents its assets as to current and non current assets (current
assets are those that are held for short-term purposes, less than 1 year whereas
noncurrent assets are held for long-term use, more than 1 year)
- Total assets declined from 171.8B to 159.4B or equivalent to 12.4B or 7.2%
mainly attributed to:
a. 4.2B decline in long-term investments
b. 13.5B decline in intangible assets. Once the company receives regulatory
approval for the R&D efforts, this becomes recorded as identified intangible
assets. Unless asset is determined to have indefinite life, it is amortized on a
straight-line basis over the remaining agreement term or expected product
life cycle [nature of account is discussed page 84 item K].
c. Offset by increase in current assets attributed to 9.7B increase in assets held
for sale because of the definitive agreement with GSK, the company now has
32% equity stake in GSK in exchange for the company’s consumer healthcare
business. Thus, assets and liabilities of the consumer healthcare business was
reclassified to asset for sale [discussion found under page 89] Commented [MOU2]: Angie, do you have further
b. Liabilities information why this business will be sold?
 - Same with assets, liabilities are also presented as to current and non current
- Total liabilities declined from 100.1B to 95.7B or equivalent to 4.4B or 4.4%
primarily due to 4.0B decrease in other taxes payable
c. Equity – declined by 7.9B because of 12.2B decline in treasury stock offset by 4.2B
increase in retained earnings [see item 6.c below]

6. Consolidated Statement of Income (page 70)

a. Revenue reported a modest growth of 1.1B or 2.1% versus 2017
- Revenues are derived from sale of products and from alliance agreements under
which the company co-promotes products discovered/developed by other
companies (alliance revenues). Majority of revenues come from manufacture and
sale of biopharmaceutical products [page 2]
o These are the sources of the company’s revenues (pages 140-141):
i. Innovative Health (62% of total revenue) or 33.4B composed of:
 Internal Medicine 10B
 Vaccines 6.3B
 Oncology 7.2B
 Inflammation and immunology 4B
 Rare disease 2.2B
 Consumer healthcare 3.6B
ii. Essential Health (38% of total revenue) or 20.2B composed of:
 Legacy established products 10.5B
 Sterile injectable pharmaceuticals 5.2B
 Peri-LOE products 2.9B
 Biosimilars 0.8B
 CentreOne 0.8B
b. Cost of sales is flat (page 33)
c. Selling, informational and admin expenses is also flat. These expenses include
internal and external costs of marketing, advertising, shipping and handling, IT and
legal defense [nature of account is discussed page 84 item J]
d. R&D expenses increased by 0.3B or 4.2%. These expenses include cost of proprietary
R&D efforts, costs incurred in connection with licensing arrangements and upfront
and milestone payments for intellectual property rights [nature of account is
discussed page 84 item K]
e. Other deductions are primarily composed of interest expense from its financing
activities and asset impairments [pls see page 96]
f. After all expenses, income before tax declined from 12.3B to 11.9B
g. Excluding non controlling interests (minority shareholders), net income declined
from 21.3T to 11.2T or equivalent to 10.1B or 47% mainly because in 2017, the
company recognized a benefit from income tax of 9B whereas in 2018, it reported a
Commented [MOU3]: Angie, what is TCJA? Here is a note I
provision for tax of 0.BT (equivalent to 9.7B downward in net income). This is saw from the FS page 75:
primarily related to certain tax initiatives associated with a law enactment in 2017,
TCJA, that provided favorable tax adjustments/estimates to the company. [Pls refer As a result of the enactment of TCJA in December 2017,
Pfizer’s provision(benefit) from income taxes was favorably
to page 75 for detailed discussion under footnote a]. The TCJA significantly changes impacted by 10.7B
 the US corporate income tax system among others, reducing federal corporate tax
rate from 35% to 21%.
h. Because of the decline in net income, earnings per share declined from 3.57 to 1.90
i. Relevant ratios (page 20):
o Gross margin is 79% = Revenue 100% minus cost of sales 21%
o Profit margin is 20.8% = Net income divided by revenue
o Cost of sale as a percentage of revenue declined from 21.4% in 2017 to 21%
in 2018 because of the increase in alliance revenues in 2018 which have no
associated cost of sales
7. Consolidated Statement of Cash flows (page 74)
a. Because of decline in revenue and income from operations, cash flow from
operating activities also declined from 16.8B down to 15.8B or equivalent to 1B
b. There is a turnaround in the cashflow from investing activities of the company, from
2016’s 7.8B outflow and 2017’s 4.7B outflow, in 2018 the company has reported a
net inflow of 4.5B primarily because of the 6.2B redemption of its long-term
investment and 17.6B redemption/sale of short-term investment which are both
higher compared to 2017. In addition, the company acquired an 18.4B in 2016 and
none for 2018.
o For 2017, the company acquired development and commercialization rights
to AstraZeneca’s small molecule anti-infective business for 1B
o For 2016, the company acquired Medivation for 13.9B, Bamboo Therapeutics
for 0.1B and Anacor Pharmaceuticals for 4.5B [discussions found in pages 87-
88] Commented [MOU4]: Subject to your confirmation Angie,
c. In terms of financing activities, the company repurchase its common stock at 12.2B and also if you can simplify the nature of these company
acquisitions (sounds too technical)
which is also the reason for the decline in capital (decline in treasury stock). It is
Commented [MOU5]: Angie, would you know why the
composed of the 8.2B open market share repurchase and 4B paid to Citibank company bought back its common shares?
pursuant to terms of accelerated share repurchase agreement (page 53)

8. Liquidity and Solvency

- The company relies largely on operating cash flows, short-term investments, short-
term borrowings and long-term debt to provide for its liquidity requirements (page
55)
- Liquidity needs:
a. Working capital for operations
b. R&D activities
c. Investments for the business
d. Dividend payments (in 2018, the company paid 8B dividends, 7.7B in
2017 and 7.3B in 2016) – page 58
e. Share repurchases
f. Cost-reduction initiatives
g. Paying debt
h. Contributions to pension plans
i. Business-development activities
- Relevant ratios:
 a. Current ratio for 2018 is 1.57 which increased from 2017’s 1.35
9. Segment Information (page 136-138) also page 22
- The company has two major operating segments: Innovative Health and Essential
Health. Innovative health contributed a higher revenue as compared with essential
health. [refer to 5.a above]. Each business has a geographic footprint across Commented [MOU6]: Angie, maybe you can share
developed and emerging markets [page 11] background about these two