2012 Annual Report  Competitors seeking approval of biological products under a full Biologics License Application (BLA) must file their own safety and  efficacy data and address the challenges of biologics manufacturing, involving more complex processes and costs than those of other  pharmaceutical operations. Under the U.S. healthcare legislation enacted in 2010, there is an abbreviated path for regulatory approval  of generic versions of biological products. This path for approval of biosimilar products under the U.S. healthcare legislation  significantly affects the regulatory data exclusivity for biological products. The legislation provides a regulatory mechanism allowing  for regulatory approval of biologic drugs similar to (but not generic copies of) innovative drugs on the basis of less extensive data than  required by a full BLA. It is not possible at this time to reasonably assess the impact of the U.S. biosimilar legislation on the  Company.  $^{ }$Globally, the healthcare industry is subject to various government-imposed regulations authorizing prices or price controls that will  continue to impact our net sales. In March 2010, the U.S. government enacted healthcare reform legislation, signing into law the  Patient Protection and Affordable Care Act (HR 3590) and a reconciliation bill containing a package of changes to the healthcare bill. We will continue to experience additional financial costs and certain other changes to our business as healthcare law provisions  become effective.  $^{ }$The aggregate financial impact of U.S. healthcare reform over the next few years depends on a number of factors, including but not  limited to pending implementation guidance, potential changes in sales volume eligible for the new rebates, discounts or fees, and the  impact of cost sharing arrangements with certain alliance partners. Our future net sales beginning in 2014 could potentially be  positively impacted from the expected increase in the number of people with healthcare coverage from the Patient Protection and  Affordable Care Act.  $^{ }$In many markets outside the U.S., we operate in environments of government-mandated, cost-containment programs, or under other  regulatory bodies or groups exerting downward pressure on pricing. For example, pricing freedom is limited in the UK by the  operation of a profit control plan and in Germany by the operation of a reference price system. Many European countries have  continuing fiscal challenges as healthcare payers, including government agencies, have reduced and are expected to continue to reduce  the cost of healthcare through actions that directly or indirectly impose additional price restrictions. Companies also face significant  delays in market access for new products as more than two years can elapse after drug approval before new medicines are available in  some countries.  $^{ }$The growth of Managed Care Organizations (MCOs) in the U.S. significantly impacted competition in the healthcare industry. MCOs  seek to reduce healthcare expenditures for participants through volume purchases and long-term contractual discounts with various  pharmaceutical providers. Because of the market potential created by the large pool of participants, marketing prescription drugs to  MCOs is an important part of our strategy. Companies compete for inclusion in MCO formularies and we generally are successful in  having our key products included. We believe that developments in the managed care industry, including continued consolidation,  continue to have a downward pressure on prices.  $^{ }$Pharmaceutical and biotechnology production processes are complex, highly regulated and vary widely by product. Shifting or adding  manufacturing capacity is usually a lengthy process requiring significant capital expenditures and regulatory approvals. Biologics  manufacturing involves more complex processes than those of traditional pharmaceutical operations. As biologics become a larger  percentage of our product portfolio, we will continue to maintain supply arrangements with third-party manufacturers and incur  substantial investments to increase our internal capacity to produce biologics on a commercial scale. The FDA approved our large  scale multi-product bulk biologics manufacturing facility in Devens, Massachusetts in May 2012.  $^{ }$We maintain a competitive position in the market and strive to uphold this position, depending on our success in discovering,  developing and delivering innovative, cost-effective products to help patients prevail over serious diseases.  $^{ }$We are the subject of a number of significant pending lawsuits, claims, proceedings and investigations. It is not possible at this time  to reasonably assess the final outcomes of these investigations or litigations. For additional discussion of legal matters, see Note 21  “Legal Proceedings and Contingencies.”  $^{ }$Over the past few years, we transformed our Company into a focused biopharmaceutical company. We continue to focus on  sustaining our business and building a foundation for the future by growing our newer key marketed products, advancing our pipeline  portfolio and managing our costs. We expect that our portfolio will become increasingly diversified across products and geographies  over the next few years.  $^{ }$We experienced substantial exclusivity losses this year for  Plavix  and  Avapro / Avalide , which together had more than $8 billion of net  sales in 2011. We had been preparing for this for a number of years. As expected, we experienced a rapid, precipitous, and material  decline in  Plavix  and  Avapro / Avalide  net sales and a reduction in net income and operating cash flow. Such events are the norm in the  industry when companies experience the loss of exclusivity of a significant product. We will also face additional exclusivity losses in  3  $^{ }$Strategy 