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Revenue Leakage And

Management – Pharmaceuticals
Created By SMS Research

July 30, 2010


Contents

1 4

Global Case Studies


Pharmaceutical
Industry
3
Pharmaceutical
Supply Chain and
Leakage
2 Points 5

Indian
Pharmaceutical Appendix
Industry
1

Global
Pharmaceutical
Industry

3
Global Pharmaceutical Market

Global Pharmaceutical Global Share Of Pharmaceutical Market (2009)


Sales in USD Billion
45% 30%
1,025
CAGR = 8%
20%

837
Europe
North
643 America Asia, Africa
5%
and Japan

Rest of the
World

India accounts for


about 1% to1.5% of the
global pharmaceutical
2006 2009 2012(E) sales

Note: Market Size include s sales


from bulk drugs and formulations
Source: IMS Health
Key Challenges In The Global Industry

 Drug Research and Development (R&D) costs have rocketed about


25 fold between 1980 to 2005 while drug development time has
Increasing
increased 12 fold in the same period
R&D Time
and Costs
 Top pharmaceutical companies such as
Increasing GSK, Pfizer, Merck, AstraZeneca etc have been facing increasing
Decreasing competition from generic drug manufacturing companies in India
R&D Output Complexity
of and Asia
Distribution
 With strict regulatory approvals, manufacturers are finding it
increasingly difficult to introduce new drugs in the market.
Challenges Hence, there is an emerging need to implement lean and flexible
concepts to reduce wastage

Pricing &  In recent years, pharmaceutical companies have been making


Biotechnology Revenue massive investments on automation and software solutions in
Alternatives Pressure manufacturing and distribution to reduce revenue leakages

Increasing  It is estimated that in 2009 the top 120 pharmaceutical companies


Competition collectively lost about USD 11 billion due to revenue leakages
From
Generics

Source: Deloitte
2

Indian
Pharmaceutical
Industry
Indian Pharmaceutical Market

Indian Pharmaceutical Market Size in USD India’s Position in Global Market By 2015 (based on market size in USD Billion)
Billion

CAGR=12%

19.6

CAGR=10%

16.3

6.3

2005 2015(E)

 The industry structure remains highly fragmented, with top ten pharmaceutical companies accounting for only about 35% of total pharmaceutical sales
 Currently Tier 1 cities (which includes metros and other major cities with over 1 million in population) account for nearly 60% of the total market while Tier 2
cities and rural areas account for the remaining 40%
 It is estimated that in the next decade over 45% of the growth is going to come from Tier 2 markets with implies that efficient distribution is going to be critical for
pharmaceutical companies
 Increasing population, rising income levels of households and increasing penetration of health insurance are expected to be some of the key drivers for the rapid
growth of the pharmaceutical market
 By 2015, generic products are estimated to capture about 10% of the total market

Source: Mckinsey, Boston Analytics


Key Challenges In The Indian Industry

• High domestic competition especially in the Generic medicines has made


Indian pharmaceutical companies to look to penetrate the untapped developed
markets (for generics) like Japan for growth
Working Capital Constraints • Capital constraints are proving to be a hindrance for Indian companies to
expand to newer markets

• Exports have a significant contribution in the total revenues for Indian


pharmaceutical companies. However, the increasing competition and stringent
Export Related Challenges country specific regulations are leading to increasing operating costs and margin
pressures

• The legal procedures governing the operation of pharmaceutical companies lack


transparency. Indian pharmaceutical companies have faced lawsuits from multi-
Lack of Transparency in nationals as a result of discrepancies in the grant of EMR (Exclusive marketing
Legal Procedures rights)

• There has been a tremendous upsurge in competition for Indian


pharmaceutical companies both at international as well as domestic
Decreasing Margins front. The increased competition has led to pricing pressures resulting in
decreasing margins for pharmaceutical companies

• In 2005, India signed the TRIPS (Trade-Related Aspects of Intellectual


Property Rights). As a result the previously existing process patent
legislation as part of the Indian Patents Act, 1970 was abolished
Challenges Due to TRIPS • TRIPS recognizes both product and process patents and these are
granted for a 20 year period
• It is expected that TRIPS will reduce competition for MNC companies
from India drug manufacturing companies in the domestic market

Source: Multiple Sources


The Prices Of Scheduled Drugs Are Regulated By
The Government
• Scheduled Bulk drugs (or API‘s) are those that are indentified and listed in the DPCO. These include key life saving drugs and constitute a majority of the pharmaceutical
market. Scheduled formulations are drugs that use an API listed in the DPCO
• For non scheduled drugs companies can set market prices
• For drugs (formulations and API’s) that are exported, companies can set prices according to local market the drug is exported to

• The prices and margins of pharmaceutical drugs in the Indian market are highly regulated by the Government
through the Drug Price Control Order (DPCO), 1995. The provisions of the DPCO are implemented by a constituted
body called National Pharmaceutical Pricing Authority (NPPA)
• The central government sets the maximum sale prices of scheduled bulk drugs. While fixing the price of a
scheduled bulk drug the Government may take into consideration
Overview • A post tax return of 14% on net worth
• Return of 22% on capital employed
• Internal rate return of 12% based on long term marginal costing
• If the production is from basic stage, the post tax return is 18% and a return of 26% on capital employed is
provided
No person can sell a drug at a price higher than the one fixed for it including the local taxes

• Government fixes the retail price of Scheduled formulations using the formula

R.P. = [M.C.+ C.C.+ P.M.+ P.C.] x [1+MAPE/100] + E.D.


