Strategies for Forecasting and Grossto-Net (GTN) Estimates in a Fluid and Fast-Paced Environment Gaining efficiencies through E2E Process Optimization March 21, 2016 1 Copyright 2016 Deloitte Development LLC. All rights reserved.
Agenda Topic Overview & Key Challenges GTN Process Assessment Identify areas of risk & assess severity Identify key stakeholders Current state assessment Defining a future state Q&A 2 Copyright 2016 Deloitte Development LLC. All rights reserved.
Disclaimer This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. 3 Copyright 2016 Deloitte Development LLC. All rights reserved.
Overview
Overview To recognize revenue when risk of loss transfers, an entity must be able to reasonably estimate any potential future adjustments to the price of a product sale that is subject to such adjustment The estimation process generally relies on evaluation of the following factors: Historical information on chargebacks and rebates Customer-specific pricing information Customer inventory levels Product pricing in reseller arrangements Demand and customer mix GTN optimization is contingent on the competency and ability of resources evaluating transactional data used to support estimates across the end to end GTN process. 5 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Process Map The end to end GTN process requires inputs and key decision from various departments across the organization. These cascading dependencies must be recognized in order to optimize GTN. Marketing Trade GTN Process Finance Accounting Dispensed Unit Forecast Responsible: Brand Analyst Accountable: Dir. Marketing Patient Access Assumptions Responsible: Brand Manager Accountable: GM; Dir. Marketing Reconciled Gross Sales Responsible: Trade Dir. Accountable: GM Gross Sales Forecast by Major Customer Responsible: Trade Analyst Accountable: Dir. Rx Analytics Trade/Channel Cost Forecast Responsible: Finance Analyst Accountable: Trade Dir.; Finance Dir. Return Reserve Forecast Responsible: Finance Analyst Accountable: Finance Dir. Accounting Actuals/True Ups Responsible: Accounting Analyst Accountable: Dir. Acct. & Reporting Patient Rebate Card Responsible: Brand Analyst Accountable: Dir. Marketing Returns Forecast Responsible: Trade Analyst Accountable: Trade Dir. Patient Access Forecast Responsible: Finance Analyst Accountable: Finance Dir. Managed Care Rebate Assumptions Responsible: Market Access Dir. Accountable: GM Accrual Rates & Gross-to-Net Model Responsible: Finance Analyst Accountable: Finance Dir. 6 Copyright 2016 Deloitte Development LLC. All rights reserved.
Poll question #1 What type of GTN risk is most impactful to your organization? A) Strategic B) Operational C) Financial D) Legal and regulatory 7 Copyright 2016 Deloitte Development LLC. All rights reserved.
Key Challenges
GTN Landscape The current landscape exposes pharmaceutical companies to increasing strategic, operational, financial, and regulatory risk due to evolving internal and external pressures. Many companies are responding to this risk by taking a conservative approach to GTN estimation and directly impacting their profitability and forecasting capabilities. Risk Strategic Operational Financial Legal & Regulatory Technology Key Challenges Pricing pressures Dynamic customer and payer landscape Minimal cross-functional alignment & coordination Unclear governance models Manually intensive calculations Data scalability & reliability Contract policy & effectiveness Health Care Reform Increasing competition Lack of standardized methodologies Actual to forecasted variances Audit effectiveness & controls environment Disparate systems infrastructure and data integrity Evaluating the end-to-end Gross-to-Net process across the organization provides companies with opportunities to improve their bottom line. 9 Copyright 2016 Deloitte Development LLC. All rights reserved.
Poll question #2 What is the biggest challenge in the GTN landscape for your business? A) Technology B) Lack of cross functional communication C) Forecasted to actual variances D) Pricing pressures and payer landscape 10 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Process Assessment
Why is a process assessment important? 1. Identifies areas of risk Definition of risk 2. Assesses the severity of the identified risks 3. Identifies interdependencies and gaps in current state process Breakdowns in the process increase risk and may increase financial risk by affecting the bottom line 4. Allows management to identify, resolve, and implement enhanced processes for optimized Gross-to-Net management 12 Copyright 2016 Deloitte Development LLC. All rights reserved.
Why is a process assessment important? (cont.) An effective process assessment: Provides transparency into GTN risk factors by identifying inputs or interdependencies in the end to end process o Enables companies to redefine their estimation process: Optimizes the financial close process Identifies assumptions to models and their range of sensitivity Standardizes complex processes Aids in the design of proper controls Monitors the operating effectiveness of controls o Shifts resources from preparation of Gross-to-Net accruals and adjustments and emphasizes analysis to provide better forecasting capabilities 13 Copyright 2016 Deloitte Development LLC. All rights reserved.
