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10/10/2016
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Don't Get Caught Chasing Your Cost of Goods
Disclosure
Wayne Boese is Vice President of Sales at American Associated Pharmacies. The conflict of interest was resolved by peer review of the slide content.
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• Discuss the components of a purchase agreement and the necessary information to make an informed decision.
• Calculate an effective or net landed cost of goods and its value.
• Discuss generic compliance rate and its effect on the pharmacies brand cost of goods.
• Describe the whole picture on your generic rebates, and explain why cheaper isn't always better.
Learning Objectives
Brand Rx COG Brand Rx COG +
Generic Rebate+
Generic Rebate=
Value of proposal?=
Value of proposal?WINNER!
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% vs. $% vs. $
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Prime Vendor AgreementPrime Vendor Agreement
Wholesale Purchase Agreement =
Wholesale Purchase Agreement =
PVAPVA
Cost of Goods Matrix - 1995
$1 to $20K$20K to $50K$50K to $100K$100K to $200K$200K to Plus
4.70%2.65%2.10%1.85%1.60%
Cost Plus
Cost Plus
Cost Plus
Cost Plus
Cost Plus
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$1 to $20K$20K to $50K$50K to $100K$100K to $200K$200K to Plus
3.40%1.39%0.82%0.57%0.40%
Cost Plus
Cost Plus
Cost Plus
Cost Plus
Cost Plus
Cost of Goods Matrix – 1998Cost of Goods Matrix – 1998
$30K to $50K +1.00%$50K to $75K +0.22%$75K to $100K 0.00%$100K to $150K ‐0.20%$150K to $200K ‐0.30%$200K to $250K ROCC$250K to $350K ROCC$350K to Plus ROCC
Cost of Goods Matrix – 2003Cost of Goods Matrix – 2003
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Return On Committed Capital
Components of ROCC
Brand Rx Generic RxGBR or GCROTC/DMECash IncentivesPayment Terms
DSO (Days Sales Outstanding)
Program FeesDelivery SchedulesContract Term (Years)
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Brand Rx
C‐ 3.0%
C‐ 4.0% C‐ 5.0% C‐ 6.0%
C‐ 1.0% C‐ 2.0%
Wholesale Acquisition Cost (WAC or Cost)
Brand Rx
C‐ 14.0%C‐ 10.0% C‐ 12.0% Net Landed COG
Cost Minus “Ridiculous”
Cost minus “What do I need to beat?”
Brand Rx
X X XX X XC‐ 7.0%
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The Reimbursement DeclinePBM
Pharmacy owner calls wholesaler
AWP – “Crazy”%
PBM
Pharmacy owner calls wholesaler
AWP – “Crazier”%
The Reimbursement Decline
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On What?On What?
Brand Rx
C‐ 4.0% C‐ 5.0% C‐ 6.0%
Cost Minus “Stupid”
C‐ 7.0%
Net ‐ Excluded ‐ Special priced Brand items
Brand Rx
Defined:
Controlled substances Specialty items Drop Ship vendors Basic Brand Rx items “Slow Moving” items Other “Contract” items
Slightly more than contract discount Billed at WAC (No discount) Billed on a Cost Plus basis
Examples=
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$150,000 X ‐5.0% = $7,500$20,000 X ‐3.5% = $1,400
$150,000 at WAC - 5.0%
Brand Rx C –5.0%
$20,000 Net items (avg. cost WAC ‐3.50%)
$20,000 Net items (avg. cost WAC +1.67%)
$190,000 Brand Rx$52,000 Generic Rx$8,000 OTC/Other
$250,000 TOTAL$20,000 X 1.67% = + $668
$8,232
$190,000 X ‐5.0% = $9,500
Difference = $1,268
$190,000 at blendedWAC ‐ 4.33%
Is the entire Brand Rx COG discount applied on Invoice or just partial?
Brand RxBrand Rx
Is Brand Rx COGs based on: oGeneric purchases?
oTotal store purchase?
oGroup performance?
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Are these factors attainable?
Brand Rx
Do you comprehend and understand any and all Brand Rx COG qualifiers?
Generic RxGeneric Rx
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“What is a goal rebate amount
or %?”
“What is a goal rebate amount
or %?”
Wholesaler Generic contract price filesoContract file name?oHow many different contracts?oNumber of SKU’s?oAre the rebates the same for all contracts?
Generic RxGeneric Rx
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Contract Substitution? o Automatic? Substitute out (rebates?) Substitute in?
Generic RxGeneric Rx
What is the design of the generic rebate program?
o Fixed
o Progressive
Generic RxGeneric Rx
What is the Rebate percentage(s)?
Are rebates paid from dollar one?
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Generic RxGeneric Rx What is the generic cost basis?
Generics can run 15%+ higher on invoiceo Invoice comparisons
oTop 100?
o“Market Basket” comparison
30% Rebate Fixed vs 24% Progressive
$52,000 Generic Rx
Generic RxGeneric Rx
$15,600 $12,480
$4,160‐ 8%
$11,440 $1,040
$3,120
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Brand Rx COGs ‐3.5%Progressive Rebate 24%
METHIMAZOLE 10MG 100
Brand Rx COGs ‐5.0%Fixed Rebate 30%
METHIMAZOLE 10MG 100
Must cover 1.5% greater Brand Rx discount plus6% additional generic Rx rebate.
Higher Not Better?Higher Not Better?
$19.49
$14.99
18% higher cost
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We will match a competitors generic prices!
Generic RxGeneric Rx
What is the generic purchase requirement?oCompliance….
oReduced or No rebates?EVERY DAY LOW PRICE = EDLP
Identify if any “excluded” generics are not included in the percentage requirement?
oNo rebates?
