Eli Lilly 2012 Annual Report Download - page 48

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consistent basis across our product portfolio. Causes 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 does not provide an incentive for speculative wholesaler buying and provides us with
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; however,
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.
When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is
primarily based on historical return rates as well as specifically identified anticipated returns due to known
business conditions and product expiry dates. We record the return amounts as a deduction to arrive at our
net product sales. Once the product is returned, it is destroyed. Actual product returns have been less than
1 percent of our net sales over the past three years and have not fluctuated significantly 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 product sales. Sales rebates and discounts
that require the use of judgment in the establishment of the accrual include Medicaid, managed care,
Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other 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 significant changes in sales trends (e.g., patent
expiries), an evaluation of the current Medicaid rebate laws and interpretations, the percentage of our
products that are sold to Medicaid recipients, and our product pricing 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 Medicaid 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
recognized in the same period as the related sales. In some large European countries, government rebates
are based on the anticipated budget for pharmaceutical payments in the country. A best estimate of these
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 costs incurred by the
government, 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. 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. A 5 percent change in our global
sales return, rebate, and discount liability at December 31, 2012 would lead to an approximate $108 million
effect on our income before income taxes.