Amgen 2010 Annual Report Download - page 99

reflect actual results. The following table summarizes amounts recorded in “Accrued liabilities” in the Consolidated
Balance Sheets for sales deductions (in millions):
Rebates Chargebacks Cash discounts Other deductions Total
Balance as of January 1, 2008 ................ $ 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
Amounts charged against product sales ...... 1,522 2,593 347 572 5,034
Payments ............................ (1,525) (2,548) (345) (442) (4,860)
Balance as of December 31, 2010 ............. $ 516 $ 173 $ 29 $426 $1,144
For the years ended December 31, 2010, 2009 and 2008, total sales deductions were 25%, 24% and 22% of
gross product sales, respectively. Included in these amounts are immaterial adjustments related to prior-year sales
due to changes in estimates. Such amounts represent less than 1% of the aggregate sales deductions charged against
product sales for 2010 and 2009 and less than 2% for 2008. 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 distributed principally to hospitals and/or wholesalers depending on the distribution practice in each country
where the product is sold. We monitor the inventory levels of our products at our wholesalers by using data from our
wholesalers and other third parties, and we believe 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 based primarily 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 primarily include amounts paid to payers in the United States and are based on contractual
arrangements which vary by product, by payer and individual payer plans. We estimate the amount of rebate
that will be paid based on the product sold, contractual terms, historical experience and wholesaler inventory levels
and accrue these rebates in the period the related sale is recorded. We adjust the accrual as more information
becomes available and to reflect actual experience. Estimating such rebates is complicated due to the time delay
between the date of sale and the actual settlement of the liability, which could take up to one year. Those rebates
totaled $1.5 billion, $1.5 billion and $1.8 billion for the years ended December 31, 2010, 2009 and 2008,
respectively. We believe 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 annual periods have been less than 2% of the estimated rebate amounts charged against
product sales for 2010 and 2009 and less than 3.5% for 2008. These changes in annual estimates relate substantially
to sales made in the immediately preceding annual period. A 2% change in our rebate estimate attributable to
rebates recognized in 2010 would have had an impact of approximately $30 million on our 2010 product sales and a
corresponding impact on our financial condition and liquidity.
Wholesaler chargebacks relate to our contractual agreements to sell products to healthcare providers in the
United States at fixed prices that are lower than the prices we charge wholesalers. When the healthcare providers
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