Eli Lilly 2007 Annual Report Download - page 25

FINANCIALS
23
than 90 percent of our sales, this is at the time prod-
ucts are shipped to the customer, typically a wholesale
distributor or a major retail chain. The remaining sales
are recorded at the point of delivery. Provisions for dis-
counts and rebates are established in the same period
the related sales are recorded.
We regularly review the supply levels of our sig-
nifi cant products sold to major wholesalers in the U.S.
and in major markets outside the U.S., primarily by
reviewing periodic inventory reports supplied by our
major wholesalers and available prescription volume
information for our products, or alternative approaches.
We attempt to maintain wholesaler inventory levels at
an average of approximately one month or less on a
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. An unusual buying pattern com-
pared with underlying demand of our products outside
the U.S. could also be the result of speculative buying
by wholesalers in anticipation of price increases. 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 dis-
close this in our product sales discussion if the amount
is believed to be material to the product sales trend;
however, we are not always able to accurately quantify
the amount of stocking or destocking.
As a result of restructuring our arrangements with
our U.S. wholesalers in early 2005, reductions occurred
in wholesaler inventory levels for certain products
(primarily Strattera, Prozac, and Gemzar) that reduced
our 2005 sales by approximately $170 million. The
modifi ed structure eliminates the incentive for specula-
tive wholesaler buying and provides us improved data
on inventory levels at our U.S. wholesalers. Wholesaler
stocking and destocking activity historically has not
caused any material changes in the rate of actual prod-
uct returns, which have been approximately 1 percent
of our net sales over the past three years and have not
fl uctuated signifi cantly as a percent of sales.
We establish sales rebate and discount accruals in
the same period as the related sales. The rebate/dis-
count amounts are recorded as a deduction to arrive at
our net sales. Sales rebates/discounts that require the
use of judgment in the establishment of the accrual in-
clude Medicaid, managed care, Medicare, chargebacks,
long-term-care, hospital, patient assistance programs,
and various other government programs. We base
these accruals primarily upon our historical rebate/dis-
count payments made to our customer segment groups
and the provisions of current rebate/discount contracts.
The largest of our sales rebate/discount amounts
are rebates associated with sales covered by Medicaid. In
determining the appropriate accrual amount, we consid-
er our historical Medicaid rebate payments by product as
a percentage of our historical sales as well as any signifi -
cant changes in sales trends, an evaluation of the current
Medicaid rebate laws and interpretations, the percent-
age of our products that are sold to Medicaid recipients,
and our product pricing and current rebate/discount
contracts. Although we accrue a liability for Medicaid
rebates at the time we record the sale (when the prod-
uct is shipped), the Medicaid rebate related to that sale
is typically paid up to six months later. Due to the 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 recog-
nized in the same period as the related sales. In some
large European countries, government rebates are
based on the anticipated pharmaceutical budget defi cit
in the country. A best estimate of these rebates, updated
as governmental authorities revise budgeted defi cits, is
recognized in the same period as the related sale. If our
estimates are not refl ective of the actual pharmaceuti-
cal budget defi cit, we adjust our rebate reserves.
We believe that our accruals for sales rebates and
discounts are reasonable and appropriate based on
current facts and circumstances. Federally mandated
Medicaid rebate and state pharmaceutical assistance
programs (Medicaid) and Medicare rebates reduced
sales by $642.1 million, $571.7 million, and $637.1 mil-
lion in 2007, 2006, and 2005, respectively. A 5 percent
change in the Medicaid and Medicare rebate amounts
we recognized in 2007 would lead to an approximate
$32 million effect on our income before income taxes.
As of December 31, 2007, our Medicaid and Medicare
rebate liability was $308.8 million.
Approximately 75 percent and 85 percent of our
global rebate and discount liability resulted from sales
of our products in the U.S. as of December 31, 2007 and
2006, respectively. The following represents a roll-for-
ward of our most signifi cant U.S. rebate and discount
liability balances, including Medicaid (in millions):
2007 2006
Rebate and discount liability,
beginning of year. . . . . . . . . . . . $ 383.3 $ 379.4
Reduction of net sales
due to discounts and
rebates
1 . . . . . . . . . . . . . . . . . 1,314.1 1,246.1
Cash payments of discounts
and rebates . . . . . . . . . . . . . (1,228.6) (1,242.2)
Rebate and discount liability,
end of year . . . . . . . . . . . . . . . . . $ 468.8 $ 383.3
1Adjustments of the estimates for these rebates and discounts to
actual results were less than 0.3 percent of net sales for each of
the years presented.