In 1997, total revenue grew 11% to $12,504 million and net income exceeded $2 billion for the first time in our history. Diluted earnings per share increased 13% to $1.70.
As a percentage of total revenues, cost of sales continued to decline in 1997. We balanced revenue growth with substantial investments in product support and R&D. The effective tax rate decreased from 31.0% in 1996 to 28.0% in 1997. Net income has increased steadily as a percentage of total revenues from 1995 through 1997.

Analysis of the Consolidated Statement of Income

							% Change*
(millions of dollars)		1997		1996		1995	97/96	96/95
Net sales	$	12,188	$	11,306	$	10,021	8	13
Alliance revenue	$	316	$	—	$	—	—	—
Total revenues	$	12,504	$	11,306	$	10,021	11	13
Cost of sales	$	2,274	$	2,176	$	2,164	5	1
% of total revenues		18.2%		19.3%		21.6%
Selling, informational and   administrative expenses	$	4,956	$	4,366	$	3,855	13	13
% of total revenues		39.6%		38.6%		38.5%
R&D expenses	$	1,928	$	1,684	$	1,442	14	17
% of total revenues		15.4%		14.9%		14.4%
Other deductions—net	$	258	$	276	$	261	(6)	6
% of total revenues		2.1%		2.4%		2.6%
Income before taxes	$	3,088	$	2,804	$	2,299	10	22
% of total revenues		24.7%		24.8%		22.9%
Taxes on income	$	865	$	869	$	738	(1)	18
Effective tax rate		28.0%		31.0%		32.1%
Income from continuing operations	$	2,213	$	1,929	$	1,554	15	24
% of total revenues		17.7%		17.1%		15.5%
Net income	$	2,213	$	1,929	$	1,573	15	23
% of total revenues		17.7%		17.1%		15.7%
*Percentages may reflect rounding adjustments.

Total Revenues

Total revenues increased $1,198 million in 1997 and $1,285 million in 1996. Excluding the impact of foreign exchange, total revenues grew by 14% in 1997 and 15% in 1996. These increases were primarily due to higher sales volume of our products in both years and revenue generated from business alliances (alliance revenue) in 1997.

Total Revenues by Business Segment


* Percentages may reflect rounding adjustments.

The health care segment consists of the Pharmaceutical and Medical Technology groups.

Pharmaceutical revenues increased 13% to $9,239 million in 1997 and 16% to $8,188 million in 1996. In the U.S. market, growth was 18% in 1997 and 21% in 1996, while overseas growth was 7% in 1997 and 11% in 1996. Foreign exchange rate changes decreased worldwide pharmaceutical revenues by approximately 4% in 1997 and approximately 3% in 1996. These changes reflect the strengthening of the dollar relative to the Japanese yen and several major European currencies.
The major pharmaceutical products grew about 13% in 1997. These products—Norvasc, Procardia XL, Cardura, Diflucan, Zithromax, Zoloft and Zyrtec—comprised 77% of worldwide pharmaceutical revenues. Patent protection extends into the next century on most of these products.
In 1997, we were a partner in the launches of two new pharmaceuticals, Lipitor and Aricept, through business alliances. Lipitor is a cholesterol-lowering medication developed by the Parke-Davis Research Division of Warner-Lambert Company. Aricept is used to treat symptoms of Alzheimer’s disease and was developed by Eisai Co., Ltd. These alliances include both copromotion and license agreements. Revenue from the copromotion agreements is reported in the Statement of Income as “Alliance revenue.” This revenue is computed largely as a percentage of net sales adjusted, in some cases, for certain specific costs.

Elements of Total Revenue Growth

Medicaid rebates and related state programs reduced revenues by $99 million in 1997, $92 million in 1996 and $85 million in 1995. We also provided legislatively mandated discounts to the federal government of $88 million in 1997, $87 million in 1996 and $80 million in 1995. Performance-based contracts provide rebates to several customers based on purchases and have reduced total revenue growth in the U.S. Volume increases in all three years more than offset these revenue reductions.

