Price Change Optimization and Key Trends Impacting Generic GTNs Jeff Baab, Vice President, Life Sciences Jennifer Sharpe, Senior Director, Revenue Analytics Collaborative March 2016 Bringing data to life. March 2016 Proprietary Information
Agenda Introductions Poll the Audience Price Change Optimization Industry Insights Trends Impacting Generic Price Change Management & GTNs Federal Budget Generic Inflation Penalty ACA Final Rule: Generics Watch List Q&A March 2016 Proprietary Information 2
Price Change Optimization Price Change Optimization Industry Insights March 2016 Proprietary Information
Utilization Path Drives GTN Rate Some fees are owed on all sales: Distribution service fees Prompt pay Data fees Fees owed: 3 rd party contract fees Billback to contracted entity Billback Sale at Retail Contract Price Sale at PHS Contract Price Manufacturer Drug WAC Wholesaler CB Issued Sale at Whlsr Contract Price Sale at FSS Contract Price CB Requested Per Contract Price Fees owed: Program admin fees Marketing fees Non contract sales fee Per Unit Rebates Price protection Shelf stock allowances Fees owed: IFF May not owe whlsr fees on Gov t Sales Retailer w/ Manufacturer Contract 340b CE Buying Off of PHS Contract Gov t Entity Buying Off of FSS Retailer w/out Manufacturer Contract May have multiple contract prices. Net Price #1 Net Price #2 Net Price #3 Net Price #4 March 2016 Proprietary Information 4
Payment Methods Are Complicated & Require Different Data Sets There are adjudication and forecasting challenges related to generic fees and rebates because the payment formulas are complicated and require multiple data sets. Here are some examples: Fee or Rebate Type Example of Calculation Methodology Data Sets Required Challenges Distribution Service Fee Apply fee % against direct sales to customer Direct Sales Direct Sales may not be readily available in Contracting System Shelf Stock Adjustments (New WAC Old WAC) x Average Inventory Level over Specified Period Wholesaler Inventory Data Validating reasonableness of inventory data Product Rebates and/or Service Fees Apply % against subset of customer s Net Sales Direct sales, adjustments, returns, chargebacks Anticipating utilization; tying together data sets and calculating net sales Per Unit Rebates Rebate % Applied to Sales from Wholesaler to Specific End Customer Chargeback data Need to identify sales to specific customer w/in a contract March 2016 Proprietary Information 5
Tracking Impact of Price Changes on Line Items Notes Arrows indicate impact of contract price change on line item (not considering changes to utilization) GTN lines that stay flat grow as % of net sales when contract price Utilization shifts can have dramatic impact on net sales & GTN rates Price basis for some GTN line items can vary by wholesaler Fee or Rebate Type Contract Price Contract Price Prompt Pay Distribution Service Fees Redistribution Fees Data Fees Program Admin Fee Marketing Fees Floor Stock Adjustments Price Protection Per Unit Rebates Chargebacks Billbacks Medicaid Returns March 2016 Proprietary Information 6
Price Change Optimization Benchmarking & Better Practices Understand Price Change Impact Successful Practices: Finance/Accounting assist Trade/Pricing to calculate price change impact Pitfalls: accrual or forecasting miss, significant negative impact on product profitability Cross-functional Communication Successful Practices: Pricing Committee and/or Price Change Mgt Protocol inclusive of Government Pricing, Finance and Accounting review/approval Pitfalls: surprise true-ups, significantly under accrued March 2016 Proprietary Information 7
Price Change Optimization Benchmarking & Better Practices Process Documentation Successful Practices: SOPs, WIs, process flows Pitfalls: Lynch Pin, human error, lost documentation Investment in Systems Successful Practices: Automated solution integrated with a Gross-to-Net accrual management application Understand price change and/or rebate impact to adjudication system Pitfalls: manual, paper process driven by e-mails and Excel. March 2016 Proprietary Information 8
Price Change Optimization Trends Impacting Generic Price Change Management & GTNs March 2016 Proprietary Information
Manufacturer M&A Activity Why? Branded companies have acquired generic companies as entry point to generic business and vice versa. Diversification, path to AG launches, reduction of risk Acquisitions can remove competitors from marketplace. Challenges: Brands and generics look at GTNs differently Completely different business models and contracting Speed and volumes of the generic world Recent deals involving generic manufacturers: Lannett Company acquired Kremers Urban Pharma ($1.2 B) Teva agreed to acquire Allergan s generic portfolio ($40.5 B) Hikma Pharma acquired Roxane Labs (~$2 B) Endo International acquired Par Pharmaceuticals ($8 B) Mylan lost bid to acquire Perrigo ($34 B) March 2016 Proprietary Information 10
