Why is Gross to Net information important for companies in the Life Sciences Industry? That is a question I kept asking myself when I started working on my first GTN project as a consultant.
From an accounting perspective, I had some idea what Gross to Net meant, but applied to the life sciences industry, this topic seemed to be a bit more complex than what the abbreviation suggests. After having completed my first GTN assignment, it became very clear to me that Gross to Net management is a very intricate process, which, if not done accurately, can lead to revenue loss.
Because many life sciences companies still perform their GTN process manually-due to a lack of communication between their information systems-frequently, inadequate forecasting methods are used to calculate expected adjustments.
What is GTN? And what does your current GTN process look like?
In the life sciences industry, Gross to Net (GTN) is the management process at the heart of the Pricing and Contracting life cycle. It is the process of Forecasting Demand and Accruing for Rebates, Chargebacks, and Other Adjustments to the price charged for a product sale.
As illustrated below in a simplified example, life science companies estimate for discounts and other adjustments expected to be paid out to the various channels they contract with, based on the demand forecasted—a process which is still done manually through spreadsheets.
Considering the complexity of the industry, why is it that management often finds themselves looking at their financials and wondering why their actuals often exceed what they forecasted for?
This bears the questions of how effectively companies perform their accruals/Gross to Net calculations at the accrual item level, and how effectively resources are allocated in performing these calculations.
From an accounting and financial reporting perspective, accurate and timely Gross to Net information is crucial in order to deduct correct forecasted adjustments from revenue recognized.
According to the US GAAP (Generally Accepted Accounting Principles): To recognize revenue upon shipment of a product, a manufacturer must be able to reasonably estimate any potential future adjustments to the price of a product sale that is subject to such adjustments. These estimates must be presented appropriately in the financial statements (Balance Sheet and Income Statement).
How often do most companies perform their forecasts? Most companies perform their forecasts annually or quarterly at the Product, Customer and Contract level. Ideally, this is what they would like their forecast to look like:
Timing is everything
When looking at GTN management from a strategic management perspective, accurate and timely GTN information allows executive management to make more critical investment decisions in order to swiftly adjust to the ever-changing demand in today’s market forces.
So, what does your current GTN management process look like and how can this be improved to optimize revenue? In the next blog, we will discuss some of the common challenges organizations face and how they can improve their ability to respond by setting up and maintaining GTN processes. Please stay tuned.