Process Assessment Key Activities Identify Assess Benchmark 1 2 3 4 Identify areas within the estimation process that drive estimate sensitivity (i.e., Areas of Risk ) Identify key stakeholders and governance model across the end-to-end GTN Process Assess current state process Benchmark current state against leading practices and management s strategy to identify gaps 14 Copyright 2016 Deloitte Development LLC. All rights reserved.
Identify Areas of Risk and Assess Severity Key Activity Identify pain points in the end to end process What are Areas of Risk? Definition Key Factors Risks should be defined as areas within the your process that can drive variance. Risks should be specific to your methodology, product portfolio, and contracting strategy Identified through a comprehensive assessment of assumptions and inputs to the GTN Model Key assumptions to the model The inputs to the GTN model, and the ability to validate such data Demand estimates Channel inventory Risk assessment is an evolving process 15 Copyright 2016 Deloitte Development LLC. All rights reserved.
The GTN Risk Assessment is ever evolving Risk assessment is an ongoing process resulting from an ever-changing legislative and competitive landscape Legislative Landscape (select items since 2008) Managed Medicaid Coverage Gap Medicaid expansion Branded Prescription Drug Fee (General & Administrative expense) Competitive Landscape Growth in specialty market Growing generic competition Success in key areas of therapy (i.e., Oncology) Wholesaler and retail market activity 16 Copyright 2016 Deloitte Development LLC. All rights reserved.
Risk Assessment Considerations A comprehensive risk assessment requires consideration of internal and external factors of key inputs to management s GTN estimation process. Risk at the product, class of trade, and contract level Unforeseen events Manual calculations maintained within Excel Documentation / auditability of calculations and assumptions Comprehensive Risk Assessment Defined methodology Source data systems and accessibility 17 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Risk Assessment Example Pharmaceutical companies who employ the income statement method calculate a discount rate to apply to current period sales. The forecasted rate may differ from actual results. Demand Sales 1 Medicare Medicaid Commercial Chargebacks Portfolio of Plans Portfolio of States Portfolio of Plans Entity Portfolio Identified Risk: 1 Financial The estimated mix per class of trade varies from actual results. Mix by class of trade is a common type of financial risk in the GTN landscape. However, to fully assess risk, we must consider the magnitude of risk. 18 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Risk Assessment Example 1: Commercial Rebates Assume the actual discount rate is 6% as opposed to the blended forecasted rate of 5.5%. 1 Commercial Plan A Plan B Plan C Plan D 5% 6% 4% 7% Discount Rate Discount Rate Discount Rate Discount Rate Identified Risk: 1 The estimated mix per class of trade varies from actual results. As the discount rate is relatively consistent across plans, the risk is focused on variability between actual and forecasted results. 19 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Risk Assessment Example 2: Commercial Risk Assume the forecasted rate is 15.5% and actual discount rates by plan range from 5% - 85%. 1 Commercial Plan A Plan B Plan C Plan D 2 5% 60% 30% 85% Discount Rate Discount Rate Discount Rate Discount Rate Identified Risks: 1 The estimated mix per class of trade varies from actual results. 2 The allocation of the commercial rebates at the plan level varies from actual results. The wide range of discount rates increases the risk of variability as shifts in the discount rate at the plan level can affect the allocation methodology. 20 Copyright 2016 Deloitte Development LLC. All rights reserved.
GTN Risk Assessment Example 2: Commercial Risk (cont.) Assume the forecasted rate is 15.5% and actual discount rates by plan range from 5% - 85%. Plan Forecasted Rate Actual Rate Sales* Variance* Plan A 20.00% 5% $500 $75.00 Plan B 20.00% 60% $250 ($100.00) Plan C 20.00% 30% $400 ($40.00) Plan D 20.00% 85% $100 ($65.00) Total ($130.00) ** In millions: Identified Risk: 12 As the actual discount rates vary significantly per plan, there is a larger possibility of variances as illustrated above. 21 Copyright 2016 Deloitte Development LLC. All rights reserved.
Poll question #3 How collaborative is strategy development from GTN learnings? A) Performed in silo B) Finance and business units collaborate C) Largely finance driven D) Organization-wide 22 Copyright 2016 Deloitte Development LLC. All rights reserved.
Process Assessment Key Activities Identify Assess Benchmark 1 2 3 4 Identify areas within the estimation process that drive estimate sensitivity (i.e., Areas of Risk ) Identify key stakeholders and governance model across the end-to-end GTN Process Assess current state process Benchmark current state against leading practices and management s strategy to identify gaps 23 Copyright 2016 Deloitte Development LLC. All rights reserved.
