in 2006, compared to 2005, which reflects:

• higher promotional investments in new product launches and in-line product promotional programs;

• expenses related to share-based payments; and

• the impact of higher implementation costs associated with our cost-reduction initiatives of $243 million in 2006, compared to $151 million in 2005,

partially offset by:

• the favorable impact on expenses of foreign exchange; and • savings related to our cost-reduction initiatives.

Research and Development (R&D) Expenses

R&D expenses increased 6% in 2007, compared to 2006, which reflects:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $416 million in 2007, compared to $176 million in 2006;

• an initial payment to BMS of $250 million and additional payments to BMS related to product development efforts, in connection with our collaboration to develop and commercialize apixaban, recorded in 2007;

• the unfavorable impact on expenses of foreign exchange;

• a one-time R&D milestone due to us from sanofi-aventis (approximately $118 million) recorded in 2006; and

• exit costs, such as contract termination costs, associated with Exubera of $100 million (See the “Our 2007 Performance: Decision to Exit Exubera” section of this Financial Review),

partially offset by:

• savings related to our cost-reduction initiatives.

R&D expenses increased 5% in 2006, compared to 2005, which reflects:

• the impact of higher implementation costs associated with our cost-reduction initiatives of $176 million in 2006, compared to $50 million in 2005;

• expenses related to share-based payments;

• timing considerations associated with the advancement of development programs for pipeline products; and

• higher payments for intellectual property rights, discussed below, among other factors,

partially offset by:

• a one-time R&D milestone due to us from sanofi-aventis (approximately $118 million); and

• savings related to our cost-reduction initiatives.

R&D expenses also include payments for intellectual property rights of $603 million in 2007, $292 million in 2006 and $156 million in 2005. (For further discussion, see the “Our Strategic Initiatives—Strategy and Recent Transactions: Acquisitions, Licensing and Collaborations” section of this Financial Review.)

Acquisition-Related In-Process Research and Development Charges

The estimated value of acquisition-related IPR&D is expensed at the acquisition date. In 2007, we expensed $283 million of IPR&D, primarily related to our acquisitions of BioRexis and Embrex. In 2006, we expensed $835 million of IPR&D, primarily related to our acquisitions of Rinat and PowderMed. In 2005, we expensed $1.7 billion of IPR&D, primarily related to our acquisitions of Vicuron and Idun.

Cost-Reduction Initiatives

In connection with our cost-reduction initiatives, which were launched in early 2005 and broadened in October 2006, our management has performed a comprehensive review of our processes, organizations, systems and decision-making procedures in a company-wide effort to improve performance and efficiency. On January 22, 2007, we announced additional plans to change the way we