XBRU:PFEB Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

• PFIZER INC. 10-Q • EXHIBIT 12 • EXHIBIT 15 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION DOCUMENT

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 July 1, 2012

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

(State of Incorporation)

13-5315170

(I.R.S. Employer Identification No.)

235 East 42nd Street, New York, New York 10017

(Address of principal executive offices) (zip code)

(212) 733-2323

(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 ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES X

NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated filer X Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ____

NO X

At August 6, 2012, 7,469,483,622 shares of the issuer’s voting common stock were outstanding.

FORM 10-Q

For the Quarterly Period Ended

July 1, 2012

Table of Contents

PART I. FINANCIAL INFORMATION	Page

Item 1.
Financial Statements

Condensed Consolidated Statements of Income for the three and six months ended July 1, 2012 and July 3, 2011	3

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2012 and July 3, 2011	4

Condensed Consolidated Balance Sheets as of July 1, 2012 and December 31, 2011	5

Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2012 and July 3, 2011	6

Notes to Condensed Consolidated Financial Statements	7

Review Report of Independent Registered Public Accounting Firm	44

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.
Quantitative and Qualitative Disclosures About Market Risk	84

Item 4.
Controls and Procedures	84

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings	84

Item 1A.
Risk Factors	85

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds	86

Item 3.
Defaults Upon Senior Securities	86

Item 4.
Mine Safety Disclosures	86

Item 5.
Other Information	86

Item 6.
Exhibits	86

Signature	87

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended				Six Months Ended
(MILLIONS, EXCEPT PER COMMON SHARE DATA)	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011

Revenues	$	15,057	$	16,485	$	29,942	$	32,509

Costs and expenses:
Cost of sales(a)		2,752		3,571		5,497		7,040
Selling, informational and administrative expenses(a)		3,977		4,800		7,954		9,178
Research and development expenses(a)		1,699		2,231		3,753		4,311
Amortization of intangible assets		1,291		1,384		2,711		2,749
Restructuring charges and certain acquisition-related costs		190		478		787		1,368
Other deductions––net		664		423		2,321		1,255
Income from continuing operations before provision for taxes on income		4,484		3,598		6,919		6,608
Provision for taxes on income		1,290		1,077		2,001		1,951
Income from continuing operations		3,194		2,521		4,918		4,657
Discontinued operations––net of tax		66		97		145		195
Net income before allocation to noncontrolling interests		3,260		2,618		5,063		4,852
Less: Net income attributable to noncontrolling interests		7		8		16		20
Net income attributable to Pfizer Inc.	$	3,253	$	2,610	$	5,047	$	4,832

Earnings per common share––basic:(b)
Income from continuing operations attributable to Pfizer Inc. common shareholders	$	0.43	$	0.32	$	0.65	$	0.58
Discontinued operations––net of tax		0.01		0.01		0.02		0.02
Net income attributable to Pfizer Inc. common shareholders	$	0.44	$	0.33	$	0.67	$	0.61

Earnings per common share––diluted:(b)
Income from continuing operations attributable to Pfizer Inc. common shareholders	$	0.42	$	0.32	$	0.65	$	0.58
Discontinued operations––net of tax		0.01		0.01		0.02		0.02
Net income attributable to Pfizer Inc. common shareholders	$	0.43	$	0.33	$	0.67	$	0.61

Weighted-average shares––Basic		7,476		7,875		7,506		7,929
Weighted-average shares––Diluted		7,537		7,935		7,570		7,980

Cash dividends paid per common share	$	0.22	$	0.20	$	0.44	$	0.40

(a)	Exclusive of amortization of intangible assets, except as disclosed in Note 9B. Goodwill and Other Intangible Assets: Other Intangible Assets.
(b)	EPS amounts may not add due to rounding.

See Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Six Months Ended
(MILLIONS OF DOLLARS)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011

Net income before allocation to noncontrolling interests	$	3,260		$	2,618		$	5,063		$	4,852

Other Comprehensive Income/(Loss)
Foreign currency translation adjustments	$	(1,981	)	$	956		$	(1,718	)	$	2,546
Reclassification adjustments(a)		––			––			––			(7	)
		(1,981	)		956			(1,718	)		2,539

Unrealized holding gains/(losses) on derivative financial instruments		(657	)		228			(230	)		535
Reclassification adjustments for realized (gains)/losses(a)		427			(224	)		127			(734	)
		(230	)		4			(103	)		(199	)

Unrealized holding gains/(losses) on available-for-sale securities		12			17			92			(20	)
Reclassification adjustments for realized (gains)/losses(a)		16			(1	)		33			9
		28			16			125			(11	)

Benefit plans: Actuarial gains/(losses)		(505	)		3			(504	)		3
Reclassification adjustments related to amortization(b)		113			70			230			140
Reclassification adjustments related to curtailments and settlements, net(b)		(8	)		122			112			173
Other		39			(57	)		54			(144	)
		(361	)		138			(108	)		172

Benefit plans: Prior service credits and other		26			––			26			1
Reclassification adjustments related to amortization(b)		(17	)		(17	)		(36	)		(35	)
Reclassification adjustments related to curtailments and settlements, net(b)		(73	)		(22	)		(82	)		(33	)
Other		––			(1	)		(2	)		(4	)
		(64	)		(40	)		(94	)		(71	)