Percentage Change in Total Revenues

	Total %	Analysis of Change
	Change	Volume	Price	Currency
Health Care
1997 vs. 1996	11.0	13.5	1.1	(3.6)
1996 vs. 1995	14.5	16.6	0.3	(2.4)
Animal Health
1997 vs. 1996	8.8	11.5	1.3	(4.0)
1996 vs. 1995	0.2	2.5	(0.4)	(1.9)
Consumer Health Care
1997 vs. 1996	7.0	6.0	2.0	(1.0)
1996 vs. 1995	15.4	14.8	5.3	(4.7)
Consolidated
1997 vs. 1996	10.6	13.0	1.2	(3.6)
1996 vs. 1995	12.8	14.8	0.4	(2.4)

Total Revenues — Major Pharmaceutical Products

				% Change*
(millions of dollars)	1997	1996	1995	97/96	96/95
Cardiovascular Diseases:	$3,806	$3,486	$2,981	9	17
Norvasc	2,217	1,795	1,265	23	42
Procardia XL	822	1,005	1,133	(18)	(11)
Cardura	626	533	413	17	29
Infectious Diseases:**	2,483	2,325	2,153	7	8
Diflucan	881	910	878	(3)	4
Zithromax	821	619	406	33	53
Central Nervous System Disorders:	1,553	1,382	1,092	12	27
Zoloft	1,507	1,337	1,037	13	29
Allergy:	273	156	21	74	—
Zyrtec/Reactine	265	146	10	81	—
Alliance Revenue	316	—	—	—	—
*Percentages may reflect rounding adjustments. **Certain prior year data have been reclassified to conform    to the current year presentation.

Medical Technology Group (MTG) is the new name of our business formerly known as Hospital Products. MTG net sales increased 1% (5% excluding the effects of foreign exchange) to $1,450 million in 1997 as compared to $1,442 million in 1996. Strong growth in the sales of stents (wire mesh-like tubes to keep blocked arteries and other hollow passageways open) and in orthopedic products was largely offset by declines in sales of angioplasty and urology products. These declines were principally due to heightened pricing pressures and new-product competition. The 1996 sales growth of 8% reflected incremental sales of stents and the acquisitions of the Leibinger Companies and Corvita Corporation. Unfavorable foreign exchange rate changes affected sales performance in 1997 and 1996.
In January 1998, we completed the sale of the Valleylab business—a part of MTG—to United States Surgical Corporation for $425 million. In connection with this transaction, a gain is expected to be recorded in the first quarter of 1998. Valleylab manufactures a line of electrosurgical and ultrasonic systems and disposables. The Valleylab business is not significant to our financial position or results of operations.

Animal health net sales grew 9% in 1997 led by several key products. Sales of companion animal products increased 14% and sales of products for food animals increased 7%. Sales of Dectomax, an antiparasitic medication for livestock, grew 58% to $150 million. Stafac, a leading antibacterial for poultry and swine, achieved 16% sales growth to $95 million. In the first quarter, Rimadyl, a nonsteroidal, anti-inflammatory medicine for treating osteoarthritis in dogs, was launched. Its 1997 sales reached $46 million. Animal health net sales were flat in 1996 due to adverse conditions in the U.S. and European livestock markets, heightened competition for companion animal products and the impact of unfavorable foreign exchange rate changes.

Consumer health care net sales increased 7% in 1997 and 15% in 1996. One factor contributing to these sales increases was the growth of the over-the-counter versions of previously prescription-only drugs (Reactine in Canada, Diflucan in the United Kingdom and OcuHist in the U.S.), which were launched in 1996 and 1995. This segment’s sales also benefited from the 1996 acquisition of the Cortizone and Hemorid brands and the 1995 acquisition of Bain de Soleil.