We will continue to highlight the benefits of our products, in terms of cost, safety and efficacy, as appropriate. For example, the success of Lipitor is the result of an unprecedented array of clinical data supporting both efficacy and safety, and we have launched a new advertising campaign that highlights these benefits.

Regulatory Environment and Pipeline Productivity

The discovery and development of safe, effective new products, as well as the development of additional uses for existing products, are necessary for the continued strong operation of our businesses.

• We are confronted by increasing regulatory scrutiny of drug safety and efficacy even as we continue to gather safety and other data on our products, before and after the products have been launched.

• The opportunities for improving human health remain abundant as scientific innovation increases daily into new and more complex areas and as the extent of unmet medical needs remains high. However, according to The Pharmaceutical Research and Manufacturers of America, 2006 Pharmaceutical Industry Profile, the cost to successfully develop and obtain regulatory approvals for a new medicine is about $800 million, and the process can take up to 10 to 15 years.

• Our product lines must be replenished over time in order to offset future revenue losses when products lose their exclusivity, as well as to provide for growth.

Our response:

• As the world’s largest privately funded biomedical operation, and through our global scale, we will continue to develop and deliver innovative medicines that will benefit patients around the world. We will continue to make the investments necessary to serve patients’ needs and to generate long-term growth. For example:

 During 2006, we continued to introduce new products, including Eraxis, Sutent, Exubera and Chantix in the U.S. In Europe, Sutent and Exubera entered the marketplace, and Champix (the trade name for Chantix in Europe) was launched in December 2006.

During2006,we or our development partners submitted two new drug applications (NDAs) to the U.S. Food and Drug Administration (FDA) for important new drug candidates: maraviroc and fesoterodine.

In December 2006, we filed a supplemental NDA with the FDA for Lyrica for the treatment of fibromyalgia.

Several key medicines received approval for new indications in 2006, including approvals for Lyrica for central neuropathic pain and generalized anxiety disorder in the E.U., and Celebrex for juvenile arthritis in the U.S.

 We continue to conduct research on a scale that can help redefine medical practice. We have over 240 novel compounds in development, spanning multiple therapeutic areas, and we are leveraging our status as the industry’s partner of choice to expand our licensing operations. Our research and development (R&D) pipeline includes 249 projects in development: 177 new molecular entities and 72 product-line extensions. In addition, we have more than 350 projects in discovery research. During 2006, 47 new compounds were advanced from discovery research into preclinical development, 29 preclinical development candidates progressed into Phase 1 human testing and 18 Phase 1