Other comprehensive income/(loss), before tax		(2,608	)		1,074			(1,898	)		2,430
Tax benefit on other comprehensive income/(loss)(c)		(205	)		(32	)		(1	)		(60	)
Other comprehensive income/(loss) before allocation to noncontrolling interests	$	(2,403	)	$	1,106		$	(1,897	)	$	2,490

Comprehensive Income
Comprehensive income before allocation to noncontrolling interests	$	857		$	3,724		$	3,166		$	7,342
Less: Comprehensive income/(loss) attributable to noncontrolling interests		(10	)		12			(2	)		28
Comprehensive income attributable to Pfizer Inc.	$	867		$	3,712		$	3,168		$	7,314

(a)	Reclassified into Other deductions—net in the condensed consolidated statements of income.
(b)	Generally reclassified into Cost of sales, Selling, informational and administrative expenses, and/or Research and development expenses, as appropriate in the condensed consolidated statements of income.
(c)	See Note 5B. Tax Matters: Taxes on Items of Other Comprehensive Income/(Loss).

See Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(millions of dollars)	July 1, 2012			Dec. 31, 2011
	(Unaudited)
Assets
Cash and cash equivalents	$	3,031		$	3,182
Short-term investments		21,275			23,270
Accounts receivable, less allowance for doubtful accounts		12,882			13,058
Inventories		7,001			6,610
Taxes and other current assets		9,215			9,380
Assets of discontinued operations and other assets held for sale		5,361			5,317
Total current assets		58,765			60,817
Long-term investments		10,548			9,814
Property, plant and equipment, less accumulated depreciation		14,756			15,921
Goodwill		44,568			44,569
Identifiable intangible assets, less accumulated amortization		48,399			51,184
Taxes and other noncurrent assets		5,806			5,697
Total assets	$	182,842		$	188,002

Liabilities and Equity
Short-term borrowings, including current portion of long-term debt	$	7,703		$	4,016
Accounts payable		3,165			3,678
Dividends payable		1,826			1,796
Income taxes payable		2,098			1,009
Accrued compensation and related items		1,493			2,120
Other current liabilities		13,215			15,066
Liabilities of discontinued operations		1,298			1,224
Total current liabilities		30,798			28,909

Long-term debt		30,868			34,926
Pension benefit obligations		6,484			6,341
Postretirement benefit obligations		3,309			3,344
Noncurrent deferred tax liabilities		18,487			18,861
Other taxes payable		7,099			6,886
Other noncurrent liabilities		5,836			6,114
Total liabilities		102,881			105,381

Commitments and Contingencies

Preferred stock		42			45
Common stock		447			445
Additional paid-in capital		72,027			71,423
Employee benefit trusts		(2	)		(3	)
Treasury stock		(34,863	)		(31,801	)
Retained earnings		47,904			46,210
Accumulated other comprehensive loss		(6,008	)		(4,129	)
Total Pfizer Inc. shareholders’ equity		79,547			82,190
Equity attributable to noncontrolling interests		414			431
Total equity		79,961			82,621
Total liabilities and equity	$	182,842		$	188,002

See Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
(millions of dollars)	July 1, 2012			July 3, 2011

Operating Activities
Net income before allocation to noncontrolling interests	$	5,063		$	4,852
Adjustments to reconcile net income before allocation to noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		4,002			4,353
Share-based compensation expense		247			244
Asset write-offs and impairment charges		758			573
Deferred taxes from continuing operations		(120	)		505
Other deferred taxes	14			(7		)
Benefit plan contributions in excess of expense		(20	)		(249	)
Other non-cash adjustments, net		(114	)		10
Other changes in assets and liabilities, net of acquisitions and divestitures		(3,035	)		259
Net cash provided by operating activities		6,795			10,540

Investing Activities
Purchases of property, plant and equipment		(548	)		(608	)
Purchases of short-term investments		(10,395	)		(6,559	)
Proceeds from redemptions and sales of short-term investments		14,357			4,643
Net proceeds from/(payments for) redemptions and sales of short-term investments with original maturities of 90 days or less		(999	)		8,327
Purchases of long-term investments		(2,317	)		(3,193	)
Proceeds from redemptions and sales of long-term investments		304			1,572
Acquisitions, net of cash acquired		(782	)		(3,169	)
Other investing activities		(56	)		73
Net cash provided by/(used in) investing activities		(436	)		1,086

Financing Activities
Proceeds from short-term borrowings		3,764			4,868
Principal payments on short-term borrowings		(2	)		(2,483	)
Net payments on short-term borrowings with original maturities of 90 days or less		(4,146	)		(2,452	)
Principal payments on long-term debt		(7	)		(3,481	)
Purchases of common stock		(2,999	)		(3,679	)
Cash dividends paid		(3,283	)		(3,159	)
Other financing activities		198			64
Net cash used in financing activities		(6,475	)		(10,322	)
Effect of exchange-rate changes on cash and cash equivalents		(35	)		57
Net increase/(decrease) in cash and cash equivalents		(151	)		1,361
Cash and cash equivalents, beginning		3,182			1,735

Cash and cash equivalents, end	$	3,031		$	3,096

Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes	$	1,127		$	737
Interest		1,194			1,337

See Notes to Condensed Consolidated Financial Statements

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation and Significant Accounting Policies

A. Basis of Presentation

We prepared the condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted.

Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three and six months ended May 27, 2012, and May 29, 2011. We have made certain reclassification adjustments to conform prior-period amounts to the current presentation, primarily related to certain inventories (see Note 8. Inventories) and the reclassification of certain investments (see Note 7. Financial Instruments).

We anticipate filing a registration statement with the SEC by mid-August for a potential initial public offering (IPO) of up to a 20% ownership stake in our Animal Health business, Zoetis, Inc. (Zoetis). If the IPO is successfully completed, which we are targeting for the first half of 2013, we will have a variety of options to achieve a potential full separation of Zoetis. The Animal Health business continues to be presented as a continuing operation in these condensed consolidated financial statements.

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé. As a result, beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. In addition, the assets and liabilities associated with this business are reported as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets (see Note 2B. Acquisitions and Divestitures: Divestitures). Prior period amounts have been restated.

On August 1, 2011, we completed the sale of our Capsugel business. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended July 3, 2011 (see Note 2B. Acquisitions and Divestitures: Divestitures).

As a result of our acquisition of King Pharmaceutical, Inc. (King) and in accordance with our domestic and international reporting periods, our condensed consolidated financial statements for the six months ended July 3, 2011 reflect approximately five months of King’s U.S. operations and approximately four months of King’s international operations (for additional information, see Note 2A. Acquisitions and Divestitures: Acquisitions).

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 representative of those for the full year.

We are responsible for the unaudited financial statements included in this Quarterly Report on Form 10-Q. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and results of operations.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

B. Adoption of New Accounting Standards

The provisions of the following new accounting and disclosure standards were adopted as of January 1, 2012:

●

Presentation of comprehensive income in financial statements. As a result of adopting this new standard, we have presented separate Condensed Consolidated Statements of Comprehensive Income.

●

An amendment to the guidelines on the measurement and disclosure of fair value that is consistent between U.S. GAAP and International Financial Reporting Standards. The adoption of this new standard did not have a significant impact on our financial statements.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

C. Fair Value

Our fair value methodologies depend on the following types of inputs:

●

Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).

●

Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).

●

Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.

Note 2. Acquisitions and Divestitures

A. Acquisitions

Alacer Corp.

On February 26, 2012, we completed our acquisition of Alacer Corp., a privately owned company that manufactures, markets and distributes Emergen-C, a line of effervescent, powdered drink mix vitamin supplements that is the largest-selling branded vitamin C line in the U.S. In connection with this consumer healthcare acquisition, we recorded $247 million in Identifiable intangible assets, consisting primarily of the Emergen-C indefinite-lived brand, $94 million in net deferred tax liabilities and $151 million in Goodwill. The allocation of the consideration transferred has been finalized.

Ferrosan Holding A/S

On December 1, 2011, we completed our acquisition of the consumer healthcare business of Ferrosan Holding A/S (Ferrosan), a Danish company engaged in the sale of science-based consumer healthcare products, including dietary supplements and lifestyle products, primarily in the Nordic region and the emerging markets of Russia and Central and Eastern Europe. Due to the fact that financial information included in our fiscal year 2011 consolidated financial statements for our subsidiaries operating outside the U.S. is as of and for the year ended November 30, this acquisition is reflected in our condensed consolidated financials beginning in the first fiscal quarter of 2012. Our acquisition of Ferrosan’s consumer healthcare business increases our presence in dietary supplements with a new set of brands and pipeline products. Also, we believe that the acquisition allows us to expand the marketing of Ferrosan’s brands through Pfizer’s global footprint and provide greater distribution and scale for certain Pfizer brands, such as Centrum and Caltrate, in Ferrosan’s key markets. In connection with this acquisition, we recorded $483 million in Identifiable intangible assets, consisting of indefinite-lived and finite-lived brands, $124 million in net deferred tax liabilities and $231 million in Goodwill. The allocation of the consideration transferred has not been finalized.

King Pharmaceuticals, Inc.

On January 31, 2011 (the acquisition date), we completed a tender offer for the outstanding shares of common stock of King at a purchase price of $14.25 per share in cash and acquired approximately 92.5% of the outstanding shares. On February 28, 2011, we acquired all of the remaining shares of King for $14.25 per share in cash. As a result, the total fair value of consideration transferred for King was approximately $3.6 billion in cash ($3.2 billion, net of cash acquired).

King’s principal businesses consist of a prescription pharmaceutical business focused on delivering new formulations of pain treatments designed to discourage common methods of misuse and abuse; the Meridian auto-injector business for emergency drug delivery, which develops and manufactures the EpiPen; an established products portfolio; and an animal health business that offers a variety of feed-additive products for a wide range of species.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table provides the assets acquired and liabilities assumed from King:

(millions of dollars)	Amounts Recognized as of Acquisition Date (Final)
Working capital, excluding inventories	$	155
Inventories		340
Property, plant and equipment		412
Identifiable intangible assets, excluding in-process research and development		1,806
In-process research and development		303
Net tax accounts		(328	)
All other long-term assets and liabilities, net		102
Total identifiable net assets		2,790
Goodwill(a)		765
Net assets acquired/total consideration transferred	$	3,555

(a)

Goodwill recorded as of the acquisition date totaled $720 million for our three biopharmaceutical operating segments and $45 million for our Animal Health and Consumer Healthcare operating segment. (Since the acquisition of King, we have revised our operating segments. See Note 13A. Segment, Geographic and Other Revenue Information: Segment Information.)

