Amgen 2007 Annual Report Download - page 98

approvals and product sales. Because the achievement of these milestones is neither probable nor reasonably es-
timable, such contingencies have not been included in the above table or recorded on our Consolidated Balance
Sheets. Individually, these arrangements are not material in any one reporting period. However, if the achieve-
ment of the milestones covered by these arrangements would happen to be reached in the same reporting period,
the resulting payment obligation would be approximately $1.5 billion.
Summary of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and the notes to the financial statements. Some of those judgments can be
subjective and complex, and therefore, actual results could differ materially from those estimates under different
assumptions or conditions.
Product sales, sales incentives and returns
Sales of our products are recognized when shipped and title and risk of loss have passed. Product sales are
recorded net of accruals for estimated rebates, wholesaler chargebacks, discounts and other incentives
(collectively “sales incentives”) and returns.
In the United States, we utilize wholesalers as the principal means of distributing our products to healthcare
providers, such as physicians or their clinics, dialysis centers, hospitals and pharmacies. Products we sell outside
the United States are principally distributed to hospitals and/or wholesalers depending upon the distribution prac-
tice in each country for which the product has been launched. We monitor the inventory levels of our products at
our wholesale distributors using third-party data and we believe that wholesaler inventories have been maintained
at appropriate levels (generally two to three weeks) given end-user demand. Accordingly, historical fluctuations
in wholesaler inventory levels have not significantly impacted our method of estimating sales incentives and re-
turns.
Accruals for sales incentives are recorded in the same period that the related sales are recorded and are rec-
ognized as a reduction in product sales. Sales incentive accruals are based on reasonable estimates of the amounts
earned or to be claimed on the related sales. These estimates take into consideration current contractual and stat-
utory requirements, specific known market events and trends, internal and external historical data and forecasted
customer buying patterns. Sales incentives are product-specific and, therefore, for any given year, can be im-
pacted by the mix of products sold.
For the years ended December 31, 2007, 2006 and 2005, reductions in product sales relating to sales in-
centives were comprised of the following (dollar amounts in millions):
2007 2006 2005
Rebates ................................................ $2,156 $2,164 $1,344
Wholesaler chargebacks ................................... 1,649 1,636 1,559
Discounts and other incentives .............................. 694 653 891
Total sales incentives ................................... $4,499 $4,453 $3,794
Percent of gross product sales .............................. 24% 24% 24%
Rebates earned in the United States by healthcare providers, such as physicians or their clinics, dialysis cen-
ters and hospitals are the sales incentives that are most difficult to estimate. These rebates are generally
performance-based offers that are primarily based on attaining contractually-specified sales volumes and segment
share. As a result, the calculation of the accrual for these rebates is complicated by the need to estimate customer
buying patterns and the resulting applicable contractual rebate rate(s) to be earned over a contractual period.
These rebates totaled $2.2 billion in 2007, $2.2 billion in 2006 and $1.3 billion in 2005. We believe that the
methodology we use to accrue for rebates is reasonable and appropriate given current facts and circumstances.
However, actual results may differ. Based on our recent experience, changes in annual estimates related to prior
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