By Bob Steller, Industry Principal – Life Sciences
Achieving a true net price of a product is a challenge for Life Sciences manufacturers. Gross-to-Net (GTN) is not a simple auditing of compliance and deducting a mix of rebates, discounts, and other reductions. In fact, it’s much more than a process and tool. GTN has a significant value for the products you have and the ones you’re about to launch. You can say, it has a profound impact on your entire business.
Don’t put a cookie cutter in the mix.
The greatest deficit you carry is trying to fit your accruals into a cookie-cutter process. And if you think a link of well-thought spreadsheets is original and therefore a solid option, think again. Your 1 or 2 dozen linked spreadsheets each department labored over will eventually make for a harried CFO and a recipe for disaster in achieving accuracy. As pricing complexities grow, you’ll realize (if you haven’t already) that GTN is never cookie-cutter. Like recipes, it is tailored to individual preferences, and will work only if the overall formulas and steps are understood.
Do you have the main ingredients for being successful with Gross-to-Net?
Accuracy and transparency in your forecasts and GTN are the cornerstone to good financial and accrual management and a profitable outcome for your current products and new launches. Without these two main ingredients, you’ll find it challenging to be financially successful. Additionally, achieving success must include a focused, targeted strategy, include all departments that utilize GTN data, and management with periodic evaluation to ensure that the execution delivers the targeted results.
It will be difficult to measure and control your reconciliation without these. The challenge becomes more apparent and even critical when managing multiple customers who are paying a different price on the same product. Now, add to the mix multiple markets and channels, making it impossible to recognize a true final price for your product.
Let’s take a closer look on how that might play out.
Why is it important as a company to understand your net price? You need to understand all the costs that are part of the product and its revenue process. This includes:
- Total contract price
- What is netted from the price?
- Fees
- Claims
- Rebates
- General and administrative
- Royalties
What are some of the ways you can use Gross-to-Net functionality to help with managing commercial operations?
- Tactically at the contract level to work contract and bid financials such as:
- Display waterfall analysis of agreement pricing
- Compare to expected pricing and margin
- Define and track compliance to agreement
- Strategically at the brand or customer class level
- Full accrual process management including:
- Develop accrual rates
- Track accrual plan to actuals
- Generate Ledger entries
- Perform accrual true-up against actual expense
The accrual management and some of the modeling that the CFO may be using is more strategic. He’s concerned with looking at data at a certain level. You can also use GTN very tactically in your negotiations. When you’re looking at contract pricing you can use many of these same elements. In negotiations, if you bring all these GTN elements in, even if they aren’t part of the direct negotiations with the customer, you can then answer the all-important question: will this impact my final bottom line. You now have the capabilities to make certain that you aren’t giving away the product.
Too many hands in the cookie jar.
Can you confidently answer: what should I be charging the customer? Those cookies we talked about have a dollar amount attached to them for cost to manufacture. Then you want to sell them at a price to make a profit. The final customer who’s going to eat the cookie wants a fair price. But there’s people in the middle and they want some of the cookies too.
You start with a pack of 100 cookies and the wholesaler takes 5 of them. Then the GPO takes another 5 cookies. Before you know it, the customer isn’t getting the cookies he thought. Or you’re not going to be able to sell them at the price you need to be profitable because everyone has their hand in the cookie jar.
There’s a lot of hungry players…
The customer, the distribution channel, people within the distribution channel, the pharmacy benefits manager or the providers, the pharmacy, the GPO all have their hand in the cookie jar. Suddenly, when you get to the end, the CFO looks inside the cookie jar and there aren’t many cookies left. You soon realize the threat with GTN is not in what you don’t know, it’s what’s hiding in plain sight.
It takes a smart cookie.
When you know you need a new solution for managing GTN, think about this: just because you’ve done it on a mass link of spreadsheets, doesn’t mean you should fit that process into a new solution. If you understand your net price and obtain your data from one single source, your product is in a good position to come out profitable. When it’s time to move on from spreadsheets, there are solutions to make your accrual process successful and help make sure the profit cookie doesn’t crumble.
As complexities grow, your GTN process grows outdated. It’s time to review and ask…is this really meeting our needs? Read Gross To Net: Easy To Say, Not Easy To Do eBook to learn more.
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