As of the acquisition date, the fair value of accounts receivable approximated the book value acquired. The gross contractual amount receivable was $200 million, virtually all of which was expected to be collected.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of King includes the following:

●	the expected synergies and other benefits that we believed would result from combining the operations of King with the operations of Pfizer;

●	any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products; and

●	the value of the going-concern element of King’s existing businesses (the higher rate of return on the assembled collection of net assets versus if Pfizer had acquired all of the net assets separately).

Goodwill is not amortized and is not deductible for tax purposes (see Note 9A. Goodwill and Other Intangible Assets: Goodwill for additional information).

The assets and liabilities arising from contingencies recognized as of the acquisition date are not significant to Pfizer’s condensed consolidated financial statements.

The following table provides the actual financial results of King included in the condensed consolidated statement of income:

(millions of dollars)	King’s Operations Included in Pfizer’s Six-Month 2011 Results
Revenues(a)	$	581
Loss from continuing operations attributable to Pfizer Inc. common shareholders(a), (b)		(74	)

(a)	From January 31, 2011 (the acquisition date) through Pfizer’s second-quarter 2011 domestic and international quarter-ends.

(b)

Includes purchase accounting adjustments related to the fair value adjustments for acquisition-date inventory estimated to have been sold ($119 million pre-tax), amortization of identifiable intangible assets acquired from King ($71 million pre-tax) and restructuring and integration costs ($159 million pre-tax).

If the acquisition of King had occurred on January 1, 2011, the change to Pfizer’s Revenues, Income from continuing operations attributable to Pfizer Inc. common shareholders and Diluted earnings per share attributable to Pfizer Inc. common shareholders would not have been material.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

B. Divestitures

On April 23, 2012, we announced that we entered into an agreement to sell our Nutrition business to Nestlé for $11.85 billion in cash. The transaction is expected to close by the first half of 2013, assuming the receipt of the required regulatory clearances and satisfaction of other closing conditions. Beginning in the second quarter of 2012, we report the operating results of the Nutrition business as Discontinued operations––net of tax in the condensed consolidated statements of income for all periods presented. The transaction also includes the sale of certain prenatal multivitamins currently commercialized by the Pfizer Consumer Healthcare business unit. The operating results of this product line are also included in Discontinued operations––net of tax for all periods presented. In addition, the assets and liabilities associated with this business are classified as Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations, as appropriate, in the condensed consolidated balance sheets.

On August 1, 2011, we completed the sale of our Capsugel business for approximately $2.4 billion in cash. The operating results of this business are reported as Discontinued operations––net of tax in the condensed consolidated statements of income for the three and six months ended July 3, 2011.

The following table provides the components of Discontinued operations—net of tax:

	Three Months Ended						Six Months Ended
(millions of dollars)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Revenues(a)	$	581		$	714		$	1,101		$	1,369
Income from discontinued operations before provision for taxes on income	$	119		$	128		$	237		$	263
Provision for taxes on income(b)		(53	)		(31	)		(92	)		(68	)
Discontinued operations––net of tax(a)	$	66		$	97		$	145		$	195

(a)	Includes the Nutrition business for all periods presented and the Capsugel business for 2011 only.

(b)

Includes deferred tax expense (includes deferred taxes related to investments in certain foreign subsidiaries resulting from our intention not to hold these subsidiaries permanent in duration) of $22 million and a deferred tax benefit of $4 million for the three months ended July 1, 2012 and July 3, 2011, respectively, and a deferred tax expense of $14 million and a deferred tax benefit of $7 million for the six months ended July 1, 2012 and July 3, 2011, respectively.

The following table provides the components of Assets of discontinued operations and other assets held for sale and Liabilities of discontinued operations:

(millions of dollars)	July 1, 2012		Dec. 31, 2011
Accounts receivable, less allowance for doubtful accounts	$	559	$	550
Inventories		366		359
Prepaid assets		40		45
Current deferred tax assets and other current assets		44		15
Property, plant and equipment, less accumulated depreciation		1,138		1,118
Goodwill		495		498
Identifiable intangible assets, less accumulated amortization		2,620		2,648
Deposits advances and other assets		32		47
Deferred charges		21		23
Noncurrent deferred tax assets and other noncurrent assets		46		14
Assets of discontinued operations and other assets held for sale	$	5,361	$	5,317

Current liabilities	$	427	$	385
Other liabilities		871		839
Liabilities of discontinued operations	$	1,298	$	1,224

The net cash flows of our discontinued operations for each of the categories of operating, investing and financing activities are not significant for any period presented.

Note 3. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives

We incur significant costs in connection with acquiring, integrating and restructuring businesses and in connection with our global cost-reduction and productivity initiatives. For example:

●

In connection with our cost-reduction and productivity initiatives, significant programs of which began in 2005, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and

●

In connection with acquisition activity, we typically incur costs associated with executing the transactions, integrating the acquired operations (which may include expenditures for consulting and the integration of systems and processes), and restructuring the combined company (which may include charges related to employees, assets and activities that will not continue in the combined company).

