Amgen 2012 Annual Report Download - page 80

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We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted
when trends or significant events indicate that adjustment is appropriate. Accruals are also adjusted to reflect actual results. Amounts
recorded in Accrued liabilities in the Consolidated Balance Sheets for sales deductions were as follows (in millions):
Rebates Chargebacks Other deductions Total
Balance as of January 1, 2010 $ 707 $ 128 $ 135 $ 970
Amounts charged against product sales 1,861 2,593 580 5,034
Payments (1,724)(2,548)(588)(4,860)
Balance as of December 31, 2010 844 173 127 1,144
Amounts charged against product sales 1,795 2,626 670 5,091
Payments (1,592)(2,600)(717)(4,909)
Balance as of December 31, 2011 1,047 199 80 1,326
Amounts charged against product sales 1,480 2,709 659 4,848
Payments (1,680)(2,741)(624)(5,045)
Balance as of December 31, 2012 $ 847 $ 167 $ 115 $ 1,129
For the years ended December 31, 2012, 2011 and 2010, total sales deductions were 23%, 25% and 25% 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 3% or less of the aggregate sales deductions charged against product sales in each of the three years ended
December 31, 2012.
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 include primarily amounts paid to payers and providers in the United States, including those paid to state Medicaid
programs, and are based on contractual arrangements or statutory requirements 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. Additionally, for Medicaid
rebates, we consider the estimated patient population and the amount of unbilled managed Medicaid claims. We adjust the rebate
accruals as more information becomes available and to reflect actual experience. Estimating such rebates is complicated, in part,
due to the time delay between the date of sale and the actual settlement of the liability, which for certain rebates can take up to
one year and more than one year for certain government programs. Rebate accruals totaled $1.5 billion, $1.8 billion and $1.9
billion for the years ended December 31, 2012, 2011 and 2010, 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. Changes in annual
estimates related to prior annual periods were less than 10% of the estimated rebate amounts charged against product sales for the
year ended December 31, 2012, and less than 5% for the years ended December 31, 2011 and 2010. A 10% change in our rebate
estimate attributable to rebates recognized in 2012 would have had an impact of approximately $150 million, or approximately
1% of our 2012 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 healthcare providers purchase our products through
wholesalers at these reduced prices, wholesalers charge us for the difference between their purchase price and the contractual price
between Amgen and the healthcare providers. The provision for chargebacks is based on the expected sales by our wholesaler
customers to healthcare providers. Those chargebacks from wholesalers totaled $2.7 billion, $2.6 billion and $2.6 billion for the
years ended December 31, 2012, 2011 and 2010, respectively. Accruals for wholesaler chargebacks are less difficult to estimate
than rebates and closely approximate actual results since chargeback amounts are fixed at the date of purchase by the healthcare
providers, and we generally settle the liability for these deductions within a few weeks.