Pfizer 2013 Annual Report Download - page 14

Financial Review
Pfizer Inc. and Subsidiary Companies
2013 Financial Report 13
• Outside the U.S., the majority of our pharmaceutical rebates, discounts and price reductions (collectively, sales allowances) are
contractual or legislatively mandated and our estimates are based on actual invoiced sales within each period, which reduces the risk of
variations in the estimation process. In certain European countries, rebates are calculated on the government’s total unbudgeted
pharmaceutical spending or on specific product sales thresholds, and we apply 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.
• For chargebacks, we closely approximate actual as we settle these deductions generally within two to five weeks after incurring the
liability.
• For sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and
practices; returns as a percentage of sales; an understanding of the reasons for past returns; estimated shelf life by product; an estimate
of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns,
such as loss of exclusivity, product recalls or a changing competitive environment.
• For sales incentives, we use our historical experience with similar incentives programs to predict customer behavior.
These deductions represent estimates of the related obligations and, as such, judgment and knowledge of market conditions and practice are
required when estimating the impact of these sales deductions on gross sales for a reporting period. Historically, our adjustments to actual
results have not been material to our overall business. On a quarterly basis, our adjustments to actual results generally have been less than
1% of biopharmaceutical net sales and can result in either a net increase or a net decrease in income. Product-specific rebate charges,
however, can have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments,
experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The
sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with U.S. Medicaid
and performance-based 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 generally 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.
Asset Impairment Reviews
We review all of our long-lived assets, including goodwill and other intangible assets, for impairment indicators throughout the year and we
perform impairment testing for goodwill and indefinite-lived assets annually and for all other long-lived assets whenever impairment indicators
are present. When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the
carrying value of these assets. Our impairment review processes are described in the Notes to Consolidated Financial Statements––Note 1K.
Basis of Presentation and Significant Accounting Policies: Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.
Examples of events or circumstances that may be indicative of impairment include:
• A significant adverse change in legal factors or in the business climate that could affect the value of the asset. For example, a successful
challenge of our patent rights would likely result in generic competition earlier than expected.
• A significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the FDA or other
regulatory authorities could affect our ability to manufacture or sell a product.
• A projection or forecast that demonstrates losses or reduced profits associated with an asset. This could result, for example, from a
change in a government reimbursement program that results in an inability to sustain projected product revenues and profitability. This
also could result from the introduction of a competitor’s product that results in a significant loss of market share or the inability to achieve
the previously projected revenue growth, as well as the lack of acceptance of a product by patients, physicians and payers. For in-
process research and development (IPR&D) projects, this could result from, among other things, a change in outlook based on clinical
trial data, a delay in the projected launch date or additional expenditures to commercialize the product.
Intangible Assets Other than Goodwill
As a result of our intangible asset impairment review work, we recognized a number of impairments of intangible assets other than goodwill.
• In 2013, $803 million, reflecting (i) $394 million of developed technology rights (for use in the development of bone and cartilage)
acquired in connection with our acquisition of Wyeth; (ii) $227 million related to IPR&D compounds; (iii) $109 million of indefinite lived
brands, primarily related to our biopharmaceutical indefinite-lived brand, Xanax/Xanax XR; and (iv) $73 million of other finite-lived
intangible assets, related to platform technology, that no longer have an alternative future use. The intangible asset impairment charges
for 2013 reflect, among other things, updated commercial forecasts and, with regard to IPR&D, also reflect the impact of new scientific
findings and delayed launch dates. The intangible asset impairment charges for 2013 are associated with the following: Specialty Care
($394 million); Established Products ($201 million); Worldwide Research and Development ($140 million); Primary Care ($54 million);
and Consumer Healthcare ($14 million).
• In 2012, $835 million, reflecting (i) $393 million of IPR&D assets, primarily related to compounds that targeted autoimmune and
inflammatory diseases (full write-off) and, to a lesser extent, compounds related to pain treatment; (ii) $175 million related to our
Consumer Healthcare indefinite-lived brand assets, primarily Robitussin, a cough suppressant; (iii) $242 million related to developed
technology rights, a charge composed of impairments of various products, none of which individually exceeded $45 million; and (iv) $25
million of finite-lived brands. The intangible asset impairment charges for 2012 reflect, among other things, the impact of new scientific
findings, updated commercial forecasts, changes in pricing, an increased competitive environment and litigation uncertainties regarding
intellectual property. The impairment charges in 2012 are associated with the following: Worldwide Research and Development ($303
million); Consumer Healthcare ($200 million); Primary Care ($137 million); Established Products ($83 million); Specialty Care ($56
million); and Emerging Markets ($56 million).