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

All of our businesses and functions may be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as groups such as information technology, shared services and corporate operations.

Since the acquisition of Wyeth on October 15, 2009, our cost-reduction initiatives announced on January 26, 2009, but not completed as of December 31, 2009, were incorporated into a comprehensive plan to integrate Wyeth’s operations to generate cost savings and to capture synergies across the combined company. In addition, on February 1, 2011, we announced a new productivity initiative to accelerate our strategies to improve innovation and productivity in R&D by prioritizing areas with the greatest scientific and commercial promise, utilizing appropriate risk/return profiles and focusing on areas with the highest potential to deliver value in the near term and over time.

The following table provides the components of costs associated with acquisitions and cost-reduction/productivity initiatives:

	Three Months Ended				Six Months Ended
(millions of dollars)	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011

Transaction costs(a)	$	1	$	13	$	1	$	23
Integration costs(b)		108		199		208		378
Restructuring charges(c):
Employee termination costs		44		189		311		853
Asset impairments		29		33		247		58
Exit costs		8		44		20		56
Restructuring charges and certain acquisition-related costs		190		478		787		1,368
Additional depreciation––asset restructuring recorded in our condensed consolidated statements of income as follows(d):
Cost of sales		57		171		136		343
Selling, informational and administrative expenses		5		22		6		29
Research and development expenses		––		167		259		230
Total additional depreciation––asset restructuring		62		360		401		602
Implementation costs recorded in our condensed consolidated statements of income as follows(e):
Cost of sales		4		––		4		––
Selling, informational and administrative expenses		15		––		31		––
Research and development expenses		37		10		85		20
Total implementation costs		56		10		120		20
Total costs associated with acquisitions and cost-reduction/ productivity initiatives	$	308	$	848	$	1,308	$	1,990

(a)	Transaction costs represent external costs directly related to acquired businesses and primarily include expenditures for banking, legal, accounting and other similar services.

(b)	Integration costs represent external, incremental costs directly related to integrating acquired businesses, and primarily include expenditures for consulting and the integration of systems and processes.

(c)

From the beginning of our cost-reduction and transformation initiatives in 2005 through July 1, 2012, Employee termination costs represent the expected reduction of the workforce by approximately 60,000 employees, mainly in manufacturing and sales and research, of which approximately 47,900 employees have been terminated as of July 1, 2012. For the six months ended July 1, 2012, the increase represents additional accruals with respect to reserves for approximately 2,600 employees.

The restructuring charges in 2012 are associated with the following:

●

For the three months ended July 1, 2012, Primary Care operating segment ($35 million income), Specialty Care and Oncology operating segment ($16 million), Established Products and Emerging Markets operating segment ($1 million), Animal Health and Consumer Healthcare operating segment ($13 million), research and development operations ($13 million), manufacturing operations ($14 million) and Corporate ($59 million).

●

For the six months ended July 1, 2012, Primary Care operating segment ($32 million income), Specialty Care and Oncology operating segment ($19 million), Established Products and Emerging Markets operating segment ($4 million), Animal Health and Consumer Healthcare operating segment ($18 million), research and development operations ($25 million), manufacturing operations ($166 million) and Corporate ($378 million).

The restructuring charges in 2011 are associated with the following:

●

For the three months ended July 3, 2011, Primary Care operating segment ($87 million), Specialty Care and Oncology operating segment ($7 million), Established Products and Emerging Markets operating segment ($12 million), Animal Health and Consumer Healthcare operating segment ($4 million), research and development operations ($51 million), manufacturing operations ($81 million) and Corporate ($24 million).

●

For the six months ended July 3, 2011, Primary Care operating segment ($133 million), Specialty Care and Oncology operating segment ($42 million), Established Products and Emerging Markets operating segment ($15 million), Animal Health and Consumer Healthcare operating segment ($14 million), research and development operations ($473 million), manufacturing operations ($155 million) and Corporate ($135 million).

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(d)	Additional depreciation––asset restructuring represents the impact of changes in the estimated useful lives of assets involved in restructuring actions.

(e)	Implementation costs represent external, incremental costs directly related to implementing our non-acquisition-related cost-reduction and productivity initiatives.

The following table provides the components of and changes in our restructuring accruals:

(millions of dollars)	Employee Termination Costs(a)			Asset Impairment Charges			Exit Costs			Accrual

Balance, December 31, 2011	$	2,425		$	––		$	92		$	2,517
Provision		311			247			20			578
Utilization and other(b)		(784	)		(247	)		(20	)		(1,051	)
Balance, July 1, 2012(c)	$	1,952		$	––		$	92		$	2,044

(a)	For the six months ended July 1, 2012 Provision includes additional accruals with respect to reserves for approximately 2,600 employees.

(b)	Includes adjustments for foreign currency translation.

(c)	Included in Other current liabilities ($1.2 billion) and Other noncurrent liabilities ($853 million).

The asset impairment charges included in restructuring charges for the six months ended July 1, 2012 primarily relate to assets held for sale and are based on an estimate of fair value, which was determined to be lower than the carrying value of the assets prior to the impairment charge.

The following table provides additional information about the long-lived assets held-for-sale that were impaired in 2012:

	Fair Value(a)								Six Months Ended July 1, 2012
(millions of dollars)	Amount		Level 1		Level 2		Level 3		Impairment

Long-lived assets held-for-sale(b)	$	99	$	––	$	99	$	––	$	227

(a)	The fair value amount is presented as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.

(b)

Reflects property, plant and equipment and other long-lived assets written down to their fair value of $99 million, less costs to sell of $2 million (a net of $97 million), in the first six months of 2012. The impairment charges of $227 million are included in Restructuring charges and certain acquisition-related costs. Fair value is determined primarily using a market approach, with various inputs, such as recent sales transactions.

Note 4. Other Deductions—Net

The following table provides components of Other deductions––net:

	Three Months Ended						Six Months Ended
(millions of dollars)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011

Interest income(a)	$	(86	)	$	(117	)	$	(167	)	$	(222	)
Interest expense(a)		379			404			769			862
Net interest expense		293			287			602			640
Royalty-related income		(124	)		(140	)		(221	)		(311	)
Net gains on asset disposals		(17	)		(14	)		(24	)		(26	)
Certain legal matters, net(b)		474			(14	)		1,287			487
Certain asset impairment charges(c)		77			320			510			480
Other, net		(39	)		(16	)		167			(15	)
Other deductions––net	$	664		$	423		$	2,321		$	1,255

(a)	Interest income decreased in both periods in 2012 due to lower interest rates earned on investments. Interest expense decreased in both periods in 2012 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.

(b)

In the second quarter and first six months of 2012, primarily includes charges for hormone-replacement therapy litigation. The first six months of 2012 also includes $450 million in settlement of a lawsuit by Brigham Young University related to Celebrex. In 2011, primarily includes charges for hormone-replacement therapy litigation. (See Note 12. Commitments and Contingencies.)

(c)

In the second quarter of 2012, includes intangible asset impairment charges of approximately $53 million, primarily reflecting a $45 million impairment of developed technology rights. In the first six months of 2012, includes intangible asset impairment charges of $449 million reflecting (i) $305 million of in-process research and development (IPR&D), substantially all related to compounds that targeted autoimmune and inflammatory diseases (full write-off), (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (iii) $99 million related to three developed technology rights. The intangible asset impairment charges for 2012 reflect, among other things, the impact of new scientific findings, updated commercial forecasts and an increased competitive environment specifically for Robitussin. The impairment charges for the six months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($45 million); Primary Care ($43 million) and Specialty Care ($19 million). In addition, the second quarter and first six months of 2012 also include charges of approximately $24 million and $61 million, respectively, for certain investments. These investment impairment charges reflect the difficult global economic environment.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In the second quarter of 2011, includes intangible asset impairment charges of approximately $320 million, reflecting a $200 million impairment of IPR&D assets, primarily related to a single compound for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. In the first six months of 2011, includes intangible asset impairment charges of approximately $480 million, reflecting a $360 million impairment of IPR&D assets, primarily related to two compounds for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. The intangible asset impairment charges for 2011 reflect, among other things, the impact of new scientific findings and updated commercial forecasts. The impairment charges for the six months of 2011 are associated with the following: Worldwide Research and Development ($355 million); Specialty Care ($116 million) and Animal Health ($9 million).

The asset impairment charges included in Other deductions––net income for the first six months of 2012 primarily relate to identifiable intangible assets and are based on estimates of fair value.

The following table provides additional information about the intangible assets that were impaired in 2012:

	Fair Value(a)								Six Months Ended July 1, 2012
(millions of dollars)	Amount		Level 1		Level 2		Level 3		Impairment
Intangible assets––IPR&D(b)	$	52	$	––	$	––	$	52	$	305
Intangible assets––Other(b)		551		––		––		551		144
Total	$	603	$	––	$	––	$	603	$	449

(a)	Fair value as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.

(b)

Reflects intangible assets written down to their fair value of $603 million in the first six months of 2012. The impairment charges of $449 million are included in Other deductions––net. When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

Note 5. Tax Matters

A. Taxes on Income from Continuing Operations

Our effective tax rate for continuing operations was 28.8% for the second quarter of 2012, compared to 29.9% for the second quarter of 2011, and in the first six months of 2012 was 28.9%, compared to 29.5% in the first six months of 2011. The decreases in the tax rates for the second quarter and first six months of 2012 were primarily due to a favorable change in the jurisdictional mix of earnings as a result of operating fluctuations in the normal course of business, partially offset by the unfavorable impact of the expiration of the U.S. research and development tax credit.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

B. Taxes on Items of Other Comprehensive Income/(Loss)

The following table provides the components of tax benefit on Other comprehensive income/(loss):

	Three Months Ended						Six Months Ended
(millions of dollars)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Tax Expense/(Benefit) on Other Comprehensive Income/(Loss)
Foreign currency translation adjustments(a)	$	(30	)	$	(50	)	$	37		$	(10	)

Unrealized holding gains/(losses) on derivative financial instruments		(216	)		81			(57	)		207
Reclassification adjustments for realized (gains)/losses		133			(87	)		18			(281	)
		(83	)		(6	)		(39	)		(74	)

Unrealized gains/(losses) on available-for-sale securities		(1	)		3			13			––
Reclassification adjustments for realized (gains)/losses		(2	)		––			5			1
		(3	)		3			18			1

Benefit plans: Actuarial gains/(losses)		(118	)		––			(118	)		––
Reclassification adjustments related to amortization		41			25			85			50
Reclassification adjustments related to curtailments and settlements, net		(4	)		42			39			61
Other		18			(32	)		17			(59	)
		(63	)		35			23			52

Benefit plan: Prior service (costs)/credits and other		8			––			8			––
Reclassification adjustments related to amortization		(6	)		(7	)		(14	)		(14	)
Reclassification adjustments related to curtailments and settlements, net		(28	)		(9	)		(32	)		(13	)
Other		––			2			(2	)		(2	)
		(26	)		(14	)		(40	)		(29	)

Tax benefit on other comprehensive income/(loss)	$	(205	)	$	(32	)	$	(1	)	$	(60	)

(a) Taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

C. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. We treat these events as discrete items in the period of resolution.

The United States is our primary tax jurisdiction and we are regularly audited by the U.S. Internal Revenue Service (IRS):

●

With respect to Pfizer Inc., tax years 2006-2010 are currently under audit. Tax years 2011-2012 are not under audit. All other tax years are closed.

●

With respect to Wyeth, tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit. All other tax years are closed.

●

With respect to King, the audit for tax year 2008 has been effectively settled, and for Alpharma Inc. (a subsidiary of King), tax years 2005-2007 are currently under audit. For King, tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. All other tax years are closed. The open tax years and audits for King and its subsidiaries are not considered material to Pfizer.

In addition to the open audit years in the U.S., we have open audit years in other major tax jurisdictions, such as Canada (2001-2012), Japan (2007-2012), Europe (2002-2012, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany), and Puerto Rico (2007-2012).

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 6. Accumulated Other Comprehensive Loss, Excluding Noncontrolling Interests

The following table provides the changes, net of tax, in Accumulated other comprehensive loss:

	Net Unrealized Gain/(Losses)								Benefit Plans
(millions of dollars)	Currency Translation Adjustment And Other			Derivative Financial Instruments			Available For-Sale Securities		Actuarial Gains/(Losses)			Prior Service (Costs)/ Credits And Other			Accumulated Other Comprehensive Loss
Balance, December 31, 2011	$	944		$	(361	)	$	46	$	(5,120	)	$	362		$	(4,129	)
Other comprehensive income/(loss)(a)		(1,737	)		(64	)		107		(131	)		(54	)		(1,879	)
Balance, July 1, 2012	$	(793	)	$	(425	)	$	153	$	(5,251	)	$	308		$	(6,008	)

(a)	Amounts do not include foreign currency translation adjustments attributable to noncontrolling interests of $18 million loss for the first six month of 2012.

Note 7. Financial Instruments

A. Selected Financial Assets and Liabilities

The following table provides additional information about certain of our financial assets and liabilities:

(millions of dollars)	July 1, 2012		Dec. 31, 2011
Selected financial assets measured at fair value on a recurring basis(a)
Trading securities(b)	$	137	$	154
Available-for-sale debt securities(c)		27,653		29,179
Available-for-sale money market funds(d)		1,994		1,727
Available-for-sale equity securities, excluding money market funds(c)		272		317
Derivative financial instruments in receivable positions(e):
Interest rate swaps		1,147		1,033
Foreign currency forward-exchange contracts		406		349
Foreign currency swaps		69		17
		31,678		32,776
Other selected financial assets(f)
Held-to-maturity debt securities, carried at amortized cost(c)		1,587		1,587
Private equity securities, carried at equity method or at cost(g)		1,072		1,020
		2,659		2,607
Total selected financial assets	$	34,337	$	35,383
Financial liabilities measured at fair value on a recurring basis(a)
Derivative financial instruments in a liability position(h):
Foreign currency swaps	$	1,743	$	1,396
Foreign currency forward-exchange contracts		285		355
Interest rate swaps		20		14
		2,048		1,765
Other financial liabilities(i)
Short-term borrowings, carried at historical proceeds, as adjusted(f)		7,703		4,016
Long-term debt, carried at historical proceeds, as adjusted(j), (k)		30,868		34,926
		38,571		38,942
Total selected financial liabilities	$	40,619	$	40,707

(a)

We use a market approach in valuing financial instruments on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 or Level 3 inputs.

(b)	Trading securities are held in trust for legacy business acquisition severance benefits.

(c)	Gross unrealized gains and losses are not significant.

(d)

Includes approximately $625 million as of July 1, 2012 and December 31, 2011 of money market funds that were released from restriction in the second quarter of 2012 and classified as part of Short-term investments. Such money market funds were held in escrow to secure certain of Wyeth’s payment obligations under its 1999 Nationwide Class Action Settlement Agreement, which relates to litigation against Wyeth concerning its former weight-loss products, Redux and Pondimin. The amount also includes $384 million as of July 1, 2012 and $357 million as of December 31, 2011 of money market funds held in trust in connection with the asbestos litigation involving Quigley Company, Inc., a wholly owned subsidiary.

(e)

Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $290 million as of July 1, 2012; and foreign currency forward-exchange contracts with fair values of $169 million and interest rate swaps with fair values of $8 million as of December 31, 2011.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(f)

The differences between the estimated fair values and carrying values of these financial assets and liabilities not measured at fair value on a recurring basis were not significant as of July 1, 2012 or December 31, 2011. Held-to-maturity debt securities and our short-term and long-term debt fair value are based on Level 2 valuations using a market approach. Fair value measurements for private equity securities are based on Level 3 valuations using a market approach.