Supply Chain Consolidation WBAD (Walgreens - ABC) McKesson Rite Aid Red Oak (CVS-Cardinal) Walgreens Rite Aid (pending) CVS - Omnicare CVS - Target Analysis of a Deal: CVS Target CVS bought Target s pharmacy business for $1.9B Target pharmacies will be rebranded and operate as CVS within Target stores Target s >80 retail clinics will rebrand as CVS MinuteClinics Target primarily bought generics directly and branded products from McKesson. Branded utilization will shift to Cardinal and generics to Red Oak, who supplies CVS. May shift flow of specialty products from Diplomat (supplied Target) to CVS Health s Specialty Connect program. March 2016 Proprietary Information 11
Generic Price Inflation is Slowing Down From 2013 2014, saw phenomena where generic prices were actually increasing for majority of products on the market. Due to various reasons such as raw material or product shortages and competitors dropping out of the market. Recently, the FDA has made a concerted effort to clear its backlog of ANDA applications which is changing the trajectory of generic competition and pricing. Wholesaler earnings reports, where margins are hurting, are clear indications that generic prices are starting to fall again. March 2016 Proprietary Information 12
Introduction of Biosimilars in Marketplace Affordable Care Act paved way for FDA to approve biosimilars, which are essentially a generic of a biologic. The approval pathways and costly manufacturing processes increase cost of bringing a biosimilar to the market. The price erosion for the branded biological drugs is not expected to be as great as for traditional generic drugs. While the market is still shaping, prices for biosimilar products may be 65% -85% of their originators. Biosimilars have huge potential in the U.S. market since there is an upcoming patent cliff on several blockbuster biologic products. Success of a given biosimilar will depend on many factors, including price, duration of therapy, experience of physicians with the products and patient preference. March 2016 Proprietary Information 13
Price Change Optimization Federal Budget Generic Inflation Penalty March 2016 Proprietary Information
Quick Background on Inflation Penalty Concept Inflation Penalty Amounts to a price protection penalty that is added to the rebate per unit paid on Medicaid utilization. Historically Inflation penalty has always been applicable to single source and innovator multi-source drugs March 2016 Proprietary Information 15
Branded Medicaid URA & Inflation Penalty Primer Greater of (AMP * 23.1%) or (AMP - BP) Current AMP Baseline AMP x CPI-U New CPI-U Baseline Unit Rebate Amount (URA) = (Basic Rebate + Additional Rebate) What is CPI-U? An economic indicator published by the Bureau of Labor Statistics that represents the prices paid by urban consumers for a representative basket of goods and services. It is represented by a number, such as 231.23, 232.67, etc. that can be compared over time to measure inflation. What does this mean? If AMP grows faster than inflation between the launch quarter and current quarter, that additional growth is added to URA as an inflation penalty. March 2016 Proprietary Information 16
Generic Inflation Penalty: What We Know What Changed The budget deal signed by President Obama on Oct 26th, 2015 requires manufacturers that participate in MDRP pay an inflation penalty on non-innovator drugs ( N drugs). This penalty has only applied to S and I drugs historically. Effective Date The additional rebate is expected to become effective in 1Q 2017. March 2016 Proprietary Information 17
Generic Inflation Penalty: Where Do We Stand? First Marketed Before April 1, 2013 First Marketed After April 1, 2013 Baseline AMP 3Q 2014 Fifth full calendar quarter after which the drug is marketed as an N drug Baseline CPI-U The CPI-U for Sept 2014 The CPI-U for the last month in the baseline AMP quarter March 2016 Proprietary Information 18
New URA Calculation for N Drugs AMP x 13% Current AMP Baseline AMP x CPI-U New CPI-U Baseline Basic Rebate + = Total URA Additional Rebate Note: The Current CPI-U is the CPI-U value of the month prior to the quarter being calculated. March 2016 Proprietary Information 19
Price Change Optimization ACA Final Rule: Generics Watch List March 2016 Proprietary Information
Final Rule: Why Does It Matter? Final Rule sets forth new and revised regulations that affect AMP and BP reporting, Medicaid rebate processing, and reimbursement rates related to Medicaid utilization. Many provisions of the rule have an effective date of April 1, 2016. Certain provisions will be effective as of April 1, 2017. The Final Rule may impact a manufacturer s brand strategies, financial liabilities, and compliance and contracting policies, processes, and systems. March 2016 Proprietary Information 21
General Provisions that May Affect Generic AMPs Area of Impact Inclusion of U.S. Territories in Definition of States Class of Trade - Specialty Pharmacies / Home Health / Infusion Prompt Pay Offered to RCPs Description of Guidance Effective April 1st, 2017, manufacturers may have to pay Medicaid rebates on Medicaid utilization in five U.S. territories, including Puerto Rico. Additionally, transactions to customers in the territories will be eligible for AMP and BP reporting. These types of customers are eligible for AMP if they also meet the definition of RCPs. Only exclude CPPD offered to wholesalers. CPPD offered to AMP eligible customers, like RCPs, should be included in AMP as a price concession. March 2016 Proprietary Information 22
Clarifications Related to Authorized Generics Area of Impact Treatment in AMP of Sales to Secondary Manufacturer Treatment in AMP when Manufacturer Owns Both Brand and AG Description of Guidance Include sales of an AG to the secondary manufacturer in the AMP of the brand only when secondary manufacturer acts as wholesaler selling to RCPs. Final Rule specifically excludes sales to a secondary manufacturer that relabels the product. When a single manufacturer markets both the original and AG under a common NDA, the AMP and Best Price calculations are to be blended across the NDC-9s. Subsequent Q&A during the CMS webinar indicated that CMS expects separate AMPs to be filed for the brand and AG in this scenario. March 2016 Proprietary Information 23
Definition of Covered Outpatient Drugs Area of Impact Definition of Multi-Source Drugs Description of Guidance CMS is now defining original NDA to mean an NDA under section 505(b) of the Food, Drug and Cosmetic Act (FDCA), as opposed to an ANDA under section 505(j) of the FDCA. This may result in drugs that have been marketed as generic drugs, for all intents and purposes, being treated as branded drugs in the Medicaid Program. CMS has created a narrow exception through which manufacturers may request their drugs continue to be treated as N drugs. Subsequent operational guidance on this matter is anticipated from CMS. March 2016 Proprietary Information 24
Move Towards AAC as Basis for Pharmacy Reimbursement States are also being asked to shift to AAC (NADAC, etc.) based reimbursement models rather than EAC (AWP). Also, FULs will be calculated at 175% of weighted average mamps but the greater of FUL or NADAC will set FUL. Potential Impact Generally, ACA FULs < State MACs < Pre- ACA FULs ACA FULs will likely act as new, lower ceiling for some product classes Considerations & Challenges Complicated to sort out impact of FULs and MACs RCP reimbursement likely to go down Need to manage relationships and pricing w/ RCPs Questions from Final Rule Spillover impact to pharmacy reimbursement from commercial plans? How will RCPs react to lower reimbursement? March 2016 Proprietary Information 25
Session Takeaways Key Elements Summary Understand and follow the trends and business deals of your customers Get involved with cross-functional team to understand the financial impact of pricing and contracting decisions Have lunch with your Medicaid folks to discuss the financial impact of the Federal Budget Inflationary Penalty Have lunch with your Government Pricing folks to discuss the financial impact of the ACA Final Rule March 2016 Proprietary Information 26
Price Change Optimization Q & A Jennifer Sharpe Sr. Director, Revenue Analytics Collaborative 908.247.9105 jsharpe@davizta.com Jeffrey Baab Vice President, Life Sciences 610.216.8222 jbaab@davizta.com March 2016 Proprietary Information
davizta Overview Company davizta was founded in 2010 with a fundamental premise: predictable revenue forecasts create healthier companies. By focusing on Revenue Analytics, davizta provides business leaders with enhanced visibility of current and forecasted company performance. This data-enabled vision provides an advantage to companies looking to optimize operations and maximize profits. Solutions Revenue Analytics Software davizta s Revenue Analytics platform, d-rive TM, takes a data-centric approach for fast, accurate, on-demand revenue forecasts. Data Management Revenue SMart is the foundational data solution for all revenue related analysis. Consulting Services Our diverse team of professionals bring unparalleled breadth and depth of experiences in the Life Sciences industry. Leveraging our perspectives in Finance, Operations, Compliance, Contracting, and IT, we pride ourselves on customizing solutions to fit each of our client s unique set of challenges. March 2016 Proprietary Information 28