The challenges of gross-to-net functions in life sciences

There are a myriad of challenges and considerations pharmaceutical manufacturers experience in financial reporting, as well as formulating major business decisions relevant to product pricing, commercial contracting and assessing the impact of new legislations or changes in the distribution channel. One critical and common aspect that poses significant challenges is developing a strong gross-to-net (GTN) function. GTN represents the difference between a pharmaceutical manufacturer's gross sales revenue and the net revenue that is recognized after accounting for various sales deductions and adjustments. This process is crucial for understanding the true financial performance of a pharmaceutical product and recognizing revenue appropriately, but it is laden with complexities and uncertainties. The following explores some of the major challenges faced by pharmaceutical manufacturers in accurately calculating, reporting, and relying on gross-to-net figures.

Revenue recognition points

One of the primary challenges associated with GTN is ensuring an in-depth understanding of the various revenue recognition points (RRP) within the distribution channel while also considering compliance with revenue recognition accounting standards such as ASC 606 and/or IFRS -15 (Revenue from Contracts with Customers). Revenue recognition refers to the process of identifying when and how revenue should be recognized in a company's financial statements. For pharmaceutical manufacturers, revenue recognition is typically complex due to a variety of factors such as sales discounts, rebates, chargebacks, product returns and other contractual obligations that can impact net revenue. The various RRP within the distribution channel are key to determining the appropriate timing and estimation methodologies for the various commercial and government sales deductions and adjustments a company is subject to, which also significantly impact revenue recognition.

The challenge of cost

Understanding costs within the product supply channel also creates major challenges in calculating gross-to-net. These challenges stem from the intricate and evolving nature of the pharmaceutical market. Manufacturers must navigate a multitude of pricing contracts and rebate programs with various stakeholders, such as government payers, private insurers, pharmacy benefit managers (PBMs) and wholesalers. Each of these entities has different reimbursement mechanisms, formulary requirements and pricing agreements that impact final net revenue. Tracking and accounting for the costs associated with these contracts and programs can be difficult and often requires a sophisticated set of assumptions and processes to forecast, true-up and adjust forecasting methods on an ongoing basis while ensuring compliance and accuracy.

Regulations, regulations, regulations

The ever-changing regulatory landscape adds another layer of complexity to the gross-to-net calculation process. Pharmaceutical manufacturers must comply with a myriad of federal and state regulations, including those associated with the Medicaid and Medicare programs, the 340B Drug Pricing Program and associated government price reporting requirements. Each of these programs has its own set of rules and regulations, which must be carefully followed to avoid penalties and ensure accurate reporting. Navigating these regulations, interpreting complex guidelines and implementing robust compliance systems can be a significant challenge for manufacturers, and the programs themselves can have a direct impact on GTN.

The final hurdle

Another challenge lies in estimating and accounting for various deductions, such as rebates, chargebacks, discounts and returns. Rebates, in particular, are a substantial component of gross-to-net calculations as they represent a portion of the product's revenue that is returned to payers or PBMs. Estimating the appropriate rebate reserves and accounting for their impact on net revenue requires accurate sales data, forecasting models and knowledge of the complex rebate landscape. Manufacturers must also consider chargebacks, which are discounts offered to wholesalers or distributors based on the difference between list price and the discounted price offered to payers. These deductions must be carefully tracked, calculated and reported to provide an accurate picture of net revenue.

The path forward?

To overcome these challenges, pharmaceutical manufacturers increasingly rely on strong data analytics models that incorporate in-depth knowledge of their products, patient prescribing habits, sales, inventory levels, dispensing data, rebate submissions and other key data points from customers within the supply channel. These models can be used to apply sophisticated assumptions to streamline the gross-to-net calculation and reporting process, improve accuracy and enhance compliance. By leveraging data analytics, manufacturers can gain insights into sales trends, pricing strategies and reimbursement patterns, allowing for more accurate forecasting and estimation of deductions.

Calculating and reporting gross-to-net figures in the pharmaceutical industry is a complex and challenging endeavor. Manufacturers must navigate a multitude of pricing contracts, rebate programs and regulatory requirements while accurately estimating and accounting for various deductions. The evolving market dynamics and global nature of the industry further compound these challenges. However, with the adoption of strong data analytics and in-depth knowledge of the product and related distribution channel, manufacturers can enhance their gross-to-net calculation process, improve accuracy and gain valuable insights into their financial performance.