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In pharmaceuticals, drug patents and exclusivity are similar, but not identical. Drug patents are intellectual property rights conferred by the US Patent and Trademark Office, and they can be granted at any time during drug development. Exclusivity has to do with delays and prohibitions on competitor drugs that are granted upon approval of a drug. The holder of the New Drug Approval (NDA) becomes eligible for exclusivity by meeting certain requirements.
The period of exclusivity and the terms of the drug patent may run concurrently, or they may not. The reason for exclusivity is to balance new drug innovation with greater drug access in the form of generics. When exclusivity ends, the handling of returns to the manufacturer can have a significant effect on revenues.
When a blockbuster drug (one that brings in more than $1 billion per year) faces loss of exclusivity, product returns that are greater than expected cost the manufacturer considerably. Accurate forecasting of product returns has become increasingly important to pharmaceutical CFOs, especially with blockbuster drugs. Not only can returns be larger than expected, they can go on for longer than you might think. Ultimately, a reserve forecast that's off by just one week's worth of inventory can cost a company tens of millions of dollars.
Brand name pharmaceutical companies have product return policies in which they credit a pharmacy (or hospital or other retailer) a percentage of the wholesale acquisition cost of the product. Returns are usually low, representing between 1 and 2 percent of annual sales. Return rates increase immediately after loss of exclusivity, and then spike for several years after loss of exclusivity. That's because generic competitors have entered the market.
Pharmacies and other points of care initiate returns when they have significant inventory of a brand name product when generics are launched. Brand share of prescriptions inevitably falls, making it harder for the pharmacy to use its inventory on hand. Plus, pharmacies are protected by manufacturer return policies that allow them to receive credit for at least 90 percent of what they paid for the brand name product.
A brand name drug can typically be returned for credit up to a year after it expires. Combine this with the usual 2.5 to 3 years of dating that remains when the drug reaches the pharmacy, and you have a situation where drugs may be returned up to four years after loss of exclusivity.
Crunching the right data can minimize returns after loss of exclusivity
Forecasting reserve levels as loss of exclusivity approaches isn't easy, but new techniques are being developed to improve accuracy. Newer forecasting models use data from multiple input sources, including:
Of course, not all inventory will be returned after loss of exclusivity, because a pharmacy will continue to sell some of the name brand product, but using a combination of data from multiple sources can help manufacturers forecast returns with greater accuracy, leading to lower financial losses due to loss of exclusivity.
Manufacturers naturally want to optimize returns after loss of exclusivity by allowing for a predicted volume of returns without tightening channel inventories too much (and losing sales that way). Things manufacturers can do to optimize returns forecasting include:
Accurate forecasting of returns surrounding loss of exclusivity can save brand name pharmaceutical companies tens of millions of dollars, affecting how investments in those companies fare. Therefore, understanding how a pharma company forecasts returns and what data they use can help the investor make the wisest investment choices.