Pharma companies prefer stable predictable sales and earnings growth.

Unexpected material GTN true-up adjustments results in earnings volatility and may significantly impact the stock price.

A disappointing surprise occurred in the fourth quarter in the example depicted below due to true-up adjustments for higher commercial rebates, more Medicaid & 340B business and unanticipated levels of product returns.

Estimating GTN Accrual Rates

GTN adjustments are recorded when product is sold based on estimated accrual rates developed by preparing a projected channel summary as shown in the illustration below:

Following are suggestions to enhance GTN accrual estimates:

  • Apply sound judgement using data analytics from the cross-functional team including accounting/finance, market access, managed markets, trade, and pricing.
  • Consider access restrictions and patient behavior when estimating the percent of business. The Medicaid estimate in the example above of 23% is lower than the prevalence of 35% reflecting patient compliance and payer utilization restrictions.
  • Determine sensitivity from a percentage of business and rebate perspective. If actual Medicaid as a percent of total is 30% instead of 23%, the GTN accrual rate true-up adjustment would be 4.3% of total quarterly gross sales resulting in a significant net sales decline. If actual commercial rebates are 33% vs. 38.9%, the accrual rate true-up adjustment would be 2.7% of total quarterly gross sales resulting in a net sales increase. Auditors scrutinize the GTN components which have the greatest degree of sensitivity.
  • Record true-up adjustments immediately and adjust the current accrual rate accordingly. For example, if Medicaid for the first quarter was accrued at a rate of 62% and actual payments based on invoices received (first quarter invoices received in third quarter) had an average rate of 66%, the first quarter true-up adjustment would be recorded in the third quarter. Furthermore, the rate to accrue for the second and third quarter would be adjusted retroactively from 62% to 66%.
  • Consider market dynamics including rapid growth in copay buydown programs, 340B and Medicare Part D coverage gap.
  • Incorporate price protection and contractual prospective commercial increases in rebates in the development of accruals. There have been circumstances where the accounting/finance department was unaware of a new or existing PBM contract with a higher rebate in the next quarter and under-accrued resulting in an unfavorable true-up adjustment. The auditors highlighted the poor communication as an internal control weakness.
  • Obtain accurate data on wholesale and retail channel inventory. Record a pipeline liability using the rebate rate expected to be in effect when the product is dispensed (or sold to a contracted customer for chargebacks).
  • Ensure GTN liabilities are adequate by incorporating anticipated lags in the receipt of invoices from government entities including Medicaid.
  • Be conservative.