expenses for our pharmaceutical products compared to 2004, due primarily to lower spending on products which have lost exclusivity and the withdrawal of Bextra.

Research and Development (R&D) Expenses

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

• higher costs of $126 million related to our AtS productivity initiative;

• 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:

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

• savings related to our AtS productivity initiative.

R&D expenses decreased 3% in 2005, which reflects:

• the initial benefits associated with the AtS productivity initiative, partially offset by:

• increased portfolio support; and

• $50 million in expenses related to our AtS productivity initiative.

R&D expense also includes payments for intellectual property rights of $292 million in 2006, $156 million in 2005 and $160 million in 2004. (For further discussion, see the “Product Developments” 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 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. In 2004, we expensed $1.1 billion of IPR&D, related primarily to our acquisition of Esperion.

Adapting to Scale Productivity Initiative

In connection with the AtS productivity initiative, which was 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 fundamentally change the way we run our business to meet the challenges of a changing business environment and to take advantage of the diverse opportunities in the marketplace. We intend to generate cost savings through site rationalization in research and manufacturing, streamlined organizational structures, sales force and staff function reductions, and increased outsourcing and procurement savings. Compared to 2006, we plan to achieve a decrease in the SI&A pre-tax component of Adjusted income of $500 million by the end of 2007, and an absolute net reduction of the pre-tax expense component of Adjusted income of between $1.5 billion and $2.0 billion by the end of 2008. (For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.) Savings realized during 2006 totaled approximately $2.6 billion. The actions associated with the expanded AtS productivity initiative include restructuring charges, such as asset impairments, exit costs and severance costs (including any related impacts to our benefit plans, including settlements and curtailments) and associated