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Executive Summary

Pfizer's Sec. 936 tax credits saved the firm $126 mil. in 1992, reducing the effective tax rate by 8.2 percentage points, Chief Financial Officer Henry McKinnell told securities analysts Feb. 26 in New York City. In recent years, the Puerto Rican tax credits generally have saved Pfizer about eight points on the tax line, McKinnell said. "As U.S. products grow rapidly," McKinnell added, the Sec. 936 "benefit will increase." Sen. Pryor's (D-Ark.) S 356, which would immediately replace the current tax credit with a wage-based credit, "would be very painful," McKinnell acknowledged. However, he reasoned, any ultimate changes to Sec. 936 are not likely to be "as draconian as immediate enactment of S 356." McKinnell's comments came in response to a question on proposals by Sen. Pryor and President Clinton to cut Sec. 936 tax credits ("The Pink Sheet" Feb. 22, p. 6). McKinnell declared that "the debate has not even started." Pfizer believes "that when Congress and the administration review 936 and the issues get out on the table, we'll see a significant change to the proposals already being made," McKinnell said. He noted that the industry would be supported by the Puerto Rican government in defending the credit (see preceding story). McKinnell reminded the analysts that "we have some flexibility here." The firm can "take the non-U.S. discovered products" such as Norvasc, Diflucan and Cardura and transfer manufacturing elsewhere, "to Ireland for example." However, he said, Pfizer has not "done a precise analysis of transferring production because we didn't think until very recently that change was imminent." Pfizer Chairman and incoming Pharmaceutical Manufacturing Association Chairman William Steere began the meeting by responding to the "very harsh political criticism" of the drug industry in recent weeks and expressing optimism that any health care reform effort will be "sufficiently prudent that America's research-based pharmaceutical industry will be able to remain the global leader in new product development." "Pfizer has taken a leadership role in the public discussion of health care coverage, including access to pharmaceutical therapies," Steere said. "We feel strongly that...any minimum benefit package should include a drug benefit" that "ensures access to all FDA-approved drugs for medically accepted purposes." On Feb. 22, Pfizer became the first drug company to declare support for a Medicare outpatient drug benefit ("The Pink Sheet" March 1, p. 6). "I think that we were all caught off guard by the vehemence of the attack on the industry," Steere said. "Even though there was a lot of milling about initially, I think that we're starting to come together....Little by little, we are making ourselves felt." The industry must "encourage those who see the error of linking price controls to health care reform," Steere said. "One of the worst things that happened was we got into global budgets," Steere maintained. "The better managed HMOs," he continued, "look at pharmaceuticals as possibly a contributor to cost containment as opposed to an expense." Asked about price increases, Steere declared that the industry must "try to get that off the table as an issue. When you go in to see a Congressman or a Senator, the first thing they want to talk about is price increases." Steere reassured the analysts that Pfizer "can live with any rational U.S. health care reform." The company's financial presentation highlighted both new product performance (see following story) and opportunities for margin improvement. McKinnell said that Pfizer has "room for improvement in production margin," which was 72% in 1992. McKinnell noted that Pfizer's margin from continuing operations in 1992 was 74.2%. Pfizer also "has room for improvement" in its marketing, distribution and administrative expenses, currently 40.1% of sales, McKinnell said. As purchasers consolidate, sales force reductions are a possibility, he indicated. Pfizer remains committed to increased R&D spending, Steere said, with plans to spend $1 bil. in 1993.

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