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US dollar, its reporting currency. This gives rise to both transaction exposure
in subsidiary financial statements due to foreign currency denominated transactions
and translation exposure from converting non-US dollar subsidiary results and
balance sheets into the Group’s US dollar consolidated financial statements. The
Group’s results have not been significantly affected by inflation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Novartis
Group’s principal accounting policies are set out in note 1 of the Group’s consolidated
financial statements and conform to International Financial Reporting Standards
(IFRS). Significant judgments and estimates are used in the preparation of the
consolidated financial statements which, to the extent that actual outcomes and
results may differ from these assumptions and estimates, could affect the accounting
in the areas described in this section.
REVENUE
Novartis recognizes product sales when title and risk of loss for the products
are transferred to the customer. At the time of sale, Novartis also records estimates
for a variety of sales deductions, including rebates, discounts and incentives,
and product returns. Sales deductions are reported as a reduction of revenue.
DEDUCTIONS FROM REVENUES: As is typical in the pharmaceutical
industry, Novartis’ gross sales are subject to various deductions, primarily comprised
of rebates and discounts to retail customers, government agencies, wholesalers
and managed health care organizations. These deductions represent estimates of
the related obligations, requiring the use of judgment when estimating the impact
of these sales deductions on gross sales for a reporting period. These adjustments
are reported as a reduction of Gross Sales to arrive at Net Sales.
The following briefly describes the nature of each deduction and how the deduction
is estimated. The US market has the most complex arrangements related to revenue
deductions. However, in a number of countries outside the U.S., including major
European countries, Novartis provides rebates to government entities. These rebates
are often legislatively mandated. Specific references are made to the US market,
and where applicable, to the Pharmaceuticals Division’s US subsidiary, Novartis
Pharmaceuticals Corporation (NPC): | •
| The US Medicaid program is a
state government-administered program that uses state and federal funds to provide
assistance to certain vulnerable and needy individuals and families. In 1990,
the Medicaid Drug Rebate Program was established to reduce state and federal expenditures
for prescription drugs. Under the rebate program, certain Novartis subsidiaries
have signed agreements to provide a rebate on drugs paid for by a state. Provisions
for estimating Medicaid rebates are calculated |
| | using
a combination of historical experience, product and population growth, price increases,
the impact of contracting strategies and specific terms in the individual state
agreements. These provisions are adjusted based upon established processes for
refiling data with individual states. For Medicaid, the calculation of rebates
involves interpretation of relevant regulations, which are subject to challenge
or change in interpretative guidance by government authorities. Since Medicaid
rebates are typically billed up to six months after the products are dispensed
to patients, any rebate adjustments may involve revisions of provisions for several
periods. | • | Novartis
subsidiaries in the US participate in prescription drug savings programs (industry
and government sponsored) that offer savings to eligible patients. These savings
vary based on a patient’s current drug coverage and personal income levels. Provisions
for the subsidiaries’ obligations under these programs are based on historical
experience, trend analysis and current program terms. On January 1, 2006, an additional
prescription drug benefit will be added to the US Medicare program. Individuals
that have dual Medicaid/Medicare drug benefit eligibility will have their Medicaid
prescription drug coverage replaced on January 1, 2006 by the new Medicare Part
D coverage, provided through private prescription drug plans. The change will
lead to a significant shift of plan participants between programs in which the
subsidiaries participate. The estimated impact of this shift that is related to
2005 sales has been reflected in Novartis’ sales accruals at the end of 2005. | | • | Wholesaler
chargebacks relate to contractual arrangements that certain Novartis subsidiaries
have with several indirect customers in the US to sell products at prices that
are lower than the list price charged to wholesalers. A wholesaler chargeback
represents the difference between the invoice price to the wholesaler and the
indirect customer’s contract discount price. Provisions for estimating chargebacks
are calculated using a combination of factors such as historical experience, product
growth rates and the specific terms in each agreement. The subsidiaries account
for wholesaler’s chargebacks by reducing accounts receivable. Wholesaler chargebacks
are generally settled within three months of incurring the liability. | | • | Customer
rebates are offered to key managed health care plans, group purchasing organizations
and other direct and indirect customers to sustain and increase Novartis product
market share. These rebate programs provide that the customer receive a rebate
after attaining certain performance parameters relating to product purchases,
formulary status and/or pre-established market share milestones relative to competitors.
Since rebates are contractually agreed upon, rebates are estimated based on the
specific terms in each agreement, historical experience and product growth rates.
Novartis considers the sales performance of products subject to managed health
care rebates and other con- |
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