Retail Prices
of Where: R.P= Retail Price, M.C= Material Cost, C.C= Conversion Cost, P.M= Packaging material Cost, P.C=
Formulations Packaging Cost, MAPE= Maximum Allowable Post Manufacturing Expenses, E.D= Excise Duty (where applicable)
• The manufacture cannot increase the prices set by the government. In case he is not satisfied with the price he
may re-appeal for the revision of price

• The Union ministry of chemicals and fertilizers has initiated a move to bring all essential medicines sold in the
Expected country under a price cap
• This legislation if implemented will give the drug price regulator, National Pharmaceutical Pricing Authority
New
(NPPA), the power to control prices of about 17,000 packs of 354 drugs named in the National List of Essential
Legislation Medicines (NLEM)

Source: NPPA
3

Pharmaceutical
Supply Chain and
Leakage Points
Pharmaceutical Value Chain & Leakage Points

Formulations Value Chain


Hospitals
API Supplier Pharmacy
Excipient Supplier Mail Order
Dr. Office Patients

Suppliers/ Global
Manufacturer Wholesalers Distributors Retailers End Customers
Sourcing

• Procurement Leakage • Chargebacks • Customer Segmentation • In addition, fraud leakages occur


(raw material costing • Rebates • Freight charges across the supply chain due to lack
and pricing) • Concealed Shortages • Product Pricing of proper processes in pricing and
distribution of products

Pharmaceutical
Manufacturer Wholesalers Distributors End Customer
Manufacturer

Flow of drugs
Flow of payments
Key Revenue
Leakage Areas
Bulk Drugs Value Chain
Leakage Points Note: This is a generic illustration of the pharmaceutical
supply chain.
Revenue Leakages does not include losses due to
counterfeit and loss of goods during transportation
Source: Datamonitor
Key Leakage Points In The Pharmaceutical
Industry Are In Logistics and Distribution

Pharmaceuticals End Customers


Manufacturing Company (Patients)

Retailers
Wholesaler Distributor (Pharmacy/
Hospitals etc)

Flow of payments
Chargebacks Rebates & Returns Concealed Shortages Flow of Revenue
Leakage

• Chargebacks- Chargebacks—the difference between the price at which product is sold to wholesalers, and the sometimes lower
price negotiated with end customers like PBMs or GPOs, must be reconciled with the wholesaler

• Rebates & Returns - Rebate errors, occur mainly due to a lack of standardization, or improper use of standardized
codes, between manufacturers and managed-care organizations

• Concealed shortages - Caused by customers claiming that orders were only partially filled, then seeking to make only a partial
payment for the order

Source: IDC
Pharmaceutical firms lose about 4.4% of their annual
revenues due to leakages in the supply chain

Key Revenue Leakage Points

Chargeback Rebates and Returns Concealed Shortages

Causes of Chargeback Discrepancies • 4% of shipments result in concealed


Causes of Rebate Discrepancies shortage claims
• 12% of chargebacks are • 7% average discrepancy size
• Over payments of managed care
flagged, of which one-third are rebates (on an average 5.5%)
resolved without resubmission • Over payment of Medicaid
• Of the remaining 8%, half are rebates (on an average 4.5%)
resolved upon resubmission
• Of the 4% not resolved, a fraction Causes of Return Discrepancies
gets written off, and the • A key data stream that impacts all
remainder split between the transactions is EDI 867 or 852 data, which
• Caused by full credit being sought usually comes from the wholesaler to the
wholesaler and the for the return of only part of an
manufacturer, resulting in a 2.2% manufacturer
order • Manufacturers employ both IT systems and
loss • 0.4% of returns are written off
• Duplicate chargebacks, involving staff to ―scrub‖ the data so that discrepancies
due to errors can be revealed, but the task is difficult
product returned to the
wholesaler, then resold, with • Manufacturers now prefer to outsource
chargebacks being generated their data-scrubbing to specialized service
each time providers like CSC, IMS Health, Activus
• Omitted reverse Solutions etc
chargebacks, caused when a
product is sold, a chargeback
filed, and then the product is
returned, which should generate
a refund of the chargeback

Source: IDC
Industry Survey On Key Revenue Leakage
Points
Is revenue leakage through the chargeback process a significant problem for your company?

2006 2009
• There is an increased awareness
6.0%
in the pharmaceutical industry
Unsure due to lack of evidence 16.2% 16.0% towards revenue leakage caused
21.2% 13.0%
Large problem by chargebacks
11.1%
Medium Problem 21.0% • 63% of the respondents in 2009
18.2% believed that chargebacks were
Small problem
42.0% either a large or medium sized
33.3% problem compared to 37% in
Not a problem
2006

Is revenue leakage through pharmaceutical returns a significant problem for your company?

