Pfizer 2010 Annual Report Download - page 23

Financial Review
Pfizer Inc. and Subsidiary Companies
Our policy relating to the supply of pharmaceutical inventory at domestic wholesalers, and in major international markets, is to
generally maintain stocking levels under one month on average and to keep monthly levels consistent from year to year based on
patterns of utilization. We historically have been able to closely monitor these customer stocking levels by purchasing information
from our customers directly or by obtaining other third-party information. We believe our data sources to be directionally reliable but
cannot verify their accuracy. Further, as we do not control this third-party data, we cannot be assured of continuing access. Unusual
buying patterns and utilization are promptly investigated.
As is typical in the pharmaceutical industry, our gross product sales are subject to a variety of deductions, that are generally
estimated and recorded in the same period that the revenues are recognized, and primarily represent rebates and discounts to
government agencies, wholesalers, distributors and managed care organizations for our pharmaceutical products. 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.
Certain deductions from revenues follow:
YEAR ENDED DECEMBER 31,
(BILLIONS OF DOLLARS) 2010 2009 2008
Medicaid and related state program rebates(a) $1.3 $0.7 $0.5
Medicare rebates(a) 1.3 0.9 0.8
Performance-based contract rebates(a), (b) 2.6 2.3 2.1
Chargebacks(c) 3.0 2.3 1.9
Total $8.2 $6.2 $5.3
(a) Rebates are product-specific and, therefore, for any given year are impacted by the mix of products sold.
(b) Performance-based contracts are with managed care customers, including health maintenance organizations and pharmacy benefit managers, who
receive rebates based on the achievement of contracted performance terms for products.
(c) Chargebacks primarily represent reimbursements to wholesalers for honoring contracted prices to third parties.
The rebates and chargebacks for 2010 were higher than 2009, primarily as a result of:
•the inclusion of rebates and chargebacks related to legacy Wyeth products;
•the impact of increased Medicaid rebate rates due to the U.S. Healthcare Legislation, in addition to higher rates for certain products that
are subject to rebates; and
•an increase in chargebacks for our branded products as a result of increasing competitive pressures and increasing sales for certain
branded products subject to chargebacks,
partially offset by, among other factors:
•changes in product mix; and
•the impact on chargebacks of decreased sales within our generics business.
Our accruals for Medicaid rebates, Medicare rebates, performance-based contract rebates and chargebacks were $3.0 billion as of
December 31, 2010 and $2.1 billion as of December 31, 2009, and primarily are all included in Other current liabilities.
Revenues by Business Segment
Effective with the acquisition of Wyeth, we operate in the following two distinct commercial organizations, which constitute our two
business segments:
•Biopharmaceutical consists of the Primary Care, Specialty Care, Oncology, Established Products and Emerging Markets units and
includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain,
infectious and respiratory diseases, urogenital conditions, cancer, eye diseases and endocrine disorders, among others.
Biopharmaceutical’s segment profit includes costs related to research and development, manufacturing, and sales and marketing
activities that are associated with the products in our Biopharmaceutical segment.
•Diversified includes Animal Health products and services that prevent and treat diseases in livestock and companion animals,
including vaccines, parasiticides and anti-infectives; Consumer Healthcare products that include over-the-counter healthcare products
such as pain management therapies (analgesics and heat wraps), cough/cold/allergy remedies, dietary supplements, hemorrhoidal
care and personal care items; Nutrition products that consist mainly of infant and toddler nutritional products; and Capsugel, which
represents our capsule products and services business. Diversified’s segment profit includes costs related to research and
development, manufacturing, and sales and marketing activities that are associated with the products in our Diversified segment.
2010 Financial Report 21