Gross-to-Net (GTN) is a term widely used in the life sciences industry. Examining the pharmaceutical value chain with its partners and key components helps understand GTN. This chain includes manufacturers, third-party partners for commercialization, wholesalers, distributors, hospitals, pharmacies, government entities, and pharmacy benefit managers (PBMs).
Many Pharmaceutical companies use third parties to commercialize their products by working with distributors for a fee through optimized distribution for greater market reach.
Pharmacy benefit managers work with large employers and insurance agencies to negotiate with pharmaceutical companies for prescription drug discounts and rebates. Drug makers offer rebates to PBMs for insurance companies to favor their products. CVS Health, Express Scripts, and OptumRx are among the leading PBMs in the US.
Pharma companies have contracts with wholesalers and distributors, which include details like sales price and quantity as well as deductions such as discounts and rebates. Some discounts are calculated and applied on the invoice upfront, while others are calculated and applied in the background, making them unavailable upfront for GTN calculation. Thus, while determining the precise GTN ratio is critical for the organization’s financial health it can be challenging.
Key Components of GTN
The major components that can help arrive at the accurate GTN value include:
Wholesaler acquisition cost (WAC): The WAC is the cost to wholesalers for acquiring a drug from the manufacturer. It is the manufacturer’s estimated list price without discounts or rebates.
Chargebacks: Distributors purchase drugs from manufacturers at a gross price – the WAC – and sell them to consumers at a different contract price. A chargeback is the difference the distributor charges the manufacturer when the consumer contract price is lower than the WAC.
Rebates: A rebate is a special discount which is paid retroactively to a distributor or customer based on the sales volume over a specified time period. It may be in the form of a pricing adjustment as a percentage of the selling price, or a fixed amount in rebate per product sold.
Medicaid Rebates: Medicaid rebates are discounts that manufacturers provide to government entities in the US and payable to the respective states.
Returns: Drug makers usually allow distributors to return unsold products within six months and after 12 months of the expiration date. GTN calculations include the cost of returned products.
What is Gross-to-Net?
GTN is the calculation of pricing adjustments, reflecting the difference between the gross price – typically the WAC – and the recognized net sale. Pricing adjustments include chargebacks, cash discounts, rebates, returns, and fees. Pricing adjustments can significantly reduce the WAC price by as much as 70%. The GTN for the top ten pharmaceutical companies amounts to over $50bn.
The following example illustrates price adjustments by different partners.
WAC (manufacturer list price) = $100
Net sales recognized = $40
GTN = WAC – net sales recognized, i.e., $100 – $40 = $60
Why GTN is crucial for the Pharma Manufacturer
GTN offers incentives to deliver the finished product from the market to the retailer and, ultimately, to the customer. It drives distributors to market the product to sub-distributors, retailers, and end-users. Distributors use the incentives to either finance their operations or promote products.
GTN calculations are critical for posting accurate accruals and improving the forecast of cash flow. It also helps improve supply chain scenario analysis capabilities and make informed decisions for upcoming products and campaigns.
On the other hand, the Generally Accepted Accounting Principles (GAAP) recommend that drug makers determine the selling price at the point of sale and estimate all pricing adjustments to record the revenue from sold products. Therefore, the calculation of GTN is essential to comply with accounting standards. It also provides management with a clear understanding of the net revenue to meet profitability goals.
