Gross-to-Net Roadmap & Calculations 101Branded Pharma Track

November 16, 2016

Murray Kay website: murraythekay.com

email:murraydkay@mac.com

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Unauthorized use and/or duplication of this material without express and written permission from the author is strictly prohibited

GTN Judgment & Estimation Acronyms

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Murray Kay - Professional Experience

Solvay Pharmaceuticals

• Vice President, Finance & CFO (U.S. Pharmaceuticals)

Abbott & AbbVie

• Commercial Controller – Specialty Care

Developing Customized Seminars:

• Pharmaceutical Gross to Net Sales

• Accounting for Non-Accountants

• Forecasting for the Pharmaceutical Industry

• Enhancing Profitability

Pursuing Board of Directors & Teaching Opportunities

Website: murraythekay.com

email:murraydkay@mac.com3

Murray

Kay

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David

Schwimmer

Ray

RomanoTom

Bergeron

Polling question

Who does Murray Kay look or sound like?

a) David Schwimmer

b) Ray Romano

c) Tom Bergeron

Gross to Net Sales Funnel

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Gross Sales (volume X AMP)

Chargebacks

Rebates

Vouchers

Co-pay Cards

ReturnsCash

Discounts

Wholesaler Fees

Polling question

PharmaCompany

Wholesaler

Record the following:

•Gross Sales

•GTN adjustments based

on estimated accrual rates

Identify adjustment

with the highest

gross-to-net

reduction.

a) Chargebacks

b) Rebates

c) Vouchers

d) Co-pay cards

e) Returns

U.S. Branded Sales

Rebates as a % of Gross Sales

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Chargebacks

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ContractedCustomer

PharmaCompany

Wholesaler

Contract for $80

Pharma companies sell directly to certain customers (VA, DOD,

GPOs, Kaiser) at a negotiated contract price

Wholesaler’s acquisition cost exceeds customer contract price

Chargeback is the wholesaler acquisition cost less contract price

Managed Care/Medicare Part D Rebates

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Insurers

Payer

PharmaCompany

Wholesaler

Retail or Specialty Pharmacy

Patient

Rebates to payers in exchange for formulary position

50% government rebate required for Medicare participants

in the Part D Coverage Gap known as the Donut Hole

Medicaid Rebates

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Medicaid provides health coverage to families with low-income,

the indigent, the elderly, & blind and/or disabled

Medicaid Rebate = Basic Rebate + CPI Penalty

+ Supplemental Rebates to States to Get Formulary Access

Basic Rebate is the greater of:

Average Manufacturer’s Price (“AMP”) * 23.1%

or

AMP - Best Price (lowest price offered to eligible customer)

Basic Rebate Simple Definition:

• Greater of 23.1% or highest commercial rebate %

CPI Penalty - additional rebate for price increases greater

than inflation (i.e., current AMP – baseline AMP adjusted for inflation)

Medicaid Rebate Scenarios

Scenario 1 Scenario 2

AMP – January 2010 $1,000 $1,000

CPI-U Dec 2015/CPI-U Dec 2009 1.095 1.095

Baseline AMP With Inflation $1,095 1,095

AMP – March 2016 $1,500 $1,090

CPI Penalty Rebate $405 $0

Lowest Eligible Customer Price $1,050 (30%

rebate or $450)

$900 (17%

rebate or $190)

AMP * 23.1% $347 $252

Basic Rebate $450 $252

Total Rebate $855 $252

% of AMP 57%* 23.1%

Net Price $645 $83810* Before supplemental rebates to states

Triggering Best Price Penalty

“The Law of Unintended Consequences”

Total Medicaid Gross Sales $50,000,000

AMP $1,000

Lowest Eligible Customer Price (20% rebate) $800

Total Medicaid Net Sales (76.9% of gross sales; 23.1% rebate) $38,450,000

Enter Contact With New or Existing Customer 30% Rebate

Gross Sales 3,000,000

Incremental Net Sales ($700 net price) $2,100,000

Total Medicaid Net Sales (70% of gross sales) $35,000,000

Decline in Medicaid Sales $3,450,000

New Customer Rebate vs. Statutory Rate (30% - 23.1%) 6.9% 11

Vouchers

Distributed by reps to HCPs

HCPs provide to patients in lieu of samples

Vouchers are redeemed by patient at

pharmacy for free trial product

Gross sales are offset by GTN adjustment

when product is sold to wholesalers based

on estimated redemption rate of vouchers

Accounting treatment for vouchers differs

from samples and patient assistance

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Co-Pay Cards (excludes government programs)

