Pfizer 2011 Annual Report Download - page 60

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
G. 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 sales rebates, discounts and incentives, and
product returns. When we cannot reasonably estimate the amount of future product returns and/or other sales deductions, we record
revenues when the risk of product return and/or additional sales deductions have been substantially eliminated. We record sales of
certain of our vaccines to the U.S. government as part of the Pediatric Vaccine Stockpile program; these rules require that for fixed
commitments made by the U.S. government, we record revenues when risk of ownership for the completed product has been
passed to the U.S. government. There are no specific performance obligations associated with products sold under this program.
Deductions from Revenues––As is typical in the biopharmaceutical industry, our gross product sales are subject to a variety of
deductions that generally are 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 with respect to our
biopharmaceutical products. These deductions represent estimates of the related obligations.
Specifically:
•In the U.S., we record provisions for pharmaceutical Medicaid, Medicare and contract rebates based upon our 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. In addition, to account for the impacts of the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act (together, U.S. Healthcare Legislation), we also consider the increase in minimum rebate
and extension of Medicaid prescription drug rebates for drugs dispensed to enrollees. We estimate discounts on branded prescription
drug sales to Medicare Part D participants in the Medicare “coverage gap,” also known as the “doughnut hole,” based on historical
experience of beneficiary prescriptions and consideration of the utilization that is expected to result from the new discount in the
coverage gap. As appropriate, we will adjust these ratios to better match our current experience or our expected future experience. For
contract rebates, we also consider current contract terms, such as changes in formulary status and discount rates.
•Outside the U.S., the majority of our pharmaceutical rebates, discounts and price reductions 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 (based on historical payments) and total revenues by country against our actual invoiced sales to
project the expected level of reimbursement. We obtain third-party information that helps us to monitor the adequacy of these accruals.
•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 five weeks of incurring the liability.
•Provisions for pharmaceutical returns are based on a calculation for each market that incorporates 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. Generally, returned
products are destroyed, and customers are refunded the sales price in the form of a credit.
•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.
Our accruals for Medicaid rebates, Medicare rebates, performance-based contract rebates and chargebacks were $3.3 billion as of
December 31, 2011, and $3.0 billion as of December 31, 2010, and substantially all are included in Other current liabilities.
Amounts recorded for sales deductions can result from a complex series of judgments about future events and uncertainties and
can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see
Note 1C. Significant Accounting Policies: Estimates and Assumptions.
Taxes collected from customers relating to product sales and remitted to governmental authorities are presented on a net basis; that
is, they are excluded from Revenues.
Collaborative Arrangements—Payments to and from our collaboration partners are presented in our consolidated statements of
income based on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable
accounting guidance. Under co-promotion agreements, we record the amounts received from our partners as alliance revenues, a
component of Revenues, when our co-promotion partners are the principal in the transaction and we receive a share of their net
sales or profits. Alliance revenues are recorded when our co-promotion partners ship the product and title passes to their customers.
The related expenses for selling and marketing these products are included in Selling, informational and administrative expenses. In
collaborative arrangements where we manufacture a product for our partner, we record revenues when our partner sells the product
and title passes to its customer. All royalty payments to collaboration partners are recorded as part of Cost of sales.
2011 Financial Report 59