Eli Lilly 2012 Annual Report Download - page 64

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52
recoverables based on existing deductibles, coverage limits, our assessment of any defenses to coverage that
might be raised by the carriers, the financial condition of the insurers, and the possibility of and length of time
for collection. For substantially all of our currently marketed products, we are completely self-insured for
product liability losses.
Revenue recognition
We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. Provisions for returns, discounts, and rebates are established in
the same period the related sales are recorded.
We also generate income as a result of collaboration agreements. Revenue from co-promotion services is
based upon net sales reported by our co-promotion partners and, if applicable, the number of sales calls we
perform. Initial fees we receive from the partnering of our compounds under development where we have
continuing involvement are generally amortized through the expected product approval date. Initial fees
received from out-licensing agreements that include both the sale of marketing rights to our commercialized
products and a related commitment to supply the products are generally recognized in net product sales over
the term of the supply agreement. We immediately recognize the full amount of developmental milestone
payments due to us upon the achievement of the milestone event if the event is substantive, is objectively
determinable, and represents an important point in the development life cycle of the pharmaceutical product.
Milestone payments earned by us are generally recorded in other—net, (income) expense. If the payment to us
is a commercialization payment that is part of a multiple-element collaborative commercialization
arrangement and is a result of the initiation of the commercialization period (e.g., payments triggered by
regulatory approval for marketing or launch of the product), we amortize the payment to income as we
perform under the terms of the arrangement. See Note 4 for specific agreement details.
Royalty revenue from licensees, which is based on third-party sales of licensed products and technology, is
recorded as earned in accordance with the contract terms when third-party sales can be reasonably
measured and collection of the funds is reasonably assured. This royalty revenue is included in collaboration
and other revenue.
Following is the composition of revenue:
2012 2011 2010
Net product sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,970.4 $ 23,604.8 $ 22,442.2
Collaboration and other revenue (Note 4) . . . . . . . . . . . . . . . . . . . . . 633.0 681.7 633.8
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,603.4 $ 24,286.5 $ 23,076.0
Research and development expenses and acquired research and development
Research and development expenses include the following:
• Research and development costs, which are expensed as incurred.
• Milestone payments incurred prior to regulatory approval of the product, which are accrued when the
event requiring payment of the milestone occurs.
Acquired IPR&D expense includes the initial costs of IPR&D projects acquired directly in asset acquisitions,
unless they have an alternative future use.
Income taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and
income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion
of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.