| | | | tract
discounts and levels of inventory in the distribution channel and adjusts the
provision periodically to reflect actual experience. | | • | In
order to evaluate adequacy of ending provision balances, Novartis uses both internal
and external estimates of the level of inventory in the distribution channel and
the rebate claims processing lag time. External data sources include periodic
reports of wholesalers and third party market data purchased by Novartis. Management
internally estimates the inventory level in the retail channel and in transit.
| | • | Where
a product with right of customer returns is sold, Novartis records a provision
for estimated sales returns through a comparison of historical return data to
related sales. Other factors are also considered, such as product recalls and,
in the case of NPC, introductions of generic products. In the US, historical rates
of return are utilized and are adjusted for known or expected changes in the marketplace
when appropriate. Sales returns amount to approximately 1% of gross product sales.
| | • | The
policy of Novartis relating to supply of pharmaceutical products is to maintain
inventories on a consistent level from year to year based on the pattern of consumption.
A process exists at NPC to monitor on a monthly basis inventory levels at wholesalers
based on gross sales volume, prescription volumes based on third party data and
information received from the key wholesalers. Based on this information, the
inventories on hand at wholesalers and other distribution channels in the US are
estimated to be approximately one month at December 31, 2005. Novartis believes
the third party data sources of information are sufficiently reliable, however
its accuracy cannot be verified. | | • | At
the end of 2005, NPC was engaged in negotiations concerning amendments to existing
agreements with US pharmaceutical |
| | | | wholesalers.
These potential agreements cover items such as product returns, timing of payment,
processing of chargebacks, provision of inventory data and the quantity of inventory
held by the respective wholesaler. These agreements, if finalized during 2006,
would provide a financial disincentive for these wholesalers to purchase quantities
of product in excess of what is necessary to meet current demand, and should help
to create a more efficient pharmaceutical supply chain. | | • | Cash
discounts are offered to customers in the US and certain other countries to encourage
prompt payment. Cash discounts, which are typically 2% of gross sales in the US,
are accrued at the time of invoicing. | | • | Shelf-stock
adjustments are generally granted to customers based on the existing inventory
of a customer following decreases in the invoice or contract price of the related
product. Provisions for shelf-stock adjustments, which are primarily relevant
within the Sandoz Division, are determined at the time of the price decline or
at the point of sale if a price decline is reasonably estimable and are based
on estimated inventory levels expected to be subject to price adjustments. | | • | Other
sales discounts, such as consumer coupons and discount cards, are also offered.
These discounts are recorded at the time of sales or when the coupon is issued
and estimated utilizing historical experience and the specific terms for each
program. | | • | Discounts,
rebates or other deductions shown on the invoice are generally recorded directly
as a reduction in the gross to net sales value and do not pass through the provision
account. |
The following table shows, the worldwide
extent of rebates made and payment experiences for Novartis: | |