Distributed to consumers via doctors and

pharmacists & can also be obtained online

Co-pay cards are redeemed by patient at

pharmacy to reduce out-of-pocket costs

• Amount of patient co-pay/deductible reduction is usually capped

Gross sales are reduced based on estimated redemption

rate and average patient cost reduction

Co-pay/deductible reductions are higher in the first quarter

• Higher out-of-pocket costs incurred by patient until deductible is

reached

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Patient Deductible

Patient Cost After Deductible

Maximum Patient Cost Reduction

$1,000 $100 $500

Returns Products generally expire 24-36 months after

date of manufacture

• Lag from date of manufacture to sale 3-6 months

General policy is to accept returns 6 months

before to 12 months after expiry

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Accounting for Returns

Estimate liability based on anticipated returns of

product sold

Liability for returns is difficult to estimate due to:

• Significant time lag

• Limited data on age of retail inventory

• Marketplace dynamics/lifecycle events

• Lack of historical data for launch products

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Liability for Rebates

Payer Claims Pipelinea

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Average Weekly Forecasted Rebates * ~ 2 weeks)

Invoice Received Not Paid

Prescription Dispensed Invoice Not Received (lag)

True-up for difference between invoices

received & previously forecasted rebates

Adjust pipeline for changes in:- Inventory levels - Forecasted demand- Formulary position - Rebate %- Channel mix

a Excludes inventory anticipated to be returned

j

k

No rebate accruals required

on portion of gross sales

determined to be returned

l

m

Average Weekly Forecasted

Rebates * ~ 1-5 weeks

Insurers

Payer

PharmaCompany

Wholesaler

Retail or Specialty Pharmacy

Patient

Liability for Chargebacks

Product Sent

To Customer Pipeline

Average Weekly Forecasted Chargebacks * ~ 2 weeks

Wholesaler CB Invoice Received Not Paid

Product Sent to Customer Wholesaler CB Invoice Not

Received (lag)

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ContractedCustomer

PharmaCompany

Wholesaler

Contract

l

j

k

Volatility in GTN Liabilities – Pipeline (dollars in millions)

Returns – Lower demand due to loss of exclusivity

Changes in pipeline inventory polling question

Rebates – New government regulations increasing rebate %

Co-pay - Impact of higher patient deductibles in first quarter

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End of Q4

End of Q3 Increase

Weekly forecasted rebates, co-pay, & vouchers $800 $800

Weekly forecasted chargebacks $100 $100

Wholesale inventory (weeks) 2.5 2.0 .5 weeks

Retail inventory (weeks) 3.5 3.0 .5 weeks

End of Q4 End of Q3 r $ in millions

Medicaid pipeline inventory – Gross $900 $800 $100

Rebate % 29.1% 23.1% 6%

Pipeline Liability $262 $185 $77

Pipeline Liability – Co-Pay End of Q4 End of Q3 r

Anticipated Redemptions 35,000 32,000 3,000

Average Forecasted Co-Pay Patient Cost Reduction $120 $45 $75

Pipeline Liability $4,200,000 $1,440,000 $2,760,000

Gross-to-Net Estimation Challenges

New product launches

Changes in government regulations

Formulary changes & contract amendments

Outcomes-based contracts & pricing

True-ups for differences between actual & forecasted:

• Channel mix

• Utilization among payers & shifts in lives

• Rebate rates within a channel

Availability of retail & specialty pharmacy pipeline

channel inventory data

Product loss of exclusivity

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Gross-to-Net Estimation Collaboration

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Accounting

Forecasting & Demand Planning

Finance

Sales & Marketing

Managed Care

Pricing

Legal

Contract Management

Channel Summary (dollars in millions)

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Progesterone Product Hepatitis C Product

% of

Business

Gross

Sales

Rebate/Di

scount

% of Gross

Net

Sales

% of

Business

Gross

Sales

Rebate/D

iscount

% of Gross

Net

Sales

Managed

Care 77% 95 -18 -19% 77 59% 462 -168 -36% 294

Medicaid 3% 4 -3 -75% 1 23% 180 -135 -75% 45

VA/DOD/PHS

/Kaiser 5% 6 -4 -67% 2 12% 90 -66 -73% 24

Non-

Contracted 15% 18 0 18 6% 48 0 48

Returns -3 -3 -12 -12

Co-pay Cards 0 0 -3 -3

Cash

Discount -2 -2 -16 -16

Total 100% 123 -30 -25% 93 100% 780 -400 -51% 380

Polling question

Gross-to-Net Roadmap & Calculations - Summary

GTN is complex & volatile

• True-up adjustments can be significant

Accrue GTN adjustments when product is sold based

on channel mix & rebate rates

Commercial rebates can adversely impact Medicaid

Patient cost reductions are higher during the first

quarter until patient deductibles are satisfied

• Q4 pipeline liability is higher

Product returns spike after LOE

Pipeline liability is adjusted based on revised:

• Forecasted demand, rebates, mix & inventory levels

Cross-functional collaboration is paramount 22