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	Financial Review (Section 5 of 5) Pfizer Inc and Subsidiary Companies
	On This Page: | Forward-Looking Information and Factors That May Affect Future Results | Recent Events |
	Forward-Looking Information and Factors That May Affect Future Results The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report contains such forward-looking statements that set out anticipated results based on management’s plans and assumptions. Words such as “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify these forward-looking statements. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results are subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Discussion of certain risks, uncertainties and assumptions follow and are discussed under the heading entitled “Cautionary Factors That May Affect Future Results” in Item 1 of our annual report on Form 10-K for the year ended December 31, 1997, which will be filed at the end of March 1998. Prior to the filing of the Form 10-K, reference should be made to the discussion under the same heading in our quarterly report on Form 10-Q for the quarter ended September 28, 1997 and to the extent incorporated by reference therein, in our 10-K filing for 1996. Competition and the Health Care Environment In the U.S., many of our pharmaceutical products are subject to increasing price pressures as managed care groups, institutions and government agencies seek price discounts. Government efforts to reduce Medicare and Medicaid expenses are expected to increase the use of managed care. This may result in managed care influencing prescription decisions for a larger segment of the population. International operations are also subject to price and market regulations. As a result, it is expected that pressures on pricing and operating results will continue. Calcium Channel Blockers During 1995, the authors of some nonclinical studies questioned the safety of calcium channel blockers (CCBs). Although the clinical evidence supported the safety of this class of medications, the FDA convened an advisory panel to review their safety. In 1996, that advisory panel found no data to support challenges to the safety of newer sustained-release and intrinsically long-acting CCBs (such as Norvasc and Procardia XL products for treatment of hypertension and angina). Questions about this class of products continued throughout 1997, however, and included scientific publications and presentations asserting that these products were associated with various serious medical conditions. During 1997, emerging data and reviews by two national regulatory authorities plus newly published National Institutes of Health (NIH) guidelines were all supportive of the safety of CCBs. In March 1997, Swedish regulatory authorities concluded that the pertinent studies did not provide sufficient evidence of any general association between use of CCBs and an increase in the risk of cancer. Additionally, in July, Canadian authorities concluded that these medications were safe and effective when used as indicated. Finally, in November, the NIH published guidelines reflecting clinical recommendations for the treatment of patients with hypertension which maintained that long-acting CCBs are useful and appropriate first-line medications. We believe that the safety and effectiveness of Norvasc and Procardia XL are supported by a large body of data from numerous studies and the daily clinical experiences of physicians around the world. It is not possible, however, to predict the impact, if any, of existing or future studies, regulatory agency actions or a continuing debate regarding CCBs on our future sales. Financial Risk Management The overall objective of our financial risk management program is to seek a reduction in the potential negative earnings effects from changes in foreign exchange and interest rates arising in our core business activities. We manage these financial exposures through operational means and by using various financial instruments. These practices may change in the future as economic conditions change. We do not use financial instruments for trading purposes. Foreign Exchange Risk A significant portion of our revenues and earnings are exposed to changes in foreign exchange rates. Where practical, we seek to relate expected local currency revenues with local currency costs and local currency assets with local currency liabilities. Foreign exchange risk is also managed through the use of foreign currency forward contracts. These contracts are used to offset the potential negative earnings effects from short-term foreign currency assets and liabilities that arise during normal operations. In addition, foreign currency put options are purchased to reduce a portion of the potential negative effects on earnings related to certain of our significant anticipated intercompany inventory purchases for periods up to two years. These purchased options hedge Japanese yen and continental European currencies versus the U.S. dollar. Also, under certain market conditions, we protect against possible declines in the reported net assets of certain key international subsidiaries—namely, those in Japan and Switzerland. We do this through borrowing in foreign currencies. Our financial instrument holdings at year-end were analyzed to determine their sensitivity to foreign exchange rate changes. The fair value of these instruments was determined as follows: • forward exchange contracts and currency swaps—net present values • purchased foreign currency options—foreign exchange option pricing model • foreign receivables, payables, debt and loans—changes in exchange rates In our sensitivity analysis, we assumed that the change in one currency’s rates relative to the U.S. dollar would not have an effect on other currencies’ rates relative to the U.S. dollar. All other factors were held constant. If there were an adverse change in foreign exchange rates of 10%, the expected effect on net income related to our financial instruments would be immaterial. For additional details, see note 5-D, “Derivative Financial Instruments—Accounting Policies.” Interest Rate Risk Our U.S. dollar interest-bearing investments, loans and borrowings are subject to interest rate risk. In addition, we are also subject to interest rate risk on Japanese yen and Swiss franc short-term borrowings. We invest and borrow primarily on a short-term or variable-rate basis. Under certain market conditions, interest rate