How to Identify Key Stakeholders Key Activity Identify key stakeholders and governance model across the end-to-end GTN Process Who are key stakeholders? Definition Identify interactions and relevant documents provided for review by key stakeholders Systems environment, master data, availability and access across functions The define roles and responsibilities around the validation of internal and industry/external data* Key Factors Conduct detailed process walkthroughs with stakeholders to identify interactions and define roles and responsibilities End-to-end view of the process Define who owns certain components to the estimate Consider validation of calculation components and sensitive assumptions *Internal processed claims, demand estimates, and contract projection Industry/external script data, wholesaler inventory, retailer inventory, etc. 24 Copyright 2016 Deloitte Development LLC. All rights reserved.
Identify Key Stakeholders (cont.) Industry trends show that the GTN process is heavily siloed across organizations. 2013 How collaborative is developing strategy from GTN learnings? 20% Done in silos 34% 54% 0% 20% 40% 60% Finance & BU's Largely Finance Organization wide Interaction and collaboration can be fostered through: Governance Cross-functional governance, standard operating procedures, and policies Financial reporting Integrated financial reporting controls and procedures Data Cross-functional data integration and advanced analytical tools Systems integration and automation Organizational design Clearly defined roles, responsibilities, decision rights, and accountability Aligned performance metrics and incentives 25 Copyright 2016 Deloitte Development LLC. All rights reserved.
Identify Key Stakeholders Example: Managed Care Rebates The end-to-end process for Managed Care Rebates involves inputs, data points, and cross functional decision making. Changes in wholesaler acquisition cost (WAC), distribution, sales forecasts, claims processing, and marketing strategies can all have effects on the GTN process. Supply chain/ distribution Sales Marketing/ branding Claims processing Gross to Net Financial planning & analysis Pricing and contracting Managed markets operations Account management Technological dependences increases the complexity of cross functional dependencies in the end-to-end process. 26 Copyright 2016 Deloitte Development LLC. All rights reserved.
Process Assessment Key Activities Identify Assess Benchmark 1 2 3 4 Identify areas within the estimation process that drive estimate sensitivity (i.e., Areas of Risk ) Identify key stakeholders and governance model across the end-to-end GTN Process Assess current state process Benchmark current state against leading practices and management s strategy to identify gaps 27 Copyright 2016 Deloitte Development LLC. All rights reserved.
Current State Assessment Assess current process, including controls and technology infrastructure, from transactional data recording to reporting 1 Inputs 2 3 Process Outputs 28 Copyright 2016 Deloitte Development LLC. All rights reserved.
Current State Assessment: Inputs The first step of assessing the current state is to evaluate the data used to estimate GTN liabilities Internal Data External Data Assumptions & Variables Processed claims by class of trade Government pricing calculations Rebates, chargebacks, off-contract discounts Sales data indirect and direct unit sales Product master Pricing master Script / Rx lives data Retail inventory information Wholesaler 852 data Out movement / 867 data 340B data GPO / Specialty utilization Palmetto Coverage Gap utilization Overall brand demand Sales mix by class of trade Pull through and claim utilization Open liabilities at the state / plan level for all open periods Inventory days on hand Systems infrastructure Data extraction Auditability Key Considerations Ownership of data Data integrity Controls environment It is imperative to identify the use of source data across the organization. 29 Copyright 2016 Deloitte Development LLC. All rights reserved.
Current State Assessment: Process After inputs have been identified, management should evaluate the current GTN forecasting methodology Data Validation Demand sales Mix assumption Ad-hoc data extraction completeness / accuracy risk Modeling & Reserve Methodology Discount rate calculation Pipeline methodology & inventory days calculations Prior period true-ups to actual Lag assumption / cycle time Timing of estimation / financial close calendar Key Considerations Systems infrastructure Data extraction Auditability Ownership of data Data integrity Controls environment Methodology varies by channel and by product and should be considered individually and in the aggregate to identify interdependencies / gaps within the endto-end process. 30 Copyright 2016 Deloitte Development LLC. All rights reserved.
Current State Assessment: Outputs The quality of outputs of the end-to-end process should be evaluated Outputs History of adjustments and variances between projections and actual results History of errors versus changes in estimate Documentation of assumptions, data, and calculations Length of end-to-end estimation process Key Considerations Systems infrastructure Data extraction Auditability Ownership of data Data integrity Controls environment Internal & external stakeholders To effectively design a future state, the current state should be benchmarked against leading practices to optimize the Gross-to-Net process. 31 Copyright 2016 Deloitte Development LLC. All rights reserved.
Process Assessment Key Activities Identify Assess Benchmark 1 2 3 4 Identify areas within the estimation process that drive estimate sensitivity (i.e., Areas of Risk ) Identify key stakeholders and governance model across the end-to-end GTN Process Assess current state process Benchmark current state against leading practices and management s strategy to identify gaps 32 Copyright 2016 Deloitte Development LLC. All rights reserved.
