Many factors influence deal performance and it benefits a Pharma manufacturer to thoroughly gather and analyze as much data as possible in order to make the most informed decision. Pre-deal analytics are certainly a critical step in the process, however a comprehensive evaluation of all drivers that influence performance is required to truly evaluate a deal. Developing tools that assist in looking back at previous deals provides an organization with a clearer understanding of a payer, the effectiveness of their internal resources and positions leadership to pursue new opportunities with greater confidence
One of the largest line items on the Income Statement of Pharmaceutical Manufacturers is customer rebates, often far exceeding costs associated with sales and marketing efforts. While both management and external analysts closely monitor and make investment decisions related to R&D expenditures, staffing levels (including sales force size) and marketing investments (share of voice, DTC spend, etc.), actual vs. forecasted performance of contracted deals with PBMs and Health Plans tends to go untracked.
Contracts between Pharma and the large payers are normally multi-year deals with rebates paid based on formulary position, performance versus a baseline (i.e. national market share, % growth over a specified time period, etc.), or a combination of both formulary position and performance. Manufacturers may establish multiple contracting strategies by brand, by channel; including standard offerings which address a majority of payers and more aggressive offers used, under the guidance of legal parameters (i.e. Robinson-Patman Act), to compete for business with a small number of larger payers. Following the 80-20 rule, it is common that the majority of sales and associated rebates are driven by the non-standard, more aggressive contract offers.
Due to the financial significance of contracts with large payers, detailed analysis is normally conducted before deals are approved by a manufacturer. Finance Departments work with account managers and brand teams to forecast the sales impact using various scenarios. Models (at various levels of sophistication) calculate break-even and expected profitability using a range of variables, including the impact of not offering a contract at all. Based on the size of the deal in terms of volume, share, spill-over, etc. approval authority may escalate to the most senior levels in the organization.
Negotiation of deal terms can be a high stakes process which escalates in importance based on the payer involved, product under consideration, competitive pressures, etc. Further, the implications of a contracting decision are often felt for multiple years.
The major focus of contracts, and rightfully so, often centers on formulary position and rebate structure. While these are certainly key components, other direct and indirect aspects of the deal need to be considered including price protection clauses, impacts on Government pricing, payer’s ability and willingness to control formulary (at both national and down-stream levels), payer and manufacturer pull through tactics, etc.
Items such as price protection and Government pricing impacts can be calculated internally using models available at most manufacturers. Failure to accurately assess these impacts can be lead to significant financial exposure, especially with longer term contracts for products with high Medicaid sales.
Forecasting the impact of payer control, payer pull through, sales rep promotion and manufacturer pull through efforts can prove more challenging and may not be considered in great detail during the pre-deal analysis. However, under-estimating their impact can lead to unexpected results.
Post Deal Analytics
During a recent discussion with a Managed Markets Executive at a large Pharma company a comment was made about the limited post deal analytics that is conducted, especially in light of the rigor involved pre-deal. It is common that following the celebration involved when a deal is consummated and the related enthusiasm exhibited by Field Sales, attention rather quickly turns to the “next deal”.
Organizations that devote the time and effort to build (and regularly utilize) a post-deal analytics process can gain a strategic advantage. A comparison of actual performance vs. historical deal assumptions can be extremely helpful and inform future contract decisions within a brand or across brands for a specific payer. This analysis provides a basis to address the aforementioned forecasting challenges related to payer control and pull through (their effectiveness in a therapeutic area) as well as the impact of a manufacturer’s personal and non-personal investments by channel, geography, etc.
Understanding and accounting for market conditions also need to be factored into the post deal analytics. Competitor actions, regulatory/government actions, product profile changes, new data and changes to the standard of care can impact pre-deal assumptions. Although in many cases these factors are out of a manufacturer’s control they nonetheless need to be accounted for and measured in order to round out the analysis.
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About the Author:
Mike is an experienced leader in the Pharmaceutical industry with extensive background and expertise in streamlining operations, developing insightful analytics and building strategies for new and existing markets. He is known for his ability to develop staff and build leaders, deliver results through influencing and collaboration skills, and manage projects across numerous market segments. To learn more about Michael click here