swap contracts are used to adjust interest rate sensitive assets and liabilities. Our financial instrument holdings at year-end were analyzed to determine their sensitivity to interest rate changes. The fair values of these instruments were determined by net present values. In our sensitivity analysis, we used the same change in interest rate for all maturities. All other factors were held constant. If interest rates increased by 10%, the expected effect on net income related to our financial instruments would be immaterial. Foreign Markets Almost half of our revenues arise from international operations and revenue and net income growth in 1998 is expected to be impacted by changes in foreign exchange rates. Revenues from Asia comprised approximately 13% of total revenues in 1997, including 9% from Japan. Revenues from the Asian markets most impacted by recent economic events—Korea, Indonesia, Thailand, Malaysia, Philippines and Taiwan—comprised approximately 2% of 1997 total revenues. A new European currency is planned for introduction in January 1999 to replace the separate currency of several individual countries. This will entail changes in our operations as we modify systems and commercial arrangements to deal with the new currency. Modifications will be necessary in operations such as payroll, benefits and pension systems, contracts with suppliers and customers and internal financial reporting systems. Although a three-year transition period is expected during which transactions can be made in the old currencies, this may require dual currency processes for our operations. We have 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. Tax Legislation Pursuant to the Small Jobs Protection Act of 1996 (the Act), Section 936 of the Internal Revenue Code (the U.S. possessions corporation income tax credit) was repealed for tax years beginning after December 31, 1995. The Act allows us to continue using the credit against the tax arising from manufacturing income earned in a U.S. possession for an additional ten-year period. The amount of manufacturing income eligible for the credit during this additional period is subject to a cap based on income earned prior to 1996 in the U.S. possession. This ten-year extension period does not apply to investment income earned in a U.S. possession, the credit on which expired as of July 1, 1996. The Act does not affect the amendments made to Section 936 by the 1993 Omnibus Budget Reconciliation Act, which provided for a five-year phase-down of the U.S. possession tax credit from 100% to 40%. In addition, the 1996 Act extended the R&D tax credit for 11 months effective July 1, 1996. In 1997, this credit was extended to June 30, 1998. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which become effective for our 1998 financial statements. SFAS No. 130 requires disclosure of comprehensive income, which consists of all changes in equity from nonshareholder sources. SFAS No. 131 requires that a company report information about its operating segments. The adoption of these statements will not impact our consolidated financial position, results of operations or cash flows, but will be limited to the form and content of our disclosures. Since most of the information required under these statements is currently disclosed, we do not expect their adoption to materially change our current disclosures. 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. A Compliance Assurance Process was developed to address this problem. A project team has performed a detailed assessment of all internal computer systems and is developing and implementing plans to correct the problems. Year 2000 problems affect many of our research and development, production, distribution, financial, administrative and communication operations. Systems critical to our business which have been identified as non-Year 2000 compliant are either being replaced or corrected through programming modifications. In addition, a separate team is looking at Year 2000 readiness from other aspects of our business, including customer order-taking, manufacturing, raw materials supply and plant process equipment. Outside companies such as vendors, major customers, service suppliers, communications providers and banks are being asked to verify their Year 2000 readiness and testing such systems where appropriate. We expect these projects to be successfully completed during 1999. External and internal costs specifically associated with modifying internal use software for Year 2000 compliance are expensed as incurred. To this point, those costs have not been material. Costs to be incurred over the next two years to fix Year 2000 problems are estimated at approximately $40 million. Such costs do not include normal system upgrades and replacements. Based on our current plans and efforts to date, we expect that there will be no material adverse effect on our operations. There is no guarantee, however, that all problems will be foreseen and corrected, or that no material disruption of our business will occur. Litigation, Tax and Environmental Matters Claims have been brought against us and our subsidiaries for various legal and tax matters. In addition, our operations are subject to international, federal, state and local environmental laws and regulations. It is possible that our cash flows and results of operations could be affected by the one-time impact of the resolution of these contingencies. We believe that the ultimate disposition of these matters to the extent not previously provided for will not have a material impact on our financial condition or cash flows and results of operations, except where specifically commented upon in note 19, “Litigation” and note 8, “Taxes on Income.” Recent Events In February 1998, we entered into a U.S. business alliance with G.D. Searle & Co., the pharmaceutical division of Monsanto Company. Under this U.S. agreement, we will copromote and develop Searle’s Celebra (celecoxib) and its second generation compound for the treatment of arthritis and pain. An initial payment to Searle of $85 million will be expensed in the first quarter of 1998. Also in February 1998, we announced that we are exploring strategic options for the Medical Technology Group. These options include the divestiture of all or part of the MTG businesses in a public or private transaction. No decisions have been made in this review process.

	Advisory Information for Investors
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