Eli Lilly 2009 Annual Report Download - page 41

rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as
the related sale. If our estimates are not reflective of the actual pharmaceutical budget deficit, we adjust
our rebate reserves.
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate
based on current facts and circumstances. U.S. sales returns, federally mandated Medicaid rebate and
state pharmaceutical assistance programs (Medicaid) and Medicare rebates reduced sales by $1.20 billion,
$1.03 billion, and $738.8 million in 2009, 2008, and 2007, respectively. A 5 percent change in the sales
return, Medicaid, and Medicare rebate amounts we recognized in 2009 would lead to an approximate
$60 million effect on our income before income taxes. As of December 31, 2009, our sales returns,
Medicaid, and Medicare rebate liability was $692.3 million.
Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated
balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent
liabilities on our consolidated balance sheet. Approximately 84 percent and 80 percent of our global sales
return, rebate, and discount liability resulted from sales of our products in the U.S. as of December 31,
2009 and 2008, respectively. The following represents a roll-forward of our most significant U.S. returns,
rebate, and discount liability balances, including Medicaid (in millions):
2009 2008
Sales return, rebate, and discount liabilities, beginning of year . . . . . ........... $ 806.5 $ 693.5
Reduction of net sales due to sales returns, discounts, and rebates
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.......... 2,233.8 1,864.9
Cash payments of discounts and rebates . . . . . . . ........................ (2,076.7) (1,751.9)
Sales return, rebate, and discount liabilities, end of year . . . . . . . . . ........... $ 963.6 $ 806.5
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Adjustments of the estimates for these returns, rebates, and discounts 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 other contingent liability amounts include the merits and jurisdiction of the litigation, the
nature and the number of other similar current and past litigation cases, the nature of the product and the
current assessment of the science subject to the litigation, and the likelihood of settlement and current
state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred,
but not filed, to the extent we can formulate a reasonable estimate of their costs. We estimate these
expenses based primarily on historical claims experience and data regarding product usage. We accrue
legal defense costs expected to be incurred in connection with significant product liability contingencies
when probable and reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by
insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions,
the potential for denial of coverage by the insurance company, the financial condition of the insurers, and
the possibility of and length of time for collection. In the past few years, we have been unable to obtain
product liability insurance due to a very restrictive insurance market. Therefore, for substantially all of our
currently marketed products, we have been and expect that we will continue to be completely self-insured
for future product liability losses. In addition, there can be no assurance that we will be able to fully
collect from our insurance carriers in the future.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have
been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
We believe that the accruals and related insurance recoveries we have established for product litigation
liabilities and other contingencies are appropriate based on current facts and circumstances.
Pension and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on
plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age,
expected return on plan assets, and health-care-cost trend rates. These assumptions have a significant
effect on the amounts reported. In addition to the analysis below, see Note 13 to the consolidated financial
statements for additional information regarding our retirement benefits.
Periodically, we evaluate the discount rate and the expected return on plan assets in our defined benefit
pension and retiree health benefit plans. In evaluating these assumptions, we consider many factors,
including an evaluation of the discount rates, expected return on plan assets, and health-care-cost trend
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FORM 10-K