Eli Lilly 2008 Annual Report Download - page 28

FINANCIALS
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of unusual wholesaler buying patterns include actual
or anticipated product supply issues, weather patterns,
anticipated changes in the transportation network,
redundant holiday stocking, and changes in wholesaler
business operations. In the U.S., the current structure
of our arrangements eliminates the incentive for specu-
lative wholesaler buying and provides us improved
data on inventory levels at our wholesalers. When we
believe wholesaler purchasing patterns have caused
an unusual increase or decrease in the sales of a major
product compared with underlying demand, we disclose
this in our product sales discussion if we believe the
amount is material to the product sales trend; how-
ever, we are not always able to accurately quantify the
amount of stocking or destocking. Wholesaler stocking
and destocking activity historically has not caused any
material changes in the rate of actual product returns.
We establish sales return accruals for anticipated
product returns. We record the return amounts as a
deduction to arrive at our net sales. Once the product
is returned, it is destroyed. Consistent with SFAS 48,
Revenue Recognition When Right of Return Exists, we
estimate a reserve when the sales occur for future
product returns related to those sales. This estimate
is primarily based on historical return rates as well as
specifi cally identifi ed anticipated returns due to known
business conditions and product expiry dates. Actual
product returns have been approximately one percent
of our net sales over the past three years and have not
fl uctuated signifi cantly as a percent of sales.
We establish sales rebate and discount accruals
in the same period as the related sales. The rebate
and discount amounts are recorded as a deduction to
arrive at our net sales. Sales rebates and discounts
that require the use of judgment in the establishment
of the accrual include Medicaid, managed care, Medi-
care, chargebacks, long-term-care, hospital, patient
assistance programs, and various other government
programs. We base these accruals primarily upon our
historical rebate and discount payments made to our
customer segment groups and the provisions of current
rebate and discount contracts.
The largest of our sales rebate and discount
amounts are rebates associated with sales covered
by Medicaid. In determining the appropriate accrual
amount, we consider our historical Medicaid rebate
payments by product as a percentage of our historical
sales as well as any signifi cant changes in sales trends,
an evaluation of the current Medicaid rebate laws and
interpretations, the percentage of our products that
are sold to Medicaid recipients, and our product pric-
ing and current rebate and discount contracts. Although
we accrue a liability for Medicaid rebates at the time we
record the sale (when the product is shipped), the Med-
icaid rebate related to that sale is typically paid up to six
months later. Because of this time lag, in any particular
period our rebate adjustments may incorporate revisions
of accruals for several periods.
Most of our rebates outside the U.S. are contractual
or legislatively mandated and are estimated and recog-
nized in the same period as the related sales. In some
large European countries, government rebates are
based on the anticipated pharmaceutical budget defi cit
in the country. A best estimate of these rebates, updated
as governmental authorities revise budgeted defi cits, is
recognized in the same period as the related sale. If our
estimates are not refl ective of the actual pharmaceuti-
cal budget defi cit, we adjust our rebate reserves.
We believe that our accruals for sales returns,
rebates, and discounts are reasonable and appropri-
ate based on current facts and circumstances. Sales
returns, federally mandated Medicaid rebate and
state pharmaceutical assistance programs (Medicaid)
and Medicare rebates reduced sales by $1.03 billion,
$738.8 million, and $704.8 million in 2008, 2007, and
2006, respectively. A 5 percent change in the sales
return, Medicaid, and Medicare rebate amounts we
recognized in 2008 would lead to an approximate
$52 million effect on our income before income taxes.
As of December 31, 2008, our sales returns, Medicaid,
and Medicare rebate liability was $618.5 million.
Our global rebate and discount liabilities are includ-
ed in sales rebates and discounts on our consolidated
balance sheet. Our global sales return liability is includ-
ed in other current liabilities and other noncurrent liabil-
ities on our consolidated balance sheet. Approximately
80 percent and 78 percent of our global sales return,
rebate, and discount liability resulted from sales of our
products in the U.S. as of December 31, 2008 and 2007,
respectively. The following represents a roll-forward of
our most signifi cant U.S. returns, rebate, and discount
liability balances, including Medicaid (in millions):
2008 2007
Sales return, rebate, and discount
liabilities, beginning of year. . . . . $ 693.5 $ 614.5
Reduction of net sales due to
sales returns, discounts,
and rebates1 . . . . . . . . . . . . . . . 1,864.9 1,404.0
Cash payments of discounts
and rebates . . . . . . . . . . . . . . . (1,751.8) (1,325.0)
Sales return, rebate, and discount
liabilities, end of year . . . . . . . . . . $ 806.5 $ 6 9 3 . 5
1Adjustments of the estimates for these returns, rebates, and dis-
counts to actual results were less than 0.1 percent of net sales
for each of the years presented.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are,
by their nature, uncertain and are based upon complex
judgments and probabilities. The factors we consider in
developing our product litigation liability reserves and