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as part of our various collaborations, including
licensing and development programs. Payments under
these agreements generally become due and payable
upon achievement of certain development, regulatory
or commercial milestones. Because the achievement
of these milestones was not considered probable as
of December 31, 2017, such contingencies have not
been recorded in our financial statements. Amounts
related to contingent milestone payments are not
considered contractual obligations as they are
contingent on the successful achievement of certain
development, regulatory approval and commercial
milestones.
Provided various development, regulatory or
commercial milestones are achieved, we anticipate
that we may pay approximately $110.0 million of
milestone payments in 2018.
Other Funding Commitments
As of December 31, 2017, we have several on-
going clinical studies in various clinical trial stages.
Our most significant clinical trial expenditures are to
CROs. The contracts
with CROs are generally
cancellable, with notice, at our option. We have
recorded accrued expenses of approximately $40.0
million in our consolidated balance sheet for
expenditures incurred by CROs as of December 31,
2017. We have approximately $460.0 million in
cancellable future commitments based on existing
CRO contracts as of December 31, 2017.
Tax Related Obligations
We exclude liabilities pertaining to uncertain tax
positions from our summary of contractual obligations
as we cannot make a reliable estimate of the period
of cash settlement with the respective taxing
authorities. As of December 31, 2017, we have
approximately $77.3 million of net liabilities
associated with uncertain tax positions.
As of December 31, 2017, we have accrued
income tax liabilities of $989.6 million under the
Transition Toll Tax, of which $78.3 million is expected
to be paid within one year. The Transition Toll Tax will
be paid over an eight-year period, starting in 2018,
and will not accrue interest.
Other Off-Balance Sheet Arrangements
We do not have any relationships with entities
often referred to as structured finance or special
purpose entities that
were established for the
purpose of facilitating off-balance sheet
arrangements. As such, we are not exposed to any
financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships. We
consolidate variable interest entities if we are the
primary beneficiary.
Legal Matters
For a discussion of legal matters as of
December 31, 2017, please read Note 21, Litigation,
to our consolidated financial statements included in
this report.
Critical Accounting Estimates
The preparation of
our consolidated financial
statements, which have been prepared in accordance
with accounting principles generally accepted in the
U.S. (U.S. GAAP), requires us to make estimates,
judgments and assumptions that may affect the
reported amounts of assets, liabilities, equity,
revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis
we evaluate our estimates, judgments and
methodologies. We base our estimates on historical
experience and on various other assumptions that we
believe
are reasonable, the results of which form the
basis for making judgments about the carrying values
of assets, liabilities and equity and the amount of
revenues and expenses. Actual results may differ
from these estimates under different assumptions or
conditions. Other significant accounting policies are
outlined in Note 1, Summary of Significant Accounting
Policies, to our consolidated financial statements
included in this report.
Revenue Recognition and Related Allowances
We recognize revenues when all of the following
criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services
have been rendered; our price to the customer is fixed
or determinable; and collectability is reasonably
assured. For additional information on the new
accounting standard for revenues from contracts with
customers please read Note 1, Summary of
Significant Accounting Policies: New Accounting
Pronouncements, to our consolidated financial
statements included in this report.
Product Revenues
Revenues from product sales are recognized
when title and risk of loss have passed to the
customer, which is typically upon delivery. Product
revenues are recorded net of applicable reserves for
discounts and allowances. The timing of distributor
orders and shipments can cause variability in
earnings.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net
of reserves established for applicable discounts and
allowances, including those associated with the
implementation of pricing actions in certain of the
international markets in which we operate. These
reserves are based on estimates of the amounts
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earned or to be claimed on the related sales and are
classified as reductions of accounts receivable (if the
amount is payable to our customer) or a liability (if the
amount is payable to a party other than our
customer). Our estimates take into consideration our
historical experience, current contractual and
statutory
requirements, specific known market events
and trends, industry data and forecasted customer
buying and payment patterns. Actual amounts may
ultimately differ from our estimates. If actual results
vary, we adjust these estimates, which could have an
effect on earnings in the period of adjustment.
In addition to the discounts and rebates
described above and classified as a reduction of
revenue, we also maintain certain customer service
contracts with distributors and other customers in the
distribution channel that provide us with inventory
management, data and distribution services, which
are generally reflected as a reduction of revenue. To
the extent we can demonstrate a separable benefit
and fair value for these services we classify these
payments within selling, general and administrative
expenses.
Concentrations of Credit Risk
The majority of our accounts receivable arise
from product sales in the U.S. and Europe and are
primarily due
from wholesale distributors, public
hospitals and other government entities. We monitor
the financial performance and creditworthiness of our
customers so that we can properly assess and
respond to changes in their credit profile. We continue
to monitor these conditions, including the volatility
associated with international economies and the
relevant financial markets, and assess their possible
impact on our business. Credit and economic
conditions in the E.U. continue to remain uncertain,
which has, from time to time, led to longer collection
periods for our accounts receivable and greater
collection risk in certain countries.
Where our collections continue to be subject to
significant payment delays due to government funding
and reimbursement practices and a portion of these
receivables are routinely being collected beyond our
contractual payment terms and over periods in excess
of
one year, we have discounted our receivables and
reduced related revenues based on the period of time
that we estimate those amounts will be paid, to the
extent such period exceeds one year, using the
country’s market-based borrowing rate for such
period. The related receivables are classified at the
time of sale as non-current assets.
To date, we have not experienced any significant
losses with respect to the collection of our accounts
receivable. If economic conditions worsen and/or the
financial condition of our customers were to further
deteriorate, our risk of collectability may increase,
which may result in additional allowances and/or
significant bad debts.
For additional information on our concentration
of credit risk associated with our accounts receivable
balances, please read the subsection entitled “Credit
Risk” in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included in this report.
Capitalization of Inventory Costs
We capitalize inventory costs associated with
our products prior to regulatory approval, when, based
on management’s judgment, future commercialization
is considered probable and the future economic
benefit is expected to be realized. We consider
numerous attributes in
evaluating whether the costs
to manufacture a particular product should be
capitalized as an asset. We assess the regulatory
approval process and where the particular product
stands in relation to that approval process, including
any known safety or efficacy concerns, potential
labeling restrictions and other impediments to
approval. We evaluate our anticipated research and
development initiatives and constraints relating to the
product and the indication in which it will be used. We
consider our manufacturing environment including our
supply chain in determining logistical constraints that
could hamper approval or commercialization. We
consider the shelf life of the product in relation to the
expected timeline for approval and we consider patent
related or contract issues that may prevent or delay
commercialization. We also base our judgment on the
viability of commercialization, trends in the
marketplace and market acceptance criteria. Finally,
we consider the reimbursement strategies that may
prevail with respect to the product and assess the
economic benefit that we are likely to realize. We
expense previously capitalized costs related to pre-
approval inventory
upon a change in such judgment,
due to, among other potential factors, a denial or
significant delay of approval by necessary regulatory
bodies. All changes in judgment in relation to pre-
approval inventory have historically been insignificant.
Acquired Intangible Assets, including In-process
Research and Development (IPR&D)
When we purchase a business, the acquired
IPR&D is measured at fair value, capitalized as an
intangible asset and tested for impairment at least
annually, as of October 31, until commercialization,
after which time the IPR&D is amortized over its
estimated useful life. If we acquire an asset or group
of assets that do not meet the definition of a
business under applicable accounting standards, the
acquired IPR&D is expensed upon its acquisition
date. Future costs to develop these assets are
recorded to research and development expense as
they are incurred.