Defining a Future State The current state assessment can provide management with visibility into prioritized risk areas in the end-to-end process. Key Challenges Pricing pressures Minimal cross-functional alignment & coordination Manually intensive calculations Contract policy & effectiveness Dynamic customer and payer landscape Unclear governance models Data scalability & reliability Health care reform Increasing competition Lack of standardized methodologies Actual to forecasted variances Audit effectiveness & controls environment Disparate systems infrastructure and data integrity Leading industry practices emphasize the cross functional alignment in the evaluation and refresh of the controls environment to support more accurate forecasting. 33 Copyright 2016 Deloitte Development LLC. All rights reserved.
Select GTN Leading Practice Key Activity Benchmark current state against leading practices Best Practice Simplification and standardization of GTN models Simplification of complex models and Excel files Standardized approach Preparation of executive summary models Linking to supporting models Risks Addressed Inaccessibility to prior period support Inadequately supported or validated calculations Reduce the ability to reassess the accuracy of previous estimates upon receipt of actual data Factors precluding management from analyzing trends in a dynamic landscape 34 Copyright 2016 Deloitte Development LLC. All rights reserved.
Select GTN Leading Practice (cont.) Key Activity Implement a cross functional GTN strategy on a common technology platform to drive optimization through accountability Best Practice Cross Functional Strategy Eliminate ad-hoc data extraction Implement a common technology platform Harmonize contract management, claims payment and sales data systems Establish cadence for cross functional communication and alignment of strategic objectives Define data integrity and documentation standards Risks Addressed Revenue leakage and data integrity issues caused by disparate systems and knowledge Data scalability & reliability 35 Copyright 2016 Deloitte Development LLC. All rights reserved.
Poll question #4 Which leading practice do you find most difficult to implement? A) Simplifying complex models and Excel files B) Implementing a common technology platform C) Cross-functional communication and alignment of objectives D) Other 36 Copyright 2016 Deloitte Development LLC. All rights reserved.
Cross-functional Governance Cross-functional governance is the key to a sustainable GTN solution and an important consideration to build an accurate GTN model. Tools for an effective Governance Board include: Common charter principles and goals Clearly defined roles, responsibilities and accountability Aligned performance metrics and incentives Alignment on types of decisions to be made and actions to be taken Governance Model Finance, Accounting, & Forecasting Supply-Chain Distribution / Prompt Payments Marketing / Brand Teams Common process and governance inefficiencies that will be solved as a result of the Governance Board: Minimal cross-function coordination Governance Board Leader Managed Markets- Sales Chargebacks & Admin. fees Managed Care and Part D Rebates Medicaid Rebates Unclear accountability Nonintegrated source data & systems Lack of effective data management and governance across functional areas Standard processes, procedures, and policies Common technology platform forecasting, reporting, and analytics Integrated data cross-functional governance & stewardship 37 Copyright 2016 Deloitte Development LLC. All rights reserved.
2006 2007 2008 Initiative X Training Initiative Training X Training Training Initiative X Initiative X Training Training Initiative X A Priority <$x B Priority $x - <$y Initiative Underway $y - $z Current Technology Enablers Information State 1.6.06 p. 25 Proprietary & Confidential - For Discussion Purposes Only 2006 BusinessEdge Solutions. All Rights Reserved. Summary Understand Current operations and future business direction Obtain information and identify improvement opportunities and risks Define Future state operating model Define future state blueprint ; prioritize needs, evaluate solution options Plan Path forward Define transformation and implement the future state Current state assessment Opportunity areas Future state model Initiatives Transformation map Example: Transformation Roadmap People & Organization Future State 2007 2008 Areas of risk New Business Applications 2006 The value of applying leading practices helps companies minimize reserve adjustments through end-to-end process efficiency and accountability resulting in increased integrity of financial results. 38 Copyright 2016 Deloitte Development LLC. All rights reserved.
New Approaches to Gross-to-Net Modeling: Gain Alignment, Decision-Making, and Control Complimentary webinar We will explore how new financial, compliance, operational, and strategic risks are changing the demands of the Gross-to- Net function and how these risks are likely to unfold in the evolving health care environment. Thursday, June 23, 2016 2:00-3:00 PM EST Register: www.cisbydeloitte.com/gtnwebinar 39 CIS by Deloitte Presentation title fits here Copyright 2016 Deloitte Development LLC. All rights reserved.
Mike Makovec Senior Manager mmakovec@deloitte.com Walt Worsham Senior Manager wworsham@deloitte.com