Amgen 2009 Annual Report Download - page 97

We analyze the adequacy of our sales deductions accruals each quarter. Amounts accrued for sales de-
ductions are adjusted when trends or significant events indicate that adjustment is appropriate. Accruals are also
adjusted to reflect actual results. The following table summarizes amounts recorded in “Accrued liabilities” in the
Consolidated Balance Sheets regarding sales deductions (in millions):
Rebates Chargebacks Cash discounts Other deductions Total
Balance as of January 1, 2007 .................. $ 788 $ 73 $ 36 $182 $1,079
Amounts charged against product sales ....... 2,156 1,649 337 357 4,499
Payments .............................. (2,189) (1,652) (331) (342) (4,514)
Balance as of December 31, 2007 ............... 755 70 42 197 1,064
Amounts charged against product sales ....... 1,813 1,635 324 466 4,238
Payments .............................. (2,064) (1,621) (323) (418) (4,426)
Balance as of December 31, 2008 ............... 504 84 43 245 876
Amounts charged against product sales ....... 1,497 2,424 312 406 4,639
Payments .............................. (1,482) (2,380) (328) (355) (4,545)
Balance as of December 31, 2009 ............... $ 519 $ 128 $ 27 $296 $ 970
For the years ended December 31, 2009, 2008 and 2007, total sales deductions were 24%, 22% and 24% of
gross product sales. Included in these amounts are immaterial adjustments related to prior year sales based on
changes in estimates. Such amounts represent less than 2% of the aggregate sales deductions charged against
product sales for each of the three years ended December 31, 2009. In late 2008 we began shifting our discount
structure as a component of broader contracting revisions to be more heavily weighted toward fixed prices to
healthcare providers (reflected as chargebacks in the table above) instead of rebates, resulting in a corresponding
reduction in rebates and an increase in chargebacks, as noted in the table above.
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 in the
EU are principally distributed to hospitals and/or wholesalers depending upon the distribution practice in each
country for which the product is sold. We monitor the inventory levels of our products at our wholesale distrib-
utors using data from our wholesalers and other third-parties 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 deductions and returns.
Accruals for sales deductions are primarily based on estimates of the amounts earned or to be claimed on the
related sales. These estimates take into consideration current contractual and statutory requirements, specific
known market events and trends, internal and external historical data and forecasted customer buying patterns.
Sales deductions are substantially product-specific and, therefore, for any given year, can be impacted by the mix
of products sold.
Rebates earned by healthcare providers in the United States may include performance-based offers, such as
attaining contractually-specified segment share or other performance-based measures. 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 $1.5 billion,
$1.8 billion and $2.2 billion for the years ended December 31, 2009, 2008 and 2007, respectively. We believe
that the methodology we use to accrue for rebates is reasonable and appropriate given current facts and circum-
stances. However, actual results may differ. Based on our recent experience, changes in annual estimates related
to prior annual periods have been less than 3.5% of the estimated rebate amounts charged against product sales
for such periods. These changes in annual estimates substantially relate to sales made in the immediately preced-
ing annual period. A 3.5% change in our rebate estimate attributable to rebates recognized in 2009 would have
had an impact of approximately $52 million on our 2009 product sales and a corresponding impact on our finan-
cial condition and liquidity.
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