(g)	Our private equity securities represent investments in the life sciences sector.

(h)

Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $200 million and foreign currency forward-exchange contracts with fair values of $163 million as of July 1, 2012; and foreign currency forward-exchange contracts with fair values of $141 million and foreign currency swaps with fair values of $123 million as of December 31, 2011.

(i)	Some carrying amounts may include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.

(j)	Includes foreign currency debt with fair values of $885 million as of July 1, 2012 and $919 million as of December 31, 2011, which are used as hedging instruments.

(k)	The fair value of our long-term debt is $35.5 billion as of July 1, 2012 and $40.1 billion as of December 31, 2011.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:

(millions of dollars)	July 1, 2012		Dec. 31, 2011
Assets
Cash and cash equivalents	$	892	$	900
Short-term investments		21,275		23,270
Long-term investments		10,548		9,814
Taxes and other current assets(a)		472		357
Taxes and other noncurrent assets(b)		1,150		1,042
	$	34,337	$	35,383
Liabilities
Short-term borrowings, including current portion of long-term debt	$	7,703	$	4,016
Other current liabilities(c)		545		459
Long-term debt		30,868		34,926
Other noncurrent liabilities(d)		1,503		1,306
	$	40,619	$	40,707

(a)

As of July 1, 2012, derivative instruments at fair value include foreign currency forward-exchange contracts ($406 million), interest rate swaps ($36 million) and foreign currency swaps ($30 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($349 million) and interest rate swaps ($8 million).

(b)	As of July 1, 2012, derivative instruments at fair value include interest rate swaps ($1.1 billion) and foreign currency swaps ($39 million) and, as of December 31, 2011, include interest rate swaps ($1 billion) and foreign currency swaps ($17 million).

(c)

At July 1, 2012, derivative instruments at fair value include foreign currency swaps ($260 million) and foreign currency forward-exchange contracts ($285 million) and, as of December 31, 2011, include foreign currency forward-exchange contracts ($355 million) and foreign currency swaps ($104 million).

(d)	At July 1, 2012, derivative instruments at fair value include foreign currency swaps ($1.5 billion) and interest rate swaps ($20 million) and, as of December 31, 2011, include foreign currency swaps ($1.3 billion) and interest rate swaps ($14 million).

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

B. Investments in Debt Securities

The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:

	Years
			Over 1		Over 5		July 1, 2012
(millions of dollars)	Within 1		to 5		to 10		Total
Available-for-sale debt securities
Western European, Asian and other government debt(a)	$	8,828	$	1,973	$	5	$	10,806
Corporate debt(b)		1,510		2,415		788		4,713
U.S. government debt		4,159		––		258		4,417
Reverse repurchase agreements(c)		2,470		––		––		2,470
Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities		––		2,370		––		2,370
Western European, Scandinavian and other government agency debt(a)		1,911		391		––		2,302
Supranational debt(a)		130		445		––		575
Held-to-maturity debt securities
Certificates of deposit and other		1,288		291		8		1,587
Total debt securities	$	20,296	$	7,885	$	1,059	$	29,240

(a)	All issued by above-investment-grade governments, government agencies or supranational entities, as applicable, except for certain holdings that are immaterial.

(b)	Largely issued by above-investment-grade institutions in the financial services sector.

(c)	Involving U.S. and Germany government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $2.7 billion as of July 1, 2012 and December 31, 2011, respectively.

D. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of July 1, 2012, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $42.5 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen and U.K. pound. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.4 billion U.K. pound debt maturing in 2038.

Interest Rate Risk

As of July 1, 2012, the aggregate notional amount of interest rate derivative financial instruments is $12.8 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.

PFIZER INC. AND SUBSIDIARY COMPANIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:

	Amount of Gains/(Losses) Recognized in OID(a), (b), (c)						Amount of Gains/(Losses) Recognized in OCI (Effective Portion)(a), (d)						Amount of Gains/(Losses) Reclassified from OCI into OID (Effective Portion)(a), (d)
(millions of dollars)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Three Months Ended
Derivative Financial Instruments in Cash Flow Hedge Relationships
Foreign currency swaps	$	––		$	––		$	(646	)	$	227		$	(432	)	$	224

Derivative Financial Instruments in Net Investment Hedge Relationships
Foreign currency swaps		(1	)		14			(53	)		(991	)		––			––

Derivative Financial Instruments Not Designated as Hedges
Foreign currency forward-exchange contracts		190			(158	)		––			––			––			––
Foreign currency swaps		6			13			––			––			––			––

Non-Derivative Financial Instruments in Net Investment Hedge Relationships
Foreign currency short-term borrowings		––			––			––			897			––			––
Foreign currency long-term debt		––			––			(27	)		(34	)		––			––
All other net		3			––			(4	)		1			5			––
	$	198		$	(131	)	$	(730	)	$	100		$	(427	)	$	224

Six Months Ended
Derivative Financial Instruments in Cash Flow Hedge Relationships
Foreign currency swaps	$	––		$	––		$	(218	)	$	531		$	(132	)	$	730