the selective COX-2 inhibitors;

• $124 million related to implementation costs of our new AtS productivity initiative; and

• $73 million in write-offs of inventory and exit costs related to suspension of sales and marketing of Bextra.

Cost of sales in 2004 (which includes legacy Pharmacia’s product portfolio for the entire period) compared to 2003 decreased as a result of:

• impact of purchase accounting in 2003, which reflected the incremental charge of $2.7 billion from the sale of inventory acquired from Pharmacia, adjusted to fair value;

• merger-related cost savings; and

• favorable product mix,

partially offset by:

• higher product costs attributable to legacy Pharmacia products; and

• the unfavorable impact of the weakening of the U.S. dollar relative to many foreign currencies.

Selling, Informational and Administrative (SI&A) Expenses

SI&A expenses increased 1% in 2005 which reflects the unfavorable impact of foreign exchange and $156 million in AtS expenses, partially offset by an increase in merger-related synergies and the impact of the Company’s AtS productivity initiative. Marketing expenses of our pharmaceutical products decreased compared to 2004, due primarily to lower spending on products which have lost exclusivity and the withdrawal of Bextra.

In 2004, SI&A expenses increased 12%, mainly due to the full year inclusion of Pharmacia SI&A-related activities, partially offset by cost synergies from Pharmacia-related restructuring activities. Marketing expenses of our pharmaceutical products included costs in 2004 primarily for supporting new product introductions such as Caduet, Lyrica, Inspra and Somavert and increased promotion due to new product competition largely offset by the realization of merger synergies.

Research and Development (R&D) Expenses

R&D expenses decreased 3% in 2005 and increased 3% in 2004. The decline in 2005 reflects the initial benefits associated with the AtS productivity initiative, partially offset by increased portfolio support and $50 million in AtS expenses. We have consolidated our infrastructure support systems into global centers of excellence that now support the entire R&D enterprise. More importantly, the mix of expenses has changed over the past three years. For example, while our capital expenditures and information technology expenses were approximately one-third of our budget in 2002, our 2006 budget will be less than 17% of the R&D budget. As a result, we are taking funds previously used to support R&D and utilizing them in our development of compounds. In 2004, year-over-year growth of R&D expenses is attributable to the inclusion of Pharmacia-related activities and increased support of the advanced-stage development portfolio, partially offset by cost synergies from Pharmacia-related restructuring activities.

R&D expense also includes payments for intellectual property rights of $156 million in 2005, $160 million in 2004 and $380 million in 2003. Additionally, see our discussion in the “Product Developments” section of this Financial Review.

Merger-Related In-Process Research and

Development Charges

The estimated value of merger-related IPR&D is expensed at the