2006 2009
• 42% of the respondents in 2009
believed that returns were
Unsure due to lack of evidence 13.0%
16.8% either a large or medium sized
21.8%
Large problem 26.0% problem
16.0%
Medium Problem 19.8% 10.9%
11.0%
Small problem

Not a problem 30.7% 32.0%

Note:
• Survey data based on responses from 151 industry
leaders, in more than 117 pharmaceutical companies
Source: IDC Survey Results
4

Case Studies
Case Studies

Total IT Spend Split (2009)


5% 5% 1%
Total IT Spend = USD 1,107 Million 19%
Pfizer 16% 1%
34%
10% 29%
Software
24% 16% 13%
Services
26%
Labor Overheads
Hardware Infrastructure Storage Systems/SCM
Ent. Collaboration Ent Accounting, Fin, HR
BI Ent App Dev
Sales & Mktg Commerce

In the next two years Pfizer is likely to invest in Technologies Pfizer has already invested to plug revenue
the following technologies leakages
• Business Intelligence
Software Vendor
• Analytics
• Procurement/Purchasing Accounting Control Model N, Oracle, SAP
• Accounts Payable
• Data Transformation Grid Computing Solution, SSA ERP,
ERP
Oracle Enterprise Manager
• Forecasting
• Price Optimization Financials Model N, SSA BPCS
• B2B Ecommerce

Source: IHL Group


Case Studies

• Lack of visibility and control over the entire revenue life cycle
Top 10 Global Challenges • Unable to track the performance of product in the market in real time
Pharmaceutical • Order to cash process plagued with errors
Company Solution
Model N
Provider
• Model N‗ implemented Revenue Management Intelligence (RMI) analytics platform with the
transactional applications in the Revenue Management Suite. This gave the company access to in-
depth and real-time performance metrics data for various products
Solution
Roadmap • Seamless integration of company’s systems with customer's SAP ERP
infrastructure to accelerate time to value and enhance the order-to-cash
process
• Replaced both custom systems and a legacy contracting vendor's systems of the company
• Model N’s solution helped the company gauge the effect of regulatory
mandates on commercial business and the bottom line
Benefits • Reduced errors and cycle time in fulfilling orders
• Improved decision making though advance modeling techniques
• Improving margins and control

Source: Press Releases


Case Studies

Challenge: Ranbaxy had already implemented SAP ERP with the idea of improving business processes
within the organization. In addition the company was using EDI to streamline the entry of orders into
the SAP software and eliminate the inconsistencies between the information in the different
Ranbaxy geographies. For the US and European geographies, the frequency of documents was almost 200+ per
day. Customers were also showing an increasing interest in submitting POs electronically instead of via
third-party systems. Hence a live integration was required between ERP and EDI.

Solution: To minimize complexity and make the most of the common system architecture Ranbaxy
implemented SAP NetWeaver PI. With the new solution in place customers and vendors were able to
see their order status, accounts and do online tracking of cargo. Orders placed online are transmitted
through EDI and automatically updated in Ranbaxy’s SAP network. Initially the system was rolled out
to overseas customers and later for domestic customers.

Benefits: About 2,500 of Ranbaxy’s partners were connected within India, apart from a similar
number in other countries. The network is serving as a powerful marketing tool and knowledge
resource for customers. The number of stockists and dealers is so large that even if 10% of them start
online transactions, the company expects to reduce physical man-hours (and errors) and increase cost
advantages. In addition, the company expects benefits such as inventory reduction

Source: Dataquest, SAP & Ranbaxy Press Releases


5

Appendix
Overview Of The Pharmaceutical Supply Chain In
India

Carrying & Retailers


Forwarding Stockist (Pharmacy/
Agents (CFA’s) Hospitals etc)

End Customers
Pharmaceuticals
(Patients)
Manufacturing
Company
• 1–10% on the total • 8% on scheduled • 16% on scheduled • Drugs are sold to
turnover + other drugs drugs end customers at
expenses • 10% on • 20% on MRP + tax
Margins
Flow of • On an average the nonscheduled drugs nonscheduled drugs
drugs margin is about 6%

 In 2006, the market size of India‘s pharmaceutical logistics segment (distribution) was valued at around $200 million with an annual growth rate of 4%
 India Organization of Chemists & Druggists (AIOCD) controls the margins of drugs in the Indian market. The maximum margins in the supply chain are
predetermined. In addition to the above mentioned margins, wholesalers and retailers are also compensated with additional trade offers
 On an average, a company may work with a total of 25–35 CFAs. Unlike a CFA that can handle the stock of only one company, a stockist (distributor) can
simultaneously handle more than one company (usually, 5–15depending on the city area), and may go up to even 30–50 different manufacturers
 The CFAs are paid by the company yearly, once or twice, on a basis of the percentage of total turnover of products. The stockist, in turn, after 30–45 days (a typical
credit or time limit) pays for the products directly in the name of the pharmaceutical company

Note:
• Supply chain illustrated is for pharmaceutical manufacturing companies in the domestic market only
• Drugs indicate formulations only and excludes bulk drugs

Source: BioPharm International