Complexities exist in traditional contract management system used by Pharma, Life science players

Complexities exist in traditional contract management system used by Pharma, Life science players

Pharmaceutical manufacturers operate in one of the most complex, competitive, and highly regulated industries. With the growing population the demand for creating drugs and treatments that prevent, treat, and cure illness are increasing. As demand grows, more players are looking to get into the game. U.S. manufacturers are seeing increased competition from new vendors developing products and bring them to the U.S. for sale from abroad.

Pharmaceutical manufacturers conduct business with numerous buyers and sellers throughout the normal course of business. The industry is increasingly being influenced by these contractual relationships. As this influence increases, so does the complexity of the terms and conditions contained within the contracts.

Manufacturers engaged in high-stakes contractual relationships are at a crossroads. They must manage diverse contracts with wholesalers, distributors, group purchasing organizations, retailers and other channel partners, each of whom receives a custom bundle of pricing incentives. Incentives range from the simple to the highly complex, and can vary by product, by buyer, by sales date, by quantity sold, and more.

Business Challenges: The limits of manual approaches to contract management.

While disparate spreadsheets may prove acceptable tools in the early days of an organization, manufacturers can quickly become overwhelmed by the demands that arise as sales grow. In the absence of automated and integrated solutions, today’s manufacturers are confronting an array of key business challenges like:

Mishandling of contracts

Due to the manual approach, companies often mishandle their contracts, both direct (wholesalers, retailers, chains) and indirect GPO contacts, which can number in the hundreds, include frequent product and price changes. Given these variables, contract management can be costly, time-consuming and prone to error.

Overpayment on chargebacks

Given that chargeback credits can exceed millions of dollars per month and account for 15-20% of gross revenue on branded drugs and 2-4% for generics,
manufacturers can severely undermine profitability through inaccurate and inefficient chargeback validation. Unfortunately, this is a common problem when wholesalers are submitting thousands of chargeback lines per day.

Overwhelmed manufacturers, who are incapable of rapidly and effectively validating chargeback submissions, are often likely to credit their wholesalers for inaccurate chargebacks and needlessly cut in to their own margins.

Excessive labor and operational costs

Given the inefficient and ineffective nature of manual methods in the face of increasing volumes, manufacturers are liable to employ at least twice as many people in contract management positions than would be necessary in an automated environment. GPO contracts must be maintained, chargebacks validated and government reports produced. However, the potential for inaccuracies and slow, unproductive work is tremendous due to the heavy volumes of data that must be captured, calculated and acted upon using spreadsheets and other limited tools.

Weak negotiating leverage

Considering the heavy concentration of the drug distribution business among the Big Three, small- and mid-sized manufacturers have relatively limited market leverage. Moreover, manufacturers are unable to renegotiate contracts in favorable ways if they cannot track the sales performance trends of individual wholesalers. The challenge for manufacturers revolves around holding wholesalers accountable for their performance. It’s difficult to reach this objective, however, without automated systems to capture, calculate and report on critical data.

All of these challenges must be addressed if manufacturers want to maximize profitability. Each one of these challenges undermines profitable growth directly or indirectly. If manufacturers want to thrive in today’s intensely competitive markets, they must consider the solution that has already been adopted by best practice firms.