GBR or GCRGBR or GCR
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GBR = Generic BrandRatio
GBR = Generic BrandRatio
Generic Rx /Brand RxSource
GCR = Generic Compliance RatioGCR = Generic
Compliance Ratio
Source Generic Rx / Total Rx*
*Brand Rx + Generic Rx
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Difference GBR vs GCR?Difference GBR vs GCR?
$52,000 / $190,000 = 27.40% GBR
GCR $52,000 / $242,000 = 21.50%
GCN = Generic Code Number
GCN = Generic Code Number
Compliance achieved based on the number of different GCN classes purchased in a given a month. (100+)
GCN ComplianceGCN Compliance
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Wholesaler must ensure generic Rx items are purchased from them vs. other distributors.
Why Generic Compliance?Why Generic Compliance?
Need to retain generic Rx profits to support Brand Rx discounts.
Compliance&
COG
Compliance&
COG
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Rx Brand Compliance Rebate
Rx Brand Compliance Rebate
18% to 27.9% = 1.00%28% to 29.9% = 1.25%30% to 31.9% = 1.50%32% to 33.9% = 1.75%34% to Plus = 2.00%
Generic Compliance% Brand Rebate
Invoice COG = Cost minus 2.5 – 3.5%
Purchase CompliancePurchase ComplianceStated as a % of total purchases
o 90% o 95%o 98%
Monitored?o BPR = Brand Purchase Rate Brands purchased vs Brand Dispensed
o GPR = Generic Purchase Rate Generics purchased vs Generics Dispensed
……90%
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Contract ComplianceContract ComplianceWhat is the penalty for not achieving the GBR or GCR?
What is the penalty for not achieving the a total purchase compliance?
o Reduction or No generic rebates?
o Increase in Brand COG?
o Reduction or No generic rebates?
OTC/DME
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Pricing based on “Cost”oCost vs List
Over The Counter/ DMEOver The Counter/ DME
Billed same at Brand discount rate Billed at Cost (No discount)
Wholesalers view OTC’s as costly to inventory & ship….though profitable.
Cash IncentivesFREE MONEY
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“Up Front” cash tied to a term contracto Usually 3 years
“Technology Credit” (1% of total purch/year)“Pay back” through:
oNET priced Brand Rx oHigher Generic Rx Invoice pricing oLower Generic Rx rebates
Cash IncentivesCash Incentives
Payment TermsPayment Terms
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Semi‐Monthly = 1‐15 Due on 25th or (EOM)o 16‐End of Month = pay on 10th (or 15th)
Weekly Pay terms oReduces COG 15‐20 basis pts
Prepay – Reduction of 40‐80 basis pts
Monthly – Increase COG 30‐40 basis pts
Payment TermsPayment Terms
Know the DSO (Days Sales Outstanding)o Semi‐monthly (1‐15) due 25th
15/2= 7.5 +10 = 17.5 DSO
o Weekly (M to F) Due Wednesday 5/2= 2.5 +5 = 7.5 DSO
Payment Terms/DSOPayment Terms/DSO
What are the penalties or COG increase for late pay or extended DSO?
(1.5 – 3 bpts/day?)
5/2= 2.5 +7 = 9.5 DSO (Due Friday)
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Program FeesProgram Fees
Add program cost back to COGs. Wholesaler sponsored groups
HealthMart
Good Neighbor
Leader or Medicine Shoppe
Other Franchise Fees
Do they provide measurable value?
Program FeesProgram Fees
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Program FeesProgram Fees
Front End pricing Managed Care services Inventory Management Advertising Reconciliation Etc.
Do they provide measurable value?
Program FeesProgram Fees
$190,000 at WAC - 5.0%$6,832 ($9,500) Brand discount
$200 ‐ Program A $300 ‐ Program B $175 ‐ Program C$675 = Fees
35.5 Basis pts
$500 ‐ Program A $150 ‐ Program B $175 ‐ Program C$825 = Fees
43.4 Basis pts
C‐ 4.33+0.36
C‐ 3.97
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DeliveryDelivery
FREE Delivery?Saturday delivery is not FREE!
oCost added to Brand Rx depending upon location
oDetermined by cost to deliver Metro vs. Rural
Is there a delivery fee?
DeliveryDelivery
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Contract TermContract Term
What is the time Commitment?o Typically 3-5 years
o May also be “dollar-spend” based $10M?
Locked in even if market conditions change
Contract TermContract Term
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“….my rep told me that the form I signed for better rates on Brand last year was actually a service agreement to stay with them for 3 years. I guess that's what lawyers are for. Signing that contract was BY FAR the most costly mistake I have ever done”
No financial considerations?o No need for contract
Contract –> No Cash = Still binding?oLoss of profit
Brand Rx patents continue to expireoAggressive Brand COGs becomes less important
Contract TermContract Term
Know your historical GBR!
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Net LandedNet Landed
Nothing if not comparing “Apples to Apples”
What is Net Landed or Effective COG?oRebates / Brand RxoWhich rebates? Program Fees? Etc.
What does Net Landed mean?What does Net Landed mean?
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Other Considerations
Other Considerations
Returns PolicyoReturns are not FREEoOnce a year “clean sweep”?
Other
NDAoNon-Disclosure Agreements
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PVAComparison
PVAComparison
Total Brand Rx X
Discount rate =Brand Discount $$
Total Brand Rx X
Discount rate =Brand Discount $$
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Total Generic Rx X
Rebate % =Generic Rebate $
Total Generic Rx X
Rebate % =Generic Rebate $
Brand Discount $ +
Generic Rebate $=
Value of proposal?
Brand Discount $ +
Generic Rebate $=
Value of proposal?
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Brand RxGeneric RxGBR/GCRCash IncentivesPayment TermsDSOProgram FeesDeliveryContract Terms
How do you want it sliced?How do you want it sliced?
