Pfizer 2006 Annual Report Download - page 12

10 2006 Financial Report
Financial Review
Pfizer Inc and Subsidiary Companies
as well as asset lives, can materially impact our results of
operations. Accordingly, for significant items, we typically obtain
assistance from third-party valuation specialists. The valuations are
based on information available near the acquisition date and are
based on expectations and assumptions that have been deemed
reasonable by management.
There are several methods that can be used to determine the fair
value of assets acquired and liabilities assumed. For intangible
assets, including IPR&D, we typically use the “income method.”
This method starts with our forecast of all of the expected future
net cash flows. These cash flows are then adjusted to present value
by applying an appropriate discount rate that reflects the risk
factors associated with the cash flow streams. Some of the more
significant estimates and assumptions inherent in the income
method or other methods include: the amount and timing of
projected future cash flows; the amount and timing of projected
costs to develop the IPR&D into commercially viable products; the
discount rate selected to measure the risks inherent in the future
cash flows; and the assessment of the asset’s life cycle and the
competitive trends impacting the asset, including consideration
of any technical, legal, regulatory, or economic barriers to entry,
as well as expected changes in standards of practice for indications
addressed by the asset.
Determining the useful life of an intangible asset also requires
judgment, as different types of intangible assets will have different
useful lives and certain assets may even be considered to have
indefinite useful lives. For example, the useful life of the right
associated with a pharmaceutical product’s exclusive patent will
be finite and will result in amortization expense being recorded
in our results of operations over a determinable period. However,
the useful life associated with a brand that has no patent
protection but that retains, and is expected to retain, a distinct
market identity could be considered to be indefinite and the
asset would not be amortized.
Revenues
Revenue Recognition—We record revenues from product sales
when the goods are shipped and title passes to the customer. At
the time of sale, we also record estimates for a variety of sales
deductions, such as rebates, discounts and incentives, and product
returns. When we cannot reasonably estimate the amount of
future product returns, we record revenue when the risk of
product return has been substantially eliminated.
Deductions from Revenues—Our gross product sales are subject
to a variety of deductions, primarily representing rebates and
discounts to government agencies, wholesalers and managed
care organizations for our pharmaceutical products. These
deductions represent estimates of the related obligations and, as
such, judgment is required when estimating the impact of these
sales deductions on gross sales for a reporting period.
Specifically:
•
In the U.S., we record provisions for pharmaceutical Medicaid,
Medicare and contract rebates based upon our actual
experience ratio of rebates paid and actual prescriptions written
during prior quarters. We apply the experience ratio to the
respective period’s sales to determine the rebate accrual and
related expense. This experience ratio is evaluated regularly to
ensure that the historical trends are as current as practicable.
As appropriate, we will adjust the ratio to better match our
current experience or our expected future experience. In
assessing this ratio, we consider current contract terms, such as
changes in formulary status and discount rates. If our ratio is
not indicative of future experience, our results could be
materially affected.
•
Provisions for pharmaceutical chargebacks (primarily
reimbursements to wholesalers for honoring contracted prices
to third parties) closely approximate actual as we settle these
deductions generally within two to three weeks of incurring the
liability.
•
Outside of the U.S., the majority of our pharmaceutical rebates
are contractual or legislatively mandated, and our estimates are
based on actual invoiced sales within each period; both of
these elements help to reduce the risk of variations in the
estimation process. Some European countries base their rebates
on the government’s unbudgeted pharmaceutical spending
and we use an estimated allocation factor against our actual
invoiced sales to project the expected level of reimbursement.
We obtain third-party information that helps us monitor the
adequacy of these accruals. If our estimates are not indicative
of actual unbudgeted spending, our results could be materially
affected.
•
We record sales incentives as a reduction of revenues at the time
the related revenues are recorded or when the incentive is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar
incentives programs.
Historically, our adjustments to actual have not been material; on
a quarterly basis, they generally have been less than 1.0% of
Pharmaceutical net sales and can result in a net increase to income
or a net decrease to income. The sensitivity of our estimates can
vary by program, type of customer and geographic location.
However, estimates associated with U.S. Medicaid and contract
rebates are most at-risk for material adjustment because of the
extensive time delay between the recording of the accrual and its
ultimate settlement, an interval that can range up to one year.
Because of this time lag, in any given quarter, our adjustments to
actual can incorporate revisions of several prior quarters.
Alliances—We have agreements to co-promote pharmaceutical
products discovered by other companies. Alliance revenues are
earned when our co-promotion partners ship the related product
and title passes to their customer. These revenues are primarily
based upon a percentage of our co-promotion partners’ net
sales. Expenses for selling and marketing these products are
included in Selling, informational and administrative expenses.
Long-Lived Assets
We review all of our long-lived assets, including goodwill and other
intangible assets, for impairment indicators at least annually and we
perform detailed impairment testing for goodwill and indefinite-
lived assets annually and for all other long-lived assets whenever
impairment indicators are present. Examples of those events or
circumstances that may be indicative of impairment include: