Are you focusing on right levers to optimise the Gross to Net equation?
04 February 2019
In today’s rapidly changing healthcare ecosystem, the importance of managing complexity cannot be overemphasised. Managing the cost of commercialising a drug is a critical challenge. From ensuring a product is available on the market to managing regulatory scrutiny and public opinion around containing - and in some cases capping - drug prices requires insight and know how.
The all-important Gross to Net (G2N) concept of drug pricing is squarely in the cross-hairs for pharmaceutical managers and is key to managing drug access and profitability.
G2N is the difference between the list price that a pharma company believes is the fair price for its effort to discover, develop and bring a drug to the market and the net price that a downstream customer is willing to pay for the drug. G2N is the sum total of various invoice discounts, off-invoice rebates and other such incentives to commercialise and drive usage of a drug. Managing this well could mean getting the reach and access to drugs right, while sustaining the pharma supply chain’s ability to do so profitably. While it is undeniably a science that commercial, finance and supply chain managers have been grappling with for some time, we believe there are four key levers which when managed well, bring maximum impact to the G2N position.
1. Distribution strategy
Distribution strategy focuses on channel structure and the scope to maximise product reach and optimise channel costs. Structural decisions, like whether a direct or indirect channel is more effective, or scope decisions, that define market reach, have significant impact on G2N relevant channel costs. For example a highly fragmented distribution channel landscape will result in higher G2N while over reliance on few channel partners may erode the drug manufacturer’s negotiating power leading to higher than optimal discounts on list price.
2. Pricing strategy
Certain drugs tend to eat more into the margin in terms of discounts than others. Identifying and focusing on these products can boost savings. Price sensitivity of therapeutic segments is a key consideration when assessing the pricing strategy for G2N optimisation. While pricing will impact all product segments, discounting and pricing promotions on over the counter (OTC) and generics play a significant role.
3. Alignment of objectives and Key Performance Indicators (KPIs)
Internal KPIs and operational metrics drive organisational behaviour at both global and local market level. Alignment between global and local market KPIs such that local behaviour supports the global organisational strategy is critical in pursuing a G2N optimization initiative. Local operating company general managers must share ownership of the margin in alignment with corporate margin goals and this must tie in with their top line KPIs so any discount or rebate given in the market factors in its overall impact on the margin. Evaluating metrics against internal benchmarks could provide another avenue of insights into potential G2N savings opportunities. For example, questions like ‘how do local market G2N metrics compare to peer markets?’ or ‘how do local market G2N metrics compare to the overall global company average?’ are crucial to understanding specific markets. The same analogy may be applied to comparable brands within therapy areas.
4. Contract terms optimisation
Non-compliance of contract terms could lead to margin dilution and, as such, is an area ripe for review. The impact of a change in contract terms on revenues and margins could be particularly considerable for higher spend contracts. It may help to evaluate whether contracts could be renegotiated into multi-country or organisation-wide to benefit from economies of scale. To better manage net price positioning, when reviewing or renegotiating contracts you should consider how you are factoring in off-invoice discounts, tender and reference pricing and the use of each products clinical differentiation.
What should pharmaceutical businesses do now?
Managing the G2N on a drug is crucial to improving patient reach, access and profitability for pharma companies. This requires focussing on the key levers that have maximum impact. This must also be underpinned by strong management sponsorship, cross-functional and cross-market teaming and the sound use of analytics.
If you would like to find out more please get in touch.